Background The FSM and RMI are independent countries about 3,000 miles southwest of Hawaii. The FSM is a federation of four semiautonomous states—Chuuk, Kosrae, Pohnpei, and Yap—whose population and income vary widely. Chuuk, the largest state by population, has the lowest per-capita gross domestic product (GDP). Overall, the FSM had a 2016 population of approximately 102,000 and a GDP per capita of about $3,200. The RMI’s 2016 population was approximately 54,000 with a GDP per capita of about $3,600. The RMI’s most recent census, in 2011, found that approximately three-quarters of the population lived in Majuro, the nation’s capital, and on the island of Ebeye in the Kwajalein Atoll. Table 1 shows the FSM’s, FSM states’, and RMI’s estimated populations and annual GDP per capita in fiscal year 2016. Compact of Free Association (1986–2003) U.S. relations with the FSM and the RMI began during World War II, when the United States ended Japanese occupation of the region. Starting in 1947, the United States administered the region under a United Nations trusteeship. In 1986, after a period of negotiations, the United States entered into a compact of free association with the FSM and RMI that provided for economic assistance to the two countries, secured U.S. defense rights, and allowed FSM and RMI citizens to migrate to the United States. Amended Compacts of Free Association (2004– Present) In 2003, after a period of negotiations, the United States approved separate amended compacts with the FSM and the RMI that went into effect on June 25, 2004, and May 1, 2004, respectively. Compact Grants and Trust Fund Contributions The amended compacts’ implementing legislation authorized and appropriated direct financial assistance to the FSM and the RMI in fiscal years 2004 through 2023, with the base amounts decreasing in most years. The legislation also provided for partial inflation adjustment of the base amount of compact sector grants and trust fund contributions each year. As the base amount of compact sector grants decreases, the trust fund contributions generally increase by an equivalent amount. Because the annual inflation adjustment is less than full inflation, the value of compact sector grants declines in real terms. Figure 1 shows the amount of compact sector grants and trust fund contributions each fiscal year from 2004 through 2023. The amended compacts and associated fiscal procedures agreements require that compact sector grants support the countries in six core sectors—education, health, infrastructure, environment, private sector development, and public sector capacity building—with priority given to the education and health sectors. These grants are described in section 211(a) of each compact and are referred to as compact sector grants or 211(a) grants. Section 211(b) of the RMI compact further states that the RMI must target a specified amount of grants to Ebeye and other Marshallese communities within Kwajalein Atoll. The RMI military use and operating rights agreement (MUORA) states that the Kwajalein- related funds provided to the RMI in the compacts shall be provided through fiscal year 2023 and thereafter for as long as this agreement remains in effect. Compact Trust Fund Management and Implementation The amended compacts and their subsidiary trust fund agreements provided that each trust fund is to be managed by a compact trust fund committee. Each compact trust fund committee includes representatives from both the United States and the respective country, but the United States is required by the terms of the trust fund agreements to hold the majority of votes on each committee. The Director of Interior’s Office of Insular Affairs serves as the chair of each committee. Trust fund committee responsibilities include overseeing fund operation, supervision, and management; investing and distributing the fund’s resources; and concluding agreements with any other contributors and other organizations. As part of this oversight, the committees are to establish an investment and distribution policy. The committees are also to determine fiscal procedures to be used in implementing the trust fund agreements on the basis of the fiscal procedures used for compact grant administration, unless otherwise agreed by the parties to the agreement. The U.S.–FSM and U.S.–RMI trust fund agreements allow for the agreements to be amended in writing at any time, with mutual consent of the governments. However, the U.S. legislation implementing the amended compacts requires that any amendment, change, or termination of all, or any part, of the compact trust fund agreements shall not enter into force until incorporated into an act of Congress. Compact Trust Fund Structure The compact trust fund agreements state that no funds, other than specified trust fund administrative expenses, may be distributed from the funds before October 1, 2023. From fiscal year 2024 onward, the maximum allowed disbursement from each compact trust fund is the amount of the fiscal year 2023 annual grant assistance, as defined by the trust fund agreement, with full inflation adjustment. In addition, the trust fund committees may approve additional amounts for special needs. The RMI compact trust fund agreement excludes Kwajalein-related assistance, defined in section 211(b) of the RMI compact, from the calculation of the allowed disbursement. Although the compact trust fund agreements state the maximum allowable disbursement level, they do not establish or guarantee a minimum disbursement level. Each country’s compact trust fund consists of three interrelated accounts: the “A” account, the “B” account, and the “C” account. The A account is the trust fund’s corpus and contains the initial, and any additional, U.S. and FSM or RMI contributions; contributions from other countries; and investment earnings. No funds, other than specified trust fund administrative expenses, may be disbursed from the A account. The B account is the trust fund’s disbursement account and becomes active in fiscal year 2023. All income earned in 2023 will be deposited in the B account for possible disbursement in 2024. Each subsequent year’s investment income will similarly be deposited in the B account for possible disbursement the following year. If there is no investment income, no funds will be deposited in the B account for possible disbursement the following year. The C account is the trust fund’s buffer account. Through 2022, any annual income exceeding 6 percent of the fund balance is deposited in the C account. The size of the C account is capped at three times the amount of the estimated annual grant assistance in 2023, including estimated inflation. From 2023 onward, if annual income from the A account is less than the previous year’s disbursement, adjusted for inflation, the C account may be tapped to address the shortfall. After 2023, any funds in the B account in excess of the amount approved for disbursement the following fiscal year are to be used to replenish the C account as needed, up to the maximum size of the account. If there are no funds in the C account and no prior-year investment income in the B account, no funds will be available for disbursement to the countries the following year. Figure 2 shows the compact trust fund account structure and associated rules. According to the U.S. trust fund agreements with the FSM and the RMI, contributions from other donors are permitted. In May 2005, Taiwan and the RMI reached an agreement that Taiwan would contribute a total of $40 million to the RMI’s compact trust fund A account between 2004 and 2023. A “D” account may also be established to hold any contributions by the FSM and the RMI governments of revenue or income from unanticipated sources. According to the trust fund agreements, the D account must be a separate account, not mixed with the rest of the trust fund. Only the RMI has a D account, governed in part by the agreement between Taiwan and the RMI. Programs and Services Provided in Compact-Related Agreements The amended compacts’ implementing legislation incorporates, by reference, related agreements extending programs and services to the FSM and RMI. The programs and services agreement with each country identifies the following programs and services as being available to each country: U.S. postal services, weather services, civil aviation, disaster preparedness and response, and telecommunications. Each programs and services agreement extends for 20 years from the compact’s entry into force. The agreement with the FSM ends on June 24, 2024, and the agreement with the RMI ends on April 30, 2024. Programs Authorized by U.S. Legislation The amended compacts’ implementing legislation (Pub. L. No. 108-188) and other U.S. legislation authorize other U.S. grants, programs, and services for the FSM and RMI. Pub. L. No. 108-188 authorized an annual supplemental education grant (SEG) for the FSM and RMI in fiscal years 2005 through 2023, to be awarded in place of grants formerly awarded to the countries under several U.S. education, health, and labor programs. The FSM and RMI are not eligible for the programs replaced by the SEG during these years. Unlike the compact sector grants, the amended compacts’ implementing legislation authorized the SEG but did not appropriate funds for it. Funding for the SEG is appropriated annually to the U.S. Department of Education (Education) and is transferred to Interior for disbursement. Other provisions of the amended compacts’ implementing legislation, as well as other U.S. law, make the FSM and RMI eligible for a number of additional programs. The FSM and RMI Rely on U.S. Grants and Programs That End in 2023 As of fiscal year 2016, compact sector grants and the SEG, each of which end in 2023, supported a substantial