Financial Services Industry: Representation of Minorities and Women in Management and Practices to Promote Diversity, 2007-2015

The financial services industry is a major source of employment that affects the economic well-being of its customers and the country as a whole. As the makeup of the U.S. workforce continues to diversify, many private sector organizations, including those in the financial services industry, have recognized the importance of recruiting and retaining minorities and women in key positions to improve business or organizational performance and better meet the needs of a diverse customer base. However, questions remain about the diversity of the workforce in the financial services industry.

This statement is based on GAO's November 2017 report on changes in management-level diversity and diversity practices in the financial services industry. This statement summarizes (1) trends in management-level diversity in the financial services industry, (2) trends in diversity among potential talent pools, and (3) challenges financial services firms identified in trying to increase workforce diversity and practices they have used to address those challenges.

In November 2017, GAO reported that overall management representation in the financial services industry increased marginally for minorities and remained unchanged for women from 2007 to 2015. Similar trends also occurred at the senior-level management of these firms. For example, women represented about 29 percent of senior-level managers throughout this time period. As shown below, representation of minorities in senior management increased slightly, but each racial/ethnic group changed by less than 1 percentage point. The diversity of overall management also varied across the different sectors of the financial services industry. For example, the banking sector consistently had the greatest representation of minorities in overall management, whereas the insurance sector consistently had the highest proportion of women in overall management.

As GAO reported in November 2017, potential employees for the financial services industry, including those that could become managers, come from external and internal pools that are diverse. For example, the external pool included those with undergraduate or graduate degrees, such as a Master of Business Administration. In 2015, one-third of the external pool were minorities and around 60 percent were women. The internal talent pool for potential managers included those already in professional positions. In 2015, about 28 percent of professional positions in financial services were held by minorities and just over half were held by women.

Representatives of financial services firms and other stakeholders GAO spoke to for its November 2017 report described challenges to recruiting and retaining members of racial/ethnic minority groups and women. They also identified practices that could help address those challenges. For example, representatives from several firms noted that an effective practice is to recruit and hire students from a broad group of schools and academic disciplines. Some firms also described establishing management-level accountability to achieve workforce diversity goals. Firm representatives and other stakeholders agreed that it is important for firms to assess data on the diversity of their employees but varied in their views on whether such information should be shared publicly.

Thank you for the opportunity to discuss diversity trends in the financial  services industry at the first hearing of the newly established  Subcommittee on Diversity and Inclusion. The financial services industry  is a major source of employment that affects the economic well-being of  its customers and the country as a whole. As the makeup of the U.S.  workforce force continues to become more diverse, many private sector  organizations have recognized the importance of recruiting and retaining  minorities and women for key positions to improve their business or  organizational performance and better meet the needs of a diverse  customer base.

I will discuss trends in management representation of minorities and  women and diversity practices in financial services firms from 2007  through 2015. Specifically, I will discuss (1) trends in management-level  diversity in the financial services industry, (2) trends in diversity among  potential talent pools, and (3) challenges financial services firms identified  in trying to increase workforce diversity and the practices they have used  to address those challenges. My statement is based on the findings from  our most recent report on the subject from November 2017. For that  report, we analyzed 2007–2015 workforce data from the Equal  Employment Opportunity Commission’s (EEOC) Employer Information  Report (EEO-1). Data for 2015 were the most current available at the time  of our review. We also summarized challenges that the financial services  industry faced in increasing workforce diversity and practices for  improving workforce diversity by reviewing relevant literature and  interviewing representatives from financial services firms and advocacy  organizations. More detailed information on our scope and methodology  can be found in that report.

The work on which this statement is based was performed 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.

Most private employers subject to Title VII of the Civil Rights Act of 1964  with 100 or more employees, and all federal contractors who have 50 or  more employees and meet certain other requirements, must submit data  to the EEOC on the racial/ethnic and gender characteristics of employees  by occupations for a range of industries, including financial services.  Employers are required to submit these data to EEOC every year using  the EEO-1 report.

EEOC requires employers to use the North American Industry  Classification System to classify their industry. Under this system, the  financial services industry includes the following five sectors:

Credit intermediation and related activities (banks and other credit  institutions), which include commercial banks, thrifts, and credit  unions;

Securities and other activities, which includes firms that bring together  buyers and sellers of securities and commodities and offer financial  advice;  Insurance firms and agents that provide protection against financial  risks to policyholders;

Funds and trusts, which include investment trusts and holding

Monetary authorities, including central banks.

Beginning in 2007, EEOC changed its requirements for reporting data on  managers. Specifically, employers were required to report separately on  senior-level management positions rather than combining data on senior- level managers with data for first- and mid-level managers, as had been  the practice until 2007. Employers are required to review EEOC guidance  describing the two management positions and determine how their firm’s  job positions fit into these classifications.

In a January 2005 report, we identified a set of nine leading practices that  should be considered when an organization is developing and  implementing diversity management. They are (1) commitment to  diversity as demonstrated and communicated by an organization’s top  leadership; (2) the inclusion of diversity management in an organization’s  strategic plan; (3) diversity linked to performance, making the case that a  more diverse and inclusive work environment could help improve  productivity and individual and organizational performance; (4)  measurement of the impact of various aspects of a diversity program; (5)  management accountability for the progress of diversity initiatives; (6)  succession planning; (7) recruitment; (8) employee involvement in an  organization’s diversity management; and (9) training for management  and staff about diversity management. In 2017, we reported that industry  representatives confirmed that these nine practices are still relevant.

Management-Level Diversity Trends in the Financial Services Industry Showed Little or No Increase from 2007 through 2015

Since 2007, Management- Level Representation Increased Marginally for Minorities and Remained Unchanged for Women

As we reported in November 2017, at the overall management level,  representation of minorities in the financial services industry increased  from 2007 through 2015, though representation varied by individual  minority groups (see fig. 1). Specifically, minorities’ representation in  overall management positions increased by 3.7 percentage points. Asians  had the largest gains since 2007, increasing their representation among  managers from 5.4 percent to 7.7 percent. Hispanics made smaller gains;  their representation among managers increased from 4.8 percent to 5.5  percent. In contrast, the proportion of African-Americans in management  positions decreased from 6.5 percent to 6.3 percent.

Representation of minorities also increased between different levels of  management from 2007 through 2015 (see fig. 2). Minority  representation among first-and mid-level managers increased by 3.7  percentage points. In contrast, representation of minorities among senior- level management increased at a slower pace during this period (1.7  percentage points). Minority representation among senior-level managers  remained considerably lower than among first- and mid-level managers.

Among first- and mid-level managers, representation of Asians  experienced the largest increase from 2007 through 2015 (2.6 percentage  points). Hispanic representation increased by less than 1 percentage  point, while African-American representation slightly decreased by 0.3  percentage point. In addition, among senior-level managers,  representation of each racial and ethnic group changed by less than 1  percentage point.

