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United States Government Accountability Office: 
GAO: 

Testimony: 

Before the Subcommittee on Fisheries, Wildlife, Oceans and Insular 
Affairs, Committee on Natural Resources, House of Representatives: 

For Release on Delivery: 
Expected at 3:00 p.m. EST: 
Tuesday, January 7, 2014: 

Compacts of Free Association: 

Actions Needed to Improve Oversight and Accountability of U.S. 
Assistance to Micronesia and the Marshall Islands: 

Statement of David Gootnick, Director: 
International Affairs and Trade: 

GAO-14-243T: 

GAO Highlights: 

Highlights of GAO-14-243T, a testimony before the Subcommittee on 
Fisheries, Wildlife, Oceans and Insular Affairs, Committee on Natural 
Resources, House of Representatives. 

Why GAO Did This Study: 

In 2003, the U.S. government approved amended Compacts of Free 
Association with the FSM and the RMI, providing for a total of $3.6 
billion in assistance over 20 years. This testimony draws from GAO’s 
September 2013 report on the use and accountability of these funds to 
review (1) the FSM’s and RMI’s use of compact funds in the education 
and health sectors; (2) the extent to which the FSM and RMI have made 
progress toward stated goals in education and health; and (3) the 
extent to which oversight activities by the FSM, RMI, and U.S. 
governments ensure accountability for compact funding. Like the 
report, this testimony also provides information on infrastructure 
spending in the education and health sectors. GAO reviewed relevant 
documents and data, including single audit reports; interviewed 
officials from Interior, other U.S. agencies, and the FSM and RMI; 
assessed data reliability for subsets of both countries’ education and 
health indicators; and visited compact-funded education and health 
facilities in both countries. 

What GAO Found: 

In fiscal years 2007 through 2011, the Federated States of Micronesia 
(FSM) and the Republic of the Marshall Islands (RMI) spent at least 
half their compact sector funds in the education and health sectors. 
Because both countries spent significant amounts of compact funds on 
personnel in those sectors, the U.S.-–FSM and U.S.–-RMI joint 
management and accountability committees capped budgets for personnel 
in those sectors at fiscal year 2011 levels due to concerns about the 
sustainability of sector budgets as compact funding continues to 
decline through fiscal year 2023. As required by the committees, the 
FSM states completed plans to address annual decreases in compact 
funding; however, as of August 2013, the FSM National Government and 
the RMI had not submitted plans to address the annual decreases. 
Without such plans, the countries may not be able to sustain essential 
services in the education and health sectors. 

Data reliability issues hindered GAO’s assessment of each country’s 
progress in the education and health sectors for fiscal years 2007 
through 2011. Although both countries tracked annual indicators in 
these sectors during this period, GAO determined that many of these 
data were not sufficiently reliable for the purpose of measuring 
progress for the compacts as a whole over the time frame. In 
education, GAO found 3 of 14 indicators in the subsets of indicators 
it reviewed for both countries to be sufficiently reliable. GAO found 
a variety of education data reliability problems; for example, the 
four FSM states did not use common definitions for some indicators, 
resulting in inconsistent data for those indicators, and in the RMI 
some indicators lacked data from the outer islands. In the health 
sector, GAO determined that data for all 5 of the subset of indicators 
it reviewed in the FSM were not sufficiently reliable, and in the RMI, 
1 health indicator was sufficiently reliable, 2 were not sufficiently 
reliable, and for 2 others, GAO had no basis to judge due to 
insufficient information. The joint management and accountability 
committees have raised concerns about the reliability of FSM’s 
education and health data and RMI’s health data and required each 
country to obtain an independent assessment and verification of these 
data; both countries have yet to meet that requirement. Without 
reliable data, the countries cannot assess progress toward their goals 
in the education and health sectors. 