portion of government expenditures in the FSM and RMI. Compact sector grants and the SEG supported about one-third of all FSM government expenditures. The four FSM states relied on these grants to a greater extent than the FSM national government does. In the RMI, compact sector grants and the SEG supported about one-quarter of all government expenditures. The end of the compacts’ programs and services agreements in 2024 would also require the FSM and RMI to bear additional costs to provide services currently provided by the United States under the agreements. U.S. Compact Grants and Other Grants Provide Substantial Support to the FSM and RMI Budgets U.S. Grants Scheduled to End in 2023 Supported About One- Third of Total FSM Government Expenditures in Fiscal Year 2016 Compact sector grants, the SEG, and other U.S. grants supported almost half of FSM national and state government expenditures in fiscal year 2016. Compact sector and supplemental education grants that end in 2023 supported approximately one-third of total FSM national and state government expenditures in fiscal year 2016, while other U.S. grants supported an additional 15 percent of total FSM government expenditures (see fig. 3). While the supplemental education grant ends in 2023, the FSM would be eligible for some of the programs that the supplemental education grant replaced after 2023. A small number of other U.S. grants also end in 2023. See GAO-19-648T, app. I, for a discussion of grants and programs that do and do not end in 2023. FSM States Relied on U.S. Grants Scheduled to End in 2023 to a Greater Extent Than the National Government Did in Fiscal Year 2016 In fiscal year 2016, compact sector and supplemental education grants that end in 2023 supported a larger proportion of FSM state governments’ expenditures than of the FSM national government’s expenditures. Compact sector grants and the SEG supported 8 percent of national government expenditures but supported 50 percent or more of each state’s government expenditures. Among the FSM states, Chuuk, which has both the largest population and the lowest per-capita income in the FSM, had the highest percentage of expenditures supported by U.S. grants. (See table 2 for a summary of FSM national and state government expenditures supported by compact sector grants and the SEG and by other U.S. grants.) U.S. Grants Scheduled to End in 2023 Supported About One Quarter of RMI Government Expenditures in Fiscal Year 2016 Compact sector and supplemental education grants that end in 2023 supported approximately 25 percent of the RMI’s $123.5 million in government expenditures in fiscal year 2016, while other U.S. grants supported an additional 8 percent. Kwajalein-related compact grants that do not end in 2023 supported an additional 3 percent (see fig. 4). While the supplemental education grant ends in 2023, the RMI would be eligible for some of the programs that the supplemental education grant replaced after 2023. A small number of other U.S. grants also end in 2023. See GAO-19-648T, app. I, for a discussion of grants and programs that do and do not end in 2023. FSM and RMI Eligibility for Some U.S. Grants, Programs, and Services Will Change after 2023 FSM and RMI budgets would be further affected if the countries assumed responsibility for providing programs and services currently provided by the United States. The following describes the status after 2023 of U.S. grants, programs, and services in the FSM and RMI under current law: Compact sector grants are scheduled to end in 2023, but the RMI MUORA extends the time frame of Kwajalein-related compact grants for as long as the MUORA is in effect. The SEG and additional grants identified in the amended compacts’ implementing legislation are scheduled to end in 2023. Also, after fiscal year 2023, the FSM and RMI will no longer be eligible for some programs that the SEG replaced, including Head Start (early childhood education, health, and nutrition services for low-income children and their families). The compact-related programs and services agreements with each country will end in 2024. However, some U.S. agencies, such as the National Weather Service, Federal Aviation Administration, and U.S. Agency for International Development, may continue to provide programs and services similar to those provided in the agreement under other authorities. The FSM and RMI will generally remain eligible for other programs identified in the amended compacts’ implementing legislation. These programs include U.S. Department of Agriculture (USDA) Rural Utilities Service grant and loan programs and U.S. Department of Education Pell grants for higher education and grants under Part B of the Individuals with Disabilities Education Act for children with disabilities. The FSM and RMI will remain eligible for additional programs we identified that have been provided under other current U.S. laws. Examples of these programs include USDA housing assistance programs and multiple public health, medical, and disease control and prevention grants provided by the U.S. Department of Health and Human Services. See appendix I for more information about the status after 2023 of U.S. grants, programs, and services in the FSM and RMI under current law. Compact Trust Funds Face Risks to Future Disbursements Our May 2018 projections for the compact trust funds showed that after fiscal year 2023, the funds are unlikely to provide maximum annual disbursements and may provide no disbursements at all in some years. The risk of disbursements below the maximum and the risk of zero disbursements increase over time for both funds. Potential strategies we analyzed in our May 2018 report would reduce or eliminate the risk of the compact trust funds’ experiencing years of zero disbursement. However, all of the potential strategies would require the countries to exchange a near-term reduction in resources for more-predictable and more- sustainable disbursements in the longer term. Projections Show Risks to Compact Trust Fund Disbursements Our May 2018 projections for the FSM and RMI compact trust funds after 2023 indicated that, given their balance at the end of fiscal year 2017 and current compact trust fund rules—the baseline scenario—the funds will be unable to provide maximum disbursements (equal to the inflation- adjusted amount of annual grant assistance in 2023) in some years and unable to provide any disbursement at all in some years, with the likelihood of zero disbursement in a given year increasing over time. The compact trust funds’ C account—designed as a buffer to protect disbursements from the B account in years when the funds do not earn enough to fund the disbursement—could be exhausted by a series of years with low or negative annual returns. Since current rules do not allow disbursements from the compact trust fund corpus (the A account), exhaustion of the C account would result in zero disbursement in years when fund returns are zero or negative. Thus, there may be no funds available to disburse even if the funds’ A accounts have a balance. As a result of low or zero disbursements, the countries could face economic and fiscal shocks and significant challenges in planning programs and budgets. Since we published our May 2018 report, an additional year of compact trust fund performance data and updated estimates of future inflation have become available; however, the updated information does not alter the conclusions we presented in May 2018. The updated data and inflation estimates change our model’s assumptions about the current compact trust fund balance, size of future U.S. contributions to the FSM and RMI compact trust funds, annual grant assistance in fiscal year 2023, and C account balance—each of which are relevant variables for our analysis. However; the updated variables would result in only slight changes to our 2018 report’s projections of future compact trust fund performance presented in this testimony and do not alter our broader conclusions about future risks to the compact trust funds. FSM compact trust fund projections. In May 2018, our model projected that, given the baseline scenario and a 6 percent net return, the FSM compact trust fund will experience declining disbursements relative to the maximum allowable disbursements and an increasing chance of zero disbursements. (See app. I of GAO-18-415 for a full description of our methodology, and see app. V of GAO-18-415 for the baseline results with alternative net returns.) Projected disbursements. We projected that the FSM compact trust fund will, on average, be able to provide disbursements equal to 82 percent of the maximum allowable disbursement—the inflation- adjusted amount of 2023 annual grant assistance—in its first decade of disbursements. The likely average disbursement falls to 49 percent of the maximum in the next decade and falls further in subsequent decades. In addition, the amount available for disbursement may fluctuate substantially from year to year. Depending on the compact trust fund’s performance in the previous year, disbursements may be higher or lower than the average amount if the balance in the C account is not sufficient to provide additional disbursements. Likelihood of providing zero disbursement. We projected a 41 percent likelihood that the FSM compact trust fund will be unable to disburse any funds in 1 or more years during the first decade of trust fund disbursements. This likelihood increases over time, rising to 92 percent in fiscal years 2054 through 2063. Figure 5 shows our May 2018 projections of the FSM compact trust fund’s average disbursements as a percentage of maximum disbursement and the likelihood of 1 or more years of zero disbursement, given the baseline scenario and a 6 percent net return. RMI compact