Internal Budget and Finance Procedures Under CFA

PL 4-77 § 1, which is codified in this chapter, enacted verbatim the text of the Agreement on Internal Budget and Finance Procedures under the Compact of Free Association, which had been previously approved by the State Legislatures.

The purpose of this chapter is to establish internal budget and finance procedures for the Compact period, including the establishment of a Federated Development Authority. The provisions set forth hereinafter recognize the right of the FSM States and the National Government to appropriate and expend Compact funds in accordance with their own respective laws, plans, policies and prerogatives. The provisions also recognize the necessity of complying with the conditions and restrictions attached to Compact funds, empowering the President with the authority to ensure compliance with such conditions and restrictions, and ensuring accountable financial management of all Compact funds.

On January 15 of the year preceding a given fiscal year, the President will transmit two sets of Compact planning estimates to each State Governor, one indicating the detailed levels of Compact and other funding expected to be available to each respective State for the upcoming fiscal year, and the second indicating general expected levels of Compact and other funding for the two subsequent fiscal years. Both sets of planning estimates will be based on the distribution formulae in the Memorandum of Understanding on the Division of Grant Assistance.

(1) No later than April 15 of the year preceding a given fiscal year, the President will transmit a set of Compact budget allowances to each State Governor indicating the firm levels of Compact funding to be available to each respective State for the upcoming fiscal year, according to the U.S. notification cited in article II, section 1(b), of the Fiscal Procedures Agreement. The budget allowances will be based on the distribution formulae in the Memorandum of Understanding on the Division of Grant Assistance.

(2) Each government's operating and development budget intended for submission to the respective legislature, may not include proposed expenditures relating to Compact funds exceeding the amounts indicated in the Compact budget allowances. State and National enacted budgets will be balanced in terms of all sources of revenue.

(1) No later than May 1 of the year preceding a given fiscal year, each State Governor and the FSM Budget Officer for the National Government will submit to the President an executive budget for all sources of funds for the upcoming fiscal year and executive budget projections for each of the two subsequent fiscal years, based on the planning estimates for each of those years and on local fund sources not included in the planning estimates.

(2) Each executive budget will contain an operations budget and a development budget, and include planned expenditures for all sources of funds. The operations budget in the executive budget will specify, for each government branch, department, office and agency or authority, the existing commitment and new expenditure levels of expenditures and staffing.

(3) The executive budget projections for each of the two subsequent fiscal years will specify preliminary budget figures in summary form, including existing commitment levels and estimated new expenditures by government branch, department, office, and agency or authority and a brief description of major new programs or equipment acquisitions planned.

(4) The executive budget will include all expected sources of foreign aid and technical assistance, including funds and assistance provided under Compact sections 224 and 226. The executive budget will specify how the aid or technical assistance will be used and whether it will require the expenditure of other funds or cause the deployment of new staff or the redeployment of existing staff.

(5) The executive budget will include the annual special block grant program plans for Compact section 221(b) grant funds required by article XI, section 4, of the Federal Programs and Services Agreement. The budgeted use of section 221(b) funds will be in accordance and consistent with the guidelines and conditions set forth in the Federal Programs and Services Agreement. The FSM Budget Officer will review the special block grant program plans for consistency with the Federal Programs and Services Agreement.

(6) Each State Governor and the President will include in their executive budget and budget projection submissions an analysis of major trends over the three years budgeted as regards funding sources, spending emphases, staffing levels and program expansions or contractions. The analysis of major trends will also specify the multi-year strategy for meeting any overall funding decrease contained in the issued planning estimates.

(7) The executive budget and budget projections of the States and the National Government shall be as submitted by the Governor or President to the Legislature or Congress as the annual budget document for that government.

(2) No later than May 15 of the year preceding a given fiscal year, the President will submit the comprehensive annual executive budget to the Congress of the Federated States of Micronesia and to the State Governors and State Legislatures for information purposes. The submission will include a budget message, with a presentation and analysis of trends as regards funding sources, spending emphases, staff levels and program expansions and contractions for the Nation as a whole. The budget message will evaluate the adequacy of local revenue levels, the preparedness of the Nation as a whole to meet the Compact funding step-downs scheduled for the sixth and eleventh years following the effective date of the Compact and the FSM strategy for foreign aid as it relates to funding needs.

