Accountability: Progress, Challenges, and a Call to Protect the Public Auditor's Offices

Keynote Speech of David B. Cohen, Deputy Assistant Secretary of the Interior, Joint Meeting of the Association of Pacific Islands Public Auditors and the Island Government Finance Officers’ Association, Honolulu, Hawaii, December 6, 2007.

Good morning. When I spoke before the Island Government Finance Officers’ Association on Tuesday, I noted that Priority 1 for the Department of the Interior’s Office of Insular Affairs is promoting private sector economic development in the islands, and Priority 1-A is ensuring accountability for public funds—particularly the Federal financial assistance provided to the islands by my office and others. On Tuesday, I spoke about Priority 1. Today, I will speak about Priority 1-A.

We say over and over again that accountability is one of OIA’s two top priorities, and we have backed up our words with deeds. For example:

• We worked with our colleagues in the Marshall Islands and the Federated States of Micronesia to negotiate a detailed, comprehensive accountability program for funds provided under the Compacts of Free Association.
• As part of our effort to implement the Compacts, we have established an office here in Honolulu dedicated to ensuring that there is accountability for Compact funds. We have also added personnel in the freely associated states for that purpose.
• We have revamped the way that we allocate Capital Improvement Project funds, instituting a competitive process that rewards good fiscal management.
• We have established the position of Accountability Policy Specialist at our headquarters in Washington, D.C.
• We have a longstanding contract with the USDA Graduate School to provide training for island officials, with an emphasis on financial management and improving compliance with the Single Audit Act.
• We have sponsored numerous conferences, workshops and training programs involving officials from the islands and our colleagues at other Federal agencies.
• We fund training for public auditors, including programs that enable personnel from the islands to work and train at various Interior Inspector General offices.
• We have revised our criteria for granting technical assistance to focus primarily on our top two priorities, including promoting accountability.
• We have greatly increased coordination with other Federal agencies to focus on improving the administration of Federal grant programs in the territories and freely associated states.
• We completely revamped OIA’s Financial Assistance Manual for the first time in a decade.

Our efforts, together with the hard work of our colleagues from the islands and our Federal colleagues, have yielded positive results. When I took office in 2002, not a single one of the 11 nations, states and territories that we serve was submitting timely or clean Single Audits. Today, the record on timeliness is almost exactly the opposite: only one of our 11 jurisdictions is not current with its Single Audits. In addition, Palau’s Single Audits have been timely and clean for the past three years, Pohnpei’s have been timely and clean for the past two years, and Kosrae became the newest member of the “Timely and Clean Club” this past year. Pohnpei is in a club of its own, having completed Single Audits for the past two years that were timely, clean and with no questioned costs. Pohnpei will soon be the rule and not the exception, and just as we all worked together to turn the situation around with regard to timeliness of audits, we will do the same with regard to cleanliness.

Although we very much value our positive relationships with our colleagues in the islands, we have taken tough action when tough action was called for. We have been forced to withhold grant assistance on a number of occasions. We hate to do that, because our grants fund important programs in health, education and other crucial areas. We recognize, however, that it is better to withhold funds and preserve them for future use than to release funds into an insecure environment, risking that they will never be properly used to address the needs of the people.

We have excellent working relationships with the governments of almost all of our island communities. This enables us to work through some very difficult issues. A while back, we made the very difficult decision to put American Samoa on high risk status. We imposed a very high bar to have that status lifted: Two consecutive timely and clean Single Audits, two consecutive balanced budgets, and sufficient progress on American Samoa’s fiscal reform plan. The plan was adopted pursuant to a Memorandum of Agreement for fiscal reform that I signed with the late Governor Tauese Sunia. Governor Togiola Tulafono has embraced these conditions as a challenge and an opportunity for his government to greatly improve its ability to serve the people of American Samoa. He wants American Samoa to meet those conditions and in so doing become a model for fiscal management in the islands. For our part, we have responded with substantial technical assistance to help American Samoa develop the tools and skills necessary to effectively manage its government finances.

In Kosrae, we have supported a process, involving the new government of Kosrae, the new government of the Federated States of Micronesia and the USDA Graduate School, to address an urgent fiscal crisis. With financial assistance from our office and the FSM National Government, Governor Robert Weilbacher, his team and the Kosrae legislature have taken painful and courageous steps to restore that state to fiscal health.

We are working with FSM President Manny Mori and Governor Wesley Simina to support a similar fiscal recovery plan that is being developed for Chuuk. We had previously worked with the Chuuk State Government and the FSM National Government to establish the Chuuk Financial Control Commission to review and certify all transactions involving Compact funds. OIA has placed a full time accountant in Chuuk to ensure compliance.

All of us working together have made significant progress to improve accountability and fiscal management in the islands. We have a tremendous way to go, however, before the overall performance of the islands in fiscal management could be called acceptable.

