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entitled 'Compacts of Free Association: Micronesia and the Marshall 
Islands Face Challenges in Planning for Sustainability, Measuring 
Progress, and Ensuring Accountability' which was released on December 
18, 2006. 

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Report to Congressional Committees: 

December 2006: 

Compacts Of Free Association: 

Micronesia and the Marshall Islands Face Challenges in Planning for 
Sustainability, Measuring Progress, and Ensuring Accountability: 

GAO-07-163: 

GAO Highlights: 

Highlights of GAO-07-163, a report to congressional committees 

Why GAO Did This Study: 

In 2003, the United States signed Compacts of Free Association with the 
Federated States of Micronesia (FSM) and the Republic of the Marshall 
Islands (RMI), amending a 1986 compact with the countries. The amended 
compacts provide the countries with a combined total of $3.6 billion 
from 2004 to 2023, with the annual grants declining gradually. The 
assistance, targeting six sectors, is aimed at assisting the countriesí 
efforts to promote economic advancement and budgetary self-reliance. 
The Department of the Interior (Interior) administers and oversees the 
assistance. Complying with a legislative requirement, GAO examined, for 
fiscal years 2004 through 2006, (1) the FSMís and the RMIís use of 
compact funds, (2) their efforts to assess progress toward development 
goals, (3) their monitoring of sector grants and accountability for 
compact funds, and (4) Interiorís administrative oversight of the 
assistance. GAO visited the FSM and the RMI; reviewed reports; and 
interviewed officials from the FSM, RMI, and U.S. governments. 

What GAO Found: 

For 2004 through 2006, compact assistance to the FSM and the RMI was 
allocated largely to the education, infrastructure, and health sectors, 
but various factors limited the countriesí use of compact funds. 
Deterrents to the FSMís use of infrastructure funds included 
constraints on land use and disagreement on project implementation 
processes. Land use issues also hindered the RMIís use of 
infrastructure funds. In addition, the FSMís distribution of the grants 
among its four states resulted in significant differences in per-
student education and per-capita health funding. Neither country has 
planned for long-term sustainability of the grant programs, taking into 
account the annual decreases in grant funding. 

To assess progress toward development goals, the FSM and the RMI 
established goals and objectives for each sector and are collecting 
performance data for education and health. However, a lack of complete 
and reliable baseline data prevents the countries from gauging progress 
in these sectors. Also, both countriesí required quarterly performance 
reports contained incomplete and unreliable information, limiting the 
reportsí utility for tracking progress. The countriesí ability to 
measure progress is further challenged by a lack of technical capacity 
to collect, assemble, and analyze baseline and performance data. 

Although the FSM and the RMI are required to monitor day-to-day sector 
grant operations, their ability to meet this requirement for 2004 
through 2006 was limited. According to officials in the respective 
governments, the responsible offices have insufficient staff, budgets, 
and time to monitor grant operations. In addition, both countriesí 
single audit reports for 2004 and 2005 indicated weaknesses in their 
ability to account for the use of compact funds. For instance, the 
FSMís audit report for 2005 contained 57 findings of material 
weaknesses and reportable conditions in the national and state 
governmentsí financial statements for sector grants, and the RMIís 
report contained 2 such findings. Furthermore, both countriesí single 
audit reports indicated noncompliance with requirements of major 
federal programs. For example, the FSMís audit report for 2005 
contained 45 findings of noncompliance, while the RMIís audit report 
contained 11 findings. 

Interiorís Office of Insular Affairs (OIA) has conducted administrative 
oversight of the sector grants by monitoring the countriesí sector 
grant performance and spending, assessing their compliance with sector 
grant conditions, and monitoring the audit process. In response to 
shortcomings that it identified, OIA took several actions, such as 
withholding or suspending grant funding and ensuring the provision of 
technical assistance. However, OIAís oversight has been limited by the 
need to deal with challenges facing the FSM, such as its difficulty in 
preparing budgets, as well as by its own staffing challenges. 

What GAO Recommends: 

GAO recommends, among other things, that Interior work with the FSM and 
the RMI to establish plans to minimize the impact of declining 
assistance and to fully develop a reliable mechanism for measuring 
progress toward compact goals. Interior agreed with all of the 
recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-163]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact David Gootnick at (202) 
512-3149 or gootnickd@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Compact Grants Targeted Infrastructure, Education, and Health, but 
Various Issues Constrained Countries' Use of Funds: 

FSM and RMI Have Limited Ability to Measure Progress toward Compact 
Goals: 

FSM and RMI Provided Limited Monitoring of Grant Operations, and FSM 
Accountability for Compact Funds Faced Challenges: 

Interior Took Oversight Actions but Faced Challenges: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: U.S. Program Assistance to the FSM and the RMI: 

Appendix III: U.S. Funds to Be Provided to the RMI Related to Kwajalein 
Atoll, 2004 through 2023: 

Appendix IV: FSM and RMI Sector Grants, 2004 through 2006: 

Appendix V: Single Audit Reports for the FSM and the RMI, 2001 through 
2005: 

Single Audits Were Not Timely, but Timeliness Improved: 

Nearly All Audit Opinions on Financial Reporting Were Qualified and 
Contained Material Weaknesses and Reportable Conditions: 

All Audit Opinions on Compliance with Requirements of Major Federal 
Programs Were Qualified and Contained Material Weaknesses and 
Reportable Conditions: 

High-Risk Designations and Other Sanctions Threatened by OIA as Late 
Reports and Other Problems Persist: 

Appendix VI: FSM Compliance with Special Sector Grant Terms and 
Conditions: 

Appendix VII: RMI Compliance with Special Sector Grant Terms and 
Conditions: 

Appendix VIII: Comments from the Department of the Interior: 

Appendix IX: Comments from the Federated States of Micronesia: 

GAO Comments: 

Appendix X: Comments from the Republic of the Marshall Islands: 

GAO Comments: 

Appendix XI: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: U.S. Assistance to Be Provided to the FSM and the RMI under 
the Amended Compacts, 2004 through 2023: 

Table 2: Distribution of Compact Funds to FSM States and States' 
Percentages of FSM Population, 2006: 

Table 3: Noncompact U.S. Program Fund Expenditures for the FSM and the 
RMI, 2004 and 2005: 

Table 4: Department of the Interior OIA Technical Assistance and 
Operations and Maintenance Improvement Program Grants: 

Table 5: Department of Education Individuals with Disabilities 
Education Act/Special Education Program for Pacific Island Entities: 

Table 6: Department of Education Pell Grant Program: 

Table 7: Department of Health and Human Services Maternal and Child 
Health Block Grants Program: 

Table 8: U.S. Department of Agriculture Rural Housing Service Housing 
Loan Program: 

Table 9: U.S. Department of Agriculture Rural Utilities Services 
Telecommunications Loan Program: 

Table 10: U.S. Department of Agriculture Rural Utilities Services 
Electrical Loan Program: 

Table 11: Federal Emergency Management Agency Program/U.S. Agency for 
International Development: 

Table 12: U.S. Postal Service Program: 

Table 13: Federal Aviation Administration Program: 

Table 14: National Weather Service Program: 

Table 15: U.S. Funds to Be Provided to the RMI Related to Kwajalein 
Atoll under the Terms of the Amended Compact, 2004 through 2023: 

Table 16: Sector Grant Allocations to the Five FSM Governments, 2004 
through 2006: 

Table 17: RMI Sector Grants, Including Kwajalein Funding, 2004 through 
2006: 

Table 18: Single Audit Act Report Submissions, 2001 through 2005: 

Table 19: Financial Statement Audit Opinions for the RMI and the FSM, 
2001 through 2005: 

Table 20: Numbers of FSM and RMI Material Weaknesses and Reportable 
Conditions in Internal Control over Financial Statement Reporting 
Identified in Single Audit Reports, 2005: 

Table 21: Numbers of FSM and RMI Material Weaknesses and Reportable 
Conditions in Internal Control over Compliance with Requirements of 
Major Federal Programs Identified in Single Audit Reports, 2005: 

Table 22: Numbers of Material Weaknesses and Reportable Conditions 
Identified in Single Audit Reports for FSM National Government and 
States, 2001 through 2005: 

Table 23: Numbers of RMI Material Weaknesses and Reportable Conditions 
Identified in Single Audit Reports, 2001 through 2005: 

Figures: 

Figure 1: Location and Map of the Federated States of Micronesia and 
the Republic of the Marshall Islands: 

Figure 2: Amended Compact Implementation Framework: 

Figure 3: FSM Sector Grant Allocation, 2004 through 2006: 

Figure 4: RMI Sector Grant Allocation, 2004 through 2006: 

Abbreviations: 

FAC: Federal Audit Clearinghouse: 

FSM: Federated States of Micronesia: 

HHS: Department of Health and Human Services: 

JEMCO: Joint Economic Management Committee (FSM): 

JEMFAC: Joint Economic Management and Financial Accountability 
Committee (RMI): 

KADA: Kwajalein Atoll Development Authority: 

OCM: Office of Compact Management (FSM): 

OIA: Office of Insular Affairs (Department of the Interior): 

OMB: Office of Management and Budget: 

RMI: Republic of the Marshall Islands: 

SEG: Supplemental Education Grant: 

December 15, 2006: 

Congressional Committees: 

From 1987 through 2003,[Footnote 1] the United States provided $2.1 
billion in economic assistance to the Federated States of Micronesia 
(FSM) and the Republic of the Marshall Islands (RMI) through a Compact 
of Free Association. In 2000, we reported that the U.S., FSM, and RMI 
governments had provided limited accountability over spending, and that 
U.S. assistance had resulted in little economic development in both 
countries.[Footnote 2] In 2003, the U.S. government approved amended 
compacts with the FSM and the RMI.[Footnote 3] These compacts provide 
for a combined total of $3.6 billion for the two countries between 2004 
and 2023,[Footnote 4] with the Department of the Interior's (Interior) 
Office of Insular Affairs (OIA) responsible for administering and 
monitoring U.S. assistance.[Footnote 5] U.S. grant funding will 
decrease annually, paired with increasing contributions to trust funds 
for the FSM and the RMI; earnings from the trust funds are intended to 
provide a source of revenue when the grants expire in 2023. The amended 
compacts identify the 20 years of grant assistance as intended to 
assist the FSM and RMI governments in their efforts to promote the 
economic advancement and budgetary self-reliance of their people. 
Recently we reported that both countries face obstacles to achieving 
these goals, including limited potential for long-term growth; 
limited progress in economic reforms; and significant dependence on 
public sector funding, which is largely supported by external 
assistance.[Footnote 6] 

The amended compacts require the countries to target funding to six 
sectors--education, health, the environment, public sector capacity 
building, private sector development, and infrastructure, with priority 
given to education and health. The amended compacts' subsidiary fiscal 
procedures agreements[Footnote 7] require the FSM and RMI governments 
to monitor the day-to-day operations of sector grants and activities, 
submit periodic performance reports and financial statements, and 
ensure annual financial and compliance audits. In addition, the 
compacts and fiscal procedures agreements require that the U.S. and FSM 
Joint Economic Management Committee (JEMCO) and the U.S. and RMI Joint 
Economic Management and Financial Accountability Committee (JEMFAC) 
meet at least once annually to evaluate the progress of the FSM and the 
RMI, respectively, in achieving the objectives specified in their 
development plans; approve grant allocations; review required annual 
reports; identify problems encountered; and recommend ways to increase 
the effectiveness of compact grant assistance.[Footnote 8] 

The amended compacts' implementing legislation instructs GAO to report, 
for the 3 years following the enactment of the legislation and every 5 
years thereafter, on the FSM's and the RMI's use and effectiveness of 
U.S. financial, program, and technical assistance as well as the 
effectiveness of administrative oversight by the United 
States.[Footnote 9] This report examines, for 2004 through 2006, (1) 
the FSM's and the RMI's use of compact funds, (2) FSM and RMI efforts 
to assess progress toward their stated development and sector goals, 
(3) FSM and RMI monitoring of sector grants and accountability for the 
use of compact funds, and (4) Interior's administrative oversight of 
the assistance provided under the compacts. In addition, appendix II 
contains information about activities funded by key federal programs. A 
separate correspondence providing additional information about the 
FSM's and the RMI's use of compact funds in each of the six sectors is 
forthcoming. 

To address our objectives, we reviewed the U.S., FSM, and RMI annual 
compact reports for 2004 and 2005; OIA grant documents for 2004 through 
2006; FSM and RMI strategic planning documents, performance budgets,and 
quarterly performance reports for 2004 and 2005, as available; and FSM 
and RMI single audits[Footnote 10] for 2001 through 2005. We observed 
2005 and 2006 JEMCO and JEMFAC meetings. In addition, we interviewed 
officials from Interior and the Departments of State, Health and Human 
Services (HHS), and Education. We also interviewed RMI officials and 
FSM national and state officials in the six sectors receiving compact 
funding and visited compact-funded facilities and activities in both 
countries. We determined that the grant, program, technical assistance, 
and performance data examined in this report are sufficiently reliable 
for our specific purposes. However, our interviews with FSM and RMI 
officials revealed important limitations in the financial and activity 
data in the countries' performance reports. We conducted our work from 
October 2005 to December 2006 in accordance with generally accepted 
government auditing standards. (For additional details of our 
objectives, scope, and methodology, see app. I.) 

Results in Brief: 

In 2004 through 2006, the FSM and RMI governments' allocations of 
compact grants prioritized the education and health sectors, as the 
compacts require, but the countries' use of compact funds was 
constrained by several factors. Education, health, and infrastructure 
accounted for 34 percent, 21 percent, and 25 percent, respectively, of 
the FSM's compact funds and for 33 percent, 20 percent, and 40 percent 
of the RMI's compact funds. In both countries, use of the funds was 
hampered by political factors and land use issues. In the FSM, 
disagreement among the national and state governments[Footnote 11] 
regarding project implementation and fund management delayed 
infrastructure projects, and the government's inability to secure land 
leases hindered project implementation in Chuuk. In the RMI, political 
disagreements between the government and Kwajalein Atoll landowners 
over the management of compact fund distribution delayed the release of 
funds allocated for special needs on the island of Ebeye,[Footnote 12] 
and disagreements over land use prevented infrastructure projects in 
the Majuro and Kwajalein Atolls. Neither country has planned its 
allocation and use of funds for long-term sustainability in view of the 
planned annual decrements in grant funding[Footnote 13] and yearly 
inflation, for which the grants are only partially adjusted.[Footnote 
14] Although representatives of both countries told us that increased 
tax revenues could replace declining compact funds, economic experts 
consider the countries' business tax schemes to be inefficient. 
Furthermore, the FSM's grant allocations have been distributed 
according to prescribed percentages rather than the states' varying 
populations and needs. 

Although the FSM and the RMI established mechanisms to measure grant 
performance in each sector, several factors inhibited the countries' 
ability to assess progress toward stated goals. The FSM and the RMI 
each established development plans that contain goals and objectives 
for most sectors and are collecting data for performance indicators for 
education and health. However, incomplete or unreliable baseline data 
for some indicators limited both countries' ability to measure progress 
toward sector goals. In addition, although both countries compiled the 
required quarterly performance reports, the reports have limited 
usefulness for assessing progress, owing to problematic formats in the 
FSM and to incomplete and inaccurate data on program activities in both 
countries. For example, although the RMI's private sector development 
report for the fourth quarter of 2005 states that eight new businesses 
were created in 2005, officials from the Ministry of Resources and 
Development indicated that only four businesses had been started that 
year. A lack of capacity to collect, assemble, and analyze performance 
data also limited both countries' ability to measure progress toward 
sector goals. 

The FSM and RMI governments provided limited monitoring of sector grant 
operations, and their single audit reports--particularly those of the 
FSM--call into question the countries' accountability for all compact 
funds. Although both governments designated offices responsible for 
compact management, these offices lack the capacity to conduct the 
required monitoring of day-to-day sector grant operations. The FSM's 
Office of Compact Management (OCM), in particular, has not been fully 
staffed. In addition, both countries' single audit reports contained 
findings and opinions that call into question the usefulness and 
reliability of their financial statements. Of the FSM's national and 
state audit reports for 2004 and 2005, only one state report showed no 
problems with financial statements. Furthermore, both countries' audit 
reports contained findings of noncompliance with requirements of major 
U.S. programs--for example, the FSM's 2005 reports contained 45 such 
findings, and the RMI's 2005 report contained 11. In 2006, the FSM and 
the RMI developed corrective action plans that address 60 percent and 
100 percent, respectively, of the 2005 findings. 

OIA provided administrative oversight of the countries' sector grants, 
but its oversight was hampered by several challenges. OIA monitored the 
countries' sector grant performance, fiscal performance, and sector 
grant outlays and assessed the countries' compliance with sector grant 
conditions. OIA's efforts also included actions such as suspending or 
withholding grant payment in response to persistent shortcomings that 
it identified in the FSM. OIA's administrative oversight of the 
compacts was constrained by the need to respond to persistent problems 
in the FSM as well as the office's difficulty in filling staff 
positions. 

In this report, we recommend that the Secretary of the Interior direct 
the Deputy Assistant Secretary for Insular Affairs, as Chairman of 
JEMCO and JEMFAC, to work with the FSM and the RMI to undertake 
planning to minimize the impact of reduced future funding; fully 
develop mechanisms for measuring sector grant performance; and improve 
the reliability of information used by the FSM, RMI, and U.S. 
governments to monitor the compacts. 

The Assistant Secretary of Policy, Management and Budget, Department of 
the Interior, provided written comments on a draft of this report, 
stating that the report was accurate, well balanced, and concurred with 
our recommendations (see app. VIII). The FSM also commented on a draft 
of the report, characterizing it as a balanced and fair assessment of 
its progress in planning for sustainability, measuring progress, and 
ensuring accountability. The FSM, however, defended its distribution 
formula for allocating compact funds to the national and state 
governments (see app. IX). The RMI government noted that its decisions, 
in light of budgeting constraints, to refrain from expanding ministry 
staffs has affected its capacity for performance monitoring and 
reporting; it also provided several comments regarding our discussion 
of the grant decrements (see app. X). In addition, the Departments of 
State, Education, and Health and Human Services provided technical 
comments, which we incorporated where appropriate. 

Background: 

U.S. relations with Micronesia and the Marshall Islands began during 
World War II, when the United States ended Japanese occupation of the 
region. The United States administered the region under a United 
Nations trusteeship beginning in 1947.[Footnote 15] The four states of 
the FSM voted in a 1978 referendum to become an independent nation, 
while the Marshall Islands established its constitutional government 
and declared itself a republic in 1979. Both locations remained subject 
to the authority of the United States under the trusteeship agreement 
until entry into force of the compact in 1986. 

The FSM is a loose federation of four states, and has a population of 
approximately 108,500,[Footnote 16] scattered over many small islands 
and atolls. The FSM states maintain considerable power, relative to the 
national government, to allocate U.S. assistance and implement 
budgetary policies. Chuuk, the largest state, has 50 percent of the 
FSM's population, followed by Pohnpei (32 percent), Yap (11 percent), 
and Kosrae (7 percent). The RMI has a constitutional government, and 
its 29 constituent atolls have local government authority. About two- 
thirds of its approximately 56,000[Footnote 17] residents are in Majuro 
Atoll, the nation's capital, and Kwajalein Atoll.[Footnote 18] The two 
countries are located just north of the equator in the Pacific Ocean. 
(See fig. 1.) 

Figure 1: Location and Map of the Federated States of Micronesia and 
the Republic of the Marshall Islands: 

[See PDF for image] - graphic text: 

Sources: GAO presentation from Map Resources and National Oceanic and 
Atmospheric Administration (maps). 

[End of figure] - graphic text: 

Compact of Free Association: 1986 through 2003: 

The United States, the FSM, and the RMI entered into the original 
Compact of Free Association in 1986 after lengthy negotiations. The 
compact provided a framework for the United States and the two 
countries to work toward achieving the following three main goals: (1) 
secure self-government for the FSM and the RMI, (2) ensure certain 
national security rights for all of the parties, and (3) assist the FSM 
and the RMI in their efforts to advance economic development and self- 
sufficiency. The first and second goals were met; the FSM and the RMI 
are independent nations, and the three countries established key 
defense rights, including securing U.S. access to military facilities 
on Kwajalein Atoll in the RMI through 2016.[Footnote 19] The compact's 
third goal was to be accomplished primarily through U.S. direct 
financial assistance to the FSM and the RMI. For the 15-year period 
covering 1987 to 2001, funding was provided at levels that decreased 
every 5 years, with an extension for 2002 and 2003 during negotiations 
to renew expiring compact provisions. For 1987 through 2003, the FSM 
and the RMI are estimated to have received about $2.1 billion in 
compact financial assistance.[Footnote 20] As we previously 
reported,[Footnote 21] economic self-sufficiency was not achieved under 
the first compact. 

Under the original compact, the FSM and the RMI used funds for general 
government operations; capital projects, such as building roads and 
investing in businesses; debt payments; and targeted sectors, such as 
energy and communications. The FSM concentrated much of its spending on 
government activities, while the RMI emphasized capital spending. 
Compact funds to the FSM were divided among the FSM's national 
government and four states, according to a distribution agreement first 
agreed to by the five governments in 1984. In 2000, we reported that 
compact funds spent on general government operations maintained high 
government wages and a high level of public sector employment, 
discouraging private sector growth, and that compact funds used to 
create and improve infrastructure likewise did not contribute to 
significant economic growth.[Footnote 22] Furthermore, many of the 
projects undertaken by the FSM and the RMI experienced problems because 
of poor planning and management, inadequate construction and 
maintenance, or misuse of funds. While the compact set out specific 
obligations for reporting and consultations regarding the use of 
compact funds, the FSM, RMI, and U.S. governments provided little 
accountability over compact expenditures and did not ensure that funds 
were spent effectively or efficiently. The "full faith and credit" 
provision made withholding funds impracticable. In addition, under the 
original compact, both nations also benefited from numerous U.S. 
federal programs, while citizens of both nations exercised their right 
under the compact to live and work in the United States as 
"nonimmigrants" and to stay for long periods of time.[Footnote 23] 

Amended Compacts of Free Association: 2004 through 2023: 

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.[Footnote 24] The amended compacts provide for 
direct financial assistance to the FSM and the RMI from 2004 to 2023, 
decreasing in most years, with the amount of the decrements to be 
deposited in the trust funds for the two nations established under the 
amended compacts[Footnote 25] (see table 1). Moreover, the amended 
compacts require the FSM and the RMI to make one-time contributions of 
$30 million each to the trust funds, which both countries have 
done.[Footnote 26] In addition, the RMI amended compact includes an 
agreement that allows the U.S. military access to certain sites in 
Kwajalein Atoll until 2086 and provides $15 million annually starting 
in 2004, rising to $18 million[Footnote 27] in 2014, to compensate for 
any impacts of the U.S. military on the atoll.[Footnote 28] 

Table 1: U.S. Assistance to Be Provided to the FSM and the RMI under 
the Amended Compacts, 2004 through 2023: 

Dollars in millions. 

2004; 
FSM grants (Section 211): $76.2; 
FSM trust fund: (Section 215): $16.0; 
RMI grants: (Section 211): $35.2; 
RMI trust fund: (Section 216): $7.0; 
Kwajalein Impact: (Section 212)[A]: $15.0. 

2005; 
FSM grants (Section 211): 76.2; 
FSM trust fund: (Section 215): 16.0; 
RMI grants: (Section 211): 34.7; 
RMI trust fund: (Section 216): 7.5; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2006; 
FSM grants (Section 211): 76.2; 
FSM trust fund: (Section 215): 16.0; 
RMI grants: (Section 211): 34.2; 
RMI trust fund: (Section 216): 8.0; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2007; 
FSM grants (Section 211): 75.4; 
FSM trust fund: (Section 215): 16.8; 
RMI grants: (Section 211): 33.7; 
RMI trust fund: (Section 216): 8.5; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2008; 
FSM grants (Section 211): 74.6; 
FSM trust fund: (Section 215): 17.6; 
RMI grants: (Section 211): 33.2; 
RMI trust fund: (Section 216): 9.0; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2009; 
FSM grants (Section 211): 73.8; 
FSM trust fund: (Section 215): 18.4; 
RMI grants: (Section 211): 32.7; 
RMI trust fund: (Section 216): 9.5; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2010; 
FSM grants (Section 211): 73.0; 
FSM trust fund: (Section 215): 19.2; 
RMI grants: (Section 211): 32.2; 
RMI trust fund: (Section 216): 10.0; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2011; 
FSM grants (Section 211): 72.2; 
FSM trust fund: (Section 215): 20.0; 
RMI grants: (Section 211): 31.7; 
RMI trust fund: (Section 216): 10.5; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2012; 
FSM grants (Section 211): 71.4; 
FSM trust fund: (Section 215): 20.8; 
RMI grants: (Section 211): 31.2; 
RMI trust fund: (Section 216): 11.0; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2013; 
FSM grants (Section 211): 70.6; 
FSM trust fund: (Section 215): 21.6; 
RMI grants: (Section 211): 30.7; 
RMI trust fund: (Section 216): 11.5; 
Kwajalein Impact: (Section 212)[A]: 15.0. 

2014; 
FSM grants (Section 211): 69.8; 
FSM trust fund: (Section 215): 22.4; 
RMI grants: (Section 211): 32.2; 
RMI trust fund: (Section 216): 12.0; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2015; 
FSM grants (Section 211): 69.0; 
FSM trust fund: (Section 215): 23.2; 
RMI grants: (Section 211): 31.7; 
RMI trust fund: (Section 216): 12.5; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2016; 
FSM grants (Section 211): 68.2; 
FSM trust fund: (Section 215): 24.0; 
RMI grants: (Section 211): 31.2; 
RMI trust fund: (Section 216): 13.0; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2017; 
FSM grants (Section 211): 67.4; 
FSM trust fund: (Section 215): 24.8; 
RMI grants: (Section 211): 30.7; 
RMI trust fund: (Section 216): 13.5; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2018; 
FSM grants (Section 211): 66.6; 
FSM trust fund: (Section 215): 25.6; 
RMI grants: (Section 211): 30.2; 
RMI trust fund: (Section 216): 14.0; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2019; 
FSM grants (Section 211): 65.8; 
FSM trust fund: (Section 215): 26.4; 
RMI grants: (Section 211): 29.7; 
RMI trust fund: (Section 216): 14.5; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2020; 
FSM grants (Section 211): 65.0; 
FSM trust fund: (Section 215): 27.2; 
RMI grants: (Section 211): 29.2; 
RMI trust fund: (Section 216): 15.0; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2021; 
FSM grants (Section 211): 64.2; 
FSM trust fund: (Section 215): 28.0; 
RMI grants: (Section 211): 28.7; 
RMI trust fund: (Section 216): 15.5; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2022; 
FSM grants (Section 211): 63.4; 
FSM trust fund: (Section 215): 28.8; 
RMI grants: (Section 211): 28.2; 
RMI trust fund: (Section 216): 16.0; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

2023; 
FSM grants (Section 211): 62.6; 
FSM trust fund: (Section 215): 29.6; 
RMI grants: (Section 211): 27.7; 
RMI trust fund: (Section 216): 16.5; 
Kwajalein Impact: (Section 212)[A]: 18.0. 

Source: Pub. L. No. 108-188. 

Notes: 

Within both the FSM and the RMI annual grant amounts include $200,000 
to be provided directly by the Secretary of the Interior to the 
Department of Homeland Security, Federal Emergency Management Agency, 
for disaster, and emergency assistance purposes. The grant amounts do 
not include the annual audit grant, capped at $500,000 that will be 
provided to both countries. 

These dollar amounts shall be adjusted each fiscal year for inflation 
by the percentage that equals two-thirds of the percentage change in 
the U.S. gross domestic product implicit price deflator, or 5 percent, 
whichever is less in any one year, using the beginning of 2004 as a 
base. Grant funding can be fully adjusted for inflation after 2014, 
under certain U.S. inflation conditions. 

[A] "Kwajalein Impact" funding is provided to the RMI government, which 
in turn compensates Kwajalein Atoll landowners for U.S. access to the 
atoll for military purposes. 

[End of table] 

The amended compacts and fiscal procedures agreements require that 
grant funding be targeted to support the countries, in six defined 
sectors, with the following general objectives: 

* Education: Advance the quality of the basic education system. 

* Health: Support and improve the delivery of preventative, curative, 
and environmental care. 

* Environment: Increase environmental protection and engage in 
environmental infrastructure planning. 

* Public sector capacity building: Build effective, accountable, and 
transparent national, state (in the FSM), and local government and 
other public sector institutions and systems. 

* Private sector development: Attract foreign investment and increase 
indigenous business activity. 

* Infrastructure: Provide adequate public infrastructure, prioritizing 
primary and secondary education capital projects and projects that 
directly affect health and safety, with 5 percent dedicated to 
maintenance.[Footnote 29] 

The RMI must also target grant funding to Ebeye and other Marshallese 
communities within Kwajalein Atoll: $3.1 million annually for 2004 
through 2013 and $5.1 million annually for 2014 through 2023. In 
addition, $1.9 million is provided from annual grant funds to address 
special needs within Kwajalein Atoll, with emphasis on the Kwajalein 
landowners. Other funds are provided to the RMI government related to 
U.S. use of the atoll for military purposes. (See app. III for 
Kwajalein-related compact funding provisions.) 

Implementation Framework: 

Under the amended compacts and according to the fiscal procedures 
agreements, annual assistance for the six sectors in the FSM and the 
RMI is to be made available in accordance with an implementation 
framework with several components. Prior to the annual awarding of 
compact funds, the countries must submit development plans that 
identify goals and performance objectives for each sector. In addition, 
the countries must submit a budget for each sector that aligns with its 
development plan. The joint management and accountability committees 
for each country are to approve annual sector grants and, subsequent to 
the awards, evaluate sector management and progress. Finally, for each 
sector, the FSM and the RMI are to prepare quarterly financial and 
performance reports to serve as a mechanism for tracking progress 
against goals and objectives and monitoring performance and 
accountability. Figure 2 shows the amended compact implementation 
framework. 

Figure 2: Amended Compact Implementation Framework: 

[See PDF for image] - graphic text: 

Source: Pub. L. No. 108-188 and the subsidiary fiscal procedures 
agreements. 

Note: This figure does not list all of the compact or fiscal procedures 
agreements requirements. 

[End of figure] - graphic text: 

Country Development Plan: 

Both countries are to develop multiyear development plans that are 
strategic in nature and continuously reviewed and updated through the 
annual budget process and that address the assistance for the defined 
sectors.[Footnote 30] The plans are to identify how the countries will 
use compact funds to promote broad compact development goals such as 
economic advancement and budgetary self-reliance. The plans are also to 
identify goals and objectives for each sector. 

Annual Sector Grant Budget: 

In addition, through the annual budget process, the FSM and the RMI are 
to prepare annual sector grant budget proposals that are based on the 
development plans, including performance goals and indicators. U.S. 
officials are to evaluate the sector budget proposals each year to 
ensure that they are consistent with compact requirements and have the 
appropriate objectives and indicators and that the expenditures are 
adequate to achieve their stated purposes. Budget consultations between 
the governments are to take place regarding the sector proposals. 

Joint Management and Accountability Committees: 

JEMCO and JEMFAC--jointly established by the United States and, 
respectively, the FSM and the RMI--are to strengthen management and 
accountability and promote the effective use of compact funding. Each 
five-member committee comprises three representatives from the United 
States and two representatives from the country.[Footnote 31] JEMCO's 
and JEMFAC's designated roles and responsibilities include: 

* reviewing the budgeting and development plans from each of the 
governments; 

* approving grant allocations and performance objectives;[Footnote 32] 

* 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 FSM, the RMI, and the United States are required to provide the 
necessary staff support to their representatives on the committee to 
enable the parties "to monitor closely the use of assistance under the 
Compacts." 

FSM and RMI Grant Management: 

The FSM and the RMI are responsible for grant management, including 
managing and monitoring the day-to-day operations and financial 
administration of each sector. 

* Program monitoring. The FSM and RMI governments are to manage the 
sector and supplemental education grants and monitor day-to-day 
operations to ensure compliance with grant terms and conditions. 
Monitoring also is required to ensure the achievement of performance 
goals. The governments are to report quarterly to the United States, 
using a uniform format that includes: 

* a comparison of actual accomplishments to the objectives and 
indicators established for the period; 

* any positive events that accelerate performance outcomes; 

* any problems or issues encountered, reasons, and impact on grant 
activities and performance measures; and: 

* additional pertinent information, including, when appropriate, an 
analysis and explanation of cost overruns. 

In addition, the FSM and the RMI must annually report to the U.S. 
President on the use of U.S. grant assistance and other U.S. assistance 
provided during the prior fiscal year, and must also report on their 
progress in meeting program and economic goals. 

* Financial administration. The FSM and the RMI must adhere to specific 
fiscal control and accounting procedures. The fiscal procedures 
agreements state that the countries' financial management systems must 
meet several standards addressing financial reporting, accounting 
records, internal and budget controls, allowable cost, cash management, 
and source documentation. The systems must also specify applicable 
procedures regarding real property, equipment, and procurement. 
Quarterly financial reports are to be provided to the United States and 
used to monitor the (1) general budget and fiscal performance of the 
FSM and the RMI and (2) disbursement or outlay information for each 
sector grant. 

In addition, the FSM and the RMI are required to submit annual audit 
reports, within the meaning of the Single Audit Act as 
amended.[Footnote 33] According to the act, single audit reports are 
due within 9 months after the end of the audited period.[Footnote 34] 
Single audits are focused on recipients' internal controls over 
financial reporting and compliance with laws and regulations governing 
U.S. federal awardees. Single audits also provide key information about 
the federal grantee's financial management and reporting. A single 
audit report includes: 

* the auditor's opinion (or disclaimer of opinion, as appropriate) 
regarding whether the financial statements are presented fairly in all 
material respects in conformity with generally accepted accounting 
principles, and findings about the internal controls related to 
financial statements; 

* the entity's audited financial reporting; 

* the schedule of expenditures of federal awards and the auditor's 
report on the schedule; 

* the auditor's opinion (or disclaimer of opinion) regarding whether 
the auditee complied with the laws, regulations, and provisions of 
contracts and grant agreements (such as the compact), which could have 
a direct and material effect on each major federal program, as well as 
findings on internal controls related to federal programs; 

* a summary of findings and questioned costs for the federal program; 
and: 

* corrective action plans for findings identified for the current year 
as well as unresolved findings from prior fiscal years.[Footnote 35] 

U.S. Grant Administration: 

The United States is responsible under the fiscal procedures agreements 
for using the performance and financial reports to monitor, 
respectively, the countries' sector grant performance and their budget 
and fiscal performance. Also, U.S. officials are responsible for 
monitoring compliance with grant terms and conditions, including any 
special grant conditions. If problems are found in areas such as the 
monitoring of sector grants or a lack of compliance with grant terms, 
the United States may impose special conditions or restrictions, 
including requiring the acquisition of technical or management 
assistance, requiring additional reporting and monitoring, or 
withholding funds. 

