Compact of Free Association: An Assessment of Current U.S. Proposals to Extend Assistance
Published: 2002-07-17T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The United States entered into the Compact of Free Association with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) In 1986. The Compact has provided U.S. assistance to the FSM and the RMI in the form of direct funding as well as federal services and programs. The Compact allows for migration from both countries to the United States and established U.S. defense rights and obligations in the region. Provisions of the Compact that deal with economic assistance were scheduled to expire in 2001; however, they will remain in effect for up to 2 additional years while the affected provisions are renegotiated. Current U.S. proposals to the FSM and the RMI to renew expiring assistance would require Congress to approve $3.4 billion in new authorizations. The proposals would provide decreasing levels of annual grant assistance over a 20-year term. Simultaneously, the proposals would require building up a trust fund for each country with earnings that would replace grants once those grants expire. The U.S. proposals include strengthened accountability measures, though details of some key measures remain unknown. The proposals have addressed many, but not all, recommendations that GAO made in past reports regarding assistance accountability.

section_title: Letter
paragraphs: I am pleased to be here today to testify on the Compact of Free  Association between the United States and the Pacific Island nations of  the Federated States of Micronesia, or FSM, and the Republic of the  Marshall Islands, or RMI. In 1986, the United States entered into this  Compact with the two countries after almost 40 years of administering the  islands under the United Nations (U.N.) Trust Territory of the Pacific  Islands. The Compact, which consists of separate international agreements  with each country, has provided U.S. assistance to the FSM and the RMI in  the form of direct funding as well as federal services and programs for  more than 15 years. Further, the Compact allows for migration from both  countries to the United States and establishes U.S. defense rights and  obligations in the region. Provisions of the Compact that deal with  economic assistance were scheduled to expire in 2001; however, they will  remain in effect for up to 2 additional years while the United States and  each nation renegotiate the affected provisions.
Today I will discuss our review of the current U.S. proposals to extend  economic assistance to the FSM and the RMI. Specifically, I will discuss  the potential cost of assistance to the U.S. government, the amount of per  capita assistance for the FSM and the RMI, and the projected earnings of  proposed trust funds. Further, I will identify accountability measures that  are in the proposals and discuss whether the proposals address past GAO  recommendations in this area. It is worth emphasizing that all of the above  issues are still under negotiation, and therefore final Compact assistance  levels and accountability measures could differ from those I will discuss  today.
subsections: section_title: Background
paragraphs: In 1986, the United States and the FSM and the RMI entered into the  Compact of Free Association. This Compact represented a new phase of  the unique and special relationship that has existed between the United  States and these island areas since World War II. It also represented a  continuation of U.S. rights and obligations first embodied in a U.N.  trusteeship agreement that made the United States the Administering  Authority of the Trust Territory of the Pacific Islands. The Compact  provided a framework for the United States to work toward achieving its  three main goals—(1) to secure self-government for the FSM and the RMI,  (2) to assure certain national security rights for all the parties, and (3) to  assist the FSM and the RMI in their efforts to advance economic  development and self-sufficiency. The first two goals have been met  through the Compact and its related agreements. The third goal, advancing  economic development and self-sufficiency, was to be accomplished  primarily through U.S. direct financial payments (to be disbursed and  monitored by the U.S. Department of the Interior) to the FSM and the RMI.  However, economic self-sufficiency has not been achieved. Although total  U.S. assistance (Compact direct funding as well as U.S. programs and  services) as a percentage of total government revenue has fallen in both  countries (particularly in the FSM), the two nations remain highly  dependent on U.S. assistance. In 1998, U.S. funding accounted for 54  percent and 68 percent of FSM and RMI total government revenues,  respectively, according to our analysis. This assistance has maintained  standards of living that are artificially higher than could be achieved in the  absence of U.S. support.
Another aspect of the special relationship between the FSM and the RMI  and the United States involves the unique immigration rights that the  Compact grants. Through the Compact, citizens of both nations are  allowed to live and work in the United States as “nonimmigrants” and can  stay for long periods of time, with few restrictions. Further, the Compact  exempts FSM and RMI migrating citizens from meeting U.S. passport, visa,  and labor certification requirements. Unlike economic assistance  provisions, the Compact’s migration provisions are not scheduled to  expire in 2003. In recognition of the potential adverse impacts that Hawaii  and nearby U.S. commonwealths and territories could face as a result of  an influx in migrants, the Congress authorized Compact impact payments  to address the financial impact of migrants on Guam, Hawaii, and the  CNMI.
