[Senate Hearing 108-128]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 108-128
 
                      COMPACT OF FREE ASSOCIATION

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

TO RECEIVE TESTIMONY REGARDING THE COMPACT OF FREE ASSOCIATION WITH THE 
                FEDERATED STATES OF MICRONESIA AND THE 
                    REPUBLIC OF THE MARSHALL ISLANDS

                               __________

                             JULY 15, 2003


                       Printed for the use of the
               Committee on Energy and Natural Resources


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma                JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho                DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming                BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee           RON WYDEN, Oregon
LISA MURKOWSKI, Alaska               TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri            MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana                EVAN BAYH, Indiana
GORDON SMITH, Oregon                 DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky                CHARLES E. SCHUMER, New York
JON KYL, Arizona                     MARIA CANTWELL, Washington

                       Alex Flint, Staff Director
                   Judith K. Pensabene, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                        Kellie Donnelly, Counsel
                 Al Stayman, Professional Staff Member





                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Akaka, Hon. Daniel K., U.S. Senator from Hawaii..................     4
Anefal, Sebastian, Secretary, Department of Economic Affairs, 
  Federated States of Micronesia.................................    39
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     3
Cohen, David B., Deputy Assistant Secretary for Insular Affairs, 
  Department of the Interior.....................................    16
Craig, Hon. Larry E., U.S. Senator from Idaho....................     4
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Short, Albert V., Director, Office of Compact Negotiations, 
  Bureau of East Asian and Pacific Affairs, Department of State..     6
Westin, Susan S., Managing Director, International Affairs and 
  Trade, General Accounting Office...............................    21
Zackios, Gerald M., Minister of Foreign Affairs, Government of 
  the Republic of the Marshall Islands...........................    45

                               APPENDIXES


                               Appendix I

Responses to additional questions................................    61

                              Appendix II

Additional material submitted for the record.....................    85


                      COMPACT OF FREE ASSOCIATION

                              ----------                              


                         TUESDAY, JULY 15, 2003

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.

    The committee met, pursuant to notice, at 2:38 p.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Pete V. Domenici, 
chairman, presiding.

          OPENING STATEMENT OF HON. PETE V. DOMENICI, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. The hearing will please come to order.
    The purpose of this hearing is to receive testimony 
regarding the Compact of Free Association with the Federated 
States of Micronesia and the Republic of the Marshall Islands. 
I appreciate the attendance of my fellow committee members. 
Thank you all for coming, and I particularly thank you, Senator 
Bingaman, as ranking member of the committee.
    We have two panels today. We will start with panel number 
one. As I call you, would you please take your seat at the 
table?
    I would like to welcome our witnesses from the first panel. 
First, Mr. Albert Short is the Director of the Office of 
Compact Negotiations, Bureau of Eastern and Asian Public 
Affairs, the U.S. Department of State. Next, Mr. David B. 
Cohen, Deputy Assistant Secretary for Insular Affairs, U.S. 
Department of the Interior. Then Ms. Susan B. Westin, Managing 
Director, International Affairs and Trade Office, the General 
Accounting Office. Thank you for being here.
    I had an opportunity, Senators, to speak with Mr. Short in 
the presence of Mr. Cohen today, and informed them that their 
statements will be made part of the record. Then they can 
proceed with their testimony.
    Let me first say to Mr. Short, I have had occasion prior to 
this hearing to be briefed on the matter before us. I 
compliment you and the others in the Federal Government for the 
work that was done, and also those witnesses on the second 
panel who represent the Freely Associated States.
    I'd like to begin with a brief opening statement. We are 
going to examine the administration's proposed amendments to 
the Compact of Free Association with the Republic of the 
Marshall Islands--the RMI--and the Federated States of 
Micronesia--the FSM.
    S.J. Res. 16, the legislation introduced yesterday by 
myself and Senators Bingaman, Craig, and Akaka on behalf of the 
administration would extend the Nation's unique relationship 
with our Pacific allies for the next 20 years. With the 
Compact's September 30 deadline rapidly approaching, both 
chambers will need to move as expeditiously as possible to 
complete action.
    I would like to extend a special welcome to our friends on 
the second panel from the Freely Associated States, the 
Honorable Gerald Zackios from the Marshall Islands; and the 
Honorable Sebastian Anefal from Micronesia.
    I know that you have traveled a long way to come before us. 
I look forward to hearing your testimony.
    The amended compact continues what I think is a remarkable 
relationship first forged after World War II. As U.N. trustee, 
the United States aided the islands' transition into self-
governing nations. With the 1986 compact, the citizens of RMI 
and FSM elected to maintain the bond enjoyed between our 
countries. Indeed, for the past 17 years, the compact has 
governed our mutual defense interests and has sought to achieve 
political and economic stability for the islands' citizens.
    Overall, most would agree that the compact has been a 
success. At the same time, areas in need of improvement have 
been identified. The legislation now before us continues U.S. 
economic assistance, and by establishing trust funds, 
encourages economic self-reliance. In addition, each nation, 
including the United States, has increased oversight and 
accountability responsibilities.
    Annual funding is provided to address the migration impacts 
to neighboring Hawaii, Guam, and the Northern Mariana Islands. 
In the wake of 9/11, the compact's immigration provisions have 
been tightened. Finally, the amended compact maintains our 
defense rights and seeks to continue access to the military 
facilities at Kwajalein Island for the next 50 to 70 years.
    As we begin this hearing today, I am interested to learn 
more about the status of the negotiations regarding landowners 
who have yet to sign the Land Use Agreement extension, as well 
as the administration's plans if such an agreement is not 
secured. I also have questions regarding the continuation of 
FEMA eligibility, and access to vital Federal educational 
programs for FAS citizens.
    With the compact set to expire in a matter of weeks, the 
committee will not examine the nuclear claims issues at this 
time. However, we will likely conduct an oversight hearing, and 
I understand the distinguished Senator, Senator Craig, is 
interested in conducting those, time permitting.
    At this time, I would like to submit statements for the 
record that have been submitted by the Defense Department; from 
Senator Christopher Loeak, chairman of the Kwajalein 
Negotiation Commission; and the Representatives from American 
Samoa.
    I would also like to submit the administration's June 3, 
2003 response to my request for information on education 
funding.
    Again, thank you all for being here. Let us proceed.
    Senator Bingaman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Thank you very much, Mr. Chairman, for 
having the hearing. I think this is a subject that our 
committee has had a long tradition of dealing with in a very 
bipartisan way. I think that is very healthy.
    There is a very special relationship between these states 
and our own country. They are the only foreign nations with 
U.S. ZIP codes, the only foreign nations whose citizens have 
the status of being able to live in the United States as 
nonimmigrants, and the only foreign nations whose financial 
assistance flows through our Department of the Interior. So we 
have a special relationship that we value very much. I am 
confident that if we can get this Compact of Free Association 
renewed, it will continue for a very long time.
    I do note that a lot of experts have participated in 
getting this together. The General Accounting Office in 
particular has completed over half-a-dozen reports to help us 
get to this stage. I very much appreciate that. There is a 
deadline, as you pointed out, at the end of September, about 11 
weeks away, for us to get this done, so we need to move ahead 
quickly.
    [The prepared statement of Senator Bingaman follows:]
        Prepared Statement of Hon. Jeff Bingaman, U.S. Senator 
                            From New Mexico
    Mr. Chairman, thank you for holding this important hearing on 
legislation to amend the Compact of Free Association with the Federated 
States of Micronesia (FSM) and the Republic of the Marshall Islands 
(RMI), and welcome to our witnesses.
    First, I'd like to associate myself with the Chairman's remarks and 
to point out the Committee's tradition of bi-partisanship in this area 
of public policy. Chairman James McClure and Ranking Member Bennett 
Johnston worked closely during consideration of the Compact in 1986, 
and Chairman Murkowski and Senator Akaka travelled extensively in the 
islands examining many of the issues we will be considering today.
    Second, I'd like to recognize the special nature of the 
relationship that exists between the United States and the people of 
the former United Nations Trust Territory of the Pacific Islands. These 
are, after all, the only foreign nations with U.S. ZIP codes, the only 
foreign nations whose citizens have status to live in the U.S. as non-
immigrants, and the only foreign nations whose financial assistance 
flows through the U.S. Department of the Interior.
    This special relationship began in 1944 when Marshall Islands' 
scouts assisted U.S. forces in ending Japan's occupation of the 
islands. It continues today with the hundreds of Micronesians and, 
Marshallese who serve in the U.S. military, including those who put 
their lives on the line every day as a part of United States forces in 
Iraq.
    During 40 years of U.S. Administration under the Trusteeship, the 
islands also played a crucial role in the development of the United 
States' nuclear weapons and strategic missile capabilities--
cornerstones of our nation's military strength.
    As Administrator, the U.S. had responsibility to advance the 
political, social, and economic development of the inhabitants, but 
after the United States discharged its responsibilities to the United 
Nations, we have continued for 17 years to work together, under the 
Compact, as partners to maintain mutual security and to advance 
economic self-sufficiency.
    As our nation debates the topic of nation-building, we should 
recall our 60-year experience in Micronesia. We have achieved our 
mutual political and security objectives, but economic development has 
taken more time and resources than anticipated. Assuring continued 
economic growth and stability will take the continued commitment not 
only of our three nations, but also that of others with an interest in 
the region, such as the Asian Development Bank, which has provided 
valuable technical expertise and financial resources.
    I'd like to commend everyone who has worked on these agreements 
over the past four years, including the experts at the General 
Accounting Office who have completed over half-a-dozen reports in 
support of this effort. This legislation appears to be a thorough job 
on a tremendously difficult and complex task. Congress now has the 
challenge of considering all of these documents, and not a lot of time 
in which to complete action. The deadline for assistance under the 
Compact is just 11 weeks away.
    Mr. Chairman, I look forward to hearing from our witnesses, and to 
working closely with you to meet this ambitious schedule.

    Thank you again for having the hearing.
    The Chairman. Thank you.
    How about the other two Senators? Senator Craig?

        STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR 
                           FROM IDAHO

    Senator Craig. Mr. Chairman, I will be very brief. You have 
clearly spelled it out, as has our ranking member, the 
importance of the Compact of Free Association between the 
United States and Micronesia and the Republic of the Marshall 
Islands.
    I think it is important to again say that security and 
self-governance for these nations has been dealt with. The 
security, certainly as it relates to our national security 
rights, has been dealt with effectively through the agreements, 
the relationships and the treaty. What is at hand is assistance 
in the island's efforts to advance economic self-sufficiency. 
That is critical.
    This committee probably has more authority over the lives 
of the people on these island nations, and of these citizens 
than almost any other citizen in our country. Certainly, 
holding these hearings is critical as we move towards 
reinstating this important treaty and relationship with these 
nations.
    I call them nations, and I mean that. I respect them in 
that regard, and their relationship with us is critical. Thank 
you.
    The Chairman. Thank you very much, Senator.
    Senator Akaka.

        STATEMENT OF HON. DANIEL K. AKAKA, U.S. SENATOR 
                          FROM HAWAII

    Senator Akaka. Thank you very much, Mr. Chairman. It is 
with great pleasure and maybe even celebration that we are here 
at this moment to have a hearing on the compact, which has been 
difficult at times.
    But I want to welcome our witnesses on the first panel: 
Colonel Al Short, Director of the Office of Compact 
Negotiations with the Department of State; Mr. David Cohen, 
Deputy Assistant Secretary for Insular Affairs for the 
Department of the Interior; and Ms. Susan Westin, from the 
Government Accounting Office.
    I also want to take time to welcome the witnesses who 
traveled from the Federated States of Micronesia in the second 
panel: the Honorable Sebastian Anefal, Secretary, Department of 
Economic Affairs; and Honorable Gerald Zackios, Minister of 
Foreign Affairs.
    The last hearing held on this issue by this committee was 
in December 2001. I remember it clearly because I was forced to 
leave my office due to anthrax contamination in the Hart Office 
Building. Given the circumstances, it seemed difficult to hold 
a hearing; but Chairman Bingaman at that time agreed that a 
hearing was necessary, given the importance of the issue.
    At that time, I stressed the importance of Congress 
receiving in a timely manner the proposed legislation codifying 
the negotiated agreements pertaining to the Compact of Free 
Association between the United States and the Republic of the 
Marshall Islands and the Federated States of Micronesia.
    For the past 3 years, we have been focused on the September 
30, 2003 date of expiration of title II of the compact. While I 
am disappointed that it took until July 2003, for us to receive 
the legislative proposal, I am glad that it is finally here, 
and I congratulate Minister Zackios, Secretary Anefal, and 
Colonel Short for the completion of what has been a challenging 
negotiation process.
    As many of you know, the Pacific islands hold a special 
place in my heart, not only because I come from Hawaii, but 
because I spent time in what is now the RMI and FSM during 
World War II and after the war. I have long-standing 
relationships with the people of these nations, and care deeply 
about U.S. policies affecting the RMI and FSM.
    While the compact has been successful in guiding transition 
of the RMI and FSM from U.N. trust territories to independent 
nations, and in preserving the national security interests of 
the United States, RMI, and FSM, it has not been as successful 
in the area of economic development and economic self-
sufficiency.
    As I'm sure we will hear from our witnesses this afternoon, 
provisions have been included in this legislative proposal to 
address some of the shortcomings of the first compact with 
respect to granting procedures and accountability, both on the 
part of the United States as well as RMI and FSM.
    I must emphasize, Mr. Chairman, the importance of improving 
the health and education infrastructure in RMI and FSM. We must 
support local efforts to improve the medical facilities and 
schools in these nations. I believe it is imperative to 
continue eligibility for citizens of the Freely Associated 
States in Federal programs, including Head Start, Pell grants, 
the Individuals with Disabilities Education Act, the No Child 
Left Behind Act, bilingual education, and adult and vocational 
education.
    We also must examine eligibility for medical programs to 
address the prevalence of diabetes and cancer in FAS. I cannot 
stress the importance of these programs to the U.S. investment 
in these islands and to our commitment to helping these nations 
to be economically self-sufficient.
    As my colleagues may be aware, the compact has had a 
significant impact on the State of Hawaii since 1986. The 
original compact authorized funds to offset the costs of FAS 
citizens in the State of Hawaii. We did not, however, begin 
receiving compact impact reimbursements until fiscal year 2002, 
and even then it was minimal compared to the amount the State 
expended over the past 15 years.
    During a briefing in March 2003, the Bush administration 
was unable to tell me how it reached the $15 million figure, 
which is the amount of funding to be distributed among the 
State of Hawaii, the Commonwealth of Northern Mariana Islands, 
American Samoa, and Guam for compact impact costs.
    I have been working on this issue for the past 2 years to 
find a way to more appropriately reimburse the jurisdictions 
who have absorbed costs associated with FAS citizens in their 
jurisdiction. I have been working with Hawaii's Governor, our 
Attorney General, and the State agencies who are bearing the 
majority of the costs, including the Hawaii departments of 
education, health, and human services.
    We also must address medical debt owed to Hawaii's 
hospitals and medical providers. The compact authorizes funding 
for the payment of medical referral debt prior to 1985. Given 
the significant amount of debt owed to Hawaii's hospitals and 
medical providers, I plan to propose a similar provision which 
will authorize funding to be provided to the FSM and RMI to 
repay the medical referral debts incurred prior to 2003.
    I look forward to starting to review this proposal in the 
next 8 weeks, and our first obligation is to ensure that this 
legislation is consistent with the intent of the Compact of 
Free Association. We must ensure that it contains sufficient 
funding and support to meet the goal of assisting the RMI and 
FSM to achieve economic self-sufficiency in 20 years. We must 
also ensure, however, that the jurisdictions impacted by the 
compact are appropriately reimbursed.
    I look forward to working with all of my colleagues, and to 
the testimony of today's witnesses.
    The Chairman. Let's proceed.
    Mr. Short, your testimony has been made part of the record. 
Would you abbreviate it for us, please?

   STATEMENT OF ALBERT V. SHORT, DIRECTOR, OFFICE OF COMPACT 
            NEGOTIATIONS, BUREAU OF EAST ASIAN AND 
              PACIFIC AFFAIRS, DEPARTMENT OF STATE

    Mr. Short. Mr. Chairman, members of the committee, thank 
you for this opportunity to testify on the Compact of Free 
Association with the Federated States of Micronesia and the 
Republic of the Marshall Islands.
    The original compact, the Compact of Free Association with 
the FSM and RMI, established a political relationship that is 
open-ended. The original 15-year compact funding authorization, 
however, ended in fiscal year 2001, with a 2-year extension 
through 30 September of this year.
    The original compact successfully met its main goal of 
providing for a stable transition from United Nations 
trusteeship to sovereign self-government for the FSM and the 
RMI. At the same time, the compact protected U.S. security 
interests in the Pacific by our assumption of defense 
responsibilities for this vast sea and airspace, and ensured 
access to important Department of Defense sites at Kwajalein 
Atoll in the Marshall Islands.
    The original compact was successful in transforming the 
relationship between these islands and the United States to one 
of our closest bilateral relationships.
    The current compact assistance.
    The United States currently provides assistance in three 
ways: financial assistance under the compact, Federal programs 
and services under the compact, and Federal programs apart from 
the compact.
    The United States provides about $160 million annually in 
financial assistance, 80 percent from the compact and 20 
percent from other Federal agencies such as the Departments of 
Health and Human Services, Education, Labor, and Agriculture.
    Reasons to continue the compact assistance. The United 
States has strong interests in these countries that justify 
continued economic assistance, and these include: advancing 
economic self-reliance; improving health, education, and social 
conditions; sustaining political stability and close ties; and 
assuring that our strategic interests continue to be secured, 
including access to important defense sites at Kwajalein Atoll.
    Our economic assistance. The administration recognizes that 
too sharp a reduction in U.S. assistance at this stage of 
development could result in economic instability and other 
disruptions, and could encourage an increase in the level of 
migration under the compact to the United States. The compact, 
as amended, will continue economic assistance from fiscal year 
2004 through fiscal year 2023.
    Furthermore, the economic package includes annual 
contributions to trust funds that will provide an ongoing 
source of revenue when the grant assistance ends in fiscal year 
2023. Federal services and program assistance also continues 
unless otherwise provided by the Congress. Compact funding will 
ensure economic and social stability, and a smooth transition 
in fiscal year 2024 when the trust fund becomes a source of 
revenue. These amounts are partially adjusted for inflation at 
the rates of the original compact.
    The President's fiscal year 2004 budget includes the 
funding, $165.4 million, for the first year of the amended 
compact; but we also need the authorization for these funds, 
which is the Compact Act that you are now considering. As 
pointed out, it needs to be enacted by October 1, 2003.
    The administration is putting in place an effective 
accountability mechanism with respect to future U.S. economic 
assistance, the details of which will be addressed by Mr. Cohen 
for the Department of the Interior.
    As part of the amended compact, the United States and the 
Republic of the Marshall Islands agrees to a long-term 
extension of the military use and operating rights agreement 
for the ballistic missile test site at Kwajalein Atoll. This 
extension could run until 2066 and beyond. Mr. Lawless from the 
Department of Defense has submitted written testimony on our 
use of Kwajalein and the security and defense aspects of the 
compact.
    Immigration. Based on our experience to date, as well as in 
the wake of the September 11 attack, we re-examined the 
immigration provisions of the existing compact. These 
provisions provide that RMI and FSM citizens ``may enter into, 
lawfully engage in occupations, and establish residence as non-
immigrants in the United States.''
    The amended compact will require FAS citizens to use 
machine-readable passports, institute child adoption visa 
procedures, implement visa entry provisions for naturalized 
citizens, precludes passport sales, and makes explicit our 
inherent U.S. authority to regulate the terms and conditions of 
FSM and RMI citizens' stay in the United States.
    Lastly, it removes the annual requirement to obtain an 
employment authorization document and substitutes a multi-year 
authorization.
    In conclusion, thank you for this opportunity to present 
the administration's views on the compacts we have signed with 
the FSM and the RMI. Let me assure you that we welcome any and 
every opportunity to keep the committee informed as you 
deliberate and proceed on S.J. Res. 16.
    [The prepared statements of Mr. Short and Mr. Lawless 
follow:]
  Prepared Statement of Albert V. Short, Director, Office of Compact 
 Negotiations, Bureau of East Asian and Pacific Affairs, Department of 
                                 State
    Mr. Chairmen and Members of the Committees: Thank you for this 
opportunity to testify on the recently submitted Compact Act of Free 
Association with the Federated States of Micronesia (FSM) and with the 
Republic of the Marshall Islands (RMI).
                          the original compact
    The original 15 years of Compact funding authorization for the FSM 
and RMI ended in Fiscal Year 2001. The Compact provisions provided an 
extension for up to two years through September 30, 2003, as long as 
Compact negotiations progressed. The original Compact successfully met 
its main goal of providing for a stable transition from United Nations 
Trusteeship to sovereign self-government for the FSM and RMI. At the 
same time, the Compact protected U.S. security, maritime, and 
commercial interests in the Pacific by assuming defense 
responsibilities for the vast sea and air space of the Freely 
Associated States (FAS) including Palau--and by ensuring access to 
important defense sites operated by the Department of Defense on 
Kwajalein Atoll in the Marshall Islands.
    The original Compact was also successful in transforming the 
relationship between these islands and the United States into one of 
our closest bilateral relationships. We now number the FSM and RMI 
among our staunchest friends in the United Nations. These achievements 
are solid and lasting, and the American and FAS peoples can be justly 
proud of them.
                       current compact assistance
    The U.S. currently provides assistance to the FSM and RMI in three 
ways: through financial assistance under the Compact; through programs 
and services that are included in the Compact, such as the services and 
related programs of the U.S. Weather Service, the Postal Service, and 
the Federal Aviation Administration; and through programs apart from 
the Compact that are funded, as Congress sees fit, by other federal 
agencies. The U.S. currently provides about $160 million annually in 
financial assistance to the FSM and RMI, 80 percent from the Compact 
and 20 percent from other federal agencies outside of the Compact, such 
as the Departments of Education, Health and Human Services, Labor, and 
Agriculture.
    The past seventeen years have witnessed recurring problems stemming 
from the lack of accountability and the sometimes ineffective use of 
Compact Funds. Therefore, a principal task of the recently signed 
agreements to amend the Compact is to improve the effectiveness and 
accountability of these funds. Moreover, we have agreed to put an 
increasing percentage of the annual U.S. Compact assistance into a 
trust fund that will provide an ongoing source of revenue to the two 
countries when annual payments by the United States end in 2023.
                 reasons to continue compact assistance
    The United States has strong interests in these countries that 
justify continued economic assistance under the Compact through FY 2023 
and the contributions to the trust fund, provided this assistance is 
structured and managed as proposed. These interests include:

  f Advancing economic self-reliance. (In this regard, the United 
        States will continue its commitment to the economic strategies 
        that the RMI and FSM have developed with the support of the 
        United States, the Asian Development Bank (ADB), the 
        International Monetary Fund, and our partners in the ADB 
        Consultative Group, including Japan and Australia);
  f Improving the health, education, and social conditions of the 
        people of the RMI and FSM;
  f Sustaining the political stability and close ties which we have 
        developed with these two emerging democracies;
  f Ensuring that our strategic interests continue to be secured, 
        including access to our important defense sites on the 
        Kwajalein Atoll;
  f Putting in place and contributing to a trust fund that will provide 
        an ongoing source of revenue when annual payments by the United 
        States end in 2023;
  f Strengthening immigration provisions in the wake of the September 
        11th attacks and addressing various problems that have arisen 
        since the Compact was first approved by the U.S. Congress; and
  f Mitigating the impact of immigration under the Compact on Hawaii, 
        Guam, the Commonwealth of the Northern Mariana Islands, and 
        American Samoa.
                          economic assistance
    The Administration recognizes that too sharp a reduction in U.S. 
assistance at this stage of economic development of the RMI and the FSM 
could result in economic instability and other disruptions, and could 
encourage an increase in the level of immigration under the Compact to 
the United States by citizens of those countries. We continue to 
believe that providing substantial financial and other assistance under 
the Compact will help to ensure economic stability while the RMI and 
FSM continue to implement economic development and reform strategies.
    The Compact, as amended, provides for continued economic assistance 
from Fiscal Year 2004 through Fiscal Year 2023. Furthermore, the 
economic package provides for annual contributions to a trust fund that 
will provide an ongoing source of revenue, to be used for the same 
purposes as the previous grant assistance when the annual grant 
assistance ends in Fiscal Year 2023. Federal services and program 
assistance also continues, if provided by Congress.
                            compact funding
    Compact funding will ensure economic and social stability and a 
smooth transition to Fiscal Year 2024 when annual payments from the 
U.S. will have terminated and the trust fund becomes a source of 
revenue.

  f Beginning in Fiscal Year 2007, the FSM sector grants decrease by 
        $800,000 per year through Fiscal Year 2023, with this decrease 
        added to the trust fund.
  f The RMI will receive $30.5 million in sectoral grants, $5.2 million 
        for Kwajalein impact, and $7 million for its trust fund 
        annually beginning in Fiscal Year 2004.
  f Beginning in Fiscal Year 2005, the RMI sectoral grants decrease by 
        $500,000 per year through Fiscal Year 2023, with this decrement 
        added to the trust fund.
  f These amounts are partially adjusted for inflation: two-thirds of 
        the implicit price deflator will be applied as in the original 
        Compact period.
  f Under the Compact, as amended, the U.S. contributions to the trust 
        funds are conditioned on the FSM contributing at least $30 
        million to the FSM trust fund prior to September 30, 2004 and 
        the RMI contributing at least $25 million to the RMI trust fund 
        on the effective date of the Trust Fund Agreement or October 1, 
        2003, whichever is later, and $2.5 million prior to October 1, 
        2004 and another $2.5 million prior to October 1, 2005.
  f Under the Compact, grant assistance will be used for six sectors, 
        with priorities in the education and health sectors and tied to 
        specific outcomes and purposes and monitored by the Department 
        of the Interior.
  f Misuse of Compact funds can lead to withholding of funds until the 
        problem is resolved. The FSM and the RMI have agreed to 
        cooperate with the United States on criminal investigations 
        regarding misuse of funds, if necessary.

    The Administration is putting in place an effective accountability 
mechanism with respect to future U.S. economic assistance to the FSM 
and the RMI under the Compact. Economic assistance will no longer be 
made available through transfers that co-mingle U.S. funds with local 
funds, thereby rendering it difficult to track and monitor their use. 
Instead, future funds under the Compact will be provided through 
targeted, sectoral assistance, each with a clearly defined scope and 
objectives.
    In the amended Compacts, the FSM, RMI, and U.S. have agreed that 
any future grant assistance will be used in six sectors:

                          f health;
                          f education;
                          f infrastructure;
                          f private sector development;
                          f public sector capacity building; and
                          f the environment.

    Built into each sectoral grant will be regular planning, 
monitoring, and reporting requirements. The amended Compacts also 
provide the necessary authority and resources to ensure effective 
oversight and reasonable progress toward the agreed objectives.
                               trust fund
    A major element of the new Compact provisions is the termination of 
annual mandatory payments to the FSM and the RMI at the end of Fiscal 
Year 2023--and the establishment of a trust fund to provide an ongoing 
source of revenue starting in Fiscal Year 2024. In its earlier 
proposals to the U.S., both the FSM and RMI anticipated the U.S. 
interest in the termination of mandatory annual financial assistance by 
proposing that the U.S. capitalize a trust fund over the next term of 
Compact assistance. Under the amended Compact, the Administration has 
agreed that annual U.S. financial assistance will terminate at the end 
of Fiscal Year 2024, and thereafter the trust fund will provide an 
ongoing source of revenue. Congress has previously authorized and 
funded the use of similar trust funds, including one established under 
the Compact with the Republic of Palau, and several established in the 
Marshall Islands as compensation for the U.S. nuclear weapons testing 
program.
                federal services and program assistance
    With a few notable exceptions, Federal program coordination and 
oversight of Compact Funds has been ineffective. We are committed to 
putting in place a more effective system of coordinating and monitoring 
that assistance during the amended Compact period.
                       kwajalein muora extension
    As part of the amended Compact, the United States and the Republic 
of the Marshall Islands have agreed to a long-term extension of the 
Military Use and Operating Rights Agreement (MUORA) for the Ronald 
Reagan Ballistic Missile Defense Test Site on Kwajalein Atoll. The 
Reagan Test Site (RTS) serves a key role in research, development, test 
and evaluation for the Administration's high-priority missile defense 
and space programs.
    Although the current Military Use and Operating Rights Agreement 
covering U.S. use of these defense sites runs through 2016, in November 
2001, RMI President Note reaffirmed the RMI's willingness to consider a 
long-term extension of U.S. use of Kwajalein Atoll for our defense 
needs. Subsequently, the RMI Government proposed that the ongoing 
negotiations to amend the Compact of Free Association provided a 
convenient forum to consider amendments extending the Military Use and 
Operating Rights Agreement. Following consultations with the Department 
of Defense, the Administration decided to pursue such an extension, if 
agreement could be concluded on acceptable terms, and negotiations on 
this issue would not delay our efforts to obtain agreement on 
amendments to the Compact.
    Sections 211 and 212 of Title Two of the Compact, as amended, and 
the MUORA, as amended, provide for the following:

  f The parties agree to extend the MUORA for a period of fifty years 
        from 2016 (the current expiration date) to 2066, with a U.S. 
        option to extend it for an additional twenty years to Fiscal 
        Year 2086.
  f To achieve the flexibility necessary to permit the long-term 
        extension of the agreement, the two sides agreed to a schedule 
        of early termination payments if the United States chooses to 
        leave Kwajalein before the end of the agreement. This outcome 
        could be exercised anytime after 2023, on advance notice of at 
        least seven years.
  f As Compensation.
  f These agreements establish a new series of Kwajalein payments 
        beginning in Fiscal Year 2004 (October 1, 2003) at a level of 
        $15 million per year (increased from the current $11.3 million) 
        with a further increase to a new base of $18 million in 2014. 
        The United States Government is obligated in any case to make 
        payments through Fiscal Year 2023, and thereafter, depending on 
        whether it chooses to continue its use of Kwajalein Atoll. The 
        RMI has assured us that it will endeavor to ensure that 
        payments to landowners are distributed more equitably than they 
        have been in the past in a manner consistent with Marshallese 
        custom and tradition.
  f The U.S. will continue paying the $1.9 million per year in 
        Kwajalein impact money established in the current agreement. 
        However, beginning in Fiscal Year 2004, this payment, which has 
        not previously been adjusted for inflation, will be subject to 
        the provisions of the new Compact Fiscal Procedures Agreement, 
        will be indexed for inflation based on the formula established 
        in the amended Compact, and emphasis will be on addressing the 
        special needs of the Kwajalein landowners most affected by the 
        United States presence on Kwajalein.
  f Pursuant to the Compact, U.S. Army Kwajalein Atoll (USAKA) has 
        developed, in cooperation with the RMI Environmental Protection 
        Authority, a strong set of environmental standards and a formal 
        process to review these standards annually and report to both 
        governments. To promote a greater RMI capability for 
        independent analysis of the Survey's findings and conclusions, 
        the U.S. will provide an annual grant of $200,000 to support 
        increased participation of the GRMI EPA in the Survey.

    For some years now, overcrowding on the Kwajalein island of Ebeye, 
where most of the Marshallese work force supporting the defense sites 
lives, has created an unmet series of special infrastructure needs for 
the Marshallese Communities on Ebeye and some other islands of the 
Kwajalein Atoll. This agreement will address these needs in the 
following way:

  f First, the U.S. and the RMI have agreed that $3.1 million per year 
        of the RMI grant funding will go towards meeting the special 
        infrastructure and development needs of the Marshallese 
        communities on Kwajalein Atoll. In 2014, this funding will 
        increase to $5.1 million per year. These funds are indexed 
        according to the Compact Title Two formula.
  f Second, considering the $1.9 million impact funding mentioned 
        above, which is specified by the Compact to offset the impact 
        of U.S. defense activities on Kwajalein Atoll, together with 
        the Ebeye special needs funding, $5 million per year 
        (increasing to $7 million in 2014), all of which will be 
        focused on improving the quality of life of the Marshallese 
        communities on Kwajalein, starting October 1, 2004.

    In sum, the Administration feels that extending the MUORA, in 
concert with the provisions of the amended Compact, will promote the 
economic stability and opportunity of the RMI for the indefinite 
future.
                              immigration
    Based on our mixed experience since the Compact took effect, as 
well as in the wake of the September 11th attack, we have reexamined 
the immigration provisions of the existing Compact. Section 141(a) 
provides that citizens of the RMI and FSM ``may enter into, lawfully 
engage in occupations, and establish residence as a non-immigrant in 
the United States'' without regard to certain grounds of 
inadmissibility under the Immigration and Nationality Act (INA). Our 
examination and the subsequent negotiations concluded that the 
immigration provisions should be amended to:

  f Require FAS citizens seeking admission under the Compact to use 
        passports.
  f Clarify that immigrant visa procedures, rather than Compact non-
        immigrant admission, are necessary and appropriate for child 
        adoption cases.
  f Limit Compact entry privileges of naturalized FAS citizens to a 
        greater degree.
  f Preclude use of passport sales and similar programs from serving as 
        a means for persons from countries other than the FSM and the 
        RMI to obtain visa-free admission privileges under the Compact.
  f Make more explicit the authority of the Government of the United 
        States to regulate the terms and conditions of FSM or RMI 
        citizens' admission and stay in the United States, including 
        its territories and possessions.
  f Make explicit that the INA applies in full to persons seeking 
        admission to, or the right to remain in, the United States 
        pursuant to the Compact.
  f Provide Compact admission privileges to the immediate relatives of 
        FAS citizens in U.S. military service, whether or not the 
        relatives are FAS citizens.
  f Streamline the documentation that FAS citizens may use as evidence 
        of work authorization in the United States.

    Under the Compact, as amended, the United States will now require 
passports for FSM and RMI citizens seeking admission as non-immigrants 
to the United States. Further, naturalized citizens of the FSM and RMI 
will, with certain limited exceptions, now be ineligible for visa-free 
admission to the United States. In addition, the Compact, as amended, 
provides other safeguards to prevent the admission under the Compact of 
persons from other countries who might seek to exploit the visa-free 
immigration privileges intended for the citizen population of the FAS. 
It addresses explicitly the problem of passport sales and other 
naturalization schemes designed to provide visa-free admission 
privileges to persons from countries other than the FSM and the RMI 
under the Compact. The Compact, as amended, also provides express 
safeguards for FSM and RMI children who are coming to the United States 
permanently pursuant to an adoption, or for the purpose of adoption, by 
requiring that those children possess an immigrant visa. This clarifies 
the existing U.S. interpretation of the Compact, and brings the 
provisions relating to the Freely Associated States into harmony with 
that pertaining to children from other countries concerning child 
adoptions and protections available to adopted children.
                                 impact
    Section 104(e)(2) of the existing and amended Compact statutes 
requires the President to report annually to Congress on the impact of 
the Compact. A recent GAO study documents the substantial impact of FAS 
migration to the State of Hawaii, Guam, and the Commonwealth of the 
Northern Mariana Islands (CNMI). The amended Compact and other proposed 
amendments to the Compact Act address the migratory impact issue in 
three ways:

  f First, we will provide $15 million per year of direct compensation 
        to Hawaii, Guam, American Samoa, and the CNMI for the negative 
        impacts of migration.
  f Second, the amended Compacts strengthen immigration provisions to 
        improve our ability to regulate RMI and FSM migrants who are 
        eligible for admission.
  f Third, the amended Compacts focus on areas such as improving the 
        health and education of, and private sector jobs for, potential 
        migrants, thereby reducing the impact of migration under the 
        Compact.

