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'Compact of Free Association:  Implementation Activities Have 
Progressed, but the Marshall Islands Faces Challenges to Achieving Long-
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Before the Subcommittee on Insular Affairs, Committee on Natural 
Resources, House of Representatives: 

United States Government Accountability Office: 


For Release on Delivery Expected at 2:00 p.m. EDT: 

Tuesday, July 24, 2007: 

Compact Of Free Association: 

Implementation Activities Have Progressed, but the Marshall Islands 
Faces Challenges to Achieving Long-Term Compact Goals: 

Statement of David B. Gootnick, Director: 

International Affairs and Trade: 

Compact of Free Association: 


Madame Chairwoman and Members of the Subcommittee: 

I am pleased to be here today to discuss GAO's recent work regarding 
the Compact of Free Association between the United States and the 
Republic of the Marshall Islands (RMI). From 1987 through 
2003,[Footnote 1] the United States provided more than $2 billion in 
economic assistance to the Federated States of Micronesia (FSM) and the 
RMI under a Compact of Free Association;[Footnote 2] approximately $579 
million of this economic assistance went to the RMI. In 2003, the U.S. 
government approved an amended compact with the RMI that provides an 
additional 20 years of assistance, totaling about $1.5 billion from 
2004 through 2023.[Footnote 3] The Department of the Interior's Office 
of Insular Affairs (OIA) is responsible for administering and 
monitoring this U.S. assistance. 

The amended compact with the RMI identifies the additional 20 years of 
grant assistance as intended to assist the RMI government in its 
efforts to promote the economic advancement and budgetary self-reliance 
of its people. The assistance is provided in the form of annually 
decreasing grants that prioritize health and education, paired with 
annually increasing contributions to trust funds intended as a source 
of revenue for the country after the grants end in 2023. The amended 
compact also contains several new funding and accountability provisions 
that strengthen reporting and bilateral interaction. These provisions 
include requiring the establishment of a joint economic management 
committee and a trust fund committee to, respectively, among other 
things, review the RMI's progress toward compact objectives and to 
assess the trust fund's effectiveness in contributing to the country's 
long-term economic advancement and budgetary self-reliance. In 2003, we 
testified that these provisions could improve accountability over 
assistance but that successful implementation will require appropriate 
resources and sustained commitment from both the United States and the 
RMI.[Footnote 4] 

Today, drawing on several reports that we have published since 
2005,[Footnote 5] I will discuss the RMI's economic prospects, 
implementation of its amended compact to meet long-term goals, and 
potential trust fund earnings. 


The RMI has limited prospects for achieving its long-term development 
objectives and has not enacted policy reforms needed to enable economic 
growth. The RMI depends on public sector spending of foreign assistance 
rather than on private sector or remittance income; public sector 
expenditure accounts for more than half of its gross domestic product 
(GDP). The RMI government budget largely depends on foreign assistance 
and, despite annual decrements in compact funding to support budgetary 
expenditures, is characterized by a growing wage bill. Meanwhile, the 
two private sector industries identified as having growth potential-- 
fisheries and tourism--face significant barriers to expansion because 
of the RMI's remote geographic location, inadequate infrastructure, and 
poor business environment. In addition, RMI emigrants lack marketable 
skills that are needed to increased revenue from remittances. Moreover, 
progress in implementing key policy reforms necessary to improve the 
private sector environment has been slow. For example, although 
economic experts describe the RMI's current tax system as complex and 
regressive, the RMI government has not implemented fundamental tax 
reform. Further, although the RMI has established land registration 
offices, continued uncertainties over land ownership and land values 
hamper the use of land as an asset. Foreign investment regulations 
remain burdensome, and RMI government involvement in commercial 
activities continues to hinder private sector development. Moreover, at 
the time of our 2006 report, the RMI's compact management committee had 
not addressed the country's slow progress in implementing reforms. 

