Compacts of Free Association: Micronesia and the Marshall Islands Face Challenges in Planning for Sustainability, Measuring Progress, and Ensuring Accountability
Released: 2006-12-15T00:00:00

Letter

Background

U.S. relations with Micronesia and the Marshall Islands began during World War II, when the United States ended Japanese occupation of the region. The United States administered the region under a United Nations trusteeship beginning in 1947. The four states of the FSM voted in a 1978 referendum to become an independent nation, while the Marshall Islands established its constitutional government and declared itself a republic in 1979. Both locations remained subject to the authority of the United States under the trusteeship agreement until entry into force of the compact in 1986.

The FSM is a loose federation of four states, and has a population of approximately 108,500, scattered over many small islands and atolls. The FSM states maintain considerable power, relative to the national government, to allocate U.S. assistance and implement budgetary policies.

Chuuk, the largest state, has 50 percent of the FSM’s population, followed by Pohnpei (32 percent), Yap (11 percent), and Kosrae (7 percent). The RMI has a constitutional government, and its 29 constituent atolls have local government authority. About two-thirds of its approximately 56,000 residents are in Majuro Atoll, the nation’s capital, and Kwajalein Atoll. The two countries are located just north of the equator in the Pacific Ocean. (See fig. 1.)

Compact of Free Association: 1986 through 2003

The United States, the FSM, and the RMI entered into the original Compact of Free Association in 1986 after lengthy negotiations. The compact provided a framework for the United States and the two countries to work toward achieving the following three main goals: (1) secure self-government for the FSM and the RMI, (2) ensure certain national security rights for all of the parties, and (3) assist the FSM and the RMI in their efforts to advance economic development and self-sufficiency. The first and second goals were met; the FSM and the RMI are independent nations, and the three countries established key defense rights, including securing U.S. access to military facilities on Kwajalein Atoll in the RMI through 2016. The compact’s third goal was to be accomplished primarily through U.S. direct financial assistance to the FSM and the RMI. For the 15-year period covering 1987 to 2001, funding was provided at levels that decreased every 5 years, with an extension for 2002 and 2003 during negotiations to renew expiring compact provisions. For 1987 through 2003, the FSM and the RMI are estimated to have received about $2.1 billion in compact financial assistance. As we previously reported, economic self-sufficiency was not achieved under the first compact.

Under the original compact, the FSM and the RMI used funds for general government operations; capital projects, such as building roads and investing in businesses; debt payments; and targeted sectors, such as energy and communications. The FSM concentrated much of its spending on government activities, while the RMI emphasized capital spending. Compact funds to the FSM were divided among the FSM’s national government and four states, according to a distribution agreement first agreed to by the five governments in 1984. In 2000, we reported that compact funds spent on general government operations maintained high government wages and a high level of public sector employment, discouraging private sector growth, and that compact funds used to create and improve infrastructure likewise did not contribute to significant economic growth. Furthermore, many of the projects undertaken by the FSM and the RMI experienced problems because of poor planning and management, inadequate construction and maintenance, or misuse of funds. While the compact set out specific obligations for reporting and consultations regarding the use of compact funds, the FSM, RMI, and U.S. governments provided little accountability over compact expenditures and did not ensure that funds were spent effectively or efficiently. The “full faith and credit” provision made withholding funds impracticable. In addition, under the original compact, both nations also benefited from numerous U.S. federal programs, while citizens of both nations exercised their right under the compact to live and work in the United States as “nonimmigrants” and to stay for long periods of time.

Amended Compacts of Free Association: 2004 through 2023

In 2003, the United States approved separate amended compacts with the FSM and the RMI that went into effect on June 25, 2004, and May 1, 2004, respectively. The amended compacts provide for direct financial assistance to the FSM and the RMI from 2004 to 2023, decreasing in most years, with the amount of the decrements to be deposited in the trust funds for the two nations established under the amended compacts (see table 1). Moreover, the amended compacts require the FSM and the RMI to make one-time contributions of $30 million each to the trust funds, which both countries have done. In addition, the RMI amended compact includes an agreement that allows the U.S. military access to certain sites in Kwajalein Atoll until 2086 and provides $15 million annually starting in 2004, rising to $18 million in 2014, to compensate for any impacts of the U.S. military on the atoll.

The amended compacts and fiscal procedures agreements require that grant funding be targeted to support the countries, in six defined sectors, with the following general objectives: Education: Advance the quality of the basic education system.

Health: Support and improve the delivery of preventative, curative, and environmental care.

Environment: Increase environmental protection and engage in environmental infrastructure planning.

Public sector capacity building: Build effective, accountable, and transparent national, state (in the FSM), and local government and other public sector institutions and systems.

Private sector development: Attract foreign investment and increase indigenous business activity.

Infrastructure: Provide adequate public infrastructure, prioritizing primary and secondary education capital projects and projects that directly affect health and safety, with 5 percent dedicated to maintenance.

The RMI must also target grant funding to Ebeye and other Marshallese communities within Kwajalein Atoll: $3.1 million annually for 2004 through 2013 and $5.1 million annually for 2014 through 2023. In addition, $1.9 million is provided from annual grant funds to address special needs within Kwajalein Atoll, with emphasis on the Kwajalein landowners. Other funds are provided to the RMI government related to U.S. use of the atoll for military purposes. (See app. III for Kwajalein-related compact funding provisions.)

Implementation Framework

Under the amended compacts and according to the fiscal procedures agreements, annual assistance for the six sectors in the FSM and the RMI is to be made available in accordance with an implementation framework with several components. Prior to the annual awarding of compact funds, the countries must submit development plans that identify goals and performance objectives for each sector. In addition, the countries must submit a budget for each sector that aligns with its development plan. The joint management and accountability committees for each country are to approve annual sector grants and, subsequent to the awards, evaluate sector management and progress. Finally, for each sector, the FSM and the RMI are to prepare quarterly financial and performance reports to serve as a mechanism for tracking progress against goals and objectives and monitoring performance and accountability. Figure 2 shows the amended compact implementation framework.

Both countries are to develop multiyear development plans that are strategic in nature and continuously reviewed and updated through the annual budget process and that address the assistance for the defined sectors. The plans are to identify how the countries will use compact funds to promote broad compact development goals such as economic advancement and budgetary self-reliance. The plans are also to identify goals and objectives for each sector.

In addition, through the annual budget process, the FSM and the RMI are to prepare annual sector grant budget proposals that are based on the development plans, including performance goals and indicators. U.S. officials are to evaluate the sector budget proposals each year to ensure that they are consistent with compact requirements and have the appropriate objectives and indicators and that the expenditures are adequate to achieve their stated purposes. Budget consultations between the governments are to take place regarding the sector proposals.

Joint Management and Accountability Committees JEMCO and JEMFAC—jointly established by the United States and, respectively, the FSM and the RMI—are to strengthen management and accountability and promote the effective use of compact funding. Each five-member committee comprises three representatives from the United States and two representatives from the country. JEMCO’s and JEMFAC’s designated roles and responsibilities include reviewing the budgeting and development plans from each of the governments; approving grant allocations and performance objectives; attaching terms and conditions to any or all annual grant awards to improve program performance and fiscal accountability; evaluating progress, management problems, and any shifts in priorities in each sector; and reviewing audits called for in the compacts.

The FSM, the RMI, and the United States are required to provide the necessary staff support to their representatives on the committee to enable the parties “to monitor closely the use of assistance under the Compacts.”

FSM and RMI Grant Management The FSM and the RMI are responsible for grant management, including managing and monitoring the day-to-day operations and financial administration of each sector.

Program monitoring. The FSM and RMI governments are to manage the sector and supplemental education grants and monitor day-to-day operations to ensure compliance with grant terms and conditions. Monitoring also is required to ensure the achievement of performance goals. The governments are to report quarterly to the United States, using a uniform format that includes a comparison of actual accomplishments to the objectives and indicators established for the period; any positive events that accelerate performance outcomes; any problems or issues encountered, reasons, and impact on grant activities and performance measures; and additional pertinent information, including, when appropriate, an analysis and explanation of cost overruns.

In addition, the FSM and the RMI must annually report to the U.S. President on the use of U.S. grant assistance and other U.S. assistance provided during the prior fiscal year, and must also report on their progress in meeting program and economic goals.

Financial administration. The FSM and the RMI must adhere to specific fiscal control and accounting procedures. The fiscal procedures agreements state that the countries’ financial management systems must meet several standards addressing financial reporting, accounting records, internal and budget controls, allowable cost, cash management, and source documentation. The systems must also specify applicable procedures regarding real property, equipment, and procurement. Quarterly financial reports are to be provided to the United States and used to monitor the (1) general budget and fiscal performance of the FSM and the RMI and (2) disbursement or outlay information for each sector grant.

In addition, the FSM and the RMI are required to submit annual audit reports, within the meaning of the Single Audit Act as amended. According to the act, single audit reports are due within 9 months after the end of the audited period. Single audits are focused on recipients’ internal controls over financial reporting and compliance with laws and regulations governing U.S. federal awardees. Single audits also provide key information about the federal grantee’s financial management and reporting. A single audit report includes the auditor’s opinion (or disclaimer of opinion, as appropriate) regarding whether the financial statements are presented fairly in all material respects in conformity with generally accepted accounting principles, and findings about the internal controls related to financial statements; the entity’s audited financial reporting; the schedule of expenditures of federal awards and the auditor’s report on the schedule; the auditor’s opinion (or disclaimer of opinion) regarding whether the auditee complied with the laws, regulations, and provisions of contracts and grant agreements (such as the compact), which could have a direct and material effect on each major federal program, as well as findings on internal controls related to federal programs; a summary of findings and questioned costs for the federal program; corrective action plans for findings identified for the current year as well as unresolved findings from prior fiscal years.

The United States is responsible under the fiscal procedures agreements for using the performance and financial reports to monitor, respectively, the countries’ sector grant performance and their budget and fiscal performance. Also, U.S. officials are responsible for monitoring compliance with grant terms and conditions, including any special grant conditions. If problems are found in areas such as the monitoring of sector grants or a lack of compliance with grant terms, the United States may impose special conditions or restrictions, including requiring the acquisition of technical or management assistance, requiring additional reporting and monitoring, or withholding funds.

Under the implementing legislation, the U.S. President is required to report annually to Congress on the use and effectiveness of U.S. assistance. The President’s report also is to include an assessment of U.S. program and technical assistance provided to the countries and an evaluation of their economic conditions.

According to federal policy implementing the Single Audit Act, U.S. agencies may take actions regarding late audits to ensure that award recipients address audit findings contained in single audit reports. According to the grants management common rule, awarding agencies may issue a high-risk designation to grant recipients if single audits reveal substantial and pervasive problems.

Compact Management Units

In addition to establishing the joint management and accountability committees, each of the three countries has designated units that are responsible for compact administration.

United States. OIA has responsibility for U.S. management and oversight of the FSM and RMI sector and supplemental education grants. OIA’s Honolulu field office has four professional staff— specialists in health, education, infrastructure, and financial management—who perform various activities, such as analyzing FSM and RMI budgets and required reports; reviewing expenditures and performance with FSM and RMI government officials and conducting site visits; providing briefings and advice to OIA, HHS, and State officials regarding progress and problems; providing support for JEMCO and JEMFAC meetings; monitoring the countries’ compliance with grant terms and withholding funds from the countries for noncompliance with requirements such as those expressed in the fiscal procedures agreements or in grant conditions (such remedies did not exist in the previous compact).

FSM. In 2005, the FSM established its Compact Management Board and OCM. The board consists of seven members: two FSM national government appointees, a member appointed by each state, and the head of OCM. The board is responsible for actions such as formulating guidelines for FSM JEMCO members and providing oversight of compact implementation, including conducting investigations to ensure compliance with all terms of the compact. OCM, which has five staff members, is principally responsible for daily communications with JEMCO and the United States regarding JEMCO and compact matters. OCM is expected to undertake various actions, such as visiting the FSM states, to monitor compliance with compact terms.

RMI. The RMI government identified the Office of the Chief Secretary as the official point of contact for all communication and correspondence with the U.S. government concerning compact sector grant assistance. Among the Chief Secretary’s responsibilities are providing oversight management and monitoring of sector grants and activities and coordination. Its role is supported by the Economic Policy, Planning, and Statistics Office, which works with the ministries receiving grants to prepare the annual budget proposals; quarterly reports, including developing performance indicators; and annual monitoring and evaluation reports. The ministries conduct day-to-day oversight.

Supplemental Education Grant

In addition to receiving compact sector grants, the FSM and the RMI are eligible for a Supplemental Education Grant (SEG). The amended compacts’ implementing legislation authorized appropriations beginning in 2005 to the Secretary of Education to supplement the education grants under the amended compacts. The SEG is awarded in place of grant assistance formerly awarded to the countries under several U.S. education, health, and labor programs. Under the fiscal procedures agreements, SEG funds are to be used to support “direct educational services at the local school level focused on school readiness, early childhood education, primary and secondary education, vocational training, adult and family literacy, and the smooth transition of students from high school to postsecondary educational pursuits or rewarding career endeavors.” Funding for the SEG is appropriated to a Department of Education account and transferred to an Interior account for disbursement, with Interior responsible for ensuring that the use, administration, and monitoring of SEG funds are in accordance with a memorandum of agreement among the Departments of Education, HHS, Labor, and the Interior as well as with the fiscal procedures agreements. The U.S. appointees to JEMCO and JEMFAC are required by the compacts’ implementing legislation to “consult with the Secretary of Education regarding the objectives, use, and monitoring of United States financial, program, and technical assistance made available for educational purposes.” JEMCO and JEMFAC are responsible for approving the SEG grants annually.

Compact Grants Targeted Infrastructure, Education, and Health, but Various Issues Constrained Countries’ Use of Funds

JEMCO and JEMFAC approved allocations of compact grants primarily to the infrastructure, education, and health sectors. The FSM and the RMI also both received a new SEG, meant to support the goals and objectives in the education sector development plans. However, the countries’ use of compact funds has been limited by several factors, including delays in implementing infrastructure projects in the FSM and ongoing land use disputes with RMI landowners on both Majuro and Kwajalein. In addition, neither country has planned for the scheduled annual decrements in compact funding, and the FSM has not undertaken local needs assessments to target funds.

