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 You are in: Under Secretary for Political Affairs > Bureau of East Asian and Pacific Affairs > Releases > Remarks > 2002 East Asian and Pacific Affairs Remarks, Testimony, and Speeches

Compact Negotiations With the Federated States of Micronesia and the Republic of the Marshall Islands

Albert V. Short, U.S. Negotiator for the Compact of Free Association
Statement before the Committee on Resources, U.S. House of Representatives
Washington, DC
July 17, 2002

Mr. Chairman and Members of the Committee:

Thank you for this opportunity to testify on the Administration’s progress in Compact negotiations with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI).

Over the past six months, the U.S. has tabled language with both countries to amend the Compact of Free Association. This effort began with Title Two (containing replacements for the expiring economic provisions of the Compact) followed by the remaining titles: Title One where several provisions deal with immigration, Title Three defining our defense and security relationship (which remains essentially unchanged), and Title Four setting out administrative, termination, and survivability provisions.

The U.S. proposal reflects the basic approach laid out in previous testimony:

  • The U.S. and the two freely associated states (FAS) have reaffirmed their commitment to the special relationship of free association, and to the end of annual mandatory financial assistance from the U.S. after a period of 20 years.
  • The U.S. has affirmed its commitment to providing annual financial and program assistance (including contributions to a trust fund) to the FSM and RMI, for a period of 20 years, to support the efforts of these nations to promote economic advancement and budgetary self-reliance.
  • The RMI and FSM have affirmed their commitment to an economic development strategy based on public sector accountability and private sector expansion, and to maintaining mutually acceptable comprehensive national development plans.
  • The U.S., FSM, and RMI have agreed to continue their defense and security relationship unchanged.

The U.S. Administration is now seeking final ad referendum agreement from the FSM and RMI on our financial and other Compact proposals in order to submit the amended Compact package with key subsidiary agreements to Congress by the end of August.

U.S. Financial Proposal

The U.S. Administration proposes to extend Title Two economic assistance annually to the FSM and RMI for a period of 20 years, commencing with $76 million for the FSM and $35.8 million for the RMI in FY 2004 (beginning on October 1, 2003) and providing declining annual assistance from these amounts through FY 2023, as described in Tab 1 to this statement. The annual decrements to annual assistance will be paid into the trust funds described below to foster prudent financial management and to safeguard the viability of the trust funds.

The annual grants to the FSM and RMI will be targeted to sectors most in need of assistance: (a) education, (b) health, and (c) infrastructure. Other areas of special need include capacity building, the environment, and private sector development. The U.S. also proposes to provide an additional $4.1 million per year to the RMI for the special needs of Ebeye (the main island community housing the U.S. defense sites' Marshallese work force) and other Kwajalein atoll communities.

The U.S. proposed to extend specific Federal services and programs to the FSM and RMI, with certain modifications, through FY 2023. It should be noted that this assistance, currently totaling approximately $35 million per annum, may be discontinued or amended at the discretion of the U.S. Congress.

RMI assistance includes certain funds already agreed to under the U.S. Military Use and Operating Rights Agreement in connection with U.S. Defense Department use of defense sites at Kwajalein Atoll through FY 2016. We are discussing with the RMI a possible extension to the Military Use and Operating Rights Agreement.

It should be noted that U.S. assistance to the RMI and FSM will cease unless the amended Compact is approved and implemented by Congress prior to October 1, 2003, the beginning of FY 2004.

Trust Fund

We propose to establish general trust funds for the FSM and RMI. The trust fund is designed partially to offset the loss of direct U.S. financial assistance after FY 2023.

The trust fund will receive a U.S. contribution of $16 million for the FSM and $7 million for the RMI in FY 2004 and increasing U.S. annual contributions from this amount as described in Tab 1 through FY 2023. The U.S. offer on trust funding is conditioned on contributions of at least $30 million from each FAS. In addition, additional FAS and third-party contributions to the funds are anticipated.

Management and Oversight

To bolster accountability, transparency, and oversight of U.S. Compact funding, the U.S. Administration has proposed a mechanism to review the use of Compact funds, including the trust funds, to ensure that they go to those areas of the economy where the greatest need exists and are used most effectively. Payment and reporting procedures are being clearly defined in a subsidiary agreement to be submitted to the U.S. Congress with the amended Compact language. To the extent applicable, these procedures will be based on the U.S. Federal Grants Management Common Rule.