The RMI has made progress in implementing compact assistance, but it 
faces several challenges in allocating and using this assistance to 
support its long-term development goals. RMI grant allocations have 
reflected compact priorities by targeting health, education, and 
infrastructure--for example, funding construction of nine new schools. 
However, in the case of Kwajalein Atoll, political disagreement over 
management of public entities and government use of leased land has 
negatively affected the construction of schools and the use of compact 
funds set aside for Ebeye special needs.[Footnote 6] The RMI also has 
not planned for long-term sustainability of services that takes into 
account the annual funding decrement. Capacity limitations have further 
affected its ability to ensure the effective use of grant funds. The 
RMI currently lacks the capacity to adequately measure progress, owing 
to inadequate baseline data and incomplete performance reports. 
Moreover, although accountability--as measured by timeliness in single 
audit reporting and corrective action plans to single audit findings-- 
has improved, insufficient staff and skills have limited the RMI's 
ability to monitor day-to-day sector grant operations as the compacts 
require. Inadequate communication about grant implementation may 
further hinder the U.S. and RMI governments from ensuring the grants' 
effective use. Although Interior's Office of Insular Affairs (OIA) has 
conducted administrative oversight of the sector grants, its oversight 
has similarly been constrained by staffing challenges and the need to 
assist the FSM with its compact implementation activities. 

The RMI trust fund may not provide sustainable income for the country 
after compact grants end, potential sources for supplementing trust 
fund income have limitations, and the trust fund committee has 
experienced management challenges. Market volatility and the choice of 
investment strategy could cause the RMI trust fund balance to vary 
widely, and there is increasing probability that in some years the 
trust fund will not reach the maximum disbursement level allowed--an 
amount equal to the inflation-adjusted compact grants in 2023--or be 
able to disburse any income. The trust fund committee's reporting has 
not analyzed the fund's potential effectiveness in helping the RMI 
achieve its long-term economic goals. Although the RMI has supplemented 
its trust fund income with a contribution from Taiwan, other sources of 
income are uncertain or entail risk. For example, the RMI's limited 
development prospects constrain its ability to raise tax revenues to 
supplement the fund's income, and options such as securitization-- 
issuing bonds against future U.S. contributions--include the risk of 
lower fund balances and reduced income. Furthermore, according to U.S. 
government officials, trust fund management processes have been 
problematic. As of June 2007, for example, the RMI trust fund committee 
had not appointed an independent auditor or a money manager to invest 
the fund according to the proposed investment strategy. 

Our previous reports on the amended compacts recommended, among other 
things, that Interior's Deputy Assistant Secretary for Insular Affairs 
ensure that the compact management committee address the RMI's lack of 
progress in implementing economic reforms; work with the RMI to develop 
plans for minimizing the impact of the declining grants; work with the 
RMI to fully develop a reliable mechanism for measuring progress toward 
compact goals; and ensure the trust fund committee's timely reporting 
on the fund's likely status as a source of revenue after 2023. Interior 
generally concurred with our recommendations and has taken some actions 
in response to several of them. 


Compact of Free Association: 1986-2003: 

In 1986, the United States, the FSM, and the RMI entered into the 
original Compact of Free Association. The compact provided a framework 
for the United States to work toward achieving its three main goals: 
(1) to secure self-government for the FSM and the RMI, (2) to ensure 
certain national security rights for all of the parties, and (3) to 
assist the FSM and the RMI in their efforts to advance economic 
development and self-sufficiency. Under the original compact, the FSM 
and RMI 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. 

Although the first and second goals of the original compact were met, 
economic self-sufficiency was not achieved under the first compact. The 
FSM and the RMI became independent nations in 1978 and 1979, 
respectively, and the three countries established key defense rights, 
including securing U.S. access to military facilities on Kwajalein 
Atoll in the RMI through 2016. The compact's third goal was to be 
accomplished primarily through U.S. direct financial assistance to the 
FSM and the RMI that totaled $2.1 billion from 1987 through 
2003.[Footnote 7] However, estimated FSM and RMI per capita GDP levels 
at the close of the compact did not exceed, in real terms, those in the 
early 1990s,[Footnote 8] although U.S. assistance had maintained income 
levels that were higher than the two countries could have achieved 
without support. In addition, we found that the U.S., FSM, and RMI 
governments provided little accountability over compact expenditures 
and that many compact-funded projects experienced problems because of 
poor planning and management, inadequate construction and maintenance, 
or misuse of funds.[Footnote 9] 