Under the implementing legislation, the U.S. President is required to 
report annually to Congress on the use and effectiveness of U.S. 
assistance. The President's report also is to include an assessment of 
U.S. program and technical assistance provided to the countries and an 
evaluation of their economic conditions. 

According to federal policy implementing the Single Audit Act,[Footnote 
36] U.S. agencies may take actions regarding late audits to ensure that 
award recipients address audit findings contained in single audit 
reports. According to the grants management common rule, awarding 
agencies may issue a high-risk designation to grant recipients if 
single audits reveal substantial and pervasive problems.[Footnote 37] 

Compact Management Units: 

In addition to establishing the joint management and accountability 
committees, each of the three countries has designated units that are 
responsible for compact administration. 

* United States. OIA has responsibility for U.S. management and 
oversight of the FSM and RMI sector and supplemental education grants. 
OIA's Honolulu field office[Footnote 38] has four professional staff-- 
specialists in health, education, infrastructure, and financial 
management--who perform various activities, such as: 

* analyzing FSM and RMI budgets and required reports; 

* reviewing expenditures and performance with FSM and RMI government 
officials and conducting site visits; 

* providing briefings and advice to OIA, HHS, and State officials 
regarding progress and problems; 

* providing support for JEMCO and JEMFAC meetings; 

* monitoring the countries' compliance with grant terms and conditions; 
and: 

* withholding funds from the countries for noncompliance with 
requirements such as those expressed in the fiscal procedures 
agreements or in grant conditions (such remedies did not exist in the 
previous compact). 

* FSM. In 2005, the FSM established its Compact Management Board and 
OCM. The board consists of seven members: two FSM national government 
appointees, a member appointed by each state, and the head of OCM. The 
board is responsible for actions such as formulating guidelines for FSM 
JEMCO members and providing oversight of compact implementation, 
including conducting investigations to ensure compliance with all terms 
of the compact. OCM, which has five staff members, is principally 
responsible for daily communications with JEMCO and the United States 
regarding JEMCO and compact matters. OCM is expected to undertake 
various actions, such as visiting the FSM states, to monitor compliance 
with compact terms. 

* RMI. The RMI government identified the Office of the Chief Secretary 
as the official point of contact for all communication and 
correspondence with the U.S. government concerning compact sector grant 
assistance. Among the Chief Secretary's responsibilities are providing 
oversight management and monitoring of sector grants and activities and 
coordination. Its role is supported by the Economic Policy, Planning, 
and Statistics Office, which works with the ministries receiving grants 
to prepare the annual budget proposals; quarterly reports, including 
developing performance indicators; and annual monitoring and evaluation 
reports. The ministries conduct day-to-day oversight. 

Supplemental Education Grant: 

In addition to receiving compact sector grants, the FSM and the RMI are 
eligible for a Supplemental Education Grant (SEG). The amended 
compacts' implementing legislation authorized appropriations beginning 
in 2005 to the Secretary of Education to supplement the education 
grants under the amended compacts. The SEG is awarded in place of grant 
assistance formerly awarded to the countries under several U.S. 
education, health, and labor programs.[Footnote 39] Under the fiscal 
procedures agreements, SEG funds are to be used to support "direct 
educational services at the local school level focused on school 
readiness, early childhood education, primary and secondary education, 
vocational training, adult and family literacy, and the smooth 
transition of students from high school to postsecondary educational 
pursuits or rewarding career endeavors." Funding for the SEG is 
appropriated to a Department of Education account and transferred to an 
Interior account for disbursement, with Interior responsible for 
ensuring that the use, administration, and monitoring of SEG funds are 
in accordance with a memorandum of agreement among the Departments of 
Education, HHS, Labor, and the Interior as well as with the fiscal 
procedures agreements. The U.S. appointees to JEMCO and JEMFAC are 
required by the compacts' implementing legislation to "consult with the 
Secretary of Education regarding the objectives, use, and monitoring of 
United States financial, program, and technical assistance made 
available for educational purposes." JEMCO and JEMFAC are responsible 
for approving the SEG grants annually.[Footnote 40] 

Compact Grants Targeted Infrastructure, Education, and Health, but 
Various Issues Constrained Countries' Use of Funds: 

JEMCO and JEMFAC approved allocations of compact grants primarily to 
the infrastructure, education, and health sectors. The FSM and the RMI 
also both received a new SEG, meant to support the goals and objectives 
in the education sector development plans. However, the countries' use 
of compact funds has been limited by several factors, including delays 
in implementing infrastructure projects in the FSM and ongoing land use 
disputes with RMI landowners on both Majuro and Kwajalein. In addition, 
neither country has planned for the scheduled annual decrements in 
compact funding, and the FSM has not undertaken local needs assessments 
to target funds. 

Compact Funding Allocation in the FSM: 

The three largest FSM sectors--education, infrastructure, and health-- 
accounted for almost 85 percent of the compact sector grant allocations 
in 2006. Of this total, education funding represented 33 percent; 
infrastructure represented 31 percent, up from 23 percent in 2004; 
and health represented 21 percent. The other three sectors--public 
sector capacity building, private sector development, and the 
environment-- together accounted for less than 20 percent of the FSM's 
compact funding in 2006. Figure 3 shows the FSM sector grant 
allocations for 2004 through 2006. (See app. IV for a breakout of 
compact funding, by FSM state.) 

Figure 3: FSM Sector Grant Allocation, 2004 through 2006: 

[See PDF for image] - graphic text: 

Source: GAO analysis of FSM fiscal years 2004 through 2006 sector grant 
agreements. 

Note: SEG funds, which started in 2005, are not included in these 
amounts. Additionally, in cases where funds were unspent and 
deobligated in one fiscal year, and reobligated in a subsequent fiscal 
year, we included the funds only in the fiscal year in which they were 
initially obligated. 

[End of figure] - graphic text: 

In general, the funds allocated for each sector were used as follows: 

* Education. JEMCO approved allocations for the education sector 
amounting to $79 million, or 34 percent of compact funds in 2004 
through 2006. U.S. assistance is the main source of revenue for the FSM 
education system. At the FSM national government level, compact funding 
supports, among other things, the College of Micronesia, the 
development of national education standards, the national standardized 
testing program, and the college admissions test. At the state level, 
the funding is principally targeted to primary and secondary education. 
Compact funding levels vary among the FSM states, with Chuuk receiving 
the least funding per student (approximately $500) and Yap receiving 
the most (approximately $1,300). The difference in the funding levels 
for these two states is directly reflected in student-to-teacher 
ratios, with Chuuk having a higher student-to-teacher ratio (19:1) than 
Yap (8:1). Overall, we found the condition of school facilities and the 
adequacy of their supplies and equipment to be poorer in Chuuk than in 
the other FSM states. The FSM is making efforts to improve teacher 
qualifications through a grant from Education. Despite some progress, 
FSM educational outcomes remain poor. For example, according to an 
official from the FSM's Department of Health, Education, and Social 
Affairs, graduates of FSM high schools often are not qualified to take 
college-level courses. 

* Health. JEMCO approved allocations amounting to $49 million, or 21 
percent of compact funds in 2004 through 2006, for health care 
activities such as medical and nursing services, dispensary services, 
and public health services. According to health officials in Chuuk and 
Pohnpei, funding under the amended compact provided for increased 
budgets for pharmaceuticals and supplies. However, a 2005 FSM 
Department of Health, Education, and Social Affairs assessment of 
primary care reported that most facilities lacked an appropriate range 
and quantity of medicine and supplies in each of the four FSM states. 
We found that each of the states' hospitals and primary care facilities 
lacked some or all of the following: maintenance, adequately trained 
staff, functional equipment, and medical and pharmaceutical supplies. 
In addition, health sector allocations varied considerably across the 
four FSM state governments. For example, in 2006 Yap received more than 
twice as much health sector funding per person as Chuuk. During our 
site visits, we observed that Chuuk's hospital and primary care 
facilities were in the poorest condition of the four states' 
facilities. 

* Infrastructure. JEMCO approved allocations amounting to $58.7 
million, or 25 percent of compact funds in 2004 through 2006, to 
infrastructure. However, the FSM's allocation of funds for 2004 and 
2005 did not meet the recommendation in the compact's implementing 
legislation, which stated that it was the sense of Congress that not 
less than 30 percent of annual compact sector grant assistance should 
be invested in infrastructure. In addition, the FSM has not completed 
any infrastructure projects. As of November 2006, OIA had approved 14 
of the FSM's priority projects, including several schools, a wastewater 
treatment facility, power and water distribution systems, and road and 
airport improvements. However, construction on these projects had not 
begun. Furthermore, according to an OIA official, the FSM had not met a 
compact requirement to establish and fund an infrastructure maintenance 
fund. 

* Public sector capacity building. JEMCO approved allocations for 
public sector capacity building amounting to $25.6 million, or 11 
percent of compact funding in 2004 through 2006. About 12 percent of 
these funds supported the operations of the public auditors' offices in 
three of the four states and the FSM national government. OIA found 
that this use of the funds met the grant's purpose. However, according 
to OIA, most of the remaining funds were to be used to support basic 
government operations, rather than for the grant's intended purpose of 
developing the internal expertise needed to build an effective, 
accountable, and transparent government. In 2004, JEMCO required that 
the FSM develop a plan to eliminate funding for such nonconforming 
purposes by 2009. The FSM submitted a plan to OIA that illustrates an 
annual reduction of such funding, but the plan does not detail how the 
nonconforming activities, such as those supporting public safety and 
the judiciary, will otherwise be funded. FSM officials told us that 
they plan to replace capacity-building funds in part with local monies. 
However, recent tax revenues have largely stagnated despite some 
improvements.[Footnote 41] 

* Private sector development. JEMCO approved private sector allocations 
amounting to $10.2 million, or 5 percent of compact funding in 2004 
through 2006. These funds supported more than 38 different offices 
throughout the FSM--including visitor bureaus, land management offices, 
and marine and agriculture departments--and economic development and 
foreign investment activities. 

* Environment. JEMCO approved allocations for the environment amounting 
to $6.6 million, or 3 percent of compact funding in 2004 through 2006. 
These funds supported 21 offices throughout the four states and the FSM 
national government, including offices responsible for environmental 
protection, marine conservation, forestry, historic preservation, 
public works, and solid waste management. 

In addition to receiving compact sector funding, the FSM education 
sector also received $24 million in SEG funds in 2005 and 
2006.[Footnote 42] However, 

SEG funding was "off cycle"[Footnote 43] in both years. As a result, 
according to Interior, the FSM did not receive its 2005 SEG funding 
until October 2005 and did not receive its 2006 SEG funding until 
September 2006, near the end of each fiscal year. In Chuuk and Pohnpei, 
SEG funding mainly supported early childhood education, while in Yap 
and Kosrae, the largest portion of SEG funding went to school 
improvement projects that provided supplemental instructional services, 
such as after-school tutoring and professional development programs. 
The SEG funding also supported vocational training, skills training, 
and staff development. In addition, the FSM national government 
received some SEG funding for monitoring, coordination, technical 
assistance, and research. The College of Micronesia received SEG funds 
for financial aid for students and for training students to be teachers 
through the teacher corps. 

Compact Funding Allocation in the RMI: 

The three largest RMI sectors--infrastructure, education, and health-- 
accounted for 92 percent of the compact sector grant allocations in 
2006. Infrastructure received approximately 40 percent of the funding 
between 2004 and 2006, while education received approximately 33 
percent and health received approximately 20 percent. Funding was also 
allocated for Ebeye special needs; however, only a small portion had 
been expended as of August 2006. As in the FSM, public sector capacity 
building, private sector development, and the environment received the 
least compact funding, totaling less than 4 percent between 2004 and 
2006. Figure 4 shows the sector grant allocations for the RMI for 2004 
through 2006. (See app. IV for a breakout of compact funding, by RMI 
sector grants.) 

Figure 4: RMI Sector Grant Allocation, 2004 through 2006: 

[See PDF for image] - graphic text: 

Source: GAO analysis of RMI fiscal years 2004 through 2006 sector grant 
agreements. 

Note: SEG funds, which started in 2005, are not included in these 
amounts. In cases where funds were unspent and deobligated in one 
fiscal year, and reobligated in a subsequent fiscal year, we included 
the funds only in the fiscal year in which they were initially 
obligated. In 2006, the special needs grant to Ebeye for the first time 
consolidated amounts provided to Ebeye across the other sectors. In 
this figure, these amounts are included in the other sector allocations 
for consistency. 

[End of figure] - graphic text: 

* Education. JEMFAC approved allocations for the education sector 
amounting to $34.2 million, or 33 percent of compact funds in 2004 
through 2006. These funds have primarily supported the operations of 
the primary and secondary schools, providing approximately $800 per 
student annually. In addition, compact education funding has supported 
the National Scholarship Board and the College of Marshall Islands. 
Furthermore, some 2004 through 2006 funding was designated specifically 
for Ebeye's schools. The quality of school facilities varies widely in 
the RMI. Although new classrooms were built with infrastructure funds, 
we found that many existing classrooms remained in poor condition. For 
example, in several Marshall Island High School classrooms, ceilings 
had fallen in, making the classrooms too dangerous to use. The RMI is 
making efforts to improve teacher qualifications through a grant from 
Education. However, although improved educational outcomes is a compact 
priority, standardized test scores show that RMI educational outcomes 
remain poor. Moreover, according to the College of the Marshall 
Islands, graduates of RMI high schools often are not qualified to take 
college-level courses. 

* Health. JEMFAC approved allocations amounting to $20.6 million, or 20 
percent of compact funds in 2004 through 2006, for health care 
activities such as medical and nursing services, dispensary services, 
and public health services. A large portion of this funding was 
allocated to hospital service improvements, such as hiring additional 
staff, providing specialized training for doctors and nurses, and 
purchasing equipment in both Majuro and Ebeye. 

* Infrastructure. JEMFAC approved allocations amounting to $41.7 
million, or 40 percent of compact funds in 2004 through 2006, for 
infrastructure--thereby meeting the RMI compact requirement to allocate 
at least 30 percent, and not more than 50 percent, of annual compact 
sector grant assistance funds to this sector. Furthermore, the RMI 
undertook and completed several infrastructure projects and established 
and funded an infrastructure maintenance fund, as required. From 
October 2003 to July 2006, 9 new construction projects and 17 
maintenance projects in the RMI either were completed or were under 
way. All of the new projects were schools where there was a clear title 
or an existing long-term lease for the land.[Footnote 44] 

* Environment, private sector development, and public sector capacity 
building. JEMFAC approved allocations of $2.6 million, or 3 percent of 
compact funds in 2004 through 2006, for these three sectors. This 
funding supported four entities, including the Environmental Protection 
Authority; the Land Registration Authority; the Office of the Auditor 
General; and Ministry of Resources and Development, which comprises the 
Small Business Development Council and the Marshall Islands Visitors' 
Authority. The RMI's Chief Secretary indicated during our meeting in 
March that the RMI would no longer seek compact funds for activities in 
these sectors and would instead focus all compact resources on 
education, health, and infrastructure. 

* Ebeye. JEMFAC approved allocations amounting to $5.8 million, or 
almost 6 percent[Footnote 45] of all compact funds in 2004 through 
2006, for Ebeye special needs. However, because OIA obligated none of 
these funds for Ebeye during 2004 and 2005, JEMFAC approved the 
reallocation of the entire amount in 2006. According to OIA, 
approximately $500,000 has been used to pay for utility costs for 
certain Ebeye residents,[Footnote 46] while another $500,000 has been 
used to support utility operations. 

In addition to receiving compact sector funding, the RMI also received 
$12 million in SEG funding for 2005 and 2006.[Footnote 47] However, 
because SEG funding was off cycle in both 2005 and 2006, according to 
OIA, the RMI did not receive its 2005 SEG until August 2005 and its 
2006 SEG until September 2006, near the end of each fiscal 
year.[Footnote 48] The SEG mainly supported early childhood education 
but also supported activities at other education levels, including the 
purchasing of textbooks and supplies; supporting foreign volunteer 
teachers and substitute teachers; and funding the National Vocational 
Training Institute, which is an alternative to the mainstream high 
schools. 

Several Factors Have Limited Countries' Use of Compact Funds: 

Political factors and land use issues have hindered compact 
implementation in the FSM and the RMI. 

* Political factors. 

* In the FSM, although $58.7 million had been allocated for 
infrastructure as of September 2006, no infrastructure projects were 
built because of, among other issues, a lack of internal agreement 
among the five FSM governments regarding project implementation and the 
governments' inability to demonstrate how the funding will be managed 
in a unified and comprehensive method. For example, one FSM state 
governor told us that he had refused to meet with the FSM national 
government's project management unit because he so strongly disagreed 
with the unit's management process. Such disagreements led to delays in 
the national government's implementation of its project management 
unit, and, according to OIA officials, significant challenges remain 
with respect to implementing the unit. 

* In the RMI, the government and landowners on Kwajalein Atoll 
disagreed about the management of the entity designated to use the 
compact funds set aside for Ebeye special needs, with an emphasis on 
the needs of Kwajalein landowners. This entity, the Kwajalein Atoll 
Development Authority (KADA), had had problems accounting for and 
effectively and efficiently using funds; moreover, according to the 
RMI's Chief Secretary, the RMI government developed a restructuring 
plan for the authority but the plan was not fully implemented. 
Moreover, Kwajalein landowners disputed the composition of the KADA 
board and its role in distributing these funds. As a result, as of 
September 2006, only approximately $1.0 million of the $5.8 million 
allocated for Ebeye special needs had been released for the community's 
benefit. 

* Land use issues. 

* In the FSM, project implementation in Chuuk was hindered by the 
state's inability to secure leases due to the lack of clear title, 
established fair market values, and local revenues to pay for land 
leases.[Footnote 49] Because of a lack of established fair market 
values, using compact funding for land lease or purchase under the 
original compact may have led to unreasonably high payment. A recent 
study[Footnote 50] of land valuation practices in Chuuk found sales of 
comparable land in Weno, the state's capital, ranging from $5 per 
square meter to $1,704 per square meter, with the higher payment 
associated with lease agreements paid for by the compact funding. 

* In the RMI, land disputes prevented construction of the Uliga 
Elementary School on Majuro, the country's main atoll, while another 
project site on Majuro was abandoned because a lease agreement could 
not be concluded with the landowner. On Kwajalein Atoll, construction 
of Kwajalein Atoll High School was delayed because of the inability of 
the RMI government to secure a long-term lease from Kwajalein 
landowners for a site large enough to accommodate new facilities for up 
to 600 students. Similar problems delayed construction of Ebeye 
Elementary School. RMI projects were built where the land titles were 
clear and long-term leases were available. However, future RMI 
infrastructure projects may be delayed because of uncertainty regarding 
the land titles for remaining projects. 

Lack of FSM and RMI Planning for Decrement Threatens Sustainability of 
Government Services: 

The FSM and the RMI lack concrete plans for addressing the annual 
decrement in compact funding and, as a result of revenue shortfalls, 
will likely be unable to sustain current levels of government services 
as compact funding diminishes. In both countries, compact funding 
represents a significant portion of the government revenue-- 
approximately 38 percent in the FSM[Footnote 51] and 27 percent in the 
RMI, according to the 2005 single audits. Personnel expenses account 
for a substantial share of compact funding expenditures. For example, 
57 percent of the education sector grant in the FSM and 75 percent of 
the grant in the RMI paid for personnel in 2006. Over the past 5 years, 
government employment has grown in both countries:[Footnote 52] in the 
FSM, the public sector employment level has varied since 2000 but 
peaked for this period in 2005, while in the RMI, the government wage 
bill rose from $17 million in 2000 to $30 million in 2005. Given the 
countries' current levels of spending on government services, the 
decrement--$800,000 per year for the FSM, beginning in 2007, and 
$500,000 per year for the RMI since 2005--will result in revenue 
shortfalls in both countries, absent additional sources of revenue. In 
addition, in the FSM, cessation of nonconforming uses of the public 
sector capacity building grant will require government operations 
currently supported by compact funds to rely on a different revenue 
source. 

Officials in the FSM and the RMI told us that they can compensate for 
the decrement in various ways, such as through the yearly partial 
adjustment for inflation, provided for in the amended 
compacts,[Footnote 53] or through improved tax collection. However, the 
partial nature of the adjustment causes the value of the grant to fall 
in real terms, independent of the decrement, thereby reducing the 
government's ability to pay over time for imports, such as energy, 
pharmaceutical products, and medical equipment. Moreover, as we 
recently reported,[Footnote 54] although tax reform may provide 
opportunities for increasing annual government revenue in the FSM and 
the RMI, the International Monetary Fund, the Asian Development Bank, 
and other economic experts consider both nations' business tax schemes 
to be inefficient because of a poor incentive structure and weak tax 
collection. In the FSM's and the RMI's response to our draft report, 
both countries raised the possibility that the decrement's negative 
effect might be addressed during the periodic bilateral review, which 
is called for every 5 years, under the compact. 

FSM Sector Fund Allocation Was Not Based on Population or Informed by 
State Needs: 

The FSM distributed compact funding among its four states according to 
a formula that did not fully account for states' differing population 
sizes or funding needs. The formula, established in an FSM law enacted 
in January 2005 and in force through 2006, allotted a set percentage to 
each state as well as 8.65 percent to the national government.[Footnote 
55] Use of the distribution formula resulted in varying per capita 
compact funding among the states (see table 2). For example, we 
calculated that in 2006, Yap received more than twice as much education 
funding per student and health care funding per person as Chuuk. 

Table 2: Distribution of Compact Funds to FSM States and States' 
Percentages of FSM Population, 2006: 

FSM state: Chuuk; 
Percentage of compact funds allotted to state: 42%; 
Percentage of FSM population in state (estimated): 50%. 

FSM state: Kosrae; 
Percentage of compact funds allotted to state: 12; 
Percentage of FSM population in state (estimated): 7. 

FSM state: Pohnpei; 
Percentage of compact funds allotted to state: 28; 
Percentage of FSM population in state (estimated): 32. 

FSM state: Yap; 
Percentage of compact funds allotted to state: 18; 
Percentage of FSM population in state (estimated): 11. 

FSM state: Total; 
Percentage of compact funds allotted to state: 100%; 
Percentage of FSM population in state (estimated): 100%. 

Source: GAO analysis of FSM Public Law 13-93 and the Federated States 
of Micronesia: Fiscal Year 2005 Economic Review. 

Note: The FSM public law distributes 8.65 percent of total compact 
funding to the FSM national government, which leaves 91.35 percent of 
compact funds available to the states. To compare the distribution of 
funds with the distribution of population among the four FSM states, we 
subtracted the funding allocated to the FSM national government from 
the total distributed. Expenditures by the national government, such as 
support for the College of Micronesia, benefit the economies of all the 
states but provide greater benefits to Pohnpei, which contains the 
largest of the college campuses and the FSM capitol. 

[End of table] 

Both the FSM government and U.S. officials acknowledged that the 
funding inequality resulted in different levels of government services 
across states, with particularly low levels of services in Chuuk. For 
example, an FSM health official told us that Chuuk's low immunization 
rate is a result of low per-capita health funding, and, according to a 
U.S. health official, HHS immunization staff see Chuuk as vulnerable. 
However, as of October 2006, neither the FSM nor JEMCO had assessed the 
impact of such differences on the country's ability to meet national 
goals or deliver services. 

FSM and RMI Have Limited Ability to Measure Progress toward Compact 
Goals: 

Although the FSM and the RMI established performance measurement 
mechanisms, several factors limited the countries' ability to assess 
progress toward compact goals. The FSM and the RMI development plans 
contain sector goals and objectives, and the countries are collecting 
performance indicators for health and education. However, neither 
country can assess progress using these indicators because of 
incomplete and poor quality data. Moreover, problems in the countries' 
quarterly performance reports--disorganized structure in the FSM 
reports as well as incomplete and inaccurate information in both the 
FSM and the RMI reports--limit their usefulness for tracking 
performance. A lack of technical capacity also challenges the 
countries' ability to collect performance data and measure progress. 

Countries Established Mechanisms for Measuring Performance, but Data 
Shortcomings Limit Ability to Assess Progress toward Goals: 

Both countries established development plans that include strategic 
goals and objectives for the sectors receiving compact funds.These 
strategic goals are broad--for example, both countries list improving 
primary health care as a strategic goal. In addition, the development 
plans list various objectives related to each strategic goal. For 
example, in the FSM, the objectives related to improving primary health 
care include (1) increasing by 20 percent the use of basic primary 
health care services provided at dispensaries and health centers and 
(2) decreasing by 50 percent the use of primary health care services 
provided at hospital outpatient clinics. According to OIA, outcome 
measures for some sectors in the FSM were inappropriate, absent, or 
poorly defined. The RMI health sector's complex performance hierarchy 
and lack of readily available baselines for many measures initially 
made it difficult for the Ministry of Health to collect data. In 2004, 
JEMCO and JEMFAC required the countries to submit a streamlined and 
refined statement of performance measures, baseline data, and annual 
targets to enable the tracking of goals and objectives for education, 
the environment, health, private sector development and in public 
sector capacity building.[Footnote 56] The countries have developed 
some performance indicators that are intended to help demonstrate 
progress in education and health, as required by JEMCO and JEMFAC, but 
have not done so for the other sectors. In 2006, JEMFAC also required 
the RMI to include in its reports six performance indicators for the 
environmental sector and two performance indicators for private sector 
development.[Footnote 57] 

The FSM and the RMI ministries have begun to collect performance 
indicators for the education and health sectors, as required by JEMCO 
and JEMFAC. However, the ministries are not yet able to assess progress 
with the indicators, because baseline data for some indicators were 
incomplete and the quality of some data was poor. 

FSM Performance Indicators: 

* Education sector. As required by JEMCO, in 2005, the FSM began 
submitting data for 20 indicators to gauge progress in the education 
sector. In 2005, the FSM submitted some data for 11 of the 20 required 
education performance indicators. In 2006, it submitted some data for 
all of the 20 indicators, with data for 5 indicators being incomplete 
because some states did not submit them. For example, none of the 
states submitted data for the number and percentage of high school 
graduates going to college. Chuuk and Yap did not provide the required 
average daily student attendance rate, and Kosrae, Pohnpei, and Yap did 
not provide data to establish a baseline for dropout rates. 
Furthermore, we found some of the data submitted to be of questionable 
quality. For example, Chuuk's 2006 submission of data for the 20 
indicators indicated a dropout rate of less than 1 percent. However, 
according to an expert familiar with the Chuuk education system, the 
actual dropout rate was much higher. Moreover, when comparing the 2005 
and 2006 submissions, we identified possible problems with some of the 
most basic data, such as the number of teachers, students, and schools, 
due to inconsistent definitions of the indicators. For example, the 
student enrollment figure reported in 2006 was for public schools only, 
but the figure submitted in 2005 included both public and private 
schools, according to an FSM education official. Likewise, reporting on 
the number of teachers in the school system differed among states. For 
example, Chuuk reported only the number of teachers, while the other 
states also included nonteaching staff. 

* Health sector. FSM state and national health directors agreed on 14 
health indicators in April 2006 as a means to gauge progress. The FSM 
national government and all four states are collecting data for 9 of 
the 14 indicators, while data for the other 5 indicators have yet to be 
collected. According to the FSM national government, delays in 
collecting data for some indicators resulted from the time required to 
establish a common methodology--that is, definitions and processes-- 
among all of the states and governments. Furthermore, we found that 
some of the health data collected were ambiguous and therefore 
difficult to use. For example, it was unclear whether reports on data 
from Yap's outer islands relating to 1 of the 14 health indicators, the 
number of dispensary encounters, covered 1 or 2 months; 
according to a Yap health official, data for this indicator may be 
incomplete. Likewise, OIA's health grant manager indicated that there 
are weaknesses in the FSM's health data. 

RMI Performance Indicators: 

* Education sector. As required by JEMFAC in 2005, the RMI started 
tracking some of the 20 indicators as a way to gauge progress in the 
education sector. The RMI submitted data for 15 of the 20 required 
education performance indicators in 2005, repeating the submission in 
2006 without updating the data, according to an OIA official. JEMFAC 
required the RMI to submit data for the 5 indicators omitted in 2005-- 
including staff education levels and parent involvement--but did not 
receive them. In addition, some of the information reported was 
outdated. For example, the 2005 submission of data for an indicator on 
student proficiency was based on a test given in the RMI in 2002. 

* Health sector. The RMI's Ministry of Health began identifying 
performance indicators when the amended compact entered into force in 
2004. Initially, the ministry developed numerous indicators, which, 
according to an OIA official, threatened to overwhelm the ministry's 
capacity for data collection and management. The ministry has since 
made refinements and reduced the number of indicators to a more 
manageable size. However, according to an RMI government report for 
2005,[Footnote 58] it is difficult to compare the ministry's 2004 and 
2005 performances because of gaps in the data reported. For example, 
limited data were available in 2004 for the outer island health care 
system and Kwajalein Atoll Health Services. According to the RMI 
government report, data collection improved and most needed data were 
available, but some data were still missing. 

Shortcomings in Performance Reports Limit Usefulness for Tracking 
Progress: 

Although the FSM and the RMI began compiling quarterly performance 
reports beginning in 2004, as required by the fiscal procedures 
agreements, the usefulness of the reports for assessing progress toward 
sector goals is limited by several factors. First, the FSM's reports 
had format problems, such as a lack of uniform structure, and some FSM 
reports were missing. Second, both countries' reports contained 
incomplete activity-level information. Third, in both countries' 
reports, some activity-level information, such as budget and 
expenditure data, were inaccurate. 

* Problematic format. The usefulness of the FSM quarterly performance 
reports is diminished by a lack of uniform structure, excessive length, 
and disorganization. In addition, some FSM reports were missing. The 
five FSM governments' quarterly 2005 performance reports that we 
reviewed lacked the uniform structure required by the fiscal procedures 
agreement. For example, while Kosrae combined sector and activities 
into one report, Pohnpei reported on each activity separately. 
Moreover, the volume of reporting was excessive. For example, the 2005 
fourth- quarter reports for the FSM education sector totaled more than 
600 pages for all five governments' quarterly submissions and more than 
1,500 pages for the entire year. The reports were also disorganized. 
For example, we found misfiled reports in the FSM's submission to OIA. 
We also found that 19 sector reports were missing in 2005. Noting 
shortcomings similar to those we observed, officials from OIA and the 
FSM stated that the performance reports could not be used as an 
effective management tool. 

In contrast, the RMI reports were uniformly formatted, as specified by 
the fiscal procedures agreement, and all required reports were 
submitted to OIA. 

* Incomplete information. Both countries' quarterly reports lacked 
complete information on program activities. For example, for 2005, the 
FSM national government's second-quarter health sector report lacked 
information on the environmental health and food safety programs 
(although its other quarterly reports included such information), and 
Pohnpei's first-quarter health sector report lacked information on 28 
of 31 activities. In the fourth quarter of 2005, Kosrae did not provide 
budgetary and expenditure information regarding the provision of 
education and support services to individuals with disabilities. 

The RMI's statistics office gathered information from the RMI's 2005 
quarterly performance reports, which contained primarily activity- 
level information, and attempted to assess progress in the various 
sectors. However, because of weaknesses in information collected in 
2004, including missing information for some activities for entire 
quarters, the RMI had difficulty in making comparisons and determining 
whether progress was being made in many of its sectors. 

* Inaccurate information. Both the FSM's and the RMI's quarterly 
performance reports contained inaccurate information on program 
activities. We found that the performance reports for the five FSM 
governments did not accurately track or report annual activity budgets 
or expenditures. For example, a 2005 Pohnpei education performance 
report stated that more than $100,000 per quarter was allocated to pay 
the salaries of two cultural studies teachers. The state's Department 
of Education could not explain the high salary figure[Footnote 59] but 
indicated that the number was incorrect. According to FSM officials in 
the departments we visited, the departments were not given an 
opportunity to review the budget and expenditure data before the 
performance reports were sent to OCM and OIA and were therefore unaware 
of the errors. 

Some of the RMI's quarterly performance reports also contained 
inaccuracies. For example, although the RMI's private sector 
development performance report for the fourth quarter of 2005 stated 
that eight new businesses were created in 2005, officials from the 
Ministry of Resources and Development indicated that only four 
businesses were started that year. In addition, the RMI Ministry of 
Health's 2005 fourth-quarter report contained incorrect outpatient 
numbers for the first three quarters, according to a hospital 
administrator in Majuro. In the RMI quarterly reports for the education 
sector, we found several errors in basic statistics, such as the number 
of students attending school. In addition, RMI Ministry of Education 
officials and officials in the other sectors[Footnote 60] told us that 
they had not been given the opportunity to review final performance 
reports compiled by the statistics office before the reports' 
submission to OIA, and that they were unaware of the errors until we 
pointed them out. 

FSM and RMI Lack Capacity to Collect, Assemble, and Analyze Data to 
Assess Progress: 

The FSM's ability to measure progress is limited by its lack of 
capacity to collect, assemble, and analyze performance data. According 
to OIA, the education sector currently lacks a reliable system for the 
regular and systematic collection and dissemination of information and 
data. An OCM official also stated that the lack of performance baseline 
data for the private sector development and environment sectors could 
be attributable to "weak capacity in performance budgeting and 
reporting" and that staff lack expertise in one or both areas. 

The RMI statistics office, which is the main entity tasked to collect 
data, indicated that it is not currently able to assess progress toward 
compact and development plan goals because of the government's lack of 
capacity to collect, assemble, and analyze data in all sectors. 
Likewise, the office's own capacity is limited. Officials from the 
office emphasized the importance of building capacity in the ministries 
to evaluate their activities. In particular, they said that 
improvements in data collection would enable ministries to respond 
quickly to requests for information from both national and 
international sources. For example, the officials noted that the 
Ministry of Education needs to develop measures to report on the 
quality of education. The officials also noted that other offices in 
the ministry should hire more trained professionals, such as the 
recently hired Assistant Secretary of Administration with a graduate 
degree in public administration. 

FSM and RMI Provided Limited Monitoring of Grant Operations, and FSM 
Accountability for Compact Funds Faced Challenges: 

The FSM's and the RMI's required monitoring of sector grant performance 
was limited by capacity constraints, among other challenges. In 
addition, the countries' single audit reports for 2004 and 2005, 
particularly the FSM's reports, indicated weaknesses in the countries' 
financial statements and compliance with the requirements of major 
federal programs, calling into question their accountability for the 
use of compact funds. However, the FSM's timeliness in submitting its 
single audit reports improved from 2004 to 2005, and the RMI submitted 
its single audit reports for these 2 years on time.[Footnote 61] 

FSM Provided Limited Monitoring and Accountability for Use of Compact 
Funds: 

The FSM's monitoring of sector grant performance, required by the 
fiscal procedures agreement, was limited at the national and state 
levels by lack of capacity in the FSM's OCM and in the state 
governments, among other factors. In addition, the FSM's single audit 
reports for 2004 and 2005 showed weaknesses in its financial statements 
and a lack of compliance with requirements of major federal programs, 
suggesting that the FSM has limited ability to account for the use of 
compact funds. However, the government's timeliness in submitting its 
audit reports improved. 

