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Testimony:

Before the Subcommittee on Asia and the Pacific, Committee on 
International Relations, House of Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 1:30 p.m. EDT:

Wednesday, June 18, 2003:

Compact of Free Association:

An Assessment of the Amended Compacts and Related Agreements:

Statement of Susan S. Westin, Managing Director International Affairs 
and Trade:

GAO-03-890T:

GAO Highlights:

Highlights of GAO-03-890T, a testimony before the House Committee on 
International Relations, Subcommittee on Asia and the Pacific


Why GAO Did This Study:

In 1986, the United States entered into a Compact of Free Association 
with the Pacific Island nations of the Federated States of Micronesia, 
or FSM, and the Republic of the Marshall Islands, or RMI. The Compact 
provided about $2.1 billion in U.S. funds, supplied by the Department 
of the Interior, over 17 years (1987-2003) to the FSM and the RMI. 
These funds were intended to advance economic development. In a past 
report, GAO found that this assistance did little to advance economic 
development in either country, and accountability over funding was 
limited. The Compact also established U.S. defense rights and 
obligations in the region and allowed for migration from both 
countries to the United States.

The three parties recently renegotiated expiring economic assistance 
provisions of the Compact in order to provide an additional 20 years 
of assistance (2004-2023). In addition, the negotiations addressed 
defense and immigration issues. The House International Relations and 
Resources Committees requested that GAO report on Compact negotiations.

This testimony discusses negotiated changes to the levels and 
structure of future assistance, including the potential cost to the 
U.S. government. Further, it reviews accountability, defense, and 
immigration changes brought about by the amended Compacts and related 
agreements.

What GAO Found:

The amended Compacts of Free Association between the United States and 
the FSM and the RMI to renew expiring U.S. assistance could 
potentially cost the U.S. government about $6.6 billion in new 
authorizations from the Congress. Of this amount, $3.5 billion would 
cover payments over a 20-year period (2004-2023), while $3.1 billion 
represents payments for U.S. military access to Kwajalein Atoll in the 
RMI for the years 2024 through 2086. While the level of annual grant 
assistance to both countries would decrease each year, contributions 
to trust funds  meant to eventually replace grant funding  would 
increase annually by a comparable amount. Nevertheless, at an assumed 
annual 6 percent rate of return, earnings from the FSM trust fund 
would be unable to replace expiring grant assistance in 2024, while 
earnings from the RMI trust fund would encounter the same problem by 
2040.

The amended Compacts strengthen reporting and monitoring measures that 
could improve accountability over assistance, if diligently 
implemented. These measures include the following: assistance grants 
would be targeted to priority areas such as health and education; 
annual reporting and consultation requirements would be expanded; and 
funds could be withheld for noncompliance with grant terms and 
conditions. The successful implementation of the many new 
accountability provisions will require appropriate resources and 
sustained commitment from the United States, the FSM, and the RMI.

Regarding defense, U.S. military access to Kwajalein Atoll in the RMI 
would be extended from 2016 through 2066, with an option to extend 
through 2086. Finally, Compact provisions addressing immigration have 
been strengthened. For example, FSM and RMI citizens entering the 
United States would need to carry a passport, and the U.S. Attorney 
General could, through regulations, specify the time and conditions of 
admission to the United States for these citizens.

www.gao.gov/cgi-bin/getrpt?GAO-03-890T.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Susan S. Westin at 
(202) 512-4148 or WestinS@gao.gov.

[End of section]

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to testify on the Compact of Free 
Association between the United States and the Pacific Island nations of 
the Federated States of Micronesia, or the FSM, and the Republic of the 
Marshall Islands, or the RMI.[Footnote 1] In 1986, the United States 
entered into this compact with the two countries after almost 40 years 
of administering the islands under the United Nations Trust Territory 
of the Pacific Islands. The Compact has provided U.S. assistance to the 
FSM and the RMI in the form of direct funding as well as federal 
services and programs for almost 17 years. Further, the Compact 
establishes U.S. defense rights and obligations in the region and 
allows for migration from both countries to the United States. 
Provisions of the Compact that address economic assistance were 
scheduled to expire in 2001; however, they can remain and have remained 
in effect while the United States and each nation renegotiated the 
affected provisions.[Footnote 2]

Today I will discuss our review of the amended Compacts and related 
agreements that the United States signed with the FSM and the RMI in 
April and May of 2003, respectively. (According to a Department of 
State official, while the original Compact was one document that 
applied to both the FSM and the RMI, the Compact that has been amended 
is now a separate Compact with each nation.) Specifically, I will 
discuss changes to levels and structure of future assistance, including 
the potential cost to the U.S. government. Further, I will comment on 
changes in accountability and other key issues addressed in the amended 
Compacts and related agreements. Our testimony is based on our reports 
on the Compact published over the past several years as well as our 
assessment of the amended Compacts that was requested by Chairman Leach 
and Ranking Minority Member Faleomavaega, Subcommittee on Asia and the 
Pacific, House Committee on International Relations; Ranking Minority 
Member Lantos, House Committee on International Relations; Ranking 
Minority Member Rahall, House Committee on Resources; and Congressman 
Bereuter.

Summary:

The amended Compacts of Free Association with the FSM and the RMI to 
renew expiring assistance would require about $3.5 billion in funding 
over the next 20 years with a total possible authorization through 2086 
of $6.6 billion from the U.S. Congress.[Footnote 3] The amended 
Compacts would provide decreasing levels of annual assistance over a 
20-year term (2004-2023) in order to encourage budgetary self-reliance. 
Simultaneously, the Compacts would require building up a trust fund 
(with contributions that would increase annually) for each country to 
generate annual earnings that would replace the grants that end in 
2023. Per capita grant assistance would fall over the 20-year period, 
particularly for the RMI. At an assumed trust fund rate of return (6 
percent), in 2024 the RMI trust fund would cover expiring grant 
assistance, while the FSM trust fund would be insufficient to replace 
grants. By the year 2040, however, RMI trust fund returns also would be 
unable to replace grant funding.