Amended Compacts of Free Association: 2004-2023: 

In 2003, the United States approved separate amended compacts with the 
FSM and RMI that (1) continue the defense relationship, including a new 
agreement providing U.S. military access to Kwajalein Atoll in the RMI 
through 2086; (2) strengthen immigration provisions; and (3) provide an 
estimated $3.6 billion in financial assistance to both nations from 
2004 through 2023, including about $1.5 billion to the RMI (see app. 
I).[Footnote 10] The amended compacts identify the additional 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. Financial assistance is provided in the form 
of annual sector grants and contributions to each nation's trust fund. 
The amended compacts and their subsidiary agreements, along with the 
countries' development plans, target the grant assistance to six 
sectors--education, health, public infrastructure, the environment, 
public sector capacity building, and private sector development-- 
prioritizing two sectors, education and health.[Footnote 11] To provide 
increasing U.S. contributions to the FSM's and the RMI's trust funds, 
grant funding decreases annually and will likely result in falling per 
capita grant assistance over the funding period and relative to the 
original compact (see app. II).[Footnote 12] For example, in 2004 U.S. 
dollar terms, FSM per capita grant assistance will fall from around 
$1,352 in 1987 to around $562 in 2023, and RMI per capita assistance 
will fall from around $1,170 in 1987 to around $317 in 2023. 

Under the amended compacts, annual grant assistance is to be made 
available in accordance with an implementation framework that has 
several components (see app. III). For example, prior to the annual 
awarding of compact funds, the countries must submit development plans 
that identify goals and performance objectives for each sector. The FSM 
and RMI governments are also required to monitor day-to-day operations 
of sector grants and activities, submit periodic financial and 
performance reports for the tracking of progress against goals and 
objectives, and ensure annual financial and compliance audits. In 
addition, the U.S. and FSM Joint Economic Management Committee (JEMCO) 
and the U.S. and RMI Joint Economic Management and Financial 
Accountability Committee (JEMFAC) are to approve annual sector grants 
and evaluate the countries' management of the grants and their progress 
toward compact goals. The amended compacts also provide for the 
formation of FSM and RMI trust fund committees to, among other things, 
hire money managers, oversee the respective funds' operation and 
investment, and provide annual reports on the effectiveness of the 

Current Development Prospects Remain Limited for the RMI: 

The RMI economy shows limited potential for developing sustainable 
income sources other than foreign assistance to offset the annual 
decline in U.S. compact grant assistance. In addition, the RMI has not 
enacted economic policy reforms needed to improve its growth prospects. 

The RMI's economy shows continued dependence on government spending of 
foreign assistance and limited potential for expanded private sector 
and remittance income. 

* Since 2000, the estimated public sector share of GDP has grown, with 
public sector expenditure in 2005--about two-thirds of which is funded 
by external grants--accounting for about 60 percent of GDP. 

* The RMI's government budget is characterized by limited tax revenue 
paired with growing government payrolls. For example, RMI taxes have 
consistently provided less than 30 percent of total government revenue; 
however, payroll expenditures have roughly doubled, from around $17 
million in 2000 to around $30 million in 2005. 

* The RMI development plan identifies fishing and tourism as key 
potential private sector growth industries. However, the two industries 
combined currently provide less than 5 percent of employment, and both 
industries face significant constraints to growth that stem from 
structural barriers and a costly business environment. According to 
economic experts, growth in these industries is limited by factors such 
as geographic isolation, lack of tourism infrastructure, inadequate 
interisland shipping, a limited pool of skilled labor, and a growing 
threat of overfishing. 