The single audit reports GAO reviewed indicated challenges to ensuring 
accountability of U.S. funds in the FSM and RMI. For example, the 
governments’ single audits showed repeat findings and persistent 
problems in noncompliance with U.S. program requirements, such as 
accounting for equipment. The Department of the Interior (Interior) 
has taken steps regarding accountability of compact funds, such as 
establishing a financial control commission in one FSM state, but 
Interior has not coordinated with other U.S. agencies about the risk 
status of the FSM and RMI and whether to designate either country as a 
high-risk grantee. Furthermore, the FSM, RMI, and U.S. offices 
responsible for compact administration faced limitations hindering 
their ability to conduct compact oversight. For example, Interior’s 
Office of Insular Affairs (OIA) experienced a staffing shortage that 
disproportionately affected compact grant oversight compared to other 
OIA activities, leaving 6 of 11 planned positions for compact 
oversight unfilled as of 2012 and 5 of 11 still unfilled as of 2013. 

What GAO Recommends: 

GAO is not making new recommendations. In its September 2013 report, 
GAO recommended that, among other actions, Interior should (1) take 
all necessary steps to ensure the reliability of FSM and RMI 
indicators in education and health, (2) assess whether to designate 
each country as high risk, and (3) take actions to correct its 
disproportionate staffing shortage related to compact grant 
implementation and oversight. Interior generally agreed with the 
recommendations and identified actions taken, ongoing, and planned. 

View [hyperlink, http://www.gao.gov/products/GAO-14-243T]. For more 
information, contact David Gootnick at (202) 512-3149 or 
gootnickd@gao.gov. 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

Chairman Fleming, Ranking Member Sablan, and Members of the 
Subcommittee: 

Thank you for this opportunity to discuss our recent work reviewing 
the use and accountability of U.S. grant funds provided under the 
amended Compacts of Free Association to the Federated States of 
Micronesia (FSM) and the Republic of the Marshall Islands (RMI). The 
amended compacts, approved by Congress in 2003, provide for a combined 
total of $3.6 billion in U.S. grant funds for the FSM and RMI during 
fiscal years 2004 through 2023.[Footnote 1] The purpose of the funds 
is to assist the FSM and RMI governments in their efforts to promote 
the economic self-sufficiency and budgetary self-reliance of their 
people. The amended compacts provide sector grants, and associated 
fiscal procedures agreements[Footnote 2] require that grant funding 
support the countries in six core sectors--education, health, 
infrastructure, environment, private sector development, and public 
sector capacity building, with the education and health sectors having 
the greatest priority. 

My remarks today are based on our September 2013 report, which was 
issued at about the midpoint of the amended compacts' 20-year grant 
period.[Footnote 3] In our report, we examined (1) the FSM's and RMI's 
use of compact funds in the education and health sectors; (2) the 
extent to which the FSM and RMI have made progress toward stated goals 
in education and health; and (3) the extent to which oversight 
activities by the FSM, RMI, and U.S. governments ensure accountability 
for compact funding. In reporting on these objectives, our time frame 
was generally fiscal years 2007 through 2011, and we also included 
information on both countries' infrastructure projects during that 
period. To perform this work, we reviewed FSM and RMI single audits 
and subsets of FSM and RMI performance indicators for the education 
and health sectors.[Footnote 4] We observed the 2012 annual meetings, 
the 2013 midyear meetings, and the 2013 annual meetings of the U.S.-
FSM Joint Economic Management Committee (JEMCO) and the U.S.-RMI Joint 
Economic Management and Financial Accountability Committee (JEMFAC); 
these joint management and accountability committees allocate grants 
and provide oversight for the amended compacts. We interviewed 
officials from the U.S. Departments of the Interior (Interior), Health 
and Human Services, Education, and State, the FSM National Government 
and state governments, and RMI government. We also directly observed 
selected compact-funded education and health facilities in Chuuk and 
Pohnpei states in the FSM and Majuro and Kwajalein Atolls in the RMI. 
[Footnote 5] 

The work on which this testimony is based was conducted in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

The FSM and the RMI are located in the Pacific Ocean just north of the 
equator, about 3,000 miles southwest of Hawaii and about 2,500 miles 
southeast of Japan. The FSM is a federation of four states and has a 
population of approximately 103,000 (as of 2010) scattered over many 
small islands and atolls. The RMI comprises 29 constituent atolls and 
five islands with a population of approximately 53,000 as of 2011. 
U.S. relations with the FSM and the RMI began during World War II when 
the United States ended Japanese occupation of the region. Beginning 
in 1947, the United States administered the region under a United 
Nations trusteeship. The four states of the FSM voted in a 1978 
referendum to become an independent nation, while the RMI established 
its constitutional government and declared itself a republic in 1979. 
Under the trusteeship agreement, both newly formed nations remained 
subject to the authority of the United States until 1986. The United 
States, the FSM, and the RMI entered into the original Compact of Free 
Association in 1986, and from 1987 through 2003 the FSM and the RMI 
are estimated to have received about $2.1 billion in compact financial 
assistance.[Footnote 6] 