FSM Monitoring: 

The FSM national government provided limited monitoring of the day-to- 
day operations of sector grants in 2004 through 2006. In addition to 
facilitating coordination and communication between the national 
government and the states and between the FSM and OIA, OCM is intended 
to have some responsibility for overseeing compact-funded programs. 
However, according to the office's director, OCM has neither the staff 
nor the budget to undertake such activities. As of November 2006, OCM 
had five of its own professional staff, including the director. Prior 
to 2007, staff from other FSM national departments were assigned to the 
office, but only the economic affairs and finance departments provided 
detailees. One staff was converted to a permanent hire in OCM and it is 
unclear if the other detailee will remain at OCM or return to the 
Office of Economic Affairs. The FSM Office of the National Public 
Auditor had not conducted any performance or financial audits of 
compact sector grants.[Footnote 62] 

The FSM states, as subgrantees of compact funds, are required to submit 
performance reports to the FSM national government. However, the 
Director of OCM indicated that he did not know how or whether each 
state, other than Chuuk, was set up to perform day-to-day monitoring of 
sector grants. In Chuuk, a financial control commission was established 
in July 2005 to address financial management and accountability 
requirements. However, while the commission had exercised a financial 
control function, it had not monitored the performance of the sector 
grants. In addition, the FSM's Secretary of Foreign Affairs and JEMCO 
representative told us that all of the states were weak on monitoring. 
Although the states' public auditors could conduct audits of compact 
performance, their efforts had been limited to financial audits. For 
example, in both Yap and Pohnpei, the public auditor's office issued 
four audits in 2005, two of which were for compact-funded activities. 
Furthermore, in Chuuk, the public auditor position required by the 
state constitution was not filled, prompting JEMCO to deny the Chuuk 
auditor's office state-budgeted funds. 

FSM Accountability: 

The FSM's single audit reports for 2004 and 2005 showed that the FSM's 
ability to account for the use of compact funds was limited, as shown 
by weaknesses in its financial statements and lack of compliance with 
requirements of major federal programs. However, the FSM's timeliness 
in submitting its audit reports improved during this period. 

* FSM financial statements. In general, the FSM single audit reports 
call into question the reliability of the country's financial 
statements. Of the single audit reports that the FSM national and state 
governments submitted for 2004 and 2005, only one report--Pohnpei 
state's report for 2005--contained an unqualified opinion on the 
financial statements, while the other reports contained qualified, 
adverse, or disclaimed opinions.[Footnote 63] (See app. V for the FSM's 
single audit financial statement opinions.) For example, for the FSM 
2005 reports, the auditors' inability to obtain audited financial 
statements for several subgrantees led them in part to render qualified 
opinions. Chuuk reports for 2004 and 2005 contained disclaimers of 
opinion related to seven and eight major issues, respectively, 
including the inability of auditors to determine the propriety of 
government expenses, fixed assets, cash, and receivables; the capital 
assets of one of its subunits; and the accounts payable and expenses of 
the Chuuk State Health Care Plan. In addition, the single audit reports 
include specific findings related to the financial statements. For 
example, the national and state governments' 2005 single audit reports 
contained 57 reportable findings of material weaknesses and reportable 
conditions[Footnote 64] in the governments' financial statements, such 
as the lack of sufficient documentation for (1) the disposal of fixed 
assets, including a two-story building, and (2) purchases of vehicles 
and copiers. Fourteen of the FSM 2005 findings had been cited as 
reportable findings in previous audits. 

* FSM compliance with requirements of major federal programs. Each of 
the FSM national and state governments' single audit reports for 2004 
and 2005 contained qualified opinions on the governments' compliance 
with requirements of major federal programs, and the 2004 and 2005 
reports noted 47 and 45, respectively, total reported weaknesses, on 
compliance. (App. V shows the FSM single audit reports' total numbers 
of material weaknesses and reportable conditions regarding compliance 
with requirements of major federal programs.) Four of the 2005 reports' 
45 findings recurred from the 2004 reports. In 2006, the FSM developed 
corrective action plans that addressed 60 percent of the 2005 audit 
findings of noncompliance. 

* Timeliness of audits. The timeliness of the FSM national and state 
governments' submission of single audits reports improved from 2004 to 
2005. The national government submitted its 2004 and 2005 single audits 
in August and September 2006, 14 and 2 months, respectively, after the 
due dates. While the four FSM states submitted their 2004 single audits 
from 7 to 13 months after the due dates, three of the four states 
submitted their 2005 audits within the 9-month period allowed by OIA. 

RMI Monitoring Was Limited, but Accountability Improved: 

The RMI government provided limited monitoring of sector grants, in 
part because of the lack of capacity in the Chief Secretary's office 
and in most ministries that receive compact funds. The RMI's single 
audit reports for 2004 and 2005 indicated weaknesses in its financial 
statements and compliance with requirements of major federal programs. 
However, the government developed corrective action plans to address 
the 2005 findings related to such compliance. The RMI government 
submitted its single audits for 2004 and 2005 on time. 

RMI Monitoring: 

The RMI's Chief Secretary, who is responsible for compact 
implementation and oversight, monitored sector grant operations on a 
limited basis. Day-to-day monitoring and oversight responsibilities 
were delegated to the ministries that receive compact funds. According 
to the RMI's statistical office,[Footnote 65] it lacked the time and 
resources to devote to oversight and focused instead on helping the 
ministries to develop the annual budgets and sector portfolios and the 
quarterly and annual monitoring and performance reports. The office 
noted the ministries' lack of personnel and skills needed to collect, 
assemble, and analyze data and emphasized the importance of building 
the ministries' capacity to monitor and evaluate their own compact- 
funded activities. (However, according to an OIA official, the Ministry 
of Health made important strides in measuring performance and using 
performance management to improve the delivery of services.) The RMI 
Auditor General's office conducted financial audits, but no performance 
audits, of compact sector grants. The RMI, like the FSM, failed to 
submit its required annual reports in a timely manner. 

RMI Accountability: 

The RMI's single audit reports for 2004 and 2005 contained opinions and 
findings that indicated weaknesses in its financial statements and 
compliance with requirements of major federal programs. However, the 
government developed a corrective action plan that addressed all of the 
findings on compliance in its 2005 single audit report. The RMI 
submitted both of the single audit reports on time. 

* RMI financial statements. The RMI's single audit reports for 2004 and 
2005 contained qualified opinions on the government's financial 
statements. (See app. V for a list of the opinions on financial 
statements in the RMI's audit reports for 2001 through 2005.) For 
example, several of the RMI's subgrantees, such as the Ministry of 
Education's Head Start program and the Kwajalein Atoll Joint Utilities 
Resources, Inc., were unable to produce audited financial statements. 

In addition, the 2005 single audit found two reportable findings in the 
RMI's financial statements. The report cited the lack of audited 
financial statements and the lack of a complete asset inventory listing 
in the RMI as material weaknesses. Both of these findings had been 
cited in previous audits. 

* RMI compliance with requirements of major federal programs. Both of 
the RMI's single audit reports for 2004 and 2005 contained qualified 
opinions on the government's compliance with requirements of major 
federal programs. In addition, the 2005 report noted 11 reported 
weaknesses in the country's compliance with requirements of major 
federal programs. The RMI developed corrective action plans to address 
all of these findings, 2 of which had recurred from 2004. (App. V shows 
the total number of material weaknesses and reportable conditions 
findings for the RMI for 2001 through 2005 single audit reports.) 

* Timeliness of audits. The RMI submitted its 2004 and 2005 single 
audit reports within the 9-month period required by the Single Audit 
Act. 

Interior Took Oversight Actions but Faced Challenges: 

As administrator of the amended compact grants, OIA monitored the FSM's 
and RMI's sector grant and fiscal performance, assessed their 
compliance with compact conditions, and took action to correct 
persistent shortcomings. However, although OIA provided technical 
assistance to help the FSM improve its single audit timeliness, the 
office did not address recurrent findings and adverse opinions in the 
FSM and the RMI audits. OIA's oversight efforts were hindered by the 
need to address problems in the FSM and by internal staffing 
challenges. In addition, Interior's Office of Inspector General 
actively engaged in reviewing the countries' implementation of the 
compact, although the office did not release its products to the 
public, and, as of October 2006, several reports remained in draft 
form. 

OIA Monitored Performance, Assessed Compliance, and Acted to Correct 
FSM and RMI Shortcomings: 

OIA undertook several administrative oversight efforts including 
monitoring the countries' sector grant performance, monitoring the 
countries' fiscal performance and sector grant outlays, and assessing 
the countries' compliance with sector grant conditions. OIA's efforts 
also included actions such as suspending or withholding grant payment 
in response to persistent shortcomings that it identified. 

* Monitoring sector grant performance. OIA grant managers monitored the 
countries' sector grant performance, using site visits and analysis of 
the quarterly sector performance reports. For example, in 2006, OIA's 
visits and analyses led it to determine that 14 of the 61 offices in 
the FSM that receive private sector and environment sector grants were 
underperforming or nonperforming. As a remedy, OIA recommended and 
JEMCO agreed that future sector funding for these entities should be on 
a project basis. Also, in response to the shortcomings of the FSM's and 
RMI's performance evaluations for 2004 and 2005, JEMCO and JEMFAC, 
under OIA's chairmanship, called for improved performance measurement 
and monitoring. In the FSM, JEMCO reprogrammed unused compact funds to 
improve capacity in this area. In addition, in response to recurrent 
lack of uniformity in the FSM's performance reports, OIA rejected the 
first-quarter reports for 2006 (although it accepted nonuniform FSM 
reports later in the year). Although OIA had used the performance 
reports to monitor sector performance, it was unaware, until we 
notified the office, that almost 20 percent of the FSM's 2005 
performance reports were missing. 

* Monitoring sector grant outlays and fiscal performance. OIA monitored 
the countries' fiscal performance and sector grant outlays through 
analyses of the countries' quarterly financial reports and, as Chair of 
JEMCO and JEMFAC, through reviews of the countries' single audit 
reports. In August 2004, OIA analyses of both countries' third-quarter 
cash transactions reports showed that some sector grant funding had not 
been spent. In response, OIA delayed payments to the FSM and the RMI 
for those sectors. 

* Reviewing single audit reports. As Chair of JEMCO and JEMFAC, OIA led 
the committees' reviews of, and responses to, the FSM's and the RMI's 
single audit reports. At a March 2006 JEMCO meeting, noting that single 
audits were the most important indicator of financial stability 
provided by a grantee to a grantor, OIA's Director of Budget and Grants 
Management said that OIA intended to "apply a remedy" for single audit 
noncompliance beginning October 1, 2006, if the FSM failed to complete 
all of its audit reports by July 1, 2006, or within 3 months of the due 
date. The Director stated that OIA's response would include withholding 
cash payments for various grants not related to the provision of 
medical care, emergency public health, or essential public safety. The 
Director also stated that OIA would notify and seek the concurrence of 
other U.S. agencies providing financial and technical assistance in 
designating the FSM a "high-risk grantee." Three FSM states met OIA's 
July 1 deadline, while the national government and Chuuk missed the 
deadline by 2 and 1 months, respectively. OIA ensured that the FSM 
received technical assistance to help address its single audit reports' 
lack of timeliness, placing advisors through a third party in the state 
governments to facilitate their completion of overdue reports. In 2004, 
we recommended that OIA initiate appropriate actions to correct compact-
related single audit findings and respond to violations of grant 
conditions or misuse of funds identified by single audits.[Footnote 66] 
Since then, OIA has provided technical advice and assistance to help 
the FSM and the RMI improve the quality of their financial statements 
and develop controls to resolve audit findings and prevent recurrences. 

* Assessing compliance with grant conditions. OIA assessed the FSM's 
and the RMI's compliance with sector grant conditions through site 
visits to the countries and reviews of the countries' submitted 
paperwork. In certain instances of the FSM's or the RMI's noncompliance 
with grant conditions, OIA monitored progress toward meeting the 
requirements and allowed the countries more time, while in other 
instances, OIA did not specifically address FSM or RMI noncompliance. 
(See apps. VI and VII for a list of sector grant special terms and 
conditions and their status.) However, OIA took corrective actions in 
several instances. 

* Suspended grant funding. In December 2004, OIA staff conducting a 
site visit were unable to verify that food purchased by the program had 
been received by the Chuuk Education Department or served to students. 
In response, OIA suspended the Chuuk 2005 education grant's meal 
service program funding of almost $1 million. OIA contacted Interior's 
Office of Inspector General for a follow-up investigation to determine 
whether Chuuk was misusing compact funds. 

* Withheld grant funding. OIA withheld the FSM's May and June 2004 
public sector capacity building and private sector development grant 
funding--approximately $2.4 million--when the FSM national government 
missed a March 2004 deadline to provide a transition plan for ending 
nonconforming use of the grant. In addition, OIA withheld awarded funds 
for the FSM infrastructure grant and the RMI Kwajalein special needs 
grant until the countries met grant terms. 

After our July 2005 report, which recommended that OIA determine the 
amount of staff travel to the FSM and the RMI needed to promote 
compliance with compact and grant requirements, OIA travel to the 
countries increased.[Footnote 67] Whereas travel to the two countries 
accounted for 15 percent of overall staff time in 2004, it rose to 20 
percent in 2005 and 25 percent for the first three quarters of 2006. 
However, according to an OIA assessment, OIA's current budget does not 
support extended, detailed reviews of U.S. funds in the various remote 
islands. 

OIA Oversight Faced Challenges: 

OIA's oversight was hampered by the need to respond to problems in the 
FSM as well as by the office's difficulty in filling staff positions. 

* FSM challenges. The need to respond to various challenges facing the 
FSM reduced OIA's administrative oversight of assistance provided under 
the compact. According to the Director of OIA, the FSM's budgets for 
2005 through 2007 were poorly prepared, and, as a result, OIA grant 
managers were forced to spend an inordinate amount of time readying the 
budgets for the JEMCO meetings. In addition, according to OIA's 
Director of Budget and Grants Management, the constant need to respond 
to emergent issues, such as education issues in Chuuk and land issues 
in the FSM, limited OIA's ability to conduct oversight. 

* Staffing challenges. Although OIA increased the 2006 budget for the 
Honolulu field office so that it could increase the number of staff 
positions, those new positions remained vacant. In December 2005, an 
advertised position to be based in Guam went unfilled, while an 
education grant specialist position in Honolulu was advertised twice 
after April 2006 but remained vacant for the entire fiscal year. In 
addition, the OIA private sector development and environment specialist 
position became vacant in September 2006. 

Interior's Inspector General Reports Identified Problems but Were Not 
Published: 

Interior's Office of Inspector General undertook compact oversight 
activities, finding deficiencies in the FSM's and the RMI's compact 
implementation and accountability.[Footnote 68] In 2005 and 2006, the 
Inspector General conducted six reviews (three remained in draft form 
as of October 2006) addressing issues such as: 

* environmental and public health concerns in Chuuk (draft dated June 
2005), 

* student meal programs in Chuuk (draft dated June 2005), 

* the RMI's progress in implementing the amended compact (final report 
issued August 2005), 

* the FSM's progress in implementing the amended compact (draft dated 
January 2006), 

* the FSM's infrastructure grant implementation (final report issued 
July 2006), and: 

* the FSM's compact trust fund status (final report issued July 2006). 

Although the Inspector General distributed the three final reports to 
OIA and the FSM and the RMI governments, the final reports were not 
released to the public or disseminated widely in the FSM and the RMI. 
However, one of the draft reports circulated unofficially and was cited 
by the media. According to the Inspector General, the reports are 
considered advisory in nature and, as such, no specific response is 
required from OIA regarding the recommendations. Nonetheless, OIA 
officials stated that the office has found the recommendations useful 
and has made an effort to address them. 

Conclusions: 

Since enactment of the amended U.S. compacts with the FSM and the RMI, 
the two countries have made significant efforts to meet new 
requirements for implementation, performance measurement, and 
oversight. However, in attempting to meet these requirements, both 
countries face significant challenges that, unless addressed, will 
hamper the countries' progress toward their goals of economic 
advancement and budgetary self-reliance before the annual grant 
assistance ends in 2023. 

In 2004 through 2006, compact grants were, for the most part, allocated 
among the countries' six sectors as required, with emphasis on health, 
education, and infrastructure, and the countries have made progress in 
implementing the grants in most sectors. However, despite the revenue 
shortfalls they will face with the scheduled grant decrements, neither 
nation has concrete plans to raise the funds needed to maintain 
government services in the coming years. Furthermore, although the 
FSM's allocation of funds among the states and among sectors caused 
significant inequalities in per-student support for education and per- 
capita funding for health care, neither the FSM nor JEMCO evaluated the 
impact of these differences on the country's ability to meet national 
goals or deliver services. 

Furthermore, although the countries worked to develop the sector grant 
performance indicators required by JEMCO and JEMFAC, a lack of complete 
and reliable baseline data limited the countries' use of the indicators 
to measure performance and evaluate progress. Moreover, weaknesses in 
the countries' required quarterly performance reports--including 
missing and, in some cases, inaccurate activity data--limited the 
reports' usefulness. Unless the FSM and the RMI take steps to correct 
these weaknesses in performance measurement, their ability to use the 
sector grants to optimal effect will continue to be curtailed. 

Recommendations for Executive Action: 

Given the FSM's and the RMI's need to maximize the benefits of compact 
assistance before the 2023 expiration of annual grants and to make 
steady progress toward the amended compact goals, we are providing the 
following seven recommendations to the Secretary of the Interior. 

To improve FSM grant administration, planning, and measurement of 
progress toward compact goals, and to ensure oversight, monitoring, and 
accountability for FSM compact expenditures, we recommend that the 
Secretary of the Interior direct the Deputy Assistant Secretary for 
Insular Affairs, as Chairman of JEMCO, to coordinate with other U.S. 
agencies on the committee in working with the FSM national government 
to take the following actions: 

* establish plans for sector spending and investment by the FSM 
national and state governments to minimize any adverse consequence of 
reduced funding resulting from the annual decrement or partial 
inflation adjustment; 

* evaluate the impact of the current FSM distribution between states 
and sectors on the ability of the nation to meet national goals or 
deliver services; 

* fully develop the mechanism for measuring sector grant performance 
and collect complete baseline data to track progress toward development 
goals; and: 

* ensure that the quarterly performance reports contain reliable and 
verified program and financial information for use as a monitoring tool 
by both the FSM and the U.S. governments. 

To improve RMI grant administration, planning, and measurement of 
progress toward compact goals, and to ensure oversight, monitoring, and 
accountability for RMI compact expenditures, we recommend that the 
Secretary of the Interior direct the Deputy Assistant Secretary for 
Insular Affairs, as Chairman of JEMFAC, in coordination with other U.S. 
agencies on the committee in working with the RMI government to take 
the following actions: 

* establish plans for sector spending and investment that minimize any 
adverse consequence of reduced funding resulting from the annual 
decrement or partial inflation adjustment; 

* fully develop the mechanism for measuring sector grant performance 
and collect complete baseline data to track progress toward development 
goals; and: 

* ensure that the quarterly performance reports contain reliable and 
verified program and financial information for use as a monitoring tool 
by the RMI and the U.S. governments. 

Agency Comments and Our Evaluation: 

We received comments from the Department of the Interior as well as 
from the FSM and the RMI (see app. VIII through X for detailed 
presentations of, and our responses to, these comments). We also 
received technical comments from the Departments of Education, Health 
and Human Services, and State, which we incorporated in our report as 
appropriate. 

Interior concurred with our recommendations and stated that the report 
was accurate and well balanced. The FSM also viewed the report as a 
balanced and fair assessment of its progress in planning for 
sustainability, measuring progress, and ensuring accountability and 
agreed with our overall conclusion that it faces significant challenges 
in meeting the various amended compact requirements. The FSM, however, 
defended its distribution formula for allocating compact funds to the 
national and state governments. The RMI acknowledged that its lack of 
capacity has slowed its implementation of the compact's monitoring and 
reporting requirements. The RMI also stated that it has refrained from 
expanding ministry staffs, given the need for budgetary restraint. 

In addition to providing copies of this report to your offices, we will 
send copies to interested congressional committees. We will also 
provide copies of this report to the Secretaries of Education, Health 
and Human Services, the Interior, and State as well as the President of 
the Federated States of Micronesia and the President of the Republic of 
the Marshall Islands. We will make copies available to others on 
request. In addition, the report will be available at no charge on the 
GAO Web site at [Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix XI. 

Signed by: 

David Gootnick: 
Director, International Affairs and Trade: 

List of Committees: 

The Honorable Pete V. Domenici: 
Chairman: 
The Honorable Jeff Bingaman: 
Ranking Minority Member: 
Committee on Energy and Natural Resources: 
United States Senate: 

The Honorable Richard G. Lugar: 
Chairman: 
The Honorable Joseph R. Biden, Jr. 
Ranking Minority Member: 
Committee on Foreign Relations: 
United States Senate: 

The Honorable Richard W. Pombo: 
Chairman: 
The Honorable Nick J. Rahall, II: 
Ranking Minority Member: 
Committee on Resources: 
House of Representatives: 

The Honorable Henry J. Hyde: 
Chairman: 
The Honorable Tom Lantos: 
Ranking Minority Member: 
Committee on International Relations: 
House of Representatives: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report examines, for 2004 through 2006,[Footnote 69] (1) the 
Federated States of Micronesia's (FSM) and the Republic of the Marshall 
Islands' (RMI) use of compact funds; (2) FSM and RMI efforts to assess 
progress toward their stated development and sector goals; (3) FSM and 
RMI monitoring of sector grants and accountability for the use of 
compact funds; and (4) the Department of the Interior's (Interior) 
administrative oversight of the compacts. Appendix II contains 
information about activities funded by key U.S. programs. 

To report on the FSM's and the RMI's use of amended compact funds, we 
reviewed the U.S., FSM, and RMI annual compact reports for 2004 and 
2005; FSM and RMI strategic planning documents and budgets; briefing 
documents prepared by Interior's Office of Insular Affairs (OIA) in 
preparation for the annual bilateral meetings with the two countries; 
and FSM and RMI single audits for 2001 through 2005. We reviewed all 
2004, 2005, and 2006 grant agreements with both countries obtained from 
OIA, including special terms and conditions included in these 
agreements.[Footnote 70] We compared and analyzed fund uses with the 
purposes specified in the amended compacts, the implementing 
legislation, subsidiary fiscal procedures agreements, and sector grant 
special terms and conditions. 

To identify issues that impact the use of compact funds, we discussed 
planning efforts with U.S., FSM, and RMI government officials and 
identified issues through our own analysis that affected planning, such 
as the FSM's use of its distribution formula. We reviewed relevant 
documents such as FSM and RMI legislation, and we also reviewed 
documentation provided to the U.S. government, such as the FSM's 
transition plan to eliminate the nonconforming spending under the 
public sector capacity building grant. To compute education spending 
per student, we used FSM and RMI grant data and student and population 
statistics. To calculate the variability in health spending per capita 
across the four FSM states, we used FSM grant data and population 
statistics. We did not calculate health spending per capita for the 
RMI. We determined that these data were sufficiently reliable for the 
purposes of our report. 

Although we were asked to evaluate the effectiveness of the compact 
funds, we determined it was too soon after the amended compacts' 
implementation to do this; therefore, we report on whether the 
countries are able to measure progress. To identify FSM and RMI efforts 
to assess progress toward their stated goals, we reviewed FSM and RMI 
strategic planning documents. We evaluated the framework in place for 
the FSM and the RMI to measure the achievement of stated goals in 
strategic planning documents and compared them with the countries' 
budget and quarterly performance documents. To determine whether the 
quarterly performance reports were being used as a tool to measure 
progress, we analyzed quarterly performance reports for 2005 
consistently across five sectors and the accuracy of the budget 
information.[Footnote 71] We then verified the results of our analyses 
with each office or department we interviewed in the FSM and the RMI in 
March and April 2006. We asked if they used these reports to measure 
progress and discussed discrepancies we found in the reports. To 
identify obstacles to measurement and achievement of goals, we reviewed 
the U.S. annual compact reports for 2004 and 2005, FSM and RMI annual 
compact reports for 2004 and 2005, FSM and RMI strategic planning 
documents and budgets, U.S. government briefing documents, and the 
RMI's 2005 Performance Monitoring Report. We verified this information 
with FSM, RMI, and OIA officials. 

To identify the extent to which the FSM and RMI governments conducted 
monitoring and accountability activities, we reviewed the amended 
compacts and fiscal procedures agreements to identify specific 
monitoring responsibilities. We also reviewed the U.S. government 
briefing documents, as well as the minutes and resolutions, when 
available, that were related to the Joint Economic Management Committee 
(JEMCO) and Joint Economic Management and Financial Accountability 
Committee (JEMFAC) meetings. We further reviewed FSM and RMI documents-
-such as budget justifications and portfolios, quarterly performance 
reports, and annual financial reports for 2004 through 2006, as 
available--submitted by the FSM and RMI governments to the U.S. 
government to confirm compliance with accountability reporting 
requirements. We discussed the sufficiency of quarterly performance 
reports with OIA officials. We obtained the single audit reports for 
2001 through 2005 from the FSM National Auditor's Web site and the 
RMI's Office of the Auditor General. These reports included audits for 
the FSM national government; the state governments of Chuuk, Kosrae, 
Pohnpei, and Yap; and the RMI national government. In total, the 30 
single audit reports covered 5 years, a period that we considered 
sufficient for identifying common or persistent compliance and 
financial management problems involving U.S. funds. We determined the 
timeliness of submission of the single audit reports by the governments 
using the Federal Audit Clearinghouse's (FAC) "Form Date," which is the 
most recent date that the required SF-SAC data collection form[Footnote 
72] was received by the FAC. We noted that the Form Date is updated if 
revised SF-FACs for that same fiscal year are subsequently filed. Our 
review of the contents of the single audit reports identified the 
auditors' opinions on the financial statements, matters cited by the 
auditors in their qualified opinions, the numbers of material 
weaknesses and reportable conditions reported by the auditors, and the 
status of corrective actions. We did not independently assess the 
quality of the audits or the reliability of the audit finding 
information. We analyzed the audit findings to determine whether they 
had recurred in successive single audits and were still occurring in 
their most recent audit, and we categorized the auditors' opinions on 
the financial statements and the Schedules of Expenditures of Federal 
Awards. 

To determine oversight activities conducted by the OIA Honolulu office, 
we reviewed senior management statements regarding the purpose and 
function of this office and job descriptions for all staff. To identify 
the extent that the Honolulu office staff traveled to the FSM and the 
RMI, we obtained the travel records for all program specialists and 
discussed this information with OIA officials to ensure that these data 
were sufficiently reliable for our use. We calculated the percentage of 
time spent conducting on-site reviews in the two countries between 2004 
and the third quarter of 2006 and compared these data with the total 
available work time for the program specialists. 

In addition, to report on the FSM's and the RMI's use of noncompact 
federal funds, we updated our prior review of U.S. programs and 
services that GAO issued in 2002.[Footnote 73] The prior review 
selected 13 programs and services, including those with the largest 
expenditures and loans over a 15-year period, as well as each of the 
services that the U.S. government agreed to provide under the 
compact.[Footnote 74] Funding for 3 of these programs was consolidated 
into the Supplemental Education Grant under the amended compacts and 
was excluded from this update.[Footnote 75] Moreover, to report on OIA- 
awarded technical assistance and operations and maintenance improvement 
program grants, we selected several projects that assisted compact 
implementation or complemented sector grant priorities, such as 
education and health, from among grants awarded to the FSM and the RMI 
for 2004 and 2005. We also requested applications and grant evaluation 
information for these projects from OIA. To determine the total amount 
of noncompact federal funding that the FSM received from the United 
States, we used the schedule of expenditures of federal awards from the 
2004 and 2005 single audit reports of the FSM national government, the 
four FSM states, and the College of Micronesia to calculate total FSM 
expenditures. For the FSM national government expenditure total, we 
included only direct expenditures and did not include funds that were 
passed from the national government to the states. We compiled the 
expenditure amounts passed directly to the four states from each of the 
state's respective single audit reports and combined these states 
totals and the national government totals to obtain the total FSM 
expenditure amount. We excluded compact and amended compact 
expenditures from our calculation. For the RMI, the federal awards 
section of the RMI and College of the Marshall Islands 2004 and 2005 
single audit reports was used to calculate total RMI expenditures. The 
amount of compact funding for the FSM and the RMI was compared with the 
total amount of federal expenditures for 2004 and 2005 to get the 
percentage of noncompact U.S. federal funding. 

To address all of our objectives, we held interviews with officials 
from Interior (Washington, D.C; Honolulu, Hawaii; the FSM; and the RMI) 
and the Department of State (Washington, the FSM, and the RMI). We also 
interviewed officials from the Departments of Health and Human Services 
(Washington and Honolulu); Education (Washington; San Francisco, 
California; and Seattle, Washington); and Agriculture (Washington, 
Honolulu, and Guam); the Federal Aviation Administration (Honolulu); 
the National Weather Service (Honolulu); the Federal Emergency 
Management Agency (FEMA) (San Francisco and Honolulu); and the U.S. 
Postal Service (Honolulu). We traveled to the FSM (Chuuk, Kosrae, 
Pohnpei, and Yap) and the RMI (Arno, Kwajalein, and Majuro Atolls). In 
addition, in Chuuk, we visited the islands of Fanapangas, Fefan, Polle, 
Toll, Tonoas, Udot, Uman, Ut, and Weno. In both countries, we visited 
primary and secondary schools, colleges, hospitals, dispensaries and 
community health centers, farms, fisheries, post offices, weather 
stations, telecommunication offices, and airport facilities. We 
discussed compact implementation with the FSM (the national, Chuuk, 
Kosrae, Pohnpei, and Yap governments) and the RMI officials from 
foreign affairs, finance, budget, health, education, public works, and 
audit agencies. Furthermore, we met with the RMI's Chief Secretary and 
the FSM's Office of Compact Management. In Kwajalein Atoll, we also met 
with officials from the U.S. Army Kwajalein Atoll and Ebeye's Mayor, 
with its Ministry of Finance, and with the public utility and health 
and education officials to discuss compact implementation issues. We 
met with a representative from the FSM's Micronesian Seminar, a 
nonprofit organization in Pohnpei that provides public education on 
current FSM events, to obtain views on compact implementation and 
development issues. We also observed 2005 and 2006 JEMCO and JEMFAC 
meetings. We met with officials from Interior's Office of Inspector 
General (Guam, Honolulu, and Washington) to discuss ongoing 
investigations in the FSM and the RMI. 

We conducted our review from October 2005 through December 2006 in 
accordance with generally accepted government auditing standards. We 
requested written comments on a draft of this report from the 
Departments of the Interior, State, and Health and Human Services as 
well as the governments of the FSM and the RMI. All of these entities' 
comments are discussed in the report and are reprinted in appendixes 
VIII through X. In addition, we considered all technical comments and 
made changes to the report, as appropriate. 

[End of section] 

Appendix II: U.S. Program Assistance to the FSM and the RMI: 

In addition to compact funding, both the FSM and the RMI received 
approximately 30 percent of their total U.S. expenditures during 2004 
and 2005 from other federal agencies, including the Departments of 
Agriculture, Education, Health and Human Services, and Transportation. 
As part of the amended compacts' subsidiary agreements with the RMI and 
the FSM, the United States agreed to extend and subsidize essential 
federal services, such as weather, aviation, and postal services that 
were provided under the original compact. The amended compacts also 
extend the programs and services of FEMA to the FSM and the RMI, but 
only until December 2008. At that time, responsibility for disaster 
assistance in the countries is transferred from FEMA to the United 
States Agency for International Development.[Footnote 76] 

U.S. program assistance is authorized by various sources, including the 
amended compacts and their implementing legislation as well as other 
U.S. legislation. 

Table 3 shows the amount of noncompact U.S. program funds expended on 
the FSM and the RMI for 2004 and 2005. Details of several key U.S. 
programs[Footnote 77] follow in tables 4 through 14. 

Table 3: Noncompact U.S. Program Fund Expenditures for the FSM and the 
RMI, 2004 and 2005: 

Dollars in millions. 

FSM; 
2004: $32.2; 
2005: $39.0. 

RMI; 
2004: 11.0; 
2005: 11.8. 

Sources: Single audit reports 2004 and 2005 from the FSM and the RMI. 

[End of table] 

Table 4: Department of the Interior OIA Technical Assistance and 
Operations and Maintenance Improvement Program Grants: 

Dollars in millions. 

Purpose and legislation; 
The FSM and the RMI continue to be eligible for the discretionary grant 
program of the Department of the Interior's (DOI) Office of Insular 
Affairs (OIA), which provides both general technical assistance grants 
and the operations and maintenance improvement program (OMIP) grants. 
The legislative authority for these activities is found at 48 U.S.C. 
1469d. According to OIA, the technical assistance program provides 
support not otherwise available in areas where expertise is lacking in 
the FSM and the RMI. The program allows each government to identify 
pressing needs and priorities and to develop plans of action to 
mitigate these problems. OIA reported that many of the technical 
assistance projects have a direct relationship to improving 
accountability and performance requirements under the amended compact. 
OMIP grants are designed to create and support institutions that 
enhance the capability of the governments of the FSM and the RMI to 
maintain their capital infrastructure. Specific areas that OIA has 
targeted for OMIP assistance are water, sewage, or power systems; 
solid waste disposal; roads; ports; airports; schools; and other public 
buildings. 

Funding; 
U.S./FSM: FY2004: $1.54; 
U.S./FSM: FY2005: $2.33; 
U.S,/RMI: FY2004: $0.98; 
U.S./RMI: FY2005: $2.22. 

