[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
    PROPOSED FISCAL YEAR 2008 BUDGET REQUEST FOR THE DEPARTMENT OF 
                 INTERIOR'S OFFICE OF INSULAR AFFAIRS

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



                           OVERSIGHT HEARING

                               before the

                    SUBCOMMITTEE ON INSULAR AFFAIRS

                                 of the

                     COMMITTEE ON NATURAL RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           February 27, 2007

                               __________

                            Serial No. 110-3

                               __________

       Printed for the use of the Committee on Natural Resources



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                     COMMITTEE ON NATURAL RESOURCES

               NICK J. RAHALL II, West Virginia, Chairman
              DON YOUNG, Alaska, Ranking Republican Member

Dale E. Kildee, Michigan             Jim Saxton, New Jersey
Eni F.H. Faleomavaega, American      Elton Gallegly, California
    Samoa                            John J. Duncan, Jr., Tennessee
Neil Abercrombie, Hawaii             Wayne T. Gilchrest, Maryland
Solomon P. Ortiz, Texas              Ken Calvert, California
Frank Pallone, Jr., New Jersey       Chris Cannon, Utah
Donna M. Christensen, Virgin         Thomas G. Tancredo, Colorado
    Islands                          Jeff Flake, Arizona
Grace F. Napolitano, California      Rick Renzi, Arizona
Rush D. Holt, New Jersey             Stevan Pearce, New Mexico
Raul M. Grijalva, Arizona            Henry E. Brown, Jr., South 
Madeleine Z. Bordallo, Guam              Carolina
Jim Costa, California                Luis G. Fortuno, Puerto Rico
Dan Boren, Oklahoma                  Cathy McMorris Rodgers, Washington
John P. Sarbanes, Maryland           Bobby Jindal, Louisiana
George Miller, California            Louie Gohmert, Texas
Edward J. Markey, Massachusetts      Tom Cole, Oklahoma
Peter A. DeFazio, Oregon             Rob Bishop, Utah
Maurice D. Hinchey, New York         Bill Shuster, Pennsylvania
Patrick J. Kennedy, Rhode Island     Dean Heller, Nevada
Ron Kind, Wisconsin                  Bill Sali, Idaho
Lois Capps, California               Doug Lamborn, Colorado
Jay Inslee, Washington
Mark Udall, Colorado
Joe Baca, California
Hilda L. Solis, California
Stephanie Herseth, South Dakota
Heath Shuler, North Carolina

                     James H. Zoia, Chief of Staff
                   Jeffrey P. Petrich, Chief Counsel
                 Lloyd Jones, Republican Staff Director
                 Lisa Pittman, Republican Chief Counsel
                                 ------                                

                    SUBCOMMITTEE ON INSULAR AFFAIRS

            DONNA M. CHRISTENSEN, Virgin Islands, Chairwoman
        LUIS G. FORTUNO, Puerto Rico, Ranking Republican Member

Eni F.H. Faleomavaega, American      Elton Gallegly, California
    Samoa                            Jeff Flake, Arizona
Raul M. Grijalva, Arizona            Don Young, Alaska, ex officio
Madeleine Z. Bordallo, Guam
Nick J. Rahall II, West Virginia, 
    ex officio
                                 ------                                
                                CONTENTS

                              ----------                              
                                                                   Page

Hearing held on February 27, 2007................................     1

Statement of Members:
    Bordallo, Hon. Madeleine Z., a Delegate in Congress from Guam     5
    Christensen, Hon. Donna M., a Delegate in Congress from the 
      Virgin Islands.............................................     1
        Prepared statement of....................................     3
    Faleomavaega, Hon. Eni F.H., a Delegate in Congress from 
      American Samoa, Statement submitted for the record.........    50
    Fortuno, Luis G., the Resident Commissioner in Congress from 
      Puerto Rico................................................     4
        Prepared statement of....................................     4

Statement of Witnesses:
    Camacho, Hon. Felix Perez, Governor of Guam..................    12
        Prepared statement of....................................    14
    Cohen, David B., Deputy Assistant Secretary for Insular 
      Affairs, U.S. Department of the Interior...................    26
        Prepared statement of....................................    29
        Letter submitted for the record..........................    53
    Tulafono, Hon. Togiola T.A., Governor of American Samoa......     6
        Prepared statement of....................................     8

Additional materials supplied:
    deJongh, Hon. John, Jr., Governor of the U.S. Virgin Islands, 
      Statement submitted for the record.........................    45
    Tenorio, Pedro A., Resident Representative, Commonwealth of 
      the Northern Mariana Islands, Statement submitted for the 
      record.....................................................    48


OVERSIGHT HEARING ON THE ``PROPOSED FISCAL YEAR 2008 BUDGET REQUEST FOR 
        THE DEPARTMENT OF INTERIOR'S OFFICE OF INSULAR AFFAIRS''

                              ----------                              


                           February 27, 2007

                     U.S. House of Representatives

                    Subcommittee on Insular Affairs

                     Committee on Natural Resources

                            Washington, D.C.

                              ----------                              

    The Subcommittee met, pursuant to call, at 10:03 a.m., in 
Room 1324, Longworth House Office Building, Hon. Donna 
Christensen [Chairwoman of the Subcommittee] presiding.
    Present: Representatives Christensen, Bordallo and Fortuno.

       STATEMENT OF THE HONORABLE DONNA M. CHRISTENSEN, 
         A DELEGATE IN CONGRESS FROM THE VIRGIN ISLANDS

    Mrs. Christensen. Good morning. The oversight hearing by 
the Subcommittee on Insular Affairs will come to order. The 
Subcommittee is meeting today to hear testimony on the proposed 
Fiscal Year 2008 budget request from the Department of 
Interior's Office of Insular Affairs. Under Committee Rule 
4(g), the Chairman and Ranking Member usually are the only ones 
to make opening statements, but today we will depart from that, 
without objection, and allow every member on the Subcommittee 
to make an opening statement if they so wish.
    But I am very pleased and honored to call this first 
meeting of the Subcommittee on Insular Affairs of the 110th 
Congress to order. I am looking forward to an active and 
productive Subcommittee, and I want to thank Chairman Rahall 
for reinstating the Subcommittee and giving me the opportunity 
to chair it. I also want to welcome my colleague, Congressman 
Fortuno, and welcome the insights and leadership that he is 
going to bring to our deliberations. And, of course, on this 
first meeting, I want to welcome all the members of the 
Subcommittee.
    It is a very special honor and pleasure also to welcome our 
friends and the leaders of our territories, the Governors. The 
two who are here are from the far-off Pacific insular areas, 
and we thank them for being here with us today.
    When the Committee was first under the Chairmanship of my 
predecessor and former Virgin Islands Congressman Ron DeLugo, 
we took advantage of the Governors being in Washington for the 
annual National Governors Association meeting to invite them to 
come before the Subcommittee, your home here in Congress, to 
comment on the proposed budget of the Office of Insular Affairs 
as well as to inform us of any issues facing you at home that 
the Federal Government could be helpful with. So I want to 
welcome The Honorable Felix Camacho, the Governor of Guam, and 
The Honorable Togiola Tulafono, the Governor of American Samoa. 
Unfortunately The Honorable Benigno Fitial, the Governor of the 
Commonwealth of the Northern Mariana Islands, was unable to 
travel to Washington for the annual meeting this year because 
of pressing business at home, including a visit by the senior 
staff of the Senate committee to the CNMI. I also regret that 
as of now, my own Governor, The Honorable John deJongh, Jr., is 
unable to be here today, but both have submitted statements for 
the record.
    Mrs. Christensen. And soon we look forward to welcoming the 
Deputy Assistant Secretary David Cohen, who I understand is 
just getting off a plane.
    As we are keenly aware, the Office of Insular Affairs has 
broad general authority to provide for the special needs and 
concerns of the U.S. insular areas. President Bush in his 
Fiscal Year 2008 budget has proposed sending $403.8 million for 
the Office of Insular Affairs of which $79.8 million is in 
current appropriations. That figure is $425,000 below the 2007 
continuing resolution, but $560,000 above the President's 
Fiscal Year 2007 budget request. $324.1 million of the Fiscal 
Year 2008 figure includes $119 million in estimated income tax 
payments to Guam and the Virgin Islands, and $205.1 million in 
payments under the Compacts of Free Association. Programs 
funded under the 2008 fiscal year budget request will continue 
long-term efforts throughout the territories and freely 
associated states. Over $200 million in Compact of Free 
Association Sector Grants will be included in the 2008 budget. 
More than $12 million will be requested for a variety of 
technical assistance programs, including ongoing efforts on the 
brown tree snake control, insular management controls, coral 
reef conservation, maintenance assistance and water and 
wastewater projects.
    Some questions we hope to receive answers from the Office 
of Insular Affairs include the specifics of the competitive 
allocation system for the Covenant Improvement Project Grants 
and whether more consideration should be given to those 
projects that are under court orders, and what are their plans 
for addressing the potential catastrophes looming for the 
economies of American Samoa and the CNMI and, to a lesser 
extent, my home islands as we continue to stave off attempts by 
the Treasury Department to effectively neuter the successful 
economic development program that Congress put in place to 
assist with our economic development. In my opinion, it is one 
that could and should serve as a model to our sister 
territories, which are all in need of an economic shot in the 
arm.
    The budget of the Office of Insular Affairs has either 
remained constant or been reduced over the last 5 fiscal years, 
from a high of $102 million in 2002 to the proposed $79.7 
million for 2007. All the while the needs and the challenges 
facing the islands have increased.
    We have also recently heard testimony at the committee on 
the severe fiscal challenges that are not being adequately met, 
and we heard those from the Office of Inspector General and 
from the Government Accountability Office.
    It is my hope that as Chair of this Subcommittee, and with 
the assistance of my colleagues, that we will explore today 
whether adequate resources are being given to the OIA to enable 
them to address the unique, important challenges that are faced 
by these, our most vulnerable members of the American family, 
the members of the insular areas. In this regard, I look 
forward to hearing from our witnesses, and now I yield to my 
friend, the Ranking Member on the Subcommittee, The Honorable 
Luis Fortuno, for any opening statements he wishes to make.
    [The prepared statement of Mrs. Christensen follows:]

           Statement of The Honorable Donna M. Christensen, 
              Chairwoman, Subcommittee on Insular Affairs

    I am pleased and honored to call the first meeting of the 
Subcommittee on Insular Affairs for the 110th Congress to order.
    I am looking forward to an active and productive subcommittee and I 
want to thank Chairman Rahall for re-instating the subcommittee and 
giving me the opportunity to chair it. I also want to welcome my 
colleague, Congressman Fortuno, and the insights and leadership he will 
bring to our deliberations and on this first meeting to welcome all of 
the members of the subcommittee.
    It is a special pleasure to welcome our friends, the governors from 
the far off pacific Insular Areas and thank them for being here with us 
today.
    When this subcommittee was under the Chairmanship of my predecessor 
and former Virgin Islands Congressman, Ron de Lugo, we took advantage 
of the governors being in Washington for the annual National Governor's 
Association meeting to invite you to come before the subcommittee--your 
home here in the Congress--to comment on the proposed budget of the 
Office of Insular Affairs as well as to inform us of any issues you are 
facing at home that the federal government could be helpful with.
    And so, I want to welcome The Honorable Felix Camacho, the Governor 
of Guam and The Honorable Togiola Tulafono, the Governor of American 
Samoa. The Honorable Benigno R. Fitial, the Governor of the 
Commonwealth of the Northern Mariana Islands was unable to travel to 
Washington for the annual meeting this year because of pressing 
business at home including a visit by the senior staff of the Senate 
committee to the CNMI. I regret that my own Governor, The Honorable 
John P, deJongh, Jr. is unable to be here today. Both have submitted 
statements for the record.
    Of course we also welcome Deputy Assistant Secretary, David Cohen 
as well.
    As we all are keenly aware, the Office of Insular Affairs has broad 
general authority to provide for the special needs and concerns of the 
U.S. Insular Areas. President Bush, in his Fiscal Year 2008 budget, has 
proposed spending $403.8 million for the Office of Insular Affairs 
(OIA), of which $79.8 million is in current appropriations.
    This figure is $425,000 below the 2007 Continuing Resolution and 
$560,000 above the President's FY 2007 budget request. $324.1 million 
of the FY08 figure includes $119 million in estimated income tax 
payments to Guam and Virgin Islands and $205.1 million in payments 
under the Compacts of Free Association.
    Programs funded under the FY 2008 Budget Request will continue 
long-term efforts throughout the territories and Freely Associated 
States. Over $200.0 million in Compact of Free Association Sector 
Grants will be included in the 2008 budget. More than $12.0 million 
will be requested for a variety of Technical Assistance programs, 
including ongoing efforts on Brown Tree Snake control, insular 
management controls, coral reef conservation, maintenance assistance, 
and water and wastewater projects.
    Some questions we hope to receive answers from the Office of 
Insular Affairs include the specifics of the competitive allocation 
system for the Covenant Improvement Project (CIP) grants and whether 
more consideration should be given to those projects that are under 
court orders; and what are their plans for addressing the potential 
catastrophes looming for the economies of American Samoa and the CNMI 
and to a lesser extent my home islands as we continue to stave off 
attempts by the Treasury Department to effectively neuter the 
successful economic development program that Congress put in place to 
assist with our economic development. In my opinion it is one that 
could and should serve as a model for our sister territories which are 
all in need of an economic shot in the arm.
    The budget of the Office of Insular Affairs has either remained 
constant or been reduced over the last five fiscal years--from a high 
of $102 million in FY 02 to the proposed $79.7 million for FY07--all 
the while the needs and challenges facing the islands have increased. 
We have also recently heard testimony at the Committee on the severe 
fiscal challenges that are not being adequately met from the office of 
the Interior Inspector General and the GAO.
    It is my hope, as chair of this subcommittee and with the 
assistance of my colleagues, to explore whether adequate resources are 
being given to OIA to enable them to address the unique, important 
challenges that are faced by these our most vulnerable members of our 
American family; the residents of the Insular Areas. In this regard, I 
look forward to hearing from our witnesses.
    I now yield to my friend, the Ranking Member on the Subcommittee, 
The Honorable Luis Fortuno for any opening statement he wishes to make.
                                 ______
                                 

     STATEMENT OF THE HONORABLE LUIS FORTUNO, THE RESIDENT 
           COMMISSIONER IN CONGRESS FROM PUERTO RICO

    Mr. Fortuno. Thank you very much, Madam Chairwoman. First 
of all, I want to congratulate you on being selected to chair 
this Subcommittee. I am truly enthusiastic about this honor 
being bestowed upon my friend from the U.S. Virgin Islands.
    It is appropriate that our first hearing together involves 
the review of the President's Fiscal Year 2008 budget request, 
which reflects the budget priorities of the Department of 
Interior's Office of Insular Affairs. While this priority may 
not always match yours or even mine sometimes, I welcome this 
historic time for a Delegate and a Resident Commissioner to 
receive policy on the insular areas, and for a chance for us to 
work together with the President and the Secretary of Interior 
to work forward in a productive fashion for the benefit of all 
the people affected by at least the decision of the 
Subcommittee.
    I join you in welcoming our witnesses today, The Honorable 
Togiola Tulafono, the Governor of American Samoa; The Honorable 
Felix Camacho from Guam; and Deputy Assistant Secretary David 
Cohen.
    Madam Chairwoman, the President's budget proposals have 
balanced the increase in funding for the Office of Insular 
Affairs to $403.8 million, an increase of $2 million over the 
present Fiscal Year 2007 continuing resolution. What I 
recognize, we are all living within difficult budget 
restraints. I look forward to hearing from the Governors here 
today about the needs and priorities of their communities as 
well as from the administration witness as to how the Office of 
Insular Affairs can best administer these scarce budget 
resources more efficiently for the benefit of all the insular 
areas.
    Thank you again, Madam Chairwoman. I look forward to 
working with you on these issues over the course of this 
Congress. I yield back.
    Mrs. Christensen. Thank you.
    [The prepared statement of Mr. Fortuno follows:]

  Statement of The Honorable Luis Fortuno, Ranking Republican Member, 
                    Subcommittee on Insular Affairs

    Madam Chairwoman, I want to congratulate you on being selected to 
Chair this Subcommittee. It is appropriate that our first hearing 
together involves a review of the President's Fiscal Year 2008 Budget 
Request which reflects the budget priorities of the Department of 
Interior's Office of Insular Affairs.
    While these priorities may not always match yours, or even mine 
sometimes, I welcome this historic time for a Delegate and Resident 
Commissioner to oversee policy on the Insular Areas and a chance for us 
to work together with the President and the Secretary of Interior to 
move forward in a productive fashion for the benefit of all the people 
affected by the legislation of this Subcommittee.
    I join you in welcoming our witnesses today: The Honorable Togiola 
T.A. Tulafono, Governor of American Samoa; The Honorable Felix Camacho 
from Guam; and from the Administration, Deputy Assistant Secretary 
David Cohen (or Nik Pula) of the Interior Department's Office of 
Insular Affairs.
    Madam Chairwoman, the President's budget proposes a modest increase 
in the funding for the Office of Insular Affairs to $403.8 million, an 
increase of $2.0 million over the present Fiscal Year 2007 continuing 
resolution.
    While I recognize we are all living within difficult budget 
restraints, I look forward to hearing from the Governors here today 
about the needs and priorities of their communities, as well as from 
the Administration witness, as to how the Office of Insular Affairs can 
best administer these scarce budget resources most efficiently for the 
benefit of all the Insular areas.
    Thank you Madame Chairwoman. I look forward to working with you on 
these issues over the course of this Congress.
                                 ______
                                 
    Mrs. Christensen. The Chair now recognizes The Honorable 
Congresswoman from Guam Madeleine Bordallo for an opening 
statement.

        STATEMENT OF THE HONORABLE MADELEINE BORDALLO, 
                A DELEGATE IN CONGRESS FROM GUAM

    Ms. Bordallo. Thank you. Thank you for calling this hearing 
today, Chairwoman Christensen. To me this is a very important 
moment as we have the first oversight hearing of the newly 
reestablished Subcommittee on Insular Affairs. And I am very 
thankful to you, Chairwoman Christensen, to Chairman Rahall and 
to Congressman Faleomavaega for reestablishing this 
Subcommittee to bring greater focus on the programs 
administered by the Office of Insular Affairs and on Federal 
policy affecting the territories.
    This hearing on the President's proposed budget for the 
Office of Insular Affairs provides to us an opportunity to hear 
from the Governors of the territories. I want to welcome all of 
you who have traveled great distances to be here with us today, 
and a very warm hafa adai to Guam's Governor, The Honorable 
Felix P. Camacho. Talofa to the Governor of the American Samoa, 
Governor Tulafono.
    Each of our territories are facing economic challenges, and 
I am interested to hear how the Office of Insular Affairs is 
helping the territories to cope with these challenges. In 
particular, while Guam's economic forecast is bright due to the 
Pentagon's intention to relocate a number of Armed Forces to 
Guam, the military build-up presents serious challenges to our 
local government. I hope to hear from Governor Camacho today on 
what some of these challenges are and how best the Department 
of Interior can assist the Government of Guam in the years 
ahead.
    Finally, let me make one comment on the Office of Insular 
Affairs Capital Improvement Grant Program for the territories. 
We are not talking about a large amount of money here. Annual 
allocations for the territories from this program amount to 
$27.72 million. For this reason I believe that it is important 
that a very clear set of priorities and transparent process be 
established for allocating these funds.
    I would like to have a better understanding from the Deputy 
Assistant Secretary of the evaluation process that has been 
developed regarding the financial management of the individual 
governments that affects the annual allocation received under 
this program.
    I would also like to hear your comments, Mr. Cohen--he is 
not here yet--regarding Congress's intent that Federally 
mandated court-ordered projects be given a higher priority than 
other projects as noted in the colloquy during House floor 
debate on the Fiscal Year 2005 Interior Appropriations Act and 
the committee's accompanied report that year.
    Again, let me welcome all of you, and let me extend my 
thanks to Chairwoman Christensen. Thank you.
    Mrs. Christensen. Thank you for your opening statement.
    Mrs. Christensen. The Honorable Eni Faleomavaega is on his 
way also from the airport, and we will give him an opportunity 
to make an opening statement when he arrives.
    At this time we will be pleased to turn to the panel, and 
we will begin with the testimony from the Governor of American 
Samoa, The Honorable Governor Tulafono.