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. The amended compacts provide for direct financial 
assistance to the FSM and the RMI from 2004 to 2023, decreasing in 
most years. The amounts of the annual decrements are to be deposited 
in trust funds established for the FSM and the RMI; the annual 
decrement in grant funding is intended to steadily increase the trust 
funds so that earnings from the trust can provide a source of annual 
revenue after the grants end in 2023 (see figure 2 on page 8 of the 
report, [hyperlink, 
http://www.gao.gov/products/GAO-GAO-13-675].[Footnote 7] In addition 
to receiving compact sector grants, the FSM and the RMI are eligible 
for a supplemental education grant each year.[Footnote 8] Separate 
from the funding authorized and appropriated under the amended 
compacts' enabling legislation, the countries also receive other 
grants and other assistance from U.S. agencies.[Footnote 9] 

The legislation and fiscal procedures agreements for the amended 
compacts established oversight mechanisms and responsibilities for the 
FSM, RMI, and the United States. To strengthen the management and 
accountability and promote the effective use of compact funding, JEMCO 
and JEMFAC were jointly established by the United States and, 
respectively, the FSM and the RMI. Each five-member committee 
comprises three representatives from the United States government and 
two representatives from the corresponding country. JEMCO's and 
JEMFAC's designated roles and responsibilities include the following: 

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

* approving grant allocations and performance objectives;[Footnote 10] 

* 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 three countries are required to provide the necessary staff 
support to their representatives on JEMCO and JEMFAC to enable the 
parties to monitor closely the use of assistance under the compacts. 
Each country has established an agency dedicated to providing compact 
oversight and ensuring compliance with regulations in the amended 
compacts, grant award terms and conditions, and JEMCO and JEMFAC 
resolutions. Interior's Office of Insular Affairs (OIA) has 
responsibility for the administration and oversight of the FSM and RMI 
compact sector and supplemental education grants. The Director of OIA 
serves as Chairman of both JEMCO and JEMFAC. 

The FSM and the RMI must adhere to specific fiscal control and 
accounting procedures and are required to submit annual audit reports, 
within the meaning of the Single Audit Act, as amended.[Footnote 11] 
Single audits are a key control for the oversight and monitoring of 
the FSM and RMI governments' use of U.S. awards. As the U.S. agency 
with the largest grant awards to the FSM and the RMI, Interior is 
designated as the cognizant audit agency[Footnote 12] for FSM and RMI 
single audits. All U.S. agencies providing noncompact grants to the 
FSM and the RMI are responsible for administering those grants in 
accordance with Office of Management and Budget (OMB) requirements 
[Footnote 13] and agency regulations that include the Grants 
Management Common Rule. Under the common rule, U.S. agencies may 
consider a grantee as "high risk" if the grantee has a history of 
unsatisfactory performance, is not financially stable, has a 
management system that does not meet required standards, has not 
conformed to the terms and conditions of previous awards, or is 
otherwise irresponsible. 

FSM and RMI Prioritized Education and Health Sectors in Spending 
Compact Funds: 

In fiscal years 2007 through 2011, the FSM spent about two-thirds and 
the RMI spent about half of their total compact sector funds in the 
education and health sectors--$158 million for the FSM and $89 million 
for the RMI.[Footnote 14] (For a breakdown of sector compact 
expenditures and supplemental education grant expenditures for both 
countries during this period, see pages 14 to 21 of the report, 
[hyperlink, http://www.gao.gov/products/GAO-GAO-13-675]). 

