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United States General Accounting Office: 
GAO: 

Report to Congressional Requesters: 

January 2002: 

Foreign Assistance: 

Effectiveness and Accountability Problems Common in U.S. Programs to 
Assist Two Micronesian Nations: 

GAO-02-70: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Federal Programs Provided Important Services, but Effectiveness Was 
Generally Hindered by Many Factors: 

Most Programs Have Accountability Problems: 

Federal Administration Has Not Ensured Financial Accountability: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: GAO Assessment of 13 Programs in the Federated States of 
Micronesia and the Republic of the Marshall Islands: 

Appendix III: Comments from the Department of the Interior: 
GAO Comments: 

Appendix IV: Comments from the Department of State: 
GAO Comments: 

Appendix V: Comments from the Department of Health and Human Services: 
GAO Comments: 

Appendix VI: Comments from the Government of the Federated States of	
Micronesia: 
GAO Comments: 

Appendix VII: Comments from the Government of the Republic of the	
Marshall Islands: 
GAO Comments: 

Appendix VIII: GAO Contact and Staff Acknowledgments: 
GAO Contact: 
Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Overview of 13 Programs Reviewed by GAO: 

Table 2: The Head Start Program: 

Table 3: The Special Education Program for Pacific Island Entities 
(SEPPIE): 

Table 4: The Freely Associated States Educational Grant (FASEG) 
Program: 

Table 5: The Pell Grants Program: 

Table 6: The Job Training Partnership Act (JTPA) Program: 

Table 7: The Maternal and Child Health (MCH) Block Grants Program: 

Table 8: The U.S. Department of Agriculture's (USDA) Rural Housing 
Service (RHS) Housing Loan Program: 

Table 9: U.S. Department of Agriculture's (USDA) Rural Utilities
Service (RUS) Telecommunications Loans Program: 

Table 10: The U.S. Department of Agriculture's (USDA) Rural Utilities 
Service (RUS) Electrical Loans Program: 

Table 11: The Federal Emergency Management Agency (FEMA) Program: 

Table 12: The U. S. Postal Service (LISPS) Program: 

Table 13: The Federal Aviation Administration (FAA) Program: 

Table 14: The National Weather Service (NWS) Program: 

Figures: 

Figure 1: Location and Map of the Federated States of Micronesia and 
the Republic of the Marshall Islands: 

Figure 2: SEPPIE, Child Find Poster for Special Education, Pohnpei, 
FSM: 

Figure 3: FASEG, Marshallese-English Story Book and Marshallese 
Phonics Book, Developed by and Published with FASEG Support, Majuro, 
RMI: 

Figure 4: Pell Grant-Assisted Students in Class, College of the 
Marshall Islands, Majuro, RMI: 

Figure 5: JTPA Carpentry Class, Majuro, RMI: 

Figure 6: Maternal and Child Health Laboratory in Hospital, Majuro, 
RMI: 

Figure 7: FEMA Assistance (Bridge Replacement) in Pohnpei, FSM: 

Figure 8: FEMA Drought Assistance (Home Water Catchment Container), 
Kosrae, FSM: 

Figure 9: Head Start Center, Science Area [shows lack of space], 
Majuro, RMI: 

Figure 10: Head Start Playground [shows inadequate playground], 
Majuro, RMI: 

Figure 11: Mail Awaiting Sorting and Placement in Post Office Boxes
at the Pohnpei Post Office, FSM: 

Figure 12: FSM Telecommunications Corporation Building Exterior,
Pohnpei, FSM: 

Figure 13: Rural Utilities Service Electric Loan: New Electric Power
Facility, Marshal's Energy Corporation, Majuro, RMI: 

Figure 14: Aviation Services: FAA-Provided Electrical Power Generator 
in Honolulu, Hawaii, Headed for the FSM and the RMI: 

Figure 15: Aviation Services: FAA-Provided Equipment in Honolulu, 
Hawaii, Headed for the FSM and the RMI: 

Figure 16: Weather Service: Sign Showing Close Collaboration between 
NWS and Pohnpei Weather Service Office in Pohnpei, FSM: 

Figure 17: Rural Housing Loans: Home of the FSM President, Financed 
with Two RHS loans; Typical RHS Loan-Financed Homes, Pohnpei, FSM: 

Figure 18: Rural Housing Loan: Home of Former Pohnpei State Housing 
Authority Director, Financed with an RHS Loan, Pohnpei, FSM: 

Figure 19: Postal Services: Open Safe Reflects Lax Security, Pohnpei, 
FSM: 

Abbreviations: 

FAA: Federal Aviation Administration: 

FASEG: Freely Associated States Educational Grants: 

FEMA: Federal Emergency Management Agency: 

FSM: Federated States of Micronesia: 

FSMTC: Federated States of Micronesia Telecommunications Corporation: 

HIS: Health and Human Services: 

JTPA: Job Training Partnership Act: 

MCH: Maternal and Child Health: 

MINTA: Marshall Islands National Telecommunication Authority: 

NWS: National Weather Service: 

RHS: Rural Housing Service: 

RMI: Republic of the Marshall Islands: 

RUS: Rural Utilities Service: 

SEPPIE: Special Education Program for Pacific Island Entities: 

USDA: U.S. Department of Agriculture: 

USPS: U.S. Postal Service: 

[End of section] 

United States General Accounting Office: 
Washington, D.C. 20548: 

January 22, 2002: 

The Honorable James V. Hansen: 
Chairman: 
Committee on Resources: 
House of Representatives: 

The Honorable Tom Lantos: 
Ranking Minority Member: 
Committee on International Relations: 
House of Representatives: 

The Honorable James A. Leach: 
Chairman, Subcommittee on East Asia and the Pacific: 
Committee on International Relations: 
House of Representatives: 

The Honorable Doug Bereuter: 
House of Representatives: 

In 1986, the U.S. government entered into a Compact of Free 
Association (Compact) with the Federated States of Micronesia and the 
Republic of the Marshall Islands. Under the Compact, the United States 
was authorized to provide federal programs, such as grants, services, 
technical assistance, and loans to the two nations. The United States 
was also authorized to provide aviation, disaster relief, postal, and 
weather services.[Footnote 1] The cost of program assistance extended 
to the two countries was about $700 million for the period beginning 
in fiscal year 1987 and ending in fiscal year 2001.[Footnote 2] The 
United States designated the Department of the Interior as the agency 
responsible for coordinating and monitoring these federal programs, 
loans, and services. 

In the fall of 1999, the United States and the two nations began 
negotiations on extending the financial provisions of the Compact, 
which expired in 2001. These negotiations also included discussions 
about the continued provision of several U.S. programs.[Footnote 3] To 
assist the Congress in its review of proposals for extending 
assistance, you asked us to report on the effectiveness and 
accountability of U.S. programs, loans, and services provided to the 
Federated States of Micronesia and the Republic of the Marshall 
Islands. In response, we (1) assessed the use and effectiveness of key 
U.S. programs, loans, and services provided to both nations; (2) 
evaluated whether each nation's administration of these programs 
ensured financial accountability; and (3) evaluated whether the U.S. 
government's oversight of these programs ensured financial 
accountability.[Footnote 4] 

We selected 13 programs and services to review,[Footnote 5] including 
those with the largest expenditures and loans over the past 15 years, 
as well as each of the services that the U.S. government agreed to 
provide under the Compact. To determine the use and effectiveness of 
U.S. programs and services, we reviewed legislation, regulations, and 
monitoring reports. We also interviewed program recipients and program 
managers in the United States, in Pohnpei and Kosrae States of the 
Federated States of Micronesia, and in Majuro, in the Republic of the 
Marshall Islands. We determined that these U.S. domestic programs were 
effective by using two separate measures. The first considered whether 
the programs met their program performance requirements and standards, 
as detailed in their legislation and regulations. The second measure 
considered whether the programs were able to achieve broader program 
goals given the conditions that existed in the Federated States of 
Micronesia and the Republic of the Marshall Islands, including those 
that could significantly reduce potential program accomplishments or 
increase costs. To be considered effective, the program had to meet 
all performance requirements and standards and had to overcome 
conditions that could significantly reduce broader program 
accomplishments or increase costs. To evaluate whether the joint U.S., 
Micronesian, and Marshallese administration of these programs ensured 
financial accountability, we identified requirements in legislation 
and regulations, reviewed monitoring reports and financial audits, and 
discussed accountability issues with program managers in each country. 
(For further details regarding our scope and methodology, see appendix 
I.) 

Results in Brief: 

The domestic programs extended by the United States to the Federated 
States of Micronesia and the Republic of the Marshall Islands were 
used 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 their effectiveness. In total, we 
found that local conditions limited the effectiveness of 9 of the 13 
programs in both countries.[Footnote 6] We found that these programs, 
originally designed for the United States, faced a variety of problems 
operating in developing island nations because of differing 
geographic, economic, and social conditions.[Footnote 7] For example, 
four education and health programs were hindered by the lack of local 
government financial support for each sector, the poor state of the 
local education system, or the lack of medical capacity commonly found 
in the United States. The four effective programs generally shared the 
following characteristics: they were focused in scope, they were 
principally managed by U.S. employees or well-trained nationals, and 
they used the same infrastructure that supported these services in the 
United States.[Footnote 8] A separate problem, loan repayment, may 
adversely affect the three loan programs in the future if U.S. Compact 
assistance to the two countries is reduced. 

The two nations' administration of the 13 programs we reviewed 
generally did not ensure financial accountability. In all, 9 of the 13 
programs we reviewed experienced accountability problems, including 5 
that experienced instances of theft or misuse of program funds. 
[Footnote 9] Instances of theft, fraud, or abuse of program funds were 
documented in (1) Head Start, (2) elementary and secondary school 
improvement grants, (3) rural housing loans, (4) disaster response, 
and (5) postal services. In general, the two nations lacked the 
administrative capacity necessary to meet the complex accountability 
requirements of federal programs, and federal program managers did not 
provide the necessary training. In contrast, accountability was 
adequate for aviation and weather services and for power and 
telecommunications loans, primarily because the United States 
controlled program funds and little direct funding was provided to 
each nation. 

Just as the two nations were unable to ensure financial accountability 
for their program administration, so too was U.S. government oversight 
unable to ensure financial accountability. The Department of the 
Interior, which was charged with coordinating and monitoring the 
individual federal programs, neither coordinated nor monitored the 
federal programs because it lacked the necessary resources, according 
to Interior officials. In addition, the State Department, whose chief 
of mission was responsible for direction and coordination of U.S. 
agency officials in foreign countries, could not meet its 
responsibility because the U.S. program managers often bypassed the 
State Department and U.S. embassies. Although some federal departments 
attempted to provide oversight, such as for the Head Start and Pell 
Grants programs, even these departments could not ensure effective 
accountability because of the travel cost, distance, and time 
involved, and because of the relatively small size of the programs in 
the region, as compared with larger programs in the United States. 
During the Compact's existence, few U.S. program managers had ever 
visited the region to conduct on-site assessments. 

In this report, we recommend that the Secretaries of the Interior and 
State report to the Congress on strategies for improving the 
performance and delivery of any future program assistance. 

We provided a draft of this report to the Departments of the Interior, 
State, Agriculture, Commerce, Health and Human Services, Education, 
Labor, and Transportation, as well as to the Federal Emergency 
Management Agency (FEMA); the U.S. Postal Service; and the governments 
of the Federated States of Micronesia and the Republic of the Marshall 
Islands. The Departments of Agriculture, Commerce, Education, Labor, 
and Transportation, as well as FEMA and the U.S. Postal Service, chose 
to provide informal comments, which we incorporated into the report as 
appropriate. The Departments of the Interior, State, and Health and 
Human Services generally agreed with our draft report. The Federated 
States of Micronesia government generally agreed with our findings and 
recommendation. The government also provided technical comments and 
indicated that we did not fully appreciate that the programs have been 
"surprisingly successful against almost insurmountable odds." The 
Republic of the Marshall Islands government also generally agreed with 
the draft report but had numerous comments on individual programs, as 
well as a historical perspective on the Compact and its relation to 
U.S. program management and oversight options. Where we agreed that 
the additional information was appropriate, we incorporated the 
changes into the final report. 

Background: 

The Federated States of Micronesia (FSM) is a grouping of 607 small 
islands with a total land area of about 270 square miles. FSM is 
located in the western Pacific, about 2,500 miles southwest of Hawaii, 
lying just above the equator. FSM comprises four states-—Chuuk, 
Pohnpei, Yap, and Kosrae-—that had an estimated total population of 
107,000 in 2000.[Footnote 10] The Republic of the Marshall Islands 
(RMI) is made up of more than 1,200 islands, islets, and atolls, with 
a total land area of about 70 square miles. RMI is located in the 
central Pacific, about 2,100 miles southwest of Hawaii. The RMI had a 
total population of approximately 50,840. See figure 1 for a map of 
the FSM and the RMI. 

Figure 1: Location and Map of the Federated States of Micronesia and 
the Republic of the Marshall Islands: 

[Refer to PDF for image: 2 maps] 

Map 1: indicates location of FSM and RMI in the Pacific Ocean. 

Map 2: maps depicting the FSM and RMI. 

Note: These maps do not represent the actual territory of the FSM and 
the RMI. 

Source: GAO. 

[End of figure] 

Since World War II, the United States has provided government support 
to the FSM and the RMI and extended federal programs, such as housing 
and food assistance.[Footnote 11] In addition, the United States 
provided for their defense; built roads, hospitals, and schools; 
provided support for government operations; and funded health and 
education systems. In 1986, the United States entered into a Compact 
of Free Association with the FSM and the RMI, a process that ended 
U.S. administration under a United Nations mandate and secured both 
nations' self-governance and certain defense rights for the FSM, the 
RMI, and the United States. The Compact provided direct financial 
payments to promote economic development in each nation. These annual 
financial payments totaled about $2 billion from fiscal year 1987 
through fiscal year 2001. Previously we reported that these payments 
supported general government operations but had led to little 
improvement in economic development, with both nations remaining 
highly dependent on U.S. assistance. Economic self-sufficiency at 
current living standards remains a distant goal for the FSM and the 
RMI. In addition, in reviewing these expenditures, we found that the 
island governments and the U.S. Departments of the Interior and State 
have provided limited accountability over the Compact expenditures. 
[Footnote 12] 

The Compact also stated that U.S. federal agencies could provide 
direct program assistance as authorized by the Congress, which 
included the grants, loans, and technical assistance provided by 
individual federal agencies. In addition, the Compact identified 
several federal services to be supplied by specifically identified 
agencies: postal services, aviation, and weather were to be provided 
by specific agencies (and then reimbursed by Interior), while the 
Federal Emergency Management Agency was to provide disaster relief. In 
total, the program assistance provided by 19 U.S. departments and 
agencies from 1987 through 2001 totaled about $700 million, which 
included money for the 13 grant, loan, and service programs that were 
the focus of this report. 

Under the Compact's implementing legislation and by executive order, 
Interior was made responsible for supervising, coordinating, and 
monitoring program assistance to the FSM and the RMI.[Footnote 13] The 
Foreign Service Act of 1980 (P.L. 96-465) stated that the Department 
of State Chief of Mission was responsible for the direction and 
coordination of all U.S. government employees in foreign countries. 
Further, presidential instructions to U.S. chiefs of mission in 
foreign nations charged them with the direction, coordination, and 
supervision of all executive branch offices and personnel in their 
nation.[Footnote 14] 

The FSM and the RMI were developing countries that, like other Pacific 
island nations, faced significant development challenges because of 
their small economies, few natural resources, remote location, and 
limited institutional capacity.[Footnote 15] The economies of both 
nations were dependent on U.S. assistance provided through the Compact 
for most of their income, as they had almost no commercial production. 
U.S. assistance accounted for a majority of government revenues in 
both nations, and the governments were the primary employer in both 
nations. Significant unemployment existed and has increased as the 
governments have cut employment in response to scheduled reductions in 
U.S. payments made under the Compact, contributing to outward 
migration. [Footnote 16] 

The FSM and the RMI, as developing nations, faced unique challenges in 
operating their health and education programs, as compared with the 
United States. According to a 1998 study, challenges for the FSM and 
the RMI's delivery of health care services included (1) lack of 
preventive health care, (2) long distances to travel in order to 
provide care in remote places, (3) dependence on declining levels of 
U.S. foreign aid, (4) inadequate fiscal and personnel management 
systems, (5) poorly maintained and equipped health care facilities, 
(6) the enormous costs associated with sending patients off-island for 
specialized care, and (7) shortages of adequately trained health 
professionals.[Footnote 17] Likewise, the education system in both 
countries faced challenges not found throughout the United States, 
including high drop-out rates, poorly trained teachers, lack of 
adequate buildings and supplies, and low academic achievement. The 
education systems of both nations were also dependent on declining 
levels of U.S. aid, which may place additional challenges on the 
education systems. In the RMI, 68 percent of education funding came 
from the United States; in the FSM, 98 percent of education funds were 
from the United States. 

In June 2000, the Department of State's negotiator for the Compact 
testified that the general approach to the new negotiations with the 
FSM and the RMI included sector grants, a trust fund, and continued 
provision of some U.S. program assistance for the term of the annual 
financial assistance. The negotiator testified that the executive 
branch was considering reporting annually to the Congress on actions 
that could improve program effectiveness, including the consideration 
of grant consolidation across programs. The November 2000 U.S. 
proposal to the FSM for future economic assistance through fiscal year 
2016 included a reduction in total assistance but an increase in U.S. 
Compact funds for health and education, as compared with current 
levels. The proposal also included a section on services and program 
assistance scheduled through 2016. Weather and aviation services were 
to be continued at a level to be negotiated. The proposal eliminated 
the commitment of disaster relief from the United States, but it 
included a modest disaster preparedness grant for the first 5 years of 
the agreement. Additionally, the USPS was to continue service, with 
the provision of special services set forth in a subsidiary agreement. 
These special services to be negotiated may include "express mail" and 
money orders, but not collect-on-delivery. The proposal stated that 
the United States would continue to provide, through fiscal year 2016, 
the programs of the Departments of Education, Health and Human 
Services, and Labor on the same basis or to the same extent as they 
were provided on October 1, 1999. The United States did not propose 
providing Department of Agriculture programs to the FSM.[Footnote 18] 
The United States had not presented an assistance proposal to the RMI. 
[Footnote 19] 

Federal Programs Provided Important Services, but Effectiveness Was
Generally Hindered by Many Factors: 

The 13 federal grant, loan, and service programs we reviewed provided 
a wide array of assistance to the FSM and the RMI that U.S. embassy 
and country officials viewed as critical to these nations. However, 
local conditions limited the effectiveness of 9 of the 13 programs. We 
determined that these U.S. domestic programs were effective by using 
two separate measures: first, whether the programs met their program 
performance requirements and standards, as detailed in their 
legislation and regulations; second, whether the programs were able to 
achieve broader program goals, given the conditions that existed in 
the FSM and the RMI, including those that could significantly reduce 
potential program benefits or increase costs. To be considered 
effective, the program had to meet all performance requirements and 
standards and to overcome conditions that could significantly reduce 
broader program accomplishments or increase costs. 

We found that, even in programs that met their requirements and 
standards, local conditions often reduced their potential 
effectiveness. Almost all of them faced problems caused by attempting 
to implement programs in the FSM and the RMI that were designed for 
the United States. Such problems included (1) the lack of 
complementary public and private health care services and financing 
typically found in the United States, necessary to support the Head 
Start, special education, and Maternal and Child Health programs; (2) 
limited opportunities for graduates of the job training program; and 
(3) the lack of contractors, building supplies, and support services 
typically found in the United States and used to respond to disasters. 
In addition, the federal education and health programs and resources 
usually supplement state and local resources in the United States. 
These resources did not exist in the FSM or the RMI, where federal 
programs were the primary and often the only funding source for an 
activity. 

As a result of these problems, the effectiveness of the U.S. programs 
was limited. The aviation and weather programs, as well as two of the 
three loan programs, were effective in large part because they were 
narrow in scope or relied on well-trained local staff and dedicated 
U.S. resources. In addition, all three loan programs (two of which 
were effective, and one ineffective) may experience future repayment 
problems if U.S. Compact assistance levels are reduced. (See app. II 
for a more detailed discussion of each program, including the program 
performance requirements and standards, our assessment against those 
standards, and our assessment of whether the program encountered 
conditions in the countries that significantly reduced potential 
program accomplishments.) 

Programs Provided Diverse and Important Services: 

We found that the 13 programs we reviewed, which encompassed grants, 
loans, and operational support, provided numerous, and in many cases 
important, services to the citizens of the FSM and the RMI. For 
example, because of the U.S. programs, preschool children received 
health, education, and nutritional services; special needs children 
received special education services; elementary and secondary schools 
received school supplies and teacher training; and college students 
received tuition grants. In addition, mothers and children were 
provided health services, and adults received job training to improve 
their employment prospects. The housing stock, telecommunications 
capacity, and electrical supply were improved through U.S. loan 
programs, while disaster response, postal delivery, aviation, and 
weather forecasting were provided by U.S. agencies. 

U.S. embassy, FSM, and RMI officials reported that these were critical 
programs in each country. Without exception, FSM and RMI program 
officials said that their countries were dependent on these programs. 
For example, according to FSM and RMI officials, the loss of U.S. 
programs would end special education assistance, the poorly supplied 
school systems might stop functioning entirely, and the sole U.S.-
accredited colleges in the FSM and the RMI might collapse. Program 
officials further stated that the loss of disaster assistance, postal 
services, aviation programs, and weather services would severely 
affect their economic development. Program managers doubted that their 
own governments would have sufficient resources to finance these 
activities in the absence of the U.S. federal programs. 

Table 1 identifies the 13 programs we reviewed, the purpose and 
funding level of each program, and a brief description of program 
accomplishments in each country. 

Table 1: Overview of 13 Programs Reviewed by GAO: 

Program, department, and purpose funding — FY 1987-1999/FY 
2000:	Head Start: Department of Health and Human Services (HHS); 
Provides health, education, and other services to prekindergarten 
children; FSM: $12.8 million/$4.1 million; RMI: $17.6 million/$2.6 
million; 
Accomplishments: FSM: Head Start provided comprehensive health, 
education, and nutrition services to about 1,800 preschool children 
each year through 94 centers and 391 support staff. Accomplishments 
included (1) helping children with health, nutrition, and learning 
deficits; (2) creating preschool programs; (3) encouraging parental 
support for the children's education; and (4) initiating a preschool 
teaching certificate program at the College of Micronesia; 
Accomplishments: RMI: Head Start provided comprehensive health, 
education, and nutrition services to about 1,200 preschool children 
each year. Services were provided through 48 centers and 74 teachers, 
54 teachers' aides, and 71 support staff. The program has served more 
than 8,400 children since it began in 1994. Accomplishments included 
(1) helping children with health, nutrition, and learning deficits; 
(2) preparing children for school; and (3) fostering parental support 
for education. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Special Education Program for Pacific Island Entities (SEPPIE): 
Department of Education; Provides direct service needs and long-term 
capacity building for children with special needs; FSM: $23.7 
million/$3.8 million; RMI: $9.4 million/$1.7 million; 
Accomplishments: FSM: This grant provided the majority of program 
funds for children with disabilities needing special education. In 
school year 1998-99, about 2,074 students were in the special 
education program in the four states of the FSM. They were taught by 
about 191 teachers. The special education program provided assistants 
for home-bound children, transportation to schools, and facility 
modifications. Because of the low educational level of special 
education teachers, approximately 16 percent of the grant was spent 
providing teacher training. SEPPIE funded almost all special education 
expenses. The remaining expenses were covered by U.S. Compact funds 
passed through the FSM governments. In instances where disabilities 
were so severe that the children would never achieve independence, 
parents reported that SEPPIE training made the children less of a 
burden at home; 
Accomplishments: RMI: This grant provided the majority of program 
funds for children with disabilities needing special education. In 
September 2000, about 625 students were in the special education 
program in the RMI. They were taught by about 86 teachers. The program 
was at work in 54 public schools throughout the RMI. The special 
education program provided assistants for home-bound children, 
transportation to schools, and facility modifications. Because of the 
low educational level of special education teachers, almost 19 percent 
of the grant was spent providing staff training. SEPPIE funded all 
special education expenses. In instances where disabilities were so 
severe that the children would never achieve independence, parents 
reported that SEPPIE training made the children less of a burden at 
home. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Freely Associated States Educational Grant (FASEG) Program[A]: 
Department of Education; Provides funds for direct educational 
services in elementary and secondary schools such as school supplies, 
teacher training, and school improvement; FSM: $8.3 million/$3.1 
million; RMI: $2.4 million/$0.860 million; 
Accomplishments: FSM: This grant has provided most of the school 
supplies in the FSM. Each state administered its own grant. 
Nationwide, 166 public elementary schools served about 23,600 
children, and 28 public secondary schools served about 5,500 students. 
Generally FASEG's $3.1 million in grants provided most educational 
materials, books, school supplies, copiers, computers, air 
conditioners, etc. It also provided teacher training funds. Generally, 
teachers' salaries were paid by using Compact funds; 
Accomplishments: RMI: This grant has provided most of the school 
supplies in the RMI. Throughout this island nation, 77 public 
elementary schools served almost 8,800 children, and 3 public 
secondary schools served almost 1,200 students. Generally, FASEG's 
$860,000 grant provided most educational materials, books, vocational 
education materials, computers, etc. It also provided teacher training 
funds, with about 200 teachers trained annually. Teachers' salaries 
were paid from Compact funds. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: Pell 
Grants: Department of Education; Provide access to college education; 
FSM: $19.3 million/$4.4 million; RMI: $6.6 million/$1.7 million; [The 
Department of Education provided an additional $6 million for Pell 
Grants from 1987 through 1991 but could not report the amount by 
country]; 
Accomplishments: FSM: Pell Grants provided 13,704 students with grant 
assistance to attend the College of Micronesia (a 2-year, U.S.-
accredited college) between 1988 and 2000. In addition, Pell Grants 
also provided grant assistance for FSM students attending U.S. 
colleges. Pell Grants were the major source of funding for the 
college; loss of Pell Grants would bankrupt the college and eliminate 
the sole opportunity for most citizens to obtain a local, U.S. 
accredited college education; 
Accomplishments: RMI: Pell Grants provided 4,375 students with grant 
assistance to attend the College of the Marshall Islands (a 2-year, 
U.S.-accredited college) between 1993 and 2000. In addition, Pell 
Grants also provided grant assistance for RMI students attending U.S. 
colleges. Pell Grants were the major source of funding for the 
college; loss of Pell Grants would bankrupt the college and eliminate 
the sole opportunity for most citizens to obtain a local 
U.S.accredited college education. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: Job 
Training Partnership Act (JTPA): Adult Training; Department of Labor; 
Provides job training for adults for increased employment and earnings
FSM: $10.9 million/$0.2 million[B]; RMI: $5.5 million/$04 million[B]; 
Accomplishments: FSM: FSM JTPA officials said that 3,263 adults and 
teenagers were trained from 1995 to 1999, of whom 1,204 were employed 
90 days after their training. JTPA was the primary job training 
program in the FSM. The Pohnpei program employed 23 staff in training 
and administrative positions. Officials said that the training 
significantly contributed to their ability to improve the lives of 
trainees through employment. This included 210 youths working in the 
United States as nurses and amusement park attendants. The Kosrae 
program trained 270 clients, and 65 were placed in employment. Many 
trainees have moved overseas for better-paying jobs; 
Accomplishments: RMI: The JTPA program reported that it provided 
training to 2,474 clients from 1995 to 1999. JTPA was the primary job 
training program in RMI. It employed 28 staff persons to administer 
the program and provide training. RMI officials said that JTPA was 
critical in helping the disadvantaged improve the lives of trainees 
through employment. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Maternal and Child Health (MCH) Block Grants Program: Department of 
Health and Human Services; Provides health services to mothers and 
children; FSM: $7.0 million/$0.56 million; RMI: $3.9 million/$0.24 
million; 
Accomplishments: FSM: The FSM reported that health services were 
provided to 70,810 mothers and children in 1999 alone. Services were 
provided by 36 staff in hospitals and clinics. The program has 
resulted in a large increase in health services provided to mothers 
and their children. Reported accomplishments include (1) an increase 
in MCH services to the target population; (2) a reduction in fertility 
rates; (3) no recent outbreaks of measles, mumps, or polio because of 
immunizations; and (4) greater social acceptance of children with 
special needs; 
Accomplishments: RMI: The RMI reported that health services were 
provided to 4,756 mothers and children in 1999 alone. Services were 
provided at 2 hospitals and 60 clinics. The program has resulted in a 
large increase in health services provided to mothers and their 
children. RMI/MCH officials listed the following as accomplishments of 
the MCH program: (1) the provision of preventive health services to 
the majority of the population and (2) reduced childhood diseases 
through immunizations. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: Rural 
Housing (loans and grants): U.S. Department of Agriculture (USDA); 
Provides housing grants and low-interest housing loans to the 
economically disadvantaged; FSM:[C] $30.0 million/$1.9 million; 
RMI:[C] $3.5 million/$0.59 million; 
Accomplishments: FSM: USDA loans have built or renovated an estimated 
37 percent of the FSM housing stock since the beginning of the 
Compact. In fact, the Rural Housing Service was the primary financier 
of home construction and renovation in the FSM. Each state of the FSM 
had a separately administered program. Between 1987 and 2000, more 
than 5,500 loans, valued at more than $27.6 million, and more than 
1,200 grants, valued at more than $4.26 million, were provided to 
residents to build, renovate, or repair their housing structures. 
Although Chuuk State comprised 50 percent of the FSM population and 
some 46 percent of the housing units, it received only 14 percent of 
the housing loan dollars. Pohnpei, with 32 percent of the population, 
received 67 percent of housing dollars loaned in the FSM; 
Accomplishments: RMI: USDA loans have built 14 percent of the RMI 
housing stock, making RHS the primary housing financier. Between 1987 
and 2000, about 937 housing loans, valued at almost $3.2 million, and 
218 housing grants, valued at about $913,000, were provided to 
residents to build, renovate, or repair their housing structures. This 
assistance was all provided specifically for the Majuro Atoll, which 
comprised 47 percent of the RMI population. USDA planned to expand 
assistance to Ebeye Island (18 percent of RMI population) in the 
Kwajelein Atoll with more housing programs and other assistance. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Telecommunications: U.S. Department of Agriculture (USDA); Provides 
rural telephone loans and loan guarantees; FSM: $40.0 million/$0; RMI: 
$22.8 million/$0; 
Accomplishments: FSM: The USDA loans have resulted in an increase in 
telephones and communications available to homes and businesses. In 
1987, when USDA approved a loan to the FSM Telecommunications 
Corporation (FSMTC), the company had 1,300 telephone subscribers. By 
1993, the number of telephone subscribers in the FSM had increased to 
6,000. In 2001, the FSMTC provided telephone service to more than 
9,870 customers on four islands of the FSM, with a total population of 
some 69,000. FSMTC provided service to about 38 percent of FSM 
households; 
Accomplishments: RMI: The USDA loans have resulted in an increase in 
telephones and communications available to homes and businesses. In 
1987, when USDA approved the loan application from the Marshall 
Islands National Telecommunications Authority (MINTA), the company had 
653 subscribers. In June 2001, MINTA provided telephone service to 
4,183 subscribers on major islands of the Majuro and Kwajalein Atolls, 
with a total population of 32,799. More than half of these customers 
purchased residential service. MINTA provided service to more than 32 
percent of RMI households. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Electric Power: U.S. Department of Agriculture (USDA); Provides loans 
for electric power facilities; FSM: $0/$0; RMI: $12.5 million/$0; 
Accomplishments: FSM: The Pohnpei Utilities Company had a loan 
application with USDA's Rural Utilities Service (RUS). The proposed 
loan for $10.8 million had not yet been approved by RUS, as of October 
2001. The difficulty of obtaining clear title to the land where the 
power plant would be built was preventing groundbreaking according to 
company officials; 
Accomplishments: RMI: The USDA loans have resulted in a large increase 
in electricity available to homes and businesses. The Marshalls Energy 
Company commissioned its new, 12.8 megawatt generating station on 
December 16, 1999. This plant, the island's second, was built with a 
$12.5 million loan from USDA to relieve the old power plant's five 
generators, all of which operated at peak hours with no backup. The 
number of private electricity consumers rose by 11 percent, and the 
number of new business users rose by 34 percent from 1997 through the 
end of 1999. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Disaster Assistance: Federal Emergency Management Agency (FEMA); 
Provides typhoon and severe drought disaster assistance including 
individual and family grants, temporary housing, infrastructure 
assistance, and hazard mitigation grants; FSM: $35.9 million/$0.4 
million; RMI: $17.4 million/$1.1 million; 
Accomplishments: FSM: Since 1986, FEMA has provided $36.3 million in 
direct assistance and through other U.S. agencies provided an 
additional $6.3 million for seven typhoons and two droughts. Through 
FEMA's assistance programs (Disaster Preparedness Improvement Grants, 
Hazard Mitigation Grant Program, and disaster assistance), the FSM has 
been able to ensure that almost all the disaster assistance funds have 
been obligated over the past 15 years; 
Accomplishments: RMI: Since 1986, FEMA has provided $18.5 million in 
direct assistance and through other U.S. agencies provided an 
additional $7.5 million for seven disasters including typhoons, 
droughts, and high wave actions. Through FEMA's assistance programs, 
the RMI has been able to ensure that almost all funds for the disaster 
relief and hazard mitigation assistance and preparedness were 
obligated over the past 15 years. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Postal Services: U.S. Postal Service (USPS); Transports mail, provides 
money orders, and furnishes supplies; FSM:[D] $ 4.9 million/$0.9 
million; RMI:[D] $1.6 million/$0.3 million; 
Accomplishments: FSM: USPS has provided for transportation of mail and 
parcels and has given equipment, materiel, supplies, technical advice, 
and assistance to the FSM. During 2000, the FSM received 1.2 million 
pounds of mail and sent out almost 220,000 pounds. Intrastate mail 
volume for the same period totaled about 67,000 pounds; 
Accomplishments: RMI: USPS has provided for transportation of mail and 
parcels and has given equipment, materiel, supplies, technical advice, 
and assistance to the RMI. During 2000, the RMI received 0.5 million 
pounds of mail and sent out almost 73,000 pounds. Records for 
intrastate mail volume and for other years were not maintained by the 
RMI. 

Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Aviation Services: Federal Aviation Administration (FAA); Provides for 
safe air transport and transit around and through FSM and RMI air 
space; FSM:[E] $ 5.4 million/$3.3 million; RMI:[E] $0.9 million/$0.1 
million; 
Accomplishments: FSM: FAA's main task was to provide for safe air 
travel. The 15-year record of air traffic safety showed two aircraft 
accidents, both within the past 2 years, but no serious injuries and 
no fatalities. The two accidents were attributed to factors, events, 
and conditions unrelated to FAA assistance; 
Accomplishments: RMI: FAA's main task was to provide for safe air 
travel. The RMI's record showed no reported aircraft accidents, 
injuries, or fatalities over the past 15 years. 
		
Program, department, and purpose funding — FY 1987-1999/FY 2000: 
Weather Services: National Weather Service (NWS); Provides weather 
forecasting capacity; FSM: $28.9 million/$2.0 million; RMI: $10.6 
million/$0.9 million; 
Accomplishments: FSM: The FSM weather service offices located at 
Pohnpei, Yap, and Chuuk provided weather forecasts and data to FSM 
citizens. These offices were fully staffed by FSM citizens. They 
received funding on a cost-reimbursable contract arrangement, 
technical assistance, advice, and training through the U.S. NWS. 
According to NWS evaluations, the three weather service offices are as 
capable and as well trained as comparable U.S.based weather service 
offices; 
Accomplishments: RMI: The RMI weather service office provided weather 
forecasts and data to RMI citizens. The office was fully staffed by 
RMI citizens. It received funding on a cost-reimbursable contract 
arrangement, technical assistance, advice, and training through the 
U.S. NWS. According to NWS evaluations, the weather service office was 
as capable and as well trained as comparable U.S.-based weather 
service offices. 

[A] The program has been changed to include U.S. insular territories 
under the reauthorization of the Elementary and Secondary Education 
Act in fiscal year 2002. As of publication, the Department is in 
process of determining the program name and implementation timetable 
for new competitions and awards. 

[B] This figure is for the Workforce Investment Act, which supplanted 
JTPA beginning in fiscal year 2000. 

[C] We used data provided by USDA. 

[D] This figure represents the Department of the Interior's payments 
to USPS for services under the Compact. According to USPS, the actual 
cost was much higher, and it has sought an additional $30 million in 
reimbursement from Interior. 

[E] This figure represents the Department of the Interior's payments 
to the FAA for services under the Compact. This figure excludes the 
cost of air traffic control to the region, which is provided from Los 
Angeles, and FAA provided airport improvements funded from the 
Department of the Interior's capital improvement funds. 

Sources: Program documentation and GAO analysis. 

[End of table] 

Photographs of U.S. Assistance at Work: 

Figure 2: SEPPIE, Child Find Poster for Special Education, Pohnpei, 
FSM: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Figure 3: FASEG, Marshallese-English Story Book and Marshallese 
Phonics Book, Developed by and Published with FASEG Support, Majuro, 
RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Figure 4: Pell Grant-Assisted Students in Class, College of the 
Marshall Islands, Majuro, RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Figure 5: JTPA Carpentry Class, Majuro, RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Figure 6: Maternal and Child Health Laboratory in Hospital, Majuro, 
RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Figure 7: FEMA Assistance (Bridge Replacement) in Pohnpei, FSM: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Figure 8: FEMA Drought Assistance (Home Water Catchment Container), 
Kosrae, FSM: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Foreign Environment and Other Factors Hindered Effectiveness of Nine 
Programs: 

Local conditions in the FSM and the RMI significantly reduced the 
effectiveness of 9 of the 13 programs, loans, and services. These 
programs were (1) Head Start, (2) special education, (3) elementary 
and secondary school improvement grants, (4) Pell Grants, (5) the Job 
Training Program for Adults, (6) Maternal and Child Health Block 
Grants, (7) housing loans, (8) disaster assistance, and (9) the USPS. 
We found that programs designed for the United States faced a variety 
of problems because of geographic, economic, and social conditions in 
the FSM and the RMI. For example, the four states of the FSM are 
separated by as much as 2,000 miles, and the RMI is made up of 1,200 
atolls and islands scattered over 750,000 square miles of ocean. In 
addition, the lack of local financial support, the poor performance of 
the education system, and the lack of medical capacity commonly found 
in the United States hindered the education and health programs. 
[Footnote 20] Limited private sector opportunities and government 
downsizing reduced the value of the job training program. Geographic 
and social conditions reduced the effectiveness of disaster relief. 
Finally, the poor performance of FSM and RMI postal services delayed 
mail service. Most managers of the nine programs recognized that they 
lacked the resources, training, and technical capacity to meet all 
program requirements. 

See appendix II for a more detailed discussion of each program, 
including the program performance requirements and standards, our 
assessment against those standards, and our assessment of whether the 
program encountered conditions in the countries that significantly 
reduced broader program accomplishments or increased program costs. 
Each table contains separate sections that provide specific examples 
of whether or not each program met requirements and standards and 
whether the program encountered conditions in each country that 
significantly reduced its potential accomplishments. To be effective, 
each program had to meet the performance requirements and standards 
and had to demonstrate that it did not encounter conditions that 
significantly reduced potential program accomplishments or increased 
costs. 

Specifically, in terms of program effectiveness, we found the 
following: 

* Head Start: Head Start was intended to promote school readiness by 
enhancing the social and cognitive development of preschool children. 
However, the FSM and the RMI programs could not meet a variety of 
program requirements because of a lack of equipment, medical capacity, 
and government support for the elementary and secondary education 
system. For example, the FSM and the RMI lacked the equipment and 
medical expertise necessary to meet dental and health requirements. 
Additionally, the Head Start program could not meet playground and 
space standards of the program (see figures 9 and 10). The program 
also lacked data to show short- or long-term benefits to the children. 
In addition, both FSM and RMI Head Start managers and parents were 
concerned that any head start provided by the program was lost because 
of the poor performance of the school system.[Footnote 21] 

Figure 9: Head Start Center, Science Area [shows lack of space], 
Majuro, RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Figure 10: Head Start Playground [shows inadequate playground], 
Majuro, RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

* SEPPIE: This program was intended to provide special education and 
related services to children with disabilities. Although the program 
met its limited performance requirements and standards, it encountered 
conditions that significantly reduced potential program 
accomplishments. For example, for some children, the program's 
effectiveness was limited by the lack of on-island medical care 
available to those suffering severe disabilities. In addition, post-
graduation employment opportunities for program graduates were rare. 
Lastly, since neither the FSM nor the RMI contributed funding for 
special education, as states and localities do in the United States, 
this program was the primary funding source for special education. 

* Freely Associated States Educational Grant: The program was intended 
to provide elementary and secondary schools with funds for direct 
educational services such as school supplies, teacher training, and 
school improvement. Although it met its limited program goals to 
provide funding for school supplies and teacher training, because the 
FSM and the RMI did not provide much funding in these areas, many 
needs continued to go unmet. The program was never intended to be the 
sole source of funding for these activities. For example, in the 
United States, most school funding comes from state and local funds, 
and the federal government provides only 6.8 percent of the total 
elementary and secondary school budgets. In contrast, the FSM and the 
RMI provided almost no funding in this area, relying instead on FASEG 
and other U.S. grants. However, because the program was so small 
relative to needs, it could not meet all school requirements for 
school supplies and teacher training. 

* Pell Grants: Pell Grants were intended to provide college students 
with financial assistance for educational expenses. In addition, the 
grants provided graduates with the potential to improve their 
employment opportunities and help meet the development and financial 
needs of the FSM and the RMI. The Pell Grants program met its limited 
program goal to provide financial assistance to FSM and RMI college 
students. However, the poor conditions of the elementary and secondary 
school system, the limitations of a 2-year college, and the lack of 
employment opportunities limited the potential accomplishments of the 
Pell Grant program. According to the FSM and the RMI college 
presidents, because of the inadequate school systems, many students 
exhausted their Pell Grants on remedial classes.[Footnote 22] As a 
result, many students could not use Pell Grants for the credited 
classes they needed to graduate. In the RMI, for example, one-half of 
high school graduates entered the college with the equivalent of a et° 
6th-grade U.S. education and required 1 to 2 years of remedial 
classes. This reduced the amount of Pell Grants available for 
graduation and contributed to the low, 9-percent graduation rate. In 
both countries, the low graduation rate and the limitations of a 2-
year college have reduced the contribution of the Pell Grant program 
to the economy. As a result, skilled workers and managers were brought 
in from the United States, the Philippines, and other countries to 
meet the demand for technical and mid- and upper-level management 
positions. 

* Job Training for Adults: The program was intended to foster 
increased employment and earnings. However, poor economic conditions 
in both the FSM and the RMI have limited the potential accomplishments 
of the program.[Footnote 23] For example, because of the lack of jobs 
in the FSM, program success in job placement for graduates dropped 
from 65 percent in 1995 to 26 percent in 1999. FSM officials said that 
the program was training people for jobs that did not exist. In the 
RMI, poor data precluded determining JTPA's effectiveness, and poor 
economic conditions limited employment opportunities. For example, the 
RMI reported that the percentage of trained adults finding jobs rose 
from 44 percent in 1993 to 100 percent in 1999. However, another 1999 
report from the RMI stated that only 14 percent found employment. 
Neither RMI nor Labor officials could explain the discrepancy, and 
Labor officials agreed that such problems precluded determining the 
program's effectiveness. In addition, because of poor economic 
conditions, the RMI boosted the number of adults it reported as being 
employed by counting numerous "self-employed" graduates as employed 
and simply estimating their potential income. According to U.S. 
Department of Labor officials, the subsistence economy in the RMI and 
the lack of employment opportunities pushed the program to categorize 
people as "self-employed" when they were actually undertaking 
subsistence work and not receiving market income. Because of the lack 
of jobs, as well as the lack of those basic academic and personal 
competencies necessary to benefit fully from job training, the RMI has 
begun providing training in "survival skills," which include 
subsistence fishing, agriculture, and handicraft production. 

* MCH Block Grants Program: The program was intended to improve the 
health of mothers and children and to reduce mortality rates. However, 
the lack of equipment, medical specialists, data collection 
capabilities, and local government support for preventive health care 
limited the accomplishments of this program. Moreover, the FSM and the 
RMI programs were exempt from meeting 6 of the 18 performance measures 
for the program, and they had difficulty in meeting others, because of 
a lack of needed equipment, medical capacity, and support programs 
(such as Medicaid) that were available only in the United States. 
Additionally, the high mortality rate, a key measure of program 
success, could not be reduced because of health care limitations and 
the lack of basic sanitary conditions, like clean water and healthy 
food, necessary for public health.[Footnote 24] Moreover, data 
collection limitations within the FSM and the RMI have hindered the 
ability of the HIS to determine program effectiveness.[Footnote 25] 
Lastly, the U.S. MCH Program generally supplements state and local 
health care initiatives; both the FSM and the RMI governments lacked 
these state or local services. According to the FSM and the RMI MCH 
directors, because the FSM and the RMI relied on the program as their 
primary preventive health care system, the program was overwhelmed by 
the social and economic conditions that were causing declines in the 
general health of the populations, including maternal and child 
health.[Footnote 26] The former U.S. MCH officer responsible for the 
FSM and the RMI programs was pessimistic about the ability of the MCH 
programs to succeed because of the social and economic problems in 
each nation.[Footnote 27] 

* Housing Loans: This program was intended to provide housing loans to 
the most needy. However, legal requirements not designed for use in 
foreign countries precluded targeting loans to only the most needy. As 
a result, the program could not meet its performance requirement to 
target only the neediest in each country. To determine program 
eligibility, the Rural Housing Service (RHS) was required to use 
adjusted income limits set by the U.S. Department of Housing and Urban 
Development (HUD). HUD in turn used U.S. Census income data. Because 
the FSM and the RMI last participated in the U.S. Census in 1980, 
prior to their independence, there were no income data available from 
the U.S. Census Bureau. Instead, RHS used HUD's "Western Pacific 
Islands" adjusted income limits. These limits were relevant only to 
the population of Guam and were not an accurate measure for the much 
poorer populations of the FSM and the RMI. Consequently, most 
households in the FSM and the RMI qualified for the program. This 
violated the program eligibility regulations, which stated that it was 
to serve only those with less than 80 percent of the local median 
income, adjusted for household size. Both nations have conducted 
censuses since 1998 that contained information on household income, so 
such data was available. 

* Disaster Assistance: This program was intended to help localities 
prepare for and respond to disasters. Although the program met its 
performance requirements and standards, it encountered conditions that 
significantly reduced potential program accomplishments and increased 
costs.[Footnote 28] For example, because of the vast distances 
involved and the absence of capabilities comparable to those in the 
United States, the implementation of FEMM disaster assistance programs 
has been costly, difficult, and labor intensive. In addition, 
according to FEMA documents, the cultural and social practices in the 
FSM and the RMI adversely affected the effectiveness of FEMA 
assistance. For example, contrary to FEMM mission to foster self-
reliance for disaster preparedness and response, FEMA found that 
providing disaster assistance to the FSM and the RMI fostered a 
dependency on FEMA assistance. FEMA found that people who would 
otherwise rebuild their lives immediately after an event did nothing 
until FEMA money and resources arrived. Lastly, FEMA officials said 
that, as a domestic agency, it was not structured or intended to 
provide disaster assistance to foreign countries. 

* USPS: Postal Services were intended to provide for mail and mail-
related financial services between the United States and the FSM and 
the RMI. Although the program met its performance requirements and 
standards, it encountered conditions that significantly reduced 
potential program accomplishments and increased costs. For example, 
the postal service has had to contract for air transport of mail, at 
the cost of $2 million annually, because of limited space on the few 
commercial flights to the region. Because flights to the region were 
limited, USPS was not able to meet delivery guarantees on certain 
classes of mail. Moreover, despite USPS's investment in chartered 
flights, once the mail arrived, FSM and RMI postal services delayed 
delivering the mail to its citizens. Citizens from both nations said 
that mail was routinely 2 to 3 months late. (See figure 11.) In the 
RMI, mail often sat in the facilities, waiting for local postal 
officials to sort and place the mail in post office boxes. In the FSM, 
mail was delayed as it awaited clearance through customs. USPS 
operations in the FSM and the RMI have also proven costly. In addition 
to $5.9 million in costs reimbursed by Interior, USPS estimated that 
it has incurred an additional $30 million in extra mail transportation 
costs. 

Figure 11: Mail Awaiting Sorting and Placement in Post Office Boxes at 
the Pohnpei Post Office, FSM: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Four Programs Were Effective: 

Two of the loan programs and two of the services have been effective. 
These programs were (1) telecommunications loans, (2) electrical 
loans, (3) aviation services, and (4) weather services. These programs 
met their performance requirements and standards and did not encounter 
problems that reduced potential program benefits or substantially 
increased costs. These programs' success was partly attributed to 
their resource management approach. The two loan programs were 
effective in meeting their narrow program requirements to provide 
loans to areas that meet the economic and social conditions that make 
them eligible for the loans. In addition, USDA, which managed the loan 
programs, provided guidance and strong oversight during the 
construction of the telecommunication and electrical systems, to 
ensure that they met U.S. building standards. For the aviation and 
weather services, U.S. employees or well-trained nationals managed and 
performed the work. 

The following programs were effective: 

* Telecommunications Loans: The Rural Utilities Service's 
telecommunications loans met its program goal to expand modern 
telecommunication facilities in remote areas by financing telephone 
system improvements in both nations. For example, in 1987, when USDA 
approved a loan to the FSM Telecommunications Corporation (FSMTC), the 
company had 1,300 telephone subscribers. By 1993, the telephone 
subscribers in the FSM had increased to 6,000. USDA ensured that both 
nations' telephone companies met the eligibility requirements of the 
program, conducted the feasibility studies necessary to determine 
their economic viability, had the telecommunications systems built to 
USDA specifications, and provided construction oversight to ensure 
that all specifications were met. (See figure 12.) 

Figure 12: FSM Telecommunications Corporation Building Exterior, 
Pohnpei, FSM: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

* Electrical Loans: The Rural Utilities Service's electrical loans 
were intended to expand access to modern electrical systems by 
providing loans for electrical power facilities, and the USDA met this 
programmatic goal in the RMI.[Footnote 29] The RMI used the loan to 
build new electric power facilities that have allowed large increases 
in electricity available to both homes and businesses. The 1999 
generating station almost doubled the RMI's electrical capacity and 
allowed the nation to meet its growing electricity needs. For example, 
the number of private electricity consumers rose by 11 percent and the 
number of new business users rose by 34 percent between 1997 and 1999. 
USDA ensured that RMI's power company met the eligibility 
requirements, conducted the feasibility studies necessary to determine 
their economic viability, had the power facilities built to U.S. 
specifications, and provided construction oversight to ensure that all 
U.S. specifications were met. (See figure 13.) 

Figure 13: Rural Utilities Service Electric Loan: New Electric Power 
Facility, Marshalls Energy Corporation, Majuro, RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

* Aviation Services: FAA effectively provided air safety services as 
required under the Compact. FAA provided (1) en route air traffic 
services, (2) flight inspections and equipment certifications, (3) 
assistance in developing and updating aviation procedures and 
standards, and (4) technical assistance to help the FSM and the RMI 
governments develop civil aviation safety authorities and aviation 
safety and certification programs. FAA was effective because of its 
direct management and implementation of program activities. Rather 
than provide funds directly to the FSM and the RMI governments for air 
safety, FAA provided the training, material, equipment, and facilities 
construction and maintenance necessary to meet FAA standards. For 
example, when FAA funded construction and maintenance, FAA selected 
the contractors to perform the work and provided oversight and 
contract management to ensure that the work met contract standards. 
(See figures 14 and 15.) 

Figure 14: Aviation Services: FAA-Provided Electrical Power Generator 
in Honolulu, Hawaii, Headed for the FSM and the RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Figure 15: Aviation Services: FAA-Provided Equipment in Honolulu, 
Hawaii, Headed for the FSM and the RMI: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

* Weather Service: The NWS provided weather services as stipulated in 
the Compact. NWS provided the FSM and the RMI with the facilities, 
equipment, technical assistance, and resources needed to operate their 
weather services. To ensure that program goals were met, it maintained 
control of the funds provided to each government through cost 
reimbursement contracts. This allowed NWS to review and disallow 
inappropriate or unauthorized FSM or RMI expenditures. NWS officials 
also performed regular visits and monitored weather operations by 
reviewing required reports and weather data. In addition, NWS required 
that local FSM and RMI officials working for the weather stations met 
the same educational and proficiency standards as NWS employees in the 
United States. For example, NWS provided assistance to local nationals 
for up to 5 years of training so that they could meet NWS standards 
for meteorologists. (See figure 16.) 

Figure 16: Weather Service: Sign Showing Close Collaboration between 
NWS and Pohnpei Weather Service Office in Pohnpei, FSM: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Three Loan Programs May Face Future Repayment Problems: 

The USDA operated the three loan programs for homeowners and utilities 
(telecommunications and electric power) discussed above. Because of 
FSM and RMI dependence on U.S. assistance, a reduction in this 
assistance could result in future repayment problems. During the first 
15 years of the Compact, U.S. funding to the FSM and the RMI was 
decreased every 5 years, and the FSM government has estimated that the 
November 2000 U.S. proposal reduces real per capita income in 2017 by 
almost 40 percent from its 2001 levels.[Footnote 30] Moreover, the 
United States has proposed an end to annual financial assistance to 
the FSM and the RMI in 2016, although the time for repaying these 
types of loans extends from 2017 to 2030. Administrators at all three 
programs were unaware that this extension could adversely impact their 
loan repayments. According to USDA officials, there were no 
requirements for the U.S. program officials to consider future 
reductions in U.S. economic assistance as a condition for extending 
authorized program assistance. Also, such considerations of future 
reductions in U.S. assistance would have significantly raised the 
price of loans to those needing assistance. 

Specifically: 

* Housing Loans: USDA did not, nor was it required to, consider the 
effect that a future reduction in U.S. economic assistance could have 
on the ability of its borrowers to repay their loans. USDA officials 
administered its housing loans and grants based on the applicants' 
eligibility for the program and their repayment ability at the time of 
loan closing, in accordance with the way in which the programs were 
administered in the United States. USDA officials said that they were 
not required to consider the effect that future reductions in U.S. 
economic assistance could have on the ability of its borrowers to 
repay their housing loans. Not considering the effect of such an 
economic downturn in nations whose entire economies could shrink 
dramatically put the U.S. government at risk of losing some $24.7 
million in housing loans. In addition, many loans have a 33-year term, 
and some could have up to a 38-year term, far exceeding the time when 
U.S. economic assistance is scheduled to end. According to Rural 
Housing Service officials, if they had considered the effect of ending 
U.S. assistance payments, they would not have made the loans. 

* Telecommunications Loans: Because USDA did not generally make such 
loans to foreign countries, it did not consider that U.S. assistance 
might be reduced in the future, jeopardizing loan repayments. 
Officials of both the FSM Telecommunications Company and the Marshall 
Islands National Telecommunications Authority stated that severe 
decreases in Compact funding could decrease their companies' revenues 
enough to jeopardize their ability to repay their USDA loans.[Footnote 
31] 

* Electrical Loans: USDA's feasibility study did not include the 
possibility that Compact funds might be severely reduced over the life 
of the loan, resulting in a decreased demand for power as the economy 
contracts. Officials of the Pohnpei Utilities Company and Marshal's 
Energy Company stated that severe decreases in Compact funding to the 
island nations could decrease their companies' revenues enough to 
jeopardize their ability to repay their USDA loans. 

Although in all three cases the FSM and the RMI governments have 
assumed responsibility for these secured loans if the borrowers were 
unable to pay, the dependence of the governments on U.S. funds may put 
such repayment at risk. According to an FSM analysis, under the 
November 2000 U.S. assistance proposal, which would decrease 
assistance levels, "The economy would be caught in a vicious circle of 
low growth, compounded by a series of shocks, requiring downward 
adjustment, loss of real incomes, unemployment, and outward 
migration."[Footnote 32] In addition, USDA administrators had not 
adequately considered how their programs could be terminated if U.S. 
program assistance were to end in 2016. 

Most Programs Have Accountability Problems: 

We found that the FSM and the RMI's administration of most of the 13 
programs we reviewed did not ensure accountability. The accountability 
of these 13 programs varied, from being adequate to having a 
significant loss of financial control, based on our review of audit 
and financial reports; discussions with U.S., FSM, and RMI program 
managers; and our evaluation of whether each program's reporting 
requirements were met. Nine of the programs had poor accountability, 
and five of the nine had instances of theft, fraud, or misuse of 
federal funds. Four had adequate accountability, in large measure 
because program funds were controlled from the United States and 
little direct funding was provided to each nation. 

