The FSM and the RMI are located in the Pacific Ocean just north of the equator, about 3,000 miles southwest of Hawaii and about 2,500 miles southeast of Japan (see fig. 1). The FSM is a federation of four semiautonomous states and has a population of approximately 103,000 (as of 2010) scattered over many small islands and atolls. The FSM states maintain considerable power, relative to the FSM National Government, to allocate U.S. assistance and implement budgetary policies. Chuuk, the largest state, has 47 percent of the FSM’s population, followed by Pohnpei (35 percent), Yap (11 percent), and Kosrae (6 percent). By contrast, the RMI government is responsible for allocating U.S. assistance in that country, though the RMI’s 29 constituent atolls and five islands exercise local government authority. About three-quarters of the RMI population of approximately 53,000 (as of 2011) live in Majuro, the nation’s capital, and on Ebeye Island in the Kwajalein Atoll. U.S. relations with the FSM and the RMI 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. During the 1940s and 1950s the RMI was the site of 67 U.S. nuclear weapons tests. The four states of the FSM voted in a 1978 referendum to become an independent nation, while the RMI established its constitutional government and declared itself a republic in 1979. Under the trusteeship agreement, both newly formed nations remained subject to the authority of the United States until 1986. 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) establish 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 compact’s third goal was to be accomplished primarily through U.S. direct financial assistance to the FSM and the RMI. From 1987 through 2003, the FSM and the RMI are estimated to have received about $2.1 billion in compact financial assistance. 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 operations at both national and state levels, while the RMI emphasized capital spending. While the original 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. 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 (hereafter referred to as the annual decrements). The amounts of the annual decrements are to be deposited in the trust funds established under the amended compacts for the two nations (see fig. 2). For more information on compact assistance and trust fund contributions, see appendix III. The amended compacts and associated fiscal procedures agreements require that grant funding support the countries in six core sectors— education, health, infrastructure, environment, private sector development, and public sector capacity building—with the education and health sectors having the greatest priority. Within the core sector grants, 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 (hereafter referred to as Ebeye special needs funds). In addition to receiving compact sector grants, the FSM and the RMI are eligible for a supplemental education grant each year. The amended compacts’ implementing legislation authorized annual appropriations of about $12.2 million for the FSM and $6.1 million for the RMI beginning in 2005 to the U.S. Secretary of Education to supplement the education grants awarded under the amended compacts. Under the fiscal procedures agreements, permitted uses of the supplemental education grant funds include, among other things, support for 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 supplemental education grant is appropriated annually to Education and transferred to Interior for disbursement, with Interior responsible for ensuring that the use, administration, and monitoring of supplemental education grant funds are in accordance with a memorandum of agreement among Interior, Education, HHS, and the Department of Labor (Labor), as well as with the fiscal procedures agreements. In addition to amended compact grants, the FSM and the RMI receive other grants and assistance from U.S. agencies. For example, in fiscal years 2007 through 2011, the FSM spent about $197 million and the RMI spent about $46 million in noncompact grants from agencies including Interior, Education, HHS, Labor, and the Department of Transportation. See appendix IV for more information on noncompact grants awarded to the FSM and the RMI. The legislation and fiscal procedures agreements for the amended compacts established oversight mechanisms and responsibilities for the FSM, RMI, and the United States. JEMCO and JEMFAC were jointly established by the United States and, respectively, the FSM and the RMI to strengthen the management and accountability and promote the effective use of compact funding. Each five-member committee comprises three representatives from the United States government and two representatives from the corresponding country. The United States, the FSM, and the RMI 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. JEMCO’s and JEMFAC’s designated roles and responsibilities include the following: reviewing the budget 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. In practice, JEMCO and JEMFAC allocate grants and attach terms and conditions to grant awards through resolutions, which are discussed and voted upon at their meetings. From fiscal years 2004 through 2013, JEMCO and JEMFAC allocated about $1.1 billion in sector grants to the FSM and RMI under the amended compacts. In practice, JEMFAC has allocated Ebeye special needs funds as a separate grant allocation, resulting in seven sectors. For more detailed information on compact sector allocations, see appendix V. The FSM national and state governments and the RMI government are to manage the sector and supplemental education grants and monitor day- to-day operations to ensure compliance with grant terms and conditions. The governments are also required to track progress toward performance goals and report quarterly to the United States. 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. Each country has established an agency dedicated to providing compact oversight and ensuring compliance with regulations in the amended compacts, grant award terms and conditions, and JEMCO and JEMFAC resolutions. The FSM and the RMI must adhere to specific fiscal control and accounting procedures and are required to submit annual audit reports, within the meaning of the Single Audit Act, as amended. Single audits are focused on recipients’ internal controls over financial reporting and compliance with laws and regulations governing U.S. federal awardees and provide key information about the federal grantee’s financial management and reporting. Through its participation in the JEMCO and JEMFAC, the United States can require that terms and conditions be attached to any and all annual grant awards to improve program performance and fiscal accountability. Interior’s Office of Insular Affairs (OIA) has responsibility for the administration and oversight of the FSM and RMI compact sector and supplemental education grants. In addition to headquarters staff, OIA operates a Honolulu field office and has staff in the FSM and RMI to conduct oversight. Under the fiscal procedures agreements governing the amended compacts, OIA is responsible for using financial reports to monitor each country’s budget and fiscal performance, and for using performance reports submitted by the countries to evaluate sector grant performance. OIA officials are also responsible for monitoring compliance with grant terms and conditions. If problems are found in areas such as the FSM and RMI 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 requiring additional prior approvals. Additionally, the United States may withhold grant funds if the countries breach the terms and conditions of certain sections of the amended compacts or of the fiscal procedures agreements, or fail to comply with the award conditions of a grant. As the U.S. agency with the largest grant awards to the FSM and the RMI, Interior is designated as the cognizant audit agency for FSM and RMI single audits and has several responsibilities, including providing technical advice to auditees and auditors and considering grant extensions to the report submission date, informing other affected federal agencies of any direct reporting of irregularities or illegal acts, and coordinating the federal response for audit findings that affect the federal program of more than one agency. Furthermore, all U.S. agencies providing noncompact grants to the FSM and the RMI are responsible for administering those grants in accordance with Office of Management and Budget (OMB) requirements and agency regulations that include the Grants Management Common Rule. Under the common rule, U.S. agencies may consider a grantee as “high risk” if the grantee has a history of unsatisfactory performance, is not financially stable, has a management system that does not meet required standards, has not conformed to the terms and conditions of previous awards, or is otherwise irresponsible. Single audits provide key information about the adequacy of a grantee’s management system. Federal agencies that designate a grantee as high risk may impose special grant conditions. In fiscal years 2007 through 2011, the FSM and RMI spent at least half of their compact sector funds in the education and health sectors. Most of the compact funds in these sectors paid for personnel costs and medical supplies and equipment. Both countries spent significant amounts of compact funds on personnel in the education and health sectors, which resulted in JEMCO and JEMFAC resolutions aimed at capping the budgetary levels for personnel in these sectors at fiscal year 2011 levels because of concerns about the sustainability of sector budgets as compact funding continues to decline through fiscal year 2023. While the four FSM states completed plans in 2012 and 2013 to address the annual decrements in compact sector funding through fiscal year 2023, the FSM National Government and the RMI have not submitted plans to address the decrements. As a result, the U.S. members of the JEMCO and JEMFAC are considering withholding certain fiscal year 2014 compact sector grant funds until the FSM National Government and RMI submit their plans. At the annual JEMCO and JEMFAC meetings in August 2013, fiscal year 2014 sector grant funds were not allocated to the FSM or the RMI. In fiscal years 2007 through 2011, the FSM spent about 67 percent, or $158 million, of sector compact funds in the education and health sectors. As seen in figure 3, of the total expenditures in all six compact sectors, expenditures for education represented approximately 37 percent and expenditures for health represented about 30 percent. Expenditures in the other four sectors—infrastructure, environment, private sector development, and public sector capacity building—together accounted for about 33 percent of total compact expenditures during this period. In addition to education sector compact funds, the FSM also spent about $35.7 million in supplemental education grant funds to support education initiatives. For information on FSM infrastructure sector compact expenditures, see appendix II. Compact funds in the FSM supported a significant portion of government expenditures in the education and health sectors. Education sector compact and supplemental education grant funds together constituted about 85 percent of total education expenditures, and health sector compact funds constituted about 66 percent of total health expenditures in fiscal year 2011. Other noncompact U.S. grants represented an additional 10 percent of the education expenditures and 25 percent of health expenditures in fiscal year 2011. With regard to the use of funds, in fiscal years 2009 through 2011, the FSM spent about 61 percent of its education sector compact and supplemental education grant funds to pay personnel, and about 41 percent of its health sector compact funds to pay personnel (see fig. 4). The levels of expenditures in the FSM education and health sectors dedicated to personnel concerned JEMCO because of the potential effects on the sustainability of sector budgets as compact funding continued to decline through fiscal year 2023 because of the annual decrements. In September 2011, JEMCO resolved that it would not approve fiscal year 2013 budgets for the education and health sectors until the FSM demonstrated that budgetary levels for personnel expenses reflected in education and health sector proposals did not exceed fiscal year 2011 levels. According to OIA, the FSM complied with this resolution in its fiscal year 2013 compact funding proposals. In March 2013, the four FSM states had completed plans to address the annual decreases, or decrements, in compact sector funding through 2023; however, the FSM National Government has not completed a plan to address the fiscal challenges facing the government because of the annual decrements. The states’ plans, completed in 2012 and early 2013, detail the proposed expenditure cuts across sector budgets intended to offset the annual decrements while preserving essential services in the education and health sectors. Absent additional revenues, proposed cuts are to be implemented in 2014, 2017, and 2020. While U.S. JEMCO members expressed their satisfaction with the FSM states’ plans, at the March 2013 JEMCO midyear meeting, they called for the FSM National Government to create a plan addressing how it will manage the fiscal challenges facing the government and how it will support the states in managing annual decrements. An FSM official explained that the FSM National Government did not create a plan because it receives only a small portion of FSM compact funds. The official said the FSM National Government was focused instead on shifting its sector operating costs, such as for the College of Micronesia, to the government’s own funds, freeing up compact funds for priorities in the education and health sectors. The FSM official also noted the government’s efforts to develop an operational plan by early 2014 outlining how the FSM government will address the budgetary and economic challenges it faces through 2023 and beyond. In May 2013, the three U.S. JEMCO members notified the FSM that the United States was considering withholding select fiscal year 2014 compact sector funds from the FSM National Government until it completes a plan detailing the concrete commitments that will be made to complement and support the states’ plans to address the annual decrements in compact sector funding. Without this plan, the FSM may not be able to sustain essential services in the education and health sectors in the absence of compact funding. The FSM National Government responded in July 2013 indicating that to address the decrement it was considering, among other things, tax reform, alternative energy initiatives, an annual funding set- aside, increased FSM trust fund contributions, and improved revenue sharing with the states. In its comments on our draft report, the FSM National Government mentioned the issue of revenue sharing between the national and state governments, noting that the FSM leadership is working together to arrive at a decision that will be beneficial to both levels of government and at the same time facilitate greater effectiveness in meeting the development objectives of the FSM. (See app. X for a copy of the FSM’s comments.) At the annual JEMCO meeting in August 2013, fiscal year 2014 sector grant funds were not allocated to the FSM. In fiscal years 2007 through 2011, the RMI spent about 