I am proud of the progress that we have made together to improve accountability because we have done so in the face of daunting challenges. Each of our insular areas has small populations and educational systems that range from significantly below to very far below mainland standards. The best and brightest often have to leave the islands to find decent job opportunities. As a result of all of these factors, each of the insular areas has a severe shortage of the type of educated talent that is necessary to ensure good fiscal management. As you can tell by looking around this room, there are many educated and talented people in the islands. There just are not yet enough of them.

In the islands, talent pool shortages cannot be solved by attracting people over from the next town or the next county. The islands have to shore up deficiencies in critical skill areas by enticing people to travel thousands of miles from home. The islands typically do not have the resources to provide a sufficient financial incentive to entice talented people to do this.
Almost all of the insular areas are made up of multiple islands, in some cases in the hundreds or thousands. This creates the additional challenge of providing essential government services to people on several islands, some of them remote. It requires duplication and makes it harder to achieve economies of scale. All of this further drains resources that are needed to attract good talent.

I do not offer these observations as excuses. However, we cannot do our jobs effectively if we do not have a proper understanding of the challenges that we face.

Are some of the islands’ fiscal management problems caused by corruption? Of course, but there is corruption all over the world, including on the U.S. mainland. The corruption that exists in the islands only makes it harder for the islands to address the challenges that I have just described.

For all of these reasons, it has taken a great deal of work by all of us to achieve the accountability gains that we have achieved in recent years, and it will take a tremendous amount of additional work to raise ourselves up collectively to an acceptable level. We are committed to doing that work.

One thing is clear: Our efforts cannot succeed unless each of our island communities has a strong, active, independent, conscientious, properly staffed and properly funded public auditor’s office. The management of public funds is a complicated business, and regular, impartial review of our work is essential to ensure that good value is received for the people’s money.

OIA has taken steps to encourage each of the island governments to strengthen their public auditor’s offices. For example, we rate each of your public auditor’s offices and use that in our determination of the amount of grant funding that various jurisdictions will receive.

To be frank, however, I am not satisfied. None of us should be satisfied. We still have jurisdictions that have not had a qualified public auditor in place for an unacceptably long period of time. We still have public auditor’s offices that do not have the staff or budget to do an effective job. We still have public auditor’s offices that are too vulnerable to political retaliation.
Protecting the auditors is always a challenge. The problem is that auditors routinely have to be critical of those who have control over their budgets, personnel decisions and other important matters. And, speaking for the finance officers’ side of the room, there is not one of us, myself included, that has not been ticked off from time to time by the work of an auditor. The problem is that each of us has a tendency to believe that we are perfect, and that anyone with the gall to suggest otherwise obviously does not know what they are talking about. Or perhaps they are criticizing us out of irrational hatred or jealousy. Why would they be jealous of us? Because, as noted earlier, we are perfect. Most of us, however, are able to take a deep breath and get beyond those sentiments. Once we do so, it becomes easier to appreciate the way in which the auditors keep us on our toes and help us to do a better job of serving the people. And just as we are not really perfect, auditors are not perfect either. However, their imperfect attempts to do their job are essential to our ability to improve in our imperfect attempts to do our job.

Earlier, we notified each of your governments that the failure to have a public auditor’s office meeting minimal standards would eventually result in a loss of eligibility for OIA technical assistance funds. Today, I would like to start a process where we all work together to flesh out that concept. I would like all of us—finance offices, public auditor’s offices, the USDA Graduate School, Interior’s Inspector General’s Office, OIA—to work together to craft clear, objective and reasonable standards that must be met in order to ensure continued eligibility for technical assistance funds. The objective will be to ensure that public auditor’s offices are protected in their independence and are properly funded and properly staffed with qualified people, starting from the very top. We will work together to establish reasonable time frames and reasonable procedures. We have no desire to cut off technical assistance funds simply because a public auditor’s office is not perfect, or does not meet the “gold standard” in terms of budget and staffing. We simply want to ensure that public auditor’s offices are not allowed to fall so far as to become irrelevant, unable to perform their role in any significant fashion. Sadly, that has occurred in at least some of our jurisdictions, and that is the problem that we must work together to address.

We are about to spend an entire day together, and hopefully I have given us something to talk about. To the extent that our agenda is too crowded to make significant progress on this topic today, let us resolve to carry on this conversation by email and other means as we work toward our objective.

The process that I have proposed today will be an important step in our effort to improve accountability for public funds in the islands. We should be proud of the progress that we have made to date, and continue to be committed to making progress in the future. We will definitely continue to make progress as long as we remember why we are here: To make life better for the people of the islands.

Thank you.

Getting in the Way of Prosperity: The Seven Deadly Sins

Keynote Address by David B. Cohen, Deputy Assistant Secretary of the Interior, Annual Conference of the Island Government Finance Officers’ Association, Honolulu, Hawaii, December 4, 2007.

