oversight

Compact of Free Association: An Assessment of the Amended Compacts and Related Agreements

Published by the Government Accountability Office on 2003-07-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            United States General Accounting Office

GAO                         Testimony
                            Before the Committee on Energy and
                            Natural Resources, U.S. Senate


For Release on Delivery
Expected at 2:30 p.m. EDT
Tuesday, July 15, 2003
                            COMPACT OF FREE
                            ASSOCIATION
                            An Assessment of the
                            Amended Compacts and
                            Related Agreements
                            Statement of Susan S. Westin, Managing Director
                            International Affairs and Trade




GAO-03-1007T
                                                July 15, 2003


                                                COMPACT OF FREE ASSOCIATION

                                                An Assessment of the Amended
Highlights of GAO-03-1007T, a testimony         Compacts and Related Agreements
before the Senate Committee on Energy
and Natural Resources




In 1986, the United States entered              The amended Compacts of Free Association between the United States and
into a Compact of Free Association              the FSM and the RMI to renew expiring U.S. assistance could potentially
with the Pacific Island nations of              cost the U.S. government about $6.6 billion in new authorizations from the
the Federated States of Micronesia,             Congress. Of this amount, $3.5 billion would cover payments over a 20-year
or FSM, and the Republic of the                 period (2004-2023), while $3.1 billion represents payments for U.S. military
Marshall Islands, or RMI. The
Compact provided about $2.1
                                                access to Kwajalein Atoll in the RMI for the years 2024 through 2086. While
billion in U.S. funds, supplied by              the level of annual grant assistance to both countries would decrease each
the Department of the Interior,                 year, contributions to trust funds–meant to eventually replace grant funding–
over 17 years (1987-2003) to the                would increase annually by a comparable amount. Nevertheless, at an
FSM and the RMI. These funds                    assumed annual 6 percent rate of return, earnings from the FSM trust fund
were intended to advance                        would be unable to replace expiring grant assistance in 2024, while earnings
economic development. In a past                 from the RMI trust fund would encounter the same problem by 2040.
report, GAO found that this
assistance did little to advance                The amended Compacts strengthen reporting and monitoring measures that
economic development in either                  could improve accountability over assistance, if diligently implemented.
country, and accountability over                These measures include the following: assistance grants would be targeted
funding was limited. The Compact
also established U.S. defense rights
                                                to priority areas such as health and education; annual reporting and
and obligations in the region and               consultation requirements would be expanded; and funds could be withheld
allowed for migration from both                 for noncompliance with grant terms and conditions. The successful
countries to the United States.                 implementation of the many new accountability provisions will require
                                                appropriate resources and sustained commitment from the United States,
The three parties recently                      the FSM, and the RMI.
renegotiated expiring economic
assistance provisions of the                    Regarding defense, U.S. military access to Kwajalein Atoll in the RMI would
Compact in order to provide an                  be extended from 2016 through 2066, with an option to extend through 2086.
additional 20 years of assistance               Finally, Compact provisions addressing immigration have been
(2004-2023). In addition, the                   strengthened. For example, FSM and RMI citizens entering the United States
negotiations addressed defense and
immigration issues. The House
                                                would need to carry a passport, and the U.S. Attorney General could,
International Relations and                     through regulations, specify the time and conditions of admission to the
Resources Committees requested                  United States for these citizens.
that GAO report on Compact
negotiations.                                   Estimated New U.S. Authorizations for the FSM and the RMI, Fiscal Years 2004-2086
                                                (U.S. dollars in millions)
This testimony discusses
negotiated changes to the levels
and structure of future assistance,                                                                   FSM                 RMI             Total
including the potential cost to the
U.S. government. Further, it                    Fiscal years 2004-2023                                 $2,296              $1,204           $3,500
reviews accountability, defense,                Fiscal years 2024-2086                          Not applicable              3,081            3,081
and immigration changes brought                 Fiscal years 2004-2086, total
about by the amended Compacts                   possible new U.S.
and related agreements.                         authorizations for the FSM
                                                and the RMI                                               $2,296           $4,285           $6,581
www.gao.gov/cgi-bin/getrpt?GAO-03-1007T.