50 percent, or $89 million, of sector compact funds in the education and health sectors. As shown in figure 5, of the total compact expenditures within the seven compact sectors (including Ebeye special needs as a sector), education represented approximately 31 percent and health represented approximately 19 percent. Expenditures in the other five sectors— infrastructure, environment, private sector development, public sector capacity building, and Ebeye special needs—together accounted for about 50 percent of total compact expenditures during this period. In addition to education sector compact funds, the RMI spent about $26.5 million of supplemental education grant funds and $11.9 million of Ebeye special needs funds to support education initiatives. In addition to health sector compact funds, the RMI spent about $3 million of Ebeye special needs funds to support health initiatives. For information on RMI infrastructure sector compact expenditures, see appendix II. Compact funds in the RMI supported a significant portion of government expenditures in the education and health sectors. Education sector compact funds, supplemental education grants, and Ebeye special needs education funds constituted about 62 percent of total education expenditures in fiscal year 2011, while health sector compact funds and Ebeye special needs health funds constituted about 33 percent of total health expenditures. Other noncompact U.S. grants represented an additional 6 percent of education expenditures and 17 percent of health expenditures in fiscal year 2011. In fiscal years 2007 through 2011, the RMI spent most education and health compact funds on personnel: about 54 percent of the education sector compact and supplemental education grant funds paid for personnel, while about 64 percent of the health sector compact funds paid for personnel (see fig. 6). Due to interrelated concerns about the amount of funds dedicated to personnel costs and the sustainability of sector budgets, JEMFAC resolved in August 2011 that personnel-related expenses in the education and health sector budgets for fiscal year 2012 could not exceed fiscal year 2011 levels and directed that fiscal year 2012 compact funds made available by this change should be budgeted for direct support of education and health programs and services. According to OIA, the RMI complied with this resolution. The RMI has not updated its plan to address the annual decrements in compact funding. In March 2011, the RMI submitted a draft medium- term budget and investment framework, which included a plan to address the annual decrements and provided an overview of economic performance, the country’s fiscal situation, and budget estimates. However, U.S. JEMFAC members raised concerns that the framework did not account for significant ongoing health sector operational costs, relied on reform efforts, and assumed unlikely new revenues. While the RMI provided a draft update to its framework in July 2013, the government has not updated the plan for addressing the annual decrements. The RMI budget submissions for fiscal years 2012 and 2013 did not reflect the RMI’s commitments outlined in the framework and failed to address JEMFAC’s ongoing concerns regarding decrement planning. An RMI official responded that the RMI government could not provide the updated framework and annual decrement plan because of obstacles it encountered in completing the 2011 audit and finalizing the 2011 census. In April 2013, the three U.S. JEMFAC members notified the RMI that the United States was considering withholding fiscal year 2014 compact sector funds from the RMI until the RMI submits the framework and an annual decrement plan. In July 2013, RMI officials submitted an updated framework outlining anticipated revenues in the medium term, but it lacked an annual decrement plan, as required. Without the annual decrement plan, the RMI may not be able to sustain essential services in the education and health sectors in the medium term. At the August 2013 JEMFAC meeting, the RMI submitted an updated medium-term budget and investment framework dated August 2013 along with several budget portfolio statements for fiscal year 2014 including statements for the departments of health and education. The RMI government considers this to be its decrement plan. However, the information was provided to the U.S. members of the JEMFAC 3 days prior to the annual meeting, and according to these members, they did not have sufficient time to review it and determine whether or not it meets the requirements of the JEMFAC resolution. At the annual JEMFAC meeting in August 2013, fiscal year 2014 sector grant funds were not allocated to the RMI. Data reliability issues hindered our assessment of progress by the FSM and RMI in both the education and health sectors for fiscal years 2007 through 2011. Between 2004 and 2006, both countries began tracking education and health indicators, establishing data collection systems, and collecting data for the majority of the indicators and have continued to track data on their indicators since that time. (See app. VI for a list of all FSM and RMI indicators in the education and health sectors.) While both countries tracked annual indicators to measure progress in these sectors, in reviewing subsets of these indicators we determined that data for eight of the subset of nine education indicators we reviewed in the FSM and for three of the subset of five education indicators we reviewed in the RMI were not sufficiently reliable to assess progress for the compacts as a whole—for a variety of reasons, some specific to individual indicators, but primarily because of missing, incomplete, or inconsistent data. We found one RMI education indicator to be both reliable and capable of demonstrating progress: the education level of teachers in the RMI. The other reliable RMI education indicator was student enrollment. We determined that data for all five of the subset of FSM health indicators we reviewed were not sufficiently reliable to assess progress for the compacts as a whole. In the RMI, of the subset of five health indicators we reviewed, we determined that one was sufficiently reliable and two were not sufficiently reliable to assess progress; for the remaining two indicators, we had no basis to judge the reliability of the data. In much of their reporting on these indicators, the FSM and RMI have noted data reliability problems and some actions they have taken to address the problems. The compacts’ joint management and accountability committees have also raised concerns about the reliability of the FSM’s education and health data and the RMI’s health data and required that each country obtain an independent assessment and verification of these data; neither country has met that requirement. In 2004, the FSM established 20 indicators to track progress toward its overarching goals in education: to improve the educational system of the country, including primary, secondary, and postsecondary education, and to develop the country’s human and material resources necessary to deliver these services. However, our review of a subset of 9 of the 20 FSM education indicators found problems with data reliability. Table 1 provides a summary of the data reliability determinations we made in reviewing the subset of 9 education indicators. (For a complete list of the indicators the FSM has tracked and reported since fiscal year 2005, see app. VI.) We determined that the data for number of schools by grade level were sufficiently reliable to report on progress in the FSM education sector. The number of schools by grade level, by itself, does not necessarily demonstrate progress or lack thereof; however, it does provide useful information about the changes in the states’ education systems. Both Chuuk and Pohnpei, for example, have gone through a process resulting in school closures, with or without consolidation of some schools, and the numbers of schools by grade level reflect this. In Chuuk, the number of schools declined from a total of 154 primary and secondary schools in 2007 to 85 schools in 2012, a 45 percent reduction. In Pohnpei, the number of schools declined from a total of 41 primary and secondary schools in 2007 to 34 schools in 2011, a 17 percent reduction. We determined that 8 of the subset of 9 FSM education indicators we reviewed could not be used to assess progress over time because of data reliability issues summarized above in table 1. For example, we found that the four FSM states did not use common definitions for some indicators; consequently, the education indicator reports we reviewed do not contain consistent data for these indicators and comparisons cannot be made across states. As an example, Chuuk, Pohnpei, and the FSM National Government each applied its own definition of dropout, creating inconsistencies in the data for that indicator. Student enrollment data provide another example: Chuuk and Kosrae included both public and private schools in reporting student enrollment data, while Pohnpei and Yap included only public schools. In addition to data reporting inconsistencies, we found that data in FSM’s education indicators reports sometimes were not complete. For example, in 2011, average daily student attendance data for Chuuk were missing; for that same year, Chuuk also lacked completion and graduation rate data for 8th and 12th graders. During January 2013 site visits in Chuuk, we visited 13 school sites selected on the basis of available time and travel constraints. This included 6 of 8 schools on the island of Weno and 7 schools on four lagoon islands. In several cases, these were school sites we visited in 2006. In facilities we were able to visit both in 2006 and 2013, we noted general improvements in the overall maintenance and condition; however, staff we interviewed reported that a lack of chairs, desks, and textbooks was a concern, especially in lagoon-island schools. In addition, we visited the Chuuk Department of Education warehouse where we found hundreds of cases of books and supplies that had not been shipped to schools in the outer islands as intended, according to the warehouse manager. An OIA education grant manager reported that the department had recently purchased and distributed 4,000 chairs and the distribution process had gone smoothly. However, as of May 2013, Chuuk did not have a fully implemented purchasing plan, inventory management system, or monitoring plan for textbooks, as required by JEMCO, according to an OIA official. In Pohnpei, we visited 8 schools (5 elementary and 3 high schools) of a total of 34 public elementary and high schools on the main island of Pohnpei, selected on the basis of available time and travel constraints. The school buildings we visited were generally clean. From what we were able to observe, they had electricity, functioning fans in the classrooms, and functioning windows. We observed desks, chairs, and textbooks in the classrooms. The newly built schools that we visited, which were funded through public sector infrastructure grants, had water tanks and new bathrooms with sinks and toilets that appeared to be operational. From what we observed, these schools were generally maintained in good condition. However, we also noted minor issues such as chipped paint and broken classroom doors and locks in some facilities. In 2004, the FSM began tracking data on 14 health indicators to measure its progress toward improving diagnostic and treatment capacity and ensuring the provision of services to geographically dispersed populations (see app. VI for a complete list of the indicators). However, our review of a subset of 5 of the 14 FSM health indicators found problems with data reliability. We determined that none of these indicators could be used to assess progress because of data reliability issues (see table 2). We found inconsistencies in the data provided by the states compared with data for the same indicators included in the FSM’s 14 annual health indicators report. For example, FSM data on immunization cannot be used due to issues with data in Chuuk. According to the FSM immunization expert, the data for that indicator were unreliable prior to 2011 because in Chuuk there was no registry of immunization to allow the computation of a coverage rate. In reviewing the Chuuk medical records, the immunization expert found that (1) an individual child might have three different immunization records in the system under three variations of his or her name, and (2) there was not appropriate consideration as to when a vaccination was medically valid and therefore should be counted. For an immunization to be medically valid, for example, a series may need to be given within certain time frames. The records that the expert examined showed vaccinations being given too early in the sequence, resulting in an incorrect dosage and invalidating the vaccination. Finally, the expert noted that immunization program documentation was bad. We also identified problems when reviewing how the FSM calculates the percentage of days when all essential drugs are in stock. Specifically, we identified problems with the source documents used in the calculations in Chuuk and Pohnpei, calling into question the reliability of the data presented in the health indicators report. The key documents from each health care facility that are used to calculate the indicator are the formulary (the list of the essential drugs) and each facility’s inventory report. We attempted to verify the accuracy of the Chuuk hospital drug inventory report and found that the report contained some incorrect information. For example, the report listed 219 bottles of Amoxicillin 125 MG/5ML Suspension 150 ML, but the hospital’s storage room had none. Since the inventory report is used in calculating the number reported for the essential drugs indicator, incorrect information found in the report raises questions about the validity and reliability of the information for this indicator in the health indicators report. In January 2013, we visited Chuuk’s only hospital, which we had previously visited in 2006. We noted that the hospital was generally better maintained than it had been on our prior visit. Moreover, officials told us that it now has reliable and consistent electric power, which was not the case in the past. Additionally, whereas previously Chuuk’s hospital had only a small incinerator to burn medical waste, we observed two functioning medical waste incinerators, which we were told operate on a routine basis. In 2006, some of the selected medical equipment that we observed was not working. In 2013, the selected equipment that we observed, such as a digital X-ray machine and laboratory equipment, was being used and reported as functional. During our 2006 visit to Chuuk’s hospital, many of the on-hand drugs that we spot checked were past their expiration days. On our 2013 visit to the hospital, however, the majority of the on-hand drugs that we spot- checked were within their labeled expiration dates. We also spot-checked drugs in two dispensaries on Chuuk Lagoon islands and found most of the drugs we checked to be within their labeled expiration dates. We cannot comment regarding on-hand drugs at the three other dispensaries in Chuuk lagoon that we visited, as they were closed when we attempted to visit them even though their schedules indicated that they were supposed to be open. During our 2006 visit to selected Pohnpei dispensaries, we