Use of funds; 
U.S./FMS: In the FSM, the technical assistance (TA) program funded 
about 40 projects, of which 21 were OMIP grants in 2004 and 2005. The 
TA grants supported more FSM governmentwide projects, while the OMIP 
grants were, in most cases, for specific projects within individual 
states. OIA stated that many of the TA projects have a direct 
relationship to improving accountability and performance requirements 
under the amended compact. For example, they provided training funds 
for the Public Auditor's Offices, and funded a project to evaluate the 
overseas medical referral program, which was requested by the FSM 
Department of Health. Another TA project was to assist the College of 
Micronesia with its budgeting, long-term planning, and decision making 
through the hiring of a consultant. 
Operations and maintenance projects were funded in each of the four 
states. For example, projects in Kosrae were for power plants and 
prepayment electric meters; in Pohnpei, for the Port Authority and 
Pohnpei State campus; in Yap, to assist the state college; and in 
Chuuk, to provide equipment and software for the public utility 
corporation; 

U.S./RMI: In the RMI, the TA program funded about 35 projects, of which 
8 were OMIP grants in 2004 and 2005. OIA stated that many of the 
projects have a direct relationship to improving accountability and 
performance requirements under the amended compact. For example, they 
provided training funds for the Public Auditor's Office, including the 
training of interns in accounting and computer operations. In addition, 
TA grants supported several large projects, such as purchasing a new 
computer system to improve border controls and enhance tax collection 
and customs programs, developing and implementing a performance-based 
budgeting process, and installing geographic information systems for 
support of economic development and landownership. OIA also funded a 
series of TA grants to assist and assess the College of the Marshall 
Islands accreditation project. 
The operations and maintenance projects also focused on addressing 
changing conditions that allow poor maintenance practices to exist and 
not just on making repairs. Examples of operations and maintenance 
projects were the writing of a landfill operations manual, a recycling 
and collection project, a project to improve the Majuro hospital, and 
assistance to the Kwajalein Atoll Joint Utilities Resource 
apprenticeship and management projects. 

Program observations; 
OIA has conducted limited oversight over its TA program. OIA's 
Financial Assistance Manual states that OIA field staff should conduct 
on-site surveys or meet periodically with the program manager and 
submit a Report of Grant Site Visit form to the grant manager. However, 
we found that the OIA Technical Assistance Division did not have any 
reports of visits by either OIA's field staff or OIA grant managers who 
conducted monitoring activities on behalf of the TA division for any of 
the projects we selected for review. A lack of staffing and 
insufficient travel funds between 2004 and 2006 were reasons given by 
the Director of the TA division for the limited oversight activity of 
his office. We found, once projects were funded, there was little 
follow-up or evaluation of the projects. For example, we reviewed the 
consulting grant for the FSM's and the RMI's community college 
accreditation efforts and found that, in the FSM, the consultant never 
finished or delivered her report and that OIA never asked for a final 
product or report. In the RMI, the consultant completed an inferior 
product that was rejected by the College of the Marshall Islands Board 
and had to be redone by another consultant. According to RMI officials, 
some more ambitious projects, such as enhancing the income revenue of 
the tax division within the RMI, could not be completed within the time 
frames and funding levels that were allocated and an additional grant 
would be needed to complete the project. The TA grant manager said that 
he has started to ask the OIA Honolulu field staff to check on specific 
TA projects if he knows that staff will be traveling to a particular 
state or country. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[End of table] 

Table 5: Department of Education Individuals with Disabilities 
Education Act/Special Education Program for Pacific Island Entities: 

Dollars in millions. 

Purpose and legislation; 
The Special Education Program for Pacific Island Entities (SEPPIE) was 
a competitive direct grant program, provided by the Department of 
Education (DOE), to support special education and related services to 
children with disabilities aged 3 through 21 years, as authorized under 
the 1997 Individuals with Disabilities Education Act (IDEA), as amended 
(Pub. L. No. 91-230). According to an official from the Office of 
Special Education Programs, following the Individuals with Disabilities 
Education Improvement Act of 2004 (Pub. L. No. 108-446), SEPPIE was 
phased out, and the FSM and the RMI began to receive grants under the 
IDEA Special Education Program applicable to the 50 states and the 
outlying areas. The official also stated that during the transition, 
the FSM and the RMI received both SEPPIE and IDEA grant funding for use 
in 2005 and that the doubling of funding was a one-time event, and 
funding beginning in 2006 came only from IDEA. 



Funding; 
U.S./FMS: SEPPIE: FY2004: $3.89; 
U.S./FMS: SEPPIE: FY2005: $3.89; 
U.S./FMS: IDEA: FY2005: $3.89; 
U.S./FMS: IDEA: FY2006: $3.89; 
U.S./RMI: SEPPIE: FY2004: $1.73; 
U.S./RMI: SEPPIE: FY2005: $1.73; 
U.S./RMI: IDEA: FY2005: $1.73; 
U.S./RMI: IDEA: FY2006: $1.73. 

Use of funds; 
U.S./FMI: According to FSM's Grant Performance Report, 2,464 FSM 
students received special education services during the 2004-2005 
school year, representing approximately 7 percent of the students 
enrolled in public schools in the four FSM states. 
The FSM had 176 special education instructors, of which at least 40 
percent were not fully certified, in 2005. According to a FSM Special 
Education official, the FSM Special Education Program requires the 
states to collect teacher certification data quarterly. In addition 
according to a U.S. Special Education official, the IDEA program 
requires that all instructors have at least a Bachelor of Arts (BA) 
degree. To support this effort, a FSM special education official said 
that the FSM's Special Education Program has allocated funding for 63 
instructors to attain BAs with funding that will be available through 
2007; 
U.S./RMI: According to the school year 2004-2005 Grant Performance 
Report, special education services are provided to 847 students, or 
approximately 10 percent of the students enrolled in RMI public 
schools. These services were available on all 24 inhabited atolls and 
in 72 of the 78 public elementary schools, as well as in all 4 public 
high schools. 
Special education services were provided by 108 special education 
teachers and 4 support staff funded by SEPPIE. Of the 108 teachers, 2 
have BA degrees, 38 have Associate of Arts or Science degrees, and the 
remaining 68 have high school degrees or less. The Ministry of 
Education has set December 2008 as its goal for ensuring that all of 
its teachers have at least an Associates Degree. However, according to 
an official from the Office of Special Education Programs, the 
requirement for the IDEA program is for all instructors to have at 
least a BA. Under IDEA requirements the RMI's first Annual Performance 
Report on meeting its targets is due to the U.S. Office of Special 
Education Programs by February 7, 2007, and so the status of this 
requirement will not be available until that date. 

Program observations; 
Each country's programs support the objectives of (1) providing direct 
special education and related services for eligible children with 
disabilities and (2) building the capacity to provide improved special 
education in the future by, for example, providing teacher training and 
training for therapists in these programs, while also improving 
facilities and service delivery through the use of vehicles such as 
buses and boats. However, according to FSM and RMI education officials 
progress toward achieving these goals has been slow, since (1) both 
countries' school systems are staffed by a substantial number of 
underqualified teachers and (2) both countries lack skilled support 
personnel, such as audiologists, diagnosticians, speech pathologists, 
and physical therapists. However, the countries have better addressed 
their goal of increasing parental involvement, since both the FSM and 
the RMI have active organizations for parents of children with 
disabilities. 
DOE's oversight has been indirect, as the Washington, D.C.-based 
program officer from the Office of Special Education has never visited 
the countries. However, that official noted that DOE provides technical 
assistance and staff training to country special education staff 
through meetings and conferences held in the United States. The 
official also said that the office plans to make site visits to both 
countries in October 2006 as part of DOE's review of all education 
programs and, in 2007, intends to again visit the countries and meet 
with teachers in schools. The office believes it does monitor the 
Special Education Programs in both countries, but limited travel funds 
and the high cost of travel to the FSM and the RMI were noted as 
constraints on oversight. 
During the annual single audits of federally funded programs in the FSM 
and the RMI, both countries' Special Education Programs were found to 
have problems complying with federal regulations, such as not 
adequately documenting procurement procedures and failing to report 
financial status or track property purchased with federal funds; 
in addition, the FSM has not submitted its audits in a timely manner. 
For example, both the FSM's and the RMI's 2004 single audits documented 
problems with special education program procurement. Since the U.S. 
Special Education Program Office has not been able to visit each 
country because of limited travel funds, its use of the single audit is 
especially critical. However, the FSM's late submission of its single 
audits hinders this effort. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[End of table] 

Table 6: Department of Education Pell Grant Program: 

Dollars in millions. 

Purpose and legislation; 
Pell Grants, from the Department of Education (DOE), are intended to 
provide eligible, undergraduate students with financial assistance for 
educational expenses. The Higher Education Act of 1965, as amended 
(Pub. L. No. 89- 329), authorized the FSM's and the RMI's 
participation. 

Funding; 
U.S./FMS: FY2004: $7.93; 
U.S./FMS: FY2005: $8.20; 
U.S./FMS: FY2006: $7.02[A]; 
U.S./RMI: FY2004: $2.15; 
U.S./RMI: FY2005: $2.21; 
U.S./RMI: FY2006: $1.55[A]. 

Use of funds; 
U.S./FMS: For 2005, Pell Grants provided approximately 2,560 FSM 
students with grant assistance to attend the College of Micronesia. 
Furthermore, approximately1,200 additional FSM residents received Pell 
Grants to attend colleges and universities in the United States. The 
funding that these students received is not included in the funding 
listed above. 
College of Micronesia officials said that Pell Grants are a critical 
source of funds for their college--they represented 45 percent of the 
college's operating expenditures in 2005; 
U.S./RMI: For 2005, Pell Grants provided approximately 820 RMI students 
with grant assistant to attend the College of the Marshall Islands. 
Furthermore, approximately 260 additional RMI residents received Pell 
Grant assistance to attend colleges and universities in the United 
States. The funding that these students received is not included in the 
funding listed above. 
College of Marshall Island officials said that Pell Grants are a 
critical source of funds for their college, providing about 43 percent 
of all federal award expenditures at the college for 2005. 

Program observations; 
The Pell Grant Program provides grants to eligible FSM and RMI 
students, and, because of the low-income levels in the two countries 
relative to the United States, most students qualify for the program. 
One major problem students from both countries face is a lack of 
adequate primary and secondary school training to prepare them for 
college-level courses. For example, a June 2005 briefing paper by the 
RMI Ministry of Education, cosponsored by the Asian Development Bank, 
showed the vast majority of high school graduates entering the College 
of the Marshall Islands from 2002 to 2004 qualified only for remedial 
courses. In math, very few students qualified for credit courses, while 
over half of the students did not even qualify for remedial courses. 
FSM College of Micronesia officials also stated that because of the 
inferior primary and secondary school preparation at most of the 
schools on the islands, most students do not pass the entrance exam to 
come to the national campus. The Pell Grant training officer said that 
students could take up to 30 credits of classes of remedial coursework 
and needed English as a Second Language (ESL) classes under the Pell 
Grant. However, students often use up all of their remedial course 
allotment and still need a significant amount of ESL courses before 
they are even able to begin taking the credit classes needed to 
eventually attain a degree. 

According to a DOE Institutional Review Specialist, the U.S. Federal 
Student Aid Office annually reviews the single audits of the colleges 
in both countries and issues a final audit determination letter to each 
institution. The office had advised the College of the Marshall Islands 
in its letters to the institution from 2000 through 2004 that repeat 
findings or failure to resolve audit findings may lead to an adverse 
administrative action, which could include the imposition of a fine or 
the limitation, suspension, or termination of the eligibility of the 
institution to receive funds. However, according to a DOE Institutional 
Review Specialist, the number of audit findings and the number of 
recurring findings had decreased between 2000 and 2004 for the RMI, and 
that the FSM had no findings in the 2002 and 2003 audit letters. 
Moreover, the fiscal year 2005 single audits of the College of 
Micronesia and the College of the Marshall Islands gave unqualified 
"clean" opinions on their financial statements and listed no auditor 
findings; the FSM had no questioned costs and the RMI had about 
$239,000 in unresolved questioned costs from the previous year's 
audits. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[A] As of August 2006. Schools have until October 2, 2006, with a few 
exceptions, to submit Pell Grant payments. 

[End of table] 

Table 7: Department of Health and Human Services Maternal and Child 
Health Block Grants Program: 

Dollars in millions. 

Purpose and legislation; 
The Maternal and Child Health (MCH) Block Grants Program under the 
Department of Health and Human Services (HHS), was authorized by Title 
V of the 1935 Social Security Act, as amended (49 Stat. 620). MCH was 
intended to help states provide mothers and children with access to 
quality health services and to reduce infant mortality and the 
incidence of preventable diseases. In 1981, MCH, along with several 
other categorical programs, was converted to a block grant, which 
allowed states to implement the program with maximum flexibility and 
minimum reporting requirements. 

Funding; 
U.S./FSM: FY2004: $0.56; 
U.S./FSM: FY2005: $0.56; 
U.S./FSM: FY2006: $0.53; 
U.S./RMI: FY2004: $0.25; 
U.S./RMI: FY2005: $0.25; 
U.S./RMI: FY2006: $0.24. 

Use of funds; 
U.S./FSM: The MCH program in the four FSM states provided significant 
direct health care and implementing services for the maternal and 
infant population. In 2004, the FSM MCH program reported providing 
services to 61,091 eligible mothers and children, and fully immunizing 
nearly 43 percent of the 19-to 35-month- old children. For 2006, the 
MCH program funded 36 positions: 14 in Chuuk, 7 in Pohnpei, 7 in Yap, 6 
in Kosrae, and 2 in the FSM national government; 
U.S./RMI: The MCH program in the RMI is combined with the Children with 
Special Health Care Needs Program. These programs provided and 
coordinated the full spectrum of preventive and primary health care 
services for mother, infants, children, and adolescents, both in 
hospital settings and health centers. In 2004, the program reported 
providing services to 33,208 eligible mothers and children and fully 
immunizing almost 50 percent of the 19-to 35-month-old children. The 
RMI reported that this percentage was below its immunization goal of 90 
percent due to several challenges, including the distance between 
islands, limited storage facilities for vaccines, and the lack of 
information and outreach about the program. The MCH/Children with 
Special Health Care Needs Programs funded 31 positions, including 22 
nurses, 7 physical assistants, 1 medical director, and 1 OB-GYN 
specialist. 

Program observations; 
FSM and RMI program officials told us they were unable to complete and 
were given exemptions for several of the MCH national performance 
measurements, which were required as part of the annual reports, 
because some of the performance measurements were beyond the level of 
services provided in both countries or were regarding support programs, 
such as Medicaid, that do not exist in these countries. Other services, 
such as metabolic screening or hearing impairment testing of newborns, 
were not available in both countries. 

The U.S. MCH State and Community Health Director stated that the 
national performance measurements are not "outcome measures" set by HHS 
for the FSM and the RMI; but that countries under the MCH program 
establish their own objectives and report on the results on the basis 
of meeting their own objectives. They are required to conduct a 
statewide or, in their case, countrywide needs assessments every 5 
years that identifies the needs for preventive and primary care 
services for pregnant women, mothers, infants, and children. According 
to the Director, the countries tailor their targets on the basis of 
their own conditions, not on HHS standards. 

Hospital officials in the FSM and the RMI believed that the MCH program 
complemented existing health services. The Kosrae Health Director said 
that the state was highly dependent on MCH funding due to a lack of 
support from the state's general fund since 2004. The Yap Director of 
Health Services said that MCH funds help support primary health care 
services. In Chuuk, MCH funding was used to support outreach services 
to the outlying villages by funding public health nurses. The RMI MCH 
coordinator said that although the immunization rates in the RMI appear 
low, there were no incidents of children dying from the diseases for 
which they were immunized, and he believed the MCH program was overall 
doing a good job. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[End of table] 

Table 8: U.S. Department of Agriculture Rural Housing Service Housing 
Loan Program: 

Dollars in millions. 

Purpose and legislation; 
The U.S. Department of Agriculture's (USDA) Rural Development Housing 
programs has provided direct housing loans and grants for single-family 
dwellings, among other services. The housing programs were authorized 
under the Housing Act of 1949, as amended (63 Stat. 413). 
* Section 502 of the Housing Act of 1949, as amended, allowed loans to 
low-income borrowers to buy, build, rehabilitate, improve, or relocate 
modest eligible dwellings for use by the borrower as a permanent 
residence; 
* Section 504 allowed loans and grants to very low-income homeowners to 
make general improvements to their homes as long as the dwelling 
remained modest and was not used for commercial purposes. 

Funding; 
U.S./FSM: FY2004: $2.12 (grant and loans); 
U.S./FSM: FY2005: $2.92 (grants and loans); 
U.S./FSM: FY2006: $2.13 (grants and loans); 
U.S./RMI: FY2004: $2.03 (grants and loans); 
U.S./RMI: FY2005: $2.27 (grants and loans); 
U.S./RMI: FY2006: $1.32 (grants and loans). 

Use of funds; 
U.S./FSM: USDA maintains a local development office in each FSM state. 
Two hundred ninety-nine loans and grants were approved totaling 
$2,916,457 in 2005. Kosrae, the state with the smallest population, 
approved the greatest number of loans and grants (146), totaling 
$1,497,458, or 51 percent of the total loan amount available in the 
FSM. The Kosrae Rural Development Manager explained that the office did 
not have the same type of problems, such as securing title to the 
property, that other states had, and that their delinquency rate was 
very low. Chuuk, the state with the largest population, funded the 
smallest number of loans (52), totaling $299,544, or 10 percent of the 
total loan amount available in the FSM, in 2005. A USDA loan official 
stated that this disparity was due to Chuuk residents having a 
difficult time obtaining title to their land, which is a requirement 
for new home construction loans; 
U.S./RMI: In 2005, 211 loans and grants were approved in the RMI, at a 
value of $2,272,020. According to the Western Pacific Area Director, 
while USDA has not opened an office in Ebeye, the RMI government 
established one there in 2001 with the intent of expanding USDA's 
housing program to the island's eligible residents. He stated that the 
office is staffed with RMI government employees who are trained in 
USDA's housing programs and supervised by the USDA manager in Majuro. 
He also stated that the office initially administered the section 504 
program, but there is also potential to administer the section 502 
construction housing program. 

Program observations; 
Previously, we pointed out that the applicable Department of Housing 
and Urban Development income limits may not target the neediest 
residents based on the basis of income levels and family size of FSM 
and RMI applicants (see GAO-02- 70). The income of FSM or RMI 
applicants has to be "low" or "very low" as determined by the Housing 
and Urban Development's Adjusted Income Limits for Western Pacific 
Islands. Moreover, according to a USDA Rural Development official, USDA 
is required by law to follow these criteria. The office managers that 
we interviewed did not see a problem in using the Western Pacific 
eligibility levels for FSM residents, and one manager estimated 90 
percent of residents would qualify for the very low-income threshold 
due to the large family sizes and low-income levels of the applicants. 

At the time of our previous report, the amended compacts between the 
FSM and the RMI and the United States were not a certainty, and there 
were concerns about the ability of borrowers to repay their loans if 
there were a future reduction in U.S. economic assistance. The amended 
compact only ensures direct U.S. grants funding until 2023, and many of 
these long-term loans will be active beyond that date. However, USDA 
was not required to consider the effects that a future reduction in 
U.S. economic assistance could have on the ability of its borrowers to 
repay their loans. 

Our prior report also found that USDA Rural Development Housing Program 
accountability was insufficient and ineffective, and that the Hawaii 
State Office failed to exercise adequate oversight in the FSM and the 
RMI. According to USDA Rural Development, accountability has improved 
through the following actions: (1) the State Internal Reviews for the 
FSM's four states and the RMI between 2001 and 2004 were conducted in 
accordance with agency regulations and guidelines, and all significant 
weaknesses were appropriately addressed and (2) the personnel involved 
with prior significant irregularities with the housing program in 
Pohnpei were terminated. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[End of table] 

Table 9: U.S. Department of Agriculture Rural Utilities Services 
Telecommunications Loan Program: 

Purpose and legislation; 
The Rural Electrification Act of 1936, as amended (49 Stat. 1363), 
authorized the U.S. Department of Agriculture (USDA) to make loans for 
furnishing and improving telephone service in rural areas. The loans 
were intended to be used to furnish, improve, expand, construct, and 
operate telephone facilities or systems in rural areas. The amended 
compacts implementing legislation authorized programs to be made 
available to the FSM and the RMI. USDA Rural Development Utilities 
Programs, which is the successor to the Rural Electrification 
Administration, made a 35-year term loan to the Federated State of 
Micronesia Telecommunications Corporation (FSMTC) and 35-year and 17-
year term loans to the Marshall Islands National Telecommunications 
Authority (MINTA). 

Funding; 
U.S./FSM: According to a USDA Rural Development official in 1987, a 
USDA Rural Development Utilities loan was approved to FSMTC for $41 
million. The loan's terms were 35 years at 5 percent interest with 
principle payments beginning in 1990. The official also stated that the 
FSMTC has been making monthly payments toward the completion of the 
loan and is scheduled to pay it off by 2022; 
U.S./RMI: According to a USDA Rural Development official in 1987, the 
Utilities loan was approved to the MINTA for $18.8 million. The loan's 
terms were 35 years at 5 percent interest beginning in 1990 and in 
1993, a second RUS loan was approved in the amount of $4.0 million. The 
terms of the second loan were 17 years at 5 percent interest with 
principle payments beginning in 1996. In addition, the official stated 
that the MINTA has been making monthly payments toward the completion 
of the loans and is scheduled to pay off the loans in 2022 and 2010, 
respectively. 

Use of funds; 
U.S./FSM: Our previous review found that the USDA loan increased 
telephone and communications availability to homes and businesses. In 
1987, the FSMTC had 1,300 subscribers, while in 1993 the number of 
subscribers increased to 6,000 and to more than 9,870 throughout the 
FSM states in 2001. The FSMTC's 2005 audit report identified a little 
over 10,000 customers of landline telephone service and approximately 
17,380 mobile service customers; 
U.S./RMI: Our previous review found that the USDA loan increased 
telephone and communications availability to homes and businesses. In 
1987, the company had 653 subscribers. The MINTA's 2005 audit report 
indicated it provided landline telephone service to 5,804 customers, 
911 cellular customers, and 807 Internet users. The MINTA noted that 
this was a decrease in cellular subscribers from 1,198 and Internet 
users from 878 in 2004 because their system on Ebeye was not 
operational from January to May 2005. 

Program observations; 
Both the FSMTC and the MINTA provided access to telephone service to an 
increasing portion of their respective national populations. According 
to World Bank Data, FSM telephone subscribers have increased from 16 
out of every 1,000 customers in 1987 to 226 per 1,000 customers in 
2004. Of the 226 subscribers, mobile telephone customers were 117 per 
1,000 and landline customers were 109. RMI subscribers also grew, from 
11 per 1,000 people in 1990 to 86 per 1,000 customers in 2003. Of the 
86 subscribers, mobile telephone customers were 10 per 1000 and 
landline were 76. 

According to officials from the FSM and RMI telecommunication agencies, 
both entities have been repaying their loans on a regular monthly basis 
to the USDA Rural Development Utilities Programs. At the time of our 
previous report, the amended compacts between the FSM and the RMI and 
the United States were not a certainty, and there were concerns about 
the ability of borrowers to repay their loans if there were a future 
reduction in U.S. economic assistance (see GAO-02-70). While the FSM 
and RMI governments have assumed responsibility for the secured loans 
if the borrowers are unable to pay, the dependence of the governments 
on U.S. funds may put such repayment at risk. However, USDA was not 
required to consider the effect a future reduction in U.S. economic 
assistance could have on the ability of its borrowers to repay their 
loans. 

Both countries' telecommunication companies were subject to feasibility 
studies as a loan requirement, and both studies showed that the 
projects were financially viable. Each company was subject to loan fund 
and accounting reviews during construction. The FSMTC's 2005 single 
audit was an unqualified "clean" on financial statements and had no 
reportable findings. The MINTA 2005 annual report, which also included 
the independent auditor's report, gave an unqualified "clean" opinion 
on the financial statements with no reportable findings. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[End of table] 

Table 10: U.S. Department of Agriculture Rural Utilities Services 
Electrical Loan Program: 

Purpose and legislation; 
USDA Rural Development Utilities Programs electrical loans, authorized 
under the Rural Electrification Act of 1936, as amended, (49 Stat. 
1363), were intended to furnish and improve electrical service in rural 
areas and finance the construction of electric distribution, 
transmission, and generation facilities. The amended compacts 
implementing legislation authorized loans to be made available to the 
FSM and the RMI. USDA Rural Development Utilities Programs is the 
successor to the Rural Electrification Administration. 

Funding; 
U.S./FSM: Loan application is pending from one of the four utility 
companies in the FSM; 
U.S./RMI: According to an USDA Rural Development official, the Marshall 
Energy Company received a loan for about $12.0 million in 1997. The 
official stated that the loan term was 20 years at 6.9 percent 
interest. 

Use of funds; 
U.S./FSM: The Pohnpei Utilities Corporation filed its original loan 
application in 1999 with USDA Rural Development for $10.6 million. 
Because of problems in obtaining title to the property where the new 
power plant was to be built, no action was taken on the loan 
application. According to a Pohnpei Utilities Corporation official, the 
state of Pohnpei legislature acted to give the Ponhpei Utilities title 
to the property in 2004 and a revised loan application for $18 million 
was filed with the USDA Rural Development in July 2005. USDA Rural 
Development requested additional information on a number of 
engineering, legal, and financial issues and is awaiting a response 
from the Pohnpei Utilities Corporation before any further action is 
taken; 
U.S./RMI: The Marshall Energy Company commissioned its 12.8 megawatt 
generating station in December 1999. This plant, the island's second, 
was built to relieve the old power plant's five generators, all of 
which operated at peak hours with no backup. Demand for electrical 
power has increased in the RMI and the number of new businesses seeking 
power increased by 34 percent between 1997 and 1999, and the number of 
private users increased by 11 percent during the same period. According 
to agency officials the Marshall Energy Company had to make three 
separate price increases in 2005 to help recoup the rising cost of oil 
used to operate its generators. The officials also stated that after 
each increase, use went down and company's revenue did not match its 
expectations. The officials believe future government and business 
users will be more stable consumers of energy, once the schools and 
other infrastructure projects are completed on Majuro. 

Program observations; 
Our prior report detailed that both power companies were subject to 
engineering and financial feasibility study requirements (see GAO-02-
70). While feasibility studies showed that the FSM project was 
necessary and financially viable, the loan application from the Pohnpei 
Utilities Corporation, which was first submitted in 1999 according to a 
USDA Rural Development official, has not been approved as of September 
2006, because of the problems previously mentioned. In addition, the 
Pohnpei Utilities Corporation has been slow in responding to RUS 
requests for additional information related to the loan. 

At the time of our previous report, the amended compacts between the 
FSM and the RMI and the United States were not a certainty, and there 
were concerns about the ability of borrowers to repay their loans if 
there were a future reduction in U.S. economic assistance. While the 
FSM and RMI governments have assumed responsibility for these secured 
loans if the borrowers are unable to pay, the dependence of the 
governments on U.S. funds may put such repayment at risk. The amended 
compact only ensures direct U.S. grants funding until 2023, and the 
Pohnpei Utilities Corporation loan, if it is funded, may still be 
active past this date. 

The USDA Rural Development official stated that the Marshall Energy 
Company was that delinquent on payments to USDA for about 30 days, and 
that they are now current with all loan repayments. The RMI 2005 single 
audit stated that the Marshall Energy Company was not in compliance 
with certain loan coverage ratio requirements, and the Rural 
Development official confirmed that the Marshall Energy Company has not 
met these requirements for the last few years. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[End of table] 

Table 11: Federal Emergency Management Agency Program/U.S. Agency for 
International Development: 

Dollars in millions. 

Purpose and legislation; 
The Federal Emergency Management Agency (FEMA) assistance is intended 
to help states and localities respond to, plan for, recover from, and 
mitigate disasters. Under the original compact, disaster assistance 
services and programs were to be made available to the FSM and the RMI 
in the same manner as assistance was made available to a U.S. state. 
Under the amended compacts, the programs and services of FEMA are also 
extended to the FSM and the RMI to the same extent that programs and 
services were available in 2003, but only until December 16, 2008. The 
FSM, the RMI, and the United States agreed in the amended compacts 
supplemental agreements to seek to reach agreement for alternate 
assistance arrangements involving a significant role for the U.S. 
Agency for International Development (USAID). If an agreement is not 
reached by December 16, 2008, all emergency and disaster preparedness, 
response, and recovery assistance will be provided to the FSM and the 
RMI by USAID. After this date, USAID will be responsible for the 
provision of emergency and disaster relief assistance in accordance 
with its statutory authorities, regulations, and policies. According to 
a FEMA official, funding for USAID disaster assistance activities in 
the FSM and the RMI will be funded from FEMA's Disaster Relief Fund. 
For the FSM and the RMI to secure disaster assistance from the United 
States, either currently or under the new arrangement, the FSM or the 
RMI can request that the President of the United States make an 
emergency or major disaster declaration. If the President declares an 
emergency or major disaster, the Department of Homeland Security (DHS), 
FEMA, and USAID will jointly (1) assess the damage caused by the 
emergency or disaster and (2) prepare a reconstruction plan that 
includes an estimate of the total amount of federal resources that are 
needed for reconstruction. 

Funding; 
U.S./FSM: FEMA FY2004: $12.36; 
U.S./FSM: FEMA FY2005: $10.16; 
U.S./FSM: DHS FY2005: $0.05; 
U.S./FSM: DHS FY2006: $0.05; 
U.S./RMI: FEMA FY2004: $0.05; 
U.S./RMI: DHS FY2005: $0.05; 
U.S./RMI: DHS FY2006: $0.05. 

Use of funds; 
U.S./FSM: Since 2004, FEMA has provided about $22.5 million in disaster 
assistance to Yap in the FSM for recovery assistance when the island 
was heavily damaged by Typhoon Sudal in April 2004. The FSM also 
received $50,000 a year from FEMA for disaster preparedness in 2004. 
Starting in 2005 and continuing through 2006, this funding will be from 
the DHS Emergency Management Performance Grants Program; 
U.S./RMI: In 2004, FEMA funded the RMI with $50,000 a year for disaster 
preparedness. Starting in 2005 and continuing through 2006, this 
funding will be from the DHS Emergency Management Performance Grants 
Program. 

Program observations; 
Previously, we found that the FSM and the RMI did not appear to be 
developing the capability for their states and localities to respond 
to, plan for, recover from, and mitigate disasters (see GAO-02-70). In 
our 2006 interviews with local agency officials, we learned the 
following: 
* The FSM National Disaster Coordinating Officer stated that some 
projects on the outer islands were difficult to complete because of the 
distance and lack of proper equipment. In Chuuk, FEMA funds from the 
2002 typhoons are still being spent to repair buildings and to build 
seawalls; 
* The Director of the RMI's Natural Disaster Management Office said the 
RMI has been more responsive in utilizing disaster preparedness funds 
in recent years, although no FEMA funds were provided when a recent 
fire damaged the Majuro hospital. Instead, the RMI received support 
from USAID's Office of Foreign Disaster Assistance and the Department 
of Defense through their U.S. Army Kwajalein Atoll site. 

Although both the FSM and the RMI disaster officers said that they had 
completed the 2004 reports that they submitted to FEMA, they were not 
able to locate or provide copies of the reports. The FSM Office of 
Public Auditor recently completed a review of files related to FEMA 
funds provided to the FSM to assist and recover from three typhoons-
damaging Chuuk, Chata'an, in July 2002; Pongsona in January 2003; and 
Lupit in December 2003--and found internal control weaknesses in the 
disbursement of FEMA funds. These weaknesses could lead to misuse of 
FEMA funds. In addition, more than 18 percent of the vouchers the 
auditors requested (22 out of 115) could not be found. These vouchers 
accounted for over 40 percent of the sampled funds and represented 
about $444,000 of the $1,088,000 selected for review. The auditors made 
four recommendations for improving internal control procedures, which 
the FSM agreed to correct. 

Under the amended compacts, there is a disaster assistance emergency 
fund established with each government, whereby the United States 
contributes $200,000 each year. However, the U.S. funding comes out of 
the amended compact funding and not from FEMA. According to the 
Emergency Management and Performance Grants Program Manager, the FSM 
and RMI will continue to have access to DHS grant program funding for 
disaster preparedness even after the transition of the responsibility 
for disaster emergency and relief assistance goes to USAID. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[End of table] 

Table 12: U.S. Postal Service Program: 

Dollars in millions. 

Purpose and legislation; 
Under the amended compacts with the FSM and the RMI, the services and 
programs of the U.S. Postal Service (USPS) are made available to the 
two countries as provided for in the Federal Programs and Services 
Agreements accompanying the amended compacts. In these supplemental 
agreements, USPS agreed to maintain a reasonable and cost-effective 
level of service for sending mail to and from the United States and 
mail offices of the FSM and the RMI. In addition, under these 
agreements, USPS no longer provides payment for services upon delivery 
(commonly called Cash on Delivery). According to a USPS official 
pursuant to the agreements, USPS also negotiated later with the 
countries to end Special Services, such as Guaranteed Express Mail and 
Insured Mail. This official stated that U.S. postal Money Order Service 
was also terminated on August 31, 2006. Finally, under the amended 
compacts supplemental agreements, the FSM and the RMI agreed that USPS 
could establish special cost-related international rates or standard 
international rates and classifications for mail to the FSM and the RMI 
that would be phased in over a 5-year period, beginning no sooner than 
2006. According to this official, the change became effective with the 
U.S. postal rate increase of January 8, 2006. 

Funding; 
U.S./FSM and U.S./RMI: : According to USPS officials, the cost of 
providing transportation, administration, and technical assistance are 
supposed to be reimbursed by the Department of the Interior (DOI). 
However, USPS reported that under the original compact, they were not 
reimbursed their full costs. Under the supplemental agreement to the 
amended compact, which allows USPS transition to international rates to 
the FSM and the RMI over a phased-in period, USPS expects that the 
amount of their subsidy for this service will decline. 
USPS was unable to separate out the costs of providing services to the 
FSM, RMI, and Republic of Palau, but provided the following combined 
totals: 
FY2004: Total costs - $3.13 Reimbursed by DOI: $2.26 Unpaid balance: 
$0.87; 
FY2005: Total costs - $2.53 Reimbursed by DOI: $2.43 Unpaid balance: 
$0.10[A]. 

Use of funds; 
U.S./FSM: USPS transports mail and parcels to and from the FSM and 
provides equipment, material, supplies, and technical assistance to the 
country. During 2005, the FSM received approximately 519,000 pounds of 
mail and sent out approximately 151,000 pounds; 
U.S./RMI: USPS transports mail and parcels to and from the RMI and 
gives equipment, material, supplies, and technical assistance to the 
country. During 2005, the RMI received approximately 385,000 pounds of 
mail and sent out approximately 73,000 pounds. 

Program observations; 
USPS provides assistance and services in accordance with the amended 
compact, including mail transportation and technical assistance. As 
permitted in the amended compacts supplemental agreements between both 
countries and the United States, beginning in January 2006, USPS began 
to phase in new international rates. According to USPS officials, while 
this has resulted in increased costs to the countries for mail sent to 
the FSM and the RMI, they believe this will increase its revenue and 
thus offset some of the cost that DOI does not reimburse. The change in 
postal rates has created controversy in the Marshall Islands, with 
government and business leaders asking that a rate hike be 
reconsidered. There has not been a similar request from the FSM. RMI 
per-capita in-bound mail volume is almost 44 percent greater than the 
per-capital FSM in-bound mail volume. 