FSM and RMI Officials Provided Inadequate Accountability for Nine 
Programs: 

We found that nine programs in the FSM or the RMI had not met program 
accountability standards. These problems were documented in annual 
audit reports required under the Single Audit Act of 1984 (P.L. 99-
502) for federal programs, technical reviews conducted by U.S. 
executive branch departments, and discussions with program managers. 
Each program had different accountability requirements. 

The following programs had instances of theft, fraud, mismanagement, 
inadequate accountability, or poor recordkeeping: 

* The Pohnpei Head Start Program fired its entire accounting 
department in 1999 for stealing program funds. A 1999 audit report 
identified $341,000 that was unaccounted for and found significant 
mismanagement, fraud, and loss of control over finances.[Footnote 33] 
In response to our questions about the report, Pohnpei program 
officials told us that the accounting department officials admitted to 
stealing about $11,500. They said that the head of the accounting 
department was forging checks and changing receipts in an attempt to 
cover up the theft, while her two assistants were stealing money 
donated by parents of children in the Head Start program. A 2000 
review of the program in the RMI found that key management staff did 
not clearly understand the program's 1997 performance requirements or 
their responsibilities. The review also found that key management 
staff lacked training in basic financial requirements. Although U.S. 
program officials said that they provided training in response to 
these problems, RMI officials told us that this training was not 
sufficient for them to understand how to comply with the requirements. 

* For the Special Education Programs for Pacific Island Entities, both 
the FSM and the RMI failed to comply, according to audit documents, 
with requirements for (1) awarding contracts competitively, (2) 
financial reporting, and (3) reporting on property purchased with 
federal money. 

* Under the Freely Associated States Educational Grant program in the 
RMI, both the Minister of Education and a staff person used program 
funds intended for teacher training to travel to Paris for more than 3 
weeks for a 1999 United Nations Educational, Scientific, and Cultural 
Organization meeting. 

* Although the Pell Grants program in the FSM has had problems 
complying with the program's accountability requirements since the 
early 1980s, improvements have resulted in the college's meeting its 
accountability requirements for the past several years. For example, 
the 1997 audit questioned $359,000 in costs from audits performed in 
1995, 1996, and 1997. Furthermore, in 1995 the college discovered a 
"double drawdown" of program funds of $1.2 million and alerted the 
U.S. Department of Education. An audit the following year reported 
that the College of Micronesia had an outstanding liability to the 
U.S. Department of Education for $1.2 million. In response, the 
Department of Education placed the college under a provisional 
certification and conducted a technical assistance review in 1999. The 
review concluded that the colleges in both the FSM and the RMI lacked 
sufficient knowledge to administer the federal program adequately, and 
the Department of Education subsequently provided the necessary 
training. According to the FSM college president and its chief 
financial officer, the school has since instituted the improvements 
necessary to meet program requirements. The school received its first 
unqualified opinion in its 1999 audit, 12 years after the Compact went 
into effect. According to FSM officials, the college also received an 
unqualified opinion from its auditors in 2000. 

* The JTPA programs in the FSM and the RMI were exempt from having to 
meet the standardized reporting systems used by the U.S. Department of 
Labor to verify program performance. Department of Labor managers 
exempted the FSM and the RMI because they lacked the necessary data 
collection capabilities. Furthermore, U.S. program managers said that 
they generally ignored the performance data submitted by the two 
nations because it was considered unreliable. As a result, the 
Department of Labor cannot verify program performance. 

* Officials in the MCH program in the FSM state of Kosrae were not 
aware of any HHS reporting requirements and had not submitted any 
progress or financial reports to the FSM government for at least 2 
years, according to the Kosrae MCH director. In addition, they lacked 
any supporting documentation on how program funds were spent. The FSM 
assistant director for public health confirmed this information and 
said that the government simply "guessed" at Kosrae's financial and 
performance data when submitting its annual report to HHS.[Footnote 34] 

* The Rural Housing Service in the FSM state of Pohnpei made housing 
loans to the FSM president and others that violated program 
regulations. The service also mismanaged more than $100,000 of local 
funds. The loan program was intended to provide loans to the 
economically disadvantaged. However, according to audit reports and 
rural housing officials, the local program manager provided 12 
unauthorized loans that violated program regulations. These included 
loans to the FSM president, the head of the Rural Housing Services 
trustee agency, and others, which, among other problems, violated the 
program's requirement that homes built with program funds be 
considered modest for the area. The president's home exceeded this 
standard. In addition, the reports documented other violations of 
program regulations, including (1) a loan to the FSM president that 
exceeded USDA limits, (2) loans for income-generating buildings, (3) 
another loan for a "nonmodest" home, and (4) numerous other weaknesses 
in internal controls. (See figures 17 and 18.) 

Figure 17: Rural Housing Loans: Home of the FSM President, Financed 
with Two RHS loans; Typical RHS Loan-Financed Homes, Pohnpei, FSM: 

[Refer to PDF for image: 4 photographs] 

Source: GAO. 

[End of figure] 

Figure 18: Rural Housing Loan: Home of Former Pohnpei State Housing 
Authority Director, Financed with an RHS Loan, Pohnpei, FSM: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

* FEMA experienced fraud and mismanagement in the FSM and the RMI. In 
the FSM, for example, FEMA reported that some citizens bought new 
pickup trucks and other items not authorized by the home repair 
assistance. FSM officials said that they lacked the staff and 
expertise needed to audit and pursue most of these cases. In the RMI, 
FEMA provided the national government almost $70,000 to replace flood-
damaged hospital facilities, supplies, and equipment on the island of 
Ebeye. However, the RMI government never released the money to the 
hospital. FEMA has spent 3 years attempting to rectify this problem. 
According to FEMA officials, the incidence of fraud and mismanagement 
were no more prevalent in the FSM and the RMI than in the United 
States. However, FEMA could not take routine legal action to recoup 
fraudulent or mismanaged funds, such as garnishment of wages, since 
the FSM and the RMI are sovereign nations. 

* The USPS, which provided the FSM and the RMI with money orders and 
other financial services, reported theft and misuse of funds and had 
difficulty collecting owed funds from the FSM and the RMI postal 
systems. The FSM and the RMI have fired several staff for money order 
theft and misuse of funds, and both continue to experience theft and 
financial irregularities with money order and other cash transactions. 
In the largest known case, a postal worker stole $7,000 in funds. 
Although the USPS had difficulty collecting owed funds from the FSM 
and the RMI postal systems, both nations ultimately transferred 
appropriate funds to USPS. In one FSM case, a special legislative 
appropriation enabled stolen and misappropriated funds to be repaid to 
USPS, although the payment was late. (See figure 19.) 

Figure 19: Postal Services: Open Safe Reflects Lax Security, Pohnpei, 
FSM: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 

Program managers and staff often received little or no training in 
either accounting principles or program requirements, causing many of 
the accountability problems. For example, the Head Start program 
manager in Kosrae was not aware of Head Start performance or reporting 
requirements because he had never been trained. Also, the MCH program 
implementers in Kosrae had never received training on program 
performance goals and lacked the staff to meet reporting requirements. 
[Footnote 35] In some cases, training was provided to the wrong 
officials. For example, in the RMI, a manager received training in how 
to meet MCH financial requirements, even though the Ministry of 
Finance, not the MCH office, controlled and reported on funding. 

FSM and RMI program managers for the education, job training, and 
health programs reported that they had difficulty in meeting federal 
accountability requirements. They said that their program staff needed 
extensive on-island training in how to comply with federal reporting 
requirements. Off-island training was not effective, the managers 
said, because (1) only one or two members of their staff could attend 
training; (2) the training was often too fast-paced for them to 
understand, or it involved technology not available in the FSM or the 
RMI; and (3) they lacked the skills and proficiency to transfer the 
training to their staff upon return. Moreover, the program managers 
said that on-island training for the entire staff was necessary to 
reduce the number of accountability problems commonly found in the 
federal programs. 

Adequate Accountability Existed for Four Programs: 

There was adequate accountability for the telecommunications and 
electric power loans and the aviation and weather services. U.S. 
personnel managed these programs, controlled program accounting from 
the United States, or simply required the FSM and the RMI to meet loan 
repayment schedules. The following examples illustrate how the four 
programs provided adequate accountability: 

* Telecommunications Loans: When applying for loans to build new 
telecommunications facilities, USDA required both the FSM and the RMI 
telecommunications companies to meet a variety of USDA requirements. 
These requirements included conducting financial and engineering 
feasibility studies during the loan application process. These 
feasibility studies showed the projects to be viable. USDA ensured 
that the companies complied with their required safeguards, including 
regular inspection visits from Rural Utilities Service officials 
during construction. Once construction was completed, RUS officials 
continued to make periodic loan-servicing visits to review operations, 
maintenance practices, and procedures for problems that could impair 
the companies' ability to repay their federal loans. The RUS also 
required companies to submit annual financial and statistical reports, 
as well as financial statements to be reviewed in Washington, D.C., 
for indicators of financial downturns, improprieties, or management 
concerns. 

* Electrical loans: Before loans were extended to build new power 
generation facilities, USDA required both local power companies to 
meet engineering and financial feasibility study requirements. These 
feasibility studies showed the projects to be both necessary and 
financially viable. The Marshalls Energy Company complied with 
required safeguards, such as building to U.S. standards. The company 
withdrew only the loan money actually needed for its facility and sent 
annual audited financial statements to USDA in Washington, D.C. The 
FSM's Pohnpei Utilities Company has not yet received money for its 
proposed power generation facilities but has undertaken the same 
process. 

* Aviation Services: The FAA assisted the FSM and the RMI with 
aviation services by providing materiel and equipment. FAA services 
included testing, inspection, and maintenance of equipment. In 
addition, facilities construction was performed either under direct 
FAA oversight or by contractors hired by FAA. Under this arrangement, 
FAA exercised significant control and accountability over the 
assistance and thereby the funding to the FSM and the RMI. 

* Weather Services: The NWS provided assistance to the FSM and the RMI 
through cost-reimbursable contracts. Expenditures made by the FSM and 
the RMI were submitted to the NWS for approval. If the expenditures 
(for example, to pay for salaries, materiel, and equipment) were 
appropriate, then the weather service authorized reimbursement of 
expended funds. A review of FSM and RMI records showed cases in which 
the NWS requested additional justification for expenditures and 
disallowed inappropriate ones. 

These programs share the common characteristics of having a narrow 
mission and being run directly by the U.S. agencies. The four programs 
achieved accountability largely because each agency controlled program 
funds from the United States, and little direct funding was provided 
to either nation. 

Federal Administration Has Not Ensured Financial Accountability: 

We found that the level of U.S. federal oversight over programs in the 
FSM and the RMI varied from adequate to almost nonexistent. Sources 
such as audits, financial reports, monitoring reports, and U.S., FSM, 
and RMI program managers documented this lack of accountability. 
Neither the Department of the Interior, which was charged with 
monitoring and coordinating the individual federal programs, nor the 
State Department, whose ambassadors were responsible for the direction 
and coordination of U.S. agency officials in foreign countries, 
fulfilled these responsibilities, because federal program managers 
often bypassed both departments to work directly with FSM and RMI 
program managers. Each federal department was responsible for ensuring 
program compliance and accountability. Most federal departments could 
not ensure accountability, and oversight was generally neglected 
because of the cost, distance, and time involved. In addition to 
communications difficulties and distance barriers, the small size of 
the programs in the nations, compared with the programs' size in large 
U.S. states, contributed to poor oversight. 

Interior Did Not Provide Effective Monitoring or Coordination: 

The legislation and executive order implementing the Compact 
designated Interior to coordinate and monitor program assistance to 
the FSM and the RMI. However, the department has neither monitored nor 
coordinated the program assistance. In 1987, the Secretary of the 
Interior determined that the most effective method to provide programs 
to the FSM and the RMI was to allow the other agencies to create a 
direct grant relationship with the Pacific Island governments. In 
addition, Interior officials reported that they were not given 
sufficient authority or resources to coordinate and monitor the 
activities of the departments providing program assistance. Instead, 
Interior's principal role has been to provide supplemental technical 
assistance and respond to assistance issues identified by federal 
agencies or the FSM and the RMI. In a previous review, we found that 
the Department of the Interior had not maintained reliable data on the 
amount of assistance provided to each country, and that there were 
inconsistencies between Interior's data and that of other agencies. 
[Footnote 36] 

According to Interior officials, Interior did not meet its legislative 
requirement to place three monitors in the region for the federal 
programs because no funding was provided for the positions. The Palau 
Compact of Free Association Implementation Act, Public Law 101-219, 
states that the Secretary of the Interior shall station 
representatives in the FSM, the RMI, and Palau in order to provide 
federal program coordination and technical assistance to each 
government. However, Interior did not fill any of these positions 
until 1997, 11 years after the Compact went into effect and 8 years 
after the public law was enacted. As of 2001, Interior had never 
stationed representatives in all three nations but instead relied on 
one representative to cover the numerous programs funded by the 19 
agencies with program locations thousands of miles apart. Interior 
officials said that no funding was provided for these positions and 
that it was able to finance the one position only when funding was 
supplied in 1997. Disputes between the Departments of the Interior and 
State concerning Interior staff selected to work in the RMI 
contributed to the lack of Interior staff for the RMI. 

In addition, other limitations negated the Interior representative's 
ability to affect the management of federal programs. For example, 

* the Interior representative had no authority to modify or suspend 
mismanaged programs operated by other executive departments; 

* although the Interior official in the field sent weekly reports to 
Interior headquarters, the Interior representative made few if any 
recommendations to improve program coordination, and no program 
improvements were implemented for any program under review; and, 

* U.S. departments often do not alert or coordinate with the Interior 
representative on proposed or continuing programs, thereby reducing 
the ability of the Interior to provide even informal coordination. 

The number of programs and the vast distances between islands also 
precluded effective monitoring by a single U.S. official. Department 
of the Interior officials in Washington, D.C., as well as the Interior 
representative and the U.S. ambassador to the RMI, all agreed that one 
person was insufficient to monitor federal programs in the region. For 
example, the Interior representative was not aware of problems 
identified in our review, such as the firing of the Head Start/FSM 
accounting staff or the fraudulent activities of FSM postal employees. 
In his 1997 report to Interior, the Interior representative stated 
that grants should be strictly controlled and closely monitored, with 
full-time, on-site monitoring and administration by the U.S. 
government. This recommendation was never implemented. 

Interior officials said that the United States used to actively 
coordinate and monitor federal grants. Prior to the Compact, before 
the FSM and the RMI gained political independence, a large U.S. staff 
located in the region managed federal programs. For example, in 1985, 
the year before the Compact was signed, 31 U.S. officials provided 
management, coordination, oversight, and reporting for U.S. programs 
to the region. In addition, these officials could modify or suspend 
programs for poor performance. Once the Compact was signed, the FSM 
and the RMI began direct grant relations with each federal department, 
and the regional U.S. staff disbanded. Now Interior has only one 
official in the region, trying to help coordinate and monitor programs 
formerly managed by 31 staff members. 

State Could Not Fulfill Program Coordination Role: 

The State Department, whose chief of mission was responsible for 
direction and coordination of U.S. agency officials in foreign 
countries, could not meet its responsibility because the U.S. program 
managers often bypassed the State Department and U.S. embassies. The 
Foreign Service Act of 1980 (P.L. 96-465) states that the Department 
of State Chief of Mission was responsible for the direction and 
coordination of all U.S. government employees in the country.[Footnote 
37] Further, presidential instructions to U.S. Chiefs of Mission 
charge them with the direction, coordination, and supervision of all 
executive branch offices and personnel in their nation. However, both 
the former ambassador to the FSM and the current ambassador to the RMI 
said that most U.S. departments ignored this requirement and bypassed 
State because of their long-standing relationships with FSM and RMI 
ministries.[Footnote 38] As a result, the Department of State, through 
its embassy, could not direct, coordinate, or supervise employees of 
other federal agencies in either the FSM or the RMI. 

Federal Departments Generally Provide Inadequate Oversight: 

We found that most federal departments have not provided adequate 
oversight of their programs in the FSM and the RMI. While weather and 
federal aviation services' accountability requirements included 
independent verification of work performed by others, as well as 
tests, inspections, and frequent visits to the islands to ensure that 
services were meeting U.S. standards, most programs provided far less 
oversight. Of the educational, job training, and health programs, only 
Head Start and the special education program required on-island 
assessments. The job training and MCH programs simply reviewed 
information submitted by each nation, and U.S. program managers said 
that this information was too unreliable to determine program 
effectiveness. We found that many program managers knew little about 
the programs, as illustrated by the following examples: 

* The SEPPIE program manager reported that she had never conducted a 
program assessment in the region, could not discuss the FSM or the 
RMI's program objectives or accomplishments, and had no idea whether 
the programs were operating as intended. Moreover, the manager was not 
aware that any on-island assessments were conducted, even though this 
was the only program in our review that conducted on-island 
assessments annually. Instead, the program manager relied on 
information collected from annual meetings in Washington, D.C. with 
representatives from the FSM and the RMI, and on semiannual reports, 
to monitor this program. 

* MCH program managers said that they had to rely on the FSM and the 
RMI's annual reports to determine program effectiveness because they 
were the only data available, even though the program managers 
recognized that the reports lacked the reliability necessary to 
determine program effectiveness. 

* The JTPA programs in the FSM and the RMI were exempted from having 
to meet the program's national standardized reporting systems, which 
the U.S. Department of Labor used to verify program performance in the 
United States. Department of Labor managers exempted these nations 
because they lacked the necessary data collection capabilities and the 
accuracy of the FSM and the RMI data was suspect. Labor officials said 
that they lacked the travel funds necessary to verify FSM or RMI 
reporting. The FSM and the RMI provided their program information to a 
Department of Labor regional office, where the data could be reviewed 
but not verified by program managers. The program managers said that 
they generally ignored all performance data that the two nations 
submitted because the data were unreliable and because the FSM and the 
RMI programs were considered a low priority as compared with the 
larger programs in the United States. 

Most program managers attributed the lack of oversight to the cost and 
time needed to visit the FSM and the RMI--the islands are about 5,000 
miles from the United States--as well as to the small size of the 
programs relative to programs located in states like California and 
New York. For example, according to representatives from the 
Departments of Labor and of Education, lack of travel funds severely 
limited trips needed to provide oversight and reduced their ability to 
ensure program effectiveness. 

Federal Managers Concerned about Lack of Impact and Accountability of 
U.S. Programs in the Pacific: 

Federal program managers with programs in the FSM and the RMI were 
concerned about the lack of impact, accountability, and training 
provided to the region. On this subject, the Federal Regional Council, 
a consortium of 20 federal departments and agencies based in San 
Francisco, including program managers for Head Start, the Job Training 
Partnership Act, and Maternal and Child Health in the Pacific area, 
released a March 2000 report, Grants to the Outer Pacific. The report 
stated that all council members were concerned about the quality of 
results achieved with federal funds, accountability levels, and 
problems related to training. They found that fragmented services, 
inadequate systems of data collection, and inconsistent attention and 
follow-up attributable to limited time and travel budgets had all 
contributed to the sense that the federal government was simply 
"throwing money at problems," with little effect. 

The council reported that limited travel budgets, time, and technical 
assistance resources made it difficult for federal agencies to monitor 
programs and provide the consistent training necessary to improve 
program performance. It also noted that problems and solutions could 
not be identified from the United States. Council members reported 
that on-site reviews were necessary to disclose causes of program 
problems and provide the best solutions necessary for successful 
program performance. They also found that an on-site federal presence 
and follow-through were important to implement corrective action and 
coordinate federal programs for maximum effect. They concluded that it 
was essential that an on-site representative be appointed with a 
mandate to improve the effectiveness of federal programs. The report 
also recommended that a working relationship be established between 
the federal program managers and the Department of the Interior to 
better use federal programs to support monitoring, coordination, and 
training. 

Conclusions: 

After 15 years of U.S. program assistance, this is an appropriate time 
to reassess the basis and conditions of the provision of U.S. domestic 
programs to the FSM and the RMI. Three considerations appear 
particularly important in this assessment. 

First, we found that many of these programs suffered from weaknesses 
in effectiveness and accountability, many of which were attributable 
to the difficulties associated with delivering programs designed for 
the United States to small island nations. For example, we found local 
administrative capabilities that were not able to meet the complex 
requirements of many federal programs, and U.S. administrative 
capabilities that were not designed to implement U.S. programs in 
foreign countries. These are likely to be difficult problems to 
address. Some of the problems are a consequence of distance, which is 
immutable, and the state of the islands' economic development, which 
is unlikely to improve in the near future. 

Second, the U.S. programs provided several fundamental government 
services in the FSM and the RMI. The provision of power, 
telecommunications, aviation, and postal services are critical for 
island economic development. Because of their importance, these 
services may well be government priorities if U.S. program support 
were to end. Other programs, such as Head Start, special education, 
and Pell Grants, primarily assisted individuals. Program 
administrators believed that these programs, while also important for 
economic development, would not be funded if the United States were to 
end its support. 

Finally, although the U.S. negotiating strategy calls for annual 
assistance to end after another term of assistance, the United States 
has made no such determination for the program assistance. We believe 
that the United States should establish a policy regarding the 
duration of ongoing program assistance during the current 
negotiations. If the United States were to end the program assistance 
for U.S. domestic programs when annual assistance ends, this would 
involve transferring the responsibility for financing and providing 
these services to the FSM and the RMI. Transferring these 
responsibilities to the FSM and the RMI will require U.S. agencies to 
emphasize the development of local capabilities. Without advance 
planning for an "exit" for the program assistance, it is unlikely that 
a new round of U.S. assistance would advance the ability of either 
nation to provide these services at the end of the term of new 
economic assistance. 

As a result, the decisions that must be made are how to improve the 
performance and accountability of the programs and whether, and for 
how long, these programs should be provided to the two nations. We 
believe that these decisions should also be made in a way that is 
consistent with the U.S. strategy to end annual assistance at a set 
time. 

Recommendation for Executive Action: 

In order to assist congressional consideration of continued U.S. 
program operations in conjunction with its consideration of new 
economic assistance to the FSM and the RMI, we recommend that the 
Departments of the Interior and State, in consultation with the 
relevant government agencies and the Federal Regional Council, jointly 
report to the Congress on (1) whether individual programs should be 
continued and for how long, with an exit strategy developed for any 
concluding program; (2) how local capabilities can be enhanced in 
order that the FSM and the RMI can provide the services; (3) how 
programs can be redesigned to work more effectively and efficiently, 
including the use of alternative mechanisms (such as grant 
consolidation, trust funds, foundations, or nonprofit organizations) 
to deliver the assistance; (4) how program coordination and 
accountability can be improved; (5) what government authority and 
resources are required to monitor and coordinate U.S. programs, 
grants, loans, and services; and (6) what the future roles and 
responsibilities of the Departments of the Interior and State should 
be in monitoring and coordinating U.S. programs, grants, loans, and 
services. 

Agency Comments: 

We provided a draft of this report to the Departments of the Interior, 
State, Agriculture, Commerce, Education, Health and Human Services, 
Labor, and Transportation, as well as to the Federal Emergency 
Management Agency, the National Weather Service, the U.S. Postal 
Service, and the governments of the FSM and the RMI. The Departments 
of Agriculture, Commerce, Education, Labor, and Transportation, as 
well as the Federal Emergency Management Agency, and the U.S. Postal 
Service chose not to provide formal comments on the draft report. 
However, we incorporated their informal comments into the report as 
appropriate. 

The Department of the Interior generally agreed with the draft's 
findings, conclusions, and recommendations. The Department of State 
generally agreed with our draft findings and recommendation but raised 
concerns about the department's lack of technical expertise and 
resources to conduct the comprehensive assessment we recommended. 
State also recommended that no new programs be authorized without 
assessments to determine whether the programs could be implemented 
effectively in the region. The department also requested changes to 
improve the balance and accuracy of the draft. In our response to 
State's comments, we agreed that State lacks the necessary resources 
and expertise and emphasized that State should use the resources and 
expertise of Interior and the other departments to implement our 
recommendation. The Department of Health and Human Services generally 
agreed with our draft report, stating that the Federal Regional 
Council's Outer Pacific Committee had expressed similar concerns about 
the lack of impact, accountability, and technical assistance to the 
two nations. In our response to HHS's comments, we incorporated their 
requested changes as appropriate. 

The FSM government also generally agreed with our findings, noting 
that performance and accountability problems could be expected in 
adapting programs designed for the United States to culturally 
different, undeveloped regions in the middle of the Pacific Ocean. 
However, the FSM government provided a number of specific suggestions 
to improve the format, balance, and accuracy of the draft. While the 
RMI government agreed that there were effectiveness and accountability 
problems in the programs, the RMI emphasized the need for these 
programs. The RMI's comments also stated that the Department of the 
Interior, not the State Department, should manage the federal 
programs. In response, we noted that neither the draft nor the final 
report recommended that State be given management responsibility for 
the federal programs. The government also requested that additional 
information be added to six of the programs under review. We made a 
number of clarifications and additions in response to FSM and RMI 
comments. 

We are sending copies of this report to interested congressional 
committees and to the secretaries of the Departments of the Interior, 
State, Agriculture, Commerce, Education, Health and Human Services, 
and Labor, as well as to the administrator of the Federal Emergency 
Management Agency, the Postmaster General, and the presidents of the 
Federated States of Micronesia and the Republic of the Marshall 
Islands. We will also make copies available to other interested 
parties on request. 

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-4128. Another GAO contact and staff 
acknowledgments are listed in appendix VIII. 

Signed by: 

Loren Yager: 
Director: 
International Affairs and Trade: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

At the request of the Chairman of the House Committee on Resources; 
the Ranking Minority Member of the House Committee on International 
Relations; the Chairman of the House Committee on International 
Relations, Subcommittee on East Asia and the Pacific; and Congressman 
Doug Bereuter, we (1) assessed the use and effectiveness of key U.S. 
programs, loans, and services provided to the Federated States of 
Micronesia (FSM) and the Republic of the Marshall Islands (RMI); (2) 
evaluated whether the administration of these programs by each nation 
ensures financial accountability; and (3) evaluated whether the 
oversight of these programs by the U.S. government ensures financial 
accountability. To gather information for our analysis, we interviewed 
more than 100 key officials in the Departments of the Interior, State, 
Education, Health and Human Services, Labor, and Agriculture; in the 
Federal Aviation Administration, the National Weather Service (NWS), 
the Federal Emergency Management Agency (FEMA), and the U.S. Postal 
Service (LISPS); and in the governments of the FSM and the RMI that 
were involved with the provision of U.S. assistance to the two nations 
between 1987 and 2000. 

To assess the use and effectiveness of key U.S. programs and services 
provided to both nations, we reviewed the Compact of Free Association, 
legislation, regulations, and procedures to determine what the 
programs were intended to accomplish and the performance requirements 
used to assess whether programs were being effectively implemented. 
[Footnote 39] To determine whether the programs were effectively 
implemented and performance requirements were met, we reviewed 
monitoring reports, program assessments, site visit reports, and 
progress reports. To ensure that we had a full understanding of the 
programs' intent and to determine whether the programs were effective, 
we conducted detailed interviews with program managers in Washington, 
D.C., San Francisco, and Honolulu; in the two Federated States of 
Micronesia—Pohnpei and Kosrae; and in Majuro, in the Republic of the 
Marshall Islands. In addition, we visited clinics, schools, post 
offices, weather stations, and other facilities to determine the use 
of the assistance, and we spoke with the intended beneficiaries of the 
assistance to obtain an independent assessment of its uses. To ensure 
accuracy, we shared our program summaries with program managers in the 
United States, the FSM, and the RMI, and we incorporated their 
comments into the final draft. 

To assess whether the administration of these programs, by each nation 
as well as by the U.S. government, ensured financial accountability, 
we determined the accountability requirements for each by reviewing 
legislation, regulations, and procedures.[Footnote 40] To determine 
whether the programs were meeting their accountability requirements, 
we reviewed audit reports, financial reports, monitoring reports, and 
site visit reports. To ensure that we had a full understanding of the 
programs' accountability requirements and whether they were met, we 
conducted detailed interviews with program managers in Washington, 
D.C., San Francisco, and Honolulu; in the two Federated States of 
Micronesia—Pohnpei and Kosrae; and in Majuro, in the Republic of the 
Marshall Islands. In both nations, we conducted detailed interviews 
with the accounting departments of each program, reviewed findings of 
audit reports with them to obtain their views, and reviewed financial 
and audit reports for the past 5 years. We also conducted a detailed 
review of the past 14 years of audit reports from the four Federated 
States of Micronesia and the Republic of the Marshall Islands to 
identify historical trends in accountability problems for the region. 
To ensure accuracy, we shared our program summaries with program 
managers in the United States, the FSM, and the RMI, and we 
incorporated their comments into the final draft. 