The U.S. Administration has proposed to create joint management committees for the FSM and RMI, each consisting of three U.S. members, including the Chair, and two FAS members. The Committees will assess the performance of the FSM and RMI governments using mutually agreed macroeconomic performance standards. The Committees will meet, as needed, each year to:

  • review the single audits and annual report;
  • evaluate progress made for each grant;
  • discuss the coming fiscal year’s grant;
  • discuss any management problems associated with each grant; and
  • discuss ways to respond to these problems and otherwise to increase the effectiveness of future U.S. assistance.

The Government of the United States, after consultations with the FSM and RMI, will attach grant terms and conditions to ensure that reasonable progress is being made toward established objectives. The Government of the United States may withhold funds for violation of grant terms and conditions. Both FAS will also be subject to the Single Audit Act.

In addition to periodic reporting, the FSM and RMI will submit annual reports on the use of U.S. financial assistance during the previous fiscal year and on the proposed use of U.S. financial assistance for the coming fiscal year. The report will include additional information needed to assess the performance of the economy and the effectiveness of U.S. assistance.

Additional Amendments to Title Two

The U.S. Administration 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.

We also propose to extend the inflation indexation adjustment adopted in the previous Compact period (capped at 5% per annum) to the annual payments for the base grant and trust funds in the new 20-year period. This indexation strikes the right balance to promote prudent financial management by the FSM and RMI while facilitating the transition to the termination of mandatory U.S. financial assistance in FY 2024.

Subsidiary Agreements

The U.S. Government has tabled subsidiary agreements on specific services and programs involving:

  • U.S. Postal Service (USPS)
  • U.S. Federal Aviation Administration (FAA)
  • Department of Transportation (DOT)
  • Department of Defense Humanitarian Assistance Projects (CHAP)
  • Telecommunications Services
  • Federal Deposit Insurance Corporation (FSM only)
  • Foreign Disaster Assistance
  • Trust Fund

In addition, the U.S. Government is considering amending the subsidiary agreements involving:

  • National Weather Service
  • Mutual Assistance in Law Enforcement Matters
  • Status of Forces Agreement
  • Fiscal Procedures Agreement

Where Are We Going?

The U.S. has been successful in fostering a political transition from Trust Territory Administration to stable, self-governing democracies in the FSM and RMI. The Compact has also been successful in transforming the relationship between the United States and these island nations from one of trust territory administration to two of our closest bilateral relationships and staunchest friends in the United Nations. These achievements are solid and lasting, and one the American, FSM, and RMI people can be proud of.

We now confront a critical challenge -- effecting the economic transition toward increased budgetary self-reliance. I believe the U.S. proposal is adequate to meet the objective of Title Two of the Compact: "to assist the RMI and FSM in their efforts to advance the economic self-sufficiency of their peoples."

Goals of Compact Assistance

The United States has strong interests in these countries that justify continued economic assistance. These interests include:

  • Maintaining economic stability. In this regard, we believe the United States should continue its commitment to the economic strategies that the RMI and FSM have developed with the support of the United States, the Asian Development Bank (ADB), the International Monetary Fund, and our partners in the ADB Consultative Group, including Japan and Australia;
  • Improving the health and social conditions of the people of the RMI and FSM.
  • Sustaining the political stability and close ties which we have developed with these two emerging democracies; and
  • Assuring that our strategic interests continue to be addressed.

We recognize that too sharp a reduction in U.S. assistance at this stage of economic development of the RMI and the FSM could result in economic instability and other disruptions, and could encourage an increase in the level of migration to the United States by citizens of those countries. We continue to believe that maintaining substantial financial and other assistance will help to assure economic stability while the RMI and FSM continue to implement economic development and reform strategies.