trust fund projections. In May 2018, our model projected that, given the baseline scenario and a 6 percent net return, the RMI compact trust fund will experience declining disbursements relative to the maximum allowable disbursements and an increasing chance of zero disbursements. Projected disbursements. We projected that in its first decade of disbursements, the RMI compact trust fund will, on average, be able to provide disbursements nearly equal to the inflation-adjusted amount of 2023 annual grant assistance as defined by the trust fund agreement—the maximum allowable. However, in each subsequent decade, the projected disbursements as a percentage of the maximum disbursements decline by about 10 percentage points. In addition, from year to year, the amount available to disburse may fluctuate substantially. Depending on the compact trust fund’s performance in the previous year, disbursements may be higher or lower than the average amount if the balance in the C account is not sufficient to provide additional disbursements. Likelihood of providing zero disbursement. We projected a 15 percent likelihood that the RMI compact trust fund will be unable to disburse any funds in 1 or more years during the first decade of trust fund disbursements. This likelihood increases over time, rising to 56 percent in fiscal years 2054 through 2063. Figure 6 shows our May 2018 projections of the RMI compact trust fund’s average disbursements as a percentage of maximum disbursement and its likelihood of 1 or more years of zero disbursement, given the baseline scenario and a 6 percent net return. For our May 2018 report, we conducted a series of simulations to determine the likely effects of potential strategies for improving the outlook of the FSM and RMI compact trust funds. For example, we developed and analyzed potential strategies in which: annual disbursements are reduced below the maximum allowable additional annual contributions are made to the trust fund prior to the end of fiscal year 2023, and the trust fund agreement disbursement policies are modified to limit the annual disbursement to a fixed percentage of the fund’s moving average balance over the previous 3 years, up to the maximum disbursement amount defined by the current trust fund agreement. All of the potential strategies we analyzed would reduce or eliminate the risk of the compact trust funds experiencing years of zero disbursement. However, some of the potential strategies may require changing the trust fund agreements and all of the potential strategies would require the countries to exchange a near-term reduction in resources for more- predictable and more-sustainable disbursements in the longer term. (See app. VII of our May 2018 report for detailed results of our analysis.) Compact Trust Fund Committees Have Not Addressed Issues Related to Distribution Policies, Fiscal Procedures, and Disbursement Timing The trust fund committees have not taken the actions we recommended in 2018 to prepare for the 2023 transition to trust fund income. The compact trust fund committees have not yet prepared distribution policies, required by the trust fund agreements, which could assist the countries in planning for the transition to trust fund income. In addition, the committees have not established fiscal procedures for oversight of compact trust fund disbursements as required by the trust fund agreements. Further, the committees have not yet addressed a potential misalignment between the timing of their annual calculation of the amounts available to disburse and the FSM’s and RMI’s budget timelines, potentially complicating each country’s planning and management. Trust Fund Committees Have Not Developed Distribution Policies Required by the Compact Trust Fund Agreements The compact trust fund committees have not yet developed, as the compact trust fund agreements require, policies to guide disbursements from the trust funds after fiscal year 2023. Under the agreements, each trust fund committee must develop a distribution policy, with the intent that compact trust fund disbursements will provide an annual source of revenue to the FSM and RMI after the scheduled end of compact grant assistance. The trust fund committees could use distribution policies to address risks to each fund’s sustainability. For example, the committees have the discretion to disburse an amount below the established maximum. Our analysis of potential strategies for improving the funds’ outlook shows that reducing the size of disbursements would improve each compact trust fund’s long-term sustainability. Without a distribution policy that provides information about the size of expected disbursements, the FSM and RMI are hampered in their current and ongoing efforts to plan for the potential reduction in U.S. compact assistance after 2023. Trust Fund Committees Have Not Established Fiscal Procedures Required by Compact Trust Fund Agreements The compact trust fund committees have not yet established fiscal procedures for compact trust fund disbursements after fiscal year 2023. Each trust fund agreement requires the respective committee to determine the fiscal procedures to be used in implementing the trust fund agreement. The committees are to base their procedures on the compact fiscal procedures agreements, unless the parties to the trust fund agreement agree to adopt different fiscal procedures. No compact trust fund disbursements are to be made unless the committee has established such trust fund fiscal procedures. Without fiscal procedures in place, the trust fund committees will not be able to provide disbursements and the United States, the FSM, and the RMI will lack clear guidance to ensure oversight for trust fund disbursements. Trust Fund Committees Have Not Addressed Issues Related to Disbursement Timing The timing for the trust fund committees’ calculation of the amounts available for annual disbursement to the FSM and the RMI after fiscal year 2023 does not align with the countries’ budget and planning timelines. The amounts available for disbursement in a given fiscal year cannot be determined until each fund’s returns have been determined at the end of the prior year. Further, if the disbursement amounts are calculated from audited fund returns as determined by annual audits required by the trust fund agreements, the amounts may not be determined until as late as March 31, 6 months into the fiscal year for which the disbursement is to be provided. However, both the FSM and the RMI government budget cycles are completed before the annual amounts available for disbursement will be known. As a result, the FSM and RMI would have to budget without knowing the amount to be disbursed, complicating their annual budget and planning processes. Trust Fund Committees Have Discussed Potential Actions to Address our Recommendations The trust fund committees, chaired by Interior, have discussed potential actions to address the recommendations in our May 2018 report. In May 2018, we made six recommendations to Interior—three parallel recommendations regarding each country’s trust fund. We recommended that the Secretary of the Interior ensure that the Director of the Office of Insular Affairs work with other members of the trust fund committees to: develop distribution policies, develop the fiscal procedures required by the compact trust fund address the timing of the calculation of compact trust fund disbursements. Interior concurred with our recommendations and has stated that it plans to implement them before the FSM and RMI transition to trust fund income in 2023. The FSM and RMI also concurred with our recommendations to Interior. According to the Trust Fund Administrator and Interior officials, the distribution policy was discussed at subsequent trust fund committee meetings—including the most recent, in May 2019. According to the trust fund administrator, trust fund representatives met with FSM and RMI representatives in January 2019 to discuss the status of the trust fund and future scenarios for its management. Interior officials further stated that discussions about trust fund policies and controls were frequent and ongoing among committee members and staffers as well as the trust fund manager and investment advisers. The FSM’s and RMI’s transition to relying on income from the compact trust funds will likely require significant budgetary choices. However, the lack of trust fund distribution policies, and the lack of alignment between the trust fund committees’ annual disbursement calculations and the countries’ budget cycles hamper the countries’ ability to plan for the transition. In addition, without the required fiscal procedures governing trust fund actions after 2023, the trust fund committees will be unable to make disbursements and the United States, the FSM, and the RMI will not have assurance of necessary oversight. However, as of June 2019, Interior had not implemented our recommendations to address these issues. Further, while Interior has continued to discuss possible actions to address our recommendations with the trust fund committees, it targeted implementation of our recommendations for 2023. Chairwoman Murkowski, Ranking Member Manchin, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. GAO Contact and Staff Acknowledgments If you or your staff have any questions about this testimony, please contact David Gootnick, Director, International Affairs and Trade, at (202) 512-3149 or gootnickd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Emil Friberg (Assistant Director), Ming Chen, Neil Doherty, Mark Dowling, Christopher Keblitis, Reid Lowe, Moon Parks, and Michael Simon. Appendix I: Status of U.S. Grants and Programs in the FSM and RMI After 2023 The amended compacts, compact–related agreements, the amended