We also reported in November 2017 that representation of women at the  overall management level had generally remained unchanged. From  2007 through 2015, women represented about 45 percent of overall  management. Representation of each racial and ethnic group varied by  gender during this time period. For example, among minority women,  African-American women consistently had the highest representation in  overall management (about 4 percent of managers per year). Among  minority men, Asian men consistently had highest representation in  overall management (3.1 percent to 4.6 percent of all managers).

The proportion of men and women within various levels of management  remained unchanged from 2007 through 2015, though there were some  increases in the representation of both minority women and minority men.  During this timeframe, women represented around 48 percent of first-and  mid-level managers and about 29 percent of senior-level managers.  Among first- and mid-level management positions, the representation of  minority women increased by 1.6 percentage points and the  representation of minority men increased by 2.2 percentage points (see  fig. 3). Among senior-level management positions, representation of  minority women and minority men increased by smaller amounts (0.3  percentage points and 1.5 percentage points, respectively).

Certain Financial Sectors Are More Diverse Than Others

In November 2017, we reported that management-level diversity varied  across sectors within the financial services industry. Minorities’  representation in overall management increased in all four sectors of the  financial services industry (see fig. 4). For example, representation of  minorities in the banks and other credit institutions sector increased by  3.1 percentage points and 4.3 percentage points in the funds and trusts  sector. Also, the representation of minorities in overall management was  consistently the greatest in the banks and other credit institutions and  lowest in the insurance sector.

The representation of women in overall management also varied by  financial services sector (see fig. 5). The insurance sector consistently  had the highest proportion of women in management positions, followed  by banks and other credit institutions. The proportion of women in  management decreased in each sector except for the insurance sector  where it increased by 1.9 percentage points from 47.7 percent to 49.6  percent.

Management-Level Representation of Minorities Increased with Firm Size

Our November 2017 report found that the representation of minorities in  overall management positions increased as firm size (number of  employees) increased, whereas the representation of women in  management generally remained the same across firm size. More  specifically, in 2007, the representation of minorities in overall  management was nearly 5 percentage points greater in firms with 5,000  or more employees compared to firms with 100–249 employees. By comparison, in 2015, the representation of minorities in overall  management was about 6 percentage points greater in firms with 5,000 or  more employees compared to firms with 100–249 employees. Across  firms of different sizes, the representation of women in management  positions in 2015 was generally the same as it was in 2007.

Financial Services Sector Trends Have Similarities and Differences Compared To Professional Services and Overall Private Sectors

Our November 2017 report found that from 2007 through 2015,  representation of minorities in all levels of management increased in the  financial services sector, the professional services sector, and the overall  private sector. However, among first- and mid-level managers,  representation of minorities increased at a lower rate in the financial  services sector during this time period (3.7 percentage points) than in the  professional services sector (7.5 percentage points) and slightly lower  than the overall private sector (3.8 percentage points) .

In addition, the financial services sector generally had a greater  proportion of women in management compared to the overall private  sector and professional services sector. For example, women  represented 36.7 percent and 38.2 percent of first- and mid-level  managers in the professional services sector and overall private sector,  respectively, in 2015. As previously mentioned, women represented  about 48 percent of first- and mid- level managers in the financial services  sector from 2007 through 2015.

External and Internal Potential Talent Pools for Financial Services Positions Are Diverse

Potential employees for the financial services industry can come from a  range of academic and professional backgrounds. Financial firm  representatives we spoke to for our November 2017 report told us that  undergraduate or graduate degrees are an important consideration for  employment. Some firm representatives also told us that while graduates  with Master of Business Administration (MBA) degrees are an important  pool of talent, firms seek students with a variety of degrees.

We also found that from 2011 through 2015, about one-third of the  external pool of potential talent for the financial services industry—that is,  those obtaining undergraduate or graduate degrees—were racial/ethnic  minorities (see fig. 6). Additionally, rates of attainment of bachelor’s,  master’s, and MBA degrees by racial/ethnic minorities all increased  during this time period. For example, minorities’ representation among  those who attained an MBA increased from 35.6 to 39.2 percent.  Furthermore, from 2011 through 2015, minority women consistently  earned a greater proportion of master’s and MBA degrees compared to  minority men.

Additionally, we found that from 2011 through 2015, a majority of those  obtaining undergraduate or graduate degrees have been women (see fig.  7). For example, women consistently earned about 58 percent of  bachelor’s degrees, just over 60 percent of master’s degrees, and about  45 percent of MBA degrees during this time period.

As we reported in November 2017, the internal pool of potential talent for  the financial services industry is known as the “internal pipeline” of staff  that could potentially move into management positions. There are two  nonmanagement job categories in the financial services sector that are  considered to be part of the internal pipeline: professional and sales  positions. From 2007 through 2015, EEOC data show that minorities’  representation in professional and sales positions had changed over time,  but had generally been greater than minorities’ representation in overall  management positions. Similarly, EEOC data over the same timeframe show that representation of women in professional positions in the  financial services industry had generally been greater than women’s  representation in overall management. For example, from 2007 through  2015, women consistently represented about 50 percent of all employees  in professional positions and about 45 percent of overall management.  The percentage of women in sales positions in the financial industry had  generally been lower, at about 40 percent.

Financial Services Firms and Others Described Workforce Diversity Challenges and Practices to Address Them

Representatives from financial services firms and organizations that  advocate for women or racial/ethnic minorities who we spoke to for our  November 2017 report described a variety of challenges to recruiting a  diverse workforce for the financial services sector. These challenges  included negative perceptions of the financial services industry that might  discourage potential candidates and a lack of awareness of career paths  in the industry. Research we reviewed and representatives we spoke with  identified several practices believed or found to be effective for recruiting  women and racial/ethnic minorities, which included:

Recruiting students from a broad group of schools and academic  disciplines. Representatives from three firms stated that they were  increasingly hiring and interested in recruiting students from a variety  of academic disciplines, such as liberal arts or science and  technology. For example, representatives from one firm said that they  were interested in candidates with critical thinking skills, and that  technical skills could be taught to new employees. Additionally,  representatives from several firms noted the importance of recruiting  at a broad group of schools, not just a small number of elite  universities.

Offering programs to increase awareness of careers in financial  services. Several representatives of financial firms told us that they  had established relationships with high school students to expose  diverse students to the financial services field. For example,  representatives from one firm described a program that pairs high  school students with a mentor from the firm. Additionally, a 2016  consulting firm report on women in financial services organizations in  32 countries found that a majority of asset managers who were  interviewed thought it was important for financial services firms to  educate students about careers in financial services.