* Although remittances from emigrants could provide increasing monetary 
support to the RMI, evidence suggests that RMI emigrants are currently 
limited in their income-earning opportunities abroad owing to 
inadequate education and vocational skills. For example, the 2003 U.S. 
census of RMI migrants in Hawaii, Guam, and the Commonwealth of the 
Northern Marianas Islands reveals that only 7 percent of those 25 years 
and older had a college degree and almost half of RMI emigrants lived 
below the poverty line.[Footnote 13] 

Although the RMI has undertaken efforts aimed at economic policy 
reform,[Footnote 14] it has made limited progress in implementing key 
tax, land, foreign investment, and public sector reforms that are 
needed to improve its growth prospects. For example: 

* The RMI government and economic experts have recognized for several 
years that the RMI tax system is complex and regressive, taxing on a 
gross rather than net basis and having weak collection and 
administrative capacity. Although the RMI has focused on improving tax 
administration and has raised some penalties and tax levels, 
legislation for income tax reform has failed and needed changes in 
government import tax exemptions have not been addressed. 

* In attempts to modernize a complex land tenure system, the RMI has 
established land registration offices. However, such offices have 
lacked a systematic method for registering parcels, instead waiting for 
landowners to voluntarily initiate the process. For example, only five 
parcels of land in the RMI had been, or were currently being, 
registered as of June 2006. Continued uncertainties over land ownership 
and land values create costly disputes, disincentives for investment, 
and problems regarding the use of land as an asset. 

* Economic experts and private sector representatives describe the 
overall climate for foreign investment in the RMI as complex and 
nontransparent. Despite attempts to streamline the process, foreign 
investment regulations remain relatively burdensome, with reported 
administrative delays and difficulties in obtaining permits for foreign 

* The RMI government has endorsed public sector reform; however, 
efforts to reduce public sector employment have generally failed, and 
the government continues to conduct a wide array of commercial 
enterprises that require subsidies and compete with private 
enterprises. As of June 2006, the RMI had not prepared a comprehensive 
policy for public sector enterprise reform. 

Although the RMI development plan includes objectives for economic 
reform, until August 2006--2 years into the amended compact--JEMFAC did 
not address the country's slow progress in implementing these reforms. 

The RMI Faces Challenges to Effectively Implementing Compact Assistance 
for Its Long-Term Development Goals: 

The RMI has allocated funds to priority sectors, although several 
factors have hindered its use of the funds to meet long-term 
development needs. Further, despite actions taken to effectively 
implement compact grants, administrative challenges have limited its 
ability to ensure use of the grants for its long-term goals. In 
addition, although OIA has monitored early compact activities, it has 
also faced capacity constraints. 

The RMI allocated compact funds largely to priority sectors for 2004- 
2006. The RMI allocated about 33 percent, 40 percent, and 20 percent of 
funds to education, infrastructure, and health, respectively (see app. 
IV). The education allocation included funding for nine new school 
construction projects, initiated in October 2003 through July 2006. 
However, various factors, such as land use issues and inadequate needs 
assessments, have limited the government's use of compact funds to meet 
long-term development needs. For example: 

* Management and land use issues. The RMI government and Kwajalein 
landowners have been disputing the management of public entities and 
government use of leased land on the atoll. Such tensions have 
negatively affected the construction of schools and other community 
development initiatives.[Footnote 15] For example, the government and 
landowners disagreed about the management of the entity designated to 
use the compact funds set aside for Ebeye special needs; consequently, 
about $3.3 million of the $5.8 million allocated for this purpose had 
not been released for the community's benefit until after September 
2006.[Footnote 16] In addition, although the RMI has completed some 
infrastructure projects where land titles were clear and long-term 
leases were available, continuing uncertainty regarding land titles may 
delay future projects. 

* Lack of planning for declining U.S. assistance. Despite the goal of 
budgetary self-reliance, the RMI lacks 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. RMI 
officials 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 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. 
Additionally, the RMI's slow progress in implementing tax reform will 
limit its ability to augment tax revenues. 

The RMI has taken steps to effectively implement compact assistance, 
but administrative challenges have hindered its ability to ensure use 
of the funds for its long-term development goals. The RMI established 
development plans that include strategic goals and objectives for the 
sectors receiving compact funds.[Footnote 17] Further, in addition to 
establishing JEMFAC, the RMI designated the Ministry of Foreign Affairs 
as its official contact point for compact policy and grant 
implementation issues.[Footnote 18] However, data deficiencies, report 
shortcomings, capacity constraints, and inadequate communication have 
limited the RMI and U.S. governments' ability to consistently ensure 
the effective use of grant funds to measure progress, and monitor day- 
to-day activities. 