    The annual impact funding of $15 million will be:

  f a mandatory appropriation for twenty years.
  f allocated based on a pro rata formula reflecting a periodic census 
        of Micronesians living in Hawaii, Guam, American Samoa, and the 
        CNMI.
                                 palau
    The Compact of Free Association between the United States and Palau 
is not up for review at this time. We believe, however, that it makes 
sense for us to bring the immigration, labor and trade provisions of 
the Palau Compact into line with those agreed with the RMI and FSM. In 
addition, Palau has sought a change to the communications provision to 
make its telecommunications carrier eligible to participate in the 
National Exchange Carriers Association and the Universal Services 
Support Fund. Negotiations are underway on these issues. If we reach 
agreement, the Administration will submit these amendments to the 
Congress.
                               conclusion
    Thank you for this opportunity to present the Administration's 
views on the Compact Act with the FSM and RMI. Let me assure you that 
we welcome any and every opportunity to keep the Committee informed as 
your deliberations proceed on the Compact Act.
                                 ______
                                 
        Prepared Statement of Richard Lawless, Deputy Assistant 
           Secretary of Defense for Asian and Pacific Affairs
    Mr. Chairman, the Freely Associated States (FAS)--the Republic of 
the Marshall Islands, the Federated States of Micronesia, and Palau--
enjoy a special relationship with the United States and with the 
Department of Defense in particular. With roots in World War II, this 
relationship grew throughout the Cold War (the FAS played a critical 
role in the development of U.S. defense programs in the 1950s and 
1960s) and continues to this day as FAS islands and citizens contribute 
to the development of U.S. missile defenses which will guard the U.S. 
and its friends and allies in the decades to come. Moreover, FAS 
citizens are also involved in the war on terrorism and in the 
liberation of Iraq, serving alongside American servicemen and women in 
the U.S. armed forces.
                   defense relationship with the fas
    Our relationship with the FAS is uniquely defined by our 
responsibility to defend these sovereign nations under the terms of the 
Compact of Free Association. More clearly, the United States is 
obligated by the Compact and its subsidiary agreements to provide for 
the defense of the Freely Associated States in perpetuity, unless there 
is mutual agreement to terminate the arrangement. We are committed to 
defending and providing for the security of these nations and their 
peoples ``as the United States and its citizens are defended.'' This is 
an obligation greater than the United States has assumed under any of 
its mutual defense treaties. In return, the United States has the right 
for certain military uses and access, as well as the right to deny 
access to third countries.
    In the absence of the Compact or, more specifically, the Security 
and Defense Relations Title of the Compact, the Mutual Security 
Agreement (MSA) still provides for the U.S. defense obligations, U.S. 
military access, and the denial of military access by third countries. 
The MSA is indefinite in duration and remains in force until terminated 
or amended by mutual agreement. The so-called ``defense veto'' and 
provisions regarding future base rights, however, are scheduled to 
terminate with the expiration of the Security and Defense Relations 
Title of the Compact no later than 30 September 2003 unless this Title 
is extended. It is in the best interests of the United States to 
maintain the full range of military access and security engagement 
options that the Compact provides.
    In addition, U.S. rights for access and operations on Kwajalein 
Atoll were negotiated under the Military Use and Operating Rights 
Agreement (MUORA) pursuant to, but separate from, the Compact. The 
MUORA had an original term of 15 years that was due to expire in 2001. 
Given the importance of the agreement, the U.S. opted in 1999 to extend 
the MUORA for an additional term of 15 years to 2016.
    When it became clear in 2002 that the Government of the Marshall 
Islands was interested in concluding a long-term extension to the 
MUORA, the U.S. decided to take the opportunity to secure needed access 
beyond 2016. The U.S. and the Marshall Islands have since negotiated an 
extended MUORA which will provide us with continued access to the 
Kwajalein Atoll defense sites until at least 2066, and possibly to 2086 
at the U.S.' option. It is important to note that, because the 
Department of Defense was unable to project our specific requirements 
for Kwajalein Atoll beyond the mid-2020's, this long-term extension to 
the MUORA was negotiated with a flexible early termination clause. 
Under this clause, the DoD can terminate the MUORA as early as 2024 
with seven years advance notice. The DoD believes that this clause is a 
prudent measure that provides us with the necessary flexibility to 
enter into a 70-year extended term agreement when the specific longer-
term uses are not clearly known.
    This amended agreement governing U.S. access to the defense sites 
on Kwajalein Atoll has been negotiated and signed. The RMI Government 
assures us that they intend to fulfill the terms of this agreement. The 
Administration is confident that the RMI Parliament will approve this 
MUORA extension along with the amended Compact. We anticipate that 
following national elections in the RMI in November, the RMI Government 
will work out an arrangement with the senior landowners to amend the 
Land Use Agreement (LUA).
    Second, it is important to note that the landowners owning title to 
land relevant to the Kwajalein defense sites are not a homogeneous 
group. The RMI Government tells us that there is in fact significant 
support among many of the landowners for the agreements we have 
negotiated with the RMI Government.
    Under the current MUORA, we have access to these defense sites 
until 2016 at an already agreed rate of compensation. According to the 
MUORA, we are obligated to give at least two years notice to the RMI 
Government if we do not intend to renegotiate the agreement or extend 
the agreement. In the unlikely event we are not able to agree with the 
RMI Government now to extend the agreement as we have negotiated, there 
are ten years between now and when we would need to give the notice to 
the GRMI of our intent not to renew the agreement. During this time 
period, we would want to assess the advances in technologies that might 
give us new options as well as progress in the primary defense programs 
that are being tested at Kwajalein. Consequently, without the benefit 
of these insights, which will only be available over the next ten 
years, it is not possible now to discuss specific alternatives to the 
missions we currently operate at Kwajalein.
    While the Kwajalein lease could have been extended under the MUORA 
separate from Compact negotiations, the two are nevertheless 
inextricably linked. The daily routine at the Kwajalein Missile Range 
and the facilities on Kwajalein Atoll depends upon a favorable working 
relationship with the people of the Marshall Islands. Provisions of the 
Compact help provide the basis for U.S. support to the Marshallese 
people who also provide much of the labor force at Kwajalein. The 
Compact therefore contributes to a positive local attitude towards 
Kwajalein.
    The primary goal of the Compact and the assistance provided under 
it is to maintain a unique relationship with the Freely Associated 
States while helping them to become economically self-sufficient. 
Continued Compact assistance will nevertheless help to preserve key 
defense interests while denying access to potentially hostile forces. 
Continuing the Compact is in the best interest of the United States and 
the Freely Associated States. It will help the Freely Associated States 
continue to work toward their national goals, while serving our 
national security interests.
                 study of defense interests in the fas
    In 1999, in preparation for the Compact of Free Association 
renewal, the Department of Defense conducted a study to determine our 
defense interests in the Freely Associated States for the post-2001 
era. The study looked at issues such as the need for continued access, 
current and future threats, and roles that the Freely Associated States 
might play in future scenarios. The study found an important defense 
interest in continuing the use of the Kwajalein Missile Range and the 
facilities on Kwajalein Atoll. The requirements of our missile defense 
and space surveillance programs, combined with the uniqueness of 
Kwajalein's location, and infrastructure investment make renewal of the 
Compact in the best interest of the Department of Defense.
    The strategic environment that surrounded the study has changed 
greatly over the past four years, but these changes only reinforce the 
importance of U.S. access to and use of the Kwajalein Missile Range.
                       quadrennial defense review
    The 2001 Department of Defense Quadrennial Defense Review (QDR) 
recognized that the world has changed and that America must prepare for 
a wide array of threats to our security at home and abroad. As 
witnessed by the terrorist attacks of September 11, the future security 
environment will be marked by uncertainty. The QDR's assessment of the 
global security environment acknowledges a great deal of uncertainty 
about the potential sources of military threats, the conduct of war in 
the future, and the form that the threats and attacks against the U.S. 
will take. While contending with such uncertainty is a key challenge 
for U.S. defense planning, certain features and trends of the security 
environment define not only today's geopolitical and military-technical 
challenges but also highlight critical operational challenges that the 
nation's armed forces will need to master in the future. Maintaining 
the Compact will support our efforts to confront these future 
challenges by providing us with the right for military use and access 
and with the right of strategic denial.
    The QDR identifies Asia as a region that is gradually emerging as 
an area susceptible to large-scale military competition. It also 
identifies an ``arc of instability'' stretching from the Middle East to 
Northeast Asia containing a volatile mix of rising and declining 
regional powers where the governments may be vulnerable to overthrow by 
radical or extremist internal forces or movements. Many of these states 
also field large militaries and possess the potential to develop or 
acquire weapons of mass destruction. The QDR sees a possibility that a 
military competitor to the U.S. with a formidable resource base may 
emerge in the region.
    Distances in the Asian theater are vast, and the density of U.S. 
basing and en route infrastructure is lower than in other critical 
regions. The U.S. has less assurance of access to facilities in the 
Asia-Pacific region than in other critical regions of the world. The 
QDR therefore identifies the necessity of securing additional access 
and infrastructure agreements and developing military systems capable 
of sustained operations at great distances with minimal theater-based 
support.
    When Secretary Rumsfeld came into office, the President charged him 
with evaluating U.S. military posture in the world, and the QDR calls 
for a reorientation of our posture in Asia. The U.S. will continue to 
meet its commitments around the world, including in Southwest and 
Northeast Asia, by maintaining the ability to defeat aggression in two 
critical areas in overlapping timeframes. As this strategy and force 
planning approach is implemented, the U.S. will strengthen its forward 
deterrent posture. Over time, U.S. forces will be tailored to maintain 
favorable regional balances in concert with U.S. allies and friends 
with the aim of swiftly defeating attacks with only modest 
reinforcement. A key objective of U.S. transformation efforts will be 
to increase the capability of its forward forces, thereby improving 
their deterrent effect and possibly allowing for reallocation of forces 
now dedicated to reinforcement of other missions.
    Inevitably, our ability and flexibility with regard to deploying 
forces forward will depend on access, which the Compact provides. While 
it is too soon to say whether the FAS will be considered as candidates 
for increased U.S. access or basing in the region that the QDR calls 
for, the fact remains that our rights under the Compact provides for 
this possibility. In this region of instability and potential conflict, 
the U.S. right of strategic denial under the Compact, whereby the U.S. 
can deny third countries access to the FAS, is also significant. 
Strategic denial effectively creates a stable and secure zone across a 
broad swath of the Western Pacific. It is reassuring to the Department 
of Defense in this period of uncertainty to have this stable region in 
the mid-Pacific in which we can deny access rights to any potentially 
hostile third country.
                            missile defense
    Another important change since the 1999 study was the December 2001 
announcement by President Bush that the United States would withdraw 
from the Anti-Ballistic Missile (ABM) Treaty. The President took this 
step as part of a broader change in our defense policy to reflect new 
threats that we face. As a result of the withdrawal we are now free to 
develop, test, and deploy effective defenses against missile attacks 
from rogue states like North Korea and Iran--states that are investing 
a large percentage of their resources to develop weapons of mass 
destruction and offensive ballistic missiles at the expense of the 
basic needs of their people. The scope of this growing threat to the 
U.S. and our allies and friends is compounded by the fact that the 
states that are developing these terror weapons have close links to a 
variety of terrorist organizations. States or even non-state actors 
could use container ships to launch shorter-range missiles against our 
territory. As the President said in his State of the Union Address, we 
must not allow the world's most dangerous regimes to threaten us with 
the world's most dangerous weapons.
    The missile defense program is now executing an aggressive 
research, development, test, and evaluation (RDT&E) program focusing on 
a single integrated ballistic missile defense system designed to defend 
the territories and deployed forces of the U.S., allies and friends 
against ballistic missiles of all ranges and in all phases of flight. 
As previously noted, the Kwajalein Atoll, home to the Ronald Reagan 
Ballistic Missile Defense Test Site, provides a unique venue for live 
testing of missiles of all ranges because of its location and 
specialized, state-of-the art data-gathering devices. Access to the 
Kwajalein Atoll is currently set to expire in 2016. However, our 
missile defense and space programs, and including those on Kwajalein, 
are programs with a long-lead time, we forecasted that we would need 
Kwajalein well beyond the 2016 date. As we continue to test and develop 
our missile defense system and capabilities, the Kwajalein Atoll will 
remain a significant test resource for future missile defense testing.
    After considering these changes in the strategic environment since 
the 1999 study, DoD's reassessment in 2002 determined that the study 
was still valid. I would argue that the results of the reassessment are 
somewhat understated. If it is at all possible, I believe that the 
changes in the strategic environment have only made our defense 
interests in the FAS even more important.
                               conclusion
    While the end of the Cold War brought about significant changes, it 
did not alter the strategic importance of the FAS to U.S. national 
security interests. So long as uncertainty, further unrest, and points 
of potential military conflict continue to dot the Asia-Pacific 
landscape, the FAS shall remain strategically important. North Korea's 
current hostile posture is an unfortunate illustration of the dangerous 
uncertainty in the region, particularly since North Korea retains the 
offensive capability of inflicting massive damage on the South in short 
order. Territorial disputes in the South China Sea and Northeast Asia 
remain unresolved and provide potential flashpoints. Indonesia's road 
toward democracy faces challenges as calls for separatism have led to 
fierce fighting in Aceh and other provinces, and communal violence 
continues throughout the archipelago. In recent years, we have seen the 
violent abandonment of the constitutional process in Fiji and in the 
Solomon Islands, which may soon spiral into a failed state if it does 
not receive much-needed external assistance. Terrorist forces are 
present in many countries in Southeast Asia: the Philippines, 
Indonesia, and even in Singapore.
    We must strive to move this region toward peace and stability. Our 
task is to dampen the sources of instability by maintaining a policy of 
robust forward deterrence and military presence, while searching for 
new opportunities to increase confidence and a spirit of common 
security. In time of peace, our responsibility also extends to taking 
actions that develop a strategic environment that will sustain this 
peace and prevent conflict over time. But to sustain this peace and to 
prevent conflict, we need to continue our defense rights in the FAS.

    The Chairman. Thank you very much, Mr. Short.
    Secretary Cohen.

  STATEMENT OF DAVID B. COHEN, DEPUTY ASSISTANT SECRETARY FOR 
              INSULAR AFFAIRS, DEPARTMENT OF THE 
                            INTERIOR

    Secretary Cohen. Mr. Chairman and members of the committee, 
I am pleased to appear before you to discuss the proposed 
legislation to amend the Compact of Free Association with the 
RMI and the FSM.
    Over the 17-year life of the compact, the United States 
will have paid a total of $1.04 billion in direct financial 
assistance to the RMI, and $1.54 billion to the FSM. There have 
been few restrictions on this aid. The GAO has issued a number 
of reports that have raised concerns about the effectiveness of 
compact assistance.
    We at Interior have had similar concerns for quite some 
time. Our desire for better accountability has been frustrated 
by the fact that the current compact provides for large, 
loosely defined grants with no express enforcement mechanisms.
    The United States, the RMI, and the FSM have now designed a 
completely new system to ensure that compact funds are used 
productively. This system, which features targeted funding, 
performance measurement, increased oversight, and remedies as a 
last resort, is explained in greater detail in my written 
statement.
    In order to implement this new program, we are assembling a 
compact oversight team based in the Pacific. I would also like 
to address the impact that migration from the Freely Associated 
States has had on Hawaii, Guam, and the Northern Mariana 
Islands.
    We are requesting $300 million in mandatory funding to 
these jurisdictions over 20 years to mitigate the impact of 
migration. This comes out to $15 million per year, which is 
substantially more than what has ever been appropriated in any 
one year by Congress or requested by any other administration. 
This is the first time that any administration has proposed 
mandatory annual funding for compact impact.
    The first line of defense against compact impact is the 
financial assistance that we will provide to the Freely 
Associated States under the amended compact. The amended 
compact is designed to address the problems that, according to 
a GAO report, drive people to migrate: inadequate health care, 
education, and economic opportunity.
    We don't pretend that the amended compact will bring 
migration to a halt, but we sincerely hope that the people of 
the Freely Associated States, including those who choose to 
migrate, will, as a result of our new targeted assistance 
program be healthier and better educated; and hence, more 
likely to be net contributors to whatever community in which 
they choose to live.
    I offer a few observations. First, when we talk about 
accountability, we are not talking about making sovereign 
states accountable to the United States. Accountability refers 
to the collective accountability that all three governments 
share, both to the people of the islands and to the American 
taxpayer. All three governments have a collective 
responsibility to ensure that the American taxpayer's money 
will not be wasted; and, just as importantly, a collective 
responsibility to deliver on our promise to help the people of 
the islands to improve their quality of life.
    Some might interpret our new accountability program as an 
admission that the original compact has been a failure. Nothing 
could be further from the truth. The compact has been a 
tremendous success. America's former trust territory wards have 
emerged as free, vibrant, sovereign democracies. These nations 
have become America's most loyal allies in the world.
    Cynics say this loyalty has been purchased with compact 
aid; but no amount of money could buy the type of loyalty that 
leads so many of these islands' finest sons and daughters to 
serve proudly and honorably in the U.S. military, risking their 
lives to protect the freedom of all Americans.
    Mr. Chairman, at this moment 82nd Airborne Army Specialist 
Hilario Bermanis from Pohnpei lies in Walter Reed Army Medical 
Center after being gravely wounded in a grenade attack in 
Baghdad. He has lost both legs and an arm. We all pray for 
Hilario's recovery, and we thank him so much for the tremendous 
courage that he has shown in the service of our country.
    I visited Hilario yesterday, and I am pleased to report 
that he has made tremendous progress in the last week alone. He 
only opened his eyes for the first time after the attack last 
week, and began to speak about 2 days later. Yesterday, I was 
able to have a normal conversation with him. Both of his 
kidneys are now functioning. He is quite an impressive young 
man, and his fighting spirit is helping him to beat the odds.
    As illustrated by the inspiring valor of Hilario Bermanis 
and other men and women from the Freely Associated States, 
there is clearly a heartfelt bond between Americans and the 
peoples of these islands. The compact has only made it 
stronger.
    We Americans value this bond. As for criticism of the 
original compact, it is important to remember that that 
document invented a comprehensive new kind of relationship that 
was completely untested at the time. It should surprise no one, 
and shame no one, that with the wisdom of 17 years of 
experience, parties can find opportunities to improve the 
compact.
    The United States and the Freely Associated States are 
committed to embracing those opportunities, working together as 
partners to ensure that the promise of these compacts is fully 
realized for all the people of the islands. Thank you.
    [The prepared statement of Mr. Cohen follows:]
 Prepared Statement of David B. Cohen, Deputy Assistant Secretary for 
              Insular Affairs, Department of the Interior
    Mr. Chairman and members of the Senate Committee on Energy and 
Natural Resources, I am David B. Cohen, Deputy Assistant Secretary of 
the Interior for Insular Affairs. I am pleased to appear before you 
today to discuss the Administration's proposal for legislation that 
would approve amendments to the Compact of Free Association with the 
Republic of the Marshall Islands (RMI) and the Federated States of 
Micronesia (FSM), which I will collectively refer to as the freely 
associated states or FAS. These amendments will, among other things, 
split the current Compact, which is a single, tri-lateral agreement 
among the United States, the RMI and the FSM, into two bi-lateral 
Compacts between the United States and the RMI and between the United 
States and the FSM, respectively.
    I will focus my comments on the fiscal and economic provisions of 
the Compacts and the Fiscal Procedures Agreements, which are subsidiary 
agreements to the respective Compacts. In particular, I will discuss 
how proposed amendments to these provisions are designed to address the 
very legitimate concerns that the General Accounting Office (GAO), the 
Department of the Interior and others have raised with respect to the 
lack of accountability for Federal funds provided under the current 
Compact.
                               background
    Over the 17-year life of Compact financial assistance, it is 
expected that the United States will ultimately have paid a total of 
$1.04 billion in directs grants to the RMI and $1.54 billion to the 
FSM. There have been few restrictions on these grants.
    Over the last several years, the GAO has issued a number of reports 
that have raised concerns about the effectiveness of Federal assistance 
that has been provided under the Compact. We at the department of the 
Interior have had similar concerns for quite some time; particularly 
officials in the Office of Insular Affairs, who have been greatly 
frustrated with the lack of tools properly to administer or track 
Federal assistance in a manner that could reasonably ensure that such 
assistance is having its intended effect. Most importantly, we have 
been hampered by the fact that the current Compact provides for large, 
loosely defined grants with no express enforcement mechanisms to ensure 
the efficient and effective expenditure of funds.
    I am pleased that, in negotiating the provisions of the amended 
Compacts, the United States and its negotiating partners, the RMI and 
FSM, have sought to address the concerns raised by the GAO, the 
Department of the Interior and others.
                       accountability provisions
    We have designed a completely new system to ensure that Compact 
funds are used productively. First, we will target our funding. Compact 
funds will be available for the following six high-priority sectors 
only:

                          f Health
                          f Education
                          f Public Infrastructure
                          f Environmental Protection
                          f Private Sector Development
                          f Public Sector Capacity Building

    Special emphasis will be given to health and education. The 
respective Compacts and the related Fiscal Procedures Agreements 
describe the types of activities that are eligible for funding under 
each of these sectors. This will enable us to ensure that Compact funds 
are used exclusively for what the U.S. and our FAS partners have 
jointly identified as high-priority activities.
    Second, the U.S. and its FAS partners will work together to control 
Compact budgets, including the allocation of funds among the six 
sectors, to ensure that the objectives of the Compact are being 
properly pursued. The process will work as follows: Each year, the RMI 
and FSM will propose their respective Compact budgets. Those proposals 
must be approved by bilateral joint committees--a U.S.-RMI joint 
committee for the RMI Compact and a U.S.-FSM joint committee for the 
FSM Compact. Each joint committee will include three members from the 
U.S. and two from the applicable freely associated state. The joint 
committees will ensure that the Compact budgets conform to the letter 
and spirit of the respective Compacts.
    Third, we will require planning to ensure that Compact budgets 
further medium- and long-term goals and objectives. Each FAS will be 
required to prepare and periodically update various plans, which will 
be subject to the approval of the applicable joint committee. The 
Compact budgets will be expected to be consistent with these plans.
    Fourth, we will give oversight personnel at the Department of the 
Interior the tools to protect against waste, fraud and abuse. The 
sector grants will be subject to terms and conditions similar to those 
applicable to Federal grants provided to state and local governments in 
the United States. The provisions designed to protect Compact funds 
include:

  f The right of the U.S. to unilaterally impose certain special 
        conditions, including additional reports, monitoring and prior 
        approvals, in the event that a grantee has a history of 
        unsatisfactory performance or is not financially stable.
  f The right of the U.S. to withhold payments or suspend or terminate 
        grants under certain conditions.
  f The requirement that the FAS be subject to annual audits, and the 
        right of the U.S. to conduct specific audits as it deems 
        necessary.
  f The right of the U.S. to have full access to all relevant FAS 
        records.
  f The requirement that the FAS follow procurement provisions designed 
        to ensure competition, transparency and the avoidance of 
        conflicts.
  f The obligation of the FAS to fully cooperate with any U.S. 
        investigation into the misuse of Compact funds.

    We do not intend to make these tools the focus of our 
accountability program. We understand that the key to a successful 
accountability program is a continued strong relationship with our FAS 
partners, so that we can work together to ensure that the Compact funds 
benefit the people that they are intended to benefit. We also 
understand, however, that it is difficult to predict what will happen 
over a 20-year period, and it would be imprudent for us to not have the 
tools necessary to protect the American taxpayers' investment to 
improve life in the FAS.
    The provisions described above will help us to ensure that the 
Compact funds reach their intended destination. But it will be of 
little good if the Compact funds reach their intended destination but 
do not have the intended effect. That is why, as the fifth prong of our 
new accountability program, we will apply performance standards and 
measures to each Compact grant. The joint committees will be 
responsible for applying appropriate performance standards and measures 
and evaluating performance on the basis thereof.
    Sixth, we will provide for strong minimum standards for each FAS's 
financial management systems, and we will help them to meet these 
standards with technical assistance provided by my office and with the 
public sector capacity development grant.
    Seventh, we will provide for detailed reporting, so that the U.S. 
and its FAS partners can track progress and identify any areas of 
concern.
    Finally, the Department of the Interior is in the process of 
assembling a Compact oversight team based in the Pacific. We are hiring 
eight additional full-time employees who will focus exclusively on 
monitoring and oversight of Compact financial assistance and 
coordination with other Federal agencies providing program assistance 
to the FAS.
    Additionally, Mr. Chairman, I would like to address the very 
important question of the impact that migration from the RMI, FSM and 
Palau, as authorized by the current Compacts, has had on Hawaii, Guam, 
the Northern Mariana Islands and American Samoa. Migrants have made 
important contributions to Hawaii and the territories, but have placed 
additional burdens on the local governments because of their 
utilization of services. The GAO reported significant outlays by these 
United States jurisdictions in aid of migrants and their families. With 
this history in mind, the legislation before you today includes $15 
million in annual mandatory funding as a contribution to these United 
States jurisdictions to mitigate the impact of migration.
    While this $15 million will be applied directly to address the 
impact of migration on United States jurisdictions, the financial 
assistance that we will provide to the FAS under the amended Compact is 
really the first line of defense against this impact. The GAO found 
that migration from the FAS is motivated mainly by the lack of proper 
education, health care and economic opportunity. The amended Compact is 
designed to address the problems that drive people to migrate: The 
targeted funding gives priority to health and education and also 
supports activities that are designed to promote economic development. 
We do not pretend that the amended Compact will bring migration to a 
halt, but we sincerely hope that the people of the FAS, including those 
who choose to migrate, will, as a result of our new targeted assistance 
program, be healthier and better educated and hence more likely to be 
net contributors to whatever community in which they choose to live. 
Thus, the legislation seeks to improve the conditions that lead to 
migration from the FAS and ameliorate the effects of migration to the 
United States when it occurs.
                              observations
    Now that I have described our new program, Mr. Chairman, I would 
appreciate the opportunity to offer a few observations.
    My first point is that when we talk about accountability, we are 
not talking about making the sovereign freely associated states 
accountable to the U.S. ``Accountability'' refers to the collective 
accountability that all three governments share both to the people of 
the islands and to the American taxpayer. All three governments have a 
collective responsibility to ensure that the American taxpayer's money 
will not be wasted, and, just as importantly, a collective 
responsibility to ensure that we deliver on our promise to help the 
people of the islands to improve their quality of life.
    Although there will always be some who are initially resistant to 
change, there is widespread support in all three governments for the 
new accountability provisions. In fact, some of the most enthusiastic 
supporters are government ``line managers'' in the RMI and the FSM--
those with the day-to-day responsibility for delivering public services 
to the people. These managers have endured years of frustration, 
struggling to keep essential programs going while knowing that a more 
productive allocation of Compact funds could have made their jobs 
easier.
    A few have expressed concern that the new accountability provisions 
are harsh, and that the FAS are not equipped to comply with them. We 
disagree. The new provisions include standard remedies for waste, fraud 
and abuse. These remedies are the same ones to which state and local 
governments in the United States are subject when they receive grants 
from the Federal government. The RMI and FSM have had considerable 
experience with numerous United States Federal programs and these same 
remedies. I stress again, however, that the key to our accountability 
program is not the remedies that could conceivably be exercised in the 
worst case scenario, but the strong, cooperative relationship that we 
have with our partners in the islands.
    In order to strengthen their ability to comply with the new 
requirements, the FAS may use Compact funds for appropriate training, 
software, equipment and guidance. For example, Compact funds could be 
used to purchase financial management systems, to provide training and 
hands-on guidance for local personnel or to supplement local personnel 
with outside experts.
    The bottom line, Mr. Chairman, is that all three governments want 
to ensure that the people of the RMI and FSM receive the full benefit 
of the Compact assistance program. We can only achieve this with a 
strong accountability program. The U.S. cannot do it alone: We could 
not place sufficient personnel on the ground to properly do this job 
all by ourselves without seriously interfering with the sovereign 
governmental operations of our FAS partners, conjuring unfortunate 
images of a return to the old Trust Territory days. The FAS cannot do 
it alone: They are still in the process of developing the capacity to 
fully protect against the possibility of waste, fraud and abuse, and to 
properly measure the effectiveness of Compact-funded activities. All 
parties recognize that we need to work together to achieve the 
objectives that we all share.
                          building on success
    Some might interpret our new accountability program as an admission 
that the original Compact has been a failure. Nothing could be further 
from the truth. The Compact has been a tremendous success. America's 
former Trust Territory wards have emerged as free, vibrant, sovereign 
democracies. The United States has achieved its strategic objective of 
denying other powers control over vast areas of the Pacific. The freely 
associated states have benefited from the United States defense 
umbrella, and their people enjoy the right to live, work and study in 
the United States. Significantly, these nations have become America's 
most loyal allies in the world.
    Cynics say that this loyalty has been purchased with Compact aid. 
No amount of money, however, could purchase the type of loyalty that 
leads so many of these islands' finest sons and daughters to serve 
proudly and honorably in the United States military, risking their 
lives to protect the freedom of all Americans. Mr. Chairman, at this 
moment, 82nd Airborne Army Specialist Hilario Bermanis from Pohnpei 
lies in Walter Reed Army Hospital after being gravely wounded in a 
grenade attack in South Baghdad. He has lost both legs and an arm. We 
all pray for Hilario's recovery, and we thank him so much for the 
tremendous courage that he has shown in the service of our country. As 
illustrated by the inspiring valor of Hilario Bermanis and other men 
and women from the freely associated states, there is clearly a 
heartfelt bond between Americans and the people of these islands. The 
Compact has only made it stronger. We Americans value this bond.
    As for criticism of the original Compact, it is important to 
remember that that document invented a comprehensive new kind of 
international relationship that was completely untested at the time. It 
should surprise no one, and shame no one, that with the wisdom of 17 
years of experience, the parties can think of ways to improve the 
Compact. The financial assistance and accountability provisions of the 
original Compact provide some opportunities for improvement. The United 
States and the freely associated states are committed to embracing 
those opportunities--working together, as partners, to ensure that the 
promise of these Compacts is fully realized for all of the people of 
the islands.

    The Chairman. Thank you very much, Mr. Cohen.
    Ms. Westin, would you please give us your testimony.

STATEMENT OF SUSAN S. WESTIN, MANAGING DIRECTOR, INTERNATIONAL 
          AFFAIRS AND TRADE, GENERAL ACCOUNTING OFFICE

    Ms. Westin. Mr. Chairman and members of the committee, I am 
pleased to be here today to testify on the Compacts of Free 
Association that the United States recently signed with the 
Federated States of Micronesia and the Republic of the Marshall 
Islands.
    Specifically, I will discuss three main topics: one, the 
potential cost to the U.S. Government; two, changes to both the 
structure and levels of future assistance; and three, changes 
in accountability addressed in the amended compacts and related 
agreements.
    Turning to the first topic, the potential cost of the 
amended compacts.
    The amended compacts of free association with the FSM and 
the RMI to renew expiring assistance would require about $3.5 
billion in funding over the next 20 years, with a total 
possible authorization through 2086 of $6.6 billion from the 
U.S. Congress. These dollar amounts include estimated 
inflation.
    I direct your attention to the chart that we have over 
here. The share of new authorizations to the FSM would be about 
$2.3 billion and would end after fiscal year 2023. The share of 
new authorizations to the RMI would be about $1.2 billion for 
the next 20 years. Further funding of $3.1 billion for the 
remainder of the period corresponds to extended grants to 
Kwajalein and payments related to U.S. military use of land at 
Kwajalein.
    This new authorized funding would be provided to each 
country in the form of annual grant funds targeted to priority 
areas, contributions to a trust fund for each country such that 
trust fund earnings would replace annual grants beginning in 
fiscal year 2024, payments the U.S. Government makes through 
the RMI government to Kwajalein landowners to compensate them 
for the U.S. use of their lands for defense sites, and an 
extension of Federal services that have been provided under the 
original compact but are due to expire at the end of 2023.
    Further, the administration is proposing to provide $15 
million annually for Hawaii, Guam, and the Northern Mariana 
Islands for the costs associated with FSM and RMI citizens who 
migrate to those areas. This would cost an additional $300 
million over the 20-year period.
    I will turn to the second topic, changes in the structure 
and levels of funding.
    Under the U.S. proposal, annual grant amounts to each 
country would be reduced each year in order to encourage 
budgetary self-reliance and transition the countries from 
receiving annual U.S. grant funding to receiving annual trust 
fund earnings begin in 2024.
    This decrease in grant funding, combined with FSM and RMI 
population growth, would result in falling per capita grant 
assistance over the funding period, particularly for the RMI. 
The reduction in real per capita funding over the next 20 years 
is a continuation of the decreasing amount of available grant 
funds that the FSM and the RMI had during the 17 years of prior 
compact assistance.
    The amended compacts were designed to build trust funds 
that, beginning in fiscal year 2024, yield annual earnings to 
replace grant assistance that expires in 2023. Our analysis 
shows that the trust funds may be insufficient to replace 
existing grants, depending on assumptions about the rate of 
return on the trust funds.
    Finally, I will discuss provisions in the amended compacts 
designed to provide improved accountability over U.S. 
assistance. This is an area where we have offered several 
recommendations in past years. Most of our recommendations 
regarding future compact assistance have been addressed with 
the introduction of strengthened accountability measures in the 
signed amended compacts and related agreements.
    Let me give four examples.
    One, the amended compacts would require that grants be 
targeted to priority areas such as health, education, the 
environment, and public infrastructure, including funding for 
maintenance.
    Two, grant conditions normally applicable to U.S. State and 
local governments would apply to each grant.
    Three, the United States could withhold payments if either 
country fails to comply with grant terms and conditions.
    Four, joint economic management committees with each 
country would be established.
    I must emphasize, however, that the successful 
implementation of the many new accountability provisions will 
require a sustained commitment, including resources, by the 
three governments to fulfill their roles and responsibilities.
    Mr. Chairman, members of the Committee, this completes my 
prepared statement. I would be happy to respond to any 
questions.
    [The prepared statement of Ms. Westin follows:]
       Prepared Statement of Susan S. Westin, Managing Director, 
       International Affairs and Trade, General Accounting Office
    Mr. Chairman and Members of the Committee: I am pleased to be here 
today to testify on the Compact of Free Association between the United 
States and the Pacific Island nations of the Federated States of 
Micronesia, or the FSM, and the Republic of the Marshall Islands, or 
the RMI.\1\ In 1986, the United States entered into this Compact with 
the two countries after almost 40 years of administering the islands 
under the United Nations Trust Territory of the Pacific Islands. The 
Compact has provided U.S. assistance to the FSM and the RMI in the form 
of direct funding as well as federal services and programs for almost 
17 years. Further, the Compact establishes U.S. defense rights and 
obligations in the region and allows for migration from both countries 
to the United States. Provisions of the Compact that address economic 
assistance were scheduled to expire in 2001; however, they can remain 
and have remained in effect while the United States and each nation 
renegotiated the affected provisions.\2\
---------------------------------------------------------------------------
    \1\ The FSM had a population of about 107,000 in 2000, while the 
RMI had a population of 50,840 in 1999, according to each country's 
most recent census.
    \2\ Other Compact provisions are also due to expire in late 2003 if 
not renewed. These include (1) certain defense provisions, such as the 
requirement that the FSM and the RMI refrain from actions that the 
United States determines are incompatible with U.S. defense obligations 
(the defense veto) and (2) federal services listed in the Compact.
---------------------------------------------------------------------------
    Today, I will discuss our review of the amended Compacts and 
related agreements that the United States signed with the FSM and the 
RMI in May and April of 2003, respectively. (According to a Department 
of State official, while the original Compact was one document that 
applied to both the FSM and the RMI, the Compact that has been amended 
is now a separate Compact with each nation.) Specifically, I will 
discuss changes to levels and structure of future assistance, including 
the potential cost to the U.S. government. Further, I will comment on 
changes in accountability and other key issues addressed in the amended 
Compacts and related agreements.
Summary
    The amended Compacts of Free Association with the FSM and the RMI 
to renew expiring assistance would require about $3.5 billion in 
funding over the next 20 years with a total possible authorization 
through 2086 of $6.6 billion from the U.S. Congress.\3\ The amended 
Compacts would provide decreasing levels of annual assistance over a 
20-year term (2004-2023) in order to encourage budgetary self-reliance. 
Simultaneously, the Compacts would require building up a trust fund 
(with contributions that would increase annually) for each country to 
generate annual earnings that would replace the grants that end in 
2023. Per capita grant assistance would fall over the 20-year period, 
particularly for the RMI. At an assumed trust fund rate of return of 6 
percent, in 2024 the RMI trust fund would cover expiring grant 
assistance, while the FSM trust fund would be insufficient to replace 
grants. By the year 2040, however, RMI trust fund returns also would be 
unable to replace grant funding.
---------------------------------------------------------------------------
    \3\ Although the amended Compacts have been signed by the U.S., 
FSM, and RMI governments, they have not been approved by the 
legislature of any country. Therefore, in our testimony we describe the 
amended Compacts' requirements and potential impact in a conditional 
manner in recognition that the Compacts have not yet been enacted. The 
total possible cost to renew expiring assistance in fiscal year 2004 
U.S. dollars would be $3.8 billion on the basis of the Congressional 
Budget Office's forecasted inflation rate.
---------------------------------------------------------------------------
    The amended Compacts include many strengthened reporting and 
monitoring measures that could improve accountability if diligently 
implemented. The amended Compacts and related agreements have addressed 
most of the recommendations that we have made in past reports regarding 
assistance accountability. For example, assistance would be provided 
through grants targeted to priority areas, such as health and 
education, and with specific terms and conditions attached. Annual 
reporting and consultation requirements would be expanded, and funds 
could be withheld for noncompliance with Compact terms and conditions. 
However, the successful implementation of the many new accountability 
provisions will require a sustained commitment and appropriate 
resources from the United States, the FSM, and the RMI.
    The amended Compacts address other key issues. One key change to 
Compact defense provisions would occur U.S. military access to 
Kwajalein Atoll in the RMI could be extended from 2016 to 2086. This 
extension would cost $3.4 billion of the total possible authorization 
of $6.6 billion. Further, amended Compact provisions on immigration 
have been strengthened. FSM and RMI citizens entering the United States 
would need to carry a passport, and regulations could be promulgated 
that would impose time limits and other conditions on admission to the 
United States for these citizens.
Background
    The 1986 Compact of Free Association between the United States, the 
FSM, and the RMI provided a framework for the United States to work 
toward achieving its three main goals: (1) to secure self-government 
for the FSM and the RMI, (2) to assist the FSM and the RMI in their 
efforts to advance economic development and self-sufficiency, and (3) 
to ensure certain national security rights for all of the parties. The 
first goal has been met. The FSM and the RMI are independent nations 
and are members of international organizations such as the United 
Nations.
    The second goal of the Compact advancing economic development and 
self-sufficiency for both countries was to be accomplished primarily 
through U.S. direct financial payments (to be disbursed and monitored 
by the U.S. Department of the Interior) to the FSM and the RMI. For 
1987 through 2003, U.S. assistance to the FSM and the RMI to support 
economic development is estimated, on the basis of Interior data, to be 
about $2.1 billion.\4\ Economic self-sufficiency has not been achieved. 
Although total U.S. assistance (Compact direct funding as well as U.S. 
programs and services) as a percentage of total government revenue has 
fallen in both countries (particularly in the FSM), the two nations 
remain highly dependent on U.S. funds. U.S. direct assistance has 
maintained standards of living that are higher than could be achieved 
in the absence of U.S. support. Further, the U.S., FSM, and RMI 
governments provided little accountability over Compact expenditures.
---------------------------------------------------------------------------
    \4\ The cost of prior assistance in fiscal year 2004 U.S. dollars 
was $2.6 billion. This estimate does not include payments for Compact-
authorized federal services or U.S. military use of Kwajalein Atoll 
land, nor does it include investment development funds provided under 
section 111 of Public Law 99-239. Additionally, the Compact served as 
the vehicle to reach a full settlement of all compensation claims 
related to U.S. nuclear tests conducted on Marshallese atolls between 
1946 and 1958. In a Compact-related agreement, the U.S. government 
agreed to provide $150 million to create a trust fund. While the 
Compact and its related agreements represented the full settlement of 
all nuclear claims, it provided the RMI with the right to submit a 
petition of ``changed circumstance'' to the U.S. Congress requesting 
additional compensation. The RMI government submitted such a petition 
in September 2000, which the U.S. executive branch is still reviewing.
---------------------------------------------------------------------------
    The third goal of the Compact securing national security rights for 
all parties has been achieved. The Compact obligates the United States 
to defend the FSM and the RMI against an attack or the threat of attack 
in the same way it would defend its own citizens. The Compact also 
provides the United States with the right of ``strategic denial,'' the 
ability to prevent access to the islands and their territorial waters 
by the military personnel of other countries or the use of the islands 
for military purposes. In addition, the Compact grants the United 
States a ``defense veto.'' Finally, through a Compact-related 
agreement, the United States secured continued access to military 
facilities on Kwajalein Atoll in the RMI through 2016.\5\ In a previous 
report, we identified Kwajalein Atoll as the key U.S. defense interest 
in the two countries.\6\ Of these rights, only the defense veto is due 
to expire in 2003 if not renewed.
---------------------------------------------------------------------------
    \5\ U.S. access to Kwajalein Atoll is established through the U.S.-
RMI Military Use and Operating Rights Agreement (MUORA). Funding 
provided for U.S. military access to Kwajalein for the years 1987 to 
2003 is estimated, on the basis of Interior data, to be $64 million for 
development assistance and $144 million for the RMI government to 
compensate landowners for U.S. use of their lands.
    \6\ See U.S. General Accounting Office, Foreign Relations: 
Kwajalein Atoll Is the Key U.S. Defense Interest in Two Micronesian 
Nations, GAO-02-119 (Washington, D.C.: Jan. 22, 2002).
---------------------------------------------------------------------------
    Another aspect of the special relationship between the FSM and the 
RMI and the United States involves the unique immigration rights that 
the Compact grants. Through the original Compact, citizens of both 
nations are allowed to live and work in the United States as 
``nonimmigrants'' and can stay for long periods of time, with few 
restrictions.\7\ Further, the Compact exempted FSM and RMI citizens 
from meeting U.S. passport, visa, and labor certification requirements 
when entering the United States. In recognition of the potential 
adverse impacts that Hawaii and nearby U.S. commonwealths and 
territories could face as a result of an influx of FSM and RMI 
citizens, the Congress authorized Compact impact payments to address 
the financial impact of these nonimmigrants on Guam, Hawaii, and the 
Commonwealth of the Northern Mariana Islands (CNMI).\8\ By 1998, more 
than 13,000 FSM and RMI citizens had made use of the Compact 
immigration provisions and were living in the three areas. The 
governments of the three locations have provided the U.S. government 
with annual Compact nonimmigrant impact estimates; for example, in 2000 
the total estimated impact for the three areas was $58.2 million. In 
that year, Guam received $7.58 million in impact funding, while the 
other two areas received no funding.\9\
---------------------------------------------------------------------------
    \7\ Typically, nonimmigrants include those individuals who are in 
the United States temporarily as visitors, students, or workers.
    \8\ Payments were also authorized for American Samoa, but impact 
compensation has not been sought.
    \9\ See U.S. General Accounting Office, Foreign Relations: 
Migration From Micronesian Nations Has Had Significant Impact on Guam, 
Hawaii, and the Commonwealth of the Northern Mariana Islands, GAO-02-40 
(Washington, D.C.: Oct. 5, 2001).
---------------------------------------------------------------------------
    In the fall of 1999, the United States and the two Pacific Island 
nations began negotiating economic assistance and defense provisions of 
the Compact that were due to expire. Immigration issues were also 
addressed. According to the Department of State, the aims of the 
amended Compacts are to (1) continue economic assistance to advance 
self-reliance, while improving accountability and effectiveness; (2) 
continue the defense relationship, including a 50-year lease extension 
(beyond 2016) of U.S. military access to Kwajalein Atoll in the RMI; 
(3) strengthen immigration provisions; and (4) provide assistance to 
lessen the impact of Micronesian migration on Hawaii, Guam, and the 
CNMI.
Amended Compacts Would Alter Assistance Levels and Structure
    Under the amended Compacts with the FSM and the RMI, new 
congressional authorizations of approximately $3.5 billion in funding 
would be required over the next 20 years, with a total possible 
authorization through 2086 of $6.6 billion. Economic assistance would 
be provided to the two countries for 20 years--from 2004 through 2023--
with all subsequent funding directed to the RMI for continued U.S. 
access to military facilities in that country. Under the U.S. 
proposals, annual grant amounts to each country would be reduced each 
year in order to encourage budgetary self-reliance and transition the 
countries from receiving annual U.S. grant funding to receiving annual 
trust fund earnings. This decrease in grant funding, combined with FSM 
and RMI population growth, would also result in falling per capita 
grant assistance over the funding period particularly for the RMI. If 
the trust funds established in the amended Compacts earn a 6 percent 
rate of return, the FSM trust fund would be insufficient to replace 
expiring annual grants. The RMI trust fund would replace grants in 
fiscal year 2024 but would become insufficient for this purpose by 
fiscal year 2040.

  Table 1--ESTIMATED NEW U.S. AUTHORIZATIONS FOR THE  FSM AND THE RMI,
                         FISCAL YEARS 2004-2086
                       (U.S. dollars in millions)
------------------------------------------------------------------------
                                             FSM          RMI     Total
------------------------------------------------------------------------
Fiscal years 2004-2023:
------------------------------------------------------------------------
  Grants for priority areas..........           $1,612  \1\ $70   $2,313
                                                              1
------------------------------------------------------------------------
  Trust fund contributions...........              517      276      793
------------------------------------------------------------------------
  Payments for U.S. military use of     Not applicable      191      191
   Kwajalein Atoll land \2\..........
------------------------------------------------------------------------
  Compact-authorized federal services              167       37      204
   \3\...............................
------------------------------------------------------------------------
New U.S. authorization for 2004-2023.            2,296    1,204    3,500
------------------------------------------------------------------------
Fiscal years 2024-2086:
------------------------------------------------------------------------
  Grants to Kwajalein................   Not applicable  \1\ 948      948
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  Payments for U.S. military use of     Not applicable    2,133    2,133
   Kwajalein Atoll land..............
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New U.S. authorization for 2024-2086.   Not applicable    3,081    3,081
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Fiscal years 2004-2086, total new               $2,296   $4,285   $6,581
 U.S. authorizations for the FSM and
 the RMI.............................
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Source: GAO estimate based on information in the amended Compacts. Under
  the amended Compacts, U.S. payments are adjusted for inflation at two-
  thirds of the percentage change in the U.S. gross domestic product
  implicit price deflator.
 
