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«Compacts of Free Association with the Federated States of Micronesia and the Republic of the Marshall Islands For Fiscal Year 2005 Table of Contents ...»

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With more stringent financial resource allocation controls written into the amended Compact, the RMI’s financial situation has the potential to improve and the RMI government has made financial stability one of its main objectives. The JEMFAC, on which the United States has the majority vote, can play an instrumental role in both allocating and managing United States assistance in a manner that reduces misallocation and mismanagement. With financial controls in place, it is expected that increased benefit from Compact funds will accrue to the people of the Marshall Islands over the next 18 years.

(B) Use and Effectiveness of United States Financial, Program and Technical Assistance Funds The FSM and the RMI receive significant financial, program, and technical assistance support from the United States Government. The amended Compacts provide the largest proportion of assistance through sector grants, trust fund transfers and other support, but the two governments also receive annual program support from a variety of Federal sources. In addition to administering Compact funds, the United States Department of the Interior continues to provide discretionary grants for technical assistance, operations and maintenance of public infrastructure, and to protect coral reefs.

The Office of Insular Affairs has had difficulty with measuring the overall effectiveness of financial assistance to the FSM and the RMI. This difficulty stems from the absence of organized statistical data from the governments, which would allow economic and financial performance to be analyzed on a recurrent basis. In the FSM, for the third consecutive year, correlations between budgets, national strategic outcomes, and sector goals are still unclear. Most FSM budgets also lack quantifiable annual performance targets.

Compact Sector Grants

In fiscal year 2005, the United States Department of the Interior managed $110,700,000 in Compact sector grant funds. Of that total, the RMI received an inflation-adjusted amount of $29,848,100. The FSM deferred its inflation adjustment until fiscal year 2006, and agreed to an allotment of $76,000,000 in grant funds only.

As mandated by the amended Compacts, funding for both countries continued to target a limited array of government sectors and, within those sectors, only specific aims to achieve enhanced accountability, safeguard the effective use of funds, and strengthen the

foundation needed for economic stability and future growth:

Education: The intent of the education sector grants is to support and improve the primary, secondary, and postsecondary education systems of the governments and develop the human and material resources necessary to perform these

services. The amended Compacts require that funding allocations’\] emphasize:

(1) the advancement of a quality basic education system by increasing primary and secondary student achievement as measured by performance standards and assessments appropriate to the two countries; (2) the provision of secondary education or vocational training to qualified students; (3) the improvement of management and accountability within the educational systems; and (4) raising the level of staff quality; and improving the relevance of education to the needs of the economy.

Health: The health sector grants support and improve the delivery of preventive, curative, and environmental health care, and develop the human and capital resources necessary to provide health services. The sector’s priority is the establishment of sustainable funding mechanisms for operating community-based systems for prevention, primary care, mental health and substance abuse prevention, and the operation of hospitals and dispensaries (clinics) to provide secondary care at appropriate levels and reduce medical referrals abroad.

Public Infrastructure: Grants in this area assist the governments in their efforts to provide adequate public infrastructure. The highest priority funding uses are for primary and secondary education capital projects and projects that directly affect health and safety, including water and wastewater projects, solid waste disposal projects, and health care facilities. Secondary priorities are projects related to economic growth and development. Examples include airport and seaport improvements, roads, sea walls, and energy development that cannot be funded through existing rate structures.

Private Sector Development: Private sector development grants support the efforts of the two governments to attract new foreign investment and increase indigenous business activity by revitalizing the commercial environment;

ensuring fair and equitable application of the law, promoting adherence to core labor standards, and making progress toward the privatization of state-owned and partially state-owned enterprises, and, engaging in other reforms. Grant priorities include advancing the private development of fisheries, tourism, and agriculture;

employing new telecommunication technologies; and, analyzing and developing new systems, laws, regulations, and policies that foster private sector growth.

Public Sector Capacity Building: Public sector capacity building grants are to support efforts to build effective, accountable, and transparent national and local governments and other public sector institutions and systems. Funding priorities are to improve economic planning, financial management, auditing, law enforcement, immigration controls, the judiciary, and the compilation and analysis of appropriate statistical indicators. The goal is to ensure that both governments have the means to carry out essential functions and fill essential positions with qualified personnel.

Environment: Environment sector grants support government efforts to protect the countries’ land and marine environment and to conserve and achieve the sustainable use of natural resources. Allowable activities include the ongoing development, adoption and enforcement of policies, laws and regulations; the reduction and prevention of environmental pollution and degradation; the protection of biological diversity; the establishment of conservation areas;

environmental infrastructure planning, design construction and operation;

interaction and cooperation with nongovernmental organizations; the promotion of increased environmental awareness; and, the promotion of increased citizen involvement in conservation.

Although appropriated in fiscal year 2005, additional funding for both countries only became available for use late in the year in the form of a Supplemental Education Grant (SEG). This money is in lieu of certain grants previously awarded by the United States Departments of Labor, Health and Human Services and Education, and supports the educational objectives of each government’s Development Plan. Different from sector grant funds, the SEG is subject to annual appropriation. This adjunctive grant does not supplant basic sector grant funding; nor does it satisfy the priorities mandated by the amended Compacts. Fiscal year 2006 will mark the first full year of grant funding.