also had found that varying amounts of the drugs on hand that we spot checked were past their expiration dates. On our recent visit to three of the four dispensaries on the main island, however, most of the on-hand drugs that we spot checked in selected dispensaries were within their expiration dates or had an extended shelf life. The three dispensary buildings we selected on Pohnpei in 2013 were all open on the day we visited. In addition, health assistants were present at the time of our visits. The buildings all generally appeared to be in an acceptable condition and had electricity at the time of our visits. The three selected dispensaries also reported some concerns, however. For example, we found some equipment, such as scales and freezers that were not functioning at the time of our visit. We also visited Pohnpei’s only public hospital during our site visits. However major renovation work was taking place on the day of our visit, which made it impossible to make any observations about its normal functioning. (For information on compact-funded infrastructure projects in the education and health sectors, see app. II.) The RMI has tracked 20 indicators selected by JEMFAC in 2004 for monitoring progress in education and began reporting on them annually in 2005 in response to a JEMFAC resolution. The RMI’s overarching education goals were to improve the educational system of the country, including primary, secondary, and postsecondary education, and to develop the country’s human and material resources necessary to deliver these services. For a complete list of the indicators the RMI has tracked and reported from 2007 through 2011, see appendix VI. However, in our review of a subset of 5 of the 20 RMI education indicators, we found problems with data reliability (see table 3). We determined that the data for 2 indicators were sufficiently reliable to assess progress in the RMI’s education sector: (1) total enrollment by grade and gender and (2) number and percentage of teachers by education level. Data we reviewed showed an improvement in the qualifications of RMI teaching staff, with the percentage of teachers having no degree, or a high school diploma, or a certificate decreasing from 57 percent in school year 2006-2007 to 42 percent in school year 2011-2012. Over the same time frame, the number of teachers holding associate’s, bachelor’s, or master’s degrees increased from 43 percent to 55 percent. OIA has advised the RMI Ministry of Education that all uncertified teachers should be in a ministry-approved degree program to be individually eligible for salary support from sector grant, supplemental education grant, or Ebeye special needs funds, and that these teachers should be certified by school year 2015. We determined that data for 3 of the indicators could not be used to assess education sector progress for the compact as a whole because of data reliability problems. For example, we found that the RMI changed the data source for some of the indicators it reported on during fiscal years 2007 through 2011. In fiscal years 2007 through 2010, the RMI reported Pacific Island Literacy Test data on student achievement for 4th graders, whereas in fiscal year 2011 it reported the Marshall Islands Standardized Test for 3rd, 6th and 8th graders, so year-to-year progress cannot be assessed because different grades and different tests were used. In January 2013, we made site visits to 6 of 12 public educational facilities in Majuro Atoll and 3 of 6 public educational facilities in Kwajalein Atoll, selected on the basis of available time and travel constraints. The new and renovated classrooms that we visited all had desks, chairs, and chalkboards. Most of the fans and lighting that we observed were in working order at the time of our visit, as were the new bathrooms. However, many of the safety doors that we observed at our selected schools were either off their hinges and moved to one side or propped open with an object. Officials told us that this problem occurred because the doors had not been properly installed. When we visited the RMI in 2006, we were shown classrooms in the Marshall Islands High School that had collapsed ceilings. We found no such problems during our visit to this school in 2013. However, we did find that several of the water tanks at the school were not connected to any of the buildings. At another school that we visited, Laura Elementary, classrooms in the new building had desks, chairs, and electricity, but an old building that was still used lacked electricity. At Delap Elementary, the classrooms also had electricity. On Ebeye, we visited a school in Gugeegue that had consistent electricity, we were told. We observed chairs, desks, and textbooks on our visit. However, we were also shown one of the school buildings being used for classrooms though it was considered unsafe by the RMI’s Project Management Unit. (For information on compact-funded infrastructure projects in the education and health sectors, see app. II.) The RMI established 26 indicators to measure progress toward its goal of improving primary health care in the RMI in 2006, and tracked them since 2007 (see app. VI for a list of the RMI’s health indicators), according to the RMI’s Ministry of Health. We found that 1 of the subset of 5 indicators that we reviewed—tuberculosis prevalence rates—was sufficiently reliable to assess progress in the health sector for fiscal years 2009 through 2011 (see table 4). While the number of tuberculosis cases was 23 in fiscal year 2009, the number increased to 30 cases in fiscal year 2010 and then fell slightly to 29 in fiscal year 2011. However, we determined that 2 of the subset of 5 health indicators that we reviewed were not sufficiently reliable because of various issues with data collection and reporting. For example, we determined that data reported for immunization coverage for 2-year-olds and the child mortality rate were not reliable due to the timeliness and accuracy of reporting and low coverage rates for data from the outer islands, all problems noted in the Ministry of Health’s responses to our questions on data reliability. We found that for 2 other health indicators we had no basis to judge their reliability. During January 2013, we visited both hospitals in the RMI, one located on Majuro and the other on Ebeye island in the Kwajalein Atoll. We did not attempt to visit any health clinics in other atolls due to logistic considerations. During our 2006 visit to the Ebeye island hospital, we were told that persistent problems with Ebeye’s power supply continued to interrupt hospital services. In 2013, however, we were told that the Ebeye island hospital had regular electricity, which we observed at the time of our visit. This facility also appeared to be clean, and the selected medical and laboratory equipment that we examined was functioning. On our visit to the hospital in Majuro, we asked whether the dispensary maintained a drug formulary—a list of the required drugs on hand. The hospital in Majuro provided us with a copy of its formulary, which was from 2007. The drugs and medical supplies that we spot-checked at the hospital were within their labeled expiration dates. (For information on compact-funded infrastructure projects in the education and health sectors, see app. II.) Education. In the annual education indicators report that it submitted to JEMCO from 2007 through 2011, the FSM identified problems with the overall quality, and consistency, of the education data, as well as problems with timeliness in reporting. Additionally, the reports noted the need for training of the data managers and difficulties with the data systems. In March 2012, JEMCO reaffirmed the need for reliable education data to evaluate performance in a resolution that required independent verification of performance indicators and data for the education sector, which the FSM was to communicate in a report due to OIA by July 1, 2013, prior to the August 2013 annual meeting. In April 2013, the FSM Department of Education (National Government) addressed the JEMCO resolution by seeking proposals to conduct an independent verification of its performance indicators and data quality. The request for proposals stated that the project period was approximately 2 months, ending July 30, 2013, but it did not state whether a report on the results of the project would be prepared within that time frame. Health. The FSM reported on its 14 annual health indicators, comprehensively by state and for the National Government, in a July 2012 report by the FSM national Department of Health and Social Affairs covering fiscal years 2004 through 2011. The report noted limitations with some of the data, for example, that not all infant deaths in the outer islands were included in the infant mortality data. In response to the report, JEMCO identified concerns regarding the reliability of data reported for the health indicators. For example, JEMCO noted concerns about the accuracy of the reported infant mortality rates as well as the reported number of encounters for primary health care services offered in community and dispensary settings, which the FSM tracked as a proxy measure of improved community-based primary health care. In its 2012 resolution JEMCO reaffirmed the need for reliable and quantifiable health data to evaluate performance and also required independent verification of performance indicators and data for the health sector; it required the FSM to submit a report on the health indicators by July 1, 2013. We inquired about the status of the FSM’s effort to address the JEMCO resolution to conduct an independent verification of the health data, and the Department of Health and Social Affairs informed us that the FSM asked for an extension of the July deadline. According to OIA, the FSM did not budget sufficient funds for the assessment, and that is why the FSM needed an extension. Education. From fiscal years 2007 through 2011, the RMI reported data on its annual indicators in its Ministry of Education annual portfolio budget statements (hereafter, portfolios). The RMI Ministry of Education reported that data on educational indicators are entered quarterly into its data management system, and that schools generally provide their data before the established deadlines. The RMI also provided us with copies of the standard forms that it uses to collect data on educational indicators. The RMI’s portfolios containing the indicator data did not explicitly identify limitations associated with the overall data; however, the portfolios included some notes describing limitations for a couple of indicators. For example, one note indicated that student teacher ratios did not include private schools. JEMFAC has not sought an independent review of RMI education indicator data quality. Health. The RMI Ministry of Health issued an annual health data report for each year from 2007 through 2011. The RMI also noted in its 2011 annual health data report that immunization coverage data showed a significant drop because of data entry problems, mainly in terms of lateness in entering data and an inability to keep track of children moving from one locality to another. The RMI Ministry of Health reported it uses a number of different international databases to track its health indicator progress such as WebIZ for immunizations and EpiAnywhere for tuberculosis. The Ministry of Health reported that they have undertaken a couple of different data assessments to improve data accuracy, as well as made efforts to improve reporting from Ebeye and the outer islands. Among the checks the Ministry of Health reported that it conducts to ensure the accuracy of the tuberculosis rate indicator is comparing the data entered into the database with results from lab tests, X-rays, and clinical visits. In 2009, JEMFAC noted that the RMI health data were unreliable because of discrepancies related to outer island data and infant mortality rates. Other outside reports also questioned how the Ministry of Health handled other data on disease incidence, prevalence, and mortality. In 2010, JEMFAC required that the Ministry of Health initiate and complete an assessment of the reliability of all its health data-management practices by September 30, 2011. The ministry obtained technical assistance from a United Nations Volunteer to address the requirement. However, the volunteer technical expert only stayed 10 months, leaving in July 2012, and the position was still vacant as of July 2013, according to the Ministry of Health. The RMI had not provided JEMFAC with the required report as of June 2013. The single audit reports we reviewed indicated challenges to ensuring accountability of compact and noncompact U.S. funds in the FSM and RMI. For example, these governments’ single audits showed repeat findings and persistent problems in noncompliance with U.S. program requirements, such as accounting for equipment. The United States has taken steps regarding the accountability of compact funds, such as establishing the Chuuk Financial Control Commission, but Interior has not coordinated with other U.S. agencies regarding the risk status of the FSM and the RMI for noncompact funds. Furthermore, the offices responsible for compact administration in the FSM, RMI, and United States faced limitations hindering their ability to conduct compact oversight. For example, OIA experienced a staffing shortage that disproportionately affected compact grant oversight compared to other OIA activities, with 5 of 11 planned positions filled in 2012. In fiscal years 2006 through 2011, the FSM National Government single audit reports indicated that the government faced financial accountability challenges. However, the single audit reports for Chuuk and Pohnpei state governments demonstrated improvement in financial accountability: financial statement audit opinions improved and the number of material weaknesses and significant deficiencies declined. As an example of the remaining challenges for the FSM National Government, its 2011 single audit report identified problems with the extent of noncompliance with program requirements, such as preparing required quarterly reports. These reports are important because OIA uses them for oversight of the amended compact. Furthermore, the National Government’s 2011 single audit report contained several repeat findings—problems noted in previous audits that had not been corrected for several years. For a detailed summary of our review of the FSM single audit reports, see appendix VII. The following briefly summarizes our analysis of the single audits for the FSM National Government and the state governments of Chuuk and Pohnpei. Financial reporting: FSM National Government single audit reports conveyed that the government was not able to account fully for its use of compact or noncompact funds for fiscal years 2006 through 2008. Chuuk’s single audit reports continued to identify financial accountability weaknesses, primarily because Chuuk’s financial statements did not contain information on its land leases in fiscal years 2009 through 2011. For fiscal years 2006 through 2011, Pohnpei received an unqualified opinion on its financial statements included in its single audit reports. (For additional details, see app. VII.) Compliance with requirements of major federal programs: The FSM National Government continued to be noncompliant with the terms and conditions of major federal programs in fiscal year 2011 in