* Data deficiencies. Although the RMI established performance 
measurement indicators, a lack of complete and reliable data has 
prevented the use of these indicators to assess progress. For example, 
the RMI submitted data to JEMFAC for only 15 of the 20 required 
education performance indicators in 2005, repeating the submission in 
2006 without updating the data. Also, in 2005, the RMI government 
reported difficulty in comparing the health ministry's 2004 and 2005 
performance owing to gaps in reported data--for instance, limited data 
were available in 2004 for the outer island health care system. 

* Report shortcomings. The usefulness of the RMI's quarterly 
performance reports has also been limited by incomplete and inaccurate 
information. For example, the RMI Ministry of Health's 2005 fourth- 
quarter report contained incorrect outpatient numbers for the first 
three quarters, according to a hospital administrator. Additionally, we 
found several errors in basic statistics in the RMI quarterly reports 
for education and RMI Ministry of Education officials and officials in 
other sectors told us that they had not been given the opportunity to 
review the final performance reports compiled by the statistics office 
prior to submission. 

* Capacity constraints. Staff and skill limitations have constrained 
the RMI's ability to provide day-to-day monitoring of sector grant 
operations. However, the RMI has submitted its single audits on time. 
In addition, although the single audit reports for 2004 and 2005 
indicated weaknesses in the RMI's financial statements and compliance 
with requirements of major federal programs, the government has 
developed corrective action plans to address the 2005 findings related 
to such compliance. 

* Lack of communication. Our interviews with U.S. and RMI department 
officials, private sector representatives, NGOs, and economic experts 
revealed a lack of communication and dissemination of information by 
the U.S. and RMI governments on issues such as JEMFAC decisions, 
departmental budgets, economic reforms, legislative decisions, and 
fiscal positions of public enterprises. Such lack of information about 
government activities creates uncertainty for public, private, and 
community leaders, which can inhibit grant performance and improvement 
of social and economic conditions. 

As administrator of the amended compact grants, OIA monitored sector 
grant and fiscal performance, assessed RMI compliance with compact 
conditions, and took action to correct persistent shortcomings. For 
example, since 2004, OIA has provided technical advice and assistance 
to help the RMI improve the quality of its financial statements and 
develop controls to resolve audit findings and prevent recurrences. 
However, OIA has been constrained in its oversight role owing to 
staffing challenges and time-consuming demands associated with early 
compact implementation challenges in the FSM. 

RMI Trust Fund May Not Provide Sustainable Income After Compact Grants 

Market volatility and choice of investment strategy could lead to a 
wide range of RMI trust fund balances in 2023[Footnote 19] and 
potentially prevent trust fund disbursements in some years. Although 
the RMI has supplemented its trust fund balance with additional 
contributions, other sources of income are uncertain or entail risks. 
Furthermore, the RMI's trust fund committee has faced challenges in 
effectively managing the fund's investment. 

Market volatility and investment strategy could have a considerable 
impact on projected trust fund balances in 2023. Our analysis indicates 
that, under various scenarios, the RMI's trust fund could fall short of 
the maximum allowed disbursement level--an amount equal to the 
inflation-adjusted compact grants in 2023--after compact grants end, 
with the probability of shortfalls increasing over time (see app. V). 
For example, under a moderate investment strategy, the fund's income is 
only around 10 percent likely to fall short of the maximum distribution 
by 2031. However, this probability rises to almost 40 percent by 2050. 
Additionally, our analysis indicates a positive probability that the 
fund will yield no disbursement in some years; under a moderate 
investment strategy the probability is around 10 percent by 2050. 
Despite the impact of market volatility and investment strategy, the 
trust fund committee's reports have not yet assessed the fund's 
potential adequacy for meeting the RMI's long-term economic goals. 