Compact Funding Allocation in the FSM

The three largest FSM sectors—education, infrastructure, and health—accounted for almost 85 percent of the compact sector grant allocations in 2006. Of this total, education funding represented 33 percent; infrastructure represented 31 percent, up from 23 percent in 2004; and health represented 21 percent. The other three sectors—public sector capacity building, private sector development, and the environment—together accounted for less than 20 percent of the FSM’s compact funding in 2006. Figure 3 shows the FSM sector grant allocations for 2004 through 2006. (See app. IV for a breakout of compact funding, by FSM state.)

In general, the funds allocated for each sector were used as follows: Education. JEMCO approved allocations for the education sector amounting to $79 million, or 34 percent of compact funds in 2004 through 2006. U.S. assistance is the main source of revenue for the FSM education system. At the FSM national government level, compact funding supports, among other things, the College of Micronesia, the development of national education standards, the national standardized testing program, and the college admissions test. At the state level, the funding is principally targeted to primary and secondary education. Compact funding levels vary among the FSM states, with Chuuk receiving the least funding per student (approximately $500) and Yap receiving the most (approximately $1,300). The difference in the funding levels for these two states is directly reflected in student-to-teacher ratios, with Chuuk having a higher student-to-teacher ratio (19:1) than Yap (8:1). Overall, we found the condition of school facilities and the adequacy of their supplies and equipment to be poorer in Chuuk than in the other FSM states. The FSM is making efforts to improve teacher qualifications through a grant from Education. Despite some progress, FSM educational outcomes remain poor. For example, according to an official from the FSM’s Department of Health, Education, and Social Affairs, graduates of FSM high schools often are not qualified to take college-level courses.

Health. JEMCO approved allocations amounting to $49 million, or 21 percent of compact funds in 2004 through 2006, for health care activities such as medical and nursing services, dispensary services, and public health services. According to health officials in Chuuk and Pohnpei, funding under the amended compact provided for increased budgets for pharmaceuticals and supplies. However, a 2005 FSM Department of Health, Education, and Social Affairs assessment of primary care reported that most facilities lacked an appropriate range and quantity of medicine and supplies in each of the four FSM states. We found that each of the states’ hospitals and primary care facilities lacked some or all of the following: maintenance, adequately trained staff, functional equipment, and medical and pharmaceutical supplies. In addition, health sector allocations varied considerably across the four FSM state governments. For example, in 2006 Yap received more than twice as much health sector funding per person as Chuuk. During our site visits, we observed that Chuuk’s hospital and primary care facilities were in the poorest condition of the four states’ facilities.

Infrastructure. JEMCO approved allocations amounting to $58.7 million, or 25 percent of compact funds in 2004 through 2006, to infrastructure. However, the FSM’s allocation of funds for 2004 and 2005 did not meet the recommendation in the compact’s implementing legislation, which stated that it was the sense of Congress that not less than 30 percent of annual compact sector grant assistance should be invested in infrastructure. In addition, the FSM has not completed any infrastructure projects. As of November 2006, OIA had approved 14 of the FSM’s priority projects, including several schools, a wastewater treatment facility, power and water distribution systems, and road and airport improvements. However, construction on these projects had not begun. Furthermore, according to an OIA official, the FSM had not met a compact requirement to establish and fund an infrastructure maintenance fund.

Public sector capacity building. JEMCO approved allocations for public sector capacity building amounting to $25.6 million, or 11 percent of compact funding in 2004 through 2006. About 12 percent of these funds supported the operations of the public auditors’ offices in three of the four states and the FSM national government. OIA found that this use of the funds met the grant’s purpose. However, according to OIA, most of the remaining funds were to be used to support basic government operations, rather than for the grant’s intended purpose of developing the internal expertise needed to build an effective, accountable, and transparent government. In 2004, JEMCO required that the FSM develop a plan to eliminate funding for such nonconforming purposes by 2009. The FSM submitted a plan to OIA that illustrates an annual reduction of such funding, but the plan does not detail how the nonconforming activities, such as those supporting public safety and the judiciary, will otherwise be funded. FSM officials told us that they plan to replace capacity-building funds in part with local monies. However, recent tax revenues have largely stagnated despite some improvements.

Private sector development. JEMCO approved private sector allocations amounting to $10.2 million, or 5 percent of compact funding in 2004 through 2006. These funds supported more than 38 different offices throughout the FSM—including visitor bureaus, land management offices, and marine and agriculture departments—and economic development and foreign investment activities.

Environment. JEMCO approved allocations for the environment amounting to $6.6 million, or 3 percent of compact funding in 2004 through 2006. These funds supported 21 offices throughout the four states and the FSM national government, including offices responsible for environmental protection, marine conservation, forestry, historic preservation, public works, and solid waste management.

In addition to receiving compact sector funding, the FSM education sector also received $24 million in SEG funds in 2005 and 2006. However, SEG funding was “off cycle” in both years. As a result, according to Interior, the FSM did not receive its 2005 SEG funding until October 2005 and did not receive its 2006 SEG funding until September 2006, near the end of each fiscal year. In Chuuk and Pohnpei, SEG funding mainly supported early childhood education, while in Yap and Kosrae, the largest portion of SEG funding went to school improvement projects that provided supplemental instructional services, such as after-school tutoring and professional development programs. The SEG funding also supported vocational training, skills training, and staff development. In addition, the FSM national government received some SEG funding for monitoring, coordination, technical assistance, and research. The College of Micronesia received SEG funds for financial aid for students and for training students to be teachers through the teacher corps.

Compact Funding Allocation in the RMI

The three largest RMI sectors—infrastructure, education, and health—accounted for 92 percent of the compact sector grant allocations in 2006. Infrastructure received approximately 40 percent of the funding between 2004 and 2006, while education received approximately 33 percent and health received approximately 20 percent. Funding was also allocated for Ebeye special needs; however, only a small portion had been expended as of August 2006. As in the FSM, public sector capacity building, private sector development, and the environment received the least compact funding, totaling less than 4 percent between 2004 and 2006. Figure 4 shows the sector grant allocations for the RMI for 2004 through 2006. (See app. IV for a breakout of compact funding, by RMI sector grants.)

Education. JEMFAC approved allocations for the education sector amounting to $34.2 million, or 33 percent of compact funds in 2004 through 2006. These funds have primarily supported the operations of the primary and secondary schools, providing approximately $800 per student annually. In addition, compact education funding has supported the National Scholarship Board and the College of Marshall Islands. Furthermore, some 2004 through 2006 funding was designated specifically for Ebeye’s schools. The quality of school facilities varies widely in the RMI. Although new classrooms were built with infrastructure funds, we found that many existing classrooms remained in poor condition. For example, in several Marshall Island High School classrooms, ceilings had fallen in, making the classrooms too dangerous to use. The RMI is making efforts to improve teacher qualifications through a grant from Education. However, although improved educational outcomes is a compact priority, standardized test scores show that RMI educational outcomes remain poor. Moreover, according to the College of the Marshall Islands, graduates of RMI high schools often are not qualified to take college-level courses.

Health. JEMFAC approved allocations amounting to $20.6 million, or 20 percent of compact funds in 2004 through 2006, for health care activities such as medical and nursing services, dispensary services, and public health services. A large portion of this funding was allocated to hospital service improvements, such as hiring additional staff, providing specialized training for doctors and nurses, and purchasing equipment in both Majuro and Ebeye.

Infrastructure. JEMFAC approved allocations amounting to $41.7 million, or 40 percent of compact funds in 2004 through 2006, for infrastructure—thereby meeting the RMI compact requirement to allocate at least 30 percent, and not more than 50 percent, of annual compact sector grant assistance funds to this sector. Furthermore, the RMI undertook and completed several infrastructure projects and established and funded an infrastructure maintenance fund, as required. From October 2003 to July 2006, 9 new construction projects and 17 maintenance projects in the RMI either were completed or were under way. All of the new projects were schools where there was a clear title or an existing long-term lease for the land.

Environment, private sector development, and public sector capacity building. JEMFAC approved allocations of $2.6 million, or 3 percent of compact funds in 2004 through 2006, for these three sectors. This funding supported four entities, including the Environmental Protection Authority; the Land Registration Authority; the Office of the Auditor General; and Ministry of Resources and Development, which comprises the Small Business Development Council and the Marshall Islands Visitors’ Authority. The RMI’s Chief Secretary indicated during our meeting in March that the RMI would no longer seek compact funds for activities in these sectors and would instead focus all compact resources on education, health, and infrastructure.

Ebeye. JEMFAC approved allocations amounting to $5.8 million, or almost 6 percent of all compact funds in 2004 through 2006, for Ebeye special needs. However, because OIA obligated none of these funds for Ebeye during 2004 and 2005, JEMFAC approved the reallocation of the entire amount in 2006. According to OIA, approximately $500,000 has been used to pay for utility costs for certain Ebeye residents, while another $500,000 has been used to support utility operations.

In addition to receiving compact sector funding, the RMI also received $12 million in SEG funding for 2005 and 2006. However, because SEG funding was off cycle in both 2005 and 2006, according to OIA, the RMI did not receive its 2005 SEG until August 2005 and its 2006 SEG until September 2006, near the end of each fiscal year. The SEG mainly supported early childhood education but also supported activities at other education levels, including the purchasing of textbooks and supplies; supporting foreign volunteer teachers and substitute teachers; and funding the National Vocational Training Institute, which is an alternative to the mainstream high schools.

Several Factors Have Limited Countries’ Use of Compact Funds

Political factors and land use issues have hindered compact implementation in the FSM and the RMI.

Political factors.

In the FSM, although $58.7 million had been allocated for infrastructure as of September 2006, no infrastructure projects were built because of, among other issues, a lack of internal agreement among the five FSM governments regarding project implementation and the governments’ inability to demonstrate how the funding will be managed in a unified and comprehensive method. For example, one FSM state governor told us that he had refused to meet with the FSM national government’s project management unit because he so strongly disagreed with the unit’s management process. Such disagreements led to delays in the national government’s implementation of its project management unit, and, according to OIA officials, significant challenges remain with respect to implementing the unit.

In the RMI, the government and landowners on Kwajalein Atoll disagreed about the management of the entity designated to use the compact funds set aside for Ebeye special needs, with an emphasis on the needs of Kwajalein landowners. This entity, the Kwajalein Atoll Development Authority (KADA), had had problems accounting for and effectively and efficiently using funds; moreover, according to the RMI’s Chief Secretary, the RMI government developed a restructuring plan for the authority but the plan was not fully implemented. Moreover, Kwajalein landowners disputed the composition of the KADA board and its role in distributing these funds. As a result, as of September 2006, only approximately $1.0 million of the $5.8 million allocated for Ebeye special needs had been released for the community’s benefit.

Land use issues.

In the FSM, project implementation in Chuuk was hindered by the state’s inability to secure leases due to the lack of clear title, established fair market values, and local revenues to pay for land leases. Because of a lack of established fair market values, using compact funding for land lease or purchase under the original compact may have led to unreasonably high payment. A recent study of land valuation practices in Chuuk found sales of comparable land in Weno, the state’s capital, ranging from $5 per square meter to $1,704 per square meter, with the higher payment associated with lease agreements paid for by the compact funding.

In the RMI, land disputes prevented construction of the Uliga Elementary School on Majuro, the country’s main atoll, while another project site on Majuro was abandoned because a lease agreement could not be concluded with the landowner. On Kwajalein Atoll, construction of Kwajalein Atoll High School was delayed because of the inability of the RMI government to secure a long-term lease from Kwajalein landowners for a site large enough to accommodate new facilities for up to 600 students. Similar problems delayed construction of Ebeye Elementary School. RMI projects were built where the land titles were clear and long-term leases were available. However, future RMI infrastructure projects may be delayed because of uncertainty regarding the land titles for remaining projects.

Lack of FSM and RMI Planning for Decrement Threatens Sustainability of Government Services

The FSM and the RMI lack concrete plans for addressing the annual decrement in compact funding and, as a result of revenue shortfalls, will likely be unable to sustain current levels of government services as compact funding diminishes. In both countries, compact funding represents a significant portion of the government revenue—approximately 38 percent in the FSM and 27 percent in the RMI, according to the 2005 single audits. Personnel expenses account for a substantial share of compact funding expenditures. For example, 57 percent of the education sector grant in the FSM and 75 percent of the grant in the RMI paid for personnel in 2006. Over the past 5 years, government employment has grown in both countries: in the FSM, the public sector employment level has varied since 2000 but peaked for this period in 2005, while in the RMI, the government wage bill rose from $17 million in 2000 to $30 million in 2005. Given the countries’ current levels of spending on government services, the decrement—$800,000 per year for the FSM, beginning in 2007, and $500,000 per year for the RMI since 2005—will result in revenue shortfalls in both countries, absent additional sources of revenue. In addition, in the FSM, cessation of nonconforming uses of the public sector capacity building grant will require government operations currently supported by compact funds to rely on a different revenue source.

Officials in the FSM and the RMI told us that they can compensate for the decrement in various ways, such as through the yearly partial adjustment for inflation, provided for in the amended compacts, or through improved tax collection. However, the partial nature of the adjustment causes the value of the grant to fall in real terms, independent of the decrement, thereby reducing the government’s ability to pay over time for imports, such as energy, pharmaceutical products, and medical equipment. Moreover, as we recently reported, although tax reform may provide opportunities for increasing annual government revenue in the FSM and the RMI, the International Monetary Fund, the Asian Development Bank, and other economic experts consider both nations’ business tax schemes to be inefficient because of a poor incentive structure and weak tax collection. In the FSM’s and the RMI’s response to our draft report, both countries raised the possibility that the decrement’s negative effect might be addressed during the periodic bilateral review, which is called for every 5 years, under the compact.