each of its three major programs. Furthermore, its fiscal year 2011 single audit report included four material weaknesses and eight significant deficiencies. The FSM National Government continued to have findings that have not been corrected for several years. For example, seven findings had recurred at least three times in the 4 years prior to 2011. In addition, the FSM National Government had consistently lacked the ability to prevent disbursing funds in excess of available funds in each year for the previous 2 years and lacked the ability to accurately report financial information in each of the previous 4 years. We believe recurring weaknesses in internal controls increase the risk that assets are susceptible to misuse. In contrast, Chuuk’s fiscal year 2011 single audit report demonstrated improvement in compliance with major federal programs. Whereas Chuuk previously had been considered noncompliant in fiscal years 2006 through 2010, it was considered materially compliant in fiscal year 2011. Pohnpei’s single audit reports also demonstrated improvement, as the state government was noncompliant with the requirements of federal programs in fiscal years 2006 and 2007 but was considered materially compliant in fiscal years 2008 through 2011. See appendix VII for additional information. Timeliness: The FSM National Government and Chuuk did not submit their 2006 single audit reports on time due to a delay in the reconciliation of accounting records. In fiscal years 2007 through 2011, however, the FSM National Government and Chuck submitted their single audit reports on time. Pohnpei met the deadline for submitting single audit reports during the entire period, fiscal years 2006 through 2011. (For additional details, see appendix VII.) The FSM has a national audit office, the Office of the National Public Auditor (ONPA), and Pohnpei has a Public Auditor. According to ONPA officials, ONPA has a staff of 15 in Pohnpei and 5 in Chuuk. According to state officials, the Pohnpei state government’s Office of the Public Auditor (OPA) has a professional staff of 8. Both the ONPA and OPA identified internal control weaknesses in their audits of the FSM National Government and state government that could lead to waste, fraud, and abuse. The following are examples from reports issued by the ONPA. An audit report on the National Government’s payroll operating controls for fiscal years 2010 through 2012 found overpayments to employees including payments to active and terminated employees and for hours worked but not authorized. A report on the Chuuk State Department of Health Services found that the department did not implement a procurement and inventory control system ensuring the efficient use of funds and the timely distribution of medications to recipients. This program was funded by the amended compact health sector grant. A report on the Chuuk Department of Education found that it failed to provide many students with textbooks, to hold schools and students accountable for lost books, and to ensure that classroom lessons followed the approved state curriculum. This program was funded by amended compact education sector grant. In fiscal years 2008 through 2011, the Pohnpei state government’s OPA also conducted audits that identified findings related to internal control weaknesses potentially leading to waste, fraud, and abuse. For example, its September 2008 audit report found weak internal controls in the issuance of pharmaceutical and medical supplies from the Pohnpei Central Medical Supply Unit and other sections of the Department of Health Services. The amended compact was the primary source of funding. The report noted the lack of assurance that recipients actually received all items indicated in the receipts because there was not a reliable audit trail for the issuance of pharmaceutical and medical supplies. RMI single audit reports for fiscal years 2006 through 2011 demonstrated an increase in material weaknesses in noncompliance with the requirements of federal programs. For example, the 2006 single audit report identified 4 material weaknesses in compliance with federal awards and about $5.7 million in unresolved questioned costs. However, the 2011 single audit report identified 8 material weaknesses and about $7.4 million in unresolved questioned costs as of September 30, 2011. While reports for fiscal years 2006 through 2010 were submitted on time, the 2011 single audit report was late. For a detailed summary of our review of the RMI single audit reports, see appendix VII. The following briefly summarizes our analysis of the RMI single audits. Financial reporting: In fiscal years 2006 through 2011, the RMI received an unqualified audit opinion on each of its annual financial statements. (See app. VII for a list of the opinions on financial statements in the RMI’s audit reports for fiscal years 2006 through 2011.) Compliance with requirements of major federal programs: The RMI single audit reports indicated they were noncompliant with the requirements of federal programs in fiscal years 2006 through 2011. The fiscal year 2011 single audit report included eight findings that were considered material weaknesses. Some findings were related to compact grants and others to noncompact funding. Furthermore, several of the weaknesses were not corrected over several years. For example, seven of the eight material weaknesses reported in the fiscal year 2011 single audit recurred at least once in the 2 prior years and five had recurred in 3 out of the 4 previous years. For example, each year for 4 years prior to fiscal year 2011, the RMI was not able to provide supporting documentation for its expenses and an adequate accounting for its fixed assets to meet the requirements in the fiscal procedures agreement. Furthermore, we believe that recurring weaknesses in internal controls increase the risk that assets are susceptible to misuse. Also, the fiscal year 2011 RMI single audit report demonstrated that the RMI did not comply with some of the requirements of federal programs. For example, the RMI disbursed $1 million in compact sector grants to the Marshall Islands National Telecommunications Authority without an audit. In addition, the auditors reported that documentation supporting expenditures from various ministries could not be located and resulted in questioned costs totaling approximately $1.1 million; other questioned costs were also identified for various reasons in the 2011 single audit. (For additional details, see app. VII.) Timeliness: For fiscal years 2006 through 2010, the RMI met the single audit report submission deadline. In July 2012, the RMI contacted OIA and requested an extension to file its 2011 single audit by September 30, 2012. OIA granted the extension, stating no adverse action would be taken if the single audit was completed and received by OIA by September 30, 2012. However, RMI submitted its fiscal year 2011 report in February 2013, 8 months late. According to the RMI Ministry of Finance, the 2011 single audit report was late because of staff turnover, computer system issues, and late reconciliation of general ledger and bank accounts. As a result, the 2011 single audit was not received by the United States until 17 months after the end of the year in which the reported findings were identified; OIA took no adverse action. (For additional details, see app. VII.) RMI Office of the Auditor General (OAG) officials also told us that previous annual single audits reported fraud indicators (e.g., numerous findings on noncompliance with procurement requirements) that were not looked into by the RMI government in office at that time. The current OAG indicated that if the RMI government at that time, including the then OAG, had investigated the reported procurement issues, the recent fraud cases in the Ministry of Health and Human Services and Ministry of Finance might have been uncovered earlier. (For additional details, see app. VII). Working through JEMCO and JEMFAC, OIA has led actions to improve financial accountability of compact funds and has recommended further actions. The improvement in Chuuk audit reports was the result of cooperation between the JEMCO and Chuuk state government. For example, Chuuk’s fiscal year 2004 single audit report included 30 findings and unresolved questioned costs totaling approximately $6.7 million. In fiscal year 2005, the JEMCO established the Chuuk Financial Control Commission (CFCC) to assist the Chuuk government in managing its finances. Consequently, Chuuk’s fiscal year 2011 single audit report identified 5 findings with no unresolved questioned costs. According to a CFCC official, the CFCC has played an important role in restoring and maintaining the integrity of compact sector grant expenditures. The JEMFAC reported after its review of the RMI fiscal year 2011 single audit report that unresolved questioned costs had significantly increased over the previous 4 years. At the JEMFAC midyear meeting held on March14, 2013, discussion included the issue of the RMI’s inability to comply with requirements regarding allowable costs, cash management, equipment, and real property management, among other issues, as well as the related unresolved questioned costs reported in the 2011 single audit, which totaled over $5 million. The RMI Secretary of Finance told OIA officials that the RMI had recently taken positive steps to resolve outstanding questioned costs and to strengthen the ministry’s internal controls; nevertheless, OIA recommended that JEMFAC refrain from allocating unexpended grant funds from fiscal year 2011 and fiscal year 2012 until the RMI demonstrated that it had resolved all current questioned costs. At its annual meeting in August 2013, JEMFAC did not allocate the unexpended 2011 and 2012 funds. Although OIA has authority to impose special conditions or restrictions for unsatisfactory performance or failure to comply with grant terms, OIA officials have preferred to work through the JEMCO and JEMFAC committees rather than take unilateral action. While no official “high risk” designation exists in the amended compacts or fiscal procedures agreements, the fiscal procedures agreements’ provisions governing grants administration allow the same special conditions to be applied to amended compact grants that exist for other high-risk grantees receiving federal assistance. OIA officials told us that they treat the amended compact funds as high risk and provide special conditions through the JEMCO and JEMFAC resolutions, such as requiring the acquisition of technical or management assistance, requiring additional reporting and monitoring, or withholding funds. Regarding financial accountability of noncompact grants, OIA has not coordinated the federal response to audit findings that affect programs of more than one agency. Nor have OIA or other federal agencies designated the FSM or the RMI as high-risk grantees, which would allow those agencies to impose special conditions on their grants such as requiring additional reporting and monitoring. Single audit reports show compliance problems for compact and noncompact grants. For example, the 2011 FSM National Government single audit reported that for one special education grant, the FSM, unable to draw down funds from the grant account because the period of funds availability had closed, improperly reimbursed itself from a different grant account that was still open. The same single audit also reported that the FSM National Government submitted financial reports for Transportation’s Airport Improvement Project grant that did not agree with underlying financial records. According to OIA officials, Interior has not coordinated the response of federal agencies to these audit findings because of its focus on its responsibility for oversight of the amended compact funding. According to Interior officials, while Interior and other U.S. agencies may designate the FSM and the RMI as high-risk grantees for noncompact grants if the grantee has a history of performance problems, as of June 2013, no agencies have done so, potentially because of the lack of coordination between OIA and other grantors. Education officials noted that the department looks to see if there are systemic problems when designating a grant recipient as high risk but they have not formally assessed this status for the FSM or RMI. HHS officials believe the department’s noncompact funds are at risk, but HHS has not conducted a systematic review of FSM and RMI audit results or considered whether the grantees should be considered high risk. OIA officials told us they have not undertaken a formal analysis to determine whether Interior noncompact funds should have a high- risk designation and have not held formal discussions with other grantor agencies (e.g., with Education, Transportation, or other grantors) regarding this issue. FSM officials stated in January 2013 that staff constraints in the Office of Statistics, Budget and Economic Management, Overseas Development Assistance, and Compact Management’s (SBOC) Division of Compact Management limit the division’s ability to conduct oversight. The Division of Compact Management is responsible for, among other things, day-to- day communications with JEMCO and the U.S. government and oversight of compact implementation, including coordination with recipients of compact grants to ensure effective and efficient use of compact funds. FSM officials told us that the division is currently staffed by three staff members who provide compact oversight for the FSM National Government and the four states across six sectors. However, FSM officials told us that they need additional staff so they can conduct more oversight activities. In addition to the staffing shortage, FSM officials told us that the Division of Compact Management is hampered by its lack of authority to ensure that the National Government and the four states comply with compact requirements. For example, while the National Government and any subgrantees, including the four states, are required by the compact’s fiscal procedures agreements to provide quarterly reports with data and information on progress toward sector performance indicators, the Division of Compact Management does not have the authority to enforce this requirement if the National Government and states do not comply. In this case, FSM officials will sometimes request that the Department of Finance withhold quarterly allotments of compact funds until an entity submits the required information or, if necessary, identify issues for OIA to address. According to RMI officials, staff constraints in the Office of Compact Implementation (OCI) limit the office’s ability to conduct oversight and enforce compact requirements across multiple sectors and operations in numerous atolls. OCI has responsibility for all issues related to the compact and is also responsible for preparation and follow-up for all JEMFAC meetings, responses to GAO reports, and preparations for any congressional hearings on compact-related matters. RMI officials told us that the office is currently staffed by two people—a director and a foreign service officer—who run the office with three divisions. RMI officials also stated they depended on officials from other government agencies to help them fulfill their responsibilities. For example, OCI uses the legal advisor of the Ministry of Foreign Affairs to assist with compact issues since the OCI’s Division of Compact Legal Affairs has