We performed our work from August 2000 through December 2001, in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix II: GAO Assessment of 13 Programs in the Federated States of 
Micronesia and the Republic of the Marshall Islands: 

The following provides our evaluation of the l3 grant, loan, and 
service programs to the Federated States of Micronesia and the 
Republic of the Marshall Islands that we reviewed. Each table covers 
one grant, loan, or service and includes information on its intent, 
its performance and accountability standards, our assessment of 
whether the programs met their performance and accountability 
standards, and our assessment of any problems related to implementing 
programs in the two foreign countries. 

Table 2: The Head Start Program: 

Purpose and legislation: 
The Head Start program of the Department of Health and Human Services 
(HHS) was intended to promote school readiness by enhancing the social 
and cognitive development of low-income children through the provision 
of health, educational, nutritional, and other services to children 
and their families. The Head Start Act (Pi. 97-35) authorized FSM and 
RMI participation. 

Requirements: 
Performance: Head Start had numerous results-based performance 
standards to measure the quality and effectiveness of programs 
operated by Head Start agencies and the effect of services provided 
through the programs to children and their families. HHS required full 
on-site reviews at least every 3 years to determine compliance with 
program, administrative, financial management, and other requirements; 
Accountability: Quarterly financial reports and annual Program 
Information Reports were required. Audits were to be conducted 
annually to determine compliance with program standards and financial 
requirements. 

Assessment of Performance: Head Start's overall effectiveness could 
not be determined because the program lacked impact data to evaluate 
its effect on school readiness and cognitive development. (GAO 
assessments of Head Start programs in the United States have concluded 
that, because of research limitations, program effectiveness could not 
be determined.) In addition, the program was not able to meet all its 
performance requirements and standards in the FSM and the RMI; 
U.S./FSM: The program was not able to meet all its performance 
requirements and standards. HHS found the FSM to be in general 
compliance with most performance standards, despite identifying 
numerous problems. Problems included lack of on-island medical 
capabilities, inadequate space, and unsafe playgrounds. A 1999 review 
summarized the program's "paramount challenges of inadequate funds, 
limited or unavailable resources, and small windows of opportunity for 
economic growth." 
U.S./RMI: The program was not able to meet all its performance 
requirements and standards. HHS assessments found the RMI to be in 
general compliance with most of its performance standards, but HHS 
reviews found numerous instances of standards not being met. The 1998 
site visit found that no observations or assessments of children's 
progress were being done, and the Program Information Report was not 
accurate. A 2000 site visit found that management did not understand 
the 1997 performance standards or their responsibilities. HHS 
officials said they provided training later that year, although RMI 
officials said that the training received from HHS was helpful but not 
adequate to meet all program needs. RMI officials stated the program 
was effective, despite numerous constraints. 

Assessment of accountability: 
Despite its efforts, HHS was unable to ensure adequate accountability 
over the FSM and the RMI programs. HHS used site visits and audit 
reports to identify problems and responded with training and technical 
assistance. However, the training did not result in full compliance 
with Head Start accountability requirements. After a 1999 audit 
identified theft and mismanagement in Pohnpei, HHS took corrective 
measures. 
U.S./FSM: The Pohnpei Head Start program had significant 
accountability problems. The entire accounting division was fired for 
theft in 1999. Nor was the FSM able to provide any financial or 
progress reports for the past 5 years. In 1999, HHS found the program 
substantially out of compliance in recordkeeping. 
U.S./RMI: A 1998 HHS visit found financial management only marginally 
in compliance and identified a number of management weaknesses, 
including noncompliance with standards to maintain budgetary control, 
to provide cost data on a timely basis, and to conduct inventories of 
Head Start properties. 

Problems in implementing U.S. programs in the FSM and the RMI: 
U.S./FSM: The program encountered conditions that significantly 
reduced potential program accomplishments. HHS reported that the FSM 
had difficulty meeting Head Start's performance standards because they 
were not designed for small island economies. Examples included unmet 
playground and space standards attributable to limited land, and unmet 
standards for mental, hearing, and dental health, because the FSM 
lacked the necessary medical facilities and expertise. In addition, 
FSM Head Start officials were concerned that Head Start 
accomplishments could be lost once children entered the resource-poor 
elementary school system. According to the FSM National Division of 
Education, 10th-grade students barely achieved the expected 2nd-grade 
score of U.S. students in the English language. 
U.S./RMI: The program encountered conditions that significantly 
reduced potential program accomplishments. HHS reported that the RMI 
had difficulty meeting Head Start's performance standards because they 
were not designed for small island economies. Examples included unmet 
health and dental requirements attributable to limited medical staff; 
unmet partnerships requirements because few private sector companies 
existed for partnering; and unmet environmental requirements because 
of high air conditioning costs. In addition, officials were concerned 
that Head Start accomplishments could be lost once children entered 
the resource-poor school system. For example, according to a 2001 RMI 
Ministry of Education study, students leave the 8th grade with "barely 
a 2nd -or 3rd-grade level in English reading ability, and many were 
unable to read even in their own language." 

[A] See Head Start: Research Insufficient to Assess Program Impact 
(GAO/T-HEHS-98-126, Mar. 26, 1998). 

Source: GAO. 

[End of table] 

Table 3: The Special Education Program for Pacific Island Entities 
(SEPPIE): 

Purpose and legislation: 
SEPPIE was a competitive, direct grant program provided by the U.S. 
Department of Education to supply special education and related 
services to children with disabilities as authorized under the 
Individuals with Disabilities Education Act, as amended (Pl. 91-230). 
The act made children with disabilities aged 3 through 21 eligible for 
special education. 

Requirements: 
Performance: The FSM and the RMI were required to provide information 
demonstrating that they will meet all conditions that apply to states 
under the Individuals with Disabilities Education Act. These special 
education grants were awarded on the basis of a competition among the 
eligible islands with the requirements that the funds be used to 
provide special education and related services to children with 
disabilities and to enhance the capacity of the FSM and the RMI to 
make available to these children free, appropriate public education. 
Performance goals of the grants that fulfill the performance 
requirements were explained in the grant applications by the special 
education departments of the FSM and the RMI. Each identified child 
with a disability was to receive specially designed instruction, at no 
cost to the parents, to meet the unique needs of that child. An annual 
report on grant performance was required for continued funding. 
Accountability: SEPPIE recipients were required to meet all conditions 
that applied to U.S. states and to use funds only to provide special 
education and related services directly to children with disabilities 
and to enhance capacity to make a free, appropriate public education 
available to all children with disabilities. The program was subject 
to the 1984 Single Audit Act. 

Assessment of performance: 
SEPPIE fulfilled its performance requirements. Each country's programs 
supported the Individuals with Disabilities Education Act's 
requirements. This included (1) providing direct special education and 
related services, such as physical and speech therapists, for eligible 
children with disabilities; and (2) building the capacity to provide 
improved special education in the future, for example by providing 
teacher training and training for the various therapists in these 
programs, and (3) improving facilities. The students, GAO saw, seemed 
to be receiving the level of education the law requires. Teachers 
received training. Related service assistants visited homes. Special 
education classrooms existed that were better equipped than regular 
classrooms. However, progress toward achieving those goals was slow, 
because both school systems were ineffective. Teachers and 
administrators seemed to want to improve the systems. Both special 
education programs had increasing parental involvement as a specific 
goal. Both countries had active organizations for parents of children 
with disabilities. This was a step toward increasing oversight of the 
programs.
U.S./FSM: About 6 percent of the total student body was identified for 
special education. The FSM Special Education (SpEd) Program performed 
its own annual internal evaluation of individual state programs. Teams 
made up of the FSM SpEd Director, another FSM state's SpEd Director, a 
consultant from San Diego State University, a professor from the 
College of Micronesia, and parents visited a state program, reviewed 
progress toward its performance goals, assessed problems, and listened 
to parents. 
U.S./RMI: 
About 4 percent of the total student body was identified for special 
education. Of the 24 inhabited atolls, 23 were staffed to provide 
special education services. In 1999-2000, the RMI Ministry of 
Education monitored 37 schools on 10 atolls through personal visits. 
Between October 2000 and March 2001, 6 additional schools on 3 atolls 
were monitored. 

Assessment of accountability: 
During the annual audits of U.S. programs in the islands, both 
countries' programs were found to have problems complying with federal 
regulations. These included problems (1) procuring materials and 
services competitively, (2) documenting the purposes and costs for 
expenditures, and (3) not fulfilling requirements for reporting the 
program's financial status or the status of property purchased with 
federal money. 

Problems in implementing U.S. programs in the FSM and the RMI: The 
program encountered conditions that significantly reduced potential 
program accomplishments. The U.S. Department of Education provided no 
direct oversight. The Washington, D.C., program officer had never 
visited these nations and had limited knowledge of the program. No 
other Department of Education Special Education program officials had 
visited these island nations since 1992. Direct U.S. Department of 
Education oversight was a missing element in the FSM and the RMI 
special education programs, which were funded almost entirely by the 
United States, placing a greater responsibility on the department than 
it had in the United States. This responsibility was greater because, 
although the Department of Education does not conduct any direct 
oversight of U.S. local special education programs, a variety of other 
organizations and government agencies provide oversight of the local 
school systems and their performance. No comparable system of 
oversight existed in the FSM and the RMI. That left the SEPPIE funds 
to be overseen by no one but the FSM and the RMI school systems. In 
the United States, federal funds supplement local and state funds. 
However, in the FSM and the RMI, U.S. funds accounted for the great 
majority of the school systems' budgets. SEPPIE dollars funded 
virtually the entire special education program. In the FSM, the states 
contributed some money for teachers from Compact funds. Both nations' 
school systems were staffed by underqualified teachers: for example, 
in the RMI, about 68 percent of special education teachers and aides 
had only a high school degree. Because of the inadequate medical 
infrastructure in both the FSM and the RMI, the special education 
programs had to deal with severe cases of disability, where children's 
problems were fundamentally medical rather than educational. Without 
the proper medical attention, the special education program could do 
little to solve the underlying medical conditions. Also, because of 
the poor economy and the high unemployment, there were few employment 
opportunities for children with disabilities once they had completed 
schooling. 

Source: GAO. 

[End of table] 

Table 4: The Freely Associated States Educational Grant (FASEG) 
Program: 

Purpose and legislation: FASEG funds were provided by the U.S. 
Department of Education through competitive, direct grants for local 
programs to strengthen and improve elementary and secondary education. 
These included teacher training, curriculum development, instructional 
materials, and general school improvement. The program was authorized 
under the Elementary and Secondary Education Act of 1965, as amended 
(PL. 89-10). 

Requirements: 
Performance: These grants were awarded on the basis of a competition 
among the eligible islands with the requirements that the funds be 
used only for programs described in the Improving America's Schools 
Act. Performance goals for the grants that fulfill their performance 
requirements were explained in the grant applications by the state 
education departments of the FSM and the education ministry of the 
RMI: instructional materials, curriculum development, teacher 
training, etc. Department of Education program officials said that an 
annual report on grant performance was required for continued funding. 
Accountability: U.S. FASEG grantees were required to submit financial 
reports. The program was subject to the 1984 Single Audit Act. 

Assessment of performance: FASEG has met its performance requirements 
and standards, according to its program documents. Each country's 
programs supported the Improving America's Schools Act's requirements: 
for example, each state's performance goals addressed (1) developing 
curriculum for improved achievement standards, (2) providing training 
for teachers, and (3) improving the involvement of parents and the 
community in the school system. The individual programs used the money 
to pursue the goals stated in their grant applications. 
U.S./FSM: Pohnpei used its funds to improve the curriculum and train 
teachers while developing better ties with communities. Kosrae had 
similar goals. Almost 70 percent of Pohnpei's and nearly 40 percent of 
Kosrae's grant budget were spent on supplies, including instructional 
materials. These supplies supported the goals outlined in the grant 
application. 
U.S./RMI: The RMI used its funds to develop curriculum, train staff 
and teachers, improve community involvement, and provide instructional 
materials. Almost 40 percent of the RMI grant budget was spent on 
supplies, including instructional materials. The other funds supported 
the goals outlined in the grant application. 

Assessment of accountability: During the annual audits of U.S. 
programs in the islands, both countries' programs were found to have 
problems complying with federal regulations. Both countries had 
problems (1) procuring materials and services competitively, (2) 
documenting the purposes and costs for expenditures, and (3) 
fulfilling requirements for reporting the financial status of the 
program or the status of property purchased with federal money. 
Although financial reports were required, program officials in 
Washington, D.C., told us that only the annual performance report was 
required in order for the FSM and the RMI to receive funds. 
U.S./FSM: In the FSM, the state education offices were responsible for 
maintaining supporting documentation for FASEG. Pohnpei and Kosrae, 
according to the annual audits, have had consistent problems adhering 
to U.S. federal property standards. 
U.S./RMI: Audits and reviews identified questionable transactions. For 
example, when we were in the RMI, we found that about $13,000 in FASEG 
funds were spent in October 1999 to send the minister of education and 
the assistant secretary of education to a United Nations Educational, 
Social, and Cultural Organization meeting in Paris for more than 3 
weeks. However, this information was not included in any audit reports 
submitted to the U.S. Department of Education. Further, in 2000 and 
1999, auditors found $350,000 and $477,000, respectively, in contracts 
that did not appear to follow appropriate procurement guidelines. 

Problems in implementing U.S. programs in the FSM and the RMI: 
The program encountered conditions that reduced potential program 
accomplishments. Furthermore, progress toward achieving the 
performance goals was slow, because both school systems were 
ineffective. For example, RMI students left the 8th grade with barely 
a 2nd- or 3rd-grade level English reading ability, and many were 
unable to read in their own language. The FSM students were 
comparable. The dropout rate was also extremely high. Many eligible 
children did not go to school, and if they did, the school buildings 
in many cases were not conducive to learning, oftentimes lacking 
running water and necessary space, as well as teachers and supplies. 
Moreover, both nations' school systems were staffed by underqualified 
teachers. The FASEG program was hampered by the lack of FSM and RMI 
financial support for the school systems. By contrast, in the United 
States, federal funds supplement local and state funds and account for 
only about 6.8 percent of total elementary and secondary school 
spending. However, the FSM and the RMI relied on federal funds for 
most of their school systems' budgets. For example, FASEG funds, along 
with other U.S. grants, provided almost all education material, and 
Compact funds provided money for teachers' salaries, building 
construction, maintenance, and repairs. Because the FSM and the RMI 
did not adequately fund their educational systems with local revenues, 
FASEG and other U.S. grants were not adequate to make significant 
improvements in the school systems. There was little U.S. oversight of 
the program. Although the Washington, D.C., program officer knew about 
the program and its performance goals, she had never visited the 
nations before July 2001. According to Department of Education 
officials, the U.S. Department of Education did not perform direct 
monitoring of the use of the FASEG funds, and there were no periodic 
site visits or reports by the department. Great distances and expense 
prevented the program from performing a more regular cycle of onsite 
visits, annual or otherwise. Oversight of the FASEG program has 
generally included long-distance monitoring activities such as 
telephone, fax, and e-mail communications to address implementation 
issues, review performance reports, and conduct annual meetings of 
grantees for technical assistance workshops during the Department of 
Education's annual regional meetings for Improving America's Schools. 

[A] The program has been changed to include U.S. insular territories 
under the reauthorization of the Elementary and Secondary Education 
Act in fiscal year 2002. As of publication, the department is in the 
process of determining the program name and implementation timetable 
for new competitions and awards. 

Source: GAO. 

[End of table] 

Table 5: The Pell Grants Program: 

Purpose and legislation: Pell Grants, from the Department of 
Education, were intended to provide eligible undergraduate students 
with financial assistance for educational expenses. The Higher 
Education Act of 1965, as amended (Pi. 89-329), authorized FSM and RMI 
participation. 

Requirements: 
Performance: Pell Grants were to provide eligible undergraduate 
students who have demonstrated financial need with grant assistance to 
help meet educational expenses. The student was expected to make 
satisfactory academic progress. Pell Grants may only be used for 1 
year of remedial education. 
Accountability: Annual financial and audits reports were required. 

Assessment of performance: The program has met its performance 
requirements and standards. The Pell Grants program effectively 
provided grants to eligible FSM and RMI students. Because of low 
income levels, most students met the financial need requirement. 
Students from both nations used Pell Grants to attend U.S. colleges as 
well as their national college.
U.S./FSM: From 1988 to 2000, Pell Grants provided 13,704 eligible 
students with grant assistance to attend the College of Micronesia. 
About 85 percent of the students received Pell Grants; most others 
were disqualified for not meeting the academic achievement requirement. 
U.S./RMI: From 1993 to 2001, Pell Grants helped 4,375 students attend 
the College of the Marshall Islands. More than 90 percent of the 
students received Pell Grants. U.S. and RMI Pell Grant managers said 
the program was highly effective. 

Assessment of accountability: Financial accountability had improved. 
The Department of Education used financial and audit reports to 
identify administrative weaknesses and provide training. U.S. 
officials said that accountability problems in the region were related 
to inadequate training necessary to comply with complex program 
requirements. The Department provided the FSM and the RMI with 
training in 2000.
U.S./FSM: The FSM had accountability problems from the early 1980s, 
including a $1.2-million double drawdown in 1994; the FSM repaid this 
in 1997. Because of recent improvements, a 1999 audit found that all 
Pell financial requirements were met. All financial reports were 
provided. 
U.S./RMI: A 1995 audit concluded that the College of the Marshall 
Islands complied with all major requirements of the Pell Grants 
program. RMI officials said that the 1999 audit found that all Pell 
financial requirements were met. The college had all required annual 
reports for the past 5 years, with the exception of 1997. 

Problems in implementing U.S. programs in the FSM and the RMI: 
U.S./FSM: The program encountered conditions that significantly 
reduced potential program accomplishments. Social and economic 
conditions blunted the potential impact of Pell Grants to support the 
FSM's development goals. Many freshman needed 1 to 2 years of remedial 
classes before they could enter accredited courses, because the K-12 
system did not prepare them for U.S. college-level courses. Because 
Pell Grants were limited to 1 year of remedial classes, many students 
could not qualify or afford the credited classes needed to graduate. 
Furthermore, the ability to meet national needs was hampered by the 
limitations of a 2-year college, lack of jobs, and low pay. Moreover, 
most college operating funds came from U.S. funds, including Pell 
Grant-supported tuition payments. Loss of these funds could bankrupt 
the FSM college. 
U.S./RMI: The program encountered conditions that significantly 
reduced potential program accomplishments. Social and economic 
conditions blunted the potential of Pell Grants to support the RMI's 
development goals. One-half of K12 graduates entered the college with 
the equivalent of a 4th- to 6th-grade U.S. education and required 1 to 
2 years of remedial classes. Because Pell Grants were limited to 1 
year of remedial classes, many students could not qualify or afford 
the credited classes needed to graduate, contributing to the low 9 
percent graduation rate. A 2000 study found that the RMI's 1st-12th-
grade school system had not improved since 1986 and may have declined, 
in part because of a lack of RMI financial support. In addition, U.S. 
funds, including Pell Grant-supported tuition payments, made up 90 
percent of the college's annual budget, and any reduction could 
bankrupt the RMI college. 

Source: GAO. 

[End of table] 

Table 6: The Job Training Partnership Act (JTPA) Program: 

Purpose and legislation: JTPA, of the Department of Labor, was 
intended to establish job training programs that would result in 
increased employment and earnings and enhance the nation's 
productivity. Compact implementing legislation authorized that this 
program be made available to the FSM and the RMI. Further, the Job 
Training Partnership Act, as amended (Pi. 97-300), authorized FSM and 
RMI participation. As of July 1, 2000, the JTPA program was replaced 
by the Workforce Investment Act. 

Requirements: 
Performance: Annual Job Training Plans were to include performance 
goals and past achievements for employment and retention. In addition, 
Labor was to determine whether performance measures were met and also 
to provide an annual report to the state governors on whether 
performance goals were met. 
Accountability: JTPA fund recipients must submit quarterly financial 
reports and annual independent audits. 

Assessment of performance: 
U.S./FSM: The program was exempt from key performance requirements and 
standards because of inadequate data. In addition, the program was not 
effective. While the program trained 1,799 adults between 1995 and 
1998, the percentage of adults who have entered employment fell from 
about 65 percent in 1990 to about 26 percent in 1999. (By comparison, 
the U.S. average was 66 percent.) Because of the worsening economy and 
lack of private sector jobs, FSM officials reported that they were 
training people for jobs that do not exist. Program graduates have 
found jobs in the United States. 
U.S./RMI: Inconsistent data precluded determining JTPA's 
effectiveness. The RMI reported that the percentage of trained adults 
finding jobs rose from 44 percent in 1993 to 100 percent in 1999. The 
RMI credited its success to paying employers to hire JTPA trainees and 
counting the "self-employed" as employed, which was allowed under the 
program. However, another RMI 1999 report stated that only 14 percent 
found employment. Neither RMI nor Labor officials could explain the 
discrepancy. 

Assessment of accountability: Financial accountability needed 
improvement. Labor officials were unable to conduct assessments of 
past performance because of unreliable data submitted by each nation 
and the lack of sufficient funds to provide on-site monitoring. The 
program manager said that none of JTPA's reporting systems could be 
used to assess program effectiveness, and FSM and RMI data were not 
included in Labor's annual report on whether performance goals were 
met. In addition, the JTPA programs in the FSM and the RMI were exempt 
from JTPA's national standardized reporting system, used by the 
Department of Labor to verify program performance. Both the FSM and 
the RMI lacked the necessary data on unemployment rates, poverty 
levels, and welfare statistics used by Labor's performance system to 
evaluate JTPA performance. Instead, Labor required each nation to 
establish goals and submit performance data. However, the Labor 
program manager was not able to verify the accuracy of the performance 
data submitted by the FSM or the RMI, and Labor program managers 
acknowledged the unreliability of the data. Labor did provide training 
and site visits from 1993 to 1997 in an attempt to resolve a variety 
of problems cited in their reports, such as inaccurate data and the 
inability of three of the four FSM states to meet their performance 
requirements. However, while the Labor program managers recognized the 
need for substantial training, lack of funds precluded providing this 
level of training. In fact, despite Labor's training and other 
technical assistance, we found many of the same problems in 2001 that 
Labor identified in 1995. 
U.S./FSM: The FSM, with one exception, provided the required quarterly 
financial reports for 1995 through 1999. Annual audits were conducted, 
and they document performance and financial accountability problems. 
For example, the 1999 audit found no evidence that trainees attended 
or completed training programs.	
U.S./RMI: The RMI provided quarterly reports late in 1997, and they 
were not provided at all in 1996, though they were submitted at a 
later date. A limited review of audit reports provided in the RMI 
found a variety of accounting problems and questioned costs. For 
example, in 1994, $8,500 was advanced to a vendor for supplies that 
were still not delivered as of 1997. 

Problems in implementing U.S. programs in the FSM and the RMI: The 
program encountered conditions that significantly reduced potential 
program accomplishments. JTPA and its successor, the Workforce 
Investment Act, were designed for the economically advanced U.S. 
states expected to have the staff and financial resources to conduct 
oversight and provide the necessary assistance to ensure that 
performance standards were met, according to Labor officials. The FSM 
and the RMI lacked these capabilities, and U.S. Labor lacked the 
resources necessary to assist the FSM and the RMI. In addition, both 
nations had high unemployment rates (the RMI's 1999 unemployment rate 
was 31 percent) and little private sector activity. The primary 
employer of JTPA graduates had been the government sector, but both 
nations have implemented government layoffs and reduced the hiring of 
JTPA graduates. JTPA graduates often migrated in search of better-
paying jobs. 

Source: GAO. 

[End of table] 

Table 7: The Maternal and Child Health (MCH) Block Grants Program: 

Purpose and legislation: MCH, of the Department of Health and Human 
Services (HHS), was authorized by Title V of the 1935 Social Security 
Act, as amended (49 Stat 620). MCH was intended to help states to 
provide mothers and children (in particular those with low incomes) 
access to quality health services and to reduce infant mortality and 
the incidence of preventable disease. The block grant allowed states 
to implement the program with maximum flexibility and minimum 
reporting requirements. 

Requirements: 
Performance: Annual applications must be submitted that include a plan 
for meeting and funding health care needs. The MCH program had 18 
national performance measures and 6 national outcome measures, such as 
prenatal care, immunizations, and mortality rates; states develop 7 
to10 additional measures. MCH officials stated that these measures 
were ambitious national health goals and that many states had not met 
all these goals. MCH officials said that it was not expected that all 
performance measures would be met in any given state and that they 
were targets only. 
Accountability: An annual report must be submitted to evaluate the 
extent to which the state has met its goals and objectives and the 
extent to which funds were spent consistent with the state's 
application. Audits were required every 2 years. 

Assessment of performance: The program could not meet all its 
performance measures. In addition, the FSM and the RMI data 
limitations, combined with the small population, precluded an accurate 
assessment of MCH effectiveness. Because of unreliable data, for 
example, neither nation could document annual decreases in mortality 
rates, a key measure of program effectiveness in states with large 
populations and more advanced data collection systems.
U.S./FSM: The FSM reported that it was able to meet some national 
performance measures, such as those for immunizations and breast-
feeding, but was not able to meet other measures, such as Pap smears 
or those for prenatal care (fewer than 10 percent of pregnant women 
received early prenatal care in 1999). 
U.S./RMI: The RMI reported that it met some national performance 
measures for immunizations, breast-feeding, and prenatal care but was 
not able to meet other measures, such as screening newborns for a 
variety of illnesses. Morbidity (illness) rates were also increasing 
in areas targeted by MCH. 

Assessment of accountability: In accordance with MCH guidelines, HHS 
officials said that they provided limited oversight and had not 
conducted any rigorous assessment in the FSM or the RMI. Instead, HHS 
relied on its annual assessments of the FSM and the RMI annual 
reports. HHS officials stated that they must rely on these reports, 
despite the limited accuracy of the data. These limitations make it 
difficult to determine FSM and RMI progress toward meeting MCH 
performance goals.
U.S./FSM: The FSM provided the annual reports as required. Audits were 
conducted as required, but neither FSM nor U.S. MCH program officials 
had read them. According to U.S. MCH officials, this responsibility 
rests with HHS financial staff.	
U.S./RMI: The RMI provided the annual reports as required. Audits were 
conducted as required, but neither RMI nor U.S. MCH officials had read 
the reports. According to U.S. MCH officials, this responsibility 
rests with HHS financial staff. 

Problems in implementing U.S. programs in the FSM and the RMI: The 
program encountered conditions that significantly reduced potential 
program accomplishments. The FSM and the RMI were exempt from 6 of the 
18 national performance measures and had difficulty meeting others 
because MCH was designed for use in the United States. In addition, 
the FSM and the RMI had difficulty in accurately reporting on its 
performance measures because the MCH reporting system was designed for 
use in the United States, where the U.S. Vital Statistics System has 
been developed over the past 65 years. An MCH official estimated that 
the FSM and the RMI data collection capabilities were 20 to 30 years 
behind those of the United States. Moreover, U.S. per capita spending 
on health care was about $4,000, as compared with $250 in the FSM and 
the RMI, and both nations lacked the level of medical expertise, 
facilities, and support services used by MCH in the United States. For 
example, MCH generally supplements Medicaid, state health programs, 
and private health care systems in the United States, while the FSM 
and the RMI used MCH as their primary preventive health care system. 

Source: GAO. 

[End of table] 

Table 8: The U.S. Department of Agriculture's (USDA) Rural Housing 
Service (RHS) Housing Loan Program: 

Purpose and legislation: 

The USDA's RHS has provided direct housing loans and grants for single-
family dwellings among other services. RHS was authorized under the 
Housing Act of 1949, as amended (Pi. 81-171). 