In the FSM in fiscal year 2011, education sector compact and 
supplemental education grant funds together amounted to about 85 
percent of total education expenditures, and health sector compact 
funds were about 66 percent of total health expenditures.[Footnote 15] 
Compact funds in the RMI also supported a significant portion of 
government expenditures in the education and health sectors. Education 
sector compact funds, supplemental education grants, and Ebeye special 
needs education funds[Footnote 16] constituted about 62 percent of the 
RMI's total education expenditures in fiscal year 2011, while health 
sector compact funds and Ebeye special needs health funds accounted 
for about 33 percent of the RMI's total health expenditures.[Footnote 
17] 

In the education and health sectors, both the FSM and RMI spent 
significant amounts of compact funds on personnel. The FSM in fiscal 
years 2009 through 2011[Footnote 18] spent about 61 percent of its 
education sector compact and supplemental education grant funds and 
about 41 percent of its health sector compact funds to pay personnel. 
In fiscal years 2007 through 2011, the RMI spent about 54 percent of 
the education sector compact and supplemental education grant funds 
and about 64 percent of the health sector compact funds for personnel. 
Concerned about the sustainability of sector budgets as compact 
funding declines through fiscal year 2023 due to the annual 
decrements, JEMCO and JEMFAC passed resolutions in 2011, capping 
budgetary levels for personnel in the education and health sectors of 
both countries at fiscal year 2011 levels. 

JEMCO and JEMFAC actions regarding annual decrement plans. JEMCO and 
JEMFAC resolutions in fiscal years 2009 and 2010 required the FSM 
National Government and state governments and the RMI government to 
complete plans that would address the annual decrements in compact 
funding and identify new revenue sources to replace compact grant 
assistance in 2023. By the March 2013 JEMCO and JEMFAC midyear 
meetings, the four FSM states had completed plans to address the 
annual decrements in compact sector funding through 2023; however, the 
FSM National Government and RMI government had not completed their 
plans. Also, in fiscal year 2013, U.S. members of the JEMCO and JEMFAC 
announced that the United States would consider withholding certain 
fiscal year 2014 compact sector grant funds until the FSM National 
Government and RMI submitted their plans for addressing the annual 
decrements. Without such plans, the countries may not be able to 
sustain essential services in the education and health sectors. 

At the annual JEMCO and JEMFAC meetings in August 2013, the committees 
withheld annual sector funds from the FSM National Government and RMI 
government because they failed to provide the required plans to 
address the annual decrements.[Footnote 19] In September 2013, 
however, JEMCO allocated sector grant funds to the four FSM states, 
which provided the required plans, but continued withholding funds 
from the FSM National Government because it failed to meet the 
requirements of the JEMCO resolution requiring the plan.[Footnote 20] 
In October 2013, JEMFAC provided sector grant funds to the RMI with 
the stipulation that no sector funds would be approved in fiscal year 
2015 unless the RMI fulfilled the terms of the JEMFAC resolution 
requiring a decrement plan.[Footnote 21] In November 2013, the FSM 
National Government provided OIA with a plan detailing the National 
Government's long-term fiscal framework, which includes a burden-
sharing commitment to the four FSM states to help address the 
decrement. Among the actions the National Government has taken to 
address the decrement is a new law modifying the annual compact 
distribution formula, reducing its share of compact sector grants from 
10 percent to 5 percent;[Footnote 22] the goal in providing an 
additional 5 percent in compact grant funds to the states is to ensure 
that priority education and health service needs are not compromised 
as the annual compact allocations decrease. The U.S. members of JEMCO 
have yet to determine whether the long-term fiscal framework plan from 
the FSM National Government meets the decrement plan requirements. 

Reported FSM and RMI infrastructure spending. In the FSM, in fiscal 
years 2004 through 2013, approximately $229 million in compact funds 
were allocated to infrastructure, and of that about $106 million has 
been expended, according to OIA.[Footnote 23] Delays in establishing 
JEMCO-approved priorities and unresolved land titling issues affected 
the construction and maintenance of some health and education 
facilities in the FSM. During fiscal years 2007 through 2012, the FSM 
completed 6 education-related projects on a JEMCO-approved list of 19 
priority projects, and other projects are under way. From 2004 through 
2013, approximately $106 million in compact funds were allocated to 
infrastructure in the RMI, and the RMI expended about $95 million 
dollars on infrastructure projects, including infrastructure 
maintenance, according to OIA. The RMI stated it has constructed or 
renovated over 200 classroom facilities in the education sector and 45 
projects in the health sector and has also conducted essential 
maintenance at its two hospitals. 