Financial services firms and other sources also noted challenges to  retaining women and racial/ethnic minorities. For example, some  representatives of financial firms noted that employee resistance,  particularly from middle-managers, poses a challenge to diversity efforts.  In addition, officials from some organizations we interviewed noted that  unconscious bias can negatively affect women and minorities. As we  noted in our November 2017 report, according to reports on diversity,  representatives from financial services firms and other stakeholders,  certain practices that may help improve the retention of women and  racial/ethnic minorities, included:

Establishing management-level accountability. Representatives from  three financial services firms told us that management should be held  accountable for workforce diversity goals. For example, two  representatives discussed the use of a “diversity scorecard,” which is  a set of objectives and measures derived from a firm’s overall  business strategy and linked to its diversity strategy. Additionally, one  firm representative noted that tying senior managers’ compensation to  diversity goals had been an effective practice for retaining women and  minorities. Researchers have noted that efforts to establish  organizational responsibility for diversity have led to the broadest  increases in managerial diversity.

Assessing Data on Workforce Diversity. Financial services firms and  organizations we talked to generally agreed that assessing  demographic data to understand a firm’s diversity is a useful practice.  All of the financial services firms we interviewed agreed on the  importance of analyzing employee data. Several firms stated that it is  important for organizations to understand their progress on workforce  diversity–and, if data trends indicate problems, such as retention  issues, they then can take steps to address them. Representatives of  firms and organizations that advocate for diversity differed on the  benefits of making demographic data public. Representatives of one  organization said requiring businesses to be transparent about their  workforce data creates incentives to improve the diversity of their  workforce. However, representatives of two financial firms expressed  concerns that publicly disclosing firm-level employee characteristics  would not be beneficial to businesses. For example, one  representative noted that publicly disclosing that firms are not diverse  could damage their reputation and make improvement of workforce  diversity more difficult.

In closing, I would like to thank you for the opportunity to discuss trends in  management-level diversity in the financial services industry. I look  forward to working with this subcommittee on these important issues.

Chairwoman Beatty, Ranking Member Wagner, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.

For further information on this testimony, please contact Daniel Garcia- Diaz at (202) 512-8678 or GarciaDiazD@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 are Lisa Moore (Assistant Director), Christine Ramos  (Analyst in Charge), Kay Kuhlman, Jill Lacey, Tovah Rom, Jena Sinkfield,  and Tyler Spunaugle.

Financial Services Industry: Trends in Management Representation of  Minorities and Women and Diversity Practices, 2007—2015. GAO-18-64.  Washington, D.C.: November 8, 2017.

Investment Management: Key Practices Could Provide More Options for  Federal Entities and Opportunities for Minority- and Women-Owned Asset  Managers. GAO-17-726. Washington, D.C.: September 13, 2017.

Corporate Boards: Strategies to Address Representation of Women  Include Federal Disclosure Requirements. GAO-16-30. Washington, D.C.:  December 3, 2015.

Federal Home Loan Banks: Information on Governance Changes, Board  Diversity, and Community Lending. GAO-15-435. Washington, D.C.: May  12, 2015.

Diversity Management: Trends and Practices in the Financial Services  Industry and Agencies after the Recent Financial Crisis. GAO-13-238.  Washington, D.C.: April 16, 2013.

Federal Reserve Bank Governance: Opportunities Exist to Broaden  Director Recruitment Efforts and Increase Transparency. GAO-12-18.  Washington, D.C.: October 19, 2011.

Financial Services Industry: Overall Trends in Management-Level  Diversity and Diversity Initiatives, 1994—2008. GAO-10-736T.  Washington, D.C.: May 12, 2010.

Financial Services Industry: Overall Trends in Management-Level  Diversity and Diversity Initiatives, 1993—2004. GAO-06-617. Washington,  D.C.: June 1, 2006.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

This testimony looks at trends in the diversity of financial services firms' management and potential talent pools, among other things.

Overall minority representation in management increased from 17.3% to 21%

Asian representation increased from 5.4% to 7.7%. Hispanic representation had smaller gains. In contrast, African-Americans representation in management decreased from 6.5% to 6.3%

Women's representation was unchanged at about 45%


Compacts of Free Association: Trust Funds for Micronesia and the Marshall Islands Are Unlikely to Fully Replace Expiring U.S. Annual Grant Assistance

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 (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 and chaired by Interior. Trust fund earnings are intended to provide a source of income after compact grants end in 2023.

This testimony summarizes GAO's May 2018 report on compact grants and trust funds ( GAO-18-415 ). In that report, GAO examined (1) the use and role of U.S. funds and programs in the FSM and RMI budgets, (2) projected compact trust fund disbursements, and (3) trust fund committee actions needed to address the 2023 transition to trust fund income. For this testimony, GAO also reviewed key variables for its trust fund model as of June 2019 to determine whether these variables had substantially changed. In addition, GAO reviewed the status of Interior's response to GAO's May 2018 recommendations.

The Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) rely on U.S. grants and programs, including several that are scheduled to end in 2023. In fiscal year 2016, U.S. compact sector grants and supplemental education grants, both scheduled to end in 2023, supported a third of the FSM's expenditures and a quarter of the RMI's. Agreements providing U.S. aviation, disaster relief, postal, weather, and other programs and services are scheduled to end in 2024, but some U.S. agencies may provide programs and services similar to those in the agreements under other authorities.

GAO's 2018 report noted that the FSM and RMI compact trust funds face risks and may not provide disbursements in some future years. GAO projected a 41 percent likelihood that the FSM compact trust fund would be unable to provide any disbursement in 1 or more years in fiscal years 2024 through 2033, with the likelihood increasing to 92 percent in 2054 through 2063. GAO projected a 15 percent likelihood that the RMI compact trust fund would be unable to provide any disbursement in 1 or more years in fiscal years 2024 through 2033, with the likelihood increasing to 56 percent in 2054 through 2063. Potential strategies such as reduced trust fund disbursements would reduce or eliminate the risk of years with no disbursement. However, some of these strategies would require changing the trust fund agreements, and all of the strategies would require the countries to exchange a near-term reduction in resources for more-predictable and more-sustainable disbursements in the longer term.

Interior has not yet implemented the actions GAO recommended to prepare for the 2023 transition to trust fund income. The trust fund committees have not developed distribution policies, required by the agreements, which could assist the countries in planning for the transition to trust fund income. The committees have not developed the required fiscal procedures for oversight of disbursements or addressed differences between the timing of their annual determinations of the disbursement amounts and the FSM's and RMI's annual budget cycles.

In its May 2018 report, GAO made three recommendations to Interior regarding each country's trust fund to address trust fund disbursement risks. Interior concurred with GAO's recommendations and discussed actions in response at subsequent trust fund committee meetings, with implementation targeted for 2023.

