Compacts of Free Association: Actions Needed to Prepare for the Transition of Micronesia and the Marshall Islands to Trust Fund Income

GAO-18-415 Published: May 17, 2018. Publicly Released: May 17, 2018.
Jump To:
Fast Facts

The U.S. is providing $3.6 billion in economic assistance to the nations of Micronesia and the Marshall Islands from 2004 through 2023. This assistance has increasingly been provided in the form of contributions to trust funds for each nation, and is intended to boost their self-sufficiency. After the assistance ends, the trust funds should generate revenue from investments.

But we found the trust funds may not provide disbursements in some years or sustain their value after 2023.

We made 6 recommendations, including that the U.S. Interior Department take steps to address the risks to the funds' ability to provide income after 2023.

The Federated States of Micronesia and Republic of the Marshall Islands

One map shows the island nations in the Pacific, northeast of Australia. The other shows the islands that make up each state.

One map shows the island nations in the Pacific, northeast of Australia. The other shows the islands that make up each state.

Skip to Highlights
Highlights

What GAO Found

The Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) continue to rely on U.S. grants and programs, including several that are scheduled to end in 2023. U.S. compact sector and supplemental education grants, both scheduled to end in 2023, support a third of the FSM's and a quarter of the RMI's expenditures. Agreements providing U.S. aviation, disaster relief, postal, weather, and other programs and services are scheduled to end in 2024, but some agencies may provide programs and services similar to those in the agreements under other authorities. FSM and RMI eligibility for some other U.S. grants and programs is expected to continue after 2023.

FSM and RMI Total Expenditures of Government Revenues, Fiscal Year 2016

FSM and RMI Total Expenditures of Government Revenues, Fiscal Year 2016

Disbursements from the compact trust funds face risks that the trust fund committees have not addressed. GAO found that the trust funds are increasingly likely to provide no annual disbursements in some years and to not sustain their value. Potential strategies such as reduced trust fund disbursements or additional contributions from the countries or other sources could help address these risks. Changing the trust fund disbursement policies could also address these risks but may require revising the trust fund agreements with each country. However, the trust fund committees have not prepared distribution policies, required by the agreements, which could assist the countries in planning for the 2023 transition to trust fund income. The committees also have not prepared the required fiscal procedures for oversight of the disbursements or addressed differences between the timing of their annual determination of the disbursement amounts and the FSM's and RMI's annual budget cycles.

The FSM and RMI did not implement planned budget reductions to address decreasing compact grants owing to increased revenues from other sources that offset the grant decreases. Current FSM and RMI infrastructure plans address the 2023 transition, while health and education plans focus on strategic goals. Both countries have established new compact planning committees to identify future challenges and develop plans for the 2023 transition to trust fund income.

Why GAO Did This Study

In 2003, the United States approved amended compacts of free association with the FSM and RMI, providing a total of $3.6 billion in economic assistance in fiscal years 2004 through 2023 and access to several U.S. programs and services. Compact grant funding, overseen by the Department of the Interior, generally decreases annually. However, the amount of the annual decrease in grants is added to the annual U.S. contributions to the compact trust funds, managed by joint U.S.-FSM and U.S.-RMI trust fund committees. Trust fund earnings are intended to provide a source of income after compact grants end in 2023, but GAO and others have previously found that the trust funds may not provide sustainable income.

GAO was asked to examine preparations for the transition in 2023. This report examines (1) the use and role of U.S. funds and programs in FSM and RMI budgets, (2) projected trust fund disbursements and potential strategies to address risks to those disbursements, and (3) FSM and RMI plans to prepare for grant decreases and the transition to trust fund income. GAO reviewed compact agreements, audit reports, and U.S. law; modeled trust fund performance under existing conditions and using potential strategies; and reviewed FSM and RMI plans. GAO visited each country and interviewed FSM, RMI, and U.S. officials.