              STATEMENT OF TOGIOLA T.A. TULAFONO, 
                    GOVERNOR, AMERICAN SAMOA

    Governor Togiola. Thank you very much, Madam Chairlady. 
Talofa and good morning to all the members of the Subcommittee.
    At the outset, let me just say, Madam Chairlady, that I am 
very grateful for the opportunity to reopen this dialogue 
through the recreation of this Subcommittee and allowing the 
Governors of the insular areas to be able to participate in the 
budget process. It has been a long time since an elected 
Governor of American Samoa was able to speak directly to 
Members of Congress about the budget process and what we are 
doing.
    I want to congratulate you on your ascent to the 
Chairmanship of the Subcommittee and all the insular area 
members in this committee. We want to register also our 
gratitude and appreciation to the Chairman of the Subcommittee 
on Resources for recreating and reinstatement of this 
Subcommittee.
    We have submitted a written statement, Madam Chairlady, and 
I am now going to try and rehash the matters we have stated. I 
am going to digress a little bit in our oral statement to 
supplement our submission today. I suppose the basic question 
here is how do we feel about the funding and the mechanism in 
which it is done for the insular areas and especially for 
American Samoa.
    Madam Chair and the honorable Members, you all know that no 
matter who is doing the talking, there will always be more 
needs and wants, and there will always be insufficient funds to 
meet all those needs. For our part today, let me just say, 
American Samoa appreciates the fiscal restraints of our 
national government, and we appreciate the fact that we are 
getting help from the Federal Government for our operation. Of 
course, these funds are nowhere near what American Samoa needs, 
and, of course, we can spend all day going through all the 
things we need to develop and sustain the economy and the 
quality of life for the people of American Samoa, but if you 
approve what has been proposed, I assure you they will be put 
to the best use we have planned.
    I would venture to say today that it is my hope that we 
will convince the United States Department of Interior that we 
need to revisit our budget system and come up with a plan that 
will adequately anticipate the needs and unique circumstances 
of American Samoa and reflect that in our submissions to 
Congress for approval.
    Two things I would like to point out. The budget system 
that we are using today to address our operations and 
developments in American Samoa as a U.S. territory is the same 
system that has been there for many, many years, and that has 
never changed. Very little has changed. Two, the same 
development plan that is being utilized for planning the 
progress of American Samoa is the same that it has been for the 
last 40 years.
    It is my hope that sometime soon, and through the process 
of the newly reinstated Subcommittee, that we will be able to 
forge Federal policy for American Samoa that will transcend 
shifts in policies and changes in attitude of our national 
government that are made to accommodate the global policies of 
our Nation, and leaving insular areas struggling to find a way 
to fit in the mix. American Samoa and the insular areas are so 
vulnerable to these policy changes and shifts that today any 
development efforts in our part is completely stagnant by the 
fact that we have lost the benefits of section 936, headnote 3A 
and the uncertainty of the minimum wage policies that are to be 
applied to us.
    We are not afraid of being self-sufficient and self-
sustained, but like any other State or territory, we need to 
have the ability to build our economy to be self-sufficient and 
self-sustaining. Unfortunately we are extremely limited in our 
ability to do so without a consistent, well-considered plan 
that will keep us competitive in our development efforts like 
any other State or country. That requires a consistent and 
sustainable Federal policy.
    The last time there was a well-considered and well-
supported plan for American Samoa, I hate to say, was in the 
early 1960s, but that, too, was in response to an article which 
called American Samoa the shame of the U.S. in the Pacific. 
Only at that time there was a consistent policy that would 
build infrastructure, put in new hospitals, new schools, a new 
airport, and created a new corporation for developmental 
efforts.
    We certainly do not want to wait until another article like 
that, nor do we want to go back to those times, but we cannot 
do it alone, and we are looking to your leadership and your 
guidance to help us develop these kinds of policies for at 
least--for our part, American Samoa.
    In terms of our economic development efforts, we are indeed 
doing all we can with the resources we have together with the 
resources allotted to us in order to build a sustainable 
economy that will sustain American Samoa and give our people a 
quality of life just like any other American.
    The operation grant that we receive through the Department 
of Interior is divided in five pieces: One, to support the 
operation of the high court that is still under the control of 
the Department of Interior. Two, of the remaining portion of 
those funds, I ask Interior to split that in four ways between 
our community college, Department of Education and our medical 
center. I did ask Interior to set aside $2 million of that to 
secure the consistent supply of medicine and drugs for our 
medical center. That was accomplished through the efforts of 
Congressman Faleomavaega in earmarking that grant and setting 
aside the $2 million, and we are grateful.
    For the funds allocated for capital improvements, the 
government submits to DOI a 5-year plan requesting funding 
based on the recommended priorities we provide in a 5-year 
plan. DOI submits this funding to Congress for approval. When 
approved, we follow the priorities we provided in the plan for 
CIPs. Occasionally we require some reprogramming, and we have 
received the cooperation of DOI in making sure that our needs 
are met through that program.
    Beginning with this fiscal year, I have prioritized the 
development of fiberoptic submarine cable over the next 5 
years. While our satellite communication capability is great, 
it has been proven--it has proven that it will not support our 
development efforts. The fiberoptic cable will allow us to 
expand those development efforts and truly achieve 
diversification, which is something that has been talked about 
in American Samoa since 1950 and has never been possible.
    Even with the availability of Federal incentives as section 
936, headnote 3A and lower wages than in the United States, 
only two U.S. companies ever relocated their plants into 
American Samoa. Since then every Governor that came to American 
Samoa talked about diversification and never was able to 
accomplish anything close to it. Madam Chairlady, the 
fiberoptic promises to bring about that diversification for 
American Samoa. Perhaps it is a timely project because the 
future of our counties are really very uncertain. The cable is 
already inspiring businesses as call centers, banking 
institutions, educational institutions to inquire as to when it 
may be available.
    I would like to register our gratitude and appreciation to 
Mr. Cohen and the Office of Insular Affairs for their support 
of this endeavor. I would also like to acknowledge our 
appreciation for the business development conferences that the 
Department of Interior has sponsored for the last few years to 
help us identify and come together with businesses that may be 
interested in investing in American Samoa. I will say through 
those conferences we have been able to meet with people 
interested in fiberoptic development, and we are moving forward 
with that project. And I realize that the Department of 
Interior has set aside $3 million every year for the next 4 
years in that submission to help us accomplish that purpose, 
and we will ask for your support of that project.
    I will stop there and will answer any questions you may 
have.
    Mrs. Christensen. Thank you.
    [The prepared statement of Governor Togiola\1\ follows:]
---------------------------------------------------------------------------
    \1\ According to traditional Samoan cultural protocol, Governor 
Togiola T.A. Tulafono is addressed by his matai title of ``Togiola'' 
and is referred to as ``Governor Togiola.'' However, those not familiar 
with Samoan culture address him as ``Governor Tulafono.'' Both forms of 
address are correct.
---------------------------------------------------------------------------

           Statement of The Honorable Togiola T.A. Tulafono, 
                       Governor of American Samoa

    Talofa. Honorable Chairman and distinguished members of this 
Committee; it is with great pleasure and honor that I appear here today 
at your invitation to give testimony on the Fiscal Year 2008 budget of 
the Office of Insular Affairs. I thank you for this opportunity to 
convey to you the importance of this funding for the territory of 
American Samoa, our operations and our economic development. I also 
want to greet and thank all of the Committee's new members as well.
Introduction
    American Samoa, located in the Central South Pacific is the only 
United States territory south of the equator. The islands of eastern 
Samoa became part of the U.S. in 1900 and 1904. A central premise of 
ceding eastern Samoa to the U.S. was to preserve the rights and 
property of the islands' indigenous inhabitants. American Samoa's 
constitution requires the government to protect persons of Samoan 
ancestry from the alienation of their lands, protect against the 
destruction of the Samoan way of life and language, and to encourage 
business enterprise among persons of Samoan ancestry. American Samoa, 
in turn, ceded authority over its lands and pledged its allegiance to 
the United States of America. The depth of our commitment is evident 
today in the disproportionately high share and the contributions of our 
people in the U.S. military, especially their dedicated service in past 
and current wars.
Economic Development Conditions in American Samoa:
    American Samoa has made extraordinary progress in recent decades, 
considering it only began its own pursuit of modern development since 
the Second World War. This is a relatively brief period from a 
development standpoint. In addition to building modern economic, 
education, health care and infrastructure systems, American Samoa has 
essentially become self-governing under the general authority of the 
U.S. Executive Office (DOI). However, we have a very long way to go. 
For example, our per capita income is only about one-fifth the U.S. 
average, and poverty levels in American Samoa are almost six times the 
national average. American Samoa also suffers from high rates of 
substandard housing and our public services and facilities remain well 
below U.S. standards.
    At the same time, American Samoa is subject to the same forces that 
affect economies, large and small, throughout the world. Rising world 
trade and globalization, as we often refer to it, is changing our 
economies dramatically as industries seek lower and lower cost venues. 
American Samoa, however, does not have the options that are available 
to major industrial economies. Our productivity, i.e. output per 
worker, is only about one-fifth that of the U.S. average. In addition 
we have the added issues of distance to markets and sources of supply 
and the diseconomies of relatively small size which affects our labor 
force quantity and skill characteristics. We do no have the development 
options that are available to most of the US.
    On the other hand, we are not really a developing economy either 
(or less developed, if you prefer) in the sense that these terms are 
used to describe nations in or bordering on abject poverty. Because of 
our relationship with the U.S. we have had access to special 
advantages. We have received financial support, federal corporate tax 
credits, and duty free access to U.S. markets and a special procedure 
for establishing minimum wages. We have had the flexibility to operate 
our own customs and immigration. These benefits have helped us rise 
above the economic fate that has befallen island nations similarly 
endowed and situated throughout the world.
    These advantages were largely responsible for our ability to retain 
our tuna cannery industry for fifty years. Furthermore, the loss of 
these benefits threatens to cause our cannery industry to seek lower 
cost locations elsewhere. Much of our success to date has been based 
upon these benefits which are now rapidly disappearing or threatened. 
There is nothing on the horizon or in the offing to replace these 
benefits.
    The departure of the canneries from American Samoa would wipe out 
one-half of the total jobs in American Samoa directly and indirectly. 
This would be a catastrophe for any economy, but it would be worse for 
a small isolated area like American Samoa.
    Furthermore, there could be very serious additional contingency 
costs for the Federal Government if the canneries were to leave 
American Samoa. The Federal Government would likely be petitioned for 
assistance to deal with very serious and protracted problems including 
unemployment, retraining, relocation assistance, business failures, 
plummeting local revenues for essential public services and other needs 
that could emerge in such an economic disaster.
    Unfortunately, the threat to American Samoa's economy does not end 
with the revocation of corporate tax credits and the diminishing value 
of our duty free access to the U.S. because of declining tariffs 
worldwide. There are pressures now to equalize U.S. and American Samoa 
minimum wage rates. There is even talk of bringing American Samoa under 
U.S. Immigration, possibly even under U.S. Customs. These are the 
characteristics that have helped us to succeed in economic development. 
If we lose these special conditions, American Samoa could face 
insurmountable economic development barriers in the future.
    However, the U.S. Congress has taken notice of our plight and we 
are hopeful that help is on the way. Last year in connection with the 
extension of our cannery tax credit, the Congress provided in its 
report:
        ``The two-year credit allowed by the provision is intended to 
        provide additional time for the development of a comprehensive, 
        long-term economic policy toward American Samoa. It is expected 
        that in developing a long-term policy, non-tax policy 
        alternatives should be carefully considered. It is expected 
        that long-term policy toward the possessions should take into 
        account the unique circumstances in each possession.''
    I am concerned that we don't know enough about what Congress wants 
except for the few words in the Committee/staff report on the tax bill 
I just cited. We are hopeful that this opportunity is taken to examine 
the critical ways in which federal legislation and policy affect 
American Samoa's development including tax credits, the minimum wage, 
immigration and customs, and a variety of other areas.
    I hope that the American Samoa Government, American Samoa's 
Congressional Representative, and the Office of Insular Affairs will be 
part of the design and conduct of the preparation of a long-term 
economic development policy for American Samoa.
ASG Economic Development Programs:
    For our part, we are working with you and the Department of 
Interior on tax credit alternatives. We are also moving ahead on the 
cannery impact analysis which will nail down cannery reduction impacts, 
remedial programs and redevelopment alternatives. Additionally, in 
conjunction with the Office of Insular Affairs, my administration has 
submitted to our Representative, for his review, consideration and 
possible adoption, a proposal for a tax incentive package that we 
believe focuses on promoting business investment within American Samoa. 
With the honorable Congressman's help and the help of this Committee, a 
tax incentive package would attract new businesses and help us overcome 
our disadvantages in distance, scarcity of transportation and reliance 
on federal grants to fund basic services.
    In addition to promoting federal tax incentives for businesses 
willing to invest in American Samoa, ASG is pursuing a number of 
complementary initiatives such as streamlining the business permitting 
and licensing process in order to make the investment climate more 
business friendly. Through technical assistance funding from the Office 
of Insular Affairs, ASG will make the process of attaining a business 
license much simpler through electronic means. Additionally, the ASG 
will do away with the inefficient waiting periods in order for multiple 
agencies to sign off on permits by consolidating hearings and allowing 
for a ``one-window'' approach to electronically apply for licenses and 
permits through the internet and to electronically attach and store 
licensing and permitting documentation. Approval of licenses and 
permits will take place electronically, without sacrificing the 
safeguards that any one agency provides.
    ASG is also pursuing a number of new programs which will encourage 
investment in the territory, including the establishment and 
administration of the territory's Low Income Housing Tax Credit 
Program, which has the potential to infuse eighteen million grant-like 
dollars into the local economy and help foster our private construction 
sector. And this is in addition to the provision of housing for our 
low-income population. Through technical assistance funding, we hope to 
bring this program into reality within the next two years.
    These are only a few of the programs that ASG is able to pursue 
through the technical assistance funding available through the Office 
of Insular Affairs. This program is invaluable to our development as a 
territory, and I express my wholehearted support for its continuation 
and expansion into the future.
Diversified Industries
    American Samoa has had some success over the years in attracting 
diversified manufacturing. Today, a key industry targeted for 
development is technology based (e-Commerce) which depends on skilled 
workers and well-developed internet-based communication systems.
    We recognize and thank the Department of Interior, Office of 
Insular Affairs, for its foresight in requesting funding for our 
undersea fiber-optic cable. In recent times, American Samoa has 
entertained proposals from U.S. companies looking to do business in the 
territory. The types of business contemplated by these companies 
require broadband Internet capability that only a hard landline 
connection may provide. American Samoa has made it clear to the Office 
of Insular Affairs that we are prepared to follow the recommendations 
of past economic advisory councils and commissions, and pursue 
aggressively, any and all opportunities to cultivate e-commerce and 
export of services via information technology from American Samoa.
    Among other economic development projects and proposals that are 
currently being pursued are a local fish processing facility, co-ops 
for local fishermen and farmers, and numerous niche markets within the 
Tourism industry.
Operational Grants
    ASG receives direct operating grants from DOI of $22 million per 
year. I can assure this Committee that these operational grants are 
absolutely vital to the well being of our people. ASG's only full-scale 
health care institution, the LBJ Tropical Medical Center, and the 
Department of Education are the major recipients of the operational 
grant funds.
    The operations grants have not had a significant increase for over 
2 decades. During that time, the population has doubled, and the cost 
of living has increased approximately sixty percent. American Samoa has 
struggled to maintain essential government services, but this can 
hardly be done given the state of the economy in American Samoa.
Operations Maintenance Improvement Program (OMIP)
    One of the biggest challenges that ASG deals with on a regular 
basis, especially given the corrosive nature of a tropical environment, 
is maintenance and improvement of facilities. Through the OMIP program, 
ASG is able to access funds that would otherwise have to come from 
other portions of the ASG budget. Currently, our own community college, 
ASCC, is availing itself of the opportunity to set up its own 
maintenance program utilizing software that is currently being used in 
other insular areas.
Capital Improvement Projects
    Currently, American Samoa receives $10.5 million in CIP funding. 
This funding is directly responsible for developing critical 
infrastructure in the territory. From the construction of schools and 
hospital facilities, to the hardening of utilities which aid in 
recovery following disasters, this funding is essential for developing 
the territory's infrastructure and making the territory more attractive 
for development. Again, it is my recommendation that this specific 
program be continued at its current level, and if possible, expanded to 
increase the funding of additional necessary infrastructure in the 
islands.
Island Fellows Program
    Agencies of the American Samoa Government have benefitted directly 
from the Office of Insular Affair's Island Fellows Program. One agency 
in particular, the Development Bank of American Samoa, is especially 
satisfied with this program. Over the past year, the Development Bank 
has increased the number of programs it administers. The Bank 
encourages the continuation of this program which promotes forward-
thinking analysis by innovative young scholars as an aid to economic 
development.
Special Industry Committees
    Of particular interest in recent months is the special industry 
committee process by which American Samoa's minimum wages are set. As I 
have stated in the past, it is the position of my administration that 
these special industry committees work for our territory. They are 
responsive and they take into account the unique factors presented by 
American Samoa's fledgling economy. Unless and until a more responsive 
and effective approach is proposed, I am asking this Committee for its 
support in maintaining the special industry committee system for 
setting minimum wages in American Samoa.
Conclusion
    I once again thank you Mr. Chairman, as well as your distinguished 
colleagues for the opportunity to speak here today. It is my fervent 
wish that you keep American Samoa's plight in your thoughts as you 
consider the budget of the Office of Insular Affairs for the new fiscal 
year.
    Soifua ma ia manuia.
                                 ______
                                 
    Mrs. Christensen. And now we will receive the testimony 
from The Honorable Felix Camacho, the Governor of Guam.

