oversight

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

Published by the Government Accountability Office on 2003-06-18.

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

                            United States General Accounting Office

GAO                         Testimony
                            Before the Subcommittee on Asia and the
                            Pacific, Committee on International
                            Relations, House of Representatives

For Release on Delivery
Expected at 1:30 p.m. EDT
Wednesday,
June 18, 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-03-890T
                                                June 18, 2003


                                                COMPACT OF FREE ASSOCIATION

                                                An Assessment of the Amended
Highlights of GAO-03-890T, a testimony          Compacts and Related Agreements
before the House Committee on
International Relations, Subcommittee on
Asia and the Pacific




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-03-890T.

To view the full product, including the scope   Source: GAO estimate based on 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 Subcommittee:

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
April and May 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. Our testimony is based on our reports on the Compact
published over the past several years as well as our assessment of the
amended Compacts that was requested by Chairman Leach and Ranking
Minority Member Faleomavaega, Subcommittee on Asia and the Pacific,
House Committee on International Relations; Ranking Minority Member
Lantos, House Committee on International Relations; Ranking Minority
Member Rahall, House Committee on Resources; and Congressman
Bereuter.


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 renegotiated and
approved. 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-03-890T Compact of Free Association
          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 $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 (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.
          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. Amended Compact provisions addressing one additional key area –
          immigration – have been strengthened by adding new restrictions and



          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 forecasted inflation rate (see
          appendix).



          Page 2                                        GAO-03-890T Compact of Free Association
             expressly applying the provisions of the Immigration and Nationality Act
             of 1952 (INA), as amended (P.L. 82-414), to Compact migrants. 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 a Compact migrant’s admission to the United States.


             In 1986, the United States and the FSM and the RMI entered into the
Background   Compact of Free Association. This Compact represented a new phase of
             the unique and special relationship that has existed between the United
             States and these island areas since World War II. It also represented a
             continuation of U.S. rights and obligations first embodied in a U.N.
             trusteeship agreement that made the United States the Administering
             Authority of the Trust Territory of the Pacific Islands.4 The Compact
             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 the 15-
             year period covering 1987 through 2001, funding was provided at levels
             that decreased every 5 years. For 2002 and 2003, while negotiations to
             renew expiring Compact provisions were ongoing, funding levels
             increased to equal an average of the funding provided during the previous
             15 years. Thus, funds available to the two governments were “bumped-up”




             4
              From 1947 to 1986, the United States administered this region under a trusteeship
             agreement that obligated it to foster the development of political institutions and move the
             Trust Territory toward self-government and promote economic, social, and educational
             advancement. In addition, the agreement allowed the United States to establish military
             bases and station forces in the Trust Territory and close off areas for security reasons as
             part of its rights. In addition to the islands of the FSM and the RMI, the Trust Territory
             included Palau and the Northern Mariana Islands.



             Page 3                                         GAO-03-890T Compact of Free Association
during the last 2 years of assistance.5 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.6 We have
found that many Compact-funded projects in the FSM and the RMI
experienced problems because of poor planning and management,
inadequate construction and maintenance, or misuse of funds. Further the
U.S., FSM, and RMI governments provided little accountability over
Compact expenditures and have not ensured that funds were spent
effectively or efficiently.

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. In addition,
U.S. programs have been extended to the FSM and the RMI to provide a
wide range of critical services, such as health care, education,
telecommunications, and job training, but in most cases local conditions
have impaired the programs’ effectiveness.7

The third goal of the Compact – securing national security rights for all
parties – has been achieved. At the time that the Compact was negotiated,
the United States was concerned about the use of the islands of the FSM


5
 The FSM received additional U.S. grant assistance of about $17.5 million in fiscal year 2002
and about $18 million in fiscal year 2003. The RMI received additional U.S. grant assistance
of about $3.1 million in fiscal year 2002 and $3.3 million in fiscal year 2003 (excluding
increased payments related to Kwajalein land use).
6
 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.
7
 For more information on U.S. programs and services provided to the FSM and the RMI, see
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).



Page 4                                           GAO-03-890T Compact of Free Association
and the RMI as “springboards for aggression” against the United States, as
they had been used in World War II, and the Cold War incarnation of this
threat – the Soviet Union. The Compact and its related agreements
established several key defense rights for all three countries. 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 addition, the Compact grants the
United States a “defense veto” over actions by the FSM or the RMI
governments that the United States determines are incompatible with its
authority and responsibility for security and defense matters in these
countries. Finally, through a Compact-related agreement, the United States
secured continued access to military facilities on Kwajalein Atoll in the
RMI through 2016.8 In a previous report, we identified Kwajalein Atoll as
the key U.S. defense interest in the two countries.9 Of these rights, only the
defense veto is due to expire in 2003 if not renegotiated.

