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. The FSM is a federation of four states and has a population of approximately 103,000 (as of 2010) scattered over many small islands and atolls. The RMI comprises 29 constituent atolls and five islands with a population of approximately 53,000 as of 2011. U.S. relations with the FSM and the RMI began during World War II when the United States ended Japanese occupation of the region. Beginning in 1947, the United States administered the region under a United Nations trusteeship. 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, and from 1987 through 2003 the FSM and the RMI are estimated to have received about $2.1 billion in compact financial assistance. 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. The amounts of the annual decrements are to be deposited in trust funds established for the FSM and the RMI; the annual decrement in grant funding is intended to steadily increase the trust funds so that earnings from the trust can provide a source of annual revenue after the GAO-13-675). In grants end in 2023 (see fig. 2 on page 8 of the report, addition to receiving compact sector grants, the FSM and the RMI are eligible for a supplemental education grant each year. Separate from the funding authorized and appropriated under the amended compacts’ enabling legislation, the countries also receive other grants and other assistance from U.S. agencies. The legislation and fiscal procedures agreements for the amended compacts established oversight mechanisms and responsibilities for the FSM, RMI, and the United States. To strengthen the management and accountability and promote the effective use of compact funding, JEMCO and JEMFAC were jointly established by the United States and, respectively, the FSM and the RMI. Each five-member committee comprises three representatives from the United States government and two representatives from the corresponding country. 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. The three countries are required to provide the necessary staff support to their representatives on JEMCO and JEMFAC to enable the parties to monitor closely the use of assistance under the compacts. 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. 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. The Director of OIA serves as Chairman of both JEMCO and JEMFAC. 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 a key control for the oversight and monitoring of the FSM and RMI governments’ use of U.S. awards. 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. All U.S. agencies providing noncompact grants to the FSM and the RMI are responsible for administering those grants in accordance with Office of and agency regulations Management and Budget (OMB) requirementsthat 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. In fiscal years 2007 through 2011, the FSM spent about two-thirds and the RMI spent about half of their total compact sector funds in the education and health sectors—$158 million for the FSM and $89 million for the RMI. (For a breakdown of sector compact expenditures and supplemental education grant expenditures for both countries during this period, see pages 14 to 21 of the report, GAO-13-675). In the FSM in fiscal year 2011, education sector compact and supplemental education grant funds together amounted to about 85 percent of total education expenditures, and health sector compact funds were about 66 percent of total health expenditures. Compact funds in the RMI also 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 the RMI’s total education expenditures in fiscal year 2011, while health sector compact funds and Ebeye special needs health funds accounted for about 33 percent of the RMI’s total health expenditures. We only reported specific expenditures for the FSM for fiscal years 2009 through 2011 because specific expenditure data for the FSM National Government and Chuuk were not presented in their single audits for fiscal years 2007 and 2008. the health sector compact funds for personnel. Concerned about the sustainability of sector budgets as compact funding declines through fiscal year 2023 due to the annual decrements, JEMCO and JEMFAC passed resolutions in 2011, capping budgetary levels for personnel in the education and health sectors of both countries at fiscal year 2011 levels. JEMCO and JEMFAC actions regarding annual decrement plans. JEMCO and JEMFAC resolutions in fiscal years 2009 and 2010 required the FSM National Government and state governments and the RMI government to complete plans that would address the annual decrements in compact funding and identify new revenue sources to replace compact grant assistance in 2023. By the March 2013 JEMCO and JEMFAC midyear meetings, the four FSM states had completed plans to address the annual decrements in compact sector funding through 2023; however, the FSM National Government and RMI government had not completed their plans. Also, in fiscal year 2013, U.S. members of the JEMCO and JEMFAC announced that the United States would consider withholding certain fiscal year 2014 compact sector grant funds until the FSM National Government and RMI submitted their plans for addressing the annual decrements. Without such plans, the countries may not be able to sustain essential services in the education and health sectors. At the annual JEMCO and JEMFAC meetings in August 2013, the committees withheld annual sector funds from the FSM National Government and RMI government because they failed to provide the required plans to address the annual decrements. In September 2013, however, JEMCO allocated sector grant funds to the four FSM states, which provided the required plans, but continued withholding funds from the FSM National Government because it failed to meet the requirements of the JEMCO resolution requiring the plan. In October 2013, JEMFAC provided sector grant funds to the RMI with the stipulation that no sector funds would be approved in fiscal year 2015 unless the RMI fulfilled the terms of the JEMFAC resolution requiring a decrement plan. In November 2013, the FSM National Government provided OIA with a plan detailing the National Government’s long-term fiscal framework, which includes a burden-sharing commitment to the four FSM states to help address the decrement. Among the actions the National Government has taken to address the decrement is a new law modifying the annual compact distribution formula, reducing its share of compact sector grants from 10 percent to 5 percent; the goal in providing an additional 5 percent in compact grant funds to the states is to ensure that priority education and health service needs are not compromised as the annual compact allocations decrease. The U.S. members of JEMCO have yet to determine whether the long-term fiscal framework plan from the FSM National Government meets the decrement plan requirements. Reported FSM and RMI infrastructure spending. In the FSM, in fiscal years 2004 through 2013, approximately $229 million in compact funds were allocated to infrastructure, and of that about $106 million has been expended, according to OIA. Delays in establishing JEMCO-approved priorities and unresolved land titling issues affected the construction and maintenance of some health and education facilities in the FSM. During fiscal years 2007 through 2012, the FSM completed 6 education-related projects on a JEMCO-approved list of 19 priority projects, and other projects are under way. From 2004 through 2013, approximately $106 million in compact funds were allocated to infrastructure in the RMI, and the RMI expended about $95 million dollars on infrastructure projects, including infrastructure maintenance, 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.