Foreign Assistance: Effectiveness and Accountability Problems Common in U.S. Programs to Assist Two Micronesian Nations
Published: 2002-01-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The United States has extended to Micronesia and the Marshall Islands a number of domestic programs in such critical areas as health care, education, job training, and telecommunications.
section_title: What GAO Found
paragraphs: GAO found that geographic, economic, and social conditions in both countries have limited the effectiveness of nine of the 13 programs, which were originally designed for the United States. Nine of the 13 programs experienced accountability problems, including theft or misuse of program funds. The two island nations lacked the administrative skills to meet the federal government's complex accountability requirements, and federal managers did not provide the necessary training. Although some federal agencies tried to provide oversight, their efforts at ensuring accountability fell short because of several factors, including time, distance, and travel costs and the relatively small size of the programs in the region.

section_title: Letter
paragraphs: In 1986, the U.S. government entered into a Compact of Free Association  (Compact) with the Federated States of Micronesia and the Republic of the  Marshall Islands.  Under the Compact, the United States was authorized to  provide federal programs, such as grants, services, technical assistance,  and loans to the two nations. The United States was also authorized to  provide aviation, disaster relief, postal, and weather services.  The cost of  program assistance extended to the two countries was about $700 million  for the period beginning in fiscal year 1987 and ending in fiscal year 2001.   The United States designated the Department of the Interior as the agency  responsible for coordinating and monitoring these federal programs, loans,  and services.
In the fall of 1999, the United States and the two nations began negotiations  on extending the financial provisions of the Compact, which expired in  2001.  These negotiations  also included discussions about the continued  provision of several U.S. programs.  To assist the Congress in its review of  proposals for extending assistance, you asked us to report on the  effectiveness and accountability of U.S. programs, loans, and services  provided to the Federated States of Micronesia and the Republic of the  Marshall Islands.  In response, we (1) assessed the use and effectiveness of  key U.S. programs, loans, and services provided to both nations; (2)  evaluated whether each nation’s administration of these programs ensured  financial accountability; and (3) evaluated whether the U.S. government’s  oversight of these programs ensured financial accountability.
We selected 13 programs and services to review, including those with the  largest expenditures and loans over the past 15 years, as well as each of the  services that the U.S. government agreed to provide under the Compact.   To determine the use and effectiveness of U.S. programs and services, we  reviewed legislation, regulations, and monitoring reports.  We also  interviewed program recipients and program managers in the United  States, in Pohnpei and Kosrae States of the Federated States of Micronesia,  and in Majuro, in the Republic of the Marshall Islands.  We determined that  these U.S. domestic programs were effective by using two separate  measures. The first considered whether the programs met their program  performance requirements and standards, as detailed in their legislation  and regulations.  The second measure considered whether the programs  were able to achieve broader program goals given the conditions that  existed in the Federated States of Micronesia and the Republic of the  Marshall Islands, including those that could significantly reduce potential  program accomplishments or increase costs.  To be considered effective,  the program had to meet all performance requirements and standards and  had to overcome conditions that could significantly reduce broader  program accomplishments or increase costs.  To evaluate whether the joint  U.S., Micronesian, and Marshallese administration of these programs  ensured financial accountability, we identified requirements in legislation  and regulations, reviewed monitoring reports and financial audits, and  discussed accountability issues with program managers in each country.   (For further details regarding our scope and methodology, see app. I.)
subsections: section_title: Background
paragraphs: The Federated States of Micronesia (FSM) is a grouping of 607 small  islands with a total land area of about 270 square miles.  FSM is located in  the western Pacific, about 2,500 miles southwest of Hawaii, lying just above  the equator.  FSM comprises four states—Chuuk, Pohnpei, Yap, and  Kosrae—that had an estimated total population of 107,000 in 2000.  The  Republic of the Marshall Islands (RMI) is made up of more than 1,200  islands, islets, and atolls, with a total land area of about 70 square miles.   RMI is located in the central Pacific, about 2,100 miles southwest of  Hawaii.  The RMI had a total population of approximately 50,840.  See  figure 1 for a map of the FSM and the RMI.
Since World War II, the United States has provided government support to  the FSM and  the RMI and extended federal programs, such as housing and  food assistance.  In addition, the United States provided for their defense;  built roads, hospitals, and schools; provided support for government  operations; and funded health and education systems.  In 1986, the United  States entered into a Compact of Free Association with the FSM and the  RMI, a process that ended U.S. administration under a United Nations  mandate and secured both nations’ self-governance and certain defense  rights for the FSM, the RMI, and the United States.  The Compact provided  direct financial payments to promote economic development in each  nation. These annual financial payments totaled about $2 billion from fiscal  year 1987 through fiscal year 2001.  Previously we reported that these  payments  supported general government operations but had led to little  improvement in economic development, with both nations remaining  highly dependent on U.S. assistance.  Economic self-sufficiency at current  living standards remains a distant goal for the FSM and the RMI.  In  addition, in reviewing these expenditures, we found that the island  governments and the U.S. Departments of the Interior and State have  provided limited accountability over the Compact expenditures.
The Compact also stated that U.S. federal agencies could provide direct  program assistance as authorized by the Congress, which included the  grants, loans, and technical assistance provided by individual federal  agencies.  In addition, the Compact identified several federal services to be  supplied by specifically identified agencies: postal services, aviation, and  weather were to be provided by specific agencies (and then reimbursed by  Interior), while the Federal Emergency Management Agency was to  provide disaster relief. In total, the program assistance provided by 19 U.S.  departments and agencies from 1987 through 2001 totaled about $700  million, which included money for the 13 grant, loan, and service programs  that were the focus of this report.
Under the Compact’s implementing legislation and by executive order,  Interior was made responsible for supervising, coordinating, and  monitoring program assistance to the FSM and the RMI.  The Foreign  Service Act of 1980 (P.L. 96-465) stated that the Department of State Chief  of Mission was responsible for the direction and coordination of all U.S.  government employees in foreign countries. Further, presidential  instructions to U.S. chiefs of mission in foreign nations charged them with  the direction, coordination, and supervision of all executive branch offices  and personnel in their nation.
The FSM and the RMI were developing countries that, like other Pacific  island nations, faced significant development challenges because of their  small economies, few natural resources, remote location, and limited  institutional capacity.  The economies of both nations were dependent on  U.S. assistance provided through the Compact for most of their income, as  they had almost no commercial production.  U.S. assistance accounted for  a majority of government revenues in both nations, and the governments  were the primary employer in both nations. Significant unemployment  existed and has increased as the governments have cut employment in  response to scheduled reductions in U.S. payments made under the  Compact, contributing to outward migration.
The FSM and the RMI, as developing nations, faced unique challenges in  operating their health and education programs, as compared with the  United States.  According to a 1998 study, challenges for the FSM and the  RMI’s delivery of health care services included (1) lack of preventive health  care, (2) long distances to travel in order to provide care in remote places,  (3) dependence on declining levels of U.S. foreign aid, (4) inadequate fiscal  and personnel management systems, (5) poorly maintained and equipped  health care facilities, (6) the enormous costs associated with sending  patients off-island for specialized care, and (7) shortages of adequately  trained health professionals.  Likewise, the education system in both  countries faced challenges not found throughout the United States,  including high drop-out rates, poorly trained teachers, lack of adequate  buildings and supplies, and low academic achievement.  The education  systems of both nations were also dependent on declining levels of U.S. aid,  which may place additional challenges on the education systems.  In the  RMI, 68 percent of education funding came from the United States; in the  FSM, 98 percent of education funds were from the United States.
In June 2000, the Department of State’s negotiator for the Compact testified  that the general approach to the new negotiations with the FSM and the  RMI included sector grants, a trust fund, and continued provision of some  U.S. program assistance for the term of the annual financial assistance.   The negotiator testified that the executive branch was considering  reporting annually to the Congress on actions that could improve program  effectiveness, including the consideration of grant consolidation across  programs.  The November 2000 U.S. proposal to the FSM for future  economic assistance through fiscal year 2016 included a reduction in total  assistance but an increase in U.S. Compact funds for health and education,  as compared with current levels.  The proposal also included a section on  services and program assistance scheduled through 2016.  Weather and  aviation services were to be continued at a level to be negotiated.  The  proposal eliminated the commitment of disaster relief from the United  States, but it included a modest disaster preparedness grant for the first 5  years of the agreement.  Additionally, the USPS was to continue service,  with the provision of special services set forth in a subsidiary agreement.   These special services to be negotiated may include "express mail" and  money orders, but not collect-on-delivery.  The proposal stated that the  United States would continue to provide, through fiscal year 2016, the  programs of the Departments of Education, Health and Human Services,  and Labor on the same basis or to the same extent as they were provided  on October 1, 1999.  The United States did not propose providing  Department of Agriculture programs to the FSM.  The United States had  not presented an assistance proposal to the RMI.
section_title: Federal Programs Provided Important Services, but Effectiveness Was Generally Hindered by Many Factors
paragraphs: The 13 federal grant, loan, and service programs we reviewed provided a  wide array of assistance to the FSM and the RMI that U.S. embassy and  country officials viewed as critical to these nations.  However, local  conditions limited the effectiveness of 9 of the 13 programs. We determined  that these U.S. domestic programs were effective by using two separate  measures: first, whether the programs met their program performance  requirements and standards, as detailed in their legislation and regulations;  second,  whether the programs were able to achieve broader program  goals, given the conditions that existed in the FSM and the RMI, including  those that could significantly reduce potential program benefits or increase  costs.  To be considered effective, the program had to meet all performance  requirements and standards and to overcome conditions that could  significantly reduce broader program accomplishments or increase costs.