not filled its legal position. Additionally, OCI officials told us they are hampered by their lack of authority to require that the RMI ministries implementing projects funded by sector grants comply with compact requirements. For example, OCI works through the Ministry of Foreign Affairs or the Office of the Chief Secretary when other RMI ministries or offices have not submitted compact-related reports. RMI officials said the government has not resolved the question of who within the RMI government has the authority to withhold funds to ensure compliance. According to RMI comments on our draft report, the Office of the Chief Secretary does not have authority to withhold funds from ministries or offices to compel them to comply with compact requirements (see app. XI). From fiscal years 2011 through 2013, OIA experienced staff constraints, particularly in the Honolulu field office and in the FSM, that limited its ability to carry out its compact oversight responsibilities. In 2010, OIA created a plan that provided detailed staffing projections across OIA for fiscal years 2010 through 2014. To ensure effective oversight for the amended compacts, OIA projected a need for 8 staff in the Honolulu field office, 2 field staff in the FSM, and 1 field staff in the RMI for fiscal years 2011 through 2013, a total of 11 staff. (See app. VIII for the plan’s detailed staffing projections.) However, in 2011 and 2012, OIA had a total of 5 staff for compact oversight: 4 staff in its Honolulu field office and 1 field staff in the RMI. In March 2013, OIA filled 1 of the 2 projected FSM field staff positions. The OIA 2010 workforce plan projected the need for 50 staff for all of its divisions in fiscal years 2010 through 2014; it projected that existing resources would allow OIA to fund a total of 43 staff during this period. However, actual staffing levels were less than 43 in 2011 and 2012. Though compact oversight staff would represent 22 percent of total projected staff in the plan, compact oversight staff represented 12 percent and 14 percent, respectively, of actual OIA total staff in fiscal years 2011 and 2012. As a result, OIA’s staffing shortage disproportionately affected compact grant oversight compared to other OIA activities. See table 5. According to OIA officials, the following three factors contributed to the staffing shortages affecting compact oversight in fiscal years 2011 and 2012. Budget constraints and uncertainties: OIA officials said budget constraints and uncertainties prevented the office from hiring staff and filling vacant positions as outlined in the workforce plan. OIA noted that the plan assumed sufficient budgetary resources, and with enacted budgets in fiscal years 2010 through 2013, OIA could not hire additional staff. OIA officials also cited budget uncertainties for fiscal years 2012 and 2013 as a factor that kept them from filling the second education grants specialist position. OIA priorities: OIA management did not fill compact-related vacancies because of other priorities, such as filling headquarters-based positions before filling field positions. For example, an OIA official said that OIA management held back some available funding in hopes of staffing a Guam field office. Lack of qualified candidates: OIA officials also noted that in 2011 OIA posted the vacancy for the second education grants specialist position in Honolulu but did not receive sufficiently qualified candidates, which prevented the office from hiring. Staffing shortages, particularly those in the Honolulu field office, have negatively affected OIA’s compact oversight in the FSM and the RMI. While oversight activities, site visits, and required meetings occurred, OIA noted the following oversight gaps: In a 2010 report, Interior’s Office of the Inspector General reported that OIA’s compact oversight was hindered by the lack of an FSM field representative to support oversight efforts, despite the fact that the FSM received about $100 million in grant funds, more than any other insular area. Additionally, the report questioned whether OIA was effectively utilizing existing staff in the Honolulu field office. One OIA official said that the Honolulu field office’s staffing shortage hinder OIA’s ability to scrutinize financial reports and provide feedback to both countries. This official also stated that without a second person working on education sector compact assistance, OIA cannot thoroughly analyze education budgets, which results in high- level recommendations to the JEMCO and JEMFAC rather than specific recommendations that address issues such as the potential misuse of funds. Noting that the RMI experienced an increase in unquestioned costs over a period of 3 years, the OIA official stated that if the Honolulu office had a second education grants specialist, OIA could identify these issues earlier and support the OIA audit liaison in following up on issues identified in the single audits. At the midpoint of the 20-year amended compact assistance term, the FSM and RMI face critical challenges in compact implementation. During the first 10 years, the FSM and the RMI spent most of their funds for education and health, sectors prioritized in the compact agreements. However, because of data reliability issues, neither country can demonstrate whether it has made progress toward its goals in these sectors. Now, with 10 years of amended compact sector funding left, both countries must quickly plan for reduced grant resources and resolve the accountability issues that have plagued them to date so that they can fully utilize the funds and time left to achieve their goals. Both countries must complete plans that address annual decrements in compact funding and determine new revenue sources that will replace compact grant assistance in 2023. Despite multiple JEMCO and JEMFAC resolutions calling for the countries to produce these plans, the FSM National Government has yet to develop a plan that shows how it will address budgetary and economic challenges through 2023 and support the states in adjusting to the annual decrements, while the RMI government has yet to develop a plan that demonstrates how it will adjust to the annual decrements. In the absence of these plans, JEMCO and JEMFAC will face challenges ensuring that annual grant assistance for both countries is allocated in a sustainable manner. Ongoing problems with data reliability exist for both countries. Without reliable data, the countries cannot assess progress toward their goals in the education and health sectors and cannot effectively use results data for setting priorities and allocating resources aimed at improving performance. The lack of reliable data also hampers the ability of JEMCO and JEMFAC to oversee compact expenditures and assess the countries’ progress toward all its goals in the education and health sectors. The FSM’s and RMI’s single audits continue to identify long-standing and recurring findings, which if addressed could allow both countries to more effectively use U.S. resources and diminish potential losses that arise from fraud, waste, and abuse. Given these recurring audit findings, both compact and noncompact U.S. funds are at risk. Interventions by JEMCO were effective in Chuuk in bringing improved financial accountability; however, similar JEMCO and JEMFAC interventions have not been undertaken for the FSM National Government or the RMI. Furthermore, U.S. grants provided separately from the amended compact by multiple agencies are at risk. Although OIA has a lead role regarding audit matters, it has not formally coordinated with other U.S. agencies to address audit findings, nor has it assessed whether its own noncompact grants should be classified as high risk. Moreover, other federal agencies whose grants may be at risk have not routinely considered designating either country as a high-risk grantee. Such consideration could enable U.S. agencies to enforce conditions and restrictions on noncompact grant funds they provide, thus improving the oversight and management of the funds. Finally, although the majority of grants administered by OIA are amended compact grants, OIA’s amended compact oversight function was disproportionally affected by staffing shortages. While budget constraints prevented OIA from hiring the total number of staff it needed to conduct oversight for all of its grants, decisions to staff other OIA divisions rather than hire compact oversight staff affected OIA’s ability to ensure compact funds were efficiently and effectively used. We recommend that the Secretary of the Interior take the following five actions: In order to improve the ability of the U.S. agencies participating in the JEMCO and JEMFAC committees to conduct required oversight of compact funds, direct the Director of Insular Affairs, as Chairman of JEMCO, to coordinate with other JEMCO-member U.S. agencies to have JEMCO take all necessary steps, or, as the administrator of compact grants, to directly take all necessary steps, to ensure that the FSM (1) completes satisfactory plans to address annual decrements in compact funds, (2) produces reliable indicator data used to track progress in education and health, and (3) addresses all single audit findings in a timely manner; and direct the Director of Insular Affairs, as Chairman of the JEMFAC, to coordinate with other JEMFAC-member U.S. agencies to have JEMFAC take all necessary steps, or, as the administrator of compact grants, to directly take all necessary steps, to ensure that the RMI (1) completes satisfactory plans to address annual decrements in compact funds, (2) produces reliable indicator data used to track progress in education and health, and (3) addresses all single audit findings in a timely manner. In order to improve financial accountability of noncompact U.S. grant assistance provided to the FSM and the RMI, consult with other grantor agencies to determine whether the FSM National Government or any FSM states meet the criteria to be designated as a high-risk grant recipient for noncompact funds, or whether other steps should be taken to improve accountability; and consult with other grantor agencies to determine whether the RMI meets the criteria to be designated as a high-risk grant recipient for noncompact funds, or whether other steps should be taken to improve accountability. In order to ensure that Interior is providing appropriate resources for oversight and monitoring of the FSM and RMI compacts, take actions to correct the disproportionate staffing shortage related to compact grant implementation and oversight. We provided a draft of this report for comment to Interior, Education, HHS, and State and also to the FSM National Government and the government of the RMI. Interior, the FSM National Government, and the government of the RMI provided formal written comments on the draft report, which are reprinted in appendixes IX, X, and XI, respectively, and which we summarize below. Education and HHS had no comments on the draft report. In an e-mail received August 13, 2013, from State’s GAO Liaison, State indicated that our report will inform its continuing work, mainly through its involvement in the JEMCO and JEMFAC. For example, State noted, the U.S. members of the JEMCO are currently taking steps to address decrement planning and improve the production of reliable indicator data in the compact priority sectors of health and education in the FSM. Similarly, the U.S. members of the JEMFAC continue to work with the RMI on its decrement plan. Interior generally concurred with all five of our recommendations and briefly discussed each. With regard to our recommendations for actions involving JEMCO and JEMFAC, Interior noted examples of how it and other U.S. members of JEMCO and JEMFAC have worked to make improvements in the three areas mentioned in the recommendations: decrement plans, reliable indicator data to track progress in education and health, and addressing single audit findings. Interior also discussed our recommendations to determine, in consultation with grantor agencies, whether steps should be taken to improve accountability of noncompact funds to the FSM and RMI, including application of the high-risk designation for grant recipients. Interior noted that it cannot direct other agencies to take action with regard to any grant-specific issues and stated it was unaware of any precedent for federal agencies to jointly designate a grantee as high risk; however, Interior said it would discuss this approach with other federal agencies. Although Interior also concurred with our final recommendation, to take actions to correct the disproportionate staffing shortage related to compact grant implementation and oversight, Interior’s response indicates that it considers corrective action to be contingent on its receiving funding for new positions through the annual budget process. However, the intent of our recommendation is to have Interior work with its actual funding levels, whatever they may be, to correct what we observed to be a misalignment in how it allocates its staff. We found that compact grants account for the majority of grant funds that OIA administers and that OIA’s staffing shortage has disproportionately affected compact grant oversight compared with other OIA activities. We believe it is feasible for OIA to address this imbalance regardless of whether it receives funding for new positions. Appendix IX presents a copy of the letter from Interior. Interior also provided technical comments that we incorporated in the report where appropriate. In its written comments on our draft report, the FSM National Government focused on three areas of our reporting: (1) decrement planning, (2) data reliability issues for education and health indicators, and (3) financial accountability over compact and U.S. federal program funds. The FSM agreed on the importance of these three issues to the successful implementation of the amended compact. The FSM identified activities under way to plan for the decrement, such as the 2023 Planning Committee’s efforts to identify ways to intensify private sector growth. Regarding data reliability, the FSM cited implementation of a contract to assess the national education system’s ability to produce valid and reliable data and efforts under way to review the quality of health indicators with government staff. The FSM remarked on what it characterized as the heavy emphasis in our report of the possibility of achieving increased accountability over noncompact grant funds through a “high-risk” designation, but noted that it was assured because the process involved in a “high-risk” designation is not an arbitrary one. As some of the FSM’s comments related to topics discussed at the August 22, 2013, JEMCO annual meeting, which we attended, we have updated our report to reflect information presented at that meeting. Appendix X presents a copy of the letter from the FSM National Government. The government of the RMI also provided written comments on our draft report. The RMI believes it submitted adequate plans regarding the medium-term budget and investment framework and the decrement, while at the same time noting the usefulness of the decrement plan as a policy guide and planning tool, rather than as a mechanism for making line-item budgetary decisions. Regarding data reliability, the RMI generally agreed with our findings of data reliability problems in both the education and health sectors. The RMI agreed that there were limitations to their education data for certain indicators, and reported that they faced challenges in data collection due to the number of schools that were spread out over a large ocean area, and the deficient state of their transportation and communication systems. In the health sector, the RMI pointed out that it has 52 health centers spread throughout 29 atolls, making it difficult to collect data in a timely manner, and that it also lacks personnel dedicated solely to collecting and entering health indicator data. The RMI, however, noted that its Ministry of Health is seeking external assistance to improve health data. In response to our recommendation that—in order to improve financial accountability of noncompact U.S. grant assistance provided to the RMI—the Secretary of the Interior should consult with other agencies to determine whether the RMI meets the criteria to be designated as a high-risk grant recipient for noncompact funds, or whether other steps should be taken to improve accountability, the RMI noted that internal controls are now in place to detect and deter fraud, waste, and noncompliance with the fiscal procedures agreement or other U.S. federal regulations. For that reason, the RMI Ministry of Finance does not believe that any special conditions or restrictions for unsatisfactory performance or failure to comply with grant terms are warranted. As some of the RMI’s comments related to topics discussed at the August 20, 2013, JEMFAC meeting, which we attended, we have updated our report to reflect information presented at that meeting. See appendix XI for a detailed presentation of comments from the RMI and our responses to them. At both the annual JEMCO and JEMFAC meetings in August 2013, resolutions were passed in response to our recommendations related to decrement planning, data reliability, and addressing single audit findings. The resolutions approve the use of prior year unobligated funding to address one or more of the following three areas: (1) completing satisfactory plans to address annual decrements in compact funds, (2) producing reliable indicator data used to track progress in education and health, and (3) addressing all single audit findings in a timely manner. 