USPS officials reported that prior to the termination of Special 
Services, such as Express Mail Guarantee, Cash on Delivery, and 
insurance, USPS had paid out thousands of dollars yearly in claims to 
customers. 

Before postal Money Order Service was terminated in August 2006, USPS 
reported that it had tightened control on all money order transactions 
from the FSM and the RMI. A finance manager in USPS's Honolulu office 
reviewed the countries' transaction reports and reported any 
irregularities to the U.S. Postal Inspection Service. In the past 2 
years, USPS reported one incident of money order irregularities that 
occurred in January 2006 in the RMI. In this instance, USPS fully 
collected all money due to the agency, and the employees involved were 
terminated. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[A] The unpaid balances do not carry over from year to year but reflect 
those annual costs for which USPS was not reimbursed by DOI. 

[End of table] 

Table 13: Federal Aviation Administration Program: 

Dollars in millions. 

Purpose and legislation; 
The Vision 100 - Century of Aviation Reauthorization Act (Pub. L. 
No.108-176) made sponsors of airports in the FSM and the RMI eligible 
for grants from the Airport Improvement Program discretionary fund and 
the Small Airport Fund for 2004 through 2007. The access to these funds 
is new. Under the original compact, the Federal Aviation Administration 
(FAA) did not provide direct funds to the RMI and the FSM but was 
required to provide aviation safety services in the countries. Under 
the amended compacts' supplemental agreements, the United States again 
agreed to provide aviation safety services to (1) foster safe and 
efficient air travel to the two countries and (2) facilitate the 
establishment of aviation safety authorities and aviation safety 
statutory and regulatory regimes in the FSM, and provide advice and 
guidance to aviation safety statutory and regulatory regimes and 
aviation safety authorities of the RMI. 

Funding; 
U.S./FSM: FY2004: $9.45; 
U.S./FSM: FY2005: $3.35; 
U.S./FSM: FY2006: $11.05; 
U.S./RMI: FY2004: $1.50; 
U.S./RMI: FY2005: $11.00; 
U.S./RMI: FY2006: $13.50. 

Use of funds; 
U.S./FSM: The FSM submitted applications to use airport improvement 
funds in Chuuk, Kosrae, Ponhpei, and Yap. Construction within the four 
states was delayed due to the length of time required to develop and 
approve the FSM application, which included all four projects, and to 
the difficulty for the FAA of coordinating four separate state airport 
projects with staggered construction dates. 
The first work will be done in Yap, with Pohnpei, Chuuk, and Kosrae to 
follow. Work on the Yap airport, which suffered typhoon damages, 
started in January 2006 and is expected to be completed by January 
2007. A short-term repair to the Pohnpei runway was completed in August 
2006, and the permanent repair is scheduled to start in 2007. Bids for 
Aircraft Rescue and Fire Fighting building plans for each of the states 
were expected in November 2006. 
The FAA also provided workshops, such as Airport Emergency Operations 
Training, to the personnel of each airport; 
U.S./RMI: According to a RMI Port Authority official, the RMI project 
is well under way, but construction has been slow because of the need 
to keep their single runway operational. Repair work thus has been 
shifted to evening hours when there are no scheduled flights. 
The rehabilitation of the runway at the Majuro airport started in 
September 2005 and was scheduled to be completed by September 2006. 
The FAA also provided various workshops, such as Airport Emergency 
Operations Training, to the personnel of the Majuro airport. 

Program observations; 
The FAA appears to be working effectively with the RMI and FSM 
governments in implementing the Airport Improvement Program. Although 
officials in each country noted various delays and problems with the 
implementation of the projects, they have acknowledged that they would 
not have been able to fund these needed repairs on their own. 

The FAA is also addressing safety and security issues. For example, the 
FAA deployed a special inspection team in October 2005 to investigate 
safety and security concerns raised in a cable from the FSM U.S. 
Embassy. The inspection report addressed the issues raised in the cable 
and concluded that the equipment, facility, and personnel in place at 
the time of the inspection provided for safe airport operations and 
that the completion of the Airport Improvement Program projects at the 
Yap airport will bring them into full compliance with current FAA 
standards. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[End of table] 

Table 14: National Weather Service Program: 

Dollars in millions. 

Purpose and legislation; 
The National Weather Service (NWS) provides weather forecasts and 
warnings for the United States and its territories, adjacent waters, 
and ocean areas for the protection of life and property and the 
enhancement of the national economy. The FSM and the RMI weather 
offices provide warnings, observations, and adaptive local forecasts as 
well as provide inputs to Guam's weather service for its daily Western 
Pacific area forecasts. Under the amended compacts with the FSM and the 
RMI, the services and programs of the NWS are made available to the two 
countries as provided for in the Federal Programs and Services 
Agreements accompanying the amended compacts. 

Funding; 
U.S./FSM: FY2004: $0.92; 
U.S./FSM: FY2005: $1.05; 
U.S./FSM: FY2006: $1.02[A]; 
U.S./RMI: FY2004: $0.34; 
U.S./RMI: FY2005: $0.46; 
U.S./RMI: FY2006: $0.37[A]. 

Use of funds; 
U.S./FSM: The FSM weather service offices are located in Chuuk, 
Pohnpei, and Yap, and a weather reporting station is located in Kosrae. 
These facilities provide weather forecasts, limited observations, and 
data to FSM citizens. According to a NWS official, these offices are 
fully staffed by FSM citizens. The official said that the offices 
receive funding on a cost-reimbursable basis, and technical assistance, 
advice, and training through the U.S. NWS. The official also stated 
that according to NWS evaluations, the three weather service offices' 
staff are as capable and as well trained as comparable U.S.-based 
weather service offices. 
According to a NWS official, the NWS is funding a new Weather Forecast 
Office in Pohnpei estimated at $2.8 million. The project is expected to 
begin in 2007; 
U.S./RMI: The RMI weather service office provides weather forecasts and 
data to RMI citizens. According to a NWS official, the office is fully 
staffed by RMI citizens. He said that the office receives funding on a 
cost-reimbursable basis, and technical assistance, advice, and training 
through the U.S. NWS. The official also stated that according to NWS 
evaluations, the weather service office's staff is as capable and as 
well trained as comparable U.S.-based weather service offices. 
According to a NWS official, the NWS paid an additional $1.98 million 
for a new Weather Forecast Office in Majuro. The majority of these 
funds were obligated in 2006. 

Program observations; 
U.S./FSM: The program provides the FSM with the facilities, equipment, 
technical assistance, and resources needed to operate weather services. 
The NWS Pacific Region Director stated that an example of the program's 
effectiveness was demonstrated in Yap in relation to Typhoon Sudal, 
which struck on April 8-9, 2004. As a result of weather service 
outreach and education in Yap, the local communities responded to early 
warnings of Typhoon Sudal, one of the strongest storms ever to strike 
Yap, and were well prepared when it struck. Yap residents suffered no 
deaths or serious injuries from the storm; 
U.S./RMI: The program provides the RMI with the facilities, equipment, 
technical assistance, and resources needed to operate weather services. 
The NWS Pacific Region Director stated that outreach and training 
performed on a continuing basis by both local office personnel and NWS 
personnel from Guam provide the basis for community readiness and 
response. 

Sources: GAO analysis of documents and interviews with agency 
officials. 

[A] As of August 2006. 

[End of table] 

[End of section] 

Appendix III: U.S. Funds to Be Provided to the RMI Related to Kwajalein 
Atoll, 2004 through 2023: 

Table 15: U.S. Funds to Be Provided to the RMI Related to Kwajalein 
Atoll under the Terms of the Amended Compact, 2004 through 2023: 

Dollars in millions. 

Compact reference. 

Section 211(b)(1)[B]; 
2004-2013: $3.1; 
2014[A] -2023: $5.1; 
Purpose: To address the special needs of the community at Ebeye and 
other Marshallese communities within Kwajalein Atoll.[C]. 

Section 211(b)(2)[B]; 
2004-2013: 1.9; 
2014[A] -2023: 1.9; 
Purpose: To address the special needs of the community at Ebeye and 
other Marshallese communities within Kwajalein Atoll, with emphasis on 
the Kwajalein landowners.[D]. 

Section 211(b)(3)[B]; 
2004-2013: 0.2; 
2014[A] -2023: 0.2; 
Purpose: To support increased participation of the RMI Environmental 
Protection Authority in the U.S. Army Kwajalein Atoll Environmental 
Standards Survey, and to promote the RMI government's capacity for 
independent analysis of the survey's findings and conclusions.[E]. 

Section 212 - Kwajalein Impact and Use; 
2004-2013: 15.0; 
2014[A] -2023: 18.0; 
Purpose: Funds are provided to the RMI government to compensate for any 
impacts of the U.S. military on the atoll. The RMI government uses the 
funds to compensate Kwajalein Atoll landowners for U.S. access to the 
atoll. 

Source: Amended RMI compact, Pub. L. No. 108-188. 

Note: The funds shown in this table are subject to inflation 
adjustment, as provided under section 218 of the compact. Furthermore, 
the "Agreement Regarding the Military Use and Operating Rights of the 
Government of the United States in the Republic of the Marshall Islands 
Concluded Pursuant to sections 321 and 323 of the Compact of Free 
Association, as Amended" states that the funds referenced in the table 
shall be provided through fiscal year 2023, "and thereafter for as long 
as this agreement remains in effect." 

[A] Beginning in 2014, the amount of total funding provided to the RMI 
will increase by $5 million. Of this amount, $3 million is to be 
allocated to "Kwajalein Impact and Use" (sec. 212), while an additional 
$2 million is to be added to annual grants to address the special needs 
of Kwajalein Atoll (sec. 211(b)(1)). 

[B] Funds for this use are made available under section 211(a) that 
provides grant assistance for education, health care, the environment, 
public sector capacity building, and private sector development. 

[C] Within its allocation of funds for the education, health, and 
infrastructure sector grants, the RMI designated funds for Kwajalein 
Atoll in 2004 and 2005. 

[D] These funds represent a continuation of funds that had gone to the 
Kwajalein Atoll Development Authority under the original compact. 

[E] Within its allocation of funds for the environment sector grant, 
the RMI designated funds for Kwajalein Atoll in 2004 and 2005. 

[End of table] 

[End of section] 

Appendix IV: FSM and RMI Sector Grants, 2004 through 2006: 

Table 16 lists the compact sector grant allocation to the five FSM 
governments in 2004 through 2006. Table 17 lists the compact sector 
grant allocation of the RMI, including the Kwajalein funding, in 2004 
through 2006. 

Table 16: Sector Grant Allocations to the Five FSM Governments, 2004 
through 2006: 

Education. 

Section grant/recipient: FSM national government; 
2004: Sector grant amount: $4,324,122; 
2004: Percentage of total sector grant: 17%; 
2005: Sector grant amount: $4,511,317; 
2005: Percentage of total sector grant: 17%; 
2006: Sector grant amount: $4,159,081; 
2006: Percentage of total sector grant: 16%. 

Section grant/recipient: Chuuk; 
2004: Sector grant amount: 8,140,265; 
2004: Percentage of total sector grant: 31; 
2005: Sector grant amount: 8,804,369; 
2005: Percentage of total sector grant: 32; 
2006: Sector grant amount: 9,432,618; 
2006: Percentage of total sector grant: 36. 

Section grant/recipient: Kosrae; 
2004: Sector grant amount: 1,883,853; 
2004: Percentage of total sector grant: 7; 
2005: Sector grant amount: 2,070,432; 
2005: Percentage of total sector grant: 8; 
2006: Sector grant amount: 2,412,498; 
2006: Percentage of total sector grant: 9. 

Section grant/recipient: Ponhpei; 
2004: Sector grant amount: 7,373,651; 
2004: Percentage of total sector grant: 28; 
2005: Sector grant amount: 7,469,772; 
2005: Percentage of total sector grant: 28; 
2006: Sector grant amount: 6,978,447; 
2006: Percentage of total sector grant: 27. 

Section grant/recipient: Yap; 
2004: Sector grant amount: 4,243,681; 
2004: Percentage of total sector grant: 16; 
2005: Sector grant amount: 4,249,157; 
2005: Percentage of total sector grant: 16; 
2006: Sector grant amount: 3,149,415; 
2006: Percentage of total sector grant: 12. 

Subtotal; 
2004: Sector grant amount: $25,965,572; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $27,105,047; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $26,132,059; 
2006: Percentage of total sector grant: 100%. 

Environment. 

Section grant/recipient: FSM national government; 
2004: Sector grant amount: $79,477; 
2004: Percentage of total sector grant: 4%; 
2005: Sector grant amount: $111,421; 
2005: Percentage of total sector grant: 5%; 
2006: Sector grant amount: $0; 
2006: Percentage of total sector grant: --. 

Section grant/recipient: Chuuk; 
2004: Sector grant amount: 378,394; 
2004: Percentage of total sector grant: 19; 
2005: Sector grant amount: 502,499; 
2005: Percentage of total sector grant: 21; 
2006: Sector grant amount: 798,428; 
2006: Percentage of total sector grant: 37%. 

Section grant/recipient: Kosrae; 
2004: Sector grant amount: 302,523; 
2004: Percentage of total sector grant: 15; 
2005: Sector grant amount: 296,592; 
2005: Percentage of total sector grant: 12; 
2006: Sector grant amount: 335,240; 
2006: Percentage of total sector grant: 16. 

Section grant/recipient: Ponhpei; 
2004: Sector grant amount: 666,944; 
2004: Percentage of total sector grant: 33; 
2005: Sector grant amount: 688,181; 
2005: Percentage of total sector grant: 29; 
2006: Sector grant amount: 665,807; 
2006: Percentage of total sector grant: 31. 

Section grant/recipient: Yap; 
2004: Sector grant amount: 595,854; 
2004: Percentage of total sector grant: 29;  
2005: Sector grant amount: 791,258; 
2005: Percentage of total sector grant: 33; 
2006: Sector grant amount: 337,977; 
2006: Percentage of total sector grant: 16. 

Subtotal; 
2004: Sector grant amount: $2,023,192; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $2,389,951; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $2,137,452; 
2006: Percentage of total sector grant: 100%. 

Health. 

Section grant/recipient: FSM national government; 
2004: Sector grant amount: $553,613; 
2004: Percentage of total sector grant: 4%; 
2005: Sector grant amount: $763,235; 
2005: Percentage of total sector grant: 4%; 
2006: Sector grant amount: $764,383; 
2006: Percentage of total sector grant: 5%. 

Section grant/recipient: Chuuk; 
2004: Sector grant amount: 4,691,707; 
2004: Percentage of total sector grant: 30; 
2005: Sector grant amount: 5,595,636; 
2005: Percentage of total sector grant: 32; 
2006: Sector grant amount: 6,292,745; 
2006: Percentage of total sector grant: 38. 

Section grant/recipient: Kosrae; 
2004: Sector grant amount: 1,326,663; 
2004: Percentage of total sector grant: 9; 
2005: Sector grant amount: 1,674,212; 
2005: Percentage of total sector grant: 10; 
2006: Sector grant amount: 1,763,553; 
2006: Percentage of total sector grant: 11. 

Section grant/recipient: Ponhpei; 
2004: Sector grant amount: 5,989,461; 
2004: Percentage of total sector grant: 39; 
2005: Sector grant amount: 6,200,560; 
2005: Percentage of total sector grant: 36; 
2006: Sector grant amount: 4,898,393; 
2006: Percentage of total sector grant: 30. 

Section grant/recipient: Yap; 
2004: Sector grant amount: 2,881,672; 
2004: Percentage of total sector grant: 19; 
2005: Sector grant amount: 3,197,090; 
2005: Percentage of total sector grant: 18; 
2006: Sector grant amount: 2,675,865; 
2006: Percentage of total sector grant: 16. 

Subtotal; 
2004: Sector grant amount: $15,443,116; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $17,430,733; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $16,394,939; 
2006: Percentage of total sector grant: 100%. 

Infrastructure; 
2004: Sector grant amount: $17,119,155; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $17,249,121; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $24,335,717; 
2006: Percentage of total sector grant: 100%. 

Subtotal; 
2004: Sector grant amount: $17,119,155; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $17,249,121; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $24,335,717; 
2006: Percentage of total sector grant: 100%. 

Private Sector. 

Section grant/recipient: FSM national government; 
2004: Sector grant amount: $513,091; 
2004: Percentage of total sector grant: 14%; 
2005: Sector grant amount: $0; 
2005: Percentage of total sector grant: --; 
2006: Sector grant amount: $0; 
2006: Percentage of total sector grant: --. 

Section grant/recipient: Chuuk; 
2004: Sector grant amount: 1,338,874; 
2004: Percentage of total sector grant: 35; 
2005: Sector grant amount: 1,403,876; 
2005: Percentage of total sector grant: 35%; 
2006: Sector grant amount: 1,498,616; 
2006: Percentage of total sector grant: 37%. 

Section grant/recipient: Kosrae; 
2004: Sector grant amount: 795,261; 
2004: Percentage of total sector grant: 21; 
2005: Sector grant amount: 988,025; 
2005: Percentage of total sector grant: 24; 
2006: Sector grant amount: 606,029; 
2006: Percentage of total sector grant: 15. 

Section grant/recipient: Ponhpei; 
2004: Sector grant amount: 525,423; 
2004: Percentage of total sector grant: 14; 
2005: Sector grant amount: 657,602; 
2005: Percentage of total sector grant: 16; 
2006: Sector grant amount: 887,817; 
2006: Percentage of total sector grant: 22. 

Section grant/recipient: Yap; 
2004: Sector grant amount: 613,470; 
2004: Percentage of total sector grant: 16; 
2005: Sector grant amount: 989,407; 
2005: Percentage of total sector grant: 24; 
2006: Sector grant amount: 1,046,701; 
2006: Percentage of total sector grant: 26. 

Subtotal; 
2004: Sector grant amount: $3,786,119; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $4,038,910; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $4,039,163; 
2006: Percentage of total sector grant: 100%. 

Private sector capacity building. 

Section grant/recipient: FSM national government; 
2004: Sector grant amount: $4,287,697; 
2004: Percentage of total sector grant: 37%; 
2005: Sector grant amount: $608,028; 
2005: Percentage of total sector grant: 8%; 
2006: Sector grant amount: $0; 
2006: Percentage of total sector grant: --. 

Section grant/recipient: Chuuk; 
2004: Sector grant amount: 2,853,813; 
2004: Percentage of total sector grant: 24; 
2005: Sector grant amount: 3,001,410; 
2005: Percentage of total sector grant: 39; 
2006: Sector grant amount: 2,724,099; 
2006: Percentage of total sector grant: 44%. 

Section grant/recipient: Kosrae; 
2004: Sector grant amount: 1,013,866; 
2004: Percentage of total sector grant: 9; 
2005: Sector grant amount: 1,113,866; 
2005: Percentage of total sector grant: 14; 
2006: Sector grant amount: 1,346,976; 
2006: Percentage of total sector grant: 22. 

Section grant/recipient: Ponhpei; 
2004: Sector grant amount: 1,676,163; 
2004: Percentage of total sector grant: 14; 
2005: Sector grant amount: 1,542,488; 
2005: Percentage of total sector grant: 20; 
2006: Sector grant amount: 759,254; 
2006: Percentage of total sector grant: 12. 

Section grant/recipient: Yap; 
2004: Sector grant amount: 1,831,307; 
2004: Percentage of total sector grant: 16; 
2005: Sector grant amount: 1,520,446; 
2005: Percentage of total sector grant: 20;  
2006: Sector grant amount: 1,345,585; 
2006: Percentage of total sector grant: 22. 

Subtotal; 
2004: Sector grant amount: $11,662,846; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $7,786,238; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $6,175,914; 
2006: Percentage of total sector grant: 100%. 

Total; 
2004: Sector grant amount: $76,000,000; 
2004: Percentage of total sector grant: --; 
2005: Sector grant amount: $76,000,000; 
2005: Percentage of total sector grant: --; 
2006: Sector grant amount: $79,215,244; 
2006: Percentage of total sector grant: --. 

Source: GAO analysis of FSM 2004 through 2006 sector grant agreements. 

[End of table] 

Table 17: RMI Sector Grants, Including Kwajalein Funding, 2004 through 
2006: 

Sector grant: Education; 
2004: Sector grant amount: $9,648,932; 
2004: Percentage of total sector grant: 90%; 
2005: Sector grant amount: $9,541,921; 
2005: Percentage of total sector grant: 86%; 
2006: Sector grant amount: $10,834,083; 
2006: Percentage of total sector grant: 91%. 

Sector grant: Kwajalein funding; 
2004: Sector grant amount: 1,100,000; 
2004: Percentage of total sector grant: 10; 
2005: Sector grant amount: 1,600,000; 
2005: Percentage of total sector grant: 14; 
2006: Sector grant amount: 1,100,000; 
2006: Percentage of total sector grant: 9. 

Subtotal; 
2004: Sector grant amount: $10,748,932; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $11,141,921; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $11,934,083; 
2006: Percentage of total sector grant: 100%. 

Sector grant: Environment; 
2004: Sector grant amount: $200,000; 
2004: Percentage of total sector grant: 50%; 
2005: Sector grant amount: $202,360; 
2005: Percentage of total sector grant: 50%; 
2006: Sector grant amount: $202,480; 
2006: Percentage of total sector grant: 50%. 

Sector grant: Kwajalein funding; 
2004: Sector grant amount: 200,000; 
2004: Percentage of total sector grant: 50; 
2005: Sector grant amount: 202,360; 
2005: Percentage of total sector grant: 50; 
2006: Sector grant amount: 205,520; 
2006: Percentage of total sector grant: 50. 

Subtotal; 
2004: Sector grant amount: $400,000; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $404,720; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $408,000; 
2006: Percentage of total sector grant: 100%. 

Sector grant: Health; 
2004: Sector grant amount: $5,894,448; 
2004: Percentage of total sector grant: 85%; 
2005: Sector grant amount: $5,564,197; 
2005: Percentage of total sector grant: 79%; 
2006: Sector grant amount: $5,597,181; 
2006: Percentage of total sector grant: 84%. 

Sector grant: Kwajalein funding; 
2004: Sector grant amount: 1,000,000; 
2004: Percentage of total sector grant: 15; 
2005: Sector grant amount: 1,500,000; 
2005: Percentage of total sector grant: 21; 
2006: Sector grant amount: 1,085,560; 
2006: Percentage of total sector grant: 16. 

Subtotal; 
2004: Sector grant amount: $6,894,448; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $7,064,197; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $6,682,741; 
2006: Percentage of total sector grant: 100%. 

Sector grant: Infrastructure; 
2004: Sector grant amount: $13,700,000; 
2004: Percentage of total sector grant: 93%; 
2005: Sector grant amount: $13,485,745; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $12,495,679; 
2006: Percentage of total sector grant: 93%. 

Sector grant: Kwajalein funding; 
2004: Sector grant amount: 1,000,000; 
2004: Percentage of total sector grant: 7; 
2005: Sector grant amount: 0; 
2005: Percentage of total sector grant: -- ; 
2006: Sector grant amount: 1,000,000; 
2006: Percentage of total sector grant: 7. 

Subtotal; 
2004: Sector grant amount: $14,700,000; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $13,485,745; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $13,495,679; 
2006: Percentage of total sector grant: 100%. 

Sector grant: Private sector; 
2004: Sector grant amount: $356,620; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $361,943; 
2005: Percentage of total sector grant: 100% ; 
2006: Sector grant amount: $361,943; 
2006: Percentage of total sector grant: 10%. 

Subtotal; 
2004: Sector grant amount: $356,620; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $361,943; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $361,943; 
2006: Percentage of total sector grant: 100%. 

Sector grant: Public sector capacity building; 
2004: Sector grant amount: $0; 
2004: Percentage of total sector grant: --; 
2005: Sector grant amount: $103,512; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $103,154; 
2006: Percentage of total sector grant: 100%. 

Subtotal; 
2004: Sector grant amount: $0; 
2004: Percentage of total sector grant: --; 
2005: Sector grant amount: $103,514; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $103,514; 
2006: Percentage of total sector grant: 100%. 

Sector grant: Special Needs (Ebeye); 
2004: Sector grant amount: $1,900,000; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $1,992,420; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $1,882,440; 
2006: Percentage of total sector grant: 100%. 

Subtotal; 
2004: Sector grant amount: $1,900,000; 
2004: Percentage of total sector grant: 100%; 
2005: Sector grant amount: $1,992,420; 
2005: Percentage of total sector grant: 100%; 
2006: Sector grant amount: $1,882,440; 
2006: Percentage of total sector grant: 100%. 

Total; 
2004: Sector grant amount: $33,100,000; 
2004: Percentage of total sector grant: --; 
2005: Sector grant amount: $32,562,040; 
2005: Percentage of total sector grant: --; 
2006: Sector grant amount: $32,985,960; 
2006: Percentage of total sector grant: --. 

Source: GAO analysis of RMI 2004 through 2006 sector grant agreements: 

[End of table] 

[End of section] 

Appendix V: Single Audit Reports for the FSM and the RMI, 2001 through 
2005: 

The FSM national government and the individual states in most cases did 
not submit their required single audit reports on time for 2001 through 
2005, while the RMI has generally improved the timeliness of its single 
audits, with its last three reports submitted by the established 
deadlines. In nearly all cases, auditors rendered qualified audit 
opinions on both the financial reporting and compliance with 
requirements of major federal programs for those single audit reports 
that were submitted. Furthermore, internal control weaknesses have 
persisted in both countries since we last reported on single audits in 
October 2003.[Footnote 78] In March 2006, JEMCO threatened to take 
action, such as withholding funds, designating the FSM as a high-risk 
grantee, or conditionally approving sector grants for 2007, if the FSM 
and its states did not submit their 2005 single audits by July 1, 
2006.[Footnote 79] 

Single Audits Were Not Timely, but Timeliness Improved: 

The FSM and the RMI are required to submit audit reports each year to 
comply with compact and fiscal procedures agreement requirements. The 
submitted audits are to be conducted within the meaning of the Single 
Audit Act,[Footnote 80] as amended. Single audits are a key control for 
the oversight and monitoring of the FSM and RMI governments' use of 
U.S. awards, and are due to the Federal Audit Clearinghouse[Footnote 
81] 9 months after the end of the audited period.[Footnote 82] All 
single audit reports include the auditor's opinion on the audited 
financial statements and a report on the internal controls related to 
financial reporting. The single audit reports also include the 
auditor's opinion on compliance with requirements of major federal 
programs and a report on internal controls related to compliance with 
laws, regulations, and the provisions of contracts or grant agreements. 
The FSM national government and the individual states in most cases did 
not submit their single audit reports[Footnote 83] on time for 2001 
through 2005, while the RMI has generally improved the timeliness of 
its single audits, with its last three reports submitted by the 
established deadlines. Table 18 shows the timeliness of reports for the 
FSM and the RMI. 

Table 18: Single Audit Act Report Submissions, 2001 through 2005: 

Fiscal year-end: 2001; 
Number of months single audits were received past deadline, by country: 
RMI: 15; 
Number of months single audits were received past deadline, by country: 
FSM national government: 27; 
Number of months single audits were received past deadline, by country: 
Chuuk: 12; 
Number of months single audits were received past deadline, by country: 
Kosrae: 26; 
Number of months single audits were received past deadline, by country: 
Pohnpei: 26; 
Number of months single audits were received past deadline, by country: 
Yap: 19. 

Fiscal year-end: 2002; 
Number of months single audits were received past deadline, by country: 
RMI: 3; 
Number of months single audits were received past deadline, by country: 
FSM national government: 26; 
Number of months single audits were received past deadline, by country: 
Chuuk: 38; 
Number of months single audits were received past deadline, by country: 
Kosrae: 11; 
Number of months single audits were received past deadline, by country: 
Pohnpei: 11; 
Number of months single audits were received past deadline, by country: 
Yap: 12. 

Fiscal year-end: 2003; 
Number of months single audits were received past deadline, by country: 
RMI: 0; 
Number of months single audits were received past deadline, by country: 
FSM national government: 25; 
Number of months single audits were received past deadline, by country: 
Chuuk: 24; 
Number of months single audits were received past deadline, by country: 
Kosrae: 21; 
Number of months single audits were received past deadline, by country: 
Pohnpei: 19; 
Number of months single audits were received past deadline, by country: 
Yap: 18. 

Fiscal year-end: 2004; 
Number of months single audits were received past deadline, by country: 
RMI: 0; 
Number of months single audits were received past deadline, by country: 
FSM national government: 14; 
Number of months single audits were received past deadline, by country: 
Chuuk: 13; 
Number of months single audits were received past deadline, by country: 
Kosrae: 12; 
Number of months single audits were received past deadline, by country: 
Pohnpei: 7; 
Number of months single audits were received past deadline, by country: 
Yap: 9. 

Fiscal year-end: 2005; 
Number of months single audits were received past deadline, by country: 
RMI: 0; 
Number of months single audits were received past deadline, by country: 
FSM national government: 2; 
Number of months single audits were received past deadline, by country: 
Chuuk: 1; 
Number of months single audits were received past deadline, by country: 
Kosrae: 0; 
Number of months single audits were received past deadline, by country: 
Pohnpei: 0; 
Number of months single audits were received past deadline, by country: 
Yap: 0. 

Sources: GAO analysis of OMB Circular A-133, auditors' reports, and 
Federal Audit Clearinghouse submission dates. 

Note: The deadline is 9 months after the close of entity's fiscal year. 
The date received is based on the most recent date that the required 
Single Audit form is received by the Federal Audit Clearinghouse. 

[End of table] 

The lack of timeliness of the single audit reports for 2001 through 
2005, especially for the FSM and its four states, has meant that U.S. 
agencies have limited knowledge of the territorial governments' 
accountability over U.S. funds received. In addition, the governments' 
inability to prepare financial statements and have them audited within 
9 months of the fiscal year-end suggests weaknesses in the underlying 
financial systems and processes needed to produce financial information 
to efficiently and effectively manage the day-to-day operations of 
government. 

Nearly All Audit Opinions on Financial Reporting Were Qualified and 
Contained Material Weaknesses and Reportable Conditions: 

Among the 30 audit reports on financial reporting submitted by the FSM 
national and its state governments and the RMI for 2001 through 2005, 
26 reports received qualified opinions.[Footnote 84] In 2005, Pohnpei 
received an unqualified[Footnote 85] ("clean") audit opinion on their 
financial statements. In 2004 and 2005, Chuuk received a 
disclaimed[Footnote 86] opinion on its financial statement, and Yap 
received a qualified/adverse[Footnote 87] opinion on its 2004 financial 
statement. Table 19 shows the type of financial statement audit 
opinions for the FSM and the RMI from 2001 through 2005. 

Table 19: Financial Statement Audit Opinions for the RMI and the FSM, 
2001 through 2005: 

Year: 2001; 
Type of opinion: RMI: Qualified; 
Type of opinion: FSM national government: Qualified; 
Type of opinion: Chuuk: Qualified; 
Type of opinion: Kosrae: Qualified; 
Type of opinion: Pohnpei: Qualified; 
Type of opinion: Yap: Qualified. 

Year: 2002; 
Type of opinion: RMI: Qualified; 
Type of opinion: FSM national government: Qualified; 
Type of opinion: Chuuk: Qualified; 
Type of opinion: Kosrae: Qualified; 
Type of opinion: Pohnpei: Qualified; 
Type of opinion: Yap: Qualified. 

Year: 2003; 
Type of opinion: RMI: Qualified; 
Type of opinion: FSM national government: Qualified; 
Type of opinion: Chuuk: Qualified; 
Type of opinion: Kosrae: Qualified; 
Type of opinion: Pohnpei: Qualified; 
Type of opinion: Yap: Qualified. 

Year: 2004; 
Type of opinion: RMI: Qualified; 
Type of opinion: FSM national government: Qualified; 
Type of opinion: Chuuk: Disclaimed; 
Type of opinion: Kosrae: Qualified; 
Type of opinion: Pohnpei: Qualified; 
Type of opinion: Yap: Qualified/ Adverse. 

Year: 2005; 
Type of opinion: RMI: Qualified; 
Type of opinion: FSM national government: Qualified; 
Type of opinion: Chuuk: Disclaimed; 
Type of opinion: Kosrae: Qualified; 
Type of opinion: Pohnpei: Unqualified "clean"; 
Type of opinion: Yap: Qualified. 

Sources: Forms SF-FACs and single audit reports in the Federal Audit 
Clearinghouse database. 

[End of table] 

All of the audit opinions of the FSM national government's financial 
statements from 2001 through 2005 were qualified. The opinions were 
qualified because of the lack of supporting evidence and restrictions 
on the scope of the audit. For example, the auditors qualified their 
opinion on the financial statements in the 2005 FSM report due to the 
following matters: 

* Their inability to determine (1) the propriety of cash and cash 
equivalents, receivables, advances, and amounts due to the FSM state 
governments for the governmental activities and the general fund; 
(2) receivables and amounts due to the FSM state governments for the 
U.S. Federal Grants Fund and the aggregate remaining fund information; 
and (3) cash and cash equivalents and receivables for the Asian 
Development Bank Loan Fund, and their effect on the determination of 
revenues and expenditures/expenses for government activities and the 
remaining aggregate remaining fund information. 

* The lack of audited financial statements of the National Fisheries 
Corporation; Micronesia Longline Fishing Company; Yap Fishing 
Corporation; Yap Fresh Tuna Inc; Chuuk Fresh Tuna, Inc; and Kosrae Sea 
Venture, Inc. 

In addition, all of the audit opinions of the RMIs' financial 
statements during the 2001 through 2005 period were qualified. For 
example, as of 2005, the auditors still could not determine the 
following: 

* the propriety of governmental activities' capital assets, 

* net assets invested in capital assets, and: 

* the net of related debt and depreciation expenses. 

The auditors also were unable to obtain audited financial statements 
for the following RMI component units:[Footnote 88] 

* Ministry of Education Head Start Program; 

* Air Marshall Islands, Inc; 

* Kwajalein Atoll Joint Utilities Resources, Inc; and: 

* Marshall Islands Development Bank. 

The single audits also identified material weaknesses and reportable 
conditions related to the 2005 financial statements reports, totaling 
57 for the FSM and 2 for the RMI (see table 20). These findings 
indicated a lack of sound internal control over financial reporting, 
which is needed to (1) adequately safeguard assets; (2) ensure that 
transactions are properly recorded; and (3) prevent or detect fraud, 
waste, and abuse. For example, in the 2005 FSM single audit report, 
material weaknesses included (1) the lack of documentation to support 
the amounts and disposition of fixed assets, (2) the lack of 
reconciliation of U.S. program receivables, (3) the lack of monitoring 
of receivable billing and collecting, and (4) unreimbursed U.S. 
expenditures. In the RMI 2005 single audit, the auditors found material 
weaknesses that included the use of unaudited financial statements from 
several component units and the lack of fixed asset inventory. 