We found that, even in programs that met their requirements and standards,  local conditions often reduced their potential effectiveness.  Almost all of  them faced problems caused by attempting to implement programs in the  FSM and the RMI that were designed for the United States. Such problems  included (1) the lack of complementary public and private health care  services and financing typically found in the United States, necessary to  support the Head Start, special education, and Maternal and Child Health  programs; (2) limited opportunities for graduates of the job training  program; and (3) the lack of contractors, building supplies, and support  services typically found in the United States and used to respond to  disasters.  In addition, the federal education and health programs and  resources usually supplement state and local resources in the United  States. These resources did not exist in the FSM or the RMI, where federal  programs were the primary and often the only funding source for an  activity.
As a result of these problems, the effectiveness of the U.S. programs was  limited.  The aviation and weather programs, as well as two of the three  loan programs, were effective in large part because they were narrow in  scope or relied on well-trained local staff and dedicated U.S. resources.  In  addition, all three loan programs (two of which were effective, and one  ineffective) may experience future repayment problems if U.S. Compact  assistance levels are reduced. (See app. II for a more detailed discussion of  each program, including the program performance requirements and  standards, our assessment against those standards, and our assessment of  whether the program encountered conditions in the countries that  significantly reduced potential program accomplishments.)
subsections: section_title: Programs Provided Diverse and Important Services
paragraphs: We found that the 13 programs we reviewed, which encompassed grants,  loans, and operational support, provided numerous, and in many cases  important, services to the citizens of the FSM and the RMI. For example,  because of the U.S. programs, preschool children received health,  education, and nutritional services; special needs children received special  education services; elementary and secondary schools received school  supplies and teacher training; and college students received tuition grants.   In addition, mothers and children were provided health services, and adults  received job training to improve their employment prospects.  The housing  stock, telecommunications capacity, and electrical supply were improved  through U.S. loan programs, while disaster response, postal delivery,  aviation, and weather forecasting were provided by U.S. agencies.
U.S. embassy, FSM, and RMI officials reported that these were critical  programs in each country. Without exception, FSM and RMI program  officials said that their countries were dependent on these programs.  For  example, according to FSM and RMI officials, the loss of U.S. programs  would end special education assistance, the poorly supplied school  systems might stop functioning entirely, and the sole U.S.-accredited  colleges in the FSM and the RMI might collapse.  Program officials further  stated that the loss of disaster assistance, postal services, aviation  programs, and weather services would severely affect their economic  development.  Program managers doubted that their own governments  would have sufficient resources to finance these activities in the absence of  the U.S. federal programs.
Table 1 identifies the 13 programs we reviewed, the purpose and funding  level of each program, and a brief description of program accomplishments  in each country.
section_title: Foreign Environment and Other Factors Hindered Effectiveness of Nine Programs
paragraphs: Local conditions in the FSM and the RMI significantly reduced the  effectiveness of 9 of the 13 programs, loans, and services.  These programs  were (1) Head Start, (2) special education, (3) elementary and secondary  school improvement grants, (4) Pell Grants, (5) the Job Training Program  for Adults, (6) Maternal and Child Health Block Grants, (7) housing loans,  (8) disaster assistance, and (9) the USPS.  We found that programs  designed for the United States faced a variety of problems because of  geographic, economic, and social conditions in the FSM and the RMI. For  example, the four states of the FSM are separated by as much as 2,000  miles, and the RMI is made up of 1,200 atolls and islands scattered over  750,000 square miles of ocean.  In addition, the lack of local financial  support, the poor performance of the education system, and the lack of  medical capacity commonly found in the United States hindered the  education and health programs. Limited private sector opportunities and  government downsizing reduced the value of the job training program.   Geographic and social conditions reduced the effectiveness of disaster  relief. Finally, the poor performance of FSM and RMI postal services  delayed mail service.  Most managers of the nine programs recognized that  they lacked the resources, training, and technical capacity to meet all  program requirements.
See appendix II for a more detailed discussion of each program, including  the program performance requirements and standards, our assessment  against those standards, and our assessment of whether the program  encountered conditions in the countries that significantly reduced broader  program accomplishments or increased program costs.  Each table  contains separate sections that provide specific examples of whether or  not each program met requirements and standards and whether the  program encountered conditions in each country that significantly reduced  its potential accomplishments.  To be effective, each program had to meet  the performance requirements and standards and had to demonstrate that  it did not encounter conditions that significantly reduced potential program  accomplishments or increased costs.
Specifically, in terms of program effectiveness, we found the following:  Head Start: Head Start was intended to promote school readiness by  enhancing the social and cognitive development of preschool children.   However, the FSM and the RMI programs could not meet a variety of  program requirements because of a lack of equipment, medical capacity,  and government support for the elementary and secondary education  system.  For example, the FSM and the RMI lacked the equipment and  medical expertise necessary to meet dental and health requirements.   Additionally, the Head Start program could not meet playground and  space standards of the program (see figures 9 and 10).  The program also  lacked data to show short- or long-term benefits to the children.  In  addition, both FSM and RMI Head Start managers and parents were  concerned that any head start provided by the program was lost because  of the poor performance of the school system.
SEPPIE: This program was intended to provide special education and  related services to children with disabilities. Although the program met  its limited performance requirements and standards, it encountered  conditions that significantly reduced potential program  accomplishments. For example, for some children, the program’s  effectiveness was limited by the lack of on-island medical care available  to those suffering severe disabilities. In addition, post-graduation  employment opportunities for program graduates were rare.  Lastly,  since neither the FSM nor the RMI contributed funding for special  education, as states and localities do in the United States, this program  was the primary funding source for special education.
Freely Associated States Educational Grant: The program was  intended to provide elementary and secondary schools with funds for  direct educational services such as school supplies, teacher training,  and school improvement.  Although it met its limited program goals to  provide funding for school supplies and teacher training, because the  FSM and the RMI did not provide much funding in these areas, many  needs continued to go unmet. The program was never intended to be the  sole source of funding for these activities.  For example, in the United  States, most school funding comes from state and local funds, and the  federal government provides only 6.8 percent of the total elementary  and secondary school budgets.  In contrast, the FSM and the RMI  provided almost no funding in this area, relying instead on FASEG and  other U.S. grants.  However, because the program was so small relative  to needs, it could not meet all school requirements for school supplies  and teacher training.
Pell Grants: Pell Grants were intended to provide college students with  financial assistance for educational expenses. In addition, the grants  provided graduates with the potential to improve their employment  opportunities and help meet the development and financial needs of the  FSM and the RMI. The Pell Grants program met its limited program goal  to provide financial assistance to FSM and RMI college students.   However, the poor conditions of the elementary and secondary school  system, the limitations of a 2-year college, and the lack of employment  opportunities limited the potential accomplishments of the Pell Grant  program.   According to the FSM and the RMI college presidents,  because of the inadequate school systems, many students exhausted  their Pell Grants on remedial classes.  As a result, many students could  not use Pell Grants for the credited classes they needed to graduate. In  the RMI, for example, one-half of high school graduates entered the  college with the equivalent of a 4th to 6th-grade U.S. education and  required 1 to 2 years of remedial classes.  This reduced the amount of  Pell Grants available for graduation and contributed to the low, 9- percent graduation rate.  In both countries, the low graduation rate and  the limitations of a 2-year college have reduced the contribution of the  Pell Grant program to the economy.  As a result, skilled workers and  managers were brought in from the United States, the Philippines, and  other countries to meet the demand for technical and mid- and upper- level management positions.