Data Inconsistencies Hindered Our Assessment of FSM and RMI Progress 
in the Education and Health Sectors: 

Data reliability issues hindered our assessment of progress by the FSM 
and RMI in both the education and health sectors for fiscal years 2007 
through 2011. Although both countries tracked annual indicators in 
these sectors to measure progress during this period, we encountered 
data reliability issues in the subsets of indicators we examined. 

We determined that eight of the subset of nine FSM education 
indicators we reviewed could not be used to assess progress over time 
because of such issues as incomplete data and inconsistent definitions 
and data collection. For example, we found that the four FSM states 
did not use common definitions for some indicators; consequently, the 
education indicator reports we reviewed did not contain consistent 
data for these indicators and comparisons could not be made across 
states. In the RMI, we determined that data for three of the subset of 
five education indicators we reviewed could not be used to assess 
education sector progress for the compact as a whole because of issues 
such as lack of data from the country's outer islands, inconsistencies 
in reported data for some years, and revisions to data with no 
explanation. 

For all five of the subset of FSM health indicators we reviewed, we 
determined that the data were not sufficiently reliable to assess 
progress for the compacts as a whole.[Footnote 24] For example, for 
the indicator that all essential drugs were to be available 80 percent 
of days, we identified problems with the source documents used in the 
calculations in Chuuk and Pohnpei, calling into question the 
reliability of the data presented in the health indicators report. In 
the RMI, of the subset of five health indicators we reviewed, we 
determined one was sufficiently reliable and two were not sufficiently 
reliable to assess progress because of various issues with data 
collection and reporting. For example, we determined that data for 
immunization coverage for 2-year-olds and the child mortality rate 
were not sufficiently reliable due to the timeliness and accuracy of 
reporting and low coverage rates for data from the outer islands. For 
the remaining two FSM health indicators we examined, we had no basis 
to judge the reliability of the data.[Footnote 25] 

In much of their reporting on their education and health indicators, 
the FSM and RMI have noted data reliability problems and some actions 
they have taken to address them. JEMCO and JEMFAC have also raised 
concerns about the reliability of the FSM's education and health data 
and the RMI's health data and required that each country obtain an 
independent assessment and verification of these data; neither country 
has met that requirement. Without reliable data, the countries cannot 
assess progress toward their goals in the education and health sectors 
and cannot effectively use results data for setting priorities and 
allocating resources aimed at improving performance. The lack of 
reliable data also hampers the ability of JEMCO and JEMFAC to oversee 
compact expenditures and assess the countries' progress toward all 
their goals in the education and health sectors. 

FSM and RMI Face Financial Accountability Challenges; Oversight Bodies 
Are Hindered by Limitations: 

The single audit reports we reviewed indicated challenges to ensuring 
accountability of compact and noncompact U.S. funds in the FSM and 
RMI. In the FSM, although the single audit reports for Chuuk and 
Pohnpei state governments demonstrated improvement in financial 
accountability, the FSM National Government single audit reports 
indicated that the government faced financial accountability 
challenges. For example, the FSM National Government's 2011 single 
audit report contained several repeat findings--problems noted in 
previous audits that had not been corrected for several years--and 
identified problems with the extent of noncompliance with program 
requirements, such as preparing required quarterly reports. RMI single 
audit reports for fiscal years 2006 through 2011 demonstrated an 
increase in material weaknesses in noncompliance with the requirements 
of federal programs. Some findings were related to compact grants and 
others to noncompact funding. Furthermore, several of the weaknesses 
were not corrected over several years. 

To improve financial accountability, OIA led actions that resulted in 
the creation of the Chuuk Financial Control Commission, but OIA has 
not coordinated with other U.S. agencies regarding the risk status of 
the FSM and the RMI for noncompact funds. Although OIA has a lead role 
regarding audit matters, it has not formally coordinated with other 
U.S. agencies to address audit findings, nor has it assessed whether 
its own noncompact grants should be classified as high risk.[Footnote 
26] Moreover, other federal agencies whose grants may be at risk have 
not routinely considered designating either country as a high-risk 
grantee. Such consideration could enable U.S. agencies to enforce 
conditions and restrictions on noncompact grant funds they provide, 
thus improving the oversight and management of the funds. 