(3) The President may utilize the comprehensive annual executive budget to support U.S. Government budget requests to the U.S. Congress, as contained in article III, sections 1 and 3, of the Fiscal Procedures Agreement. The budget projections section may also be utilized to support FSM requests to the U.S. Government for supplemental funding over and above the Compact funding for fiscal years subsequent to the upcoming fiscal year.

(1) Any reprogramming, redesignation or amendment to the OEDP shall be authorized by the appropriate State or National Government officials according to the specific legal process established by each State government and the National Government.

(a) At any time prior to the beginning of a given fiscal year, major block grant current account funds may be reprogrammed as capital account funds by allocating more major block grant funds to the capital account. The effect of this reprogramming is to devote more major block grant funding to the capital account than the minimum percentage required allocation for a given State or the National Government as specified in the Memorandum of Understanding on the Division of Grant Assistance. Such a reprogramming shall be executed, if at all, by including the change in the apportionment/allocation certification submitted by each Governor and the President on August 10.

(b) At any time prior to the beginning of a given fiscal year, current account program funds may be reprogrammed as capital account program funds. Such a reprogramming shall be executed, if at all, by submission of a program account reprogramming notification to the President. The President shall review the reprogramming to ascertain conformance of the use of the program funds with the Compact. Reprogrammed use of program account funds will be consistent with conditions on the use of funds specified in the Compact and its related agreements. The effect of this reprogramming is to amend the OEDP. The amendment to the OEDP may be for a single year or for a number of years.

(c) At any time prior to August 10 of the year preceding a given fiscal year, capital account program funds may be reprogrammed as current account program funds. Such a reprogramming shall be executed, if at all, by submission before August 10 of a program account reprogramming notification to the President, for his review in accordance with subsection (b) of this section. The effect of this reprogramming is to amend the OEDP.

(a) At any time during a given fiscal year, major block grant current account funds may be redesignated to the capital account. The effect of this redesignation is to allocate more major block grant funds to the capital account than the minimum allocation for a given State or the National Government, as specified in the Memorandum of Understanding on the Division of Grant Assistance. Such a redesignation may be executed by submission of a notification of redesignation by the Governor or the FSM Budget Officer to the President. The notification of redesignation will include justification, in accordance with article II, section 3(e), of the Fiscal Procedures Agreement. The President will record this notification and issue two redesignation allotments showing the increase in capital account and the decrease in current account, for the given State or National Government, with the allotments to be effective on the first day of the fiscal quarter at least 90 days after receipt of such notification by the President.

(b) At any time during a given fiscal year, current account program funds may be redesignated as capital account program funds. The effect of such a redesignation is to amend the OEDP. Such a redesignation may be executed by submission of a notification of redesignation, as in subsection (a) of this section.

(5) No reprogramming or redesignation of major block grant capital account as current account below the minimum percentage set in the Memorandum of Understanding on the Division of Grant Assistance may occur for any fiscal year, except by mutual agreement to amend the Memorandum of Understanding on the Division of Grant Assistance.

(7) The project listing in the development section of the executive budget submitted by each State Governor and the FSM Budget Officer for the National Government to the President, in accordance with section 304 of this chapter, will concurrently be the proposed amendment to the OEDP. The development budget on its effective date will constitute an effective amendment to the OEDP.

(1) No later than August 10 of the year preceding a given fiscal year, the Governor of each State and the FSM Budget Officer for the National Government shall submit a copy of the enacted appropriation law and will certify to the President a quarterly apportionment of current account and current account program funds and specify the allocation for capital account and capital program funds for each quarter of the upcoming fiscal year, based on the appropriated budget of each State and the National Government.

(2) The apportionment for the current account and current account program funds will be on a quarterly basis, with each quarterly share comprising at least 20 percent and not more than 30 percent of the total amount available for the fiscal year in question, as specified in article II, section 2(c), of the Fiscal Procedures Agreement.

(3) No later than August 25 of the year preceding a given fiscal year, the FSM Budget Officer will consolidate the State and National Government certifications and produce a nationwide apportionment and allocation document.

(4) The Budget Officer will ensure that the specification of fund used and the level of funds in the nationwide apportionment and allocation document are consistent with the Memorandum of Understanding on the Division of Grant Assistance, the OEDP and any official revisions of the OEDP.

(5) The President will certify the apportionment and allocation contained in the document to the U.S. Government no later than August 30 of the year preceding the subject fiscal year, as specified in article II, section 1(b), of the Fiscal Procedures Agreement.