FSM Sector Fund Allocation Was Not Based on Population or Informed by State Needs

The FSM distributed compact funding among its four states according to a formula that did not fully account for states’ differing population sizes or funding needs. The formula, established in an FSM law enacted in January 2005 and in force through 2006, allotted a set percentage to each state as well as 8.65 percent to the national government. Use of the distribution formula resulted in varying per capita compact funding among the states (see table 2). For example, we calculated that in 2006, Yap received more than twice as much education funding per student and health care funding per person as Chuuk.

Both the FSM government and U.S. officials acknowledged that the funding inequality resulted in different levels of government services across states, with particularly low levels of services in Chuuk. For example, an FSM health official told us that Chuuk’s low immunization rate is a result of low per-capita health funding, and, according to a U.S. health official, HHS immunization staff see Chuuk as vulnerable. However, as of October 2006, neither the FSM nor JEMCO had assessed the impact of such differences on the country’s ability to meet national goals or deliver services.

FSM and RMI Have Limited Ability to Measure Progress toward Compact Goals

Although the FSM and the RMI established performance measurement mechanisms, several factors limited the countries’ ability to assess progress toward compact goals. The FSM and the RMI development plans contain sector goals and objectives, and the countries are collecting performance indicators for health and education. However, neither country can assess progress using these indicators because of incomplete and poor quality data. Moreover, problems in the countries’ quarterly performance reports—disorganized structure in the FSM reports as well as incomplete and inaccurate information in both the FSM and the RMI reports—limit their usefulness for tracking performance. A lack of technical capacity also challenges the countries’ ability to collect performance data and measure progress.

Countries Established Mechanisms for Measuring Performance, but Data Shortcomings Limit Ability to Assess Progress toward Goals

Both countries established development plans that include strategic goals and objectives for the sectors receiving compact funds. These strategic goals are broad—for example, both countries list improving primary health care as a strategic goal. In addition, the development plans list various objectives related to each strategic goal. For example, in the FSM, the objectives related to improving primary health care include (1) increasing by 20 percent the use of basic primary health care services provided at dispensaries and health centers and (2) decreasing by 50 percent the use of primary health care services provided at hospital outpatient clinics. According to OIA, outcome measures for some sectors in the FSM were inappropriate, absent, or poorly defined. The RMI health sector’s complex performance hierarchy and lack of readily available baselines for many measures initially made it difficult for the Ministry of Health to collect data. In 2004, JEMCO and JEMFAC required the countries to submit a streamlined and refined statement of performance measures, baseline data, and annual targets to enable the tracking of goals and objectives for education, the environment, health, private sector development and in public sector capacity building. The countries have developed some performance indicators that are intended to help demonstrate progress in education and health, as required by JEMCO and JEMFAC, but have not done so for the other sectors. In 2006, JEMFAC also required the RMI to include in its reports six performance indicators for the environmental sector and two performance indicators for private sector development.

The FSM and the RMI ministries have begun to collect performance indicators for the education and health sectors, as required by JEMCO and JEMFAC. However, the ministries are not yet able to assess progress with the indicators, because baseline data for some indicators were incomplete and the quality of some data was poor.

FSM Performance Indicators

Education sector. As required by JEMCO, in 2005, the FSM began submitting data for 20 indicators to gauge progress in the education sector. In 2005, the FSM submitted some data for 11 of the 20 required education performance indicators. In 2006, it submitted some data for all of the 20 indicators, with data for 5 indicators being incomplete because some states did not submit them. For example, none of the states submitted data for the number and percentage of high school graduates going to college. Chuuk and Yap did not provide the required average daily student attendance rate, and Kosrae, Pohnpei, and Yap did not provide data to establish a baseline for dropout rates. Furthermore, we found some of the data submitted to be of questionable quality. For example, Chuuk’s 2006 submission of data for the 20 indicators indicated a dropout rate of less than 1 percent. However, according to an expert familiar with the Chuuk education system, the actual dropout rate was much higher. Moreover, when comparing the 2005 and 2006 submissions, we identified possible problems with some of the most basic data, such as the number of teachers, students, and schools, due to inconsistent definitions of the indicators. For example, the student enrollment figure reported in 2006 was for public schools only, but the figure submitted in 2005 included both public and private schools, according to an FSM education official. Likewise, reporting on the number of teachers in the school system differed among states. For example, Chuuk reported only the number of teachers, while the other states also included nonteaching staff.

Health sector. FSM state and national health directors agreed on 14 health indicators in April 2006 as a means to gauge progress. The FSM national government and all four states are collecting data for 9 of the 14 indicators, while data for the other 5 indicators have yet to be collected. According to the FSM national government, delays in collecting data for some indicators resulted from the time required to establish a common methodology—that is, definitions and processes—among all of the states and governments. Furthermore, we found that some of the health data collected were ambiguous and therefore difficult to use. For example, it was unclear whether reports on data from Yap’s outer islands relating to 1 of the 14 health indicators, the number of dispensary encounters, covered 1 or 2 months; according to a Yap health official, data for this indicator may be incomplete. Likewise, OIA’s health grant manager indicated that there are weaknesses in the FSM’s health data.

RMI Performance Indicators

Education sector. As required by JEMFAC in 2005, the RMI started tracking some of the 20 indicators as a way to gauge progress in the education sector. The RMI submitted data for 15 of the 20 required education performance indicators in 2005, repeating the submission in 2006 without updating the data, according to an OIA official. JEMFAC required the RMI to submit data for the 5 indicators omitted in 2005—including staff education levels and parent involvement—but did not receive them. In addition, some of the information reported was outdated. For example, the 2005 submission of data for an indicator on student proficiency was based on a test given in the RMI in 2002.

Health sector. The RMI’s Ministry of Health began identifying performance indicators when the amended compact entered into force in 2004. Initially, the ministry developed numerous indicators, which, according to an OIA official, threatened to overwhelm the ministry’s capacity for data collection and management. The ministry has since made refinements and reduced the number of indicators to a more manageable size. However, according to an RMI government report for 2005, it is difficult to compare the ministry’s 2004 and 2005 performances because of gaps in the data reported. For example, limited data were available in 2004 for the outer island health care system and Kwajalein Atoll Health Services. According to the RMI government report, data collection improved and most needed data were available, but some data were still missing.

Shortcomings in Performance Reports Limit Usefulness for Tracking Progress

Although the FSM and the RMI began compiling quarterly performance reports beginning in 2004, as required by the fiscal procedures agreements, the usefulness of the reports for assessing progress toward sector goals is limited by several factors. First, the FSM’s reports had format problems, such as a lack of uniform structure, and some FSM reports were missing. Second, both countries’ reports contained incomplete activity-level information. Third, in both countries’ reports, some activity-level information, such as budget and expenditure data, were inaccurate.

Problematic format. The usefulness of the FSM quarterly performance reports is diminished by a lack of uniform structure, excessive length, and disorganization. In addition, some FSM reports were missing. The five FSM governments’ quarterly 2005 performance reports that we reviewed lacked the uniform structure required by the fiscal procedures agreement. For example, while Kosrae combined sector and activities into one report, Pohnpei reported on each activity separately. Moreover, the volume of reporting was excessive. For example, the 2005 fourth- quarter reports for the FSM education sector totaled more than 600 pages for all five governments’ quarterly submissions and more than 1,500 pages for the entire year. The reports were also disorganized. For example, we found misfiled reports in the FSM’s submission to OIA. We also found that 19 sector reports were missing in 2005. Noting shortcomings similar to those we observed, officials from OIA and the FSM stated that the performance reports could not be used as an effective management tool.

In contrast, the RMI reports were uniformly formatted, as specified by the fiscal procedures agreement, and all required reports were submitted to OIA.

Incomplete information. Both countries’ quarterly reports lacked complete information on program activities. For example, for 2005, the FSM national government’s second-quarter health sector report lacked information on the environmental health and food safety programs (although its other quarterly reports included such information), and Pohnpei’s first-quarter health sector report lacked information on 28 of 31 activities. In the fourth quarter of 2005, Kosrae did not provide budgetary and expenditure information regarding the provision of education and support services to individuals with disabilities.

The RMI’s statistics office gathered information from the RMI’s 2005 quarterly performance reports, which contained primarily activity-level information, and attempted to assess progress in the various sectors. However, because of weaknesses in information collected in 2004, including missing information for some activities for entire quarters, the RMI had difficulty in making comparisons and determining whether progress was being made in many of its sectors.

Inaccurate information. Both the FSM’s and the RMI’s quarterly performance reports contained inaccurate information on program activities. We found that the performance reports for the five FSM governments did not accurately track or report annual activity budgets or expenditures. For example, a 2005 Pohnpei education performance report stated that more than $100,000 per quarter was allocated to pay the salaries of two cultural studies teachers. The state’s Department of Education could not explain the high salary figure but indicated that the number was incorrect. According to FSM officials in the departments we visited, the departments were not given an opportunity to review the budget and expenditure data before the performance reports were sent to OCM and OIA and were therefore unaware of the errors.

Some of the RMI’s quarterly performance reports also contained inaccuracies. For example, although the RMI’s private sector development performance report for the fourth quarter of 2005 stated that eight new businesses were created in 2005, officials from the Ministry of Resources and Development indicated that only four businesses were started that year. In addition, the RMI Ministry of Health’s 2005 fourth-quarter report contained incorrect outpatient numbers for the first three quarters, according to a hospital administrator in Majuro. In the RMI quarterly reports for the education sector, we found several errors in basic statistics, such as the number of students attending school. In addition, RMI Ministry of Education officials and officials in the other sectors told us that they had not been given the opportunity to review final performance reports compiled by the statistics office before the reports’ submission to OIA, and that they were unaware of the errors until we pointed them out.

FSM and RMI Lack Capacity to Collect, Assemble, and Analyze Data to Assess Progress

The FSM’s ability to measure progress is limited by its lack of capacity to collect, assemble, and analyze performance data. According to OIA, the education sector currently lacks a reliable system for the regular and systematic collection and dissemination of information and data. An OCM official also stated that the lack of performance baseline data for the private sector development and environment sectors could be attributable to “weak capacity in performance budgeting and reporting” and that staff lack expertise in one or both areas.

The RMI statistics office, which is the main entity tasked to collect data, indicated that it is not currently able to assess progress toward compact and development plan goals because of the government’s lack of capacity to collect, assemble, and analyze data in all sectors. Likewise, the office’s own capacity is limited. Officials from the office emphasized the importance of building capacity in the ministries to evaluate their activities. In particular, they said that improvements in data collection would enable ministries to respond quickly to requests for information from both national and international sources. For example, the officials noted that the Ministry of Education needs to develop measures to report on the quality of education. The officials also noted that other offices in the ministry should hire more trained professionals, such as the recently hired Assistant Secretary of Administration with a graduate degree in public administration.

FSM and RMI Provided Limited Monitoring of Grant Operations, and FSM Accountability for Compact Funds Faced Challenges

The FSM’s and the RMI’s required monitoring of sector grant performance was limited by capacity constraints, among other challenges. In addition, the countries’ single audit reports for 2004 and 2005, particularly the FSM’s reports, indicated weaknesses in the countries’ financial statements and compliance with the requirements of major federal programs, calling into question their accountability for the use of compact funds. However, the FSM’s timeliness in submitting its single audit reports improved from 2004 to 2005, and the RMI submitted its single audit reports for these 2 years on time.

FSM Provided Limited Monitoring and Accountability for Use of Compact Funds

The FSM’s monitoring of sector grant performance, required by the fiscal procedures agreement, was limited at the national and state levels by lack of capacity in the FSM’s OCM and in the state governments, among other factors. In addition, the FSM’s single audit reports for 2004 and 2005 showed weaknesses in its financial statements and a lack of compliance with requirements of major federal programs, suggesting that the FSM has limited ability to account for the use of compact funds. However, the government’s timeliness in submitting its audit reports improved.

FSM Monitoring

The FSM national government provided limited monitoring of the day-to-day operations of sector grants in 2004 through 2006. In addition to facilitating coordination and communication between the national government and the states and between the FSM and OIA, OCM is intended to have some responsibility for overseeing compact-funded programs. However, according to the office’s director, OCM has neither the staff nor the budget to undertake such activities. As of November 2006, OCM had five of its own professional staff, including the director. Prior to 2007, staff from other FSM national departments were assigned to the office, but only the economic affairs and finance departments provided detailees. One staff was converted to a permanent hire in OCM and it is unclear if the other detailee will remain at OCM or return to the Office of Economic Affairs. The FSM Office of the National Public Auditor had not conducted any performance or financial audits of compact sector grants.

The FSM states, as subgrantees of compact funds, are required to submit performance reports to the FSM national government. However, the Director of OCM indicated that he did not know how or whether each state, other than Chuuk, was set up to perform day-to-day monitoring of sector grants. In Chuuk, a financial control commission was established in July 2005 to address financial management and accountability requirements. However, while the commission had exercised a financial control function, it had not monitored the performance of the sector grants. In addition, the FSM’s Secretary of Foreign Affairs and JEMCO representative told us that all of the states were weak on monitoring. Although the states’ public auditors could conduct audits of compact performance, their efforts had been limited to financial audits. For example, in both Yap and Pohnpei, the public auditor’s office issued four audits in 2005, two of which were for compact-funded activities. Furthermore, in Chuuk, the public auditor position required by the state constitution was not filled, prompting JEMCO to deny the Chuuk auditor’s office state-budgeted funds.

FSM Accountability

The FSM’s single audit reports for 2004 and 2005 showed that the FSM’s ability to account for the use of compact funds was limited, as shown by weaknesses in its financial statements and lack of compliance with requirements of major federal programs. However, the FSM’s timeliness in submitting its audit reports improved during this period.