Note: Numbers may not sum due to rounding.
 
\1\ The 1986 U.S.-RMI Military Use and Operating Rights Agreement
  (MUORA) grants the United States access to certain portions of
  Kwajalein Atoll and provides $24.7 million of funding for development
  and impact on Kwajalein from 2004 to 2016. Approximately $112 million
  of the new proposed U.S. grant assistance of $701 million is for
  increasing this funding to Kwajalein from 2004 to 2016 and for
  continuation of the increased level of funding through 2066 and
  possibly to 2086 if the agreement is extended.
\2\ As part of the 1986 MUORA, the RMI government has also allocated
  $162 million of U.S. funding from 2004 to 2016 under this agreement to
  landowners via a traditional distribution system to compensate them
  for the U.S. use of their lands for defense sites. The amended Compact
  increases these payments from 2004 to 2016 and continues the increased
  level of payments through 2066 and possibly to 2086 if the agreement
  is extended.
\3\ Federal services authorized in the Compact include weather,
  aviation, and postal services. Services associated with the Federal
  Emergency Management Agency have been excluded. An estimate of
  assistance from the U.S. Agency for International Development's Office
  of Disaster Assistance has not been included.

Amended Compacts Could Cost the U.S. Government $6.6 Billion
    Under the amended Compacts with the FSM and the RMI, new 
congressional authorizations of approximately $6.6 billion could be 
required for U.S. payments from fiscal years 2004 to 2086, of which 
$3.5 billion would be required for the first 20 years of the Compacts 
(see table 1). The share of new authorizations to the FSM would be 
about $2.3 billion and would end after fiscal year 2023. The share of 
new authorizations to the RMI would be about $1.2 billion for the first 
20 years, with about $300 million related to extending U.S. military 
access to Kwajalein Atoll through 2023. Further funding of $3.1 billion 
for the remainder of the period corresponds to extended grants to 
Kwajalein and payments related to U.S. military use of land at 
Kwajalein Atoll.\10\ The cost of this $6.6 billion new authorization, 
expressed in fiscal year 2004 U.S. dollars, would be $3.8 billion.
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    \10\ U.S. access to Kwajalein Atoll in the RMI has already been 
secured through 2016 through a Compact-related agreement. The amended 
Compact with the RMI extends this funding to 2066, with an additional 
20-year optional lease extension at that point.
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    This new authorized funding would be provided to each country in 
the form of (1) annual grant funds targeted to priority areas (such as 
health, education, and infrastructure); (2) contributions to a trust 
fund for each country such that trust fund earnings would become 
available to the FSM and the RMI in fiscal year 2024 to replace 
expiring annual grants; (3) payments the U.S. government makes to the 
RMI government that the RMI transfers to Kwajalein landowners to 
compensate them for the U.S. use of their lands for defense sites; and 
(4) an extension of federal services that have been provided under the 
original Compact but are due to expire in fiscal year 2003.
Amended Compacts Would Reduce U.S. Grant Support Annually
    Under the U.S. proposals, annual grant amounts to each country 
would be reduced each year in order to encourage budgetary self-
reliance and transition the countries from receiving annual U.S. grant 
funding to receiving annual trust fund earnings. Thus, the amended 
Compacts increase annual U.S. contributions to the trust funds each 
year by the grant reduction amount. This decrease in grant funding, 
combined with FSM and RMI population growth, would also result in 
falling per capita grant assistance over the funding period 
particularly for the RMI (see fig. 1).* Using published U.S. Census 
population growth rate projections for the two countries, the real 
value of grants per capita to the FSM would begin at an estimated $687 
in fiscal year 2004 and would further decrease over the course of the 
Compact to $476 in fiscal year 2023. The real value of grants per 
capita to the RMI would begin at an estimated $627 in fiscal year 2004 
and would further decrease to an estimated $303 in fiscal year 2023. 
The reduction in real per capita funding over the next 20 years is a 
continuation of the decreasing amount of available grant funds (in real 
terms) that the FSM and the RMI had during the 17 years of prior 
Compact assistance.
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    * Retained in committee files.
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    The decline in annual grant assistance could impact FSM and RMI 
government budget and service provision, employment prospects, 
migration, and the overall gross domestic product (GDP) outlook, though 
the immediate effect is likely to differ between the two countries. For 
example, the FSM is likely to experience fiscal pressures in 2004, when 
the value of Compact grant assistance drops in real terms by 8 percent 
relative to the 2001 level (a reduction equal to 3 percent of GDP).\11\ 
For the RMI, however, the proposed level of Compact grant assistance in 
2004 would actually be 8 percent higher in real terms than the 2001 
level (an increase equal to 3 percent of GDP). According to the RMI, 
this increase would likely be allocated largely to the infrastructure 
investment budget and would provide a substantial stimulus to the 
economy in the first years of the new Compact.
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    \11\ The level of grant assistance in 2001 was converted into 
fiscal year 2004 dollars for comparison purposes.
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Trust Funds May Be Insufficient to Replace Expiring Grants
    The amended Compacts were designed to build trust funds that, 
beginning in fiscal year 2024, yield annual earnings to replace grant 
assistance that ends in 2023. Both the FSM and the RMI are required to 
provide an initial contribution to their respective trust funds of $30 
million. In designing the trust funds, the Department of State assumed 
that the trust fund would earn a 6 percent rate of return.\12\ The 
amended Compacts do not address whether trust fund earnings should be 
sufficient to cover expiring federal services, but they do create a 
structure that sets aside earnings above 6 percent, should they occur, 
that could act as a buffer against years with low or negative trust 
fund returns. Importantly, whether the estimated value of the proposed 
trust funds would be sufficient to replace grants or create a buffer 
account would depend on the rate of return that is realized.\13\
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    \12\ The State Department chose a 6 percent return in order to 
reflect a conservative investment strategy. This rate of return can be 
compared with the current average forecasted return for long-term U.S. 
government bonds of 5.8 percent by the Congressional Budget Office.
    \13\ This analysis does not take into account volatile or negative 
returns. The sufficiency of either the FSM or the RMI trust fund to 
replace grants has not been tested under conditions of market 
volatility.

  f If the trust funds earn a 6 percent rate of return, then the FSM 
        trust fund would yield a return of $57 million in fiscal year 
        2023, an amount insufficient to replace expiring grants by an 
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        estimated value of $27 million.

    The RMI trust fund would yield a return of $33 million in fiscal 
year 2023, an estimated $5 million above the amount required to replace 
grants in fiscal year 2024. Nevertheless, the RMI trust fund would 
become insufficient for replacing grant funding by fiscal year 2040.

  f If the trust funds are comprised of both stocks (60 percent of the 
        portfolio) and long-term government bonds (40 percent of the 
        portfolio) such that the forecasted average return is around 
        7.9 percent, then both trust funds would yield returns 
        sufficient to replace expiring grants and to create a buffer 
        account. However, while the RMI trust fund should continue to 
        grow in perpetuity, the FSM trust fund would eventually deplete 
        the buffer account and fail to replace grant funding by fiscal 
        year 2048.
 amended compacts have strengthened accountability over u.s. assistance
    I will now discuss provisions in the amended Compacts designed to 
provide improved accountability over, and effectiveness of, U.S. 
assistance. This is an area where we have offered several 
recommendations in past years, as we have found accountability over 
past assistance to be lacking.\14\ In sum, most of our recommendations 
regarding future Compact assistance have been addressed with the 
introduction of strengthened accountability measures in the signed 
amended Compacts and related agreements. I must emphasize, however, 
that the extent to which these provisions will ultimately provide 
increased accountability over, and effectiveness of, future U.S. 
assistance will depend upon how diligently the provisions are 
implemented and monitored by all governments.
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    \14\ See U.S. General Accounting Office, Foreign Assistance: U.S. 
Funds to Two Micronesian Nations Had Little Impact on Economic 
Development, GAO/NSIAD-00-216 (Washington, D.C. Sept. 22, 2000) for a 
review of the first 12 years of direct Compact assistance.
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    The following summary describes key accountability measures 
included in the amended Compacts and related agreements:

  f The amended Compacts would require that grants be targeted to 
        priority areas such as health, education, the environment, and 
        public infrastructure. In both countries, 5 percent of the 
        amount dedicated to infrastructure, combined with a matching 
        amount from the island governments, would be placed in an 
        infrastructure maintenance fund.
  f Compact-related agreements with both countries (the so-called 
        ``fiscal procedures agreements'') would establish a joint 
        economic management committee for the FSM and the RMI that 
        would meet at least once annually. The duties of the committees 
        would include (1) reviewing planning documents and evaluating 
        island government progress to foster economic advancement and 
        budgetary self-reliance; (2) consulting with program and 
        service providers and other bilateral and multilateral partners 
        to coordinate or monitor the use of development assistance; (3) 
        reviewing audits; (4) reviewing performance outcomes in 
        relation to the previous year's grant funding level, terms, and 
        conditions; and (5) reviewing and approving grant allocations 
        (which would be binding) and performance objectives for the 
        upcoming year. Further, the fiscal procedures agreements would 
        give the United States control over the annual review process: 
        The United States would appoint three government members to 
        each committee, including the chairman, while the FSM or the 
        RMI would appoint two government members.
  f Grant conditions normally applicable to U.S. state and local 
        governments would apply to each grant. General terms and 
        conditions for the grants would include conformance to plans, 
        strategies, budgets, project specifications, architectural and 
        engineering specifications, and performance standards. Other 
        special conditions or restrictions could be attached to grants 
        as necessary.
  f The United States could withhold payments if either country fails 
        to comply with grant terms and conditions. In addition, funds 
        could be withheld if the FSM or RMI governments do not 
        cooperate in U.S. investigations regarding whether Compact 
        funds have been used for purposes other than those set forth in 
        the amended Compacts.
  f The fiscal procedures agreements would require numerous reporting 
        requirements for the two countries. For example, each country 
        must prepare strategic planning documents that are updated 
        regularly, annual budgets that propose sector expenditures and 
        performance measures, annual reports to the U.S. President 
        regarding the use of assistance, quarterly and annual financial 
        reports, and quarterly grant performance reports.
  f The amended Compacts' trust fund management agreements would grant 
        the U.S. government control over trust fund management: The 
        United States would appoint three members, including the 
        chairman, to a committee to administer the trust funds, while 
        the FSM or the RMI would appoint two members. After the initial 
        20 years, the trust fund committee would remain the same, 
        unless otherwise agreed by the original parties.

    The fiscal procedures agreements would require the joint economic 
management committees to consult with program providers in order to 
coordinate future U.S. assistance. However, we have seen no evidence 
demonstrating that an overall assessment of the appropriateness, 
effectiveness, and oversight of U.S. programs has been conducted, as we 
recommended.\15\
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    \15\ This recommendation was included in U.S. General Accounting 
Office, Foreign Assistance: Effectiveness and Accountability Problems 
Common in U.S. Programs to Assist Two Micronesian Nations, GAO-02-70 
(Washington, D.C.: Jan. 22, 2002).
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    The successful implementation of the many new accountability 
provisions will require a sustained commitment by the three governments 
to fulfill their new roles and responsibilities. Appropriate resources 
from the United States, the FSM, and the RMI represent one form of this 
commitment. While the amended Compacts do not address staffing issues, 
officials from Interior's Office of Insular Affairs have informed us 
that their office intends to post six staff in a new Honolulu office. 
Further, an Interior official noted that his office has brought one new 
staff on board in Washington, D.C., and intends to post one person to 
work in the RMI (one staff is already resident in the FSM). We have not 
conducted an assessment of Interior's staffing plan and rationale and 
cannot comment on the adequacy of the plan or whether it represents 
sufficient resources in the right location.
                amended compacts address other key areas
U.S. Military Access to Kwajalein Atoll Could Be Extended Until 2086
    The most significant defense-related change in the amended Compacts 
is the extension of U.S. military access to Kwajalein Atoll in the 
RMI.\16\ While the U.S. government had already secured access to 
Kwajalein until 2016 through the 1986 MUORA, the newly revised MUORA 
would grant the United States access until 2066, with an option to 
extend for an additional 20 years to 2086. According to a Department of 
Defense (DOD) official, recent DOD assessments have envisioned that 
access to Kwajalein would be needed well beyond 2016. He stated that 
DOD has not undertaken any further review of the topic, and none is 
currently planned. This official also stated that, given the high 
priority accorded to missile defense programs and to enhancing space 
operations and capabilities by the current administration, and the 
inability to project the likely improvement in key technologies beyond 
2023, the need to extend the MUORA beyond 2016 is persuasive. He also 
emphasized that the U.S. government has flexibility in that it can end 
its use of Kwajalein Atoll any time after 2023 by giving advance notice 
of 7 years and making a termination payment.
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    \16\ A few expiring provisions would be extended indefinitely in 
the amended Compacts. The ``defense veto'' has been extended. In 
addition, the ability of FSM and RMI citizens to volunteer to serve in 
the U.S. military would be extended.
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    We have estimated that the total cost of this extension would be 
$3.4 billion (to cover years 2017 through 2086).\17\ The majority of 
this funding ($2.3 billion) would be provided by the RMI government to 
Kwajalein Atoll landowners, while the remainder ($1.1 billion) would be 
used for development and impact on Kwajalein Atoll. According to a 
State Department official, there are approximately 80 landowners. Four 
landowners receive one-third of the annual payment, which is based on 
acreage owned. This landowner funding (along with all other Kwajalein-
related funds) through 2023 would not be provided by DOD but would 
instead continue as an Interior appropriation. Departmental 
responsibility for authorization and appropriation for Kwajalein-
related funding beyond 2023 has not been determined according to the 
Department of State. Of note, the Kwajalein Atoll landowners have not 
yet agreed to sign an amended land-use agreement with the RMI 
government to extend U.S. access to Kwajalein beyond 2016 at the 
funding levels established in the amended Compact.
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    \17\ Our figure of $3.4 billion is adjusted for inflation.
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Amended Compacts Would Strengthen Immigration Provisions
    While the original Compact's immigration provisions are not 
expiring, the Department of State targeted them as requiring changes. 
The amended Compacts would strengthen the immigration provisions of the 
Compact by adding new restrictions and expressly applying the 
provisions of the Immigration and Nationality Act of 1952, as amended 
(P.L. 82-414) to Compact nonimmigrants.\18\ There are several new 
immigration provisions in the amended Compacts that differ from those 
contained in the original Compact. For example, Compact nonimmigrants 
would now be required to carry a valid passport in order to be admitted 
into the United States. Further, children coming to the United States 
for the purpose of adoption would not be admissible under the amended 
Compacts. Instead, these children would have to apply for admission to 
the United States under the general immigration requirements for 
adopted children. In addition, the Attorney General would have the 
authority to issue regulations that specify the time and conditions of 
a Compact nonimmigrant's admission into the United States (under the 
original Compact, regulations could be promulgated to establish 
limitations on Compact nonimmigrants in U.S. territories or 
possessions).
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    \18\ As noted in the background section, FSM and RMI citizens who 
enter the United States are legally classified as ``nonimmigrants''--
that is, individuals who are in the United States temporarily as 
visitors, students, or workers.
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    In addition, the implementing legislation for the amended Compacts 
would provide $15 million annually for U.S. locations that experience 
costs associated with Compact nonimmigrants. This amount would not be 
adjusted for inflation, would be in effect for fiscal years 2004 
through 2023, and would total $300 million. Allocation of these funds 
between locations such as Hawaii, Guam, and the CNMI would be based on 
the number of qualified nonimmigrants in each location.
    Mr. Chairman and Members of the Committee, this completes my 
prepared statement. I would be happy to respond to any questions you or 
other Members of the Committee may have at this time.

    The Chairman. Thanks very much. I noticed in putting up the 
chart you hid a very important person here attending: the 
former chairman, Senator Bennett Johnson.
    Ms. Westin. That was certainly not my intention.
    The Chairman. We wanted to tell him we told her to do that. 
We thought you had been receiving too much visibility.
    I gather you have an interest, a client interest, Mr. 
Chairman. We welcome you. We welcome your attendance.
    Senator Bingaman, do you have any questions of any of the 
witnesses, in any order you would like?
    Senator Bingaman. Thank you very much, Mr. Chairman. Let me 
ask a couple of questions.
    First, the decline in the assistance level that is 
anticipated over the next 20 years--I guess I am just concerned 
that that anticipated decline may not leave these nations with 
sufficient funds to carry on their essential government 
operations.
    I gather you have analyzed that and decided that is 
adequate funding. Is that your position, Mr. Short?
    Mr. Short. Yes, sir, it is. If you look back at the 
original compact, there was a series of reductions in the 
compact, but they were in 5-year increments. The Government has 
found difficulty in accommodating especially the last of these 
so-called stepdowns.
    The declines or the decrements that we have installed in 
this compact are on an annual basis so that they are smaller 
over time and easier to adjust to.
    If you would go back to the original 1987 compact, at that 
time we were providing about $1,500 per capita per year. It is 
now down to about $690 to $620 in the two venues. It will 
probably drop to somewhere in the range of $300 to $400 per 
capita in another 20 years, which should reflect the increased 
development of the islands, basically increasing their revenue 
base.
    Senator Bingaman. Do either of the other witnesses have a 
comment on the adequacy of these projected payments?
    Secretary Cohen. I would concur with Mr. Short that these 
payments should be adequate. It is our hope over a 20-year 
program if our targeted assistance succeeds in developing the 
economic infrastructure of the Freely Associated States and 
increasing economic development opportunities, increasing basic 
health and education levels, that the Freely Associated States 
should have a higher degree of self-sufficiency at the end of 
20 years.
    Senator Bingaman. Ms. Westin.
    Ms. Westin. We have looked at the trend in per capita 
income for both countries. Frankly, over the life of the former 
compact, the FSM showed a greater ability to sustain the loss 
of grant assistance and the stepdowns. You see less of a 
decline in their per capita income.
    I think that the new accountability provisions in the 
compact will have quite an impact, because as we recorded in 
one of our first reports, the economic assistance that had been 
provided under the first compact in the first 15 years that we 
looked at had not provided the type of economic growth and 
stimulus you would like to see.
    I think it is really important that the grants are now 
sector grants, targeted to health, education, public 
infrastructure. I think that the existence of the joint 
economic management committees will also provide a venue for 
greater assistance and oversight in the spending of these 
funds, and we hope lead to greater economic development.
    Senator Bingaman. Let me ask about programs that FEMA has 
been operating. As I understand it, the proposal here is to 
shift those over to the Office of Foreign Disaster Assistance.
    I am also informed that the Office of Foreign Disaster 
Assistance does not replace destroyed or damaged 
infrastructure. How does this change affect the prospects for 
economic development? If there is in fact some kind of disaster 
that destroys infrastructure, how do we propose to assist in 
the reconstruction of that in such circumstance?
    Mr. Short. Sir, you are correct in that the 
administration's proposal you have before you would substitute 
the Office of Foreign Disaster Assistance for FEMA, that has 
been operating out there during the trusteeship period and 
during the last 17 years.
    I would note that OFDA, the Office of Foreign Disaster 
Assistance, has been operative in Palau the entire period their 
compact has been in effect, and it is a program that the U.S. 
Government uses everywhere else around the world in foreign 
disaster assistance and recovery.
    This particular program does not have one element that FEMA 
includes; that is, capital replacement on a matching basis.
    Senator Bingaman. Do you think that is okay?
    Mr. Short. We have provided a fund. We have provided 
$200,000 a year that we matched by the respective state to 
accrue a fund that can respond to whatever--whether it is 
public or private--loss of property.
    Senator Bingaman. It sounds like a fairly modest amount of 
money, if there were really any kind of disaster.
    Let me also ask about some of the outside-the-compact 
programs, the Pell Grants and the Head Start. Do we assume that 
those will be continued in other legislation? There is no 
dealing with them in this compact. Do we assume they will be 
continued by the Congress in the future? If so, if they were 
not continued, what would be the effect?
    Mr. Short. Sir, the compact recognizes--and I noted in my 
opening statement that there are a number of Federal programs 
that operate in the two Micronesian states outside the context 
of the compact provisions, but are recognized in the compact. 
The document you have before you would continue those, but 
subject to the congressional action. So we are not taking a 
position on those Federal programs. They exist to the degree 
that Congress continues to apply them to the FAS, Federated 
States of Micronesia and the Marshall Islands.
    I would note that the chairman incorporated in the record a 
policy statement that we provided to him recently that laid out 
the policy with regard to Federal programs and the relationship 
with the compact.
    There have been a series of education programs over the 
last few years that have been stricken, or Micronesian access 
to them has been withdrawn. It has had an impact on their 
educational system.
    As you correctly point out, the Pell Grant program, which 
is scheduled for reauthorization in fiscal year 2004, could 
have a severe impact in that the land grant colleges, the 
Micronesian junior colleges, receive the bulk of their funding 
through the Pell Grant program.
    Senator Bingaman. So you are taking no position as to 
whether or not we ought to continue with that funding; but you 
are just saying if we don't, the ability of that school to 
continue as it has would be in great jeopardy?
    Mr. Short. Yes, sir.
    And further, the title II funding in the compact was not 
structured to replace expiring Federal programs, or take the 
place of any program that is eliminated now or could be 
eliminated in the future.
    Senator Bingaman. Thank you very much, Mr. Chairman.
    The Chairman. Senator Akaka, do you have some questions?
    Senator Akaka. Yes, sir.
    The Chairman. Senator, I will leave for a few minutes, but 
I will be right back. I have a couple questions also.
    Senator Akaka [presiding]. Mr. Short, congratulations on 
completing negotiations. I want you to know that I appreciate 
your continued willingness to discuss the compact with me and 
my staff over time and during the negotiating process also. I 
look forward to continuing to work with you on the compact.
    As a follow-up to Senator Bingaman's question, I remain 
concerned about the fact that the proposal of FEMA does not 
include continuing program support from FEMA. I notice instead 
that relief is provided through the USAID program, as Senator 
Bingaman mentioned.
    My only question now is, could you please explain why 
FEMA's role has been discontinued?
    Mr. Short. FEMA has had difficulties--first of all, this is 
a foreign area. FEMA is basically a domestic program. FEMA has 
encountered a number of problems simply operating in these two 
states because it is not the United States, where they are 
really set up to operate. That is the principal reason.
    Senator Akaka. Do you have any comments about the ability 
of either trust funds to substantively sustain economic self-
sufficiency for FSM and RMI after 20 years, particularly in the 
light of GAO's testimony that the FSM trust fund would be 
insufficient to replace expiring annual grants; and that the 
RMI trust fund would replace grants in fiscal year 2024, but 
would become insufficient for this purpose by fiscal year 2040? 
Do you have any comments on that?
    Mr. Short. I think, as was pointed out in Ms. Westin's 
testimony, the sufficiency or insufficiency is largely a factor 
of one's assumptions on rate of return to the point where, at 6 
percent rate of return, the numbers may be on the low side; at 
7 percent, they are adequate. We feel that the trust funds will 
provide an ongoing source of revenue that will commence in 
2004.
    It is important to note that the provisions of the trust 
fund are set up in such a way that there can be no changed 
circumstances or no early withdrawals; so all of the resources, 
both United States and Micronesian, that are contributing to 
the trust funds will be there and will have earned interest 
until 2024. The mechanism thereafter is that the corpus will 
not be touched. Only the proceeds, the annual proceeds will be 
distributed.
    We cannot guarantee a one-for-one replacement, but we feel 
this trust fund gives them a high degree of assurance of 
continued economic assistance almost in perpetuity.
    Senator Akaka. In your written testimony, you stated that 
improving the infrastructure in RMI and FSM will improve the 
adverse impact of migrations. Can you give your best estimate 
on how many years it will be before such a benefit becomes 
viable?
    Mr. Short. Mr. Cohen might be best to answer that.
    Secretary Cohen. Yes, Senator. To be honest with you, I 
can't give an actual estimate as to how long the process will 
take. We hope that over time, gradually, we will be improving 
the conditions, especially health, education, and lack of 
economic opportunity--which the GAO identified as the primary 
causes of migration--to an extent where people will be less 
motivated to migrate.
    But it will be very difficult to estimate how long it would 
take, nor do we even pretend that migration will stop because 
of our program.
    Senator Akaka. Mr. Short, in your written testimony you 
list the modified immigration provisions, which improve the 
United States' ability to regulate RMI and FSM migrants who are 
eligible for admission as a factor to alleviate the adverse 
impacts of migration.
    I would like to make it clear that the State of Hawaii did 
not ask for modifications to the immigration provisions to 
alleviate adverse impacts caused by the migration of FAS 
citizens to Hawaii. While our criminal system has borne some 
costs, the majority of our costs are in education and health. 
Can you clarify how you believe the immigration provisions 
address adverse consequences of migration?
    Mr. Short. Sir, let me just give you one example. That is 
basically reporting of felons between our government and the 
respective Micronesian governments. We have what we call a 
watch list, where information is provided by the FAS 
government. That information, for example, is in Hawaii. If a 
Micronesian citizen shows up in Honolulu and he or she is on 
that watch list or has been previously removed, that person 
would not be admitted.
    So there are some safeguards, first of all, with regard to 
Micronesian citizens entering the United States. A greater 
concern is that a third country national somehow could obtain a 
Micronesian passport of some type, whether through purchase, 
marriage, or some other device, and then use that to enter the 
United States.
    Senator Akaka. Mr. Chairman, my time has expired.
    The Chairman. Senator, did you have any more questions?
    Senator Akaka. I do have.
    The Chairman. Go ahead.
    Senator Akaka. Colonel Short, I remain very concerned about 
efforts made by those who misunderstand the intent of the 
Compact of Free Association who have sought to eliminate the 
eligibility of FAS citizens for Federal programs. It seems that 
we must keep a vigilant watch over any legislation 
reauthorizing Federal programs to ensure that the eligibility 
of FAS citizens is not eliminated.
    For the record, can you clarify whether or not the 
provisions intended to improve the educational and medical 
infrastructure in the legislative proposal were intended to 
replace the current Federal programs provided to FAS citizens?
    Mr. Short. I would be happy to respond to that, sir.
    Title II support, the economic assistance and the compact, 
was not structured to substitute for or replace any existing 
Federal programs. We do not take any position on continuation 
or reauthorization of those programs. That language is also 
restated in the policy statement the chairman already entered 
into the record.
    Senator Akaka. Secretary Cohen, I was pleased to review 
your comments about increased accountability provisions in the 
proposed legislation. I think we can all agree that the United 
States, as well as the RMI and FSM, share the blame for any 
accountability issues.
    I am pleased to see that we have provisions and proposals 
that improve accountability. I believe a big part of the 
problem with the grants during the first 17 years of the 
compact is that policy implementation did not take into account 
cultural differences. For example, some of the economic 
development challenges are based on the land tenure system 
utilized in the FAS. Without taking these issues into 
consideration, economic development policies will not work.
    As you were developing these accountability provisions, 
what steps did you take to consider implementation of these 
policies in a culturally sensitive manner? What kinds of 
provisions are included in the compact to allow for adjustments 
to the implementation of policies if such modifications are 
necessary?
    Secretary Cohen. Thank you for the question, Senator. The 
process is structured to give due deference to the priorities 
that are set by the Freely Associated States themselves, which 
of course will presumably take into account the cultural 
context in which the policies will have to exist in.
    All of the allocations of the grants are going to be 
approved by joint committees, so there will be FSM 
representation on the U.S.-FSM joint committees and there will 
be RMI representation on the U.S.-RMI joint committee. The 
United States has three votes and the Freely Associated States 
has two votes, but we will be acting together to consider the 
proposals to allocate compact funds.
    But as I noted, the initial proposal to allocate the funds 
will come from the Freely Associated States themselves. It will 
not be the job of the joint committee to substitute its 
judgment for the judgment of the RMI or the FSM. The job of the 
joint committee will be to make sure that the letter and spirit 
of the compact is being protected so that the allocations, for 
example, don't fail to give proper emphasis to health and 
education, as the compact requires.
    By giving due deference to the priorities set by the Freely 
Associated States, we think we are ensuring that all of the 
policies will properly account for the cultural context that 
you are so right to point out.
    Senator Akaka. Mr. Cohen, we have worked closely with your 
office and the Department of the Interior over the past 17 
years to address costs borne by the State of Hawaii, Guam, 
CNMI, and American Samoa which we refer to as ``compact 
impact.''
    As you know, Hawaii only started receiving funds 2 years 
ago, at minimal rates. I am pleased that the legislative 
proposal includes $15 million in mandatory funding for compact 
impact to be distributed annually between Hawaii, Guam, CNMI 
and American Samoa. This figure doesn't even begin to address 
the costs borne by these jurisdictions.
    I have two questions. One is, how did you determine that 
the $15 million would be appropriate for the costs of compact 
impact aid? Is there any provision in the legislative proposal 
that would reimburse Hawaii, Guam, CNMI, and American Samoa for 
the costs incurred over the past 17 years due to the migration 
of FAS citizens?
    Secretary Cohen. Your first question, Senator, how we came 
up with $15 million--we don't pretend that the $15 million is 
some sort of mathematical estimate that is designed to fully 
indemnify the State of Hawaii or any of the territories for any 
costs that may occur on an annually basis.
    We basically looked at levels of compact impact funds that 
had been appropriated by Congress in the past and significantly 
increased the average amount, and significantly increased even 
the amount that had been appropriated previously, and felt that 
was a level we were comfortable with in this fiscal climate.
    We are looking more with this $15 million, or $300 million 
over 20 years, to the future. We are looking for a level that 
we are comfortable committing to on a mandatory basis every 
year for the next 20 years. We don't know what is going to 
happen in the future, but this is an amount that will be there 
no matter what if this legislation is passed.
    It doesn't mean that it will necessarily fully compensate 
the State of Hawaii or any of the other territories for the 
costs they incur over the next 20 years. But if our program is 
successful, the next impact of the compact should be much, much 
less.
    As I noted before, hopefully we will dissuade some people 
from migrating by making conditions better from the Freely 
Associated States. But also, if the people that do migrate are 
better educated and are in better health, the impact of 
migration will be less. There will be more established 
communities in the State of Hawaii and the territories that 
will more likely be net contributors rather than net users of 
social services.
    We have seen when you have strong, established communities 
with a high rate of employment, that they are clearly net 
contributors. We are very confident that this is going to 
happen over the course of this program in the State of Hawaii, 
as well.
    The program is our best effort to help address the impact 
of migration, but we thought it would be impossible to come up 
with a mathematical formula to fully indemnify the states and 
the territories for the impact that they suffer, nor do we 
think that that would necessarily be appropriate.
    Senator Akaka. Mr. Chairman, I have one last question. But 
before I ask the question to Ms. Westin, I just recently 
received a copy of the State of Hawaii's compact impact report 
for fiscal year 2002, and ask that it be included in the 
record.
    The Chairman. Without objection.
    Senator Akaka. Ms. Westin, you have testified that the 
trust funds for RMI and FSM which are proposed in this 
legislation are inadequate to replace the expiring grant system 
in 20 years for the FSM. RMI would likely face the same problem 
in 2040.
    How would you recommend we address this issue?
    Ms. Westin. As Mr. Short has testified, there is nothing in 
the compact that says that the annual earnings from the trust 
funds starting in the year 2024 will necessarily completely 
replace the grant assistance.
    Our analysis was just to take a couple of different rates 
of return to try to get an idea of how close the replacement 
would be, and then we looked to see that for the FSM, there is 
not going to be enough money even in 2024 at the 6 percent rate 
of return, which we understood the State Department to be using 
as its best assumption of the rate of return.
    Furthermore, for the RMI, it would last maybe about 16 
years and then run out. But again, there is nothing in the 
compact that says that full replacement is the objective of the 
trust fund.
    I would point out that we looked at other small island 
nations that have been helped by other countries. In several of 
them, a trust fund does seem to be something that has been very 
useful for them.
    Senator Akaka. Thank you very much.
    Mr. Chairman, I want to thank the panel for their 
responses. That concludes my questioning.
    The Chairman. Panel, I know we are running out of time, and 
we want to hear the others, some of whom have come from long 
distances.
    First, I have 10 or 15 questions. I will submit them to 
you. We will try to commit to get this legislation out of this 
committee in a timely manner and to the floor. Even though we 
are on a short fuse, we will try very hard. I will ask the 
leader to make time for it on the floor so we can get it done.
    Let me ask a couple of questions that bother me. First, we 
have all for a long time talked of trust funds. As some of you 
know, I know a little bit about budgeting, so I know that the 
Federal Government has 356 trust funds. Most of them are on 
budget. Every now and then Congress gets a wild idea and takes 
them off-budget, and thinks they have done some great act of 
integrity by taking it off-budget.
    But here, this is a most intriguing thing to me that we are 
talking about a trust fund. I am not suggesting by using the 
word ``intriguing'' that I am opposed. It is just that what we 
are saying is we want to find a way to get around, at a point 
in time, payments and want to have some money ready to take its 
place.
    We are the same entity that would have made the payments 
had there not been a trust fund. The United States is going to 
put money in the trust fund. Had we not had a trust fund, we 
would be paying money to the island. The United States would be 
the same source.
    Mr. Short. Sir, I would like to make a comment on that.
    The Chairman. It is after the $30 million.
    Mr. Short. The point I was going to make is that both 
governments are committed to contribute $30 million on the 
front end. That is not a limit on future contributions. 
Further, the trust fund has a built-in mechanism whereby it can 
accommodate subsequent contributors, whether that be another 
government, the Asian Development Bank, or some other outside 
organization.
    The Chairman. Well, I think I understand. There is not 
going to be any benevolence around. Nobody is going to be 
benevolent and contribute.
    First of all, the islands cannot contribute more. They are 
too poor. The U.S. Government is not going to contribute more. 
If we were going to contribute more, we wouldn't be worried 
about doing this. If you have read about it today, we only have 
a deficit of $452 billion.
    Now, I didn't read all this in detail, but most of the 
trust funds that we have spoken of before, we set them up 
hoping that they would make more money than by leaving them in 
the Federal Treasury, where they generally make nothing, just 
like Social Security.
    Do you know how many times we have heard, let's take all 
their money and put it in the trust fund? And the Social 
Security answers, we always thought it was in the trust fund. 
It is not, you understand; it is in the Federal Treasury.
    Where is this money going to go?
    Secretary Cohen. The money will be invested in actually a 
fairly limited list of----
    The Chairman. Who is going to be in charge of it?
    Secretary Cohen. There is going to be a board. It will 
likely mirror the joint committees that are responsible for 
allocation of the compact grants.
    The Chairman. Do we expect this to be a good investment so 
that it yields good return, or extremely safe and yields little 
or no return?
    Secretary Cohen. Hopefully, somewhere in the middle. The 
list of permitted investments--which I don't have with me--
conceptually I can tell you it is your standard list of fairly 
safe permitted investments. We are not going to allow 
speculation in hedge funds or things of that sort.
    The Chairman. Corporate stock?
    Secretary Cohen. I am not sure if the stock of private 
companies is a permissible investment. We can find that 
information out for you.
    The Chairman. I think you should find out for me.
    I think it is pretty obvious to me that the safest fund or 
the safest place, aside from Treasury bills--which is 
interesting, because then we set up the trust fund in order not 
to have the money so we won't have to pay the money later. Then 
we invest it in ourselves in U.S. Treasury bills. So it would 
seem to me that would be foolish, other than pretty good 
paperwork. It should yield more revenue than that.
    I think you would probably find that anybody telling you 
would say that it ought to be invested in common stocks of the 
U.S. corporations, if you've got a long term.
    But you take a look. I can assure you that I will be 
interested. That is one thing I will be interested in knowing, 
whether we are going to invest it in such a way that it is most 
apt to yield the best return. If it is a 1- or 5-year 
investment, I wouldn't say that; but if it is a 25- or 30-year 
investment, it has kind of been proven that the best investment 
going is the corporate stock of the United States.
    Now, what are we trying to do? The population of these 
islands is getting younger all the time, which means the adults 
leave. Children are born, and of course they don't leave 
quickly; they stay there. One of the things we must do is 
educate them better, right?
    Secretary Cohen. Yes.
    The Chairman. What are we educating them better for? I am 
all for that--but what for? Is it so they can leave sooner and 
get a good job, a better job somewhere, or what?
    Secretary Cohen. Mr. Chairman, sir, it is our belief that 
to the extent that conditions in one's own country are 
acceptable, economically acceptable, and the quality of life is 
acceptable, people would rather stay at home than to go to a 
foreign land. So it is our hope that by improving education and 
health and economic opportunity----
    The Chairman. Don't put all those in the same boat. 
Economic opportunity may not follow if there is nothing for 
economic development to build on. What would the economic 
development that might occur there be?
    Secretary Cohen. We are going to have to explore that over 
20 years. Certain things that have been looked at in the past 
have included, of course, tuna, tuna processing. There have 
been some attempts----
    The Chairman. Little tiny job numbers, very few; right?
    Secretary Cohen. Well, the efforts so far have been modest, 
but of course we are talking about modest-sized populations.
    The Chairman. I understand. I am most interested in 
whatever we can do to improve the educational standards, 
because it does seems to me that if there is one thing we are 
vulnerable to as a Nation with reference to relationships like 
this, it would be if we were to continue a relationship knowing 
that the educational standards are not as good as they ought to 
be.
    Now, as good as they ought to be for what? As good as they 
ought to be for any adult to attain a good standard of living 
in this world; not on these islands only, because there is no 
work on these islands.
    So we wouldn't be concerned if it was just that. It is when 
they leave there and go wherever they go, to Hawaii, we are 
hoping that they are educated better so they can get good jobs. 
Is that correct?
    Secretary Cohen. That is our hope. We are hoping to educate 
people generally.
    The Chairman. Now, let's see. One thing that impresses me, 
and I wonder if you could tell me how it works, all of the 
people there have a card that says, ``My name is. I am a''--and 
it says what they are. And they are not American citizens, 
right?
    Secretary Cohen. That is correct, they are not American 
citizens.
    The Chairman. They go back and forth and show the card. 
They can have a savings account in America or on the islands, 
if they like, but they move back and forth with ease. Is that 
correct?
    Secretary Cohen. Yes, sir. They are given the right of 
migration.
    The Chairman. Do they have to have passports?
    Mr. Short. Sir, I will address that. The present compact as 
it now stands does not require a passport to enter the United 
States. It simply requires some sort of identification. The 
amended compact that you are considering would require a 
machine-readable passport to be carried and presented by every 
Micronesian citizen as they enter the United States.
    The Chairman. Why?
    Mr. Short. Primarily for security.
    The Chairman. What is dangerous about this situation?
    Mr. Short. The danger is that these people enter the United 
States without resort to any sort of quota or visas. They 
simply show up at a U.S. port of entry and present themselves 
for entry into the United States. If you were coming----
    The Chairman. Does it have a picture on the card?
    Mr. Short. They may or may not on these cards.
    The Chairman. Why don't you do that?
    Mr. Short. The passport----
    The Chairman. Why don't you do that, instead of having a 
passport?
    Mr. Short. A passport also is the international indicia of 
sovereignty, and it is simply the way that countries interact 
when a citizen from one country travels to another sovereign 
nation.
    The Chairman. I am telling you, I'm going to be for it if I 
am convinced that we are not going to have some horsing around. 
We either have free passage like we have, or we don't. If we 
don't, we are going to clutter it all up with something, and we 
ought to make sure that everybody knows that.
    Normally, passports clutter up things. That is okay. We 
have got to have them, but they are not the normal thing that 
these islanders have had. They have just had these certificates 
of whatever you call them. They are certificates of non-
citizenship, but of residency of their country, right?
    Mr. Short. In many cases, yes. Many do carry a passport 
because no other Nation in the world will admit them without a 
passport.
    The Chairman. The reason that I am so intrigued, I am 
wondering why we don't do something like this with Mexico, even 
though they are not in the same relationship. Why can't a 
Mexican worker just carry a card, and when he is finished 
working go home, and when he wants to come back, come back?
    As a matter of fact, could I ask, do any of you know 
whether the current system is working? I'm going to ask if 
passports would do it; but is it working?
    Mr. Short. It is working reasonably well. As I indicated in 
addressing the Senator from Hawaii's questions concerning some 
of the reasons we have put some of the controls in, it is to 
control access to the United States by people with criminal 
convictions, people who have been removed, and that sort of 
thing.
    So it has worked adequately in the past, but it simply does 
not fit the situation post-9/11 when we simply need to have 
reasonably stringent controls on our borders. The real concern 
is that a third-party person, not a Micronesian citizen, could 
show up at a U.S. port of entry and claim to be a Micronesian 
and enter the United States.
    The Chairman. Since I don't know, where would most migrant 
Micronesians enter the United States?
    Mr. Short. Sir, through two points, either through Guam or 
Hawaii.
    The Chairman. And do we know, Senator Akaka, is the entry 
at Hawaii difficult? Is this work? Do you know of serious 
problems regarding this, or not?
    Senator Akaka. Apparently they have been able to come in 
rather freely.
    The Chairman. You haven't heard of any exceptional problems 
regarding this network? They show something and they come in, 
and when they want to leave, they show something and they 
leave?
    Senator Akaka. That's correct.
    The Chairman. You are not familiar with Guam, so you don't 
know.
    Senator Akaka. No.
    The Chairman. I think that is it. I want to thank you. 
Hard, hard work goes into this. Nobody thanks you all for it. 
We thank you all for it.
    We hope you have the investment provisions right. I would 
assume you wouldn't have put them in there without talking to 
the Treasury Department and other people that know about trust 
funds. Is that correct, Mr. Cohen?
    Secretary Cohen. That's correct.
    The Chairman. Thank you very much.
    Let's take the next witnesses, The Honorable Secretary of 
Economic Affairs For Federated States, Sebastian Anafal; and 
the Honorable Gerald Zackios, Minister of Foreign Affairs, the 
government of the Republic of the Marshall Islands.
    Thank you very much, both of you, and we welcome you.
    Mr. Secretary, it is a pleasure having you here. It is good 
to meet you. Would you please proceed.