To view the full product, including the scope   Source: GAO estimate based on information in the amended Compacts.
and methodology, click on the link above.
For more information, contact Susan S.          Note: These figures are adjusted for inflation. In 2004 U.S. dollars, the total cost would be $3.8
Westin at (202) 512-4148 or                     billion.
WestinS@gao.gov.
          Mr. Chairman and Members of the Committee:

          I am pleased to be here today to testify on the Compact of Free
          Association between the United States and the Pacific Island nations of
          the Federated States of Micronesia, or the FSM, and the Republic of the
          Marshall Islands, or the RMI.1 In 1986, the United States entered into this
          Compact with the two countries after almost 40 years of administering the
          islands under the United Nations Trust Territory of the Pacific Islands. The
          Compact has provided U.S. assistance to the FSM and the RMI in the form
          of direct funding as well as federal services and programs for almost 17
          years. Further, the Compact establishes U.S. defense rights and obligations
          in the region and allows for migration from both countries to the United
          States. Provisions of the Compact that address economic assistance were
          scheduled to expire in 2001; however, they can remain and have remained
          in effect while the United States and each nation renegotiated the affected
          provisions.2

          Today I will discuss our review of the amended Compacts and related
          agreements that the United States signed with the FSM and the RMI in May
          and April of 2003, respectively. (According to a Department of State
          official, while the original Compact was one document that applied to both
          the FSM and the RMI, the Compact that has been amended is now a
          separate Compact with each nation.) Specifically, I will discuss changes to
          levels and structure of future assistance, including the potential cost to the
          U.S. government. Further, I will comment on changes in accountability
          and other key issues addressed in the amended Compacts and related
          agreements.


          The amended Compacts of Free Association with the FSM and the RMI to
Summary   renew expiring assistance would require about $3.5 billion in funding over
          the next 20 years with a total possible authorization through 2086 of




          1
           The FSM had a population of about 107,000 in 2000, while the RMI had a population of
          50,840 in 1999, according to each country’s most recent census.
          2
           Other Compact provisions are also due to expire in late 2003 if not renewed. These include
          (1) certain defense provisions, such as the requirement that the FSM and the RMI refrain
          from actions that the United States determines are incompatible with U.S. defense
          obligations (the defense veto) and (2) federal services listed in the Compact.



          Page 1                                        GAO-03-1007T Compact of Free Association
$6.6 billion from the U.S. Congress.3 The amended Compacts would
provide decreasing levels of annual assistance over a 20-year term (2004-
2023) in order to encourage budgetary self-reliance. Simultaneously, the
Compacts would require building up a trust fund (with contributions that
would increase annually) for each country to generate annual earnings
that would replace the grants that end in 2023. Per capita grant assistance
would fall over the 20-year period, particularly for the RMI. At an assumed
trust fund rate of return of 6 percent, in 2024 the RMI trust fund would
cover expiring grant assistance, while the FSM trust fund would be
insufficient to replace grants. By the year 2040, however, RMI trust fund
returns also would be unable to replace grant funding.

The amended Compacts include many strengthened reporting and
monitoring measures that could improve accountability if diligently
implemented. The amended Compacts and related agreements have
addressed most of the recommendations that we have made in past
reports regarding assistance accountability. For example, assistance
would be provided through grants targeted to priority areas, such as health
and education, and with specific terms and conditions attached. Annual
reporting and consultation requirements would be expanded, and funds
could be withheld for noncompliance with Compact terms and conditions.
However, the successful implementation of the many new accountability
provisions will require a sustained commitment and appropriate resources
from the United States, the FSM, and the RMI.

The amended Compacts address other key issues. One key change to
Compact defense provisions would occur–U.S. military access to
Kwajalein Atoll in the RMI could be extended from 2016 to 2086. This
extension would cost $3.4 billion of the total possible authorization of $6.6
billion. Further, amended Compact provisions on immigration have been
strengthened. FSM and RMI citizens entering the United States would need
to carry a passport, and regulations could be promulgated that would
impose time limits and other conditions on admission to the United States
for these citizens.




3
 Although the amended Compacts have been signed by the U.S., FSM, and RMI
governments, they have not been approved by the legislature of any country. Therefore, in
our testimony we describe the amended Compacts’ requirements and potential impact in a
conditional manner in recognition that the Compacts have not yet been enacted. The total
possible cost to renew expiring assistance in fiscal year 2004 U.S. dollars would be $3.8
billion on the basis of the Congressional Budget Office’s forecasted inflation rate.