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.10 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,



8
 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.
9
 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).
10
  Typically, nonimmigrants include those individuals who are in the United States
temporarily as visitors, students, or workers.



Page 5                                          GAO-03-890T Compact of Free Association
                        and the Commonwealth of the Northern Mariana Islands (CNMI).11 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
                        that year, Guam received $7.58 million in impact funding, while the other
                        two areas received no funding.12

                        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 State Department, 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.
                        Annual grant assistance to the FSM would fall from a real value of $76
                        million in fiscal year 2004 to a real value of $55 million in fiscal year 2023.
                        Annual grant assistance to the RMI would fall from a real value of $35
                        million to a real value of $24 million over the same period. This decrease in



                        11
                         Payments were also authorized for American Samoa, but impact compensation has not
                        been sought.
                        12
                         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 6                                     GAO-03-890T Compact of Free Association
                               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 (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.13 The cost of this $6.6 billion new
                               authorization, expressed in fiscal year 2004 U.S. dollars, would be $3.8
                               billion (see the appendix for a breakout of estimated new U.S.
                               authorizations to the FSM and the RMI in fiscal year 2004 U.S. dollars).

                               This new authorized funding would be provided to each country in the
                               form of

                           •   annual grant funds targeted to priority areas (such as health, education,
                               and infrastructure), audit assistance, and disaster assistance;

                           •   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;

                           •   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



                               13
                                U.S. access to Kwajalein Atoll in the RMI has already been secured through 2016 through
                               a Compact-related agreement. The U.S. proposal to the RMI extends this funding to 2066,
                               with an additional 20-year optional lease at that point.



                               Page 7                                       GAO-03-890T Compact of Free Association
•   an extension of federal services that have been provided under the original
    Compact but are due to expire in fiscal year 2003.

    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                           Not applicable                191          191
        Atoll landb
                                            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
        Grants to Kwajalein                                                   Not applicable              $948a         $948
        Payments for U.S. military use of Kwajalein                           Not applicable              2,133         2,133
        Atoll land
        Possible 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 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 U.S. proposal 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.


    In addition to the new authorized funding, the U.S. government has further
    expenditures related to the FSM and the RMI. These include (1) the cost of




    Page 8                                                          GAO-03-890T Compact of Free Association
                            U.S. program assistance, estimated at around $1 billion14 to the two
                            countries for the next 20 years; (2) payments previously authorized of
                            about $187 million for U.S. military access to Kwajalein Atoll in the RMI
                            through 2016; and (3) oversight and administration by the Department of
                            the Interior, estimated at a cost of around $42 million over the 20-year
                            period. Combining these three sources of U.S. funding ($1.2 billion) with
                            new authorizations ($6.6 billion), the total U.S. cost for all Compact-
                            related payments related to the FSM and the RMI would amount to about
                            $7.8 billion, including estimated inflation.


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 (see figs. 1 and 2). Annual grant assistance to the
                            FSM would fall from a real value of $76 million in fiscal year 2004 to a real
                            value of $55 million in fiscal year 2023.15 Annual grant assistance to the
                            RMI would fall from a real value of $35 million to a real value of $24
                            million over the same period.




                            14
                              In addition to Compact authorized federal services, numerous U.S. federal agencies
                            extend specific programs offered in the United States, such as Pell grants and Head Start,
                            to the FSM and the RMI in areas such as education and health. The level of this program
                            assistance has varied over time as certain programs have been eliminated and other
                            programs have been introduced. Currently, the U.S. Congress is reviewing a number of
                            education programs to the FSM and the RMI, and the level of continued program assistance
                            is uncertain.
                            15
                              Although new authorization figures are provided in current dollars so that total costs to
                            the U.S. government can be identified, this display of economic assistance is provided in
                            fiscal year 2004 constant dollars for comparative purposes to show the impact of changes
                            in government funding on the economy and population.



                            Page 9                                         GAO-03-890T Compact of Free Association
Figure 1: Estimated New U.S. Authorizations for Economic Assistance to the FSM
by Type of Funding, Fiscal Years 2004-2023 (fiscal year 2004 U.S. dollars, in
millions)




Note: This analysis excludes program assistance.




Page 10                                            GAO-03-890T Compact of Free Association
Figure 2: Estimated New U.S. Authorizations for Economic Assistance to the RMI by
Type of Funding, Fiscal Years 2004-2023 (fiscal year 2004 U.S. dollars, in millions)




Note: This analysis excludes program assistance and payments for U.S. military use of Kwajalein
Atoll land.