    STATEMENT OF SEBASTIAN ANEFAL, SECRETARY, DEPARTMENT OF 
             ECONOMIC AFFAIRS, FEDERATED STATES OF 
                           MICRONESIA

    Secretary Anefal. Thank you, Mr. Chairman.
    Mr. Chairman and members, I have the honor to appear before 
you today on behalf of the Federated States of Micronesia, and 
wish to thank you and members of your committee for holding 
this important and timely hearing on a matter of utmost 
importance to my nation.
    Mr. Chairman, we joined the United States in signing the 
compact agreements now before you in May of this year, and look 
forward to working with members and staff to address concerns 
we have regarding the proposed legislation.
    The sectoral approach to grant assistance in the new 
agreement is a marked change from past practice. So, too, are 
the new accountability and oversight requirements which we have 
welcomed and are committed to.
    Along these lines, the FSM proposed the notion of a joint 
committee to oversee implementation of the compact. The Joint 
Economic Management Committee, as it is envisioned now, 
provides a mechanism for constructive and consistent dialogue.
    While the U.S. offer of assistance under the compact 
amendments is generous, the level proposed falls short of the 
annual basis we have identified as the absolute minimum 
required to sustain programs.
    First and foremost, we are concerned about the level of 
grant and trust fund assistance. The rationale for the economic 
package is to establish economic stability throughout the 20-
year period and beyond.
    We presented our detailed economic analysis to the U.S. 
negotiator, and the administration has never disputed our 
analysis. Instead, we were told that the administration 
proposal is simply the maximum that the United States would 
offer; in a sense, a political decision, rather than being 
based on sound economic analysis.
    Given the administration's best and final offer and time 
constraints, we had little choice but to accept the submittal 
to Congress. However, the sum of annual grant and trust fund 
contributions falls $7 million short--on an annual basis--of 
what we find is the absolute minimum needed to sustain our 
economy.
    While the overall assistance level in the proposed 
agreement, $92 million, would seem to represent an increase 
over the grant level at the end of the previous arrangements, 
this is misleading. Twenty million dollars of this amount 
annually is not available in the initial 20 years, as it will 
be put aside for the trust fund. In addition, beginning in the 
fourth year, the grant amount available to the FSM will be 
decreased by $800,000 annually.
    The adequacy of the trust fund is also a profoundly 
important aspect of our long-term development strategy as it 
gives our people and potential investors a sense of hope and 
confidence in a sustainable future. We hope that expressed 
misgivings along this line will not be ignored.
    Our second main concern is the inadequacy of inflation 
adjustment. FSM seeks the assistance of the Congress in 
providing full inflation adjustment, and in adjusting the base 
year to 2001, the last year of the original compact funding.
    Another area of concern is the loss of FEMA disaster 
assistance. Without reinstatement of this important benefit by 
the Congress, the substantial investment made to this point by 
the United States and those to be made over the next 20 years 
could be lost.
    Our fourth concern is the possible loss of eligibility for 
Federal programs such as the No Child Left Behind, Pell grants, 
Head Start, and IDEA, among others, which continue to provide 
critical support to the education and well-being of our people. 
Continuation of these successful Federal programs is vital. For 
example, without Pell grants, our college would collapse.
    The administration has clarified that its proposal for this 
amended compact was based on the assumption that Federal 
programs would continue at their current levels. We hope that 
Congress in its wisdom will take note of this important policy 
statement and act to ensure the continuation of these 
invaluable programs.
    Mr. Chairman, during our negotiations we also sought to 
address nonfinancial methods by which the United States could 
enhance the FSM's growth prospects for the future. We seek to 
maintain and modernize tax and trade provisions in the compact 
that will enhance the economic linkages between our two nations 
by stimulating private investment.
    Finally, the proposal before you includes changes to the 
non-expiring immigration provisions of the compact. These 
changes have been made at the insistence of the administration. 
The FSM fully understands the U.S. concerns over security, and 
supports the United States in all its positions against 
terrorism and transnational crime. The FSM wants to do its part 
to assist the United States in its important task of securing 
peace and securing its borders.
    Mr. Chairman, allow me to turn to elements of the 
legislation that are not part of the proposed compact 
amendment.
    I want you to know that the FSM was not consulted by the 
administration in drafting proposed changes to the Compact Act. 
When we finally were given an opportunity to review the 
administration's proposed changes, we identified at least three 
major problems for which we seek adjustments by the Congress.
    First, there is the issue of transition to a machine-
readable passport scheme. This is a concept to which the FSM 
has repeatedly pledged its support. However, we find it quite 
alarming that the administration has seen fit, unilaterally and 
without prior notice, to set aside $250,000 from the compacts' 
capacity-building assistance for this purpose.
    Second is that the administration insists on mandating the 
FSM's development of a more effective immigrant screening 
system. We are given just 1 year to do this or risk funding 
loss. Again, the FSM has repeatedly agreed to undertake steps 
to implement such systems. However--and by all reasonable 
estimates--it is an extremely complex and expensive undertaking 
that could not reasonably be completed by FSM in 1 year.
    Third, the unilateral changes in the language concern 
provisions of compensatory Federal programs. In 1986, Congress 
initiated and passed this language as partial compensation for 
loss of tax and trade benefits agreed to by the administration.
    Unexpectedly, the United States has now proposed to alter 
the language of the compensatory provisions to make them 
optional for U.S. agencies. These changes undermine the good 
faith in which we have negotiated, and are not indicative of 
the long-standing good efforts and mutual understanding that we 
have shared with the United States throughout our history.
    Mr. Chairman, I have highlighted a number of problems posed 
by the compact amendments and the Compact Act proposals. We 
would like to propose the Congress include in its legislation a 
provision for a 3-year comprehensive congressional review of 
the health of the FSM economy to examine whether a need then 
exists for further adjustments.
    In conclusion, Mr. Chairman, the compact was a success. 
Both the United States and the FSM can be rightly proud of the 
unique bonds we have forged in the compact period. We hope to 
be equally proud of the course that will be set for the next 20 
years and beyond. We urge Congress to act favorably on the 
compact legislation, and make the adjustments necessary to 
ensure a solid foundation for the future.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Anefal follows:]
   Prepared Statement of Sebastian Anefal, Secretary, Department of 
            Economic Affairs, Federated States of Micronesia
    Mr. Chairman: I have the honor to appear before you today on behalf 
of the Federated States of Micronesia (FSM), and wish to thank you and 
the Members of your Committee for holding this important and timely 
hearing on a matter of utmost importance to my nation.
    Mr. Chairman, the FSM has now concluded negotiations with the 
Administration on a package of Compact amendments. We joined the U.S. 
in signing these agreements in May of this year, and look forward to 
working with Members and staff to address concerns we have regarding 
the proposed legislation now before you so that Congress may pass this 
important legislation on a timely basis.
    We stand at an important juncture in the special relationship 
between our nations. The Compact as it is to be amended, intends to 
further our mutual commitment to preserve the peace and stability of 
the central Pacific, and to promote the continued development of the 
FSM on a sustainable basis. Mr. Chairman, these documents will 
profoundly affect the fate of the Micronesian people and the security 
and stability of the region for the next twenty years and beyond.
    The sectoral approach to grant assistance in the new agreement is a 
marked change from past practice. As such it will require 
implementation adjustments by both sides. Nonetheless, it provides the 
best mechanism for reaching our mutual goals and will direct assistance 
to where it is needed most.
    Similarly, we welcome and are committed to implementing new 
accountability and oversight requirements. It is no secret that there 
have been mistakes on both sides under the original Compact. While we 
were not always in agreement with the tone and findings of the GAO's 
reports during the past several years, we are thankful to the Congress 
for undertaking this important initiative and shedding light on 
deficiencies. Their work assisted both the U.S. and FSM negotiators in 
addressing these issues in the amendment documents.
    At the outset of the talks, the FSM proposed the notion of a joint 
committee to oversee implementation of the Compact. This proposal was 
welcomed by the U.S., and ultimately took the form of the proposed 
Joint Economic Management Committee (JEMCO). The JEMCO will consist of 
representatives from the U.S. and FSM, with a U.S. majority, and will 
meet regularly to identify any problems in Compact implementation and 
develop prompt and cooperative responses. This approach certainly adds 
to the measures available to make proportional and selective 
interventions to ensure effective implementation of the amended 
Compact; however, and most importantly, the JEMCO provides a mechanism 
for constructive, consultative and consistent dialogue that was missing 
in the past.
    We appreciate the generous nature of the U.S. proposal. However, 
there remain certain provisions of the Administration's proposal that 
cause the FSM serious concern. Unless addressed by the U.S. Congress 
during the approval process, these problems hold the potential to 
unravel the carefully-woven fabric of the Compact package. And that 
package, Mr. Chairman, was designed in close consultation with 
professional economists and adopted by the FSM leadership to achieve 
our mutual goal of ultimate self-reliance.
    First and foremost, our concerns center on the level of economic 
assistance over the next twenty years. Beginning in 1997, the FSM began 
work on constructing a comprehensive economic analysis of its needs 
over the next twenty years. This analysis was at the core of our 
original economic proposal made in 1999, which called for economic 
assistance at the level of $84 million annually over the next twenty 
years. Six months later, the U.S. responded with an initial offer of 
$61 million annually that fell far short of our annual needs and 
disastrously short of creating a Trust Fund sufficient to secure 
stability at the end of the period. After further analysis of ongoing 
macroeconomic trends, the FSM was able to lower its minimum required 
figure by $5 million annually. Still, the U.S. proposal as reflected in 
the legislation before you falls $7 million annually short of that 
level.
    The FSM demonstrated that such a marked reduction in current levels 
of assistance would threaten the viability of the nation from the 
outset. The rationale for the economic package was to provide economic 
stability throughout the twenty year period, while allowing for a 
gradual reduction in the level of the FSM's reliance on annual 
assistance as the economy grows. On numerous occasions we presented our 
economic reasoning to the U.S. negotiator, and at no time were they met 
with countering arguments. Neither has there ever been any dispute with 
the analysis or the anticipated outcomes based on economic modeling. 
Instead, we were told that the U.S. assistance proposal was simply the 
maximum that the U.S. could offer--in essence, the result of a 
political decision rather than being based on sound and responsible 
economic analysis.
    Fortunately, and through the hard work of negotiators on both 
sides, we were able to bridge the gap to the point where we could agree 
on submitting the document for Congressional consideration. However the 
sum of the annual grant and Trust Fund contributions still falls $7 
million short on an annual basis of what we identified as the absolute 
minimum required for the FSM economy to achieve our mutual goals. Those 
being, among others, to gradually improve economic vitality and living 
standards during the next twenty years and to have a sufficiently 
funded Trust Fund to achieve self-reliance.
    In addition to the effects of the initial proposed reduction in 
grant funding in 2004, the FSM is facing significant pressures placed 
on the economy by the need to raise the necessary $30 million trust 
fund contribution and by the reduction in government capacity due to 
new restrictions on the funds. Quite frankly, the potential for 
economic instability exists. The $7 million in additional annual 
funding requested by the FSM may not seem like much in the overall 
scheme of the Compact or relative to the U.S. budget, but it is 
critical to the health of the FSM's economy, the well-being of our 
people, and to the future of our nation.
    The adequacy of the Trust Fund is also a profoundly important 
aspect of our long-term development strategy as it gives our people and 
potential investors a sense of hope and confidence in a sustainable 
future. In considering the legislative package as submitted, the U.S. 
Congress should take note of the stated Compact goals and determine 
whether the funding levels and mechanisms can produce the desired 
result, making such adjustments as it may deem necessary.
    There are several other aspects of the Compact proposals that are 
troublesome from our point of view. First, there is the inadequacy of 
the inflation adjustment. This involves two separate issues--the 
formula to calculate the annual adjustment and the base year for 
adjustment. The FSM seeks the assistance of the Congress in restoring 
full inflation adjustment and adjusting the base year to 2001, the last 
year of original Compact funding.
    Another area of great concern to the FSM is the loss of FEMA 
disaster relief assistance. Without reinstatement of this important 
benefit by the U.S. Congress, the substantial investment made by the 
U.S., and pledged for the next twenty years, is placed in jeopardy. As 
the proposed amendments now stand, storms or other natural disasters--a 
statistical certainty--hold the potential to irreparably damage the 
social and economic infrastructure upon which our nation's growth 
prospects rely.
    Similar to the FEMA issue, we are very concerned by threats to the 
continuation of important and successful federal programs under the 
Compact as amended. Throughout the negotiations, the Administration has 
stated that it was not their desire to preempt the Congress on these 
important issues. At the same time, Congress has at times (such as in 
the ``No Child Left Behind Act'') called upon the negotiators to decide 
the matter. In many areas this has resulted in essential federal 
programs extended to the FSM possibly falling through the cracks and no 
longer being made available to support our development efforts. Again, 
loss of complementary programs presents a further threat to near-term 
stability and reduces the chances to achieve even our modest economic 
growth projections.
    The U.S. negotiator has since clarified the Administration's 
position on the matter, stating that calculations of the U.S. 
assistance offer were made based upon the assumption that federal 
programs would continue at their current levels. We hope that Congress, 
in its wisdom, will take note of this important statement and act to 
ensure the continuation of invaluable programs to the FSM, such as 
those under NCLBA, IDEA, Head Start, Pell Grants, and others.
    Mr. Chairman, during our lengthy negotiations we sought to address 
non-financial methods in which the U.S. could enhance the FSM's growth 
prospects for the future. We seek to maintain and modernize tax and 
trade provisions that will enhance the economic linkages between our 
two nations. Specifically we wish to work with Members to redress the 
elimination of reference to certain tax provisions in the legislation 
before you by ensuring that the original intent of those tax provisions 
will be maintained. In order to support private sector development and 
to foster private investment, we would like the U.S. Congress to 
consider enhancing the trade provisions available to the FSM. The scope 
for trade preferences has narrowed and the prevailing conditions have 
changed since the Compact was first drafted; however, we believe both 
our special relationship of Free Association and the clear intent of 
the proposed twenty year package provide sufficient justification for 
the FSM to gain access to modernized trade privileges.
    The proposal before you includes changes to the non-expiring 
immigration provisions of the Compact. These changes have been made at 
the insistence of the Administration. While the FSM agreed to discuss, 
and did discuss, in good faith and on a bilateral basis, specific 
issues of concern as to our citizen's entry and residence in the United 
States, we would not have amended the Compact to accomplish the result 
of our discussions. The FSM fully understands the U.S. concerns over 
security, and we support the U.S. in all its positions against 
terrorism and transnational crime. But the FSM and our citizens are not 
a threat to the United States. We have never sold passports to foreign 
nationals. We have not naturalized a foreign national in many years, 
and the requirements are almost impossible to meet. We do not 
facilitate the adoption of our children to ``baby brokers.'' We do 
agree with the U.S. that passports should be required of our citizens, 
and we are willing to accommodate the expressed interest in the FSM's 
use of the latest technology to reduce the risk of passport fraud. The 
FSM wants to do its part to assist the U.S. in its important task of 
securing the peace and in securing its borders.
    Mr. Chairman, allow me to turn to elements of the legislation that 
are not part of the proposed Compact amendments. We wish the Committee 
to be aware that the FSM was not consulted in the drafting of these 
Compact Act proposals by the Administration. We were assured that any 
changes from the existing language in PL 99-239, would be solely to 
update existing language. When we finally had the opportunity to review 
the proposal transmitted by the Administration, we found that the 
changes went far beyond a simple ``updating.'' We identified at least 
three major problems for which we seek adjustments by the Congress.
    First, there is the issue of transition to a machine-readable 
passport scheme. This is a concept to which the FSM has repeatedly 
pledged its support. However, we find it quite alarming that the 
Administration has seen fit, unilaterally, without prior notice, to set 
aside $250,000 or more from the Compact's capacity-building assistance 
for this purpose. It is alarming for many reasons--the fact that 
budgets are in the process of being developed on the negotiated 
package, the fact that the sector is currently under-funded even before 
these changes, and for the precedent it sets for future Administration 
action without consultation.
    Second, and similar to the first, is that the Administration 
insists on mandating the FSM's development of a more effective 
immigrant screening system. We are given just one year to do this. 
Again, the FSM has repeatedly agreed to undertake steps to implement 
such systems. However, and by all reasonable estimates, it is an 
extremely complex and expensive undertaking. With multiple court 
systems, four states, and a decentralized judicial system, it is 
unlikely this effort could be concluded in just one year. Under the 
Administration's unilateral proposal, FSM failure to meet this 
arbitrary deadline would result in withholding of Compact assistance. 
Such a punitive provision is unnecessary and unjustified considering 
our mutual interest in pursuing this objective.
    Third, there is the matter of changes to the language concerning 
provision of compensatory federal programs. In 1986, Congress initiated 
and passed this language in order to mandate these programs, and 
funding, to the FSM as partial compensation for loss of tax and trade 
benefits agreed to by the Administration but eliminated by Congress 
prior to passage. Unexpectedly, the Administration now has proposed to 
alter the language of the compensatory provisions to make them optional 
for the U.S. agencies. The FSM requests that the Congress restore the 
original language consistent with the original Congressional intent.
    Mr. Chairman, I have highlighted a number of problems and 
uncertainties posed by the Compact amendments and the Compact Act 
proposals. We would like to propose the Congress include in its 
legislation a provision for a three-year comprehensive Congressional 
review of the health of the FSM economy, to examine whether, in light 
of experience, a need then exists for further adjustments beyond those 
that now may be made.
    In conclusion, Mr. Chairman, the U.S. and the FSM, acting together, 
have drawn upon the lessons of the original Compact in an attempt to 
develop a document that will further the mutual interests of both 
nations. With the help of the U.S. Congress in addressing our concerns 
about the legislation before you, we can arrive at an agreement that 
ensures the continued viability of a nation and the well-being of its 
people, and that maintains the peace and security of this critical 
region of the world.
    Both the U.S. and the FSM can be rightly proud of the unique bonds 
we have forged in the Compact period. We hope to be equally proud of 
the course that will be set for the next 20 years and beyond. We urge 
Congress to act favorably on the Compact legislation, and to make the 
adjustments necessary to ensure a solid foundation for the future.
    I thank you, Mr. Chairman.

    The Chairman. Thank you very much.
    Mr. Zackios, please proceed.

 STATEMENT OF GERALD M. ZACKIOS, MINISTER OF FOREIGN AFFAIRS, 
       GOVERNMENT OF THE REPUBLIC OF THE MARSHALL ISLANDS

    Mr. Zackios. Thank you, Mr. Chairman. Before I proceed with 
my submission this afternoon, may I respectfully request of 
this honorable committee that the record remain open for 
submission of a statement by the four atolls affected by the 
nuclear testing programs?
    The Chairman. That will be done.
    Mr. Zackios. Thank you, Mr. Chairman.
    Mr. Chairman, on behalf of the people and the government of 
the Republic of the Marshall Islands, RMI, I want to express my 
gratitude to you and this committee for its oversight and the 
review of the proposed legislation to sustain the success of 
free association between our governments.
    The RMI government respectfully requests that Congress 
approve the negotiated agreements. While we fully support our 
agreements, several outstanding issues remain. Before 
summarizing these issues, Mr. Chairman, I ask that the 
committee first hear our basis for how we see the compact and 
funding obligations.
    As a first principle, the compact is not a grant handout or 
a foreign aid program; it is an alliance closer than NATO's, in 
which RMI continues to support U.S. leadership in the 
preservation of international peace and security. It is a two-
way relationship, a real partnership.
    We are not just asking for more; we are asking Congress to 
fine-tune the amended compact so it does endure for the benefit 
of both areas. The RMI has not and in the future is obligated 
not to erode its unique security and defense commitments that 
include: the defense veto, third-country denial, continuing use 
of key defense sites, and the eligibility of Marshallese to 
join and be drafted into the U.S. Armed Forces.
    On the other side of the equation, we hope that the United 
States does not allow its commitments to the RMI on economic 
assistance, immigration, and Federal programs to erode.
    The unresolved issues include: first, a full inflation 
adjustment for compact funds so that the grant assistance and 
compensation provided by the compact does not lose real value 
and fully supports the compact's mutual commitments. We do not 
know why a partial adjustment is mandated, unless the United 
States has the intention of deflating the grant assistance and 
compensation, and thus, our budget and economy.
    For Kwajalein landowner compensation under the Military Use 
and Operating Rights Agreement, MUORA, with only a partial 
inflation adjustment, the landowners are giving the U.S. 
Government a rebate, and that will only multiply the longer the 
MUORA is in effect.
    Finally, we learned there is serious discussion of having a 
5-year period to review if full inflation or other grant 
assistance is necessary. While we appreciate the concerns 
regarding the adequacy of the Title II package negotiated, my 
government believes we should fix the package now instead of 
waiting for 5 years.
    The effect and impact of a flawed inflation adjustment on 
compact economic assistance can be predicted with certainty 
now. We still strongly believe that full inflation adjustment 
should be provided, since this change would help us achieve 
fiscal stability in the long term and provide the real funding 
we have negotiated.
    Second, we seek the continuation of Federal education 
programs and services that are an integral part of the RMI's 
education system. If these programs and services were removed, 
it would severely impact education in the RMI, as well as limit 
education opportunities for Marshallese youth. As it stands 
now, we are losing eligibility under the No Child Left Behind 
Act as well as other programs, including Pell grants in 2004.
    Mr. Chairman, both our governments have made education a 
deep priority sector for compact grant assistance. However, if 
Federal programs and services are eliminated, the added 
investments we plan to make will not have an impact. More 
specifically, if the Pell grant program is not continued, the 
College of the Marshall Islands would be in a critical 
position, and post-secondary education would be unattainable 
for almost all Marshallese.
    Third, we ask for congressional support to assist the 
repaving of the Majura International Airport so U.S. commercial 
air service and military access is maintained for the sole 
international air link for the RMI, and a crucial link for the 
Micronesian region.
    Fourth, we urgently seek continuing eligibility for FEMA 
disaster and rehabilitation assistance, especially since most 
of our infrastructure has and will continue to be built using 
compact funds, and since our low-lying atoll environment is 
highly susceptible to natural disasters. This assistance has 
been seldom used, but it has been proven critical in times of 
need.
    Fifth, in order to fully realize the long-term objective 
and goals of the RMI government, as well as the Kwajalein 
landowners, it is imperative that the early termination 
provisions of the MUORA be modified to ensure that the United 
States does not vacate Kwajalein earlier than 2030.
    Such an extension, which is only 7 years past the current 
earliest termination date, would help the landowners build up 
their own trust fund, and it would provide incentives to make 
viable the RMI and U.S. investments for the medium and long 
term.
    Sixth, the RMI government petitioned the Congress under the 
compact ``changed circumstances'' provisions in September 2000 
and updated it in November 2001. Congress has yet not responded 
to the RMI's petition for additional compensation contemplated 
by the settlement agreement. To move forward, we ask that this 
committee schedule a hearing focused on the nuclear claims 
issues as soon as possible.
    Also, Congress requested that the administration review the 
RMI's petition over 1 year ago, and we understand that there 
still is no definite date for its completion and release. 
Meanwhile, Marshallese who were directly exposed to nuclear 
tests continue to die from cancers and leukemia without ever 
receiving full compensation for their injuries.
    Moreover, entire communities continue to live in exile from 
their homelands to this day. Confronting and resolving these 
issues should not be put off any longer. We believe solutions 
are possible.
    The final issue, Mr. Chairman, concerns the Compact Act. We 
were not provided the opportunity to address our concerns 
resulting from the administration's unilateral changes. While 
our main issues are in our submitted testimony, we were taken 
aback by the changes that were made without consultation and 
not in the spirit of the compact agreement which was 
painstakingly negotiated. I hope we can resolve several of the 
key issues changed in the act.
    Thank you, Mr. Chairman. I look forward to working with you 
and your staff so our common interests are achieved and we can 
conclude the amended compact in both our legislatures. Thank 
you.
    [The prepared statement of Mr. Zackios follows:]
 Prepared Statement of Gerald M. Zackios, Minister of Foreign Affairs, 
           Government of the Republic of the Marshall Islands
    On behalf of the people and the Government of the Republic of the 
Marshall Islands (RMI), I want to express our gratitude to this 
Committee for its oversight and review on behalf of the United States 
Senate of agreements and proposed legislation to sustain the success of 
free association between our governments. The agreements that have been 
signed by our governments to renew expiring provisions of the Compact, 
and to adapt some of its provisions to our evolving alliance amid new 
realities, were negotiated in a spirit of friendship and respect. 
Consistent with the special and unique history and features of our 
bilateral alliance, both the RMI and U.S. negotiators have consulted 
regularly with the Members and staff of this and other Committees of 
the U.S. Congress regarding the progress of our negotiation process.
    This special and unique history between our two countries extends 
from World War II when Marshallese scouts assisted U.S. soldiers as 
they advanced across the Pacific through to the testing of 67 atomic 
and thermonuclear warheads from 1946-1958, to the continuous provision 
of land and sea at Kwajalein Atoll since the 1960s and the continued 
cutting edge advancements made there for U.S. missile defense. Today, 
Marshallese citizens are serving in the U.S. Armed Forces, with many 
having participated in Operation Iraqi Freedom. We are proud that our 
citizens are serving not only because it is a Compact provision but 
also because we share the same ideals as the United States: the pursuit 
of life, liberty and happiness and our real experience in democratic 
governance and freedom.
    The RMI Government fully supports and respectfully requests that 
Congress approve the negotiated agreements. My government is also 
seeking early approval of the agreements by the Nitijela, our national 
parliament. President Note and his Cabinet believe the agreements will 
provide the continuity and stability that is imperative in our 
bilateral relationship with the United States, thereby also enabling 
the RMI to continue, domestically and internationally, to support the 
political, social and economic development of our people.
    As we can now see how free association has evolved over the last 17 
years of the Compact, we have come to realize that the bilateral 
relationship that was constructed during the late 1970s and to the mid-
1980s has more than survived the test of time. The agreement and 
relationship has evolved to changing circumstances--circumstances 
within the global and regional context; circumstances and priorities 
within the United States; and circumstances and challenges within the 
RMI. Some will concentrate on the weaknesses of the past years, 
however, the strengths and accomplishments of our relationship, and the 
Compact that embodies this relationship, far outweigh the weaknesses. 
If not, we would not be here today discussing the acceptance of 
amendments to the Compact.
    Mr. Chairman, as you and the Committee members know, we have 
negotiated an agreement that adjusts the Compact to today's world and 
today's needs and tries to set a realistic framework for the future. 
The main components of this agreement are the renewal of the Compact's 
economic provisions that contain several new or revised elements. Most 
notable is the introduction of a trust fund and a more practical and 
transparent accountability framework; a renewal of our mutual security 
and defense relations which set forth obligations that remain 
unprecedented in U.S. bilateral relations with any other country; 
revised immigration policies and procedures that address U.S. security 
and other concerns but maintain the right for Marshallese to live, work 
and learn in the United States; and, while not expiring, an amended 
Military Use and Operating Rights Agreement that continues the use of 
Kwajalein Atoll for the U.S. Army beyond 2016 with the potential to 
remain until 2086.
    Mr. Chairman, we have painstakingly negotiated these elements with 
the U.S. Administration over the last 2 years. We thank U.S. Compact 
Negotiator Al Short and the Administration for their constant pursuit 
of an agreement and we thank them for their patience in working with us 
to address our concerns, our hopes, and our belief in the future of our 
relationship.
    While we stand by what was negotiated, there remain several 
outstanding issues that the Administration could not respond to or 
changes that were made without consultation. My government hopes and 
expects that all pending issues between our nations can and will be 
addressed in the same spirit of trust, justice, and partnership that 
produced the amendments to the Compact agreements. We believe 
outstanding issues can be resolved positively in a way that preserves 
and further improves our relationship.
    We do not see the Compact as a grant hand-out or a foreign aid 
program as the underpinning of our relationship. To the contrary, we 
strongly believe that we have provided and continue to provide the 
United States with our very limited land, our vast air space and sea 
area, and even our people--past, present, and future--through the 
historical and present security and defense relationship, including the 
sacrifices we have and continue to endure because of these commitments. 
In our view, it is a two-way relationship, a real partnership. Thus, 
when the Congress addresses our remaining issues, we hope that you view 
them in this context.
    We are not asking for ``more'' just to supplement what we 
negotiated with the Administration. We are asking Congress to fine tune 
the Compact, as amended, so that it does endure for the benefit of both 
parties. The RMI has not and in the future is obligated not to erode 
its unique security and defense commitments that include: the defense 
veto; third-country denial; use of air, land and sea space; and the 
eligibility of Marshallese to join the U.S. Armed Forces. On the other 
side of the equation, we hope that the U.S. commitments to the RMI on 
the economic, immigration and certain eligibility for Federal programs 
do not erode.
    The unresolved pending issues include: 1) a full inflation 
adjustment for Compact funds so that the grant assistance and 
compensation provided by the Compact does not lose real value and fully 
compensates the RMI and its citizens for its continued support and 
commitments of the Compact's provisions; 2) the continuation of Federal 
education programs and services that are an integral part of the RMI's 
education system and, if removed, would severely injure the delivery of 
education in the RMI as well as limit education opportunities for 
Marshallese youth; 3) Congressional support to assist the repaving of 
the Majuro international airport so U.S. commercial air service and 
military access is maintained for the sole international air link for 
the RMI and a crucial link for the Micronesian region; 4) continued 
eligibility for FEMA disaster and rehabilitation assistance especially 
since most of our infrastructure has been and will continue to be built 
using Compact funding and since our low-lying atoll environment is 
highly susceptible to natural disasters; 5) Congressional support for a 
Kwajalein landowner trust fund; and 6) Congressional consideration of 
nuclear claims issues arising from the U.S. nuclear weapons testing 
program.
    In reference to these issues, I am submitting with this statement 
several issue papers that summarize where continued agreement is 
required. If I may, Mr. Chairman, the following is a summary of our 
views on the crucial elements of these issues.
                       full inflation adjustment
    Most of the current Compact agreement's economic assistance has a 
partial inflation adjustment (2/3 of the Gross National Product 
Implicit Price Deflator). Since the grant assistance was only partially 
inflation adjusted and there were substantial step-downs (by $4 million 
in 1992 and $3 million in 1997), our economy suffered severe economic 
shocks during these step-downs. The economic growth and budget cuts 
that were expected materialized to some degree but not at the expected 
levels.
    For the Compact, as amended, we have agreed with the Administration 
to have the annual grant assistance decremented by $500,000 annually 
with the decremented amount being added annually to the trust fund's 
annual contribution. While this decremented amount is a large 
percentage of our annual grant, and grows as a proportion of the grant 
annually, we agreed to such a large decrement because without it, our 
trust fund would not be viable for the post 2023 era. In addition, we 
are committed to contribute $30 million between now and FY05--this 
amounts to about 30 percent of our current annual budget. We 
consciously made a medium term sacrifice to save for future 
generations.
    While we fully believe in the decremented approach and the 
reduction of our grant assistance because of this conscious sacrifice, 
we cannot understand why the grant assistance must lose value to 
inflation. Since most of our goods for our import-reliant economy are 
from the United States, and the U.S. dollar is the official currency of 
the RMI, we not only import U.S. inflation but also the added 
inflation-affected costs of shipping and handling.
    The only answer we can come up with for the U.S. inflation policy 
is that the United States wishes to deflate our economy by having the 
funding lose its real value. The U.S. Government has not provided a 
reason--past or present--of why only a partial inflation adjustment is 
applied. We have suffered in the past for this error and we hope not to 
suffer again. It is, to us, ironic that the Administration has agreed 
to allow the distributions from the Compact trust fund (post 2023 when 
annual grant assistance is to end) to equal the annual grant assistance 
plus full inflation.
    There are many statements within the U.S. government and my 
government about achieving ``economic advancement and budgetary self-
reliance'' via the Compact grant assistance. Rather than deal with a 
generic objective, we have concentrated on budgetary self-reliance as 
meaning long term fiscal stability as our goal for the Compact's 
economic assistance and post grant assistance era. Why? During the 
current Compact we have put in place the components of democratic 
governance and a free society. Even given our belt tightening and some 
economic growth, we realize that to have properly funded government 
functions and the related trained human resources, our fiscal situation 
requires an input from an outside source. We see the main source as 
being the Compact's grant assistance until 2023 and the trust fund 
distribution thereafter.
    The problem is that with the annual decrement and the loss of the 
grant funding to inflation, we can fill this growing funding gap in the 
short term but we cannot do it continuously. The gap just grows at too 
rapid a pace and we cannot fill it by such large increases in revenue 
generation or budget cuts. Thus, our request to apply the full 
inflation adjustment. With this minimal added amount to the grant 
funding and trust fund contributions we believe we can maintain fiscal 
stability as well as have a strengthened Compact trust fund that will 
insure that fiscal and economic stability will occur.
    For the funding provided under the Military Use and Operating 
Rights Agreement (MUORA), the same argument applies with a twist: the 
Kwajalein landowners are providing their very limited land for use of 
the Ronald Reagan Missile Test Site at Kwajalein Atoll. Why should the 
payments under the MUORA only be partially inflation adjusted? With 
only a partial adjustment, the landowners are really giving the U.S. 
Government a rebate on their access to Kwajalein. This rebate will 
multiply as the new MUORA is extended to 2023 and can go as long as 
2086. In effect, the longer the MUORA is extended, the more money 
landowners will lose in terms of the real value of the funding provided 
and the larger the bargain to the U.S. for access
    As I have said above, the RMI commitments do not erode under the 
Compact and, thus, the U.S. commitments should not erode.
    Finally, we learned that there is serious discussion of having a 5-
year period to review if full inflation or other grant assistance is 
necessary. While we appreciate the concern regarding the adequacy of 
the Title Two package negotiated, my government believes we should fix 
the package now instead of waiting for 5-years. The effect and impact 
of a flawed inflation adjustment on Compact economic assistance can be 
predicted with certainty now. We still strongly believe that the full 
inflation adjustment should be provided since this change would help us 
achieve fiscal stability in the long term and provide the real funding 
we have negotiated. In addition, we have had experience with review 
periods (annual JEC) and showing impacts (Section 111b tax and trade 
compensation) for in the current Compact. These provisions have proven 
hard for us to make any changes in the current agreement though they 
were mandated by Congress. We don't want a review period that we will 
have to stir up a constituency for 5 years from now.
       the importance of federal education programs and services
    Federal education programs and services have proven to be critical 
in educating young Marshallese and opening doors to those who go on to 
post-secondary education. Our country has significantly benefited from 
these programs and services and, I believe, the United States has 
benefited also. Just as an example, most of our Compact and Embassy 
team, as well as most of the people in my Ministry, have benefited in 
an extraordinary way from a U.S. Federal education program, with the 
most critical being the Pell Grant program. If these doors are shut, 
our mutual objectives for economic advancement and budget self-reliance 
will be severely impacted.
    The importance of these programs is not only in terms of financing, 
but even more critically in terms of technical expertise, methods and 
approaches as well as access to educational institutions.
    The RMI Government has made a firm and conscious decision to apply 
the largest portion of Compact grant assistance to the education 
sector. For Fiscal Years 2004-2006 about $10 million will be aimed at 
the education sector annually, in addition to domestic resources and in 
addition to targeted infrastructure spending on education facilities. 
The Federal programs are identified to provide critical programs and 
services for which the RMI does not have the funding or capabilities, 
on its own, to provide. Thus, if the RMI loses its eligibility for the 
education program funding, the Compact funding will merely replace 
funding and programs once provided by the Federal education programs. 
These programs are in crucial areas, such as Elementary and Secondary 
Education, Head Start, Special Education, Bilingual Education, and 
Vocational Education. The elimination of the Pell Grant program would 
have more catastrophic impacts such as critically destabilizing the 
College of the Marshall Islands (a U.S. land grant institution) as well 
as closing higher education opportunities in the United States.
    Mr. Chairman, we have sought support from the U.S. Compact 
Negotiator on this issue. He has kindly informed us, through a letter 
to the Senate Energy Committee of the Administration's position: the 
Compact's Title Two grant assistance was not negotiated on the basis of 
replacing funding for U.S. Federal programs and services.
    I kindly request that we work with your committee and other related 
committees to continue RMI eligibility for these crucial education 
programs and services. If we do not have the U.S. Government's support 
on this issue, I believe that the Compact's emphasis placed on 
education by the Administration during negotiations will be lost during 
the new term of the Compact, as amended. We simply cannot replace what 
would be lost from these programs and services.
       federal emergency management assistance (fema) eligibility
    The current Compact provides for RMI eligibility for FEMA's 
disaster rehabilitation and hazard mitigation assistance as well as a 
disaster preparedness annual grant. Under the Compact, as amended, FEMA 
will provide the disaster preparedness annual grant but the U.S. Agency 
for International Development's Office of Foreign Disaster Assistance 
will provide the disaster relief assistance. No hazard mitigation or 
rehabilitation services will be available. The U.S. will provide 
$200,000 annually for a disaster relief fund under the Compact, which 
will assist our capacity to deal with small-scale disasters, but will 
certainly not help in the case of a catastrophic disaster.
    FEMA program eligibility is critical for the RMI given the 
vulnerability of the RMI to high impact natural disasters, such as 
typhoons, tropical storms, wave action and drought. The RMI's natural 
environment is characterized by low lying atolls scattered throughout 
the Western Pacific ocean with an average of 6 feet above sea level, a 
total land area of 71 square miles, limited fresh water supplies, and 
remoteness from major metropolitan centers with the closest being 
Hawaii at 2,500 miles away.
    FEMA has provided significant disaster rehabilitation and hazard 
mitigation assistance during the Compact's current term. Without FEMA, 
the RMI would be in a precarious position financially and more 
susceptible to natural disasters. The OFDA program is provided to all 
foreign countries but does not have FEMA's disaster relief and hazard 
mitigation programs.
    Finally, we note that most of the RMI's essential infrastructure 
has been built with the use of U.S. grant assistance and this will 
continue to be the case under the new Title Two Compact provisions for 
public infrastructure. Given the large U.S. investment in the public 
infrastructure of the RMI, it follows that measures should be taken to 
protect these investments.
    Mr. Chairman, we ask that the RMI continue to be eligible for 
FEMA's disaster rehabilitation and hazard mitigation assistance. There 
is no question that these programs have proven most critical for our 
country.
                 majuro international airport repaving
    The RMI has an urgent infrastructure need to repave the Majuro 
international airport. The U.S. Federal Aviation Administration 
identified this urgent need in early 2002. Since that time, the RMI has 
performed an engineering feasibility study and attempted to find 
project funding sources. The cost is estimated at $10-12 million.
    My government did look at using Compact ``bump-up'' funds in FY2002 
and FY2003 to fund the project. However, given our commitment for the 
Compact trust fund's start-up amount of $30 million, we had to set 
aside most Compact FY2002 and FY2003 infrastructure and ``bump-up'' 
funding for this Trust Fund contribution. Finding an extra $10-12 
million in a total budget of about $100 million was not possible.
    We have run out of financing options and the airport is now in 
danger of being shut down. Two U.S. carriers service the airport: 
Continental and Aloha airlines. It is also the home for Air Marshall 
Islands- the only airline that provides intra-RMI services. If 
Continental and Aloha must stop services, the RMI will be physically 
cut off from Hawaii and Guam and will disrupt service throughout 
Micronesia as well as prevent commercial flights to the Ronald Reagan 
Missile Test Site at Kwajalein Atoll. In addition to commercial 
flights, U.S. military flights land, transit and refuel in Majuro for 
flights to/from Kwajalein as well as for trans-Pacific flights.
    Mr. Chairman, we would like to work with you and the Committee to 
address this immediate need. If we are not successful in finding a 
funding source, we will have to dip into our trust fund set-aside and, 
thus, we will not meet our obligation under the Compact. We do want to 
meet this obligation since without the RMI initial contribution, the 
Compact trust fund will be inadequate.
     extension of the military use and operating rights agreement 
                           for kwjalein atoll
    The RMI Government and the Kwajalein landowners will be negotiating 
an amended Land Use Agreement to reflect the negotiated terms and 
conditions of the extended MUORA, which allows the U.S. access to 
Kwajalein to at least 2023 with the potential to remain until 2086. The 
U.S. can terminate use at any time after 2023 as long as it provides a 
7-year notice. The Kwajalein landowner trust fund was a proposal by the 
landowners to help insure an income stream once the U.S. does terminate 
use, especially if termination occurs between the years 2023-2030.
    The trust fund initiative for the Kwajalein landowners is 
consistent with the MUORA and is well supported by precedent and other 
aspects of the RMI-U.S. relationship. Trust funds for the atolls of 
Rongelap, Bikini, Enewatak, Utrik and the Nuclear Claims Trust Fund, 
under Section 177 of the Compact, have been established by the United 
States to provide for the long-term economic and social benefit of RMI 
citizens impacted by U.S. nuclear testing.
    The requested funding for the initial capitalization of the 
Kwajalein landowner trust fund is $20 million. The landowners have 
committed to additional self-financing of the trust fund on an annual 
basis if this one-time appropriation is provided. If early U.S. 
termination were to occur, projections indicate that with a $20 million 
initial capitalization, plus the landowners' contributions in addition 
to early termination payments by the U.S. as agreed to in the 
negotiated MUORA, the Kwajalein landowner trust fund corpus would reach 
above $150 million in 2023, the earliest the U.S. can vacate Kwajalein. 
With such a corpus, the landowners will be able to replace the annual 
rent payments for about 10 years, which would allow a reasonable 
timeframe for the landowners to transition into an alternative use and/
or resettlement of their lands on Kwajalein.
    If, however, such a request cannot be met by the U. S. Government 
at this time, the RMI Government requests that Congress, at the very 
least, allow for the extension of the MUORA early termination clause to 
2030, thereby giving assurance that the U.S. will use Kwajalein for a 
sufficient length of time to achieve the long-term objectives of the 
RMI and the Kwajalein landowners.
    Such an early termination clause will not only help Kwajalein 
landowners but also RMI and U.S. Army long-term initiatives. For 
instance, the RMI and the U.S. Army, with the Federated States of 
Micronesia (FSM), are currently preparing a project to extend a fiber 
optic cable from Guam to Pohnpei, Majuro and Kwajalein (to the Ronald 
Reagan Missile Test Site). The benefits for the U.S. Army's operations 
are obvious as well as the commercial opportunities for the RMI and 
FSM. Such a project will surely enhance and illustrate the cooperation 
between the U.S., RMI and FSM. The extension of the U.S. Army's 
definite presence until 2030 will make this project more commercially 
viable.
      nuclear claims issues arising from the u.s. nuclear weapons 
                            testing program
    One major issue of commitment in the Compact that was not addressed 
during our negotiations regarding amendments to the Compact is the U.S. 
nuclear testing legacy and those categories of claims that remain 
unresolved under the terms of Section 177 of the Compact, as amended, 
and the Section 177 Agreement. Although Section 177 of the Compact as 
amended and the Section 177 Agreement remain in full force and effect, 
we were informed early in our negotiations that the U.S. Compact 
negotiator lacked authority to deal with unresolved issues related to 
the effects of the U.S. nuclear testing program in the Northern 
Marshall Islands.
    The reason given to us for this lack of authority was that the 
nuclear issues were under the jurisdiction of Congress by virtue of the 
``Changed Circumstances'' provisions of Article IX of the Section 177 
Agreement. The RMI Government filed a petition under this provision 
with the U.S. Congress in September 2000, and updated it in November, 
2001. The problem that has arisen, as the attached issue paper 
regarding the nuclear test legacy explains, is that the U.S. Congress 
has not responded to the RMI's petition for additional compensation to 
be provided through the political process contemplated by the 
settlement agreement.
    Unfortunately, the issues involved are many and complex. They 
include government taking of private property without just 
compensation; important new information regarding the effects of 
radiation on human health; and the clean up and restoration of 
radiologically contaminated lands.
    The RMI understands that responding to the RMI's petition for 
additional compensation in the political process may be difficult, 
which is why the RMI is proposing that the awards of the RMI Nuclear 
Clams Tribunal (NCT) be returned to the legal process on the basis of a 
limited grant of jurisdiction to review, and reject or certify the 
awards of the NCT, based on U.S. standards of adequate compensation.
    In order to move forward, we would ask that this Committee schedule 
a hearing focusing on the nuclear claims issues as soon as possible. 
Congress had requested that the Administration review the RMI's 
petition over one year ago and we understand that there still is no 
definite date for its completion and release. Meanwhile, Marshallese 
who were directly exposed to the nuclear tests continue to die from 
serious cancers and leukemias without ever receiving full compensation 
for their injuries. Moreover, entire communities continue to live in 
exile from their homelands to this day. Confronting and resolving these 
issues should not be put off any longer.
                              other issues
    The Administration provided my government with a copy of the 
amended Compact Act on June 20, just before the amended Compact was 
sent to Congress. We were not provided the opportunity to address any 
of our concerns resulting from the Administration's unilateral changes.
    In some instances, such as Section 104(b), these changes 
unilaterally amend the economic assistance and immigration provisions 
that we just concluded with the Administration. These issues have been 
difficult and contentious at times during our negotiations and to see 
the Administration making substantive changes to the Compact in this 
manner is wrong .
    Moreover, in other instances, these changes affect the substance 
and intent of provisions inserted by Congress, in its wisdom, during 
the first Compact approval process. Below are several items we wish 
Congress to address by re-inserting its original Compact language.
    Section 103(e)(3) makes reference to Articles X and XI of the 
Section 177 Agreement regarding claims, yet fails to point out actions 
taken by the RMI Government under Article IX of the same agreement to 
seek additional compensation, based on the U.S. commitment to provide 
adequate compensation under the terms of the claims settlement 
implemented pursuant to Section 177 of the Compact, as amended. Given 
that U.S. negotiators claimed a lack of authority to address unresolved 
nuclear-related concerns in Compact negotiations, the RMI Government 
believes it would be only fair to return to Congress's original 
language in this section. If the Administration wishes to advance a 
legal interpretation of Section 177 or provisions of the agreement 
implementing U.S. commitments to settle nuclear claims, the time and 
place to do that would be in a hearing and in legislation on the 
nuclear claims issue. The attempt to introduce this disputed legal 
interpretation into legislation approving agreements that do not 
address the nuclear claims issue, because the Administration refused to 
discuss the issues, is not a proper way to proceed.
    Section 103(f)(2) should be clarified to provide that essential 
agricultural and food programs shall be continued to the affected atoll 
communities. While additional food supplement programs will be needed 
to support resettlement of contaminated islands once radiological clean 
up has progressed and safety standards have been satisfied, these 
nutritional programs are a moral obligation of the U.S. to ensure a 
minimum level of food assistance to both dislocated and resettling 
populations for the foreseeable future. We doubt that anyone familiar 
with the hardships and living conditions of the nuclear affected 
peoples would dispute the need for these programs to be extended as an 
on-going U.S. responsibility. This legislation presents the best 
opportunity that may arise before the current authorization for these 
programs expires for Congress to extend the USDA food program for at 
least another five years.
    Under the current Compact and its Compact Act, Congress included 
Compensatory Adjustments (Section 108) that were provided for 
Congress's revision of the tax and trade provisions of Title Two, 
Economic Assistance. The Congress provided, under Section 108(a) that 
certain commercial U.S. programs ``shall be made available.'' The 
Administration has now changed the RMI's eligibility for these programs 
to ``are authorized to be made available.'' The programs include: the 
Small Business Administration, Economic Development Administration, 
Rural Utilities Service (formerly the Rural Electrification 
Administration); the programs and services of the Department of Labor 
under the Workforce Investment Act of 1998; the FDIC, and the programs 
and services of the Department of Commerce relating to tourism and to 
marine resources development.
    The RMI sees this as a significant downgrade of eligibility and 
application of these programs. Your Committee should note that the 
trade provisions of the amended Compact are the same, restricting RMI 
exports in certain products. Congress should restore its original 
language in the new Section 108(a) (formerly Section 111(a)) to include 
all of the programs listed in Section 111(a) or their successors and to 
require that these programs ``shall be made available'' as provided by 
Congress in the original Compact Act.
    This comment also relates to the amended Compact's Section 108(b). 
In the current Compact Act, the Congress allowed up to $20 million to 
be authorized for compensation for any adverse impact of the Compact's 
tax and trade provisions. The RMI did apply for this compensation but 
the request did not pass the Administration's review. As you can 
imagine by reading the section, it is extremely difficult to prove such 
a negative impact. The result is that no funds have been disbursed to 
the RMI or FSM under this Compact provision.
    The amended Compact Act sets a time limit to submit such an impact 
report or request by September 30, 2004 and for impacts only suffered 
from 1987-2003. We do not think this just. If the trade provisions were 
improved, we would understand, but, they are not.
    Mr. Chairman, we ask that your committee review this provision so 
that: 1) impact can be claimed for the new Compact term, if 
appropriate; 2) that the deadline for submission for any such claim be 
submitted by September 30, 2023, the end of the amended Compact's Title 
Two; and 3) transparent guidelines and an evaluation process and 
requirements are defined so that it is something practical, not a 
nebulous, subjective process.
                               conclusion
    Last, Mr. Chairman, I would like to comment on the accountability 
mechanisms negotiated for the amended Compact's term, and thereafter in 
regard to the Compact trust fund. We stand by and fully support the 
Fiscal Procedures and the Trust Fund Agreements. We firmly believe just 
as the U.S. government must be accountable to its taxpayers for Compact 
funds, my government must be accountable to its citizens for spending 
Compact funds and our own resources.
    In fact, Mr. Chairman, we initiated steps on our own last year 
during our budget process and have begun allocating Compact assistance 
in the key sectors. The priorities are clear in our Medium Term Budget 
and Investment Framework. These are education, infrastructure 
development and maintenance, health and environment. We are currently 
working closely with the U.S. Department of Interior in applying the 
Fiscal Procedures Agreement and we welcome their support and 
cooperation.
    My only word of caution is that what we are developing is a new 
budget and fiscal management system that resounds throughout our public 
service. As in the United States, applying performance-based budgeting 
and other requirements at a federal, state or local level does not 
occur overnight. We are instituting a step-by-step process. I hope both 
sides have patience as well as perseverance. We need assistance and 
support to help us apply these new requirements, not people looking 
over our shoulder and pointing fingers. With the cooperation we have 
received so far, my government is encouraged, progress is being made, 
and we feel we are doing it right.
    Mr. Chairman, I realize our issues, together, may sound 
overwhelming to you and other Committee members. I believe that, 
together, we can address these issues in a timely manner. As I have 
said early on in my statement, we have come a long way in our 
relationship. The issues identified are to move our relationship 
forward so we both step into the future together and that we have an 
enduring Compact that serves both our needs while giving us both the 
tools to meet our obligations.
    Mr. Chairman, after departing Washington, I will return to Majuro 
where I look forward to presenting the Compact, as amended, to our 
legislature, the Nitijela. The sooner we can come to agreement on the 
above issues, the faster we can have the amended Compact passed through 
our legislative process.
    I look forward to working with you and your staff so our common 
interests are achieved.
    Kommol Tata.