(6) The certification by the President to the U.S. Government will include a designation of a bank or commercial financial institution into which the U.S. Government will transfer Compact funds into the titled and numbered account of the FSM.

(7) The quarterly apportionment schedule cited in subsection (1) of this section may be modified during a given fiscal year by the submission to the FSM President of a quarterly apportionment schedule change request; provided, that the apportionment after the change is in accordance with subsection (2) of this section. In accordance with article II, section 2(c), of the Fiscal Procedures Agreement, revision in the quarterly apportionment schedule must be made not less than one fiscal quarter in advance of the quarter for which the revised apportionment is to be effective. The FSM Budget Officer will issue an allotment incorporating the change for the quarter in which the change is to be effective.

(8) If a Governor fails to submit an apportionment schedule by August 29, the President in his overall certification to the U.S. Government will assume a 30/30/20/20 percentage apportionment schedule for the State for the upcoming fiscal year. If a State government or the National Government does not enact a State or National budget prior to August 29 or approve an allocation schedule for the upcoming fiscal year, the President in his overall certification to the U.S. Government shall assume the current fiscal year's allocation schedule.

(1) All obligation and expenditure of Compact funds shall be in accordance with the Compact of Free Association and its related agreements, the Financial Management Act of each respective government, and this chapter.

(2) The financial reporting systems of each government shall provide full disclosure of the financial positions and results of operations of each accounting fund in accordance with a uniform and standardized format set forth by the Secretary of Finance. The financial information generated from these systems shall include, but not be limited to, all pertinent information needed to prepare comprehensive annual financial reports as required by the Fiscal Procedures Agreement and section 211(c) of the Compact.

(3) The Secretary of Finance and the State finance officers, together with the Budget Officers of the State and National Governments, shall continuously review accounting and financial reporting systems for the governments of the Federated States of Micronesia and make recommendations for their improvement.

The Secretary of Finance shall have full and complete oversight over, and at all times full and complete access to all financial records for, all Compact funds of the State and National governments of the Federated States of Micronesia.

(2) The purpose of the Compact Financial Assistance Fund is to account for Compact funds received from the U.S. Government by the FSM National Government on behalf of itself and each of the four States from the time of receipt of such Compact funding and until such funding is drawn down by the respective government to which such funding accrues.

(3) The accounting records and accounts maintained for the Fund shall be in sufficient detail to provide a full and complete accounting of Compact funds accruing to each jurisdiction and within each jurisdiction to provide a full and complete accounting of current account, capital account, and as may be required, program account funds. The Fund shall also account for funds obligated for investment, investment income earned on behalf of each government, and investment expenses assessed to each government related to such earnings. The Secretary of Finance shall report on the status of the account on a monthly basis.

(4) Upon receipt of Compact funds from the U.S. Government by the President of the FSM on behalf of the National Government and each of the four State governments, the accounting records of the Compact Financial Assistance Fund shall be updated to reflect the amount of Compact funds received. Concurrently, the President shall obligate and transfer to the Federated Development Authority for investment purposes, all capital account funds received and to the extent authorized by each Governor, current account Compact funds, excluding program funds under section 221(b) of the Compact.

(5) Concurrently with subsection (4) of this section, the FSM Budget Officer shall verify that the Compact funds approved for transfer to the Federated States of Micronesia from the U.S. Government have been received and recorded in the accounts of the Compact Financial Assistance Fund. Upon such verification, the President shall immediately certify to each Governor the current account, capital account and program account funds received on behalf of each government and the amount of such funding obligated and transferred to the Federated Development Authority for investment purposes.

Without further authorization or appropriation, any appropriate Compact Financial Assistance Fund account of the FSM National Government or a State government may be debited for expenses, including trustee fees, associated with such government's Compact Financial Assistance Fund accounts or with such government's borrowing under the Compact Funds Financial Act.

(1) As provided for in subchapter III of this chapter, the Federated Development Authority is the designated agency under which Compact funds available for investment are obligated and placed. All Federated Development Authority investment funds shall be managed by the Secretary of Finance for the Federated Development Authority as provided in subchapter III of this chapter.

(2) The Federated Development Authority shall maintain such accounting systems and records as necessary to account for investment funds placed with the Authority by the President on behalf of each government. Such accounts and accounting records shall also include, but not be limited to, records supporting the investment earnings of each government and investment expenses incurred related to such investment earnings.