compacts’ implementing legislation, and other U.S. laws provide grants or eligibility for U.S. programs and services for the Federated States of Micronesia (FSM) and Republic of the Marshall Islands (RMI). The amended compacts provide compact sector, Kwajalein-related, and audit grants. Under current law, compact sector and audit grants are each scheduled to end in 2023, but the RMI military use and operating rights agreement (MUORA) extends the time frame of Kwajalein-related compact grants for as long as the agreement is in effect. The amended compacts’ implementing legislation provides additional grants, including authorizing a supplemental education grant (SEG), and identifies several specific U.S. programs as available to the FSM and RMI. Under current law, the additional grants end in 2023, but the statutory authorizations for some programs identified in Pub. L. No. 108-188 provide for the continued eligibility of the FSM and RMI to receive benefits under the programs. However, after fiscal year 2023, the FSM and RMI will no longer be eligible under current U.S. law for some programs that the SEG replaced. The compact-related programs and services agreements with each country identify additional programs and services that the United States makes available to the FSM and RMI. While these agreements will end in 2024, under current law, some U.S. agencies may continue to provide programs and services similar to those provided in the agreement under other authorities. Based on the status of current law, the FSM’s and RMI’s eligibility for other programs we identified that have been provided under other current U.S. laws will not change after fiscal year 2023. Compact Sector and Audit Grants End in 2023, but Kwajalein-Related Grants for the RMI Will Continue Under current law, compact sector grants provided to the FSM and the RMI under section 211(a) of the amended compacts are scheduled to end in 2023. However, the RMI is scheduled to continue to receive $7.2 million, partially inflation adjusted, related to the U.S. military base in Kwajalein Atoll and provided under section 211(b) of its compact. Under the terms of the RMI MUORA, the United States agreed to provide these Kwajalein-related grants for as long as the MUORA is in effect. The MUORA continues until 2066 and may be extended at the discretion of the United States until 2086. The amended RMI compact provides for $18 million, partially inflation adjusted, in annual payments to the RMI government to compensate for impacts from the U.S. Army Garrison– Kwajalein Atoll. These payments will continue for as long as the MUORA is in effect. Annual compact grants of up to $500,000 (not inflation adjusted) to each country to pay for required annual audits of compact grants are scheduled to end in 2023. See table 3 for a summary of compact sector, Kwajalein-related, and audit grants. FSM and RMI Are No Longer Eligible for Many Programs Replaced by the Supplemental Education Grant The supplemental education grant (SEG) authorized by the amended compacts’ implementing legislation is scheduled to end in fiscal year 2023 and, under current law, FSM and RMI eligibility for most programs that the SEG replaced will not resume after fiscal year 2023. Absent changes to current law, the FSM and RMI will not be eligible after fiscal year 2023 for the following programs that the SEG replaced during fiscal years 2005 through 2023: U.S. elementary and secondary education grant programs, adult education and literacy programs, career and technical education programs, job training programs, and Head Start early education programs. However, under other provisions of current law, qualifying individuals in the FSM and RMI will be eligible after fiscal year 2023 for undergraduate education grants and work-study programs that the SEG replaced. See table 4. Some Programs and Services in the Programs and Services Agreement Will End, while Others May Continue under Other Authorities Although the programs and services agreements with the FSM and RMI will end in fiscal year 2024, current U.S. law enables U.S. agencies to continue providing some programs and services now provided under the agreements. After the agreements end, no current provisions of U.S. law will enable the Federal Emergency Management Agency (FEMA) to provide disaster response funding, enable the Federal Deposit Insurance Corporation to provide deposit insurance, or enable the U.S. Postal Service to provide the services that it currently provides to the FSM and RMI. However, the National Weather Service, the U.S. Department of Transportation’s (DOT) Federal Aviation Administration (FAA), and the U.S. Agency for International Development (USAID) could, under other legal authorities, provide services similar to those they now provide under the programs and services agreements. National Weather Service. The programs and services agreements authorize the National Weather Service to fund the operations of weather stations in the FSM and RMI, which it can continue to fund after the end of the agreements under other authorities, according to Department of Commerce officials. Federal Aviation Administration. The programs and services agreements authorize DOT’s FAA to provide technical assistance in the FSM and RMI, which it can continue to provide after the end of the agreements under other provisions of current U.S. law. However, DOT officials stated that FAA would require new bilateral agreements with the FSM and the RMI in order for the countries to continue to receive the civil aviation safety services that FAA currently provides under the programs and services agreements. The FAA would also seek reimbursement for any technical assistance it provides to the FSM and RMI. With regard to the civil aviation economic services provided under the programs and services agreements, DOT officials stated that, while the FSM and RMI could voluntarily decide to allow U.S. air carriers to continue operations in the FSM and RMI, new bilateral agreements would be needed to assure that result. U.S. Agency for International Development. Following a U.S. presidential disaster declaration, FEMA provides the funding for disaster relief and reconstruction, which is programmed through USAID. Under current law, FEMA funds will no longer be available to the FSM and RMI for this purpose once the agreements end; however, USAID will be able to provide foreign disaster assistance funding to the two countries under the same terms as it provides this assistance to other countries. After the programs and services agreements end, FEMA will be able to support disaster relief efforts only if USAID or the countries request such support on a reimbursable basis. In addition, according to State and Interior officials, telecommunications- related services that the two agencies provide to the FSM and RMI under the programs and services agreements will continue as long as the FSM and RMI provide appropriate authorization for such services. Table 5 shows the status after the programs and services agreements end of programs and services currently provided to the FSM and the RMI under the agreements. Programs Identified in Amended Compacts’ Implementing Legislation Generally Continue after Fiscal Year 2023 Although additional grants provided to the FSM and the RMI under the amended compacts’ implementing legislation will end in fiscal year 2023, the countries’ eligibility for programs now provided under that legislation will generally continue under current U.S. law. Grants provided under the amended compacts’ implementing legislation for (1) judicial training in the FSM and the RMI, and (2) agricultural and planting programs on the RMI’s nuclear-affected Enewetak Atoll are scheduled to end. However, under current U.S. law, legal authorities permitting the operation of other programs will remain available to the FSM and RMI after fiscal year 2023. Eligibility under these legal authorities continues either because the amended compacts’ implementing legislation does not specify an ending date or because other provisions in current U.S. law make the FSM and RMI eligible for the program. Programs provided in the amended compacts’ implementing legislation include U.S. Department of Agriculture Rural Utilities Service grant and loan programs; U.S. Department of Education Pell grants for higher education and grants under Part B of the Individuals with Disabilities Education Act for children with disabilities; programs for nuclear-affected areas in the RMI; and additional programs provided by the Departments of Commerce and Labor as well as law enforcement assistance provided by the U.S. Postal Service. See table 6 for a summary of the programs identified in the amended compacts’ implementing legislation and their status as of the end of fiscal year 2023. Programs Identified in Other Legislation Generally Continue after Fiscal Year 2023 In addition to being eligible for the programs provided through the compact, its associated agreements, and the amended compacts’ implementing legislation, the FSM and RMI are also eligible for a number of programs under other provisions of current U.S. law. The FSM and RMI have each received funds from the U.S. Department of Agriculture for forestry and rural housing programs, multiple U.S. Department of Health and Human Services public health program grants, U.S. Department of the Interior technical assistance and historic preservation programs, and the DOT FAA airport improvement program, among others. Under current U.S. law, the legal authorities permitting the provision of these programs in the FSM and RMI would not necessarily change after 2023. Table 7 shows the FSM’s and RMI’s eligibility for these additional grants and programs under current law after fiscal year 2023.