Requirements: 
Performance: Section 502 of the Housing Act of 1949, as amended, 
allowed loans to low-income borrowers to buy, build, rehabilitate, 
improve, or relocate eligible, modest dwellings for use by the 
borrower as a permanent residence. Section 504 allowed loans and 
grants to very low-income homeowners to make general improvements to 
their homes as long as the dwelling remained modest and was not used 
for commercial purposes. To be eligible, applicants were required to 
have low or very low incomes "Low income" was defined as an adjusted 
income that was greater than the Department of Housing and Urban 
Development's (HUD)-established very low-income limit, but that did 
not exceed the HUD established low-income limit (generally 80 percent 
of median income adjusted for household size for the area where the 
property was located. "Very low income" was defined as an adjusted 
income that did not exceed the HUD-established very low-income limit 
(generally 50 percent of median income adjusted for household size) 
for the area where the property was located. For Micronesian or 
Marshallese applicants, their income had to be "low" or "very low" as 
determined by the Department of Housing and Urban Development's 
Adjusted Income Limits for Western Pacific Islands. Section 502 loan 
terms extended for up to 33 years and in some cases 38 years but were 
not to exceed the expected useful life of the property as a dwelling, 
at a subsidized interest rate that varied with the borrower's income. 
Section 504 loan terms extended for no longer than 20 years, at 1 
percent interest. Building sites could be inspected by RHS officials 
during construction. Loans and grants had to be deposited into a 
supervised account to ensure that funds were disbursed for work 
completed. 
Accountability: Local Rural Housing Offices were to be subjected to a 
State Internal Review (SIR) at least once every 5 years. In instances 
where problems existed, reviews could be performed more often at the 
discretion of the state director. For each construction or 
rehabilitation loan, inspections should have occurred as contractors 
were paid for work completed. No post-construction reports were 
requested or required, although supervised bank accounts were to be 
reconciled. USDA delegated responsibility for this program to the 
local RHS representative, the community development manager. 

Assessment of performance: Legal requirements not designed for use in 
foreign countries precluded targeting loans to the most needy. The 
Rural Housing Service's compliance with its legal and program 
requirements inadvertently resulted in its not targeting housing 
assistance to low- and very low-income households, thereby providing 
assistance to households whose incomes exceeded the local low- and 
very low-income levels. This was not attributable to a deficiency in 
the FSM or the RMI but to the legal requirement that RHS was required 
to use adjusted income limits set by the Department of Housing and 
Urban Development (HUD) to determine program eligibility. By the 
Housing Act of 1949 as amended, RHS was required to use income levels 
set by HUD. HUD in turn used U.S. Census income data. Because the FSM 
and the RMI last participated in the U.S. Census in 1980, prior to 
their independence, there were no current income data available from 
the U.S. Census Bureau for HUD to use in writing adjusted income 
limits on which program eligibility was based, according to U.S. 
officials. RHS had used adjusted income limits published as HUD's 
"Western Pacific Islands" adjusted income limits table. According to a 
HUD official, these data were relevant only to the population of Guam 
and were not comparable to the much poorer populations of the FSM and 
the RMI. As a result, most households in the FSM and the RMI qualified 
for the program, even though the regulations stated that it was to 
serve those with less than 80 percent of the local median income, 
adjusted for household size.
U.S./FSM: Although many houses were built and repaired in accordance 
with the requirements, the Pohnpei RHS office clearly violated program 
requirements with some loans, including loans to the FSM president and 
the head of the local housing trustee agency that works with the RHS 
office.[A] Specifically, the Pohnpei office (1) made loans to 12 
borrowers who constructed or repaired houses that were subsequently 
used for income-producing purposes; (2) made loans to 2 borrowers, 
including the president, who constructed houses that exceeded what 
would be considered a "modest design"; and (3) approved a loan to the 
FSM president that exceeded the authorized maximum loan limit by 
$15,000. According to the Department of the Interior audit report, 
these problems occurred because the Pohnpei office (1) was not aware 
that the regulations prohibited using loans for commercial purposes, 
(2) did not adequately review loan documents, (3) did not believe that 
one house was unacceptably elaborate, and (4) did not adequately 
monitor the construction of the elaborate house. 
U.S./RMI: With the support of the RMI government, the RHS was 
increasing the programs provided in the RMI and extending them to 
Ebeye on the Kwajelein Atoll. 

Assessment of accountability: Accountability was insufficient and 
ineffective. The Hawaii State Office failed to exercise adequate 
oversight in the FSM and the RMI. Because of the distance and cost, 
the RHS state office in Hawaii had not performed a state level 
evaluation of the FSM and the RMI offices since 1993. The SIR for the 
Pohnpei office in 1999 was the first since 1993. 
U.S./FSM: The Hawaii State Office suspended loan-making in Pohnpei and 
the rest of the Western Pacific because of high delinquency rates from 
June 1998 until June 1999. In December 1998, the Hawaii State Office 
identified irregularities in loans made to the president of the FSM. 
On January 8, 1999, the state office instructed the Rural Development 
manager in Guam, who had direct oversight of the Pohnpei local office, 
to review loans made by the Pohnpei office. This review found that the 
total outstanding loan amount of approximately $95,000 exceeded the 
maximum loan limit of $81,548. Upon these findings, the state office 
revoked the loan-making authority of the Community Development manager 
in Pohnpei on February 19, 1999. On January 12, 1999, the Department 
of the Interior Inspector General began an audit of the Pohnpei office 
at the request of the U.S. deputy chief of mission at the Pohnpei 
embassy. Only after these events was a State Internal Review 
undertaken in July 1999 by the Hawaii State Office. Other audits 
ensued. The Hawaii State Office demanded and collected the FSM 
president's loans in full on June 8, 2000. The next day, June 9, 2000, 
the Pohnpei office was closed and the Community Development manager 
removed at the insistence of the U.S. embassy. The office was quickly 
reopened under the management of U.S. citizen employees of USDA.Since 
uncovering the problems in Pohnpei, RHS has increased its oversight of 
the other FSM programs. In May 2001, the Hawaii State Office conducted 
a State Internal Review for the local office in Kosrae. The review 
team discovered weaknesses in the Section 502 and 504 programs and 
instructed that more attention be paid to the programs. Still, because 
of the relatively strong compliance, no further state internal reviews 
were scheduled until 2006. 
U.S./RMI: Since uncovering the problems in Pohnpei, RHS has increased 
its oversight of the RMI program. In May 2001, the Hawaii State Office 
conducted a State Internal Review for the local office in Majuro. The 
review team discovered weaknesses in the Section 502 and 504 programs 
and instructed that more attention be paid to the programs. Still, 
because of the relatively strong compliance, no further state internal 
reviews were scheduled until 2006. 

Problems in implementing U.S. programs in the FSM and the RMI: The 
timeline for repayment of many of these loans extends beyond the end 
of further Compact assistance. Because USDA began this program in the 
FSM and the RMI before independence and did not modify the program 
when the islands became foreign countries, USDA failed to consider 
that future reductions in U.S. economic assistance could affect the 
ability of its borrowers to repay their loans. In addition, some loans 
had up to a 33-year team, and some had a 38-year term, far beyond the 
time when U.S. economic assistance is scheduled to end. Time 
differences made it difficult for RHS borrowers to contact USDA's 
Centralized Servicing Center in St. Louis by telephone. In addition, 
it put the burden of repayment tracking and collection on the local 
RHS offices and officials in the islands. The Rural Housing Service's 
(RHS) compliance with its legal and program requirements inadvertently 
resulted in its not targeting housing assistance to low- and very low-
income households. 

[A] These issues were extensively covered in these reports: U.S. 
Department of the Interior Office of the Inspector General, Audit 
Report: Pohnpei Local Office, Rural Development Program, U.S. 
Department of Agriculture, Federated States of Micronesia, Report No. 
99-1-953 (Washington, D.C.: Department of the Interior, Sept. 1999); 
and U.S. Department of Agriculture, State Internal Review (SIR) Report,
Pohnpei Local Office (Hawaii State Office: U.S. Department of 
Agriculture, July 12-22, 1999). 

Source: GAO. 

[End of table] 

Table 9: U.S. Department of Agriculture's (USDA) Rural Utilities 
Service (RUS) Telecommunications Loans Program: 

Purpose and legislation: The Rural Electrification Act of 1936, as 
amended (49 Stat 1363), authorized USDA to make loans for furnishing 
and improving telephone service in rural areas. The loans were 
intended to be used to furnish, improve, expand, construct, and 
operate telephone facilities or systems in rural areas. Compact-
implementing legislation authorized programs of the Rural 
Electrification Administration to be made available to the FSM and the 
RMI. The Rural Utilities Service was the successor to the Rural 
Electrification Administration. 

Requirements: 
Performance: Telecommunications facilities were required to be built 
and operated according to USDA specifications, and loans were required 
to be repaid in a timely manner. The length of the loans was not 
allowed to exceed the expected life of the equipment built, except as 
approved by the administrator of RUS. The interest rate varied by the 
type of loan: hardship loans were at 5 percent; cost of money loan 
rates varied but could not exceed 7 percent. 
Accountability: Each loan application was subject to review and to 
engineering and financial feasibility studies. A variety of safeguards 
were in place to protect U.S. funds. The borrower received no loan 
funds until he showed that the work was either under contract or 
completed. As contractors completed phases of each project, the 
borrower's engineer and architect were required to provide extensive 
documentation to RUS. RUS inspected the site at the completion of 
major project phases. After construction, annual audits kept USDA 
aware of the companies' financial status. 

Assessment of performance: This program met its performance 
requirements. Both companies, the FSM Telecommunications Corporation 
(FSMTC) and the Marshall Islands National Telecommunications Authority 
(MINTA), provided access to telephone service to a significant portion 
of the national populations. They were also repaying their loans. The 
loan to FSMTC totaled $39.9 million for 35 years, at 5 percent 
interest. The loans to MINTA totaled $22.80 million and were also for 
35 years, at 5 percent interest. 

Assessment of accountability: Accountability was effective. Both 
countries' telecommunications companies were subject to the 
feasibility study requirement. Both feasibility studies showed the 
projects to be financially viable. USDA and the companies complied 
with required safeguards. Each company was subject to loan fund and 
accounting reviews during construction. Each audit had minor findings 
that were quickly resolved. The Rural Utilities Service-financed 
projects had strict oversight by USDA employees, who required the 
builders to meet USDA specifications. 

Problems in implementing U.S. programs in the FSM and the RMI: The 
program encountered conditions that could significantly increase costs 
to USDA. For example, several developments could jeopardize loan 
repayment. Although the feasibility studies predicted the projects' 
viability, the studies did not assess the possibility that Compact 
funds might be severely reduced over the life of the loans. During the 
first 15 years of the Compact, U.S. funding to the island nations was 
decreased every 5 years. Officials of both companies stated that 
future severe decreases in Compact funding to the island nations could 
decrease their companies' revenues enough to jeopardize their ability 
to repay their USDA loans. In addition, USDA administrators had not 
adequately considered how their programs could be terminated if U.S. 
program assistance were to end in 2016. Also, in 1997 the Federal 
Communications Commission issued an order to establish benchmarks that 
would govern the international settlement rates that U.S. carriers 
were permitted to pay foreign carriers to terminate international 
traffic originating in the United States. According to the order, 
these benchmark rates were necessary because under the current system, 
the settlement rates that U.S. carriers paid foreign carriers to 
terminate international traffic originating in the United States were 
substantially above the cost that foreign carriers incurred to 
terminate that traffic. FSMTC and MINTA both protested that this would 
seriously damage their revenues, cuffing their income substantially 
and endangering the companies' ability to repay their loans to the 
U.S. government. Both companies relied on incoming long distance 
telephone calls for a significant portion of their revenue. As of 
October 2001, settlement rates had not been adjusted, but negotiations 
were underway between U.S. carriers and FSMTC and MINTA to reach an 
agreement on this issue.The loan to MINTA was guaranteed by the 
government of the Marshall Islands. The loan to FSMTC was secured by 
the facilities of the company. Under the November 2000 U.S. proposal 
for future FSM assistance, U.S. funding would decrease, and as it 
decreased, real per capita gross domestic product (GDP) in the islands 
would also decrease. As GDP decreased, funds available to the 
governments would also decrease, calling into question the 
governments' ability to repay any guaranteed loans. 

Source: GAO. 

[End of table] 

Table 10: The U.S. Department of Agriculture's (USDA) Rural Utilities 
Service (RUS) Electrical Loans Program: 

Purpose and legislation: RUS electrical loans, authorized under the 
Rural Electrification Act of 1936, as amended, were intended to 
furnish and improve electrical service in rural areas and to finance 
the construction of electric distribution, transmission, and 
generation facilities. Compact-implementing legislation authorized 
programs of the Rural Electrification Administration to be made 
available to the FSM and the RMI. The Rural Utilities Service was the 
successor to the Rural Electrification Administration. 

Requirements: 
Performance: Electrical facilities were to be built and operated 
according to USDA specifications, and the loan(s) were to be repaid in 
a timely manner. The terms of the loans varied up to 35 years but were 
not to exceed the useful life of the equipment built. The USDA 
regulations defined electrical engineering, architectural and design 
policies and procedures, electric system construction policies and 
procedures, and electric standards and specifications for materials 
and construction. Each loan application was required to be reviewed 
and assessed through detailed engineering and financial feasibility 
studies to determine the usefulness of the facilities and the 
borrower's ability to repay the loans. 
Accountability: A variety of safeguards were in place to protect U.S. 
funds. The borrower was to receive no loan funds until it showed that 
the work was either under contract or completed. Once the borrower 
received funds, it was to submit detailed financial reports and annual 
audited financial statements. RUS field accountants perform a loan 
review to ensure that all funds have been expended for the purposes 
for which they were granted. On-site inspections of facilities were 
supposed to occur every 3 years to ensure that the facilities were 
being maintained in a satisfactory manner. 

Assessment of performance: This program has met its performance 
requirements to date. Both local power companies were subject to 
engineering and financial feasibility study requirements. Feasibility 
studies showed the projects to be both necessary and financially 
viable. 
U.S./FSM: No loans have yet been made to FSM electric utilities. The 
Pohnpei Utilities Company (PUC) currently has an application pending 
with RUS. No construction has occurred. Approval of the application 
was contingent on the PUC's obtaining clear title to a parcel of land 
as a site for the plant. This would provide additional power to the 
main island of Pohnpei State. 
U.S./RMI: The Marshalls Energy Company's (MEC) RUS loan financed the 
construction of a new power plant in Majuro, consisting of two 6.4-
megawatt diesel engines and related facilities. This was the first RUS 
electrical loan to the FSM, the RMI, or Palau.a The new facilities 
became functional in December 1999. MEC borrowed about $12 million. 
The terms were 6.9 percent for 20 years. 

Assessment of accountability: Accountability was effective. The Rural 
Utilities Service-financed projects had oversight by USDA-approved 
consulting engineers, who required the builders to meet USDA 
specifications. USDA and the companies complied with required 
safeguards. PUC had not yet received loan approval as of October 2001. 
MEC borrowed only the money actually needed. MEC had sent 1 year's 
audited financial statements. MEC came through loan fund and 
accounting reviews during construction, with minor findings that were 
quickly resolved. 

Problems in implementing U.S. programs in the FSM and the RMI: Future 
developments may jeopardize loan repayment. Although the financial 
feasibility studies predicted the projects' viability, neither study 
assessed the possibility that Compact funds might be reduced over the 
life of the loans. Indeed, during the first 15 years of the Compact, 
U.S. funding to the island nations was decreased every 5 years. 
Officials of both companies stated that future severe decreases in 
Compact funding to the island nations could diminish their companies' 
revenues enough to jeopardize their ability to repay their USDA loans. 
RUS managers stated that they had discussed the possibility of 
severely reduced funding to the FSM and the RMI and had decided that 
such a funding decrease was unlikely. The MEC provided documentation 
showing that its leases for property on which the plant would be built 
were extended until 2017. MEC also provided documentation that the 
Republic of the Marshall Islands' legislative assembly, the Nitijela, 
authorized the Marshall Islands to guarantee the repayment of the 
loan. Under the November 2000 proposal for U.S. assistance to the FSM, 
U.S. funding would decrease and, as it decreased, real per capita 
gross domestic product (GDP) in the islands would also decrease. As 
GDP decreased, funds available to the governments would also decrease, 
calling into question the governments' ability to repay any guaranteed 
loans. 

[A] Palau was another nation that, along with the FSM and the RMI, is 
a Freely Associated State and likewise was formerly subject to U.S. 
administration under the Trust Territory of the Pacific Islands. 

Source: GAO. 

[End of table] 

Table 11: The Federal Emergency Management Agency (FEMA) Program: 

Purpose and legislation: FEMA assistance was intended to help states 
and localities respond to, plan for, recover from, and mitigate 
against disasters. Disaster assistance services and programs were to 
be made available to the FSM and the RMI in the same manner as 
assistance was made available to a U.S. state. The assistance was to 
be provided in accordance with the Disaster Relief Act of 1974, as 
amended, and applicable executive orders and FEMA regulations. FEMA's 
authority for conducting disaster assistance in the FSM and the RMI 
was contained in the Compact of Free Association, sections 221 and 
232, and in article X of the Federal Programs and Services Agreement 
concluded pursuant to the Compact of Free Association. 

Requirements: 
Performance: FEMA was to make disaster preparedness improvement grants 
on an annual basis and to provide hazard mitigation grants and 
disaster assistance as determined by the president. The actual amount 
of direct disaster assistance provided in a given year varied and was 
completely dependent on U.S. presidential disaster declarations. 
Accountability: According to FEMA-provided documents, FEMA exercised 
accountability over a variety of programs to the FSM and the RMI, 
including disaster preparedness grants, for which it awarded up to 
$50,000 per year on a matching basis, and hazard mitigation grants, to 
reduce future losses from disasters. FEMA was required to provide 
assistance to the FSM and the RMI at levels equivalent to those 
available to the Trust Territory of the Pacific Islands in 1986. The 
FSM and the RMI were required to provide annual performance reports to 
FEMA. 

Assessment of performance: The program has met its performance 
requirements and standards. FEMA has provided the assistance required 
in the Compact; however, the FSM and the RMI have not fully used the 
available funds to improve their disaster preparedness as allowed 
under the grant agreements. Neither the FSM nor the RMI appeared to be 
developing the capability for their states and localities to respond 
to, plan for, recover from, and mitigate against disasters. The 
disaster preparedness grants were awarded to help develop the 
capability to respond to disasters. However, the FSM and the RMI have 
not taken full advantage of the available funds. 
U.S./FSM: Since 1995, FEMA has responded to a 1997 typhoon and a 1998 
drought in the FSM. The obligations totaled $2.7 million and $1.8 
million, respectively. Regional financial records show that the FSM 
has expended only $12,525 of $138,000 awarded for disaster 
preparedness grants since fiscal year 1997. Since the start of the 
hazard mitigation grants in 1988, six disasters occurred in the FSM, 
and less than 100 percent of the available funds were committed. 
U.S./RMI: Since 1995, FEMA has responded to a 1998 drought in the RMI. 
The obligations totaled $7.9 million. Regional financial records show 
that the RMI has expended $11,598 of $100,000 awarded for disaster 
preparedness grants since fiscal year 1998. Since the start of the 
hazard mitigation grants in 1988, the RMI has committed less than 100 
percent of the available funds. 

Assessment of accountability: Accountability needed improvements to be 
more effective. 
U.S./FSM: The FSM last submitted a performance report in October 1996-
2000, although it is required to do so annually. 
U.S./RMI: The RMI did not submit a performance report during 1999 and 
did not submit a report as required in 2000.	 

Problems in implementing U.S. programs in the FSM and the RMI: The 
program encountered conditions that significantly reduced potential 
program accomplishments and increased program costs. FEMA's programs 
were designed to support and supplement viable state programs and 
efforts. They were not intended to go directly to local communities, 
supplanting marginal central government programs. Some of the biggest 
problems encountered related to implementing traditional programs, 
developed for the United States, in a distant island environment and 
culture. According to FEMA, providing money and assistance consistent 
with U.S-based regulations and laws disrupts social structures and 
changes relative priorities in communities, fosters a counter-
productive dependency, and frequently results in adverse long-term 
effects. For example, temporary and sustained free food programs 
discourage traditional fishing and farming. Assistance as currently 
provided delayed rebuilding after a disaster until FEMA resources 
arrived, and it proved to be difficult to manage. 

Source: GAO. 

[End of table] 

Table 12: The U.S. Postal Service (USPS) Program: 

Purpose and legislation: 
USPS assistance under the Compact was intended to provide for (1) mail 
service between U.S. locations and exchange points in the FSM and the 
RMI, including special services; and (2) dispatch, documentation, 
statistical, accounting, and settlement operations in connection with 
the international exchange of mail. The assistance was to be provided 
to help the FSM and the RMI develop the infrastructure and capacity 
for independent postal operations. 

Requirements: 
Performance: USPS was required to provide mail transportation, 
technical assistance, postal financial services such as money orders, 
and postal transaction and reporting forms. USPS was authorized to 
establish cost-related postal rates for mail going from the United 
States to the FSM and the RMI. Additionally, USPS was required to 
transfer ownership of postal facilities and equipment in use as of 
1986 to the FSM and the RMI. The FSM and the RMI were required to (1) 
protect the postal services provided by the United States from 
exploitation for monetary gain by individuals and organizations and 
(2) ensure that outgoing mail complies with international and U.S. 
postal requirements. 
Accountability: USPS was required to provide services at levels 
equivalent to those available in 1986, such as dispatching and keeping 
records on international mail exchanges and reconciling activity on 
transactions with the FSM and the RMI. USPS was also required to pay 
and be reimbursed by Department of the Interior from appropriations 
for the cost of transporting mail to and from six designated FSM and 
RMI exchange points. The FSM and the RMI were required to (1) 
adequately fund internal postal services so the USPS may perform its 
responsibilities; (2) issue money orders in compliance with USPS 
regulations; and (3) remit money collected to the USPS; for example, 
from collect-on-delivery parcels and money orders. 

Assessment of performance: The program has met its performance 
requirements and standards. USPS has provided assistance and services 
in accordance with the Compact, including mail transportation, 
technical assistance, postal financial services such as money orders, 
and postal transaction and reporting forms. Additionally, USPS has 
transferred postal facilities and equipment to the FSM and the RMI. 
U.S./FSM: The FSM has experienced internal problems with its 
operations; however, reasonable efforts have been made to avoid 
exploitation and to comply with international and U.S. postal 
requirements. 
U.S./RMI: The RMI has experienced internal problems with its 
operations; however, reasonable efforts have been made to avoid 
exploitation and to comply with international and U.S. postal 
requirements. 

Assessment of accountability: Accountability needed to be improved. 
USPS has had difficulties receiving remittances in a timely manner 
from the FSM and the RMI post offices for collect-on-delivery parcels 
and money order transactions; however, it has no enforcement or 
control authority over FSM and RMI postal operations.
U.S./FSM: The FSM has dismissed staff persons over the past 5 years 
for money order-related and other theft and misuse of funds. The most 
recent national public audit of FSM postal operations, for fiscal 
years 1997-1998, concluded that internal controls, especially 
involving revenue, were generally inadequate. An FSM legislative 
appropriation in fiscal year 2000 repaid outstanding obligations due 
to USPS. Shortages accumulating over a 10-year period resulted from 
bank deposit errors and money order shortages and errors. The FSM 
decided to clear all arrears at one time; thus, it required FSM 
congressional action for funding. 
U.S./RMI: The RMI has dismissed staff persons over the past 5 years 
for theft of funds. The RMI continues to experience theft and 
financial irregularities with money order and other cash transactions. 
External audits of its postal operations were not conducted. Internal 
postal operations in the RMI were not adequately funded, because 
operating expenses were not paid. For example, monthly rental on the 
main post office building was more than 1 year in arrears. 
Additionally, post office telephone service has been terminated at 
least three times in the past year because of delinquency. Liquidating 
obligations was a Minister of Finance rather than a postal 
responsibility. 

Problems in implementing U.S. programs in the FSM and the RMI: The 
program has encountered conditions that have significantly reduced 
potential program accomplishments and increased costs. For example, 
mail delivery has not met postal standards for prompt and efficient 
delivery. Despite USPS investment in special contracted mail flights 
to the islands, mail delivery was not prompt. Since in-transit mail 
was under USPS control, the USPS had a shared responsibility for 
delays when mail was offloaded from aircraft. The USPS incurred 
significant costs in providing mail to the FSM and the RMI. USPS was 
reimbursed almost $7.6 million from Interior in transportation, 
administration, and technical assistance costs during fiscal years 
1987-2000. However, according to USPS officials, accumulated though 
not reimbursed costs for transporting mail totaled $30 million in 
extra mail transportation costs during those years. Interior was aware 
of the USPS's additional costs but said that USPS has only recently 
documented the additional incurred expenses. Interior did not believe 
a special appropriation was possible, because the USPS has taken 
almost 10 years to uncover its costs. Furthermore, though granted 
authority to establish cost-related rates for mail going from the 
United States to the FSM and the RMI and to apply international postal 
rates, the USPS has failed to exercise this authority, thereby 
contributing to its lack of sufficient revenue to cover its expenses, 
including the $30 million in accumulated but not reimbursed costs. 

Source: GAO. 

[End of table] 

Table 13: The Federal Aviation Administration (FAA) Program: 

Purpose and legislation: The Compact has required the U.S. government 
to provide aviation safety services in the FSM and the RMI in order 
to: (1) foster safe and efficient air travel and (2) facilitate the 
establishment of aviation safety authorities and aviation safety 
statutory and regulatory regimes in the FSM and the RMI. 

Requirements: 
Performance: FAA was the federal entity that provided aviation 
services to the FSM and the RMI. The Compact required FAA to provide 
(1) en route air traffic services, (2) flight inspection and equipment 
evaluation and certification, (3) assistance in developing and 
updating procedures and standards, and (4) technical assistance to 
help the FSM and the RMI governments develop civil aviation safety 
authorities and aviation safety and certification programs. 
Accountability: FAA was required to provide services at levels 
equivalent to those provided to the FSM and the RMI in 1986. FAA did 
not provide any direct grants or other funds directly to the FSM and 
the RMI. Therefore, the accountability for funds was indirect, meaning 
that FAA was required to account only for materiel, equipment, 
facilities, and training. 

Assessment of performance: The program has met its performance 
requirements and standards. FAA has carried out its responsibilities 
as stipulated in the Compact, according to U.S., RMI, and FSM 
officials and the FAA's overall safety record. FAA has provided 
training to develop infrastructure (including rescue and firefighter 
training), assisted in aviation security, and funded travel and 
lodging expenses for local nationals to attend the FAA Training 
Academy in Oklahoma City, Oklahoma, and other FAA training facilities. 
U.S./FSM: The FSM's 14-year record of air traffic safety showed two 
accidents within the past 2 years, but no serious injuries and no 
fatalities.
U.S./RMI: The RMI has reported no aircraft accidents, injuries, or 
aircraft fatalities over the past 14 years. 
	
Assessment of accountability: Accountability appeared to be effective, 
according to U.S., RMI, and FSM officials. FAA did not provide any 
grants or other funds directly to the FSM and the RMI. As a result, 
FAA directly accounted for all materiel, equipment, facilities, and 
training. There have been no FAA findings of theft or misuse of 
materiel or equipment provided by the United States. FAA was helping 
local nationals to take over airport operations and had drafted a plan 
for the FSM and the RMI to assume a large share of responsibility for 
airport operations over the next 10 years. 

Problems in implementing U.S. programs in the FSM and the RMI: 
Retention of trained staff necessary to operate airports was an issue 
for the FSM and the RMI, though some workforce stability has been 
achieved in the past 4 to 5 years. FAA provided training to local 
nationals in airworthiness safety, certification, and inspection; in 
airport operations; and in operating, inspecting, testing, and 
maintaining existing and newly installed equipment. Once trained, 
however, local nationals have commanded better pay elsewhere and have 
often left. Training was also a challenge because of the differences 
in educational background, culture, and experience of FSM and RMI 
trainees in comparison with U.S.-educated trainees. In addition, 
construction costs were usually two to four times higher than in the 
United States, because most items had to be imported, including the 
contractors. When local contractors or others with the appropriate 
expertise were available, FAA hired them and gained savings by 
employing local contractors. 

Source: GAO. 

[End of table] 

Table 14: The National Weather Service (NWS) Program: 

Purpose and legislation: NWS has generally provided weather forecasts 
and warnings for the United States and its territories, adjacent 
waters, and ocean areas for the protection of life and property and 
the enhancement of the national economy. The NWS services and programs 
were provided in the FSM and the RMI as required in the Compact and 
pursuant to legal provisions cited in article VII of the Federal 
Programs and Services Agreement authorized under section 232 of the 
Compact of Free Association. The NWS assistance program under the 
Compact allowed for the FSM and the RMI to establish and maintain 
their own weather services. 