(3) The Secretary of Finance will ensure that no Compact section 221(b) program account funds are obligated or transferred to the Federated Development Authority for investment purposes or held in interest bearing instruments by any government of the FSM, as required by the Federal Programs and Services Agreement, article XI, section 5(b).

(1) "Allotment" means the delegation of authority to a person to create legally enforceable financial obligations in accordance with applicable FSM State or National law and the Compact and its related agreements, within the limits specified in a National and State appropriation act.

(4) The President shall withhold allotment of Compact funds where allotment would cause obligations, expenditures or disbursements in violation of the terms of the Compact or its related agreements, with particular attention to the listing of qualified capital account uses in article II, section (3)(f), of the Fiscal Procedures Agreement.

(c) capital account and capital account program funds in the aggregate or on a project basis as requested at the beginning of the fiscal year or during the fiscal year for projects which (i) have been appropriated, (ii) are supported by a project control document, and (iii) are within the scope of the Compact and its related agreements.

(6) The project control document shall contain information related to the implementation of the project, anticipated or actual contractual terms with the contractor, if selected, and the name of the inspector assigned to certify progress payments.

(a) A project control document shall be amended and resubmitted upon any amendment of the State or National government appropriation law affecting such document, and capital account funds shall be reallotted by the President accordingly.

(7) All project control documents shall be reviewed by the FSM Budget Officer for compliance with the terms of the Compact, its related agreements and applicable appropriation laws prior to allotment of the funds specified in the project control document.

(1) For the purpose of this chapter, the term "obligation" shall have the same meaning as that term is used in the respective Financial Management Acts of the governments, as in effect on October 12, 1984, unless otherwise mutually agreed upon.

(2) No officer or employee of any government of the FSM, or allottee of funds shall make or otherwise authorize an expenditure from, or create or authorize an obligation pursuant to, any allotment of Compact funds:

(1) No later than August 30 of the year preceding a given fiscal year, each State Governor and the Secretary of Finance will submit to the President an annual cash drawdown schedule for the upcoming fiscal year, detailing by month the anticipated current and capital cash disbursement requirements of the State or National Governments based on appropriated budgets, payroll information, additional data from government officials, and anticipated project contract pay-out schedules.

(2) Cash shall be disbursed by the Secretary of Finance to State finance officers and the National Treasury subsequent to allotment, for valid obligations and based upon an annual cash drawdown schedule, a monthly submission of State cash needs, and a correlated monthly budget execution report from the State Government. The monthly submission of State cash needs should be submitted to the Secretary of Finance by the twenty-first day of each month. Cash disbursement shall be made no later than first day of the following month.

(a) In the event of early termination of assets to provide a given government with cash in advance of the availability according to the annual cash drawdown schedule, then that given government will bear any and all penalties and loss of interest incurred.

(b) In case a monthly cash needs submission of a given government specifies more funds for a given period than is specified in the annual cash drawdown schedule, the submitting government may allow a certain period to elapse before the specified funds can be drawn down without penalty or bear any and all penalties and loss of interest incurred.

(b) Capital account: Capital account and capital account program funds may be drawn down on a monthly reimbursement basis, on a monthly advance cash needs basis, or on an advance basis for valid obligations.

(1) Allotments of Compact current account program funds will specify an expiration date provided by the appropriation laws of the respective State Legislature or Congress, upon which unobligated funds previously allotted will lapse.

(3) Carried-over current account program funds will be allotted by the FSM Budget Officer as current account program funds or capital account program funds as specified by the State Governor or President, in accordance with applicable law. Carried-over current account program funds will be allotted by the FSM Budget Officer for program account uses as specified in appropriation laws.

Funds unallotted from current account and current account program funds to a given government will be available for allotment upon appropriation in future fiscal year, and will be included in the annual planning estimates and budget allowances.

The State finance officer will close out Compact capital project accounts upon project completion and ensure that no obligation of funds occurs after project completion. The Close-out process will be conducted on a timely basis. The Secretary of Finance will assist in the close-out procedure of capital accounts after three months following project completion, if such close-out has not been conducted by the State finance officer. Unused spending authority resulting from project close-out will revert to the unallotted capital account of the respective government and shall be available for reallotment after appropriation for valid capital account purposes.

(2) No later than January 1 of each year, each Governor and the Secretary of Finance will submit a comprehensive annual financial report to the President providing a full accounting of each State or National legislature appropriation, including obligations and expenditures, for all types of funds available to the State or National government, as of the end of the prior fiscal year. Such reports will conform with the standards established by the Secretary of Finance.