We also found that the offices responsible for compact administration 
in the FSM, RMI, and United States faced limitations hindering their 
ability to conduct compact oversight. FSM officials told us that they 
need additional staff to be able to conduct more oversight activities 
and also noted that the Division of Compact Management is hampered by 
its lack of authority to ensure that the National Government and the 
four states comply with compact requirements. According to RMI 
officials, staff constraints in the Office of Compact Implementation 
limit its ability to conduct oversight and enforce compact 
requirements across multiple sectors and operations in numerous 
atolls. Additionally, this office told us they are hampered by their 
lack of authority to require that the RMI ministries implementing 
projects funded by sector grants comply with compact requirements. 
Finally, we found that OIA experienced a staffing shortage that 
disproportionately affected compact grant oversight compared to other 
OIA activities, with 6 of 11 planned positions unfilled in 2012 and 5 
of 11 unfilled in 2013 (for details, see pages 51-53 of the report, 
[hyperlink, http://www.gao.gov/products/GAO-13-675]). Although the 
majority of grants administered by OIA are amended compact grants, 
OIA's amended compact oversight function was disproportionally 
affected by staffing shortages, which affected its ability to ensure 
compact funds were efficiently and effectively used. 

Interior's Implementation of Recommendations Could Improve Oversight 
and Accountability of U.S. Assistance to FSM and RMI: 

In our September 2013 report, we directed five recommendations to 
Interior to improve oversight and financial accountability of U.S. 
compact and noncompact funds allocated to the FSM and RMI. 

Improving oversight through JEMCO and JEMFAC. We recommended that 
Interior take all necessary steps to improve the ability of JEMCO and 
JEMFAC to ensure that the FSM and RMI (1) complete satisfactory plans 
to address annual decrements in compact funds, (2) produce reliable 
indicator data used to track progress in education and health, and (3) 
address all single audit findings in a timely manner. Our 
recommendations suggested the Director of Insular Affairs could 
accomplish the accountability improvements by coordinating with other 
member U.S. agencies of both oversight committees to have the 
committees take all necessary steps, or by taking all necessary steps 
directly, acting in his capacity as administrator of compact grants. 
In its written response to a draft of our report, Interior noted 
examples of how it and other U.S. members of JEMCO and JEMFAC have 
worked to make improvements in the three areas mentioned in the 
recommendations. At both their annual meetings in August 2013, JEMCO 
and JEMFAC passed resolutions in response to the recommendations in 
our draft report related to decrement planning, data reliability, and 
addressing single audit findings. 

Consulting with other agencies about possible high-risk designation. 
In order to improve financial accountability of noncompact U.S. grant 
assistance provided to the FSM and the RMI, we recommended that 
Interior consult with other grantor agencies to determine whether the 
FSM National Government, any FSM state government, or the RMI 
government meets the criteria to be designated as a high-risk grant 
recipient for noncompact funds, or whether other steps should be taken 
to improve accountability. 

In its written response to a draft of our report, Interior noted that 
it cannot direct other agencies to take action with regard to any 
grant-specific issues and stated it was unaware of any precedent for 
federal agencies to jointly designate a grantee as high risk; however, 
Interior said it would discuss this approach with other federal 
agencies. 

Correcting the staffing shortage related to compacts oversight. To 
ensure that Interior is providing appropriate resources for oversight 
and monitoring of the FSM and RMI compacts, we recommended that the 
Secretary of the Interior take actions to correct the disproportionate 
staffing shortage related to compact grant implementation and 
oversight. Interior concurred with this recommendation, as it did with 
the others. However, Interior's written response to this 
recommendation indicated that it considers corrective action to be 
contingent on its receiving funding for new positions through the 
annual budget process. The intent of our recommendation is to have 
Interior work within its actual funding levels, whatever they may be, 
to correct what we observed to be a misalignment in how it allocates 
its staff. 