Job Training for Adults: The program was intended to foster increased  employment and earnings.  However, poor economic conditions in both  the FSM and the RMI have limited the potential accomplishments of the  program. For example, because of the lack of jobs in the FSM, program  success in job placement for graduates dropped from 65 percent in 1995  to 26 percent in 1999.  FSM officials said that the program was training  people for jobs that did not exist.  In the RMI, poor data precluded  determining JTPA’s effectiveness, and poor economic conditions limited  employment opportunities. For example, the RMI reported that the  percentage of trained adults finding jobs rose from 44 percent in 1993 to  100 percent in 1999. However, another 1999 report from the RMI stated  that only 14 percent found employment. Neither RMI nor Labor officials  could explain the discrepancy, and Labor officials agreed that such  problems precluded determining the program’s effectiveness. In  addition, because of poor economic conditions, the RMI boosted the  number of adults it reported as being employed by counting numerous  “self-employed” graduates as employed and simply estimating their  potential income.  According to U.S. Department of Labor officials, the  subsistence economy in the RMI and the lack of employment  opportunities pushed the program to categorize people as “self- employed” when they were actually undertaking subsistence work and  not receiving market income.  Because of the lack of jobs, as well as the  lack of  those basic academic and personal competencies necessary to  benefit fully from job training, the RMI has begun providing training in  “survival skills,” which include subsistence fishing, agriculture, and  handicraft production.
MCH Block Grants Program: The program was intended to improve the  health of mothers and children and to reduce mortality rates.  However,  the lack of equipment, medical specialists, data collection capabilities,  and local government support for preventive health care limited the  accomplishments of this program. Moreover, the FSM and the RMI  programs were exempt from meeting 6 of the 18 performance measures  for the program, and they had difficulty in meeting others, because of a  lack of needed equipment, medical capacity, and support programs  (such as Medicaid) that were available only in the United States.  Additionally, the high mortality rate, a key measure of program success,  could not be reduced because of health care limitations and the lack of  basic sanitary conditions, like clean water and healthy food, necessary  for public health.  Moreover, data collection limitations within the FSM  and the RMI have hindered the ability of the HHS to determine program  effectiveness.  Lastly, the U.S. MCH Program generally supplements  state and local health care initiatives; both the FSM and the RMI  governments lacked these state or local services.  According to the FSM  and the RMI MCH directors, because the FSM and the RMI relied on the  program as their primary preventive health care system, the program  was overwhelmed by the social and economic conditions that were  causing declines in the general health of the populations, including  maternal and child health.  The former U.S. MCH officer responsible  for the FSM and the RMI programs was pessimistic about the ability of  the MCH programs to succeed because of the social and economic  problems in each nation.
Housing Loans: This program was intended to provide housing loans to  the most  needy.  However, legal requirements not designed for use in  foreign countries precluded targeting loans to only the most needy.  As a  result, the program could not meet its performance requirement to  target only the neediest in each country.   To determine program  eligibility, the Rural Housing Service (RHS) was required to use adjusted  income limits set by the U.S. Department of Housing and Urban  Development (HUD). HUD in turn used U.S. Census income data.   Because the FSM and the RMI last participated in the U.S. Census in  1980, prior to their independence, there were no income data available  from the U.S. Census Bureau. Instead, RHS used HUD’s “Western Pacific  Islands” adjusted income limits.  These limits were relevant only to the  population of Guam and were not an accurate measure for the much  poorer populations of the FSM and the  RMI.  Consequently, most  households in the FSM and the RMI qualified for the program.  This  violated the program eligibility regulations, which stated that it was to  serve only those with less than 80 percent of the local median income,  adjusted for household size.  Both nations have conducted censuses  since 1998 that contained information on household income, so such  data was available.
Disaster Assistance: This program was intended to help localities  prepare for and respond to disasters. Although the program met its  performance requirements and standards, it encountered conditions  that significantly reduced potential program accomplishments and  increased costs. For example, because of the vast distances involved  and the absence of capabilities comparable to those in the United States,  the implementation of FEMA’s disaster assistance programs has been  costly, difficult, and labor intensive.  In addition, according to FEMA  documents, the cultural and social practices in the FSM and the RMI  adversely affected the effectiveness of FEMA assistance.  For example,  contrary to FEMA’s mission to foster self-reliance for disaster  preparedness and response, FEMA found that providing disaster  assistance to the FSM and the RMI fostered a dependency on FEMA  assistance.  FEMA found that people who would otherwise rebuild their  lives immediately after an event did nothing until FEMA money and  resources arrived.  Lastly, FEMA officials said that, as a domestic  agency, it was not structured or intended to provide disaster assistance  to foreign countries.
USPS: Postal Services were intended to provide for mail and mail- related financial services between the United States and the FSM and  the RMI. Although the program met its performance requirements and  standards, it encountered conditions that significantly reduced potential  program accomplishments and increased costs.  For example, the postal  service has had to contract for air transport of mail, at the cost of $2  million annually, because of limited space on the few commercial flights  to the region.  Because flights to the region were limited, USPS was not  able to meet delivery guarantees on certain classes of mail.  Moreover,  despite USPS’s investment in chartered flights, once the mail arrived,  FSM and RMI postal services delayed delivering the mail to its citizens.  Citizens from both nations said that mail was routinely 2 to 3 months  late. (See figure 11.) In the RMI, mail often sat in the facilities, waiting  for local postal officials to sort and place the mail in post office boxes.   In  the FSM, mail was delayed as it awaited clearance through customs.  USPS operations in the FSM and the RMI have also proven costly.  In  addition to $5.9 million in costs reimbursed by Interior, USPS estimated  that it has incurred an additional $30 million in extra mail transportation  costs.
section_title: Four Programs Were Effective
paragraphs: Two of the loan programs and two of the services have been effective.  These programs were (1) telecommunications loans, (2) electrical loans,  (3) aviation services, and (4) weather services.  These programs met their  performance requirements and standards and did not encounter problems  that reduced potential program benefits or  substantially increased costs.   These programs’ success was partly attributed to their resource  management approach. The two loan programs were effective in meeting  their narrow program requirements to provide loans to areas that meet the  economic and social conditions that make them eligible for the loans.  In  addition, USDA, which managed the loan programs, provided guidance and  strong oversight during the construction of the telecommunication and  electrical systems, to ensure that they met U.S. building standards. For the  aviation and weather services, U.S. employees or well-trained nationals  managed and performed the work.
The following programs were effective:  Telecommunications Loans:  The Rural Utilities Service’s  telecommunications loans met its program goal to expand modern  telecommunication facilities in remote areas by financing telephone  system improvements in both nations.  For example, in 1987, when  USDA approved a loan to the FSM Telecommunications Corporation  (FSMTC), the company had 1,300 telephone subscribers.  By 1993, the  telephone subscribers in the FSM had increased to 6,000.  USDA ensured  that both nations’ telephone companies met the eligibility requirements  of the program, conducted the feasibility studies necessary to determine  their economic viability, had the telecommunications systems built to  USDA specifications, and provided construction oversight to ensure that  all specifications were met. (See figure 12.)
Electrical Loans: The Rural Utilities Service’s electrical loans were  intended to expand access to modern electrical systems by providing  loans for electrical power facilities, and the USDA met this  programmatic goal in the RMI. The RMI used the loan to build new  electric power facilities that have allowed large increases in electricity  available to both homes and businesses.  The 1999 generating station  almost doubled the RMI’s electrical capacity and allowed the nation to  meet its growing electricity needs.  For example, the number of private  electricity consumers rose by 11 percent and the number of new  business users rose by 34 percent between 1997 and 1999.  USDA  ensured that RMI’s power company met the eligibility requirements,  conducted the feasibility studies necessary to determine their economic  viability, had the power facilities built to U.S. specifications, and  provided construction oversight to ensure that all U.S. specifications  were met. (See figure 13.)
Aviation Services: FAA effectively provided air safety services as  required under the Compact.  FAA provided (1) en route air traffic  services,  (2) flight inspections and equipment certifications, (3)  assistance in developing and updating aviation procedures and  standards, and (4) technical assistance to help the FSM and the RMI  governments develop civil aviation safety authorities and aviation safety  and certification programs. FAA was effective because of its direct  management and implementation of program activities. Rather than  provide funds directly to the FSM and the RMI governments for air  safety, FAA provided the training, material, equipment, and facilities  construction and maintenance necessary to meet FAA standards.  For  example, when FAA funded construction and maintenance, FAA  selected the contractors to perform the work and provided oversight  and contract management to ensure that the work met contract  standards. (See figures 14 and 15.)