    The Chairman. Thank you very much.
    Might I ask my colleague a question? Senator, I have a very 
urgent meeting. If I were to ask a few questions, would you 
mind terribly closing the meeting for me; continuing it, and 
subsequently closing it?
    Senator Akaka. I would be happy to.
    The Chairman. First of all, I would ask on our side if 
staff would please research for me this whole issue of 
passports. I don't quite understand. I guess it is sort of 
like, if what you are doing is not broken, we don't have to fix 
it.
    Is what we have now not working, and therefore we need 
passports? I would like to have a breakdown on that before we 
have a final wrap-up.
    Is it your position, both of you, that you don't think we 
need that passport system that is provided in this legislation? 
We will start with you, Secretary Anefal. Do you want the 
passport system as provided?
    Secretary Anefal. As I stated in my statement, Mr. 
Chairman, we support the United States in terms of providing 
assistance in whatever way possible to fall in line with the 
aftermath of 9/11. But there are changes that could be made 
without having to really deal with having new passports.
    The Chairman. We would be interested in that. You could 
submit that to us.
    Secretary Anefal. Thank you.
    The Chairman. How about you, Mr. Zackios?
    Mr. Zackios. Thank you, Mr. Chairman. As you know, we have 
negotiated the amended immigration provisions. One of our main 
concerns was if these provisions were to dilute the right of 
FSM citizens to enter, work, and live in the United States and 
seek education opportunities.
    We have, however, moved into a machine-readable passport 
system. This system is soon to be operational in the Marshall 
Islands.
    The Chairman. So you don't see any problem if we move in 
the direction mandated in this legislation?
    Mr. Zackios. I think we have negotiated an amendment that 
reflects both of our desires and concerns.
    The Chairman. Okay. Thank you.
    Could I ask, with reference to education, the school 
systems must be rather small. Who runs the schools, either of 
you?
    Mr. Zackios. Thank you, Mr. Chairman.
    In the Marshall Islands, a majority of the schools are run 
by the government.
    The Chairman. The government of the Marshall Islands?
    Mr. Zackios. Yes.
    The Chairman. Do you have schools modeled after American 
schools, grade one or kindergarten through 12, and then post-
high school, or what?
    Mr. Zackios. In most if not all our schools, they are based 
on the U.S. education curriculum, yes.
    The Chairman. And you must be contending that schools are 
not going too well and you would like to improve them, is that 
correct?
    Mr. Zackios. That is correct, Mr. Chairman.
    The Chairman. Does that mean they are not going well as 
compared with, say, ours in the United States? Ours aren't 
going too well, either. Or are they just inadequate? What is it 
that you are telling the committee?
    Mr. Zackios. Mr. Chairman, there is a two-fold issue. Of 
course, we need to improve our education system; but the 
challenges, obviously, are resources that are available to 
focus on a better education system. We feel that with better 
resources and with better human resource capacity, we will be 
able to upgrade the education system in the Marshall Islands.
    The Chairman. Many of your citizens now leave and go to 
other places to work, that is pretty obvious. They leave and go 
to work some other places. Do very many of them return money to 
their families in the islands, to your knowledge? Do they send 
back money?
    The Mexicans are fully aware that the people that work in 
the United States send home millions of dollars to Mexico, 
which help the Mexican communities, the Mexican government, and 
the families. What about yours? Do you have that relationship, 
or not?
    Secretary Anefal. I would say for the FSM, yes. To a larger 
extent it is partly cultural, that you tend to contribute to 
your family.
    The Chairman. I understand it would not be mandatory, but 
you think it is happening in your island?
    Secretary Anefal. Yes, sir.
    The Chairman. Would you say to a large extent? Is a lot of 
the resource that families have there coming from their members 
who are overseas working elsewhere, or a small amount? How 
would you categorize it?
    Secretary Anefal. Not to a large extent; but it is taking 
place, I'm sure.
    The Chairman. How about you? Do you have any observation on 
your end?
    Mr. Zackios. Mr. Chairman, although there is no mandatory 
requirement for repatriation, people do send not only cash but 
they send products back to the islands, as we do to the United 
States, as well.
    The Chairman. So when they leave, it is not a total loss to 
the community? They do contribute, in some ways, resources to 
the communal life.
    What do either of you think the future holds in terms of 
economic development? When I speak of economic development, I 
don't speak of more government. I understand if we put more 
money in, there is more government. If we give you more money 
and there is more government, presumably the Government will 
write more checks, and you would say there is economic 
development. But I'm not talking about that.
    Looking at economic development as non-government 
development of resources, is there a future of any 
significance, or are we going to remain more or less like we 
are for the foreseeable future, in your opinion?
    Mr. Zackios. Mr. Chairman, as you know, we are a small 
island Nation with restricted resources, restricted natural 
resources. I think our main challenge is to educate our people. 
As you have rightly stated, educating our people does not 
necessarily mean we will have a very bright economic future in 
terms of our domestic policy; but it also gives us the 
opportunity to educate our people to become internationally 
competitive, where they may go out and seek opportunities.
    The Chairman. So you don't see anything beyond that, that 
there would be any business opportunities for the island and 
the island people?
    Mr. Zackios. We do see some opportunity, but I don't think 
it will be that kind of opportunity.
    The Chairman. But it won't be much, is that correct?
    Mr. Zackios. Yes, sir.
    The Chairman. How about you, Secretary Anefal?
    Secretary Anefal. That is basically the same story, Mr. 
Chairman. But, of course, education means development in all 
sectors, so education is a priority. But for the private sector 
to thrive, even though the Government has set three sectors in 
our case, agriculture, fisheries, tourism--we have over the 
years begun to see some growth in the tourism sector. 
Unfortunately, because of all these outside occurrences or 
happenings, that has impacted upon the tourism sector, as well.
    The Chairman. The little tourism that you have, or that 
started, what was it? Motels? People coming there to visit? 
Hotels?
    Secretary Anefal. Hotels.
    The Chairman. Resorts?
    Secretary Anefal. Yes.
    The Chairman. Are the islands resort-positive? Do you have 
shorelines that people would enjoy?
    Secretary Anefal. In some of the islands, yes, we have some 
beaches that would be good for tourism development. But 
together with that, of course, would be the infrastructure, 
along with transportation.
    The Chairman. I close with my last observation. I believe 
that the administration is mistaken in the idea of FEMA and 
FEMA's successor. It would seem to me that it is very 
shortsighted to take FEMA out. I think we have to have FEMA in, 
or we have to provide some kind of insurance.
    There is a propensity for danger. Why would we put all our 
money to help build things, and then take away the only 
disaster relief agency that we have? So I would think that, 
Senator Akaka, perhaps bipartisan-wise we could consider 
putting that back. I don't know what the administration thinks 
about that. I take it that we intend to do that, and they will 
react to it in due course. If your response is a terribly 
serious howl, we might reconsider; but let's hope it wouldn't 
be that big a howl. It seems to me it would be rather rational.
    I thank the two of you and others who were here for the 
testimony and helping us today.
    Is the other big issue your inflation issue? Let's just say 
we will consider that. A two-thirds inflation, of course, is 
full inflation. Again, I am very, very familiar with that. That 
doesn't matter for the first 10 years. It is 10, 20, 25, and 
then it gets big. I understand it gets very big at the end.
    Thank you very much.
    Senator Akaka [presiding]. Thank you very much, Mr. 
Chairman.
    Foreign Minister Zackios and Secretary Anefal, it is always 
a pleasure to have you testify before the committee.
    I want to say that I agree with the chairman and also with 
the FAS position on FEMA. I believe we have to examine very 
closely the issue of whether to include FEMA, the FEMA program 
eligibility for the FAS in the proposed revisions to the 
compact.
    As you know, I also support efforts to continue eligibility 
for FAS citizens in Federal programs. That we need to consider 
also.
    I just have a question or two for you, for both of you. We 
can all agree that accountability provisions are important 
steps for all three countries. Part of the problem with the 
first 17 years of the compact was that western ideas were 
placed on Pacific communities and cultures without 
consideration of the traditions and practices of FAS citizens.
    I say that because, as I mentioned in my opening statement, 
I have been in that area before, during the war, and after the 
war. Therefore, I have seen the changes over the years. I also 
feel that this consideration is very important.
    In negotiating these provisions, were cultural practices in 
terms of policy implementation considered? And this question is 
to both of you: If so, do you think these considerations were 
appropriate? Will it make a difference in the implementation of 
the negotiated provisions of the compact? So these questions go 
to both of you.
    Foreign minister Zackios?
    Mr. Zackios. Thank you, Senator.
    Mr. Chairman, I believe we have taken into account in our 
discussions the issues and the local circumstances. I think it 
is important--in doing this, we also looked back on the 17 
years of experience. As I stated in my statement, this is a 
partnership; it is not one looking over the other. That is the 
premise where we tried to work on this. It will be on a 
consensus basis, it is our understanding.
    We do believe that we have to be accountable to our 
citizens, as the United States has to be accountable to its 
taxpayers, and to make sure that in the next 20 years term of 
this economic assistance we do realize our investments in the 
sectors that we have identified for the long-term economic 
advancement of our islands and the fiscal stability of our 
people.
    Senator Akaka. Secretary Anefal.
    Secretary Anefal. Thank you very much, Mr. Chairman.
    Yes, I do believe that the structure that is being proposed 
under the amended compact is really a measurable improvement 
over the original compact. It is my firm belief, too, that all 
policy considerations were taken into account as far as the FSM 
negotiating team was concerned.
    Internal to the FSM would be the--in regard to the cultural 
aspect of your question--the internal setup of FSM, where we 
have, like our sister Republic of the Marshall Islands, we have 
four distinct island governments. So that would be an internal 
factor for the FSM national government to work with.
    But yes; to a large extent, I believe we have taken a lot 
of the cultural and policy considerations into account from the 
beginning, because this is--like what has been said--a 
partnership arrangement; and we foresee that it is going to be 
a continuing working relationship where both sides could come 
to the table and say, okay, maybe this is the plan that should 
be taken, and this is where the money should be put to reflect 
the priorities that we have.
    Mr. Zackios. Mr. Chairman, if I may add a little, this has 
been an area where we had quite elaborate discussions. Although 
this is where we are right now on a voting basis, it would have 
been more preferable as a partnership if this board had a 
consensus mechanism rather than a voting mechanism on the 
allocation of the membership.
    Senator Akaka. I was surprised to read in your testimony 
that there were some unilateral changes that were made to the 
legislative proposal after the negotiations were completed. Can 
both of you further elaborate on these changes?
    Honorable Zackios.
    Mr. Zackios. Thank you, Mr. Chairman. I believe I have 
addressed some of these issues, as you have rightly pointed 
out, in my written testimony. These are in certain areas.
    For example, I would say that in section 177 in particular, 
which is an area that the administration indicated that it has 
no authority to negotiate, changes have been made to this 
particular section of that agreement where we did not 
negotiate.
    Aside from this, there are other sections where we did not 
negotiate, but after signing and concluding, changes were made. 
These include those sections that have been identified where it 
relates to commercial--our eligibility to use commercial 
enterprises. There have been language changes there, and these 
are, to us, substantive in nature.
    In the current instance of section 108(a), the current 
language says that certain commercial U.S. programs shall be 
made available. Under the changes, the language has been 
changed to ``are authorized to be made available.'' I think 
that is a substantial change to how we receive these programs.
    Senator Akaka. Honorable Anefal.
    Secretary Anefal. Thank you, Mr. Chairman. I think I 
briefly touched upon some of the concerns that we have where 
the unilateral changes were made. Likewise, we have enumerated 
these major concerns in the written statement.
    For example, one of the changes that was made--let me back 
off. Let me clarify that we were under the impression that the 
administration was going to do basically updating and necessary 
changes without really making any significant changes.
    For example, I guess partly due to the time constraint 
between the negotiating and the time for submission of the 
package to the Congress, when we eventually got a copy of the 
draft legislation we found out that, for example, the $250,000 
figure has been inserted in there for the FSM to have this 
machine-readable passport program, and to be done within a 
period of 1 year. We don't think it is reasonable. We did not 
really concur to this. It was just maybe an insertion, and we 
object to it, as an example. Thank you.
    Senator Akaka. Thank you.
    Mr. Zackios.
    Mr. Zackios. Mr. Chairman, if I may add, I think that 
section in itself where there was that amendment also goes to 
question certain mechanisms that we have in place, such as the 
establishment of a general pact, because these funds are now 
specifically being identified for us in the sectors, such as 
allocating $250,000 for passport programs. That is telling us 
where our priorities are in the priority sectors that we have 
established.
    These actions, as I also stated in the section 177 
agreement, tend to preempt certain actions that, for the 
Marshall Islands, we have already started; for example, the 
submission of a changed circumstance petition to Congress. 
Thank you.
    Senator Akaka. Are there any further comments that you 
would like to make? Otherwise, I want to say thank you very 
much to all of you, panel one and two, for your testimony and 
your responses to the questions.
    I declare that the Committee on Energy and Natural 
Resources in the hearing of the Compact of Free Association is 
adjourned. Thank you.
    [Whereupon, at 4:30 p.m. the hearing was adjourned.]
                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

   Responses of the Administration to Questions From Senator Domenici
    Question 1. The Administration's legislation eliminates FEMA 
eligibility for the Freely Associated States and replaces the program 
with the U.S. AID'S Office of Foreign Disaster Assistance (OFDA). Will 
OFDA fully replace FEMA's disaster and rehabilitation programs and 
services?
    Answer. This question has been asked of the United States 
Negotiator, Office of Compact Negotiations in the Department of State. 
He will state the position of the Administration on this question.
    Question 2. How will losing FEMA eligibility impact the islands?
    Answer. This question has been asked of the United States 
Negotiator, Office of Compact Negotiations in the Department of State. 
He will state the position of the Administration on this question.
    Question 3. Are the levels of economic assistance under the amended 
Compacts sufficient to maintain essential government operations and 
ensure economic and social stability?
    Answer. This question has been asked of the United States 
Negotiator, Office of Compact Negotiations in the Department of State. 
He will state the position of the Administration on this question.
    Question 4. The amended Compacts' trust fund agreements state that 
each nation will initially contribute $30 million to the trust funds. 
How much has each country contributed to date? What assurance does 
Congress have that any remaining FSM or RMI contributions will be made 
by the required dates?
    Answer. We expect that both the RMI and FSM will comply with the 
agreements they have signed, and will contribute the funds at the times 
required in the agreements (see section 215(b) of the U.S.-FSM amended 
Compact and section 216(b) of the U.S.-RMI amended Compact). We 
anticipate that each party to each trust fund will jointly make the 
initial contribution to the respective trust fund.
    I met in July with the Secretary of Finance and Administration for 
the FSM, Mr. John Ehsa, regarding the FSM trust fund. I was told that, 
at the present time, the FSM has over $27 million ready to deposit in 
the trust fund and that they expect to have the full $30 million in 
hand by October 1, 2003. Furthermore, Mr. Ehsa stated that the FSM is 
anxious to deposit the FSM funds, along with the United States 
contribution as soon as possible after October 1, 2003, in order for 
the fund to begin generating income and additional corpus in the 
crucial early months of the life of the trust fund.
    While I have not spoken directly with officials of the RMI 
regarding their trust fund contribution, we have no reason to believe 
that they will not live up to the agreement they have signed and 
contribute their $30 million in accordance with section 216(b) of the 
U.S.-RMI amended Compact.
    With regard to the United States, under the amended Compact, the 
U.S. contributions are contingent on the FSM and RMI contributions; but 
otherwise the only event that would delay a United States contribution 
would be the lack of an appropriation by the Congress. Such an event 
would occur if the Congress did not pass the authorizing legislation 
contained in S.J. Res. 16 or H.J. Res. 63, which includes the necessary 
permanent and indefinite appropriations.
    Question 5. How will the trust fund be administered?In particular, 
please describe the investment strategy for the trust funds.
    Answer. The trust fund for the RMI and the trust fund for the FSM 
will be held in separate financial institutions (``trustee'') organized 
in the United States. Each trustee will hold the trust fund under the 
direction of a five-member governing body (Joint Trust Fund Committee), 
of which three members shall be officers of the Government of the 
United States and two shall represent the RMI or the FSM, respectively.
    The U.S., FSM and RMI have signed subsidiary agreements regarding 
the respective trust funds. These agreements provide that each trust 
fund will have a governing body as described above, a ``trustee'' 
selected from among trust institutions organized in the U.S. with a net 
worth in excess of $100 million, at least ten years experience as a 
custodian of financial assets, and experience in managing trust funds 
of at least $500 million that will have legal custody of the funds, and 
an investment advisor that will advise the governing body on investment 
decisions. The trust fund subsidiary agreements contemplate investment 
in a full range of investment vehicles, including common stocks.
    An investment strategy will be developed, respectively, by each 
governing body, with the help of its investment advisor. Until the 
governing bodies take on their official duties and consult with their 
investment advisors, it would be premature to predict the specifics 
with regard to their investment strategy and asset allocation.
    Question 6(a). The Department of the Interior has indicated that it 
will increase its staff in order to administer and oversee future 
compact assistance. Please explain your Department's potential staff 
increase, and how the determination was made that this was the 
appropriate level of staff.
    Answer. The DOI's Compact implementation team will be composed of 
nine staff members. A program specialist was hired prior to fiscal year 
2003 and is located in the United States Embassy in Pohnpei, FSM; he 
will be one of the nine-member team. One position was recently filled 
in Washington by a senior grants manager, who will serve as the overall 
program coordinator. Five positions are currently being recruited for 
an office in Honolulu. These include two financial positions with 
accounting/auditing backgrounds and one program specialist with an 
economics background. We are also recruiting two program specialists 
for the Honolulu office, one with a background in health care and one 
with a background in education. We are also currently recruiting a 
program specialist to be placed, subject to approval of the Chief of 
Mission, in the United States Embassy in Majuro, Republic of the 
Marshall Islands. Finally, we expect to fill a sixth position in 
Honolulu early next year, which will be for an engineer to help monitor 
and oversee infrastructure development. In summary, the DOI's Compact 
implementation team will consist of nine permanent employees, of whom 
six will be located in Honolulu, one in Pohnpei, one in Majuro, and one 
in Washington, D.C. If we need additional help, particularly in the 
early stages of Compact implementation, we can obtain it through 
temporary positions, reimbursable arrangements with other Federal 
agencies, or contractual arrangements.
    The determination of the appropriate level of staffing was made 
after considerable input from external sources and internal discussion 
within the Department, including comparisons of the staff to dollars 
ratios in similar financial assistance programs. OIA also evaluated and 
sought input regarding the mix of personnel; thus there will be 
specialists in the three major sector areas under the Compact: health, 
education and infrastructure as well as personnel with strong financial 
backgrounds. Feedback from several sources indicated a strong need for 
some permanent on-site personnel. This resulted in a decision to place 
generalists in each of the embassies, subject to the concurrence of the 
Chiefs of Mission, who will constantly receive and evaluate information 
on the ground and either take necessary action to correct problems or 
pass information to the appropriate specialists. The single DOI 
position in Washington will serve an overall coordinating role. A 
position in Washington is necessary because (1) the budget process 
occurs in Washington, (2) all disbursements are made from Washington, 
(3) interagency group coordination takes place in Washington and (4) 
day-today liaison with the Department of State is facilitated in 
Washington.
    OIA's staffing proposal was reviewed and approved by the 
Department, by the Office of Management and Budget and by the Congress 
in the appropriations process.
    Question 6(b). Why won't the additional staff working on Compact 
issues be located in the RMI or FSM?
    Answer. DOI's Compact implementation team will actually have staff 
permanently located in the RMI and FSM, and most of the staff that is 
not permanently located in the FAS will nonetheless spend a great deal 
of time there. The nine positions will be located as follows: one in 
Washington, D.C. (program coordinator), six in Honolulu (two auditor/
accountants, three program specialists and one engineer) and, with the 
concurrence of the Chiefs of Mission, one in Majuro (program 
specialist) and one in Pohnpei (program specialist).
    In order to understand DOI's Compact implementation staffing plan, 
it is important to understand how the overall Compact accountability 
plan is designed to work and the specific tasks that DOI's Compact 
implementation team will be responsible for.
    The Compact accountability plan is designed to ensure that Compact 
dollars are properly allocated and accounted for and that the results 
of Compact spending are properly measured. DOI's Compact team will 
therefore be responsible for, among other things: (a) providing 
staffing work for the bilateral joint committees that will approve the 
allocation of Compact funds and the performance measures and standards 
(which will in turn require the team to provide substantive analysis on 
the effectiveness of Compact grants in the areas targeted for 
spending); (b) reviewing and analyzing the various plans and reports 
that will be required under the amended Compact; (c) reviewing and 
analyzing the regular and special audits that will be prepared for the 
freely associated states or for specific programs; (d) reviewing and 
analyzing the documentation submitted by the respective freely 
associated states for Compact expenditures; (e) making frequent visits 
to project sites and local government offices to verify documentation 
that is submitted; (f) remaining in contact with local sources to 
determine if any matters warrant investigation, and determining whether 
to request investigations by the appropriate Federal entities (which 
investigations the RMI and FSM have agreed to permit and cooperate with 
under the amended Compact); (g) working with Federal agencies that are 
providing services in the freely associated states to promote a 
coordinated Federal approach to assistance to the region; and (h) 
coordinating with the office of Insular Affairs home office in 
Washington, D.C., to ensure that the actions in the field properly 
reflect policy and that policy is properly informed by what is learned 
from the field.
    The Compact accountability plan does not envision that DOI's 
Compact implementation team will be a police force which must be able 
to arrive on the scene of any waste, fraud or abuse instantly in order 
to catch the perpetrators. Rather, the oversight plan provides various 
check points at which waste, fraud or abuse can be discovered, whether 
through discrepancies between reports and documentation and the reality 
discovered on the ground, through on-the-ground intelligence, through 
audits, through discovery and disclosure by the local governments (and 
the Compact's new public sector capacity development grant is designed 
to improve the ability of the RMI and FSM to discover problems) or 
through the failure of the Compact budgets to achieve objectively 
measured performance standards. The amended Compact expressly permits 
the U.S. to withhold funds if it is subsequently discovered that 
Compact funds have been spent in an improper manner. Thus, if there are 
cases in which we are unable to prevent waste, fraud and abuse even 
with the improved procedures of the amended Compact, we will still have 
several opportunities to discover it after the fact and exercise 
remedies in order to make the program whole.
    The staffing plan for DOI's Compact implementation team is designed 
to ensure implementation of the Compact accountability program. Most of 
the work of the team does not need to be done in the RMI or FSM, as the 
case may be. Communicating with local governmental officials and 
project managers; reviewing and analyzing plans, reports, audits, 
investigations and documentation; staffing the joint committees; 
coordinating with Federal partners and the home office; reviewing 
intelligence received from the region; and consulting with regional 
experts in order to make substantive recommendations to the joint 
committees can all be done, and in many cases are better done, from 
outside of the RMI and FSM.
    Since the team will require substantive expertise, especially in 
the primary target areas of health, education and infrastructure, a 
staffing program that relied primarily on employees permanently based 
in the RMI and FSM would be inefficient and duplicative. An in-country 
staffing plan would, for example, require separate health grants 
experts for each of the RMI, the FSM national government and all four 
states of the FSM (which function with a substantial amount of autonomy 
and will be the primary sub-grantees for FSM grants). We think it would 
make more sense to leverage our resources by having a single health 
grants expert cover both countries and all four states of the FSM. The 
same logic would apply to our experts in education and infrastructure.
    We were also cognizant of the possibility that employees that are 
permanently based in the RMI or FSM could be susceptible to losing some 
of their objectivity. This is why the State Department rotates its 
overseas personnel frequently.
    In light of all of the factors that we had to consider, we came to 
the conclusion that, rather than rely primarily on employees based 
permanently in the RMI, the FSM and each of the four states of the FSM, 
we should have a core team of professionals based in the Pacific that 
would: (a) make frequent trips through the RMI and FSM; (b) remain in 
constant communication with partners and colleagues in the freely 
associated states, Federal agencies, institutions with expertise on the 
region and the home office; and (c) be supplemented by a staffer based 
in each of the RMI and the FSM that would be an ``eyes and ears'' for 
waste, fraud and abuse and other problems, and would have the ability 
to call in additional resources (from the rest of the team, the home 
office or investigative agencies of the Federal Government) if 
necessary. For a variety of reasons, we decided that Honolulu would be 
the best place to locate the core team.
    The Honolulu location is the one place in the United States with 
business day overlap with the freely associated states, Washington, 
D.C. and the West Coast with its Region Nine offices. Region Nine plays 
a coordination role for Federal programs, and Honolulu is where 
programs that serve the freely associated states are based. In-depth 
institutional knowledge regarding the freely associated states can be 
found in Honolulu at the East West Center, at the University of Hawaii, 
with the U.S. Corps of Engineers, and in hospitals experienced in 
medical referrals. Another very important reason is the ability to 
recruit and retain high quality professional staff on a permanent 
basis. The Honolulu team will be able to travel frequently to the 
freely associated states. While travel costs are high from Honolulu, 
additional travel costs are offset by not having to supply permanent 
housing, post differential, home leave, and education for dependents 
that come with foreign posts.
    Needless to say, we will constantly evaluate the effectiveness of 
this staffing plan and make changes as necessary. However, we have put 
a great deal of thought into devising the best plan and we are 
confident that we have come up with a plan that we are capable of 
implementing successfully.
    Question 6(c). How much will your plans cost?
    Answer. We budgeted $800,000, which was appropriated to begin 
establishing the offices in fiscal year 2003. An additional $900,000 to 
fully fund all positions has been requested for fiscal year 2004. Thus, 
we estimate the total cost for full operations of DOI's Compact 
implementation team will be approximately $1.7 million annually.
    Question 7. Does the Interior Department have information regarding 
how future funds might be withheld if problems occur, particularly in 
the areas of health and education? For example, if schools in the FSM/
RMI are not meeting grant conditions, how would the U.S. determine the 
amount and timing of funds that could be withheld?
    Answer. Withholding funds will be a last resort. We believe that 
our accountability program will succeed not because of any withholding 
of funds, but because we will work together with our partners in the 
freely associated states to achieve a better program. We believe that 
through cooperation with our partners, we will achieve much better 
accountability than either party could achieve acting alone. Under the 
amended Compact, U.S. grant assistance may be used for capacity 
building in the public sector. Grant assistance to this sector will be 
designed to improve the ability of the RMI and the FSM to prevent and 
detect waste, fraud and abuse.
    While the withholding of funds generally will not be our first 
option, our ability to do so will give us more leverage to insist that 
specific steps be taken to improve accountability should that be 
necessary. We should certainly be willing to withhold funds in cases 
where there has been an intentional violation of the terms of the 
Compact, such as in cases of theft or corruption. In general, however, 
the decision to withhold funds will be made on a case-by-case basis 
with reference to all relevant factors and in light of the objectives 
that we are trying to achieve.
    We view the performance measures and standards primarily as a 
planning tool. The failure to achieve objectives generally would not, 
absent misconduct, argue in favor of withholding funds. Depending on 
the circumstances, though, it might argue in favor of allocating 
Compact funds differently. It is not our intention to punish the RMI or 
the FSM if our Compact investments do not fully succeed in every 
instance. Rather, it is our intention to use the performance measures 
and objectives to determine if we are allocating our resources 
effectively, and to guide adjustments in course as appropriate to 
maximize our chances of eventual success.
    Although we intend to allow the RMI and the FSM to establish their 
own priorities within the parameters set by the amended Compact, the 
applicable joint committee would not be expected to approve an annual 
allocation of U.S. grant assistance which, according to the results of 
performance measurement, would not be a promising means to achieve 
improvements in health, education or the other targeted areas. Under 
such a scenario, the joint committee's best course of action would 
probably not be to withhold funds, but to insist on appropriate changes 
to the proposed allocation of grant assistance.
    However, if the performance measures (or any of the other 
information available to us) lead us to discover negligence or 
intentional misconduct in connection with the use of Compact funds, we 
would be much more likely to exercise remedies. Remedies in such case 
could be exercised directly by the Department of the Interior, rather 
than by the applicable joint committee.
    Question 8. How will Compact grants be protected from the long-term 
impacts of inflation?
    Answer. This question has been asked of the United States 
Negotiator, Office of Compact Negotiations in the Department of State. 
He will state the position of the Administration on this question.
    Question 9. Why was a 2/3 partial inflation adjustment selected and 
not a full inflation adjustment?
    Answer. This question has been asked of the United States 
Negotiator, Office of Compact Negotiations in the Department of State. 
He will state the position of the Administration on this question.
                                 ______
                                 
   Responses of the Administration to Questions From Senator Bingaman
    Question 1. Your chart illustrates the estimated decline in per 
capita assistance over the next 20 years under the proposed 
legislation. Have you estimated how this decline would affect the rate 
of migration to the U.S.? Would replacing the partial inflation 
adjustment (2/3rds) with a full inflation adjustment have a significant 
impact on estimated per capita assistance, trust fund performance, and 
on estimated migration rates?
    Answer. The chart in question was provided by the witness for the 
General Accounting Office. She would be in a better position to 
respond.
    Question 2(a). What progress have the FSM and RMI made in 
developing the technical capabilities necessary to meet the new 
accountability measures?
    Answer. The RMI and FSM have had considerable experience with 
numerous United States Federal programs and these same requirements and 
remedies, so there is very little that will be new to them at a 
professional level. One new element that should help ensure improved 
performance is the creation of joint management boards that will make 
determinations on the annual allocation of Compact funds among six 
sectors and will ensure both program and economic performance goals are 
being addressed and closely monitored. One of the six sectors is 
capacity building; this will allow the United States and the freely 
associated states to identify deficiencies in technical and management 
capabilities and direct resources toward specific problems areas. This 
funding will be further augmented by technical assistance in a variety 
of areas provided by the Department of the Interior, including but not 
limited to financial management (including procurement), economic and 
statistical collection and analysis, operations and maintenance of 
infrastructure, planning and budgeting, and economic development. 
Interior has already provided technical assistance funding this past 
year that will aid the freely associated states in complying with new 
Compact fiscal and reporting requirements.
    Question 2(b). Are discussions underway to develop the objectives 
and performance standards for each of the proposed sector grants 
(education, health, private sector development, capacity building in 
the public sector, environment)?
    Answer. Discussions have been underway for some time to develop 
objectives and performance standards for the proposed sector grants. 
The Office of Insular Affairs recently provided technical assistance 
funding for the RMI to hire experts to aid it in developing performance 
standards for OIA to review. The FSM has already proposed performance 
standards that OIA is reviewing. OIA staff traveled to the FSM in the 
spring, and attended a July 31, 2003 meeting in Pohnpei on performance 
standards to make sure they are appropriate. Additionally, the OIA has 
approved major technical assistance funding for both the RMI and FSM to 
upgrade their financial management systems.
    Question 3(a). The proposed accountability mechanisms include 
establishment of two joint economic management committees. There are to 
be three U.S. members on each of these two committees. Have you decided 
who those three officials will be?
    Answer. For this year, the three United States officials will be:

          (1) David B. Cohen, Deputy Assistant Secretary of the 
        Interior for Insular Affairs;
          (2) Matthew Daley, Deputy Assistant Secretary of State for 
        East Asia and the Pacific;
          (3) William Steiger, Special Assistant to the Secretary of 
        Health and Human Services for International Affairs.

