Compacts of Free Association:

Implementation of New Funding and Accountability Requirements Is Well Under Way, but Planning Challenges Remain

GAO-05-633: Published: Jul 11, 2005. Publicly Released: Jul 11, 2005.

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From 1987 to 2003, the United States provided economic aid to the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) through a Compact of Free Association. A previous GAO report found little accountability for the assistance provided by the U.S. Department of the Interior under this compact. In 2004, amended compacts with the FSM and RMI went into effect and will provide $3.5 billion in assistance over 20 years, consisting of grants and contributions to trust funds that are to replace the grants after 2023. The amended compacts include funding and accountability requirements that were not present in the original compact. To better understand the status of the compacts' implementation, GAO evaluated actions taken by the U.S., FSM, and RMI governments since fiscal year 2004 to (1) meet funding requirements and plan for the use of this funding, (2) meet accountability requirements, and (3) establish operations to implement the new agreements.

In fiscal years 2004 and 2005, the U.S. government signed grant agreements with the FSM and the RMI focused on six sectors, such as health and education, as provided for in the amended compacts. Authorized grant amounts for each year were about $76 million for the FSM and about $35 million for the RMI. Required trust funds were also established. Strategic planning issues impacting the long-term, effective use of funds have not been addressed. The allocations of the grants to the sectors have not been linked to the countries' development goals; the FSM and RMI have not planned for annual required decreases in grant funding; and trust funds have not been invested to maximize interest earnings (though efforts are currently under way to resolve this final issue). The U.S., FSM, and RMI governments have taken actions to meet compact accountability requirements. For example, the FSM and the RMI have provided financial and performance reports, and the U.S. government has withheld funding to ensure compliance with grant requirements. However, a few important accountability requirements have not been met. For instance, the FSM's development plan has not been approved by the U.S. government, and it is unclear whether the U.S. government has assessed the RMI's planning documents. Finally, the FSM has not completed single audits for fiscal years 2003 or 2004, and none of the three governments has submitted its required annual compact spending and development report for fiscal year 2004. The Department of the Interior took a significant step in October 2003 to facilitate implementation and oversight of the amended compacts by opening a new office in Honolulu, Hawaii. However, Interior has not determined how much oversight of compact activities in the FSM and the RMI is necessary, though the current level of on-site review is viewed as insufficient. The FSM and RMI governments have each taken actions to establish centralized compact management offices; the RMI government is progressing more rapidly in these efforts than the FSM government.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Although Department of Interior's Office of Insular Affairs (OIA) stated in August 2006 that Interior considered this recommendation fully implemented as part of the assigned activities of OIA, the Republic of the Marshall Islands (RMI) and the Joint Economic Management and Financial Accountability Committee (JEMFAC), we do not consider this recommendation to have been fully implemented. We testified in September 2007 that the RMI lacked concrete plans for addressing the annual decrement in compact funding, which could limit its ability to sustain current levels of government services in the future. Further, the RMI was not utilizing a strategic development plan and had not enacted policy decisions that took into account declining annual grants.

    Recommendation: To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management and Financial Accountability Committee, in coordination with other U.S. agencies that participate in this committee, to work with the RMI government to establish a time frame for the completion of an RMI government plan to manage decreasing annual grant amounts in a strategic fashion.

    Agency Affected: Department of the Interior

  2. Status: Closed - Not Implemented

    Comments: Department of Interior's Office of Insular Affairs (OIA) stated in August 2006 that the Department of the Interior considered this recommendation fully implemented as part of the assigned activities of the staff of the OIA Hawaii Field Office, and the ongoing work amongst OIA, the Republic of the Marshall Islands (RMI) governments and Joint Economic Management and Financial Accountability Committee (JEMFAC). However, we do not consider this recommendation to have been fully implemented. We testified in September 2007 that the RMI economy showed limited potential for developing sustainable income sources other than foreign assistance and that the RMI government had not enacted economic policy reforms needed to improve the economy?s growth prospects.

    Recommendation: To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management and Financial Accountability Committee, in coordination with other U.S. agencies that participate in this committee, to work with the RMI government to establish sector grant levels that will assist in promoting long-term development goals such as economic advancement and budgetary self-reliance.

