May 22, 2006

For Further Information Please Contact Roger Stillwell (202) 208-6974

Text of Speech by Deputy Assistant Secretary of the Interior David B. Cohen Before the Annual Congress of the South Pacific Association of Supreme Audit Institutions in Saipan, May 22, 2006
"Accountability, Sovereignty and Typhoon JEMCO"

Good afternoon. It's an honor to be here. I've given my remarks the working title of "Accountability, Sovereignty and Typhoon JEMCO," and I hope it will all make sense by the time I finish.

It's very generous of you to have invited me to speak here, given that my office is often the subject of the types of audits that your offices perform. You could say that I'm one of your victims. Perhaps you'd like to rethink your decision to offer me the microphone.

Actually, you have nothing to worry about. I know that the auditor always gets the last word. If I were foolish enough to get up here and badmouth auditors, I'm sure that GAO would shortly thereafter issue a report entitled "Incompetent Leadership of Office of Insular Affairs Threatens to Sink Islands."

In all seriousness, my good-natured teasing aside, I have no desire to badmouth auditors. I fully support what you do, and believe that your mission is absolutely crucial to the development of the islands. I pay you this compliment out of admiration, not fear...although the fear certainly helps.

Before I go on, perhaps I should introduce my office, the U.S. Department of the Interior's Office of Insular Affairs, to those of you who are not familiar with it. The Office of Insular Affairs provides more aid to the Pacific islands than any other agency of the U.S. Government-by a very large margin. On behalf of the Secretary of the Interior, the Office of Insular Affairs generally administers the U.S. Government's relationship with its territories with the exception of Puerto Rico. The Office of Insular Affairs also administers the financial assistance that the U.S. provides to the nations in "free association" with the U.S.-the Republic of the Marshall Islands, the Federated States of Micronesia and the Republic of Palau-under the Compacts of Free Association.

The Office of Insular Affairs has an annual budget of over 425 million U.S. dollars, the large majority of which is provided to the Pacific. We provide financial assistance to eight jurisdictions, including the State of Hawaii. Seven of these eight jurisdictions are in the Pacific. The Office of Insular Affairs is the dominant player in the U.S. financial assistance program for the Pacific islands.

The Office of Insular Affairs' top two areas of focus for the islands are promoting private sector economic development and promoting accountability. As auditors, you have an important role to play not only in promoting accountability, but also in helping to create the conditions necessary for private sector economic development.

We at the Office of Insular Affairs have a unique role that frequently requires us to explain the islands to Washington and to explain Washington to the islands. Sometimes we feel like we're talking out of both sides of our mouths.

In Washington, for example, we try to make sure that people appreciate the serious challenges that the islands face in order to improve their fiscal management. The insular areas have small, isolated populations and have very limited means to train accountants, financial managers and substantive program experts. Locals generally have to leave the island to get these skills, and once they do, they're more likely to find opportunities worthy of their qualifications off-island. When you're in the middle of the ocean, you can't just bring people in from the next county or the next state the way that small stateside communities can. In order to induce qualified professionals to relocate from thousands of miles away, insular area governments generally have to offer compensation packages that are way out of proportion to what the local economy can typically support. Even then, turnover for off-island recruits is very high. For isolated island nations and territories, providing for good fiscal management can itself be a fiscal challenge for a cash-strapped government. The only solution in the long term is for island governments to develop more home-grown talent, but we need to get through the short term in order to make it to the long term.

In Washington, I'm sure that many people feel that my office is filled with bleeding-heart apologists for the islands that are willing to excuse almost anything. In the islands, on the other hand, I'm sure that many people feel that my office is filled with rigid, insensitive, bullying bureaucrats who get pleasure from inflicting pain and suffering on the islands. Because in the islands, we don't encourage excuses. Even if we might have personal sympathy for the challenges that the islands face, we cannot allow that to stand in the way of our obligation to protect U.S. taxpayer funds. By doing our job, we can help ensure that the people of the islands receive the benefits that they are supposed to receive.

One of our greatest accountability challenges is our effort to implement Compact II. For those of you who don't know, "Compact II" refers to the 20-year financial assistance packages that the U.S. provides to the Republic of the Marshall Islands and the Federated States of Micronesia, respectively, under 2003 amendments to the Compacts of Free Association. Even though this is a particular case, I believe that the issues it raises are relevant to all of us.