FSM and RMI responses. In its written comments on our draft report, 
the FSM National Government agreed on the importance of the three 
issues that were the focus of our JEMCO-related recommendation to 
Interior. The FSM identified activities under way to plan for the 
decrement and cited implementation of a contract to assess the 
national education system's ability to produce valid and reliable 
data, as well as efforts to review the quality of health indicators 
with government staff. The FSM remarked on our report's discussion of 
the possibility of achieving increased accountability over noncompact 
grant funds through a high-risk designation, noting that it was 
assured because the process involved in a high-risk designation is not 
an arbitrary one. 

In its written comments on our draft report, the RMI government stated 
its belief that it had submitted adequate plans to JEMFAC regarding 
the medium-term budget and investment framework and the decrement. The 
RMI generally agreed with our findings of data reliability problems in 
both the education and health sectors and cited challenges in data 
collection in both sectors, noting that its Ministry of Health was 
seeking external assistance to improve data quality. With regard to 
our recommendation that Interior should consult with other agencies to 
determine whether the RMI meets the criteria to be designated as a 
high-risk grant recipient for noncompact funds, or whether other steps 
should be taken to improve accountability, the RMI stated that 
internal controls are now in place to detect and deter fraud, waste, 
and noncompliance with the fiscal procedures agreement or other U.S. 
federal regulations. For that reason, the RMI Ministry of Finance does 
not believe that any special conditions or restrictions for 
unsatisfactory performance or failure to comply with grant terms are 
warranted. We addressed several of the comments in the RMI's letter by 
adding or updating information in the report, or to note areas of RMI 
concern. In reprinting the letter in the report, we also provided 
specific responses to a number of the comments. 

Chairman Fleming, Ranking Member Sablan, and Members of the 
Subcommittee, this concludes my prepared statement. I would be pleased 
to respond to any questions you may have at this time. 

GAO Contact and Staff Acknowledgments: 

If you or your staff have any questions about this testimony, 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 statement. GAO staff who made key 
contributions to this testimony include Emil Friberg (Assistant 
Director), Ashley Alley, Christina Bruff, David Dayton, Martin De 
Alteriis, Julie Hirshen, Jeffrey Isaacs, and Kathleen Monahan. 

[End of section] 

Footnotes: 

[1] Compact of Free Association Amendments Act of 2003, Pub. L. No. 
108-188 (Dec. 17, 2003). 

[2] The agreements between the U.S. government and the FSM and RMI 
governments contain detailed requirements concerning implementation of 
the amended compacts' funding and accountability provisions. 

[3] GAO, Compacts of Free Association: Micronesia and the Marshall 
Islands Continue to Face Challenges Measuring Progress and Ensuring 
Accountability, [hyperlink, http://www.gao.gov/products/GAO-13-675] 
(Washington, D.C.: Sept. 20, 2013). 

[4] Although the scope of the report was generally fiscal years 2007 
through 2011, for our analysis of the single audits we included fiscal 
year 2006 because the last single audit report discussed in our prior 
report was for fiscal year 2005. See GAO, Compacts of Free 
Association: Micronesia and the Marshall Islands Face Challenges in 
Planning for Sustainability, Measuring Progress, and Ensuring 
Accountability, [hyperlink, http://www.gao.gov/products/GAO-07-163] 
(Washington, D.C.: Dec. 15, 2006). 

[5] In the FSM, we focused our review on the National Government and 
the state governments of Chuuk and Pohnpei. Chuuk and Pohnpei account 
for 82 percent of the total population of the FSM. We did not include 
in our review the state governments of Yap and Kosrae. The 
observations we made during our site visits to facilities such as 
hospitals, dispensaries, and schools in the FSM and RMI are not 
generalizable. We determined that the financial data examined in our 
report were sufficiently reliable for our purposes. However, our 
reviews of performance data from both the FSM and RMI and interviews 
with FSM and RMI officials revealed important limitations in the data 
in the countries' annual reports on education and health indicators, 
and therefore we determined that many of these data were not 
sufficiently reliable for the purpose of measuring progress for the 
compacts as a whole over our time frame. For additional details on our 
objectives, scope, and methodology, see app. I of the report, 
[hyperlink, http://www.gao.gov/products/GAO-13-675]. 

