Audit of FSM Trust Fund lists several action steps in order to achieve Trust Fund goals

By Bill Jaynes

The Kaselehlie Press


January 4, 2021

FSM—A recently released audit of the FSM Trust Fund conducted by the FSM Office of the Public Auditor concludes that “actions are required to effectively and efficiently achieve the goals of the FSM Trust Fund.”  The FSM Trust Fund is a separate Trust Fund account from the trust fund established under the Compact of Free Association.  It is entirely under the control of the FSM government. 

The balance of the FSM trust fund at the end of the audit period, which covered only fiscal years 2015-2019, was $266.9 million.  During the audit period balance has gone as high as $285.01 million, which was the balance in December of 2019 but, though outside of the audit scope, auditors point at that due to the economic impact of COVID-19, Fund investments lost $40.6 million during the period from January 2020 to March 31, 2020.  However, there was a significant recovery during the next two quarters so that by the end of the 2020 fiscal year, the balance was $307.3 million.

According to the Investment Advisors’s report for March 2020, “Volatility is expected to remain elevated until the terminal impact of the virus can be measured accurately—a feat that remains out of grasp for the time being”.

Contributions to the Fund are mainly through appropriations by the FSM Congress.  For the FY2015 to FY2019 a total amount of $174.7 million was appropriated. The Administrator through the Division of Investment and International Finance (IIF) would identify the source of funding either from Fishing Fees or Corporate Tax, which should be equivalent to the amount appropriated by Congress. All funds for the Fund were deposited at a bank custodian which currently is the Bank of New York (BNY).

The current investment manager for the fund is Wilshire Associates, an investment firm based in Santa Monica, California. Currently there are twelve money managers who are responsible for buying and selling

underlying investment securities. The Investment Advisor closely monitors the overall performance and other responsibilities of the money managers, and makes recommendations on their appointment and termination.

The audit concluded that the FSM Secretary for the Department of Finance and Administration and the Board of Trustees should:

(i)            Improve its governance process by ensuring that Chapter 12 of Title 55 of the FSM Code reflect appropriately and sufficiently all issues relating to management, benefits and demise of the Fund;

(ii)           Improve its internal controls processes by developing and operationalizing procedures manuals;

(iii)          Improve its risk management process in order to be abreast with any uncertainty in the financial markets; and

(iv)          Improve its operations by ensuring that Strategic Plan and Action Plans together with their milestones are developed, operationalized, monitored and teamwork environment is fostered; and improved capacity building for the management and members of the Board of Trustees in order to enable them to carry out their roles effectively and efficiently.

The first finding was that the main objective of establishing the trust fund may not be achieved in the next ten years at the current pace.

“Between fiscal years 2015 to 2018 total recurrent expenditures for the FSM Government ranged from $161.6 million to $207.9 million, while foreign contribution to the total expenditures was between $80.9 million to $109.6 million annually. Based on the highest foreign grants given during the period, $109.6 million, it is obvious that in the event of 100% cessation of foreign grants to FSM budget, the current available funds in the Fund could suffice to fill the gap for a period of 2 to 4-fiscal years if the expenditures are maintained at the same level. However, if cessation will be at 50%, the same could suffice to fill the void for about 5-fiscal years. [assuming all economic and social factors remain the same].”

The audit says that appropriations have been low and with no pre-determined pattern.  It wasn’t until fiscal year 2018 (the FSM Trust Fund has been in existence since 1999) that “Congress took a bold decision to enact a law (Public Law N. 20-130) that guaranteed specific percentage from identified sources of fund to be set aside for investment. Implementation of PL 20-130 started during the fiscal year 2019 whereby 20% of fishing fees and 50% of the tax on all premiums collected from captive insurance companies were transferred to the Fund: a total of $42.8 million.”

Finding two was that there was a lack of governance and risk management activities and that failure to appropriately manage investment risk could lead to losses for the FSM Trust Fund.

Auditors also found that capacity building of the board and management of the Trust fund needs to be strengthened. “The Board of Trustees and staff overseeing the Fund are continually dealing with experts in the field who are either fund managers or fund custodians and thus a need to provide them specific capacity building on investment, in order to somehow match with these experts.” It says that the Congress-approved budget does not show a commitment to capacity building activities and that there was no planned capacity building for the staff and members of the Board.

The audit found that the FSM Trust Fund lacked effective and efficient management. It said that during the audit they found that the was a poor filing system, an absence of an operations manual, that reconciliations are only performed when transactions from bank statements are recorded in the books of accounts of the Fund and the same records are used for reconciliation, and that journal vouchers prepared by the Division of Treasury had only vague descriptions to the purpose of the transactions.

The audit found that sub-accounts of the FSM Trust Fund were co-mingled in the Financial Management Information System (FMIS).  Auditors found that there is no separate account for the States’ sub-accounts as required by law. The National Treasury division does not maintain subsidiary ledgers in the FMIS for the Fund as to reflect the sub-accounts presented in the bank statements.

Auditors also concluded that the FSM Trust Fund Management and Department of Finance and Administration did not implement all audit recommendations issued in the previous audit of the Trust Fund activities.

The full audit can be found at

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