RMI trust fund income could be supplemented from several sources, 
although this potential is uncertain. For example, the RMI received a 
commitment from Taiwan to contribute $40 million over 20 years to the 
RMI trust fund, which improved the RMI fund's likely capacity for 
disbursements after 2023. However, the RMI's limited development 
prospects constrain its ability to raise tax revenues to supplement the 
fund's income. Securitization--issuing bonds against future U.S. 
contributions--could increase the fund's earning potential by raising 
its balances through bond sales. However, securitization could also 
lead to lower balances and reduced fund income if interest owed on the 
bonds exceeds investment returns.[Footnote 20] 

The RMI trust fund committee has experienced management challenges in 
establishing the trust fund to maximize earnings. Contributions to the 
trust fund were initially placed in a low-interest savings account and 
were not invested until 16 months after the initial 
contribution.[Footnote 21] As of June 2007, the RMI trust fund 
committee had not appointed an independent auditor or a money manager 
to invest the fund according to the proposed investment strategy. U.S. 
government officials suggested that contractual delays and committee 
processes for reaching consensus and obtaining administrative support 
contributed to the time taken to establish and invest funds. As of May 
2007, the committee had not yet taken steps to improve these processes. 


Since enactment of the amended compacts, the U.S. and RMI governments 
have made efforts to meet new requirements for implementation, 
performance measurement, and oversight. However, the RMI faces 
significant challenges in working toward the compact goals of economic 
advancement and budgetary self-reliance as the compact grants decrease. 
Largely dependent on government spending of foreign aid, the RMI has 
limited potential for private sector growth, and its government has 
made little progress in implementing reforms needed to increase 
investment opportunities and tax income. In addition, JEMFAC did not 
address the pace of reform during the first 2 years of compact 
implementation. Further, both the U.S. and RMI governments have faced 
significant capacity constraints in ensuring effective implementation 
of grant funding. The RMI government and JEMFAC have also shown limited 
commitment to strategically planning for the long-term, effective use 
of grant assistance or for the budgetary pressure the government will 
face as compact grants decline. Because the trust fund's earnings are 
intended as a main source of U.S. assistance to the RMI after compact 
grants end, the fund's potential inadequacy to provide sustainable 
income in some years could impact the RMI's ability to provide 
government services. However, the RMI trust fund committee has not 
assessed the potential status of the fund as an ongoing source of 
revenue after compact grants end in 2023. 

Prior Recommendations: 

Our prior reports on the amended compacts[Footnote 22] include 
recommendations that the Secretary of the Interior direct the Deputy 
Assistant Secretary for Insular Affairs, as chair of the RMI management 
and trust fund committees, to, among other things, 

* ensure that JEMFAC address the lack of RMI progress in implementing 
reforms to increase investment and tax income; 

* coordinate with other U.S. agencies on JEMFAC to work with the the 
RMI to establish plans to minimize the impact of declining assistance; 

* coordinate with other U.S. agencies on JEMFAC to work with the RMI to 
fully develop a reliable mechanism for measuring progress toward 
compact goals; and: 

* ensure the RMI trust fund committee's assessment and timely reporting 
of the fund's likely status as a source of revenue after 2023. 

Interior generally concurred with our recommendations and has taken 
actions in response to several of them. For example, in August 2006, 
JEMFAC discussed the RMI's slow progress in implementing economic 
reforms. Additionally, the trust fund committee decided in June 2007 to 
create a position for handling the administrative duties of the fund. 
Regarding planning for declining assistance and measuring progress 
toward compact goals, JEMFAC has not held an annual meeting since the 
December 2006 publication of the report containing those 
recommendations.[Footnote 23] 

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

Contacts and Acknowledgments: 

For future contacts regarding this testimony, please call David 
Gootnick at (202) 512-3149 or Individuals making key 
contributions to this testimony included Emil Friberg, Jr., Ming Chen, 
Tracy Guerrero, Julie Hirshen, Leslie Holen, Reid Lowe, Mary Moutsos, 
Kendall Schaefer, and Eddie Uyekawa. 

[End of section] 

Appendix I:

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

(Dollars in millions). 

Fiscal Year: 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. 

Fiscal Year: 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. 

Fiscal Year: 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. 

Fiscal Year: 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. 

Fiscal Year: 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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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. 