FSM financial statements. In general, the FSM single audit reports call into question the reliability of the country’s financial statements. Of the single audit reports that the FSM national and state governments submitted for 2004 and 2005, only one report—Pohnpei state’s report for 2005—contained an unqualified opinion on the financial statements, while the other reports contained qualified, adverse, or disclaimed opinions. (See app. V for the FSM’s single audit financial statement opinions.) For example, for the FSM 2005 reports, the auditors’ inability to obtain audited financial statements for several subgrantees led them in part to render qualified opinions. Chuuk reports for 2004 and 2005 contained disclaimers of opinion related to seven and eight major issues, respectively, including the inability of auditors to determine the propriety of government expenses, fixed assets, cash, and receivables; the capital assets of one of its subunits; and the accounts payable and expenses of the Chuuk State Health Care Plan. In addition, the single audit reports include specific findings related to the financial statements. For example, the national and state governments’ 2005 single audit reports contained 57 reportable findings of material weaknesses and reportable conditions in the governments’ financial statements, such as the lack of sufficient documentation for (1) the disposal of fixed assets, including a two-story building, and (2) purchases of vehicles and copiers. Fourteen of the FSM 2005 findings had been cited as reportable findings in previous audits.

FSM compliance with requirements of major federal programs. Each of the FSM national and state governments’ single audit reports for 2004 and 2005 contained qualified opinions on the governments’ compliance with requirements of major federal programs, and the 2004 and 2005 reports noted 47 and 45, respectively, total reported weaknesses, on compliance. (App. V shows the FSM single audit reports’ total numbers of material weaknesses and reportable conditions regarding compliance with requirements of major federal programs.) Four of the 2005 reports’ 45 findings recurred from the 2004 reports. In 2006, the FSM developed corrective action plans that addressed 60 percent of the 2005 audit findings of noncompliance.

Timeliness of audits. The timeliness of the FSM national and state governments’ submission of single audits reports improved from 2004 to 2005. The national government submitted its 2004 and 2005 single audits in August and September 2006, 14 and 2 months, respectively, after the due dates. While the four FSM states submitted their 2004 single audits from 7 to 13 months after the due dates, three of the four states submitted their 2005 audits within the 9-month period allowed by OIA.

RMI Monitoring Was Limited, but Accountability Improved

The RMI government provided limited monitoring of sector grants, in part because of the lack of capacity in the Chief Secretary’s office and in most ministries that receive compact funds. The RMI’s single audit reports for 2004 and 2005 indicated weaknesses in its financial statements and compliance with requirements of major federal programs. However, the government developed corrective action plans to address the 2005 findings related to such compliance. The RMI government submitted its single audits for 2004 and 2005 on time.

RMI Monitoring

The RMI’s Chief Secretary, who is responsible for compact implementation and oversight, monitored sector grant operations on a limited basis. Day-to-day monitoring and oversight responsibilities were delegated to the ministries that receive compact funds. According to the RMI’s statistical office, it lacked the time and resources to devote to oversight and focused instead on helping the ministries to develop the annual budgets and sector portfolios and the quarterly and annual monitoring and performance reports. The office noted the ministries’ lack of personnel and skills needed to collect, assemble, and analyze data and emphasized the importance of building the ministries’ capacity to monitor and evaluate their own compact-funded activities. (However, according to an OIA official, the Ministry of Health made important strides in measuring performance and using performance management to improve the delivery of services.) The RMI Auditor General’s office conducted financial audits, but no performance audits, of compact sector grants. The RMI, like the FSM, failed to submit its required annual reports in a timely manner.

RMI Accountability

The RMI’s single audit reports for 2004 and 2005 contained opinions and findings that indicated weaknesses in its financial statements and compliance with requirements of major federal programs. However, the government developed a corrective action plan that addressed all of the findings on compliance in its 2005 single audit report. The RMI submitted both of the single audit reports on time.

RMI financial statements. The RMI’s single audit reports for 2004 and 2005 contained qualified opinions on the government’s financial statements. (See app. V for a list of the opinions on financial statements in the RMI’s audit reports for 2001 through 2005.) For example, several of the RMI’s subgrantees, such as the Ministry of Education’s Head Start program and the Kwajalein Atoll Joint Utilities Resources, Inc., were unable to produce audited financial statements.

In addition, the 2005 single audit found two reportable findings in the RMI’s financial statements. The report cited the lack of audited financial statements and the lack of a complete asset inventory listing in the RMI as material weaknesses. Both of these findings had been cited in previous audits.

RMI compliance with requirements of major federal programs. Both of the RMI’s single audit reports for 2004 and 2005 contained qualified opinions on the government’s compliance with requirements of major federal programs. In addition, the 2005 report noted 11 reported weaknesses in the country’s compliance with requirements of major federal programs. The RMI developed corrective action plans to address all of these findings, 2 of which had recurred from 2004. (App. V shows the total number of material weaknesses and reportable conditions findings for the RMI for 2001 through 2005 single audit reports.)

Timeliness of audits. The RMI submitted its 2004 and 2005 single audit reports within the 9-month period required by the Single Audit Act.

Interior Took Oversight Actions but Faced Challenges

As administrator of the amended compact grants, OIA monitored the FSM’s and RMI’s sector grant and fiscal performance, assessed their compliance with compact conditions, and took action to correct persistent shortcomings. However, although OIA provided technical assistance to help the FSM improve its single audit timeliness, the office did not address recurrent findings and adverse opinions in the FSM and the RMI audits. OIA’s oversight efforts were hindered by the need to address problems in the FSM and by internal staffing challenges. In addition, Interior’s Office of Inspector General actively engaged in reviewing the countries’ implementation of the compact, although the office did not release its products to the public, and, as of October 2006, several reports remained in draft form.

OIA Monitored Performance, Assessed Compliance, and Acted to Correct FSM and RMI Shortcomings

OIA undertook several administrative oversight efforts including monitoring the countries’ sector grant performance, monitoring the countries’ fiscal performance and sector grant outlays, and assessing the countries’ compliance with sector grant conditions. OIA’s efforts also included actions such as suspending or withholding grant payment in response to persistent shortcomings that it identified.

Monitoring sector grant performance. OIA grant managers monitored the countries’ sector grant performance, using site visits and analysis of the quarterly sector performance reports. For example, in 2006, OIA’s visits and analyses led it to determine that 14 of the 61 offices in the FSM that receive private sector and environment sector grants were underperforming or nonperforming. As a remedy, OIA recommended and JEMCO agreed that future sector funding for these entities should be on a project basis. Also, in response to the shortcomings of the FSM’s and RMI’s performance evaluations for 2004 and 2005, JEMCO and JEMFAC, under OIA’s chairmanship, called for improved performance measurement and monitoring. In the FSM, JEMCO reprogrammed unused compact funds to improve capacity in this area. In addition, in response to recurrent lack of uniformity in the FSM’s performance reports, OIA rejected the first-quarter reports for 2006 (although it accepted nonuniform FSM reports later in the year). Although OIA had used the performance reports to monitor sector performance, it was unaware, until we notified the office, that almost 20 percent of the FSM’s 2005 performance reports were missing.

Monitoring sector grant outlays and fiscal performance. OIA monitored the countries’ fiscal performance and sector grant outlays through analyses of the countries’ quarterly financial reports and, as Chair of JEMCO and JEMFAC, through reviews of the countries’ single audit reports. In August 2004, OIA analyses of both countries’ third-quarter cash transactions reports showed that some sector grant funding had not been spent. In response, OIA delayed payments to the FSM and the RMI for those sectors.

Reviewing single audit reports. As Chair of JEMCO and JEMFAC, OIA led the committees’ reviews of, and responses to, the FSM’s and the RMI’s single audit reports. At a March 2006 JEMCO meeting, noting that single audits were the most important indicator of financial stability provided by a grantee to a grantor, OIA’s Director of Budget and Grants Management said that OIA intended to “apply a remedy” for single audit noncompliance beginning October 1, 2006, if the FSM failed to complete all of its audit reports by July 1, 2006, or within 3 months of the due date. The Director stated that OIA’s response would include withholding cash payments for various grants not related to the provision of medical care, emergency public health, or essential public safety. The Director also stated that OIA would notify and seek the concurrence of other U.S. agencies providing financial and technical assistance in designating the FSM a “high-risk grantee.” Three FSM states met OIA’s July 1 deadline, while the national government and Chuuk missed the deadline by 2 and 1 months, respectively. OIA ensured that the FSM received technical assistance to help address its single audit reports’ lack of timeliness, placing advisors through a third party in the state governments to facilitate their completion of overdue reports. In 2004, we recommended that OIA initiate appropriate actions to correct compact-related single audit findings and respond to violations of grant conditions or misuse of funds identified by single audits. Since then, OIA has provided technical advice and assistance to help the FSM and the RMI improve the quality of their financial statements and develop controls to resolve audit findings and prevent recurrences.

Assessing compliance with grant conditions. OIA assessed the FSM’s and the RMI’s compliance with sector grant conditions through site visits to the countries and reviews of the countries’ submitted paperwork. In certain instances of the FSM’s or the RMI’s noncompliance with grant conditions, OIA monitored progress toward meeting the requirements and allowed the countries more time, while in other instances, OIA did not specifically address FSM or RMI noncompliance. (See apps. VI and VII for a list of sector grant special terms and conditions and their status.) However, OIA took corrective actions in several instances.

Suspended grant funding. In December 2004, OIA staff conducting a site visit were unable to verify that food purchased by the program had been received by the Chuuk Education Department or served to students. In response, OIA suspended the Chuuk 2005 education grant’s meal service program funding of almost $1 million. OIA contacted Interior’s Office of Inspector General for a follow-up investigation to determine whether Chuuk was misusing compact funds.

Withheld grant funding. OIA withheld the FSM’s May and June 2004 public sector capacity building and private sector development grant funding—approximately $2.4 million—when the FSM national government missed a March 2004 deadline to provide a transition plan for ending nonconforming use of the grant. In addition, OIA withheld awarded funds for the FSM infrastructure grant and the RMI Kwajalein special needs grant until the countries met grant terms.

After our July 2005 report, which recommended that OIA determine the amount of staff travel to the FSM and the RMI needed to promote compliance with compact and grant requirements, OIA travel to the countries increased. Whereas travel to the two countries accounted for 15 percent of overall staff time in 2004, it rose to 20 percent in 2005 and 25 percent for the first three quarters of 2006. However, according to an OIA assessment, OIA’s current budget does not support extended, detailed reviews of U.S. funds in the various remote islands.

OIA Oversight Faced Challenges

OIA’s oversight was hampered by the need to respond to problems in the FSM as well as by the office’s difficulty in filling staff positions.

FSM challenges. The need to respond to various challenges facing the FSM reduced OIA’s administrative oversight of assistance provided under the compact. According to the Director of OIA, the FSM’s budgets for 2005 through 2007 were poorly prepared, and, as a result, OIA grant managers were forced to spend an inordinate amount of time readying the budgets for the JEMCO meetings. In addition, according to OIA’s Director of Budget and Grants Management, the constant need to respond to emergent issues, such as education issues in Chuuk and land issues in the FSM, limited OIA’s ability to conduct oversight.

Staffing challenges. Although OIA increased the 2006 budget for the Honolulu field office so that it could increase the number of staff positions, those new positions remained vacant. In December 2005, an advertised position to be based in Guam went unfilled, while an education grant specialist position in Honolulu was advertised twice after April 2006 but remained vacant for the entire fiscal year. In addition, the OIA private sector development and environment specialist position became vacant in September 2006.

Interior’s Inspector General Reports Identified Problems but Were Not Published

Interior’s Office of Inspector General undertook compact oversight activities, finding deficiencies in the FSM’s and the RMI’s compact implementation and accountability. In 2005 and 2006, the Inspector General conducted six reviews (three remained in draft form as of October 2006) addressing issues such as environmental and public health concerns in Chuuk (draft dated June student meal programs in Chuuk (draft dated June 2005), the RMI’s progress in implementing the amended compact (final report issued August 2005), the FSM’s progress in implementing the amended compact (draft dated January 2006), the FSM’s infrastructure grant implementation (final report issued July the FSM’s compact trust fund status (final report issued July 2006).

Although the Inspector General distributed the three final reports to OIA and the FSM and the RMI governments, the final reports were not released to the public or disseminated widely in the FSM and the RMI. However, one of the draft reports circulated unofficially and was cited by the media. According to the Inspector General, the reports are considered advisory in nature and, as such, no specific response is required from OIA regarding the recommendations. Nonetheless, OIA officials stated that the office has found the recommendations useful and has made an effort to address them.

Conclusions

Since enactment of the amended U.S. compacts with the FSM and the RMI, the two countries have made significant efforts to meet new requirements for implementation, performance measurement, and oversight. However, in attempting to meet these requirements, both countries face significant challenges that, unless addressed, will hamper the countries’ progress toward their goals of economic advancement and budgetary self-reliance before the annual grant assistance ends in 2023.

In 2004 through 2006, compact grants were, for the most part, allocated among the countries’ six sectors as required, with emphasis on health, education, and infrastructure, and the countries have made progress in implementing the grants in most sectors. However, despite the revenue shortfalls they will face with the scheduled grant decrements, neither nation has concrete plans to raise the funds needed to maintain government services in the coming years. Furthermore, although the FSM’s allocation of funds among the states and among sectors caused significant inequalities in per-student support for education and per-capita funding for health care, neither the FSM nor JEMCO evaluated the impact of these differences on the country’s ability to meet national goals or deliver services.

Furthermore, although the countries worked to develop the sector grant performance indicators required by JEMCO and JEMFAC, a lack of complete and reliable baseline data limited the countries’ use of the indicators to measure performance and evaluate progress. Moreover, weaknesses in the countries’ required quarterly performance reports—including missing and, in some cases, inaccurate activity data—limited the reports’ usefulness. Unless the FSM and the RMI take steps to correct these weaknesses in performance measurement, their ability to use the sector grants to optimal effect will continue to be curtailed.

Recommendations for Executive Action

Given the FSM’s and the RMI’s need to maximize the benefits of compact assistance before the 2023 expiration of annual grants and to make steady progress toward the amended compact goals, we are providing the following seven recommendations to the Secretary of the Interior.