The amended Compacts include many strengthened reporting and monitoring 
measures that could improve accountability if diligently implemented. 
The amended Compacts and related agreements have addressed most of the 
recommendations that we have made in past reports regarding assistance 
accountability. For example, assistance would be provided through 
grants targeted to priority areas, such as health and education, and 
with specific terms and conditions attached. Annual reporting and 
consultation requirements would be expanded, and funds could be 
withheld for noncompliance with Compact terms and conditions. The 
successful implementation of the many new accountability provisions 
will require a sustained commitment and appropriate resources from the 
United States, the FSM, and the RMI.

The amended Compacts address other key issues. One key change to 
Compact defense provisions would occur - U.S. military access to 
Kwajalein Atoll in the RMI could be extended from 2016 to 2086. This 
extension would cost $3.4 billion of the total possible authorization 
of $6.6 billion. Amended Compact provisions addressing one additional 
key area - immigration - have been strengthened by adding new 
restrictions and expressly applying the provisions of the Immigration 
and Nationality Act of 1952 (INA), as amended (P.L. 82-414), to Compact 
migrants. FSM and RMI citizens entering the United States would need to 
carry a passport, and regulations could be promulgated that would 
impose time limits and other conditions on a Compact migrant's 
admission to the United States.

Background:

In 1986, the United States and the FSM and the RMI entered into the 
Compact of Free Association. This Compact represented a new phase of 
the unique and special relationship that has existed between the United 
States and these island areas since World War II. It also represented a 
continuation of U.S. rights and obligations first embodied in a U.N. 
trusteeship agreement that made the United States the Administering 
Authority of the Trust Territory of the Pacific Islands.[Footnote 4] 
The Compact provided a framework for the United States to work toward 
achieving its three main goals: (1) to secure self-government for the 
FSM and the RMI, (2) to assist the FSM and the RMI in their efforts to 
advance economic development and self-sufficiency, and (3) to ensure 
certain national security rights for all of the parties. The first goal 
has been met. The FSM and the RMI are independent nations and are 
members of international organizations such as the United Nations.

The second goal of the Compact - advancing economic development and 
self-sufficiency for both countries - was to be accomplished primarily 
through U.S. direct financial payments (to be disbursed and monitored 
by the U.S. Department of the Interior) to the FSM and the RMI. For the 
15-year period covering 1987 through 2001, funding was provided at 
levels that decreased every 5 years. For 2002 and 2003, while 
negotiations to renew expiring Compact provisions were ongoing, funding 
levels increased to equal an average of the funding provided during the 
previous 15 years. Thus, funds available to the two governments were 
"bumped-up" during the last 2 years of assistance.[Footnote 5] For 1987 
through 2003, U.S. assistance to the FSM and the RMI to support 
economic development is estimated on the basis of Interior data, to be 
about $2.1 billion.[Footnote 6] We have found that many Compact-funded 
projects in the FSM and the RMI experienced problems because of poor 
planning and management, inadequate construction and maintenance, or 
misuse of funds. Further the U.S., FSM, and RMI governments provided 
little accountability over Compact expenditures and have not ensured 
that funds were spent effectively or efficiently.

Economic self-sufficiency has not been achieved. Although total U.S. 
assistance (Compact direct funding as well as U.S. programs and 
services) as a percentage of total government revenue has fallen in 
both countries (particularly in the FSM), the two nations remain highly 
dependent on U.S. funds. U.S. direct assistance has maintained 
standards of living that are higher than could be achieved in the 
absence of U.S. support. In addition, U.S. programs have been extended 
to the FSM and the RMI to provide a wide range of critical services, 
such as health care, education, telecommunications, and job training, 
but in most cases local conditions have impaired the programs' 
effectiveness.[Footnote 7]

The third goal of the Compact - securing national security rights for 
all parties - has been achieved. At the time that the Compact was 
negotiated, the United States was concerned about the use of the 
islands of the FSM and the RMI as "springboards for aggression" against 
the United States, as they had been used in World War II, and the Cold 
War incarnation of this threat - the Soviet Union. The Compact and its 
related agreements established several key defense rights for all three 
countries. The Compact obligates the United States to defend the FSM 
and the RMI against an attack or the threat of attack in the same way 
it would defend its own citizens. The Compact also provides the United 
States with the right of "strategic denial," the ability to prevent 
access to the islands and their territorial waters by the military 
personnel of other countries or the use of the islands for military 
purposes. In addition, the Compact grants the United States a "defense 
veto" over actions by the FSM or the RMI governments that the United 
States determines are incompatible with its authority and 
responsibility for security and defense matters in these countries. 
Finally, through a Compact-related agreement, the United States secured 
continued access to military facilities on Kwajalein Atoll in the RMI 
through 2016.[Footnote 8] In a previous report, we identified Kwajalein 
Atoll as the key U.S. defense interest in the two countries.[Footnote 
9] Of these rights, only the defense veto is due to expire in 2003 if 
not renegotiated.

Another aspect of the special relationship between the FSM and the RMI 
and the United States involves the unique immigration rights that the 
Compact grants. Through the original Compact, citizens of both nations 
are allowed to live and work in the United States as "nonimmigrants" 
and can stay for long periods of time, with few restrictions.[Footnote 
10] Further, the Compact exempted FSM and RMI citizens from meeting 
U.S. passport, visa, and labor certification requirements when entering 
the United States. In recognition of the potential adverse impacts that 
Hawaii and nearby U.S. commonwealths and territories could face as a 
result of an influx of FSM and RMI citizens, the Congress authorized 
Compact impact payments to address the financial impact of these 
nonimmigrants on Guam, Hawaii, and the Commonwealth of the Northern 
Mariana Islands (CNMI).[Footnote 11] By 1998, more than 13,000 FSM and 
RMI citizens had made use of the Compact immigration provisions and 
were living in the three areas. The governments of the three locations 
have provided the U.S. government with annual Compact nonimmigrant 
impact estimates; for example, in 2000 the total estimated impact for 
the three areas was $58.2 million. In that year, Guam received $7.58 
million in impact funding, while the other two areas received no 
funding.[Footnote 12]

In the fall of 1999, the United States and the two Pacific Island 
nations began negotiating economic assistance and defense provisions of 
the Compact that were due to expire. Immigration issues were also 
addressed. According to the State Department, the aims of the amended 
Compacts are to (1) continue economic assistance to advance self-
reliance, while improving accountability and effectiveness; (2) 
continue the defense relationship, including a 50-year lease extension 
(beyond 2016) of U.S. military access to Kwajalein Atoll in the RMI; 
(3) strengthen immigration provisions; and (4) provide assistance to 
lessen the impact of Micronesian migration on Hawaii, Guam, and the 
CNMI.