Thank you for this opportunity to discuss our prior report on U.S.  compacts of free association with the Federated States of Micronesia  (FSM) and the Republic of the Marshall Islands (RMI). My testimony  today will summarize our 2018 report on (1) the use and role of U.S.  funds and programs in the FSM and RMI budgets, (2) projected compact  trust fund disbursements, and (3) trust fund committee actions needed to  address the 2023 transition to trust fund income.

In 2003, the United States approved amended compacts of free  association with the FSM and RMI that provide for a total of $3.6 billion in  compact sector grants, trust fund contributions, and other grants, as well  as access to several U.S. programs and services, in fiscal years 2004  through 2023. Compact sector grants, managed by the U.S. Department  of the Interior (Interior), generally decrease annually before their  scheduled end in 2023. However, the amount of the annual decrease in  compact sector grants is added to the annual U.S. contributions to the  compact trust fund established for the benefit of each country. Investment  earnings from the compact trust funds are intended to provide an annual  source of revenue after the compact sector grants are scheduled to end  in 2023. As 2023 approaches, questions remain about the FSM’s and  RMI’s ability to successfully transition to greater self-reliance when the 20  years of U.S. compact economic assistance end.

To discuss the use and role of U.S. funds in the FSM and RMI, compact  trust fund projections, and trust fund committee actions needed to  address the 2023 transition, we relied on our related May 2018 report.   Detailed information on the scope and methodology for our prior work  summarized in this testimony can be found in appendix I of our May 2018 report. In addition, we reviewed key variables for our trust fund model as  of June 2019, such as the fund balances and projected inflation, to  determine whether these variables had substantially changed since our  original modeling. We found that the updated variables would result in  only slight changes to the report’s projections of future compact trust fund  performance presented in this testimony and do not alter the broader  conclusions of our 2018 report with regard to future risks to the compact  trust funds. We also reviewed information provided by Interior to update  the status of its response to our previous recommendations to address  risks to the compact trust funds.

We conducted this performance audit from June 2019 to July 2019 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.

The FSM and RMI are independent countries about 3,000 miles  southwest of Hawaii. The FSM is a federation of four semiautonomous  states—Chuuk, Kosrae, Pohnpei, and Yap—whose population and  income vary widely. Chuuk, the largest state by population, has the  lowest per-capita gross domestic product (GDP). Overall, the FSM had a  2016 population of approximately 102,000 and a GDP per capita of about  $3,200. The RMI’s 2016 population was approximately 54,000 with a  GDP per capita of about $3,600. The RMI’s most recent census, in 2011,  found that approximately three-quarters of the population lived in Majuro,  the nation’s capital, and on the island of Ebeye in the Kwajalein Atoll.  Table 1 shows the FSM’s, FSM states’, and RMI’s estimated populations  and annual GDP per capita in fiscal year 2016.

U.S. relations with the FSM and the RMI began during World War II,  when the United States ended Japanese occupation of the region.  Starting in 1947, the United States administered the region under a  United Nations trusteeship. In 1986, after a period of negotiations, the  United States entered into a compact of free association with the FSM  and RMI that provided for economic assistance to the two countries,  secured U.S. defense rights, and allowed FSM and RMI citizens to  migrate to the United States.

Amended Compacts of Free Association (2004– Present)

In 2003, after a period of negotiations, 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.

Compact Grants and Trust Fund Contributions

The amended compacts’ implementing legislation authorized and  appropriated direct financial assistance to the FSM and the RMI in fiscal  years 2004 through 2023, with the base amounts decreasing in most  years. The legislation also provided for partial inflation adjustment of the  base amount of compact sector grants and trust fund contributions each  year. As the base amount of compact sector grants decreases, the trust  fund contributions generally increase by an equivalent amount. Because  the annual inflation adjustment is less than full inflation, the value of  compact sector grants declines in real terms. Figure 1 shows the amount  of compact sector grants and trust fund contributions each fiscal year  from 2004 through 2023.

The amended compacts and associated fiscal procedures agreements  require that compact sector grants support the countries in six core  sectors—education, health, infrastructure, environment, private sector  development, and public sector capacity building—with priority given to  the education and health sectors. These grants are described in section  211(a) of each compact and are referred to as compact sector grants or  211(a) grants. Section 211(b) of the RMI compact further states that the  RMI must target a specified amount of grants to Ebeye and other  Marshallese communities within Kwajalein Atoll.  The RMI military use  and operating rights agreement (MUORA) states that the Kwajalein- related funds provided to the RMI in the compacts shall be provided  through fiscal year 2023 and thereafter for as long as this agreement  remains in effect.

Compact Trust Fund Management and Implementation

The amended compacts and their subsidiary trust fund agreements  provided that each trust fund is to be managed by a compact trust fund  committee. Each compact trust fund committee includes representatives  from both the United States and the respective country, but the United  States is required by the terms of the trust fund agreements to hold the  majority of votes on each committee. The Director of Interior’s Office of  Insular Affairs serves as the chair of each committee. Trust fund  committee responsibilities include overseeing fund operation, supervision,  and management; investing and distributing the fund’s resources; and  concluding agreements with any other contributors and other  organizations. As part of this oversight, the committees are to establish  an investment and distribution policy. The committees are also to  determine fiscal procedures to be used in implementing the trust fund  agreements on the basis of the fiscal procedures used for compact grant  administration, unless otherwise agreed by the parties to the agreement.

The U.S.–FSM and U.S.–RMI trust fund agreements allow for the  agreements to be amended in writing at any time, with mutual consent of  the governments. However, the U.S. legislation implementing the  amended compacts requires that any amendment, change, or termination  of all, or any part, of the compact trust fund agreements shall not enter  into force until incorporated into an act of Congress.

The compact trust fund agreements state that no funds, other than  specified trust fund administrative expenses, may be distributed from the  funds before October 1, 2023. From fiscal year 2024 onward, the  maximum allowed disbursement from each compact trust fund is the  amount of the fiscal year 2023 annual grant assistance, as defined by the  trust fund agreement, with full inflation adjustment. In addition, the trust  fund committees may approve additional amounts for special needs.   The RMI compact trust fund agreement excludes Kwajalein-related  assistance, defined in section 211(b) of the RMI compact, from the  calculation of the allowed disbursement. Although the compact trust fund  agreements state the maximum allowable disbursement level, they do not  establish or guarantee a minimum disbursement level.

Each country’s compact trust fund consists of three interrelated accounts:  the “A” account, the “B” account, and the “C” account.

The A account is the trust fund’s corpus and contains the initial, and  any additional, U.S. and FSM or RMI contributions; contributions from  other countries; and investment earnings. No funds, other than  specified trust fund administrative expenses, may be disbursed from  the A account.