Weather Service: The NWS provided weather services as stipulated in  the Compact. NWS provided the FSM and the RMI with the facilities,  equipment, technical assistance, and resources needed to operate their  weather services. To ensure that program goals were met, it maintained  control of the funds provided to each government through cost  reimbursement contracts. This allowed NWS to review and disallow  inappropriate or unauthorized FSM or RMI expenditures. NWS officials  also performed regular visits and monitored weather operations by  reviewing required reports and weather data.  In addition, NWS required  that local FSM and RMI officials working for the weather stations met  the same educational and proficiency standards as NWS employees in  the United States.  For example, NWS provided assistance to local  nationals for up to 5 years of training so that they could meet NWS  standards for meteorologists. (See figure 16.)
section_title: Three Loan Programs May Face Future Repayment Problems
paragraphs: The USDA operated the three loan programs for homeowners and utilities  (telecommunications and electric power) discussed above. Because of  FSM and RMI dependence on U.S. assistance, a reduction in this assistance  could result in future repayment problems. During the first 15 years of the  Compact, U.S. funding to the FSM and the RMI was decreased every 5  years, and the FSM government has estimated that the November 2000 U.S.  proposal reduces real per capita income in 2017 by almost 40 percent from  its 2001 levels.   Moreover, the United States has proposed an end to  annual financial assistance to the FSM and the RMI in 2016, although the  time for repaying these types of loans extends from 2017 to 2030.  Administrators at all three programs were unaware that this extension  could adversely impact their loan repayments. According to USDA officials,  there were no requirements for the U.S. program officials to consider  future reductions in U.S. economic assistance as a condition for extending  authorized program assistance.  Also, such considerations of future  reductions in U.S. assistance would have significantly raised the price of  loans to those needing assistance.
Housing Loans: USDA did not, nor was it required to, consider the  effect that a future reduction in U.S. economic assistance could have on  the ability of its borrowers to repay their loans. USDA officials  administered its housing loans and grants based on the applicants’  eligibility for the program and their repayment ability at the time of loan  closing, in accordance with the way in which the programs were  administered in the United States.  USDA officials said that they were  not required to consider the effect that future reductions in U.S.  economic assistance could have on the ability of its borrowers to repay  their housing loans.  Not considering the effect of such an economic  downturn in nations whose entire economies could shrink dramatically  put the U.S. government at risk of losing some $24.7 million in housing  loans.  In addition, many loans have a 33-year term, and some could  have up to a 38-year term, far exceeding the time when U.S. economic  assistance is scheduled to end.  According to Rural Housing Service  officials, if they had considered the effect of ending U.S. assistance  payments, they would not have made the loans.
Telecommunications Loans: Because USDA did not generally make  such loans to foreign countries, it did not consider that U.S. assistance  might be reduced in the future, jeopardizing loan repayments. Officials  of both the FSM Telecommunications Company and the Marshall Islands  National Telecommunications Authority stated that severe decreases in  Compact funding could decrease their companies’ revenues enough to  jeopardize their ability to repay their USDA loans.
Electrical Loans: USDA’s feasibility study did not include the possibility  that Compact funds might be severely reduced over the life of the loan,  resulting in a decreased demand for power as the economy contracts.   Officials of the Pohnpei Utilities Company and Marshalls Energy  Company stated that severe decreases in Compact funding to the island  nations could decrease their companies’ revenues enough to jeopardize  their ability to repay their USDA loans.
Although in all three cases the FSM and the RMI governments have  assumed responsibility for these secured loans if the borrowers were  unable to pay, the dependence of the governments on U.S. funds may put  such repayment at risk.  According to an FSM analysis, under the  November 2000 U.S. assistance proposal, which would decrease assistance  levels, “The economy would be caught in a vicious circle of low growth,  compounded by a series of shocks, requiring downward adjustment, loss of  real incomes, unemployment, and outward migration.”  In addition, USDA  administrators had not adequately considered how their programs could be  terminated if U.S. program assistance were to end in 2016.
section_title: Most Programs Have Accountability Problems
paragraphs: We found that the FSM and the RMI’s administration of most of the 13  programs we reviewed did not ensure accountability.  The accountability of  these 13 programs varied, from being adequate to having a significant loss  of financial control, based on our review of audit and financial reports;  discussions with U.S., FSM, and RMI program managers; and our  evaluation of whether each program’s reporting requirements were met.   Nine of the programs had poor accountability, and five of the nine had  instances of theft, fraud, or misuse of federal funds.  Four had adequate  accountability, in large measure because program funds were controlled  from the United States and little direct funding was provided to each  nation.
subsections: section_title: FSM and RMI Officials Provided Inadequate Accountability for Nine Programs
paragraphs: We found that nine programs in the FSM or the RMI had not met program  accountability standards. These problems were documented in annual  audit reports required under the Single Audit Act of 1984 (P.L. 99-502) for  federal programs, technical reviews conducted by U.S. executive branch  departments, and discussions with program managers. Each program had  different accountability requirements.
The following programs had instances of theft, fraud, mismanagement,  inadequate accountability, or poor recordkeeping:  The Pohnpei Head Start Program fired its entire accounting department  in 1999 for stealing program funds. A 1999 audit report identified  $341,000 that was unaccounted for and found significant  mismanagement, fraud, and loss of control over finances. In response  to our questions about the report, Pohnpei program officials told us that  the accounting department officials admitted to stealing about $11,500.   They said that the head of the accounting department was forging  checks and changing receipts in an attempt to cover up the theft, while  her two assistants were stealing money donated by parents of children  in the Head Start program.  A 2000 review of the program in the RMI  found that key management staff did not clearly understand the  program’s 1997 performance requirements or their responsibilities.  The  review also found that key management staff lacked training in basic  financial requirements.  Although U.S. program officials said that they  provided training in response to these problems, RMI officials told us  that this training was not sufficient for them to understand how to  comply with the requirements.
For the Special Education Programs for Pacific Island Entities, both the  FSM and the RMI failed to comply, according to audit documents, with  requirements for (1) awarding contracts competitively, (2) financial  reporting, and (3) reporting on property purchased with federal money.
Under the Freely Associated States Educational Grant program in the  RMI, both the Minister of Education and a staff person used program  funds intended for teacher training to travel to Paris for more than 3  weeks for a 1999 United Nations Educational, Scientific, and Cultural  Organization meeting.
Although the Pell Grants program in the FSM has had problems  complying with the program’s accountability requirements since the  early 1980s, improvements have resulted in the college’s meeting its  accountability requirements for the past several years.  For example, the  1997 audit questioned  $359,000 in costs from audits performed in 1995,  1996, and 1997.  Furthermore, in 1995 the college discovered a “double  drawdown” of program funds of $1.2 million and alerted the U.S.  Department of Education.  An audit the following year reported that the  College of Micronesia had an outstanding liability to the U.S.  Department of Education for $1.2 million.  In response, the Department  of Education placed the college under a provisional certification and  conducted a technical assistance review in 1999.  The review concluded  that the colleges in both the FSM and the RMI lacked sufficient  knowledge to administer the federal program adequately, and the  Department of Education subsequently provided the necessary training.   According to the FSM college president and its chief financial officer,  the school has since instituted the improvements necessary to meet  program requirements.  The school received its first unqualified opinion  in its 1999 audit, 12 years after the Compact went into effect. According  to FSM officials, the college also received an unqualified opinion from  its auditors in 2000.
The JTPA programs in the FSM and the RMI were exempt from having to  meet the standardized reporting systems used by the U.S. Department of  Labor to verify program performance. Department of Labor managers  exempted the FSM and the RMI because they lacked the necessary data  collection capabilities.  Furthermore, U.S. program managers said that  they generally ignored the performance data submitted by the two  nations because it was considered unreliable. As a result, the  Department of Labor cannot verify program performance.
Officials in the MCH program in the FSM state of Kosrae were not aware  of any HHS reporting requirements and had not submitted any progress  or financial reports to the FSM government for at least 2 years,  according to the Kosrae MCH director. In addition, they lacked any  supporting documentation on how program funds were spent. The FSM  assistant director for public health confirmed this information and said  that the government simply “guessed” at Kosrae’s financial and  performance data when submitting its annual report to HHS.
The Rural Housing Service in the FSM state of Pohnpei made housing  loans to the FSM president and others that violated program regulations.  The service also mismanaged more than $100,000 of local funds.  The  loan program was intended to provide loans to the economically  disadvantaged. However, according to audit reports and rural housing  officials, the local program manager provided 12 unauthorized loans  that violated program regulations.  These included loans to the FSM  president, the head of the Rural Housing Services trustee agency, and  others, which, among other problems, violated the program’s  requirement that homes built with program funds be considered modest  for the area. The president’s home  exceeded this standard. In addition,  the reports documented other violations of program regulations,  including (1) a loan to the FSM president that exceeded USDA limits, (2)  loans for income-generating buildings, (3) another loan for a  “nonmodest” home, and (4) numerous other weaknesses in internal  controls. (See figures 17 and 18.)
