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.