The B account is the trust fund’s disbursement account and becomes  active in fiscal year 2023. All income earned in 2023 will be deposited  in the B account for possible disbursement in 2024. Each subsequent  year’s investment income will similarly be deposited in the B account  for possible disbursement the following year. If there is no investment  income, no funds will be deposited in the B account for possible  disbursement the following year.

The C account is the trust fund’s buffer account.

Through 2022, any annual income exceeding 6 percent of the  fund balance is deposited in the C account.

The size of the C account is capped at three times the amount of  the estimated annual grant assistance in 2023, including  estimated inflation.

From 2023 onward, if annual income from the A account is less  than the previous year’s disbursement, adjusted for inflation, the C  account may be tapped to address the shortfall.

After 2023, any funds in the B account in excess of the amount  approved for disbursement the following fiscal year are to be used  to replenish the C account as needed, up to the maximum size of  the account.

If there are no funds in the C account and no prior-year investment  income in the B account, no funds will be available for disbursement to  the countries the following year.

Figure 2 shows the compact trust fund account structure and associated  rules.

According to the U.S. trust fund agreements with the FSM and the RMI,  contributions from other donors are permitted. In May 2005, Taiwan and  the RMI reached an agreement that Taiwan would contribute a total of  $40 million to the RMI’s compact trust fund A account between 2004 and  2023. A “D” account may also be established to hold any contributions by  the FSM and the RMI governments of revenue or income from  unanticipated sources. According to the trust fund agreements, the D  account must be a separate account, not mixed with the rest of the trust  fund. Only the RMI has a D account, governed in part by the agreement  between Taiwan and the RMI.

Programs and Services Provided in Compact-Related Agreements

The amended compacts’ implementing legislation incorporates, by  reference, related agreements extending programs and services to the  FSM and RMI. The programs and services agreement with each country  identifies the following programs and services as being available to each  country: U.S. postal services, weather services, civil aviation, disaster  preparedness and response, and telecommunications.  Each programs  and services agreement extends for 20 years from the compact’s entry  into force. The agreement with the FSM ends on June 24, 2024, and the  agreement with the RMI ends on April 30, 2024.

The amended compacts’ implementing legislation (Pub. L. No. 108-188)  and other U.S. legislation authorize other U.S. grants, programs, and  services for the FSM and RMI. Pub. L. No. 108-188 authorized an annual  supplemental education grant (SEG) for the FSM and RMI in fiscal years  2005 through 2023, to be awarded in place of grants formerly awarded to  the countries under several U.S. education, health, and labor programs.  The FSM and RMI are not eligible for the programs replaced by the SEG  during these years. Unlike the compact sector grants, the amended  compacts’ implementing legislation authorized the SEG but did not  appropriate funds for it. Funding for the SEG is appropriated annually to  the U.S. Department of Education (Education) and is transferred to  Interior for disbursement. Other provisions of the amended compacts’  implementing legislation, as well as other U.S. law, make the FSM and  RMI eligible for a number of additional programs.

The FSM and RMI Rely on U.S. Grants and Programs That End in 2023

As of fiscal year 2016, compact sector grants and the SEG, each of which  end in 2023, supported a substantial portion of government expenditures  in the FSM and RMI. Compact sector grants and the SEG supported  about one-third of all FSM government expenditures. The four FSM states  relied on these grants to a greater extent than the FSM national  government does. In the RMI, compact sector grants and the SEG  supported about one-quarter of all government expenditures. The end of  the compacts’ programs and services agreements in 2024 would also  require the FSM and RMI to bear additional costs to provide services  currently provided by the United States under the agreements.

U.S. Compact Grants and Other Grants Provide Substantial Support to the FSM and RMI Budgets

U.S. Grants Scheduled to End in 2023 Supported About One- Third of Total FSM Government Expenditures in Fiscal Year 2016

Compact sector grants, the SEG, and other U.S. grants supported almost  half of FSM national and state government expenditures in fiscal year  2016. Compact sector and supplemental education grants that end in  2023 supported approximately one-third of total FSM national and state  government expenditures in fiscal year 2016, while other U.S. grants  supported an additional 15 percent of total FSM government expenditures  (see fig. 3).

While the supplemental education grant ends in 2023, the FSM would be  eligible for some of the programs that the supplemental education grant  replaced after 2023. A small number of other U.S. grants also end in  2023. See GAO-19-648T, app. I, for a discussion of grants and programs  that do and do not end in 2023.

FSM States Relied on U.S. Grants Scheduled to End in 2023 to a Greater Extent Than the National Government Did in Fiscal Year 2016

In fiscal year 2016, compact sector and supplemental education grants  that end in 2023 supported a larger proportion of FSM state governments’  expenditures than of the FSM national government’s expenditures.  Compact sector grants and the SEG supported 8 percent of national  government expenditures but supported 50 percent or more of each  state’s government expenditures. Among the FSM states, Chuuk, which  has both the largest population and the lowest per-capita income in the  FSM, had the highest percentage of expenditures supported by U.S.  grants. (See table 2 for a summary of FSM national and state government  expenditures supported by compact sector grants and the SEG and by  other U.S. grants.)

U.S. Grants Scheduled to End in 2023 Supported About One Quarter of RMI Government Expenditures in Fiscal Year 2016

Compact sector and supplemental education grants that end in 2023  supported approximately 25 percent of the RMI’s $123.5 million in  government expenditures in fiscal year 2016, while other U.S. grants  supported an additional 8 percent. Kwajalein-related compact grants that  do not end in 2023 supported an additional 3 percent (see fig. 4).

While the supplemental education grant ends in 2023, the RMI would be  eligible for some of the programs that the supplemental education grant  replaced after 2023. A small number of other U.S. grants also end in  2023. See GAO-19-648T, app. I, for a discussion of grants and programs  that do and do not end in 2023.

FSM and RMI Eligibility for Some U.S. Grants, Programs, and Services Will Change after 2023

FSM and RMI budgets would be further affected if the countries assumed  responsibility for providing programs and services currently provided by  the United States. The following describes the status after 2023 of U.S.  grants, programs, and services in the FSM and RMI under current law:

Compact sector grants are scheduled to end in 2023, but the RMI  MUORA extends the time frame of Kwajalein-related compact grants  for as long as the MUORA is in effect.

The SEG and additional grants identified in the amended compacts’  implementing legislation are scheduled to end in 2023. Also, after  fiscal year 2023, the FSM and RMI will no longer be eligible for some  programs that the SEG replaced, including Head Start (early  childhood education, health, and nutrition services for low-income  children and their families).

The compact-related programs and services agreements with each  country will end in 2024. However, some U.S. agencies, such as the  National Weather Service, Federal Aviation Administration, and U.S.  Agency for International Development, may continue to provide  programs and services similar to those provided in the agreement  under other authorities.