Page 2                                       GAO-03-1007T Compact of Free Association
             The 1986 Compact of Free Association between the United States, the
Background   FSM, and the RMI provided a framework for the United States to work
             toward achieving its three main goals: (1) to secure self-government for
             the FSM and the RMI, (2) to assist the FSM and the RMI in their efforts to
             advance economic development and self-sufficiency, and (3) to ensure
             certain national security rights for all of the parties. The first goal has been
             met. The FSM and the RMI are independent nations and are members of
             international organizations such as the United Nations.

             The second goal of the Compact–advancing economic development and
             self-sufficiency for both countries–was to be accomplished primarily
             through U.S. direct financial payments (to be disbursed and monitored by
             the U.S. Department of the Interior) to the FSM and the RMI. For 1987
             through 2003, U.S. assistance to the FSM and the RMI to support economic
             development is estimated, on the basis of Interior data, to be about $2.1
             billion.4 Economic self-sufficiency has not been achieved. Although total
             U.S. assistance (Compact direct funding as well as U.S. programs and
             services) as a percentage of total government revenue has fallen in both
             countries (particularly in the FSM), the two nations remain highly
             dependent on U.S. funds. U.S. direct assistance has maintained standards
             of living that are higher than could be achieved in the absence of U.S.
             support. Further, the U.S., FSM, and RMI governments provided little
             accountability over Compact expenditures.

             The third goal of the Compact–securing national security rights for all
             parties–has been achieved. The Compact obligates the United States to
             defend the FSM and the RMI against an attack or the threat of attack in the
             same way it would defend its own citizens. The Compact also provides the
             United States with the right of “strategic denial,” the ability to prevent
             access to the islands and their territorial waters by the military personnel
             of other countries or the use of the islands for military purposes. In



             4
              The cost of prior assistance in fiscal year 2004 U.S. dollars was $2.6 billion. This estimate
             does not include payments for Compact-authorized federal services or U.S. military use of
             Kwajalein Atoll land, nor does it include investment development funds provided under
             section 111 of Public Law 99-239. Additionally, the Compact served as the vehicle to reach
             a full settlement of all compensation claims related to U.S. nuclear tests conducted on
             Marshallese atolls between 1946 and 1958. In a Compact-related agreement, the U.S.
             government agreed to provide $150 million to create a trust fund. While the Compact and
             its related agreements represented the full settlement of all nuclear claims, it provided the
             RMI with the right to submit a petition of “changed circumstance” to the U.S. Congress
             requesting additional compensation. The RMI government submitted such a petition in
             September 2000, which the U.S. executive branch is still reviewing.



             Page 3                                          GAO-03-1007T Compact of Free Association
addition, the Compact grants the United States a “defense veto.” Finally,
through a Compact-related agreement, the United States secured
continued access to military facilities on Kwajalein Atoll in the RMI
through 2016.5 In a previous report, we identified Kwajalein Atoll as the
key U.S. defense interest in the two countries.6 Of these rights, only the
defense veto is due to expire in 2003 if not renewed.

Another aspect of the special relationship between the FSM and the RMI
and the United States involves the unique immigration rights that the
Compact grants. Through the original Compact, citizens of both nations
are allowed to live and work in the United States as “nonimmigrants” and
can stay for long periods of time, with few restrictions.7 Further, the
Compact exempted FSM and RMI citizens from meeting U.S. passport,
visa, and labor certification requirements when entering the United States.
In recognition of the potential adverse impacts that Hawaii and nearby
U.S. commonwealths and territories could face as a result of an influx of
FSM and RMI citizens, the Congress authorized Compact impact payments
to address the financial impact of these nonimmigrants on Guam, Hawaii,
and the Commonwealth of the Northern Mariana Islands (CNMI).8 By 1998,
more than 13,000 FSM and RMI citizens had made use of the Compact
immigration provisions and were living in the three areas. The
governments of the three locations have provided the U.S. government
with annual Compact nonimmigrant impact estimates; for example, in
2000 the total estimated impact for the three areas was $58.2 million. In




5
 U.S. access to Kwajalein Atoll is established through the U.S.-RMI Military Use and
Operating Rights Agreement (MUORA). Funding provided for U.S. military access to
Kwajalein for the years 1987 to 2003 is estimated, on the basis of Interior data, to be $64
million for development assistance and $144 million for the RMI government to
compensate landowners for U.S. use of their lands.
6
 See U.S. General Accounting Office, Foreign Relations: Kwajalein Atoll Is the Key U.S.
Defense Interest in Two Micronesian Nations, GAO-02-119 (Washington, D.C.: Jan. 22,
2002).
7
 Typically, nonimmigrants include those individuals who are in the United States
temporarily as visitors, students, or workers.
8
 Payments were also authorized for American Samoa, but impact compensation has not
been sought.



