GAO: Letting grant assistance to FSM, RMI lapse will mean less funding

The U.S. Government Accountability Office projects that the Federated States of Micronesia and the Republic of the Marshall Islands’ trust funds that the U.S. contributes will supply less funding than the grant assistance that are ending in 2023 or 2024 and may provide none in some years—leading to annual budget gaps.

According to GAO’s report released Wednesday, GAO projects minimal disbursement risks to the Republic of Palau’s compact trust fund before fiscal year 2044.

GAO found that Palau relied on compact grants as well as disbursements from its compact trust fund for 13% of expenditures in fiscal year 2019.

As of September 2021, GAO said, the U.S. Department of State, working with the U.S. Department of the Interior, had not set the timeframes to put together the Palau Advisory Group on Economic Reform, which the Palau Compact Review Agreement had said would recommend reforms to enhance long-term economic sustainability.

Latesha Love, director for the GAO International Affairs and Trade, prepared the report on the implications of ending some U.S. economic assistance under the Compact of Free Association.

For this report, Love said, GAO was asked to project the effects of the ending of certain assistance under the compacts as well as the sustainability of compact trust funds disbursements to replace grants and financially support the three nations.

Under the Compacts of Free Association, the U.S. has provided economic assistance to FSM, RMI, and Palau for decades. The U.S. Department of the Interior is scheduled to have provided, in total, $3.7 billion to FSM and $2.5 billion to RMI by 2023 and $803 billion to Palau by 2024.

GAO this U.S. assistance provides as much as one-third of these countries’ annual budgets, and includes U.S. contributions to trust funds meant to partly replace grants that will end in 2023 or 2024. The trust funds are meant to provide long-term budgetary support after certain grant assistance ends after fiscal year 2023 for FSM and RMI and after fiscal year 2024 for Palau.

FSM and RMI compact trust fund earnings are intended to provide revenue after compact grant assistance ends. Palau is receiving disbursements from its compact trust fund, which is designed to provide revenue until 2045.

GAO previously found that the FSM and RMI trust funds may not provide sustainable income and recommended that the U.S. Department of the Interior work to develop a trust fund distribution policy to address the funds’ sustainability.

GAO also found that the State Department hasn’t set timeframes for establishing an advisory group intended to recommend reforms to enhance long-term economic sustainability for Palau.

GAO is recommending that the State Secretary, working with Interior, establish timeframes to constitute the Palau Advisory Group on Economic Reform.

GAO is also recommending that the State Secretary, working with the Department of the Interior, should establish timeframes with milestones to constitute the Palau Advisory Group on Economic Reform before its 2023 termination date.

For FSM, GAO found that the country relied on compact sector grants and a supplemental education grant ending in fiscal year 2023 for 28% of expenditures in fiscal year 2019.

GAO projects that disbursements from FSM’s compact trust fund will not cover all of the value of these grants, resulting in annual fiscal gaps.

Because of rules governing the compact trust fund, FSM faces a 36% likelihood of zero disbursements from its compact trust fund in one or more years before fiscal year 2034, even though the fund may have a substantial balance.

For RMI, GAO found that the country relied on compact sector grants and a supplemental education grant ending in fiscal year 2023 for 21% of expenditures in fiscal year 2019.

GAO projects that disbursements from RMI’s compact trust fund will not cover all of the value of these grants, leading to annual fiscal gaps.

GAO said because of rules governing the compact trust fund, RMI faces a 12% likelihood of zero disbursements from its compact trust fund in one or more years before fiscal year 2034, even with a projected increasing fund balance.