Amended Compacts Would Alter Assistance Levels and Structure:

Under the amended Compacts with the FSM and the RMI, new congressional 
authorizations of approximately $3.5 billion in funding would be 
required over the next 20 years, with a total possible authorization 
through 2086 of $6.6 billion. Economic assistance would be provided to 
the two countries for 20 years - from 2004 through 2023 - with all 
subsequent funding directed to the RMI for continued U.S. access to 
military facilities in that country. Under the U.S. proposals, annual 
grant amounts to each country would be reduced each year in order to 
encourage budgetary self-reliance and transition the countries from 
receiving annual U.S. grant funding to receiving annual trust fund 
earnings. Annual grant assistance to the FSM would fall from a real 
value of $76 million in fiscal year 2004 to a real value of $55 million 
in fiscal year 2023. Annual grant assistance to the RMI would fall from 
a real value of $35 million to a real value of $24 million over the 
same period. This decrease in grant funding, combined with FSM and RMI 
population growth, would also result in falling per capita grant 
assistance over the funding period - particularly for the RMI. If the 
trust funds established in the amended Compacts earn a 6 percent rate 
of return, the FSM trust fund would be insufficient to replace expiring 
annual grants. The RMI trust fund would replace grants in fiscal year 
2024 but would become insufficient for this purpose by fiscal year 
2040.

Amended Compacts Could Cost the U.S. Government $6.6 Billion:

Under the amended Compacts with the FSM and the RMI, new congressional 
authorizations of approximately $6.6 billion could be required for U.S. 
payments from fiscal years 2004 to 2086, of which $3.5 billion would be 
required for the first 20 years of the Compacts (see table 1). The 
share of new authorizations to the FSM would be about $2.3 billion and 
would end after fiscal year 2023. The share of new authorizations to 
the RMI would be about $1.2 billion for the first 20 years, with about 
$300 million related to extending U.S. military access to Kwajalein 
Atoll through 2023. Further funding of $3.1 billion for the remainder 
of the period corresponds to extended grants to Kwajalein and payments 
related to U.S. military use of land at Kwajalein Atoll.[Footnote 13] 
The cost of this $6.6 billion new authorization, expressed in fiscal 
year 2004 U.S. dollars, would be $3.8 billion (see the appendix for a 
breakout of estimated new U.S. authorizations to the FSM and the RMI in 
fiscal year 2004 U.S. dollars).

This new authorized funding would be provided to each country in the 
form of:

* annual grant funds targeted to priority areas (such as health, 
education, and infrastructure), audit assistance, and disaster 
assistance;

* contributions to a trust fund for each country such that trust fund 
earnings would become available to the FSM and the RMI in fiscal year 
2024 to replace expiring annual grants;

* payments the U.S. government makes to the RMI government that the RMI 
transfers to Kwajalein landowners to compensate them for the U.S. use 
of their lands for defense sites; and:

* an extension of federal services that have been provided under the 
original Compact but are due to expire in fiscal year 2003.

Table 1: Estimated New U.S. Authorizations for the FSM and the RMI, 
Fiscal Years 2004-2086 (U.S. dollars in millions):

Fiscal years 2004-2023:

Grants for priority areas; FSM: $1,612; RMI: $701[A]; Total: $2,313.

Trust fund contributions; FSM: 517; RMI: 276; Total: 793.

Payments for U.S. military use of Kwajalein Atoll land[B]; FSM: Not 
applicable; RMI: 191; Total: 191.

Compact-authorized federal services[C]; FSM: 167; RMI: 37; Total: 204.

New U.S. authorization for 2004-2023; FSM: $2,296; RMI: $1,204; Total: 
$3,500.

Fiscal years 2024-2086:

Grants to Kwajalein; FSM: Not applicable; RMI: $948[A]; Total: $948.

Payments for U.S. military use of Kwajalein Atoll land; FSM: Not 
applicable; RMI: 2,133; Total: 2,133.

Possible New U.S. authorization for 2024-2086; FSM: Not applicable; 
RMI: $3,081; Total: $3,081.

Fiscal years 2004-2086, total new U.S. authorizations for the FSM and 
the RMI; FSM: $2,296; RMI: $4,285; Total: $6,581.

Source: GAO estimate based on the amended Compacts. Under the amended 
Compacts, U.S. payments are adjusted for inflation at two-thirds of the 
percentage change in the U.S. gross domestic product implicit price 
deflator.

Note: Numbers may not sum due to rounding.

[A] The 1986 U.S.-RMI Military Use and Operating Rights Agreement 
(MUORA) grants the United States access to certain portions of 
Kwajalein Atoll and provides $24.7 million of funding for development 
and impact on Kwajalein from 2004 to 2016. Approximately $112 million 
of the new proposed U.S. grant assistance of $701 million is for 
increasing this funding to Kwajalein from 2004 to 2016 and for 
continuation of the increased level of funding through 2066 and 
possibly to 2086 if the agreement is extended.

[B] As part of the 1986 MUORA, the RMI government has also allocated 
$162 million of U.S. funding from 2004 to 2016 under this agreement to 
landowners via a traditional distribution system to compensate them for 
the U.S. use of their lands for defense sites. The U.S. proposal 
increases these payments from 2004 to 2016 and continues the increased 
level of payments through 2066 and possibly to 2086 if the agreement is 
extended.

[C] Federal services authorized in the Compact include weather, 
aviation, and postal services. Services associated with the Federal 
Emergency Management Agency have been excluded. An estimate of 
assistance from the U.S. Agency for International Development's Office 
of Disaster Assistance has not been included.