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 the Interior, Education, HHS, and State, as well as to the President of the Federated States of Micronesia and the President of the Republic of the Marshall Islands. In addition, the report will be available at no charge on the GAO website 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 XII. This report examines, for fiscal years 2007 through 2011, (1) the Federated States of Micronesia’s (FSM) and the Republic of the Marshall Islands’ (RMI) use of compact funds in the education and health sectors; (2) the extent to which the FSM and RMI have made progress toward achieving their stated goals in education and health; and (3) the extent to which oversight activities by the FSM, RMI, and the United States ensure accountability for compact funding. In addition we provide information on the FSM and the RMI infrastructure sector grants. To determine how the FSM and RMI used amended compact funds in the education and health sectors, we analyzed the single audits for the FSM National Government and the state governments of Chuuk and Pohnpei and for the RMI government for fiscal years 2007 through 2011. The single audits provide information on total education and health sector compact fund expenditures as well as total supplemental education grant expenditures in both countries and Ebeye special needs expenditures in the RMI. The single audits also provide details on specific expenditures within each of these sectors, such as personnel costs and medical supplies. However, data on specific expenditures for fiscal year 2007 and fiscal year 2008 were not available for the FSM National Government or the state of Chuuk; hence, we reported on specific sector expenditures for the FSM National Government, Chuuk, and Pohnpei for fiscal years 2009 through 2011 only. We were able, however, to provide specific expenditure data for the RMI for fiscal years 2007 through 2011. We report on the specific expenditures that constitute at least the top 80 percent of expenditures in the education and health sectors, as well as for supplemental education grant expenditures for both countries. Any remaining expenditure categories are aggregated under an “Other expenditures” category. Within the single audits, we also analyzed the total expenditures within the education and health sectors for the FSM National Government, Chuuk, Pohnpei, and the RMI government to determine the portion of sector expenditures supported by compact and noncompact U.S. funds. We determined that these data were sufficiently reliable for the purposes of our report. To evaluate the extent to which the FSM and RMI made progress toward achieving their stated goals in the education and health sectors from fiscal years 2007 through 2011, we identified the indicators the FSM and RMI developed to track progress in those sectors. In assessing FSM progress, we used data from Chuuk and Pohnpei since these two states represent 82 percent of the FSM population. As each country had numerous indicators, we selected a subset of the health and education indicators in both countries to review. We used the U.S. 5-year reviews of the FSM and RMI; Joint Economic Management Committee (JEMCO) and Joint Economic Management and Financial Accountability Committee (JEMFAC) health and education related resolutions from 2007 through 2012; and the Millennium Development Goals (MDG) performance measures as criteria to determine the subset of measures. We selected these criteria for the following reasons: the U.S. 5-year reviews and the JEMCO and JEMFAC resolutions identified indicators that reflected country-specific concerns, while the MDG reflected global standards because they were developed by international health and education experts and agreed upon by almost all developing countries. An indicator was selected to be part of the subset if it was included in two of the three sources listed above for the FSM, and listed in all three sources for the RMI. We also consulted with officials at the U.S. Departments of Education (Education) and Health and Human Services (HHS) regarding our proposed methodology. We then reviewed FSM and RMI annual reports tracking these indicators for 2007 through 2011. To determine whether the data presented in the annual health and education indicator reports were sufficiently reliable to measure progress in the compacts as a whole, and in selected states, we reviewed the reports themselves, reviewed JEMCO and JEMFAC resolutions related to health and education data, and interviewed FSM and RMI officials responsible for collecting and providing the data during our site visits in January 2013. In the FSM and RMI, we also attempted to replicate the reported data in some of the education and health reports. Additionally, we sent each country a series of specific follow-up questions related to the subset of indicators to learn more about each country’s data collection and verification activities, as well as to try to clarify discrepancies in the data we identified. In some instances, the responses we obtained did not provide sufficient information for us to determine that the data were reliable; in those instances we classified the indicators as “no basis to judge.” We reported on the reliability of these indicators in the report. To identify the extent to which the FSM and RMI governments conducted monitoring and oversight activities, we reviewed the amended compacts and fiscal procedures agreements to identify specific monitoring responsibilities. We also reviewed the U.S. briefing documents, as well as the minutes and resolutions, when available, related to the JEMCO and JEMFAC meetings. We further reviewed FSM and RMI documents—such as portfolios, quarterly performance reports, and annual reports, for fiscal years 2007-2011 as available—submitted by the FSM and RMI governments to the U.S. government to confirm compliance with accountability reporting requirements. We discussed the lack of required annual reporting with Department of the Interior (Interior) Office of Insular Affairs (OIA) officials. We obtained the single audit reports for the years 2006 through 2011 from the FSM Office of the National Auditor’s website and the RMI’s Office of the Auditor General. These reports included audits for the FSM National Government and the state governments of Chuuk and Pohnpei, and for the RMI government. In total, 24 single audit reports covered 6 years, a period that we considered sufficient for identifying common or persistent compliance and financial management problems involving U.S. funds (amended compact and other noncompact funds). We determined the timeliness of submission of the single audit reports by the insular area 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 did note that the “Form Date” is updated if a revised SF-SAC for that same fiscal year is 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 if they had recurred in successive single audits and were still occurring in their most recent audit and categorized the auditor’s 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 OIA staff. To identify the staffing levels for the Honolulu office we reviewed Interior’s 2010 workforce plan and obtained current staffing levels from OIA, as well as reviewed Interior congressional budget submissions for 2013 and 2014 for actual staffing levels in 2011 and 2012. We discussed this information with OIA officials to ensure that the data were sufficiently reliable for our use. To provide information on the FSM and RMI infrastructure sector grants, we analyzed the single audits for the FSM National Government and the state governments of Chuuk and Pohnpei and for the RMI government for fiscal years 2007 through 2011. The single audits provide information on total infrastructure sector compact fund expenditures and provide details on specific expenditures within the infrastructure sector, such as contractual services. However, data on specific expenditures for fiscal year 2007 and fiscal year 2008 were not available for the FSM National Government or the state of Chuuk; hence, we reported on specific sector expenditures for the FSM National Government, Chuuk, and Pohnpei for fiscal years 2009 through 2011 only. We were able, however, to provide specific expenditure data for the RMI for fiscal years 2007 through 2011. We report on the specific expenditures that constitute at least the top 80 percent of expenditures in the infrastructure sector. Any remaining expenditure categories are aggregated under an “Other expenditures” category. We determined that these data were sufficiently reliable for the purposes of our report. We also reviewed the infrastructure development and infrastructure maintenance plans for the FSM and RMI, interviewed officials in the FSM and RMI project management units, and reviewed progress reports submitted by the FSM and RMI. We reviewed JEMCO and JEMFAC minutes and resolutions related to the infrastructure sector and discussed the status of the infrastructure development plans and projects with OIA’s infrastructure grant manager. Additionally, we visited a variety of ongoing completed projects in the FSM and RMI supporting the health and education sectors in January 2013. To address all objectives, we held interviews with officials from Interior (Washington, D.C.; Honolulu, Hawaii; and the RMI) and the Department of State (Washington, D.C.; the FSM; and the RMI). We also interviewed officials from the HHS (Washington, D.C., and San Francisco, California) and Education (Washington, D.C.). We traveled to the FSM (Chuuk and Pohnpei) and the RMI (Kwajalein and Majuro Atolls) in January 2013. In addition, in Chuuk state, we visited the islands of Fefen, Parem, Tonoas, Udot, and Weno. In both countries we visited selected primary and secondary schools, hospitals, and dispensaries. Our site selections were judgmental because of the number of facilities on the islands, logistics, and the time at our disposal. The facilities we visited exhibited a mix of factors, such as facility type (elementary and secondary schools), age (older and newer facilities), renovation status (those which had been renovated and those that had not), and logistical needs. Where possible, we selected facilities that we had visited in 2006 in order to draw comparisons, to the degree possible. During our site visits we made observations and performed spot checks. We used our 2006 report to help select aspects to observe—such as cleanliness, electrical power, and desks—and drug expiry dates to spot-check. These site visits were not designed to yield generalizable conclusions but rather to illustrate relevant conditions in the education and health sectors, including whether there was functioning equipment, in both countries. We discussed compact implementation with FSM (national, Chuuk, and Pohnpei governments, as applicable) and RMI officials from the attorney general, education, finance, foreign affairs, health, auditor general, public works, and public service commission offices. Furthermore, we met with the RMI’s Office of Compact Implementation and Chief Secretary and the FSM’s Office of Statistics, Budget and Economic Management, Overseas Development Assistance, and Compact Management. In Kwajalein Atoll, we met Ebeye health and education officials to discuss compact implementation issues. We also observed the 2012 annual meetings, the 2013 midyear meetings, and the 2013 annual meetings of the JEMCO and the JEMFAC. We contacted Interior’s Inspector General’s Office in Washington, D.C., to discuss ongoing investigations in the FSM and RMI; however, we received no response to our inquiries. We conducted this performance audit from August 2012 to September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In the infrastructure sector, the FSM spent the majority of sector compact funds, 74 percent, on contractual services, which include repairing and maintaining facilities such as schools (see fig. 7). The FSM tracks progress in the infrastructure sector by the completion of projects. The FSM established an infrastructure development plan in 2004 and infrastructure maintenance funds by 2009. As we reported in 2007, the infrastructure development plan proved to be problematic because it included synopses of 11 different infrastructure sectors, contained long lists of projects, and though its estimated costs were prepared by professional engineers, it did not provide explanations or support for individual projects or prioritize them as the Joint Economic Management Committee (JEMCO) required. Furthermore, the plan was not based on any type of assessment of the needs of specific areas in the FSM, did not meet with concurrence from the FSM states, and was not adopted by the FSM Congress. In fiscal year 2010, the FSM submitted an official list of priority infrastructure projects; JEMCO had already approved partial funding for 13 projects on the list at its September 2009 annual meeting. Of the 19 priority-one projects, 4 were school buildings and classrooms in Pohnpei and 2 were school buildings in Yap; the remaining 13 were health-care facilities or projects directly affecting public health and safety, including water and wastewater projects and a detention center. The