Page 4                                          GAO-03-1007T Compact of Free Association
                           that year, Guam received $7.58 million in impact funding, while the other
                           two areas received no funding.9

                           In the fall of 1999, the United States and the two Pacific Island nations
                           began negotiating economic assistance and defense provisions of the
                           Compact that were due to expire. Immigration issues were also addressed.
                           According to the Department of State, the aims of the amended Compacts
                           are to (1) continue economic assistance to advance self-reliance, while
                           improving accountability and effectiveness; (2) continue the defense
                           relationship, including a 50-year lease extension (beyond 2016) of U.S.
                           military access to Kwajalein Atoll in the RMI; (3) strengthen immigration
                           provisions; and (4) provide assistance to lessen the impact of Micronesian
                           migration on Hawaii, Guam, and the CNMI.


                           Under the amended Compacts with the FSM and the RMI, new
Amended Compacts           congressional authorizations of approximately $3.5 billion in funding
Would Alter                would be required over the next 20 years, with a total possible
                           authorization through 2086 of $6.6 billion. Economic assistance would be
Assistance Levels and      provided to the two countries for 20 years–from 2004 through 2023–with
Structure                  all subsequent funding directed to the RMI for continued U.S. access to
                           military facilities in that country. Under the U.S. proposals, annual grant
                           amounts to each country would be reduced each year in order to
                           encourage budgetary self-reliance and transition the countries from
                           receiving annual U.S. grant funding to receiving annual trust fund earnings.
                           This decrease in grant funding, combined with FSM and RMI population
                           growth, would also result in falling per capita grant assistance over the
                           funding period–particularly for the RMI. If the trust funds established in
                           the amended Compacts earn a 6 percent rate of return, the FSM trust fund
                           would be insufficient to replace expiring annual grants. The RMI trust fund
                           would replace grants in fiscal year 2024 but would become insufficient for
                           this purpose by fiscal year 2040.

Amended Compacts Could     Under the amended Compacts with the FSM and the RMI, new
Cost the U.S. Government   congressional authorizations of approximately $6.6 billion could be
$6.6 Billion               required for U.S. payments from fiscal years 2004 to 2086, of which $3.5
                           billion would be required for the first 20 years of the Compacts



                           9
                           See U.S. General Accounting Office, Foreign Relations: Migration From Micronesian
                           Nations Has Had Significant Impact on Guam, Hawaii, and the Commonwealth of the
                           Northern Mariana Islands, GAO-02-40 (Washington, D.C.: Oct. 5, 2001).



                           Page 5                                    GAO-03-1007T Compact of Free Association
(see table 1). The share of new authorizations to the FSM would be about
$2.3 billion and would end after fiscal year 2023. The share of new
authorizations to the RMI would be about $1.2 billion for the first 20 years,
with about $300 million related to extending U.S. military access to
Kwajalein Atoll through 2023. Further funding of $3.1 billion for the
remainder of the period corresponds to extended grants to Kwajalein and
payments related to U.S. military use of land at Kwajalein Atoll.10 The cost
of this $6.6 billion new authorization, expressed in fiscal year 2004 U.S.
dollars, would be $3.8 billion.

This new authorized funding would be provided to each country in the
form of (1) annual grant funds targeted to priority areas (such as health,
education, and infrastructure); (2) contributions to a trust fund for each
country such that trust fund earnings would become available to the FSM
and the RMI in fiscal year 2024 to replace expiring annual grants; (3)
payments the U.S. government makes to the RMI government that the RMI
transfers to Kwajalein landowners to compensate them for the U.S. use of
their lands for defense sites; and (4) an extension of federal services that
have been provided under the original Compact but are due to expire in
fiscal year 2003.




10
 U.S. access to Kwajalein Atoll in the RMI has already been secured through 2016 through
a Compact-related agreement. The amended Compact with the RMI extends this funding to
2066, with an additional 20-year optional lease extension at that point.