Finally, the Compact served as the vehicle to reach a full settlement of all  compensation claims related to U.S. nuclear tests conducted on  Marshallese atolls between 1946 and 1958. In a Compact-related  agreement, the U.S. government agreed to provide $150 million to create a  trust fund. While the Compact and its related agreements represented the  full settlement of all nuclear claims, it provided the RMI the right to submit  a petition of “changed circumstance” to the U.S. Congress requesting  additional compensation. The RMI government submitted such a petition  in September 2000.
section_title: Current U.S. Compact Proposals Would Cost Billions and Create Trust Funds
paragraphs: Under the most recent (May 2002) U.S. proposals to the FSM and the RMI,  new congressional authorizations of approximately $3.4 billion would be  required for U.S. assistance over a period of 20 years (fiscal years 2004  through 2023). The share of new authorizations to the FSM would be about  $2.3 billion, while the RMI would receive about $1.1 billion (see table 1).  This new assistance would be provided to each country in the form of  annual grant funds, extended federal services (that have been provided  under the original Compact but are due to expire in 2003), and  contributions to a trust fund for each country. (Trust fund earnings would  become available to the FSM and the RMI in fiscal year 2024 to replace  expiring annual grants.) For the RMI, the U.S. proposal also includes  funding to extend U.S. access to Kwajalein Atoll for U.S. military use from  2017 through 2023. In addition to new authorized funding, the U.S.  government will provide (1) continuing program assistance amounting to  an estimated $1.1 billion to the two countries over 20 years and (2)  payments previously authorized of about $189 million for U.S. access to  Kwajalein Atoll in the RMI through 2016. If new and previous  authorizations are combined, the total U.S. cost for all Compact-related  assistance under the current U.S. proposals would amount to about $4.7  billion over 20 years, not including costs for administration and oversight  that are currently unknown.
Under the U.S. proposals, annual grant amounts to each country would be  reduced over time, while annual U.S. contributions to the trust funds  would increase by the grant reduction amount. Annual grant assistance to  the FSM would fall from a real value of $76 million in fiscal year 2004 to a  real value of $53.2 million in fiscal year 2023. Annual grant assistance to  the RMI would fall from a real value of $33.9 million to a real value of $17.3  million over the same period. This decrease in grant funding, combined  with FSM and RMI population growth, would also result in falling per  capita grant assistance over the funding period – particularly for the RMI  (see fig. 1). The real value of grants per capita to the FSM would decrease  from an estimated $684 in fiscal year 2004 to an estimated $396 in fiscal  year 2023. The real value of grants per capita to the RMI would fall from  an estimated $623 in fiscal year 2004 to an estimated $242 in fiscal year  2023. In addition to grants, however, both countries would receive federal  programs and services, and the RMI would receive funding related to U.S.  access to Kwajalein Atoll.
The U.S. proposals are designed to build trust funds that earn a rate of  return such that trust fund yields can replace grant funding in fiscal year  2024 once annual grant assistance expires. The current U.S. proposals do  not address whether trust fund earnings should be sufficient to cover  expiring federal services or create a surplus to act as a buffer against years  with low or negative trust fund returns. At a 6 percent rate of return (the  Department of State’s assumed rate) the U.S. proposal to the RMI would  meet its goal of creating a trust fund that yields earnings sufficient to  replace expiring annual grants, while the U.S. proposal to the FSM would  not cover expiring annual grant funding, according to our analysis.  Moreover, at 6 percent, the U.S. proposal to the RMI would cover the  estimated value of expiring federal services, while the U.S. proposal to the  FSM clearly would not. At a 6 percent return, neither proposed trust fund  would generate buffer funds. If an 8.2 percent average rate of return were  realized, then the RMI trust fund would yield earnings sufficient to create a  buffer, while the FSM trust fund would yield earnings sufficient to replace  grants and expiring federal services.
section_title: Current U.S. Proposals Contain Stronger Accountability Measures and Address GAO Recommendations, Some Key Details Remain Unknown
paragraphs: I now turn my attention to provisions in the current U.S. proposals  designed to provide improved accountability over, and effectiveness of,  U.S. assistance. This is an area where we have offered several  recommendations in the past 2 years. As I discuss key proposed  accountability measures, I will note whether our past recommendations  have been addressed where relevant. In sum, many of our  recommendations regarding future Compact assistance have been  addressed with the introduction of strengthened accountability measures  in the current U.S. proposals. However, specific details regarding how  some key accountability provisions would be carried out will be contained  in separate agreements that remain in draft form or have not yet been  released.