Background The FSM and RMI are independent countries about 3,000 miles southwest of Hawaii. The FSM is a federation of four semiautonomous states—Chuuk, Kosrae, Pohnpei, and Yap—whose population and income vary widely. Chuuk, the largest state by population, has the lowest per-capita gross domestic product (GDP). Overall, the FSM had a 2016 population of approximately 102,000 and a GDP per capita of about $3,200. The RMI’s 2016 population was approximately 54,000 with a GDP per capita of about $3,600. The RMI’s most recent census, in 2011, found that approximately three-quarters of the population lived in Majuro, the nation’s capital, and on the island of Ebeye in the Kwajalein Atoll. Table 1 shows the FSM’s, FSM states’, and RMI’s estimated populations and annual GDP per capita in fiscal year 2016. Compact of Free Association (1986–2003) U.S. relations with the FSM and the RMI began during World War II, when the United States ended Japanese occupation of the region. Starting in 1947, the United States administered the region under a United Nations trusteeship. In 1986, after a period of negotiations, the United States entered into a compact of free association with the FSM and RMI that provided for economic assistance to the two countries, secured U.S. defense rights, and allowed FSM and RMI citizens to migrate to the United States. Amended Compacts of Free Association (2004– Present) In 2003, after a period of negotiations, the United States approved separate amended compacts with the FSM and the RMI that went into effect on June 25, 2004, and May 1, 2004, respectively. Compact Grants and Trust Fund Contributions The amended compacts’ implementing legislation authorized and appropriated direct financial assistance to the FSM and the RMI in fiscal years 2004 through 2023, with the base amounts decreasing in most years. The legislation also provided for partial inflation adjustment of the base amount of compact sector grants and trust fund contributions each year. As the base amount of compact sector grants decreases, the trust fund contributions generally increase by an equivalent amount. Because the annual inflation adjustment is less than full inflation, the value of compact sector grants declines in real terms. Figure 1 shows the amount of compact sector grants and trust fund contributions each fiscal year from 2004 through 2023. The amended compacts and associated fiscal procedures agreements require that compact sector grants support the countries in six core sectors—education, health, infrastructure, environment, private sector development, and public sector capacity building—with priority given to the education and health sectors. These grants are described in section 211(a) of each compact and are referred to as compact sector grants or 211(a) grants. Section 211(b) of the RMI compact further states that the RMI must target a specified amount of grants to Ebeye and other Marshallese communities within Kwajalein Atoll. The RMI military use and operating rights agreement (MUORA) states that the Kwajalein- related funds provided to the RMI in the compacts shall be provided through fiscal year 2023 and thereafter for as long as this agreement remains in effect. Compact Trust Fund Management and Implementation The amended compacts and their subsidiary trust fund agreements provided that each trust fund is to be managed by a compact trust fund committee. Each compact trust fund committee includes representatives from both the United States and the respective country, but the terms of the trust fund agreements require the United States to hold the majority of votes. The Director of Interior’s Office of Insular Affairs serves as the chair of each committee. Trust fund committee responsibilities include overseeing fund operation, supervision, and management; investing and distributing the fund’s resources; and concluding agreements with any other contributors and other organizations. As part of this oversight, the committees are to establish an investment and distribution policy. The committees are also to determine fiscal procedures to be used in implementing the trust fund agreements on the basis of the fiscal procedures used for compact grant administration, unless otherwise agreed by the parties to the agreement. The U.S.–FSM and U.S.–RMI trust fund agreements allow for the agreements to be amended in writing at any time, with mutual consent of the governments. However, the U.S. legislation implementing the amended compacts requires that any amendment, change, or termination of all, or any part, of the compact trust fund agreements shall not enter into force until incorporated into an act of Congress. Compact Trust Fund Structure The compact trust fund agreements state that no funds, other than specified trust fund administrative expenses, may be distributed from the funds before October 1, 2023. From fiscal year 2024 onward, the maximum allowed disbursement from each compact trust fund is the amount of the fiscal year 2023 annual grant assistance, as defined by the trust fund agreement, with full inflation adjustment. In addition, the trust fund committees may approve additional amounts for special needs. The RMI compact trust fund agreement excludes Kwajalein-related assistance, defined in section 211(b) of the RMI compact, from the calculation of the allowed disbursement. Although the compact trust fund agreements state the maximum allowable disbursement level, they do not establish or guarantee a minimum disbursement level. Each country’s compact trust fund consists of three interrelated accounts: the “A” account, the “B” account, and the “C” account. The A account is the trust fund’s corpus and contains the initial, and any additional, U.S. and FSM or RMI contributions; contributions from other countries; and investment earnings. No funds, other than specified trust fund administrative expenses, may be disbursed from the A account. The B account is the trust fund’s disbursement account and becomes active in fiscal year 2023. All income earned in 2023 will be deposited in the B account for possible disbursement in 2024. Each subsequent year’s investment income will similarly be deposited in the B account for possible disbursement the following year. If there is no investment income, no funds will be deposited in the B account for possible disbursement the following year. The C account is the trust fund’s buffer account. Through 2022, any annual income exceeding 6 percent of the fund balance is deposited in the C account. The size of the C account is capped at three times the amount of the estimated annual grant assistance in 2023, including estimated inflation. From 2023 onward, if annual income from the A account is less than the previous year’s disbursement, adjusted for inflation, the C account may be tapped to address the shortfall. After 2023, any funds in the B account in excess of the amount approved for disbursement the following fiscal year are to be used to replenish the C account as needed, up to the maximum size of the account. If there are no funds in the C account and no prior-year investment income in the B account, no funds will be available for disbursement to the countries the following year. Figure 2 shows the compact trust fund account structure and associated rules. According to the U.S. trust fund agreements with the FSM and the RMI, contributions from other donors are permitted. In May 2005, Taiwan and the RMI reached an agreement that Taiwan would contribute a total of $40 million to the RMI’s compact trust fund A account between 2004 and 2023. A “D” account may also be established to hold any contributions by the FSM and the RMI governments of revenue or income from unanticipated sources. According to the trust fund agreements, the D account must be a separate account, not mixed with the rest of the trust fund. Only the RMI has a D account, governed in part by the agreement between Taiwan and the RMI. Programs and Services Provided in Compact-Related Agreements The amended compacts’ implementing legislation incorporates, by reference, related agreements extending programs and services to the FSM and RMI. The programs and services agreement with each country identifies the following programs and services as being available to each country: U.S. postal services, weather services, civil aviation, disaster preparedness and response, and telecommunications. Each programs and services agreement extends for 20 years from the compact’s entry into force. The agreement with the FSM ends on June 24, 2024, and the agreement with the RMI ends on April 30, 2024. Programs Authorized by U.S. Legislation The amended compacts’ implementing legislation (Pub. L. No. 108-188) and other U.S. legislation authorize other U.S. grants, programs, and services for the FSM and RMI. Pub. L. No. 108-188 authorizes an annual supplemental education grant (SEG) for the FSM and RMI in fiscal years 2005 through 2023, to be awarded in place of grants formerly awarded to the countries under several U.S. education, health, and labor programs. The FSM and RMI are not eligible for the programs replaced by the SEG during these years. Unlike the compact sector grants, the amended compacts’ implementing legislation authorized the SEG but did not appropriate funds for it. Funding for the SEG is appropriated annually to the U.S. Department of Education (Education) and is transferred to Interior for disbursement. Other provisions of the amended compacts’ implementing legislation, as well as other U.S. law, make the FSM and RMI eligible for a number of additional programs. The FSM and RMI Rely on U.S. Grants and Programs That End in 2023 As of fiscal year 2016, compact sector grants and the SEG, each of which end in 2023, supported a substantial portion of government