FEMA experienced fraud and mismanagement in the FSM and the RMI.    In the FSM, for example, FEMA reported that some citizens bought new  pickup trucks and other items not authorized by the home repair  assistance. FSM officials said that they lacked the staff and expertise  needed to audit and pursue most of these cases. In the RMI, FEMA  provided the national government almost $70,000 to replace flood- damaged hospital facilities, supplies, and equipment on the island of  Ebeye.  However, the RMI government never released the money to the  hospital.  FEMA has spent 3 years attempting to rectify this problem.   According to FEMA officials, the incidence of fraud and  mismanagement were no more prevalent in the FSM and the RMI than in  the United States.  However, FEMA could not take routine legal action  to recoup fraudulent or mismanaged funds, such as garnishment of  wages, since the FSM and the RMI are sovereign nations.
The USPS, which provided the FSM and the RMI with money orders and  other financial services, reported theft and misuse of funds and had  difficulty collecting owed funds from the FSM and the RMI postal  systems.  The FSM and the RMI have fired several staff for money order  theft and misuse of funds, and both continue to experience theft and  financial irregularities with money order and other cash transactions.  In  the largest known case, a postal worker stole $7,000 in funds. Although  the USPS had difficulty collecting owed funds from the FSM and the  RMI postal systems, both nations ultimately transferred appropriate  funds to USPS.  In one FSM case, a special legislative appropriation  enabled stolen and misappropriated funds to be repaid to USPS,  although the payment was late. (See figure 19.)
Program managers and staff often received little or no training in either  accounting principles or program requirements, causing many of the  accountability problems. For example, the Head Start program manager in  Kosrae was not aware of Head Start performance or reporting  requirements because he had never been trained.  Also, the MCH program  implementers in Kosrae had never received training on program  performance goals and lacked the staff to meet reporting requirements.   In some cases, training was provided to the wrong officials.  For example,  in the RMI, a manager received training in how to meet MCH financial  requirements, even though the Ministry of Finance, not the MCH office,  controlled and reported on funding.
FSM and RMI program managers for the education, job training, and health  programs reported that they had difficulty in meeting federal accountability  requirements.  They said that their program staff needed extensive on- island training in how to comply with federal reporting requirements.  Off- island training was not effective, the managers said, because (1) only one  or two members of their staff could attend training; (2) the training was  often too fast-paced for them to understand, or it involved technology not  available in the FSM or the RMI; and (3) they lacked the skills and  proficiency to transfer the training to their staff upon return.  Moreover, the  program managers said that on-island training for the entire staff was  necessary to reduce the number of accountability problems commonly  found in the federal programs.
section_title: Adequate Accountability Existed for Four Programs
paragraphs: There was adequate accountability for the telecommunications and electric  power loans and the aviation and weather services. U.S. personnel  managed these programs, controlled program accounting from the United  States, or simply required the FSM and the RMI to meet loan repayment  schedules.  The following examples illustrate how the four programs  provided adequate accountability:  Telecommunications Loans: When applying for loans to build new  telecommunications facilities, USDA required both the FSM and the RMI  telecommunications companies to meet a variety of USDA  requirements.  These requirements included conducting financial and  engineering feasibility studies during the loan application process.   These feasibility studies showed the projects to be viable.  USDA  ensured that the companies complied with their required safeguards,  including regular inspection visits from Rural Utilities Service officials  during construction. Once construction was completed, RUS officials  continued to make periodic loan-servicing visits to review operations,  maintenance practices, and procedures for problems that could impair  the companies’ ability to repay their federal loans.  The RUS also  required companies to submit annual financial and statistical reports, as  well as financial statements to be reviewed in Washington, D.C., for  indicators of financial downturns, improprieties, or management  concerns.
Electrical loans: Before loans were extended to build new power  generation facilities, USDA required both local power companies to  meet engineering and financial feasibility study requirements.  These  feasibility studies showed the projects to be both necessary and  financially viable.  The Marshalls Energy Company complied with  required safeguards, such as building to U.S. standards.  The company  withdrew only the loan money actually needed for its facility and sent  annual audited financial statements to USDA in Washington, D.C.  The  FSM’s Pohnpei Utilities Company has not yet received money for its  proposed power generation facilities but has undertaken the same  process.
Aviation Services: The FAA assisted the FSM and the RMI with aviation  services by providing materiel and equipment.  FAA services included  testing, inspection, and maintenance of equipment.  In addition,  facilities construction was performed either under direct FAA oversight  or by contractors hired by FAA. Under this arrangement, FAA exercised  significant control and accountability over the assistance and thereby  the funding to the FSM and the RMI.
Weather Services: The NWS provided assistance to the FSM and the RMI  through cost-reimbursable contracts.  Expenditures made by the FSM  and the RMI were submitted to the NWS for approval.  If the  expenditures (for example, to pay for salaries, materiel, and equipment)  were appropriate, then the weather service authorized reimbursement  of expended funds.  A review of FSM and RMI records showed cases in  which the NWS requested additional justification for expenditures and  disallowed inappropriate ones.
These programs share the common characteristics of having a narrow  mission and being run directly by the U.S. agencies.  The four programs  achieved accountability largely because each agency controlled program  funds from the United States, and little direct funding was provided to  either nation.
section_title: Federal Administration Has Not Ensured Financial Accountability
paragraphs: We found that the level of U.S. federal oversight over programs in the FSM  and the RMI varied from adequate to almost nonexistent.  Sources such as  audits, financial reports, monitoring reports, and U.S., FSM, and RMI  program managers documented this lack of accountability.  Neither the  Department of the Interior, which was charged with monitoring and  coordinating the individual federal programs, nor the State Department,  whose ambassadors were responsible for the direction and coordination of  U.S. agency officials in foreign countries, fulfilled these responsibilities,  because federal program managers often bypassed both departments to  work directly with FSM and RMI program managers. Each federal  department was responsible for ensuring program compliance and  accountability.  Most federal departments could not ensure accountability,  and oversight was generally neglected because of the cost, distance, and  time involved.  In addition to communications difficulties and distance  barriers, the small size of the programs in the nations, compared with the  programs’ size in large U.S. states, contributed to poor oversight.
subsections: section_title: Interior Did Not Provide Effective Monitoring or Coordination
paragraphs: The legislation and executive order implementing the Compact designated  Interior to coordinate and monitor program assistance to the FSM and the  RMI.  However, the department has neither monitored nor coordinated the  program assistance.  In 1987, the Secretary of the Interior determined that  the most effective method to provide programs to the FSM and the RMI  was to allow the other agencies to create a direct grant relationship with  the Pacific Island governments.  In addition, Interior officials reported that  they were not given sufficient authority or resources to coordinate and  monitor the activities of the departments providing program assistance.   Instead, Interior’s principal role has been to provide supplemental  technical assistance and respond to assistance issues identified by federal  agencies or the FSM and the RMI.   In a previous review, we found that the  Department of the Interior had not maintained reliable data on the amount  of assistance provided to each country, and that there were inconsistencies  between Interior’s data and that of other agencies.
According to Interior officials, Interior did not meet its legislative  requirement to place three monitors in the region for the federal programs  because no funding was provided for the positions.  The Palau Compact of  Free Association Implementation Act, Public Law 101-219, states that the  Secretary of the Interior shall station representatives in the FSM, the RMI,  and Palau in order to provide federal program coordination and technical  assistance to each government.  However, Interior did not fill any of these  positions until 1997, 11 years after the Compact went into effect and 8 years  after the public law was enacted.  As of 2001, Interior had never stationed  representatives in all three nations but instead relied on one representative  to cover the numerous programs funded by the 19 agencies with program  locations thousands of miles apart.  Interior officials said that no funding  was provided for these positions and that it was able to finance the one  position only when funding was supplied in 1997.  Disputes between the  Departments of the Interior and State concerning Interior staff selected to  work in the RMI contributed to the lack of Interior staff for the RMI.
In addition, other limitations negated the Interior representative’s ability to  affect the management of federal programs.  For example,  the Interior representative had no authority to modify or suspend  mismanaged programs operated by other executive departments;  although the Interior official in the field sent weekly reports to Interior  headquarters, the Interior representative made few if any  recommendations to improve program coordination, and no program  improvements were implemented for any program under review; and,   U.S. departments often do not alert or coordinate with the Interior  representative on proposed or continuing programs, thereby reducing  the ability of the Interior to provide even informal coordination.