               STATEMENT OF FELIX PEREZ CAMACHO, 
                         GOVERNOR, GUAM

    Governor Camacho. Madam Chair, thank you. And members of 
this newly reestablished Subcommittee on Insular Affairs, I 
thank you for this opportunity to present my testimony today 
which will present Guam's view on the work of the Office of 
Insular Affairs and the support OIA has offered us, assisting 
us in the challenges that face the Government of Guam, and, of 
course, the role of the U.S. Department of Interior in our 
island's future as we enter a period of growth and extreme 
complexity.
    I had a State of the Island address recently, and I 
mentioned that the island is growing stronger, our economy and 
the state of our island is strong. But despite that, we have 
many complex challenges that the anticipated increased military 
presence will bring. And I am confident that OIA will be of 
invaluable assistance as we partner with the Federal Government 
and DOD in this season of growth.
    I also would like to express my appreciation to David 
Cohen, Nik Pula and other members of their staff of OIA. The 
Bush administration's proposal for Fiscal Year 2008 is roughly 
$403.8 million for OIA. I believe it is a responsible budget, 
and one I believe will do much to ensure that the territories 
of the insular areas are able to further improve their 
respective government infrastructure and economic 
diversification. I believe it is in those two areas that we 
have really received much input.
    As you know, Guam stands to benefit, of course, from the 
technical assistance programs to eradicate, as you mentioned 
earlier in your opening statements, invasive species like the 
brown tree snake. There has been very much success in the FMIP 
programs, the Financial Management Improvement Programs, with 
our Department of Administration and the technical assistance 
that has been provided. The protection of our ecosystems, and I 
believe most important is the hardening of our aging 
infrastructure systems is where the greatest challenge will be. 
I, of course, have submitted the testimony, so I think the 
record speaks for itself.
    But Congresswoman Bordallo talked about--the question 
really was, what is it we are going to do in the anticipation 
of the build-up, you know, and others that it is going to be an 
extremely complex issue and of a magnitude we have never seen 
before. There is concern of its impact on the quality of life, 
of course, and our ability to keep pace with the military 
development.
    Our desire is to ensure that the development is mutually 
beneficial. The challenge though, as we all know in the 
islands, is our ability, our financial capacity to provide for 
infrastructure; on top of that, the many demands placed upon us 
with other Federal agencies. There may be Federal mandates that 
are unfunded, EITC being one, consent decrees imposed upon us 
for the closure of a 60-year-old dump, and the requirement of 
the building of a new one, time management is not met, moneys 
that are not available, and an almost impossible situation, it 
seems, at times.
    That, of course, all faced with the realization that as the 
U.S. realigns its forces throughout the world, the strategic 
importance and significance of Guam is becoming abundantly 
clear. I look at all of this as an opportunity, not a 
challenge, but really an opportunity for us to work together. 
We have had the ability of working with OEA as an example, but 
Interior and the funding that is provided there is going to be 
extremely critical.
    Our Port Authority is one area that definitely has not had 
or seen any type of improvement in its infrastructure for many 
years. It receives 95 percent of all the goods. There is a $2 
million loan or grant that would be provided to purchase an 
additional gantry crane. The impact on that not only in our 
local economy, but on the capacity and the need for the 
military or DOD to bring in their goods for growth and 
development is extremely highlighted.
    So the challenges obviously remain--there are discretionary 
fundings that are provided to deal with various issues at OIA, 
including the compliance with the National Environmental Policy 
Act, the transition of the Department's financial and business 
management system.
    Now, I mentioned earlier that the build-up of the U.S. 
military on Guam is underway. Aside from infrastructure, 
challenges that we face, of course, are going to be expected 
growth in population. I anticipate that over the next 10 years, 
we are going to see a 12 to 15 percent growth in our 
population, and the stresses placed upon it in health, 
education, public safety are going to be extremely highlighted. 
So along with that, we talked about the water, wastewater, 
power, transportation systems that have been identified, and 
there is a need to maintain and improve the current or future 
service levels.
    As mentioned, because of our limited resources, individual 
agencies within our government continue to seek funding sources 
or availability. I have submitted a request to the Secretary of 
Interior to create an Interagency Group on Insular Affairs 
Working Group on Military Expansion. This would be in 
cooperation with the U.S. Department of Defense's Joint Guam 
Program Office, and I believe that a combination of these two 
groups would be extremely beneficial.
    To put the notes aside, I also just wanted to talk briefly 
on your concept of a bond bank, which can be utilized in the 
territories as a vehicle for securing Federal guarantees for 
funding necessary to prepare for and support the military 
expansion on our island. I support this effort to pull the 
efforts of the territories together to seek bond financing for 
specific issues like infrastructure development. This bond bank 
would take much of the administrative work normally reserved 
for economic development authorities in our areas and would 
focus on working with borrowing communities or institutions to 
ensure that the most advantageous financing options are 
explored.
    The bond bank is an attractive vehicle that is greatly 
needed for our investors and can certainly bring about the 
projected $600- to $800 million worth of needed improvements in 
our infrastructure as a whole, and I ask that the committee 
supports the territories in such an effort, and please know 
that this would greatly assist Guam as the military is building 
up on both ends of our island.
    I am truly appreciative of all the efforts that have been 
provided, and as mentioned by my colleague, Governor Tulafono, 
this Subcommittee and our ability to talk to you directly on 
the issues that affect our islands I think is critical and 
much, much received.
    The islands, in closing, always face the challenges of 
financing, and fragile economies that oftentimes our ability to 
deliver and provide for the quality of life and opportunities 
necessary for our people are extremely and greatly challenged. 
But by working with you and recognizing the uniqueness of 
island economies and governments, I believe that there are, as 
I mentioned, extreme opportunities to prosper. So I look 
forward to working with you, as mentioned earlier. The details 
of our testimony is provided here. But again, I believe that 
Guam stands to benefit from this, and the $403.8 million budget 
for OIA I believe, again, is a responsible one, and would do 
much to ensure that the territories are able to further improve 
our economies, both in infrastructure and quality of life. So 
with that, I thank you very much for this opportunity.
    [The prepared statement of Governor Camacho follows:]

            Statement of The Honorable Felix Perez Camacho, 
                            Governor of Guam

    Mr. Chairman and Members of the Committee, thank you for inviting 
me to participate in your hearing on the Fiscal Year 2008 Budget 
request for the Office of Insular Affairs, U.S. Department of the 
Interior, specifically its impact on the island of Guam for the coming 
year. My name is Felix Perez Camacho; I am the Governor of Guam. My 
testimony today is to present to you Guam's view on the work of the 
Office of Insular Affairs, the support OIA has offered in assisting us 
through the challenges that have faced the Government of Guam in 
providing basic services to our people, and the role of the U.S. 
Department of the Interior in our island's future as we enter a period 
of prosperity.
    Mr. Chairman, I would like to express my appreciation to you and to 
the members of the Committee for holding this hearing to better 
understand the needs and concerns of the Pacific Island Territories on 
this most important issue for the people of Guam and our Pacific Island 
brothers and sisters.
    Last week, I delivered my annual report on the State of the Island 
of Guam. It offered a synopsis of the challenges we currently face, 
offered up realistic solutions to get our island through what has been 
some tough financial times for the Government of Guam, and, most 
importantly, where we are headed in the next year and beyond. As I told 
my people and as I share with you here on Capitol Hill, the State of 
our island is growing strong and will grow even stronger. Despite the 
challenges that an increased military presence will bring, I am 
confident that the OIA will be of invaluable assistance as we partner 
with the Federal Government in Guam's Season of Transformation.
    During my Administration I have been proud of the relationship that 
has been established between the Office, its management and the great 
people who work everyday with the Government of Guam to ensure that 
federal money spent on our island is done so wisely and with great 
attention to reporting its use back to Washington D.C.
    I want to take this opportunity to commend Deputy Assistant 
Secretary of the U.S. Department of the Interior David Cohen for his 
leadership of the Office of Insular Affairs. Mr. Cohen has been such a 
staunch advocate for the people of Guam and it has been through his 
efforts that great progress has been made on our island in the areas of 
accountability and in the capital improvements made over the past four 
years.
    Mr. Nik Pula and the staff of the Office of Insular Affairs have 
also been a tremendous help. Their vision is in line with ours to bring 
about lasting change to the programs we offer our people and to ensure 
that each dollar is protected and well spent for the betterment of the 
people of Guam.
    It has been the commitment to following the mandates as set out by 
Congress and the unwavering support of the good men and women at the 
U.S. Department of the Interior that have changed the perception of 
Guam to one that is responsible in the administration of federal 
dollars and with a clear direction of where as a people and, as 
citizens of this great nation.
    The Bush Administration proposal for FY 2008 of $403.8 million for 
the Office of Insular Affairs (OIA) is a responsible budget and one I 
believe will do much to ensure that the Territories of the Insular 
Areas are able to further improve their respective government 
infrastructure and economic diversification.
    There is no question that the programs funded under the FY 2008 
Budget Request will continue to result in long-term benefits throughout 
the territories and Freely Associated States. I look with great 
interest in the more than $200 million in Compact of Free Association 
Sector Grants that are included in the 2008 budget. Guam stands to 
benefit from the more than $12 million in technical assistance programs 
to eradicate invasive species in the Western Pacific, strengthen the 
financial management of our governments, protecting our reef ecosystems 
and hardening our aging infrastructure systems.
    There is one item of interest that this budget reflects and that is 
$2 million to support the installation of an additional gantry crane at 
the Port Authority of Guam. The Port Authority of Guam owns, controls 
and manages just over 1,000 acres of fast and submerged lands 
comprising Cabras Island (CI), which is a heavy industrial area. The 
Sea port at Apra Harbor is the entry point for 95% of all goods 
entering the island, and is a transshipment center for Micronesia with 
over 20 cargo ships leaving outbound throughout the Western Pacific on 
a monthly basis. The port also sees 200 port calls by vessels carrying 
containers annually, accommodates over 27,000 cruise passenger 
arrivals, 5 million barrels of fuel, up to 100 fuel tankers, and 2,000 
port calls by foreign fishing boats each year. This additional gantry 
crane will continue to allow us to reap the benefits of trade between 
the United States and Asia. It is critical to the further 
diversification of our economy through the Regional Distribution Center 
initiative I am committed to implementing. This compliments the Office 
of Insular Affairs mandate to improve the economies of our islands and, 
to expand our economic base so that we will be less reliant on the 
largesse of the Federal Government. OIA is committed to seeing this 
initiative occur and even supported it by providing with the initial 
grant for this project.
    As the U.S. realigns its forces throughout the world, the strategic 
importance and significance of Guam is becoming abundantly clear. With 
the repositioning of U.S. forces and their dependents to Guam in the 
immediate years ahead, Guam's Port will be the first entity to feel and 
support the impact of this increase in the form of construction 
materials and goods. These materials are immediate and essential for 
the enormous buildup that will occur to accommodate our troops and 
their families. The Port of Guam will also see an influx of household 
goods and consumer goods as a result of our increased military 
population and their families. The $2 million will contribute to a 
portion of the cost associated with the acquisition of a new gantry 
crane, which will assist immediately with the importation of 
construction materials related to the buildup of necessary.
    The budget request also includes an increase in discretionary 
funding to deal with various issues at OIA including compliance with 
the National Environmental Policy Act and the transition of the 
Department's Financial and Business Management System. Just as the OIA 
has remained committed to promoting sound financial management 
practices in the insular governments, encouraging private sector-led 
economic development, and increasing Federal responsiveness to the 
unique needs of island communities, their budget must reflect that.
    This request comes as word of the buildup of the U.S. Military is 
underway on Guam. With the increase of U.S. military assets to Guam 
expected over the next 10 years, the Government of Guam has begun the 
preparation to receive an estimated 8,000 to 12,000 military personnel 
and their dependents. According to U.S. Census Bureau estimates, Guam's 
population is expected to increase from 168,564 in 2005 to 180,692 in 
2010, without factoring any increase to the local military population 
by the United States Department of Defense. The increases are enough to 
direct capital improvement in those locations expected to develop more 
rapidly in the expansion as identified by military planners.
    The Government of Guam's 10-year Consolidated Infrastructure 
Improvement Forecast has determined that much of the infrastructure 
throughout the island, installed following the Liberation of Guam from 
Japanese occupation in 1944, needs to be completely replaced.
    Other major water, wastewater, power and transportation systems 
projects have been identified to maintain or improve current and future 
service levels. The improvements to the junctions that adjoin military 
and civilian facilities have also been slated for improvement. Millions 
of dollars in capital improvement projects have been identified in the 
civilian community, though we continue to seek for more than half of 
those projects. Because of limited resources, individual agencies 
within the Government of Guam continue to seek funding sources, 
including bond financing, to support projects that will improve the 
quality of life for all residents. The Government of Guam is taking 
cost-cutting measures and approaches to maximize the limited funding 
opportunities afforded the island as a U.S. Territory void of natural 
resources.
    I have already asked the Secretary of the Interior to create an 
Interagency Group on Insular Areas Working Group on Military Expansion. 
The U.S. Department of the Interior Office of Insular Affairs, in 
cooperation with the U.S. Department of Defense Joint Guam Program 
Office, would lead the group. The group would ideally include a number 
of federal government agencies and all relevant executive branch 
divisions of the agencies to guide the Government of Guam and the 
island's U.S. military commands in understanding what is needed to 
respond to this tremendous growth and the certain impacts to the Guam 
community now and into the future. I believe that proceeding on a 
monthly basis, the working group would help in the effort to address 
critical workforce needs and provide guidance in the completion of all 
expedited Capital Improvement Projects related to the military 
expansion in Guam.
    This, in combination with funds from the U.S. Congress, public-
private partnerships would also help the Government of Guam and Guam's 
military partners in securing the necessary funding to make the 
upgrades necessary in anticipation of the increase in U.S. forces in 
Guam and improve the quality of life for both residents and military 
personnel. This issue will be further worked out as the Government of 
Japan continues its efforts to assist with the $10 billion investment 
into the military in the Western Pacific.
    I believe that a bond bank can be utilized in the Territories as a 
vehicle for securing federal guarantees for funding necessary to 
prepare for and support the military expansion on our island. I support 
this effort to pool the efforts of the territories together to seek 
bond financing for specific issues like infrastructure development. A 
bond bank would take much of the administrative work, normally reserved 
for the economic development authorities in our areas, and would focus 
on working with borrowing communities to ensure that the most 
advantageous financing options are explored. The bond bank is an 
attractive vehicle for investors and can bring about the projected $600 
to $800 million needed to improve our infrastructure as a whole. I ask 
that the Committee support the Territories in such an effort and please 
know that this would greatly assist Guam as the military is building up 
on both ends of my island.
Summary
    Mr. Chairman and members of the Committee, Guam continues to move 
ahead together with our island brothers and sisters in Micronesia and 
the Western Pacific; but there is so much more that can be done to 
ensure that Guam stays on a course to prosperity. I share your values, 
your priorities and your concerns as leaders of our great Nation and 
today, I ask you to stand with the people of Guam as we take our island 
to new heights and to build a greater Guam better and stronger than 
we've ever seen and firmly establish Guam as the showcase of our 
democracy.
    Thank you for your attention. I am pleased to answer any questions.
                                 ______
                                 