The FSM and RMI will generally remain eligible for other programs  identified in the amended compacts’ implementing legislation. These  programs include U.S. Department of Agriculture (USDA) Rural  Utilities Service grant and loan programs and U.S. Department of  Education Pell grants for higher education and grants under Part B of  the Individuals with Disabilities Education Act for children with  disabilities.

The FSM and RMI will remain eligible for additional programs we  identified that have been provided under other current U.S. laws.  Examples of these programs include USDA housing assistance  programs and multiple public health, medical, and disease control and  prevention grants provided by the U.S. Department of Health and  Human Services.

See appendix I for more information about the status after 2023 of U.S.  grants, programs, and services in the FSM and RMI under current law.

Compact Trust Funds Face Risks to Future Disbursements

Our May 2018 projections for the compact trust funds showed that after  fiscal year 2023, the funds are unlikely to provide maximum annual  disbursements and may provide no disbursements at all in some years.  The risk of disbursements below the maximum and the risk of zero  disbursements increase over time for both funds. Potential strategies we  analyzed in our May 2018 report would reduce or eliminate the risk of the  compact trust funds’ experiencing years of zero disbursement. However,  all of the potential strategies would require the countries to exchange a  near-term reduction in resources for more-predictable and more- sustainable disbursements in the longer term.

Projections Show Risks to Compact Trust Fund Disbursements

Our May 2018 projections for the FSM and RMI compact trust funds after  2023 indicated that, given their balance at the end of fiscal year 2017 and  current compact trust fund rules—the baseline scenario—the funds will be unable to provide maximum disbursements (equal to the inflation- adjusted amount of annual grant assistance in 2023) in some years   and unable to provide any disbursement at all in some years, with the  likelihood of zero disbursement in a given year increasing over time.

The compact trust funds’ C account—designed as a buffer to protect  disbursements from the B account in years when the funds do not earn  enough to fund the disbursement—could be exhausted by a series of  years with low or negative annual returns. Since current rules do not allow  disbursements from the compact trust fund corpus (the A account),  exhaustion of the C account would result in zero disbursement in years  when fund returns are zero or negative. Thus, there may be no funds  available to disburse even if the funds’ A accounts have a balance. As a  result of low or zero disbursements, the countries could face economic  and fiscal shocks and significant challenges in planning programs and  budgets.

Since we published our May 2018 report, an additional year of compact  trust fund performance data and updated estimates of future inflation  have become available; however, the updated information does not alter  the conclusions we presented in May 2018. The updated data and  inflation estimates change our model’s assumptions about the current  compact trust fund balance, size of future U.S. contributions to the FSM  and RMI compact trust funds, annual grant assistance in fiscal year 2023,  and C account balance—each of which are relevant variables for our  analysis. However; the updated variables would result in only slight  changes to our 2018 report’s projections of future compact trust fund  performance presented in this testimony and do not alter our broader  conclusions about future risks to the compact trust funds.

FSM compact trust fund projections. In May 2018, our model projected  that, given the baseline scenario and a 6 percent net return, the FSM  compact trust fund will experience declining disbursements relative to the  maximum allowable disbursements and an increasing chance of zero  disbursements. (See app. I of GAO-18-415 for a full description of our  methodology, and see app. V of GAO-18-415 for the baseline results with  alternative net returns.)

Projected disbursements. We projected that the FSM compact trust  fund will, on average, be able to provide disbursements equal to 82  percent of the maximum allowable disbursement—the inflation- adjusted amount of 2023 annual grant assistance—in its first decade  of disbursements. The likely average disbursement falls to 49 percent  of the maximum  in the next decade and falls further in subsequent  decades. In addition, the amount available for disbursement may  fluctuate substantially from year to year. Depending on the compact  trust fund’s performance in the previous year, disbursements may be  higher or lower than the average amount if the balance in the C  account is not sufficient to provide additional disbursements.

Likelihood of providing zero disbursement. We projected a 41  percent likelihood that the FSM compact trust fund will be unable to  disburse any funds in 1 or more years during the first decade of trust  fund disbursements. This likelihood increases over time, rising to 92  percent in fiscal years 2054 through 2063.

Figure 5 shows our May 2018 projections of the FSM compact trust fund’s  average disbursements as a percentage of maximum disbursement and  the likelihood of 1 or more years of zero disbursement, given the baseline  scenario and a 6 percent net return.

RMI compact trust fund projections. In May 2018, our model projected  that, given the baseline scenario and a 6 percent net return, the RMI  compact trust fund will experience declining disbursements relative to the  maximum allowable disbursements and an increasing chance of zero  disbursements.

Projected disbursements. We projected that in its first decade of  disbursements, the RMI compact trust fund will, on average, be able  to provide disbursements nearly equal to the inflation-adjusted  amount of 2023 annual grant assistance as defined by the trust fund  agreement—the maximum allowable. However, in each subsequent  decade, the projected disbursements as a percentage of the  maximum disbursements decline by about 10 percentage points. In  addition, from year to year, the amount available to disburse may  fluctuate substantially. Depending on the compact trust fund’s  performance in the previous year, disbursements may be higher or  lower than the average amount if the balance in the C account is not  sufficient to provide additional disbursements.

Likelihood of providing zero disbursement. We projected a 15  percent likelihood that the RMI compact trust fund will be unable to  disburse any funds in 1 or more years during the first decade of trust  fund disbursements. This likelihood increases over time, rising to 56  percent in fiscal years 2054 through 2063.

Figure 6 shows our May 2018 projections of the RMI compact trust fund’s  average disbursements as a percentage of maximum disbursement and  its likelihood of 1 or more years of zero disbursement, given the baseline  scenario and a 6 percent net return.

For our May 2018 report, we conducted a series of simulations to  determine the likely effects of potential strategies for improving the  outlook of the FSM and RMI compact trust funds. For example, we  developed and analyzed potential strategies in which: annual disbursements are reduced below the maximum allowable additional annual contributions are made to the trust fund prior to the  end of fiscal year 2023, and  the trust fund agreement disbursement policies are modified to limit  the annual disbursement to a fixed percentage of the fund’s moving  average balance over the previous 3 years, up to the maximum  disbursement amount defined by the current trust fund agreement.

All of the potential strategies we analyzed would reduce or eliminate the  risk of the compact trust funds experiencing years of zero disbursement.  However, some of the potential strategies may require changing the trust  fund agreements and all of the potential strategies would require the  countries to exchange a near-term reduction in resources for more- predictable and more-sustainable disbursements in the longer term. (See  app. VII of our May 2018 report for detailed results of our analysis.)