The number of programs and the vast distances between islands also  precluded effective monitoring by a single U.S. official.  Department of the  Interior officials in Washington, D.C., as well as the Interior representative  and the U.S. ambassador to the RMI, all agreed that one person was  insufficient to monitor federal programs in the region.  For example, the  Interior representative was not aware of problems identified in our review,  such as the firing of the Head Start/FSM accounting staff or the fraudulent  activities of FSM postal employees.  In his 1997 report to Interior, the  Interior representative stated that grants should be strictly controlled and  closely monitored, with full-time, on-site monitoring and administration by  the U.S. government.  This recommendation was never implemented.
Interior officials said that the United States used to actively coordinate and  monitor federal grants.  Prior to the Compact, before the FSM and the RMI  gained political independence, a large U.S. staff located in the region  managed federal programs.  For example, in 1985, the year before the  Compact was signed, 31 U.S. officials provided management, coordination,  oversight, and reporting for U.S. programs to the region.  In addition, these  officials could modify or suspend programs for poor performance.  Once  the Compact was signed, the FSM and the RMI began direct grant relations  with each federal department, and the regional U.S. staff disbanded.  Now  Interior has only one official in the region, trying to help coordinate and  monitor programs formerly managed by 31 staff members.
section_title: State Could Not Fulfill Program Coordination Role
paragraphs: The State Department, whose chief of mission was responsible for  direction and coordination of U.S. agency officials in foreign countries,  could not meet its responsibility because the U.S. program managers often  bypassed the State Department and U.S. embassies. The Foreign Service  Act of 1980 (P.L. 96-465) states that the Department of State Chief of  Mission was responsible for the direction and coordination of all U.S.  government employees in the country. Further, presidential instructions  to U.S. Chiefs of Mission charge them with the direction, coordination, and  supervision of all executive branch offices and personnel in their nation.  However, both the former ambassador to the FSM and the current  ambassador to the RMI said that most U.S. departments ignored this  requirement and bypassed State because of their long-standing  relationships with FSM and RMI ministries.  As a result, the Department  of State, through its embassy, could not direct, coordinate, or supervise  employees of other federal agencies in either the FSM or the RMI.
section_title: Federal Departments Generally Provide Inadequate Oversight
paragraphs: We found that most federal departments have not provided adequate  oversight of their programs in the FSM and the RMI.  While weather and  federal aviation services’ accountability requirements included  independent verification of work performed by others, as well as tests,  inspections, and frequent visits to the islands to ensure that services were  meeting U.S. standards, most programs provided far less oversight.  Of the  educational, job training, and health programs, only Head Start and the  special education program required on-island assessments.  The job  training and MCH programs simply reviewed information submitted by  each nation, and U.S. program managers said that this information was too  unreliable to determine program effectiveness. We found that many  program managers knew little about the programs, as illustrated by the  following examples:   The SEPPIE program manager reported that she had never conducted a  program assessment in the region, could not discuss the FSM or the  RMI’s program objectives or accomplishments, and had no idea whether  the programs were operating as intended.  Moreover, the manager was  not aware that any on-island assessments were conducted, even though  this was the only program in our review that conducted on-island  assessments annually. Instead, the program manager relied on  information collected from annual meetings in Washington, D.C. with  representatives from the FSM and the RMI, and on semiannual reports,  to monitor this program.
MCH program managers said that they had to rely on the FSM and the  RMI’s annual reports to determine program effectiveness because they  were the only data available, even though the program managers  recognized that the reports lacked the reliability necessary to determine  program effectiveness.
The JTPA programs in the FSM and the RMI were exempted from having  to meet the program’s national standardized reporting systems, which  the U.S. Department of Labor used to verify program performance in the  United States.  Department of Labor managers exempted these nations  because they lacked the necessary data collection capabilities and the  accuracy of the FSM and the RMI data was suspect.  Labor officials said  that they lacked the travel funds necessary to verify FSM or RMI  reporting.  The FSM and the RMI provided their program information to  a Department of Labor regional office, where the data could be reviewed  but not verified by program managers.  The program managers said that  they generally ignored all performance data that the two nations  submitted because the data were unreliable and because the FSM and  the RMI programs were considered a low priority as compared with the  larger programs in the United States.
Most program managers attributed the lack of oversight to the cost and  time needed to visit the FSM and the RMI--the islands are about 5,000 miles  from the United States-- as well as to the small size of the programs relative  to programs located in states like California and New York.  For example,  according to representatives from the Departments of Labor and of  Education, lack of travel funds severely limited trips needed to provide  oversight and reduced their ability to ensure program effectiveness.
section_title: Federal Managers Concerned about Lack of Impact and Accountability of U.S. Programs in the Pacific
paragraphs: Federal program managers with programs in the FSM and the RMI were  concerned about the lack of impact, accountability, and training provided  to the region.  On this subject, the Federal Regional Council, a consortium  of 20 federal departments and agencies based in San Francisco, including  program managers for Head Start, the Job Training Partnership Act, and  Maternal and Child Health in the Pacific area, released a March 2000 report,  Grants to the Outer Pacific.  The report stated that all council members  were concerned about the quality of results achieved with federal funds,  accountability levels, and problems related to training.  They found that  fragmented services, inadequate systems of data collection, and  inconsistent attention and follow-up attributable to limited time and travel  budgets had all contributed to the sense that the federal government was  simply “throwing money at problems,” with little effect.
The council reported that limited travel budgets, time, and technical  assistance resources made it difficult for federal agencies to monitor  programs and provide the consistent training necessary to improve  program performance. It also noted that problems and solutions could not  be identified from the United States.  Council members reported that on- site reviews were necessary to disclose causes of program problems and  provide the best solutions necessary for successful program performance.   They also found that an on-site federal presence and follow-through were  important to implement corrective action and coordinate federal programs  for maximum effect.  They concluded that it was essential that an on-site  representative be appointed with a mandate to improve the effectiveness of  federal programs. The report also recommended that a working  relationship be established between the federal program managers and the  Department of the Interior to better use federal programs to support  monitoring, coordination, and training.
section_title: Conclusions
paragraphs: After 15 years of U.S. program assistance, this is an appropriate time to  reassess the basis and conditions of the provision of U.S. domestic  programs to the FSM and the RMI.  Three considerations appear  particularly important in this assessment.
First, we found that many of these programs suffered from weaknesses in  effectiveness and accountability, many of which were attributable to the  difficulties associated with delivering programs designed for the United  States to small island nations.  For example, we found local administrative  capabilities that were not able to meet the complex requirements of many  federal programs, and U.S. administrative capabilities that were not  designed to implement U.S. programs in foreign countries.  These are likely  to be difficult problems to address.  Some of the problems are a  consequence of distance, which is immutable, and the state of the islands’  economic development, which is unlikely to improve in the near future.
Second, the U.S. programs provided several fundamental government  services in the FSM and the RMI.  The provision of power,  telecommunications, aviation, and postal services are critical for island  economic development.  Because of their importance, these services may  well be government priorities if U.S. program support were to end.  Other  programs, such as Head Start, special education, and Pell Grants, primarily  assisted individuals.  Program administrators believed that these programs,  while also important for economic development, would not be funded if the  United States were to end its support.
Finally, although the U.S. negotiating strategy calls for annual assistance to  end after another term of assistance, the United States has made no such  determination for the program assistance.  We believe that the United  States should establish a policy regarding the duration of ongoing program  assistance during the current negotiations. If the United States were to end  the program assistance for U.S. domestic programs when annual assistance  ends, this would involve transferring the responsibility for financing and  providing these services to the FSM and the RMI.  Transferring these  responsibilities to the FSM and the RMI will require U.S. agencies to  emphasize the development of local capabilities.  Without advance  planning for an “exit” for the program assistance, it is unlikely that a new  round of U.S. assistance would advance the ability of either nation to  provide these services at the end of the term of new economic assistance.