Page 6                                      GAO-03-1007T Compact of Free Association
                            Table 1: Estimated New U.S. Authorizations for the FSM and the RMI, Fiscal Years
                            2004-2086 (U.S. dollars in millions)

                                                                                                                  FSM             RMI          Total
                                Fiscal years 2004-2023
                                                                                                                                       a
                                Grants for priority areas                                                   $1,612              $701         $2,313
                                Trust fund contributions                                                       517                276           793
                                Payments for U.S. military use of Kwajalein Atoll                    Not applicable               191           191
                                    b
                                land
                                                                    c
                                Compact-authorized federal services                                                167             37           204
                                New U.S. authorization for 2004-2023                                             2,296          1,204         3,500
                                Fiscal years 2024-2086
                                                                                                                                       a
                                Grants to Kwajalein                                                  Not applicable              948            948
                                Payments for U.S. military use of Kwajalein Atoll                    Not applicable             2,133         2,133
                                land
                                New U.S. authorization for 2024-2086                                 Not applicable             3,081         3,081
                                Fiscal years 2004-2086, total new U.S.
                                authorizations for the FSM and the RMI                                         $2,296          $4,285        $6,581
                            Source: GAO estimate based on information in the amended Compacts. Under the amended Compacts, U.S. payments are adjusted
                            for inflation at two-thirds of the percentage change in the U.S. gross domestic product implicit price deflator.

                            Note: Numbers may not sum due to rounding.
                            a
                             The 1986 U.S.-RMI Military Use and Operating Rights Agreement (MUORA) grants the United States
                            access to certain portions of Kwajalein Atoll and provides $24.7 million of funding for development
                            and impact on Kwajalein from 2004 to 2016. Approximately $112 million of the new proposed U.S.
                            grant assistance of $701 million is for increasing this funding to Kwajalein from 2004 to 2016 and for
                            continuation of the increased level of funding through 2066 and possibly to 2086 if the agreement is
                            extended.
                            b
                             As part of the 1986 MUORA, the RMI government has also allocated $162 million of U.S. funding
                            from 2004 to 2016 under this agreement to landowners via a traditional distribution system to
                            compensate them for the U.S. use of their lands for defense sites. The amended Compact increases
                            these payments from 2004 to 2016 and continues the increased level of payments through 2066 and
                            possibly to 2086 if the agreement is extended.
                            c
                            Federal services authorized in the Compact include weather, aviation, and postal services. Services
                            associated with the Federal Emergency Management Agency have been excluded. An estimate of
                            assistance from the U.S. Agency for International Development’s Office of Disaster Assistance has
                            not been included.


Amended Compacts Would      Under the U.S. proposals, annual grant amounts to each country would be
Reduce U.S. Grant Support   reduced each year in order to encourage budgetary self-reliance and
Annually                    transition the countries from receiving annual U.S. grant funding to
                            receiving annual trust fund earnings. Thus, the amended Compacts
                            increase annual U.S. contributions to the trust funds each year by the
                            grant reduction amount. This decrease in grant funding, combined with
                            FSM and RMI population growth, would also result in falling per capita
                            grant assistance over the funding period–particularly for the RMI (see fig.
                            1). Using published U.S. Census population growth rate projections for the
                            two countries, the real value of grants per capita to the FSM would begin


                            Page 7                                                        GAO-03-1007T Compact of Free Association
                                         at an estimated $687 in fiscal year 2004 and would further decrease over
                                         the course of the Compact to $476 in fiscal year 2023. The real value of
                                         grants per capita to the RMI would begin at an estimated $627 in fiscal
                                         year 2004 and would further decrease to an estimated $303 in fiscal year
                                         2023. The reduction in real per capita funding over the next 20 years is a
                                         continuation of the decreasing amount of available grant funds (in real
                                         terms) that the FSM and the RMI had during the 17 years of prior Compact
                                         assistance.

Figure 1: Estimated FSM and RMI Per Capita Grant Assistance for Fiscal Years 1987-2023 (Fiscal Year 2004 U.S. Dollars)




                                         Note: This analysis includes only Compact funds available to governments. Therefore, the analysis
                                         excludes investment development funds provided under section 111 of Public Law 99-239, trust fund
                                         contributions, federal programs and services, audit assistance, and MUORA-related lease payments
                                         that the RMI government transfers to Kwajalein landowners. U.S. Census population historical and
                                         projected population growth rates are used in conjunction with the most recent country Census data.
                                         U.S. Census projections are subject to revision.