Table 20: Numbers of FSM and RMI Material Weaknesses and Reportable 
Conditions in Internal Control over Financial Statement Reporting 
Identified in Single Audit Reports, 2005: 

Internal control over financial reporting: Material weaknesses; 
RMI: 2; 
FSM: 20; 
FSM national government: 7; 
Chuuk: 11; 
Kosrae: 2; 
Pohnpei: 0; 
Yap: 0. 

Internal control over financial reporting: Reportable conditions; 
RMI: 0; 
FSM: 37; 
FSM national government: 15; 
Chuuk: 2; 
Kosrae: 10; 
Pohnpei: 5; 
Yap: 5. 

Internal control over financial reporting: Total; 
RMI: 2; 
FSM: 57; 
FSM national government: 22; 
Chuuk: 13; 
Kosrae: 12; 
Pohnpei: 5; 
Yap: 5. 

Sources: Single audit reports for 2005 from the FSM national government 
and four states and the RMI. 

Note: Material weaknesses are a subset of reportable conditions, but 
such weaknesses are considered more serious. To compute the number of 
reportable conditions that were not material weaknesses shown in this 
table, we subtracted the number of material weaknesses from the total 
findings. 

[End of table] 

We found that 14 of the 57 findings previously mentioned from the 2005 
FSM single audit report on financial reporting were recurring problems 
from the previous year or had been reported for several consecutive 
years. Likewise, the 2 findings from the 2005 RMI single audit report 
were recurring problems reported for several consecutive years. The FSM 
has developed corrective action plans to address about 91 percent of 
the financial statement findings in the 2005 single audits, and the RMI 
has developed plans for both of its financial statement reportable 
findings. For example, the FSM said that it would make efforts to 
reconcile intergovernmental balances and discuss this issue with all 
four states in 2006, and the RMI said that it would hire a consultant 
qualified to conduct the valuation of fixed assets. 

All Audit Opinions on Compliance with Requirements of Major Federal 
Programs Were Qualified and Contained Material Weaknesses and 
Reportable Conditions: 

In addition to the auditor's report on financial statement findings, 
the auditors also provide a report on the countries' compliance with 
requirements of major federal programs. All 30 of the audit reports on 
such compliance submitted by the FSM national and its state governments 
and the RMI for 2001 through 2005 received qualified opinions. 
Moreover, in the 2005 single audit reports of compliance with 
requirements of major federal programs, auditors reported 45 material 
weaknesses and reportable conditions findings for the FSM and 11 for 
the RMI (see table 21). For example: 

* In the FSM, findings that were material weaknesses included (1) the 
lack of internal controls over cash management requirements and (2) no 
reconciliation of U.S. grants receivable per Catalog of Federal 
Domestic Assistance number or by program number. 

* In the RMI, findings that were material weaknesses included (1) a 
lack of inventory of fixed assets and (2) the lack of audit reports 
from subrecipient component units. 

Table 21: Numbers of FSM and RMI Material Weaknesses and Reportable 
Conditions in Internal Control over Compliance with Requirements of 
Major Federal Programs Identified in Single Audit Reports, 2005: 

Internal control over compliance with federal awards: Material 
weaknesses; 
RMI: 6; 
FSM total: 22; 
FSM national government: 2; 
Chuuk: 9; 
Kosrae: 11; 
Pohnpei: 0; 
Yap: 0. 

Internal control over compliance with federal awards: Reportable 
conditions; 
RMI: 5; 
FSM total: 23; 
FSM national government: 18; 
Chuuk: 0; 
Kosrae: 0; 
Pohnpei: 2; 
Yap: 3. 

Total; 
RMI: 11; 
FSM total: 45; 
FSM national government: 20; 
Chuuk: 9; 
Kosrae: 11; 
Pohnpei: 2; 
Yap: 3. 

Sources: Single audit reports for 2005 from the FSM national government 
and four states and the RMI. 

Note: Material weaknesses are a subset of reportable conditions, but 
such weaknesses are considered more serious. To compute the number of 
reportable conditions that were not material weaknesses shown in this 
table, we subtracted the number of material weaknesses from the total 
findings. 

[End of table] 

We found that only 4 of the 45 findings from the 2005 FSM single audit 
report, and only 2 of the 11 findings from the 2005 RMI single audit 
report, were recurring problems from the previous year or had recurred 
for several consecutive years. For the RMI, this was a significant 
shift from 2002, when 8 of the 11 findings were recurring problems from 
the previous year or had recurred for several consecutive years. The 
FSM has developed corrective action plans to address about 60 percent 
of the 2005 single audit's reportable findings on compliance with 
requirements of major federal programs, and the RMI has developed plans 
for all its reportable findings on such compliance. For example, the 
FSM said that on October 1, 2005, a new procedure was implemented to 
properly monitor the drawdown of U.S. funds and to properly reimburse 
the states on time, and the RMI said that it would hire a consultant to 
assist component units in rectifying their accounting books and 
records. 

High-Risk Designations and Other Sanctions Threatened by OIA as Late 
Reports and Other Problems Persist: 

According to OMB Circular A-133, if a grantee fails to complete its 
single audit reports, U.S. agencies may impose sanctions such as, but 
not limited to, (1) withholding a percentage of federal U.S. awards 
until single audits are completed satisfactorily, (2) withholding or 
disallowing overhead costs, (3) suspending U.S. federal awards until 
the single audit is conducted, or (4) terminating the U.S. federal 
award. At the special March 2006 JEMCO meeting, the OIA Budget Director 
noted that single audits were the most important indicator of financial 
stability provided by a grantee to a grantor. He emphasized that OIA 
was particularly concerned about the lack of FSM single audits and 
notified FSM JEMCO participants that OIA intended to "apply a remedy" 
for single audit noncompliance beginning October 1, 2006, that would 
include the possibility of withholding cash payments. OIA also may take 
necessary steps to have the FSM designated as a "high-risk" grantee. 
Finally, OIA recommended to JEMCO in the March 2006 meeting that if 
audits were not completed by July 1, 2006, that it only conditionally 
approve sector grants for 2007 so that funds may only be released to 
entities in compliance with single audit requirements. This warning 
appeared to have an impact on most of the FSM states, because Kosrae, 
Pohnpei, and Yap completed their 2005 reports on time. 

Other U.S. agencies have not designated the FSM as high risk in the 
past, even though they can assign a grantee as high risk if the grantee 
has a history of unsatisfactory performance, is not financially stable, 
has an inadequate management system, has not conformed to the terms and 
conditions of previous awards, or is otherwise irresponsible. Federal 
agencies that designate a grantee as high risk may impose special terms 
and conditions.[Footnote 89] Currently, none of the U.S. agencies 
providing funds to the FSM and the RMI have designated either country 
as a high-risk grantee, although this may be a possibility if the 
single audits are not completed within the deadlines requested by 
Interior. Officials from the Department of Education told us that, 
because most of the direct grant funding to the FSM has been subsumed 
by the Special Education Grant, which is administered by Interior, 
Education now has an even smaller share of the U.S. funds in the FSM, 
and therefore Interior would be in the best position to invoke a high- 
risk designation if warranted for a particular grant. Nevertheless, 
Education officials did take into account the lack of single audit 
performance when administering program funds and, in the case of funds 
for special education, had imposed additional reporting requirements. 

Tables 22 and 23 show the total numbers of material weaknesses and 
reportable conditions identified in single audit reports for the FSM 
and the RMI in 2001 through 2005. 

Table 22: Numbers of Material Weaknesses and Reportable Conditions 
Identified in Single Audit Reports for FSM National Government and 
States, 2001 through 2005: 

Year: 2001; 
Location: FSM national government; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 5; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 10; 
Reportable findings on internal control over financial reporting: 
Total: 15; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 1; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 1; 
Reportable findings on internal control over compliance with federal 
awards: Total: 2. 

Year: 2001; 
Location: Chuuk; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 2; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 16; 
Reportable findings on internal control over financial reporting: 
Total: 18; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 2; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 6; 
Reportable findings on internal control over compliance with federal 
awards: Total: 8. 

Year: 2001; 
Location: Kosrae; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 15; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 1; 
Reportable findings on internal control over financial reporting: 
Total: 16; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 1; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 4; 
Reportable findings on internal control over compliance with federal 
awards: Total: 5. 

Year: 2001; 
Location: Pohnpei; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 10; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 2; 
Reportable findings on internal control over financial reporting: 
Total: 12; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 2; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 2. 

Year: 2001; 
Location: Yap; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 1; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 7; 
Reportable findings on internal control over financial reporting: 
Total: 8; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 1; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 13; 
Reportable findings on internal control over compliance with federal 
awards: Total: 14. 

Year: 2001; 
Location: Total; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 33; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 36; 
Reportable findings on internal control over financial reporting: 
Total: 69; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 7; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 24; 
Reportable findings on internal control over compliance with federal 
awards: Total: 31. 

Year: 2002; 
Location: FSM national government; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 11; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 1; 
Reportable findings on internal control over financial reporting: 
Total: 12; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 2; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 2. 

Year: 2002; 
Location: Chuuk; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 5; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 15; 
Reportable findings on internal control over financial reporting: 
Total: 20; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 2; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 6; 
Reportable findings on internal control over compliance with federal 
awards: Total: 8. 

Year: 2002; 
Location: Kosrae; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 6; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 9; 
Reportable findings on internal control over financial reporting: 
Total: 15; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 5; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 5. 

Year: 2002; 
Location: Pohnpei; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 8; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 7; 
Reportable findings on internal control over financial reporting: 
Total: 15; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 5; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 1; 
Reportable findings on internal control over compliance with federal 
awards: Total: 6. 

Year: 2002; 
Location: Yap; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 1; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 6; 
Reportable findings on internal control over financial reporting: 
Total: 7; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 1; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 14; 
Reportable findings on internal control over compliance with federal 
awards: Total: 15. 

Year: 2002; 
Location: Total; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 31; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 38; 
Reportable findings on internal control over financial reporting: 
Total: 69; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 15; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 21; 
Reportable findings on internal control over compliance with federal 
awards: Total: 36. 

Year: 2003; 
Location: FSM national government; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 6; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 2; 
Reportable findings on internal control over financial reporting: 
Total: 8; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 3; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 1; 
Reportable findings on internal control over compliance with federal 
awards: Total: 4. 

Year: 2003; 
Location: Chuuk; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 2; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 8; 
Reportable findings on internal control over financial reporting: 
Total: 10; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 7; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 7. 

Year: 2003; 
Location: Kosrae; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 3; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 4; 
Reportable findings on internal control over financial reporting: 
Total: 7; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 2; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 2. 

Year: 2003; 
Location: Pohnpei; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 1; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 6; 
Reportable findings on internal control over financial reporting: 
Total: 7; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 0; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 3; 
Reportable findings on internal control over compliance with federal 
awards: Total: 3. 

Year: 2003; 
Location: Yap; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 1; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 7; 
Reportable findings on internal control over financial reporting: 
Total: 8; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 1; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 5; 
Reportable findings on internal control over compliance with federal 
awards: Total: 6. 

Year: 2003; 
Location: Total; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 13; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 27; 
Reportable findings on internal control over financial reporting: 
Total: 40; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 13; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 9; 
Reportable findings on internal control over compliance with federal 
awards: Total: 22. 

Year: 2004; 
Location: FSM national government; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 9; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 16; 
Reportable findings on internal control over financial reporting: 
Total: 25; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 2; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 14; 
Reportable findings on internal control over compliance with federal 
awards: Total: 16. 

Year: 2004; 
Location: Chuuk; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 17; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 2; 
Reportable findings on internal control over financial reporting: 
Total: 19; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 12; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 12. 

Year: 2004; 
Location: Kosrae; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 0; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 9; 
Reportable findings on internal control over financial reporting: 
Total: 9; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 9; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 9. 

Year: 2004; 
Location: Pohnpei; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 0; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 7; 
Reportable findings on internal control over financial reporting: 
Total: 7; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 0; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 5; 
Reportable findings on internal control over compliance with federal 
awards: Total: 5. 

Year: 2004; 
Location: Yap; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 1; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 6; 
Reportable findings on internal control over financial reporting: 
Total: 7; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 0; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 5; 
Reportable findings on internal control over compliance with federal 
awards: Total: 5. 

Year: 2004; 
Location: Total; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 27; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 40; 
Reportable findings on internal control over financial reporting: 
Total: 67; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 23; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 24; 
Reportable findings on internal control over compliance with federal 
awards: Total: 47. 

Year: 2005; 
Location: FSM national government; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 7; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 15; 
Reportable findings on internal control over financial reporting: 
Total: 22; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 2; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 18; 
Reportable findings on internal control over compliance with federal 
awards: Total: 20. 

Year: 2005; 
Location: Chuuk; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 11; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 2; 
Reportable findings on internal control over financial reporting: 
Total: 13; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 9; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 9. 

Year: 2005; 
Location: Kosrae; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 2; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 10; 
Reportable findings on internal control over financial reporting: 
Total: 12; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 11; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 11. 

Year: 2005; 
Location: Pohnpei; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 0; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 5; 
Reportable findings on internal control over financial reporting: 
Total: 5; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 0; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 2; 
Reportable findings on internal control over compliance with federal 
awards: Total: 2. 

Year: 2005; 
Location: Yap; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 0; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 5; 
Reportable findings on internal control over financial reporting: 
Total: 5; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 0; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 3; 
Reportable findings on internal control over compliance with federal 
awards: Total: 3. 

Year: 2005; 
Location: Total; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 20; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 37; 
Reportable findings on internal control over financial reporting: 
Total: 57; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 22; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 23; 
Reportable findings on internal control over compliance with federal 
awards: Total: 45. 

Sources: Single audit reports for 2001 through 2005 from the FSM 
national government and four states. 

Note: Material weaknesses are a subset of reportable conditions, but 
such weaknesses are considered more serious. To compute the number of 
reportable conditions that were not material weaknesses shown in this 
table, we subtracted the number of material weaknesses from the total 
findings. 

[End of table] 

Table 23: Numbers of RMI Material Weaknesses and Reportable Conditions 
Identified in Single Audit Reports, 2001 through 2005: 

Year: 2001; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 7; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 3; 
Reportable findings on internal control over financial reporting: 
Total: 10; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 8; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 0; 
Reportable findings on internal control over compliance with federal 
awards: Total: 8. 

Year: 2002; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 9; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 8; 
Reportable findings on internal control over financial reporting: 
Total: 17; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 10; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 1; 
Reportable findings on internal control over compliance with federal 
awards: Total: 11. 

Year: 2003; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 7; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 8; 
Reportable findings on internal control over financial reporting: 
Total: 15; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 9; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 8; 
Reportable findings on internal control over compliance with federal 
awards: Total: 17. 

Year: 2004; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 2; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 1; 
Reportable findings on internal control over financial reporting: 
Total: 3; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 6; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 3; 
Reportable findings on internal control over compliance with federal 
awards: Total: 9. 

Year: 2005; 
Reportable findings on internal control over financial reporting: 
Material weaknesses: 2; 
Reportable findings on internal control over financial reporting: 
Reportable conditions only: 0; 
Reportable findings on internal control over financial reporting: 
Total: 2; 
Reportable findings on internal control over compliance with federal 
awards: Material weaknesses: 6; 
Reportable findings on internal control over compliance with federal 
awards: Reportable conditions only: 5; 
Reportable findings on internal control over compliance with federal 
awards: Total: 11. 

Sources: Single audit reports for 2001 through 2005 from the RMI. 

Note: Material weaknesses are a subset of reportable conditions, but 
such weaknesses are considered more serious. To compute the number of 
reportable conditions that were not material weaknesses shown in this 
table, we subtracted the number of material weaknesses from the total 
findings. 

[End of table] 

[End of section] 

Appendix VI: FSM Compliance with Special Sector Grant Terms and 
Conditions: 

Sector: Education; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of grant award to realign this sector budget so that 
activities and related costs are clearly defined for each funding input 
under the grant. In doing so, the FSM should use a common or unified 
format wherever possible; 
Status according to OIA: Between October and December 2003, OIA lacked 
education staff needed to conduct the follow-up. 

Sector: Education; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of grant award to identify the amounts, sources, and 
the specific strategic focus and activities of all noncompact funding 
and direct technical assistance that relates to this sector; 
Status according to OIA: Between October and December 2003, OIA lacked 
education staff needed to conduct the follow-up. 

Sector: Education; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall submit 
within 180 days from the date of grant award a streamlined and refined 
statement of outcome measures, baseline data, and annual targets to 
enable the tracking of outputs and outcomes. In doing so, the FSM 
should use a common or unified format wherever possible. These 
materials shall form the basis for setting measurable annual targets 
for the sector grant budget and performance plan that the FSM submits 
for 2005 funding; 
Status according to OIA: Between January and March 2004, OIA staff had 
discussions with all state directors of education and other sectors, 
expressing concern regarding performance-based budgeting and the lack 
of a unified format. OIA did not receive formal communication regarding 
these concerns from the FSM in 2004. The new education grant manager 
placed a similar condition on the FSM in 2005. 

Sector: Education; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: As a condition precedent 
to the drawdown of funding for this specific activity, Pohnpei shall 
provide written materials to justify the request for $52,463 for the 
funding of the public library from the education sector grant; 
Status according to OIA: Written justification was not received from 
the Pohnpei Department of Education. However, OIA held discussions with 
the Pohnpei Director of Education during OIA's first site visit in 
February 2004. The OIA education grant manager approved the use of 
education funds to support the library's purchase of children's books. 

Sector: Education; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The FSM shall submit 
within 90 days from the date of the grant award a streamlined and 
refined statement of national strategic goals, outcome measures, 
baseline data, and annual targets to enable the tracking of uniform and 
consistent, national, and state outputs and outcomes. In doing so, the 
FSM should use a common or unified format; 
Status according to OIA: The FSM did not meet the deadline. OIA 
reminded the FSM National Division of Education (NDOE) of the 
requirement several times, and finally indicated it would cut off funds 
to them in March 2005 if the submission was not received. The FSM 
provided the required submission in late February, but the quality of 
the information was deemed "questionable" by OIA. 

Sector: Education; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The FSM shall conduct 
four evaluation studies and performance assessments; 
(1) Within 60 days from the date of the grant award, an analysis of 
school year 2004-2005 staffing patterns will be submitted and include, 
but not be limited to, the number of students enrolled as of October 1, 
2004; the number of staff by category (principals, vice-principals, 
teachers, teacher assistants, specialists, support staff, etc.) as of 
October 1, who are full-time and part-time employees; changes in 
staffing from school year 2003-2004; the number of staff in each 
category in each school; and the October 1 student-to-teacher ratio; 
(2) Within 60 days from the date of the grant award, an inventory of 
textbooks and related resource materials for each grade in the core 
subjects of language arts, math, social studies, and science will be 
conducted and submitted; 
(3) Within 180 days from the date of the grant award, a national 
inventory of educational facilities will be conducted and progress to 
date submitted. The inventory will include, but not be limited to, the 
number of educational buildings, age of each, condition of each, list 
of repair needs by school, and date when last renovated; 
(4) Within 180 days from the date of the grant award, an evaluation of 
the effectiveness of the national student testing (NST) systems will be 
conducted and progress to date submitted. The NST and state testing 
instruments will be evaluated for validity and alignment to state 
standards and curricula; 
Status according to OIA: (1) The staffing patterns report was submitted 
in a summarized form. The summary document did not include data on all 
of the staffing categories cited in the grant condition-- for example, 
no data on vice-principals were received. 
(2) Each state completed their textbook inventory and submitted it to 
NDOE. NDOE transmitted the document "as is," without a summary or any 
analysis. Yap's report file could not be opened; 
a revision was received a few days later. 
(3) OIA was asked by NDOE to provide a sample format for the states to 
follow. NDOE was late in sending out the proposed format to the states. 
Thus, the four state submissions came in different formats, with no 
summary or analysis provided. 
(4) The report was completed for the FSM by a consultant. OIA learned 
later that the FSM hired the same consultant who had created the NST to 
evaluate it. 

Sector: Education; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The FSM shall provide 
data of educational progress no less than annually, in time for 
submittal to JEMCO. At a minimum, data on the 20 indicators of 
educational progress discussed at the August 11 JEMCO meetings will be 
gathered and submitted by state, along with a national summary, no 
later than July 30, 2005; 
Status according to OIA: The FSM submitted a summary document, but it 
contained little narrative. According to OIA, it was difficult to 
decipher the meaning of some of the charts. The Office of Compact 
Management questioned the quality of the report, but it was submitted 
unchanged to OIA. A later submission contained a narrative analysis. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The FSM shall ensure 
that within 90 days of the grant award, the FSM Department of Health, 
Education, and Social Affairs, in consultation with the four state 
departments of education and OIA, shall develop a national process and 
procedure for the procurement of textbooks on a 5-year purchasing 
cycle; 
Status according to OIA: The FSM submitted the final national process 
and procedure document to OIA on March 16, 2006. According to OIA, the 
document was well thought out and included significant state input, but 
did not include the proposed purchasing cycle for each state. This 
omission will be a grant condition in 2007. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The FSM shall ensure 
that in 2006 through 2008, no less than $2.5 million of compact 
education sector funding allocated to state governments shall be used 
to purchase textbooks for the primary and secondary education systems 
and related instructional materials; 
Status according to OIA: The states provided revised line item budgets, 
indicating their contribution to the $2.5 million requirement in 
November 2005. OIA withheld a portion of the education sector grant 
funding in October and November 2005 until this requirement was met. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The FSM shall provide 
data of educational progress no less than annually, in time for 
submittal to JEMCO. At a minimum, data on the 20 indicators of 
educational progress discussed at the August 11 JEMCO meetings will be 
gathered and submitted by state, along with a national summary, no 
later than July 30, 2006; 
Status according to OIA: The FSM missed the original July 30, 2006, 
deadline. However, OIA granted their requested extension until August 
14, 2006. The report on the 20 indicators was received on that date. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: SEG: The FSM shall 
submit, for approval by OIA, a written description and annual plan for 
the use of the grant funds. No funds may be disbursed until the plan is 
approved; 
Status according to OIA: OIA approved the plan submitted by the FSM in 
September 2005. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: SEG: Timelines for all 
major objectives and activities must match the annual funding period. 
Timelines for the 2005 funding period are due to OIA by October 31, 
2005; 
Status according to OIA: Revised timelines were received directly from 
each state, with no attempt to submit them as an FSM-wide deliverable. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: SEG: The FSM shall 
submit to OIA by December 31, 2005, a framework for each sub-grantee 
that illustrates how the programs and goals funded by the Special 
Education Grant correlate to the programs and goals funded by the 
compact education sector grant, and how all correlate to the FSM 
Strategic Development Plan's education goals; 
Status according to OIA: The national submission was received on 
January 30, 2006. According to OIA, it was obvious the national 
submission was written by one author who used little of what the states 
submitted. 

Sector: Environment; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of grant award to realign this sector budget so that 
activities and related costs are clearly defined for each funding input 
under the grant. In doing so, the FSM should use a common or unified 
format wherever possible; 
Status according to OIA: Never submitted. 

Sector: Environment; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of grant award to identify the amounts, sources, and 
the specific strategic focus and activities of all noncompact funding 
and direct technical assistance that relates to this sector; 
Status according to OIA: Met. 

Sector: Environment; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall submit 
within 180 days from the date of grant award a streamlined and refined 
statement of outcome measures, baseline data, and annual targets to 
enable the tracking of outputs and outcomes. In doing so, the FSM 
should use a common and unified format wherever possible. These 
materials shall form the basis for setting measurable annual targets 
for the sector grant budget and performance plan that the FSM submits 
for 2005 funding; 
Status according to OIA: Never submitted. 

Sector: Environment; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: As a condition precedent 
to the drawdown of funding for this specific activity, Chuuk shall 
provide written justification to OIA for the funding of $100,990 for 
Marine Resources; 
Status according to OIA: Justification was provided, and the funding 
was released. 

Sector: Environment; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: These activities listed 
below require additional written justification that they are in line 
with the sector grant's mandated emphasis and guidelines. JEMCO 
conditionally approves the following, pending the submittal to OIA of 
sufficient information: 
* National Government: Archives and Historic Preservation; 
* Chuuk: Marine Resources, Agricultural Operations, and Historic 
Preservation Office; 
* Yap: Roadside Maintenance and YAPCAP; 
Status according to OIA: Justification was submitted, and the fiscal 
procedures agreement language was broad enough to encompass all of the 
agencies' core missions. Funding was released. 

Sector: Environment; 
Special terms and conditions in sector grants: The FSM has 30 days from 
the date of grant award to submit the appropriate performance measures 
and baseline data to OIA for all approved activities. The measures and 
data are to be specific to each funded activity, not for the sector as 
a whole; 
Status according to OIA: Funding was held until performance measures 
and baseline data were eventually submitted, the information was 
extremely poor quality. However, no guidance was given or requested by 
OIA to the FSM for the development of the information. 

Sector: Environment; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The FSM shall not incur 
obligations against this grant until OIA has approved all proposed 
budget line items for the national government and its subgrantees; 
Status according to OIA: OIA approved the budgets and released funds. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of grant award to realign this sector budget so that 
activities and related costs are clearly identified for each funding 
input under the grant. In doing so, the FSM should use a common or 
unified format wherever possible; 
Status according to OIA: Partially met. According to OIA, while the 
numbers added up, the connection between activities and costs, and the 
relationship between costs to expected outputs--or how outputs linked 
back to the FSM's strategic goals and stated performance outcomes-- 
remained unclear. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of grant award to identify the amounts, sources, and 
specific strategic focus and activities of all noncompact funding and 
direct technical assistance that relates to this sector; 
Status according to OIA: Met. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall submit 
within 180 days from the date of grant award a streamlined and refined 
statement of outcome measures, baseline data, and annual targets to 
enable the tracking of outputs and outcomes. In so doing, the FSM 
should use a common or unified format wherever possible. These 
materials shall form the basis for setting measurable annual targets 
for the sector grant budget and performance plan that the FSM submits 
for 2005 funding; 
Status according to OIA: Partially met. According to OIA, statements of 
outcome measures were revised and submitted but work was still required 
to make the FSM's intent and targets clear. There were also problems 
related to having a common baseline year and using and providing 
information in a unified and common format. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have until 
September 30, 2006, to obligate the carryover funds from 2004; 
Status according to OIA: According to OIA, obligations are in process. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: Consistent with the 
resolution adopted by JEMCO on August 2004, funds made available 
through this award may only be used for health-related infrastructure 
expenditures and are subject to conditions applicable to the public 
infrastructure grant. Such allowable uses include facility upgrades, 
renovation and repair, and fixed equipment and other capital assets; 
Status according to OIA: The list of projects and purchases received by 
OIA complied with the resolution. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM Office of 
Compact Management shall compile a list of proposed related 
infrastructure expenditures identified by the FSM National Department 
of Health, Education, and Social Affairs and by Chuuk, Pohnpei, and Yap 
to be funded under this grant. The list shall be submitted to OIA's 
Honolulu Field Office for review and concurrence by November 30, 2005. 
No expenditures shall be allowed prior to that review, unless 
specifically approved by OIA; 
Status according to OIA: OIA communicated directly with Chuuk, Pohnpei, 
and Yap and notified the Office of Compact Management that the lists 
were acceptable. The deadline was extended because the grant award was 
not signed by the FSM until December 19, 2005, due to a technical 
(nonsubstantive) error. This error was not brought to OIA's attention 
for correction until after the deliverable's due date. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The FSM shall have 30 
days from the date of grant award to provide information on the three 
health insurance programs in existence for national and state 
government employees. At a minimum, this information should include (1) 
a breakdown of costs associated with the programs in Chuuk and Pohnpei; 
(2) the numbers served by each of the three programs; (3) eligibility 
requirements; (4) the basis for calculating premiums and/or government 
subsidies; and (5) capitation payments to private providers, state 
hospitals, and, as applicable, off-island tertiary care facilities; 
Status according to OIA: The required information was provided, but its 
emphasis was on the FSM national government's program. OIA asked for 
and received clarification on Chuuk and Pohnpei's programs as well. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The FSM shall have until 
April 1, 2005, to complete a comprehensive evaluation of the 
effectiveness of existing primary care systems and expansion plans in 
all four states. The study shall give specific emphasis on 
dispensaries, community health centers, and rural health and cover the 
following areas: (1) dispensary staffing, (2) communications, (3) 
referrals, (4) infrastructure, (5) transportation, (6) the procurement 
and distribution of medicines and other essential supplies, and (7) new 
and in-service training. The responsible agency for the evaluation 
shall be the FSM National Department of Health, Education, and Social 
Affairs (HESA) in consultation with the four state departments of 
health; 
Status according to OIA: The FSM submitted an acceptable evaluation of 
its existing primary care systems and expansion plans for all four 
states on time, and provided an oral report to JEMCO at the August 2005 
meeting in Pohnpei. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: HESA shall have 30 days 
from the date of grant award to submit an implementation plan and scope 
of work to OIA before going forward with the study; 
Status according to OIA: Deadline was extended by OIA and met by the 
FSM. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The FSM has 30 days from 
the date of grant award to reprogram $4,391 earmarked for Chuuk's 
Department of Education to a purpose specifically linked to the state's 
Department of Health Services; 
Status according to OIA: Met. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The FSM has 30 days from 
the date of grant award to reprogram $11,500 earmarked for agricultural 
programs of Yap's Department of Resources and Development, to either 
nutrition education or another program activity directly managed by the 
state's Department of Health Services; 
Status according to OIA: Met. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: No money shall be used 
by the FSM National Department of Health, Education, and Social Affairs 
for either building new facilities or renovating existing buildings. 
The findings of any physical assessment of health facilities funded 
under this grant shall be submitted to OIA no later than 90 days before 
the end of the grant period and also to the infrastructure development 
planning committees in all four FSM states; 
Status according to OIA: Met. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: By April 15, 2005, the 
FSM national government and Chuuk, in consultation with OIA, shall 
develop an outline of a plan that shall promptly address the 
deficiencies found in the Chuuk health dispensary program. The 
completed plan shall be transmitted to OIA by May 15, 2005; 
Status according to OIA: An acceptable plan was developed in 
consultation with OIA and submitted on time. A verbal report on the 
plan's implementation was accepted by JEMCO at its August 2005 meeting 
in Pohnpei. 

Sector: Health; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The FSM shall not incur 
obligations against this grant until OIA has approved all proposed 
budget line items from the national government and its subgrantees; 
Status according to OIA: OIA gave its approval at the start of the 
fiscal year. 

Sector: Health; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: 2004: The FSM shall have 
180 days from the date of grant award to submit information to OIA on 
(1) the common year selected by the National Department of Health, 
Education, and Social Affairs and all four state health departments 
that shall serve as the base for evaluations of sector grant 
performance and (2) data collected from that baseline year for all 
appropriate outcome measures described in the health care chapter of 
the FSM Strategic Development Plan. The submission shall also include 
2004 data linked to these performance measures; 
Status according to OIA: The FSM health directors met in September 2005 
and agreed to use 2004 as the baseline year. At that time, they 
established a process to review the strategic goals and outcome 
measures in the FSM's development plan. In January 2006, they met again 
and reaffirmed their previous selection of 10 outcome measures and 
added 4 more measures. The FSM national government also began 
collecting baseline data. 

Sector: Health; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The FSM shall have 180 
days from the date of grant award to submit the appropriate actual 
performance targets for 2006 and prospectively for 2007 and 2010; 
Status according to OIA: The health directors established medium-term 
targets for 2010 but did not meet the condition to submit actual 
performance targets for 2006 or prospectively for 2007. According to 
OIA, the FSM health directors were confused about the requirement. 

Sector: Infrastructure; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: No grant funds may be 
expended or obligated before an infrastructure development plan (IDP) 
is developed by the FSM and submitted to OIA for review; 
Status according to OIA: Not met in 2004. 

Sector: Infrastructure; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: To the extent that the 
infrastructure priorities in the IDP differ materially from those set 
forth in the FSM Infrastructure Development Plan prepared by Nathan 
Associates, Inc., written justification should be provided to OIA for 
concurrence; 
Status according to OIA: Not met in 2004. 

Sector: Infrastructure; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: An amount equal to 5 
percent of the total grant must be placed in a separate bank account 
(the Infrastructure Maintenance Fund (IMF)), which upon deposit by the 
FSM will be matched by OIA. Funds in this account may be used for 
operations and maintenance needs once an IMF plan has been developed 
and submitted by the FSM and approved by OIA; 
Status according to OIA: Not met in 2004. 

Sector: Infrastructure; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: JEMCO resolves that 
infrastructure investment for 2005 should move toward being funded at 
no less than 30 percent of annual compact grant funding, consistent 
with the sense of Congress, and shall achieve that level for 2006; 
Status according to OIA: Met. 

Sector: Infrastructure; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: JEMCO resolves that OIA 
shall approve no projects until JEMCO has granted its concurrence in 
compact-funded portions of the FSM's Infrastructure Development Plan; 
Status according to OIA: Met. 

Sector: Infrastructure; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: JEMCO resolves that OIA 
shall deem approved no projects until the FSM national government has 
provided OIA with, and OIA has approved, a consolidated list of 
projects in order of national priority consistent with the IDP 
concurred by JEMCO; 
Status according to OIA: Not met in 2005. 

Sector: Infrastructure; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: JEMCO resolves that as 
part of the justification of each infrastructure project, the FSM 
national government shall demonstrate that the project implementation 
shall be professionally managed; 
Status according to OIA: Met. 

Sector: Infrastructure; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: JEMCO allocates from the 
infrastructure sector the amount of $1 million for the initial 
establishment of a project management unit; 
Status according to OIA: Met. 

Sector: Infrastructure; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: JEMCO resolves that by 
August 31, 2005, the FSM national government shall conduct detailed 
planning studies to determine the infrastructure requirements of the 
health and education sectors; 
Status according to OIA: Not met in 2005 --extended to January 31, 
2006, by JEMCO resolution. Extension of its deadline also was not met 
by the FSM. 

