Compacts of Free Association:

Trust Funds for Micronesia and the Marshall Islands May Not Provide Sustainable Income

GAO-07-513: Published: Jun 15, 2007. Publicly Released: Jun 15, 2007.

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In 2003, the U.S. government extended its economic assistance to the Federated States of Micronesia (FSM) and Republic of the Marshall Islands (RMI) through Amended Compacts of Free Association. From 2004 to 2023, the United States will provide an estimated combined total of $3.6 billion, with annually decreasing grants as well as annually increasing contributions to trust funds for each country. The trust funds are to be invested and provide income for the FSM and RMI after the compact grants end. A trust fund committee for each country is to establish and oversee the funds. This report examines (1) the committees' progress in establishing, investing, and reporting on the funds; (2) the sustainability of income from the trust funds; and (3) potential options to supplement or enhance the trust funds' income. GAO reviewed trust fund-related documents and legislation; interviewed U.S., FSM, RMI, and industry officials and used a simulation model to project the trust funds' income.

The FSM trust fund committee has established the fund by appointing a trustee, an auditor, an investment adviser, and money managers. As of the end of March 2007, the RMI committee had not appointed an auditor or a money manager. Investment of the funds began 22 months and 16 months, respectively, after the FSM's and RMI's initial contributions, with the funds remaining in low-interest savings accounts until their investment. Contractual delays contributed to the time taken to establish and invest the funds, as did the committees' processes for reaching consensus and obtaining administrative support; the committees have not yet taken steps to improve these processes. Although the committees are required to report annually on the trust funds, they did not publish reports for 2004 and were late in publishing the reports for 2005 and 2006. Moreover, the published reports do not assess the trust funds' potential effectiveness in helping the FSM and RMI achieve the compact goals of economic advancement and budgetary self-reliance. The FSM and RMI trust funds may not provide sustainable income after the compact grants end. Market volatility, as well as the investment strategies chosen, may lead to a wide range of trust fund balances in 2023. There is increasing probability that in some years the trust funds will not reach the maximum disbursement level allowed--an amount equal to the inflation adjusted compact grants in 2023--or be unable to disburse any income. GAO's analysis shows low probabilities of not reaching the maximum level allowed or disbursing no income in 2024 but higher probabilities of not reaching the maximum level allowed in 2050. For instance, by 2050, with a conservative investment strategy, income from the FSM and RMI trust funds, respectively, is over 90 percent and 60 percent likely to be less than the maximum level allowed and more than 20 percent and 15 percent likely to allow for no disbursements. The trust funds' income could be supplemented or enhanced through (1) greater tax revenue, (2) increasing remittances from growing emigration, (3) economic assistance from other sources, and, possibly, (4) securitization of the funds. However, limited development prospects constrain the countries' ability to raise tax revenues to supplement the trust fund income. In addition, FSM and RMI emigrants' inadequate education and vocational skills may limit their earning opportunities. Further, although the RMI trust fund received contributions from Taiwan, it is unclear whether the FSM trust fund will receive other contributions. Finally, although securitization--the issuing of bonds against future U.S. contributions--could increase the funds' earning potential by raising their balances, it could also lead to lower balances and reduced income. The committees have not yet obtained an independent evaluation of securitization's potential benefits and risks.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To enhance the FSM and the RMI trust fund committees' oversight of the trust funds, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the committees, to work with other U.S. agencies on the committees to develop strategies to improve the timeliness of the committees' decision-making and administrative processes.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: In June 2007, GAO reported (Compacts of Free Association: Trust Funds for Micronesia and the Marshall Islands May Not Provide Sustainable Income, GAO-07-513) on the Federated States of Micronesia (FSM) and Republic of Marshall Islands (RMI) trust fund committees' progress in establishing, investing, and reporting on the funds. The report noted that the FSM and RMI trust fund committees' processes for reaching consensus and obtaining administrative support contributed to the time taken to establish and invest the funds, and the committees have not yet taken steps to improve these processes. The report also noted that U.S. government employees have undertaken administrative functions for the trust funds in addition to their other duties and the trust fund committees' reliance on U.S. government staff for administrative support slowed committee processes. GAO recommended that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the committees, to work with other U.S. agencies on the committees to develop strategies to improve the timeliness of the committees' decision-making and administrative processes. As a result of the recommendation, the FSM and RMI trust fund committees hired an Executive Administrator, beginning in October 2007, to improve timeliness of decision-making and administrative processes. The duties of the Executive Administrator include (1)maintaining all official Trust Fund Committee (TFC) documents and records; (2) updating the Chairman and other TFC members on activities of the Trust Funds; (3) assisting in the hiring and supervision of the Trust Fund's counsel, trustee, investment advisers, money managers and auditors; (4) drafting written instructions on behalf of the TFC to the trustee to pay bills, purchase and liquidate investments, meet capital calls and wire funds for these purposes; (5) drafting, coordinating and sending official TFC correspondence, including responses to inquiries from the public, governments and international agencies regarding the Trust Fund; (6) drafting and coordinating resolutions, unanimous written consents and other official documents of the Trust Fund and monitoring their implementation; (7) providing records to the auditors and drafting narrative portions of audit reports; (8) scheduling meetings and reviews of investments, obtaining space, inviting participants, recording meetings and reporting on actions; (9) drafting annual reports, preparing and disseminating to the members of the TFC periodic updates of investments, performance, and actions by the investment adviser, trustee, money managers, auditors, and others. As a result of hiring an executive administrator, the trust fund committees have improved the timeliness of the committees' decision-making and administrative processes.

    Recommendation: To enhance the FSM and the RMI trust fund committees' oversight of the trust funds, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the committees, to work with other U.S. agencies on the committees to ensure the committees' timely reporting of trust fund activities, including assessing the funds' likely status as a source of revenue and effectiveness in helping the countries achieve economic self-sufficiency and long-term budgetary self-reliance.

    Agency Affected: Department of the Interior

    Status: Closed - Not Implemented

    Comments: Interior agreed with the part of the recommendation about ensuring timely reporting and noted that "the trust fund committees should consider ways to ensure timely reporting. The identification of viable solutions will be discussed at the next committee meetings in May 2007." As a result of the recommendation, the FSM and RMI trust fund committees hired an Executive Administrator, beginning in October 2007, to improve timeliness of decision-making and administrative processes. The duties of the Executive Administrator include drafting annual reports among other things. Since the Executive Administrator was hired, the trust fund committees have improved the timeliness of the trust funds' annual reports. Since our 2007 recommendation, the RMI and FSM trust funds' annual reports for fiscal years 2008 through 2010 have been completed within 6 months after the end of the fiscal year, as required, except for one report, which was completed about 2 months late, according to the Executive Administrator. However, none of the annual reports assessed the trust fund's viability and likely status as a source of revenue for the FSM and RMI. The reports did not assess how effective the trust funds will be in helping the countries achieve economic self-sufficiency and budgetary self-reliance either. Therefore, we closed the recommendation as unimplemented.

    Recommendation: To enhance the FSM and the RMI trust fund committees' oversight of the trust funds, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the committees, to work with other U.S. agencies on the committees to obtain a full and independent evaluation of the potential benefits and risks of using securitization to increase the trust fund balances.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: In response to our recommendation, in October 2007, the Federated States of Micronesia (FSM) and Republic of Marshall Islands (RMI) trust fund committees contracted with an independent study on securitization to conduct an assessment of the proposed securitization structure and its potential risks, and the probability of a net increase in the value of the trust fund corpus in 2023.

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