Skip to Recommendations

Recommendations

GAO recommends that Interior work with the compact trust fund committees to develop distribution policies and fiscal procedures for the funds and to address disbursement timing. Interior concurred with the recommendations.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of the Interior
Priority Rec.
This is a priority recommendation.
The Secretary of the Interior should ensure that the Director of the Office of Insular Affairs, as Chairman of the FSM compact trust fund committee, works with other members of the committee to develop a distribution policy for the FSM compact trust fund, as required by the compact trust fund agreement, that takes into account potential strategies that could address risks to the fund's ability to provide a source of income after fiscal year 2023. (Recommendation 1)
Open
Interior concurred with our report's recommendations and set a target date for implementation of October 1, 2023. While various options for the distribution policy have been discussed at subsequent trust fund committee meetings, the FSM compact trust fund committee has not made any decisions regarding steps to address our recommendations. The FSM's position is that the distribution policy and other future compact trust fund-related issues should be discussed as part of ongoing compact negotiations between the FSM and the United States. As part of negotiations, the FSM has presented a proposal to the United States for an updated trust fund agreement. The outcome of those negotiations may address our recommendation or modify the trust fund structure in the future. In June 2021, GAO included this recommendation as a priority open recommendation that warrants priority attention from the Secretary of the Interior. Subsequent trust fund committee meetings have included further discussions related to the trust fund agreement and distribution policy. As of March 2022, Interior still had a target date for implementation of October 1, 2023 and anticipated that future bilateral discussions with the FSM would include discussion of the trust fund agreement.
Department of the Interior
Priority Rec.
This is a priority recommendation.
The Secretary of the Interior should ensure that the Director of the Office of Insular Affairs, as Chairman of the FSM compact trust fund committee and of the FSM Joint Economic Management Committee, works with other members of the committees to develop the fiscal procedures required by the compact trust fund agreement. (Recommendation 2)
Open
Upon the report's publication, Interior concurred with our report's recommendations, set a target date for implementation of October 1, 2023, and stated that discussions to address them are ongoing within the trust fund committees. However, the FSM compact trust fund committee has not made any decisions regarding steps to address our recommendations. The FSM's position is that future compact trust fund-related issues should be discussed as part of ongoing negotiations between the FSM and the United States. As part of negotiations, the FSM has presented a proposal to the United States for an updated trust fund agreement. The outcome of those negotiations may address our recommendation or modify the trust fund structure in the future. In June 2021, GAO included this recommendation as a priority open recommendation that warrants priority attention from the Secretary of the Interior. Subsequent trust fund committee meetings have included further discussions related to the trust fund agreement. As of March 2022, Interior still had a target date for implementation of October 1, 2023 and anticipated that future bilateral discussions with the FSM would include discussion of the trust fund agreement.
Department of the Interior
Priority Rec.
This is a priority recommendation.
The Secretary of the Interior should ensure that the Director of the Office of Insular Affairs, as Chairman of the FSM compact trust fund committee, works with other members of the committee to address the timing of the calculation of compact trust fund disbursements. (Recommendation 3)
Open
Upon the report's publication, Interior concurred with our report's recommendations and stated that discussions to address them are ongoing within the trust fund committees. Interior added that the final determination on the timing of the calculation of the trust fund disbursements will be addressed in the distribution policy. Interior set a target date for implementation of the recommendation to develop a distribution policy of October 1, 2023. The FSM's position is that future compact trust fund-related issues should be discussed as part of future negotiations between the FSM and the United States. The outcome of those negotiations may address our recommendation or modify the trust fund structure in the future. As part of negotiations, the FSM has presented a proposal to the United States for an updated trust fund agreement. In June 2021, GAO included this recommendation as a priority open recommendation that warrants priority attention from the Secretary of the Interior. Subsequent trust fund committee meetings have included further discussions related to the trust fund agreement. As of March 2022, Interior still had a target date for implementation of October 1, 2023 and anticipated that future bilateral discussions with the FSM would include discussion of the trust fund agreement.
Department of the Interior
Priority Rec.
This is a priority recommendation.
The Secretary of the Interior should ensure that the Director of the Office of Insular Affairs, as Chairman of the RMI compact trust fund committee, works with other members of the committee to develop a distribution policy for the RMI compact trust fund, as required by the compact trust fund agreement, that takes into account potential strategies that could address risks to the fund's ability to provide a source of income after fiscal year 2023. (Recommendation 4)
Open
Interior concurred with our report's recommendations and set a target date for implementation of October 1, 2023. While various options for the distribution policy have been discussed at subsequent trust fund committee meetings, the RMI trust fund committee has not made any decisions regarding steps to address our recommendation. The RMI government has determined that any adjustments to the distribution policy and trust fund structure will be made as a result of government to government negotiation. The outcome of those ongoing bilateral negotiations may address our recommendation or modify the trust fund structure in the future. RMI representatives have stated that they do not believe that a distribution policy for the trust funds could be discussed by the trust fund committee while compact negotiations were ongoing. In June 2021, GAO included this recommendation as a priority open recommendation that warrants priority attention from the Secretary of the Interior. Subsequent trust fund committee meetings have included further discussions related to the trust fund agreement and distribution policy. As of March 2022, Interior still had a target date for implementation of October 1, 2023 and anticipated that future bilateral discussions with the RMI would include discussion of the trust fund agreement.
Department of the Interior
Priority Rec.
This is a priority recommendation.
The Secretary of the Interior should ensure that the Director of the Office of Insular Affairs, as Chairman of the RMI compact trust fund committee and of the RMI Joint Economic Management and Financial Accountability Committee, works with other members of the committees to develop the fiscal procedures required by the compact trust fund agreement. (Recommendation 5)
Open
Upon the report's publication, Interior concurred with our report's recommendations, set a target date for implementation of October 1, 2023, and stated that discussions to address them are ongoing within the trust fund committees. However, an RMI representative on the RMI compact trust fund committee has stated that any adjustments to the distribution policy and trust fund structure will be made as a result of government to government negotiation. The outcome of those ongoing bilateral negotiations may address our recommendation or modify the trust fund structure in the future. In June 2021, GAO included this recommendation as a priority open recommendation that warrants priority attention from the Secretary of the Interior. Subsequent trust fund committee meetings have included further discussions related to the trust fund agreement. As of March 2022, Interior still had a target date for implementation of October 1, 2023 and anticipated that future bilateral discussions with the RMI would include discussion of the trust fund agreement.
Department of the Interior
Priority Rec.
This is a priority recommendation.
The Secretary of the Interior should ensure that the Director of the Office of Insular Affairs, as Chairman of the RMI compact trust fund committee, works with other members of the committee to address the timing of the calculation of compact trust fund disbursements. (Recommendation 6)
Open
Upon the report's publication, Interior concurred with our report's recommendations and stated that discussions to address them are ongoing within the trust fund committees. Interior added that the final determination on the timing of the calculation of the trust fund disbursements will be addressed in the distribution policy. Interior set a target date for implementation of the recommendation to develop a distribution policy of October 1, 2023. However, an RMI representative on the RMI compact trust fund committee has stated that any adjustments to the distribution policy and trust fund structure will be made as a result of government to government negotiation. The outcome of those ongoing bilateral negotiations may address our recommendation or modify the trust fund structure in the future. In June 2021, GAO included this recommendation as a priority open recommendation that warrants priority attention from the Secretary of the Interior. Subsequent trust fund committee meetings have included further discussions related to the trust fund agreement. As of March 2022, Interior still had a target date for implementation of October 1, 2023 and anticipated that future bilateral discussions with the RMI would include discussion of the trust fund agreement.

Full Report

GAO Contacts