    Mrs. Christensen. Secretary Cohen, welcome. We have just 
taken testimony from the Governors, so what we will do now is 
we will ask them some questions, and we will give you a chance 
to catch your breath, if that is OK with you. Thank you.
    And the Chair now recognizes myself for 5 minutes of 
questioning, and I will start. Governor Camacho, at the end of 
his testimony spoke about the budget and feeling that it was a 
good budget. Governor Tulafono, in your testimony, you talk 
about the value of the Office of Insular Affairs in helping to 
promote economic development in the territory, and you 
underscore the importance of the technical assistance account, 
and your support for its continuation and expansion. So given 
your experience with having to compete with the other insular 
areas for technical assistance, have you given any thought to 
what level you think that technical assistance accounts ought 
to be funded at?
    And if you have any comments, Governor Camacho, I would 
welcome yours as well.
    Governor Togiola. The technical assistance grant has been a 
great vehicle to back us up in areas where we are not able to 
provide funding for critical needs in terms of studies and 
affecting some of the things that we need to promote ourselves. 
However, the efforts are limited only by the fact that the 
fundings are limited.
    I don't know exactly how much would be adequate, but I do 
believe that in order to adequately address the needs, which 
there are abundant from all the insular areas, that an 
extension of that program is truly required.
    Mrs. Christensen. Governor Camacho, did you have any----
    Governor Camacho. Certainly. Is there ever enough? No. And 
I think our challenge has always been recognizing that it is a 
limited pool of resources that is competitive. How can we 
maximize these technical assistance grants? And I believe that 
one area that we have been successful, and I am very much 
appreciative of this technical assistance and the grants, has 
been in the Financial Management Improvement Projects for the 
government. Both hardware and technical assistance has enabled 
us, at least in the Department of Administration, to get a 
better handle on our finances to certainly upgrade the 
infrastructure in that area, and I see a need to expand 
greatly.
    I believe that with innovation and technology, we can 
improve efficiencies, and this is not just in the financial 
management of our accounts, but certainly in the reporting 
requirements and data necessary that is required as grant 
moneys are given. So reporting is certainly there.
    Efficiency improvements in the area of health care, in 
public safety and education are areas that I think with 
assistance grants, that if we can improve on those areas, it 
certainly has long-lasting impacts that are extremely 
beneficial.
    As you know, we have received grant moneys also for 
invasive species, and although it may be--it may seem that the 
brown tree snake doesn't have--it may be a joke, it seems, 
outside of Guam, the impact it could have on neighboring 
islands and their fragile tourism economies, even the State of 
Hawaii and the impact on agriculture and livestock, it is 
tremendous. So when you think about also the grants provided 
for our ecosystems upon which our tourism industry depends on 
is very real.
    The one area that we fall short of, I believe, is the 
hardening of our aging infrastructure systems, and I talk about 
water power, wastewater systems that are absolutely mandatory, 
necessary. That is where the challenges are. And as I mentioned 
earlier, with this bond bank as a financing vehicle, we need to 
be creative in finding ways for the territories to seek 
additional funding outside of the normal channels. It is always 
going to be a challenge for us in finding ways to pay for it, 
and the ability of the local governments with restricted and 
limited budgets to pay for multimillion-dollar improvements is 
always going to be very real and very, very complex. Thank you.
    Mrs. Christensen. Since I am almost out of time, I will 
come back on another round with some of my further questions.
    At this point I will yield to the Ranking Member Mr. 
Fortuno for 5 minutes.
    Mr. Fortuno. Thank you, Madam Chairwoman. I commend you for 
the hearing we are having today, and I want to thank both 
Governors for your testimony.
    You both talked about the challenges the territories face. 
Perhaps we have an 18th century solution to 21st century 
issues, and that is what we are dealing with, and we are fully 
cognizant of that fact over here on the dais as well.
    If I may start with Governor Tulafono, you mentioned 
actually report language on the tax package that was extended 
for another 2 years, and actually that report language is very 
explicit, I would say, in terms of promoting that nontax policy 
alternatives be explored for any long-term economic development 
policies toward the possessions. And actually I believe that is 
the mood of Congress regardless of who is in the Majority or in 
the Minority. That is my feeling here.
    And you mentioned and stressed how important maintaining 
the special industry committee processes for setting minimum 
wage standards are. Could you expand further on those needs 
regarding those special industry committee processes, please?
    Governor Togiola. We support the continuation of the 
special committees because we believe the committees have been 
very responsive to the local conditions and the local 
situations. Imposition of minimum wages that are conducive to 
economic conditions in the United States are definitely not 
going to now work for American Samoa, and the structure of this 
committee is such that an economic study is done before the 
hearings. Our input is given as a local government from a 
government's point of view, and then the participation of our 
community and the Federal Government in the process of the 
committee itself lends for a very well-supported investigation 
of whether or not, you know, increases in the wages are 
justifiable.
    And I will say that ever since I have been involved with 
the process, I found the committees to be very responsive to 
real situations and to the real conditions of American Samoa, 
and their decisions have been conducive to the supporting of 
the committee and what they do. So in that regard, we believe 
that it is the only thing that has proven to work for our 
situation at this point in time. Perhaps in the future there 
might be some other process that may work better, but for now, 
this is the thing that has been proven to work best for us. So 
we would urge your support in continuing that for American 
Samoa.
    Mr. Fortuno. I understand.
    Governor Perez Camacho, if I may, certainly this increase 
in the number of military personnel in the next couple of years 
will create some stress on the infrastructure, as you were 
mentioning, of Guam. Could you expand a little bit further as 
to different examples of what you all are doing in preparing 
for the arrival of the personnel and their dependents and all 
the assets that will be there?
    Governor Camacho. Thank you very much. Our Census Bureau 
estimates that our population is expected to increase from 
roughly 168,000, which was in 2005, to roughly 180,000 by 2010. 
When you add military personnel, an anticipated 8,000 to 12,000 
Active Duty, and when you throw in the support personnel and 
family members, it could be anywhere from a total of an 
additional 17,000 to 24,000 personnel by 2014. So between 8 and 
10 years from now, I think we can see that the population will 
grow between 12 and 15 percent.
    In anticipation of that growth, we are working closely with 
the Office of Economic Adjustment, or OEA, working, of course, 
with the Department of Interior, and ensuring that we have to 
improve--we are going to be developing a master plan that would 
cover infrastructure, water power, wastewater, all the 
infrastructure needs. We have also got a group together that is 
focusing on the social impact for, of course, public safety, 
education and public health. And by recognizing that we have to 
approach this in a very deliberate and phased process, by 
developing a master plan that would transcend administrations, 
recognizing I will be gone in 4 years and the new Governor will 
be there and legislature and other leaders, a plan must be 
implemented, backed up by an organization that will transcend 
politics and be there for the duration. We then have to back 
this up with adequate funding.
    The government to this day actually is still challenged in 
the U.S. Supreme Court by a case that was brought against my 
administration from the now removed attorney general. We are 
anticipating a decision by June on our ability or authority to 
borrow on the bond market anywhere up to $250 million, but that 
is just for debt. The challenge will be how do we pay for 
infrastructure that can be mutually beneficial to our civilian 
community and allow for growth on the military end? We think 
that there are opportunities there, but by working with OEA, by 
working with Interior, by working with the Department of 
Defense and finding creative ways through public-private 
partnerships, we can find ways to fund it, but it is going to 
be a very, very deliberate, very well thought out and complex 
issue. Something of this magnitude has never been seen on Guam 
since World War II when we had to recover from the effects of 
the Japanese invasion and, of course, liberation by U.S. 
forces. So it is of that magnitude.
    So it is with those efforts that we are going to proceed in 
a very deliberate manner. But again, the challenges are, once 
we have that master plan, finding a way to pay for it will be 
the biggest challenge.
    Mr. Fortuno. Thank you. And I am sorry we went over time.
    Mrs. Christensen. That is all right.
    The Chair now recognizes Ms. Bordallo for 5 minutes.
    Ms. Bordallo. Thank you, Madam Chairman.
    First of all, Governor Camacho, thank you for your comments 
on the bond bank. I do agree with you and the military build-
up. It is an opportunity. And there are challenges, and I think 
working together, we are going to be able to survive all of the 
challenges.
    I have one question here for you. Is the reconciliation 
process for Section 30 funds adequate from your standpoint? And 
are the Federal agencies forthright in reporting Section 30 
funds that are owed to Guam?
    Governor Camacho. We recently had a Director of Taxation 
working out here with, I believe, the relevant agencies that 
are there. We have been able to go back, I think, to the mid-
1980s to rectify some of the discrepancies and make some 
corrections there.
    I believe there is room for improvement in the way of 
reporting, in the way of accuracy of data and information. It 
has been an ongoing process, but I think we are getting there. 
Through better communication and better data, I think we can 
begin to reconcile and ensure that we do collect on the Section 
30s.
    But if I may just digress a bit and indicate that the real 
challenge we face right now is with Department of Defense 
contracts for construction and business that is being conducted 
on Guam. We need to find ways to ensure that corporations that 
come and do Department of Defense work on the island are 
properly registered, and they pay their fair share in taxes. A 
billion dollars' worth of construction has occurred over the 
last 4 or 5 years, and without Guam being able to collect. I 
think we were able to collect out of the amount of money owed 
roughly $4 million, or rather $40,900,000. So you can see that 
there is a real shortfall in that area, but by better 
cooperation with DOD and our taxation department, we can work 
on it.
    Section 30, though, there is room for improvement, but I 
see that there has been collaboration.
    Ms. Bordallo. So what you are saying then to the committee, 
Governor, is you will continue to monitor this, correct?
    Governor Camacho. Yes.
    Ms. Bordallo. All right. I have another question. Does the 
government in Guam have a process for clearing open items in 
the Inspector General's reports? By this, I think these open 
items are financial accountability, audit reports and that type 
thing. Is OIA helpful in working with you to clear the open 
items?
    Governor Camacho. I believe that they are. With the 
technical assistant grants that have been given, particularly 
in the area of our financial management improvement plans 
through Department of Administration, our ability to improve 
upon our accounting procedures has greatly improved. There have 
been a certain number of qualifications; I would say on average 
about 11. We have reduced to down to about one or two, so we 
have made tremendous progress in that regard.
    Ms. Bordallo. Governor from American Samoa Tulafono, do you 
feel Insular Affairs has been responsive to your request for 
technical assistance?
    Governor Togiola. I believe they have, and I think one of 
the classic examples of that success and one of the, I think, 
finance success stories is the fact that when we came into 
office, American Samoa was about 8 years behind in their 
financial statements, and where----
    Ms. Bordallo. Did you say 8 years or 80?
    Governor Togiola. Eight. I am sorry. I am still recovering 
from a cold. I could say 80 because that would just make me 
look better.
    But we asked the Department of Interior for assistance, and 
through the technical assistance and other OMIP and FMIP 
grants, we were able to put together the financial system and 
the financial mechanisms that has brought us current to date 
with our financial statements. And without that technical 
assistance and the assistance from OIA and the Department of 
Interior, it might have never been possible for us to bring our 
financial information and our financial statements current as 
it is today.
    And I believe also the success of the business conferences 
are beginning to yield results, and in addition to that, they 
are also helping us with our own local promotions, efforts 
where they would allow technical assistance funds to allow our 
Department of Commerce to do their own promotions in promoting 
our economic development.
    Ms. Bordallo. Perhaps you have more or less answered this, 
but I will ask it. In 2002, the American Samoa Economic 
Advisory Commission submitted a report entitled Transforming 
the Economy of American Samoa. As you know, the Commission was 
the first of its kind in American Samoa's history to 
specifically address the economic needs of American Samoa. To 
what extent has the report assisted you in laying out a vision 
for the economic diversification in American Samoa?
    Governor Togiola. Well, before I give an opinion, response 
to your question, ma'am, I should preface my response by saying 
that I was one of the Commissioners, so if my response is 
slightly biased, there is a good reason for that.
    I believe the report of the Governor Waihee Commission that 
was commissioned by the Department of Interior had provided us 
a great document that provided good guidelines for what we 
needed to do. Even though we have had a long dialogue about 
that and what to do with it, our administration has gone 
forward and begin to implement changes along the lines of the 
recommendations provided by the Commission. So every now and 
then we have some agreements on some of those things. And we 
have also been able to utilize that document to support 
technical assistance requests.
    Ms. Bordallo. Good.
    Governor Togiola. And to some degree, we have received some 
assistance to implement some of those things on a local level.
    Ms. Bordallo. Thank you. Thank you very much, Governor.
    I yield back.
    Mrs. Christensen. Thank you.
    I am going to recognize myself for another round. And if 
the other Members have other questions, we will recognize them 
as well.
    Governor Tulafono, I wanted to follow up on that question. 
And you talked a lot about the need for a plan, and I was 
wondering what is the relationship of that Commission's plan, 
the report, to your need for a plan, and are you required--
would you require more assistance from OIA for the development 
of that plan, or is it something that you think American Samoa 
can do on its own?
    Governor Togiola. I think this is, Madam Chairlady, 
something that is not necessarily related to the American Samoa 
Economic Advisory Commission report. What I talk about today is 
something that will help us deal with the shifts and changing 
in the national policies, trade agreements, issues of minimum 
wage increases, the loss of tax credits and the withering away 
of the benefits of headnote 3A as it relates to trade 
agreements and all that.
    What I am talking about is, I believe, that funding for--at 
least for American Samoa should be done within the context of a 
plan where funding sources are identified much like what, you 
know, the United States does with compact states, where you 
know what you are going to get, and you know what you can plan 
for that, and we will give you a direction for the long term 
instead of just a year by year by year. As it is, as much as we 
appreciate the funds that we receive, it is very tough to plan. 
It is very tough to plan replacing the infrastructure from--you 
know, in this fashion.
    So what I am talking about is maybe through the process of 
your Subcommittee and the necessary parties, us, the Interior 
and who else there may be, so that we can look at all the 
policies of the United States and say, this is the best 
direction for the territory that we will assure that no matter 
what the policy shifts will be, that there is consistency. As 
it is today, we cannot market American Samoa meaningfully 
because of their minimum wage issue, because of the lack of 
Federal incentives. So that is what I am talking about today, 
ma'am.
    Mrs. Christensen. I understand it better now.
    And just to follow up on another issue that was raised by 
Governor Camacho, and it is also included in Governor Tenorio's 
written statement, on their support for the bond bank. Do you 
also support that concept?
    Governor Camacho, you recently noted in your State of the 
Island address that the island of Guam has a $700 million 
deficit. Could you tell the Subcommittee what steps have been 
taken to address that growing deficit over the last 2, 3 years, 
and do you see the Federal Government in having any role in 
Guam's financial problems.
    Governor Camacho. As a matter of record, the deficit is at 
$511 million. When I had stepped into office in 2003, we 
inherited a deficit of $209 million. What has added to it has 
not been so much an operational deficit, but rather several 
judgments and settlements that have occurred in our courts, the 
biggest being the most recent $123 million judgment against the 
government for a retirement bonus, if you will. It is a 13- or 
14-year-old law--or case that had been filed and was finally 
dealt with by a certain judge and made a ruling against the 
government. It is, again, a judgment that would have to be 
funded by the local general fund, totally unanticipated.
    The other significant addition to the deficit has been a 
$90 million settlement on the earned income tax credit that 
remains unpaid after roughly 8 years, dating back to 1996. 
That, again, is another settlement that has to be paid out of 
the general taxes or the general fund of our government. It is 
another typical example of the--you know, the round peg going 
into a square, or square peg going into a round hole. It is an 
unfunded Federal mandate that the territories have a very 
difficult time, and now it has a major impact upon our 
finances.
    So those are the two issues that have added greatly to it.
    And finally, I would have to say that the $700 million 
figure is what I indicated that in the next 5 years, should we 
not--or should our local policymakers or legislature not 
implement what I am going to be presenting, which is a deficit 
elimination and fiscal recovery plan, should they not follow it 
and implement it as we proceed in the 2008 budget over the next 
5 years, it could potentially grow to that amount. So there is 
a sense of urgency and a need for fiscal discipline in that 
area.
    Mrs. Christensen. The Chair will now recognize Mr. Fortuno 
for a second round.
    Mr. Fortuno. Thank you again, Madam Chairwoman.
    Actually, going back to each of the two local economies and 
the concerns that you raise--certainly you are both trying to 
do the best you can given the circumstances--brings to my 
recollection actually a great piece that was put together by a 
university professor. He is of Chilean descent. His name is 
Fernando Lefort. He wrote about how in colonial times, colonial 
colonies, economies diverted from the country's--you know, the 
mother country's economy in such a way that is very similar to 
what occurs between the economies of territories and the U.S. 
economy. And there are different reasons for it, and actually, 
if I may, we will get it, and if we have a few days to put it 
into the record, I appreciate that.
    Mrs. Christensen. Without objection, so ordered.
    [NOTE; The report entitled ``PUERTO RICO'S ECONOMY IS NOT 
CATCHING UP'' by Fernando Lefort, Business School, Pontificia 
Universidad Catolica de Chile submitted for the record has been 
retained in the Committee's official files.]
    Mr. Fortuno. Thank you.
    Going back to that issue again, again, the issues, for 
example, Governor Tulafono, you bring to our attention are very 
familiar: trade agreements, our opening of markets that 
previously were almost exclusive to U.S. territories, the fact 
that the tax policies have changed and those benefits are no 
longer there, the increases in the cost of operating vis-a-vis 
the cost that could be borne in the mainland and so on and so 
forth. What--if you would discuss very briefly, which way--you 
mention at the end Internet-Based and knowledge-based, 
specialized industries perhaps. Is that the way American Samoa 
will be going? Is that how you feel you will be going?
    Governor Togiola. Just reflecting back on the historical 
successes of Section 936, after 50 years, we have only really 
had two companies that took advantage of that and located 
plants in American Samoa. I do not think it really is going to 
do anything further for us.
    The fiberoptic cable was brought to the fore as a result of 
the investigation of business opportunities and where a certain 
company came in and wanted to establish call centers on the 
islands, but after their investigation of the satellite 
capability and telecommunication capability, they determined 
they cannot do that kind of business unless there is 
fiberoptic.
    From that point forward, we have gone forward, full steam 
ahead, in doing that because we have also been consulted by 
banking institutions. They would like to relocate certain 
banking products into American Samoa because of the favorable 
business atmosphere, but they cannot do it with satellite 
communications.
    So, after listening to those two discussions, we made the 
determination that if we are going to be able to diversify, 
invite new businesses different from the canneries and truly 
achieve diversification of the economy, the fiberoptic is the 
link that is necessary; and that is why we are asking for your 
assistance in this endeavor.
    Mr. Fortuno. If I may ask very briefly and quickly, what 
percentage of the total workforce is tourism and what 
percentage is government employees in both Territories?
    Governor Togiola. In American Samoa, tourism is not a very 
well developed----
    Mr. Fortuno. OK.
    Governor Togiola.--industry. We are doing some things 
together with the assistance of the Department of Interior to 
develop the infrastructure for tourism, but one of the biggest 
challenges that we have is transportation. Transportation is 
extremely expensive and erratic, and you cannot develop, you 
know, meaningful tourism unless you have consistent, reasonably 
priced air transportation. We do not have that. It is an issue 
with us before the Department of Transportation right now.
    Mr. Fortuno. And how big is the government vis-a-vis the 
general population, the working population?
    Governor Togiola. Our employable workforce is estimated 
around 18,000. Unfortunately, the most recent figures that have 
been presented to us show that the aggregate unemployment rate 
in American Samoa is 29 percent. Of course, that percentage 
includes people--farmers, subsistence farmers, who sell their 
products in the markets and are self-supporting in that regard, 
who may not be employed, but they earn income through different 
sources. So, while it says 29 percent, our local estimate is 
around 16, 17 percent.
    Mr. Fortuno. OK. Thank you.
    May I have Governor Perez Camacho answer very briefly about 
what percentage is government and what percentage is tourism?
    Governor Camacho. With the total workforce right now, the 
government has, roughly, between 11,000 to 12,000 employees. A 
small percentage of that is Federally funded, but the majority 
of our workforce is in the private sector, and as a parallel 
comparison, the economy is 60 percent funded by tourism, 30 
percent funded by military and 10 percent, roughly, by the 
service industry.
    We have an unemployment rate of about 7 percent. It has 
been slashed by half. When I entered office, it was about 14. 
So there has been dramatic improvement in that area.
    Mr. Fortuno. Thank you both.
    Mrs. Christensen. Thank you.
    The Chair recognizes Ms. Bordallo for a second round.
    Ms. Bordallo. Thank you, Madam Chairman. I do have some 
questions for Mr. Cohen. We are going to be able to----
    Mrs. Christensen. Yes. Yes.
    Ms. Bordallo. This one is for Governor Camacho.
    In your State of the Island address, Governor, you also 
stated that you cannot adequately exercise sufficient 
management of the entire government of Guam.
    Can you give us a sense of the additional authority that 
you would need to address these concerns? And do you think the 
Organic Act should be amended further to strengthen the 
authority of the Governor?
    Governor Camacho. Well, that is--thank you--a very, very 
intriguing question and a very, very important question. I 
thank you for asking that.
    I had noticed prior to being Governor--I had a 10-year 
career as a senator. I was a local legislator, and through the 
years there has been an erosion of the organic authority of the 
Governor by local legislation. I think the Organic Act is 
written in a very broad sweep, and there is a provision that 
would allow for local interpretation in the very broad areas. 
However, the local legislature has begun to erode that.
    For example and specific to your question about my 
authority to manage specifically the cash management of our 
government, in the area of our public school system, which 
clearly utilizes in excess of--more than half of our revenues 
go toward education, local legislation has established an 
elected body which then chooses its superintendent.
    But by budget law, they have required that a section of our 
revenue, which is withholding tax--first, it began with 82.5 
percent goes toward education; we found out it was 
insufficient. Then they improved it to 100 percent of 
withholding taxes will then go to education; they found out 
that that still was not sufficient. Then they said, you now 
must give all withholding tax and anything else needed, and you 
must give it to education first before you can pay anyone else.
    And so, if I may use an analogy, it would be like a family 
that is at the table having a meal, and you have a very robust 
and healthy child who may be slightly overweight, and the 
father says, ``That child will eat everything on this table 
until he is satisfied, and whatever is left over, the rest of 
you can eat.'' so my authority has been taken.
    If I can further explain, between Fiscal Year 2004 and 2005 
in the line agencies that I have controlled with casual 
management, we have reduced expenditures by $11.1 million 
between 2005 and 2006 with the line agencies that I, again, 
control; and with the cash allotment, I have reduced it by 
12.2, and yet, our education department has gone extremely 
overboard.
    If I cannot control more than 50 percent of the cash flow 
of government which goes toward education, then I lose control, 
and we have a growing deficit. I do intend to take a look at my 
own organic authority and see if it has been violated and, 
perhaps, bring this to court.
    Thank you.
    Ms. Bordallo. Thank you, Governor.
    Mrs. Christensen. Thank you.
    You know, I am just getting used to being a chairwoman. I 
cut myself off right at the 5 minutes, but I did have one 
further question to Governor Camacho which follows what you 
just spoke about and also your statement earlier about the need 
for fiscal discipline.
    There are a lot of similarities between Guam and the U.S. 
Virgin Islands, and as you, I am sure, know, I have introduced 
legislation to create a chief financial officer for the 
Territory, which would be a person who would be chosen locally, 
nominated by the Governor, confirmed by the local legislature; 
and that person would have the responsibility for certifying 
revenues and ensuring that we do not overspend in any area or 
overall.
    We heard from the Inspector General last week and from 
someone from the General Accountability Office who had been 
looking at issues in Interior and in the Territories, and they 
both supported the concept of a CFO.
    Do you think that would be something that would be helpful 
for Guam?
    Governor Camacho. I believe it would be, but it must be 
balanced against the existing legislation that through the 
years continues to grow certain pieces of legislation. As it 
relates to cash allotment and cash management, it would have to 
be repealed, and I think, if you can find that balance, 
certainly it would work.
    What the local legislature has attempted to do, to lend 
credibility to their efforts for funding education, is to 
engage and authorize our public auditor to certify the 
expenditure levels, and then it approves, of course, the 
releasing of funds. In violation of that very law, we have had 
to give more just so they can make payroll. So, in many ways, 
there is the use of the Office of Public Auditor as a chief 
financial officer, but I certainly would appreciate that. We do 
have our director of administration that serves in that role 
and capacity anyway right now.
    Mrs. Christensen. Thank you.
    If it is OK with the other members of the committee, Deputy 
Assistant Secretary Cohen, I think, just got off a plane at 
around 6:00 o'clock this morning. We really appreciate your 
making that extra effort to be here, and we recognize you now 
for your testimony.