Fiscal year 2005 Sector Allocations for the FSM and Uses The following is a breakdown of grant allocations to the FSM by sector, and within

sectors, by government entity:

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Most FSM states identified the following common goals:

1. The establishment of quality early childhood education programs;

2. The provision of quality elementary and secondary education programs;

3. The offering of relevant vocational education programs; and

4. The support of post-secondary education students and programs.

Education personnel proposed revisiting the FSM Strategic Development Plan’s goals for education to ensure a better alignment with state objectives and nationwide conformity.

The FSM spent an average of $707 of its Compact sector grant allocation for fiscal year 2005 on each student. The data show a wide range of per capita expenditures, from a low

of $526 per student in Chuuk to a high of $1,525 in Yap:

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$19,292,263 $659 $20,758,010 $707 Education continued to be one of two Compact sectors that provided baseline data. The indicators of educational performance allowed annual comparisons among the four states. Over time, a quantifiable determination of progress and nationwide trends will be possible.

The FSM National Division of Education continued to focus on high school accreditation, using criteria of the Western Association of Schools and Colleges, and sought input and endorsement of a proposed, national education strategic plan. In Chuuk, potential mismanagement of funds for a secondary student nutrition program initiated a nine-month investigation, during which time Compact funding for that activity was suspended. The probe into Chuuk education resulted in the system-wide Chuuk Education Reform Plan. Several objectives of the plan were met by the close of fiscal year 2005, such as developing clear guidelines for operating the student nutrition program on a smaller scale, and removing non-working educational staff from payroll.

Kosrae maintained its focus on teacher certification; fewer than 10 percent of their teachers now lack a minimum AA or AS degree. Pohnpei developed and instituted a structured leadership training program for school principals and continued to enforce a mandate that all teachers must pursue a BA in education degree. One year after typhoon Sudal struck Yap in April 2004, repairs to all schools and administrative offices were complete. However, computers, textbooks and related curricular materials remain in short supply.

Supplemental Education Grant (SEG) funding for the FSM arrived late in the fiscal year. The funds supplement the activities of the four goals cited above.

The calculation uses a population of 108,031. The estimate applies a 0.24 percent growth rate to FSM’s 2000 Census data (FSM National Government, Department of Economic Affairs).

The FSM’s four state departments of education provided public school enrollment data for the school year 2004/2005 to the Honolulu Field Office. This information serves as the basis for calculating per capita expenditures.


For fiscal year 2005, the FSM received a health sector grant of $17,430,733. This amount represented an overall increase of 12 percent over the previous year’s allocation, but there was a much wider percentage spread among the five government entities that received allotments: Chuuk State, 19.3 percent; Kosrae State, 26.2 percent; FSM National Government, 37.9 percent; Pohnpei State, 3.5 percent; and Yap State, 23.8 percent. The variability arose from competing financial support needs within the states and different budget formulation policies and priorities, and did not translate into more health care improvements in the states that received proportionately higher grant funding.

Fiscal year 2005 per capita expenditures for health, while increased over fiscal year 2004 levels, reflected the disparity of Compact funding allocation within and between the


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$12,801,859 $118 $16,088,459 $148 As was the case in fiscal year 2004, the health sector grant again primarily supported regular recurring operations. It also enabled long-neglected salary adjustments for some categories of health professionals, supported tertiary medical referral management and care; and provided resources to hire staff to expand in- and out-patient service capacity and perform minor repairs. For the hospitals, direct assistance enabled the improvement of supply inventories that alleviated chronic shortages and the restoration of at least minimally adequate diagnostic capacity. However, lacking reliable inventory systems, procurement procedures, willing vendors, equipment maintenance and recruitment methods, these facilities still risk deterioration.

Without an accurate accounting of health revenues from the FSM, it is impossible to determine the extent to which Compact dollars supported FSM’s health sector in fiscal year 2005. However, it is clear that none of the four states allocated general revenues to the sector and that Compact assistance alone supported their operating budgets. Other revenue sources included U.S. grants primarily for public health and prevention; the basic social services loan from the Asian Development Bank; targeted foreign assistance;

health insurance reimbursement and/or capitation; and nominal service fees.

Despite the FSM Strategic Development Plan’s espoused emphasis on primary health care, funding continued to follow the path of curative care. This was, in large measure, due to a continuing need to play “catch up” to normalize those services and programs that were adversely affected during the step down phase of the Compact’s first financial assistance period.

The overall impact of these service and organizational enhancements over the medium and longer terms continues to depend on the safety and adequacy of the health sector’s physical infrastructure. Facility repair, renovation, and construction that needed redress years ago are still issues. The likelihood of health projects receiving expedited attention and priority is marginal.

Public health and primary care received comparatively less attention, even though the population of the FSM is far-flung and still vulnerable to both infectious and debilitating chronic disease. Chuuk’s dispensary program evidenced severe problems in maintaining adequate drug and supply stocks; supervising health assistant performance and attendance; up-keep and repair of facilities; supporting transportation; and communicating with the outer islands. This situation prompted the reprogramming of Compact sector grant funds to begin redressing some of the more urgent needs. Issues relating to the delivery of primary health care to remote populations, however, were not just isolated to Chuuk. An evaluation of dispensaries required by JEMCO revealed that the other FSM states had the same problems, prompting JEMCO to recommend closer monitoring of the FSM’s fiscal year 2007 budget formulation and execution activities to link financial assistance to the country’s strategic goal of improved primary health care.

Public Infrastructure

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