[End of table]

In addition to the new authorized funding, the U.S. government has 
further expenditures related to the FSM and the RMI. These include (1) 
the cost of U.S. program assistance, estimated at around $1 
billion[Footnote 14] to the two countries for the next 20 years; (2) 
payments previously authorized of about $187 million for U.S. military 
access to Kwajalein Atoll in the RMI through 2016; and (3) oversight 
and administration by the Department of the Interior, estimated at a 
cost of around $42 million over the 20-year period. Combining these 
three sources of U.S. funding ($1.2 billion) with new authorizations 
($6.6 billion), the total U.S. cost for all Compact-related payments 
related to the FSM and the RMI would amount to about $7.8 billion, 
including estimated inflation.

Amended Compacts Would Reduce U.S. Grant Support Annually:

Under the U.S. proposals, annual grant amounts to each country would be 
reduced each year in order to encourage budgetary self-reliance and 
transition the countries from receiving annual U.S. grant funding to 
receiving annual trust fund earnings. Thus, the amended Compacts 
increase annual U.S. contributions to the trust funds each year by the 
grant reduction amount (see figs. 1 and 2). Annual grant assistance to 
the FSM would fall from a real value of $76 million in fiscal year 2004 
to a real value of $55 million in fiscal year 2023.[Footnote 15] Annual 
grant assistance to the RMI would fall from a real value of $35 million 
to a real value of $24 million over the same period.

Figure 1: Estimated New U.S. Authorizations for Economic Assistance to 
the FSM by Type of Funding, Fiscal Years 2004-2023 (fiscal year 2004 
U.S. dollars, in millions):

[See PDF for image]

Note: This analysis excludes program assistance.

[End of figure]

Figure 2: Estimated New U.S. Authorizations for Economic Assistance to 
the RMI by Type of Funding, Fiscal Years 2004-2023 (fiscal year 2004 
U.S. dollars, in millions):

[See PDF for image]

Note: This analysis excludes program assistance and payments for U.S. 
military use of Kwajalein Atoll land.

[End of figure]

This decrease in grant funding, combined with FSM and RMI population 
growth, would also result in falling per capita grant assistance over 
the funding period - particularly for the RMI (see fig. 3).[Footnote 
16] Using U.S. Census population growth rate projections for the two 
countries, the real value of grants per capita to the FSM would begin 
at an estimated $687 in fiscal year 2004 and would further decrease 
over the course of the compact to $476 in fiscal year 2023. The real 
value of grants per capita to the RMI would begin at an estimated $627 
in fiscal year 2004 and would further decrease to an estimated $303 in 
fiscal year 2023. The reduction in real per capita funding over the 
next 20 years is a continuation of the decreasing amount of available 
grant funds (in real terms) that the FSM and the RMI had during the 17 
years of prior Compact assistance.

Figure 3: Estimated FSM and RMI per Capita Grant Assistance for Fiscal 
Years 1987-2023 (fiscal year 2004 U.S. dollars):

[See PDF for image]

Note: This analysis includes only Compact funds available to 
governments. Therefore, the analysis excludes investment development 
funds provided under section 111 of Public Law 99-239, trust fund 
contributions, federal programs and services, audit assistance, and 
MUORA-related lease payments that the RMI government transfers to 
Kwajalein landowners. U.S. Census population historical and projected 
population growth rates are used in conjunction with the most recent 
country Census data. U.S. Census projections are subject to revision.

[End of figure]

The decline in annual grant assistance could impact FSM and RMI 
government budget and service provision, employment prospects, 
migration, and the overall gross domestic product (GDP) outlook, though 
the effect is likely to differ between the two countries. For example, 
the FSM is likely to experience fiscal pressures in 2004, when the 
value of Compact grant assistance drops in real terms by 8 percent 
relative to the 2001 level (a reduction equal to 3 percent of 
GDP).[Footnote 17] For the RMI, however, the proposed level of Compact 
grant assistance in 2004 would actually be 8 percent higher in real 
terms than the 2001 level (an increase equal to 3 percent of GDP). 
According to the RMI, this increase would likely be allocated largely 
to the infrastructure investment budget and would provide a substantial 
stimulus to the economy in the first years of the new Compact.

Challenges to achieving economic self-sustainability in the long run 
remain significant for both countries. First, education and health 
indicators show the need to improve basic services in these areas, as 
the nations face challenges with regard to literacy rates, high birth 
rates, and access to safe water. Second, private sector employment is 
largely made up of services and distribution activities that support 
the public sector such that employment prospects are uncertain, given 
declining U.S. assistance. Third, private sector growth, which would 
rely on expanded exports and a growing tourism industry, is limited by 
constraining factors common to small island economies, such as limited 
domestic markets, a narrow resource base, and a lack of 
infrastructure.[Footnote 18] Fourth, socioeconomic activities, 
infrastructure, and population may be vulnerable to the impacts of 
climate change because the two countries could experience coastal 
inundation, more frequent droughts and floods, and increases in 
tropical cyclone intensities that could damage transport 
infrastructure.[Footnote 19]

Trust Funds May Be Insufficient to Replace Expiring Grants:

Given the challenges for achieving economic self-sustainability, the 
amended Compacts were designed to build trust funds that, beginning in 
fiscal year 2024, yield annual earnings to replace grant assistance 
that ends in 2023. Both the FSM and the RMI are required to provide an 
initial contribution to their respective trust funds of $30 million. In 
designing the trust funds, the State Department assumed that the trust 
fund would earn a 6 percent rate of return.[Footnote 20] The amended 
Compacts do not address whether trust fund earnings should be 
sufficient to cover expiring federal services, but they do create a 
structure that sets aside earnings above 6 percent, should they occur, 
that could act as a buffer against years with low or negative trust 
fund returns. Importantly, whether the estimated value of the proposed 
trust funds would be sufficient to replace grants or create a buffer 
account would depend on the rate of return that is realized (see table 
2). [Footnote 21]

* If the trust funds earn a 6 percent rate of return, then the FSM 
trust fund would yield a return of $57 million in fiscal year 2023, an 
amount insufficient to replace expiring grants by an estimated value of 
$27 million. The RMI trust fund would yield a return of $33 million in 
fiscal year 2023, an estimated $5 million above the amount required to 
replace grants in fiscal year 2024. Nevertheless, the RMI trust fund 
would become insufficient for replacing grant funding by fiscal year 
2040.