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

    Mr. Cohen. Thank you very much, Madam Chairwoman.
    Mrs. Christensen. Governors, would you like to be excused 
or are you fine?
    OK. Thank you.
    Go ahead, Mr. Cohen. I am sorry for the interruption.
    Mr. Cohen. Thank you, Madam Chairwoman.
    First, let me express my appreciation to the new leadership 
of this Congress and of the House Resources Committee for 
seeing fit to reestablish a Subcommittee on Insular Affairs. I 
think it is an excellent step, and I very much look forward to 
working with all of you.
    Madam Chairwoman, we would like to thank you and the entire 
committee for the support that you have provided to the insular 
areas by funding economic development initiatives, critical 
infrastructure and technical assistance projects, which provide 
invaluable resources to the insular areas. OIA's top two 
priorities for the insular areas are to promote private-sector 
economic development and accountability for the Federal 
financial assistance that we provide to the insular areas. We 
discuss our specific efforts to make progress in these areas 
later in the testimony, but will begin with an overview of the 
proposed budget.
    The Fiscal Year 2008 budget seeks to continue efforts to 
promote economic sustainability throughout the Territories and 
the freely associated states. The proposed Fiscal Year 2008 
budget is $403.8 million of which $79.8 million is requested in 
current appropriations. With enactment of the Fiscal Year 2007 
joint resolution, we now have a full-year current appropriation 
of $81.5 million. Based on the direction of the joint 
resolution, we are preparing a detailed operating plan for 
Fiscal Year 2007.
    OIA's budget is broken out into two major categories of 
funding--permanent and mandatory and current discretionary. 
Most of OIA's budget reflects mandatory commitments to U.S.-
affiliated insular areas and has permanently appropriated 
$324.1 million. With current appropriations, two activities are 
considered to be mandatory--covenant grants, $27.7 million, 
that provide for capital improvement projects, or CIP, in the 
U.S. Territories; and an annual health and education block 
grant given to the Republic of Palau in the amount of $2 
million.
    This budget request includes a discretionary increase 
totaling $560,000. This includes an additional $200,000 to 
ensure compliance with the National Environmental Policy Act, 
NEPA, on Federally funded infrastructure projects, $352,000 to 
fully fund fixed costs, and $8,000 for the transition to the 
Department's financial and business management system.
    The Fiscal Year 2008 OIA budget continues to focus on 
increasing self-sufficiency of insular areas. OIA will continue 
to provide assistance to develop more efficient and effective 
government in the insular areas through the Technical 
Assistance Program. This assistance includes grant funding that 
meets a variety of needs, including resources for critical 
infrastructure like wastewater systems, hospitals and schools.
    In Fiscal Year 2006, OIA received over $81 million in 
assistance to Territories' funding, providing over 90 percent 
of these funds to insular areas in the form of financial 
assistance grants and will continue this effort in the future. 
The 2008 request is $79.8 million.
    American Samoa operations in the amount of $22.9 million, 
the second largest budget activity, is part of OIA's 
discretionary funding, but the requirement to provide funds is 
included in authorizing language. These funds provide essential 
assistance to the American Samoa government to provide basic 
services of health care, education, public safety, and support 
for the judiciary.
    While not officially considered a mandatory program, 
Federal Services assistance--that is, $2.9 million--is 
comprised of two subactivities that were negotiated and defined 
in law. The first is reimbursement to the U.S. Postal Service 
for continuation of mail service to the Freely Associated 
States. Failure to provide this service would be a breach of 
the negotiated compact. The second activity provides funding 
for the Republic of Palau to conduct an annual financial audit. 
The only funding that can be considered truly discretionary are 
OIA salaries and expenses and the technical assistance 
activity, $16.1 million, which account for $24.3 million out of 
a total OIA budget of over $400 million in Fiscal Year 2008.
    It should be noted that all but 2 percent of the total 
funding received by OIA goes toward assistance to the 
Territories and to the Freely Associated States.
    One of OIA's top two priorities, as noted above, is to help 
the insular areas expand and strengthen the private sectors, 
building more sustainable economies to meet the needs and 
aspirations of their citizens. Most of the economies of the 
insular areas are currently dominated by the public sector and 
cannot be sustained without significant subsidy from the 
Federal Government.
    OIA has historically provided financial and technical 
assistance for a number of activities that can help strengthen 
the foundations for economic development, such as developing 
public infrastructure, improving health care, improving 
education, and providing expert analysis on issues affecting 
the economy. More recently, however, OIA has recognized the 
need to more directly facilitate private-sector economic 
development. OIA now makes it their priority to provide 
technical assistance to help the insular areas identify and 
implement the necessary steps to make their economies more 
sustainable.
    For example, OIA has provided technical assistance in 
recent years to help the insular areas identify their 
competitive advantages, identify industries that have the most 
potential for success in bringing prosperity to the insular 
areas, identify companies in those industries that might 
consider investing in the insular areas, identify specific 
investment opportunities for those companies, reach out to as 
many of those companies as possible, educate companies on the 
competitive advantages offered by the insular areas, and assist 
insular area governments to identify and implement ways to make 
the insular areas more attractive to private-sector investment.
    OIA has worked to find ways to make progress and economic 
development without a large commitment of resources. In fact, 
less than 1 percent of the assistance to Territories' 
appropriation is spent on private-sector development due to the 
fact that many of the costs of the major events in this program 
are borne by the participants. This effort is proving to be 
successful with business opportunities being fostered in the 
insular areas through OIA's facilitation efforts.
    OIA's other top priority is to promote accountability in 
the insular areas for the Federal funds that we provide there. 
Specifically, OIA has been working with all of the Territories 
and the Freely Associated States to help the island governments 
improve financial policies and procedures, upgrade automated 
financial management systems, train staff, complete accurate 
financial statements, and meet Single Audit Act requirements.
    At the start of this comprehensive effort, all of the 
insular areas were several years behind in completing financial 
statements in annual audits. At the same time, the insular 
areas have significantly improved their submission times for 
the annual audits. At this time, the insular areas have 
improved their timeliness. OIA will continue to assist the 
insular areas as they work toward compliance with the Single 
Audit Act.
    In conclusion, we believe that this budget request supports 
the continuation of programs to help the insular areas attain 
self-sufficiency. Toward this ultimate goal, we are committed 
to promoting sound financial management practices in the 
insular area governments, encouraging private-sector-led 
economic development, increasing Federal responsiveness to the 
unique needs of the island communities.
    We thank you for your continued support of the insular 
areas as you are considering OIA's 2008 budget request.
    Thank you.
    [The prepared statement of Mr. Cohen follows:]

Statement of David B. Cohen, Deputy Assistant Secretary of the Interior 
                          for Insular Affairs

    Madam Chairwoman and members of the Committee, thank you for the 
opportunity to testify on the Fiscal Year 2008 Office of Insular 
Affairs budget request. As Deputy Assistant Secretary of the Interior 
for Insular Affairs, I am the Federal official that is responsible for 
generally administering, on behalf of the Secretary of the Interior, 
the Federal Government's relationship with the territories of Guam, 
American Samoa, the U.S. Virgin Islands, and the Commonwealth of the 
Northern Mariana Islands, as well as administering the financial 
assistance provided to the Freely Associated States (the Federated 
States of Micronesia, the Republic of the Marshall Islands, and the 
Republic of Palau) under the Compacts of Free Association.
    Madam Chairwoman, we would like to thank you and the entire 
committee for the support you have provided to the insular areas by 
funding economic development initiatives, critical infrastructure, and 
technical assistance projects which provide invaluable resources to the 
insular areas. OIA's top two priorities for the insular areas are to 
promote private sector economic development and accountability for the 
Federal financial assistance that we provide to the insular areas. We 
discuss our specific efforts to make progress in these areas later in 
the testimony, but will begin with an overview of the proposed budget.
Overview of the FY2008 Budget Request
    The FY 2008 budget request seeks to continue efforts to promote 
economic sustainability throughout the territories and Freely 
Associated States.
    The proposed FY 2008 budget is $403.8 million, of which $79.8 
million is requested in current appropriations. With enactment of the 
FY2007 Joint Resolution, we now have a full year current appropriation 
of $81.5 million, not including additional funds that will be provided 
for 50 percent of the January 2007 pay raise. Based on direction of the 
Joint Resolution we are preparing a detailed operating plan for FY2007. 
We are not at liberty to disclose the details of the operating plans 
until they are approved by the Administration and submitted to Congress 
on March 17. At that time we will be able to provide comparisons at the 
program level with the 2008 budget request. The comparisons in our 2008 
budget are with the third 2007 continuing resolution, which was in 
effect through February 15. Throughout this testimony the comparisons 
will be on that basis.
    Over $200.0 million in Compact of Free Association sector grants 
are included in the 2008 budget. More than $12.0 million is requested 
for a variety of technical assistance programs, including ongoing 
efforts on Brown Tree Snake control, insular management controls, coral 
reef conservation, maintenance assistance, and water and wastewater 
projects. The 2008 budget request funds $27.7 million in critical 
infrastructure projects including: $3.0 million to support the 
development of an undersea fiber-optic link to American Samoa, $3.7 
million to support the closure of the Puerto Rico Dump on Saipan, with 
the area being redeveloped as a public park, $2.0 million to support 
the installation of an additional gantry crane at the Port of Guam, and 
$2.8 million to support wastewater collection system upgrades 
throughout the U.S. Virgin Islands.
    OIA's budget is broken out into two major categories of funding--
permanent or mandatory and current discretionary. Most of OIA's budget 
reflects mandatory commitments to U.S.-affiliated insular areas and is 
permanently appropriated ($324.1 million). Within current 
appropriations, two activities are considered to be mandatory: covenant 
grants ($27.7 million) that provide for capital improvement projects 
(CIP) in U.S. territories and an annual health and education block 
grant given to the Republic of Palau ($2.0 million).
    This budget request includes a discretionary increase totaling 
$560,000. This includes an additional $200,000 to ensure compliance 
with the National Environmental Policy Act (NEPA) on Federally funded 
infrastructure projects, $352,000 to fully fund fixed costs, and $8,000 
for the transition to the Department's Financial and Business 
Management System.
    The FY 2008 OIA budget continues to focus on increasing the self-
sufficiency of insular areas. OIA will continue to provide assistance 
to develop more efficient and effective government in the insular areas 
through the Technical Assistance Program. This assistance includes 
grant funding that meets a variety of needs, including resources for 
critical infrastructure like wastewater systems, hospitals, and 
schools. In FY 2006, OIA received over $81.0 million in Assistance to 
Territories funding, providing over 90 percent of these funds to 
insular areas in the form of financial assistance grants and will 
continue this effort in the future. The 2008 request is $79.8 million.
    American Samoa Operations ($22.9 million), the second largest 
budget activity, is part of OIA's discretionary funding but the 
requirement to provide funds is included in authorizing language. These 
funds provide essential assistance to the American Samoa Government to 
provide basic services of health care, education, public safety, and 
support for the judiciary.
    While not officially considered a mandatory program, Federal 
Services assistance ($2.9 million) is comprised of two subactivities 
that were negotiated and defined in law. The first is reimbursement to 
the U.S. Postal Service for continuation of mail service to the Freely 
Associated States. Failure to provide this service would be a breach of 
the negotiated Compact. The second activity provides funding for the 
Republic of Palau to conduct an annual financial audit. Public Law 99-
658 provides that the Republic of Palau's single audit, in accordance 
with the Single Audit Act of 1984, will be conducted at no cost to 
Palau through FY 2009.
    The only funding that can be considered truly discretionary are OIA 
salaries and expenses ($8.2 million) and the Technical Assistance 
activity ($16.1 million), which account for $24.3 million out of the 
total OIA budget of $403.8 million in FY 2008. It should be noted that 
all but two percent of the total funding received by OIA goes toward 
assistance to the territories.
Strengthening the Private Sector
    One of OIA's two top priorities, as noted above, is to help the 
insular areas expand and strengthen their private sectors, building 
more sustainable economies to meet the needs and aspirations of their 
citizens. Most of the economies of the insular areas are currently 
dominated by the public sector and cannot be sustained without 
significant subsidy from the Federal government. OIA has historically 
provided financial and technical assistance for a number of activities 
that can help strengthen the foundations for economic development, such 
as developing public infrastructure, improving health care, improving 
education, and providing expert analysis on issues affecting the 
economy.
    More recently, however, OIA has recognized a need to more directly 
facilitate private sector economic development. OIA now makes it a 
priority to provide technical assistance to help the insular areas 
identify and implement the necessary steps to make their economies more 
sustainable. For example, OIA has provided technical assistance in 
recent years to help the insular areas identify their competitive 
advantages; identify industries that have the most potential for 
success in bringing prosperity to the insular areas; identify companies 
in those industries that might consider investing in the insular areas; 
identify specific investment opportunities for those companies; reach 
out to as many of those companies as possible; educate companies on the 
competitive advantages offered by the insular areas; and, assist 
insular area governments to identify and implement ways to make the 
insular areas more attractive to private sector investment.
    The Island Fellows Program has been an important part of OIA's 
efforts to promote private sector economic development in the insular 
areas. Launched in 2003, the program sends graduate students from 
business schools such as Wharton, Harvard, Kellogg, and Georgetown to 
the insular areas to study their economies, identify competitive 
business advantages, identify industries that could be successful in 
the insular areas, identify investment opportunities for businesses in 
the insular areas, facilitate outreach to announce opportunities to 
mainland companies, and identify ways to improve the business climate. 
The work of the Island Fellows has supported the year-round efforts of 
OIA full-time staff and contractors in all of these activities. The 
Island Fellows also helped OIA organize conferences in 2003, 2004, and 
2006, as well as three separate Business Opportunities Missions in 2005 
and 2006, which gave island business and government officials the 
opportunity to meet and market opportunities to businesses from around 
the country. In 2006, the Island Fellows prepared private sector 
assessment reports for American Samoa, Guam, the U.S. Virgin Islands 
and the Commonwealth of the Northern Mariana Islands, following 
methodologies that the Asian Development Bank has used to produce 
similar reports for the Freely Associated States. These reports have 
received a great deal of attention in the insular areas, and are 
available on OIA's web site. In the coming year, the Island Fellows 
program will continue to focus on assisting with preparations for the 
fourth Conference on Business Opportunities in the Islands, which will 
be held in Guam in the Fall of 2007.
    OIA has worked to find ways to make progress on economic 
development without a large commitment of resources. In fact, less than 
one percent of the Assistance to Territories appropriation is spent on 
private sector development, due to the fact that many of the costs for 
those major events are borne by participants. This effort is proving to 
be successful, with business opportunities being fostered in the 
insular areas through OIA's facilitation efforts.
Promoting Accountability
    OIA's other top priority is to promote accountability in the 
insular areas for the Federal funds. Specifically, OIA has been working 
with all of the territories and Freely Associated States to help the 
island governments improve financial policies and procedures, upgrade 
automated financial management systems, train staff, complete accurate 
financial statements, and meet Single Audit Act requirements. At the 
start of this comprehensive effort all of the insular areas were 
several years behind in completing financial statements and annual 
audits. At this time the insular areas have significantly improved 
their submission times for the annual audits. OIA will continue to 
assist the insular areas as they work towards compliance with the 
Single Audit Act.
Conclusion
    In conclusion, we believe that this budget request supports the 
continuation of programs to help the insular areas attain self-
sufficiency. Towards this ultimate goal, we are committed to promoting 
sound financial management practices in the insular governments, 
encouraging private sector-led economic development, and increasing 
Federal responsiveness to the unique needs of the island communities. 
We thank you for your continued support of the insular areas as you are 
considering OIA's 2008 budget request.
                                 ______
                                 