expenditures in the FSM and RMI. Compact sector grants and the SEG supported about one-third of all FSM government expenditures. The four FSM states relied on these grants to a greater extent than did the FSM national government. In the RMI, compact sector grants and the SEG supported about one-quarter of all government expenditures. The expiration of the compacts’ programs and services agreements in 2024 would also require the FSM and RMI to bear additional costs to provide services currently provided by the United States under the agreements. U.S. Compact Grants and Other Grants Provide Substantial Support to the FSM and RMI Budgets U.S. Grants Scheduled to End in 2023 Supported About One- Third of Total FSM Government Expenditures in Fiscal Year 2016 Compact sector grants, the SEG, and other U.S. grants supported almost half of FSM national and state government expenditures in fiscal year 2016. Compact sector and supplemental education grants that end in 2023 supported approximately one-third of total FSM national and state government expenditures in fiscal year 2016, while other U.S. grants supported an additional 15 percent of total FSM government expenditures (see fig. 3). In fiscal year 2016, compact sector and supplemental education grants that end in 2023 supported a larger proportion of FSM state governments’ expenditures than of the FSM national government’s expenditures. Compact sector grants and the SEG supported 8 percent of national government expenditures but supported 50 percent or more of each state’s government expenditures. Among the FSM states, Chuuk, which has both the largest population and the lowest per-capita income in the FSM, had the highest percentage of expenditures supported by U.S. grants. (See table 2 for a summary of FSM national and state government expenditures supported by compact sector grants and the SEG and by other U.S. grants.) U.S. Grants Scheduled to End in 2023 Supported About One Quarter of RMI Government Expenditures in Fiscal Year 2016 Compact sector and supplemental education grants that end in 2023 supported approximately 25 percent of the RMI’s $123.5 million in government expenditures in fiscal year 2016, while other U.S. grants supported an additional 8 percent. Kwajalein-related compact grants that do not end in 2023 supported an additional 3 percent (see fig. 4). FSM and RMI Eligibility for Some U.S. Grants, Programs, and Services Will Change after 2023 FSM and RMI budgets would be further affected if the countries assumed responsibility for providing programs and services currently provided by the United States. The following describes the status after 2023 of U.S. grants, programs, and services in the FSM and RMI under current law: Compact sector grants are scheduled to end in 2023, but the RMI MUORA extends the time frame of Kwajalein-related compact grants for as long as the MUORA is in effect. The SEG and additional grants identified in the amended compacts’ implementing legislation are scheduled to end in 2023. Also, after fiscal year 2023, the FSM and RMI will no longer be eligible for some programs that the SEG replaced, including Head Start (early childhood education, health, and nutrition services for low-income children and their families). The compact-related programs and services agreements with each country will end in 2024. However, some U.S. agencies, such as the National Weather Service, Federal Aviation Administration, and U.S. Agency for International Development, may continue to provide programs and services similar to those provided in the agreement under other authorities. The FSM and RMI will generally remain eligible for other programs identified in the amended compacts’ implementing legislation. These programs include U.S. Department of Agriculture (USDA) Rural Utilities Service grant and loan programs and U.S. Department of Education Pell grants for higher education and grants under Part B of the Individuals with Disabilities Education Act for children with disabilities. The FSM and RMI will remain eligible for additional programs we identified that have been provided under other current U.S. laws. Examples of these programs include USDA housing assistance programs and multiple public health, medical, and disease control and prevention grants provided by the U.S. Department of Health and Human Services. See appendix I for more information about the status after 2023 of U.S. grants, programs, and services in the FSM and RMI under current law. Compact Trust Funds Face Risks to Future Disbursements Our May 2018 projections for the compact trust funds showed that after fiscal year 2023, the funds are unlikely to provide maximum annual disbursements and may provide no disbursements at all in some years. The risk of disbursements below the maximum and the risk of zero disbursements increase over time for both funds. Potential strategies we analyzed in our May 2018 report would reduce or eliminate the risk of the compact trust funds’ experiencing years of zero disbursement. However, all of the potential strategies would require the countries to exchange a near-term reduction in resources for more-predictable and more- sustainable disbursements in the longer term. Projections Show Risks to Compact Trust Fund Disbursements Our May 2018 projections for the FSM and RMI compact trust funds after 2023 indicated that, given their balance at the end of fiscal year 2017 and current compact trust fund rules—the baseline scenario—the funds will be unable to provide maximum disbursements (equal to the inflation- adjusted amount of annual grant assistance in 2023) in some years and unable to provide any disbursement at all in some years, with the likelihood of zero disbursement in a given year increasing over time. The compact trust funds’ C account—designed as a buffer to protect disbursements from the B account in years when the funds do not earn enough to fund the disbursement—could be exhausted by a series of years with low or negative annual returns. Since current rules do not allow disbursements from the compact trust fund corpus (the A account), exhaustion of the C account would result in zero disbursement in years when fund returns are zero or negative. Thus, there may be no funds available to disburse even if the funds’ A accounts have a balance. As a result of low or zero disbursements, the countries could face economic and fiscal shocks and significant challenges in planning programs and budgets. Since we published our May 2018 report, an additional year of compact trust fund performance data and updated estimates of future inflation have become available; however, the updated information does not alter the conclusions we presented in May 2018. The updated data and inflation estimates change our model’s assumptions about the current compact trust fund balance, size of future U.S. contributions to the FSM and RMI compact trust funds, annual grant assistance in fiscal year 2023, and C account balance—each of which are relevant variables for our analysis. However, the updated variables would result in only slight changes to our 2018 report’s projections of future compact trust fund performance presented in this testimony and do not alter our broader conclusions about future risks to the compact trust funds. FSM compact trust fund projections. In May 2018, our model projected that, given the baseline scenario and a 6 percent net return, the FSM compact trust fund will experience declining disbursements relative to the maximum allowable disbursements and an increasing chance of zero disbursements. (See app. I of GAO-18-415 for a full description of our methodology, and see app. V of GAO-18-415 for the baseline results with alternative net returns.) Projected disbursements. We projected that the FSM compact trust fund will, on average, be able to provide disbursements equal to 82 percent of the maximum allowable disbursement—the inflation- adjusted amount of 2023 annual grant assistance—in its first decade of disbursements. The likely average disbursement falls to 49 percent of the maximum in the next decade and falls further in subsequent decades. In addition, the amount available for disbursement may fluctuate substantially from year to year. Depending on the compact trust fund’s performance in the previous year, disbursements may be higher or lower than the average amount if the balance in the C account is not sufficient to provide additional disbursements. Likelihood of providing zero disbursement. We projected a 41 percent likelihood that the FSM compact trust fund will be unable to disburse any funds in 1 or more years during the first decade of trust fund disbursements. This likelihood increases over time, rising to 92 percent in fiscal years 2054 through 2063. Figure 5 shows our May 2018 projections of the FSM compact trust fund’s average disbursements as a percentage of maximum disbursement and the likelihood of 1 or more years of zero disbursement, given the baseline scenario and a 6 percent net return. We calculated the average disbursement as a percentage of the maximum allowable disbursement by averaging, over each 10-year period and over 10,000 simulated cases, the ratio of simulated disbursement to the maximum inflation-adjusted allowable disbursement in the given period. We calculated the likelihood of zero disbursement by counting cases with 1 or more years of zero disbursement in each of the given periods over 10,000 simulated cases. RMI compact trust fund projections. In May 2018, our model projected that, given the baseline scenario and a 6 percent net return, the RMI compact trust fund will experience declining disbursements relative to the maximum allowable disbursements and an increasing chance of zero disbursements. Projected disbursements. We projected that in its