                                         Page 8                                            GAO-03-1007T Compact of Free Association
                              The decline in annual grant assistance could impact FSM and RMI
                              government budget and service provision, employment prospects,
                              migration, and the overall gross domestic product (GDP) outlook, though
                              the immediate effect is likely to differ between the two countries. For
                              example, the FSM is likely to experience fiscal pressures in 2004, when the
                              value of Compact grant assistance drops in real terms by 8 percent relative
                              to the 2001 level (a reduction equal to 3 percent of GDP).11 For the RMI,
                              however, the proposed level of Compact grant assistance in 2004 would
                              actually be 8 percent higher in real terms than the 2001 level (an increase
                              equal to 3 percent of GDP). According to the RMI, this increase would
                              likely be allocated largely to the infrastructure investment budget and
                              would provide a substantial stimulus to the economy in the first years of
                              the new Compact.


Trust Funds May Be            The amended Compacts were designed to build trust funds that, beginning
Insufficient to Replace       in fiscal year 2024, yield annual earnings to replace grant assistance that
Expiring Grants               ends in 2023. Both the FSM and the RMI are required to provide an initial
                              contribution to their respective trust funds of $30 million. In designing the
                              trust funds, the Department of State assumed that the trust fund would
                              earn a 6 percent rate of return.12 The amended Compacts do not address
                              whether trust fund earnings should be sufficient to cover expiring federal
                              services, but they do create a structure that sets aside earnings above 6
                              percent, should they occur, that could act as a buffer against years with
                              low or negative trust fund returns. Importantly, whether the estimated
                              value of the proposed trust funds would be sufficient to replace grants or
                              create a buffer account would depend on the rate of return that is
                              realized.13

                          •   If the trust funds earn a 6 percent rate of return, then the FSM trust fund
                              would yield a return of $57 million in fiscal year 2023, an amount
                              insufficient to replace expiring grants by an estimated value of $27 million.


                              11
                               The level of grant assistance in 2001 was converted into fiscal year 2004 dollars for
                              comparison purposes.
                              12
                                The State Department chose a 6 percent return in order to reflect a conservative
                              investment strategy. This rate of return can be compared with the current average
                              forecasted return for long-term U.S. government bonds of 5.8 percent by the Congressional
                              Budget Office.
                              13
                               This analysis does not take into account volatile or negative returns. The sufficiency of
                              either the FSM or the RMI trust fund to replace grants has not been tested under conditions
                              of market volatility.



                              Page 9                                         GAO-03-1007T Compact of Free Association
                          The RMI trust fund would yield a return of $33 million in fiscal year 2023,
                          an estimated $5 million above the amount required to replace grants in
                          fiscal year 2024. Nevertheless, the RMI trust fund would become
                          insufficient for replacing grant funding by fiscal year 2040.

                      •   If the trust funds are comprised of both stocks (60 percent of the
                          portfolio) and long-term government bonds (40 percent of the portfolio)
                          such that the forecasted average return is around 7.9 percent, then both
                          trust funds would yield returns sufficient to replace expiring grants and to
                          create a buffer account. However, while the RMI trust fund should
                          continue to grow in perpetuity, the FSM trust fund would eventually
                          deplete the buffer account and fail to replace grant funding by fiscal year
                          2048.


                          I will now discuss provisions in the amended Compacts designed to
Amended Compacts          provide improved accountability over, and effectiveness of, U.S.
Have Strengthened         assistance. This is an area where we have offered several
                          recommendations in past years, as we have found accountability over past
Accountability Over       assistance to be lacking.14 In sum, most of our recommendations regarding
U.S. Assistance           future Compact assistance have been addressed with the introduction of
                          strengthened accountability measures in the signed amended Compacts
                          and related agreements. I must emphasize, however, that the extent to
                          which these provisions will ultimately provide increased accountability
                          over, and effectiveness of, future U.S. assistance will depend upon how
                          diligently the provisions are implemented and monitored by all
                          governments.

                          The following summary describes key accountability measures included in
                          the amended Compacts and related agreements:

                      •   The amended Compacts would require that grants be targeted to priority
                          areas such as health, education, the environment, and public
                          infrastructure. In both countries, 5 percent of the amount dedicated to
                          infrastructure, combined with a matching amount from the island
                          governments, would be placed in an infrastructure maintenance fund.