Compact Trust Fund Committees Have Not Addressed Issues Related to Distribution Policies, Fiscal Procedures, and Disbursement Timing

The trust fund committees have not taken the actions we recommended  in 2018 to prepare for the 2023 transition to trust fund income. The  compact trust fund committees have not yet prepared distribution policies,  required by the trust fund agreements, which could assist the countries in  planning for the transition to trust fund income. In addition, the  committees have not established fiscal procedures for oversight of  compact trust fund disbursements as required by the trust fund  agreements. Further, the committees have not yet addressed a potential  misalignment between the timing of their annual calculation of the  amounts available to disburse and the FSM’s and RMI’s budget timelines,  potentially complicating each country’s planning and management.

Trust Fund Committees Have Not Developed Distribution Policies Required by the Compact Trust Fund Agreements

The compact trust fund committees have not yet developed, as the  compact trust fund agreements require, policies to guide disbursements  from the trust funds after fiscal year 2023. Under the agreements, each  trust fund committee must develop a distribution policy, with the intent  that compact trust fund disbursements will provide an annual source of  revenue to the FSM and RMI after the scheduled end of compact grant  assistance. The trust fund committees could use distribution policies to  address risks to each fund’s sustainability. For example, the committees  have the discretion to disburse an amount below the established  maximum. Our analysis of potential strategies for improving the funds’  outlook shows that reducing the size of disbursements would improve  each compact trust fund’s long-term sustainability. Without a distribution  policy that provides information about the size of expected  disbursements, the FSM and RMI are hampered in their current and  ongoing efforts to plan for the potential reduction in U.S. compact  assistance after 2023.

Trust Fund Committees Have Not Established Fiscal Procedures Required by Compact Trust Fund Agreements

The compact trust fund committees have not yet established fiscal  procedures for compact trust fund disbursements after fiscal year 2023.  Each trust fund agreement requires the respective committee to  determine the fiscal procedures to be used in implementing the trust fund  agreement. The committees are to base their procedures on the compact  fiscal procedures agreements, unless the parties to the trust fund  agreement agree to adopt different fiscal procedures.  No compact trust  fund disbursements are to be made unless the committee has established  such trust fund fiscal procedures. Without fiscal procedures in place, the  trust fund committees will not be able to provide disbursements and the  United States, the FSM, and the RMI will lack clear guidance to ensure  oversight for trust fund disbursements.

Trust Fund Committees Have Not Addressed Issues Related to Disbursement Timing

The timing for the trust fund committees’ calculation of the amounts  available for annual disbursement to the FSM and the RMI after fiscal  year 2023 does not align with the countries’ budget and planning  timelines. The amounts available for disbursement in a given fiscal year  cannot be determined until each fund’s returns have been determined at  the end of the prior year. Further, if the disbursement amounts are  calculated from audited fund returns as determined by annual audits required by the trust fund agreements, the amounts may not be  determined until as late as March 31, 6 months into the fiscal year for  which the disbursement is to be provided.  However, both the FSM and  the RMI government budget cycles are completed before the annual  amounts available for disbursement will be known. As a result, the FSM  and RMI would have to budget without knowing the amount to be  disbursed, complicating their annual budget and planning processes.

Trust Fund Committees Have Discussed Potential Actions to Address our Recommendations

The trust fund committees, chaired by Interior, have discussed potential  actions to address the recommendations in our May 2018 report. In May  2018, we made six recommendations to Interior—three parallel  recommendations regarding each country’s trust fund. We recommended  that the Secretary of the Interior ensure that the Director of the Office of  Insular Affairs work with other members of the trust fund committees to: develop distribution policies, develop the fiscal procedures required by the compact trust fund address the timing of the calculation of compact trust fund  disbursements.

Interior concurred with our recommendations and has stated that it plans  to implement them before the FSM and RMI transition to trust fund  income in 2023. The FSM and RMI also concurred with our  recommendations to Interior. According to the Trust Fund Administrator  and Interior officials, the distribution policy was discussed at subsequent  trust fund committee meetings—including the most recent, in May 2019.  According to the trust fund administrator, trust fund representatives met  with FSM and RMI representatives in January 2019 to discuss the status  of the trust fund and future scenarios for its management. Interior officials  further stated that discussions about trust fund policies and controls were  frequent and ongoing among committee members and staffers as well as  the trust fund manager and investment advisers.

The FSM’s and RMI’s transition to relying on income from the compact  trust funds will likely require significant budgetary choices. However, the  lack of trust fund distribution policies, and the lack of alignment between  the trust fund committees’ annual disbursement calculations and the  countries’ budget cycles hamper the countries’ ability to plan for the  transition. In addition, without the required fiscal procedures governing  trust fund actions after 2023, the trust fund committees will be unable to  make disbursements and the United States, the FSM, and the RMI will  not have assurance of necessary oversight. However, as of June 2019,  Interior had not implemented our recommendations to address these  issues. Further, while Interior has continued to discuss possible actions to  address our recommendations with the trust fund committees, it targeted  implementation of our recommendations for 2023.

Chairwoman Murkowski, Ranking Member Manchin, and Members of the  Committee, this concludes my statement. I would be pleased to respond  to any questions you may have.

If you or your staff have any questions about this testimony, please  contact David Gootnick, Director, International Affairs and Trade, 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  are Emil Friberg (Assistant Director), Ming Chen, Neil Doherty, Mark  Dowling, Christopher Keblitis, Reid Lowe, Moon Parks, and Michael  Simon.

Appendix I: Status of U.S. Grants and Programs in the FSM and RMI After 2023

The amended compacts, compact–related agreements, the amended  compacts’ implementing legislation, and other U.S. laws provide grants or  eligibility for U.S. programs and services for the Federated States of  Micronesia (FSM) and Republic of the Marshall Islands (RMI). The  amended compacts provide compact sector, Kwajalein-related, and audit  grants. Under current law, compact sector and audit grants are each  scheduled to end in 2023, but the RMI military use and operating rights  agreement (MUORA) extends the time frame of Kwajalein-related  compact grants for as long as the agreement is in effect. The amended  compacts’ implementing legislation provides additional grants, including  authorizing a supplemental education grant (SEG), and identifies several  specific U.S. programs as available to the FSM and RMI. Under current  law, the additional grants end in 2023, but the statutory authorizations for  some programs identified in Pub. L. No. 108-188 provide for the  continued eligibility of the FSM and RMI to receive benefits under the  programs. However, after fiscal year 2023, the FSM and RMI will no  longer be eligible under current U.S. law for some programs that the SEG  replaced. The compact-related programs and services agreements with  each country identify additional programs and services that the United  States makes available to the FSM and RMI. While these agreements will  end in 2024, under current law, some U.S. agencies may continue to  provide programs and services similar to those provided in the agreement  under other authorities. Based on the status of current law, the FSM’s and  RMI’s eligibility for other programs we identified that have been provided  under other current U.S. laws will not change after fiscal year 2023.