As a result, the decisions that must be made are how to improve the  performance and accountability of the programs and whether, and for how  long, these programs should be provided to the two nations. We believe  that these decisions should also be made in a way that is consistent with  the U.S. strategy to end annual assistance at a set time.
section_title: Recommendation for Executive Action
paragraphs: In order to assist congressional consideration of continued U.S. program  operations in conjunction with its consideration of new economic  assistance to the FSM and the RMI, we recommend that the Departments of  the Interior and State, in consultation with the relevant government  agencies and the Federal Regional Council, jointly report to the Congress  on (1) whether individual programs should be continued and for how long,  with an exit strategy developed for any concluding program; (2) how local  capabilities can be enhanced in order that the FSM and the RMI can  provide the services; (3) how programs can be redesigned to work more  effectively and efficiently, including the use of alternative mechanisms  (such as grant consolidation, trust funds, foundations, or nonprofit  organizations) to deliver the assistance; (4) how program coordination and  accountability can be improved; (5) what government authority and  resources are required to monitor and coordinate U.S. programs, grants,  loans, and services; and (6) what the future roles and responsibilities of the  Departments of the Interior and State should be in monitoring and  coordinating U.S. programs, grants, loans, and services.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Departments of the Interior, State,  Agriculture, Commerce, Education, Health and Human Services, Labor, and  Transportation, as well as to the Federal Emergency Management Agency,  the National Weather Service, the U.S. Postal Service, and the governments  of the FSM and the RMI.  The Departments of Agriculture, Commerce,  Education, Labor, and Transportation, as well as the Federal Emergency  Management Agency, and the U.S. Postal Service chose not to provide  formal comments on the draft report.  However, we incorporated their  informal comments into the report as appropriate.
The Department of the Interior generally agreed with the draft’s findings,  conclusions, and recommendations.  The Department of State generally  agreed with our draft findings and recommendation but raised concerns  about the department’s lack of  technical expertise and resources to  conduct the comprehensive assessment we recommended.  State also  recommended that no new programs be authorized without assessments to  determine whether the programs could be implemented effectively in the  region. The department also requested changes to improve the balance and  accuracy of the draft.  In our response to State’s comments, we agreed that  State lacks the necessary resources and expertise and emphasized that  State should use the resources and expertise of Interior and the other  departments to implement our recommendation. The Department of Health  and Human Services generally agreed with our draft report, stating that the  Federal Regional Council’s Outer Pacific Committee had expressed similar  concerns about the lack of impact, accountability, and technical assistance  to the two nations. In our response to HHS’s comments, we incorporated  their requested changes as appropriate.
The FSM government also generally agreed with our findings, noting that  performance and accountability problems could be expected in adapting  programs designed for the United States to culturally different,  undeveloped regions in the middle of the Pacific Ocean.  However, the FSM  government provided a number of specific suggestions to improve the  format, balance, and accuracy of the draft.  While the RMI government  agreed that there were effectiveness and accountability problems in the  programs, the RMI emphasized the need for these programs.  The RMI’s  comments also stated that the Department of the Interior, not the State  Department, should manage the federal programs. In response, we noted  that neither the draft nor the final report recommended that State be given  management responsibility for the federal programs. The government also  requested that additional information be added to six of the programs  under review.  We made a number of clarifications and additions in  response to FSM and RMI comments.
We are sending copies of this report to interested congressional  committees and to the secretaries of the Departments of the Interior, State,  Agriculture, Commerce, Education, Health and Human Services, and Labor,  as well as to the administrator of the Federal Emergency Management  Agency, the Postmaster General, and the presidents of the Federated States  of Micronesia and the Republic of the Marshall Islands.  We will also make  copies available to other interested parties on request.
If you or your staff have any questions regarding this report, please contact  me at (202) 512-4128.  Another GAO contact and staff acknowledgments  are listed in appendix VIII.
section_title: Objectives, Scope, and Methodology
paragraphs: At the request of the Chairman of the House Committee on Resources; the  Ranking Minority Member of the House Committee on International  Relations; the Chairman of the House Committee on International  Relations, Subcommittee on East Asia and the Pacific; and Congressman  Doug Bereuter, we (1) assessed the use and effectiveness of key U.S.  programs, loans, and services provided to the Federated States of  Micronesia (FSM) and the Republic of the Marshall Islands (RMI); (2)  evaluated whether the administration of these programs by each nation  ensures financial accountability; and (3) evaluated whether the oversight of  these programs by the U.S. government ensures financial accountability. To  gather information for our analysis, we interviewed more than 100 key  officials in the Departments of the Interior, State, Education, Health and  Human Services, Labor, and Agriculture; in the Federal Aviation  Administration, the National Weather Service (NWS), the Federal  Emergency Management Agency (FEMA), and the U.S. Postal Service  (USPS); and in the governments of the FSM and the RMI that were involved  with the provision of U.S. assistance to the two nations between 1987 and  2000.
To assess the use and effectiveness of key U.S. programs and services  provided to both nations, we reviewed the Compact of Free Association,  legislation, regulations, and procedures to determine what the programs  were intended to accomplish and the performance requirements used to  assess whether programs were being effectively implemented.  To  determine whether the programs were effectively implemented and  performance requirements were met, we reviewed monitoring reports,  program assessments, site visit reports, and progress reports. To ensure  that we had a full understanding of the programs’ intent and to determine  whether the programs were effective, we conducted detailed interviews  with program managers in Washington, D.C., San Francisco, and Honolulu;  in the two Federated States of Micronesia—Pohnpei and Kosrae; and in  Majuro, in the Republic of the Marshall Islands.  In addition, we visited  clinics, schools, post offices, weather stations, and other facilities to  determine the use of the assistance, and we spoke with the intended  beneficiaries of the assistance to obtain an independent assessment of its  uses.  To ensure accuracy, we shared our program summaries with program  managers in the United States, the FSM, and the RMI, and we incorporated  their comments into the final draft.
To assess whether the administration of these programs, by each nation as  well as by the U.S. government, ensured financial accountability, we  determined the accountability requirements for each by reviewing  legislation, regulations, and procedures.  To determine whether the  programs were meeting their accountability requirements, we reviewed  audit reports, financial reports, monitoring reports, and site visit reports.   To ensure that we had a full understanding of the programs’ accountability  requirements and whether they were met, we conducted detailed  interviews with program managers in Washington, D.C., San Francisco, and  Honolulu; in the two Federated States of Micronesia—Pohnpei and Kosrae;  and in Majuro, in the Republic of the Marshall Islands.  In both nations, we  conducted detailed interviews with the accounting departments of each  program, reviewed findings of audit reports with them to obtain their  views, and reviewed financial and audit reports for the past 5 years.  We  also conducted a detailed review of the past 14 years of audit reports from  the four Federated States of Micronesia and the Republic of the Marshall  Islands to identify historical trends in accountability problems for the  region.  To ensure accuracy, we shared our program summaries with  program managers in the United States, the FSM, and the RMI, and we  incorporated their comments into the final draft.
We performed our work from August 2000 through December 2001, in  accordance with generally accepted government auditing standards.
section_title: GAO Assessment of 13 Programs in the Federated States of Micronesia and the Republic of the Marshall Islands
paragraphs: The following provides our evaluation of the13 grant, loan, and service  programs to the Federated States of Micronesia and the Republic of the  Marshall Islands that we reviewed.   Each table covers one grant, loan, or  service and includes information on its intent, its performance and  accountability standards, our assessment of whether the programs met  their performance and accountability standards, and our assessment of any  problems related to implementing programs in the two foreign countries.
section_title: Comments from the Department of the Interior
subsections: section_title: GAO Comments
paragraphs: The following are GAO’s comments on the Department of the Interior’s  letter dated December 11, 2001. 1. We amended the draft on page 55 to clarify that the Department of the  Interior did not fill the position of federal programs coordinator until  1997.  The Department of the Interior, in commenting on this draft,  stated that a field representative covered the FSM, the RMI, and Palau  in 1990, implying that it met its requirement to provide federal program  coordination. However, discussions with the field representative  revealed that he was neither given the authority, nor had the means, to  coordinate the federal programs in the FSM and the RMI until 1997. 2. We amended the draft on page 56 to clarify that the Department of the  Interior’s federal program coordinator’s report did not usually include  recommendations.
section_title: Comments from the Department of State
subsections: section_title: GAO Comments
paragraphs: The following are GAO’s comments on the Department of State’s letter  dated November 16, 2001. 1.