Requirements: 
Performance: Under the Compact, NWS was to provide public and aviation 
weather forecasts and severe weather warnings in the FSM and the RMI. 
The FSM and the RMI weather offices were required to provide warnings, 
observations, and forecasts, and also to give inputs to Guam's weather 
service for its daily Western Pacific area forecasts. 
Accountability: NWS was required to provide or reimburse the FSM and 
the RMI for materials, equipment, facilities, salaries, maintenance, 
and other expenses of its weather service operations. Appropriated 
funds to support the FSM and the RMI weather offices went to the 
Department of the Interior, and Interior was to reimburse NWS. The 
reimbursements included costs incurred by the FSM, the RMI, and the 
NWS/Pacific Region to manage, supervise, operate, and maintain the 
facilities and offices. NWS was required to provide assistance to the 
FSM and the RMI at levels equivalent to those available to the Trust 
Territory of the Pacific Islands in 1986. 

Assessment of performance: The program has met its performance 
requirements and standards. The program was effective in that NWS 
provided the FSM and the RMI with facilities, equipment, technical 
assistance, and resources for operating their weather services. NWS 
has also trained the FSM and the RMI weather staffs. 
U.S./FSM: The FSM weather offices provided warnings, observations, and 
forecasts and gave inputs to Guam's weather service for its daily 
Western Pacific area forecasts. 
U.S./RMI: The RMI weather offices provided warnings, observations, and 
forecasts and gave inputs to Guam's weather service for its daily 
Western Pacific area forecasts. 

Assessment of accountability: The accountability actions appeared 
responsive to the NWS requirements. NWS had direct oversight of the 
FSM and the RMI weather service offices and exercised quality control 
over their operations and products. NWS had undertaken regular 
inspections of weather stations and required that the stations operate 
at U.S. standards. NWS performed comprehensive audits and regularly 
received monthly reports on activities to facilitate exercising 
quality control over FSM and RMI weather observations. According to 
U.S., FSM, and RMI officials, NWS provided services in accordance with 
the Compact. NWS reviewed and approved all reimbursements for FSM and 
RMI payrolls and their equipment, facilities, and materials costs. 
NWS, using Interior-provided funding, paid the operating costs. NWS 
had trained the FSM and the RMI weather staffs and reimbursed these 
countries for costs incurred for all NWS-approved training and partly 
funded the meteorologist training program. The reimbursements included 
costs incurred by the FSM, RMI, and NWS/Pacific Region to manage, 
supervise, operate, and maintain the facilities and offices.
U.S./FSM: The FSM provided reports to NWS and had not been cited for 
significant deficiencies in observations, reports, and inspections. 
Since NWS has the option to refuse any reimbursements or to request 
justification for any reimbursements, problems with reimbursements to 
FSM have been minimal. 
U.S./RMI: The RMI provided reports to NWS and has not been cited for 
significant deficiencies in observations, reports, and inspections. 
Since NWS has the option to refuse any reimbursements or to request 
justification for any reimbursements, problems with reimbursements to 
RMI have been minimal. 

Problems in implementing U.S. programs in the FSM and the RMI: NWS 
officials have reported no significant implementation problems. 

Source: GAO. 

[End of table] 

Appendix III: Comments from the Department of the Interior: 

Note: GAO's comments supplementing those in the report text appear at 
the end of the appendix. 

United States Department of the Interior: 
Office Of The Secretary: 
Washington, D.C. 20240: 

December 11, 2001: 

Loren Yager: 
Director, International Affairs and Trade: 
U.S. General Accounting Office: 
441 G Street, NW: 
Washington, DC 20548-0001: 

Dear Mr. Yager: 

The Department of the Interior (Interior) appreciates the opportunity 
to review and comment on the GAO Draft Report entitled "Foreign 
Assistance: Effectiveness and Accountability Problems Common in U.S. 
Programs to Assist Two Micronesian Nations," (GAO-02-70).
Interior understands the special legal and historical relationship 
between the United States and the Freely Associated States (FAS), and 
supports the continued extension of U.S. programs, as included in the 
Compact and subsidiary agreements, to the FAS. This special 
relationship will continue under the next period of Compact economic 
assistance. As the agency through which much of the Compact direct aid 
passes to the FAS, including Capital Improvement Projects, Operation & 
Maintenance Improvement Projects, and Technical Assistance grants, 
Interior is familiar with the accountability problems in the FAS. 

Interior generally agrees with the findings, conclusions, and 
recommendations made in the Draft Report, however, the Department 
would like to correct certain points: 

1) On page thirty-nine (39), the Draft Report states that "Interior 
did not place its single representative in the region until 1997, 11 
years after the Compact went into effect." In fact, Interior had 
placed a field representative in the region, Palau, in 1990. The field 
representative covered the Federated States of Micronesia (FSM), and 
the Republic of the Marshall Islands (RMI), as well as Palau. In 1997, 
that field representative was moved to Pohnpei, FSM and given the 
title of "federal programs coordinator." [See comment 1, now on p. 55] 

2) On page forty (40), the Draft Report states that "although the 
Interior official in the field sent weekly reports to Interior 
headquarters with program recommendations, none of his recommendations 
have been implemented..." [See comment 2, now on p. 56] 

This is an inaccurate statement. The weekly reports generally gave 
accounts of the various program accomplishments, funding and budgets. 
They did not include recommendations. It is true, however, that a 1997 
report did include a general recommendation that grants should be 
strictly controlled and monitored. 

3) As stated on page forty-one (41) of the Draft Report, [Now on p. 
56] before the Compact was implemented, 31 U.S. officials managed, 
coordinated, and provided oversight and reporting for U.S. programs in 
the region. Interior has not received funding to replace any of the 31 
staff. If funding is provided, the Department of the Interior will be 
able to coordinate and monitor U.S. federal programs in the FAS with a 
more modest cadre of professionals experienced in the area. 

Interior notes Federal Emergency Management Agency's (FEMA) 
observation, on page thirty-five (35) of the Draft Report, [Now on p. 
51] that fraud and mismanagement were no more prevalent in the FSM and 
the RMI than in the United States. However, FEMA was constrained from 
taking legal action to recoup funds from the FSM and RMI because they 
are sovereign nations. Interior supports all efforts, including more 
effective requirements in the next period of Compact economic 
assistance, to improve accountability and management of federal funds 
and programs in the FAS. 

If there are any questions concerning this response, please contact 
Mr. Nikolao Pula, Acting Director, Office of Insular Affairs, at (202) 
208-6816. 

Sincerely, 

Signed by: 

P. Lynn Scarlett: 

Assistant Secretary: 
Policy, Management and Budget: 

GAO Comments: 

The following are GAO's comments on the Department of the Interior's 
letter dated December 11, 2001. 

1. We amended the draft on page 55 to clarify that the Department of 
the Interior did not fill the position of federal programs coordinator 
until 1997. The Department of the Interior, in commenting on this 
draft, stated that a field representative covered the FSM, the RMI, 
and Palau in 1990, implying that it met its requirement to provide 
federal program coordination. However, discussions with the field 
representative revealed that he was neither given the authority, nor 
had the means, to coordinate the federal programs in the FSM and the 
RMI until 1997. 

2. We amended the draft on page 56 to clarify that the Department of 
the Interior's federal program coordinator's report did not usually 
include recommendations. 

[End of section] 

Appendix IV: Comments from the Department of State: 

Note: GAO's comments supplementing those in the report text appear at 
the end of the appendix. 

United States Department of State: 
Chief Financial Officer: 
Washington, D.C. 20520-7427: 

November 16, 2001: 

Ms. Susan S. Westin: 
Managing Director: 
International Affairs and Trade: 
U.S. General Accounting Office: 

Dear Ms. Westin: 

We appreciate the opportunity to review your draft report, "Foreign 
Assistance: Effectiveness and Accountability Problems Common in U.S. 
Programs to Assist Two Micronesian Nations," GAO-02-70, GAO Job Code 
711558. 

The enclosed Department of State comments are provided for 
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact 
John R. Fairlamb, Bureau of East Asian and Pacific Affairs, at (202) 
736-4418. 

Sincerely, 

Signed by: 

Larry J. Eisenhart: 
Acting: 

Enclosure: As stated. 

cc: GAO/IRT - Mr. Benjamin Nelson: 
State/OIG - Mr. Atkins: 
State/EAP - Mr. Short: 

[End of letter] 

Department of State Comments on GAO Draft Report: Foreign Assistance: 
Effectiveness and Accountability Problems Common in U.S. Programs to 
Assist Two Micronesian Nations (GAO-02-70, GAO Code 711558): 

The Department of State appreciates the opportunity to review the GAO 
draft report "Foreign Assistance: Effectiveness and Accountability 
Problems Common in U.S. Programs to Assist Two Micronesian Nations," 
GAO-02-70, GAO Job Code 711558. In addition to the comments in this 
letter, the Department forwarded three specific recommended additions 
to the GAO Report text provided by our Embassy in Majuro. 

This report provides a useful review of some of the Program and 
Services Assistance provided to the Freely Associated States (FAS) 
pursuant to the Compact of Free Association, and some of the problems 
experienced by Federal agencies in providing and accounting for this 
assistance. The Department concurs with the GAO view, expressed in 
this report, that despite these problems, many of these programs have 
made an important contribution to improving the health, education and 
welfare of the people of the FAS. At the same time, we point out that 
Congress added eligibility for Federal programs to the FAS after the 
Compact was ratified. It is unclear whether in doing so, Congress 
requested an assessment of the appropriateness or problems Federal 
agencies might encounter providing these programs. The Department 
recommends that no new eligibility for Federal programs, beyond that 
already authorized, be granted without such an assessment. 

We agree with GAO's recommendation that an overall assessment of the 
effectiveness and appropriateness of continuing program and services 
assistance to the FAS would be valuable. Responsibility for such an 
assessment is continuous and rests with the parent organizations (and 
Region IX offices). The Department could contribute to a joint 
assessment of programs, but would need the resources in many cases to 
contract out the work recommended by the GAO. State does not have the 
technical expertise to conduct such a comprehensive assessment. [See 
comment 1] 

Past history demonstrates the difficulty in assigning such oversight 
to a single department or agency. In approving the Compact, Congress 
assigned to the Department of the Interior the task of monitoring and 
overseeing several dozen categorical grant programs, but did not 
provide Interior the resources to accomplish the task. As the GAO has 
indicated, that task, which involves assessing the effectiveness of a 
panoply of program and services assistance, reporting findings to 
Congress, and recommending the continuation or termination of several 
dozen Federal programs lying outside the purview of either department, 
is largely outside the existing expertise or personnel staffing levels 
of any single agency or pair of agencies. 

For these reasons, we suggest that GAO consider these resource issues 
carefully before recommending that Interior and/or State be assigned 
to such an oversight role. In particular, GAO should explain how the 
U.S. Government entity charged with program oversight can ensure a 
satisfactory division of labor between the grant-making departments 
and agencies, and identify the resources needed to support the task. 

As a final comment, the Department feels it important to correct the 
impression on page 45 of the report that our negotiating strategy 
envisions ending program assistance at the end of the next period of 
Compact economic assistance. In our negotiations to date, we have said 
only that the USG will agree to extend program assistance to the 
extent that such assistance, services and programs were available to 
the FSM on October 1, 1999 for the next period of Compact economic 
assistance. Thus far, we have left open the decision on whether or 
when program assistance might end, but we have signaled our intention 
to establish a process designed to provide periodic review of the 
continued utility of each program currently offered to the FAS. [See 
comment 2, now on p. 60] 

If there are any questions concerning this response, please contact 
John Fairlamb, Office of Compact Negotiations, Bureau of East Asian 
and Pacific Affairs, at (202) 736-4418. 

GAO Comments: 

The following are GAO's comments on the Department of State's letter 
dated November 16, 2001. 

1. In commenting on our draft report, the Department of State reported 
that it supported GAO's recommendation but lacked the resources and 
technical expertise to conduct a comprehensive assessment of program 
assistance to the FSM and the RMI. We recognize that State lacks the 
resources and technical expertise. For that reason, our recommendation 
calls for State to work in consultation with the Department of the 
Interior and those federal departments with programs in the region, as 
well as with the Federal Regional Council, to take advantage of their 
resources and technical expertise to develop the joint report to the 
Congress. Given the unique opportunity presented by the Compact 
renegotiations, we believe this is an appropriate time to reassess the 
basis and conditions for providing U.S. program assistance to the FSM 
and the RMI. 

2. We have added language to page 60 to clarify State's current 
position. 

[End of section] 

Appendix V: Comments from the Department of Health and Human Services: 

GAO's comments supplementing those in the report text appear at the 
end of the appendix. 

Department Of Health & Human Services: 
Office of Inspector General: 
Washington, D.C. 20201: 

December 3, 2001: 

Mr. Loren Yager: 
Director, International Affairs and Trade: 
United States General Accounting Office: 
Washington, D.C. 20548: 

Dear Mr. Yager: 

Enclosed are the Department's comments on your draft report, "Foreign 
Assistance: Effectiveness and Accountability Problems Common in U.S. 
Programs to Assist Two Micronesian Nations." The comments represent 
the tentative position of the Department and are subject to 
reevaluation when the final version of this report is received.
The Department also provided extensive technical comments directly to 
your staff. 

The Department appreciates the opportunity to comment on this draft 
report before its publication. 

Sincerely, 

Signed by: 

Janet Renquist: 
Inspector General: 

Enclosure: 

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for General Accounting Office 
reports. The OIG has not conducted an independent assessment of these 
comments and therefore expresses no opinion on them. 

[End of letter] 

Comments Of The Department Of Health And Human Services On The General 
Accounting Office's Draft Report "Foreign Assistance: Effectiveness 
And Accountability Problems Common In U.S. Programs To Assist Two 
Micronesian Nations" 

The Department of Health and Human Services appreciates the 
opportunity to comment on the General Accounting Office's (GAO) draft 
report, which included reviews of the Head Start and Maternal and 
Child Health Block Grants programs, two of 13 programs GAO selected 
for review. 

General Comments: 

Head Start has had a significant presence in Micronesia through 
grantees in Chuuk, Pohnpei, Yap, and the Republic of the Marshall 
Islands (RMI), which annually serve over 3,000 low-income children and 
their families. While GAO's report acknowledges a lack of resources, 
which impede on the overall success of the Head Start program, we do 
not believe the report provides a balanced look at the program's 
achievements. Children receive medical and dental screening and follow-
up treatment; children receive up-to-date immunizations; an increasing 
number of teachers have their degrees in Early Childhood Education or 
their Child Development Associate credential; children are learning to 
read and write in English; and literacy has been a priority in 
educating the whole family. [See comment 1] 

In addition, the Federal Regional Council's (FRC) Outer Pacific 
Committee in their initial report dated March 2000 expressed concerns 
about the quality of results being achieved in the Pacific 
jurisdictions with Federal funds, the level of accountability, and the 
inability to provide technical assistance in a sustainable way. These 
concerns resulted from fragmented services, inadequate systems of data 
collection, and lack of consistent attention and follow-up due to 
limited time and travel budgets. The GAO report not only substantiates 
the concerns of the FRC, but acknowledges that the FRC must be an 
involved partner if program effectiveness and accountability are to 
improve in the Pacific. 

The continuation of many programs are closely tied to the Compact of 
Free Association (Compact) renegotiations that started in the last 
year between the Department of State (State) and the Federated States 
of Micronesia (FSM) and RMI. With the recent departure of the chief 
negotiator from State, the status of the economic provisions that 
expire in Fiscal Year 2002 are uncertain at this time. However, both 
the Department's Administration for Children and Families and Health 
Resources and Services Administration (HASA) have indicated that 
program outcomes have greatly benefited these jurisdictions. 

Uniform reporting, data collection, and accountability requirements 
must be the principal goal of any program redesign. The GAO report 
vividly points out that nine Federal programs in FSM and RMI all "had 
different accountability requirements." The FRC had participated in a 
national conference held from October 17 through October 20, 2000 in 
San Francisco entitled, "Strengthening Federal-Insular Grant Alliance" 
and sponsored by the U.S. Department of Interior (DOI) and the 
Interagency Group on Insular Areas. What emerged from the conference 
was the need for the Federal Government to develop best practice 
models to facilitate improved grant management and to advocate for 
more flexible grant programs and streamlined application, data 
collection, compliance and reporting requirements. These 
recommendations remain especially true in light of the draft GAO 
report. 

The draft report is not correct when it attributes to FRC a 
recommendation that it was "essential that an on-site representative 
be appointed (unaware that an Interior representative has provided an 
on-site presence for the past 4 years)...." The FRC was aware of DOI's 
lone Federal coordinator, which was the reason for a recommendation 
that a Federal coordinator be appointed for each of the flag 
territories and the freely associated States. These coordinators must 
also see themselves as being responsible for coordinating all Federal 
issues and not merely for DOI or State issues. [See comment 2] 

The GAO report recommends that DOI and State consult with the relevant 
government agencies and FRC in addressing the issues raised within the 
report. The Department's Region IX is a principal partner in serving 
constituencies in the Outer Pacific. The FRC should be consulted by 
both DOI and State as each carries out its respective roles and 
responsibilities in the pacific jurisdictions. 

GAO Finding: 

The Pohnpei Head Start Program fired its entire accounting department 
in 1999 for stealing program funds. A 1999 audit report identified 
more than $300,000 that was unaccounted for and found significant 
mismanagement, fraud, and loss of control over finances. 

Department Comment: 

The Pohnpei Head Start Program notified the Department in 1999 of the 
misappropriation of approximately $10,000 found during the annual 
audit. The 1999 audit identified $341,378 in questioned costs, which 
the grantee subsequently responded to with appropriate documentation. 
The Pohnpei Head Start Program received about $1.1 million in Head 
Start funding for 1999. The Department's Office of Inspector General 
was notified and the grantee was advised to take appropriate legal and 
financial actions to prevent other potential problems. [See comment 3] 

GAO Finding: 

Head Start's overall effectiveness could not be determined because the 
program lacked impact data to evaluate the program's impact on school 
readiness and cognitive development. GAO assessments of Head Start 
programs in the United States have concluded that, because of research 
limitations, program effectiveness could not be determined. 

Department Comment: 

The GAO is referencing a 1997 GAO report in this current evaluation of 
Micronesia. The Department requested that GAO delete this reference in 
our initial draft comments because it is set in a different context, 
and subsequent GAO and research findings have concluded the 
effectiveness of the Head Start program. [See comment 4] 

GAO Finding: 

MCH Block Grant Program: The program was intended to improve the 
health of mothers and children and reduce mortality rates. However, 
the lack of equipment, medical specialists, data collection 
capabilities, and local government support for preventive health care 
limited the accomplishments of this program. For example, the FSM and 
RMI programs were exempt from meeting six of the 18 performance 
measures for the program, and had difficulty meeting others, due to 
lack of needed equipment, medical capacity, and support programs that 
were available only in the United States (such as Medicaid). 
Additionally, the high mortality rate, a key measure of program 
success, could not be reduced because of health care limitations and 
the lack of basic sanitary conditions, like clean water and healthy 
food, necessary for public health. Moreover, data collection 
limitations within the FSM and the RMI have hindered the ability of 
the HHS to determine program effectiveness. Lastly, the U.S. MCH 
Program generally supplements state and local health care initiatives; 
both the FSM and the RMI governments lacked these state or local 
services. Because the FSM and the RMI relied on the program as their 
primary preventive health care system, the program was overwhelmed by 
the social and economic conditions that were causing declines in the 
general health of the populations, including maternal and child 
health. The U.S. MCH officer responsible for the FSM and RMI programs 
was pessimistic about the ability of the MCH programs to succeed 
because of the social and economic problems in each nation. 

Department Comment: 

The third sentence implies that FSM and RMI have been exempted from 
six of the 18 MCH performance measures because of the problem 
identified in the previous sentence. A more accurate rationale for why 
these nations are exempt from some performance measures is that some 
measures are predicated on participation in particular Federal 
programs, such as Medicaid and Supplemental Security Income which are 
unavailable to the FSM and RMI under existing law. [See comment 5] 

Under this same finding a statement reads as follows: "Because the FSM 
and the RMI relied on the program as their primary preventive health 
care system,...." 

The above might be an overstatement. The HRSA's Bureau of Health 
Professions, through the Division of Medicine and Dentistry, continues 
to fund a Continuing Medical Education (CME) program for providers in 
the Pacific Basin, including FSM and RMI. In the first year (1999) of 
that program, the investigators reported a count of providers 
(physicians, nurses, dentists, and allied health personnel) in nine 
jurisdictions along with their CME needs. The majority of providers 
counted in each jurisdiction practice primary care, which would 
include preventive medicine, and were residents of FSM and RMI. Many 
of the providers are graduates of the Pacific Basin Medical Officer 
Training Program (PBMOTP) that was sponsored by HRSA's Bureau of 
Primary Health Care, and has now sunset. Many of the PBMOTP graduates 
function as physicians in these jurisdictions. [See comment 6] 

The last sentence stated, "The U.S. MCH officer responsible for the 
FSM and RMI programs was pessimistic about the ability of the MCH 
programs to succeed because of the social and economic problems in 
each nation." [See comment 7] 

We do not believe this statement this is an accurate characterization 
of the program by the MCH Officer from Region IX. The statement should 
read, The U.S. MCH Officer responsible for the FSM and RMI programs 
acknowledges the overwhelming need in these island nations and the 
technical assistance required by the MCH programs to succeed because 
of the social and economic problems in each nation." 

GAO Comments: 

The following are GAO's comments on the Department of Health and Human 
Service's letter dated December 3, 2001. 

1. We believe our report provides a balanced review of the program's 
achievements. We state in the lead sentence of our Results in Brief 
that many federal programs provided numerous, and in many cases 
critical, services to the FSM and the RMI. Head Start was included in 
this assessment. In addition, we stated on page 13 that the Head Start 
program provided comprehensive health, education, and nutrition 
services to 1,800 preschool children each year in the FSM and 1,200 
each year in the RMI. For both countries, we noted specific 
accomplishments of the Head Start program. 

2. Our report did not state that Federal Regional Council made a 
recommendation; rather, it simply quoted the council report, in which 
the council "concluded that it was essential that an on-site federal 
grants coordinator be appointed..." to each nation. We removed the 
statement that council members were not aware that an Interior 
representative already provided an on-site presence. 

3. We added a footnote to page 44 to incorporate HHS's statement that 
the grantee provided documentation for the $341,378 in questioned 
costs. However, neither HHS nor FSM officials indicated during the 
audit that the Pohnpei program subsequently provided appropriate 
documentation for the questioned costs. As a result, we were not able 
to independently verify HHS's statement or to review the supporting 
documentation. 

4. HIS is not correct in stating that GAO and research findings have 
concluded that the Head Start program is effective. GAO, in its 2001 
report on Head Start, stated that there is still insufficient research 
to draw conclusions about the effectiveness of the program.[Footnote 
41] The report also stated that, based on GAO's recommendation, 
Congress mandated that HHS fund and conduct an evaluation of the 
impact of the Head Start program. The final report is not due until 
2006. 

5. We added language to page 31 to clarify this point. 

6. We added language to page 31 attributing these statements. 

7. We have clarified on page 31 that it was the former Maternal and 
Child Health program manager who provided us with this information 
just prior to his retirement. We also added a footnote that the 
current U.S. MCH officer responsible for the FSM and the RMI programs 
also acknowledges the overwhelming need for technical assistance 
because of the social and economic problems in the FSM and the RMI. 

[End of section] 

Appendix VI: Comments from the Government of the Federated States of 
Micronesia: 

GAO's comments supplementing those in the report text appear at the 
end of the appendix. 

Embassy Of The Federated States Of Micronesia: 
Office of the Ambassador: 
1725 N Street, N.W. 
WASHINGTON, D.C. 20036: 
TELEPHONE (202) 223-4383: 
TELEFAX: (202) 2234391: 
EMAIL: FSMAIAB@aol.com: 

December 10, 2001: 

Mr. Loren Yager: 
Director, International Affairs and Trade: 
United States General Accounting Office: 
Washington, D.C. 20548: 

Dear Mr. Yager: 

Subject: Foreign Assistance: Effectiveness & Accountability Problems 
Common in U.S. Programs to Assist Two Micronesian Countries (GAO-02-
70): 

It is with pleasure that I forward the attached response on behalf of 
the Government of the Federated States of Micronesia to the proposed 
draft GAO Report: Effectiveness & Accountability Problems Common in 
U.S. Programs to Assist Two Micronesian Countries (GAO-02-70). 

We very much appreciate the opportunities extended to us to comment on 
the GAO draft reports. We value our relationship with the people and 
the government of the United States under the Compact of Free 
Association and believe that continued and open dialogue between our 
two countries only support and strengthen that relationship. 

If there are any questions concerning our response to the proposed 
draft, please do not hesitate to contact my office. Thank you.
Sincerely, 

Signed by: 

Jesse B. Marehalau: 
Ambassador: 

Enclosure (6 pages): 

[End of letter] 

Comments Of The Government Of The Federated States Of Micronesia (FSM) 
On The GAO Draft Report: "Foreign Assistance: Effectiveness and 
Accountability Problems Common In U.S. Programs to Assist Two 
Micronesian Nations" 

December 10, 2001: 

Overall, it can be said that the FSM Government finds more in this 
Draft Report with which it can agree than was the case with most other 
recent GAO reports concerning U.S. assistance to the Freely Associated 
States. The GAO premise, clearly stated as the Report's title, is, of 
course, unchallengeable. This should come as no surprise to anyone. It 
was virtually inevitable from the beginning that there would be 
implementation, performance and accountability problems in adapting 
programs and activities designed for U.S. states to a culturally 
different, undeveloped region in the middle of the Pacific Ocean. We 
would suggest a different title for the Report, namely, "U.S. Programs 
to Assist Two Micronesian Nations Have Been Surprisingly Successful 
Against Almost Insurmountable Odds." 

While the FSM National and State governments must take our share of 
the blame for the problems that have been experienced with U.S. 
federal programs, we are gratified that the Draft Report fairly cites 
the difficult conditions in the FSM and the low level of mentoring and 
monitoring by the U.S. Government as having played large roles in 
holding back program performance. 

We have no quarrel with the selections made by the GAO as to which, 
among many programs to examine. The list they chose seems reasonably 
representative, given the time and resources they had. It is 
disappointing, however, that they chose to confine their report to 
program activities in only two of the four FSM States that account for 
less than half of the total FSM population. Had they gone to Yap, for 
example, they would have discovered a far more positive situation in 
elementary and secondary education than they portray in the Draft 
Report as a nationwide condition. 

It is also to be regretted that this Draft Report continues the format 
of previous reports by intermingling references to the FSM and the RMI 
in such a way that the reader is left to assume that what exists in 
the RMI also applies to the FSM. [See comment 1] Example: The Draft 
Report, on page 22, cites a "low, 9 percent" graduation rate at the 
College of the RMI, and immediately thereafter seeks to make a point 
asserting the "low graduation rate" "in both countries." In fact, the 
graduation rate at the College of Micronesia-FSM is almost 30 percent, 
(and rising), a rate that compares favorably with many colleges in the 
U.S. This is only one of many instances throughout all the GAO Reports 
where the GAO has used selective information to reduce both 
Micronesian countries to a lowest common denominator. We continue to 
feel that it is misleading to the U.S. Congress and unfair to both 
countries. [See comment 2] 

We understand the specialized meaning of the term, "effective," as 
defined by the methodology of the Draft Report. We would hope, 
however, that a reader would not be led to conclude that the nine 
programs which failed the GAO's "effectiveness" test have been 
failures by normal perceptions. Even the GAO seems to conclude, and we 
agree, that these programs, despite obstacles, have succeeded in 
delivering crucial services to the people of the FSM, without which in 
future a serious diminution in essential social services would occur. 
Surely, it is only fair to point out that, due to the inherent and 
inescapable disabilities of the FSM that are recognized and listed by 
the GAO, virtually any FSM-administered program would fall somewhere 
short of the standard established by the GAO — that it must "overcome 
conditions that could significantly reduce broader program 
accomplishments or increase costs." How many programs within the U.S. 
itself could meet this literal requirement? One is led to question the 
useful relevance of the judgmental aspect of this Draft Report. [See 
comment 3] 

We do not, however, question the broad usefulness of the Draft Report. 
The FSM Government strongly endorses the need to address on a priority 
basis each of the six areas identified in the Recommendation section 
of the Draft Report. We would only suggest that the list of those with 
whom consultation is to take place should include the FAS Governments. 
We also observe, without disputing the need for a comprehensive report 
to the U.S. Congress, that such a report, at best, could only make 
initial recommendations. The six areas to be covered must remain under 
constant review throughout the term of future Compact assistance. 

This seems a good place to point out that, at the opening round of 
US/FSM Compact renegotiations the FSM Government, on November 5, 1999 
took the initiative to propose four basic principles that a future 
Compact revision should incorporate. One of these was that, "The 
parties are jointly committed to more effective accountability under 
the Compact." The United States Negotiator agreed to the four 
principles, which continue to guide the negotiations today. 

