GAO-19-722T, COMPACTS OF FREE ASSOCIATION: Trust Funds for Micronesia and the Marshall Islands Are Not Likely to Fully Replace Expiring U.S. Annual Grant Assistance

grants and programs, including several that are scheduled to end in 2023. In fiscal year 2016, U.S. compact sector grants and supplemental education grants supported a third of the FSM's expenditures and a quarter of the RMI's. Agreements providing U.S. aviation, disaster relief, postal, weather, and other programs and services are scheduled to end in 2024, but some U.S. agencies may provide programs and services similar to those in the agreements under other authorities. The FSM and RMI compact trust funds face risks and may not provide disbursements in some future years. GAO projected a 41 percent likelihood that the FSM compact trust fund would be unable to provide any disbursement in 1 or more years in fiscal years 2024 through 2033, with the likelihood increasing to 92 percent in 2054 through 2063. GAO projected a 15 percent likelihood that the RMI compact trust fund would be unable to provide any disbursement in 1 or more years in fiscal years 2024 through 2033, with the likelihood increasing to 56 percent in 2054 through 2063. Potential strategies such as reduced trust fund disbursements would reduce or eliminate the risk of years with no disbursement. The FSM and RMI are independent countries with a population of approximately 102,000 and 54,000, respectively. The FSM has a GDP per capita of about $3,200, while the RMI has a GDP per capita of about $3,600. The FSM is a federation of four semiautonomous states, with Chuuk being the largest state by population and having the lowest per-capita GDP. The FSM and RMI have a long history of receiving U.S. economic assistance, with the U.S. providing a total of $3.6 billion in compact sector grants, trust fund contributions, and other grants from 2004 to 2023. The U.S. Department of the Interior (Interior) manages the compact sector grants, which generally decrease annually before their scheduled end in 2023. However, the amount of the annual decrease in compact sector grants is added to the annual U.S. contributions to the compact trust fund established for the benefit of each country. Investment earnings from the compact trust funds are intended to provide an annual source of revenue after the compact sector grants are scheduled to end in 2023. As 2023 approaches, questions remain about the FSM's and RMI's ability to successfully transition to greater self-reliance when the 20 years of U.S. compact economic assistance end. The FSM and RMI compact trust fund committees have not developed distribution policies, required by the agreements, which could assist the countries in planning for the transition to trust fund income. The committees have not developed the required fiscal procedures for oversight of disbursements or addressed differences between the timing of their annual determinations of the disbursement amounts and the FSM's and RMI's annual budget cycles. Interior has not yet implemented the actions GAO recommended to prepare for the 2023 transition to trust fund income.