GAO: US and Compact Nations facing Funding Accountability Challenges

The amended Compacts of Free Association between the United States and the Republic of the Marshall Islands and the Federated States of Micronesia include funding and accountability requirements that were not present in the original compact. To better understand the status of the compacts’ implementation, GAO evaluated actions taken by the U.S., FSM, and RMI governments since fiscal year 2004 to (1) meet funding requirements and plan for the use of this funding, (2) meet accountability requirements, and (3) establish operations to implement the new agreements.

According to the GAO report, "Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Under Way, but Planning Challenges Remain," released July 11, 2005, the three governments have taken a number of actions to fulfill key compact accountability requirements, but a few important requirements have not been met.

Although the three governments’ commitment to meeting compact requirements is clear, challenges for future performance exist. The failure of all three governments to complete required annual compact spending and development reports means that, for the first year under the amended compacts, there is no assessment of the use of U.S. assistance and initial performance in key areas such as health and education.

Similarly, the lack of timely single audits deprives the United States of a key source of information on the FSM’s and the RMI’s compliance with detailed compact requirements.

The GAO said it is unclear why strategic issues, such as the need for planning to use compact funds to achieve long-term economic advancement or to address annual grant decreases, are not being actively considered by all three governments, regardless of the early stage of the amended compacts’ implementation.

The U.S. government has not pursued resolution of these issues, which have implications for the FSM’s and the RMI’s long-term, effective use of funds.

RECOMMENDATIONS

To effectively use Interior staff resources and to maximize the effectiveness of U.S. monitoring of compact expenditures, the GAO recommended that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs to determine, relative to other office responsibilities, the extent of OIA on-site review in the FSM and the RMI of compact activities that is required in order to adequately promote compliance with compact and grant requirements.

To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, the GAO recommended that the Secretary direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management Committee, in coordination with other U.S. agencies that participate in this committee, to work with the FSM government to take the following four actions:

• establish sector grant levels for each of the five governments that are consistent with national priorities and will assist in promoting long-term development goals such as economic advancement and budgetary selfreliance,
• establish a time frame for the completion of required and overdue FSM single audits,
• establish a time frame for the completion of FSM government plans to manage decreasing annual grant amounts and to shift basic government operations under the public sector capacity building to local revenues in a strategic fashion, and
• outline specific actions that the FSM government will take in managing and monitoring day-to-day sector grant operations to ensure compliance with all grant terms and conditions.

BACKGROUND

From 1987 to 2003, the United States provided economic aid to the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) through a Compact of Free Association. A previous GAO report found little accountability for the assistance provided by the U.S. Department of the Interior under this compact. In 2004, amended compacts with the FSM and RMI went into effect and will provide $3.5 billion in assistance over 20 years, consisting of grants and contributions to trust funds that are to replace the grants after 2023.

MORE HIGHLIGHTS - WHAT GAO FOUND

In fiscal years 2004 and 2005, the U.S. government signed grant agreements with the FSM and the RMI focused on six sectors, such as health and education, as provided for in the amended compacts. Authorized grant amounts for each year were about $76 million for the FSM and about $35 million for the RMI. Required trust funds were also established. Strategic planning issues impacting the long-term, effective use of funds have not been addressed.

The allocations of the grants to the sectors have not been linked to the countries’ development goals; the FSM and RMI have not planned for annual required decreases in grant funding; and trust funds have not been invested to maximize interest earnings (though efforts are currently under way to
resolve this final issue).

The U.S., FSM, and RMI governments have taken actions to meet compact accountability requirements. For example, the FSM and the RMI have provided financial and performance reports, and the U.S. government has withheld funding to ensure compliance with grant requirements.

The Department of the Interior took a significant step in October 2003 to facilitate implementation and oversight of the amended compacts by opening a new office in Honolulu, Hawaii. However, Interior has not determined how much oversight of compact activities in the FSM and the RMI is necessary, though the current level of on-site review is viewed as insufficient.

The FSM and RMI governments have each taken actions to establish centralized compact management offices; the RMI government is progressing more rapidly in these efforts than the FSM government.

Download the entire report in PDF:
Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Under Way, but Planning Challenges Remain - GAO-05-633, July 11, 2005