    The Department of State and the Department of the Interior have the 
greatest roles in implementing the amended Compact and the Department 
of Health and Human Services provides many of the important programs in 
this area (and under the terms of the Compact health is one of the two 
priority sectors for U.S. grant assistance). It is important to note, 
however, that regardless of which U.S. officials serve on the joint 
committees, the U.S. delegation will be able to avail itself of the 
expertise of an interagency committee that includes all of the relevant 
departments from the Federal Government. In addition, the ambassadors 
to the RMI and the FSM, respectively, and the staffs of the Department 
of the Interior and the Department of State will be able to provide 
advice and guidance to the U.S. delegation.
    Question 3(b). Given the expertise of the Asian Development Bank 
(ADB) in regional economic development, and their involvement in the 
FSM and RMI over the past 10 years, doesn't it make sense to have a 
U.S. official from the ADB as one of the members?
    Answer. The joint committees will benefit from the advice emanating 
from several quarters. The interagency committee will help. 
Representatives from the Department of Treasury will be involved. We 
are actively engaged with the ADB on a number of projects.
    I visited the ADB in Manila earlier this year to discuss how the 
United States and the ADB can coordinate assistance in light of the new 
financial assistance provisions of the Compact. In return, I have been 
visited in Washington by ADB officials, including Joseph Eichenberger, 
the U.S. Treasury official who is a Vice-President of the ADB. With 
this thorough interaction between United States officials and the ADB, 
we do not believe that membership on the joint committees by a U.S. 
official from the ADB is necessary.
    Question 4. The additional staff to be hired by the Department of 
the Interior to assure that financial assistance will be used more 
effectively will not be stationed in the FSM and RMI. Are you confident 
that the Department will be able to exercise necessary diligence with 
staff stationed in-country?
    Answer. DOI's Compact implementation team will actually have staff 
permanently located in the RMI and FSM, and most of the staff that is 
not permanently located in the FAS will nonetheless spend a great deal 
of time there. The nine positions will be located as follows: one in 
Washington, D.C. (program coordinator), six in Honolulu (two auditor/
accountants, three program specialists and one engineer) and, with the 
concurrence of the Chiefs of Mission, one in Majuro (program 
specialist) and one in Pohnpei (program specialist).
    In order to understand DOI's Compact implementation staffing plan, 
it is important to understand how the overall Compact accountability 
plan is designed to work and the specific tasks that DOI's Compact 
implementation team will be responsible for.
    The Compact accountability plan is designed to ensure that Compact 
dollars are properly allocated and accounted for and that the results 
of Compact spending are properly measured. DOI's Compact team will 
therefore be responsible for, among other things, (a) providing 
staffing work for the bilateral joint committees that will approve the 
allocation of Compact funds and the performance measures and standards 
(which will in turn require the team to provide` substantive analysis 
on the effectiveness of Compact grants in the areas targeted for 
spending); (b) reviewing and analyzing the various plans and reports 
that will be required under the amended Compact; (c) reviewing and 
analyzing the regular and special audits that will be prepared for the 
freely associated states or for specific programs; (d) reviewing and 
analyzing the documentation submitted by the respective freely 
associated states for Compact expenditures; (e) making frequent visits 
to project sites and local government offices to verify documentation 
that is submitted; (f) remaining in contact with local sources to 
determine if any matters warrant investigation, and determining whether 
to request investigations by the appropriate Federal entities (which 
investigations the RMI and FSM have agreed to permit and cooperate with 
under the amended Compact); (g) working with Federal agencies that are 
providing services in the freely associated states to promote a 
coordinated Federal approach to assistance to the region; and (h) 
coordinating with the Office of Insular Affairs home office in 
Washington, D.C., to ensure that the actions in the field properly 
reflect policy and that policy is properly informed by what is learned 
from the field.
    The Compact accountability plan does not envision that DOI's 
Compact implementation team will be a police force which must be able 
to arrive on the scene of any waste, fraud or abuse instantly in order 
to catch the perpetrators. Rather, the oversight plan provides various 
check points at which waste, fraud or abuse can be discovered, whether 
through discrepancies between reports and documentation and the reality 
discovered on the ground, through on-the-ground intelligence, through 
audits, through discovery and disclosure by the local governments (and 
the Compact's new public sector capacity development grant is designed 
to improve the ability of the RMI and FSM to discover problems) or 
through the failure of the Compact budgets to achieve objectively 
measured performance standards.
    The amended Compact expressly permits the U.S. to withhold funds if 
it is subsequently discovered that Compact funds have been spent in an 
improper manner. Thus, if there are cases in which we are unable to 
prevent waste, fraud and abuse even with the improved procedures of the 
amended Compact, we will still have several opportunities to discover 
it after the fact and exercise remedies in order to make the program 
whole.
    The staffing plan for DOI's Compact implementation team is designed 
to ensure implementation of the Compact accountability program. Most of 
the work of the team does not need to be done in the RMI or FSM, as the 
case may be. Communicating with local governmental officials and 
project managers; reviewing and analyzing plans, reports, audits, 
investigations and documentation; staffing the joint committees; 
coordinating with Federal partners and the home office; reviewing 
intelligence received from the region; and consulting with regional 
experts in order to make substantive recommendations to the joint 
committees can all be done, and in many cases are better done, from 
outside of the RMI and FSM.
    Since the team will require substantive expertise, especially in 
the primary target areas of health, education and infrastructure, a 
staffing program that relied primarily on employees permanently based 
in the RMI and FSM would be inefficient and duplicative. An in-country 
staffing plan would, for example, require separate health grants 
experts for each of the RMI, the FSM national government and all four 
states of the FSM (which function with a substantial amount of autonomy 
and will be the primary sub-grantees for FSM grants). We think it would 
make more sense to leverage our resources by having a single health 
grants expert cover both countries and all four states of the FSM. The 
same logic would apply to our experts in education and infrastructure.
    We were also cognizant of the possibility that employees that are 
permanently based in the RMI or FSM could be susceptible to losing some 
of their objectivity. This is why the State Department rotates its 
overseas personnel frequently.
    In light of all of the factors that we had to consider, we came to 
the conclusion that, rather than rely primarily on employees based 
permanently in the RMI, the FSM and each of the four states of the FSM, 
we should have a core team of ``professionals based in the Pacific that 
would (a) make frequent trips through the RMI and FSM; (b) remain in 
constant communication with partners and colleagues in the freely 
associated states, Federal agencies, institutions with expertise on the 
region and the home office; and (c) be supplemented by a staffer based 
in each of the RMI and the FSM that would be an ``eyes and ears'' for 
waste, fraud and abuse and other problems, and would have the ability 
to call in additional resources (from the rest of the team, the home 
office or investigative agencies of the Federal Government) if 
necessary. For a variety of reasons, we decided that Honolulu would be 
the best place to locate the core team.
    The Honolulu location is the one place in the United States with 
business day overlap with the freely associated states, Washington, 
D.C. and the West Coast with its Region Nine offices. Region Nine plays 
a coordination role for Federal programs, and Honolulu is where 
programs that serve the freely associated states are based. In-depth 
institutional knowledge regarding the freely associated states can be 
found in Honolulu at the East West Center, at the University of Hawaii, 
with the U.S. Corps of Engineers, and in hospitals experienced in 
medical referrals. Another very important reason is the ability to 
recruit and retain high quality professional staff on a permanent 
basis. The Honolulu team will be able to travel frequently to the 
freely associated states. While travel costs are high from Honolulu, 
additional travel costs are offset by not having to supply permanent 
housing, post differential, home leave, and education for dependents 
that come with foreign posts.
    Needless to say, we will constantly evaluate the effectiveness of 
this staffing plan and make changes as necessary. However, we have put 
a great deal of thought into devising the best plan and we are 
confident that we have come up with a plan that we are capable of 
implementing successfully.
    Question 5. The Asian Development Bank (ADB) has played an 
important role in economic development under the compact by providing 
grants for construction and technical assistance, and by chairing the 
``Consultative Group'' for each of these two nations. This Group is the 
forum which coordinates assistance and activities among the various 
donors. Do you object if the new accountability provisions specifically 
provide for the continued ADB involvement?
    Answer. We have a bilateral relationship with each of the freely 
associated states. We do not believe it prudent to compromise the 
sovereignty of the United States by giving a formal role in these 
relationships to a non-United States entity. We appreciate the 
cooperative relationship we have with the ADB as it pursues its work on 
programs that help the FAS and will continue to work very closely with 
the ADB to ensure that our programs are well coordinated to maximize 
our chances of success.
    Question 6. This legislative package provides for an extension, 
beyond 2016, for U.S. access to the missile test site at Kwajalein 
Atoll. However, several landowners find the terms unacceptable. Is 
there a deadline by which time an agreement will need to be reached 
between the Marshall Islands Government and the Kwajalein Landowners in 
order to avoid issues with U.S. access in 2016? Given that the current 
agreement is good until 2016, could this issue be deferred from 
consideration under this legislation to allow negotiations to continue? 
Is there a contingency plan to deal with the possibility that the RMI 
government may be unable to reach an agreement with the landowners soon 
enough to avoid a disruption in U.S. access to Kwajalein? (There are 
practical problems with the exercise of eminent domain in the RMI 
because of traditional land rights.)
    Answer. This question has been asked of the United States 
Negotiator, Office of Compact Negotiations in the Department of State. 
He will state the position of the Administration on this question.
    Question 7. In addition to including the agreements with the FSM 
and RMI, this new legislation has several ``updates'' to the Compact 
Act, within which the two new agreements are nested. The testimony of 
the FSM and RMI states that these ``updates'' are, in several cases, 
substantive and were revealed to the islanders just days before the 
legislation was transmitted to Congress. Are you prepared to review 
these changes with them and the Committee staff to determine whether 
their concerns can be resolved?
    Answer. This question has been asked of the United States 
Negotiator, Office of Compact Negotiations in the Department of State. 
He will state the position of the Administration on this question.
    Question 8. The Administration is in the process of reviewing a 
report which the Republic of the Marshall Islands submitted to Congress 
seeking additional compensation pursuant to the so-called ``changed 
circumstances'' provisions of the Compact. When can we expect the 
Administration to submit its views to Congress?
    Answer. This question has been asked of the United States 
Negotiator, Office of Compact Negotiations in the Department of State. 
He will state the position of the Administration on this question.
                                 ______
                                 
                                  U.S. Department of State,
                                      Washington, DC, June 3, 2003.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate.
    Dear Mr. Chairman: Thank you for your letter of June 2 regarding 
the Compact of Free Association with the Republic of the Marshall 
Islands (RMI) and the Federated States of Micronesia (FSM).
    I am writing in reply to your specific question concerning the 
implications for expiring Federal programs of the U.S. Compact funding 
agreed upon with the FSM and RMI under the Compact of Free Association, 
to the extent that such programs and services continue to be available 
to State and local governments of the United States.
    The State Department's Office of Compact Negotiations recently 
renegotiated the economic assistance terms of the Compact of Free 
Association with the FSM and RMI, and agreed to extend such assistance 
for 20 years (through 2023), subject to Congressional approval. The 
Administration is presently preparing legislation, to be transmitted to 
Congress, incorporating the agreement reached with the FSM and RMI.
    Under our agreement, U.S. assistance would be devoted to key 
economic sectors, with the highest priority accorded to the education 
and health sectors. While assistance to the FSM and the RMI under 
existing Federal programs was considered in the formulation of the 
assistance package, the amount of the assistance package was not 
specifically structured to substitute for or replace existing Federal 
programs.
    We recognize that it is the prerogative of the Congress to 
determine whether to extend or continue the eligibility of the FSM and 
RMI for any particular Federal program. A more complete statement of 
the Administration's policy on the relationship between certain Federal 
programs and the amended Compact is attached.
    This letter has been coordinated with the Office of Management and 
Budget.
    We would be pleased to meet with you or your staff, along with 
representatives from the appropriate agencies on this matter.
            Sincerely,
                                             Paul V. Kelly,
                          Assistant Secretary, Legislative Affairs.
Policy Regarding the Relationship Between Certain U.S. Federal Programs 
  and the Compact of Free Association, as Amended, With the Federated 
  States of Micronesia (FSM) and the Republic of the Marshall Islands 
                                 (RMI)
    Under section 221(b) of Title Two of the amended Compact we have 
recently signed with the FSM and RMI, to the extent authorized by the 
Congress oftheUnited States, the Government of the United States would 
make available to the FSM/RMI the services and programs that were 
available on the effective date of the compact, as amended.
    This provision keeps the door open for the continuing eligibility 
of the FSM/RMI for U.S. federal programs, to the extent provided by the 
Congress. It does not assume that particular federal programs are to be 
continued nor does it operate to reinstate any programs that terminated 
prior to the effective date of the Compact, as amended. It does 
acknowledge the role of Congress in determining the appropriateness, 
continuing applicability, and funding for such programs in the future.
    The amended Compact, to be submitted by the Administration to 
Congress for passage, would provide continued economic support to the 
FSM/RMI. While the Administration was aware of the level, type, and 
status of existing federal programs when formulating the Title Two 
assistance, the amount of the assistance was not specifically 
structured to substitute for or replace existing programs, nor intended 
to express a view with respect to continuation or reauthorization of 
any federal program.
    The Administration, including agencies administering federal 
program funds to the FSM/RMI, will continue to update Congress on the 
appropriateness and effectiveness of federal programs and U.S. funding 
to the FSM/RMI.
                                 ______
                                 
                    Department of Economic Affairs,
                            Federated States of Micronesia,
                               Palikir, Pohnpei, FM, July 25, 2003.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Chairman Domenici: I have the honor to refer to your letter of 
July 18, 2003 in which you transmitted additional written questions 
from the Committee in connection with its July 15 hearing on the 
Compact of Free Association. I am pleased to enclose the response to 
the relevant questions.
    I wish to thank you, and through you the Members of the Committee, 
for holding the hearing and for your continued attention to this matter 
of utmost importance to my nation.
    With best regards, I am
            Sincerely,
                                       Sebastian L. Anefal,
                                                         Secretary.
    Responses of Sebastian Anefal to Questions From Senator Domenici
    Question 1. Are the levels of economic assistance under the Amended 
Compacts sufficient to maintain essential government operations and 
ensure economic and social stability?
    Answer. There is no established way to determine the right level of 
government operations or economic assistance. It can be said, however, 
that the FSM has managed, at current levels of Compact assistance, to 
provide and maintain a minimum level of acceptable Government services, 
to achieve social stability and to make some economic progress. In 
developing its positions for the negotiations on Compact amendments the 
FSM was assisted by experts funded by the Asian Development Bank, who 
spent several years analyzing the FSM experience under the Compact. 
They recommended, and the FSM negotiators proposed to the United 
States, that assistance should remain at current levels to ensure both 
the provision of a minimal level of government services and to maintain 
economic and social stability. Without making any analysis of its own, 
and citing no disagreement with the FSM's economic analysis, the U.S. 
negotiators put forward offers based only on arbitrary numbers 
assigned, presumably, by OMB. It is the judgment of the FSM's experts 
and other objective advisors that the OMB's self described, ``last and 
best offer'' falls seven million dollars annually short of the level 
most likely to be required to avoid a ``crash and bum'' economic 
scenario, beginning in the very first year of the new arrangement. We 
cannot help but wonder why, if the United States Administration is 
serious about the goals of the Compact, the FSM has been presented with 
an arbitrary stone wall on the level of giant funding with no 
refutation or even consideration of our economic analysis, while the 
levels of grant assistance requested by the RMI have been met, even 
irrespective of their separate requests for Kwajelein.
    Question 2. What will be the impact on the standard of living in 
your nation under the amended Compacts?
    Answer. The impact will be severe, negative and immediate. The FSM 
National Government has already budgeted for a fifteen percent 
reduction in the first year of the amended Compact. Things will get 
worse, not better, as time goes on. With such a negative shock in the 
beginning followed by annual regular decrements and lack of full 
indexation for inflation, our experts project an annual decline of GDP 
by 0.6 percent. It is simply a fantasy to expect the attraction of 
foreign investment and other aspects of economic growth that the U.S. 
would like to expect of us. We cannot blame the original Compact 
negotiators for having had unrealistic economic expectations for a new, 
small-island undeveloped country, but at this stage we should all know 
better. The FSM welcomes improved efficiency as a byproduct of improved 
accountability, and that would show results over time on an otherwise 
level field. The problem here is going to be the negative initial 
shock, further complicated by annual decrements and lack of full 
indexation. Why, some ask, did we sign such a deal? The answer is 
simple. We had no choice. The Administration has refused further 
negotiation, and the U.S. Congress is our last hope.
    Question 3. How will sector grants be distributed in your nation?
    Answer. Pursuant to the terms of the amended Compact and of its 
associated Fiscal Procedures Agreement, the distribution of sector 
grant funding will be driven by: (a) the FSM's comprehensive Strategic 
Development Plan as it evolves during the assistance period; and (b) 
the FSM National and State annual budgets--all as subjected to 
continuous scrutiny by the Joint Economic Management Committee (JEMCO). 
The equities involved in the proportionate internal distribution of 
grant benefits is also a matter for continuing review and discussion by 
the FSM State and National leadership.
    Question 4. The amended Compact requires your nation to initially 
contribute $30 million to a trust fund. How much has your country 
contributed to date? What are your plans for providing the remaining 
contributions?
    Answer. The FSM as of now has appropriated 26.76 million of the 
required 30 million dollars that must be contributed by September 30, 
2004, and is anxious to see it placed in the Trust Fund as soon as 
possible. No actual contribution can yet be made, because the Trust 
Fund instrument only becomes effective upon implementation of the 
amended Compact. We are examining other possible sources for the 
remaining contribution, with the incentive that the sooner it is placed 
in the Fund, the sooner it begins earning income.
    Question 5. It is my understanding that the RMI and FSM seek full 
inflation adjustment as opposed to the 2/3 partial inflation 
adjustment. Please explain.
    Answer. The 2/3 formula in the original Compact, while arbitrary in 
amount, was conceived by the U.S. Administration to encourage a gradual 
reduction of the FSM's dependence on external assistance. It was part 
of the original package that at the time, like now, we had no choice 
but to agree to. During the recently-concluded negotiations of the 
Compact amendments the U.S. unilaterally decided to introduce a second 
``weaning'' factor in the form of the decrements. Both of these 
features, lack of full indexation and the decrements, are reductions in 
the real level of transfers, and will adversely affect the FSM economy. 
Each produces an annual 0.3 percent reduction in GDP. While the FSM had 
no choice but to cope with the annual impediment to its economy due to 
the lack of full indexation during the first Compact period, we feel 
that the imposition of double-weaning is unfair and unwise. It will 
place an even more severe impediment on economic growth than before, 
further burdening the FSM's efforts to develop its fledgling private 
sector. In order to avoid that outcome, the FSM has requested the U.S. 
Congress to remove one of the weaning factors by providing for full 
indexation, calculated monthly as monthly grant payments are made, and 
capped at the original 7 percent. Provision for full indexation will 
maintain the real value of annual grants to ensure continuity of 
essential Government services and improved prospects for economic 
growth. It will also allow for increased transfers to the Trust Fund.
    Question 6. Does your government have the technical capabilities 
necessary to meet the terms of future assistance by this fall?
    Answer. Yes, and this has been demonstrated by our preparations so 
far to meet the extensive new pre-award reporting requirements. 
However, many challenges are involved in our successful compliance with 
extensive new post-award requirements involving more complex fiscal 
procedures and new financial management systems nationwide. We have 
been heartened by the Department of the Interior's understanding of 
these challenges, and its willingness to work with us in overcoming 
them, particularly in the early years of the new arrangement.
    Both internally and in repeated and ongoing meetings with officials 
of the Department of the Interior, the FSM Government has been making 
the necessary preparations. Most recently, we beat by several weeks the 
assigned deadline to provide a budget for FY 2004 to the United States 
for review. Our President has established the FSM's JEMCO membership on 
a provisional basis, so that the necessary preparatory discussions with 
the U.S. counterparts can proceed. At the time these answers are 
provided, a ten-day conference of finance and budget officers from 
throughout the FSM is convened in Pohnpei to meet with officials of the 
Department of the Interior to continue discussions on the 
implementation process. Similarly, with regard to the Trust Fund, our 
designated officials are engaged in discussions with the Department of 
the Interior on manning the positions necessary to get the Fund up and 
running as soon as possible.
    Question 7. How will information in the decisions, reports, and 
audits of the joint economic management committee be shared with the 
public in your nation? Will your government maintain a web site that 
contains this information?
    Answer. It is a little too early to provide specifics in answer to 
this question, but, yes, there is a Government website that undoubtedly 
will be utilized in ways that the Government deems appropriate. Up to 
now, the website has been used, among other purposes, to convey 
information regarding the negotiations. This use, adapted to meet the 
new circumstances, will continue. I might add that the FSM, with strong 
traditions of consensus decision-making, will continue a variety of 
consultative processes such as broadly-participative economic summits 
and leadership conferences that overlay and provide guidance to the 
regular, Constitutional Legislative and Executive functions.
    Question 8. What will be the impact on your nation of losing 
eligibility for FEMA?
    Answer. Much has already been said on this subject, and it must be 
understood that the FSM has no parachute to offset the loss of FEMA. 
The Office of Foreign Disaster Assistance (OFDA) at the Department of 
State is simply no substitute for FEMA, a fact that has been openly 
admitted by the U.S. Negotiator, Al Short, in recent testimony. The 
U.S. interest in protecting its long-term investment in FSM public 
infrastructure is an obvious consideration, but the less direct U.S. 
investment in private infrastructure also should not be discounted. Al 
Short recently testified that the Administration's intention is to 
treat the FSM and RMI ``like Palau,'' which does not enjoy FEMA 
coverage. This situation for Palau, however, was the outcome of a deal 
made years ago, whereby Palau accepted a U.S. contribution of $20 
million into a trust fund in lieu of FEMA coverage. We wonder whether 
they would make the same bargain today, when some years ago they 
suffered a bridge collapse costing many millions and with loss of life, 
and the total contribution of the U.S. OFDA was fifty thousand dollars.
    Question 9. What would be the impact on your nations if programs 
that are outside the scope of the Compact--such as federal education 
programs--are not continued?
    Answer. The impact would be a collapse of the very sector--
education--that everyone seems to agree lies at the heart of the 
amended Compact's objectives. Don't forget, the Administration confirms 
that in arriving at its grant level figures it assumed the continuation 
of federal programs. In the recent hearings, there has been some focus 
on the vulnerability of the College of Micronesia-FSM to the threat of 
loss of Pell Grants, and that is very Teal. But more, the same threat 
is posed to all other levels of the education system in the FSM if U.S. 
Federal programs are withdrawn, at the very time when the U.S. 
Government negotiators have spent the last four years telling FSM 
negotiators that the number one, top U.S. priority in future U.S. 
assistance to the FSM is--EDUCATION! Certain people on the Hill would 
prefer to throw money at the problem rather than continue program 
eligibility, but there are two problems with that approach: first, 
after the jawboning is over the money in the amounts required will 
almost certainly not be there; and second, in this critical field and 
at this time this far down the road money alone cannot substitute for 
the programmatic and social connectivity that has been built up over so 
many years with the concealed U.S. Departments. If this battle is lost, 
then the U.S. Government might as well confess that it really does not 
care about social advancement and political stability in this 
increasingly strategic region of the Pacific.
    Question 10. How will the Compact's immigration provisions impact 
your nation?
    Answer. The FSM, after many months of bilateral, not Compact, 
negotiation on this highly sensitive subject was able to agree to the 
negotiated amendments in this area, on the understanding with the U.S. 
Agency negotiators that with the single exception of now requiring FSM 
citizens to carry passports when exercising their Compact privileges to 
travel to and from the U.S., the new provisions do not expand authority 
previously possessed by the United States under the U.S. Immigration 
and Naturalization Act. In other words, FSM citizens will not notice 
any difference in their status coming to, residing in or leaving the 
United States. We have also agreed with U.S. officials to cooperate in 
implementing new measures to increase passport information and security 
features, and to provide a system for sharing with the U.S. criminal 
conviction information that would be relevant to decisions on 
admissibility and deportability of FSM or U.S. citizens, as the case 
may be. We invite attention to the FSM's proposed alternative approach 
to the U.S., iron-negotiated and unilateral insertions in its 
legislative proposal, as representing an effective alternative to a 
curiously uncalled-for and threatening sledgehammer demand.
    In light of the above answers, and not knowing now what response 
the U.S. Congress may provide, we also urge that the Committee 
seriously consider the last of the FSM's amendment proposals. This is 
to add a section mandating a Congressional review no later than three 
years into the amended Compact experience, to determine what 
adjustments may need to be made.
                                 ______
                                 
           Embassy of the Republic of the Marshall Islands,
                                     Washington, DC, July 30, 2003.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Chairman Domenici: On behalf of the Government of the Republic 
of the Marshall Islands, I am pleased to forward to you the attached 
responses from Minister Gerald Zackios to questions that were submitted 
for the record following the hearing on the Compact, as amended.
    Thank you for your engagement and consideration of these issues.
            Sincerely,
                                              Banny deBrum,
                                   Ambassador to the United States.
     Responses of Gerald Zackios to Questions From Senator Domenici
    Question 1. Are the levels of economic assistance under the amended 
Compacts sufficient to maintain essential government operations and 
ensure economic and social stability?
    Answer. Compact funding, in the past, has been a declining yet 
essential component of the Republic of the Marshall Islands' (RMI's) 
government's budget. For FY 2001-2003 period for example, Compact 
funding, including U.S. Federal programs, have provided 35-40 percent 
of our budget revenue.
    Under the amended Compact, the economic grant assistance and U.S. 
Federal programs will continue to play an essential role. The amended 
Compact does provide a transition in the economic grant assistance from 
the current Compact. While this amount is sufficient for economic and 
social stability initially, as based on our Medium Term Budget and 
Investment Framework, our concern is in the medium term since the grant 
assistance declines at a too rapid pace. This rapid decline is caused 
by: 1) the $500,000 annual decrement of the economic grant assistance 
with the decremented amount going into the Compact Trust Fund; and 2) 
the loss to inflation since Compact funds are only partially adjusted 
(2/3 of the GDP Implicit Price Deflator).
    While we strongly believe we can increase local revenues, cutting 
costs and attaining other public sector efficiencies, we cannot do it 
at such a rapid pace. This can result in fiscal instability, with 
evident negative repercussions on the economy and social welfare, in 
the medium term. This is why my Government has been stressing the need 
to maintain at least the real value of the Compact financial assistance 
by applying a full instead of only a partial inflation adjustment. Even 
given the full inflation adjustment, the RMI's reliance on Compact 
funds will significantly decrease over the term of the 20-year period.
    Question 2. What will be the impact on the standard of living in 
your nation under the amended Compacts?
    Answer. In the short term, the amended Compact will have a positive 
impact on the RMI's standard of living. The RMI Government has already 
planned on placing a majority of grant assistance funding in the 
education sector to improve education standards at all levels. The 
second priority is investments in the health sector and the third in 
infrastructure development and maintenance.
    However, there are two caveats. First, if some or all of the U.S. 
Federal education programs are discontinued in FY 2004, the increased 
investments we have targeted for education will merely, and maybe only 
partially, cover the continuance of these programs on our own. Thus, 
instead of education being a priority of the RMI government and the 
Compact, we will have a difficult time providing the range of education 
programs and services and will severely detract from any added emphasis 
and investment in education. This will injure our standard of living in 
the short, medium and long term.
    Second, as we have stated in our testimony, the RMI is vulnerable 
to natural disasters. FEMA has played a crucial role for rehabilitation 
and mitigation during these intermittent crises. Since the U.S. AID's 
Office of Foreign Disaster Assistance does not replace FEMA's 
rehabilitation and mitigation programs then the RMI would be confronted 
with these costs if a major disaster occurred. Such an event would 
severely injure the RMI's standard of living by either not adequately 
responding to after effects of such disasters or causing us to take 
away resources from other areas to fill the rehabilitation or 
mitigation needs. We simply do not have the financial resource base to 
respond to such cost-prohibitive rehabilitation and mitigation.
    In the medium term, however, as per the response to Question 1, the 
provision of government programs and services will decline if no other 
funding sources are generated. This will also impact the private sector 
since much of the private sector services are related to the fiscal 
stability of the government. While this is changing, it will take time 
to orient the private sector more towards our productive sectors: 
fisheries and aquaculture and tourism. Thus, in the medium term, as of 
2010 and thereafter, living standard improvements will probably 
stagnate or the improvements will slow.
    Question 3. How will grants in the areas of education and health be 
distributed within your nation?
    Answer. The education and health sector grants are identified in 
our Medium Term Budget and Investment Framework (MTBIF). We adopted 
this medium term performance budgeting approach in the planning of our 
FY 2003 budget. Our current MTBIF, which was just approved, indicates 
the specific amounts of Compact funding that will go toward these two 
priority sectors. For example, in FY 2004, the first year of the 
amended Compact, we have identified $10.2 million for the education 
sector and $6 million to go to the health sector.
    These amounts are further broken down in the sector programs. For 
instance, for the education sector, these amounts will mainly go to 
primary and secondary education to include standard development, 
teacher training and retention, curriculum development and program 
delivery. In addition, we will invest part of the Compact's 
infrastructure funds in the building and maintenance of much neglected 
education facilities. The education program will be monitored using a 
set of indicators and other measurements to see if the Compact and 
other investments are having a real impact. The agency responsible as 
well as our Economic Policy, Planning and Statistics Office will review 
these measurements. The measurements will also be reviewed by the U.S.-
RMI Joint Economic Management and Financial Accountability Committee to 
ensure the Compact funds are being used effectively and have real 
results.
    The health program is currently being formulated and will have the 
same approach of the education program.
    We realize that installing such a performance-oriented financial 
management and accountability system will take time. This is why we are 
first concentrating on the education, health and infrastructure 
sectors. We hope to apply the system government-wide in 2-3 years time.
    Question 4. The amended Compact requires your nation to initially 
contribute $30 million to a trust fund. How much has your country 
contributed to date? What are your plans for providing the remaining 
contributions?
    Answer. The RMI has set aside a portion of the Compact ``bump-up'' 
funds and part of the Compact's capital investment funds in FY 2002 and 
FY 2003 to be used as the RAM's initial contribution for the Compact 
Trust Fund. This set-aside now amounts to $25 million. Thus, the RMI 
can meet its Compact Trust Fund commitment that is to be $25 million 
once the Compact Trust Fund becomes operational (after the amended 
Compact becomes U.S. and RMI law) with a further $2.5 million to be 
contributed in FY 2005 and $2.5 million in FY 2006.
    I should note that while the PAR does have the funds set aside, we 
did make the conscious sacrifice of not investing in our infrastructure 
for the past two years. While this decision has injured our 
infrastructure in the short term, it has provided us the funds to 
invest in future generations of Marshallese and make the Compact Trust 
Fund a more viable source of funding post 2023.
    An example of this delay in infrastructure investment and an urgent 
need that must be met is the paving of the Majuro International 
Airport. Since the government set-aside most capital investment funds 
for the Compact Trust Fund, it could not finance this project though 
the FAA identified the urgency of the repaving in 2002. Since that time 
we have sought various sources of funding but failed to find an 
appropriate source. We have been working to include the $10 million 
needed for repaving in the FAA reauthorization bill. Tickets to/from 
the RMI are surcharged with the amounts contributing to the Airport 
Trust Fund,, and Continental and Aloha Airlines, the two main airport 
users, have supported our approach. Unfortunately, we have not been 
successful. As a result, we will have to take the funding from our 
Compact Trust Fund set-aside to address this urgent project. The 
closing of the airport, which is an immediate possibility, will have 
disastrous ramifications on the RMI economy as well as for travel 
within the region and to/from the Ronald Reagan Missile Test Site at 
Kwajalein Atoll.
    Question 5. It is my understanding that the RMI and FSM seek full 
inflation adjustment as opposed to the 2/3 partial inflation 
adjustments. Please explain.
    Answer. The partial inflation adjustment (2/3 of the U.S. GDP 
Implicit Price Deflator) effects the Title Two sector grant funding, 
Compact Trust Fund contribution and Kwajalein landowner compensation 
for the U.S. use of Kwajalein Atoll. Our main argument is that the 
RNA's defense, security and other commitments and obligations under the 
Compact do not erode yet the U.S. economic and finance commitments do 
erode simply because of the loss of the value of the funds due to only 
a partial inflation adjustment.
    Secondly, from an economic and finance perspective, as we have 
shown in our issue paper that fully outlines our views, there are 
negative impacts.
    For the sector grant funding, as stated in response to Question 1, 
while the RMI believes it can generate revenue, create efficiencies and 
reduce costs, the rapid decline of this funding due to the decrement 
and the partial inflation adjustment will create a growing funding gap 
that occurs at a rate in which we don't feel we have the capacity to 
quickly fill. We believe that if a full inflation adjustment was 
provided the fiscal stability that is warranted by the Compact will be 
maintained and we will be able to improve and further develop public 
services while further facilitating private sector development and, 
thus, economic stability.
    For the Compact Trust Fund, there are two points. First, our 
analysis, which is similar to the GAO's, points out that the 
distributions from the trust fund will not be sufficient to supplant 
the Compact grant assistance in the medium term. We see the Compact 
Trust Fund as integral to our future fiscal stability. As it is 
structured now, it will not meet that objective. Second, the U.S. 
Administration has allowed, within the Compact Trust Fund Agreement of 
the amended Compact, that the distributions from the Trust Fund that 
will begin in 2024 to consist of the prior year's Compact's Title Two 
sector grant assistance PLUS a full inflation adjustment. Such an 
approach is inconsistent. We are confounded that the Administration 
does not allow full inflation to apply to the sector grants between 
2004-2023 and the U.S. Trust Fund contributions but will allow the 
monies drawn from the Trust Fund to be based on a full inflation rate. 
Thus, our Trust Fund will have inadequate inputs and a much larger 
demand in the post 2023 era.
    For the Kwajalein landowner compensation, the landowners are 
providing their major resource, their land, for an extended period to 
at least 2023 and potentially to 2086. Yet, despite this obligation and 
commitment of the landowners, the U.S. is only partially adjusting the 
land use payment. In essence, the landowners are giving the United 
States Government a rebate annually for this land as the value 
increases and the payments don't increase at the same rate. Thus, the 
longer the U.S. uses Kwajalein Atoll, the lower cost for the U.S. and 
the more loss of value to Kwajalein landowners. This is simply not 
right and inconsistent with practices within the United States.
    The bottom line is that the RMI is not really asking for more 
funding, but asking to be dealt with fairly. We would like the funding 
provided under the Compact to maintain its real value so that fiscal 
stability and economic progress can continue to be made. We do not want 
the fiscal and reverberating economic shocks and value loss that has 
occurred during the current Compact. As mentioned, we do not see why 
the U.S. obligations and commitments should erode if the RMI does not 
erode its security, defense and other obligations and commitments.
    Question 6. In your view, does your government have the technical 
capabilities necessary to meet the terms of future assistance by this 
fall?
    Answer. The RMI government, with the assistance of the Asian 
Development Bank and the U.S. Department of the Interior's Office of 
Insular Affairs, is concentrating on building the technical capacity 
not only to implement the Compact's Fiscal Procedures Agreement (FPA) 
but also to have a government-wide performance budgeting and financial 
management system.
    We have implemented a step-by-step process by concentrating on 
those ministries receiving the largest portion of Compact funds--
education and health. We have also installed a Medium Term Budget and 
Investment Framework--a 5-year rolling budget framework that allows us 
to review past expenditure, plan the next year's expenditure, and look 
at budget trends two years into the future. We initiated this system 
for our FY 2003 budget last year and the same system is being used for 
FY 2004.
    For the sector grants, the Ministry of Education has already 
prepared its FY 2004 Education Program Portfolio. The program was 
recently submitted to the U.S. Department of the Interior for its 
review in anticipation of the first Joint Economic Management and 
Financial Accountability Committee (JEMFAC) meeting scheduled for the 
end of August. The program identifies the source of ministry funding, 
including Compact funding, where the funding is targeted, and what 
objectives will be served and results achieved. We are currently doing 
the same for the Ministry of Health. In addition, we have completed our 
first Infrastructure Development and Maintenance Program. This program 
identifies our priority capital investment and maintenance needs. 
Projects are now being selected for which Compact funds will be 
targeted.
    As you can ascertain from the above, we are building our 
capabilities but it would be misleading to say they are all present and 
we can fully comply. Thus, we encourage the continued cooperation, 
support and technical assistance from U.S. Department of the Interior 
so that we have an ongoing system and capabilities. This support will 
not only improve Compact funding accountability but also allow us to 
develop a more efficient and result-oriented public sector budgeting 
and financial management system that provides quality public services 
and a supportive and maintained infrastructure to facilitate private 
sector development.
    Question 7. How will information in the decisions, reports, and 
audits of the joint economic management committees be shared with the 
public in your nation?
    Answer. The U.S.-RMI JEMFAC will have two members from the RMI 
government. The recently established Economic Policy, Planning and 
Statistics Office (EPPSO) will support the RMI JEMFAC members. EPPSO 
will be responsible for not only organizing the government's inputs to 
the JEMFAC but also in monitoring and providing public information. In 
addition, the current negotiations of the Compact have occurred fully 
in the public eye. The Compact Negotiations Office (which will 
transition to become part of EPPSO), have held extensive public 
meetings, provided information for the local press (newspaper, radio, 
and television) and provided information on the Internet for public 
access. This type of public liaison is envisioned to continue. In 
addition, the local newspaper follows government activities quite 
closely and will most likely continue to provide public information on 
the government's activities as well as Compact implementation.
    Question 8. What will be the impact on your nation of losing 
eligibility for FEMA?
    Answer. As you know and as we have attempted to explain in our 
issue paper on the subject, FEMA has provided unparalleled assistance 
to the RMI during the current term of the Compact. The amended Compact 
provides some remedies to replace FEMA eligibility but does not fully 
cover what has been provided in the past and leaves our disaster 
sensitive islands vulnerable in terms of disaster mitigation and 
rehabilitation.
    The amended Compact's disaster-related elements are: FEMA provides 
a $50,000 grant annually to help formulate a disaster preparedness plan 
as well as assist related capacity building; the services of U.S. AID's 
Office of Foreign Disaster Assistance (OFDA) for disaster emergency 
response; and the establishment of a disaster relief ``sinking fund'' 
with the United States contributing $200,000 annually and the RMI 
government matching this contribution. While this assistance is 
beneficial in the preparation and immediate response to disasters that 
may occur, a gap is evident in terms of FEMA's mitigation and 
infrastructure rehabilitation. This is especially important regarding 
infrastructure since most of our country's infrastructure was, and will 
continue to be, built with Compact funds. In essence, the disaster 
rehabilitation is a way of protecting our joint investments.
    In the past, FEMA has provided intermittent assistance for disaster 
mitigation and rehabilitation. The problem is that if these resources 
are no longer available, the RMI will: a) not be capable of rebuilding 
destroyed infrastructure; or b) not be able to mitigate specific 
disasters, such as a drought in 1998 for which FEMA provided much 
needed assistance in 1998. The amount of disaster assistance provided 
over the current term of the Compact (17 years) amounts to about $25 
million. If the RMI had to provide these funds on its own either there 
would have been an inadequate response resulting in loss of human life 
and deteriorating living standards or the RMI's fiscal and economic 
stability would be in jeopardy. This same caution would apply to the 
amended Compact period if disaster rehabilitation for public 
infrastructure and mitigation were not provided.
    Question 9. What would be the impact on your nation if programs 
that are outside the scope of the Compact--such as federal education 
programs--are not continued?
    Answer. U.S. Federal education programs have proven an integral, 
not supplemental, component of the RMI's education system. Besides the 
funding, the programs more importantly provide technical expertise, 
models, guidelines, etc. that have allowed us to either strengthen our 
own efforts or provide educational services that were absent.
    If the Federal education programs, such as special education 
(SEPPIE), bilingual and CARE under the No Child Left Behind Act, and 
Head Start, are discontinued the RMI will be forced to redirect 
financial, human and other resources to try to replace these programs 
on its own or to eliminate the services these programs provide 
altogether. In fact, there is no way the RMI government can fully 
replace these programs simply because we would have to find $10-$12 
million annually to do so. We simply do not have these financial 
resources and this is despite our emphasis on strengthening education. 
As indicated above, we are targeting a majority of our Compact grant 
funding to education. Even with this significant added emphasis, we 
could not replace these programs. As the U.S. Compact Negotiator has 
stated, we did not negotiate our Title Two grant assistance package 
thinking we had to replace these instrumental Federal education 
programs. Thus, our education system would be downgraded and we would 
ultimately reduce the quality of our future labor pool as well as 
create youth and related downstream societal problems that will 
negatively impact our living standards.
    The eligibility of Pell grants is an even more significant issue. 
Simply put, if Pell grants are not provided to Marshallese students, 
the College of the Marshall Islands, a Land Grant institution, will 
most likely cease to exist and there would be limited post secondary 
opportunities for our students to attend U.S. colleges and 
universities. The result would be a severely under-educated population, 
no appropriate resources for our labor market, and inadequately 
educated Marshallese emigrating to the United States.
    Last, Mr. Chairman, while there has been criticism of the RMI in 
the application of some of these education programs, no one has ever 
looked at the extraordinary benefits that these programs have provided. 
For instance, the Pell grant program, under the current Compact, has 
educated a generation of Marshallese in the last 17 years--
significantly more of our youth have received post secondary education 
in the past 17 than in the entire pre-Compact period. We are more than 
willing to place more of a focus on education and measure our 
performance to show real results. We should concentrate on building our 
capabilities rather than taking away the resources that help us develop 
one of our vital and one of our very few resources--our people.
    Question 10. How will the Compact's immigration provisions impact 
your nation?
    Answer. Although changes to the Compact's immigration provisions 
have been an issue of great contention and controversy with my 
Government, we believe that the negotiated provisions deal with the 
needs and concerns of both governments.
    My Government has recently acquired new equipment and facilities to 
change our current passports to a more secure system in compliance with 
the new Compact immigration provisions. Implementation of this new 
system will take some time as will implementation of the requirement 
that all RMI citizens possess passports for purposes of entry into the 
United States under the Compact.
    One significant improvement in the current immigration regime under 
the Compact is the elimination of the requirement of Employment 
Authorization Documents (EAD) in order for Marshallese to work in the 
United States. This has previously been a source of great frustration 
to our people who have sought and gained employment in the United 
States.
    Long waiting periods for the issuance or renewal of EADs have 
resulted in significant disruptions and economic hardships for 
qualified Marshallese seeking or retaining employment in the United 
States. We believe that this change will also benefit Marshallese who 
choose to migrate to the United States in the future under the amended 
Compact with an increased emphasis on education and health. In the long 
term, we believe that those of our people who choose to migrate to the 
United States will be in a better position to increase their 
contributions to both the United States as well as the RMI's economy.
    Mr. Chairman, my Government views the immigration provisions in the 
Compact as one of the cornerstones of free association itself. These 
immigration benefits are priceless. The new immigration provisions will 
be successful only if both nations work together in good faith to 
ensure fair and open implementation. It is crucial that any measures 
promulgated by the United States under the new provisions be consistent 
with the overall intent of the immigration provisions contained in 
Section 141 of the amended Compact taking into account the ``special 
and unique relationship'' between both countries and the right of 
Marshallese to establish and maintain ``residence'' in the U.S. For our 
part, my Government is prepared to take necessary and appropriate 
measures to implement the new provisions in cooperation and 
consultation with the U.S. in order to allay legitimate U.S. concerns.
    Question 11. Have Kwajalein landowners signed an amended land use 
agreement with the RMI government? If not, what steps are being taken 
to ensure that the landowners enter into a land use agreement?
    Answer. At present, the Kwajalein landowners have not signed an 
amended Land Use Agreement (LUA) with the RMI government. The existing 
LUA of 1982 is valid through 2016 under the terms of the existing 
Military Use and Operating Rights Agreement (MUORA) for the use of 
Kwajalein.
    The RMI Government has on numerous occasions invited the Kwajalein 
Negotiation Commission (KNC), a group that purports to represent all 
the landowners of Kwajalein Atoll to discuss a new or amended LUA based 
on the proposed MUORA extension. The KNC's response has been that it is 
not interested in discussing the terms a new or amended LUA because in 
their view, compensation under the extended MUORA is inadequate.
    Unfortunately, given that the RMI will have national elections in 
November of this year and the political sensitivity of these issues, we 
do not anticipate that we will be in a position to have serious 
discussions on a new or amended LUA until next year. In the interim, my 
Government is prepared to honor the terms of the existing LUA of 1982, 
and make payments to the landowners pursuant to that agreement until 
such time as a new LUA is negotiated and concluded. Under these 
circumstances, we are prepared to hold any additional funds which would 
otherwise be payable to the Kwajalein landowners in a separate account 
until such time that a new or amended LUA has been concluded.
    In my Government's view, there are two aspects of the proposed 
MUORA which if addressed would facilitate a timely conclusion to a new 
or amended LUA in the future. First, as noted above in my answers to 
previous questions, the application of full inflation to the MUORA 
payments will allow these funds to maintain their real value and 
prevent what over time will in effect be a rebate to the U.S. 
Government for its use of Kwajalein. Second, we firmly believe that 
extending the date of early termination from the present 2023 to 2030 
will achieve the necessary long term commitment desired by both my 
Government and the Kwajalein landowners in terms of providing an 
adequate guaranteed additional term so we can work with the Kwajalein 
landowners in the establishment of a trust fund as well as provide a 
secure environment for increased investment at Kwajalein including a 
new fiber optic cable with joint RMI government and U.S. Army 
participation. The RMI Government remains fully committed to extending 
the military use agreement for Kwajalein and will live up to its 
obligations under this agreement.
                                 ______
                                 
                                  U.S. Department of State,
                               Washington, DC., September 25, 2003.