first decade of disbursements, the RMI compact trust fund will, on average, be able to provide disbursements nearly equal to the inflation-adjusted amount of 2023 annual grant assistance as defined by the trust fund agreement—the maximum allowable. However, in each subsequent decade, the projected disbursements as a percentage of the maximum disbursements decline by about 10 percentage points. In addition, from year to year, the amount available to disburse may fluctuate substantially. Depending on the compact trust fund’s performance in the previous year, disbursements may be higher or lower than the average amount if the balance in the C account is not sufficient to provide additional disbursements. Likelihood of providing zero disbursement. We projected a 15 percent likelihood that the RMI compact trust fund will be unable to disburse any funds in 1 or more years during the first decade of trust fund disbursements. This likelihood increases over time, rising to 56 percent in fiscal years 2054 through 2063. Figure 6 shows our May 2018 projections of the RMI compact trust fund’s average disbursements as a percentage of maximum disbursement and its likelihood of 1 or more years of zero disbursement, given the baseline scenario and a 6 percent net return. We calculated the average disbursement as a percentage of the maximum allowable disbursement by averaging, over each 10-year period and over 10,000 simulated cases, the ratio of simulated disbursement to the maximum inflation-adjusted allowable disbursement in the given period. We calculated the likelihood of zero disbursement by counting cases with 1 or more years of zero disbursement in each of the given periods over 10,000 simulated cases. For our May 2018 report, we conducted a series of simulations to determine the likely effects of potential strategies for improving the outlook of the FSM and RMI compact trust funds. For example, we developed and analyzed potential strategies in which annual disbursements are reduced below the maximum allowable additional annual contributions are made to the trust fund prior to the end of fiscal year 2023; and the trust fund agreement disbursement policies are modified to limit the annual disbursement to a fixed percentage of the fund’s moving average balance over the previous 3 years, up to the maximum disbursement amount defined by the current trust fund agreement. All of the potential strategies we analyzed would reduce or eliminate the risk of the compact trust funds experiencing years of zero disbursement. However, some of the potential strategies might require changing the trust fund agreements, and all of the potential strategies would require the countries to exchange a near-term reduction in resources for more- predictable and more-sustainable disbursements in the longer term. (See app. VII of our May 2018 report for detailed results of our analysis.) Compact Trust Fund Committees Have Not Addressed Issues Related to Distribution Policies, Fiscal Procedures, and Disbursement Timing The compact trust fund committees have not taken the actions we recommended in 2018 to prepare for the 2023 transition to trust fund income. The committees have not yet prepared distribution policies, required by the trust fund agreements, which could assist the countries in planning for the transition to trust fund income. In addition, the committees have not established fiscal procedures for oversight of compact trust fund disbursements as required by the trust fund agreements. Further, the committees have not yet addressed a potential misalignment between the timing of their annual calculation of the amounts available to disburse and the FSM’s and RMI’s budget timelines, potentially complicating each country’s planning and management. Trust Fund Committees Have Not Developed Distribution Policies Required by the Compact Trust Fund Agreements The compact trust fund committees have not yet developed, as the compact trust fund agreements require, policies to guide disbursements from the trust funds after fiscal year 2023. Under the agreements, each trust fund committee must develop a distribution policy, with the intent that compact trust fund disbursements will provide an annual source of revenue to the FSM and RMI after the scheduled end of compact grant assistance. The trust fund committees could use distribution policies to address risks to each fund’s sustainability. For example, the committees have the discretion to disburse an amount below the established maximum. Our analysis of potential strategies for improving the funds’ outlook shows that reducing the size of disbursements would improve each compact trust fund’s long-term sustainability. Without a distribution policy that provides information about the size of expected disbursements, the FSM and RMI are hampered in their current and ongoing efforts to plan for the potential reduction in U.S. compact assistance after 2023. Trust Fund Committees Have Not Established Fiscal Procedures Required by Compact Trust Fund Agreements The compact trust fund committees have not yet established fiscal procedures for compact trust fund disbursements after fiscal year 2023. Each trust fund agreement requires the respective committee to determine the fiscal procedures to be used in implementing the trust fund agreement. The committees are to base their procedures on the compact fiscal procedures agreements, unless the parties to the trust fund agreement agree to adopt different fiscal procedures. No compact trust fund disbursements are to be made unless the committee has established such trust fund fiscal procedures. Without fiscal procedures in place, the trust fund committees will not be able to provide disbursements and the United States, the FSM, and the RMI will lack clear guidance to ensure oversight for trust fund disbursements. Trust Fund Committees Have Not Addressed Issues Related to Disbursement Timing The timing for the compact trust fund committees’ calculation of the amounts available for annual disbursement to the FSM and the RMI after fiscal year 2023 does not align with the countries’ budget and planning timelines. The amounts available for disbursement in a given fiscal year cannot be determined until each fund’s returns have been determined at the end of the prior year. Further, if the disbursement amounts are calculated from audited fund returns as determined by annual audits required by the trust fund agreements, the amounts may not be determined until as late as March 31, 6 months into the fiscal year for which the disbursement is to be provided. However, both the FSM and the RMI government budget cycles are completed before the annual amounts available for disbursement will be known. As a result, the FSM and RMI would have to budget without knowing the amount to be disbursed, complicating their annual budget and planning processes. Trust Fund Committees Continue to Discuss Potential Actions to Address Our Recommendations The compact trust fund committees, chaired by Interior, have continued to discuss potential actions to address the recommendations in our May 2018 report. In May 2018, we made six recommendations to Interior— three parallel recommendations regarding each country’s trust fund. We recommended that the Secretary of the Interior ensure that the Director of the Office of Insular Affairs work with other members of the trust fund committees to develop distribution policies, develop the fiscal procedures required by the compact trust fund address the timing of the calculation of compact trust fund disbursements. Interior concurred with our recommendations and has stated that it plans to implement them before the FSM and RMI transition to trust fund income in 2023. The FSM and RMI also concurred with our recommendations to Interior. According to the Trust Fund Administrator and Interior officials, the distribution policy was discussed at trust fund committee meetings convened since our May 2018 report. At their September 2019 meetings, the FSM and RMI compact trust fund committees did not make any decisions regarding steps to address our recommendations. The FSM’s and RMI’s transition to relying on income from the compact trust funds will likely require significant budgetary choices. However, the lack of trust fund distribution policies as well as the lack of alignment between the trust fund committees’ annual disbursement calculations and the countries’ budget cycles, hampers the countries’ ability to plan for the transition. In addition, without the required fiscal procedures governing trust fund actions after 2023, the trust fund committees will be unable to make disbursements and the United States, the FSM, and the RMI will not have assurance of necessary oversight for trust fund disbursements. However, as of September 2019, Interior had not implemented our recommendations to address these issues. Further, while Interior has continued to discuss possible actions to address our recommendations with the trust fund committees, it targeted implementation of our recommendations for 2023. Chairmen Grijalva and Engel, Ranking Members Bishop and McCaul, and Members of the Committees, this concludes my statement. I would be pleased to respond to any questions you may have. GAO Contact and Staff Acknowledgments If you or your staff have any questions about this testimony, please contact David Gootnick, Director, International Affairs and Trade, at (202) 512-3149 or gootnickd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Emil Friberg (Assistant Director), Ming Chen, Neil Doherty, Mark Dowling, Reid Lowe, Moon Parks, and Michael Simon. Appendix I: Status of U.S. Grants and Programs in the FSM and RMI After 2023 The amended compacts, compact–related agreements, the amended compacts’ implementing legislation, and