Addressing the principle quoted above, on April 19, 2001, the FSM 
Government formally proposed to the U.S. Compact Negotiator the 
inclusion in the future Compact arrangement of a permanent monitoring 
and management body that would be jointly manned by representatives 
from the U.S. and FSM governments. This body, which we have called the 
"Joint Economic Management Mechanism" (JEMM), would have a broad
range of responsibilities to provide constant oversight of the 
expenditure of Compact grant funds, as well as of the operation of 
U.S. federal programs, in light of the agreed goals and objectives of 
the parties. 

The full panel of the JEMM would meet at least once a year, but it 
would have been kept informed of developments via Internet and other 
means, and provided recommendations, by a full-time Joint Secretariat, 
based in Pohnpei, of a size determined by need. We strongly believe 
that such a mechanism, appropriately empowered and sufficiently 
funded, could overcome many of the obstacles that have hindered 
progress up to now, and substantially ensure future effectiveness and 
accountability for both Compact funds and U.S. federal program 
activities. We also believe it would build increased confidence on the 
part of both Governments, and further strengthen the existing bond 
between us. 

Another important point on which the FSM Government agrees with GAO is 
the need to make effective preparations for the termination of direct 
U.S. assistance to the FSM, both budgetary and programmatic, "by a 
date certain." Some have called this the "exit strategy." To that end, 
the FSM proposed at the first round of renewed Compact negotiations 
the establishment of a Trust Fund, funded by U.S., FSM and other 
contributions over the next period of U.S. Compact assistance. The 
goal would be to accumulate a Trust corpus sufficient to yield annual 
earnings that would replace the need for annual U.S. direct assistance 
to the FSM as of the scheduled expiration date of that assistance. To 
be successful, this strategy would require an adequate level of U.S. 
financial assistance during the buildup of the Trust Fund to 
facilitate sustained economic growth, especially growth of the private 
sector. 

The GAO observes at several points in the Draft Report how economic 
downturns in the FSM triggered, particularly, by the last five-year 
stepdown in Compact grant funding, have hampered the success of some 
U.S. federal programs by decreasing locally-generated revenues and 
depressing private sector activity. GAO stated that this has 
negatively impacted FSM governments' ability to contribute to some 
sectors in which U.S. programs are active, and has also retarded the 
private sector job market. We find this to be an accurate observation, 
and suggest that the way to avoid this in future is to secure an 
adequate level of U.S. Compact assistance at a constant level, as per 
the FSM's proposal currently on the table in the Compact negotiations. 

In addition to these general comments, and notwithstanding that the 
FSM Government has no dispute with most of the Draft Report's findings 
and recommendations, we nevertheless offer the following, page-
specific comments: 

Page 4: Instead of saying that, "Theft, fraud, or abuse of program 
funds were evident in" five listed programs, we feel that, on the 
basis of evidence cited by GAO, it would be fairer to say that, 
"Isolated instances of theft, fraud, or abuse of program funds were 
found in" the five. Otherwise, the impression is given that these 
programs were rife with such instances, and that is not supported by, 
nor fairly inferred from, GAO factfinding. [See comment 4] 

Page 12: The section headed, "Programs Provided Diverse and Important 
Services" should be given close attention. Where it is stated that, 
"Program managers doubted that their own governments would finance 
these activities in the absence of U.S. federal programs," the point 
is not that their governments don't care about these activities. The 
point is that all available funds are committed, so, FSM Government 
funding to replace a terminated U.S. federal program activity could 
only come at the expense of some other ongoing Government-funded 
activity. Even in Micronesia, a dollar can only be spent once. [See 
comment 5] 

Page 14: The statement is made that, "SEPPIE funded almost all special 
education expenses. The remaining expenses were covered by U.S. 
Compact funds passed through the FSM governments." This erroneously 
assumes no component of FSM revenues, because all "U.S. Compact funds" 
are commingled with local revenues. We cite this here as an example of 
commentary throughout the Draft Report, which leads one to believe 
that whatever was not funded in these areas directly by the programs 
themselves was funded by "U.S. Compact funds," with no Micronesian 
input. FSM' s locally generated revenues up to now have been 
increasing against the proportion of total revenues accounted for by 
U.S. assistance, as recognized by the GAO in its first of these many 
Reports. Hopefully, this trend will continue, but it is simply 
inaccurate and misleading to make statements assuming that any support 
for sectoral activity not met by Program funding is supplied only by 
"U.S. Compact funds." [See comment 6, now on p. 13] 

Page 20: At the end of an otherwise very insightful paragraph, it is 
truly unfair for GAO to say, "Finally, the poor performance of FSM and 
RMI postal services prevented successful mail service." Never mind 
that this sweeping indictment is thoroughly qualified elsewhere in the 
Draft Report, for the few who may read on for the details. Mail 
service is an important issue, and it has been treated as such both by 
the USPS and the FSM Postal Service from the very beginning. There 
have been horrendous difficulties in the region with mail service that 
go far back into the Trust Territory days. The main problem is, and 
always has been, sporadic delivery of the mail via limited and 
unpredictable air service. This is not an attempt to sweep under the 
rug our own lingering inadequacies within the FSM postal system, but 
we would venture to say that the relationship between the USPS and the 
FSM Postal Service is as close as exists between any counterpart 
agencies of our governments. The instance here of the GAO, sitting 
back and saying from the perspective of a recent flying visit by well-
meaning investigators that our "poor performance" resulted in a 
failure of "successful mail service" must be comparable to what King 
George's agents would have reported regarding the American colonies 
when His Majesty's unreliable shipping was the root of the problem. 
[See comment 7, now on p. 25] 

Page 22: Pell Grants: This comment also pertains to pages 15 and 57 of 
the Draft Report. While it is recognized that this report focuses on 
program activities in Micronesia, the subject of Pell Grants cannot be 
addressed without taking into account the graduates of the nation's 
high schools and those graduates of the College of Micronesia-FSM who 
utilize Pell Grants to pursue college studies in the United States. 
This missing aspect of the Draft Report leaves us in an incomplete 
universe when addressing the subject of the Pell Grant program in 
Micronesia. It ignores the role of the College of Micronesia-FSM in 
sending its graduates on for further study in the United States. [See 
comment 8, now on pp. 29, 14, and 72] 

It cannot be denied that the Pell Grant recipients play an important 
role in funding for the College of Micronesia — FSM, but the GAO 
paints too extreme a picture when it seeks to suggest that, without 
the inputs of Pell Grant students, the Institution would collapse. 
Somewhere around 60% of the College's operating revenue is derived 
from tuition, fees, and room and board payments by students. 
[Approximately 80% of our students receive Pell Grants, which provide 
significant, but not total assistance to them in meeting their 
financial obligations to attend the College. These, along with other 
students, work in a variety of ways to meet their full obligations.] 
The remaining 40% of the College operating revenues comes from annual 
National Government appropriations representing Compact funds in part, 
and local revenues. [See comment 9] 

It is simply incorrect to say that, because of a "low" graduation rate 
from the COM/FSM the nation is experiencing an influx of skilled 
foreign workers and managers. First of all, as pointed out earlier, 
the graduation rate is not "low." Second, the premise that young 
Micronesians are not coming along to fill key skilled positions is 
false. The pace is indeed quickening, as witness for example, the 
presentation by two budding Micronesian economists of a PowerPoint 
briefing to Compact negotiators on the outlook for the FSM economy 
given various levels of U.S. assistance. 

Page 32: Regarding the Pohnpei Head Start program, the Draft Report, 
in essence, asserted that $300,000 was stolen. A closer look reveals 
that, yes, there was some misappropriation briefly by people who were 
fired, but the bulk of the $300,000 had to do with unaccounted travel 
costs that were subsequently confirmed. Relatively minor problems? 
Yes. Significant scandal? No. [See comment 10, now on p. 44] 

Page 33: It is unworthy of the GAO to target the College of Micronesia-
FSM as they have on this page, especially following GAO's interview 
with the College President during which it was pointed out that the 
College itself first discovered the overpayment by the US Department 
of Education of $1.2 million and brought it to the Department's 
attention. By the way, following the 1999 unqualified audit opinion, 
the College has received another unqualified opinion for 2000. The GAO 
should be giving credit where credit is due, rather than stretching to 
present negative implications. [See comment 11, now on p. 45] 

Page 34: The Draft Report erroneously states that the U.S. Embassy 
suspended the FSM's Rural Housing Service program in 2000 "for making 
inappropriate loans to the FSM President and others." This is 
incorrect. A cable dated June 9, 2000 from the U.S. Embassy in Pohnpei 
to the U.S. State Department states: "Operations Of Pohnpei State 
Office Of USDA-Rural Development Were Suspended On June 9 Due To 
Serious Allegations In Draft Audit On Use Of $479,000 Provided To USDA 
By FSM Congress." Nothing in that draft audit had anything to do with 
allegedly inappropriate loans. [See comment 12, now on p. 46] 

Not to trivialize that situation, and not to deny that improprieties 
with this program did take place, we submit the following in light of 
the GAO's curious enthusiasm to highlight loans advanced to "the FSM 
President." GAO infers, contrary to fact, that the President received 
two loans, each in excess of maximum allowable amounts. First of all, 
the "President" was then a Member of the FSM Congress. The first loan 
for which he fully qualified ($75,000) according to RHS program 
regulations then applicable was explicitly and solely for the first 
story alone (within "modest" standards) of an eventual two-story 
dwelling. The second loan ($20,000) was for site improvements 
including a driveway when it was discovered that construction 
equipment could not reach the steeply uphill building site. This loan 
was specifically approved by the Hilo, Hawaii Director of the Program. 
The second story of the (since) President's house was added with funds 
provided by the FSM having nothing to do with the RHS. Well prior to 
the assignment of GAO to produce this Draft Report, both of these 
loans were fully repaid. 

Bottom line here is that the juxtaposition of the photograph in the 
Draft Report of the President's house, on the one hand, with a far 
more modest dwelling, on the other, is too clever by half, but 
certainly calculated to produce a natural response from the casual 
reader. Is it fair? Of course not. 

Page 56: One of the FSM's education officials reacted to this 
discussion of the FASEG program by asking, "How can we be held to a 
standard of making "significant improvements" when we're just 
struggling to make ends meet?" This brings a human element to the 
overall message of the Draft Report. The need for significant 
improvement at all levels of the FSM educational system cannot be 
denied. However, it is far too easy just to say that more local 
revenues should be dedicated to these uses. It is also too easy to 
suggest a reordering of priorities. If anyone thinks that there is 
"double dipping" going on with regard to U.S. support for education in 
Micronesia, let that person step back and understand that the "single 
dip" has everyone severely stretched. [Now on p. 69] 

The FSM Government appreciates this opportunity to comment on the 
Draft Report, and looks forward to a continuing dialog with all who 
have roles to play in developing policies and opinions within the 
Legislative Branch on the future of the Compact of Free Association. 

GAO Comments: 

The following are GAO's comments on the Government of the Federated 
States of Micronesia's letter dated December 10, 2001. 

1. Because of past FSM and RMI concerns about formatting issues, the 
draft that GAO provided had separate evaluations of each nation's 
performance in appendix II of the report, to ensure that the two 
nations were separately listed. 

2. According to the Asian Development Bank and others, although the 
college does not track student attrition rates, and consequently lacks 
hard data on student graduation rates, it has a low graduation rate. 
According to the Asian Development Bank's study (Federated States of 
Micronesia: Human Resources Study: Health and Education, Dec. 1999), 
the "actual graduate output of the COM system is quite small, with 
only 139 graduates from the national campus in 1998." During this 
period, there were 775 full-time enrollments. In addition, the report 
noted that the college lacked an accurate student tracking system 
necessary to develop correct statistics. For example, no data were 
kept on student attrition rates. In addition, the college's 1998 
accreditation report found that the college lacked information on 
student retention rates, completion rates, and graduation rates, and 
that with 80 percent of the incoming freshmen academically unprepared 
for college, the college could not effectively help students who 
experienced academic difficulty. According to the college president, 
only 50 percent of the applicants to the college met the college 
requirements for entrance; of those, 80 percent were placed in 
remedial math and English classes. According to the president, those 
students often exhausted their Pell Grants before they were ready for 
credit courses and thus lost the financial resources necessary to 
continue their schooling, contributing to the low graduation rate from 
the college. 

3. GAO did not state in the report that any of the nine programs were 
"failures." We stated, in the opening sentence of our Results in 
Brief, that the programs we reviewed provided numerous, and in many 
cases important, services to the citizens of the FSM and the RMI and 
that U.S. embassy, FSM, and RMI officials reported that these were 
critical programs in each country. We also documented those 
accomplishments, by program and by country, in table I of this report. 
To the question that the FSM posed concerning how many programs within 
the United States itself could meet the assessment standard, we point 
out that four of the programs in the FSM and the RMI successfully
met program standards and goals without significantly increased costs. 

4. We are not in a position to know whether or not these programs are 
rife with theft, fraud, and abuse. Because of time and resource 
constraints while in-country, we were able to conduct only limited 
evaluations of the accountability of each program, and we are unable 
to say what was undetected. However, the auditors were surprised to 
find accountability problems in two-thirds of the programs they 
selected and instances of theft, fraud, and abuse in 5 of the 12 
programs. 

5. We incorporated this clarification on page 12 of the report. 

6. Program managers from SEPPIE, FASEG, Head Start, and other programs 
consistently told us that almost all program funds came either from 
U.S. program or U.S. Compact funds. In addition, the Asian Development 
Bank found in 1998 that only $560,000, or 2 percent of the FSM 
national and state budget allocations for education, came from locally 
generated revenues. The remaining 98 percent came from U.S. grants or 
Compact funds. Although these locally generated revenues may be 
increasing, FSM special education officials told us that it is 
unlikely that greater levels of local funding for special education 
would become available unless new funding sources were identified. We 
repeatedly asked FSM program managers, as well as our liaison officer 
from the FSM finance department, for data specifying by program the 
amount of locally generated revenue, but these data were never 
provided. 

7. We changed the text on page 25 to state that mail delivery was 
delayed. 

8. This information was included in the draft report and can be found 
on pages 14 and 72. We agree that Pell Grants offer an important 
opportunity for FSM students to pursue college studies in the United 
States. Although we tried to examine this aspect of the program, for 
example, by quantifying the number of FSM students who graduated from 
U.S. institutions, neither the FSM government nor the U.S. Department 
of Education was able to provide this information. 

9. There is overwhelming evidence that, without Pell Grants, the FSM 
college would collapse. For example, in documentation prepared for our 
visit, the college provided an analysis of the loss of U.S. student 
financial aid, of which Pell Grants are the largest source. The 
analysis found that the loss of these funds would have a "devastating 
effect," as 50 percent of the college revenues is derived from this 
assistance. It also stated that the FSM government funds are "non-
existent" to make up for the loss of U.S. student assistance funds and 
that, therefore, if the college "were to lose access to U.S. student 
financial assistance programs, most, if not all, of the programs would 
close down." In addition, in its December 1999 report, the Asian 
Development Bank found that financing for education was "almost 
totally reliant on U.S. funding either through Compact funds or access 
to U.S. grant programs. The FSM is largely dependent on external 
sources of funding for its education system-—without these funds the 
system in its current form would collapse." 

10. We added clarifying language to page 44 of the report. The three 
accounting department officials admitted to stealing about $11,500. 

11. We added language to page 45 clarifying this point and to 
emphasize the efforts made by the FSM college to improve 
accountability. 

12. When people at or near the top of any nation's government receive 
assistance that was designed for the neediest, they should not be 
surprised that such assistance receives extra scrutiny. Our findings 
draw on our own review, as well as on reports by the Inspector 
General. The Department of the Interior Inspector General detailed 
this particular case in a September 1999 report: 

The Pohnpei Local Office made Rural Development Direct Single Family 
Housing Program loans to borrowers who constructed houses that 
exceeded what would be considered a modest house design on the island 
of Pohnpei and made a loan to one borrower that exceeded the maximum 
authorized loan amount by $15,000.... 

The Code of Federal Regulations (7 CFR 3550.57(a)), in defining a 
"modest dwelling," states, "The property must be one that is 
considered modest for the area, must not be designed for income 
providing purposes...." 

Our [the Inspector General's] review of the floor plans in the loan 
file disclosed that the design of the house appeared to exceed what 
would be considered a modest house on the island of Pohnpei. In 
addition, we noted a May 23, 1998, entry in the running case record 
stating that the Pohnpei local office's engineer visited the 
construction site and found that the design of the house had been 
changed to include the construction of a second floor. However, no 
action was taken by the Pohnpei local office to stop the construction 
of the second floor. We also noted, based on documents in the loan 
file, that the borrower had required an additional loan of $38,000 to 
complete the construction of the house. However, in an October 29, 
1998, letter to the borrower, the Pohnpei local office stated that "we 
are unable to approve your application on the basis that your total 
indebtedness with the agency will exceed the present authorized loan 
limit." As a result of our review of the loan file, on March 16, 1999, 
we visited the construction site and found that a two-story house, 
which appeared to be more than modest, was under construction. 

We were told in April 2001 that the local trustee agency for the Rural 
Housing Service, the Pohnpei State Housing Authority, had paid off the 
USDA loans from the escrow account set up to pay off any defaulted 
loans. This depleted the escrow account, and the Pohnpei State 
Legislature had to appropriate funds to replenish the account. 

We have also added another photograph in figure 17 of a modest house 
to contrast with the photographs of the nonmodest houses. 

[End of section] 

Appendix VII: Comments from the Government of the Republic of the 
Marshall Islands: 

GAO's comments supplementing those in the report text appear at the 
end of the appendix. 

Embassy Of The Republic Of The Marshall Islands: 
2433 Massachusetts Avenue, N.W. 
Washington, D.C. 20008: 
Tel. # (202) 234-5414: 

December 10, 2001: 

Mr. Loren Yager: 
Director, International Affairs and Trade: 
U.S. General Accounting Office, Room 4T55a: 
441 G Street, NW: 
Washington, D.C. 20548-0001: 

Dear Mr. Yager: 

I appreciate your willingness to provide the Government of the 
Republic of the Marshall Islands (RMI) opportunity to comment on the 
drafts of your reports. I am pleased to provide you with comments on 
your most recent draft report entitled Foreign Assistance: 
Effectiveness and Accountability Problems Common in U.S. Programs to 
Assist Two Micronesian Countries. 

As you will see from the attached response from the RM1 Government, 
implementing programs designed to serve communities in the United 
States has proved to be challenging. By the same token, U.S. Federal 
programs are of critical assistance to the RMI, particularly in the 
education and health sectors. The RMI Government relies on U.S. 
Federal programs to provide the most basic health and education 
services to our population. 

I hope you will take time to consider the reactions of the RMI 
Government in the final version of your report. If you have any 
questions about the content of the RMI Government's response, please 
feel free to contact me at anytime. 

With Best Regards: 

Signed by: 

Banny deBrum: 
Ambassador to the United States: 

[End of letter] 

RMI Response To Draft GAO Report Entitled "Foreign Assistance: 
Effectiveness And Accountability Problems Common In U.S. Programs To 
Assist Two Micronesian Countries" 

The RMI national government has reviewed the draft GAO report on U.S. 
federal programs with RMI officials having responsibilities directly 
related to operation of such programs and services in the RMI. These 
programs are authorized and implemented under Sections 221-226 of the 
Compact of Free Association as approved under U.S. Public Law 99-239, 
and the Federal Programs and Services Agreement concluded pursuant 
Section 232 of the Compact. 

In general, there is recognition and agreement that federal programs 
conceived for implementation in the mainland United States have had to 
be adapted to realities of life in the RMI. While there are 
effectiveness and accountability problems as noted by the GAO, it is 
the view of the RMI that both U.S. and RMI officials responsible for 
program operations have been resourceful and dedicated in delivering 
services in a manner that contributed to the well-being and 
development of the RMI. These programs have been important to the 
success of free association during the first 15 years. 

Most of the federal programs now being provided under the Compact were 
being provided in the RMI under the trusteeship, and those that were 
not have been extended during the first 15 years of free association 
by Congress in order to ensure that free association under the Compact 
would not terminate U.S. commitments and responsibilities to promote 
the political, social and economic development of the RMI. As such, 
these programs were extended by Congress to support U.S. national 
interests in the strategic partnership under the Compact, and to ensue 
that free association would not in an unintended way become a halfway 
house to simple non-associated independence. 

For the free association political status model to operate as a 
framework for evolution of close relations, rather than abandonment of 
the RMI by the U.S. as former administering power of a trusteeship, 
Congress sought to ensure that U.S. federal programs that were 
operating in the RMI under the trusteeship, however imperfectly, were 
not simply terminated along with the trusteeship itself. The programs 
added under 48 U.S.C. 1905 (h) and other provisions of law and 
agreements were deemed necessary by Congress in order to ensure that 
free association sustained rather than ended the economic assistance 
role of the federal government that had developed during four decades 
of trusteeship. 

The GAO argues that the State Department should play a management and 
direct supervision role in implementation of any federal programs in 
the RMI, again incorrectly characterizing Compact economic assistance 
as a form of "foreign assistance." However, the applicable provisions 
and legislative history of the Compact leave no room for doubt that 
Congress intended U.S. domestic programs to operate in the RMI as much 
as possible as they had during the trusteeship, adapted, again, to the 
conditions of life in the islands. For that reason, Congress 
specifically and expressly provided that the State Department would 
not play the role now urged by the GAO. 

Thus, under 48 U.S.C. 1905(3) Congress assigns federal program 
supervisory responsibilities to the Secretary of the Interior. While 
the U.S. Ambassador in the RMI has authority with respect to U.S. 
personnel in the RMI, the division of responsibility between the 
Secretary of State and the Secretary of the Interior set forth in 
Section 1905 was implemented by President Reagan under Executive Order 
12596. This arrangement is consistent with the fact that the 
Department of the Interior was responsible for trusteeship 
administration on behalf of the U.S. under the Trusteeship Agreement 
between the U.S. and the United Nations. 

The RMI believes the reasons Congress extended domestic programs to 
the RMI and gave the Department of the Interior authority and 
responsibility for supervising these programs continue to exist. 
Although the RMI is not a domestic jurisdiction of the U.S.,
and never has been, the package of federal programs and services 
provided under the Compact has become a feature of the government-to-
government and the people-to-people relationships that exist between 
our two nations. 

These programs sustain the economic, social and cultural elements of 
the close relationship between the RMI and the U.S. that was 
encouraged and promoted by the U.S. under the trusteeship, and does so 
at a cost far below territorial status and political integration under 
the "commonwealth" model adopted by the Northern Mariana Islands 
(which was also part of the trusteeship territory). Without the 
inclusion of these federal programs in free association, the RMI would 
have had to give closer consideration to continuation of the 
trusteeship or territorial status. 

These broad points having been made, the RMI can report that its program
managers responsible for coordination of federal and RMI programs and 
services agree with the GAO that program management training should be 
improved in the future and that there be more regular contact between 
the program managers and their U.S. counter parts. Further, the RMI 
concurs that there is a need for a joint review and tailoring of these 
programs to address the relevancy, accountability and effectiveness of 
some programs. 

In this regard, it has to be recognized that the RMI national and 
local governments do not have the financial resources of state and 
local government in the United States. Thus, the RMI cannot be a 
partner with the federal government in funding and administering some 
programs in the same way as the state, county and city governments in 
the U.S. mainland. The tax base in the RMI does not allow the RMI to 
implement the capacity building strategies of local governments in the 
U.S. in order to implement social services and programs. 

For example, on the outer islands over half of the households earn 
less than $1,000 per year, less than $200 per capita. Structural 
differences in the economy and the demographics of the population 
contribute significantly to an unemployment rate of over 30%. It is 
because of these differences and challenges facing the RMI that all 
the program managers stressed that the need for closer cooperation on 
coordination, training and reporting is among the legitimate points 
made by the GAO report. There are methods that can be found to improve 
these areas, such as the delivery of training in a cost effective and 
program effective manner. 

The RMI believes that U.S. program managers have done a good job 
dealing with the unconventional tasks implementing programs in the 
RMI. The Department of Interior has done a good job supporting program 
managers from other agencies to understand and work under the Compact. 
The State Department and U.S. embassy have played an appropriate role, 
but should not be expected to manage the activities of federal 
agencies program directly. 

The State Department does not and should not have the same role in 
administering Compact assistance as it does in other nations with 
regard to foreign assistance. Compact assistance is not provided under 
the Foreign Assistance Act of 1961, as amended, and the Compact is a 
distinct and different framework for assistance than the Sate 
Department works under in other countries. 

Thus, in the view of the RMI the GAO and the State Department need to 
move beyond the notion of "normalizing" assistance to the RMI based on 
what the Agency for International development, other federal agencies, 
or the State Department do in other nations around the world. That is 
not what Congress provided for under he Compact, and it is not what 
the RMI agreed to in entering into free association. 

USDA — Rural Development: 

The report also refers to the income limits used by the Rural Housing 
Service in its programs. The assertion that the neediest residents 
were not served because of the higher income limits used from the 
"Western Pacific Islands" is not supportable. Granted the income 
limits used were probably much higher in Micronesia and the RIv1I, the 
audit report did not include the income of residents actually served 
by the housing program to reach this conclusion in the report. 
Therefore, the report needs to be corrected to state that the income 
limits used were not reflective of the incomes on the islands because 
income data was not available until 1998. [See comment 1] 

The report also states "USDA officials asserted that they are not 
required to consider repayment ability in providing housing loans." 
The RMI USDA office is required to determine the individuals' 
repayment ability at the same time the loan is being considered. 
However, the program manager is not required to consider possible
economic downturns when underwriting individual loans. It is not 
correct to say the USDA failed to consider the impact of future 
reductions in U.S. economic assistance will have on a borrower's 
ability to repay since this has not been a loan underwriting condition. 
[See comment 2] 

Health And Human Services: 

Comments on the programs and services provided under the MCH Block 
Grants are adequately stated. The MCH Block Grant is the only source 
of funding that can be utilized to send children with special health 
care needs (CSHCN) to Honolulu to access services that are lacking in 
the Marshall Islands. It is the only funding source that also enables 
the Maternal and Child Health Program to bring in children with 
disabilities (CSGCN) from outer islands to Majuro to access services 
from specialists who visit the RMI. The specialties include 
orthopedics, ENT (ears, nose, throat) specialists and other 
specialized areas that are lacking in the RMI. 

Compliance with the Maternal and Child Health Block Grant (MCHBG) 
requirements is cumbersome because the block grant requirements are 
designed for the United States where all services required from the 
grant are available. Some of the services that are required for the 
Ministry of Health and Environment to provide under the MCHBG selected 
national performance objectives are not available in the RMI. There 
are no services provided for neonatal intensive care. There is a lack 
of equipment and qualified staff to screen for PKU, hypothyroidism and 
galactosemia in newborns to be able to reduce the risk for other 
preventable illnesses such as mental retardation or growth stunting. 

Furthermore, because preventative services and other health care 
services necessary for maternal and child health are not accessible in 
the outer islands, the mothers who live in the urban centers are the 
only ones who can access adequate health services. Screening for 
sexually transmitted diseases during prenatal care is not provided
in the outer islands. Therefore, it is possible that pregnant mothers 
may be infected but have no way of knowing if screening for STD is not 
provided in the outer island health centers. 

Other funding sources that support maternal and child health such as
Immunization Grant is the only source of funds that can be used to 
purchase vaccines, medical supplies and materials, and enable the 
nurses to travel to the outer islands to provide immunization. Nurses 
are required to make these trips to the outer islands because (1) lack 
of electricity to store vaccines in the health centers and (2) most 
health assistants do not have immunization training. Immunization 
coverage has improved tremendously, and the Ministry of Health and 
Environment believes it is higher than the current coverage rate of 
64%. However, weakness in data collection and reporting systems is 
another barrier due to lack of skills and capabilities in managing 
health information systems. The RMI has not experienced any outbreak 
of preventable childhood diseases since 1998. 