* If the trust funds are comprised of both stocks (60 percent of the 
portfolio) and long-term government bonds (40 percent of the portfolio) 
such that the forecasted average return is around 7.9 percent, then 
both trust funds would yield returns sufficient to replace expiring 
grants and to create a buffer account. However, while the RMI trust 
fund should continue to grow in perpetuity, the FSM trust fund would 
eventually deplete the buffer account and fail to replace grant funding 
by fiscal year 2048.

Table 2: Estimated Performance for the FSM and the RMI Trust Funds 
under Alternative Rates of Return (U.S. dollars in millions):

Projected value of trust fund at the end of FY 2023; Fund earns State 
Dept. assumed return (6%): FSM: $1,013; Fund earns State Dept. assumed 
return (6%): RMI: $575; Fund earns return from 60% stocks and 40% long-
term government bonds (7.9%): FSM: $1,255; Fund earns return from 60% 
stocks and 40% long-term government bonds (7.9%): RMI: $717.

Projected value of FY 2023 trust fund return; Fund earns State Dept. 
assumed return (6%): FSM: 57; Fund earns State Dept. assumed return 
(6%): RMI: 33; Fund earns return from 60% stocks and 40% long-term 
government bonds (7.9%): FSM: 92; Fund earns return from 60% stocks and 
40% long-term government bonds (7.9%): RMI: 53.

Surplus of FY 2023 trust fund return over FY 2024 required grant 
funding; Fund earns State Dept. assumed return (6%): FSM: -27; Fund 
earns State Dept. assumed return (6%): RMI: 5; Fund earns return from 
60% stocks and 40% long-term government bonds (7.9%): FSM: 8; Fund 
earns return from 60% stocks and 40% long-term government bonds (7.9%): 
RMI: 25.

Year when trust fund return is unable to replace grant funding; Fund 
earns State Dept. assumed return (6%): FSM: ; FY 2024; Fund earns State 
Dept. assumed return (6%): RMI: ; FY 2040; Fund earns return from 60% 
stocks and 40% long-term government bonds (7.9%): FSM: ; FY 2048; Fund 
earns return from 60% stocks and 40% long-term government bonds (7.9%): 
RMI: [A].

Source: GAO estimate based on amended Compacts adjusted for expected 
inflation.

Note: The historic average real rate of return from the U.S. stock 
market has been 7 percent. Assuming a trust fund based on 60 percent 
stocks, which at a forecasted inflation rate of 2.2 percent would earn 
a 9.2 percent return, and 40 percent long-term U.S. government bonds, 
which would earn the forecasted nominal rate of return of 5.8 percent, 
a nominal rate of return of 7.9 percent could be achieved for the trust 
fund. The estimated value of the trust funds includes monies accrued in 
the buffer accounts and reflect the initial contribution made by the 
FSM and the RMI to their respective trust funds.

[A] The RMI trust fund under this scenario continues to grow in 
perpetuity. However, this analysis assumes a steady real rate of return 
and does not account for volatility in returns.

[End of table]

Amended Compacts Have Strengthened Accountability Over U.S. Assistance:

I will now discuss provisions in the amended Compacts designed to 
provide improved accountability over, and effectiveness of, U.S. 
assistance. This is an area where we have offered several 
recommendations in past years, as we have found accountability over 
past assistance to be lacking. As I discuss key proposed accountability 
measures, I will note where appropriate whether our previous 
recommendations have been addressed. In sum, most of our 
recommendations regarding future Compact assistance have been addressed 
with the introduction of strengthened accountability measures in the 
signed amended Compacts and related agreements. I must emphasize, 
however, that the extent to which these provisions will ultimately 
provide increased accountability over, and effectiveness of, future 
U.S. assistance will depend upon how diligently the provisions are 
implemented and monitored by all governments.

The following summary describes key accountability measures included in 
the amended Compacts and related agreements:

* The amended Compacts would require that grants be targeted to 
priority areas such as health, education, the environment, and public 
infrastructure.[Footnote 22] In both countries, 5 percent of the amount 
dedicated to infrastructure, combined with a matching amount from the 
island governments, would be placed in an infrastructure maintenance 
fund. We recommended in a September 2000 report that the U.S. 
government should negotiate provisions that would provide future 
Compact funding through grants targeted to priority areas and that 
funding should be set aside for infrastructure maintenance.[Footnote 
23]

* Compact-related agreements with both countries (the so-called "fiscal 
procedures agreements") would establish a joint economic management 
committee for the FSM and the RMI that would meet at least once 
annually. The duties of the committees would include (1) reviewing 
planning documents and evaluating island government progress to foster 
economic advancement and budgetary self-reliance; (2) consulting with 
program and service providers and other bilateral and multilateral 
partners to coordinate or monitor the use of development assistance; 
(3) reviewing audits; (4) reviewing performance outcomes in relation to 
the previous year's grant funding level, terms, and conditions; and (5) 
reviewing and approving grant allocations (which would be binding) and 
performance objectives for the upcoming year. In our previously cited 
2000 report, we recommended that the U.S. government negotiate an 
expanded agenda for future annual consultations. Further, the fiscal 
procedures agreements would give the United States control over the 
annual review process: The United States would appoint three government 
members to each committee, including the chairman, while the FSM or the 
RMI would appoint two government members.

* Grant conditions normally applicable to U.S. state and local 
governments would apply to each grant. General terms and conditions for 
the grants would include conformance to plans, strategies, budgets, 
project specifications, architectural and engineering specifications, 
and performance standards. Other special conditions or restrictions 
could be attached to grants as necessary. Specific post-award 
requirements address financial administration by establishing, for 
example, (1) improved financial reporting, accounting records, internal 
controls, and budget controls; (2) appropriate use of real property and 
equipment; and (3) competitive and well-documented procurement. In our 
2000 report, we recommended that future assistance be provided with 
grants that had specific requirements.

* The United States could withhold payments if either country fails to 
comply with grant terms and conditions. The withholding amount would be 
proportional to the breach of the term or condition. In addition, funds 
could be withheld if the FSM or RMI governments do not cooperate in 
U.S. investigations regarding whether Compact funds have been used for 
purposes other than those set forth in the amended Compacts. In our 
2000 report, we recommended that withholding of funds be allowed.