The following summary describes key accountability measures included in  the U.S. proposals that address past GAO recommendations:    The proposals require that grants would be targeted to priority areas such  as health, education, and infrastructure. Further, grant conditions  normally applicable to U.S. state and local governments would apply to  each grant. Such conditions could address areas such as procurement  and financial management standards. U.S. proposals also state that the  United States may withhold funds for violation of grant terms and  conditions. We recommended in a 2000 report that the U.S. government  negotiate provisions that would provide future Compact funding through  specific grants with grant requirements attached and allow funds to be  withheld for noncompliance with spending and oversight requirements.  However, identification of specific grant terms and conditions, as well as  procedures for implementing and monitoring grants and grant  requirements and withholding funds, will be addressed in a separate  agreement that has not yet been released.
The U.S. proposals to the FSM and the RMI list numerous items for  discussion at the annual consultations between the United States and the  two countries. Specifically, the proposals require that consultations  address single audits and annual reports; evaluate progress made for each  grant; discuss the coming fiscal year’s grant; discuss any management  problems associated with each grant; and discuss ways to respond to  problems and otherwise increase the effectiveness of future U.S.  assistance. In the previously cited report, we recommended that the U.S.  government negotiate an expanded agenda for future annual  consultations. Further, the proposals give the United States control over  the annual review process: The United States would appoint three  members to the economic review board, including the chairman, while the  FSM or the RMI would appoint two members.
Recommendations from our 2000 report are being addressed regarding  other issues. The U.S. proposals require U.S. approval before either  country can pledge or issue future Compact funds as a source for repaying  debt. The proposals also exclude a “full faith and credit” pledge that made  it impracticable to withhold funds under the original Compact. In addition,  the U.S. proposals provide specific uses for infrastructure projects and  require that some funds be used for capital project maintenance.
We also recommended that Interior ensure that appropriate resources are  dedicated to monitoring future assistance. While the U.S. proposals to the  two countries do not address this issue, an official from the Department of  the Interior’s Office of Insular Affairs has informed us that his office has  tentative plans to post five staff in a new Honolulu office. Further, Interior  plans to bring two new staff on board in Washington, D.C., to handle  Compact issues, and to post one person to work in the RMI (one staff is  already resident in the FSM). A Department of State official stated that the  department intends to increase its Washington, D.C., staff and overseas  contractor staff but does not have specific plans at this point.
Trust fund management is an area where we have made no  recommendations, but we have reported that well-designed trust funds  can provide a sustainable source of assistance and reduce long-term aid  dependence. The U.S. proposals would grant the U.S. government control  over trust fund management: The United States would appoint three  trustees, including the chairman, to a board of trustees, while the FSM or  the RMI would appoint two trustees. The U.S. Compact Negotiator has  stated that U.S. control would continue even after grants have expired and  trust fund earnings become available to the two countries; in his view, “the  only thing that changes in 20 years is the bank,” and U.S. control should  continue. He has also noted that it may be possible for the FSM and the  RMI to assume control over trust fund management at some as yet  undetermined point in the future.
Finally, while the departments of State and the Interior have addressed  many of our recommendations, they have not implemented our  accountability and effectiveness recommendations in some areas. For  example, our recommendation that annual consultations include a  discussion of the role of U.S. program assistance in economic  development is not included in the U.S. proposals. Further, the  departments of State and the Interior, in consultation with the relevant  government agencies, have not reported on what program assistance  should be continued and how the effectiveness and accountability of such  assistance could be improved. Finally, U.S. proposals for future  assistance do not address our recommendation that consideration should  be given to targeting future health and education funds in ways that  effectively address specific adverse migration impact problems, such as  communicable diseases, identified by Guam, Hawaii, and the CNMI.
section_title: Current U.S. Proposals Also Amend Nonexpiring Immigration Provisions
paragraphs: I would also like to take just a moment to cite proposed U.S. changes to  the Compact’s immigration provisions. These provisions are not expiring  but have been targeted by the Department of State as requiring changes. I  believe it is worth noting these proposed changes because, to the extent  that they could decrease migration rates (a shift whose likelihood is  unclear at this point), our current per capita grant assistance figures are  overstated. This is because our calculations assume migration rates that  are similar to past history and so use lower population estimates than  would be the case if migration slowed.