    Mrs. Christensen. Thank you for your testimony, Mr. Cohen.
    I recognize myself for 5 minutes.
    Mr. Cohen, I am interested in reviewing what you describe 
as the new competitive allocation system for the CIP dollars. 
Can you tell us how you determine the base amounts for each 
Territory and review the competitive criteria for us?
    Mr. Cohen. Sure.
    First of all, the base amounts were established largely out 
of historical practice, so we wanted to establish baselines 
that did not significantly alter the levels of funding that we 
have been provided historically. And as you know, typically, 
since the economies of American Samoa and the Northern Mariana 
Islands were less developed, especially in terms of critical 
infrastructure, than Guam and the U.S.V.I.--even though, 
obviously, Guam and the U.S.V.I. also have very severe 
infrastructure challenges--we continued a higher level of 
funding for the baseline for American Samoa and the CNMI than 
for the other two.
    The criteria were designed to encourage the insular areas 
to improve their financial management practices, and in our 
budget, as I outlined in my testimony, we have limited areas of 
flexibility; and we sought to develop an area where we can 
provide incentives for improving fiscal management. And that is 
what we sought to do, but we wanted to limit this so that, as 
Governor Togiola has suggested, we did not create wild swings 
in funding from year to year. So we established a range from 
the baseline, up to $2 million above and up to $2 million 
below, where the ultimate allocation might fall on the basis of 
how each of the Territories in this case performed in the 
competitive criteria.
    We have a set of 10 criteria. I could go through them if 
you would like--you know, we can submit them for the record--
but they are all designed to improve fiscal management, 
including timeliness on single audits, responsiveness to 
inquiries and questions that are raised in Inspector General 
reports, GAO reports, things of that sort.
    Mrs. Christensen. Can I ask you, what were the specific 
performance criteria that led the Virgin Islands to be 
penalized to the extent of a reduction in their CIP funding 
over their baseline?
    Mr. Cohen. Sure. And we would not characterize it as being 
penalized because, I guess, the way the allocation works is, 
you know, an insular area might improve financial management 
from one year to the next, but if all of the other Territories 
make greater improvements as determined according to the 10 
criteria, then that insular area may still end up with less of 
an allocation. But in the case of the Virgin Islands, as I 
recall, the number one factor was the failure to be timely on 
the single audits.
    The other three Territories--Guam, the U.S.V.I. and 
American Samoa--are all current on their single audits; and we 
believe the U.S. Virgin Islands is one single audit behind. So, 
on that factor, which we attach a lot of importance to, the 
U.S. Virgin Islands, even though it has made very commendable 
progress in recent years in catching up on its single audits, 
was still behind the other three Territories.
    Mrs. Christensen. Thank you, and you know--let's see. We 
have talked about the decreasing of our allocation over the 
last couple of years, but you know that our islands remain 
under Federal court orders with the Department of Justice and 
EPA, which estimate that it will cost about $50 million to 
construct new wastewater treatment plants to comply with the 
Clean Water Act.
    I can support your efforts on the compliance of the single 
audit and the other criteria, but I am inclined to believe that 
an additional criterion relating to complying with court orders 
or consent decrees might be needed to really address the 
significant cost that such compliance actions will have on the 
already-strained budgets of insular governments.
    So what is your view on the impact of court orders and 
consent decrees on CIP funding? Do you think that it should be 
another criterion that would be considered?
    Mr. Cohen. Thank you for the question, Madam Chairwoman.
    That certainly could be considered, and we have thought 
about it. Our thinking to date has been that the state of 
infrastructure at each of the insular areas is--well, they are 
all facing such great challenges that it is very hard to 
distinguish between them in terms of consent decrees and court 
orders, not to say that it is not relevant; and we are 
certainly open to taking another look at that because it is 
certainly--you know, it is certainly a very valid point.
    But I believe there are consent decrees active in all of 
the Territories, with the possible exception of American Samoa 
where there are also similar needs. I mean, we funded the 
hospital with a certain allocation, not because it was under 
consent decree, but it was in violation of certain other 
standards that might have affected its eligibility for other 
Federal funds.
    So, between consent decrees and situations such as those 
faced by LBJ Medical Center, all of the Territories have those 
issues. But we have been thinking about this, and as of course 
you know, we received an additional source of funding 
specifically for water and wastewater projects recently, and we 
established criteria, competitive criteria, again for all of 
the Territories to be able to apply for this fund, for this 
amount of funds. It is just under $1 million, and we do include 
consent decrees in that. In fact, the criteria are whether the 
Territory is subject to a consent decree and, if so, whether 
the proposed activity will directly assist in meeting consent 
decree deadlines and obligations. And we have three other 
criteria, particularly because these additional funds, I think, 
are more focused on helping the Territories get out from under 
consent decrees and comply with their requirements.
    Mrs. Christensen. Are those funds competitive also?
    Mr. Cohen. They are competitive. In fact, I think, for 
Fiscal Year 2007, the entire amount, which is $990,000, is 
going to be provided to the U.S. Virgin Islands for wastewater 
system infrastructure and improvements. I think mostly the 
sewer system on St. Croix is mandated by the USEPA because we 
know that there are very urgent challenges both on the ground 
and legally that are being faced by the U.S.V.I. now.
    Mrs. Christensen. OK. Beginning in Fiscal Year 2005, 
Congress and Appropriations gave the Secretary the authority to 
modify the covenant CIP funding formula to address 
appropriately court-ordered infrastructure projects. It sounds 
as if everything else was equal, that that would also be a 
criterion, if I understand your response.
    Mr. Cohen. Yes, definitely. We have it as an express 
criterion for the water and wastewater funds, and are very open 
to considering your request that it be an express criterion for 
the CIP funds as well. I mean, that is certainly a reasonable 
thought; and you know, I guess I would welcome the opportunity 
to continue the dialogue with yourself and your staff and the 
staff of the other members of the committee on this issue.
    Mrs. Christensen. Thank you.
    I now recognize Congressman Fortuno for questions.
    Mr. Fortuno. Thank you, Madam Chairwoman, and again, thank 
you, Assistant Secretary Cohen, for making the effort to be 
here with us this morning. We truly appreciate the effort.
    I will go back to my line of questioning with the Governors 
regarding the Territories' economy. Certainly, actually, you 
mentioned that your office is trying to attain self-sufficiency 
for the Territories. I would like to discuss this further.
    Can you identify--or certainly you have provided particular 
assistance to the Territories to identify their comparative 
advantages, and you discuss or identify some of those 
advantages, at least pertaining to two Territories that 
represent the respected Governors here this morning; and 
second, as to those industries that perhaps may have the most 
potential, given the actual present circumstances, they are 
very different. Certainly, we heard, for example, of how 
different the two economies may be even though there are 
similarities in their political status right now.
    So can you expound on this, please?
    Mr. Cohen. Sure. Thank you very much for the question, and 
they are very different circumstances.
    Guam, of course, is going to be the recipient of 
approximately $14 billion of investment from the Department of 
Defense not only for the relocation of the III Marine 
Expeditionary unit from Okinawa to Guam, but also complementary 
upgrades that are going to be occurring at Anderson Air Force 
Base and the naval base in Guam. So that amount of money going 
to the economy, is going to fund a lot of construction, and the 
percentages that Governor Camacho has cited as to 
contribution--30 percent military, 60 percent tourism--will 
perhaps alter somewhat with this type of infusion of funds into 
the economy.
    They continue to have a very strong tourism sector 
primarily from Japan, but they are looking at opportunities to 
diversify outside of that, as well; and I know Governor Camacho 
has been very active in looking at other opportunities of maybe 
using Guam as a Customs clearing center where goods can be 
transferred, you know, where Customs could clear goods there, 
and they can be shipped on to the U.S. mainland.
    There has been investigation of whether Guam could serve as 
a good financial services center or banking center for that 
part of the world because one of the competitive advantages 
that all of the Territories share is the protection of the U.S. 
flag and the U.S. legal system. So Guam, which refers to itself 
as America in Asia, can provide that type of safety and 
security, maybe for a trust fund business or other types of 
financial services in that region of the world, bringing the 
U.S. legal system there.
    So there are a number of opportunities that Guam has been 
looking at.
    In American Samoa, it is a very different circumstance. You 
know, Guam is a transportation hub for Asia and Micronesia, and 
it benefits from that. American Samoa, as Governor Togiola 
pointed out, is very isolated both geographically and in terms 
of the air service that it desperately relies upon.
    Its competitive advantages include the benefits of the U.S. 
flag; it has more flexibility with respect to wages because of 
the special industry committee structure that Puerto Rico once 
used and American Samoa still does. As the Governor has 
suggested, they are looking at the contact center industry; in 
other words, you know, taking advantage of what the different 
cost structure businesses might encounter there.
    Plus, the fact that the workforce is fluent in the English 
language and it is a different time zone, people in American 
Samoa can work while people in England are asleep and vice 
versa, and that might make some sense, but that would require 
an investment in a fiberoptic cable, which is something that 
the Governor has put into his budget request. And we have 
honored that in our budget request, so that is a possibility.
    American Samoa, like Guam, is physically a very beautiful 
place, and in fact, American Samoa is, if I may say so, more 
unspoiled, less developed and offers a great deal of 
opportunity in tourism. As the Governor suggested, the tourism 
industry is not that well developed yet, which means that there 
is a lot of room to grow if we can solve the transportation 
problem, especially ecotourism.
    American Samoa, I think alone with Puerto Rico, has a 
national park that is in a tropical rainforest environment. So 
that is unique to American Samoa and Puerto Rico. And, you 
know, it is a beautiful place; the outer islands of Manu'a, 
these are spectacularly beautiful places. If we can get people 
out there, it will be very popular, but solving the 
transportation issue is the key.
    Mr. Fortuno. Thank you again.
    Thank you, Madam Chairwoman.
    Mrs. Christensen. The Chair now recognizes Ms. Bordallo for 
questions.
    Ms. Bordallo. Thank you. Thank you very much, Madam 
Chairman.
    I was listening very carefully to Mr. Cohen's comments 
about the islands. As island representatives, of course, we 
always feel they are equally as beautiful.
    Mr. Cohen, I note that the Fiscal Year 2008 budget request 
represents the fourth consecutive year of proposed capital 
improvement grant funding under the new criteria. The baseline 
for both Guam and the Virgin Islands is reportedly $3.36 
million. Yet, I believe that Guam, if you average the level of 
funding provided under the program for the past 3 years, has 
come out below this baseline.
    Can you please comment on how effective you believe the 
established competitive criterion has been toward improving 
financial management practices in the Territories; and in 
addition to that, have you shared the CIP competitive criterion 
with the territorial Governors and public auditors?
    How transparent is the process? Do they receive a scorecard 
each year?
    After your comments, if the Governors would like to 
respond, please do.
    Mr. Cohen. Thank you very much for the question, 
Congresswoman Bordallo.
    First of all, I think the system has been effective. For 
example, you mentioned that, as for Guam, the average funding 
in these past years is below Guam's baseline. Well, in Guam's 
first year, it scored fairly low, and Governor Camacho is 
fairly new; and obviously you inherit a bureaucracy, and it 
takes a while to identify areas that can use improvement. He 
immediately came to us and said, I want to know why we scored 
the way we did, what we need to do to score better and--as we 
would offer to the governments of all of the insular areas, 
which by the way, are equally beautiful. If I was not clear on 
that, I want to make sure that is on the record.
    Ms. Bordallo. Thank you.
    Mr. Cohen. We honored his request, and we sent the head of 
our Budget and Grants Management Division out to consult with 
them and the relevant members of his team; and the next year, 
their score improved dramatically.
    So what we are trying to do is send the right signals. It 
is never going to be an exact science, but we want to send the 
right signals. We want to make it very clear that good 
financial management practices will be rewarded and that the 
converse is also true. We have been under tremendous pressure 
from the GAO reports and the Inspector General reports, and 
rightfully so, to send stronger signals to the governments of 
the insular areas that financial management practices, 
especially with respect to the Federal funds, are of utmost 
priority.
    The criteria, themselves, have been shared. They are 
transparent, and I think we can investigate ways to--and we are 
happy to share the results of the scoring practice. I mean, we 
have sort of--I mean, this is a newly conceived and a newly 
developed program, and we are very much open to suggestions. I 
believe--you know, we do not put these on our Web site, but we 
do not want to make any of our Territories feel that we are 
making them look bad or favoring one over the other; we are 
very happy to share this process and be very transparent about 
it. I mean, that is our obligation in any appropriate way that 
does not make it look like we are being overly critical of any 
of the Territories.
    So we are open to suggestions on how to do that, and we are 
free to share the results of our analysis.
    Ms. Bordallo. Just on that same note, Governors, are you 
satisfied with this new practice?
    Governor Togiola. I think the record should show that when 
this program was--when this was first announced, I was one of 
the most critical ones that resisted handling the CIPs this 
way, and more so after the first 2 years when we lost funding 
because of the grading. We decided to stop wondering what they 
are doing with it and just go ahead and do it; and since then, 
they have improved my score, and I have been happy, so----
    Ms. Bordallo. Very good, Governor.
    Governor Camacho.
    Governor Camacho. Definitely, what David had expressed is 
exactly what happened. Recognizing that Guam was below the 
baseline and it scored poorly in the previous years, what could 
we do to improve it? With their guidance, we have improved and 
have benefited from it.
    I think one of the things we are requesting, for example, 
now, is some help on the new gantry crane, but as I mentioned 
earlier in response to your inquiry, with the financial 
management improvement plans that have been there in a single 
audit, we went from 11 qualifications, I think down to one or 
two now. So there have been tremendous improvements in our 
reporting requirements, and it has, as you mentioned, resulted 
in not only better scores, but we have been rewarded.
    Ms. Bordallo. Very good, and I am happy. I am always out 
for new ideas and new methods, and if it is working, great.
    Now, one other question. Has the criterion been modified at 
all since the implementation?
    Mr. Cohen. Yes. Yes, it has.
    When we originally developed the criterion, we focused not 
only on good fiscal management but also on providing a good 
slate of projects; but we subsequently determined that the 
slate of projects kind of takes care of itself because we have 
a planning process and we have the ability to say that the 
slate of projects you presented is not consistent with your 
plan. We communicate back and forth with the island 
governments, and we really wanted to send a strong, clear, 
unambiguous signal that fiscal management needs to be improved 
in the Territories, in all of the Territories.
    It needs to be improved in all of the States; we do not 
want to single out the Territories, but we want to send a very 
clear, unambiguous signal that this is our priority.
    And the quality of the projects is also very important, but 
we have other ways to address that.
    Ms. Bordallo. Madam Chair, I have one simple, little 
question here for Mr. Cohen again.
    This has to do with the $30 million compact impact funding. 
It is allocated based on a census of the FAS citizens.
    What are your plans for the upcoming census and how will 
this be conducted?
    Mr. Cohen. Well, we are planning, again, to work with the 
island governments to help on these enumerations and to make 
sure that our methodology is standard across all of the island 
jurisdictions and that there should not be any sort of 
undercount or overcount bias of----
    Ms. Bordallo. Inflated numbers, right?
    Mr. Cohen. Right, and as you know, we are required to do 
this no less frequently than every 5 years----
    Ms. Bordallo. Five years.
    Mr. Cohen.--and I guess we are coming up on the next one 
soon. But we have a budget for this.
    The budget actually comes out of the $30 million. The first 
time we did it, we offered from the Office of Insular Affairs 
to fund that out of our technical assistance grant, but for all 
subsequent years, we will take that out of the $30 million. It 
is not going to be a significant deduction from the $30 million 
at all, and it is an investment to make sure we are counting 
accurately; but of course, that is a very important procedure 
because it determines for up to the next 5 years how much 
compact impact money each of the jurisdictions is going to 
receive.
    Ms. Bordallo. Yes.
    Governor Camacho.
    Governor Camacho. Thank you for allowing me to just comment 
on this.
    I wanted to commend OIA and David Cohen and his staff for 
having an open mind when it comes to the expenditure of compact 
impact moneys. What we did was a very unique thing in 
leveraging the moneys. We were taking $6.1 million out of our 
allotment, and by entering into a municipal lease over 20 
years, we are now able to build for schools----
    Ms. Bordallo. Yes.
    Governor Camacho.--worth millions of dollars that, if we 
had just outright spent, we could not have done it.
    So finding ways to take the limited funds we have and 
leveraging them over the years has allowed us some brick-and-
mortar projects that would be there for quite awhile.
    So I just wanted to commend them for having an open mind 
and allowing that to happen.
    Ms. Bordallo. Thank you.
    Thank you very much, Madam Chair.
    Mrs. Christensen. Thank you.
    Mr. Cohen--let's see. I have a few more questions.
    You know, we have benefited, as have all of the other 
Territories, from the outreach to investors and to the economic 
conferences that have been held; but I am curious to know if 
any thought has been given to also putting some focus on the 
development of small businesses, small local businesses, either 
on their own or in conjunction with some of these new investors 
that are coming in.
    Mr. Cohen. Thank you, Madam Chairwoman, for the question.
    Yes, we give a lot of thought to that, and we give a lot of 
priority to it. Our ideal scenario is not that a big company 
will come in from off-island and establish a presence in the 
islands and compete out all of the local businesses. In fact, 
that is the type of thing we are trying to avoid.
    We are very much focused on what we call ``win-win 
opportunities.'' I mean it is a slogan, but it is also 
something that we try to put substance to and take very 
seriously, and that is facilitating strategic partnerships 
between local small businesses on the islands and off-island 
businesses so that both can prosper.
    I mean, the typical scenario is, you might have a small 
business on an island that does not have sufficient capital or 
technological expertise or business expertise or marketing 
channels to take its business to the next level, that can 
partner up with an off-island company that provides that so 
that both can prosper. The off-island business can take 
advantage of the local knowledge and presence of the small 
business on the island, and the small business on the island 
can benefit from the additional capital expertise and all of 
that. So that is our ideal scenario.
    A lot of the success stories that we have had have been 
ones where island businesses themselves have benefited. There 
have been IT entrepreneurs, for example, in American Samoa that 
have teamed up with other island businesses to provide services 
in different island communities; and for us, those are the most 
exciting opportunities.
    Mrs. Christensen. Well, we see the emphasis on the 
investment coming in, which is, again, very important. You 