                          14
                           See U.S. General Accounting Office, Foreign Assistance: U.S. Funds to Two Micronesian
                          Nations Had Little Impact on Economic Development, GAO/NSIAD-00-216 (Washington,
                          D.C.: Sept. 22, 2000) for a review of the first 12 years of direct Compact assistance.



                          Page 10                                    GAO-03-1007T Compact of Free Association
•   Compact-related agreements with both countries (the so-called “fiscal
    procedures agreements”) would establish a joint economic management
    committee for the FSM and the RMI that would meet at least once
    annually. The duties of the committees would include (1) reviewing
    planning documents and evaluating island government progress to foster
    economic advancement and budgetary self-reliance; (2) consulting with
    program and service providers and other bilateral and multilateral
    partners to coordinate or monitor the use of development assistance; (3)
    reviewing audits; (4) reviewing performance outcomes in relation to the
    previous year’s grant funding level, terms, and conditions; and (5)
    reviewing and approving grant allocations (which would be binding) and
    performance objectives for the upcoming year. Further, the fiscal
    procedures agreements would give the United States control over the
    annual review process: The United States would appoint three government
    members to each committee, including the chairman, while the FSM or the
    RMI would appoint two government members.

•   Grant conditions normally applicable to U.S. state and local governments
    would apply to each grant. General terms and conditions for the grants
    would include conformance to plans, strategies, budgets, project
    specifications, architectural and engineering specifications, and
    performance standards. Other special conditions or restrictions could be
    attached to grants as necessary.

•   The United States could withhold payments if either country fails to
    comply with grant terms and conditions. In addition, funds could be
    withheld if the FSM or RMI governments do not cooperate in U.S.
    investigations regarding whether Compact funds have been used for
    purposes other than those set forth in the amended Compacts.

•   The fiscal procedures agreements would require numerous reporting
    requirements for the two countries. For example, each country must
    prepare strategic planning documents that are updated regularly, annual
    budgets that propose sector expenditures and performance measures,
    annual reports to the U.S. President regarding the use of assistance,
    quarterly and annual financial reports, and quarterly grant performance
    reports.

•   The amended Compacts’ trust fund management agreements would grant
    the U.S. government control over trust fund management: The United
    States would appoint three members, including the chairman, to a
    committee to administer the trust funds, while the FSM or the RMI would
    appoint two members. After the initial 20 years, the trust fund committee
    would remain the same, unless otherwise agreed by the original parties.


    Page 11                              GAO-03-1007T Compact of Free Association
                           The fiscal procedures agreements would require the joint economic
                           management committees to consult with program providers in order to
                           coordinate future U.S. assistance. However, we have seen no evidence
                           demonstrating that an overall assessment of the appropriateness,
                           effectiveness, and oversight of U.S. programs has been conducted, as we
                           recommended.15

                           The successful implementation of the many new accountability provisions
                           will require a sustained commitment by the three governments to fulfill
                           their new roles and responsibilities. Appropriate resources from the
                           United States, the FSM, and the RMI represent one form of this
                           commitment. While the amended Compacts do not address staffing issues,
                           officials from Interior’s Office of Insular Affairs have informed us that
                           their office intends to post six staff in a new Honolulu office. Further, an
                           Interior official noted that his office has brought one new staff on board in
                           Washington, D.C., and intends to post one person to work in the RMI (one
                           staff is already resident in the FSM). We have not conducted an
                           assessment of Interior’s staffing plan and rationale and cannot comment
                           on the adequacy of the plan or whether it represents sufficient resources
                           in the right location.



Amended Compacts
Address Other Key
Areas
U.S. Military Access to    The most significant defense-related change in the amended Compacts is
Kwajalein Atoll Could Be   the extension of U.S. military access to Kwajalein Atoll in the RMI.16 While
Extended Until 2086        the U.S. government had already secured access to Kwajalein until 2016
                           through the 1986 MUORA, the newly revised MUORA would grant the
                           United States access until 2066, with an option to extend for an additional
                           20 years to 2086. According to a Department of Defense (DOD) official,



                           15
                            This recommendation was included in U.S. General Accounting Office, Foreign
                           Assistance: Effectiveness and Accountability Problems Common in U.S. Programs to
                           Assist Two Micronesian Nations, GAO-02-70 (Washington, D.C.: Jan. 22, 2002).
                           16
                            A few expiring provisions would be extended indefinitely in the amended Compacts. The
                           “defense veto” has been extended. In addition, the ability of FSM and RMI citizens to
                           volunteer to serve in the U.S. military would be extended.