    Agency Affected: Department of the Interior

  3. Status: Closed - Not Implemented

    Comments: The Department of Interior's Office of Insular Affairs (OIA) stated in August 2006 that Interior considered this recommendation fully implemented because of OIA?s ongoing responsibilities, the focus of audits (Single Audits, DOI-OIG audits, and FSM Public Auditor audits), and the establishment of the Office of Compact Management (OCM) by the Federated States of Micronesia (FSM) national government. However, we do not consider this recommendation implemented because, as we testified in June 2008 we found that the OCM lacked the authority and resources to carry out its functions. Acknowledging the weaknesses of the OCM, the FSM created the Statistics, Budget and Overseas Development Assistance and Compact Management Office (SBOC) in 2007 to conduct compact coordination and provide technical assistance to the states and ensure sector-by-sector compliance. However, as of April 2008, SBOC had not addressed performance problems, such as missing reports and data, and had failed to hold the FSM governments accountable for not carrying out JEMCO resolutions and grant requirements. As a result, the FSM continued to rely on OIA to enforce compact requirements.

    Recommendation: To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management Committee, in coordination with other U.S. agencies that participate in this committee, to work with the FSM government to outline specific actions that the FSM government will take in managing and monitoring day-to-day sector grant operations to ensure compliance with all grant terms and conditions.

    Agency Affected: Department of the Interior

  4. Status: Closed - Implemented

    Comments: In our July 2005 report (Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Under Way, but Planning Challenges Remain, GAO-05-633) we recommended that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management Committee (JEMCO: a joint U.S.-Federated States of Micronesia [FSM] committee), in coordination with other U.S. agencies that participate in this committee, to work with the FSM government to establish a time frame for the completion of FSM government plans to manage decreasing annual grant amounts?in a strategic fashion. In August 2005, Interior responded to our recommendation. Interior's Deputy Assistant Secretary for Insular Affairs, in coordination with other U.S. JEMCO participants (the Departments of State and Health and Human Services), proposed a resolution for consideration at the August JEMCO meeting stating that "JEMCO resolves that the FSM Office of Compact Management, in consultation with the budget offices in the national and each of the state governments, should develop budgets for fiscal years 2007 through 2009 that, at a minimum, ensure the health and education sectors fulfill their strategic outcomes, [annual] decrements notwithstanding." This resolution was adopted unanimously at the August 15-16, 2005 JEMCO meeting.

    Recommendation: To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management Committee, in coordination with other U.S. agencies that participate in this committee, to work with the FSM government to establish a time frame for the completion of FSM government plans to manage decreasing annual grant amounts and to shift basic government operations under the public sector capacity building to local revenues in a strategic fashion.

    Agency Affected: Department of the Interior

  5. Status: Closed - Implemented

    Comments: In our July 2005 report (Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Under Way, but Planning Challenges Remain, GAO-05-633) we recommended that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management Committee (JEMCO: a joint U.S.-Federated States of Micronesia [FSM] committee), in coordination with other U.S. agencies that participate in this committee, to work with the FSM government to establish a time frame for the completion of required and overdue FSM single audits. In August 2005, Interior responded to our recommendation. Interior's Deputy Assistant Secretary for Insular Affairs, in coordination with other U.S. JEMCO participants (the Departments of State and Health and Human Services), proposed a resolution for consideration at the August JEMCO meeting stating that "JEMCO resolves that the FSM shall submit its audit plan and schedule for fiscal years 2003, 2004, and 2005 to the Office of Insular Affairs no later than October 1, 2005. This resolution was adopted unanimously at the August 15-16, 2005 JEMCO meeting.

    Recommendation: To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management Committee, in coordination with other U.S. agencies that participate in this committee, to work with the FSM government to establish a time frame for the completion of required and overdue FSM single audits.