[6] 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 in the RMI, nor does it include 
investment development funds provided under section 111 of Pub. L. No. 
99-239, the law enacting the original Compact of Free Association in 
1986. 

[7] Our earlier work provides additional details on the trust funds 
established for FSM and RMI, see GAO, Compacts of Free Association: 
Trust Funds for Micronesia and the Marshall Islands May Not Provide 
Sustainable Income, [hyperlink, http://www.gao.gov/products/GAO-07-
513] (Washington, D.C.: June 15, 2007). 

[8] The supplemental education grant is awarded in place of grant 
assistance formerly awarded to the countries under several U.S. 
education, health, and labor programs. 

[9] In fiscal years 2007 through 2011, the FSM spent about $197 
million and the RMI spent about $46 million in noncompact grants from 
U.S. agencies, including Interior and the Departments of Education, 
Health and Human Services, Labor, and Transportation. 

[10] JEMCO and JEMFAC render decisions by majority vote, except those 
decisions regarding the division of RMI grants among sectors, which 
are made by consensus. JEMCO and JEMFAC are also responsible for 
approving the plans that form the basis for the use of the 
supplemental education grants annually. 

[11] 31 U.S.C. § 7501 et seq. The single audit is an organization-wide 
financial statement audit that includes the audit of the Schedule of 
Expenditures of Federal Awards and also focuses on internal control 
and the recipient's compliance with laws and regulations governing the 
federal financial assistance received. The act requires grantees to 
address material noncompliance and internal control weaknesses in a 
corrective action plan, which is to be submitted to appropriate 
federal officials. 

[12] The cognizant agency is the federal agency designated to carry 
out the federal responsibilities with regard to a single audit and is 
the agency that provides the predominant amount of direct funding to 
an entity, such as the FSM and the RMI. Grantees receiving more than 
$50 million in federal assistance are assigned to a cognizant agency 
for audit supervision. See Office of Management and Budget, Audits of 
States, Local Governments, and Non-Profit Organizations, OMB Circular 
No. A-133 (revised 2007). 

[13] See Office of Management and Budget, Grants and Cooperative 
Agreements with State and Local Governments, OMB Circular No. A-102 
(revised 1997). 

[14] Since we focused our review on the FSM National Government and 
the state governments of Chuuk and Pohnpei, the FSM expenditure amount 
includes data for these three governments. Data for the state 
governments of Kosrae and Yap are not included. 

[15] Other noncompact U.S. grants represented an additional 10 percent 
of the FSM's education expenditures and 25 percent of its health 
expenditures in fiscal year 2011. 

[16] In addition to the core sector grants, 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. 

[17] Other noncompact U.S. grants represented an additional 6 percent 
of the RMI's education expenditures and 17 percent of its health 
expenditures in fiscal year 2011. 

[18] We only reported specific expenditures for the FSM for fiscal 
years 2009 through 2011 because specific expenditure data for the FSM 
National Government and Chuuk were not presented in their single 
audits for fiscal years 2007 and 2008. 

[19] The RMI provided a plan to U.S. JEMFAC members 3 days prior to 
the annual meeting; however, according to the U.S. members, they did 
not have sufficient time to review it and determine whether or not it 
met the requirements of the JEMFAC resolution. 

[20] The resolution was JEMCO 2010-2, and there were two exceptions to 
funds being allocated to the FSM National Government--the College of 
Micronesia and the supplemental education grant award. 

[21] JEMFAC Resolution 2010-1. 

[22] FSM Pub. L. No. 18-12 (Sep.14, 2013). 

[23] The infrastructure funds that OIA reported expended during this 
period were for projects in education and health, as well as road and 
water-related projects, among other things. 

[24] By "sufficiently reliable," we mean that the likelihood of 
significant errors or incompleteness is minimal, and the use of the 
data would not lead to an incorrect or unintentional message. 

[25] We sent each country a series of specific follow-up questions 
related to the subset of indicators we examined to learn more about 
each country's data collection and verification activities, as well as 
to try to clarify discrepancies in the data we identified. In some 
instances, the responses we obtained did not provide sufficient 
information for us to determine that the data were reliable; in those 
instances, we classified the indicators as "no basis to judge." 

[26] 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. 

[End of section] 

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