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Highlights

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.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of the Interior 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.
Closed - Implemented
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.
Department of the Interior 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.
Closed - Not Implemented
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.
Department of the Interior 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.
Closed - Implemented
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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