To improve FSM grant administration, planning, and measurement of progress toward compact goals, and to ensure oversight, monitoring, and accountability for FSM compact expenditures, we recommend that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of JEMCO, to coordinate with other U.S. agencies on the committee in working with the FSM national government to take the following actions: establish plans for sector spending and investment by the FSM national and state governments to minimize any adverse consequence of reduced funding resulting from the annual decrement or partial inflation adjustment; evaluate the impact of the current FSM distribution between states and sectors on the ability of the nation to meet national goals or deliver services; fully develop the mechanism for measuring sector grant performance and collect complete baseline data to track progress toward development goals; and ensure that the quarterly performance reports contain reliable and verified program and financial information for use as a monitoring tool by both the FSM and the U.S. governments.

To improve RMI grant administration, planning, and measurement of progress toward compact goals, and to ensure oversight, monitoring, and accountability for RMI compact expenditures, we recommend that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of JEMFAC, in coordination with other U.S. agencies on the committee in working with the RMI government to take the following actions: establish plans for sector spending and investment that minimize any adverse consequence of reduced funding resulting from the annual decrement or partial inflation adjustment; fully develop the mechanism for measuring sector grant performance and collect complete baseline data to track progress toward development goals; and ensure that the quarterly performance reports contain reliable and verified program and financial information for use as a monitoring tool by the RMI and the U.S. governments.

Agency Comments and Our Evaluation

We received comments from the Department of the Interior as well as from the FSM and the RMI (see app. VIII through X for detailed presentations of, and our responses to, these comments). We also received technical comments from the Departments of Education, Health and Human Services, and State, which we incorporated in our report as appropriate.

Interior concurred with our recommendations and stated that the report was accurate and well balanced. The FSM also viewed the report as a balanced and fair assessment of its progress in planning for sustainability, measuring progress, and ensuring accountability and agreed with our overall conclusion that it faces significant challenges in meeting the various amended compact requirements. The FSM, however, defended its distribution formula for allocating compact funds to the national and state governments. The RMI acknowledged that its lack of capacity has slowed its implementation of the compact’s monitoring and reporting requirements. The RMI also stated that it has refrained from expanding ministry staffs, given the need for budgetary restraint.

In addition to providing copies of this report to your offices, we will send copies to interested congressional committees. We will also provide copies of this report to the Secretaries of Education, Health and Human Services, the Interior, and State as well as the President of the Federated States of Micronesia and the President of the Republic of the Marshall Islands. We will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions regarding this report, please contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix XI.

Objectives, Scope, and Methodology

This report examines, for 2004 through 2006, (1) the Federated States of Micronesia’s (FSM) and the Republic of the Marshall Islands’ (RMI) use of compact funds; (2) FSM and RMI efforts to assess progress toward their stated development and sector goals; (3) FSM and RMI monitoring of sector grants and accountability for the use of compact funds; and (4) the Department of the Interior’s (Interior) administrative oversight of the compacts. Appendix II contains information about activities funded by key U.S. programs.

To report on the FSM’s and the RMI’s use of amended compact funds, we reviewed the U.S., FSM, and RMI annual compact reports for 2004 and 2005; FSM and RMI strategic planning documents and budgets; briefing documents prepared by Interior’s Office of Insular Affairs (OIA) in preparation for the annual bilateral meetings with the two countries; and FSM and RMI single audits for 2001 through 2005. We reviewed all 2004, 2005, and 2006 grant agreements with both countries obtained from OIA, including special terms and conditions included in these agreements. We compared and analyzed fund uses with the purposes specified in the amended compacts, the implementing legislation, subsidiary fiscal procedures agreements, and sector grant special terms and conditions.

To identify issues that impact the use of compact funds, we discussed planning efforts with U.S., FSM, and RMI government officials and identified issues through our own analysis that affected planning, such as the FSM’s use of its distribution formula. We reviewed relevant documents such as FSM and RMI legislation, and we also reviewed documentation provided to the U.S. government, such as the FSM’s transition plan to eliminate the nonconforming spending under the public sector capacity building grant. To compute education spending per student, we used FSM and RMI grant data and student and population statistics. To calculate the variability in health spending per capita across the four FSM states, we used FSM grant data and population statistics. We did not calculate health spending per capita for the RMI. We determined that these data were sufficiently reliable for the purposes of our report.

Although we were asked to evaluate the effectiveness of the compact funds, we determined it was too soon after the amended compacts’ implementation to do this; therefore, we report on whether the countries are able to measure progress. To identify FSM and RMI efforts to assess progress toward their stated goals, we reviewed FSM and RMI strategic planning documents. We evaluated the framework in place for the FSM and the RMI to measure the achievement of stated goals in strategic planning documents and compared them with the countries’ budget and quarterly performance documents. To determine whether the quarterly performance reports were being used as a tool to measure progress, we analyzed quarterly performance reports for 2005 consistently across five sectors and the accuracy of the budget information. We then verified the results of our analyses with each office or department we interviewed in the FSM and the RMI in March and April 2006. We asked if they used these reports to measure progress and discussed discrepancies we found in the reports. To identify obstacles to measurement and achievement of goals, we reviewed the U.S. annual compact reports for 2004 and 2005, FSM and RMI annual compact reports for 2004 and 2005, FSM and RMI strategic planning documents and budgets, U.S. government briefing documents, and the RMI’s 2005 Performance Monitoring Report. We verified this information with FSM, RMI, and OIA officials.

To identify the extent to which the FSM and RMI governments conducted monitoring and accountability activities, we reviewed the amended compacts and fiscal procedures agreements to identify specific monitoring responsibilities. We also reviewed the U.S. government briefing documents, as well as the minutes and resolutions, when available, that were related to the Joint Economic Management Committee (JEMCO) and Joint Economic Management and Financial Accountability Committee (JEMFAC) meetings. We further reviewed FSM and RMI documents—such as budget justifications and portfolios, quarterly performance reports, and annual financial reports for 2004 through 2006, as available—submitted by the FSM and RMI governments to the U.S. government to confirm compliance with accountability reporting requirements. We discussed the sufficiency of quarterly performance reports with OIA officials. We obtained the single audit reports for 2001 through 2005 from the FSM National Auditor’s Web site and the RMI’s Office of the Auditor General. These reports included audits for the FSM national government; the state governments of Chuuk, Kosrae, Pohnpei, and Yap; and the RMI national government. In total, the 30 single audit reports covered 5 years, a period that we considered sufficient for identifying common or persistent compliance and financial management problems involving U.S. funds. We determined the timeliness of submission of the single audit reports by the governments using the Federal Audit Clearinghouse’s (FAC) “Form Date,” which is the most recent date that the required SF-SAC data collection form was received by the FAC. We noted that the Form Date is updated if revised SF-FACs for that same fiscal year are subsequently filed. Our review of the contents of the single audit reports identified the auditors’ opinions on the financial statements, matters cited by the auditors in their qualified opinions, the numbers of material weaknesses and reportable conditions reported by the auditors, and the status of corrective actions. We did not independently assess the quality of the audits or the reliability of the audit finding information. We analyzed the audit findings to determine whether they had recurred in successive single audits and were still occurring in their most recent audit, and we categorized the auditors’ opinions on the financial statements and the Schedules of Expenditures of Federal Awards.

To determine oversight activities conducted by the OIA Honolulu office, we reviewed senior management statements regarding the purpose and function of this office and job descriptions for all staff. To identify the extent that the Honolulu office staff traveled to the FSM and the RMI, we obtained the travel records for all program specialists and discussed this information with OIA officials to ensure that these data were sufficiently reliable for our use. We calculated the percentage of time spent conducting on-site reviews in the two countries between 2004 and the third quarter of 2006 and compared these data with the total available work time for the program specialists.

In addition, to report on the FSM’s and the RMI’s use of noncompact federal funds, we updated our prior review of U.S. programs and services that GAO issued in 2002. The prior review selected 13 programs and services, including those with the largest expenditures and loans over a 15-year period, as well as each of the services that the U.S. government agreed to provide under the compact. Funding for 3 of these programs was consolidated into the Supplemental Education Grant under the amended compacts and was excluded from this update. Moreover, to report on OIA- awarded technical assistance and operations and maintenance improvement program grants, we selected several projects that assisted compact implementation or complemented sector grant priorities, such as education and health, from among grants awarded to the FSM and the RMI for 2004 and 2005. We also requested applications and grant evaluation information for these projects from OIA. To determine the total amount of noncompact federal funding that the FSM received from the United States, we used the schedule of expenditures of federal awards from the 2004 and 2005 single audit reports of the FSM national government, the four FSM states, and the College of Micronesia to calculate total FSM expenditures. For the FSM national government expenditure total, we included only direct expenditures and did not include funds that were passed from the national government to the states. We compiled the expenditure amounts passed directly to the four states from each of the state’s respective single audit reports and combined these states totals and the national government totals to obtain the total FSM expenditure amount. We excluded compact and amended compact expenditures from our calculation. For the RMI, the federal awards section of the RMI and College of the Marshall Islands 2004 and 2005 single audit reports was used to calculate total RMI expenditures. The amount of compact funding for the FSM and the RMI was compared with the total amount of federal expenditures for 2004 and 2005 to get the percentage of noncompact U.S. federal funding.

To address all of our objectives, we held interviews with officials from Interior (Washington, D.C.; Honolulu, Hawaii; the FSM; and the RMI) and the Department of State (Washington, the FSM, and the RMI). We also interviewed officials from the Departments of Health and Human Services (Washington and Honolulu); Education (Washington; San Francisco, California; and Seattle, Washington); and Agriculture (Washington, Honolulu, and Guam); the Federal Aviation Administration (Honolulu); the National Weather Service (Honolulu); the Federal Emergency Management Agency (FEMA) (San Francisco and Honolulu); and the U.S. Postal Service (Honolulu). We traveled to the FSM (Chuuk, Kosrae, Pohnpei, and Yap) and the RMI (Arno, Kwajalein, and Majuro Atolls). In addition, in Chuuk, we visited the islands of Fanapangas, Fefan, Polle, Toll, Tonoas, Udot, Uman, Ut, and Weno. In both countries, we visited primary and secondary schools, colleges, hospitals, dispensaries and community health centers, farms, fisheries, post offices, weather stations, telecommunication offices, and airport facilities. We discussed compact implementation with the FSM (the national, Chuuk, Kosrae, Pohnpei, and Yap governments) and the RMI officials from foreign affairs, finance, budget, health, education, public works, and audit agencies. Furthermore, we met with the RMI’s Chief Secretary and the FSM’s Office of Compact Management. In Kwajalein Atoll, we also met with officials from the U.S. Army Kwajalein Atoll and Ebeye’s Mayor, with its Ministry of Finance, and with the public utility and health and education officials to discuss compact implementation issues. We met with a representative from the FSM’s Micronesian Seminar, a nonprofit organization in Pohnpei that provides public education on current FSM events, to obtain views on compact implementation and development issues. We also observed 2005 and 2006 JEMCO and JEMFAC meetings. We met with officials from Interior’s Office of Inspector General (Guam, Honolulu, and Washington) to discuss ongoing investigations in the FSM and the RMI.

We conducted our review from October 2005 through December 2006 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Departments of the Interior, State, and Health and Human Services as well as the governments of the FSM and the RMI. All of these entities’ comments are discussed in the report and are reprinted in appendixes VIII through X. In addition, we considered all technical comments and made changes to the report, as appropriate.

U.S. Program Assistance to the FSM and the RMI

In addition to compact funding, both the FSM and the RMI received approximately 30 percent of their total U.S. expenditures during 2004 and 2005 from other federal agencies, including the Departments of Agriculture, Education, Health and Human Services, and Transportation. As part of the amended compacts’ subsidiary agreements with the RMI and the FSM, the United States agreed to extend and subsidize essential federal services, such as weather, aviation, and postal services that were provided under the original compact. The amended compacts also extend the programs and services of FEMA to the FSM and the RMI, but only until December 2008. At that time, responsibility for disaster assistance in the countries is transferred from FEMA to the United States Agency for International Development.

U.S. program assistance is authorized by various sources, including the amended compacts and their implementing legislation as well as other U.S. legislation.

Table 3 shows the amount of noncompact U.S. program funds expended on the FSM and the RMI for 2004 and 2005. Details of several key U.S. programs follow in tables 4 through 14.

FSM and RMI Sector Grants, 2004 through 2006

Table 16 lists the compact sector grant allocation to the five FSM governments in 2004 through 2006. Table 17 lists the compact sector grant allocation of the RMI, including the Kwajalein funding, in 2004 through 2006.

Single Audit Reports for the FSM and the RMI, 2001 through 2005

The FSM national government and the individual states in most cases did not submit their required single audit reports on time for 2001 through 2005, while the RMI has generally improved the timeliness of its single audits, with its last three reports submitted by the established deadlines. In nearly all cases, auditors rendered qualified audit opinions on both the financial reporting and compliance with requirements of major federal programs for those single audit reports that were submitted. Furthermore, internal control weaknesses have persisted in both countries since we last reported on single audits in October 2003. In March 2006, JEMCO threatened to take action, such as withholding funds, designating the FSM as a high-risk grantee, or conditionally approving sector grants for 2007, if the FSM and its states did not submit their 2005 single audits by July 1, 2006.

Single Audits Were Not Timely, but Timeliness Improved

The FSM and the RMI are required to submit audit reports each year to comply with compact and fiscal procedures agreement requirements. The submitted audits are to be conducted within the meaning of the Single Audit Act, as amended. Single audits are a key control for the oversight and monitoring of the FSM and RMI governments’ use of U.S. awards, and are due to the Federal Audit Clearinghouse 9 months after the end of the audited period. All single audit reports include the auditor’s opinion on the audited financial statements and a report on the internal controls related to financial reporting. The single audit reports also include the auditor’s opinion on compliance with requirements of major federal programs and a report on internal controls related to compliance with laws, regulations, and the provisions of contracts or grant agreements. The FSM national government and the individual states in most cases did not submit their single audit reports on time for 2001 through 2005, while the RMI has generally improved the timeliness of its single audits, with its last three reports submitted by the established deadlines. Table 18 shows the timeliness of reports for the FSM and the RMI.