                           Page 12                                     GAO-03-1007T Compact of Free Association
                         recent DOD assessments have envisioned that access to Kwajalein would
                         be needed well beyond 2016. He stated that DOD has not undertaken any
                         further review of the topic, and none is currently planned. This official
                         also stated that, given the high priority accorded to missile defense
                         programs and to enhancing space operations and capabilities by the
                         current administration, and the inability to project the likely improvement
                         in key technologies beyond 2023, the need to extend the MUORA beyond
                         2016 is persuasive. He also emphasized that the U.S. government has
                         flexibility in that it can end its use of Kwajalein Atoll any time after 2023
                         by giving advance notice of 7 years and making a termination payment.

                         We have estimated that the total cost of this extension would be $3.4
                         billion (to cover years 2017 through 2086).17 The majority of this funding
                         ($2.3 billion) would be provided by the RMI government to Kwajalein Atoll
                         landowners, while the remainder ($1.1 billion) would be used for
                         development and impact on Kwajalein Atoll. According to a State
                         Department official, there are approximately 80 landowners. Four
                         landowners receive one-third of the annual payment, which is based on
                         acreage owned. This landowner funding (along with all other Kwajalein-
                         related funds) through 2023 would not be provided by DOD but would
                         instead continue as an Interior appropriation. Departmental responsibility
                         for authorization and appropriation for Kwajalein-related funding beyond
                         2023 has not been determined according to the Department of State. Of
                         note, the Kwajalein Atoll landowners have not yet agreed to sign an
                         amended land-use agreement with the RMI government to extend U.S.
                         access to Kwajalein beyond 2016 at the funding levels established in the
                         amended Compact.


Amended Compacts Would   While the original Compact’s immigration provisions are not expiring, the
Strengthen Immigration   Department of State targeted them as requiring changes. The amended
Provisions               Compacts would strengthen the immigration provisions of the Compact by
                         adding new restrictions and expressly applying the provisions of the
                         Immigration and Nationality Act of 1952, as amended (P.L. 82-414) to
                         Compact nonimmigrants.18 There are several new immigration provisions
                         in the amended Compacts that differ from those contained in the original


                         17
                          Our figure of $3.4 billion is adjusted for inflation.
                         18
                           As noted in the background section, FSM and RMI citizens who enter the United States
                         are legally classified as “nonimmigrants” – that is, individuals who are in the United States
                         temporarily as visitors, students, or workers.



                         Page 13                                          GAO-03-1007T Compact of Free Association
                  Compact. For example, Compact nonimmigrants would now be required
                  to carry a valid passport in order to be admitted into the United States.
                  Further, children coming to the United States for the purpose of adoption
                  would not be admissible under the amended Compacts. Instead, these
                  children would have to apply for admission to the United States under the
                  general immigration requirements for adopted children. In addition, the
                  Attorney General would have the authority to issue regulations that
                  specify the time and conditions of a Compact nonimmigrant’s admission
                  into the United States (under the original Compact, regulations could be
                  promulgated to establish limitations on Compact nonimmigrants in U.S.
                  territories or possessions).

                  In addition, the implementing legislation for the amended Compacts would
                  provide $15 million annually for U.S. locations that experience costs
                  associated with Compact nonimmigrants. This amount would not be
                  adjusted for inflation, would be in effect for fiscal years 2004 through 2023,
                  and would total $300 million. Allocation of these funds between locations
                  such as Hawaii, Guam, and the CNMI would be based on the number of
                  qualified nonimmigrants in each location.


                  Mr. Chairman and Members of the Committee, this completes my prepared
                  statement. I would be happy to respond to any questions you or other
                  Members of the Committee may have at this time.


                  For future contacts regarding this testimony, please call Susan S. Westin
Contacts and      or Emil Friberg, Jr., at (202) 512-4128. Individuals making key
Acknowledgments   contributions to this testimony included Leslie Holen, Kendall Schaefer,
                  Mary Moutsos, and Rona Mendelsohn.




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                  Page 14                                GAO-03-1007T Compact of Free Association
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