The RMI and the FSM, of course, were once part of the United Nations Trust Territory of the Pacific Islands, which the U.S. administered in the decades following World War II. It eventually became apparent that the residents of the Trust Territory were ready to take charge of their own destiny but still faced serious challenges of economic development. The founding leaders of the RMI, FSM and Palau negotiated an arrangement with the U.S. whereby they would become sovereign nations in "free association" with the U.S. Under this unique status, the U.S. would receive, among other things, the right to deny other foreign powers military access to the land and waters of these nations. The people of the freely associated states, as these nations came to be known, would receive, among other things, the right to migrate indefinitely to the U.S. without a visa, the right to benefit from several U.S. domestic programs, and long-term financial assistance packages. All of these provisions were spelled out in bilateral agreements known as Compacts of Free Association.

The RMI and the FSM entered the Compact era in 1986, and Palau followed in 1994. The original financial assistance package under the RMI and FSM Compacts was to have lasted 15 years, but was eventually extended for two additional years while a new financial assistance package was being negotiated. During the 17 years of "Compact I," as we now call it, the U.S. provided over $1.5 billion to the FSM and over $1 billion to the RMI.

The negotiation of Compact II for the RMI and the FSM provided a good opportunity to evaluate Compact I. The first Compact period was remarkably successful in allowing the people of the RMI and the FSM to develop strong, stable democratic systems. Since the Compact was an arrangement that had never been tried before, however, it is not surprising that the experience of the first 17 years would suggest areas where improvements could be made. The Government Accountability Office made a number of suggestions to improve accountability for Compact funds, and hence improve health, education and economic opportunity for the people of the freely associated states.

Under Compact I, the legislatures of the RMI and FSM were given wide latitude to spend Compact funds as they saw fit. Compact II, which will provide roughly $3.5 billion to the RMI and FSM over 20 years, incorporates a number of reforms that were designed to ensure that Compact funds would be spent more effectively. These reforms include:

• Targeted funding, in which grants are provided to six high-priority sectors only;
• Medium- and long-term planning to guide Compact funding;
• Comprehensive reporting requirements and performance measurement;
• Remedies for non-compliance; and
• Increased oversight.

Another major reform is the creation of bilateral joint committees with the authority to, among other things, approve the allocation of Compact grants, review and approve plans and impose appropriate conditions on Compact funding. For the U.S.-RMI Compact, this body is known as the Joint Economic Management and Financial Accountability Committee, or "JEMFAC." For the U.S.-FSM Compact, this board is known as the Joint Economic Management Committee, or "JEMCO." Three of the five members of JEMFAC and JEMCO, respectively, are appointed by the U.S. I am the Chairman of both JEMFAC and JEMCO. I don't recall how I got these assignments…or what horrible sin I committed to deserve them. They must have stuck me with these jobs at some meeting that I missed.

I am, of course, kidding. I am honored to be Chairman of JEMFAC and JEMCO. I am well aware that the decisions of JEMFAC and JEMCO will have a major impact on the quality of life in the region for generations to come. I take these responsibilities very seriously, and am committed to doing the best job that I can do. I know that all members of both committees, be they from the RMI, the FSM or the U.S., feel the same way. Let me make it clear, however, that I am not speaking today on behalf of either committee or in my capacity as a member of either committee.

JEMCO is responsible for approving over $79 million in grants for the FSM each year. This dwarfs the FSM's local tax revenue, which GAO estimated to be only $29 million in 2005. JEMFAC is responsible for approving over $35 million in grants for the RMI each year, as compared to an estimated $22 million in local tax revenue. This illustrates how much power the joint committees have in the FSM and the RMI, respectively.

I point this out not to brag, but to highlight a dilemma: The unelected joint committees have ultimate authority over a much larger share of public revenue in both the RMI and the FSM than do the elected legislatures. Is this an ideal situation? Of course not. Is there a reasonable alternative? In the short run, I believe that the answer is no, for reasons that I will explain. In the long run, if we manage Compact grants effectively, we can hopefully maximize the ability of the RMI and the FSM to generate local revenues and hence reduce the importance of the joint committees. I realize that there is a great distance to travel, but the members of the joint committees must do everything in our power to reduce our own power as rapidly as possible.

The joint committees have a great deal of responsibility, and hence have an obligation to act with a great deal of responsibility. I believe that we do. Every year, the joint committees review massive budget documents that are submitted by the RMI and the FSM, respectively. When we review these budgets, we do not ask whether these are the budgets that we would have come up with had we been starting from scratch. We simply ask whether these budgets are consistent with the letter and spirit of the Compact, and whether they are reasonably likely to further the objectives of the Compact so that we can achieve the progress that needs to occur by the end of the 20-year grant period. The answer to these questions is "yes," we defer to the RMI and FSM governments and approve the budgets. This is what we do the overwhelming majority of the time. Occasionally we make tweaks, especially when we identify major problems that are not adequately addressed in the budget. We only do this to the extent we believe necessary to ensure that our Compact expenditures will improve health, education and economic opportunity in the manner that we all intend.