The lack of timeliness of the single audit reports for 2001 through 2005, especially for the FSM and its four states, has meant that U.S. agencies have limited knowledge of the territorial governments’ accountability over U.S. funds received. In addition, the governments’ inability to prepare financial statements and have them audited within 9 months of the fiscal year-end suggests weaknesses in the underlying financial systems and processes needed to produce financial information to efficiently and effectively manage the day-to-day operations of government.

Nearly All Audit Opinions on Financial Reporting Were Qualified and Contained Material Weaknesses and Reportable Conditions

Among the 30 audit reports on financial reporting submitted by the FSM national and its state governments and the RMI for 2001 through 2005, 26 reports received qualified opinions. In 2005, Pohnpei received an unqualified (“clean”) audit opinion on their financial statements. In 2004 and 2005, Chuuk received a disclaimed opinion on its financial statement, and Yap received a qualified/adverse opinion on its 2004 financial statement. Table 19 shows the type of financial statement audit opinions for the FSM and the RMI from 2001 through 2005.

All of the audit opinions of the FSM national government’s financial statements from 2001 through 2005 were qualified. The opinions were qualified because of the lack of supporting evidence and restrictions on the scope of the audit. For example, the auditors qualified their opinion on the financial statements in the 2005 FSM report due to the following matters: Their inability to determine (1) the propriety of cash and cash equivalents, receivables, advances, and amounts due to the FSM state governments for the governmental activities and the general fund; (2) receivables and amounts due to the FSM state governments for the U.S. Federal Grants Fund and the aggregate remaining fund information; and (3) cash and cash equivalents and receivables for the Asian Development Bank Loan Fund, and their effect on the determination of revenues and expenditures/expenses for government activities and the remaining aggregate remaining fund information.

The lack of audited financial statements of the National Fisheries Corporation; Micronesia Longline Fishing Company; Yap Fishing Corporation; Yap Fresh Tuna Inc.; Chuuk Fresh Tuna, Inc.; and Kosrae Sea Venture, Inc.

In addition, all of the audit opinions of the RMIs’ financial statements during the 2001 through 2005 period were qualified. For example, as of 2005, the auditors still could not determine the following: the propriety of governmental activities’ capital assets, net assets invested in capital assets, and the net of related debt and depreciation expenses.

The auditors also were unable to obtain audited financial statements for the following RMI component units: Ministry of Education Head Start Program; Air Marshall Islands, Inc.; Kwajalein Atoll Joint Utilities Resources, Inc.; and Marshall Islands Development Bank.

The single audits also identified material weaknesses and reportable conditions related to the 2005 financial statements reports, totaling 57 for the FSM and 2 for the RMI (see table 20). These findings indicated a lack of sound internal control over financial reporting, which is needed to (1) adequately safeguard assets; (2) ensure that transactions are properly recorded; and (3) prevent or detect fraud, waste, and abuse. For example, in the 2005 FSM single audit report, material weaknesses included (1) the lack of documentation to support the amounts and disposition of fixed assets, (2) the lack of reconciliation of U.S. program receivables, (3) the lack of monitoring of receivable billing and collecting, and (4) unreimbursed U.S. expenditures. In the RMI 2005 single audit, the auditors found material weaknesses that included the use of unaudited financial statements from several component units and the lack of fixed asset inventory.

We found that 14 of the 57 findings previously mentioned from the 2005 FSM single audit report on financial reporting were recurring problems from the previous year or had been reported for several consecutive years. Likewise, the 2 findings from the 2005 RMI single audit report were recurring problems reported for several consecutive years. The FSM has developed corrective action plans to address about 91 percent of the financial statement findings in the 2005 single audits, and the RMI has developed plans for both of its financial statement reportable findings. For example, the FSM said that it would make efforts to reconcile intergovernmental balances and discuss this issue with all four states in 2006, and the RMI said that it would hire a consultant qualified to conduct the valuation of fixed assets.

All Audit Opinions on Compliance with Requirements of Major Federal Programs Were Qualified and Contained Material Weaknesses and Reportable Conditions

In addition to the auditor’s report on financial statement findings, the auditors also provide a report on the countries’ compliance with requirements of major federal programs. All 30 of the audit reports on such compliance submitted by the FSM national and its state governments and the RMI for 2001 through 2005 received qualified opinions. Moreover, in the 2005 single audit reports of compliance with requirements of major federal programs, auditors reported 45 material weaknesses and reportable conditions findings for the FSM and 11 for the RMI (see table 21). For example: In the FSM, findings that were material weaknesses included (1) the lack of internal controls over cash management requirements and (2) no reconciliation of U.S. grants receivable per Catalog of Federal Domestic Assistance number or by program number.

In the RMI, findings that were material weaknesses included (1) a lack of inventory of fixed assets and (2) the lack of audit reports from subrecipient component units.

We found that only 4 of the 45 findings from the 2005 FSM single audit report, and only 2 of the 11 findings from the 2005 RMI single audit report, were recurring problems from the previous year or had recurred for several consecutive years. For the RMI, this was a significant shift from 2002, when 8 of the 11 findings were recurring problems from the previous year or had recurred for several consecutive years. The FSM has developed corrective action plans to address about 60 percent of the 2005 single audit’s reportable findings on compliance with requirements of major federal programs, and the RMI has developed plans for all its reportable findings on such compliance. For example, the FSM said that on October 1, 2005, a new procedure was implemented to properly monitor the drawdown of U.S. funds and to properly reimburse the states on time, and the RMI said that it would hire a consultant to assist component units in rectifying their accounting books and records.

High-Risk Designations and Other Sanctions Threatened by OIA as Late Reports and Other Problems Persist

According to OMB Circular A-133, if a grantee fails to complete its single audit reports, U.S. agencies may impose sanctions such as, but not limited to, (1) withholding a percentage of federal U.S. awards until single audits are completed satisfactorily, (2) withholding or disallowing overhead costs, (3) suspending U.S. federal awards until the single audit is conducted, or (4) terminating the U.S. federal award. At the special March 2006 JEMCO meeting, the OIA Budget Director noted that single audits were the most important indicator of financial stability provided by a grantee to a grantor. He emphasized that OIA was particularly concerned about the lack of FSM single audits and notified FSM JEMCO participants that OIA intended to “apply a remedy” for single audit noncompliance beginning October 1, 2006, that would include the possibility of withholding cash payments. OIA also may take necessary steps to have the FSM designated as a “high-risk” grantee. Finally, OIA recommended to JEMCO in the March 2006 meeting that if audits were not completed by July 1, 2006, that it only conditionally approve sector grants for 2007 so that funds may only be released to entities in compliance with single audit requirements. This warning appeared to have an impact on most of the FSM states, because Kosrae, Pohnpei, and Yap completed their 2005 reports on time.

Other U.S. agencies have not designated the FSM as high risk in the past, even though they can assign a grantee as high risk if the grantee has a history of unsatisfactory performance, is not financially stable, has an inadequate management system, has not conformed to the terms and conditions of previous awards, or is otherwise irresponsible. Federal agencies that designate a grantee as high risk may impose special terms and conditions. Currently, none of the U.S. agencies providing funds to the FSM and the RMI have designated either country as a high-risk grantee, although this may be a possibility if the single audits are not completed within the deadlines requested by Interior. Officials from the Department of Education told us that, because most of the direct grant funding to the FSM has been subsumed by the Special Education Grant, which is administered by Interior, Education now has an even smaller share of the U.S. funds in the FSM, and therefore Interior would be in the best position to invoke a high-risk designation if warranted for a particular grant. Nevertheless, Education officials did take into account the lack of single audit performance when administering program funds and, in the case of funds for special education, had imposed additional reporting requirements.

Tables 22 and 23 show the total numbers of material weaknesses and reportable conditions identified in single audit reports for the FSM and the RMI in 2001 through 2005.

FSM Compliance with Special Sector Grant Terms and Conditions

Special terms and conditions in sector grants The FSM shall have 60 days from the date of grant award to realign this sector budget so that activities and related costs are clearly defined for each funding input under the grant. In doing so, the FSM should use a common or unified format wherever possible.

Between October and December 2003, OIA lacked education staff needed to conduct the follow-up.

The FSM shall have 60 days from the date of grant award to identify the amounts, sources, and the specific strategic focus and activities of all noncompact funding and direct technical assistance that relates to this sector.

Between October and December 2003, OIA lacked education staff needed to conduct the follow-up.

The FSM shall submit within 180 days from the date of grant award a streamlined and refined statement of outcome measures, baseline data, and annual targets to enable the tracking of outputs and outcomes. In doing so, the FSM should use a common or unified format wherever possible. These materials shall form the basis for setting measurable annual targets for the sector grant budget and performance plan that the FSM submits for 2005 funding.

Between January and March 2004, OIA staff had discussions with all state directors of education and other sectors, expressing concern regarding performance-based budgeting and the lack of a unified format. OIA did not receive formal communication regarding these concerns from the FSM in 2004. The new education grant manager placed a similar condition on the FSM in 2005.

As a condition precedent to the drawdown of funding for this specific activity, Pohnpei shall provide written materials to justify the request for $52,463 for the funding of the public library from the education sector grant.

Written justification was not received from the Pohnpei Department of Education. However, OIA held discussions with the Pohnpei Director of Education during OIA’s first site visit in February 2004. The OIA education grant manager approved the use of education funds to support the library’s purchase of children’s books.

The FSM shall submit within 90 days from the date of the grant award a streamlined and refined statement of national strategic goals, outcome measures, baseline data, and annual targets to enable the tracking of uniform and consistent, national, and state outputs and outcomes. In doing so, the FSM should use a common or unified format.

The FSM did not meet the deadline. OIA reminded the FSM National Division of Education (NDOE) of the requirement several times, and finally indicated it would cut off funds to them in March 2005 if the submission was not received. The FSM provided the required submission in late February, but the quality of the information was deemed “questionable” by OIA.

The FSM shall conduct four evaluation studies and performance assessments.

Special terms and conditions in sector grants (1) Within 60 days from the date of the grant award, an analysis of school year 2004-2005 staffing patterns will be submitted and include, but not be limited to, the number of students enrolled as of October 1, 2004; the number of staff by category (principals, vice-principals, teachers, teacher assistants, specialists, support staff, etc.) as of October 1, who are full-time and part-time employees; changes in staffing from school year 2003-2004; the number of staff in each category in each school; and the October 1 student-to-teacher ratio. (1) The staffing patterns report was submitted in a summarized form. The summary document did not include data on all of the staffing categories cited in the grant condition—for example, no data on vice- principals were received. (2) Within 60 days from the date of the grant award, an inventory of textbooks and related resource materials for each grade in the core subjects of language arts, math, social studies, and science will be conducted and submitted. (2) Each state completed their textbook inventory and submitted it to NDOE. NDOE transmitted the document “as is,” without a summary or any analysis. Yap’s report file could not be opened; a revision was received a few days later. (3) Within 180 days from the date of the grant award, a national inventory of educational facilities will be conducted and progress to date submitted. The inventory will include, but not be limited to, the number of educational buildings, age of each, condition of each, list of repair needs by school, and date when last renovated. (3) OIA was asked by NDOE to provide a sample format for the states to follow. NDOE was late in sending out the proposed format to the states. Thus, the four state submissions came in different formats, with no summary or analysis provided. (4) Within 180 days from the date of the grant award, an evaluation of the effectiveness of the national student testing (NST) systems will be conducted and progress to date submitted. The NST and state testing instruments will be evaluated for validity and alignment to state standards and curricula. (4) The report was completed for the FSM by a consultant. OIA learned later that the FSM hired the same consultant who had created the NST to evaluate it.

The FSM shall provide data of educational progress no less than annually, in time for submittal to JEMCO. At a minimum, data on the 20 indicators of educational progress discussed at the August 11 JEMCO meetings will be gathered and submitted by state, along with a national summary, no later than July 30, 2005.

The FSM submitted a summary document, but it contained little narrative. According to OIA, it was difficult to decipher the meaning of some of the charts. The Office of Compact Management questioned the quality of the report, but it was submitted unchanged to OIA. A later submission contained a narrative analysis.

The FSM shall ensure that within 90 days of the grant award, the FSM Department of Health, Education, and Social Affairs, in consultation with the four state departments of education and OIA, shall develop a national process and procedure for the procurement of textbooks on a 5-year purchasing cycle.

The FSM submitted the final national process and procedure document to OIA on March 16, 2006. According to OIA, the document was well thought out and included significant state input, but did not include the proposed purchasing cycle for each state. This omission will be a grant condition in 2007.

Special terms and conditions in sector grants The FSM shall ensure that in 2006 through 2008, no less than $2.5 million of compact education sector funding allocated to state governments shall be used to purchase textbooks for the primary and secondary education systems and related instructional materials.

The states provided revised line item budgets, indicating their contribution to the $2.5 million requirement in November 2005. OIA withheld a portion of the education sector grant funding in October and November 2005 until this requirement was met.

The FSM shall provide data of educational progress no less than annually, in time for submittal to JEMCO. At a minimum, data on the 20 indicators of educational progress discussed at the August 11 JEMCO meetings will be gathered and submitted by state, along with a national summary, no later than July 30, 2006.

The FSM missed the original July 30, 2006, deadline. However, OIA granted their requested extension until August 14, 2006. The report on the 20 indicators was received on that date.

SEG: The FSM shall submit, for approval by OIA, a written description and annual plan for the use of the grant funds. No funds may be disbursed until the plan is approved.

OIA approved the plan submitted by the FSM in September 2005.

SEG: Timelines for all major objectives and activities must match the annual funding period. Timelines for the 2005 funding period are due to OIA by October 31, 2005.

Revised timelines were received directly from each state, with no attempt to submit them as an FSM-wide deliverable.

SEG: The FSM shall submit to OIA by December 31, 2005, a framework for each sub-grantee that illustrates how the programs and goals funded by the Special Education Grant correlate to the programs and goals funded by the compact education sector grant, and how all correlate to the FSM Strategic Development Plan’s education goals.

The national submission was received on January 30, 2006. According to OIA, it was obvious the national submission was written by one author who used little of what the states submitted.

