Bureau of East Asian and Pacific Affairs
April 23, 2002
U.S. Proposes Amended Compact of Free Association Funding for the Federated States of Micronesia
As part of the ongoing negotiations regarding the Compact of Free Association between the Government of the United States and the Government of the Federated States of Micronesia (FSM), the U.S. and FSM have previously jointly committed to the purpose of Title II of the Compact, which is to assist the Government of the FSM in its efforts to advance the economic self-sufficiency of the people of the FSM, and to continued security and defense relations as set forth in Title III of the Compact. The U.S. and FSM are also jointly committed to public sector reform and more effective accountability under the Compact. The United States Compact Negotiator is Albert V. Short.
Regarding the expiring funding provisions of Title II, the United States has proposed new Title II assistance levels beginning in FY 2004. The U.S. is committed to extending economic assistance annually to the FSM for a period of 20 years, commencing with $72 million in U.S. FY 2004 (beginning on October 1, 2003) and providing declining annual assistance from this amount as described in the attached table from FY 2005 through FY 2023.
U.S. assistance to the FSM will be targeted to sectors most in need of assistance: (a) education, (b) health, and (c) infrastructure. Other areas of special need include private sector development, capacity building, and the environment. In addition, the U.S. will continue to extend federal programs and services to the FSM, with certain modifications, through Fiscal Year 2023. This assistance, currently valued at approximately $25 million per annum, may be discontinued or amended at the discretion of the U.S. Congress.
The U.S. proposes to terminate annual mandatory financial assistance to the FSM after a period of 20 years. The U.S. also proposes to establish a general trust fund for the FSM to offset partially the termination of direct U.S. financial assistance after FY-2023. The trust fund will receive an initial U.S. contribution of $19 million in FY 2004 and increasing U.S. annual contributions as described in Tab 1 from FY 2005 through FY 2023.
The U.S. offer on trust funding is conditioned on FSM contributions of at least $30 million prior to FY 2004 of "bump-up" funds available to them under section 231 of the Compact during Fiscal Years 2002 and 2003, as well as other FSM funds. In addition, after FY 2004, additional FSM and third-party contributions to the fund are anticipated.
In an effort to improve monitoring and oversight of U.S.-provided funds, the U.S. proposed the establishment of a joint U.S.-FSM mechanism to review the use of Compact funds, including the trust fund, to ensure they benefit those areas of the economy with the greatest need and are used most effectively. U.S. and FSM representatives will assess the performance of the FSM in achieving mutually agreed goals using macroeconomic performance standards.
Questions and Answers on U.S. Proposed Amended Compact Funding
Question: Is this a new Compact with the Federated States of Micronesia?
Answer: It is not a new Compact but rather amendments to the Compact. Certain funding provisions in Title II of the Compact were for 15 years plus up to an additional 2 year period while negotiations continue. Amending Title II to continue financial assistance will require Congressional action. In addition, the U.S. plans to table amended language to update Titles I, II, and IV of the Compact. The U.S.-FSM relationship of free association continues in accordance with the Compact, and independent of the expiring provisions of Title II.
Question: When does the Compact expire?
Answer: The Compact itself does not expire. Certain funding provisions of Title II of the Compact expired in October 2001. However, the Compact provides for follow-on assistance for up to 2 years at the average level of the preceding 15 years through FY-2003 (ending on September 30, 2003), while negotiations on an amended Compact are ongoing.
Question: Will the Congress have to pass the amended Compact?
Answer: Yes. Congress will have to enact the amended Compact by a vote of both houses prior to October 2003 in order to assure continued Compact funding.
Question: Will the Compact of Free Association continue after FY 2023?
Answer: Yes. The Compact, which establishes the relationship of free association between the United States and the FSM, does not expire. Similarly, the United States expects to maintain its defense and security relationship with the FSM indefinitely. Consistent with our overall goal of assisting the FSM in its efforts to achieve economic self-sufficiency, the United States intends to terminate annual mandatory financial assistance after 20 years, and replace it with the proceeds of a separate trust fund established for the FSM. The United States intends to contribute to this trust fund, and expects the FSM, together with others, to contribute to the trust fund.
The United States is also negotiating an extension of certain Federal services for 20 more years. Federal domestic programs may also be continued during this 20-year period. Whether such services and programs continue after the 20 years will be for the U.S. Congress to decide.
Question: Why would U.S. Compact Title II annual grant assistance decline as the U.S. trust fund payment increases over the 20 years of the amended Compact?
Answer: The Title II base grant would decline by $1 million per year from FY 2005 to FY 2023. This decrement would be deposited into the trust fund. The U.S. believes this decrement strikes the right balance to support prudent financial management on the part of the FSM government while facilitating a transition from annual mandatory assistance in FY 2023 to reliance on trust fund income in FY 2024.
Question: Is the FSM receiving 25-30% more assistance than the Republic of the Marshall Islands on a per capita basis?
Answer: That calculation is misleading. It is based on the deduction of the economic assistance related to the use of Kwajalein from the amount of assistance the Republic of the Marshall Islands (RMI) receives. Kwajalein assistance under the Military Use and Operating Rights Agreement (MUORA) is intended to benefit the people of Kwajalein atoll. Since it is assistance, it should be included in the assistance total.
Including Kwajalein assistance currently totaling $13 million per year, the RMI's per capita assistance is $784 compared to $782 for the FSM for FY-2003. (This calculation is based on the RMI's population estimate.)
It is also important to note that the FSM and RMI negotiations are on separate tracks. Each country's assistance is based on the demonstrated needs of that country rather than a general comparison of the two based on a simple per capita formula. For instance, the FSM's population is distributed over a larger sea space served by four state governments. The FSM situation is therefore not amenable to a simple per capita comparison with the situation in the Marshall Islands.
Question: Will the U.S. guarantee funding with a "full faith and credit" pledge over the amended Compact period?
Answer: The U.S. proposes to amend section 236 (the full faith and credit provision) of the Compact. The amendment will ensure a multi-year mandatory appropriation for Compact funding but not extend the ability to pledge or assign future Compact funding as a source for repaying debt, without specific prior approval of the U.S. Government. Future funds may not be encumbered except as specifically approved by the U.S. Government.
Question: Is there an inflation adjustment in the new Compact?
Answer: The U.S. proposes to extend the inflation indexation adjustment adopted in the previous Compact period (capped at 5 percent per annum) to the annual payments for the base grant and trust funds in the new 20-year period.
Question: What oversight conditions will apply to Compact assistance?
Answer: Grant conditions normally applicable to U.S. state and local governments shall apply to Compact assistance and the trust fund. Each year, the Government of the United States would, after consultations with the FSM, attach grant terms and conditions which may include special grant conditions that the U.S. Government determines:
Question: What federal services and programs will be extended to the FSM?
Answer: The U.S. has tabled draft subsidiary agreements to provide, through FY 2023, the services of the following federal agencies to the FSM:
U.S. Postal Service (USPS)
The U.S. is preparing the following subsidiary agreements for discussion:
National Weather Service
The U.S. will continue to extend federal programs to the FSM, with certain modifications, and subject to future action to modify, amend, or eliminate such programs by the U.S. Congress.
Table on Amended Compact Funding Federated States of Micronesia (in millions, see attached Notes)
Notes to Table on Funding: