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