Office of Insular Affairs (OIA) has used the FSM’s 2010 list of 19 priority-one projects as the basis for funding infrastructure projects in the FSM. As of June 2013, the FSM National Government and state governments had not issued a revised infrastructure development plan, according to OIA. FSM infrastructure is overseen by a Program Management Unit (PMU) whose responsibilities include (1) certifying infrastructure projects, or determining that the scope and budget are reasonable and justifiable, and (2) ensuring that the projects will be designed to a professionally acceptable standard and that the project budgets properly reflect the costs of such as standard. The PMU also certifies that projects in all four FSM states are consistent with the priorities listed in the FSM’s infrastructure development plan. The PMU is to provide quarterly reports on construction activities to OIA. The reports generally include information related to the phase of a project, such as whether or not professional engineers and design services are being sought; the type of project (classroom, dispensaries, etc); the type of predesign document; whether or not a request for fee proposal was issued; and whether task orders were issued. PMU reports also include comments on such details as whether the estimated cost is higher than budgeted for, and whether land title documents were provided. The FSM’s PMU has not consistently provided quarterly progress reports on construction activities to OIA. According to OIA, significant delays, deficiencies, and project cost overruns have not been brought to OIA’s attention in a timely manner as required by the amended compact’s fiscal procedures agreement. OIA believes that the PMU’s inability to ensure professional effectiveness on a continual basis through the services of an experienced Contracting Officer is hindering implementation of compact- funded infrastructure projects throughout the FSM. In 2006, the FSM’s PMU hired a Contracting Officer on behalf of the FSM National Government to execute project planning, design, and construction of projects throughout the FSM. Since 2006, the PMU has had a succession of Contracting Officers, eight in all. In a 2011 resolution, JEMCO stated that it would not consider approval of any new infrastructure project proposals until the PMU hired a professional Contracting Officer. In December 2012, the PMU’s Contracting Officer quit, claiming “constant interference from the FSM PMU Program Manager and a corrupted decision-making environment within the PMU controlled by the PMU Program Manager.” A new Contracting Officer was hired in February 2013. During fiscal years 2007 through 2012, the FSM completed 6 education- related projects on the September 2009 JEMCO-approved list of 19 priority projects, and other projects are under way. A major factor in determining OIA’s approval of a project has been whether the government holds clear title to the land. Chuuk. Land title disputes have been common in Chuuk, and as a result of this continuing problem, no new schools were built in Chuuk using infrastructure funds in fiscal years 2004 through 2011. However, according to OIA’s infrastructure grant manager, because of the poor condition of schools in Chuuk, OIA permitted some school buildings to be renovated with infrastructure maintenance funds or carryover education sector grant funds, and these projects were not on the FSM list of priority infrastructure projects. According to Chuuk’s Planning and Statistics Office, six school projects have been completed on Weno and islands within the Chuuk lagoon using money from Chuuk’s infrastructure maintenance fund. According to the Chuuk State: School Facility Repair and Construction Master Plan, as of May 31, 2012, 51 primary schools and 5 secondary schools needed renovation, new construction, or both. Pohnpei. Land title issues have been less of a problem here, and 6 school projects were completed. Since 2009, classrooms were built at four elementary schools (a single project on the priority list), and buildings and classrooms were constructed at two high schools on the priority list. Designs for two College of Micronesia facilities were started but not completed for the Pohnpei State Campus, a vocational center and a learning resources center, according to OIA. In the FSM, difficulty and delays in establishing JEMCO-approved priorities and unresolved land titling issues affected the construction and maintenance of health facilities. Dispensaries in Chuuk were on the OIA- approved list of FSM priority projects in fiscal year 2009, but these projects have not begun as of April 2013. Eight other projects with public health and safety aspects such as waterlines and sewers were also on the priority infrastructure project list; the majority of them are in Pohnpei. In addition to approving the priority projects, JEMCO also approved funding for the repair of Pohnpei State Hospital’s roof and ceiling. The U.S. Army Humanitarian Assistance-FSM (HAFSM) Team completed the renovation project in 2013. HAFSM replaced the roof and undertook extensive internal repairs, including installing new dry wall and plumbing, as well as doing interior painting throughout the hospital. Repairs did not include the electrical system or air conditioning. Chuuk State Hospital was on the list of projects JEMCO approved in 2009 that got included in the 2010 list of 19 priority-one projects; however, it was not until June 2012 that the Chuuk state government’s Infrastructure Planning and Implementation Committee finalized its revised infrastructure priorities in a plan that included a new hospital estimated to cost about $50 million dollars. The Chuuk plan also called for replacing 68 dispensaries in the outer islands using a common dispensary model estimated to cost $150,000 each. OIA had not received a plan from the national government to replace the dispensaries, as of June 2013. In the infrastructure sector, the RMI spent the majority of compact sector funds, 65 percent, on capital outlay, which includes construction project and maintenance contracts payments for facilities such as schools and hospitals (see fig. 8). The RMI tracks progress in the infrastructure sector by the completion of projects. The RMI expended $86.5 million dollars on infrastructure projects including infrastructure maintenance, from fiscal years 2004 through 2011, according to OIA. The RMI stated it has constructed or renovated over 200 classroom facilities in the education sector and 45 projects in the health sector and has also conducted essential maintenance at its two hospitals. During fiscal years 2007 through 2011, the RMI’s Project Management Unit was generally consistent in reporting monthly to the Office of Insular Affairs (OIA) on the status of construction activities, according to OIA. The reports included the project number and name as well as a brief description of the project. These reports also included categories such as the contract value, amount certified to date, estimated final cost, percentage completed, and completion date, and other details such project status—completed, on hold, or on-going for example. In August 2012, allegations were raised by an RMI official regarding the Project Management Unit’s use of substandard materials and bid rigging. OIA proposed a review by an independent engineering firm in response to the allegations. OIA recommended to the Joint Economic Management and Fiscal Accountability Committee (JEMFAC) at its March 2013 meeting that additional allocations of compact infrastructure funds to the RMI be withheld until the review was completed and the results submitted to JEMFAC. The RMI negotiated a contract with an independent professional engineering firm to undertake an assessment of the Project Management Unit’s procedures, contract administration, and inspection process; the review is expected to commence in August 2013, according to OIA. The school buildings and dispensaries constructed throughout the RMI were built using standard designs prepared by a professional engineering firm. The College of the Marshall Islands Master Plan, initiated in 2007 with capital projects worth over $25 million, was almost completed when we visited in January 2013. Future infrastructure projects include the redevelopment plan for the hospital in Majuro. Various designs for the hospital project, which was estimated to cost between $50 million and $70 million, have been discussed for over 5 years. The key unresolved issue is the size of the new facility, which was still being discussed as of June 2013. The RMI has recently begun to focus on preventive maintenance of infrastructure facilities. For example, in its fiscal year 2013 budget statement for infrastructure, the RMI noted that an adequate level of maintenance resources was critical for the longevity of the new College of the Marshall Islands campus, and RMI proposed allocating $280,000 for this purpose. These dollar amounts shall be adjusted each fiscal year for inflation by the percentage that equals two-thirds of the percentage change in the U.S. gross domestic product implicit price deflator, or 5 percent, whichever is less in any one year, using the beginning of 2004 as a base. Grant funding can be fully adjusted for inflation after 2014, under certain U.S. inflation conditions. The increase in RMI grant assistance from fiscal year 2013 to 2014 is due to a $2 million increase in payments to be made available for addressing the special needs of the community at Ebeye and other Marshallese communities within the Kwajalein Atoll. From fiscal years 2004 through 2013, the U.S.–FSM Joint Economic Management Committee (JEMCO) and the U.S.–RMI Joint Economic Management and Financial Accountability Committee (JEMFAC) allocated about $1.1 billion in sector grants to the countries under the amended compacts. Additionally, about $142 million in supplemental education grant funds were provided to the countries during this period. Figures 9 and 10 show the distribution of allocations by sector for fiscal years 2004 through 2013 and tables 8 and 9 provide each country’s allocation amounts, by sector, for this period. As shown in figures 11 and 12, the education, health, and infrastructure sectors in both countries received the most funding during this period, consistent with provisions in the amended compacts legislation indicating that these sectors were priorities. Tables 10 and 11 list the education and health indicators that the Federated States of Micronesia (FSM) tracked during fiscal years 2007 through 2011. Tables 12 and 13 list the education and health indicators that the Republic of the Marshall Islands (RMI) tracked during the same period. The National Government of the Federated States of Micronesia (FSM) and the individual FSM states (Chuuk and Pohnpei) submitted their required single audit reports on time for 5 of the 6 fiscal years from 2006 through 2011. Similarly, the Republic of the Marshall Islands (RMI) submitted its single audit reports on time during those years except for fiscal year 2011. Half of the financial statement audit opinions for the FSM and all for the RMI were unqualified for fiscal years 2006 through 2011. However, 17 of 18 financial statement audits for those years from the FSM and all 6 from the RMI found material weaknesses and significant deficiencies resulting in the entities receiving qualified audit opinions with regard to internal controls over financial reporting. In most of the single audit reports submitted by both countries for those years, auditors also rendered qualified audit opinions on compliance with requirements of major federal programs. In addition, our review of the single audit reports found that internal control weaknesses have persisted in both countries since we last reported on their single audits in December 2006. As a result of persistent weaknesses in RMI’s single audit reports, in March 2013, the Department of the Interior’s Office of Insular Affairs (OIA) recommended to the U.S.–RMI Joint Economic Management and Financial Accountability Committee (JEMFAC) that it refrain from allocating unexpended grant funds from fiscal year 2011 and fiscal year 2012 until the RMI demonstrated that it had resolved all current questioned costs. The amended compacts and their respective fiscal procedures agreements require the FSM and RMI to submit reports each year on audits conducted within the meaning of the Single Audit Act, as amended. Single audits generally cover the entire organization and focus on recipients’ internal controls over financial reporting and compliance with laws and regulations governing federal awards. A single audit report includes the following: 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 a report on internal controls related to financial statements; the entity’s audited financial statements; the schedule of expenditures of federal awards and the auditor’s opinion on whether the schedule is reported fairly in relation to the financial statements as a whole; 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, and a report on findings on internal controls related to federal programs; a summary of findings and any questioned costs for the federal program; and corrective action plans for findings identified for the current year as well as unresolved findings from prior fiscal years. Single audits are a key control for the oversight and monitoring of the FSM and RMI governments’ use of U.S. awards, and the resulting audit reports are due at the Federal Audit Clearinghouse—which includes an automated public database of single audit information on the Internet—9 months after the end of the audited period. For the FSM and RMI, that is by July 1 each year. 