The FSM shall have 60 days from the date of grant award to realign this sector budget so that activities and related costs are clearly defined for each funding input under the grant. In doing so, the FSM should use a common or unified format wherever possible.

Never submitted.

The FSM shall have 60 days from the date of grant award to identify the amounts, sources, and the specific strategic focus and activities of all noncompact funding and direct technical assistance that relates to this sector.

Met.

The FSM shall submit within 180 days from the date of grant award a streamlined and refined statement of outcome measures, baseline data, and annual targets to enable the tracking of outputs and outcomes. In doing so, the FSM should use a common and unified format wherever possible. These materials shall form the basis for setting measurable annual targets for the sector grant budget and performance plan that the FSM submits for 2005 funding.

Never submitted.

Special terms and conditions in sector grants As a condition precedent to the drawdown of funding for this specific activity, Chuuk shall provide written justification to OIA for the funding of $100,990 for Marine Resources.

Justification was provided, and the funding was released.

Justification was submitted, and the fiscal procedures agreement language was broad enough to encompass all of the agencies’ core missions. Funding was released.

Chuuk: Marine Resources, Agricultural Operations, Yap: Roadside Maintenance and YAPCAP The FSM has 30 days from the date of grant award to submit the appropriate performance measures and baseline data to OIA for all approved activities. The measures and data are to be specific to each funded activity, not for the sector as a whole.

Funding was held until performance measures and baseline data were eventually submitted, the information was extremely poor quality. However, no guidance was given or requested by OIA to the FSM for the development of the information.

The FSM shall not incur obligations against this grant until OIA has approved all proposed budget line items for the national government and its subgrantees.

OIA approved the budgets and released funds.

The FSM shall have 60 days from the date of grant award to realign this sector budget so that activities and related costs are clearly identified for each funding input under the grant. In doing so, the FSM should use a common or unified format wherever possible.

Partially met. According to OIA, while the numbers added up, the connection between activities and costs, and the relationship between costs to expected outputs—or how outputs linked back to the FSM’s strategic goals and stated performance outcomes—remained unclear.

The FSM shall have 60 days from the date of grant award to identify the amounts, sources, and specific strategic focus and activities of all noncompact funding and direct technical assistance that relates to this sector.

Met.

The FSM shall submit within 180 days from the date of grant award a streamlined and refined statement of outcome measures, baseline data, and annual targets to enable the tracking of outputs and outcomes. In so doing, the FSM should use a common or unified format wherever possible. These materials shall form the basis for setting measurable annual targets for the sector grant budget and performance plan that the FSM submits for 2005 funding.

Partially met. According to OIA, statements of outcome measures were revised and submitted but work was still required to make the FSM’s intent and targets clear. There were also problems related to having a common baseline year and using and providing information in a unified and common format.

The FSM shall have until September 30, 2006, to obligate the carryover funds from 2004.

According to OIA, obligations are in process.

Special terms and conditions in sector grants Consistent with the resolution adopted by JEMCO on August 2004, funds made available through this award may only be used for health-related infrastructure expenditures and are subject to conditions applicable to the public infrastructure grant. Such allowable uses include facility upgrades, renovation and repair, and fixed equipment and other capital assets.

The list of projects and purchases received by OIA complied with the resolution.

The FSM Office of Compact Management shall compile a list of proposed related infrastructure expenditures identified by the FSM National Department of Health, Education, and Social Affairs and by Chuuk, Pohnpei, and Yap to be funded under this grant. The list shall be submitted to OIA’s Honolulu Field Office for review and concurrence by November 30, 2005. No expenditures shall be allowed prior to that review, unless specifically approved by OIA.

OIA communicated directly with Chuuk, Pohnpei, and Yap and notified the Office of Compact Management that the lists were acceptable. The deadline was extended because the grant award was not signed by the FSM until December 19, 2005, due to a technical (nonsubstantive) error. This error was not brought to OIA’s attention for correction until after the deliverable’s due date.

The FSM shall have 30 days from the date of grant award to provide information on the three health insurance programs in existence for national and state government employees. At a minimum, this information should include (1) a breakdown of costs associated with the programs in Chuuk and Pohnpei; (2) the numbers served by each of the three programs; (3) eligibility requirements; (4) the basis for calculating premiums and/or government subsidies; and (5) capitation payments to private providers, state hospitals, and, as applicable, off-island tertiary care facilities.

The required information was provided, but its emphasis was on the FSM national government’s program. OIA asked for and received clarification on Chuuk and Pohnpei’s programs as well.

The FSM shall have until April 1, 2005, to complete a comprehensive evaluation of the effectiveness of existing primary care systems and expansion plans in all four states. The study shall give specific emphasis on dispensaries, community health centers, and rural health and cover the following areas: (1) dispensary staffing, (2) communications, (3) referrals, (4) infrastructure, (5) transportation, (6) the procurement and distribution of medicines and other essential supplies, and (7) new and in-service training. The responsible agency for the evaluation shall be the FSM National Department of Health, Education, and Social Affairs (HESA) in consultation with the four state departments of health.

The FSM submitted an acceptable evaluation of its existing primary care systems and expansion plans for all four states on time, and provided an oral report to JEMCO at the August 2005 meeting in Pohnpei.

HESA shall have 30 days from the date of grant award to submit an implementation plan and scope of work to OIA before going forward with the study.

Deadline was extended by OIA and met by the FSM.

Special terms and conditions in sector grants The FSM has 30 days from the date of grant award to reprogram $4,391 earmarked for Chuuk’s Department of Education to a purpose specifically linked to the state’s Department of Health Services.

Met.

The FSM has 30 days from the date of grant award to reprogram $11,500 earmarked for agricultural programs of Yap’s Department of Resources and Development, to either nutrition education or another program activity directly managed by the state’s Department of Health Services.

Met.

No money shall be used by the FSM National Department of Health, Education, and Social Affairs for either building new facilities or renovating existing buildings. The findings of any physical assessment of health facilities funded under this grant shall be submitted to OIA no later than 90 days before the end of the grant period and also to the infrastructure development planning committees in all four FSM states.

Met.

By April 15, 2005, the FSM national government and Chuuk, in consultation with OIA, shall develop an outline of a plan that shall promptly address the deficiencies found in the Chuuk health dispensary program. The completed plan shall be transmitted to OIA by May 15, 2005.

An acceptable plan was developed in consultation with OIA and submitted on time. A verbal report on the plan’s implementation was accepted by JEMCO at its August 2005 meeting in Pohnpei.

The FSM shall not incur obligations against this grant until OIA has approved all proposed budget line items from the national government and its subgrantees.

OIA gave its approval at the start of the fiscal year.

The FSM shall have 180 days from the date of grant award to submit information to OIA on (1) the common year selected by the National Department of Health, Education, and Social Affairs and all four state health departments that shall serve as the base for evaluations of sector grant performance and (2) data collected from that baseline year for all appropriate outcome measures described in the health care chapter of the FSM Strategic Development Plan. The submission shall also include 2004 data linked to these performance measures.

The FSM health directors met in September 2005 and agreed to use 2004 as the baseline year. At that time, they established a process to review the strategic goals and outcome measures in the FSM’s development plan. In January 2006, they met again and reaffirmed their previous selection of 10 outcome measures and added 4 more measures. The FSM national government also began collecting baseline data.

The FSM shall have 180 days from the date of grant award to submit the appropriate actual performance targets for 2006 and prospectively for 2007 and 2010.

The health directors established medium- term targets for 2010 but did not meet the condition to submit actual performance targets for 2006 or prospectively for 2007. According to OIA, the FSM health directors were confused about the requirement.

No grant funds may be expended or obligated before an infrastructure development plan (IDP) is developed by the FSM and submitted to OIA for review.

Not met in 2004.

Special terms and conditions in sector grants To the extent that the infrastructure priorities in the IDP differ materially from those set forth in the FSM Infrastructure Development Plan prepared by Nathan Associates, Inc., written justification should be provided to OIA for concurrence.

Not met in 2004.

An amount equal to 5 percent of the total grant must be placed in a separate bank account (the Infrastructure Maintenance Fund (IMF)), which upon deposit by the FSM will be matched by OIA. Funds in this account may be used for operations and maintenance needs once an IMF plan has been developed and submitted by the FSM and approved by OIA.

Not met in 2004.

JEMCO resolves that infrastructure investment for 2005 should move toward being funded at no less than 30 percent of annual compact grant funding, consistent with the sense of Congress, and shall achieve that level for 2006.

Met.

JEMCO resolves that OIA shall approve no projects until JEMCO has granted its concurrence in compact- funded portions of the FSM’s Infrastructure Development Plan.

Met.

JEMCO resolves that OIA shall deem approved no projects until the FSM national government has provided OIA with, and OIA has approved, a consolidated list of projects in order of national priority consistent with the IDP concurred by JEMCO.

Not met in 2005.

JEMCO resolves that as part of the justification of each infrastructure project, the FSM national government shall demonstrate that the project implementation shall be professionally managed.

Met.

JEMCO allocates from the infrastructure sector the amount of $1 million for the initial establishment of a project management unit.

Met.

JEMCO resolves that by August 31, 2005, the FSM national government shall conduct detailed planning studies to determine the infrastructure requirements of the health and education sectors.

Not met in 2005 —extended to January 31, 2006, by JEMCO resolution. Extension of its deadline also was not met by the FSM.

An amount equal to 5 percent of the total grant must be placed in a separate bank account, the IMF, which upon deposit by the FSM, will be matched by OIA. Funds in this account may be used for maintenance needs once an IMF plan has been developed and submitted by the FSM and approved by OIA.

Not met as of August 2006.

Special terms and conditions in sector grants The FSM shall have 60 days from the date of grant award to realign this sector budget so that activities and related costs are clearly defined for each funding input under the grant. In doing so, the FSM should use a common or unified format wherever possible.

Never submitted.

The FSM shall have 60 days from the date of grant award to identify the amounts, sources, and the specific strategic focus and activities of all noncompact funding and direct technical assistance that relates to this sector.

Met.

The FSM shall submit within 180 days from the date of grant award a streamlined and refined statement of outcome measures, baseline data, and annual targets to enable the tracking of outputs and outcomes. In doing so, the FSM should use a common and unified format wherever possible. These materials shall form the basis for setting measurable annual targets for the sector grant budget and performance plan that FSM submits for 2005 funding.

Never submitted.

Funding under this grant shall not be used by Yap for the Visitor’s Bureau unless OIA approves a reprogramming request.

Yap submitted a revised budget and received approval for funding the Visitor’s Bureau.

Included within this grant is $888 for Yap to use for Resources and Development.

In accordance with the condition, Yap budgeted the funding for Resources and Development.

As a condition precedent to the drawdown of funding for this specific activity, Kosrae shall provide written materials to justify the request for $152,000 for the funding of Livestock Research/Tissue Culture.

Justification was provided, and the funding was released.

As a condition precedent to the drawdown of funding for this specific activity, Kosrae shall provide written materials to justify the request for $205,000 for the funding of the Mangrove Crab Project.

Funding was released.

The FSM contested the notion of a phase- out plan for the private sector development grant and planned to discuss the issue further at the next JEMCO meeting. OIA sent a letter agreeing to release the funds, and the issue was dropped.

Justifications were submitted. The fiscal procedures agreements language is broad enough to encompass all agencies’ core missions. Funding was released.

Pohnpei: Economic Development Authority Yap: Resources and Development The FSM has 30 days from the date of the grant award to submit the appropriate performance measures and baseline data to OIA for all approved activities. The measures and data are to be specific to each funded activity, not for the sector as a whole.

Funding was held until performance measures and baseline data were submitted. When performance measures and baseline data were eventually submitted, the information was of extremely poor quality. However, no guidance was given by OIA or requested from the FSM for the development of the information.

None.

The FSM shall have 60 days from the date of the grant award to realign its budget so that activities and related costs are clearly defined for each funding input. In doing so, the FSM should use a common or unified format wherever possible.

Partially met. According to OIA, while the numbers added up, the connection between activities and costs, and the relationship between costs to expected outputs or how outputs— linked back to the FSM’s strategic goals and stated performance outcomes—remained unclear.

The FSM shall have 60 days from the date of the grant award to identify amounts, sources, and the specific strategic focus and activities of all noncompact funding and technical assistance that relates to this sector.

Met.

The FSM shall submit within 180 days from the date of the grant award a streamlined and refined statement of outcome measures, baseline data, and annual targets to enable the tracking of outputs and outcomes. In doing so, the FSM should use a common or unified format wherever possible. These materials shall form the basis for setting measurable annual targets for the sector grant budget and performance plan that the FSM submits for 2005 funding.

Not met. The public sector capacity building grant does not contain any conforming, unified outcome measures; baseline data; or annual targets.

As a condition precedent to the drawdown of funding of $122,698, Chuuk shall hire a qualified public auditor.

Chuuk has not yet hired a qualified public auditor.

The plan was late, and funds were temporarily withheld.

The FSM had 30 days from the date of the grant award to submit the appropriate performance measures and baseline data to OIA for all approved activities. The measures and data are to be specific to each funded activity, not for the sector as a whole.

No submittal from the FSM.

A schedule was submitted that showed the reduction of public sector capacity building revenues going to basic operations funding, but not how it would be replaced by local revenue. plan to migrate basic operations funding from the public sector capacity building grant to local revenues. This plan will provide for this migration to happen over a period not to exceed 5 years.

None.

RMI Compliance with Special Sector Grant Terms and Conditions

Special terms and conditions in sector grants The RMI shall have 60 days from the date of grant award to realign its budget so that activities and related costs are clearly defined for each funding input. The category, “U.S. and Other Grants,” shall list components and allowable uses.

Met.

The RMI shall submit within 180 days from the date of grant award a streamlined and refined statement of performance measures, baseline data, and annual targets to enable the tracking of goals and objectives. These materials shall form the basis for setting measurable annual targets for the sector grant budget and performance plan that the RMI submits for 2005 funding.

Met.