* The fiscal procedures agreements would require numerous reporting 
requirements for the two countries. For example, each country must 
prepare strategic planning documents that are updated regularly, annual 
budgets that propose sector expenditures and performance measures, 
annual reports to the U.S. President regarding the use of assistance, 
quarterly and annual financial reports, and quarterly grant performance 
reports. In our 2000 report, we recommended that expanded reporting 
requirements be negotiated.

* The amended Compacts' trust fund management agreements would grant 
the U.S. government control over trust fund management: The United 
States would appoint three members, including the chairman, to a 
committee to administer the trust funds, while the FSM or the RMI would 
appoint two members. After the initial 20 years, the trust fund 
committee would remain the same, unless otherwise agreed by the 
original parties. We have reported that well-designed trust funds can 
provide a sustainable source of assistance and reduce long-term aid 
dependence.[Footnote 24]

The fiscal procedures agreements would require the joint economic 
management committees to consult with program providers in order to 
coordinate future U.S. assistance. However, we have seen no evidence 
demonstrating that an overall assessment of the appropriateness, 
effectiveness, and oversight of U.S. programs, as we recommended, has 
been conducted.[Footnote 25]

The successful implementation of the many new accountability provisions 
will require a sustained commitment by the three governments to fulfill 
their new roles and responsibility. Appropriate resources from the 
United States, the FSM, and the RMI represent one form of this 
commitment. While the amended Compacts do not address staffing issues, 
officials from Interior's Office of Insular Affairs have informed us 
that their office intends to post six staff in a new Honolulu office. 
According to an Interior official, these staff will consist of a health 
grant specialist, an education grant specialist, an accountant, an 
economist, an auditor, and an office assistant. Interior can also 
contract with the Army Corps of Engineers for engineering assistance 
when necessary. Honolulu-based staff may spend about half of their time 
in the FSM and the RMI. Further, an Interior official noted that his 
office has brought one new staff on board in Washington, D.C., and 
intends to post one person to work in the RMI (one staff is already 
resident in the FSM). We have not conducted an assessment of Interior's 
staffing plan and rationale and cannot comment on the adequacy of the 
plan or whether it represents sufficient resources in the right 
location.

Amended Compacts Address Other Key Areas:

U.S. Military Access to Kwajalein Atoll Could Be Extended Until 2086:

The most significant defense-related change in the amended Compacts is 
the extension of U.S. military access to Kwajalein Atoll in the RMI. 
While the U.S. government had already secured access to Kwajalein until 
2016 through the 1986 MUORA, the newly revised MUORA would grant the 
United States access until 2066, with an option to extend for an 
additional 20 years to 2086. According to a Department of Defense (DOD) 
official, recent DOD assessments have envisioned that access to 
Kwajalein would be needed well beyond 2016. He stated that DOD has not 
undertaken any further review of the topic, and none is currently 
planned. This official also stated that, given the high priority 
accorded to missile defense programs and to enhancing space operations 
and capabilities by the current administration, and the inability to 
project the likely improvement in key technologies beyond 2023, the 
need to extend the MUORA beyond 2016 is persuasive. He also emphasized 
that the U.S. government has flexibility in that it can end its use of 
Kwajalein Atoll any time after 2023 by giving advance notice of 7 years 
and making a termination payment.

We have estimated that the total cost of this extension would be $3.4 
billion (to cover years 2017 through 2086). [Footnote 26] The majority 
of this funding ($2.3 billion) would be provided by the RMI government 
to Kwajalein Atoll landowners, while the remainder ($1.1 billion) would 
be used for development and impact on Kwajalein Atoll. According to a 
State Department official, there are approximately 80 landowners. Four 
landowners receive one-third of the annual payment, which is based on 
acreage owned. This landowner funding (along with all other Kwajalein-
related funds) through 2023 would not be provided by DOD but would 
instead continue as an Interior appropriation. Departmental 
responsibility for authorization and appropriation for Kwajalein-
related funding beyond 2023 has not been determined according to the 
State Department. The Kwajalein Atoll landowners have not yet agreed to 
sign an amended land-use agreement with the RMI government to extend 
U.S. access to Kwajalein beyond 2016 at the funding levels established 
in the amended Compact.

A few expiring provisions would be extended indefinitely in the amended 
Compacts. The "defense veto" - the ability of the United States to veto 
actions by the FSM or the RMI governments that the United States 
determines are incompatible with U.S. authority and responsibility for 
security and defense matters in the two countries - has been extended. 
In addition, the ability of FSM and RMI citizens to volunteer to serve 
in the U.S. military would be extended. According to a DOD official, 
this is a beneficial provision since it, for example, gives the United 
States access to persons with specialized knowledge and understanding 
of Pacific cultures while also providing career opportunities for FSM 
and RMI citizens.[Footnote 27]

Amended Compacts Would Strengthen Immigration Provisions:

While the original Compact's immigration provisions are not expiring, 
the State Department targeted them as requiring changes. The amended 
Compacts would strengthen the immigration provisions of the Compact by 
adding new restrictions and expressly applying the provisions of the 
INA to Compact nonimmigrants.[Footnote 28] There are several new 
immigration provisions in the amended Compacts that differ from those 
contained in the original Compact (see table 3).

Table 3: Key Immigration Issues: A Comparison of the Original and 
Amended Compacts:

Issue: Passports; Original Compact: Compact nonimmigrants do not need a 
passport to be admitted to the United States; Amended Compacts: 
Compact nonimmigrants would need a valid passport in order to be 
admitted into the United States.

Issue: Entry into the United States for naturalized FSM and RMI 
citizens; Original Compact: Naturalized FSM and RMI citizens are 
eligible to apply for admission to the United States 5 years after they 
are naturalized, so long as they were a resident of the FSM or the RMI 
during that time; Amended Compacts: Naturalized citizens would only be 
admissible if they are immediate relatives of a citizen of the FSM or 
the RMI or if they were naturalized before April 30, 2003.[A].