So far, Compact implementation has proceeded relatively smoothly in the RMI, although we still need to do more to ensure that the RMI is on the path to achieving sufficient economic advancement and budgetary self-reliance.

I believe that we are making excellent progress in the FSM as well, although the FSM poses some inherent challenges that the RMI does not pose. The FSM is a loose confederation of four powerful state governments that represent islands with different languages and cultures. The dynamics among the states and between the states and the national government give rise to logistical complexities that can complicate our efforts to implement the Compact. The geographical dispersion of the FSM's many islands exacerbates these complications.

The unique challenges of the FSM are nobody's fault. They simply are. And we have to deal with them. Let me say that dedicated public servants from the FSM National Government and all four state governments are working extremely hard under very difficult circumstances to make the Compact work, and we appreciate their efforts very much.

I believe that the complexities that I mentioned are at the root of some of the frustrations that some in the FSM have expressed with JEMCO's efforts to implement the Compact. I believe that there is strong support for what we are trying to do with JEMCO, and that support will grow stronger as we continue to explain our activities and objectives. However, some who have criticized JEMCO have done so rather vociferously. Let me explain the joking reference to "Typhoon JEMCO" in the title of these remarks. I recently sat down with one of the most respected founding fathers of the FSM. I had an excellent discussion with this person, whom I will not name, about how we were working collaboratively with our FSM colleagues to try to improve the quality of life in the FSM. And we also discussed how some in the FSM had been so critical of JEMCO. He told me the story of Typhoon Jean, which hit the islands really bad back in the 1960s. The typhoon was so destructive that it affected the quality of life of the people long after it was over. For years and years after Typhoon Jean struck, people blamed it for everything. If someone got sick, he would blame it on Jean. If there was a bad crop, they would blame it on Jean. If someone lost his job, he would blame it on Jean. Whatever misfortune they encountered, they would blame it on Jean. And this very wise gentleman told me that for some people, JEMCO had become like Jean-not because of JEMCO's destructive power, but because of the determination of a few people to blame it for everything. And I say, thank goodness that JEMCO has come along so we can finally give that poor old lady Jean a rest. Typhoon Jean has now been replaced by "Typhoon JEMCO."

I am not making light of criticisms that some have leveled against JEMCO, especially by legislators who see JEMCO as eclipsing their power. They raise legitimate points that deserve to be answered. They claim that because Compact funds so dominate the FSM's public revenues, JEMCO must defer to the wishes of the legislatures or else the sovereignty of the FSM will be undermined. And they claim that JEMCO has not been sufficiently deferential to the will of the legislature.

With the greatest of respect, I would offer this response: For last year's annual meeting, JEMCO reviewed a budget submission that included over 20,000 line items. Out of those 20,000 line items, do you know how many the U.S. and the FSM members were unable to reach unanimous agreement on at that meeting? One. One out of over 20,000. I realize that it is human nature to fixate on the one time we say no and ignore the over 20,000 times we say yes, but we need to maintain our sense of perspective.

And let me take a minute to explain the one time we said no. The U.S. members of JEMCO pushed to set aside $2.5 million for textbooks, because, after consulting with FSM education officials, we came to the conclusion that this was necessary to address a crisis where FSM schoolchildren did not have proper educational materials. For example, one state only had enough textbooks to equip 17 percent of its students at the very most. Many of the history books used in this state could not provide any information to the students about their own nation, because the books were published in 1970-before the FSM became a nation. Over 40 schools in this state, covering almost 5,000 students, had NO textbooks. None. Zero. The other states also had severe textbook shortages.

The FSM representatives said that they had better ways to spend this money than to set aside $2.5 million for textbooks. We had a very thorough and respectful discussion. We kept asking the simple question: How can students learn with no textbooks, and if we don't address this emergency now, is there not a risk that the children of the FSM will fall so far behind that they will never catch up? We listened carefully to the answers, but did not hear, in our judgment, a convincing explanation of how the proposed budget would address this crisis. Perhaps our judgment was wrong, but each of us was bound to follow our own best judgment. We recognize that we can never match the caring that the FSM's leaders have for their own people or the knowledge that they have of their own country's needs. We therefore give them a strong benefit of the doubt. But the benefit of the doubt does not mean that we should approve proposals that still do not make sense to us after we have received a thorough explanation. In this case, we simply failed to get on the same page in spite the best good faith efforts of all parties to do so. That happens sometimes.

I agree that the U.S. members of JEMCO should not be micromanagers. But nor should we be potted plants. We have an obligation to exercise our independent judgment to help ensure that the Compact will be successful. Compact II would never have passed the U.S. Congress had it not included all of the accountability reforms. It is now our duty to implement those reforms. Do we have an obligation to give careful and respectful consideration to the views expressed by the FSM's elected leaders? Absolutely, and we do. Should our failures to achieve consensus be the exception rather than the rule? Yes, and they are. But at the end of the day, each member of JEMCO-whether from the U.S. or the FSM-has a duty to vote according to his conscience. The U.S. members have an obligation to the American taxpayer to ensure that Compact money is spent wisely to benefit the people of these islands.

Some, especially in this roomful of auditors, may criticize us from the other direction: Are we not disapproving enough? Are we giving too much deference to the FSM government? My response is that our excellent record of achieving consensus is a result of the hard work that people from both countries put in all year round. We try to identify issues early and work them out before they reach JEMCO. We communicate extensively with one another at every stage of the process. We have a similar excellent working relationship with the RMI. This is a testament to the excellent partnership that we have with both countries.

To those legislators that complain that the joint committees have too much power, I say, "I hear you." But if you view JEMCO or JEMFAC as a threat to your sovereignty, you're focusing on the symptom and not the disease. The real problem is excessive reliance on outside grants. As long as our grants our involved, we will have an obligation to exercise proper oversight. Some have tried to argue that because Compact funds are the dominant source of revenue for the FSM, they can no longer be thought of as mere grants and should not be managed as grants. I would respectfully respond that the Compact quite clearly provides to the contrary. The fact that Compact funds are important to the FSM does not negate the fact that their effective use is also very important to the U.S. That is why the Compact requires an active oversight role for both the U.S. and the FSM.

The good news is that Compact funds, if invested wisely, should help reduce reliance on outside grants over time. That's why it's so important to use grants not for today's consumption, but for tomorrow's foundation. This is true not only of Compact grants, but of grants that are provided to every recipient represented in this room. If we invest now to ensure that the people of the islands are healthy and educated, that they have proper infrastructure, and that the business climate attracts opportunity rather than chases it away, then these islands will eventually be able to take genuine control of their own destiny. We must view grants not as a source of dependence, but as a means to independence. The overwhelming majority of our colleagues from the RMI and FSM with whom we work on a day-to-day basis understand this. They are committed not to fighting the Compact, but to making the Compact work for them to build a better future. And we are their willing partners in that endeavor.

They say that this generation plants the tree so that the next generation can enjoy the shade. With every penny that we spend, we must ask ourselves: How will this make life better for the next generation?

A while back, I came up with a phrase that I think describes many Pacific island economies: "Upside down in the middle of the ocean." A healthy economy is driven by a strong and diverse private sector, which the public sector can tax at reasonable levels to provide essential services for the people. Many Pacific economies are dominated by the public sector, with a small private sector that is largely dependent on government contracts and favors. This type of economy is upside down, and cannot survive without outside subsidy. And I would suggest that the middle of the ocean, where most Pacific islands are, is the worst place to be upside down. It is important to use aid not to subsidize and perpetuate the upside down economies of the Pacific, but to help them get their heads above water.

I don't have to tell you what a crucial role that auditors play in all of this. Make sure we're spending the money wisely. Make sure that we're spending it accordingly to a plan that will build a better future for the people of the islands. And if we're not doing that, then do what you do best: Humiliate us. Write stink about us in your reports. Make us look stupid. You're very good at humiliating us. That's why we love you-because you remind us of our parents.

And just a thought: While we appreciate being told everything we did wrong a year after the fact, wouldn't it be better if you could actually catch us before we mess up? Some people compare auditors to people who arrive on the battlefield after the battle is over to bayonet the wounded. I don't say that, mind you; I'm just reporting what I've heard from certain ignorant people with bad attitudes. But here's what I will say: The only thing better than good information is good information that arrives in time for you to use it. And to give credit where credit is due, both GAO and the Department of the Interior's Office of the Inspector General have done an excellent job lately in getting us extremely useful constructive suggestions early and often. We greatly appreciate it, it helps us do our job better, and it is resulting in money being used more effectively to serve the needs of real people. So thank you, GAO and OIG, for your willingness to bayonet us before we enter the battlefield.

I appreciate your having taken the time to listen, and thank you for being patient with my good-natured teasing. I sincerely appreciate the honor of being asked to speak before you, and I sincerely appreciate the work that you do. Thank you, and enjoy the rest of the conference.