No later than April 1 of each year the President will submit the "Annual Report to the U.S. Government" to the U.S. President and U.S. Congress, in accordance with article III, section 2, of the Fiscal Procedures Agreement and section 211 of the Compact of Free Association.

The purpose of the Federated Development Authority is to provide an effective institutional framework for the establishment of overall development goals, policies and strategies for the Nation; the rationalization and coordination of development efforts throughout the Nation, so that State and national development programs will be complementary and mutually supportive, rather than duplicative or competitive; and the sharing of information and technical resources to ensure adequate program and project evaluation, design and implementation.

(8) To review and provide comments on the development aspects of the budgets prepared pursuant to subsection (1) of section 304, subsection (2) of section 305, and subsection (1) of section 307 of this chapter, which shall be submitted to the Authority by the President.

(5) to acquire, in any lawful manner, real, personal, or mixed property, either tangible or intangible; to hold, maintain, use, and operate such property; and to sell, lease or otherwise dispose of such property;

(6) to retain and terminate the services of employees, agents, attorneys, auditors, and independent contractors, and require bonds for the faithful performance of their duties and to pay the premiums for such bonds.

The debts or obligations of the Authority shall not be the debts or obligations of the National Government or the State Governments, nor shall they be responsible for the same. No action shall be brought in any court in the Federated States of Micronesia against the National Government or the State governments or any political subdivision thereof because of any activities, actions, or omissions of the Authority, its board members, officers, employees or agents.

(1) The Authority shall be managed and its powers exercised by the Policy Board. The Policy Board shall consist of the chief executives of the State and National Governments of the FSM. The Policy Board shall appoint a Chairman for a term of one year, who may be reappointed by action of the Board.

(1) The Policy Board shall issue an annual directive on investment policy to the Secretary of Finance no later than June 30 of each year for the upcoming fiscal year, providing investment policy guidelines on all Compact and other funds held by the Authority for investment.

(2) The goal of investment policy shall be to maximize investment returns while maintaining adequate liquidity and high standards of safety and quality of assets, and giving due consideration to the need to stimulate the Nation's economy.

(3) Each member of the Board and each employee, agent, and contractor of the Federated Development Authority shall be considered a "public official" within the meaning of subsection (2) of section 1301 of title 11 of this code.

(1) The Secretary of Finance and staff members designated by him will be fiduciaries with respect to the management of investment and disbursement of funds on behalf of the States, the National Government and the Federated Development Authority.

(2) The Secretary of Finance, with the concurrence of the Authority Policy Board, may select and contract with a public or private sector investment counsel to manage the portfolio of investments. Such investment counsel shall be a fiduciary with respect to services rendered. Such fiduciary relationship shall be specified in a written agreement between the investment counsel and the Secretary of Finance.

(6) Net earnings on invested funds will be credited to the account of each government based on the proportion and duration of the funds of a given government in the investment portfolio. "Net earnings" shall be defined as the excess of interest earned over costs of administering the investments.

The technical staff of the Authority will be drawn from the existing staffs of the State and National governments, to the extent practicable. The director of the Authority may request and assign technical staff from the governments for temporary assignment with the Authority, with the cost allocation of such assignment to be arranged by the director.

(1) Material describing the implementation of the relevant State or National portion of the OEDP in the prior year, including how Compact funds were used in the achievement of the goals, objectives and general and specific programs set forth in the relevant portions of the OEDP; and

No later than January 1 of each fiscal year, the Authority shall issue an annual report on Authority operations during the prior fiscal year to the speakers of the Congress and the four state legislatures. The report shall include:

The President and each Governor may designate officials of the National and State governments, respectively, to act on their behalf with respect to the duties and responsibilities vested in them by this chapter. Such designation shall be in writing.

(2) The President, Governors, and other officials designated in this chapter are authorized to take such actions as are necessary to ensure that this chapter can be fully implemented on the effective date of the Compact of Free Association; provided, that the requirements of the chapter shall not be construed or interpreted as applicable to any funds until the effective date of the Compact.

The provisions of this chapter relating to the creation, authority, and responsibilities of the Federated Development Authority shall remain in full force and effect for five years after the effective date of the Compact of Free Association, and may be extended thereafter by mutual agreement of the governments. The remaining provisions of this chapter shall remain in full force and effect during the effectiveness of title II of the Compact of Free Association.