Issue: Entry into the United States for the purpose of adoption; 
Original Compact: A child who came to the United States for the purpose 
of adoption is not expressly prohibited from seeking admission into the 
United States under the Compact. However, the United States government 
has maintained that such children are not admissible under the Compact, 
but, rather, that they had to seek admission under general immigration 
requirements for adopted children; Amended Compacts: A child who is 
coming to the United States for the purpose of adoption would not be 
admissible under the amended Compacts. Instead, these children would 
have to apply for admission to the United States under the general 
immigration requirements for adopted children. This provision would 
apply to any child who applied for admission to the United States on or 
after March 1, 2003.

Issue: Conditions on admission to the United States and its territories 
or possessions for Compact nonimmigrants; Original Compact: The United 
States has the authority to establish limitations, either in statutes 
or regulations, on a Compact nonimmigrant's right to establish habitual 
residence in a territory or possession of the United States.[B]; 
Amended Compacts: The Attorney General would have the authority to 
issue regulations that specify the time and conditions of a Compact 
nonimmigrant's admission into the United States.[C].

Source: GAO legal analysis of the original and amended Compacts.

Note: In addition, any of the authorities in the amended Compacts that 
the United States may exercise could also be exercised by the 
governments of the U.S. territories or possessions where the INA does 
not apply (i.e., the CNMI and American Samoa), so long as the exercise 
of such authority is lawful under the laws of that territory or 
possession.

[A] Such naturalized citizens would also have to meet additional 
requirements, including residency requirements, unless they are an 
immediate relative of a citizen of the FSM or the RMI who is serving in 
the U.S. military.

[B] The United States promulgated regulations in September 2000 
regarding the rights and limitations of habitual residents in the 
territories and possessions of the United States. These regulations 
applied to Compact nonimmigrants in Guam, the Commonwealth of Puerto 
Rico, and the U.S. Virgin Islands. They did not apply to Compact 
nonimmigrants residing in the 50 states, the District of Columbia, 
American Samoa, or the CNMI.

[C] The INA would now expressly apply to any Compact migrant who seeks 
admission or is admitted to the United States. As such, in addition to 
the Attorney General's authority to promulgate regulations, any grounds 
of inadmissibility or deportability under the INA would now apply to 
Compact migrants except where the amended Compacts specify otherwise. 
Some modifications, however, were made to the INA provision, section 
237(a)(5), allowing for deportation on the basis of an alien becoming a 
public charge.

[End of table]

In addition, the implementing legislation for the amended Compacts 
would provide $15 million annually for U.S. locations that experience 
costs associated with Compact nonimmigrants. This amount would not be 
adjusted for inflation, would be in effect for fiscal years 2004 
through 2023, and would total $300 million. Allocation of these funds 
between locations such as Hawaii, Guam, and the CNMI would be based on 
the number of nonimmigrants in each location.

Mr. Chairman and Members of the Subcommittee, this completes my 
prepared statement. I would be happy to respond to any questions you or 
other Members of the Subcommittee may have at this time.

Contacts and Acknowledgments:

For future contacts regarding this testimony, please call Susan S. 
Westin or Emil Friberg, Jr., at (202) 512-4128. Individuals making key 
contributions to this testimony included Leslie Holen, Kendall 
Schaefer, Mary Moutsos, and Rona Mendelsohn.

[End of section]

Appendix I: Estimated New U.S. Authorizations to the FSM and the RMI in 
Fiscal Year 2004 U.S. Dollars:

The estimated value of new congressional authorizations to the FSM and 
the RMI would be approximately $3.8 billion from fiscal years 2004 to 
2086 measured in fiscal year 2004 dollars (see table 4).

Table 4: Estimated New U.S. Authorizations for the FSM and the RMI, 
Fiscal Years 2004-2086 (Fiscal Year 2004 U.S. Dollars in Millions):

Fiscal years 2004-2023:

Grants for priority areas; FSM: $1,323; RMI: $572; Total: $1,895.

Trust fund contributions; FSM: 411; RMI: 218; Total: 628.

Payments for U.S. military use of Kwajalein Atoll land; FSM: Not 
applicable; RMI: 144; Total: 144.

Compact-authorized federal services; FSM: 135; RMI: 30; Total: 165.

New U.S. authorization for 2004-2023; FSM: $1,868; RMI: $963; Total: 
$2,832.

Fiscal years 2024-2086:

Grants to Kwajalein; FSM: Not applicable; RMI: $306; Total: $306.

Payments for U.S. military use of Kwajalein Atoll land; FSM: Not 
applicable; RMI: 688; Total: 688.

New U.S. authorization for 2024-2086; FSM: Not applicable; RMI: $993; 
Total: $993.

Fiscal years 2004-2086, total new U.S. authorizations for the FSM and 
the RMI; FSM: $1,868; RMI: $1,956; Total: $3,825.

Source: GAO estimate based on the amended Compacts.

Note: Numbers may not sum due to rounding.

[End of table]

[End of section]

FOOTNOTES

[1] The FSM had a population of about 107,000 in 2000, while the RMI 
had a population of 50,840 in 1999, according to each country's most 
recent census.

[2] Other Compact provisions are also due to expire in late 2003 if not 
renegotiated and approved. These include (1) certain defense 
provisions, such as the requirement that the FSM and the RMI refrain 
from actions that the United States determines are incompatible with 
U.S. defense obligations (the defense veto), and (2) federal services 
listed in the Compact.

[3] Although the amended Compacts have been signed by the U.S., FSM, 
and RMI governments, they have not been approved by the legislature of 
any country. Therefore, in our testimony we describe the amended 
Compacts' requirements and potential impact in a conditional manner in 
recognition that the Compacts have not yet been enacted. The total 
possible cost to renew expiring assistance in fiscal year 2004 U.S. 
dollars would be $3.8 billion on the basis of the Congressional Budget 
Office forecasted inflation rate (see appendix).

[4] From 1947 to 1986, the United States administered this region under 
a trusteeship agreement that obligated it to foster the development of 
political institutions and move the Trust Territory toward self-
government and promote economic, social, and educational advancement. 
In addition, the agreement allowed the United States to establish 
military bases and station forces in the Trust Territory and close off 
areas for security reasons as part of its rights. In addition to the 
islands of the FSM and the RMI, the Trust Territory included Palau and 
the Northern Mariana Islands.