other U.S. laws provide grants or eligibility for U.S. programs and services for the Federated States of Micronesia (FSM) and Republic of the Marshall Islands (RMI). The amended compacts provide compact sector, Kwajalein-related, and audit grants. Under current law, compact sector and audit grants are each scheduled to end in 2023, but the RMI military use and operating rights agreement (MUORA) extends the time frame of Kwajalein-related compact grants for as long as the agreement is in effect. The amended compacts’ implementing legislation provides additional grants, including authorizing a supplemental education grant (SEG), and identifies several specific U.S. programs as available to the FSM and RMI. Under current law, the additional grants end in 2023, but the statutory authorizations for some programs identified in Pub. L. No. 108-188 provide for the continued eligibility of the FSM and RMI to receive benefits under the programs. However, after fiscal year 2023, the FSM and RMI will no longer be eligible under current U.S. law for some programs that the SEG replaced. The compact-related programs and services agreements with each country identify additional programs and services that the United States makes available to the FSM and RMI. While these agreements will end in 2024, under current law, some U.S. agencies may continue to provide programs and services similar to those provided in the agreement under other authorities. Based on the status of current law, the FSM’s and RMI’s eligibility for other programs we identified that have been provided under other current U.S. laws will not change after fiscal year 2023. Compact Sector and Audit Grants End in 2023, but Kwajalein-Related Grants for the RMI Will Continue Under current law, compact sector grants provided to the FSM and the RMI under section 211(a) of the amended compacts are scheduled to end in 2023. However, the RMI is scheduled to continue to receive $7.2 million, partially inflation adjusted, related to the U.S. military base in Kwajalein Atoll and provided under section 211(b) of its compact. Under the terms of the RMI MUORA, the United States agreed to provide these Kwajalein-related grants for as long as the MUORA is in effect. The MUORA continues until 2066 and may be extended at the discretion of the United States until 2086. The amended RMI compact provides for $18 million, partially inflation adjusted, in annual payments to the RMI government to compensate for impacts from the U.S. Army Garrison– Kwajalein Atoll. These payments will continue for as long as the MUORA is in effect. Annual compact grants of up to $500,000 (not inflation adjusted) to each country to pay for required annual audits of compact grants are scheduled to end in 2023. See table 3 for a summary of compact sector, Kwajalein-related, and audit grants. FSM and RMI Are No Longer Eligible for Many Programs Replaced by the Supplemental Education Grant The supplemental education grant (SEG) authorized by the amended compacts’ implementing legislation is scheduled to end in fiscal year 2023 and, under current law, FSM and RMI eligibility for most programs that the SEG replaced will not resume after fiscal year 2023. Absent changes to current law, the FSM and RMI will not be eligible after fiscal year 2023 for the following programs that the SEG replaced during fiscal years 2005 through 2023: U.S. elementary and secondary education grant programs, adult education and literacy programs, career and technical education programs, job training programs, and Head Start early education programs. However, under other provisions of current law, qualifying individuals in the FSM and RMI will be eligible after fiscal year 2023 for undergraduate education grants and work-study programs that the SEG replaced. See table 4. Some Programs and Services in the Programs and Services Agreement Will End, while Others May Continue under Other Authorities Although the programs and services agreements with the FSM and RMI will end in fiscal year 2024, current U.S. law enables U.S. agencies to continue providing some programs and services now provided under the agreements. After the agreements end, no current provisions of U.S. law will enable the Federal Emergency Management Agency (FEMA) to provide disaster response funding, enable the Federal Deposit Insurance Corporation to provide deposit insurance, or enable the U.S. Postal Service to provide the services that it currently provides to the FSM and RMI. However, the National Weather Service, the U.S. Department of Transportation’s (DOT) Federal Aviation Administration (FAA), and the U.S. Agency for International Development (USAID) could, under other legal authorities, provide services similar to those they now provide under the programs and services agreements. National Weather Service. The programs and services agreements authorize the National Weather Service to fund the operations of weather stations in the FSM and RMI, which it can continue to fund after the end of the agreements under other authorities, according to Department of Commerce officials. Federal Aviation Administration. The programs and services agreements authorize DOT’s FAA to provide technical assistance in the FSM and RMI, which it can continue to provide after the end of the agreements under other provisions of current U.S. law. However, DOT officials stated that FAA would require new bilateral agreements with the FSM and the RMI in order for the countries to continue to receive the civil aviation safety services that FAA currently provides under the programs and services agreements. The FAA would also seek reimbursement for any technical assistance it provides to the FSM and RMI. With regard to the civil aviation economic services provided under the programs and services agreements, DOT officials stated that, while the FSM and RMI could voluntarily decide to allow U.S. air carriers to continue operations in the FSM and RMI, new bilateral agreements would be needed to assure that result. U.S. Agency for International Development. Following a U.S. presidential disaster declaration, FEMA provides the funding for disaster relief and reconstruction, which is programmed through USAID. Under current law, FEMA funds will no longer be available to the FSM and RMI for this purpose once the agreements end; however, USAID will be able to provide foreign disaster assistance funding to the two countries under the same terms as it provides this assistance to other countries. After the programs and services agreements end, FEMA will be able to support disaster relief efforts only if USAID or the countries request such support on a reimbursable basis. In addition, according to State and Interior officials, telecommunications- related services that the two agencies provide to the FSM and RMI under the programs and services agreements will continue as long as the FSM and RMI provide appropriate authorization for such services. Table 5 shows the status, under current law, of programs and services currently provided to the FSM and the RMI under the programs and services agreements after the agreements end in fiscal year 2024. Programs Identified in Amended Compacts’ Implementing Legislation Generally Continue after Fiscal Year 2023 Although additional grants provided to the FSM and the RMI under the amended compacts’ implementing legislation will end in fiscal year 2023, the countries’ eligibility for programs now provided under that legislation will generally continue under current U.S. law. Grants provided under the amended compacts’ implementing legislation for (1) judicial training in the FSM and the RMI, and (2) agricultural and planting programs on the RMI’s nuclear-affected Enewetak Atoll are scheduled to end. However, under current U.S. law, legal authorities permitting the operation of other programs will remain available to the FSM and RMI after fiscal year 2023. Eligibility under these legal authorities continues either because the amended compacts’ implementing legislation does not specify an ending date or because other provisions in current U.S. law make the FSM and RMI eligible for the program. Programs provided in the amended compacts’ implementing legislation include U.S. Department of Agriculture Rural Utilities Service grant and loan programs; U.S. Department of Education Pell grants for higher education and grants under Part B of the Individuals with Disabilities Education Act for children with disabilities; programs for nuclear-affected areas in the RMI; and additional programs provided by the Departments of Commerce and Labor as well as law enforcement assistance provided by the U.S. Postal Service. See table 6 for a summary of the programs identified in the amended compacts’ implementing legislation and their status as of the end of fiscal year 2023. Programs Identified in Other Legislation Generally Continue after Fiscal Year 2023 In addition to being eligible for the programs provided through the compact, its associated agreements, and the amended compacts’ implementing legislation, the FSM and RMI are also eligible for a number of programs under other provisions of current U.S. law. The FSM and RMI have each received funds from the U.S. Department of Agriculture for forestry and rural housing programs, multiple U.S. Department of Health and Human Services public health program grants, U.S. Department of the Interior technical assistance and historic preservation programs, and the DOT FAA airport improvement program, among others. Under current U.S. law, the legal authorities permitting the provision of these programs in the FSM and RMI would not necessarily change after 2023. Table 7 shows the FSM’s and RMI’s eligibility for these additional grants and programs under current law after fiscal year 2023.