For 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 

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] 

[End of section] 

Appendix II: Estimated FSM and RMI per Capita Compact Grant Assistance for Fiscal Years 1987 - 2023: 


[See PDF for Image] 

Source:  GAO analysis of amended compacts and U.S. Census population 

Note: Compact grant assistance was decreased in 1991, 1996, and 2001 
and increased in 2002 and 2003 to equal an average of the funding 
provided during the previous 15 years. Compact grant assistance under 
the amended compacts (2004-2024) is decreased annually. U.S. 
contributions to each country's trust funds increase by the same amount 
as the grant decrement. Funding for compact-authorized federal 
services, trust-fund contributions, and U.S. military use of Kwajalein 
Atoll land is not included. 

[End of figure] 

[End of section] 

Appendix III: Amended Compact Implementation Framework: 


[See PDF for Image] 

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

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

[End of Figure] 

[End of section] 

Appendix IV:RMI Sector Grant Allocation, 2004 through 2006: 


[See PDF for Image] 

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

Note: Supplemental Education Grant funds, which started in 2005, are 
not depicted. In cases where funds were unspent and deobligated in one 
year and reobligated in a subsequent year, we included the funds only 
in the 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] 

[End of section] 

Appendix V: Probability of RMI Trust Fund Income Not Reaching the Maximum Disbursement Levels Allowed: 

Market volatility and choice of investment strategy could result in the 
RMI trust fund's inability to disburse the maximum level of income 
allowed in the trust fund agreement, or any income, in some 
years.[Footnote 24] Trust fund income levels will depend on the 
investment strategy chosen, with a more conservative strategy carrying 
a lower level of market volatility and a lower level of expected 
returns over time than an aggressive investment strategy. Figure 1 
illustrates projected RMI trust fund balances under the conservative, 
moderate, and aggressive investment strategies that we 
projected.[Footnote 25] As shown in figure 2, under all three 
strategies, the RMI trust fund's annual income will likely not reach 
the maximum disbursement allowed, with the probability of shortfall 
increasing with time. For example, our analysis of the moderate 
investment strategy shows probability of about 10 percent that the RMI 
trust fund's income will not reach the maximum allowed disbursement 
after 2031, with the probability rising to around 40 percent by 2050. 

[End of section] 

Figure 1: Projections of RMI Account Balance with Three Possible 
Investment Strategies: 

[See PDF for Image] 

Source:  GAO

[End of figure] 

Figure 2: Probability of RMI Trust Fund Income Not Reaching the Maximum 
Disbursement Levels Allowed, Fiscal Years 2024 - 2050: 

[See PDF for Image] 

Source: GAO analysis of amended compacts and U.S. Census population 

Note: This analysis includes Taiwan's contribution to the A account. 
The chart depicts results from 1,000 trial runs. The change from one 
year to the next may not always be monotonic, but the general time 
trend is clear. As the number of trial runs increase, the time trend 
becomes smoother. 

[End of figure] 

[End of Section] 



[1] In this testimony, all annual references refer to the fiscal year 
rather than the calendar year. 

[2] In 2000, we reviewed assistance under the compact and determined 
that the U.S. and RMI governments had provided limited accountability 
over spending and that U.S. assistance had resulted in little impact on 
economic development in the RMI. See 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] This figure is based on a Department of Interior projection as of 
July, 2007. 

[4] GAO, Compact of Free Association: An Assessment of the Amended 
Compacts and Related Agreements, GAO-03-988T (Washington, D.C.: June 
18, 2003), testimony before the Committee on Resources, House of 

[5] The amended compacts' implementing legislation instructs GAO to 
report 3 years following the enactment of the legislation and every 5 
years thereafter on 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. 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); GAO, Compacts of Free 
Association: Development Prospects Remain Limited for the Micronesia 
and the Marshall Islands, GAO-06-590 (Washington, D.C.: June 27, 2006); 
GAO, 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); 
GAO, Compacts of Free Association: Trust Funds for Micronesia and the 
Marshall Islands May Not Provide Sustainable Income, GAO-07-513 
(Washington, D.C.: July 15, 2007); and GAO, Compact of Free 
Association: Micronesia and the Marshall Island's Use of Sector Grants, 
GAO-07-514R (Washington, D.C.: May 25, 2007). 