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. 3).16 Using U.S. Census
population growth rate projections for the two countries, the real value of
grants per capita to the FSM would begin 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.


16
  The migration impact of the amended Compacts is difficult to determine, but if migration
slows as a result of the amended Compacts or other economic and demographic
influences, then our per capita estimates would be overstated.



Page 11                                            GAO-03-890T Compact of Free Association
Figure 3: 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.


                                         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 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).17 For the RMI, however,


                                         17
                                          The level of grant assistance in 2001 was converted into fiscal year 2004 dollars for
                                         comparison purposes.


                                         Page 12                                            GAO-03-890T Compact of Free Association
                          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.

                          Challenges to achieving economic self-sustainability in the long run remain
                          significant for both countries. First, education and health indicators show
                          the need to improve basic services in these areas, as the nations face
                          challenges with regard to literacy rates, high birth rates, and access to safe
                          water. Second, private sector employment is largely made up of services
                          and distribution activities that support the public sector such that
                          employment prospects are uncertain, given declining U.S. assistance.
                          Third, private sector growth, which would rely on expanded exports and a
                          growing tourism industry, is limited by constraining factors common to
                          small island economies, such as limited domestic markets, a narrow
                          resource base, and a lack of infrastructure.18 Fourth, socioeconomic
                          activities, infrastructure, and population may be vulnerable to the impacts
                          of climate change because the two countries could experience coastal
                          inundation, more frequent droughts and floods, and increases in tropical
                          cyclone intensities that could damage transport infrastructure.19


Trust Funds May Be        Given the challenges for achieving economic self-sustainability, the
Insufficient to Replace   amended Compacts were designed to build trust funds that, beginning in
Expiring Grants           fiscal year 2024, yield annual earnings to replace grant assistance that 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 State Department assumed that the trust fund would earn




                          18
                           Potential sources of private sector growth include export earnings from three sectors:
                          commercial agriculture, fisheries, and tourism.
                          19
                           The Intergovernmental Panel on Climate Change predicts that rising sea levels over the
                          next 50 years will result in land loss for areas in the RMI and the FSM that will disrupt
                          virtually all economic and social sectors. The sea level rises could trigger significant
                          migration because resettlement within national boundaries, or abandonment of some atolls
                          altogether, may be the only viable option, with substantial costs for resettlement. For
                          example, in the RMI the average elevation on Majuro is 2.2 meters. In Kwajalein Atoll,
                          Ebeye’s average elevation is 2.2 meters, and the maximum elevation is 2.5 meters.



                          Page 13                                       GAO-03-890T Compact of Free Association
    a 6 percent rate of return.20 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
    (see table 2). 21

•   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.
    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.




    20
      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.
    21
     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 14                                       GAO-03-890T Compact of Free Association
                      Table 2: Estimated Performance for the FSM and the RMI Trust Funds under
                      Alternative Rates of Return (U.S. dollars in millions)

                                                                                              Fund earns return from
                                                                     Fund earns State Dept. 60% stocks and 40% long-
                                                                        assumed return       term government bonds
                                                                             (6%)                     (7.9%)
                                                                          FSM          RMI       FSM               RMI
                          Projected value of trust fund at
                          the end of FY 2023                               $1,013                $575         $1,255    $717
                          Projected value of FY 2023
                          trust fund return                                      57                     33       92       53
                          Surplus of FY 2023 trust fund
                          return over FY 2024 required
                          grant funding                                         -27                     5         8       25
                          Year when trust fund return is
                          unable to replace grant
                                                                                                                            a
                          funding                                        FY 2024            FY 2040          FY 2048
                      Source: GAO estimate based on amended Compacts adjusted for expected inflation.

                      Note: The historic average real rate of return from the U.S. stock market has been 7 percent.
                      Assuming a trust fund based on 60 percent stocks, which at a forecasted inflation rate of 2.2 percent
                      would earn a 9.2 percent return, and 40 percent long-term U.S. government bonds, which would earn
                      the forecasted nominal rate of return of 5.8 percent, a nominal rate of return of 7.9 percent could be
                      achieved for the trust fund. The estimated value of the trust funds includes monies accrued in the
                      buffer accounts and reflect the initial contribution made by the FSM and the RMI to their respective
                      trust funds.
                      a
                       The RMI trust fund under this scenario continues to grow in perpetuity. However, this analysis
                      assumes a steady real rate of return and does not account for volatility in returns.