know, we would like to see a little more. I am sure the 
Congresswoman and my Ranking Member would also appreciate the 
help for some of the small, struggling, locally owned 
businesses in the Territory as well.
    A similar question that I have.
    You heard Governor Camacho talk about the impact of the 
military buildup, and even bringing these wealthy investors 
into the Territory has a tremendous social impact on the 
Territories. Has OIA given any consideration to looking at not 
only the economic benefits and the infrastructure needs for 
bringing in these businesses, but how we can ameliorate some of 
the, perhaps even negative impacts that the residents, the 
longtime residents, of the Territories might experience?
    Mr. Cohen. That is a very good and important question; and 
of course, I am familiar with the situation, particularly in 
the U.S. Virgin Islands, where incentive programs actually had 
a lot of high-wealth individuals relocating and moving their 
homes to the U.S. Virgin Islands.
    And, of course, as you know better than anyone, it created 
a lot of good, and it also raised certain issues as to 
interaction between the folks who have been there for a long 
time and folks who are new to the community. That is 
something----
    Mrs. Christensen. Property values, to name one impact?
    Mr. Cohen. Sure, and it goes back and forth.
    Property values can have the effect of pricing middle-class 
people out of the market, but yet more jobs are provided by the 
demand for these types of homes. So you are right. There are 
positive and negative impacts.
    We are open to using our technical assistance funds to 
study these impacts when appropriate. We certainly like to keep 
them in mind. I mean, our office is, I guess in the Federal 
executive branch, the one that is most aware of the cultural 
sensitivities of all of the island communities in the Pacific 
and the Caribbean more than any other Federal executive branch 
office. We keep that in mind when we do our business 
opportunities missions and our conferences, but we can 
certainly do more to address those issues.
    Mrs. Christensen. OK. Let me try to get in one other 
question here.
    In the budget request, you make mention of the Island 
Fellows Program which you offer to several different 
universities, and I notice they are all Ivy League 
universities. So I have two questions, really.
    One, do you seek out students from the Territories when you 
do this? Do you look at HBCUs and other minority-serving 
institutions? Do you look for fellows at the University of Guam 
or at the University of the Virgin Islands to help our young 
people develop these skills and to help give them an 
opportunity to help their communities?
    Then, how is the final product from these students used? 
Are there private-sector assessments made available to the 
island governments? Are they provided to Congress?
    Mr. Cohen. Thank you very much for the question. And I 
think in the question, there was, I guess, a suggestion that we 
do reach out to other schools.
    Mrs. Christensen. Yes, in all of my questions.
    Mr. Cohen. Yes. Well, I think it is an excellent 
suggestion, but let me give you an idea of how we sort of got 
to this point with the Island Fellows Program. To skip ahead to 
the end, I think your suggestion is an excellent one, and we 
will definitely look at that.
    The Island Fellows Program started as, really, just a joint 
program with the Wharton School, the University of 
Pennsylvania. Actually, it started from an offhand suggestion 
that Secretary Norton, at the time--you know, my former boss at 
Interior--said:
    ``Well, can't we send bright, young business students from 
Harvard Business School out to the islands to help think 
through some of these economic issues?''
    I am actually a graduate of the Wharton School, and I said, 
``Well, Harvard. We can do better than that.'' so I went to 
Wharton to establish the program there.
    The first year was very successful, but after that, it was 
suggested that--well, we expanded out, and we have expanded it 
beyond just Ivy League schools.
    I just got back from a trip to Wharton and Harvard to 
recruit up there, but we also have students--we have had 
students from the University of Hawaii. We have had many 
students from there. We have had students from the University 
of Virginia, Northwestern University, George Washington, 
Georgetown, and we are always looking to expand it out.
    I think your suggestion to expand it out maybe to the 
University of Guam--well, one issue there is, we have 
traditionally used MBA candidates because of the nature of the 
program, so some of these colleges do not have MBA programs. 
But we can still think that through.
    We are looking for ways to bring folks from the islands 
into our office either as permanent employees or for the 
summer, and we have a very good record of having done that, but 
we certainly would be open to doing that.
    Part of the charm--or one of the greatest benefits, I would 
say, of the Island Fellows Program is, even though we have 
hired students who are from the islands--we have had folks from 
Palau, and some were just from, like, Hawaii. But one of the 
most satisfying things from my perspective is that most of the 
folks that we have hired have no background in the islands, but 
as a result of their experience, they form what I hope will be 
life-long affinities with the islands; and often these folks go 
on to careers in high-powered consulting firms or investment 
banks or whatnot, but yet they are always friends of the 
islands.
    I mean, we have folks coming back from a few-weeks' stay in 
the islands, and then they start referring to the community 
they visited as ``we,'' you know, like ``we'' have to improve 
our economy, and that really struck me. So I like the idea of 
bringing folks who have never been exposed to the islands out 
to the islands and creating life-long friendships.
    But we have also benefited from the perspectives of those 
who are from the islands, and it creates good interaction. So I 
consider that an excellent suggestion which we will definitely 
look into.
    Mrs. Christensen. Thanks.
    Mr. Fortuno.
    Mr. Fortuno. Yes. Thank you again, Madam Chairwoman.
    Mr. Cohen, if we may follow the economic development 
issues, actually, in our earlier discussions with the Governors 
here, we were acknowledging the fact that the tax incentives 
that were in place for so many years are gone, and actually, I 
made some comments after reading the report, the report that 
came out of Congress, essentially stating that in terms of 
future, long-term economic policy, it should be non-tax-based 
and what have you.
    Have you thought of what kind of incentives, economic and 
otherwise, may be needed to promote greater private-sector 
investment and development in the islands?
    Mr. Cohen. Yes, we have given a lot of thought to that. I 
want to be careful in not suggesting an administration position 
on any particular approach, because we are still in the process 
of working that through; but if you look at the tools that are 
available, arguably they are fairly limited. You have tax 
incentives, and we have worked with those, and we have 
experienced some problems and also some successes. We have 
trade.
    Now, arguably, the ability to use trade incentives is being 
eroded with the very positive development of expanding free 
trade around the globe, and the more foreign nations that get, 
for example, duty-free access to the U.S. or other sorts of 
favored access to the U.S. market, the less room for maneuver 
you have to provide those benefits to the Territories in a way 
that creates a real competitive advantage. So, arguably, the 
value of trade incentives is going down.
    Then you have direct grant assistance, and we have been 
working to sort of reduce the Territories' dependence on direct 
grant assistance. There are other things, like helping to build 
up the infrastructure, and we are doing that as much as we can.
    As Governor Camacho pointed out, we are also looking at 
ways to be creative with the grant assistance we have, so that 
it can be leveraged and that the private sector and other 
financing sources can come in and really carry most of the 
burden.
    Mr. Fortuno. Mr. Cohen, if I may--and I am sorry to 
interject here--there is a reason why I called this structure, 
political structure, 18th century solutions to 21st century 
realities; and everywhere I turn, I think we are facing the 
same challenges in that the world is changing for the better in 
terms of opening up markets, that actually we have WTO 
restrictions as to what can and cannot be done. So that creates 
additional burdens on our economic development possibilities; 
and we are turning back to the same problems, actually, that we 
have been facing.
    And actually, if I may say so--actually, Governor Tulafono 
mentioned only two plans that were created or built in X number 
of years given all these tax incentives; and I am very 
concerned. Really, we have a responsibility here. There is a 
political aspect to this, but certainly I have a feeling that 
we are getting to the same point over and over again.
    There is only so much we can do short of a major influx of 
new money for military construction that will be occurring in 
Guam, for example. Are you in agreement with this?
    Mr. Cohen. Well, I want to be careful to say, that is 
really the only tool we have, but I certainly accept your 
assertion that the tools we have are limited. That is one of 
the reasons that we have put such emphasis on trying to bring 
the private sector into this, because at the end of the day, 
the Territories are going to be strong if they are strong 
economically, and they can only be strong economically if they 
have the strong private-sector-driven economies.
    We are talking about, well, how do you finance all the 
infrastructure, how do you finance the health care needs, the 
education needs?
    Well, jurisdictions that generate sufficient tax revenue to 
provide for all of these needs do not have to worry. It is 
jurisdictions that have private sectors that are too small and 
are too thin and concentrated, lacking economic 
diversification, so that they cannot reliably generate the 
revenues they need to provide the critical needs.
    Well, those are the ones that are in trouble. Those are the 
ones that need to keep turning to the Federal Government.
    Now, the island communities, as you well know, start with 
so many disadvantages in terms of remoteness, resource poverty, 
a small population base. Puerto Rico less than the other 
insular areas, but these are problems throughout the island 
communities; and the Federal Government cannot solve these 
problems on its own and the island governments cannot solve 
these problems on their own. It really all comes down to 
whether there is a strong, healthy, private-sector-led economy 
that we can establish in the islands. There are barriers to our 
ability to do this.
    But there are competitive advantages that the island 
communities have. We have to stress those, enhance those, make 
sure everybody knows about them, do our best to promote the 
islands, because ultimately that is really the only way that 
the islands are going to have long-term fiscal and economic 
health.
    Mr. Fortuno. Thank you again, and I couldn't agree with you 
more. Thank you again, Madam Chairman.
    Mrs. Christensen. Thank you. Ms. Bordallo?
    Ms. Bordallo. Thank you again, Madam Chairman. I have one 
question for Mr. Cohen. Could you expand on what efforts are 
currently being undertaken by OIA to address high risk grantee 
status of some territorial government agencies with certain 
Federal Government agencies, including the Department of 
Education, for example? Is OIA taking a lead role in 
coordinating with other agencies in this area? This is the 
reconciliation of Section 30 funds owed to the government of 
Guam, say, by certain Federal agencies. It remains an ongoing 
challenge, and I have been asked over and over by our local 
senators. I just returned from Guam yesterday, and the Governor 
and I were referencing this earlier. Certain fees and 
withholding taxes collected are not always covered over to the 
Guam Treasury by individual and relevant agencies. Can you give 
us some idea about this? What is being done to improve this?
    Mr. Cohen. Sure. Thank you, Madam Congresswoman. We put a 
very high priority in making sure that the Territories get 
their due, what they are entitled to under Federal law. So my 
staff has been very active in trying to make sure that, you 
know, these Section 30 amounts are properly accounted for and 
that the government of Guam in particular, of course, in this 
case gets what it is entitled to. Our chief budget officer, 
Charlene Leizear, actually takes very--has been very actively 
involved. We also participate in the All Island Tax Association 
meeting annually with the IRS where we work through these 
issues. Because a lot of this is under the control of other 
agencies, you know, we certainly are very active behind the 
scenes just to make sure that they are engaged, and especially 
in recent years we have a lot of good cooperation from the IRS. 
But we also recognize that because of upswings and downswings 
in sort of the accounting as to what is ultimately owed under 
Section 30, that it can create a hardship on the government of 
Guam. So what one thing we are able to control is to the extent 
that say a large amount is owed because of, you know, a 
perceived overcompensation on the Section 30 funds, we have 
been giving Guam more time to repay, that they wouldn't have 
to, you know, pay a larger amount up at once, but the IRS has 
been catching up on its process of determining how much--of 
making sure Guam is paid everything it is owed, including from 
back years, and then we have provided greater flexibility to 
the government of Guam, recognizing the Section 30 amounts will 
likely increase as this process continues to not have to pay 
back all at once. We have given them 3 years to pay back an 
amount that hopefully will never have to be fully paid back 
because Section 30 amounts Guam is entitled to will be 
increased.
    Ms. Bordallo. Governor Camacho, is there any area that you 
wish to bring up at this point in regards to this?
    Governor Camacho. As mentioned earlier, we had a director 
here I believe that worked with you in OPM. And I think those 
matters are being resolved. And we are grateful also to the 
fact that where years the government overestimated Section 30 
we are allowed a number of years, over 3 years to pay it back, 
settle. So we are very much appreciative of that.
    Ms. Bordallo. The other part of that question, any efforts 
at OIA to address high-risk grantee status of the Territories?
    Mr. Cohen. Yes, Congresswoman. We have been funding a 
number of programs to help give the insular area governments 
the tools they need to address these fiscal management 
challenges, and other agencies have put either entire--well, 
you know, we had a high risk situation with the government of 
American Samoa, and other agencies have put various agencies, 
various local agencies in Guam, U.S. Virgin Islands and other 
communities in high risk status, and we recognize that it is 
often a matter of capacity. It is very much a matter of 
capacity. So we have put a lot of resources and a lot of effort 
into capacity building for fiscal management. We have a strong 
partnership with the USDA grad school. We have a program funded 
to the tune of about $2 million every year where they provide 
intensive training to fiscal managers in the islands. We host 
annual conferences where training occurs, and it is always 
attended at a high level by the Office of Insular Affairs. We 
have provided funds for hardware, software, fiscal hardware and 
software. As Governor Camacho has pointed out, we have funded 
the fiscal management improvement plans for a number of 
agencies in Guam, Department of the Administration, Department 
of Education, as you have suggested. We have recognized it is a 
resource issue. We also recognize that the island communities 
have very serious challenges that they have to face, you know, 
to have good fiscal management. They have smaller population 
bases, you know, it is harder to attract talent to the islands. 
Basically, the pay scale is lower than what you get in the 
States. So you don't have enough of a home grown talent pool to 
rely on. You know, you can't pull folks in from neighboring 
counties or neighboring states because you are in the middle of 
the ocean. And to attract, you know, off-island talent, you 
generally have to--and keep it there, you have to pay beyond 
what your typical pay scale is. So we recognize there are 
inherent difficulties--not to make excuses. We recognize there 
are challenges that simply are not faced in mainland 
communities so we devote resources to try to overcome those.
    Ms. Bordallo. Thank you. Thank you, Mr. Cohen. Madam 
Chairman, I have no further questions, but I do want to make a 
comment. We are actually witnessing a historic meeting today. I 
think after 12 years we have re-established the Insular Affairs 
Subcommittee, and by re-establishing this committee I think it 
brings specific attention to all matters pertaining to the 
Territories, and I am extremely pleased with that. It gives us 
a unique advantage, and Madam Chairman, I am very pleased to be 
a part of this re-establishment of the Insular Subcommittee, 
and I want to thank the Governor from American Samoa, the 
Governor from Guam and of course you, Mr. David Cohen, for 
being a part of this historic meeting. Thank you.
    Mrs. Christensen. Thank you. Mr. Fortuno also--he will 
return shortly, but he doesn't have any further questions. Of 
course I have one more.
    Mr. Cohen, when they appeared before the full committee 2 
weeks ago, as you heard me say in a question to Governor 
Camacho, both the Inspector General of the Department of 
Interior and the GAO representative endorsed the idea of a 
chief financial officer as a good idea for the Virgin Islands 
and perhaps the other islands. So in light of those recent GAO 
reports on the severe problems in financial management in the 
Territories as well as the reports from the Inspector General, 
do you still oppose a CFO or similar officer in the USVI? And 
if so, why?
    Mr. Cohen. Madam Chairwoman, we are happy to take another 
look at it. You know, the last time the bill came up, you know, 
to be frank, we were put in an awkward position because there 
was, you know, obviously, you know, you had a position that was 
well reasoned and as reflected in your legislation, and the 
Governor had a different position. And in those situations, we 
don't choose between oh, well, we would--you know, side with 
the Congresswoman over the Governor or the Governor over the 
Congresswoman. In situations like that, you know, we would 
typically want to defer to the institution where there is the--
where the people of the Virgin Islands would have the most say. 
So that is why, you know, we would--you know, our----
    Mrs. Christensen. I agree it was a difficult position.
    Mr. Cohen. Yeah. But what I would want to say--and that is 
because there is a split. So when in doubt, regardless of the 
personalities or whatever, you know, we would tend to favor, 
you know, deferring the solution to the institution where local 
people have the most say, and of course you are elected by all 
of the people of the Virgin Islands, but you are serving a body 
where you are the only voice from the Virgin Islands as opposed 
to, you know, a local legislature that is fully elected by the 
people of the Virgin Islands. So that has nothing to do with 
the merits of the proposal. That was just sort of the 
institutional difficulty we were placed in.
    Mrs. Christensen. But you could probably see it, I mean, 
God willing this will never happen, but there could have come a 
time where the situation was so dire that it might have 
required that you not defer to the local legislature but do 
what was the right thing to do in the interest of the people of 
the Territory.
    Mr. Cohen. Oh, absolutely. Absolutely. And, you know, our 
first preference is when there is a disagreement on substance 
between elected officials is to, you know, try to defer to one 
institution or the other based on local control. But I will say 
if, for example, you know, with the new Governor in the U.S. 
Virgin Islands, you know, if the government there were to 
support a proposal that you were to put forward, we wouldn't be 
put in that situation. I couldn't guarantee any particular 
result without having cleared it through the administration.
    Mrs. Christensen. Sure.
    Mr. Cohen. But it is a different--put aside the substance, 
that puts us in a different situation as to what institutions 
we would tend to defer to.
    Mrs. Christensen. Would you ever remain neutral if it was a 
good--if there was a division between different offices in a 
Territory and--but a good proposal?
    Mr. Cohen. I am sorry. Could you say that again?
    Mrs. Christensen. Would you ever consider remaining 
neutral, not having an opinion?
    Mr. Cohen. Yeah. We would take every situation as it 
arises. We do have a preference to allow local decisions to be 
made locally, and again, that has nothing to do with the 
substance. And you are right, the substance--the facts on the 
ground could reach a point where we would override that 
preference and say, you know, there is a compelling need to, 
you know, impose a Federal solution because a local solution, 
you know, may result in, you know, irreparable harm or 
something of that sort. So the bottom line though is that we 
are happy to take another look at whatever proposal you have, 
and we are happy to work with you on that, and of course we 
will be in contact with your office, and the Office of the new 
Governor and especially if there is agreement between your two 
offices, that is a completely different situation for us.
    Mrs. Christensen. OK. If there are no further questions, I 
move to have the testimonies of the U.S. Virgin Islands 
Governor John deJongh and the Commonwealth of the Northern 
Mariana Islands Representative Pete Tenorio entered into the 
hearing record, and without objection, so ordered.
    [The prepared statement of Governor deJongh follows:]