    Agency Affected: Department of the Interior

  6. Status: Closed - Not Implemented

    Comments: Department of Interior's Office of Insular Affairs (OIA) stated in August 2006 that Interior considered this recommendation fully implemented because of the ongoing work of OIA and its Hawaii Field Office staff, the Federated States of Micronesia (FSM) governments, and the Joint Economic Management Committee (JEMCO). However, we do not consider that the FSM governments and JEMCO have yet established sector grant levels that are consistent with national priorities and that will assist in promoting long-term development goals such as economic advancement and budgetary self-reliance. The ongoing activities of OIA and the FSM governments and JEMCO result in approved yearly sector grant budgets focused on health and education. However, as we noted in our December 2006 report (GAO-07-163), the FSM distributes compact funding according to a formula that does not fully account for states? differing population sizes or funding needs. At an oversight hearing of the House Committee on Natural Resources, Insular Affairs Subcommittee, on June 10, 2008, we stated that the FSM lacked a needs analysis and that the allocation of FSM grants among its four states was not needs based and had resulted in significant differences in per capita funding, creating varying levels of government services across the states. We also stated that the FSM had limited prospects for achieving budgetary self-reliance and long-term economic advancement and that the FSM government had not yet implemented policy reforms needed to enable economic growth. At this hearing, the OIA Acting Director stated that the fiscal and economic future of the FSM was of concern to the U.S. members of JEMCO.

    Recommendation: To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management Committee, in coordination with other U.S. agencies that participate in this committee, to work with the FSM government to establish sector grant levels for each of the five governments that are consistent with national priorities and will assist in promoting long-term development goals such as economic advancement and budgetary self-reliance.

    Agency Affected: Department of the Interior

  7. Status: Closed - Implemented

    Comments: Interior took steps to implement this recommendation. In response to the GAO recommendation, the Office of Insular Affairs (OIA) stated in August 2006 that Interior approved OIA's budget request. The budget request included an increase over fiscal year 2005 funding, owing in part to the need for more on-site reviews by OIA staff. Interior increased the funding for the OIA Hawaii Field Office, which has primary oversight responsibility over the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI), and OIA reported an increase of on-site activities from 12 percent to 29 percent in fiscal years 2005 through 2006. This response was confirmed in our December 2006 review, which found that OIA travel to the FSM and RMI increased, from 15 percent of overall field office staff time in 2004 to 20 percent in 2005 and 25 percent for the first three quarters of 2006. (See Compacts of Free Association: Micronesia and the Marshall Islands Face Challenges in Planning For Sustainability, Measuring Progress, and Ensuring Accountability, GAO-07-163 (Washington, D.C.: Dec. 15, 2006).) However, at present, OIA has three unfilled positions for professional staff responsible for onsite compact review.

    Recommendation: To effectively use Interior staff resources and to maximize the effectiveness of U.S. monitoring of compact expenditures, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs to determine, relative to other office responsibilities, the extent of Office of Insular Affairs on-site review in the FSM and the RMI of compact activities that is required in order to adequately promote compliance with compact and grant requirements.

    Agency Affected: Department of the Interior

  8. Status: Closed - Implemented

    Comments: Department of Interior's Office of Insular Affairs (OIA) stated in August 2006 that Interior considered this recommendation to have been fully implemented as part of the ongoing responsibilities of OIA, the focus of audits (Single Audits, DOI-OIG audits), and the work of the Republic of the Marshall Islands' (RMI) Economic Policy, Planning and Statistics Office. We did not consider this recommendation fully implemented when we testified in September 2007, because we had found that insufficient staff and skills limited the RMI?s ability to monitor day-to-day sector grant operations as the compact requires. At the September 2007 hearing, OIA agreed with our conclusion that capacity limitations had affected the RMI?s ability to ensure the effective use of grant funds. In response, the RMI government proposed that $300,000 of its 2008 compact funds be allocated to public sector capacity building. According to OIA, the Office of Compact Implementation established under the Ministry of Foreign Affairs is now effectively monitoring day-to-day grant operations and ensuring compliance with grant terms and conditions.

    Recommendation: To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management and Financial Accountability Committee, in coordination with other U.S. agencies that participate in this committee, to work with the RMI government to outline specific actions that the RMI government will take in managing and monitoring of day-to-day sector grant operations to ensure compliance with all grant terms and conditions.

    Agency Affected: Department of the Interior

 

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