Migration Impact

The past 15 years have ushered in an era of increased impact on the health, education, and welfare programs of U.S. jurisdictions in the Pacific because some migrants from the FSM and RMI have come with low work skills, poor health, and dependent children. The Administration will address the need to reimburse U.S. jurisdictions for the added costs they bear in honoring our commitment on migration to the FSM and RMI people. Every new arrival in our country imposes costs on our communities by drawing on social services. But, most arrivals also add to our economy and pay taxes that support those public services. Many FSM and RMI arrivals to the U.S. come with job skills, work hard like any American, spend money here, and pay U.S. taxes. Their contribution should not be ignored or forgotten in reaching an understanding of the impact of migration on U.S. jurisdictions.

Just as importantly, these migratory flows follow established trade and business routes. U.S. business looms large in the trade and commerce of the FSM and RMI, earns money for many U.S. companies, and reinforces our special relationship.

Section 104(e) of the Compact Act requires the President to report annually to Congress on the impact of the Compact. The annual reports and a recent GAO study document the substantial impact of FSM and RMI migration to the State of Hawaii, Guam, and the Commonwealth of the Northern Mariana Islands (CNMI). Of particular concern are migrants who have communicable diseases, criminal records, or are likely to become a public charge as a result of chronic health or other problems. These conditions are currently all grounds for inadmissibility to the United States under the Immigration and Nationality Act.

One way to address the issue of Compact impact on Hawaii, Guam, and the CNMI is to increase the compensation to those jurisdictions for the negative impacts of migration, as authorized by section 104 of the Compact Act. This solution, while helpful, would not decrease the adverse impact of migration from the FSM and RMI. It would, instead, shift the cost burden to the U.S. Government.

Compact impact can also be addressed, in part, through our plan to commit a substantial portion of future U.S. assistance through sector assistance to improve the general health and education of citizens of the FSM and the RMI. We believe that over time, improving the quality of life in the FSM and the RMI will reduce the incentives for citizens of those countries to migrate to the United States. Further, it would ensure that those persons who do migrate would be healthier and better educated, and therefore in a better position to contribute to the communities where they choose to live within the United States.

In the wake of the September 11 attacks, we have proposed an amended section 141 of the Compact. This section provides that citizens of the RMI and FSM "may enter into, lawfully engage in occupations, and establish residence as a nonimmigrant in the United States." We intend to establish that Micronesian entrants to the U.S. will have a FSM or RMI passport in an effort to halt the entry of inadmissible people who might seek to exploit this route of entry into the U.S. This and other immigration-related issues are the subject of ongoing talks with the FAS representatives.

In conclusion, we are considering three new responses to the migration issue:

First, we are looking at ways to provide compensation to Hawaii, Guam, and the CNMI for the negative impacts of migration, as authorized by section 104 of the Compact Act.

Second, we have reviewed migration issues and procedures including important Administration proposals for reform of the Compacts to strengthen application of immigration laws. This effort is also handled through our regular government-to-government consultations.

Third, we are committing a substantial portion of U.S. assistance during the second Compact term to improve the health and education of potential migrants from the FSM and RMI in order to reduce significantly Compact impact.

As I noted at the beginning of my statement, the U.S. Administration hopes to complete its negotiations soon with the FSM and the RMI negotiating teams on the Compact language and appropriate funding levels. We also hope to wrap up, subject to final approval, several key subsidiary agreements including the trust fund agreement. In general, talks with both FAS are progressing well. We have had five negotiating sessions with the FSM, and three with the RMI. Upcoming rounds to conclude Compact funding and language issues should occur this August.

Conclusion

Thank you for this opportunity to present the Administration’s views on Compact negotiations. The U.S. proposal is the product of over two years of discussions with, and contains input from, U.S. officials representing dozens of agencies, members of Congress and their staffs, representatives of international financial institutions, as well as potential bilateral donors. In developing our proposal, we have also carefully considered the input of the FSM and RMI.

In addition, Congress has requested several reports from the General Accounting Office (GAO) on U.S. assistance to the FSM and RMI. These reports have raised questions about the effectiveness of current U.S. assistance. We are working to assure Congress that the U.S. proposal addresses the planning and management problems identified by the GAO.

Let me assure you that we continue to welcome any and every opportunity to keep the Committee informed as these negotiations come to a close. Just as importantly, we look forward to submitting the amended Compact of Free Association to the Congress for review and enactment into law.  Thank you.