Thank you for inviting me to speak. As always, it is an honor to be here with you. Ever since I took this job in June 2002, we have been consistent in expressing the top two priorities for the Office of Insular Affairs. Priority 1 is helping the insular areas promote private sector economic development. Priority 1-A is promoting accountability, particularly for the Federal financial assistance that we provide for the islands. Normally, when I speak before this group, I speak about Priority 1-A. There is an obvious relationship between Priority 1-A—promoting accountability—and your jobs as government finance officers. Today I would like to speak about Priority 1, because I believe that there is also an important relationship between your jobs and the urgent need to promote private sector economic development in the islands.

Why have we made private sector economic development Priority 1? The reason is that in most of the insular area economies, there is an unsustainable imbalance between the public and private sectors. In a healthy economy, a strong private sector creates jobs and generates income and wealth, which can be taxed at a reasonable rate to fund essential services for the public. The private sector dominates the economy. In many island economies, this model is turned on its head: The economy is dominated by the public sector. Since the public sector generally is a consumer and not a producer of wealth, this type of economy can only be sustained with outside subsidy. I have referred to these island economies as being “upside down in the middle of the ocean”. These economies will have to get right side up in order to get their heads above water.

Many island economies have evolved in this manner for several reasons. For one thing, island communities—and small island communities in particular—face unique barriers to private sector economic development. These communities tend to have small populations, few resources and remote locations. That means that they are heavily dependent upon transportation systems to bring people and goods to and from their islands, and that transportation is likely to be significantly more expensive than it is in more populated areas. This, in turn, tends to make everything else on the island more expensive. The cost of doing business is therefore high.
Many island communities are subject to destructive weather patterns, and in the salty ocean air, the climate often corrodes what it does not destroy.

There are cultural and historical forces in play here as well. Pacific cultures, for example, are sharing cultures. The philosophy is “what we have today, we share today”. Pacific cultures do not have the selfish gene that triggers the generation of wealth in a free market economy. Sharing is a virtue and selfishness a vice, but enlightened self-interest has proven to a useful tool to enable societies to achieve a comfortable standard of living.

Ironically, the Pacific virtue of sharing, when combined with outside financial assistance, has helped to create the bloated public sectors that we see today in many island communities. The island instinct is to share financial assistance from donors in much the same way that food is shared. Since donors generally do not allow island governments to allocate their aid to people in the form of cash, they tend to allocate the aid in the form of public sector jobs. More aid tends to result in more government jobs. Since the Department of the Interior’s Office of Insular Affairs provides more aid to the Pacific islands than any other U.S. agency by far, we have been, inadvertently, the greatest U.S. contributor to this phenomenon.

The result is not only an oversized public sector, but also a public sector mindset where government jobs are deemed to be provided for the benefit of the recipients rather than for the benefit of the public. The public sector budget is not oriented to provide public service, but rather to provide public jobs. This means that the public as a whole tends not to receive good value for public expenditures, and donors tend to get frustrated when we attempt to measure the performance of our assistance.

In many island communities, outside subsidies and other distortive policies tend to make government jobs significantly higher paying than private sector jobs. This tends to encourage the islands’ best and brightest to aspire to public sector employment and look down on private sector employment. In some islands communities, the overwhelming majority of the indigenous workforce is employed by the local government and the lower-paying private sector jobs are filled almost exclusively by foreigners. These communities become two-tiered societies where a largely unproductive local government workforce is kept afloat by outside subsidies and outside labor. This type of arrangement, besides being economically unsustainable, can create tension within the society and give rise to a sense of dependence and helplessness in the indigenous population.

These problems tend to exacerbate themselves in a vicious cycle. A society that cannot sustain itself without outside subsidy generally cannot afford to invest in education, health, infrastructure and other essential building blocks of a strong and prosperous society. This lack of essential investment tends to weaken the private sector, sending the most talented locals overseas in search of opportunity and making the community more and more dependent on imported labor willing to work for lower wages.

These problems do not exist only in the islands. Small island communities are particularly vulnerable to them, however. These problems can be overcome by intelligent policy, strong leadership and a commitment to good governance. Overcoming these problems requires the development and maintenance of a business climate that enables business to create jobs, to foster prosperity and to assume its natural role as the engine that drives the economy.
That is where all of you come in. All of you are responsible for executing policy, and as any sports fan knows, good execution typically is the difference between success and failure. However, most of you also have sufficient stature within your local governments to have an important influence on the formulation of policy, and not merely its execution. When your respective governments consider reforms designed to improve the business climate, you are likely to be involved in the discussion. You might even be the driving force behind the discussion. With so many things beyond your control, it is all the more important for you as government leaders in small island societies to act with wisdom and political courage to address the things that you can control. Small island societies can successfully transcend their limitations, but there is little room for error.