In commenting on our draft report, the Department of State reported  that it supported GAO’s recommendation but lacked the resources and  technical expertise to conduct a comprehensive assessment of program  assistance to the FSM and the RMI.  We recognize that State lacks the  resources and technical expertise. For that reason, our  recommendation calls for State to work in consultation with the  Department of the Interior and those federal departments with  programs in the region, as well as with the Federal Regional Council, to  take advantage of their resources and technical expertise to develop  the joint report to the Congress. Given the unique opportunity  presented by the Compact renegotiations, we believe this is an  appropriate time to reassess the basis and conditions for providing U.S.  program assistance to the FSM and the RMI. 2. We have added language to page 60 to clarify State’s current position.
section_title: Comments from the Department of Health and Human Services
subsections: section_title: GAO Comments
paragraphs: The following are GAO’s comments on the Department of Health and  Human Service’s letter dated December 3, 2001. 1. We believe our report provides a balanced review of the program’s  achievements.  We state in the lead sentence of our Results in Brief that  many federal programs provided numerous, and in many cases critical,  services to the FSM and the RMI.  Head Start was included in this  assessment.  In addition, we stated on page 13 that the Head Start  program provided comprehensive health, education, and nutrition  services to 1,800 preschool children each year in the FSM and 1,200  each year in the RMI.  For both countries, we noted specific  accomplishments of the Head Start program. 2. Our report did not state that Federal Regional Council made a  recommendation; rather, it simply quoted the council report, in which  the council “concluded that it was essential that an on-site federal  grants coordinator be appointed...” to each nation.  We removed the  statement that council members were not aware that an Interior  representative already provided an on-site presence. 3. We added a footnote to page 44 to incorporate HHS’s statement that the  grantee provided documentation for the $341,378 in questioned costs.   However, neither HHS nor FSM officials indicated during the audit that  the Pohnpei program subsequently provided appropriate  documentation for the questioned costs.  As a result, we were not able  to independently verify HHS’s statement or to review the supporting  documentation. 4. HHS is not correct in stating that GAO and research findings have  concluded that the Head Start program is effective.  GAO, in its 2001  report on Head Start, stated that there is still insufficient research to  draw conclusions about the effectiveness of the program.  The report  also stated that, based on GAO’s recommendation, Congress mandated  that HHS fund and conduct an evaluation of the impact of the Head  Start program.  The final report is not due until 2006. 5. We added language to page 31 to clarify this point. 6. We added language to page 31 attributing these statements.  7. We have clarified on page 31 that it was the former Maternal and Child  Health program manager who provided us with this information just  prior to his retirement. We also added a footnote that the current U.S.  MCH officer responsible for the FSM and the RMI programs also  acknowledges the overwhelming need for technical assistance because  of the social and economic problems in the FSM and the RMI.
section_title: Comments from the Government of the Federated States of Micronesia
subsections: section_title: GAO Comments
paragraphs: The Pohnpei Local Office made Rural Development Direct Single Family Housing Program  loans to borrowers who constructed houses that exceeded what would be considered a  modest house design on the island of Pohnpei and made a loan to one borrower that  exceeded the maximum authorized loan amount by $15,000….
The Code of Federal Regulations (7 CFR 3550.57(a)), in defining a “modest dwelling,” states,  “The property must be one that is considered modest for the area, must not be designed for  income providing purposes….”
Our  review of the floor plans in the loan file disclosed that the  design of the house appeared to exceed what would be considered a modest house on the  island of Pohnpei.  In addition, we noted a May 23, 1998, entry in the running case record  stating that the Pohnpei local office’s engineer visited the construction site and found that  the design of the house had been changed to include the construction of a second floor.   However, no action was taken by the Pohnpei local office to stop the construction of the  second floor.  We also noted, based on documents in the loan file, that the borrower had  required an additional loan of $38,000 to complete the construction of the house.  However,  in an October 29, 1998, letter to the borrower, the Pohnpei local office stated that “we are  unable to approve your application on the basis that your total indebtedness with the agency  will exceed the present authorized loan limit.”  As a result of our review of the loan file, on  March 16, 1999, we visited the construction site and found that a two-story house, which  appeared to be more than modest, was under construction.
We were told in April 2001 that the local trustee agency for the Rural  Housing Service, the Pohnpei State Housing Authority, had paid off the  USDA loans from the escrow account set up to pay off any defaulted  loans.  This depleted the escrow account, and the Pohnpei State  Legislature had to appropriate funds to replenish the account.
We have also added another photograph in figure 17 of a modest house  to contrast with the photographs of the nonmodest houses.
section_title: Comments from the Government of the Republic of the Marshall Islands
subsections: section_title: GAO Comments
paragraphs: The following are GAO’s comments on the Government of the Republic of  the Marshall Islands letter dated December 10, 2001. 1. We do not assert that the neediest residents were not served.  The  report stated that, because of the lack of accurate income data, loans  could not be targeted only to the most needy, which is the purpose of  the program.  We assert that, if income data specifically for the FSM  and the RMI were used to calculate the low- and very low-income levels  for each country, fewer people would likely be eligible for the program  than are now eligible with the current Western Pacific income levels.  2. Additional language was inserted to clarify this issue on page 42. 3. The JTPA Title II Quarterly Status Report, July 1, 1999, to June 2000  (Final Report), signed by the local program manager on September 11,  2000, reported that only 14 percent of the job training graduates entered  employment.  In contrast, RMI reported in its Program Year 1999  Annual Report that 100 percent entered employment.  Both documents  stated that 35 trainees finished their job training; however, the first  document reported that only 5 entered employment, while the second  document states that all 35 entered employment. 4. Although the RMI was exempted from having to meet the program’s  national reporting requirements, the RMI was required to provide  accurate performance reports to the Department of Labor’s regional  office in San Francisco.  The Department of Labor’s program manager,  as well Department of Labor documentation stretching back to 1993,  documents Labor’s concerns about the unreliability of the data  submitted to the regional office.  For example, a 1994 Department of  Labor memorandum on a Pacific Basin JTPA liaison meeting stated that  “the enrollment and termination rates, as reported by the RMI, cannot  be trusted.” In 2001, the Department of Labor’s program manager  expressed these same concerns. 5. As noted above, the program was not exempt from providing  performance reports to the regional office. 6. GAO based its conclusion that “poor economic conditions limited  employment opportunities” on the fact that the program is now focused  on teaching “survival skills,” or subsistence living, because of a lack of  jobs. 7. We agree with the RMI that having unreliable data precludes knowing  with certainty whether the JTPA program was effective. However, the  program was designed so that the burden of proof was on those  implementing the program, and program effectiveness was determined  by having reliable data on the numbers of trainees that found  employment. 8. We have added this to the report on page 30. 9. Table I describes the “usefulness” of this program to the RMI. To further  clarify this point, we have added information on the number of teachers  trained using FASEG funds.  10. Additional language has been added to page 29 to clarify this point. 11. The 9-percent graduation rate was stated by the president of the  college, who also provided documentation to support the graduation  rate. 12. The report notes on page14 that the program has made college  education available for thousands of students and funded the creation  of the only U.S.-accredited college in the RMI. 13. FEMA, not GAO, concluded that these programs should be terminated. 14. FEMA, not GAO, concluded that these programs foster dependency. 15. Disaster Preparedness Improvement Grants over two years totaled  $100,000 and are matching grants.  According to FEMA records, the  funds had not been expended at the time of our review.  The RMI  confirmed that the information had not been timely and properly  reported, and added that reorganization and capacity issues hindered  the timely reporting of these expenditures.  GAO agrees that the RMI  needs to institute improvements to better comply with FEMA’s  reporting requirements.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Eugene Beye, Edward George,  Wyley Neal, Rona Mendelsohn, and Mary Moutsos made key contributions  to this report.
section_title: Related GAO Products
paragraphs: Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in  Two Micronesian Nations (GAO-02-119, Jan. 22, 2002).
Compact of Free Association: Negotiations Should Address Aid  Effectiveness and Accountability and Migrants’ Impact on U.S. Areas  (GAO-02-270T, Dec. 6, 2001).
Foreign Relations: Migration From Micronesian Nations Has Had  Significant Impact on Guam, Hawaii, and the Commonwealth of the  Northern Mariana Islands (GAO-02-40, Oct. 5, 2001).
Foreign Assistance: Lessons Learned From Donors’ Experiences in the  Pacific Region (GAO-01-808, Aug. 17, 2001).
Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little  Impact on Economic Development (GAO/NSIAD-00-216, Sept. 21, 2000).
Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little  Impact on Economic Development and Accountability Over Funds Was  Limited (GAO/T-NSIAD/RCED-00-227, June 28, 2000).
Foreign Relations: Better Accountability Needed over U.S. Assistance to  Micronesia and the Marshall Islands (GAO/RCED-00-67, May 31, 2000).
subsections: section_title: GAO’s Mission
paragraphs: The General Accounting Office, the investigative arm of Congress, exists to  support Congress in meeting its constitutional responsibilities and to help improve  the performance and accountability of the federal government for the American  people. GAO examines the use of public funds; evaluates federal programs and  policies; and provides analyses, recommendations, and other assistance to help  Congress make informed oversight, policy, and funding decisions. GAO’s  commitment to good government is reflected in its core values of accountability,  integrity, and reliability.
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subsections: section_title: Order by Mail or Phone
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section_title: Public Affairs