Sector: Infrastructure; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: An amount equal to 5 
percent of the total grant must be placed in a separate bank account, 
the IMF, which upon deposit by the FSM, will be matched by OIA. Funds 
in this account may be used for maintenance needs once an IMF plan has 
been developed and submitted by the FSM and approved by OIA; 
Status according to OIA: Not met as of August 2006. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of grant award to realign this sector budget so that 
activities and related costs are clearly defined for each funding input 
under the grant. In doing so, the FSM should use a common or unified 
format wherever possible; 
Status according to OIA: Never submitted. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of grant award to identify the amounts, sources, and 
the specific strategic focus and activities of all noncompact funding 
and direct technical assistance that relates to this sector; 
Status according to OIA: Met. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall submit 
within 180 days from the date of grant award a streamlined and refined 
statement of outcome measures, baseline data, and annual targets to 
enable the tracking of outputs and outcomes. In doing so, the FSM 
should use a common and unified format wherever possible. These 
materials shall form the basis for setting measurable annual targets 
for the sector grant budget and performance plan that FSM submits for 
2005 funding; 
Status according to OIA: Never submitted. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: Funding under this grant 
shall not be used by Yap for the Visitor's Bureau unless OIA approves a 
reprogramming request; 
Status according to OIA: Yap submitted a revised budget and received 
approval for funding the Visitor's Bureau. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: Included within this 
grant is $888 for Yap to use for Resources and Development; 
Status according to OIA: In accordance with the condition, Yap budgeted 
the funding for Resources and Development. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: As a condition precedent 
to the drawdown of funding for this specific activity, Kosrae shall 
provide written materials to justify the request for $152,000 for the 
funding of Livestock Research/Tissue Culture; 
Status according to OIA: Justification was provided, and the funding 
was released. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: As a condition precedent 
to the drawdown of funding for this specific activity, Kosrae shall 
provide written materials to justify the request for $205,000 for the 
funding of the Mangrove Crab Project; 
Status according to OIA: Funding was released. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: Within 6 months, the FSM 
will develop a transition plan to migrate basic operations funding from 
compact sector grants to local revenues. This plan will provide for 
this migration to happen over a period not to exceed 5 years and in 
amounts no less than 20 percent of the totals in each year, unless 
otherwise mutually agreed. The following amounts will be included in 
the transition plan: 
* Chuuk: $918,242; 
* Kosrae: $240,132; 
* Pohnpei: $335,781; 
* Yap: $319,136; 
Status according to OIA: The FSM contested the notion of a phase-out 
plan for the private sector development grant and planned to discuss 
the issue further at the next JEMCO meeting. OIA sent a letter agreeing 
to release the funds, and the issue was dropped. 

Sector: Private Sector Development; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: JEMCO approves the 
following grants once adequate written justification is provided to 
OIA. The grants were for: 
* Chuuk: Commerce and Industry, Marine Resources, and Agriculture; 
* Pohnpei: Economic Development Authority; 
* Yap: Resources and Development; 
Status according to OIA: Justifications were submitted. The fiscal 
procedures agreements language is broad enough to encompass all 
agencies' core missions. Funding was released. 

Sector: Private Sector Development; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The FSM has 30 days from 
the date of the grant award to submit the appropriate performance 
measures and baseline data to OIA for all approved activities. The 
measures and data are to be specific to each funded activity, not for 
the sector as a whole; 
Status according to OIA: Funding was held until performance measures 
and baseline data were submitted. When performance measures and 
baseline data were eventually submitted, the information was of 
extremely poor quality. However, no guidance was given by OIA or 
requested from the FSM for the development of the information. 

Sector: Private Sector Development; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: None; 
Status according to OIA: [Empty]. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of the grant award to realign its budget so that 
activities and related costs are clearly defined for each funding 
input. In doing so, the FSM should use a common or unified format 
wherever possible; 
Status according to OIA: Partially met. According to OIA, while the 
numbers added up, the connection between activities and costs, and the 
relationship between costs to expected outputs or how outputs--linked 
back to the FSM's strategic goals and stated performance outcomes-- 
remained unclear. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall have 60 
days from the date of the grant award to identify amounts, sources, and 
the specific strategic focus and activities of all noncompact funding 
and technical assistance that relates to this sector; 
Status according to OIA: Met. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The FSM shall submit 
within 180 days from the date of the grant award a streamlined and 
refined statement of outcome measures, baseline data, and annual 
targets to enable the tracking of outputs and outcomes. In doing so, 
the FSM should use a common or unified format wherever possible. These 
materials shall form the basis for setting measurable annual targets 
for the sector grant budget and performance plan that the FSM submits 
for 2005 funding; 
Status according to OIA: Not met. The public sector capacity building 
grant does not contain any conforming, unified outcome measures; 
baseline data; 
or annual targets. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: As a condition precedent 
to the drawdown of funding of $122,698, Chuuk shall hire a qualified 
public auditor; 
Status according to OIA: Chuuk has not yet hired a qualified public 
auditor. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: Within 6 months, the FSM 
will develop a transition plan to migrate basic operations funding from 
the public sector capacity building sector grant to local revenues. The 
plan will provide for this migration to happen over a period not to 
exceed 5 years and in amounts not less than 20 percent of the totals in 
each year, unless otherwise mutually agreed. The following amounts will 
be included in the transition plan: 
* Chuuk: $2,741,115; 
* Kosrae: $909,187; 
* Pohnpei: $1,457,080; 
* Yap: $1,726,367; 
* National government: $3,782,175; 
Status according to OIA: The plan was late, and funds were temporarily 
withheld. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: 2006: The FSM had 30 
days from the date of the grant award to submit the appropriate 
performance measures and baseline data to OIA for all approved 
activities. The measures and data are to be specific to each funded 
activity, not for the sector as a whole; 
Status according to OIA: No submittal from the FSM. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: JEMCO confirms the 
decision by the Anticipatory Task Force in August 2003 to require a 
transition plan of nonconforming expenses out of the public sector 
capacity building grant over a 5-year period and agrees, except to the 
extent otherwise provided by the foregoing resolution, to the schedule 
to which the FSM government has committed from the implementation of 
that transition plan for all five FSM governments. The schedule is as 
follows: 
* Within 6 months, the FSM will develop a transition plan to migrate 
basic operations funding from the public sector capacity building grant 
to local revenues. This plan will provide for this migration to happen 
over a period not to exceed 5 years; 
Status according to OIA: A schedule was submitted that showed the 
reduction of public sector capacity building revenues going to basic 
operations funding, but not how it would be replaced by local revenue. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: Special terms and 
conditions in sector grants: None; 
Status according to OIA: Status according to OIA: [Empty]. 

Sources: FSM sector grant agreements for 2004 through 2006 and OIA 
compliance updates. 

[End of table] 

[End of section] 

Appendix VII: RMI Compliance with Special Sector Grant Terms and 
Conditions: 

Sector: Education; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall have 60 
days from the date of grant award to realign its budget so that 
activities and related costs are clearly defined for each funding 
input. The category, "U.S. and Other Grants," shall list components and 
allowable uses; 
Status according to OIA: Met. 

Sector: Education; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall submit 
within 180 days from the date of grant award a streamlined and refined 
statement of performance measures, baseline data, and annual targets to 
enable the tracking of goals and objectives. These materials shall form 
the basis for setting measurable annual targets for the sector grant 
budget and performance plan that the RMI submits for 2005 funding; 
Status according to OIA: Met. 

Sector: Education; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI shall conduct 
three evaluation studies and; 
performance assessments. 
(1) Within 60 days from the date of the grant award, an inventory of 
textbooks and related resource materials for each grade in the core 
subjects of language arts, math, social studies, and science will be 
conducted and submitted. 
(2) Within 180 days from the date of the grant award, an analysis of 
school year 2004-2005 staffing patterns will be submitted and include, 
but not be limited to, the number of students enrolled as of October 1, 
2004; the number of staff by category (principals, vice-principals, 
teachers, teacher assistants, specialists, support staff, etc.) as of 
October 1, who are full-time and part-time employees; 
changes in staffing from school year 2003- 2004; 
the number of staff in each category in each school; 
and the October 1 student-to-teacher ratio. 
(3) Within 180 days from the date of the grant award, an evaluation of 
the effectiveness of the national student testing systems will be 
conducted and progress to date submitted. The third and sixth grade 
national testing instruments will be evaluated for validity and 
alignment to national standards and curricula. An eighth grade testing 
instrument will be designed; 
Status according to OIA: (1) An extension was requested. The 
deliverable was extended to 2006. An inventory of 71 of 80 schools was 
received on July 21, 2006. The remaining 9 schools' inventory is 
required in the first quarter of 2007. 
(2) A summary document was received. A revision was requested to meet 
the requirement for select data by school, not in summary format. The 
revision was received in the Fall of 2005. 
(3) An extension was requested, and was granted. The deliverable was 
extended to 2006. 

Sector: Education; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI shall provide 
data of educational progress no less than annually, in time for 
submittal to JEMFAC. At a minimum, data on the 20 indicators of 
educational progress discussed at the August 13th JEMFAC meetings will 
be gathered and submitted no later than July 1, 2005. Quarterly 
performance reports must include completed data charts, effective 
immediately, and incorporate the 20 indicators of educational progress 
no later than July 1, 2005; 
Status according to OIA: The majority of the 20 indicators were 
submitted on time. The outstanding 5 indicators were requested but not 
received. 

Sector: Education; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI shall routinely 
submit to the OIA Honolulu Field Office one copy of all educational 
studies, surveys, and performance evaluations completed with education 
sector or Supplemental Education Grant funds; 
Status according to OIA: Some locally developed reports are routinely 
submitted to OIA. Other reports are not routinely submitted but are 
identified in quarterly reports, which OIA then requests. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: Quarterly financial and 
performance reports shall include completed data charts, data on Ebeye 
Special Needs expenditures and activities, and copies of all reports 
completed with education sector or Supplemental Education Grant funds; 
Status according to OIA: The quarterly reports were received on time 
and included information specific to Ebeye. However, data charts 
embedded in the RMI format were often incomplete. Other reports 
completed with compact or Supplemental Education Grant funds are 
occasionally but not routinely transmitted to OIA. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: All 20 indicators of 
educational progress shall be reported by July 1st annually; 
Status according to OIA: Received July 28, 2006. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The Government of the 
Republic of the Marshall Islands shall complete the textbook and 
staffing inventories by October 31, 2005; 
Status according to OIA: (1) An extension was requested for the 
textbook inventory. 
(2) The staffing inventory was received by the deadline. 

Sector: Education; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The Government of the 
Republic of the Marshall Islands shall spend those monies required, up 
to $100,000, to conduct the mandated national evaluation of the 
effectiveness of the national student testing systems by a reputable 
testing and evaluation expert within 180 days of the grant award, and 
to conduct other evaluations and assessments as needed. These monies 
shall come from the education sector grant award, unless available from 
other sources; 
Status according to OIA: According to OIA, the national student testing 
system is in near final form. The RMI brought in a consultant to review 
and validate its new testing system. The consultant provided a minimal 
assessment of the testing system to the RMI. The RMI shared with OIA. 
OIA requested a more thorough analysis, but the RMI did not provide 
this by the end of school year 2005-2006. This grant condition will 
continue into 2007. 

Sector: Environment; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall have 60 
days from the date of grant award to realign its budget so that 
activities and related costs are clearly defined for each funding 
input. The category, "U.S. and Other grants," shall list components and 
allowable uses; 
Status according to OIA: Never submitted. 

Sector: Environment; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall submit 
within 180 days from the date of the grant award a streamlined and 
refined statement of performance measures, baseline data, and annual 
targets to enable the tracking of goals and objectives; 
Status according to OIA: Never submitted. 

Sector: Environment; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI shall deliver to 
OIA the appropriate performance measures and baseline data for all 
approved activities by November 30, 2004; 
Status according to OIA: The RMI submitted revised portfolios. 

Sector: Environment; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: 2004: The grantee shall 
submit a written explanation of each budgeted activity no later than 30 
days after the date of grant award; 
Status according to OIA: The RMI submitted revised portfolios. 

Sector: Environment; 
Special terms and conditions in sector grants: The following 
performance measures shall be reported on quarterly: 
* Percentage of safe public water supply in Majuro; 
* Percentage of coastal water tests deemed safe; 
* Total conservation areas in the Republic of the Marshall Islands; 
* Percentage of safe outer island water supply; 
* Percentage of dead and endangered reef areas; 
* Total number of solid waste violation per quarter; 
Status according to OIA: The deadline is the end of 2006. According to 
OIA's environmental grant manager, the RMI is expected to submit all 6 
indicators by the deadline. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall have 60 
days from the date of the grant award to realign its budget so that 
activities and related costs are clearly defined for each funding 
input. The category, "U.S. and Other Grants," shall list component and 
allowable uses; 
Status according to OIA: Partially met. Soon after the grant was 
awarded, OIA worked closely with the RMI's consultant on performance 
budgeting, and with the RMI's Economic, Policy Planning Statistics 
Office and Ministry of Health, on addressing the grant's budget 
realignment requirements. The results were evident in improvements to 
the first and subsequent quarterly reports in 2004 and the 2005 budget 
submitted to OIA. Although the requirement was directed to the Ministry 
of Health, the condition had a beneficial spillover effect in improving 
reporting and performance budgeting for all compact grant sectors. In 
retrospect, the deadline imposed in the grant may have been premature 
since the realignment process required time and effort beyond the 60-
day framework and is still continuing. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall submit 
within 180 days from the date of grant award a streamlined and refined 
statement of performance measures, baseline data, and annual targets to 
enable the tracking of goals and objectives. These materials shall form 
the basis for setting measurable annual targets for the sector grant 
budget and performance plan that the RMI submits for its 2005 funding; 
Status according to OIA: Partially met. The RMI reduced the number of 
performance measures it tracks to those that primarily relate to 
effectiveness and efficiency, and ensured its annual targets were 
output oriented. In retrospect, the deadline imposed in the grant may 
have been premature since the realignment process required time and 
effort beyond the 180-day framework and is still continuing. 

Sector: Health; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: Insofar as possible, 
performance measures should apply equally to both Majuro and Ebeye 
health subsystems, and baselines should reflect differences in health 
status and service levels in the two urban centers. Measures of disease 
incidence or prevalence should also be developed to gauge the impact of 
environmental and infrastructure improvements on health status; 
Status according to OIA: Soon after the grant was awarded, OIA worked 
with the RMI's consultant on performance budgeting and with RMI's 
statistics office to improve the consistency of performance budgeting 
between Ebeye and Majuro. According to OIA, the reporting has improved 
and is reflected in the 2005 and 2006 budgets submitted to OIA. 
Measures of disease incidence and prevalence, however, still do not 
adequately track environmental conditions. The RMI, however, is working 
to improve its health status statistics. Education and health 
infrastructure projects were the RMI's priority in 2004 and 2005. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI shall have 90 
days before the end of the grant period to complete a comprehensive 
evaluation of the effectiveness of its existing primary health care 
system and expansion plans. No less than 1 percent of the total grant 
award shall be set aside for this purpose; 
Status according to OIA: Met. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI shall have 30 
days to submit an implementation plan and scope of work to OIA before 
implementing the study; 
Status according to OIA: Met. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: Up to a maximum of 
$100,000 in carryover funding from the 2004 health sector grant shall 
be used to continue the provision of technical assistance in 
performance budgeting and measurement. The scope of work shall focus on 
refining outcome statements, measures, and baselines that demonstrate 
the effectiveness or efficiency of the Ministry of Health's interim 
outputs; 
Status according to OIA: The 2004 carryover grant awarded to the RMI 
provided funds to continue the provision of technical assistance to 
build performance budgeting and monitoring capacity. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: No grant funds may be 
used by agencies outside the health sector or for general government 
administrative costs, unless specifically justified and preapproved by 
JEMFAC; 
Status according to OIA: This condition was meant to prohibit any 
further levying of a percentage cost for the Office of the Auditor 
General as was done (and not disclosed) by the RMI during 2004. 

Sector: Health; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The Ministry of Health 
shall have 30 days from the date of grant award to submit a list to 
OIA's Honolulu Field Office that describes the specific uses of funding 
provided under CSG-RMI-2006-C. Funds may not be used for recurring 
salaries and may not be used for other operating costs, except as 
approved by OIA; 
Status according to OIA: Partially met. The Ministry of Health notified 
OIA of its intent to use most of its carryover funds to support the 
continuation of performance budgeting technical assistance. This 
notification was within the 30-day time frame. The remaining funds were 
to go to Majuro Hospital, but specific uses were not identified until 
August 2006. 

Sector: Health; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: None; 
Status according to OIA: [Empty]. 

Sector: Infrastructure; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall submit a 
formal infrastructure development and maintenance plan to OIA prior to 
the expenditure of sector grant funds for construction activities; 
Status according to OIA: Met. 

Sector: Infrastructure; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: Funds designated for 
Infrastructure Maintenance Funds will be deposited after the RMI has 
transmitted its 2004 infrastructure maintenance plan to OIA for its 
concurrence in writing; 
Status according to OIA: Met. 

Sector: Infrastructure; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI government shall 
formulate a project development plan, consistent with the 
Infrastructure Development Maintenance Plan format for the project 
entitled "Ebeye Hospital Repair."; 
Status according to OIA: No plan formulated as of September 13, 2006. 

Sector: Infrastructure; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: None; 
Status according to OIA: [Empty]. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall have 60 
days from the date of grant award to realign its budget so that 
activities and related costs are clearly defined for each funding 
input. The category, "U.S. and Other grants," shall list components and 
allowable uses; 
Status according to OIA: Never submitted. 

Sector: Private Sector Development; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: The RMI shall submit 
within 180 days from the date of grant award a streamlined and refined 
statement of performance measures, baseline data, and annual targets to 
enable the tracking of goals and objectives. These materials shall form 
the basis for setting measurable annual targets for the sector grant 
budget and performance plan that the RMI submits for 2005 funding; 
Status according to OIA: Never submitted. 

Sector: Private Sector Development; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI shall deliver to 
OIA the appropriate performance measures and baseline data for all 
approved activities by November 30, 2004; 
Status according to OIA: The RMI submitted revised portfolios. 

Sector: Private Sector Development; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The following 
performance measures shall be reported on quarterly: 
(1) Dollar amount of export revenues from local products. (Baseline 
will be established in 2006, and this measure will be used in future 
years to determine program development.). 
(2) Number of international tourist arrivals; 
Status according to OIA: Never submitted. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2004; 
Special terms and conditions in sector grants: None; 
Status according to OIA: [Empty]. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2005; 
Special terms and conditions in sector grants: The RMI shall deliver to 
OIA the appropriate performance measures and baseline data for all 
approved activities by November 30, 2004; 
Status according to OIA: Never submitted. 

Sector: Public Sector Capacity Building; 
Fiscal year: 2006; 
Special terms and conditions in sector grants: The RMI shall deliver to 
OIA an audit work plan and audit schedule for 2006 by October 31, 2005; 
Status according to OIA: Submitted late. 

Sources: RMI sector grant agreements for 2004 through 2006 and OIA 
compliance updates. 

[End of table] 

[End of section] 

Appendix VIII: Comments from the Department of the Interior: 

Office Of The Assistant Secretary: 
Policy, Management And Budget: 
Washington, DC 20240: 

DEC 07 2006: 

Mr. David Gootnik: 
Director: 
International Affairs and Trade: 
United States Government Accountability Office: 
Washington, D.C. 20548: 

Dear Mr. Gootnik: 

Thank you for the opportunity to review and comment on the Government 
Accountability Office (GAO) draft report entitled "Compacts of Free 
Association: Micronesia and the Marshall Islands Face Challenges in 
Planning for Sustainability, Measuring Progress, and Ensuring 
Accountability" (GAO-07-163). (Draft Report). The Department of the 
Interior (Department) agrees with the seven recommendations presented 
in the Draft Report with regard to the roles of the Department and 
other U.S. agencies in the joint economic management of the Compacts of 
Free Association. 

We find the report to be accurate and well balanced. The Draft Report 
exhaustively details the challenges facing the Federated States of 
Micronesia (FSM), the Republic of the Marshall Islands (RMI), and the 
United States as we act as partners to make each compact successful. As 
the Draft Report makes clear, despite significant efforts, progress is 
not easily achieved in either of these two nations. The continuing 
shortfall of internal capacity to plan, budget, implement and report on 
the use of compact resources is a serious concern to the Department and 
to the freely associated states governments themselves. 

We particularly appreciate that the Draft Report reflects an 
understanding that the compacts are bilateral agreements between 
nations, and that the Joint Economic Management Committee (JEMCO) and 
the Joint Economic Management and Financial Accountability Committee 
(JEMFAC) have limited authorities. Although both committees are 
important actors in addressing the Draft Report's recommendations, 
success depends more on bilateral cooperation within the JEMCO and the 
JEMFAC than on unilateral U.S. action. 

The Department, both as grants manager, and through its representation 
on the committees, is committed to working with the freely associated 
states and other U.S. agencies to address the four recommendations 
concerning the FSM and the three recommendations concerning the RMI. 
Because three of the recommendations to each government are similar, 
and our responses to them essentially the same, they will be presented 
together. 

Recommendations-: 

To improve FSM/RMI grant administration, planning, and measurement of 
progress toward compact goals, and to ensure oversight, monitoring, and 
accountability for FS//RMI compact expenditures, we recommend that the 
Secretary of the Interior direct the Deputy Assistant Secretary for 
Insular Affairs, as Chairman of JEMCO and JEMFAC, to coordinate with 
other U.S. agencies on the committee in working with the FSMRMI 
national governments to take the following three actions: 

Establish plans for sector spending and investment by the FSM/RMI 
national and FSM state governments that minimize any adverse 
consequence of reduced funding resulting from the annual decrement or 
partial inflation adjustment. 

We agree with this recommendation, but because the decrements and 
partial inflation adjustment are deliberately part of compact policy, 
the adverse consequences to be addressed first are in the priority 
sectors of education, health and infrastructure. The decrements and 
partial inflation adjustment were intended to stimulate the FSM and RMI 
to address reforms to their tax and budgetary policy, government 
structure and approach to economic development. The governments would 
need to do this, in theory, to maintain adequate program funding in the 
six compact sectors, and to fund other public services. The theory is 
correct, although neither government to date has taken sufficient 
action to address these problems in the short term. 

The authorities of the JEMCO/JEMFAC are limited with regard to these 
policy issues, though the annual meetings will be used as a platform to 
promote sound policy outside the realm of the compact sectors. JEMCO/ 
JEMFAC can affect macroeconomic policy only to the extent sector grant 
allocations touch on those issues. However, we have also entered into 
conversations with the International Monetary Fund and the Asian 
Development Bank and the governments to promote reform and sound 
economic and budget planning. Success will only come, however, when the 
governments recognize their best interests and implement policy 
reforms. 

Fully develop the mechanisms for measuring sector grant performance and 
collect complete baseline data to track progress toward development 
goals. 

We agree with this recommendation. The report notes the continued 
efforts made to develop and obtain baseline data and sector 
performance. Both the FSM and the RMI have used technical assistance 
and compact funding to improve their capacity to provide timely and 
meaningful information. JEMCO/JEMFAC can help address this problem by 
earmarking funds and conditioning receipt of sector funds on 
improvements in this area. 

Ensure that the quarterly performance reports contain reliable and 
verified program and financial information for use as a monitoring tool 
by the FSMRMI and U.S. governments. 

We agree with this recommendation. We recognize the importance of this 
information and are working with the governments to improve the quality 
of the submissions. The FSM has recently embarked on a project using 
local and international contractors to address performance budgeting 
and reporting problems. We continue to seek improved financial 
information, and have used the fiscal procedures audit provisions as a 
tool to generate more timely data delivery. We will continue to use 
withholding of funds when appropriate to compel collection and 
distribution of timely financial information. 

There is one FSM specific recommendation: 

Evaluate the impact of the current FSM distribution between states and 
sectors on the ability of the nation to meet national goals or deliver 
services. 

We agree with this recommendation. The United States has never formally 
recognized the FSM's formula to distribute compact funding, and notes 
the language in Section 211 which says that United States assistance 
under the compact shall constitute "a particular 
distribution...required by the terms or special nature of the 
assistance" for purposes of Article XII, section 1(b) of the 
Constitution of the FSM. This language means that allocation of Compact 
funding may be determined by JEMCO solely under terms of the fiscal 
procedures agreement. Nevertheless, the FSM is a sovereign country, and 
a partner in JEMCO and in the compact. We believe that the allocation 
of compact funds provided by the FSM should be respectfully considered, 
but ultimately evaluated by the results of the programs. 

As the Draft Report states, there are large variances in per capita 
funding among the four FSM states. We agree that this bears scrutiny, 
and we are also concerned with the variance in performance that is 
reported and viewed. As more experience is gained in implementing the 
compact, and as information indicates that more or less funding should 
be provided to programs in a particular state, the JEMCO will not be 
constrained in making adjustments to fund allocations. 

Finally, the Draft Report often notes the lack of capacity in both 
countries. Implementation of each recommendation requires that greater 
attention be paid by all parties to the Capacity Building Sector, 
especially in the FSM, to direct compact funding to ensure that 
planning, evaluating, measuring and reporting performance can be 
provided by the local governments. 

Thank you again for the opportunity to comment on the Draft Report. If 
you have any questions concerning the response, please contact David B. 
Cohen, Deputy Assistant Secretary of the Interior-Insular Affairs, or 
Nikolao Pula, Director of the Office of Insular Affairs, at: 

(202) 208-4736. 

Sincerely, 

Signed by: 

R. Thomas Weimer Assistant Secretary: 

[End of section] 

Appendix IX: Comments from the Federated States of Micronesia: 

Embassy Of The Federated States Of Micronesia: 
1725 N Street, N.W. 
Washington, D.C. 20036: 
Telephone (202) 223-4383: 
Telefax: (202) 223-4391: 
Telex: 292003 FSME: 

December 4, 2006: 

Mr. David Gootnick: 
Director, International Affairs and Trade: 
United States Government Accountability Office: 
441 G Street, NW: 
Washington, D.C. 20548: 

Dear Mr. Gootnick: 

The Government of the Federated States of Micronesia is grateful to the 
GAO for the opportunity to present the views of our government on the 
report entitled "Micronesia and the Marshall Islands Face Challenges in 
Planning for Sustainability, Measuring Progress, and Ensuring 
Accountability". We also take this opportunity to express our 
appreciation to the GAO staff for the time and effort that clearly went 
into the development of this report, and the overall level of 
commitment and resources that the GAO has dedicated to monitoring 
developments in our islands over the years. 

The report, in our view, presents a balanced and fair assessment of our 
progress in planning for sustainability, measuring progress, and 
ensuring accountability. We agree with the overall conclusion that we 
face significant challenges in meeting the various amended Compact 
requirements. During the Consultative Group of Donors Meeting for the 
FSM held last month in Manila, the message from our government to our 
development partners emphasizes the development challenges that we 
face, particularly in implementing the amended Compact. We stressed to 
our donors our need for technical assistance to build the appropriate 
capacity to meet our development objectives, including and in 
particular Compact implementation. There is some overlap in the issues 
we raised with our donors and those raised here in the report. 

Delay in use of infrastructure grant is one of the key issues. A land 
valuation assessment was completed under the Private Sector Development 
Loan from the ADB. The assessment recommended a framework for valuing 
land in each of the four FSM states. The government intends to build on 
this work to advance progress in addressing the important issue of 
access to land for infrastructure projects. Another important 
development that we expect will improve the ability of the government 
in managing infrastructure grants is the hiring of a qualified engineer 
to work in the Department of Transportation, Communications & 
Infrastructure (TC&I). 

We also agree with the finding and recommendations regarding the need 
for developing the appropriate mechanism for tracking and monitoring 
performance. The FSM and the OIA Honolulu office have over the past 
year been in close consultation on ways to effect progress in measuring 
performance. Recent developments include the dedication of public 
sector capacity building carryover grant funds from fiscal year 2004 
and 2005 for funding activities that are specifically targeted at 
improvements in performance budgeting and reporting. With close 
consultation between the Office of Compact Management and the OIA 
Honolulu office, OCM is currently engaged in a project that will 
improve the budgeting and reporting framework in the FSM. This project 
involves linking the annual budgets to the FSM's Strategic Development 
Plan as well as improving the system currently in place for producing 
the quarterly performance reports. 

Measures have also been taken to address the limited ability to monitor 
sector grant operations and accountability in general on use of Compact 
sector grants. In fact, the FSM has been working with OIA staff to 
develop and, strengthen the accounting and other reporting requirements 
as mandated under the amended Compact and its related agreements, 
including the Fiscal Procedures Agreement (FPA). These efforts are 
showing results in the improving timeliness of the single audits. All 
the five FSM governments are up to date on their annual single audits 
up to the fiscal year ending September 30, 2005. Single audits for FY 
2006 onward are expected to be completed on time. For FY 2006 audits, 
all five governments are concentrating on resolving all audit findings 
and questioned costs and have clean audits. Specifically for Chuuk, the 
government with the greatest number of audit findings and questioned 
costs, a joint effort has been initiated between the FSM government and 
OIA to have quarterly audits in order to improve compliance with laws, 
regulations and other requirements under the amended Compact. 

A new Uniform Financial Management Information System (FMIS) has been 
implemented in the FSM with the main objective of improving the 
accounting and reporting capability of the FSM, especially in dealing 
with Compact funds. The new system has been installed and implemented 
in Yap and Pohnpei State Finance offices and will be implemented in the 
other states and the national government soon. It is estimated that all 
the governments will be on line with the new FMIS before the beginning 
of FY 2008. 

Another development that will contribute to the overall improvement in 
the capacity of the FSM governments to meet amended Compact 
requirements is the Public Sector Capacity Building Roadmap project. 
Through ADB-funded technical assistance, a plan identifying training 
needs in the three focus areas financial management, economic planning, 
and statistics-was developed in consultation with the five governments 
and is currently being implemented with assistance from an ADB follow- 
up TA. The national and states governments are strongly motivated to 
utilize Compact capacity building sector grant to fund implementation 
of the roadmap. 

We generally agree with the set of GAO recommendations offered at the 
end of the report, and would look forward to working within the JEMCO 
structure and with the U.S. Agencies to achieve those goals. However, 
the FSM government must point out that the experience over the past 
three years with the amended Compact shows that minimizing the impact 
of declining compact grants and partial inflation adjustment is easier 
said than done. It is not something that will be overcome by mere 
planning. In fact, the planning already has been done. The need to 
achieve budgetary and economic self-reliance was the guiding principle 
for the development of the Sustained Growth Strategy (SGS) agreed to 
during the 3rd FSM Economic Summit and documented in the Strategic 
Development Plan (SDP). The SGS entailed the FSM implementing a 
comprehensive set of reforms designed hopefully to ensure fiscal 
sustainability despite declining Compact grants and partial inflation 
adjustment by fostering private sector growth. In practice, the 
implementation of this strategic planning document is proving to be 
more time-consuming than had been anticipated, and it is becoming clear 
that further Compact adjustments will be necessary if the Compact's 
economic goals are to be reached. 

Tax reform is a key component of the SGS. While the importance of 
streamlining public spending is recognized, emphasis is also accorded 
to improving the tax system in the FSM to improve tax revenue as well 
as encouraging private sector development. A growing tax base resulting 
from the implementation of measures to improve the investment climate 
is seen as a necessary basis for improving domestic revenue generation. 

FSM is making encouraging strides on the tax reform front. We are now 
moving forward with implementation of the long discussed comprehensive 
tax reform. Development partners such as the IMF and the ADB have 
consistently indicated support for the FSM's comprehensive tax reform 
program. On the ground, a nation-wide policy level steering committee 
has been established and has held several meetings to discuss and reach 
certain policy decisions on the tax reform and a technical working 
group meets regularly to provide policy advice to the steering 
committee. The FSM government has committed funding for the operations 
of the tax reform unit, and the government is now actively seeking 
assistance from development partners for long-term technical support 
for the tax reform unit. 

The GAO observations and recommendation regarding the impact of the 
distribution formula used in allocating compact sector grants among the 
five FSM governments touches on a very important issue for the FSM. The 
existing distribution formula is derived, with some adjustment, from 
the average of the various formulas used for allocating Compact I 
grants, which also allocated less funds on a per capita basis to the 
more populated states. In fact, the 70:30 principle applied to some of 
the Compact I funds allocated 70 percent of such grants by population 
and the remaining 30 percent equally regardless of population. The 
underlying principle supporting this approach is that while most 
government expenditures are based on population, there are certain 
fixed costs needed for running a government such as putting in place 
basic infrastructure like airports and seaports and having the minimum 
public service that must be met regardless of population. A decision to 
adopt a distribution formula that allocates compact sector grants fully 
on the basis of population would have been too drastic a step to take 
from the status quo. The current distribution formula was agreed to 
after years of debate and deliberation among national and state policy 
makers. 

The FSM particularly welcomes the observation made by the GAO that we 
face significant challenges in implementing the amended Compact, given 
the new funding levels, new funding structure, and the new compliance 
and reporting requirements. Indeed, we recall that during the 
negotiations, we raised concerns on whether the new funding structure, 
compliance and reporting requirements might present too difficult a 
challenge for the FSM to be able to absorb. We pointed out at that time 
the greater magnitude of this challenge because of the FSM's broader 
cultural and federal structure. 

Nevertheless, the idea that prevailed in the negotiations, at the 
insistence of the U.S., is that such arrangements and requirements are 
necessary for the amended Compact and that only practice will tell how 
they perform. We left the negotiating table uncertain as to how and 
whether these new arrangements and requirements we were forced to agree 
to will actually work in practice, and most importantly whether we will 
have the capacity to make them work. FSM negotiators were assured at 
the time that the U.S. would keep an open mind, and indeed the Amended 
Compact contains much in the periodic review process that suggests 
flexibility in light of experience. 

Progress continues to be made toward meeting compact compliance and 
reporting requirements, indicating good faith effort and commitment 
from the FSM. While we agree that there is room for further improvement 
in our capacity, the persistence of problems and challenges three years 
into amended Compact implementation is evidence there is room for re- 
evaluating the practicality of the new arrangement and requirements of 
the amended Compact. Such re-evaluation should be with a view to 
streamlining some of the compliance and reporting requirements, and 
determining whether funding levels are sufficient. 

The only shortcoming that we might cite on the draft report is that 
while it provides a fair and thorough assessment of progress in 
implementing the amended Compact as is, there is no attention paid to 
assessing the amended Compact itself. This approach implies that there 
is no need for improvement in the amended Compact as presently being 
implemented. In this regard, we suggest that the U.S. Congress consider 
extending coverage of future GAO reports to an assessment of the 
amended Compact itself. Such an assessment should consider the 
practicality of the amended Compact with a view to assessing adequacy 
of funding as well as streamlining overly burdensome and unnecessary 
compliance and reporting requirements. 

Again, the FSM expresses appreciation to the U.S. Congress and the GAO 
for its close attention to the progress of the FSM. 

Sincerely, yours, 

Signed by: 

James A Naich: 

Charge d'Affaires Ad Interim: 

The following are GAO's comments on the Federated States of 
Micronesia's letter dated December 4, 2006. 

GAO Comments: 

1. As we noted in both our June 2006 report[Footnote 90] and this 
report, the FSM's efforts to address the decrement to date have not 
yielded the financial changes, including significant tax reforms, 
required to address the decrement. Therefore, we reiterate our position 
that the FSM needs to develop a plan to address the decrement. If the 
FSM fails to address the decrement, the federal and states' budgets 
will likely be reduced, making it difficult to maintain current 
personnel levels. 