Tab 1A – Table on Amended Compact Funding
Republic of Marshall Islands
(in millions, see attached Notes)
 

Fiscal Year

Grant (N/1, 3&5)

Kwajalein Impact (N/3, 7)

Trust (N/2, 3, 4&5)

Sub-total

Kwajalein Payments(N/3&6)

Total N/3)

2004

29.8

4.1/1.9

7

42.8

11.3

54.1

2005

29.3

4.1/1.9

7.5

42.8

11.3

54.1

2006

28.8

4.1/1.9

8

42.8

11.3

54.1

2007

28.3

4.1/1.9

8.5

42.8

11.3

54.1

2008

27.8

4.1/1.9

9

42.8

11.3

54.1

2009

27.3

4.1/1.9

9.5

42.8

11.3

54.1

2010

26.8

4.1/1.9

10

42.8

11.3

54.1

2011

26.3

4.1/1.9

10.5

42.8

11.3

54.1

2012

25.8

4.1/1.9

11

42.8

11.3

54.1

2013

25.3

4.1/1.9

11.5

42.8

11.3

54.1

2014

24.8

4.1/1.9

12

42.8

11.3

54.1

2015

24.3

4.1/1.9

12.5

42.8

11.3

54.1

2016

23.8

4.1/1.9

13 (+1.5/3)

42.8

11.3

54.1

2017

23.3

0

13.5 (+1.5/3)

36.8

0

36.8

2018

22.8

0

14 (+1.5/3)

36.8

0

36.8

2019

22.3

0

14.5 (+1.5/3)

36.8

0

36.8

2020

21.8

0

15 (+1.5/3)

36.8

0

36.8

2021

21.3

0

15.5 (+1.5/3)

36.8

0

36.8

2022

20.8

0

16

36.8

0

36.8

2023

20.3

0

16.5

36.8

0

36.8

Notes to Tab 1A:

  1. Grant funds are decremented by $.5 million per year, with the decremented funds going to the trust fund.
  2. Trust funds are increased by $.5 million per year, with these incremented funds coming from the grant account.
  3. An inflation adjustment will be applied similar to that in section 217 of the current Compact to all except the Kwajalein impact assistance of $1.9 million per year.
  4. RMI to contribute funds, at least $35 million in addition to the U.S. contribution to the trust fund by FY-06.
  5. Grant and trust amounts do not account for other RMI or third party contributions. In FY-2016 through FY-2021, the RMI may contribute $3 million per year to be matched by $1.5 million by the U.S. government, as stated within parentheses.
  6. Under Article X(4)(a) of the Military Use and Operating Rights Agreement (MUORA) -- $7.1 million with inflation adjustment.
  7. Compact section 213 and Article X(4)(b) of the MUORA provides $1.9 million per year not inflated.

Tab 1B – Table on Amended Compact Funding
Federated States of Micronesia
(in millions, see attached Notes)
  

Fiscal Year

Grant (N/1, 3&5)

Trust Fund (N/2, 3, 4&5)

Total

2004

76

16

92

2005

76

16

92

2006

76

16

92

2007

75.2

16.8

92

2008

74.4

17.6

92

2009

73.6

18.4

92

2010

72.8

19.2

92

2011

72

20

92

2012

71.2

20.8

92

2013

70.4

21.6

92

2014

69.6

22.4

92

2015

68.8

23.2

92

2016

68

24

92

2017

67.2

24.8

92

2018

66.4

25.6

92

2019

65.8

26.4

92

2020

64.8

27.2

92

2021

64

28

92

2022

63.2

28.8

92

2023

62.4

29.6

92

Notes to Tab 1B:

  1. Commencing in FY-2007, grant funds are decremented by $.8 million per year, with the decremented funds going to the trust fund.
  2. Commencing in FY-2007, trust funds are increased by $.8 million per year, with these incremented funds coming from the grant account.
  3. An inflation adjustment will be per the proposed section 217 of the draft Title II language.
  4. FSM to contribute funds (at least $30 million) in addition to the U.S. contribution to the trust fund in FY-04.
  5. Grant and trust fund amounts do not account for other FSM or third party contributions.


Released on July 17, 2002

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