Compact Sector and Audit Grants End in 2023, but Kwajalein-Related Grants for the RMI Will Continue

Under current law, compact sector grants provided to the FSM and the  RMI under section 211(a) of the amended compacts are scheduled to end  in 2023. However, the RMI is scheduled to continue to receive $7.2  million, partially inflation adjusted, related to the U.S. military base in  Kwajalein Atoll and provided under section 211(b) of its compact. Under  the terms of the RMI MUORA, the United States agreed to provide these  Kwajalein-related grants for as long as the MUORA is in effect. The  MUORA continues until 2066 and may be extended at the discretion of  the United States until 2086. The amended RMI compact provides for  $18 million, partially inflation adjusted, in annual payments to the RMI  government to compensate for impacts from the U.S. Army Garrison– Kwajalein Atoll. These payments will continue for as long as the MUORA  is in effect. Annual compact grants of up to $500,000 (not inflation  adjusted) to each country to pay for required annual audits of compact  grants are scheduled to end in 2023. See table 3 for a summary of  compact sector, Kwajalein-related, and audit grants.

FSM and RMI Are No Longer Eligible for Many Programs Replaced by the Supplemental Education Grant

The supplemental education grant (SEG) authorized by the amended  compacts’ implementing legislation is scheduled to end in fiscal year 2023  and, under current law, FSM and RMI eligibility for most programs that  the SEG replaced will not resume after fiscal year 2023. Absent changes  to current law, the FSM and RMI will not be eligible after fiscal year 2023  for the following programs that the SEG replaced during fiscal years 2005  through 2023: U.S. elementary and secondary education grant programs,  adult education and literacy programs, career and technical education  programs, job training programs, and Head Start early education  programs. However, under other provisions of current law, qualifying  individuals in the FSM and RMI will be eligible after fiscal year 2023 for  undergraduate education grants and work-study programs that the SEG  replaced. See table 4.

Some Programs and Services in the Programs and Services Agreement Will End, while Others May Continue under Other Authorities

Although the programs and services agreements with the FSM and RMI  will end in fiscal year 2024, current U.S. law enables U.S. agencies to  continue providing some programs and services now provided under the  agreements. After the agreements end, no current provisions of U.S. law  will enable the Federal Emergency Management Agency (FEMA) to  provide disaster response funding, enable the Federal Deposit Insurance  Corporation to provide deposit insurance, or enable the U.S. Postal  Service to provide the services that it currently provides to the FSM and  RMI. However, the National Weather Service, the U.S. Department of  Transportation’s (DOT) Federal Aviation Administration (FAA), and the  U.S. Agency for International Development (USAID) could, under other  legal authorities, provide services similar to those they now provide under  the programs and services agreements.

National Weather Service. The programs and services agreements  authorize the National Weather Service to fund the operations of  weather stations in the FSM and RMI, which it can continue to fund  after the end of the agreements under other authorities, according to  Department of Commerce officials.

Federal Aviation Administration. The programs and services  agreements authorize DOT’s FAA to provide technical assistance in  the FSM and RMI, which it can continue to provide after the end of the  agreements under other provisions of current U.S. law. However,  DOT officials stated that FAA would require new bilateral agreements  with the FSM and the RMI in order for the countries to continue to  receive the civil aviation safety services that FAA currently provides  under the programs and services agreements. The FAA would also  seek reimbursement for any technical assistance it provides to the  FSM and RMI. With regard to the civil aviation economic services  provided under the programs and services agreements, DOT officials  stated that, while the FSM and RMI could voluntarily decide to allow  U.S. air carriers to continue operations in the FSM and RMI, new  bilateral agreements would be needed to assure that result.

U.S. Agency for International Development. Following a U.S.  presidential disaster declaration, FEMA provides the funding for  disaster relief and reconstruction, which is programmed through  USAID. Under current law, FEMA funds will no longer be available to  the FSM and RMI for this purpose once the agreements end;  however, USAID will be able to provide foreign disaster assistance  funding to the two countries under the same terms as it provides this  assistance to other countries. After the programs and services  agreements end, FEMA will be able to support disaster relief efforts  only if USAID  or the countries request such support on a reimbursable  basis.

In addition, according to State and Interior officials, telecommunications- related services that the two agencies provide to the FSM and RMI under  the programs and services agreements will continue as long as the FSM  and RMI provide appropriate authorization for such services. Table 5  shows the status after the programs and services agreements end of programs and services currently provided to the FSM and the RMI under  the agreements.

Programs Identified in Amended Compacts’ Implementing Legislation Generally Continue after Fiscal Year 2023

Although additional grants provided to the FSM and the RMI under the  amended compacts’ implementing legislation will end in fiscal year 2023,  the countries’ eligibility for programs now provided under that legislation  will generally continue under current U.S. law. Grants provided under the  amended compacts’ implementing legislation for (1) judicial training in the  FSM and the RMI, and (2) agricultural and planting programs on the  RMI’s nuclear-affected Enewetak Atoll are scheduled to end. However,  under current U.S. law, legal authorities permitting the operation of other  programs will remain available to the FSM and RMI after fiscal year 2023.  Eligibility under these legal authorities continues either because the  amended compacts’ implementing legislation does not specify an ending  date or because other provisions in current U.S. law make the FSM and  RMI eligible for the program.

Programs provided in the amended compacts’ implementing legislation  include U.S. Department of Agriculture Rural Utilities Service grant and  loan programs; U.S. Department of Education Pell grants for higher  education and grants under Part B of the Individuals with Disabilities  Education Act for children with disabilities; programs for nuclear-affected  areas in the RMI; and additional programs provided by the Departments  of Commerce and Labor as well as law enforcement assistance provided  by the U.S. Postal Service. See table 6 for a summary of the programs  identified in the amended compacts’ implementing legislation and their  status as of the end of fiscal year 2023.

Programs Identified in Other Legislation Generally Continue after Fiscal Year 2023

In addition to being eligible for the programs provided through the  compact, its associated agreements, and the amended compacts’  implementing legislation, the FSM and RMI are also eligible for a number  of programs under other provisions of current U.S. law. The FSM and  RMI have each received funds from the U.S. Department of Agriculture  for forestry and rural housing programs, multiple U.S. Department of  Health and Human Services public health program grants, U.S.  Department of the Interior technical assistance and historic preservation  programs, and the DOT FAA airport improvement program, among  others. Under current U.S. law, the legal authorities permitting the  provision of these programs in the FSM and RMI would not necessarily  change after 2023. Table 7 shows the FSM’s and RMI’s eligibility for  these additional grants and programs under current law after fiscal year  2023.

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 as 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.

We testified that the trust funds may not provide disbursements in some years or sustain their value after 2023.

To date, the U.S. Interior Department has not implemented the 6 recommendations we previously made to address the risks to the funds' ability to provide income after 2023.