                      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. As I discuss key proposed accountability
U.S. Assistance       measures, I will note where appropriate whether our previous
                      recommendations have been addressed. In sum, most of our
                      recommendations regarding 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.




                      Page 15                                                         GAO-03-890T Compact of Free Association
    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.22 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. We
    recommended in a September 2000 report that the U.S. government should
    negotiate provisions that would provide future Compact funding through
    grants targeted to priority areas and that funding should be set aside for
    infrastructure maintenance.23

•   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. In our previously cited
    2000 report, we recommended that the U.S. government negotiate an
    expanded agenda for future annual consultations. 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


    22
      Public infrastructure projects would be focused in the areas of education, health, and
    safety. Progress reports for each project would be required, and funding would be provided
    on a reimbursable basis. For the RMI, not less than 30 percent or more than 50 percent of
    the annual grant assistance would be available for public infrastructure projects.
    23
     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 16                                       GAO-03-890T Compact of Free Association
    specifications, architectural and engineering specifications, and
    performance standards. Other special conditions or restrictions could be
    attached to grants as necessary. Specific post-award requirements address
    financial administration by establishing, for example, (1) improved
    financial reporting, accounting records, internal controls, and budget
    controls; (2) appropriate use of real property and equipment; and (3)
    competitive and well-documented procurement. In our 2000 report, we
    recommended that future assistance be provided with grants that had
    specific requirements.

•   The United States could withhold payments if either country fails to
    comply with grant terms and conditions. The withholding amount would
    be proportional to the breach of the term or condition. 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. In our 2000
    report, we recommended that withholding of funds be allowed.

•   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. In our 2000 report, we recommended that expanded reporting
    requirements be negotiated.

•   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.
    We have reported that well-designed trust funds can provide a sustainable
    source of assistance and reduce long-term aid dependence.24

    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



    24
     See U.S. General Accounting Office, Foreign Assistance: Lessons Learned From Donors’
    Experiences in the Pacific Region, GAO-01-808 (Washington, D.C.: Aug. 17, 2001).



    Page 17                                     GAO-03-890T Compact of Free Association
                           demonstrating that an overall assessment of the appropriateness,
                           effectiveness, and oversight of U.S. programs, as we recommended, has
                           been conducted.25

                           The successful implementation of the many new accountability provisions
                           will require a sustained commitment by the three governments to fulfill
                           their new roles and responsibility. 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. According to an Interior
                           official, these staff will consist of a health grant specialist, an education
                           grant specialist, an accountant, an economist, an auditor, and an office
                           assistant. Interior can also contract with the Army Corps of Engineers for
                           engineering assistance when necessary. Honolulu-based staff may spend
                           about half of their time in the FSM and the RMI. 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. 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,
                           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


                           25
                            This recommendation was included in GAO-02-70.



                           Page 18                                   GAO-03-890T Compact of Free Association
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). 26 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 State Department. 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.

A few expiring provisions would be extended indefinitely in the amended
Compacts. The “defense veto” – the ability of the United States to veto
actions by the FSM or the RMI governments that the United States
determines are incompatible with U.S. authority and responsibility for
security and defense matters in the two countries – has been extended. In
addition, the ability of FSM and RMI citizens to volunteer to serve in the
U.S. military would be extended. According to a DOD official, this is a
beneficial provision since it, for example, gives the United States access to
persons with specialized knowledge and understanding of Pacific cultures
while also providing career opportunities for FSM and RMI citizens.27




26
 Our figure of $3.4 billion is adjusted for inflation.
27
 In the amended Compacts, DOD’s civic action teams have been eliminated. Both
countries would now have access to humanitarian assistance programs that would
emphasize health, education, and infrastructure projects that DOD would carry out.



Page 19                                           GAO-03-890T Compact of Free Association
                   While the original Compact’s immigration provisions are not expiring, the
Amended Compacts   State Department targeted them as requiring changes. The amended
Would Strengthen   Compacts would strengthen the immigration provisions of the Compact by
                   adding new restrictions and expressly applying the provisions of the INA
Immigration        to Compact nonimmigrants.28 There are several new immigration
Provisions         provisions in the amended Compacts that differ from those contained in
                   the original Compact (see table 3).