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 FSM National Government and Chuuk state submitted their single audit reports late for fiscal year 2006 but submitted them on time for fiscal years 2007 through 2011. The RMI submitted its single audit report on time for fiscal years 2006 through 2010 but submitted its report late for fiscal year 2011. Table 14 shows the timeliness of reports for the FSM and the RMI. Among the 24 audit reports submitted by the FSM national and two state governments and by the RMI for fiscal years 2006 through 2011, 15 reports received unqualified opinions. For fiscal years 2006 through 2008, the FSM National Government received qualified opinions on their financial statements. However, the FSM National Government improved its financial management reporting and received an unqualified (“clean”) audit opinion on its financial statements for fiscal years 2009 through 2011. In 2006, Chuuk received a disclaimer of opinion, which is given when the auditor determines that the audit cannot be completed in accordance with generally accepted auditing standards and therefore an opinion cannot be expressed on the financial statements. For fiscal years 2007 through 2011, Chuuk received qualified opinions on its financial statements. Chuuk’s 2011 financial statement audit opinion was qualified because the financial statements did not report a liability for land leases and related claims payable in the governmental activities and general fund or the expenditure for the current period reflecting the change in that liability. Table 15 shows the type of financial statement audit opinions for the FSM and the RMI for fiscal years 2006 through 2011. For fiscal years 2006 through 2011, 17 of 18 financial statement audits from the FSM National Government and the two FSM states and all 6 from the RMI found material weaknesses, significant deficiencies, or both in internal control over (1) financial reporting and (2) compliance with the requirements of major federal awards. (For a detailed count of these reportable findings, see table 16 for the FSM and table 17 for the RMI.) The single audit reports for fiscal year 2011, the most recent year for which reports were available during our review, identified a combined total of 13 material weaknesses and significant deficiencies which relate to the FSM’s fiscal year 2011 financial statements, and a total of 11 for the RMI’s statements (see tables 16 and 17, respectively). These findings indicated a lack of effective internal controls over collection of travel advances and the lack of ability to adequately safeguard assets; to ensure that transactions are properly recorded; and to prevent or detect fraud, waste, and abuse. For example, the material weaknesses reported in FSM’s fiscal year 2011 single audit report included (1) the lack of timely reconciliation of the Holding Bank Account, (2) the lack of adequate monitoring of collection of travel advances, (3) the lack of timely and accurate reconciliation of general ledger accounts, and (4) the lack of adequate reconciliation of and accounting for fixed assets. In RMI’s fiscal year 2011 single audit report, the auditors found material weaknesses that included (1) the lack of documentation to determine whether certain costs were allowable, (2) lack of inventory of fixed assets, (3) lack of general ledger account reconciliation, and (4) lack of internal controls over bank wire transfers. We found that 6 of the 7 material weaknesses in internal control over financial reporting contained in the FSM’s fiscal year 2011 single audit report were recurring problems from the previous year or had been reported for several years. Below are two examples: General ledger account reconciliations were not performed in a timely manner or accurately. The lack of timely and accurate account reconciliations may affect accurate reporting and timely submission of the single audit report. Fixed-asset records were not periodically reconciled and timely recorded. Likewise, 8 of the 11 material weakness findings in the RMI’s fiscal year 2011 single audit report were recurring problems from the previous year or had been reported for several years, including these examples: Fixed assets records were not being periodically reconciled and recorded in a timely manner. Procurement requirements were not followed, such as the lack of the required three price quotations for an expenditure. The FSM and RMI have developed corrective action plans to address financial statement findings in the 2011 single audit. In addition to the auditor’s report on financial statement findings, FSM and RMI auditors issuing an entity’s single audit reports also issue an opinion on the entity’s compliance with requirements of major federal programs. Of the 24 single audit reports submitted by the FSM national and state governments and the RMI for fiscal years 2006 through 2011, 19 received qualified opinions regarding compliance with requirements of major federal programs. The remaining six received unqualified opinions; Pohnpei received 4 of the 6 unqualified opinions. In the 2011 single audit reports on compliance with requirements of major federal programs, auditors reported 14 material weaknesses and significant deficiencies for the FSM and 8 for the RMI (see tables 16 and 17, respectively). For example, in the FSM, the reported material weaknesses included (1) the lack of internal controls over compliance with cash management requirements, (2) lack of funds control to prevent disbursements in excess of available funds, and (3) lack of controls over property accountability. In the RMI, findings that were material weaknesses included (1) a lack of fixed assets inventory control, (2) the lack of internal controls over compliance with cash management requirements, (3) the lack of internal controls over procurement, and (4) the lack of adequate documentation of cost allowability. We found that 13 of the 14 findings from the 2011 FSM and state governments’ single audit reports, and 7 of the 8 findings from the 2011 RMI single audit report, were recurring problems from the previous year or had recurred for several years. In contrast, for the FSM only 5 of the 41 findings from the 2005 single audit reports and, for the RMI, only 5 of the 13 findings from the 2005 single audit report were recurring problems from the previous year or had recurred for several years. The FSM and RMI 2011 single audit reports stated that the FSM and RMI have developed corrective action plans to address all the 2011 single audit reports’ findings on compliance with requirements of major federal programs. As the count of single audit findings in table 17 demonstrate, material weaknesses related to internal controls have increased over the last 3 years. As we have previously reported, weaknesses in internal controls may lead to fraud, waste, and abuse. Since late 2010, 22 cases involving collusion among three employees of the RMI Ministry of Finance, three employees of the RMI Ministry of Health, and three local businesses are being prosecuted in the RMI. These 22 cases involve a total of approximately $550,000 in compact funding. According to an OIA official, this fraud was not uncovered through an audit; rather, it was detected when the leader of the group of government workers involved in the fraud tried to pick up a vendor payment from the RMI Ministry of Finance, raising suspicions and leading to an investigation. According to an OIA official, in 2012, two former RMI government workers were charged with 25 counts of theft related to 20 checks from the government valued at $350,000. They received fines and 5-year prison sentences. According to an RMI official, the investigation is ongoing, and the RMI Office of the Auditor General (OAG) has collaborated with the RMI Attorney General since the start of the investigation. Furthermore, the OAG has taken its own action to better detect fraud by creating a new investigation unit within the OAG to conduct investigations of suspected fraudulent activities and created a confidential fraud hotline where RMI citizens can contact the OAG to report instances of fraud, waste, and abuse for further investigation. According to an RMI official, over the past 5 years, the RMI Auditor General has focused on financial and compliance audits, including the single audits of RMI government agencies. The OAG also conducted its own audits of component units for fiscal years 2006 through 2011. According to the RMI Auditor General, because of insufficient staff, the OAG performed only 1 performance audit over the past several years, and additional staff would be needed to enable the office to address the demand for fraud investigations. Recognizing the magnitude of potential fraud, OIA authorized a Technical Assistance grant of $110,500 in 2012 to recruit a Certified Fraud Examiner for RMI. According to a RMI OAG official, as of June 2013, the RMI had not filled this position. problem might have occurred during our visit. We noted this information on page 33. We have not verified this information. 9. In its comments, the RMI noted that Delap Elementary School currently has no problem with water. It noted though that during the dryer months water catchment tanks are low or have no water, and that Majuro Water and Sewer Company rations water. The reference to the lack of water at Delap Elementary school was deleted from the final report. 10. In its comments regarding our observation that a school building was being used on Ebeye though it was considered unsafe, the RMI noted that the building has been abandoned and that a new three-classroom building has been constructed at Kwajalein Atoll High School. We noted this information on page 33. We have not verified this information. 11. In its comments, the RMI noted that the Office of the Chief Secretary did not have the authority to withhold funds, but if it had the authority to do so, it would do so as a last resort. We amended the text on page 51 of the report to reflect this information. 12. In its comments, the RMI stated that it feels a reference to intent of the RMI trust fund to provide an annual source of revenue post-2023 should cite our 2007 trust fund report. We added the footnote citing our prior trust fund report, as suggested. In addition to the person named above, Emil Friberg (Assistant Director), Christina Bruff, Julie Hirshen, and Jeffrey Isaacs were key contributors to this report. Ashley Alley, David Dayton, Martin De Alteriis, and Etana Finkler provided technical assistance. Compacts of Free Association: Improvements Needed to Assess and Address Growing Migration. GAO-12-64. Washington, D.C.: November 14, 2011. Compacts of Free Association: Micronesia Faces Challenges to Achieving Compact Goals. GAO-08-859T, Washington, D.C.: June 10, 2008. Compacts of Free Association: Implementation Activities Have Progressed, but the Marshall Islands Faces Challenges to Achieving Long-Term Compact Goals. GAO-07-1258T. Washington, D.C.: September 25, 2007. Compacts of Free Association: Trust Funds for Micronesia and the Marshall Islands May Not Provide Sustainable Income. GAO-07-513. Washington, D.C.: June 15, 2007. Compacts of Free Association: Micronesia’s and the Marshall Islands’ Use of Sector Grants. GAO-07-514R. Washington, D.C.: May 25, 2007. Compacts of Free Association: Micronesia and the Marshall Islands Face Challenges in Planning for Sustainability, Measuring Progress, and Ensuring Accountability. GAO-07-163. Washington, D.C.: December 15, 2006. 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. Compact of Free Association: An Assessment of Current U.S. Proposals to Extend Assistance. GAO-02-857T. Washington, D.C.: July 17, 2002. 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. Compact of Free Association: Negotiations Should Address Aid Effectiveness and Accountability and Migrants’ Impact on U.S. Areas. GAO-02-270T. Washington, D.C.: December 6, 2001. Foreign Relations: Migration From Micronesian Nations Has Had Significant Impact on Guam, Hawaii, and the Commonwealth of the Northern Mariana Islands. GAO-02-40. Washington, D.C.: October 5, 2001.

Summary: In 2003, the U.S. government approved amended Compacts of Free Association with the FSM and the RMI, providing for a total of $3.6 billion in assistance over 20 years. Given the countries' dependence on compact funding, GAO was asked to conduct a review of the use and accountability of these funds. This report addresses (1) the FSM's and RMI's use of compact funds in the education and health sectors; (2) the extent to which the FSM and RMI have made progress toward stated goals in education and health; and (3) the extent to which oversight activities by the FSM, RMI, and U.S. governments ensure accountability for compact funding. GAO also provided information on infrastructure spending and projects in the education and health sectors. GAO reviewed relevant documents and data, including single audit reports; interviewed officials from Interior, other U.S. agencies, and the FSM and RMI; assessed data reliability for subsets of both countries' education and health indicators; and visited compact-funded education and health facilities in both countries. In fiscal years 2007 through 2011, the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) spent at least half their compact sector funds in the education and health sectors. Because both countries spent significant amounts of compact funds on personnel in the education and health sectors, the U.S.-FSM and U.S.-RMI joint management and accountability committees capped budgets for personnel in these sectors at fiscal year 2011 levels due to concerns about the sustainability of sector budgets as compact funding continues to decline through fiscal year 2023. The FSM states completed plans to address annual decreases in compact funding; however, the FSM National Government and the RMI have not submitted plans to address these annual decreases as required. Without plans, the countries may not be able to sustain essential services in the education and health sectors in the future. Data reliability issues hindered GAO's assessment of progress by the FSM and RMI in the education and health sectors for fiscal years 2007 through 2011 for the compacts as a whole. Between 2004 and 2006, both countries began tracking education and health indicators, establishing data collection systems, and collecting data for the majority of the indicators and have continued to track data on their indicators since that time. In education, GAO found 3 of 14 indicators in the subsets of indicators it reviewed for both countries to be sufficiently reliable and 1 also to be capable of demonstrating progress: the education level of teachers in the RMI. GAO found a variety of data reliability problems, such as some FSM states reporting data for both public and private schools while other states included only public schools in their data. In the health sector, GAO determined that data for all 5 of the subset of indicators it reviewed in the FSM were not sufficiently reliable to assess progress for the compacts as a whole, and in the RMI, 1 health indicator was sufficiently reliable and 2 were not sufficiently reliable; for 2 other RMI health indicators, GAO had no basis to judge. In much of their reporting on their education and health indicators, the FSM and RMI have noted data reliability problems and some actions they have taken to address the problems. The U.S.-FSM and U.S.-RMI joint management and accountability committees have also raised concerns about the reliability of FSM's education and health data and RMI's health data and required that each country obtain an independent assessment and verification of these data; both countries have yet to meet that requirement, and, as a result, neither country can determine its progress in these sectors. The single audit reports GAO reviewed indicated challenges to ensuring accountability of compact and noncompact U.S. funds in the FSM and RMI. For example, the governments' single audits showed repeat findings and persistent problems in noncompliance with U.S. program requirements, such as accounting for equipment. The Department of the Interior (Interior) has taken steps regarding accountability of compact funds such as establishing the Chuuk Financial Control Commission, but Interior has not coordinated with other U.S. agencies about the risk status of the FSM and RMI. Furthermore, the FSM, RMI, and U.S. offices responsible for compact administration faced limitations hindering their ability to conduct compact oversight. For example, Interior's Office of Insular Affairs (OIA) experienced a staffing shortage that disproportionately affected compact grant oversight compared to other OIA activities, with 5 of 11 planned positions filled. Among other actions, Interior should (1) take all necessary steps to ensure the reliability of FSM and RMI indicators in education and health, (2) assess whether to designate each country as high risk, and (3) take actions to correct its disproportionate staffing shortage related to compact grant implementation and oversight. Interior generally agreed with GAO's recommendations and identified actions taken, ongoing, and planned.