2. We recognize that the FSM established its 70:30 formula according to 
its stated goal of providing for certain needs common to each state, 
regardless of population size, such as the need for airports and 
seaports. However, the differences in per-capita funding resulting from 
use of the formula may have contributed to disparate conditions among 
the FSM states, especially in health and education, that cannot be 
ignored. These differences have also been identified by a Department of 
Health and Human Services official and in the FSM's own development 
plans as well as in a study by the Asian Development Bank. We believe 
that the formula's impact on each state's performance and development 
should be continuously evaluated and the allocation of funds revised as 
necessary. As we observe in this report, such an assessment requires 
the full development of the mechanism for measuring sector grant 
performance and collecting complete baseline data. 

3. We testified three times in 2003, before the House and the Senate, 
regarding our assessment of the new arrangements and requirements of 
the amended compacts.[Footnote 91] 

[End of section] 

Appendix X: Comments from the Republic of the Marshall Islands: 

Republic of the Marshall Islands: 
Office Of The Chief Secretary: 
P.O. Box 15: 
Majuro, Marshall Islands MH 96960: 

December 4, 2006: 

Mr. David Gootnick: 
Director: 
International Affairs and Trade: 
U.S. General Accounting Office: 
441 G St. N.W: 
Washington D.C. 20548: 

Re: GAO Report "Compacts of Free Association: Micronesia and the 
Marshall Islands Face Challenges in Planning for Sustainability, 
Measuring Progress, and Ensuring Accountability" 

Dear Mr. Gootnick: 

Thank you for providing the GAO Report (GAO-07-163) "Compact of Free 
Associations: Micronesia and the Marshall Islands Face Challenges in 
Planning for Sustainability, Measuring Progress, and Ensuring 
Accountability" (Draft) to the Government of the Republic of the 
Marshall Islands (RMI), and for allowing the RMI the opportunity to 
review and comment on the draft report. 

General Comments: 

The monitoring and reporting requirements, while agreed to by the RMI, 
were always anticipated to take a while to be able to be implemented. 
The RMI knew that it would take time to develop the capacity but agreed 
to the rigorous reporting requirements because it, too, wanted to be 
able to measure the performance of the Compact funding. Reporting is 
improving but it is recognized that the lack of capacity has meant that 
effective implementation of the monitoring and reporting requirements 
has taken longer than originally anticipated. While the Office of the 
Chief Secretary (OCS), the Economic Policy, Planning, and Statistics 
Office (EPPSO) and the Ministry of Finance (MOF) have this 
responsibility, these offices are also mindful of the need to set an 
example and not expand staffing levels, when other Ministries are being 
asked to exercise restraint. Having said that, significant progress has 
been made on this issue. 

Specific Comments: 

What GAO Found (Page 3): 

The GAO needs to recognize that the cited lack of sustainability is not 
unrelated to the view that part of the problems with reporting is due 
to lack of staff. Increasing staff will accentuate problems of 
sustainability. The important issue with respect to sustainability for 
the RMI is to restrain the cost structure of the civil service while 
improving services (outcomes) provided by the government. Part of the 
problem may also be that the reporting requirements of the Compact and 
the Fiscal Procedures Agreement (FPA) are very rigorous and it should 
be recognized that the RMI will struggle to meet the full letter of the 
reporting and monitoring requirements. 

Since separate Compacts were agreed to, why does the GAO continue to 
report on FSM and RMI together? (See page 12): 

Lack of FSM and RMI Planning for Decrement Threatens Sustainability of 
Government Services (Page 34): 

The GAO continues to raise this issue. While the GAO correctly 
identifies that the real value of funds is declining there is no 
mention that the nominal value of grants will normally increase at 
normal levels of inflation. While prices will tend to rise over time, 
the government's revenue sources also tend to rise over time. As the 
price of imported goods rise, so will import duties, a major component 
of government revenues. The RMI's expenditure on imports is much 
smaller than expenditures on personnel. 

The main concerns for the government are the increasing pressures from 
the growth in the government payroll, which squeezes operational 
expenditures. Management problems in State-Owned Enterprises (SOE's) 
have also placed increased expenditure pressures on the government 
budget. 

The RMI acknowledges the need to improve the tax regime. However, in 
consultation with the private sector, the government has determined to 
focus on tax administration as the initial priority before addressing 
major reforms of the tax structure. The government recognizes that the 
tax structure is a major issue and has recommendations to address the 
situation but wishes to address these after the next election (due in 
November 2007) to allow time for the community to comment on the 
proposed changes before the following election. 

The U.S. Compact of Free Association Amendments Act of 2003, U.S. P.L. 
108-188 also makes provision for assessing and, if necessary, remedying 
adverse impacts caused by the decrement. Section 104(h)(2) provides 
that the U.S. Government shall review the terms of the U.S.-RMI Compact 
every five years and make this review a part of the President's report 
to Congress. The RMI is to be given the opportunity to comment on the 
review. This will provide an opportunity, starting in 2009, to examine 
the effect of the decrement and to make recommendations to address such 
concerns or problems. 

In addition, the RMI maintained throughout the Compact re-negotiation 
process that the best way to deal with any negative effects of the 
decrement was to make provision for full inflation adjustment to the 
annual economic assistance listed in Section 217 of the U.S.-RMI 
Compact. Although inflation continues to be partially adjusted at the 
same rate as the original Compact, the Section 104(h)(2) review can 
make recommendations to adjust the inflation rate. See Section 
104(h)(1)(E). 

Furthermore, Section 104(j) provides that full inflation will apply 
starting in FY 2015 if the U.S. Gross Domestic Product Implicit Price 
Deflator average is greater for Fiscal Years 2009 through 2013 than the 
average for Fiscal Years 2004 through 2008. 

Countries Established Mechanisms for Measuring Performance, but Data 
Shortcomings Limit Ability to Assess Progress toward Goals (Page 37): 

The RMI acknowledges that there are difficulties in measuring 
performance. It should be recognized that 2005 was only the second year 
of implementation and the measurement systems need time to develop 
especially where capacity in the line Ministries is lacking. The 
problems in the Ministry of Education (MOE) are being addressed by the 
exchange of staff between the MOE and EPPSO. In this way staff from 
EPPSO will be able to provide technical input into the performance 
measurements in MOE by boosting their statistical reporting capacity 
among other things. MOE staff working with EPPSO will receive a better 
appreciation of the reasons the data is needed for performance-based 
budgeting (PBB). Although the Ministry of Health (MOH) has demonstrated 
a greater ability to cope with the reporting requirements of the 
Compact, this approach will be pursued with MOH as well. 

This is one reason why the RMI has decided to restrict its sector 
grants to the three sectors of education, health and infrastructure 
development and maintenance. The main reason is that these sectors are 
the government's priorities, but complementing this is the decision to 
develop the reporting and monitoring capacity in the relevant 
Ministries, since, as mentioned above, the reporting is dependent 
heavily on line Ministry capacity. 

RMI Monitoring Was Limited, but Accountability Improved: 

Similar to the performance monitoring efforts listed above, the line 
Ministries are still developing familiarity with the detailed reporting 
requirements of the Compact. However, MOF has initiated a Finance 
Officers Committee, that meets regularly to help developed greater 
capacity in monitoring of Compact sector grants as well as other grant 
funding such as Federal program grants. MOF has also visited Ebeye to 
discuss all these issues with the government officials in Ebeye to 
ensure that all parts of the government are aware of the need for 
greater accountability and build capacity to cope with these. 
requirements. 

As indicated, MOF has reduced the number of audit findings in recent 
years to a small number and aims to have an unqualified audit in the 
near future. 

In conclusion. the RMI continues to welcome the GAO's input and looks 
forward to continuing to work with the GAO to identify and address 
issues of concern under the Compact of Free Association, as amended. 

Sincerely, 

[signed] 

Robert S. Muller: 
Chief Secretary: 

Copy to: Hon. Gerald M. Zackios, Minister of Foreign Affairs, RMI Hon. 
Brenson S. Wase, Minister of Finance, RMI Ambassador Banny deBrum, RMI 
Embassy, Washington, DC: 

The following are GAO's comments on the Republic of the Marshall 
Islands' letter dated December 4, 2006. 

GAO Comments: 

1. Throughout the report, we differentiate between the FSM and the RMI 
when discussing findings specific to each country. For example, when 
addressing land issues that have delayed projects in the countries, we 
discuss the issues and projects in each country separately. However, 
when findings were the same for both countries, we discussed the 
findings jointly. For example, we discuss planning for the decrement 
jointly because both the FSM and the RMI face the same issue. 

2. The RMI projects that the annual inflation adjustment will allow the 
nominal value of annual grants to increase.[Footnote 92] However, using 
the Congressional Budget Office's projections on the GDP Implicit Price 
Deflator, we found that for most years, the nominal value of the grants 
for the RMI declines each year from the previous years.[Footnote 93] We 
believe that the RMI response does not capture the true impact of the 
decrement and the urgent need for sector grant planning to take it into 
account. 

The combined impact of the decrement and partial inflation creates 
difficult challenges. First, absent full adjustment of the grants for 
inflation, the grants' real value declines, leading to reduced sector 
resources and creating challenges in recruiting and retaining agency 
staff. 

* RMI government agencies will not be able to maintain the current 
levels of imported resources when the real value of grants decline. 
Imported items needed for the education and health sectors, such as 
textbooks and pharmaceuticals, are subject to rising external prices. 
Likewise, increasing costs of imported building supplies may reduce the 
purchasing power of the infrastructure grant. 

* In the RMI, personnel expenses are the largest area of government 
expenditures. Recruiting and retaining staff will be difficult if 
salaries are not fully adjusted for inflation. Furthermore, because RMI 
citizens can move to the United States to work, and many have done so, 
finding qualified personnel may become more difficult. A recent 
assessment of Marshallese emigration concluded that about one quarter 
of Marshallese now live abroad.[Footnote 94] 

Second, although the RMI states in its letter that it expects import 
duties to increase with external inflation, the inflation increase will 
not fully compensate for the decrements without aggressive growth in 
import duties. 

[End of section] 

Appendix XI: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

David Gootnick, 202 512-3149: 

Staff Acknowledgments: 

In addition to the individual named above, Emil Friberg, Assistant 
Director; Julie Hirshen; Ming Chen; Tracy Guerrero; Emmy Rhine; and 
Eddie Uyekawa made key contributions to this report. Joe Carney, Etana 
Finkler, Mary Moutsos, and Reid Lowe provided technical assistance. 

[End of section] 

Related GAO Products: 

Compacts of Free Association: Development Prospects Remain Limited for 
Micronesia and the Marshall Islands. GAO-06-590. Washington, D.C.: June 
27, 2006. 

Compacts of Free Association: Implementation of New Funding and 
Accountability Requirements Is Well Underway, but Planning Challenges 
Remain. GAO-05-633. Washington, D.C.: July 11, 2005. 

Compact of Free Association: Single Audits Demonstrate Accountability 
Problems over Compact Funds. GAO-04-7. Washington, D.C.: October 7, 
2003. 

Compact of Free Association: An Assessment of Amended Compacts and 
Related Agreements. GAO-03-890T. Washington, D.C.: June 18, 2003. 

Foreign Assistance: Effectiveness and Accountability Problems Common in 
U.S. Programs to Assist Two Micronesian Nations. GAO-02-70. Washington, 
D.C.: January 22, 2002. 

Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in 
Two Micronesian Nations. GAO-02-119. Washington, D.C.: January 22, 
2002. 

Foreign Relations: Migration From Micronesian Nations Has Had 
Significant Impact on Guam, Hawaii, and the Commonwealth of the 
Northern Mariana Islands. GAO-02-04. Washington, D.C.: October 5, 2001. 

Foreign Assistance: Lessons Learned From Donors' Experiences in the 
Pacific Region. GAO-01-808. Washington, D.C.: August 17, 2001. 

Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little 
Impact on Economic Development. GAO/NSIAD-00-216. Washington, D.C.: 
September 22, 2000. 

Foreign Relations: Better Accountability Needed Over U.S. Assistance to 
Micronesia and the Marshall Islands. GAO/RCED-00-67. Washington, D.C.: 
May 31, 2000. 

(320368): 

FOOTNOTES 

[1] In this report, all annual references refer to the fiscal year 
rather than the calendar or school year, unless otherwise noted. 

[2] GAO, 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). 

[3] Whereas the original compact (approved in Pub. L. No. 99-239, Jan. 
14, 1986) was one agreement among the U.S., FSM, and RMI governments, 
the amended compacts (approved in Pub. L. No. 108-188, Dec. 17, 2003) 
are separate agreements between the United States and each of the two 
countries. 

[4] The $3.6 billion in assistance includes (1) compact grants; (2) 
trust fund contributions; (3) Kwajalein impact funding; (4) estimated 
values of compact-authorized federal services, such as weather, 
aviation, and postal services over the 20-year period; and (5) 
inflation adjustments. Services related to disaster relief have been 
excluded. 

[5] Administrative and monitoring responsibility for U.S. assistance to 
the FSM, the RMI, and the Republic of Palau is delegated to the 
Secretary of the Interior and carried out by OIA. 

[6] GAO, Compacts of Free Association: Development Prospects Remain 
Limited for Micronesia and the Marshall Islands, GAO-06-590 
(Washington, D.C.: June 27, 2006). 

[7] These agreements contain detailed requirements concerning 
implementation of the amended compacts' funding and accountability 
provisions. The U.S. fiscal procedures agreements with the FSM and the 
RMI are formally known as the "Agreement Concerning Procedures for the 
Implementation of United States Economic Assistance Provided in the 
Compact of Free Association, as amended, Between the Government of the 
United States of America and the Government of the Federated States of 
Micronesia" and the "Agreement Concerning Procedures for the 
Implementation of United States Economic Assistance Provided in the 
Compact, as amended, of Free Association Between the Government of the 
United States of America and the Government of the Republic of the 
Marshall Islands." 

[8] For our early assessment of implementation progress of the amended 
compacts, see GAO, Compacts of Free Association: Implementation of New 
Funding and Accountability Requirements Is Well Under Way, but Planning 
Challenges Remain, GAO-05-633 (Washington, D.C.: July 11, 2005). 

[9] Pub. L. No. 108-188. The act requires us to report on political, 
social, and economic conditions in the FSM and the RMI; this 
information has been issued in GAO-06-590. We will be providing 
additional information on the trust funds in 2007. 

[10] The FSM and the RMI are required to conduct annual audits within 
the meaning of the Single Audit Act, as amended. The act, as amended, 
is codified in Chapter 75 of Title 31 of the United States Code. For 
the purposes of this report, we refer to the required annual audits as 
"single audits." 

[11] The FSM comprises the following four states: Chuuk, Kosrae, 
Pohnpei, and Yap. 

[12] Kwajalein Atoll is the second most populated atoll in the RMI, 
where many residents were displaced within the atoll to provide space 
for U.S. missile testing. Many of these residents now reside on Ebeye 
Island. 

[13] The decrement in grant funding is deposited into the FSM's and the 
RMI's trust funds. The RMI's annual decrement of $500,000 began in 
2004, and the FSM's annual decrement of $800,000 began in 2007. 

[14] The compacts provide for a partial inflation adjustment of grant 
funding. Under the compacts' implementing legislation, after 2014 the 
funding may be fully adjusted for inflation under certain U.S. 
inflation conditions. 

[15] The Department of the Navy began civil administration of these 
islands on July 18, 1947. This responsibility was transferred to 
Interior in July 1951. 

[16] Mark Sturton, Federated States of Micronesia: Fiscal Year 2005 
Economic Review (June 2006). 

[17] Mark Sturton, Republic of the Marshall Islands: Fiscal Year 2005 
Economic Review (June 2006). 

[18] Some Marshallese live under urban conditions: 1999 RMI census 
population density data show that part of Majuro Atoll has a greater 
density than New York City (2000), while the over 9,000 Marshallese who 
live on Ebeye Island in the Kwajalein Atoll, experience more than twice 
the population density of New York City (2000). 

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

[20] This estimate represents total nominal outlays. It 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 Pub. L. No. 99-239. 

[21] GAO, Compact of Free Association: An Assessment of the Amended 
Compacts and Related Agreements, GAO-03-890T (Washington, D.C.: June 
18, 2003). 

[22] GAO/NSIAD-00-216. 

[23] GAO, 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); and 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). "Nonimmigrants" is a status that 
typically signifies nonpermanent visitors, such as tourists or 
students. 

[24] The amended compacts and related agreements addressed most of the 
recommendations that we had made in past reports. See GAO-03-890T. 

[25] The amended compacts' implementing legislation provides a 
continuing appropriation until 2023 for the financial assistance. 

[26] Other donors are allowed to contribute to the trust funds as well. 
Taiwan has committed to providing $50 million to the RMI's trust fund; 
the FSM has no other benefactor. While the United States, the FSM, and 
the RMI worked to set up trust fund procedures and policies, and engage 
money managers and trustees, the funds were deposited into bank 
accounts. Initial investments of the FSM and the RMI trust funds did 
not occur until August 2006 and September 30, 2005, respectively. 

[27] In 2014, the annual payment will be either $18 million (not 
adjusted for inflation) or the 2013 amount with an inflation 
adjustment, whichever is greater. 

[28] However, the RMI government has not reached an agreement with the 
Kwajalein landowners to extend their current land use agreement. 
Currently, the RMI continues to compensate the landowners under a 1982 
agreement that has been extended to 2016, with an annual payment of 
$11.4 million (as of 2004). Per the requirements of the compacts' 
implementing legislation, in the absence of a new or amended land use 
agreement reflecting the terms of the amended U.S.-RMI compact 
subsidiary agreement, the additional funds are accumulating in an RMI 
government escrow account. Accordingly, if a new or amended land use 
agreement is not concluded within 5 years after the enactment of the 
U.S. implementing legislation, the funds and interest earned are to be 
returned to the U.S. Treasury, unless the RMI and the United States 
mutually agree otherwise. (The legislation was enacted on Dec. 17, 
2003.) 

[29] In the compacts' implementing legislation, Congress also suggested 
that the FSM allocate at least 30 percent of its total sector grant 
allocation toward infrastructure improvement and maintenance. The RMI 
compact requires its infrastructure grant to be 30 to 50 percent of its 
total annual sector grants. Regarding the use of those funds, the 
fiscal procedures agreements further prioritized the use of those funds 
specifically toward primary and secondary education capital projects 
and projects that affect health and safety, including water and 
wastewater projects. 

[30] The FSM's development plan is called the Strategic Development 
Plan. The RMI's development plan consists of three documents: Vision 
2018, Meto 2000, and its Medium Term Budget and Investment Framework. 
In addition, the annual portfolio submissions include strategic goals 
and indicators for each of the sectors. We refer collectively to all 
these of these RMI documents as the development plan. 

[31] The three U.S. representatives to JEMCO and JEMFAC include one 
official each from Interior, State, and HHS, with the Interior 
representative serving as Chairman. A revision, under preparation since 
2003, to a 1986 executive order, outlining specific responsibilities of 
the U.S. agencies regarding compact matters had not been issued as of 
October 2006. 

[32] JEMCO and JEMFAC render decisions by majority vote, except those 
decisions regarding the division of RMI grants among sectors, which are 
made by consensus. 

[33] For the purposes of this report, our definition of a "single 
audit" is financial and compliance audits within the meaning of the 
Single Audit Act, as amended. (See chapter 75 of Title 31 of the U.S.C. 
ß 7501 et seq.) Office of Management and Budget Circular A-133, Audits 
of States, Local Governments, and Non-Profit Organizations, provides 
audit requirements for audits of nonfederal entities expending over a 
certain amount of federal awards. The due date for audits can be 
extended by federal agencies. While the compacts do not reference these 
policies, U.S. agencies that have programs in the FSM and the RMI would 
implement these policies with respect to single audits related to 
federal programs. 

[34] The fiscal procedures agreements state that the single audits are 
to be completed no later than 6 months after the end of the fiscal year 
(by Apr. 1)--a period that is generally 3 months shorter than that 
specified in the Single Audit Act, as amended. However, OIA considers 
the 6-month requirement in the fiscal procedures agreements to be an 
error and is allowing the FSM and the RMI 9 months to complete their 
audits. 

[35] The Single Audit Act requires that recipients submit their single 
audit report packages to the Federal Audit Clearinghouse. While the 
fiscal procedures agreements do not address the filing requirement, OIA 
is using the date of complete filing with the clearinghouse to 
determine when the country completes the audit process. 

[36] Office of Management and Budget Circular A-133, Audits of States, 
Local Governments, and Non-Profit Organizations. 

[37] According to the grants management common rule, a high-risk 
designation is authorized if a grantee has a history of unsatisfactory 
performance or otherwise irresponsible actions, such as failing to 
submit single audit reports in a timely manner or if single audits or 
other Inspector General investigations reveal substantial and pervasive 
problems. Such a designation allows the grantor to impose special terms 
and conditions or sanctions that could result in suspensions or 
terminations of federal awards. The grants management common rule was 
established in 1987 under presidential direction to adopt 
governmentwide terms and conditions for grants to state and local 
governments. Each federal department incorporates the rule in its 
agency regulations. 

[38] OIA has two additional staff located in the FSM and the RMI, one 
in Pohnpei and the other in Majuro, who are funded by, and considered 
part of, the Honolulu office. These staff provide on-the-ground 
monitoring and grants management follow-up. 

[39] The SEGs are awarded in place of grants formerly awarded to the 
FSM and the RMI under Part A of title I of the Elementary and Secondary 
Education Act of 1965 (20 U.S.C. 6311 et seq.); title I of the 
Workforce Investment Act of 1998 (29 U.S.C. 2801 et seq.), other than 
subtitle C of that act (29 U.S.C. 2881 et seq.) (Job Corps); title II 
of the Workforce Investment Act of 1998 (20 U.S.C. 9201 et seq; 
commonly known as the Adult Education and Family Literacy Act); title I 
of the Carl D. Perkins Vocational and Technical Education Act of 1998 
(20 U.S.C. 2321 et seq.); the Head Start Act (42 U.S.C. 9831 et seq.); 
and subpart 3 of Part A, and part C, of title IV of the Higher 
Education Act of 1965 (20 U.S.C. 1070b et seq., 42 U.S.C. 2751 et 
seq.), according to Pub. L. No. 108-188. 

[40] SEG funding is appropriated annually. The provision authorizing 
the SEG in the amended compacts' implementing legislation authorizes to 
be appropriated to the Secretary of Education an annual amount adjusted 
for inflation (partial) through 2023. A memorandum of agreement among 
Interior, Education, HHS, and Labor states that Education "shall seek 
the annual appropriation of funds for the SEGs, including adjustments 
for inflation, as described in Section 105(f)(1)(B)(iii) of Pub. L. No. 
108-188." 

[41] GAO-06-590. 

[42] The FSM received $12,083,360 in SEG funds for 2005, and 
$12,059,401 for 2006. The 2006 SEG, which was awarded in September 
2006, was not adjusted for inflation and was subject to a federal 
budget rescission. 

[43] Off-cycle funds are those not received at the beginning of the 
fiscal year for which they were appropriated. Because the FSM did not 
receive SEG funds until the end of the fiscal year, domestic funding 
was used to cover the SEG cost. The delayed SEG funds were used to 
reimburse the expenses that had been incurred. 

[44] The fiscal procedures agreements require that evidence of title, 
leasehold agreement, or other legal authority for use of land upon 
which a capital improvement project is to be constructed must be 
provided to the United States prior to a draw down of funds. 

[45] The funds were supposed to be allocated to the Kwajalein Atoll 
Development Authority, which experienced problems in effectively and 
efficiently using funds in the past. In early 2005, RMI legislation was 
passed that contained plans for KADA's restructuring, but the agency 
was still not operating as of October 2006, according to an RMI 
official. Instead, the Marshall Island's government allocated funds to 
the utility. 

[46] Specifically, funding for utilities went to displaced midcorridor 
residents residing in Ebeye. 

[47] The RMI received $6,100,000 in SEG funds for 2005, and received 
$5,941,769 for 2006. The 2006 SEG, which was awarded in September 2006, 
was not adjusted for inflation and was subject to a federal budget 
rescission. 

[48] Because the RMI did not receive the SEG funds until the end of the 
fiscal year, domestic funding was used to cover SEG costs. The delayed 
SEG funds were used to reimburse the expenses that had been incurred. 

[49] JEMCO addressed this issue in 2004, resolving that no use of 
compact funds for payments toward preexisting land purchase 
arrangements or leases will be allowed. 

[50] Neil K. Darroch, Land Consultancy & Valuation - Government Leased 
Land Chuuk State, a special report requested by the Asian Development 
Bank on behalf of the FSM (August 1998). 

[51] The reliance on compact sector funding as a source of government 
revenue varies, with compact funding accounting for 61 percent of the 
government revenue in Chuuk, 58 percent in Kosrae, 52 percent in 
Pohnpei, 31 percent in Yap, and 13 percent in the national government, 
according to data from the single audits. 

[52] GAO-06-590. 

[53] Grant funding is partially adjusted for inflation, although it can 
be fully adjusted after 2014 under certain U.S. inflation conditions. 

[54] GAO-06-590. 

[55] As of 2007, absent an agreement between the chief executive of the 
national government and each state government, a revised distribution 
formula provides 10 percent of total grant funding to the FSM national 
government. The accordingly reduced FSM state allocations maintain the 
same proportions with respect to each other. According to OIA, the 2007 
grants reflect the increased share for the FSM national government. 

[56] The requirement on public capacity building only applied to the 
FSM. 

[57] Since the reporting requirement was established in 2006 and the 
data were not available until the end of the fiscal year, in addition, 
the funding to the two sectors was small compared with the funding to 
health and education, we did not evaluate these performance measures. 

[58] Republic of the Marshall Islands, Office of the President, 
Economic Policy, Planning and Statistics Office, Fiscal Year 2005 
Performance Monitoring Report (Majuro: July 2006). 

[59] According to the FSM National Department of Education, the average 
annual teacher salary in Pohnpei is approximately $10,000. 

[60] The fiscal procedures agreement requires quarterly construction 
performance reports in the infrastructure sector. We did not discuss 
the quality of the information in the reports with the Project 
Management Unit Manager. 

[61] OIA requires the countries to submit their single audit reports 
within 9 months after the end of the fiscal year, which is consistent 
with the requirements under the Single Audit Act, as amended. 

[62] However, the FSM Office of the National Public Auditor conducted 
an audit related to the FSM's trust fund. 

[63] "Qualified" opinions state that, except for the effects of the 
matter to which the qualifications relate, the financial statements are 
presented fairly, in all material respects. A qualified opinion is 
given when the auditor finds conditions, such as a lack of supporting 
evidence or a restriction on the scope of the audit. Scope limitations 
occur when auditors are not able to perform all of the procedures 
necessary to conduct audits in accordance with generally accepted 
auditing standards. Scope limitations can result from the timing of 
audit work; the inability to obtain sufficient, competent evidential 
matter; or inadequate accounting records. An auditor issues a 
"disclaimer" of opinion when unable to perform all of the procedures 
necessary to complete an audit. In these situations, the audit scope is 
limited or restricted. A disclaimer of opinion indicates that the 
reliability of the financial statements is not known, and, in issuing 
one, the auditor declines to express an opinion on the financial 
statements. An "adverse" opinion is given when the auditor concludes 
that the financial statements are not fairly presented. 

[64] "Reportable" conditions are matters related to significant 
deficiencies in the design or operation of internal controls over 
financial reporting that could adversely affect the entity's ability to 
produce financial statements that fairly represent the entity's 
financial conditions. Material weaknesses are reportable conditions in 
which the design or operation of internal controls does not reduce to a 
relatively low level the risk that errors, fraud, or abuse in financial 
reporting--that is, material related to the financial statements being 
audited--may occur and not be detected in a timely fashion by employees 
in the normal course of performing their duties. 

[65] The Economic Policy, Planning and Statistics Office is the RMI's 
statistics office. 

[66] GAO, Compact of Free Association: Single Audits Demonstrate 
Accountability Problems over Compact Funds, GAO-04-7 (Washington, D.C.: 
Oct. 7, 2003). 

[67] GAO-05-633. 

[68] The Inspector General also has undertaken an investigation in 
Chuuk regarding the education meal service program. 

[69] In this report, all annual references refer to the fiscal year 
rather than the calendar or school year, unless otherwise stated. 

[70] We did not review funding provided to Kwajalein landowners in 
exchange for U.S. military access to Kwajalein Atoll. This funding is 
for landowner use and is not included as part of U.S. economic 
assistance that is subject to sector grant and accountability 
requirements. 

[71] We did not assess the infrastructure sector performance reports 
for this purpose. In the FSM, no infrastructure sector reports were 
available at the time of our review because no infrastructure projects 
had been built. In the RMI, construction performance reports were 
available, although they served a different purpose than the quarterly 
performance reports in other sectors. 

[72] The FSM and the RMI governments submit a SF-SAC data collection 
form to the FAC that includes information about the auditee, its 
federal programs, and the results of the audit. 

[73] GAO, 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). 

[74] These programs were (1) Head Start, (2) Special Education Program 
for Pacific Island Entities, (3) Freely Associated States Education 
Grants, (4) Pell Grants, (5) Job Training Partnership Act, (6) Maternal 
and Child Health Block Grants, (7) U.S. Department of Agriculture's 
Rural Housing Service housing loans, (8) U.S. Department of 
Agriculture's Rural Utilities Service Telecommunications loans, (9) 
U.S. Department of Agriculture's Rural Utilities Service Electrical 
loans, (10) Federal Emergency Management Agency, (11) U.S. Postal 
Service, (12) Federal Aviation Administration, and (13) U.S. National 
Weather Service. 

[75] The three programs were (1) Head Start; (2) Freely Associated 
States Education Grants; and (3) job training for adults (Job Training 
Partnership Act), later known as the Workforce Investment Act. 

[76] Both countries expressed concerns with this transfer since FEMA 
had provided extensive aid to both countries, such as the $12.3 million 
in assistance to the FSM in 2004 after typhoon Sudal hit Yap in April 
2004. 

[77] These programs were reviewed in a previous GAO report on U.S. 
program assistance to the FSM and the RMI. See GAO-02-70. Three of 
these programs have been incorporated into the Supplemental Education 
Grant and are no longer under the direct oversight of the individual 
federal agencies. These programs were (1) Head Start, (2) the Freely 
Associated States Educational Grant Program, and (3) the Job Training 
and Partnership Act Program. We reviewed the remaining 10 programs and 
added a review of the OIA Technical Assistance and Operations and 
Maintenance Improvement program for a total of 11 programs. 

[78] See GAO, Compact of Free Association: Single Audits Demonstrate 
Accountability Problems over Compact Funds, GAO-04-7 (Washington, D.C.: 
Oct. 7, 2003). Our review of 30 single audit reports from the FSM 
national government, four FSM states, and the RMI for 1996 through 2000 
identified pervasive and persistent compliance and financial-related 
audit findings. These reports contained 458 audit findings over this 
period and showed recurring audit findings, despite the corrective 
action plans that were meant to address these problems. 

[79] The FSM national government's single audit cannot be completed 
until the states' single audits have been completed. If any one state 
is late, the FSM national government's audit becomes automatically 
late. Chuuk submitted both its 2004 and 2005 single audits in July 
2006, which were 13 and 1 months late, respectively. 

[80] All nonfederal entities that expend $500,000 or more of federal 
awards in a year are required to obtain an annual audit in accordance 
with the Single Audit Act, as amended. 31 U.S.C. Chp. 75. 

[81] The Federal Audit Clearinghouse is an automated database of single 
audit information. 

[82] The fiscal procedures agreements specify that the audits are due 6 
months after the fiscal year-ends, but Interior believes that was a 
mistake in the agreements, and, according to Interior officials, they 
have allowed the countries 9 months, which is generally the required 
time frame under the Single Audit Act. According to the act, there is 
generally no standard due date for the annual single audit. The audited 
entity, upon hiring the auditor, negotiates a due date for the audit 
within 9 months after the close of the entity's fiscal year. The entity 
must have time to read the report and prepare the corrective action 
plan that is required to be included in the reporting package. 

[83] Single audits generally cover the entire organization and focus on 
recipients' internal controls over financial reporting and compliance 
with laws and regulations governing federal awards. Among other 
information, single audit reports include the auditor's opinion on the 
audited financial statements; reports on internal controls related to 
the financial reporting and major programs; and reports on compliance 
with laws, regulations, and the provisions of contracts or grant 
agreements. 

[84] A qualified opinion is given when the auditor finds conditions 
such as a lack of supporting evidence or a restriction on the scope of 
the audit. 

[85] An unqualified opinion is given when the auditor is reasonably 
assured that the financial statements are free of material 
misstatements. 

[86] A disclaimer is given when the auditor cannot express an opinion 
on the financial statements. 

[87] An adverse opinion is given when the auditor concludes that the 
financial statements are not fairly presented. In the Yap 2004 single 
audit report, the auditors gave an adverse opinion on the component 
units because they could not determine the propriety of fixed assets of 
the Yap Fishing Authority and Diving Seagull, Inc., and the lack of 
audited financial statements of Yap Fresh Tuna, Inc. Overall, this is 
considered a qualified/adverse opinion because the other Yap entities 
were given an unqualified and qualified opinion. 

[88] A component unit is a legally separate organization that a primary 
government is financially accountable for and must include as part of 
its financial reporting entity for fair presentation in conformity with 
generally accepted accounting practices. These component units also can 
be other organizations that due to their relationship to the primary 
government, if excluded would cause the reporting entity's financial 
statements to be misleading or incomplete. 

[89] The Grants Management Common Rule was established in 1987 under 
presidential direction to adopt governmentwide terms and conditions for 
grants to state and local governments. Each federal department 
incorporates the Grants Management Common Rule in its agency 
regulations. 

[90] GAO, Compacts of Free Association: Development Prospects Remain 
Limited for Micronesia and the Marshall Islands, GAO-06-590 
(Washington, D.C.: June 27, 2006). 

[91] GAO, Compact of Free Association: An Assessment of Amended 
Compacts and Related Agreements, GAO-03-890T (Washington, D.C.: June 
18, 2003). 

[92] Because of the difference between the FSM's and the RMI's 
decrements, although the nominal value of the RMI's grants generally 
drops each year from the previous year, the nominal value of the FSM's 
grants rises in most years. 

[93] However, the RMI experiences a spike in funding in 2014, which 
temporarily increases the nominal value of the grants. 

[94] Ben Graham, "Marshallese Out-Migration Intensifies," Pacific 
Islands Report Website of the East-West Center, University of Hawaii 
(available at Hyperlink, 
http://archives.pireport.org/archive/2006/November/graham_report.pdf). 

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