    Dear Mr. Chairman: Following the July 15, 2003 hearing, at which 
Director Albert V. Short testified, additional questions were submitted 
for the record. Please find enclosed the responses to those questions.
    If we can be of further assistance to you, please do not hesitate 
to contact us.
            Sincerely,
                                             Paul V. Kelly,
                           Assistant Secretary Legislative Affairs.
[Enclosure.]
    Responses of Albert V. Short to Questions From Senator Domenici
    Question 1. Was the RMI Government told during the negotiations 
process that Section 177 of the Compact and the related nuclear claims 
issues were outside of the scope of the negotiations?
    Answer. The Agreement Between the Government of the United States 
and the Government of the Marshall Islands for the Implementation of 
Section 177 of the Compact of Free Association (Section 1-77 Agreement) 
came into effect in 1986 at the same time as the Compact and 
``constitutes the full settlement of all claims, past, present and 
future, of the Government, citizens, and nationals of the Marshall 
Islands which are based upon, arise out of, or are in any way related 
to the Nuclear Testing Program, and which are against the United 
States, its agents, employees, contractors and citizens and nationals, 
and of all claims for equitable of any other relief in connection with 
such claims.'' Accordingly, there were no nuclear claims issues to be 
negotiated and the Section 177 Agreement continues in effect as 
reflected in section 462(a) of the U.S.-RMI Compact which lists the 
Section 177 Agreement among those ``which shall remain in effect and 
shall survive in accordance with their terms.''
    Question 2. Did the Special Negotiator have authority to negotiate 
changes to the Compact regarding nuclear claims issues?
    If not, under what authority was the proposed paragraph 103(e)(3), 
regarding section 177, added to the proposed amendments to the Compact?
    Answer. As noted above in response to question (1), all nuclear 
claims were settled in 1986 in the Section 177 Agreement and section 
462(a) of the U.S.-RMI Compact reflects U.S. and RMI agreement that the 
Section 177 agreement continues in effect. The Administration's 
proposed paragraph 103(e)(3) regarding section 177 does not amend the 
U.S.-RMI Compact. It updates P.L. 99-239 by noting that the payment 
required under section (1) of 103(e) has been paid, and, at the same 
time, to avoid any misunderstanding, makes clear that updating P.L. 99-
239 does not create any rights or obligations beyond those contained in 
the original P.L. 99-239 and that the Section 177 Agreement was a full 
and final settlement of the nuclear claims.
    Question 3. Why were the Congress and the RMI government not 
informed of the U.S. intention to modify Section 177?
    Answer. As noted above in response to question (2), the U.S. did 
not modify Section 177 and nothing in the Administration's proposed 
legislation purports to do so or has the effect of doing so.
    Question 4. What is the purpose and intent of the proposed new 
Paragraph 103(e)(3)?
    Answer. As noted above in response to question (2), paragraph 
103(e)(3) updates P.L. 99-239 by noting that the payment required under 
section (1) of 103(e) has been paid, and, at the same time, to avoid 
any misunderstanding, makes clear that updating P.L. 99-739 does not 
create any rights or obligations beyond those contained in the original 
P.L. 99-239 and that the Section 177 Agreement was a full and final 
settlement of the nuclear claims.
    Question 5. Why does the proposed Paragraph 103(e)(3) not make 
reference to Article IX of the Section 177 Agreement?
    Answer. The proposed paragraph 103(e) is an update of P.L. 99-239 
paragraph 103(g). As was appropriate, the latter did not make reference 
to Article IX of the Section 177 Agreement and there was no reason to 
do so in the revision the Administration has proposed.
    This paragraph of the legislation mentions specific articles of the 
Section 177 Agreement in connection with the full and final settlement 
of all claims related to the nuclear testing program. Article IX of the 
Section 177 Agreement spells out that the RMI can, under specific 
circumstances, submit a request to Congress for provision for specified 
injuries without commitment on the part of the United States that 
Congress will authorize and appropriate funds for such injuries. 
Article IX is not a basis for legally enforceable claims, and thus is 
not relevant to the espousal provisions contained in paragraph 103(g) 
of P.L. 99-239 or paragraph 103(e) of the Administration's proposal.
    Question 6. Section 103(k), as proposed, states that the 
Comptroller General shall have the authorities necessary to carry out 
his responsibilities including the authority to audit all grants, 
program assistance, and other assistance provided under the Compact. 
Does this authority include the ability of the Comptroller General (or 
the Comptroller's representative) to observe the Joint Economic 
Management Committee and other processes that will determine the 
allocation, objectives and performance standards affecting the use of 
U.S. assistance under the proposed Compact, as amended?
    Answer. No. The Comptroller General shall have the authority to 
audit all grants, program assistance, and other assistance provided 
under the U.S.-FSM and U.S.-RMI Compacts but not to observe the 
intergovernmental deliberations or other processes by which the 
allocation of the assistance, the objectives of the assistance and 
performance standards are determined.
    Question 7. Section 104(b)(2), as proposed, requires that up to 
$250,000 shall be used by the RMI and FSM for the purpose of increasing 
the machine-readability and security of passports. Given the authority 
of the Government of the United States to attach grant conditions under 
sections 212/213 (Accountability); and majority U.S. membership on the 
Committee established pursuant to sections 213/214, is Sec. 104(b)(2) 
necessary to assure such use of these funds?
    Was this amendment negotiated with the FSM and RMI, or made 
unilaterally by the U.S.?
    Answer. This amendment, which allocates a sum of up to $250,000 per 
country to develop secure travel documentation, is proposed as part of 
the implementing U.S. legislation, rather than as an amendment to the 
Compacts themselves. This provision is intended to set an appropriate 
and necessary earmark on a one-time basis of a very small portion of 
the massive U.S. assistance package to the FAS. Wherever possible, the 
United States should strive to ensure that all countries issue 
passports and travel documents that meet the highest possible standards 
of integrity. The compacts allow FAS nationals to enter the United 
States without a visa for stays that may be prolonged and involve 
residence and employment. It is therefore appropriate and desirable 
that the security level of their passports parallel, at a minimum, 
those to go into effect for nationals of Visa Waiver Program countries, 
who will be required to possess machine-readable passports even though 
their visits are limited to 90 days for the sole purpose of tourist or 
business visits. This amendment is intended to ensure expeditious 
development of passport security infrastructure in the FAS.
    Machine-readable passports are more secure, more difficult to 
forge, enhance efficient and timely processing at busy ports of entry 
such as Honolulu Airport, provide for the possibility of biometric 
information to identify travelers more positively (and thereby help 
avoid delay and complications to legitimate travelers that may result 
from mistaken identity), and in general more thoroughly promote the 
protection of the security of the United States and the FAS alike. 
Allocation of up to $250,000 of U.S. assistance funds for this purpose 
on a one-time basis per FAS nation is an excellent investment in 
national security. Further, with respect to the Republic of the 
Marshall Islands, a program of passport security funded in this way is 
particularly appropriate given that nation's past history of selling 
its passports to third country nationals. In other words, it is 
important that such capacity be developed as soon as possible.
    It has been the understanding of the Administration that the FAS 
are not opposed to passport security, a matter that benefits all 
involved nations, but have concerns about their ability to pay for more 
secure passports themselves. Therefore, this provision provides that 
the United States will pay, in the first year the Compacts, as amended, 
are in effect, for such secure documents out of the U.S. assistance 
funds specifically set aside, under the Compacts, as amended, for the 
purposes of public capacity building--a sector which, by its terms (see 
Article II of the Fiscal Procedures Agreements), specifically includes 
immigration controls, which would include travel documentation 
infrastructure. This amendment ensures that our countries' mutual 
security needs will be addressed immediately upon entry into effect of 
the Compacts, as amended.
    Question 8. Given the authority of the Government of the United 
States under proposed sections 212/213 (Accountability) and under 
proposed sections 213/214 (Joint Economic Management and Financial 
Accountability Committee), is paragraph 104(b)(8) [sic] necessary to 
assure the development of the required information sharing capability?
    Was this amendment negotiated with the FSM and RMI, or made 
unilaterally by the U.S.?
    Answer. The requirement, in paragraph 104(b)(3) of the proposed 
legislation, that the RMI develop the capability to provide reliable 
and timely information needed in enforcing criminal and security-
related grounds of admissibility and deportability is a very important 
element in maintaining the security of our borders and the safety of 
the U.S. public. The financial accountability provisions of the U.S.-
FSM and U.S.-RMI Compacts do not cover this issue.
    Question 9. What was the basis for proposing the deletion of the 
Statement of Congressional intent in Section 104(e) of P.L. 99-239 
regarding adverse consequences of the Compact?
    Answer. The Administration's proposed approach to addressing 
Compact impact is different from that reflected in Section 104(e)(1). 
That provision focuses only on the ``adverse consequences'' on Compact 
migration, and does not encourage a balanced analysis in which the 
costs incurred by U.S. jurisdictions as a result of Compact migration 
are weighed against Compact benefits in such areas as economic 
activity, tax revenue, labor supply and opportunities for local 
contractors. Under the former process, each affected jurisdiction 
attempted to justify its request for assistance by preparing reports 
that focused only on the negative impacts of migration. This process 
required each jurisdiction to expend a great deal of resources and 
effort to produce reports that were not balanced and, ultimately, were 
not very useful. The Administration approach would eliminate the need 
for this wasteful process, and would instead provide a mandatory 
appropriation for Compact impact that would be divided in a manner that 
is simple, fair, transparent and practical.
    Question 10. What was the basis for proposing to change Section 
105(k) of P.L. 99-239 so than the availability of DOD medical 
facilities for properly referred FAS citizens is no longer required?
    Answer. There is no intent to change the access for citizens of the 
Freely Associated States (FAS) citizens to Department of Defense (DOD) 
medical facilities. The Compact made citizens of the FAS eligible for 
referral to DOD medical facilities on a space available and 
reimbursable basis. The same eligibility is continued in the Compact, 
as amended.
    During a final review of the proposed Administration legislation, 
Administration legal advisors recommended a minor change to the 
language of the original Compact Act, which, as written, could be read 
incorrectly to make the provision of such medical care mandatory, 
irrespective of space and cost considerations. Such a reading would be 
inconsistent with actual practice and policy, which has been, for 
practical reasons, to provide such medical care only on a space 
available and cost reimbursable basis for FAS patients properly 
referred by their governments. It was therefore necessary to modify 
this language accordingly. This change to section 105(k) of P.L. 99-239 
(section 105(i) in the Administration's proposal) was not coordinated 
with the FSM or the RMI Governments because it accurately reflects the 
current Status of Forces Agreements with those two governments as well 
as the amended Status of Forces Agreements they just signed.
    Question 11. What are the basis for proposing the deletion of the 
Congressional requirement in section 105(b)(4) of P.L. 99-239 that the 
Secretary of the Interior and the Secretary of State shall serve on the 
Interagency Group on Freely Associated States' Affairs?
    Do you believe it would be appropriate to have such a Group without 
the participation of these two officials or their representatives?
    Answer. Under the Policy Coordinating Committee for East Asia 
chaired by the Assistant Secretary of State for East Asian and Pacific 
Affairs, there is a subgroup on the Compacts of Free Association 
chaired by the Deputy Assistant Secretary of State for East Asian and 
Pacific Affairs responsible for Freely Associated States Affairs. The 
Deputy Assistant Secretary of the Interior for Insular Affairs is also 
on that Compact of Free Association subgroup as are representatives of 
all other appropriate departments and agencies. All the agencies that 
were previously represented under E.O. 12569 are represented. There is 
no need for singling out any agencies in the legislation.
    Question 12. Why are the last ten lines of section 105(c)(2) not 
deleted in the proposal--they only relate to the time period 1986-
1989--What purpose do they now serve?
    Answer. The Administration recognizes that section 105(c)(2) no 
longer has any effect. The last ten lines of section 105(c)(2) make 
this clear. The Administration intentionally did not propose to delete 
the last ten lines because to do so would appear to give the section 
new effect. The Administration's intentions could also be achieved by 
deleting all of section 105(c)(2), but the Administration would not 
support deleting only the last ten lines. It updates P.L. 99-239 by 
noting that the payment required under section (1) of 103(e) has been 
paid and at the same time makes clear that updating P.L. 99-239 does 
not create any rights or obligations beyond those contained in the 
original P.L. 99-239 and that the Section 177 Agreement was a full and 
final settlement of the nuclear claims.
    Question 13. Hasn't the United States paid all Indefinite Land Use 
Debts as authorized under Section 105(n) of P.L. 99-239?
    Answer. The Administration's financial obligations have been met, 
including timely payments for land use.
    Question 14. Section 105(h)(5) of P.L. 99-239 provided for the 
extension of the Peel Grant Program, the Supplemental Educational 
Opportunity Grant Program, and the College Work-Study Program. Why is 
this paragraph proposed to be deleted?
    Was this amendment negotiated with the FSM and RMI, or made 
unilaterally by the U.S.?
    Answer. Section 105(h)(5) of P.L. 99-239 was deleted because the 
eligibility of the residents of the FSM and RMI for the Pell Grant 
Program, the Supplemental Educational Opportunity Grant Program, and 
the College Work Study Program was addressed more recently in 1998 
under the current provisions of title IV of the Higher Education Act of 
1965, as amended (P.L. 105-244).
    Section 105(h)(5) is contained under Title I of P.L. 99-239, which 
is purely domestic legislation, as opposed to the bilateral government-
to-government agreement contained in Title II of that public law. 
Therefore, this provision was not negotiated with tine FSM or RMI.
    Question 15. Which department of the U.S. Government do you intend 
to Chair the Joint Economic Management Committees, State, the Interior, 
or some other department?
    Answer. For this year, the three U.S. representatives to the JEMCO/
JEMFAC will be Matthew Daley, Deputy Assistant Secretary of State for 
East Asia and the Pacific; David B. Cohen, Deputy Assistant Secretary 
of the Interior for Insular Affairs; and William Steiger, Special 
Assistant for International Affairs to the Secretary of Health and 
Human Services. Decisions regarding subsequent representatives and 
chairmanship will be made once the amended Compacts take effect.
    Question 16. Is there a requirement that the three U.S. members on 
the Joint Economic Management Committees concur in a U.S. position 
before there is a vote of the Committee?
    If not, wouldn't this pose a problem by not having a single U.S. 
policy on the use of U.S. assistance?
    If so, which U.S. department and official will have the authority 
to resolve any internal disputes regarding U.S. policy?
    Answer. The JEMCO and JEMFAC are decision-making bodies created by 
the respective Compacts. Major decisions of the JEMCO and JEMFAC will 
reflect judgments, based upon the best available information, regarding 
the proper allocation of funds among the various eligible sectors and 
the specific conditions that should apply to the grants. We expect much 
of the work of the five members to be collegial and collaborative and 
that all of the members of each joint committee, including the members 
from the freely associated states, will work together to review, 
discuss and decide on these issues. Where votes are taken, however, we 
would expect a unified U.S. government policy to be followed by the 
three members representing the U.S. government. Internal disputes 
regarding U.S. policy will be resolved through usual interagency 
processes: As with any other internal dispute regarding U.S. policy, 
the ultimate authority resides with the President.
    Question 17. In 2003, the source of annual financial assistance is 
to shift from appropriations to the U.S. Department of the Interior to 
proceeds of the Trust Funds. In both cases, the funds are to be used 
for the purposes set forth in section 211.
    a. Will officials of the Trust Fund negotiate grant terms and 
conditions after 2023, or will that be a continuing responsibility of 
the three U.S. members of the Joint Economic Management Committees?
    Answer. After 2023, proceeds from the trust funds will provide an 
annual source of revenue for assistance in the sectors described in 
section 211 of the Compacts, as amended, or other sectors as mutually 
agreed by the U.S. and the FSM and RMI respectively, with priorities in 
education and health care (Article 3 of the Trust Fund agreements). The 
U.S. will continue to have the three members on the joint economic 
management committees and will have three voting members on the joint 
trust fund committees, including the chairman. There is no requirement 
that the proceeds from the trust funds be disbursed to the FSM and RMI 
through grants; however, before any disbursements may be made to the 
FSA and RMI, the joint trust fund committees are to determine the 
fiscal procedures, including remedies, to be used in implementing the 
trust fund agreements, and the fiscal procedures agreements (which 
govern the grants under section 211) are to be the basis for such 
fiscal procedures, unless otherwise agreed by the U.S. and the FSM or 
RMI, respectively.
    Question b.Who will sign the grants on behalf of the United States 
after 2023?
    Answer. As noted above in answer to 17(a), there is no requirement 
that the proceeds from the trust funds be disbursed to the FSM and RMI 
through grants.
    Question c. How will funds flow from the Trust Fund to the FAS--
will they pass through the Department of the Interior?
    Answer. They will not pass through the Department of the Interior. 
They will be disbursed to the governments of the FSM and RMI in 
accordance with the Trust Fund Agreements.
    Question d. How will the funds be invested?
    Answer. The U.S., FSM and RMI have signed subsidiary agreements 
regarding the respective trust funds. These agreements provide that 
each trust fund will have a five-member governing body (three of the 
members are to be U.S. officers); a ``trustee'' selected from among 
trust institutions organized in the U.S. with a net worth in excess of 
$100 million, at least ten years experience as a custodian of financial 
assets, and experience in managing trust funds of at least $500 million 
that will have legal custody of the funds; and an investment advisor 
that will advise the governing body on investment decisions. The trust 
fund subsidiary agreements contemplate investment in a full range of 
investment vehicles, including all stocks, bonds, and other securities 
issued or recognized in any United States stock exchange.
    An investment strategy will be developed, respectively, by each 
governing body, with the help of its investment advisor. Until the 
governing bodies take on their official duties and consult with their 
investment advisors, it would be premature to predict the specifics 
with regard to their investment strategy and asset allocation.
    Question 18. What is the basis for providing an inflation 
adjustment based on 
2/3 of a percent change in the U.S. GDP Implicit Price Deflator, under 
sections 217/218, as opposed to a full percent change?
    Answer. The Compact, approved by Congress as the Compact of Free 
Association Act of 1985, established the formula for indexing certain 
portions of tine Compact annual assistance and compensation based on 
the two thirds calculation. Over the past seventeen years of Compact 
funding, none of the assistance and compensation has ever been indexed 
to the full rate of inflation.
    In formulating its policy for providing another twenty years of 
such assistance and compensation, the Administration decided to retain 
the formula from the original Compact. The purpose of the partial, 
rather than full, adjustment is to contribute to the transition of the 
FSM and RMI away from dependence on U.S. assistance.
    Question 19. What will be the investment strategy for the Trust 
Fund--What are the permitted and prohibited types of investment and who 
will be making the investment decisions?
    Answer. Please see the answer to question 17(d) above.
    Question 20. What was the basis for using the United States Gross 
Domestic Product Implicit Price Deflator for the inflation adjustment 
instead of the Consumer Price Index which is the indicator used for 
Social Security?
    Answer. The Compact, approved by Congress as the Compact of Free 
Association Act of 1985, established the formula for indexing certain 
portions of the Compact annual assistance and compensation based on the 
two thirds of the United States Gross Domestic Product Implicit Price 
Deflator calculation. In formulating its policy for providing another 
twenty years of such assistance and compensation, the Administration 
decided to retain formula from the original Compact. The purpose of the 
partial, rather than full, adjustment is to contribute to the 
transition of the FSM and RMI away from dependence on U.S. assistance.
    Question 21. Section 232 of the proposal states that the 
Comptroller General of the U.S. shall have such powers and authorities 
as described in sections 102(c) and 110(c) of P.L. 99-239, but the 
proposal deletes these two subsections and replaces them with 
102(b)(1). Is a correction needed to clarify Comptroller General 
authority?
    Answer. As signed, the amended Compacts make reference to P.L. 99-
239. Once P.L. 99-239 is revised, we would expect to reach agreement 
with the FSM and RMI to make a technical correction to section 232 of 
the amended Compacts.
    Question 22. Section 103(d)(1) of P.L. 99-239 states that it is the 
policy of the U.S. Congress that the RMI Government is required to pay 
landowners of Kwajalein in accordance with the October 19, 1982 land 
use agreement. Why does the proposal delete this provision?
    Answer. Section 103(d)(1) of P.L. 99-239 is obsolete. The U.S. and 
RMI have signed an amended Military Use and Operating Rights Agreement 
(MUORA). The October 19, 1982 land use agreement (LUA) does not reflect 
the amendments to the MUORA. The Government of the Republic of the 
Marshall Islands needs to reach an agreement with the Kwajalein 
landowners that reflects the changes to the MUORA. The policy of the 
United States is that both the government of the Republic of the 
Marshall Islands and the Kwajalein landowners must fulfill their 
obligations with respect to U.S. use of Kwajalein under the revised 
MUORA.
    Question 23. Section 103(d)(2) of P.L. 99-239 presents 
Congressional policy guidance to the Government of the United States in 
the event that the RMI Government fails to make land use payments. Why 
does the proposal delete this policy guidance?
    Answer. See answer to question 22, above.
    Question 24. The current land use agreement between the RMI and the 
landowners has a term that extends until 2016. If Congress were to 
approve the proposed Compact amendments and the proposed MUORA changes, 
would that not, in effect, alter the terms of this existing land use 
agreement and possibly trigger a legal dispute between the parties to 
that existing and on-going agreement?
    Answer. The U.S. is not a party to the Land Use Agreement (LUA). 
The LUA is between the RMI Government and the relevant landowners on 
whose land the U.S. defense sites are located. Nobody but the parties 
to the existing LUA can make changes to it. It is true, however, that 
if the proposed Compact amendments and MUORA changes take effect 
without the Government of the Republic of the Marshall islands and 
landowners having reached an agreement that reflects the Compact and 
MUORA amendments, there will be a shortcoming between, on the one hand, 
U.S. and GRMI rights and responsibilities under the amended Compact and 
MUORA and, on the other, the GRMI and landowner rights and 
responsibilities under the LUA. The RMI Government has pledged to work 
out an arrangement with the Kwajalein landowners to revise the LUA to 
reflect the U.S.-RMI amended Compact and MUORA.
    Question 25. When Congress enacted the Compact in 1986 it 
compensated the FSM and RMI for the loss of certain tax and trade 
benefits that had been negotiated. This compensation included the 
extension of several domestic programs identified in Section 111(a) of 
P.L. 99-139.
    a. in these proposed amendments, what is the basis for the 
availability of these compensatory programs from ``shall'' be made 
available to ``are authorized'' to be made available?
    b. Were these amendments negotiated with the FSM and RMI, or made 
unilaterally by the U.S.?
    Answer. The Administration's proposal reflects the view this 
provision should authorize, but not mandate, availability of the listed 
domestic programs. This also reflects the status of the FSM and RMI as 
foreign sovereign states and to further their transition away from 
their former treatment as territories covered by U.S. domestic 
programs.
    Section 111(a) is contained under Title I of P.L. 99-239, which is 
purely domestic legislation, as opposed to the bilateral government-to-
government agreement contained in Title II of that public law. 
Therefore, this provision was not negotiated with the FSM or RMI.
    Question 26. As a further part of this compensation package for the 
loss of tax and trade benefits, the Congress authorized, in Sec. 
111(d), up to $60 million in further compensation and provided that the 
FSM and RMI may submit reports to the Congress concerning the overall 
impact of the loss.
    a. In these proposed amendments, what is the basis for repealing 
this authorization for additional compensation?
    b. Were these amendments negotiated with the FSM and RMI, or made 
unilaterally by the U.S.?
    Answer. The Administration is not proposing to repeal this 
authorization. The FSM and RMI have failed to make the case for 
compensation under this provision. The Administration proposal extends 
the authorization to give the FSM and RMI one final year in which to 
make their case.
    Section 111(d) is contained under Title I of P.L. 99-239, which is 
purely domestic legislation, as opposed to the bilateral government-to-
government agreement contained in Title II of that public law. 
Therefore, this provision was not negotiated with the FSM or RMI.
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                                   State of Hawaii,
                                        Executive Chambers,
                                        Honolulu, HI, July 7, 2003.
Mr. Nikolao Pula,
Director, Office of Insular Affairs, U.S. Department of the Interior, 
        Office of the Secretary, Washington, DC.

    Dear Mr. Pula: I am sending you our annual report * on the impact 
of the Compacts of Free Association with the Federated States of 
Micronesia, the Republic of the Marshall Islands, and the Republic of 
Palau, for your transmittal to Congress in accordance with section 
103(e)(3) of P.L. 99-239, as amended by P.L. 106-504.
---------------------------------------------------------------------------
    * Retained in committee files.
---------------------------------------------------------------------------
    Hawaii continues to feel a tremendous pressure on our resources as 
a result of the Compact. The issues addressed in our previous annual 
reports continue to be problematic, and the strain on our limited 
resources is growing as migration to Hawaii from the Compact nations 
increases.
    To put in perspective the impact of the Compact migrants on the 
State, it is important to remember that Hawaii has one of the highest 
costs of living in the country. According to a recent study 
commissioned by the Hawaii State Commission on the Status of Women, 
many families in Hawaii cannot afford housing, food, childcare, or 
other basic needs.\1\ As you know, a high percentage of the Compact 
migrant population are poorly educated and live in poverty,\2\ and are 
thus part of the additional demand on the already strained social 
support systems of the State.
---------------------------------------------------------------------------
    \1\ Self-Sufficiency Standard Report, dated April 9, 2003, by Diana 
Pearce, Ph.D. with Jennifer Brooks; a project of the Wider 
Opportunities for Women program; available on-line at 
www.sixstrategies.org.
    \2\ General Accounting Office, Foreign Relations: Migration From 
Micronesian Nations Has Had Significant Impact on Guam, Hawaii, and the 
Commonwealth of the Northern Marianas Islands, October 2001.
---------------------------------------------------------------------------
    Please also keep in mind that the data included in this report is 
not comprehensive and can really only be considered a portion of the 
actual costs to the State. For instance, there is evidence of increased 
need for outreach services by the Honolulu Police Department to 
identify and respond to gang-related problems within the migrant 
communities, and hours expended by social workers to address concerns 
of child abuse and neglect and domestic violence among the migrant 
populations.\3\ These costs are not included in the data because the 
nature of the problem is not easily quantified, or they are incidental 
to other costs not the result of direct financial aid to the Compact 
migrants. Despite the imprecise and anecdotal nature of the measure of 
these costs, they are nevertheless real costs to the State in terms of 
time and resources expended toward servicing the Compact migrant 
population.
---------------------------------------------------------------------------
    \3\ These and other ``hidden'' costs were discussed in meetings 
held on April 21, 2003 with various state and private agencies, 
coordinated by the Department of the Attorney General and staff members 
for the Congressional delegates from Hawaii .
---------------------------------------------------------------------------
    For 2002, Hawaii expended over $32 million in assistance to Compact 
migrants. Since we began reporting in 1997, Hawaii has identified over 
$140 million of cumulative financial impact to the State. While I am 
glad to note that we received $4 million in 2001 as a grant to the 
Department of Education, clearly that is nowhere near the support 
needed in order to continue providing the current level of services to 
the migrant population.\4\
---------------------------------------------------------------------------
    \4\ The Department of Education alone has reported an accumulated 
total of more than $96 million based on data compiled since 1988. (See, 
Exhibit A-1).
---------------------------------------------------------------------------
    Compact migrants continue to have an extraordinary impact on the 
education system in Hawaii. The number of Compact migrants in 2002 
increased 32% in the primary and secondary school systems. This 
resulted in a cost of over $18 million for the academic year 2002-2003. 
(Exhibit A-1). That figure is based on an average cost to educate a 
child in the public schools, and does not include the additional costs 
for special services required for thus population. For instance, a 
majority of the migrant students come to the classroom with inadequate 
preparation and poor English language skills; 1,721 of the 2,381 
Compact migrant students identified in our public schools were enrolled 
in the English as a Second Language Program. (Exhibits A-1 to A-2).
    The demands on our higher education system increased as well. For 
fiscal year 2002, there were 669 students from Compact nations enrolled 
in the University of Hawaii system.\5\ These students pay resident 
tuition rather than non-resident tuition and, as a result, the 
University of Hawaii realized $1,346,514 in foregone revenue for the 
academic year. (Exhibits B-1 to B-4). Paying non-resident tuition would 
be prohibitive for these students coming from such poor families. 
Requiring them to pay non-resident tuition would effectively bar them 
from attending college.
---------------------------------------------------------------------------
    \5\ The University of Hawaii system includes UH-Manoa, UH-Hilo, UH-
West Oahu, and the community colleges.
---------------------------------------------------------------------------
    After education, the Department of Human Services (``DHS'') shows 
the next highest impact, providing a broad range of social services to 
Compact migrants. The largest expenditures reported by DHS include 
Financial Assistance ($4,521,240), and Medical Assistance ($6,746,008). 
(Exhibit C-1). The number of Compact migrants DHS reports servicing for 
2002 increased almost 20% from the previous year. (Exhibit C-2).
    The costs to the Department of Health (``DOH'') also continue to 
rise as DOH provides health care services to an increasing number of 
Compact migrants, many of whom have severe and specialized health care 
needs. DOH reports major expenditures for the Communicable Disease 
Branch ($490,576), Community Health Services ($298,244); and contracts 
to provide medical care to the uninsured ($240,000). (Exhibit D-1).
    The Department of Labor and Industrial Relations (``DLIR'') also 
provides social services to a growing number of Compact migrants: DLIR 
provides services primarily through two of its state funded programs, 
the Employment Core Services for Immigrants (ECSI), and the Youth 
Services for Immigrants (YSI). ECSI provides specialized employment 
services that address the particular employment needs of immigrants, 
including language, acculturation, job preparation, and search 
assistance, and family support services to wage earners. The YSI 
program provides bi-lingual services for at-risk immigrant youth to 
assist low-income immigrant youth in: 1) overcoming cultural and 
language barriers in school, at home, and in their community; 2) 
improving their understanding and adaptation to American culture; and 
3) preparing older youth for employment.
    For fiscal year 2001, DLIR estimates it served 127 Compact migrants 
at a cost of over $60,000.\6\ For fiscal year 2002, the cost is 
estimated at over $96,000, and includes services provided to 101 
Compact migrants. (Exhibit E). Current observations from DLIR indicate 
that both the number of Compact migrants and the cost of servicing them 
are expected to increase for fiscal year 2003.
---------------------------------------------------------------------------
    \6\ The reported figure is believed to be lower than what was 
actually expended, as some of the contracted service providers were not 
able to provide data.
---------------------------------------------------------------------------
    The increasing number of migrants continues to impact the State's 
criminal justice system. According to figures provided by the Hawaii 
Criminal Justice Data Center, 512 adult Compact migrants were arrested 
on a total of 759 charges. Those arrests resulted in 160 convictions on 
a total of 203 charges.\7\ (Exhibit F).
---------------------------------------------------------------------------
    \7\ Specific arrest and conviction information is not available for 
Compact migrant juveniles in the Hawaii court system.
---------------------------------------------------------------------------
    The Department of Public Safety has estimated a cost of $300,000 
for the 64 incarcerated Compact migrant adults. The Office of Youth 
Services reports that three minors from Compact nations were 
incarcerated at the Hawaii Youth Correctional Facility in 2002, at a 
cost of over $59,000. (Exhibit C-5). Neither the adult nor juvenile 
data takes into account the specialized needs that Compact migrants may 
have for support services within the corrections systems. Additional 
unreported costs may include counseling, probation, drug treatment, and 
court ordered domestic violence education.
    The increase in cases involving Compact migrants before the courts 
has increased the need for interpreters for those Compact migrants who 
tend to come with a background of poor education, and generally have 
limited English language skills. The State of Hawaii Judiciary 
indicates that identifying qualified interpreters for Compact migrants 
is difficult due to the close-knit communities formed by the migrants, 
which results in a relatively small pool of neutral interpreters. 
Retention of the qualified interpreters is also a problem due to the 
transient nature of the migrant population. For 2001, the Judiciary 
reported a cost of $5,930 for interpreting services to Compact 
migrants. That figure jumped dramatically in 2002, to $14,560. (Exhibit 
G).
    I understand that the Department of the Interior is proposing an 
annual compensation package of $15 million to address the currently 
nonexistent reimbursement to the State. I am also aware, however, that 
the amount proposed would be a small proportion of the total annual 
costs, and would not adequately remediate the previously reported 
expenditures. Additionally, I understand the $15 million would be 
shared proportionally with Guam and the Commonwealth of the Northern 
Marianas Islands, based upon a census of the Compact migrants in each 
of our jurisdictions.
    Naturally, I would support any measure of relief that the Federal 
government would consider. However, I request that the proposed 
appropriation be increased to take into consideration the actual cost 
to the State, realizing that in many instances they are most likely 
underreported due to inherent problems of record-keeping and the fact 
that many of the costs are not easily quantifiable or reportable. The 
proposal should also consider the increase in the number of migrants to 
Hawaii as well as the increased cost to service more of the Compact 
migrants which we expect in future. Finally, the proposal should also 
include an appropriate amount to address the enormous past expenditures 
that have strained our State's limited resources.
    In closing, I urge the Congress to honor the terms of the Compacts 
intended to alleviate adverse effects on the State, and to act 
``sympathetically and expeditiously'' in adopting the proposal once it 
is made. I request that Congress assist Hawaii by appropriating enough 
money to adequately compensate the State for the costs already incurred 
in meeting the needs of the Compact migrants, and for those costs 
expected to be incurred in the future, in order that we can continue to 
provide services to the Compact migrants, and to all of the people of 
Hawaii.
            Sincerely,
                                   James R. Aiona Jr.,
                                           Acting Governor.