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

[7] This estimate is based on Interior data and 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 
Public Law 99-239. 

[8] Estimated FSM per capita GDP, in fiscal year 2003 U.S. dollars, was 
$2,151 in 2003 compared with an average of $2,093 from 1990 to 1995. 
Estimated RMI per capita GDP, in fiscal year 2003 U.S. dollars, was 
$2,247 in 2003 compared with an average of $2,336 from 1990 to 1995. 

[9] GAO/NSIAD-00-216. 

[10] The RMI and FSM amended compacts went into effect on May 1, 2004, 
and June 25, 2004, respectively. The $1.5 billion in assistance to the 
RMI includes (1) compact grants; (2) trust fund contributions; (3) 
lease payments; and (5) inflation adjustments. 

[11] The RMI compact requires its infrastructure grant to be 30 to 50 
percent of its total annual sector grants. Additionally, the RMI must 
target grant funding to Ebeye and other Marshallese communities within 
Kwajalein Atoll. 

[12] U.S. contributions to trust funds were conditioned on the FSM and 
the RMI making their own required contribution. The RMI made its 
required initial contribution of $30 million to its trust fund on June 
1, 2004. 

[13] See GAO-06-590. However, a preliminary survey of RMI emigrants in 
Springdale, Arkansas suggests that the emigrant population there has 
higher education levels and lower poverty levels relative to the 
emigrant population in Hawaii, Guam, and the CNMI. 

[14] For example, the Asian Development Bank has recently assisted the 
RMI in holding "Dialogue for Action" retreats that enable public and 
private sector representatives to develop a common vision for 
sustainable development through economic reform. 

[15] In addition to these examples, land issues remain an issue for 
U.S. access to Kwajalein Atoll through the defense provisions of the 
amended compact. The RMI government is bound by an agreement with the 
U.S. government that allows for U.S. access to Kwajalein Atoll until 
2086. To date, the RMI government has not reached an agreement with 
Kwajalein Atoll landowners (who own the land under use by the U.S. 
government) that allows for this long-term access. 

[16] 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 
stipulated the authority's restructuring; however, the law was 
subsequently repealed by the RMI government. Kwajalein landowners are 
challenging this decision in court. 

[17] The RMI's development plan consists of three documents: Vision 
2018, Meto 2000, and the 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 of 
these RMI documents as "the development plan." 

[18] Prior to designating the Ministry of Foreign Affairs as a compact 
implementation unit, the RMI had 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. The RMI's Economic Policy, Planning, and Statistics Office 
also works with the ministries receiving grants to prepare the annual 
budget proposals, quarterly reports, and annual monitoring and 
evaluation reports. 

[19] Under a projected conservative investment strategy, our analysis 
estimates that the RMI trust fund could range from $439 million to $862 
million in 2023. Under a projected aggressive investment strategy, the 
RMI trust fund could range from $438 million to $1.4 billion in 2023. 

[20] According to Interior officials, the trust fund committees are 
reviewing this option but have not initiated an independent study to 
objectively evaluate its potential risks. 

[21] For the months before the investment of the RMI trust fund's 
approximately $49 million in October 2005, the fund earned a return of 
approximately 3 percent, compared with a stock market return of about 4 
percent. Given the small difference in returns, as well as the fees 
that the fund would have paid if invested in the stock market, we 
estimate that this delay reduced the fund's earnings by approximately 

[22] GAO-05-633, GAO-06-590, GAO-07-163, GAO-07-513, GAO-07-514R. 

[23] GAO-07-163, p. 50. 

[24] The trust fund agreements specify that in 2024 and thereafter, the 
RMI trust fund committee may disburse amounts up to the annual grant 
assistance in 2023, fully adjusted for inflation, provided that funds 
are available in the B account to reach such a level. 

[25] Our methodology for projecting trust fund income is based on a 
technique known as Monte Carlo simulation. We built a Monte Carlo 
simulation model--based on the trust fund agreements, contributions to 
date, and historical returns of the market--to project the trust fund's 
likely income levels given market volatility as well as historical 
returns of various asset classes, including large company stocks, 
treasury bills, and international stocks from 1970 to 2005. (See GAO-07-

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