The RMI shall conduct three evaluation studies and performance assessments. (1) Within 60 days from the date of the grant award, an inventory of textbooks and related resource materials for each grade in the core subjects of language arts, math, social studies, and science will be conducted and submitted. (1) An extension was requested. The deliverable was extended to 2006. An inventory of 71 of 80 schools was received on July 21, 2006. The remaining 9 schools’ inventory is required in the first quarter of 2007. (2) Within 180 days from the date of the grant award, an analysis of school year 2004-2005 staffing patterns will be submitted and include, but not be limited to, the number of students enrolled as of October 1, 2004; the number of staff by category (principals, vice-principals, teachers, teacher assistants, specialists, support staff, etc.) as of October 1, who are full-time and part-time employees; changes in staffing from school year 2003- 2004; the number of staff in each category in each school; and the October 1 student-to-teacher ratio. (2) A summary document was received. A revision was requested to meet the requirement for select data by school, not in summary format. The revision was received in the Fall of 2005. (3) Within 180 days from the date of the grant award, an evaluation of the effectiveness of the national student testing systems will be conducted and progress to date submitted. The third and sixth grade national testing instruments will be evaluated for validity and alignment to national standards and curricula. An eighth grade testing instrument will be designed. (3) An extension was requested, and was granted. The deliverable was extended to 2006.

Special terms and conditions in sector grants The RMI shall provide data of educational progress no less than annually, in time for submittal to JEMFAC. At a minimum, data on the 20 indicators of educational progress discussed at the August 13th JEMFAC meetings will be gathered and submitted no later than July 1, 2005. Quarterly performance reports must include completed data charts, effective immediately, and incorporate the 20 indicators of educational progress no later than July 1, 2005.

The majority of the 20 indicators were submitted on time. The outstanding 5 indicators were requested but not received.

The RMI shall routinely submit to the OIA Honolulu Field Office one copy of all educational studies, surveys, and performance evaluations completed with education sector or Supplemental Education Grant funds.

Some locally developed reports are routinely submitted to OIA. Other reports are not routinely submitted but are identified in quarterly reports, which OIA then requests.

Quarterly financial and performance reports shall include completed data charts, data on Ebeye Special Needs expenditures and activities, and copies of all reports completed with education sector or Supplemental Education Grant funds.

The quarterly reports were received on time and included information specific to Ebeye. However, data charts embedded in the RMI format were often incomplete. Other reports completed with compact or Supplemental Education Grant funds are occasionally but not routinely transmitted to OIA.

All 20 indicators of educational progress shall be reported by July 1st annually.

Received July 28, 2006.

The Government of the Republic of the Marshall Islands shall complete the textbook and staffing inventories by October 31, 2005. (1) An extension was requested for the textbook inventory. (2) The staffing inventory was received by the deadline.

The Government of the Republic of the Marshall Islands shall spend those monies required, up to $100,000, to conduct the mandated national evaluation of the effectiveness of the national student testing systems by a reputable testing and evaluation expert within 180 days of the grant award, and to conduct other evaluations and assessments as needed. These monies shall come from the education sector grant award, unless available from other sources.

According to OIA, the national student testing system is in near final form. The RMI brought in a consultant to review and validate its new testing system. The consultant provided a minimal assessment of the testing system to the RMI. The RMI shared with OIA. OIA requested a more thorough analysis, but the RMI did not provide this by the end of school year 2005-2006. This grant condition will continue into 2007.

The RMI shall have 60 days from the date of grant award to realign its budget so that activities and related costs are clearly defined for each funding input. The category, “U.S. and Other grants,” shall list components and allowable uses.

Never submitted.

Special terms and conditions in sector grants The RMI shall submit within 180 days from the date of the grant award a streamlined and refined statement of performance measures, baseline data, and annual targets to enable the tracking of goals and objectives.

Never submitted.

The RMI shall deliver to OIA the appropriate performance measures and baseline data for all approved activities by November 30, 2004.

The RMI submitted revised portfolios.

The grantee shall submit a written explanation of each budgeted activity no later than 30 days after the date of grant award.

The RMI submitted revised portfolios.

The deadline is the end pf 2006. According to OIA’s environmental grant manager, the RMI is expected to submit all 6 indicators by the deadline.

Percentage of safe outer island water supply Percentage of dead and endangered reef areas Total number of solid waste violation per quarter The RMI shall have 60 days from the date of the grant award to realign its budget so that activities and related costs are clearly defined for each funding input. The category, “U.S. and Other Grants,” shall list component and allowable uses.

Partially met. Soon after the grant was awarded, OIA worked closely with the RMI’s consultant on performance budgeting, and with the RMI’s Economic, Policy Planning Statistics Office and Ministry of Health, on addressing the grant’s budget realignment requirements. The results were evident in improvements to the first and subsequent quarterly reports in 2004 and the 2005 budget submitted to OIA. Although the requirement was directed to the Ministry of Health, the condition had a beneficial spillover effect in improving reporting and performance budgeting for all compact grant sectors. In retrospect, the deadline imposed in the grant may have been premature since the realignment process required time and effort beyond the 60-day framework and is still continuing.

Special terms and conditions in sector grants The RMI shall submit within 180 days from the date of grant award a streamlined and refined statement of performance measures, baseline data, and annual targets to enable the tracking of goals and objectives. These materials shall form the basis for setting measurable annual targets for the sector grant budget and performance plan that the RMI submits for its 2005 funding.

Partially met. The RMI reduced the number of performance measures it tracks to those that primarily relate to effectiveness and efficiency, and ensured its annual targets were output oriented. In retrospect, the deadline imposed in the grant may have been premature since the realignment process required time and effort beyond the 180-day framework and is still continuing.

Insofar as possible, performance measures should apply equally to both Majuro and Ebeye health subsystems, and baselines should reflect differences in health status and service levels in the two urban centers. Measures of disease incidence or prevalence should also be developed to gauge the impact of environmental and infrastructure improvements on health status.

Soon after the grant was awarded, OIA worked with the RMI’s consultant on performance budgeting and with RMI’s statistics office to improve the consistency of performance budgeting between Ebeye and Majuro. According to OIA, the reporting has improved and is reflected in the 2005 and 2006 budgets submitted to OIA. Measures of disease incidence and prevalence, however, still do not adequately track environmental conditions. The RMI, however, is working to improve its health status statistics. Education and health infrastructure projects were the RMI’s priority in 2004 and 2005.

The RMI shall have 90 days before the end of the grant period to complete a comprehensive evaluation of the effectiveness of its existing primary health care system and expansion plans. No less than 1 percent of the total grant award shall be set aside for this purpose.

Met.

The RMI shall have 30 days to submit an implementation plan and scope of work to OIA before implementing the study.

Met.

Up to a maximum of $100,000 in carryover funding from the 2004 health sector grant shall be used to continue the provision of technical assistance in performance budgeting and measurement. The scope of work shall focus on refining outcome statements, measures, and baselines that demonstrate the effectiveness or efficiency of the Ministry of Health’s interim outputs.

The 2004 carryover grant awarded to the RMI provided funds to continue the provision of technical assistance to build performance budgeting and monitoring capacity.

No grant funds may be used by agencies outside the health sector or for general government administrative costs, unless specifically justified and preapproved by JEMFAC.

This condition was meant to prohibit any further levying of a percentage cost for the Office of the Auditor General as was done (and not disclosed) by the RMI during 2004.

Special terms and conditions in sector grants The Ministry of Health shall have 30 days from the date of grant award to submit a list to OIA’s Honolulu Field Office that describes the specific uses of funding provided under CSG-RMI-2006-C. Funds may not be used for recurring salaries and may not be used for other operating costs, except as approved by OIA.

Partially met. The Ministry of Health notified OIA of its intent to use most of its carryover funds to support the continuation of performance budgeting technical assistance. This notification was within the 30-day time frame. The remaining funds were to go to Majuro Hospital, but specific uses were not identified until August 2006.

None.

The RMI shall submit a formal infrastructure development and maintenance plan to OIA prior to the expenditure of sector grant funds for construction activities.

Met.

Funds designated for Infrastructure Maintenance Funds will be deposited after the RMI has transmitted its 2004 infrastructure maintenance plan to OIA for its concurrence in writing.

Met.

The RMI government shall formulate a project development plan, consistent with the Infrastructure Development Maintenance Plan format for the project entitled “Ebeye Hospital Repair.”

No plan formulated as of September 13, 2006.

None.

The RMI shall have 60 days from the date of grant award to realign its budget so that activities and related costs are clearly defined for each funding input. The category, “U.S. and Other grants,” shall list components and allowable uses.

Never submitted.

The RMI shall submit within 180 days from the date of grant award a streamlined and refined statement of performance measures, baseline data, and annual targets to enable the tracking of goals and objectives. These materials shall form the basis for setting measurable annual targets for the sector grant budget and performance plan that the RMI submits for 2005 funding.

Never submitted.

The RMI shall deliver to OIA the appropriate performance measures and baseline data for all approved activities by November 30, 2004.

The RMI submitted revised portfolios.

Never submitted. (1) Dollar amount of export revenues from local products. (Baseline will be established in 2006, and this measure will be used in future years to determine program development.) (2) Number of international tourist arrivals.

None.

The RMI shall deliver to OIA the appropriate performance measures and baseline data for all approved activities by November 30, 2004.

Never submitted.

The RMI shall deliver to OIA an audit work plan and audit schedule for 2006 by October 31, 2005.

Submitted late.

Comments from the Department of the Interior

Comments from the Federated States of Micronesia

The following are GAO’s comments on the Federated States of Micronesia’s letter dated December 4, 2006.

GAO Comments

1. As we noted in both our June 2006 report and this report, the FSM’s efforts to address the decrement to date have not yielded the financial changes, including significant tax reforms, required to address the decrement. Therefore, we reiterate our position that the FSM needs to develop a plan to address the decrement. If the FSM fails to address the decrement, the federal and states’ budgets will likely be reduced, making it difficult to maintain current personnel levels. 2. We recognize that the FSM established its 70:30 formula according to its stated goal of providing for certain needs common to each state, regardless of population size, such as the need for airports and seaports. However, the differences in per-capita funding resulting from use of the formula may have contributed to disparate conditions among the FSM states, especially in health and education, that cannot be ignored. These differences have also been identified by a Department of Health and Human Services official and in the FSM’s own development plans as well as in a study by the Asian Development Bank. We believe that the formula’s impact on each state’s performance and development should be continuously evaluated and the allocation of funds revised as necessary. As we observe in this report, such an assessment requires the full development of the mechanism for measuring sector grant performance and collecting complete baseline data. 3. We testified three times in 2003, before the House and the Senate, regarding our assessment of the new arrangements and requirements of the amended compacts.

Comments from the Republic of the Marshall Islands

The following are GAO’s comments on the Republic of the Marshall Islands’ letter dated December 4, 2006.

GAO Comments

1. Throughout the report, we differentiate between the FSM and the RMI when discussing findings specific to each country. For example, when addressing land issues that have delayed projects in the countries, we discuss the issues and projects in each country separately. However, when findings were the same for both countries, we discussed the findings jointly. For example, we discuss planning for the decrement jointly because both the FSM and the RMI face the same issue. 2. The RMI projects that the annual inflation adjustment will allow the nominal value of annual grants to increase. However, using the Congressional Budget Office’s projections on the GDP Implicit Price Deflator, we found that for most years, the nominal value of the grants for the RMI declines each year from the previous years. We believe that the RMI response does not capture the true impact of the decrement and the urgent need for sector grant planning to take it into account.

The combined impact of the decrement and partial inflation creates difficult challenges. First, absent full adjustment of the grants for inflation, the grants’ real value declines, leading to reduced sector resources and creating challenges in recruiting and retaining agency staff.

RMI government agencies will not be able to maintain the current levels of imported resources when the real value of grants decline. Imported items needed for the education and health sectors, such as textbooks and pharmaceuticals, are subject to rising external prices. Likewise, increasing costs of imported building supplies may reduce the purchasing power of the infrastructure grant.

In the RMI, personnel expenses are the largest area of government expenditures. Recruiting and retaining staff will be difficult if salaries are not fully adjusted for inflation. Furthermore, because RMI citizens can move to the United States to work, and many have done so, finding qualified personnel may become more difficult. A recent assessment of Marshallese emigration concluded that about one quarter of Marshallese now live abroad.

Second, although the RMI states in its letter that it expects import duties to increase with external inflation, the inflation increase will not fully compensate for the decrements without aggressive growth in import duties.

GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Emil Friberg, Assistant Director; Julie Hirshen; Ming Chen; Tracy Guerrero; Emmy Rhine; and Eddie Uyekawa made key contributions to this report. Joe Carney, Etana Finkler, Mary Moutsos, and Reid Lowe provided technical assistance.

Related GAO Products

Compacts of Free Association: Development Prospects Remain Limited for Micronesia and the Marshall Islands. GAO-06-590. Washington, D.C.: June 27, 2006.

Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Underway, but Planning Challenges Remain. GAO-05-633. Washington, D.C.: July 11, 2005.

Compact of Free Association: Single Audits Demonstrate Accountability Problems over Compact Funds. GAO-04-7. Washington, D.C.: October 7, 2003.

Compact of Free Association: An Assessment of Amended Compacts and Related Agreements. GAO-03-890T. Washington, D.C.: June 18, 2003.

Foreign Assistance: Effectiveness and Accountability Problems Common in U.S. Programs to Assist Two Micronesian Nations. GAO-02-70. Washington, D.C.: January 22, 2002.

Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in Two Micronesian Nations. GAO-02-119. Washington, D.C.: January 22, 2002.

Foreign Relations: Migration From Micronesian Nations Has Had Significant Impact on Guam, Hawaii, and the Commonwealth of the Northern Mariana Islands. GAO-02-04. Washington, D.C.: October 5, 2001.

Foreign Assistance: Lessons Learned From Donors’ Experiences in the Pacific Region. GAO-01-808. Washington, D.C.: August 17, 2001.

Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little Impact on Economic Development. GAO/NSIAD-00-216. Washington, D.C.: September 22, 2000.

Foreign Relations: Better Accountability Needed Over U.S. Assistance to Micronesia and the Marshall Islands. GAO/RCED-00-67. Washington, D.C.: May 31, 2000.