                   28
                     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 20                                         GAO-03-890T Compact of Free Association
Table 3: Key Immigration Issues: A Comparison of the Original and Amended Compacts

Issue                                  Original Compact                                                        Amended Compacts
Passports                              Compact nonimmigrants do not need a passport                            Compact nonimmigrants would need a valid
                                       to be admitted to the United States.                                    passport in order to be admitted into the
                                                                                                               United States.
Entry into the United States for       Naturalized FSM and RMI citizens are eligible to                        Naturalized citizens would only be
naturalized FSM and RMI citizens       apply for admission to the United States 5 years                        admissible if they are immediate relatives of
                                       after they are naturalized, so long as they were a                      a citizen of the FSM or the RMI or if they
                                       resident of the FSM or the RMI during that time.                        were naturalized before April 30, 2003.a
Entry into the United States for the   A child who came to the United States for the                           A child who is coming to the United States
purpose of adoption                    purpose of adoption is not expressly prohibited                         for the purpose of adoption would not be
                                       from seeking admission into the United States                           admissible under the amended Compacts.
                                       under the Compact. However, the United States                           Instead, these children would have to apply
                                       government has maintained that such children                            for admission to the United States under the
                                       are not admissible under the Compact, but,                              general immigration requirements for
                                       rather, that they had to seek admission under                           adopted children. This provision would apply
                                       general immigration requirements for adopted                            to any child who applied for admission to the
                                       children.                                                               United States on or after March 1, 2003.
Conditions on admission to the         The United States has the authority to establish                        The Attorney General would have the
United States and its territories or   limitations, either in statutes or regulations, on a                    authority to issue regulations that specify the
possessions for Compact                Compact nonimmigrant’s right to establish                               time and conditions of a Compact
nonimmigrants                          habitual residence in a territory or possession of                      nonimmigrant’s admission into the United
                                       the United States.b                                                     States.c
                                            Source: GAO legal analysis of the original and amended Compacts.

                                            Note: In addition, any of the authorities in the amended Compacts that the United States may
                                            exercise could also be exercised by the governments of the U.S. territories or possessions where the
                                            INA does not apply (i.e., the CNMI and American Samoa), so long as the exercise of such authority is
                                            lawful under the laws of that territory or possession.
                                            a
                                             Such naturalized citizens would also have to meet additional requirements, including residency
                                            requirements, unless they are an immediate relative of a citizen of the FSM or the RMI who is serving
                                            in the U.S. military.
                                            b
                                             The United States promulgated regulations in September 2000 regarding the rights and limitations of
                                            habitual residents in the territories and possessions of the United States. These regulations applied to
                                            Compact nonimmigrants in Guam, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands.
                                            They did not apply to Compact nonimmigrants residing in the 50 states, the District of Columbia,
                                            American Samoa, or the CNMI.
                                            c
                                             The INA would now expressly apply to any Compact migrant who seeks admission or is admitted to
                                            the United States. As such, in addition to the Attorney General’s authority to promulgate regulations,
                                            any grounds of inadmissibility or deportability under the INA would now apply to Compact migrants
                                            except where the amended Compacts specify otherwise. Some modifications, however, were made
                                            to the INA provision, section 237(a)(5), allowing for deportation on the basis of an alien becoming a
                                            public charge.




                                            Page 21                                                            GAO-03-890T Compact of Free Association
                  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
                  nonimmigrants in each location.


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




                  Page 22                                 GAO-03-890T Compact of Free Association
Appendix: Estimated New U.S.
Authorizations to the FSM and the RMI in
Fiscal Year 2004 U.S. Dollars
              The estimated value of new congressional authorizations to the FSM and
              the RMI would be approximately $3.8 billion from fiscal years 2004 to 2086
              measured in fiscal year 2004 dollars (see table 4).

              Table 4: Estimated New U.S. Authorizations for the FSM and the RMI, Fiscal Years
              2004-2086 (Fiscal Year 2004 U.S. Dollars in Millions)

                                                                                FSM         RMI       Total
               Fiscal years 2004-2023
               Grants for priority areas                                      $1,323       $572     $1,895
               Trust fund contributions                                          411        218        628
               Payments for U.S. military use of Kwajalein             Not applicable       144        144
               Atoll land
               Compact-authorized federal services                               135         30        165
               New U.S. authorization for 2004-2023                           $1,868       $963     $2,832
               Fiscal years 2024-2086
               Grants to Kwajalein                                     Not applicable      $306       $306
               Payments for U.S. military use of Kwajalein             Not applicable       688        688
               Atoll land
               New U.S. authorization for 2024-2086                    Not applicable      $993       $993
               Fiscal years 2004-2086, total new U.S.
               authorizations for the FSM and the RMI                         $1,868     $1,956     $3,825
              Source: GAO estimate based on the amended Compacts.

              Note: Numbers may not sum due to rounding.




(320096)
              Page 23                                               GAO-03-890T Compact of Free Association
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