                                   for

                                   Linda Lingle,
                                           Governor of Hawaii.
                                 ______
                                 
    Statement of the Peoples of Bikini, Enewetak, Rongelap and Utrik
                            i. introduction
    Mr. Chairman, thank you for giving the peoples of the four atolls 
of Bikini, Enewetak, Rongelap and Utrik the opportunity to testify on 
House Joint Resolution (H.J.R.) 63, a bill to reauthorize the Compacts 
of Free Association with Micronesia and the Marshall Islands.
    The most remarkable aspect of the testimony of Mr. Short, the U.S. 
Compact negotiator, is that a Congressman or legislative aide new to 
this area can read the entire statement and never realize that the 
United States conducted 67 atmospheric nuclear tests in the Marshall 
Islands between 1946 and 1958, that some of our people were irradiated 
by fallout and others moved from their islands, and that lingering 
radiation has forced thousands of us to remain exiles from our atolls 
nearly 60 years after the testing program began.
    The nuclear legacy in the Marshall Islands remains the proverbial 
elephant at the garden party. It's there, everyone knows it, but no one 
talks about it. Not one word appears on this topic in the U.S. 
Government's statement. Indeed, this opportunity to submit testimony 
today before Congress constitutes a greater recognition to the peoples 
of the four atolls than that accorded by the executive branch, which, 
under both the Clinton and Bush Administrations, has not seen fit to 
include issues from the nuclear testing program in the Compact 
negotiations. The legacy of these tests, like radiation, still lingers 
in the islands after more than half a century and will not go away.
    The silence of the Executive Branch on nuclear claims in its 
statement before this Committee is consistent with the refusal of the 
U.S. negotiators to address nuclear claims issues in the Compact 
renewal negotiations. What is not consistent is that after imposing a 
blackout on these issues in the negotiations, the U.S. Government is 
attempting in its legislative proposal to insert language that is 
prejudicial to the orderly implementation of the nuclear claims 
settlement still in effect under Section 177 of the Compact. The 
failure of the Administration to disclose this to the Committee in its 
testimony is surprising, to say the least, and seems to us to do a 
disservice both to the Congress and to the Compact renewal approval 
process.
   ii. background on nuclear testing program in the marshall islands
    The saga of the U.S. nuclear testing program in the Marshall 
Islands has been recounted in great detail in dozens of government 
reports, Congressional hearings, histories and films. A brief summary 
is as follows: The people of Bikini were moved off their atoll by the 
U.S. Navy in 1946 to facilitate Operation Crossroads, the world's 
fourth and fifth atomic bomb explosions. The people of Enewetak were 
moved off their islands the next year to prepare for a second series of 
atomic tests. In the 12-year period from 1946-1958, when the Marshall 
Islands was a United Nations Trust Territory administered by the United 
States, the United States conducted 67 atomic and hydrogen atmospheric 
bomb tests in islands, with a total yield of 108 megatons, which is 98 
times greater than the total yield of all the U.S. tests in Nevada. Put 
another way, the total yield of the tests in the Marshall Islands was 
equivalent to 7,200 Hiroshima bombs. That works out to an average of 
more than 1.6 Hiroshima bombs per day for the 12-year nuclear testing 
program in the Marshalls.
    Radioactive fallout from one of those tests--the March 1, 1954 
Bravo shot at Bikini--drifted in the wrong direction and irradiated the 
236 inhabitants of Rongelap and Utrik Atolls as well as the crew of a 
Japanese fishing vessel. Bravo, the largest U.S. nuclear test in 
history with an explosive force equal to nearly 1,000 Hiroshima-type 
atomic bombs, touched off a huge international controversy that 
eventually led to the U.S. moratorium on atmospheric nuclear testing 
and the U.S.-U.S.S.R. Limited Nuclear Test Ban Treaty.\1\ President 
Eisenhower told a press conference in late March that U.S. scientists 
were ``surprised and astonished'' at the test, and a year later the 
Atomic Energy Commission (AEC) admitted that about 7,000 square miles 
downwind of the shot ``was so contaminated that survival might have 
depended upon prompt evacuation of the area. . . .'' \2\ Put another 
way, if Bravo had been detonated in Washington, DC, and the fallout 
pattern had headed in a northeast direction, the entire population from 
Washington to New York would have been killed, while near-lethal levels 
of fallout would stretch from New England to the Canadian border.\3\
---------------------------------------------------------------------------
    \1\ See, e.g., Peter Pringle and James Spigelman, The Nuclear 
Barons (Holt, Rinehart and Winston 1981) pp. 243-59.
    \2\ New York Times, March 25, 1954, pp. 1, 18.
    \3\ Jonathan M. Weisgall, Operation Crossroads: The Atomic Tests at 
Bikini Atoll (Naval Institute Press 1994), pp. 304-05.
---------------------------------------------------------------------------
    The statistics 57 years after testing began:

  f The Bikinians have been exiled from their homeland since 1946, 
        except for a brief period after President Johnson announced in 
        1968 that Bikini was safe and the people could return. Many of 
        the islanders returned and lived there until 1978, when medical 
        tests by U.S. doctors revealed that the people had ingested 
        what may have been the largest amounts of radioactive material 
        of any known population, and the people were moved off 
        immediately. What went wrong? An AEC blue-ribbon panel, in 
        estimating the dose the returning Bikinians would receive, 
        relied on an erroneous calculation by one of their scientists, 
        which threw off their calculations by a factor of 100. ``We 
        just plain goofed,'' the scientist told the press.\4\
---------------------------------------------------------------------------
    \4\ Los Angeles Times, July 23, 1978, p. 3.
---------------------------------------------------------------------------
  f The people of Enewetak were exiled from the southern islands of 
        their atoll for 33 years, and approximately half the population 
        (the Enjebi people) still cannot return to their home islands 
        in the northern part of Enewetak Atoll because those islands 
        remain too radioactive 56 years after they were first moved.
  f Today, a nuclear waste site containing over 110,000 cubic yards of 
        radioactive contaminants, known as the Runit Dome, remains on 
        Enewetak Atoll.
  f At least four islands at Bikini and five at Enewetak were 
        completely or partially vaporized during the testing program, 
        and many others were heavily contaminated with radiation.
  f Although they were 100 miles from Bikini, the people of Rongelap 
        received a radiation dose from Bravo equal to that received by 
        Japanese people less than two miles from ground zero at 
        Hiroshima and Nagasaki. They displayed all the classic symptoms 
        of radiation poisoning--hair loss, skin lesions, and lowered 
        white blood cell counts. All but two of the nineteen 
        Rongelapese who were under ten years old at the time of Bravo 
        developed abnormal thyroid nodules, and there has been one 
        leukemia death.\5\ The people were moved off the islands for 
        three years after the Bravo shot, and they moved off again in 
        1985 amid concerns about radiation dangers.
---------------------------------------------------------------------------
    \5\ Edwin J. Martin and Richard H. Rowland, Castle Series (Defense 
Nuclear Agency Report No. 6035F 1954), pp. 3, 235; Robert A. Conard et 
al., A Twenty-Year Review of Medical Findings in a Marshallese 
Population Accidentally Exposed to Radioactive Fallout (Brookhaven 
National Laboratory 1974), pp. 59-76, 81-86).
---------------------------------------------------------------------------
  f The 236 inhabitants of Rongelap and Utrik have required regular 
        medical care by U.S. doctors since the time of the Bravo shot.
  f The people of Utrik were returned to their home atoll a mere three 
        months after Bravo and were exposed to extremely high levels of 
        residual fallout in the ensuing years. This unnecessary 
        exposure led to many thyroid problems and other cancers.

    No inkling of these facts is even suggested by the U.S. 
Government's testimony. As far as the U.S. negotiators are concerned, 
these events have been previously dealt with and are now relegated to 
the trash bin of history.
                 iii. 1980s court cases and the compact
    In the 1980s, the peoples of the four atolls and other island 
groups brought lawsuits against the United States for property and 
other damages totaling more than $5 billion. In the Bikini case, for 
example, in which more than 300 pleadings were filed in seven years, 
the trial judge denied the U.S. Government's motion to dismiss the case 
and set a trial date before the U.S. and Republic of the Marshall 
Islands (RMI) Governments signed the Compact and the subsidiary Section 
177 Agreement, which established a $150 Nuclear Fund, income from which 
was earmarked for the peoples of the four atolls and for other programs 
related to the legacy of the nuclear testing program ``as a means to 
address past, present, and future consequences of the Nuclear Testing 
Program.'' \6\ In addition, approximately $3 million annually of the 
income generated by the Nuclear Fund went to the Nuclear Claims 
Tribunal, which was established under the Agreement with ``jurisdiction 
to render final determination upon all claims past, present and future, 
of the Government, citizens, and nationals of the Marshall Islands 
which are based on, arise out of, or are in any way related to the 
Nuclear Testing Program.'' \7\
---------------------------------------------------------------------------
    \6\ Compact Section 177 Agreement, Article I, Section 2.
    \7\ Id., Article IV, Section 1(a).
---------------------------------------------------------------------------
    The Section 177 Agreement also provides that it constitutes the 
full settlement of all claims, ``past, present and future,'' of 
Marshall Islanders and their government against the United States 
arising out of the testing program, and another section provides that 
all such claims pending in U.S. courts are to be dismissed.\8\
---------------------------------------------------------------------------
    \8\Id., Articles X and XII.
---------------------------------------------------------------------------
    Faced with these provisions, Judge Harkins of the U.S. Claims Court 
dismissed the nuclear cases after the Compact went into effect, but he 
emphasized that ``in none of these cases has Congress abolished 
plaintiffs' rights. The Compact recognizes the United States 
obligations to compensate for damages from the nuclear testing program 
and the Section 177 Agreement establishes an alternative tribunal [the 
Nuclear Claims Tribunal] to provide such compensation.'' \9\ He 
repeated this point several more times: ``Plaintiffs are not deprived 
of every forum. An alternative tribunal to provide compensation has 
been provided.'' \10\
---------------------------------------------------------------------------
    \9\Juda v. United States, 13 Cl.Ct. 667, 688 (1987).
    \10\ Id. at 689.
---------------------------------------------------------------------------
    In this regard, Judge Harkins recognized the obvious point that 
Congress cannot close the doors of U.S. courts for a constitutional 
taking claim. As the noted constitutional scholar Gerald Gunther wrote, 
``[A]ll agree that Congress cannot bar all remedies for enforcing 
federal constitutional rights.'' \11\ Congress can, however, close the 
doors of U.S. courts if it provides for an alternative method of 
compensation, but the exercise of this power, as noted by the U.S. 
Supreme Court, is subject to the overriding requirement that when 
property is taken for public use ``there must be at the time of taking 
`reasonable, certain and adequate provision for obtaining 
compensation.' '' \12\
---------------------------------------------------------------------------
    \11\ Gunther, ``Congressional Power to Curtail Federal Court 
Jurisdiction: An Opinionated Guide to the Ongoing Debate,'' 36 
Stan.L.Rev. 895, 921 n. 113 (1984).
    \12\ Blanchette v. Connecticut General Insurance Corp., 419 U.S. 
102, 124-25 (1974), quoting Cherokee Nation v. Southern Kansas Railroad 
Co., 135 U.S. 641, 659 (1890).
---------------------------------------------------------------------------
    For example, the plaintiff in Dames & Moore v. Reagan contended 
that the suspension of its pending claims against Iran under the 
agreement for the release of the U.S. hostages was an uncompensated 
taking. It also argued that the alternative forum provided by that 
agreement, the U.S.-Iran Claims Tribunal, would not provide 
``reasonable, certain and adequate provision for obtaining 
compensation,'' because some claims might not be paid in full or not 
even be adjudicated. The Supreme Court found that the U.S.-Iran 
Tribunal was an adequate alternative forum and therefore upheld the 
agreement, noting, however, that the Claims Court remained open under 
the Tucker Act ``to the extent petitioner believes it has suffered an 
unconstitutional taking by the suspension of the claims.'' \13\
---------------------------------------------------------------------------
    \13\ 453 U.S. 654, 689 (1981).
---------------------------------------------------------------------------
    Judge Harkins agreed with this standard, but he found that the 
``settlement procedure, as effectuated through the Section 177 
Agreement, provides a `reasonable' and `certain' means for obtaining 
compensation.'' However, he was not so sure about whether the procedure 
would provide adequate funding: ``Whether the compensation in the 
alternative procedures . . . is adequate is dependent upon the amount 
and type of compensation that ultimately is provided through these 
procedures.'' In essence, he imposed an ``exhaustion of remedies'' test 
for the claimants: Because the Nuclear Claims Tribunal was not yet in 
existence, he held that ``[w]hether the settlement provides `adequate' 
compensation cannot be determined at this time. . . . This alternative 
procedure for compensation cannot be challenged judicially until it has 
run its course.'' \14\
---------------------------------------------------------------------------
    \14\ Juda v. United States, supra, 13 Cl.Ct. at 689.
---------------------------------------------------------------------------
    On appeal, the U.S. Court of Appeals for the Federal Circuit 
reached a similar conclusion: ``Congress intended the alternative 
procedure [the Nuclear Claims Tribunal] to be utilized, and we are 
unpersuaded that judicial intervention is appropriate at this time on 
the mere speculation that the alternative remedy may prove to be 
inadequate.'' \15\
---------------------------------------------------------------------------
    \15\ People of Enewetak, Rongelap and other Marshall Islands Atolls 
v. United States, 864 F.2d 134, 136 (Ct. App. Fed. Cir, 1988).
---------------------------------------------------------------------------
    Fifteen years have passed since that court's decision, and history 
has shown that the peoples of the four atolls were right: The Nuclear 
Claims Tribunal has ``run its course'' and is not capable of providing 
adequate compensation. After lengthy trials, it awarded $386 million 
the people of Enewetak for loss of use, restoration, and hardship, and 
$563 million to the people of Bikini, but it has paid out less than 
one-half of one percent of these awards. The Tribunal, which has also 
paid out nearly $67 million in personal injury awards, has less than 
$10 million on hand, and it has yet to issue awards in the just-
concluded cases brought by the peoples of Rongelap and Utrik. These 
circumstances are different from those in the Dames & Moore case, where 
the alternative system of relief--the U.S.-Iran Claims Tribunal--was 
appropriate because it was ``capable of providing meaningful relief.'' 
\16\ Here, the remedy was simply not adequate.
---------------------------------------------------------------------------
    \16\ Dames & Moore, 453 U.S. at 687.
---------------------------------------------------------------------------
    Everyone involved in the political status talks in the 1970s and 
1980s knows that the $150 million payment under Section 177 was just 
that--a political payment to help redress the nuclear legacy. No one at 
that time knew the full costs of cleanup, much less the extent of 
radiological illnesses and damage or the value of past takings of land. 
That is precisely why the Nuclear Claims Tribunal was established. Its 
role has been to assess the extent of damage and injury from the U.S. 
testing program.
             iv. bona fides of the nuclear claims tribunal
    Before discussing a possible Congressional solution to this 
dilemma, it may be useful to address head-on two contentious questions: 
First, was the Nuclear Claims Tribunal process valid or did the ``home 
field'' advantage result in skewed and inflated awards? Second, how 
should Congress deal with what some describe as the ``sticker shock'' 
of these awards?
    As to the first question, an independent investigation of the 
Nuclear Claims Tribunal conducted by former U.S. Attorney General Dick 
Thornburgh (``Thornburgh Report'') concluded in January 2003 that:

  f The Nuclear Claims Tribunal fulfilled the basic functions 
        contemplated by the U.S. Congress under the Compact.
  f Tribunal personnel were qualified to perform their functions and 
        have had access to the resources they needed.
  f The Tribunal has conducted its business in an orderly manner, 
        following rules and procedures that closely resemble those used 
        by legal systems in the United States.
  f Property damage claims before the Tribunal have been asserted 
        through class action vehicles similar to those used in the 
        United States, with litigation ``characterized by the kind of 
        legal briefing, expert reports, and motion practice that would 
        be found in many U.S. court proceedings,'' and hearing 
        procedures and rules of evidence that resemble those used in 
        administrative proceedings in the United States.\17\
---------------------------------------------------------------------------
    \17\ Dick Thornburgh et al., ``The Nuclear Claims Tribunal of the 
Republic of the Marshall Islands: An Independent Examination and 
Assessment of its Decision-Making Process'' (Kirkpatrick & Lockhart, 
LLP 2003), p. 2.
---------------------------------------------------------------------------
  f The Tribunal relied heavily on U.S. legal authorities in reaching 
        its decisions on damages issues.
  f Although the Marshall Islands parliament, the Nitijela, 
        occasionally sought to influence the Tribunal's work, 
        particularly in expanding the range of persons eligible to 
        receive personal injury awards, ``any such interference had not 
        more than a modest impact on the total dollar amount of the 
        Tribunal's awards.'' \18\
---------------------------------------------------------------------------
    \18\ Id.
---------------------------------------------------------------------------
         v. nuclear claims tribunal awards for loss of use and 
                          restoration of lands
    As to the amount of the Tribunal's awards, we wish to bring the 
following points to the attention of this Committee:

  f The people of Bikini presented cleanup options that ranged as high 
        as $1 billion, involving the scraping of all the radioactive 
        soil off the atoll and replacing it with non-radioactive soil. 
        The restoration option selected by the Tribunal--scraping the 
        soil only in the living area of Bikini Island and treating the 
        rest with potassium-rich fertilizer to block the uptake of 
        radioactive material--is exactly the cleanup method recommended 
        by the U.S. Department of Energy's environmental contractor, 
        Lawrence Livermore National Laboratory, and the cost was set at 
        just over $250 million.
  f These cleanup costs must be considered in the context of the cost 
        of the tests themselves. The Defense Department costs alone 
        just for the two shots of Operation Crossroads were $1.3 
        billion in 1996 dollars, and total Defense Department costs for 
        all shots in the Marshall Islands exceeded $4.3 billion.\19\ 
        (All dollar amounts in this paragraph are in 1996 dollars.) 
        Civilian costs are harder to calculate, but some numbers are 
        known. For example, in transferring its materials, facilities 
        and properties to the new AEC in 1946, the Manhattan Project 
        spent $3.1 billion to manufacture nine new atomic bombs and 
        continue research into thermonuclear weapons.\20\ The AEC spent 
        over $3.5 billion from July 1, 1946 through June 30, 1947,\21\ 
        and from 1948-1958, the AEC spent approximately $106 billion on 
        production research, development, and testing of nuclear 
        weapons.\22\
---------------------------------------------------------------------------
    \19\ Stephen I. Schwartz, ed., Atomic Audit: The Costs and 
Consequences of U.S. Nuclear Weapons Since 1940 (Brookings Institution 
Press 1998), pp. 101-03.
    \20\ Id. at 61-62.
    \21\ Id. at 63.
    \22\ Id. at 65-75.
---------------------------------------------------------------------------
  f The United States never questioned the cost or value of the nuclear 
        tests at Bikini and Enewetak, because they assured U.S. nuclear 
        superiority over the Soviet Union and led to immediate savings 
        of billions of dollars in the Defense Department budget in the 
        late 1940s and 1950s. Just the first two tests at Bikini led to 
        a greater emphasis on atomic warfare than on more expensive 
        conventional weapons and troops.\23\ As the AEC told Congress: 
        ``Each of the tests involved a major expenditure of money, 
        manpower, scientific effort and time. Nevertheless, in 
        accelerating the rate of weapons development, they saved far 
        more than their cost.'' \24\
---------------------------------------------------------------------------
    \23\ See, e.g., Weisgall, Operation Crossroads, supra n. 3 at 279-
87.
    \24\ U.S. Atomic Energy Commission, Thirteenth Semiannual Report of 
the Atomic Energy Commission (1953), p. 18.
---------------------------------------------------------------------------
  f Congress clearly knew that the $150 million trust fund under the 
        Section 177 Agreement was a political number arrived at to 
        settle the Claims Court lawsuits, because it also left the door 
        open for other funding programs for the four atolls in the 
        Compact. The Compact Section 177 Agreement limits the Nuclear 
        Fund to $150 million and states that it constitutes the full 
        settlement of all claims arising out of the nuclear testing 
        program, but after passage of this language Congress continued 
        to fund various programs. For example:

          Section 103(h)(2) of the Compact of Free Association Act 
        (Pub. L. 99-239) (the ``Act'') established the Enewetak Food 
        and Agriculture Program, which Congress has funded for 17 years 
        at an annual amount of between $1.1 and $1.7 million because it 
        recognized the challenge of providing food to the Enewetak 
        people. That program involves soil rehabilitation and 
        revegetation of the land with traditional food bearing crops, 
        importation of food, and the operation of a vessel to bring the 
        food and agricultural materials to Enewetak.
          Section 103 (i) of the Act authorized funding for the 
        radiological cleanup of Rongelap Island, and Congress 
        subsequently appropriated $40 million for a Rongelap 
        resettlement trust fund.
          Article VI of the Section 177 Agreement provides that the 
        United States ``reaffirms its commitment to provide funds for 
        the resettlement of Bikini Atoll . . . at a time which cannot 
        now be determined,'' and Section 103 (l) of the Act declares 
        that ``it is the policy of the United States . . . that because 
        the United States . . . rendered Bikini Atoll unsafe for 
        habitation . . . , the United States will fulfill its 
        responsibility for restoring Bikini Atoll to habitability. . . 
        .'' After the Compact went into effect, Congress appropriated 
        an additional $90 million for the radiological cleanup of 
        Bikini Atoll. See Pub. L. No. 100-446.

  f The $150 million trust fund established under the Section 177 
        Agreement was provided to cover payment of claims for injuries, 
        damages and losses known in 1986, based on information 
        available at that time. However, recognizing that additional 
        compensation might be required, U.S. negotiators and Congress 
        agreed to an extraordinary statutory right for the RMI to 
        present additional claims directly to Congress based on 
        injuries, damages and losses discovered or determined 
        subsequent to 1986. Article IX of the Agreement, entitled 
        ``Changed Circumstances,'' provides that if property or 
        personal injury losses resulting from the Nuclear Testing 
        Program are discovered after the effective date of the 
        Agreement, ``were not and could not reasonably have been 
        identified as of the effective date'' of the Agreement, and 
        ``if such injuries render the provisions of this Agreement 
        manifestly inadequate,'' the RMI Government may submit a 
        request directly to Congress to provide for such injuries. The 
        RMI submitted such a petition to Congress in 2000 and again in 
        2001, and sixteen months ago the top leadership in the Senate 
        Energy Committee and House Resources Committee asked the Bush 
        Administration to review and report back on the petition.
  f The Department of Energy's Environmental Management Program Budget, 
        which is earmarked for the cleanup of radioactive, chemical and 
        other hazardous waste at 53 U.S. nuclear weapons production and 
        development sites in 23 states, dwarfs the numbers under 
        consideration here. Five years ago, that cleanup program was 
        estimated to cost nearly $147 billion.\25\ Congress 
        appropriated an average of $5.75 billion annually for the 
        program in the late 1990s, and it is anticipated that this 
        funding level will continue at this rate indefinitely.\26\
---------------------------------------------------------------------------
    \25\ Accelerating Cleanup: Paths to Closure (U.S. Department of 
Energy, Office of Environmental Management) (June 1998) at 2, 5.
    \26\ Id. at 8. See also Environmental Management: Program Budget 
Totals (FY 1998-FY 2000) and Environmental Management's FY 2000 
Congressional Budget Request.
---------------------------------------------------------------------------
  f Since 1991 the U.S. Government, through DOE's Environmental 
        Management Program, has spent more than $10 billion at the 
        Hanford, Washington nuclear weapons site without removing one 
        teaspoonful of contaminated soil.\27\ That is what DOE has 
        spent on studying the problem. The Bikini and Enewetak cleanup 
        numbers sound big, but they look like a bargain compared to 
        what the United States spends on its own sites--sites that were 
        exposed to a tiny percentage of the radiation that was 
        unleashed in the Marshall Islands.
---------------------------------------------------------------------------
    \27\ Environmental Management: Progress & Plans of the 
Environmental Management Program (November 1996) (DOE/EM-0317) at 120.
---------------------------------------------------------------------------
  f The U.S. Government has already approved compensation claims of 
        more than $562 million under the Downwinders' Act by people 
        injured as a result of nuclear tests in Nevada that were nearly 
        100 times smaller in magnitude that the tests conducted in the 
        Marshall Islands.\28\
---------------------------------------------------------------------------
    \28\ Thornburgh Report, supra n. 17 at 3
---------------------------------------------------------------------------
  f As the Thornburgh Report noted, ``[I]t is our judgment that the 
        $150 million trust fund initially established in 1986 [under 
        the Compact] is manifestly inadequate to fairly compensate the 
        inhabitants of the Marshall Islands for the damages they 
        suffered as a result of the dozens of U.S. nuclear tests that 
        took place in their homeland.\29\
---------------------------------------------------------------------------
    \29\ Id.
---------------------------------------------------------------------------
                   vi. proposed legislative solution
    The RMI and leaders of Bikini, Enewetak, Rongelap and Utrik have 
requested an amendment to the Compact of Free Association that grants 
narrowly defined jurisdiction to the U.S. Court of Appeals for the 
Federal Circuit to review the judgments of the Nuclear Claims Tribunal 
and to order the United States to pay these judgments (after deducting 
the compensation already received by the claimants from the Nuclear 
Claims Tribunal) unless it finds, after a hearing, that a particular 
judgment ``is manifestly erroneous as to law or fact, or manifestly 
excessive.'' The provision also makes the U.S. Government party to the 
case, thus giving it standing to oppose partially or entirely the 
awards adjudicated by the Nuclear Claims Tribunal.\30\
---------------------------------------------------------------------------
    \30\ The text of the amendment is as follows:

    Section 103(g) of United States Public Law 99-239 (99 Stat. 1775) 
is amended by adding a new paragraph (3) as follows:
    ``Judgments of the Nuclear Claims Tribunal established pursuant to 
Article IV of the Section 177 Agreement with respect to claims for loss 
or damage to property or person that have not been fully paid or 
otherwise satisfied may be presented for review and certification to 
the United States Court of Appeals for the Federal Circuit, or its 
successor court, which shall have jurisdiction therefor, 
notwithstanding the provisions of Article X, XI, and XII of the Section 
177 Agreement or 28 U.S.C. 1502, for the limited purposes set forth in 
this paragraph only, and which court's decisions shall be reviewable as 
provided by the laws of the United States. The United States Court of 
Appeals for the Federal Circuit shall review such judgments, certify 
them and order payment thereof pursuant to 28 U.S.C. 1304, unless such 
court finds, after a hearing, that any such judgment is manifestly 
erroneous as to law or fact, or manifestly excessive. In either of such 
cases, the United States Court of Appeals for the Federal Circuit shall 
have jurisdiction to modify such judgment. In ordering payment, the 
Court shall take into account any prior compensation made by the 
Nuclear Claims Tribunal as a result of such judgment. In any such 
certification proceeding the Government of the United States shall 
stand in the place of the Defender of the Fund and shall be a party to 
and may oppose certification or payment of judgments of the Nuclear 
Claims Tribunal.''
---------------------------------------------------------------------------
    The peoples of the four atolls and the RMI Government urge the 
Congress to give careful consideration to this proposal for following 
reasons:

          1. This proposal would resolve major components of the 
        ``changed circumstances'' petition.

    As noted above, the Section 177 Agreement's changed circumstances 
provision (Article IX) states that the RMI Government may petition 
Congress if it believes developments since the settlement was approved 
render the assistance and compensation provided ``manifestly 
inadequate.'' There is no precise definition of what exactly 
constitutes a ``changed circumstance,'' but by adopting this proposal 
the U.S. Congress can make the major part of the changed circumstances 
petition end up where it started--in the courts, which, on a daily 
basis, deal with factual and legal issues concerning damage claims.

          2. This proposal would help to resolve the outstanding legal 
        flaw in the Compact 177 scheme.

    As explained above, the Section 177 Agreement provided the peoples 
of the four atolls with a $150 million Nuclear Fund, now nearly 
exhausted, which is far less than the value of their claims. The 
liability of the U.S. Government for damages resulting from the nuclear 
testing program has never been an issue. Indeed, Section 177(a) of the 
Compact specifically states that the ``Government of the United States 
accepts responsibility for compensation owing to the citizens of the 
Marshall Islands . . . for loss or damage to property and person . . . 
resulting from the nuclear testing program. . . .'' The only question 
was how to resolve those claims and how much compensation to provide.
    For the U.S. and Marshall Islands Governments, the Section 177 
process served its purpose by establishing a process to resolve the 
value of the Marshall Islanders' claims, a process that has now lasted 
more than 15 years. The results of that process have demonstrated that 
the $150 million provided by the Section 177 Agreement is inadequate to 
meet the U.S. Government's ``accept[ance],'' in Section 177, of its 
``responsibility for compensation owing to the citizens of the Marshall 
Islands . . . .'' In order to implement this pledge and to fulfill the 
purpose of Section 177, Congress should restore federal court 
jurisdiction to complete the compensation process to determine whether 
the Nuclear Claims Tribunal's awards are adequate and, if so, to order 
payment.

          3. This proposal treats the nuclear legacy claims in the same 
        manner as other pre-Trusteeship termination claims.

    Under Section 174 of the Compact, the United States waives 
sovereign immunity for all claims arising from its previous actions as 
Administering Authority of the Trust Territory, other than those claims 
settled by the Section 177 Agreement. The four-atoll proposal closely 
tracks the language of Section 174 (c) and does nothing more than 
provide the identical treatment to the nuclear cases filed in the U.S. 
Claims Court in the 1980s, which were then singled out for special 
treatment (espousal and dismissal of claims) under the Section 177 
Agreement. There is no legitimate reason to treat the nuclear cases 
differently from other claims arising out of the U.S. Government's role 
as Administrator of the Trust Territory, now that the Nuclear Claims 
Tribunal process has run its course. Unless Congress itself is prepared 
to determine the level of funding that must be provided to resolve the 
nuclear legacy claims, restoring to the federal courts the same 
jurisdiction they have over other claims from the Trusteeship era is 
morally and legally the only solution.

          4. This proposal resolves a potentially difficult political 
        dilemma for both the executive and legislative branches of the 
        U.S. Government.

    The Office of Compact Negotiations has opted to exclude nuclear 
legacy issues from the current negotiations. However, these issues will 
still be on the table if the current negotiations are concluded without 
addressing them; they will not go away. Congress is understandably 
reluctant to delve into this type of issue, given the need for a 
detailed review of scientific, medical and legal questions that it is 
simply ill-equipped to handle. It lacks the expertise and may be 
unwilling to tackle the issue, and the executive branch has indicated 
that it is unwilling to address the matter at this time. This proposal 
solves those problems. The Section 177 Agreement imposed a political 
settlement on a legal matter. This proposal returns the resolution of 
the nuclear legacy where it belongs--in the courts.

          5. This proposal contains an alternative source of funding 
        for the nuclear legacy issues.

    By providing for U.S. Court of Appeals for the Federal Circuit 
review, any award upheld by that court would be paid from the Claims 
Court Judgment Fund established for awards against the United States 
and appropriated under 28 U.S.C. Sec. 1304. (``Necessary amounts are 
appropriated to pay final judgments, awards, compromise settlements, 
and interests and costs specified in the judgments or otherwise 
authorized by law . . . .'') Although the funds would still come from 
the U.S. Treasury, this proposal creates a separate source of funding 
to pay these judgments, rather than looking to a specific Congressional 
appropriation, which is difficult to accomplish under any 
circumstances.

          6. This proposal provides for adequate executive branch 
        involvement in resolution of the final awards.

    Some in the executive branch have questioned the validity of the 
Nuclear Claims Tribunal process, suggesting that the Tribunal tilted 
its views towards the RMI nuclear victims and acted like a ``kangaroo 
court.'' (See above.) By providing that the U.S. Government stands in 
the place of the Defender of the Fund in any certification proceeding, 
this proposal will protect the role of the U.S. Government by ensuring 
that the Justice Department can appear to oppose payment or offer 
modifications to any proposed award. In addition, any new awards would 
be discounted by amounts already paid under the Compact.

          7. This proposal is consistent with certain Compact language.

    This proposal is consistent with the view of the executive and 
legislative branches at the time the Compact was concluded, which was 
that more funding might be needed to resolve issues relating to the 
nuclear legacy. See above, for three examples of post-Compact funding 
for Rongelap, Enewetak and Bikini. This proposal is consistent with the 
spirit of the existing Compact by recognizing that the funds provided 
by the Section 177 Agreement were never designed to provide total 
compensation owing to the peoples of the four atolls.
                 vii. unilateral changes to compact act
    The peoples of the four atolls are in agreement with the position 
of the RMI Government, as stated at pp. 8-9 of Foreign Minister Gerald 
M. Zackios' written testimony, concerning the Administration's 
unilateral changes to the amended Compact Act, especially with respect 
to Section 103(e)(3). As noted above at page 1, if the U.S. negotiators 
claimed a lack of authority to negotiate nuclear legacy provisions in 
the Compact negotiations, where did they come up with the authority to 
propose unilateral changes to existing provisions involving that 
nuclear legacy? Congress' original language should continue to govern 
on the language of the Section 177 Agreement.
                           viii. future steps
    The peoples of the four atolls have long sought a seat at the table 
in the Compact negotiations, but we were never granted one. We also 
understand that H.J.R. 63 contains many other important provisions that 
govern all aspects of the future political, military, and economic 
relationship between the RMI and the United States. Our first choice 
would be to amend H.J.R. 63 to insert the provision discussed above. If 
that is not politically feasible due to time constraints in 
implementing the Compact, we request that this Committee (a) make clear 
in its legislative history of H.J.R. 63 that it intends to deal with 
the nuclear legacy issues outlined in the testimony and (b) commence 
that process by committing to hold a hearing on these matters as soon 
as feasible after passage of H.J.R. 63.
    Again, we appreciate your willingness to consider our views, and we 
and our legal representatives are available at any time to work with 
you and your staff.
    Thank you.
                                 ______
                                 
             Statement of Christopher J. Loeak, Chairman, 
                 Kwajalein Negotiation Commission (KNC)
    My name is Christopher J. Loeak, Chairman of the Kwajalein 
Negotiation Commission. I appreciate the opportunity to present the 
views of the KNC today.
    Recently, I submitted testimony to the House Resources Committee 
and House International Relations Committee regarding the views of the 
KNC on the proposed agreement between the United States and the RMI 
with respect to a new Military Use and Operating Rights Agreement. I 
append that statement to the one that I submit to you today.
    The position of the KNC on the proposed MUORA can be summarized by 
the following points:

  f The compensation amounts for landowners of Kwajalein are 
        insufficient to provide for the long-term benefit of the people 
        of Kwajalein. The amount of compensation for the people of 
        Kwajalein must be at least $19.1 million in 2004 fully indexed 
        for inflation.
  f The term of the agreement is insufficient and must be made longer 
        to adequately plan for the use of Kwajalein for our people. 
        Although the U.S. portrays this agreement as an agreement of 
        over 50 years duration, it only guarantees use of Kwajalein for 
        seven years beyond 2016. Thus, the agreement is only a 7-year 
        extension with a series of 1-year options to terminate, leaving 
        the landowners in a state of suspended animation for years to 
        come. This term is far worse than the present 15-year term in 
        the present MUORA. The guaranteed term of the MUORA should be 
        at least through 2030 with mutual termination rights after that 
        date.
  f The RMI should not be made to guarantee to the United States a 
        ``subsidized'' tax rate for the duration of the MUORA. The RMI 
        should be free to impose the national tax rate of the RMI to 
        the expatriate workers on the Kwajalein base as it is applied 
        throughout the country as an exercise of national sovereignty.
  f The Landowners will not sign a new Land Use Agreement until and 
        unless acceptable changes are made to the MUORA to address 
        these deficiencies. The 7-year extension of the MUORA as 
        proposed is legally insufficient and cannot be implemented.

    In addition to these fundamental points made on behalf of the KNC, 
I find it incumbent upon me to also make the following points on behalf 
of the nation at-large with respect to the rest of the Compact.

  f The unilateral changes that the U.S. Government has made to the 
        compact documents, including the denial of the Section 177 
        petition and the immigration changes, are unacceptable.
  f The lack of an agreement on the application of education programs 
        through the duration of the Compact make the agreement 
        insufficient and may even aggravate problems associated with 
        immigration.
  f FEMA coverage should be extended for the RMI. The islands are 
        susceptible to typhoons, rising sea levels and residual 
        pollution from nuclear tests and non-nuclear military 
        activities. Kwajalein is the target end of a missile shot 
        several times a year. The possibility of disaster remains for 
        as long as tests are conducted. Civilian communities ring this 
        target and the RMI government has neither technical nor 
        financial capabilities to deal with such an eventuality.
  f The application of Full Inflation to the Compact provisions and 
        payments is an absolute necessity and should be specifically 
        provided for in the agreement.

    It is my opinion that if Congress does not make these changes then 
the Nitijela will reject the agreement when it comes up for debate in 
August.
    Thank you for this opportunity and you can be sure that we will 
pursue every opportunity to reach an acceptable agreement through the 
constitutional processes of our respective governments.
                                 ______
                                 
        Statement of David Bencivenga, Principle, North Pacific 
                            Trading Company
    Separate ``Agreements in Implementation of Section 175(b) of the 
Compact of Free Association'' for the Federated States of Micronesia 
(FSM) and the Republic of the Marshall Islands (RMI) were attached to 
the Compact of Free Association (CFA) to impose U.S. Department of 
Labor (DOL) regulation of recruitment firms in those two countries.
    At the outset of negotiations, the U.S. Department of State (DOS) 
and the FSM and RMI Governments opposed the regulations.
    Accordingly, DOL officials conspired with reporters from the 
Orlando Sentinel and Baltimore Sun (OS&BS) to produce a series of 
articles entitled ``Indentured in America.'' The DOL officials fed the 
reporters restricted documents that did not reflect official Government 
policy or investigative results. The reporters misused the documents to 
create the appearance of impropriety and criminal conduct when none 
existed.
    The DOL official's goal was to influence the on-going negotiations 
on the CFA. The ``Indentured in America'' series was fabricated to 
bring public pressure to bear on the negotiating parties to adopt the 
proposed regulations.
    The OS&BS claim this was accomplished. The most recent June 6 
article states the ``Indentured in America'' story ``prompted some U.S. 
officials to push for changes in the compact, which was then being 
negotiated. . . .''
    The DOL never established a factual basis to justify the 
regulations. The DOL never sought industry comments on the regulations. 
The regulations contain provisions that are unduly burdensome. The 
regulations contain provisions that restrict normal and customary 
business practices. The regulations would eliminate recruitment 
programs in Micronesia.
    Burdensome regulations include:

          1. Semi-annual reporting of ``the names, addresses, telephone 
        numbers, fax numbers, and e-mail addresses'' of all citizens of 
        the RMI and FSM who are currently employed in the United States 
        pursuant to employment arranged by the recruiter [Section B]. 
        The recruiter does not normally have access to this information 
        and has no legal basis to obtain it. The release of the 
        information may violate the privacy rights of the Micronesians.
          2. A list of legal rights must be disclosed to each RMI and 
        FSM citizen written in both English and the local language 
        [Section C.2.]. English is the common language in the RMI and 
        FSM. Business contracts and Government documents are written in 
        English. There are dozens of separate and distinct local 
        languages. Any RMI or FSM citizen may speak several languages. 
        There are no translation services in the RMI and FSM. It is 
        simply not feasible to provide disclosure information in every 
        local language.

    Restriction of normal and customary business practice include:

          1. The regulations prohibit ``debt, liquidated damages, or 
        similar arrangements'' [Subsection C.2.].
          2. Micronesians are provided the most favorable financial 
        treatment of any alien worker. Recruitment services are 
        provided to the Micronesian workers free or virtually free of 
        charge. The airfare from Micronesia to the U.S. is provided 
        free of charge. Training schools to obtain professional 
        designation such as Certified Nursing Assistant are provided 
        free of charge. The financial commitment made on behalf of each 
        Micronesian exceeds $5,000. In return, the Micronesians agree 
        to a one-year or two-year period of employment with the 
        Employing Company. If the Micronesian fails to complete the 
        contract, then the Micronesian is to reimburse $1,500 to $2,500 
        (liquidated damages) of the $5,000 commitment. The amount of 
        liquidated damage is reasonably related to the commitment. The 
        liquidated damage provision is used to simplify the legal 
        process if the contract is breached.
          3. The regulations make it clear that ``failure to complete 
        such employment contract may constitute a breach of contract 
        with certain legal consequences (including an action for 
        actual, but not liquidated or similar damages), depending on 
        the circumstances'' [Subsection C.3.(b)(v)].
          4. Liquidated damages are simply a tool used to quantify the 
        amount of damages in a small claims case such as this. It is a 
        normal and customary business practice. Acknowledging that the 
        Micronesian may be responsible for actual damages but outlawing 
        liquidated damages is like saying you can build the house but 
        you can't use a hammer.
          5. Of the approximately 2,000 Micronesians brought to the 
        U.S. by recruitment firms specifically mentioned in the 
        ``Indentured in America'' series, the greater majority did NOT 
        complete the one-year or two-year employment contract. Of this 
        ``in excess of 1,000'' Micronesians who failed to complete 
        their contract, only three are known to actually be making 
        payments toward liquidated damages.
          6. Approximately $10,000,000 was spent by private industry to 
        make these 2,000 jobs available to Micronesians. The U.S. 
        Government commitment toward these programs was miniscule (less 
        than $100,000). If the U.S., RMI and FSM Governments want this 
        practice to continue, then ways must be found to enhance the 
        Micronesian's resolve to complete his contract, not weaken it. 
        No employer will be willing to expend $5,000 on behalf of each 
        Micronesian unless there is a reasonable expectation that the 
        Micronesian will complete his contract.

    The stated goal of the DOL regulations is to ``safeguard the rights 
and welfare'' of the Micronesians. However, with the recruiters gone, 
the real result will be that many young Micronesians will lose the only 
opportunity they had for employment. The regulations will end up 
harming the very Micronesians that the DOL claims they were trying to 
protect.
    Of course, one has to question whether leaking restricted documents 
to the press to create the appearance of impropriety and criminal 
conduct when none exists, in order to get what the DOL wanted without 
going through the usual and customary channels, is proper conduct for 
U.S. Government officials.
    It is our request to the Senate Committee on Energy and Natural 
Resources that the ``Agreement(s) in Implementation of Section 175(b) 
of the Compact of Free Association'' be tabled or deferred pending a 
thorough investigation into this entire matter.