[5] The FSM received additional U.S. grant assistance of about $17.5 
million in fiscal year 2002 and about $18 million in fiscal year 2003. 
The RMI received additional U.S. grant assistance of about $3.1 million 
in fiscal year 2002 and $3.3 million in fiscal year 2003 (excluding 
increased payments related to Kwajalein land use).

[6] The cost of prior assistance in fiscal year 2004 U.S. dollars was 
$2.6 billion. This estimate does not include payments for Compact 
authorized federal services or U.S. military use of Kwajalein Atoll 
land, nor does it include investment development funds provided under 
section 111 of Public Law 99-239. Additionally, the Compact served as 
the vehicle to reach a full settlement of all compensation claims 
related to U.S. nuclear tests conducted on Marshallese atolls between 
1946 and 1958. In a Compact-related agreement, the U.S. government 
agreed to provide $150 million to create a trust fund. While the 
Compact and its related agreements represented the full settlement of 
all nuclear claims, it provided the RMI with the right to submit a 
petition of "changed circumstance" to the U.S. Congress requesting 
additional compensation. The RMI government submitted such a petition 
in September 2000, which the U.S. executive branch is still reviewing.

[7] For more information on U.S. programs and services provided to the 
FSM and the RMI, see U.S. General Accounting Office, Foreign 
Assistance: Effectiveness and Accountability Problems Common in U.S. 
Programs to Assist Two Micronesian Nations, GAO-02-70 (Washington, 
D.C.: Jan. 22, 2002).

[8] U.S. access to Kwajalein Atoll is established through the U.S.-RMI 
Military Use and Operating Rights Agreement (MUORA). Funding provided 
for U.S. military access to Kwajalein for the years 1987 to 2003 is 
estimated, on the basis of Interior data, to be $64 million for 
development assistance and $144 million for the RMI government to 
compensate landowners for U.S. use of their lands.

[9] See U.S. General Accounting Office, Foreign Relations: Kwajalein 
Atoll Is the Key U.S. Defense Interest in Two Micronesian Nations, 
GAO-02-119 (Washington, D.C.: Jan. 22, 2002).

[10] Typically, nonimmigrants include those individuals who are in the 
United States temporarily as visitors, students, or workers.

[11] Payments were also authorized for American Samoa, but impact 
compensation has not been sought.

[12] See U.S. General Accounting Office, Foreign Relations: Migration 
From Micronesian Nations Has Had Significant Impact on Guam, Hawaii, 
and the Commonwealth of the Northern Mariana Islands, GAO-02-40 
(Washington, D.C.: Oct. 5, 2001).

[13] U.S. access to Kwajalein Atoll in the RMI has already been secured 
through 2016 through a Compact-related agreement. The U.S. proposal to 
the RMI extends this funding to 2066, with an additional 20-year 
optional lease at that point.

[14] In addition to Compact authorized federal services, numerous U.S. 
federal agencies extend specific programs offered in the United States, 
such as Pell grants and Head Start, to the FSM and the RMI in areas 
such as education and health. The level of this program assistance has 
varied over time as certain programs have been eliminated and other 
programs have been introduced. Currently, the U.S. Congress is 
reviewing a number of education programs to the FSM and the RMI, and 
the level of continued program assistance is uncertain.

[15] Although new authorization figures are provided in current dollars 
so that total costs to the U.S. government can be identified, this 
display of economic assistance is provided in fiscal year 2004 constant 
dollars for comparative purposes to show the impact of changes in 
government funding on the economy and population. 

[16] The migration impact of the amended Compacts is difficult to 
determine, but if migration slows as a result of the amended Compacts 
or other economic and demographic influences, then our per capita 
estimates would be overstated.

[17] The level of grant assistance in 2001 was converted into fiscal 
year 2004 dollars for comparison purposes.

[18] Potential sources of private sector growth include export earnings 
from three sectors: commercial agriculture, fisheries, and tourism. 

[19] The Intergovernmental Panel on Climate Change predicts that rising 
sea levels over the next 50 years will result in land loss for areas in 
the RMI and the FSM that will disrupt virtually all economic and social 
sectors. The sea level rises could trigger significant migration 
because resettlement within national boundaries, or abandonment of some 
atolls altogether, may be the only viable option, with substantial 
costs for resettlement. For example, in the RMI the average elevation 
on Majuro is 2.2 meters. In Kwajalein Atoll, Ebeye's average elevation 
is 2.2 meters, and the maximum elevation is 2.5 meters.

[20] The State Department chose a 6 percent return in order to reflect 
a conservative investment strategy. This rate of return can be compared 
with the current average forecasted return for long-term U.S. 
government bonds of 5.8 percent by the Congressional Budget Office.

[21] This analysis does not take into account volatile or negative 
returns. The sufficiency of either the FSM or the RMI trust fund to 
replace grants has not been tested under conditions of market 
volatility.

[22] Public infrastructure projects would be focused in the areas of 
education, health, and safety. Progress reports for each project would 
be required, and funding would be provided on a reimbursable basis. For 
the RMI, not less than 30 percent or more than 50 percent of the annual 
grant assistance would be available for public infrastructure projects. 


[23] See U.S. General Accounting Office, Foreign Assistance: U.S. Funds 
to Two Micronesian Nations Had Little Impact on Economic Development, 
GAO/NSIAD-00-216 (Washington, D.C.: Sept. 22, 2000) for a review of the 
first 12 years of direct Compact assistance.

[24] See U.S. General Accounting Office, Foreign Assistance: Lessons 
Learned From Donors' Experiences in the Pacific Region, GAO-01-808 
(Washington, D.C.: Aug. 17, 2001).

[25] This recommendation was included in GAO-02-70.

[26] Our figure of $3.4 billion is adjusted for inflation.

[27] In the amended Compacts, DOD's civic action teams have been 
eliminated. Both countries would now have access to humanitarian 
assistance programs that would emphasize health, education, and 
infrastructure projects that DOD would carry out.

[28] As noted in the Background section, FSM and RMI citizens who enter 
the United States are legally classified as "nonimmigrants" - that is, 
individuals who are in the United States temporarily as visitors, 
students, or workers.