Compacts of Free Association: Trust Funds for Micronesia and the Marshall Islands Are Not Likely 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 has continued to discuss actions in response at 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 May 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) compact trust fund committee actions  needed to address the FSM’s and RMI’s 2023 transitions 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 changed substantially 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. Also, to update the status of Interior’s response to our May  2018 recommendations to address compact trust fund issues, we  reviewed information provided by Interior and from the compact trust  funds’ administrator, and observed meetings of the compact trust fund  committees in September 2019.

We conducted the work on which this testimony is based 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 terms of  the trust fund agreements require the United States to hold the majority of  votes. 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 authorizes 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 did the FSM national  government. In the RMI, compact sector grants and the SEG supported  about one-quarter of all government expenditures. The expiration 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).

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).

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.

We calculated the average disbursement as a percentage of the  maximum allowable disbursement by averaging, over each 10-year  period and over 10,000 simulated cases, the ratio of simulated  disbursement to the maximum inflation-adjusted allowable disbursement  in the given period.

We calculated the likelihood of zero disbursement by counting cases with  1 or more years of zero disbursement in each of the given periods over  10,000 simulated cases.

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 might 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 compact trust fund committees have not taken the actions we  recommended in 2018 to prepare for the 2023 transition to trust fund  income. The 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 compact 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 Continue to Discuss Potential Actions to Address Our Recommendations

The compact trust fund committees, chaired by Interior, have continued to  discuss 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 trust fund  committee meetings convened since our May 2018 report. At their  September 2019 meetings, the FSM and RMI compact trust fund  committees did not make any decisions regarding steps to address our  recommendations.

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 as well as the lack of alignment  between the trust fund committees’ annual disbursement calculations and  the countries’ budget cycles, hampers 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 for trust fund disbursements.  However, as of September 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.

Chairmen Grijalva and Engel, Ranking Members Bishop and McCaul, and  Members of the Committees, 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, 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, under current law, of programs and services currently  provided to the FSM and the RMI under the programs and services  agreements after the agreements end in fiscal year 2024.

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. will provide $3.6 billion in assistance to Micronesia and the Marshall Islands between 2004 and 2023—increasingly as contributions to trust funds for these nations. The trust funds should generate income from their investments after 2023.

But we testified that these trust funds may not be able to generate income every year. For instance, there is a 41% chance that Micronesia's trust fund won't be able to generate income in at least 1 of the fiscal years between 2024 and 2033.

We previously made recommendations to the Department of the Interior to help resolve this issue, but the department has yet to implement all of our recommendations.