One of the problems that I have observed with the relationship between the public and private sector in insular area economies is an inability of the public sector to get out of the way. That does not mean that island governments should abandon their duty to regulate business in a reasonable manner. It simply means that in some cases, government actions and failures to act needlessly obstruct economic progress. I have come up with a list of Seven Deadly Sins that could cause island governments needlessly to get in the way of the economic advancement of their own societies.

I will introduce the First Deadly Sin by noting something that most of us love about the islands: the unhurried pace. I remember overhearing a Samoan man and a Mexican man talking to each other about their respective cultures. The Mexican man said, “Mexicans are a hard-working people. New immigrants come to the U.S. and take jobs that Americans won’t take. In successive generations, they work themselves up from the working class to the middle class and beyond. Still, with some of my people some of the time, there’s this culture of ‘mañana’—tomorrow. What needs to get done can wait until tomorrow.”

The Samoan guy said, “Yeah, I think I know what you mean. In the islands, we always say ‘fai fai lemu’.”

The Mexican guy asked: “What’s that?”

The Samoan guy responded: “Well, I think it’s like your ‘mañana’, except without the sense of urgency.”

I remember hearing Willie Kostka, a Pohnpeian who heads a conservation NGO in Micronesia, poke good-natured at his fellow islanders. He said, “Haoles come to the islands and they see young men standing around and they think that islanders are lazy. We’re not lazy. We’re just patient.”

Well, the First Deadly Sin on my list of seven what I will politely call the Sin of Patience. Patience is indeed a virtue, unless one becomes excessively and discourteously patient with other people’s time. In business, time is money, and when government officials fail to act responsively in a timely fashion, it can drive away potential investment. Businesses greatly value a bureaucracy’s ability to process permits and licenses expeditiously and to respond quickly to inquiries and requests.

The Second Deadly Sin is the Sin of Complication. Needlessly complicated, protracted, redundant and even contradictory permitting, licensing and other regulatory procedures discourage the formation and retention of businesses.

The Third Deadly Sin is the Sin of Competitiveness. This sin occurs when the government sees a private company succeeding in a new type of business and decides that jumping into that business would be a good way to support its bloated public payroll. This is likely to result in both the private company and the government ultimately failing at the business. The private company is likely to fail because the government will not compete fairly. The government will fail because governments are notoriously bad at running businesses. The best way for a government to generate revenue from a profitable business is for it to get out of its way and tax it—reasonably.

The Fourth Deadly Sin is the Sin of Opaqueness. Government procedures should be transparent in order to inspire the confidence and full participation of the private sector. If good companies cannot be satisfied that they will be competing on a level playing field, they will stay away and the community will miss out on the capital, technology, know-how and economic activity that good companies can bring to the islands.

The Fifth Deadly Sin is the Sin of Favoritism. Favoritism comes in many varieties, including nepotism, where one favors one’s family; cronyism, where one favors one’s friends; xenophobia, where one favors one’s countrymen, and self-dealing, where one favors oneself. By creating an uneven playing field, it scares away businesses that can bring good things to the islands.

The Sixth Deadly Sin is the Sin of Fickleness. Businesses value consistency more than anything else. There is nothing more frustrating than policies that constantly lurch back and forth, to and fro, with the political wind.

The Seventh Deadly Sin is the Sin of Arbitrariness. Decisions made by government officials should be based upon objective standards applied consistently. Government leaders who retain too much discretionary power are in a position to benefit themselves at the expense of their constituents. It is best not to leave government leaders with too much discretionary power, as it is a strong invitation to abuse.

These sins are committed by government officials all around the world, not merely in the islands. They are certainly committed all across the United States by Republicans and Democrats alike. As I noted earlier, however, small island communities have a very narrow margin of error, and hence it is all the more imperative to avoid these sins. Those who commit the sins of Lust, Gluttony, Greed, Sloth, Wrath, Envy and Pride should seek forgiveness from God. Government officials who commit the sins of Patience, Complication, Competitiveness, Opaqueness, Favoritism, Fickleness and Arbitrariness should seek forgiveness from their own people.We all know that island communities face many challenges. It is important to remember that these challenges can be overcome. They can only be overcome, however, if government leaders do everything in their power to discharge their duties with the highest degree of skill, judgment, integrity and vision. Given everything that is at stake for the people of the islands, to do anything less than that would be a sin.

Thank you.

Accountability, Sovereignty and "Typhoon JEMCO"

Keynote Speech, U.S. Deputy Assistant Secretary of the Interior David B. Cohen, Annual Congress of the South Pacific Association of Supreme Audit Institutions in Saipan, Commonwealth of the Northern Mariana Islands, May 22, 2006.

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.