Any officer or employee of any State or the National Government who shall knowingly and willfully violate subsections (2) and (3) of section 313 of this chapter shall, upon conviction, be subject to the penalties specified in section 223 of this title.

(3) "Capital account program funds" means program account funds specified in the OEDP as being programmed for capital account use, as defined in article II, section 3(f), of the Fiscal Procedures Agreement.

(6) "Existing commitment level" means the spending level needed in a fiscal year to maintain existing activities and including no new programs, travel or staff, limited equipment replacement and increases over the prior year based strictly on increases of nondiscretionary costs, such as utility cost, air fares, personnel step or grade increases and inflation-driven cost increases.

(7) "Federal Programs and Services Agreement" means the "Federal Programs and Services Agreement Concluded Pursuant to Article II of Title two and Section 232 of the Compact of Free Association" as executed on October 1, 1982, by the Government of the Federated States of Micronesia and the Government of the United States.

(8) "Federated Development Authority" means an entity with juridical existence organized in accordance with the laws of the Government of the Federated States of Micronesia, subject to the control of the FSM at least insofar as Government accounts are concerned, subject to the provisions of the Compact and the Fiscal Procedures Agreement to the extent specified in the Fiscal Procedures Agreement and described, by inclusion of its organization, in the OEDP and as further defined and described in this chapter.

(9) "Fiscal Procedures Agreement" means the "Agreement Concerning Procedures for the Implementation of United States Economic Assistance, Programs and Services Provided in the Compact of Free Association," entered into in June 1983 by the U.S. Government and the FSM Government.

(10) "Fiscal year" means the fiscal year of the Government of the United States commencing on the first day of October of one calendar year and ending on the thirtieth day of September of the following calendar year, or as may subsequently be provided by the laws of the United States.

(11) "Memorandum of Understanding on the Division of Grant Assistance" means the "Memorandum of Understanding with respect to the Division of Grant Assistance under the Compact of Free Association among the National and State Governments of the Federated States of Micronesia," entered into in January and February 1984 by the State and National Governments of the FSM.

(2) Each of the governments of the Federated States of Micronesia shall take all necessary steps, of a general or particular character, to ensure, not later than the effective date of the Compact of Free Association, the conformity of its laws, regulations and administrative procedures with the provisions of this chapter.

Funds deposited in the Compact Financial Assistance Fund, created by section 310 of this chapter, shall be administered, allotted to the State governments, obligated and transferred to the Federated Development Authority, and drawn down by the State governments in accordance with this chapter, without requirement for an appropriation by the National Government.

Mutual agreement by the Government of the Federated States of Micronesia as provided for in sections 335, 336, and 337 of this chapter which results in the amendment, extension, or termination of all or any part of such chapter shall be effected only by an act of the Congress.

The President shall report immediately to the Congress of the Federated States of Micronesia on any failure to comply with the provisions of this chapter and on any withholding or withdrawal of allotment pursuant to subsection (4) of section 312 of this chapter or this section.

If the President of the Federated States of Micronesia determines that any government is not acting in compliance with one or more provisions of the Compact of Free Association or its related agreements, this chapter, or rules and regulations promulgated pursuant to this chapter, he shall confer with the appropriate government in an effort to remedy the effects of such noncompliance and to ensure future compliance with such provisions. The President may withhold or withdraw allotment of Compact financial assistance until such time as such government has taken adequate steps to comply with such provisions.

Notwithstanding sections 306 and 335 of this chapter, the State of Pohnpei shall be permitted to redesignate to the current account that portion of its fiscal year 1997 and 1998 Compact block grant section 217 (inflation adjustment) funds previously designated to the capital account; provided, however, that the redesignation for fiscal year 1998 shall not exceed $1,200,000; and provided further that with these two exceptions, at least 40% of Compact block grant section 217 (inflation adjustment) funds in each fiscal year must have been and continue to be designated to the capital account. The designation of block grant section 217 (inflation adjustment) funds shall follow the formula for the base amount of section 211 block grant funds under subparagraph (b) of paragraph 3 of the Memorandum of Understanding on the Division of Grant Assistance.

Section 2. The State of Pohnpei shall not be permitted to make the redesignation for fiscal year 1998 pursuant to section 345 of title 55 except upon mutual agreement of the four State governments of the Federated States of Micronesia.