Job Training Partnership Act: 

There are three major items of concern to the RMI in this area. First, 
the GAO report states that in one local JTPA report there was 100% job 
placement, then in other local report this figure is 14%. The local 
program manager has no files or reports that support this seeming 
contradiction in reporting. The GAO report does not cite or describe 
the source of the conflicting information and as a result the local 
program manager cannot verify this important point for accuracy. The 
second point concerns definitions and programs. The Department of 
Labor — Employment Training Administration has recognized that there 
are differences and important economic structural differences between 
the Pacific region and the U.S. mainland. The result is that the 
Regional DOL office in San Francisco is looking into some waivers that 
would allow Pacific jurisdictions some program flexibility that will 
allow programs to more effectively address local work force needs. 
[See comment 3] 

The GAO report also indicates that "in the RMI, poor data precluded 
determining JTPA's effectiveness, and poor economic conditions limited 
employment opportunities.) Elsewhere, however, the same report states, 
"the JTPA programs in the FSM and the RMI were exempt from having to 
meet the program's standardized reporting systems used by the 
Department of Labor to verify program performance. Department of Labor 
managers exempted the FSM and the RMI because they lacked the 
necessary data collection capabilities. Furthermore, U.S. program 
managers said they generally ignored the performance data submitted by 
the two nations because it was considered unreliable. [See comment 4] 

It is not constructive to criticize a program for failing to meet data 
reporting standards from which the local program was specifically 
exempted, or to criticize data reports that were apparently dismissed 
as "unreliable" sight unseen. [See comment 5] If the reported data is 
unreliable, then upon what does the GAO report base its conclusion 
that "poor economic conditions limited employment opportunities" for 
JTPA graduates? [See comment 6] Perhaps it is better to say simply 
that we do not know for certain how effective the JTPA program really 
was. [See comment 7] 

The crucial anecdotal evidence that is available about the JTPA 
program is that its effectiveness was not limited so much by the poor 
economic environment, as by the limited English and mathematics skills 
of the students enrolled in the program. The instructors have reported 
that many students lacked the basic academic and personal competencies 
necessary to benefit fully from job training. This experience has 
directly contributed to the revised job training program currently 
being funded jointly by the Ministry of Education and the Asian 
Development Bank, which is designed to build on the lessons of the 
JTPA program. But to dismiss this entire program as a failure seems to 
miss the point. [See comment 8] 

Freely Associated States Education Grants: 

These funds are awarded to the Ministry of Education, which in turn 
releases some of the available funds to support in — service teacher 
training, especially during the summer for Teacher Education courses 
in A.A. and B.A. programs. The grant provides support for teachers' 
tuition, fees, and textbooks for teachers attending classes at the 
College of the Marshall Islands as well as for University of Guam 
(UOG) extension courses offered through the CMI Adult and Continuing 
Education Office, for those students who are candidates for the 
B.S.Ed. degree from UOG. 

The GAO report indicates that although this program "met its...limited 
goals to provide funding for school supplies and teacher training, 
because the...RMI did not provide much funding in these areas, many 
needs continued to go unmet...Because the program was so small 
relative to the needs, it could not meet all school requirements for 
school supplies and teacher training." 

While it can be acknowledged that the educational needs of the RMI are
substantial, we believe that the GAO's conclusion underestimates the 
usefulness of this program to RMI teachers. The following table shows 
total registration numbers of RMI —in—service teachers in recent 
summer semesters. As the table shows, each summer over 200 RMI — in—
service teachers continue their education and make progress on degrees 
with the financial support made possible by the Freely Associated 
States Educational Grants. This represents a substantial percentage of 
the entire force of public school teachers in the RMI, and represents 
a very important contribution toward upgrading the level of teaching 
in the RMI public schools. [See comment 9] 

Table: Registration of In — Service Teachers in Summer Semesters, 1998-
2001: 

CMI Courses: 
1998: 145; 
1999: 110; 
2000: 127; 
2001: 162. 

UOG Courses: 
1998: 74; 
1999: 63; 
2000: 67; 
2001: 93. 

Total Registration: 
1998: 219; 
1999: 173; 
2000: 194; 
2001: 255. 

[End of table] 

It should also be noted that the Ministry of Education is in the 
process of reorganization, following the directives of the recently 
adopted Education Strategic Plan. Under this reorganization, the 
Ministry of Education has proposed that a separate office be 
established specifically to oversee the implementation of U.S. Federal 
Grants. This office will be responsible for implementation oversight 
and maintaining financial records for all Federal Programs. 

The Ministry of Education also agreed with the report that there was 
inadequate program monitoring of the programs in the RMI and the 
Ministry feels that this was a major cause of the problems in local 
administration. Program managers felt that they were running things on 
their own and coupled with the scarce availability of local
resources, this contributed to many of the problems pointed out in the 
GAO report. 

Pell Grants: 

As the GAO report points out this is the largest single source of 
funds for the College of the Marshall Islands. The GAO report 
commented "the poor conditions of the elementary and secondary school 
system, the limitations of a two year college, and the lack of 
employment opportunities limited the potential accomplishments of the 
Pell Grant Program." The GAO report also indicates "in the RMI...one-
half of high school graduates entered the college with the equivalent 
of a 4th — 6th grade U.S. education and required 1—2 years of remedial 
classes. This reduced the amount of Pell Grants available for 
graduation and contributed to the low, 9-percent graduation rate". 

It is true that the average high school graduate comes to the College 
of the Marshall Islands with 4th — 6 grade level of English. It is 
also true that many students will require 1 —2 years of remedial 
classes. But the GAO report neglects to indicate that the Pell Grants 
program specifically provides funding for only 30 credit hours of 
remedial work in English and mathematics. Once students have completed 
their remedial English and mathematics courses, they are then eligible 
for additional Pell funding sufficient to complete their A.A. or A.S. 
degrees. The remedial training students receive at CMI, prior to 
student's credit level work, in no way reduces the Pell Grants 
available for degree program course work. [See comment 10] 

It is also true, however, that some students do not complete their 
remedial work within the 30 credit limitation set by the Pell Grant 
Program. These students then lose their Pell eligibility. Some of 
these students continue their education with alternate sources of 
funding; other students lack sufficient resources and drop out of 
college all together. And it is likewise true that these dropouts 
lower CMI's overall graduation rate. We question the 9% graduation 
rate, however. The following table shows CMI academic year 
registration since the Fall Semester 1998. Figures are provided for 
both Developmental (pre—credit level) and Credit Level registration, 
and, for each year, the total number of graduates in degree programs. 

Table: College of the Marshall Islands Academic Year Registration and 
Graduation, 1998-2001: 

Description: Developmental; 
Fall 98: 162; 
Spring 99: 201; 
Fall 99: 290; 
Spring 00: 275; 
Fall 00: 322; 
Spring 01: 195. 

Description: Credit Level; 
Fall 98: 265; 
Spring 99: 241; 
Fall 99: 225; 
Spring 00: 184; 
Fall 00: 235; 
Spring 01: 316. 

Description: Total; 
Fall 98: 427; 
Spring 99: 442; 
Fall 99: 515; 
Spring 00: 459; 
Fall 00: 557; 
Spring 01: 511. 

Graduates: 
Spring 99: 59; 
Spring 00: 57; 
Spring 01: 42. 

Graduation Rate (All Students): 
Spring 99: 13%; 
Spring 00: 12%; 
Spring 01: 8%. 
						
Graduation Rate (Credit	Level Students): 
Spring 99: 31%; 
Spring 00: 24%; 
Spring 01: 13%. 

[End of table] 

Graduation rates can be figured in a variety of ways, but by a 
calculation, CMI graduated well over 9% of its students in academic 
years 1998—1999 and 1999—2000. A comparison of the number of graduates 
and the number of credit level students suggests that CMI students are 
making relatively good progress toward their degrees once students 
reach credit level courses. 

The GAO report also states "the limitations of a 2—Year College" as a 
restriction on the "potential accomplishments of the Pell Program." 
The Pell Grant program routinely offers financial assistance to 
students at 2—year colleges in the United States. Community Colleges 
in the U.S. and elsewhere have proven to be a very effective means of 
preparing students for the rigors of academic life at baccalaureate — 
level colleges and universities. There is no question that CMI 
graduates with A.A. or A.S. degrees are holding down highly 
responsible jobs in both the private and public sectors in the 
Marshall Islands, and that CMI graduates have benefited from the 
educational opportunities made available to them there is no reason to 
denigrate the accomplishments that have already been made or the 
effectiveness of the U.S Federal programs that assist them. [See 
comment 12] 

Federal Emergency Management Administration (FEMA) Disaster Relief 
Program: 

The GAO clearly states that disaster relief programs in the RMI have 
met their "performance requirements and standards," a point with which 
the RMI also agrees. Despite this praise, the conclusion reached by 
the GAO is that these programs be discontinued. This recommendation 
reflects only the challenges that the US Federal Emergency Management 
Administration's (FEMA) claims to face in the RMI and not the 
successes of these programs. The RMI does not dispute the fact that 
emergency management in the nation is costly, difficult, and labor 
intensive due, in part, to geography, social differences, and the 
absence of capabilities comparable to those in the United States. 
However, there can be no question that FEMA programs have succeeded in 
providing crucial assistance to victims of natural disasters 
throughout the first 15-years of the Compact. The need for this 
assistance was recognized during the RMI's Trusteeship period, and was 
included in the ensuing Compact agreement as part and parcel of the 
RMI's acceptance of it current free-association status. [See comment 
13] 

The report also is concerned that FEMA disaster assistance fosters 
dependency to the degree that victims delay rebuilding efforts until 
assistance arrives. However, the report fails to mention operational 
changes within FEMA itself that focus efforts on effective planning 
and preparedness that address and encourage self-reliance. The report 
is misleading in that it states that the RMI expended only $11,598 of 
$100,000 of the Disaster Preparedness Improvement Grant (DPIG). For 
the record, the total amount awarded by FEMA was $50,000. Local 
program managers in the RMI report that of the DPIG $46,228.42 was 
actually expended. Reorganization and capacity issues hindered the 
timely reporting of these expenditures, but the current administration 
has instituted improvements enabling the local office to better comply 
with FEMA's reporting requirements. [See comment 14] 

The GAO also makes vague claims about the allocation of Hazard 
Mitigation Grant Program (HMPG) funds by the RMI, stating simply that 
since 1988 less than 100% of funds were spent. What the GAO fails to 
mention is that the RMI was unaware of this program until FEMA made 
efforts to educate program managers, and once instituted these 
programs were extremely successful. The RMI eventually accessed funds 
totaling approximately $1.75 million, that was invested in projects 
greatly benefiting citizens, such as the identification of fresh water 
sources, building sea walls, and updating communication systems. 

Training And Program Coordination: 

There is unanimous agreement that one area for improvement is in 
training and program coordination. As the GAO report points out, 
programs are designed for the United States, not for a foreign 
country, much less a country with a widely dispersed population on 
small islands. All the federal program managers and agency heads 
expressed concern that many standard program procedures need some 
adjustment to fit the economic and social challenges of the RMI. 

During an October 2001 semi annual Department of Labor (Employment 
Training Administration) meeting in Honolulu, some important ideas for 
the future of the Workforce Investment Act (WIA) were discussed. The 
first being that the DOL Regional Office in San Francisco will be 
contracting PREL (Pacific Resources for Education and Learning) to 
provide technical assistance to DOL. DOL is concerned that because of 
the differences between the Pacific entities and the mainland there is 
an effect on program development and reporting. DOL is seeking this 
technical assistance so that requests for program waivers and funding 
allocation can be made. DOL is also concerned about improving program 
and fiscal reporting from the region and to make the reporting more 
relevant to labor environments. 

Under the current WIA legislation funds cannot be shifted from one 
program to another, as was the case with JTPA. Under WIA the bulk of 
the funding is for programs under the category Dislocated Workers. But 
throughout the Pacific region Dislocated Workers is just not as 
significant a program need as say on the mainland with an 
industrialized economy. The regional DOL office wants to develop a 
proposal for a waiver so funds from Dislocated Worker Programs can be 
shifted to support Adult and Youth programs. This shift would be much 
more practical for the Pacific jurisdictions because of the challenges 
surrounding education and training opportunities for adults. Another 
aspect of the PREL technical assistance is the provision of training 
concerning financial reporting. PREL will be conducting some training 
in the winter or the spring. The site will be determined at a later 
date. People from all the Pacific jurisdictions felt this approach 
using PREL was very worthwhile and beneficial to the region and 
individual entities. All the programs under U.S. federal jurisdiction 
could benefit from the approach being undertaken by the Department of 
Labor. 

Because all the programs examined in the GAO report are beneficial and 
critical to the RMI, a redesign of the programs is in order, not 
discontinuance. Levels of acceptable accountability and associated 
monitoring need to be designed for programs in the RMI, that takes 
into account many of the differences between the RMI and the mainland 
United States. This will require more involvement by U.S. program 
officials in areas of training, coordination, and monitoring. Having 
program staff and staff from the Ministry of Finance attend the same 
training would be beneficial. 

Several program managers felt that off island training is not very 
effective if only one staff person attends such training. Staff from 
relevant agencies will benefit more if the training takes place on 
islands or as close to the RMI as possible. In this way more people 
can take advantage of the training, and more relevant staff from the 
Ministry of Finance can attend as well. It would be more beneficial if 
the program training could be designed to meet the challenges of the 
RMI or at least the Pacific Region. 

The GAO report also mentions a meeting concerning insular areas and 
federal program coordination that took place in the Fall of 2000. This 
meeting was for the territories and commonwealths of the United 
States. The RMI did not participate in this meeting and has received 
little information regarding the results of this meeting. 

GAO Comments: 

The following are GAO's comments on the Government of the Republic of 
the Marshall Islands letter dated December 10, 2001. 

1. We do not assert that the neediest residents were not served. The 
report stated that, because of the lack of accurate income data, loans 
could not be targeted only to the most needy, which is the purpose of 
the program. We assert that, if income data specifically for the FSM 
and the RMI were used to calculate the low- and very low-income levels 
for each country, fewer people would likely be eligible for the 
program than are now eligible with the current Western Pacific income 
levels. 

2. Additional language was inserted to clarify this issue on page 42. 

3. The JTPA Title II Quarterly Status Report, July 1, 1999, to June 
2000 (Final Report), signed by the local program manager on September 
11, 2000, reported that only 14 percent of the job training graduates 
entered employment. In contrast, RMI reported in its Program Year 1999 
Annual Report that 100 percent entered employment. Both documents 
stated that 35 trainees finished their job training; however, the 
first document reported that only 5 entered employment, while the 
second document states that all 35 entered employment. 

4. Although the RMI was exempted from having to meet the program's 
national reporting requirements, the RMI was required to provide 
accurate performance reports to the Department of Labor's regional 
office in San Francisco. The Department of Labor's program manager, as 
well Department of Labor documentation stretching back to 1993, 
documents Labor's concerns about the unreliability of the data 
submitted to the regional office. For example, a 1994 Department of 
Labor memorandum on a Pacific Basin JTPA liaison meeting stated that 
"the enrollment and termination rates, as reported by the RMI, cannot 
be trusted." In 2001, the Department of Labor's program manager 
expressed these same concerns. 

5. As noted above, the program was not exempt from providing 
performance reports to the regional office. 

6. GAO based its conclusion that "poor economic conditions limited 
employment opportunities" on the fact that the program is now focused 
on teaching "survival skills," or subsistence living, because of a 
lack of jobs. 

Comments from the Government of the Republic of the Marshall Islands
7. We agree with the RMI that having unreliable data precludes knowing 
with certainty whether the JTPA program was effective. However, the 
program was designed so that the burden of proof was on those 
implementing the program, and program effectiveness was determined by 
having reliable data on the numbers of trainees that found employment. 

8. We have added this to the report on page 30. 

9. Table I describes the "usefulness" of this program to the RMI. To 
further clarify this point, we have added information on the number of 
teachers trained using FASEG funds. 

10. Additional language has been added to page 29 to clarify this 
point. 

11. The 9-percent graduation rate was stated by the president of the 
college, who also provided documentation to support the graduation 
rate. 

12. The report notes on pagel4 that the program has made college 
education available for thousands of students and funded the creation 
of the only U.S.-accredited college in the RMI. 

13. FEMA, not GAO, concluded that these programs should be terminated. 

14. FEMA, not GAO, concluded that these programs foster dependency. 

15. Disaster Preparedness Improvement Grants over two years totaled 
$100,000 and are matching grants. According to FEMA records, the funds 
had not been expended at the time of our review. The RMI confirmed 
that the information had not been timely and properly reported, and 
added that reorganization and capacity issues hindered the timely 
reporting of these expenditures. GAO agrees that the RMI needs to 
institute improvements to better comply with FEMAs reporting 
requirements. 

[End of section] 

Appendix VIII: GAO Contact and Staff Acknowledgments 

GAO Contact: 

Emil Friberg, (202) 512-8990. 

Acknowledgments: 

In addition to the contact named above, Eugene Beye, Edward George, 
Wyley Neal, Rona Mendelsohn, and Mary Moutsos made key contributions 
to this report. 

[End of section] 

Related GAO Products: 

Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in 
Two Micronesian Nations [hyperlink, 
http://www.gao.gov/products/GAO-02-119], Jan. 22, 2002. 

Compact of Free Association: Negotiations Should Address Aid 
Effectiveness and Accountability and Migrants' Impact on U.S. Areas 
[hyperlink, http://www.gao.gov/products/GAO-02-270T], Dec. 6, 2001. 

Foreign Relations: Migration From Micronesian Nations Has Had 
Significant Impact on Guam, Hawaii, and the Commonwealth of the 
Northern Mariana Islands [hyperlink, 
http://www.gao.gov/products/GAO-02-40], Oct. 5, 2001. 

Foreign Assistance: Lessons Learned From Donors' Experiences in the 
Pacific Region [hyperlink, http://www.gao.gov/products/GAO-01-808], 
Aug. 17, 2001. 

Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little 
Impact on Economic Development [hyperlink, 
http://www.gao.gov/products/GAO/NSIAD-00-216], Sept. 21, 2000. 

Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little 
Impact on Economic Development and Accountability Over Funds Was 
Limited [hyperlink, 
http://www.gao.gov/products/GAO/T-NSIAD/RCED-00-227], June 28, 2000. 

Foreign Relations: Better Accountability Needed over U.S. Assistance 
to Micronesia and the Marshall Islands [hyperlink, 
http://www.gao.gov/products/GAO/RCED-00-67], May 31, 2000. 

[End of section] 

Footnotes: 

[1] Under the Compact, the United States also provided direct 
financial assistance. We reported on this assistance in Foreign 
Assistance: U.S. Funds to Two Micronesian Nations Had Little Impact on 
Economic Development [hyperlink, 
http://www.gao.gov/products/GAO/NSIAD-00-216], Sept. 22, 2000. 

[2] Relying on information from U.S. agencies, we previously 
documented the amount of program assistance provided during 1987-99. 
See Foreign Relations: Better Accountability Needed over U.S. 
Assistance to Micronesia and the Marshall Islands [hyperlink, 
http://www.gao.gov/products/GAO/RCED-00-67], May 31, 2000. We have 
estimated program costs for fiscal years 2000 and 2001. The figure of 
$700 million does not include payments to the Republic of the Marshall 
Islands related to nuclear testing compensation and is based on 
partial data, known to understate amounts. 

[3] Compact provisions related to economic assistance, access to U.S. 
federal services and certain programs, and defense obligations were to 
expire on October 21, 2001, for the Republic of the Marshall Islands 
and on October 1, 2001, for the Federated States of Micronesia. The 
expiring provisions of the Compact remain in full force and effect for 
up to 2 additional years while negotiations are underway. 

[4] At your request, we attempted to report on the administrative 
costs of implementing these programs in the islands. However, this 
information was not available. Most agencies administering programs in 
the islands from Washington, D.C., or San Francisco were unable to 
segregate their costs for running the programs. 

[5] These programs were (1) Head Start for preschoolers, (2) Special 
Education Program for Pacific Island Entities, (3) Freely Associated 
States Education Grants, (4) Pell Grants for college education, (5) 
job training for adults (Job Training Partnership Act), (6) Maternal 
and Child Health, (7) U.S. Department of Agriculture's Rural Housing 
Service single family home loans, (8) U.S. Department of Agriculture's 
Rural Utilities Service Telecommunications loans, (9) U.S. Department 
of Agriculture's Rural Utilities Service Electrical loans, (10) 
Federal Emergency Management Agency's assistance, (11) U.S. Postal 
Service, (12) Federal Aviation Administration service, and (13) U.S. 
National Weather Service. 

[6] Programs that either could not meet their performance requirements 
or faced local conditions that hampered their effectiveness were (1) 
Head Start for preschoolers, (2) special education, (3) elementary and 
secondary school improvements, (4) Pell Grants for college education, 
(5) job training for adults, (6) Maternal and Child Health, (7) 
housing loans, (8) disaster response, and (9) postal services. 

[7] These programs were ineffective, despite generally meeting their 
performance requirements and standards, because of problems related to 
implementing domestic programs in the FSM and the RMI: (1) special 
education, (2) elementary and secondary school improvements, (3) Pell 
Grants for college education, (4) housing loans, (5) disaster 
response, and (6) postal services. 

[8] Programs that generally met their performance requirements and did 
not face limitations attributable to local conditions were (1) 
aviation services, (2) weather services, (3) telecommunications loans, 
and (4) electric power loans. 

[9] We found that several of the programs had met their program 
performance requirements yet still had accountability problems; in 
many cases, the program and finance offices were completely separate 
offices and operations. Programs that experienced accountability 
problems included (1) Head Start for preschoolers, (2) special 
education, (3) education grants, (4) Pell Grants for college 
education, (5) job training for adults, (6) Maternal and Child Health, 
(7) rural housing loans, (8) disaster response, and (9) postal 
services. 

[10] The FSM Department of Foreign Affairs provided this population 
figure to us. The FSM Department of Economic Affairs is finalizing the 
FSM 2000 census results and has not yet released the updated FSM 
population figure. 

[11] See David Hanlon, Remaking Micronesia: Discourses over 
Development in a Pacific Territory, 1944-1982 (Honolulu: University of 
Hawaii Press, 1998). Having driven the Japanese from these islands in 
World War II, the U.S. Department of the Navy began civil 
administration of Micronesia and the Marshall Islands on July 18, 
1947, as part of the United Nations Trust Territory of the Pacific 
Islands. This responsibility was transferred to the Department of the 
Interior in July 1951. 

[12] See Foreign Assistance: U.S. Funds to Two Micronesian Nations Had 
Little Impact on Economic Development [hyperlink, 
http://www.gao.gov/products/GAO/NSIAD-00-216], Sept. 22, 2000. Our 
estimate of Compact payments excludes payments to the RMI related to 
nuclear compensation. 

[13] The Compact of Free Association Act of 1985, Public Law 99-239. 
The Compact implementing legislation said that all programs and 
services provided to the FSM and the RMI may be provided only after 
consultation with and under the supervision of the Secretary of the 
Interior. This role and responsibility was reinforced in Executive 
Order 12569, issued in 1986. 

[14] This does not apply to employees under the command of U.S. area 
military commander. 

[15] See Foreign Assistance: Lessons Learned from Donors' Experiences 
in the Pacific Region [hyperlink, 
http://www.gao.gov/products/GAO-01-808], Aug. 17, 2001. 

[16] The Compact grants the citizens of the FSM and the RMI the right 
to live and work in the United States. See Foreign Assistance: 
Migration from Micronesian Nations Has Had Significant Impact on U.S. 
Island Areas [hyperlink, http://www.gao.gov/products/GAO-02-40], Oct. 
5, 2001). 

[17] See Pacific Partnerships for Health, Charting a New Course 
(Washington, D.C.: National Academy Press, Institute of Medicine, 
1998). 

[18] The U.S. proposal discusses additional programs and services that 
were not part of this report's scope. In addition, there were sections 
dealing with sector grants, a trust fund, and accountability 
requirements. 

[19] During 2001, the United States has met with both the FSM and the 
RMI regarding extending Compact provisions. 

[20] In commenting on this report, U.S. Department of Education 
officials said that neither the FSM nor the RMI could comply with all 
program procedures, noting that it was difficult to comply with the 
Federal Acquisition Act requirements for competitive bidding, since 
few providers wanted to do business there because of the cost of 
travel and transporting supplies. 

[21] For example, according to a 2001 RMI Ministry of Education study, 
students leave the 8th grade with "barely a 2nd- or 3rd-grade level in 
English reading ability, and many were unable to read even in their 
own language." An FSM National Division of Education study found that 
10th-grade students barely achieved the expected 2nd-grade score of 
U.S. students in the English language. 

[22] Pell Grants were limited to 1 year of remedial classes. 

[23] The U.S. Department of Labor exempted the FSM and the RMI from 
meeting some performance requirements and standards, including a key 
standard for the number of trainees that found employment. 

[24] Officials from BHS said that similar limitations seriously 
impeded the goal of reducing infant mortality in many parts of the 
United States, as they do in the FSM and the RMI. 

[25] The U.S. MCH official in charge of the MCH program in the FSM 
said he had doubted the accuracy of the data the FSM states submitted 
to the FSM national government to send to the MCH program in 
Washington, D.C., but that verifying the accuracy of the data was not 
an option because of the travel costs involved. 

[26] For example, the RMI reported that the health of the maternal and 
child population has declined as the rates of diabetes, hypertension, 
heart disease, tuberculosis, and malnutrition have risen, causing 
increases in infant and childhood illness. The RMI's MCH Director said 
that, despite the assistance provided by the Maternal and Child Health 
program, the positive effect of the program was being blunted by the 
social, economic, and educational problems in the RMI. 

[27] In commenting on this report, BHS officials stated the current 
MCH program officer also acknowledges the overwhelming needs for 
technical assistance because of the social and economic problems in 
the FSM and the RMI. 

[28] FEMA maintains that it would be much more appropriate, cost-
effective, and consistent with efforts toward self-sufficiency to 
assist the FSM and the RMI through other U.S. programs and agencies, 
such as the Office of U.S. Foreign Disaster Assistance in the U.S. 
Agency for International Development. The FSM and the RMI are 
independent countries and, according to FEMA officials, should be 
afforded the same assistance as other foreign nations. FEMA has 
formally notified the Department of State that it no longer finds it 
appropriate for FEMA to provide disaster assistance to the FSM and the 
RMI beyond 2003. 

[29] One FSM utility had a loan application pending with USDA as of 
October 2001. 

[30] The United States has not prepared a similar analysis regarding 
the effect of its funding proposal. 

[31] After USDA approval of the telecommunications loans, the Federal 
Communications Commission issued an order, effective January 1, 1998, 
to reduce the settlement rates paid by U.S. telecommunications 
companies to foreign companies for international calls originating in 
and terminating outside the United States. According to the order, 
these benchmark rates were necessary because, under the current 
system, the settlement rates U.S. carriers paid foreign carriers to 
terminate U.S.-originated traffic were in most cases substantially 
above the costs that foreign carriers incur to terminate that traffic. 
FSMTC and MINTA both protested that this action would seriously damage 
their revenues, cutting their income substantially and endangering the 
companies' ability to repay their loans to the U.S. government. Both 
companies relied on incoming long distance telephone calls for a 
significant portion of their revenue. 

[32] "The U.S. Compact Counter Proposal," Economic Management Policy 
Advisory Team of the Federated States of Micronesia (Feb. 8, 2001). 

[33] HHS, in commenting on this report, said that the Pohnpei program 
subsequently provided appropriate documentation for the $341,000 in 
questioned costs. However, neither BHS nor FSM officials indicated 
during the audit that the Pohnpei program subsequently provided 
appropriate documentation for the questioned costs. As a result, we 
were not able to independently verify HHS's statement or review the 
supporting documentation. 

[34] HHS officials, who were not aware of this situation, said that 
such fabrication could be considered "criminal wrongdoing," if true. 
They noted that under MCH guidelines, estimates were acceptable, and 
that all such estimates should be explained in a footnote. However, 
based on a review of the FSM's 2000 Annual Report, none of the 
reported performance data from Kosrae were footnoted. 

[35] During our visit to Kosrae, the director of health services told 
us that the MCH/Kosrae office had been unable to obtain the nation's 
MCH goals. When we provided him with a copy of the MCH goals, the 
director told the FSM assistant secretary for health, "Now we have our 
goals!" 

[36] See Foreign Relations: Better Accountability Needed over U.S. 
Assistance to Micronesia and the Marshall Islands [hyperlink, 
http://www.gao.gov/products/GAO/RCED-00-67], May 31, 2000. 

[37] This does not apply to employees under the command of a U.S. area 
military commander. 

[38] In commenting on this draft, USDA officials said that they were 
not aware of this requirement and did not coordinate with State; in 
addition, the National Weather Service indicated that its policy is to 
coordinate with embassies, and their staff members always obtain 
country clearances prior to visits. 

[39] See appendix 2, Purpose and legislation section, for the specific 
program legislation we reviewed. 

[40] See appendix 2, Purpose and legislation section, for the specific 
program legislation we reviewed. 

[41] Early Childhood Programs: The Use of Impact Evaluations to Assess 
Program Effects [hyperlink, http://www.gao.gov/products/GAO-01-542], 
Apr. 16, 2001. 

[End of section] 

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