             Statement of The Honorable John deJongh, Jr., 
                  Governor of the U.S. Virgin Islands

    Madame Chairwoman, and distinguished members of the House 
Subcommittee on Insular Affairs, it is an honor for me to present 
testimony today on the state of the Virgin Islands and on some of the 
critical issues facing our Territory.
    As you know, I was privileged to be elected by the people of the 
Virgin Islands last November as their governor. While our Territory has 
made undeniable progress since the days of appointed governors, we are 
still challenged by difficult, though not intractable, problems. 
Thirty-five percent of our children still live in poverty. Our family 
incomes are a third lower than the poorest State in the Union. As a 
group of small islands geographically removed from the United States 
mainland, our cost of living is significantly higher than the average 
American community. Our economy is overly dependent upon tourism and 
requires further diversification. Like many of our border states, our 
social services and the fabric of our community are strained by illegal 
immigration and drug smuggling. And while the fiscal condition of our 
government has improved in recent years, much more remains to be done 
to close the gap between the standard of living in the Territory and 
that on the mainland.
    It is my fervent belief that the people of the Virgin Islands have 
the capacity, the strength, and the will to successfully address these 
challenges over the next four years. As I have said at home, the State 
of our Territory in the midst of these challenges is one of hope and 
great expectations. And while I will call on our proud and resilient 
people to unleash their imaginations, their ideas and their energy to 
help my administration build a better future for all, there are also 
issues where the Federal Government--including this Congress--must play 
their part as well. It is in these areas that I would like to focus my 
remarks today.
Property Tax Reform
    Economic growth and development in recent years has helped generate 
the marked improvement in the Government's financial condition, but it 
has also come with social costs that cannot be ignored. In particular, 
growth and development invariably bring rapidly increasing property 
values which, if not addressed, can threaten to tax homeownership out 
of reach for the average Virgin Islander. The ability of the 
Territorial government to deal with this problem has, as you know, been 
hampered by a recent federal court decision reviving a colonial-era 
statute which severely limits the authority of the Virgin Islands 
Government to administer its real property tax system.
    Under this outdated statute--enacted by Congress in 1936 and 
previously thought to have been repealed by the 1954 Revised Organic 
Act--the Virgin Islands Government is prevented from exercising the 
authority enjoyed by States and local governments on the mainland to 
tax real property on the basis of use or other rational classification. 
By requiring, for example, a uniform rate of tax for both residential 
and commercial property, the 1936 statute puts at risk long-standing 
Government policies designed to develop the economy, promote social 
welfare, and protect homeownership in the Territory, including capping 
residential assessments during any assessment period.
    Without the authority to limit property tax increases caused by 
rising property values--through capping assessments or phasing in 
increases--the revived 1936 statute may quickly put land and 
homeownership beyond the reach of many Virgin Islanders. This is 
particularly true in St. John, where development has resulted in 
significant increases in property values in recent years. The 1936 
statute also puts into legal question other Government policies 
designed to promote economic and social development, including taxing 
agricultural land at lower rates than commercial land and providing 
veterans preferences.
    I want to thank you, Madame Chairwoman, for your leadership in 
sponsoring legislation to repeal this anachronistic law and to clarify 
that the Virgin Islands has the same powers and authority as any other 
American jurisdiction to determine and to administer its own property 
tax system. I am pleased that the House moved quickly, upon the 
convening of the 110th Congress, to pass this important and necessary 
legislation. I am hopeful that the Senate will act quickly as well so 
that the legislation can be signed into law as soon as possible.
Control of Our Borders
    Madame Chairwoman, I would also like to commend you for your 
efforts to secure a Border Patrol Unit for the Virgin Islands. As you 
know, currently there is no Border Patrol station in the Territory, 
with the closest station responsible for protecting our borders and our 
coast line located in Puerto Rico. The problem is that the station in 
Puerto Rico must focus on the hundreds of miles of coastline in that 
part of the Caribbean, leaving the coastline and coastal waters of the 
Virgin Islands largely exposed and vulnerable to human smuggling and 
drug trafficking. As a result, international smugglers and organized 
crime have been increasingly utilizing our Islands as a major 
transshipment point into the United States. In addition to this 
implications for our national and regional security, the scourge of 
smuggling and illegal drug trafficking has a direct impact on the crime 
rate in the Territory and on our quality of life.
    I am therefore pleased to reaffirm my commitment to work with you, 
other Congressional leaders and the Department of Homeland Security to 
establish a Border Patrol Unit in the Virgin Islands as soon as 
possible.
Elimination of the Cap on Rum Excise Taxes Returned to the Virgin 
        Islands
    Madame Chairwoman, I would also like to lend my support to your 
efforts to eliminate the ``cap'' on the amount of federal rum excise 
taxes that are returned to the Virgin Islands each year under the 
provisions of the Revised Organic Act and the U.S. Internal Revenue 
Code. As you know, Congress is required periodically to extend the 
current formula for calculating the rum tax payment to the Virgin 
Islands. In the absence of such periodic extensions, the formula would 
be reduced, costing the Virgin Islands Government millions of dollars 
and putting at risk the Government's bonds which are secured by such 
tax revenues.
    But even the temporary extensions, while welcome, cause problems 
for the local Government which could be eliminated by removing the cap 
entirely and allowing the Territory to receive the full amount of the 
federal tax imposed on Virgin Islands rum. First, the temporary 
extensions authorize the return of $13.25 per proof gallon of rum 
produced in the Virgin Islands and shipped to the United States, while 
the full tax imposed by the Federal Government on Virgin Islands rum is 
$13.50 per proof gallon. Under the temporary formula, 25 cents on each 
proof gallon of Virgin Islands rum is retained by the U.S. Treasury. 
Second, it is difficult to securitize long-term bonds with revenue 
streams that may be interrupted by unscheduled or unforeseen delays by 
Congress in extending the present formula. Indeed, the history of the 
most recent extension by Congress reinforces this point. Congress 
passed the last extension this past December--eleven months after the 
previous extension expired. While Congress made the extension 
retroactive and the Territory did not lose funds as a result, it 
nonetheless created concerns for the nation's financial institutions 
that hold our bonds and has the potential to affect both our bond 
ratings and bond capacity.
    It is generally accepted that there are no policy reasons that 
stand in the way of Congressional action to remove the cap and allow 
the Territory to receive the full amount of the tax imposed on Virgin 
Islands rum. The tax was imposed, in the first place, not to raise 
revenues for the Federal government, but rather to ensure a commercial 
level playing field for domestically produced distilled spirits with 
which Virgin Islands rum competes in the U.S. market. Rather, it would 
appear that the reasons blocking a permanent solution to this problem 
up until now is a more practical one: under the Congressional budget 
rules, a Congressionally initiated legislative change must be 
``offset'' with other revenues, but a permanent solution proposed by 
the administration as part of its annual budget proposals to the 
Congress does not. Accordingly, I would respectfully request that this 
Committee work with the House Ways and Means Committee to urge the 
President to include a permanent solution to the rum tax formula in his 
next budget submission to the Congress.
Elimination of the Discriminatory Cap on Medicaid Funding for the 
        Virgin Islands
    Madame Chairwoman, as you are well aware, the ability of the Virgin 
Islands Government to assure adequate health care to Island residents 
is hampered by the discriminatory cap on Medicaid funds provided to the 
Virgin Islands and the other U.S. Territories. Medicaid is a federal-
state program to provide for the health care needs of the poorest and 
neediest persons in our country. The quality of health care should not 
depend on whether an individual lives in California, Alaska or in a 
United States Territory. While, under your leadership, Congress 
approved last year an increase in the amount of Medicaid funds provided 
to the Virgin Islands, such increases only narrow the gap between the 
funds allocated to the Virgin Islands and funds the Virgin Islands 
would be entitled to if the Virgin Islands were treated as a State 
under the Medicaid formula. The Government of the Virgin Islands 
respectfully requests the Administration to support, through the IGIA 
process, further improvements in the Medicaid formula and to ensure 
that the neediest residents in the Territories receive no less 
favorable treatment than the neediest residents in the United States.
Support for the Virgin Islands Economic Development Commission Program
    Finally, I would like to bring to this Committee's attention an 
issue which has profound implications for the fiscal and economic 
independence of the Virgin Islands. That issue is the unrestrained 
program of IRS audits which is having a significant adverse impact on 
our vital Economic Development Commission (``EDC'') program.
    As you know, residents of the Virgin Islands, as citizens of the 
United States, are required to pay Federal income tax like any other 
citizen living outside the United States. However, Section 932 of the 
Internal Revenue Code states that bona fide residents of the Virgin 
Islands are not required to file an income tax return with the IRS. 
They are required instead, to file their income tax return with, and 
pay the applicable tax to, the Government of the Virgin Islands.
    The amount of the liability to the Virgin Islands, determined under 
the ``mirror code'' system, in most cases is exactly the same amount 
that they would otherwise have been required to pay to the Federal 
Government. The only exception is a provision under Section 934 of the 
Code which permits the Virgin Islands to provide economic development 
incentives through tax credits or tax rate reductions for income from 
sources in the Virgin Islands or income effectively connected with the 
conduct of a trade or business in the Virgin Islands.
    Pursuant to this authority, the government of the Virgin Islands 
established, almost 50 years ago, an economic development program that 
was intended to diversify the local economy, create jobs for its 
citizens, and to lessen its dependence on the Federal Government. Under 
this program, the Virgin Islands government provided tax incentives to 
qualified businesses that established operations and invested in the 
Virgin Islands, and that met the program's criteria for creating jobs 
and economic opportunity for Virgin Islanders.
    In response to concerns that some U.S. citizens claimed tax 
benefits who neither lived nor worked in the Territory, Congress two 
years ago tightened the income and residency rules as part of the 
American Jobs Creation Act of 2004 (``Jobs Act''). With respect to the 
rules for determining residency in the Virgin Islands, the Jobs Act 
replaced a ``facts and circumstances test'' similar to that previously 
used for determining the tax residency for aliens with a physical 
presence test, a closer connection test, and a tax home test.
    At around the same time, the U.S. Internal Revenue Service 
(``IRS'') initiated a comprehensive series of audits not only of 
individuals who participated in the Territory's EDC program, but also 
of many taxpayers who had moved to the Virgin Islands years earlier and 
who did not participate in the EDC program, as well as taxpayers who 
were born in the Virgin Islands but who had spent periods of their 
working life outside the Territory due to the lack of opportunities in 
the Virgin Islands.
    Neither the Government of the Virgin Islands nor most responsible 
members of our EDC community have any objection to properly conducted 
IRS audits, performed in compliance with the statutes and rules 
governing such audits and with clear audit guidelines in place at the 
outset. However, it appears that the IRS has used the subjective nature 
of the pre-Jobs Act legal standard for determining bona fide V.I. 
residency as a license to challenge anyone who claimed EDC benefits as 
a potential participant in an abusive tax shelter, rather than as a 
participant in a lawful economic development program duly authorized by 
the Congress.
    Rather than facilitating and ensuring tax compliance and, if the 
facts warrant, ferreting out wrongdoers, the IRS audits have instead 
become a vehicle for undermining a Congressionally sanctioned and 
authorized economic development program through punitive and heavy-
handed techniques, including repetitive, intrusive, and burdensome data 
and document requests. Unfortunately and unfairly, the IRS audit 
presumption seems to be that the taxpayer engaged in tax fraud unless 
he or she can prove otherwise.
    The IRS tactics, however, go far beyond intrusive and burdensome 
data requests. In the course of these audits, the IRS has reversed its 
long-standing administrative practice and published position, and now 
claims that the statute of limitations never runs for V.I. taxpayers 
who reasonably and in good faith file their tax returns with, and pay 
their tax to, the Virgin Islands Bureau of Internal Revenue (BIR), as 
the law requires them to do.
    In a General Counsel Advisory Memorandum published last summer, the 
IRS announced its new position that it has the right to audit the 
returns of a V.I. taxpayer as far back as they like and, if they 
determine under the subjective pre-Jobs Act test that the taxpayer was 
not a bona fide V.I. resident, that it can assess full tax and 
penalties even if the taxpayer has paid the correct amount to the 
Virgin Islands. Because the Virgin Islands statute of limitations will 
have run in many of these circumstances, the taxpayer will be precluded 
from seeking a refund of tax paid to the Virgin Islands, and thus be 
subject to double taxation. Moreover, since the IRS position reverses a 
previously issued IRS advisory memorandum and also runs counter to the 
general rule that persons can be audited for up to three years after 
filing a return, many taxpayers who are being audited no longer have 
the records to defend themselves.
    Similarly, at least some IRS agents may now be taking the position 
that even a bona fide V.I. resident who underpays his tax to the Virgin 
Islands by even one dollar (even if this is a result of a good faith 
error) may now be subject to full taxation by the United States without 
regard to, or credit for, any payments made to the Virgin Islands. Such 
a position is not only not without legal support, but it operates 
perversely as a disincentive for our Bureau of Internal Revenue to 
audit and seek any underpayments of tax from our own taxpayers.
    These heavy handed practices violate the due process rights of 
Virgin Islands taxpayers and have had a chilling impact on the 
Territory's EDC program, raising the specter of guaranteed and endless 
audits of virtually anyone who moves to, and invests in, the Virgin 
Islands. This is not, I would respectfully submit, what Congress had in 
mind when it enacted the Virgin Islands tax incentives at issue as part 
of the 1986 Tax Reform Act, or when Congress acted to include more 
objective factors in the determination of residency and sourcing of 
income as part of the Jobs Act in 2004. Without any consultation and 
indeed notice, these actions continue. On February 21, 2007, Treasury 
issued Notice 2007-19, covering statute of limitations that does not 
adequately address our concerns and has unilaterally imposed draconian 
measures on our residents. I hope that through my efforts, beginning 
with this testimony and continuing with meetings that had already been 
scheduled with both Houses of Congress and the Executive Branch, we 
will be able to restore a cooperative process going forward and that we 
will be able to revise, amend or replace these recent regulations and 
actions with policies and programs that work to assure our mutual 
goals.
    I appreciate the efforts you have made along with other Members of 
Congress to rectify this wrong. Because this issue cuts at the heart of 
our efforts to diversify and grow our economy and to achieve fiscal 
independence, I would respect urge this Committee to support 
legislation affirming the previous federal policy that a tax return 
filed in the Virgin Islands shall be treated as a tax return filed in 
the United States for purposes of triggering the statute of 
limitations.
    Thank you very much.
                                 ______
                                 
    [The prepared statement of Mr. Tenorio follows:]

        Statement of Pedro A. Tenorio, Resident Representative, 
              Commonwealth of the Northern Mariana Islands

    Madame Chairwoman, members of the Committee, thank you for this 
opportunity to submit testimony today on the FY 2008 proposed budget 
for the Office of Insular Affairs. I apologize for being unable to be 
with you in person today. I am in the Commonwealth accompanying Senate 
Energy and Natural Resources Committee staff, Allen Stayman and Joshua 
Johnson, as they conduct a series of fact finding meetings on issues 
relating to local immigration control and the CNMI economy. If you have 
any questions regarding this testimony please do not hesitate to submit 
them to me and I will respond as soon as possible.
    The Commonwealth of the Northern Mariana Islands is committed to 
being self-sufficient, self-reliant, and able to provide a high 
standard of living for its people. Unfortunately, we have encountered a 
few problems and have not been able to reach and maintain this goal. As 
the subcommittee members are fully aware, the CNMI is currently in a 
financial depression and that we have yet to find our way out of this 
crisis.
    It is a necessity that we rely on funding that we receive under 
Compact Impact from OIA to supplement our local funding for schools, 
health care clinics, police and fire protection, and other basic 
government services. The continuation of this funding is vital.
    We are also dependent on Covenant funding that we receive to build 
and/or improve our infrastructure. While I would like to ask for a 
greater share of these funds, I am aware that we have a back log of 
unspent funding that we must liquidate first.
    There are several areas that I would request special consideration 
for in the FY 2008 budget.
    1.  I am bothered about the accountability and audit problems that 
were highlighted in a recent GAO report: U.S. Insular Areas: Economic, 
Fiscal, and Financial Accountability Challenges. Although throwing 
money at a problem doesn't always fix it, if this problem needs more 
staff training, technical expertise, or general technical assistance, I 
respectfully request that funding be provided to address these needs.
    2.  As CNMI Government revenues continue to decline our first 
priority must be to the general welfare of our residents. Shortages in 
government funding could easily interfere with our responsibilities for 
immigration and border control. The CNMI Law Enforcement, Labor and 
Immigration Initiative is currently funded under The OIA Technical 
Assistance Program. It is my understanding that annual grants have been 
declining for the past five years or so. I respectfully request that 
additional funds be provided to the Technical Assistance Program to 
strengthen this important initiative.
    3.  Congressional appropriating committees have always earmarked 
funding for the Close Up Foundation, Junior Statesmen, and the Pacific 
Business Center out of the Technical Assistance Program. These are 
worthy organizations and I request that their earmarks be continued.
    4.  Congresswoman Bordallo has recently introduced H.R. 1075, the 
United States Territories Infrastructure Bond Bank Authorization Act. I 
strongly support this bill, and thank her for her leadership in 
bringing it to a reality. As I am sure that this structure will have 
great benefits for the CNMI as well as the other territories, funds 
need to be identified so that the purchasers of these bonds can be 
paid. I respectfully request that this subcommittee examine ways to 
allow Compact Impact funding available as leverage for these bonds.
    5.  Lastly, Madame Chairwoman, I need to ask for additional funds 
to repair vital infrastructure at the CNMI's only hospital. The back-up 
generator and reverse osmosis equipment are in need of replacement. The 
lives of the patients in the Commonwealth Health Center are dependent 
on stable power and clean water. It is estimated that $1 million is 
needed to replace these systems and upgrade the hospital interfaces.
    Thank you for this opportunity to share my thoughts on the Office 
of Insular Affairs' FY 2008 Budget with you today.
                                 ______
                                 
    Mrs. Christensen. I would also ask your office, Deputy 
Assistant Secretary Cohen, if you would supply the information 
on the 10 criteria in the CIP program and, in addition to that, 
a report on what has occurred in the years of this program has 
existed with respect to each of the Territories, what were the 
criteria they were judged on and their funding levels.
    Mrs. Christensen. A lot came up during this hearing on 
issues related to the IRS, and we will be looking at perhaps 
holding a joint hearing with Ways and Means to look at some of 
the concerns of the Territories with respect to IRS and I don't 
have to go into detail on what those might be for the Virgin 
Islands. You have heard from Ms. Bordallo on some of her 
concerns. But I want to thank also the Deputy Assistant 
Secretary Cohen for coming under such difficult circumstances 
and being patient and waiting for the Governors to be 
questioned and taking our questions, and of course I want to 
thank the Governors for being here and for your testimony and 
for your responses and your recommendations, and I am also very 
happy that we have reinstituted this Subcommittee and that you 
have an opportunity to come to the Congress and for us to have 
this dialogue on the record and to be able to really focus on 
some of the unique challenges that the Territories face.
    The hearing record will be open for 10 days for any 
responses to additional questions that the Subcommittee members 
may have. And if there is no further business before the 
Subcommittee, the Chairman again thanks the members of the 
Subcommittee and our witnesses, and the Subcommittee stands 
adjourned.
    [Whereupon, at 12:17 p.m., the Subcommittee was adjourned.]

    [Additional material submitted for the record follows:]

    [A statement submitted for the record by Mr. Faleomavaega 
follows:]

           Statement of The Honorable Eni F.H. Faleomavaega, 
               a Delegate in Congress from American Samoa

    Madame Chairman:
    I commend you for holding this hearing which is both necessary and 
timely. The 2008 budget request for the Office of Insular Affairs (OIA) 
is $403.8 million. Of this, $27.7 million has been requested for 
critical infrastructure projects (CIPS).
    Historically, at least for the past decade or more, the U.S. 
Department of the Interior has left American Samoa's CIP funds unmarked 
in the President's budget. In fact, Congress appropriates (through the 
Covenant) a fixed amount of about $10 million per year for American 
Samoa's CIPs based now on a competitive allocation system. These funds 
are held by OIA until the American Samoa Government (ASG) makes a 
request or proposal for funding of a specific project.
    Over the years, it is my understanding that the Governors and the 
Fono are supposed to work together in determining what projects should 
be undertaken. By way of this process, our local leaders were supposed 
to be assured of having input in how federal dollars are spent and 
managed in the Territory.
    However, this year, OIA and Governor Togiola have pre-determined 
that $3 million should be set aside for fiber optics or ``economic 
development'' and this has been done without consultation with the Fono 
and without my knowledge. As a Member of Congress, it is within my 
purview to earmark CIP funds prior to ASG receiving those funds. 
However, as a courtesy to our local leaders, I have never earmarked CIP 
funds even though I may have disagreed with ASG's priorities. The only 
exception was a $2 million set aside for emergency medicines and 
supplies at LBJ.
    While I am not against fiber optics and while I actually introduced 
the Governor and OIA to the idea, I was led to believe that OIA would 
loan money to ASG for this purpose and was never informed that money 
would be taken from our CIPs to fund this proposal. American Samoa's 
CIP funds are used for health and education and these are and must be 
our highest priorities and we cannot afford to have $3 million stripped 
away to fund fiber optics which ultimately will be a $20 million or 
more project.
    More importantly, I cannot support a process that cuts out the 
Fono. Again, as a courtesy to our local government, I have never 
earmarked, or set aside, ASG's CIP funds, although it is within my 
purview to do so. As a matter of personal policy, I have left it to the 
discretion of our local leaders to decide how CIP and operations funds 
should be spent and this is how I believe the process should remain.
    However, if the Department of the Interior, OIA, and Governor 
Togiola intend to stand by their proposal to take $3 million from our 
CIP funds without consultation with the Fono, then I will earmark the 
remaining money to assure that the Fono is represented and that 
critically needed projects are funded.
    I also want to comment about how OIA has labeled this $3 million 
for fiber optics. OIA has stated that this is for purposes of 
``economic development.'' I believe if OIA was sincerely interested in 
economic development in American Samoa it would seriously consider the 
recommendations made by the American Samoa Economic Development 
Commission.
    In 1997 federal legislation was introduced and enacted in 1999 
which established a Secretarial Commission to examine American Samoa's 
economic condition and make recommendations on how to diversify and 
expand American Samoa's economy. This was the first time in American 
Samoa's relationship with the United States that a Secretarial 
Commission was established.
    This Secretarial Commission was established at a cost of $600,000, 
supported by Presidents Clinton and George W. Bush, chaired by the 
former Governor of Hawaii John Waihee, and administered by the U.S. 
Department of the Interior. Governor Tulafono Togiola of American Samoa 
served as a commission member. I served as an ex officio member.
    In conjunction with the people of American Samoa, the Commission 
developed an economic plan based on the will of the people. In fact, 
over 8,000 people were surveyed at the request of the Commission by the 
American Samoa Community College.
    In April 2002, the Secretarial Commission issued its final report 
to the President of the United States and I would like to ask that the 
Executive Summary be included for the record. The Chair noted that 
``while the people of American Samoa are ultimately responsible for 
implementing the plan, they will need the direct assistance and support 
of the United States Government, in particular the Department of the 
Interior to succeed.''
    To date, the U.S. Department of the Interior has failed to move 
forward on this plan and I must say our local government officials have 
also not acted. Despite $600,000 of American taxpayer dollars having 
been set aside for this purpose, I am disappointed that OIA has 
dismissed the findings of the Commission and has instead set about 
spending additional taxpayer dollars on bringing down university 
students from the mainland who are completely unfamiliar with our 
culture to develop our economy with no input from the community or even 
my office and maybe even without input from our local Governor although 
he is in a better position to know what he has been privy to or not.
    I am also disappointed that the OIA recently spent $92,000 of 
taxpayer dollars to fund the writing of a federal bill to replace IRS 
section 936, the possession tax credit. I would like to ask that a copy 
of this proposed bill be included as a matter of record as well as 
other pertinent materials relating to this decision. I would also like 
to note that the proposed bill failed to include input from our 
canneries, our Fono, our fishing fleet, my office, and other vested 
stakeholders.
    Given that the House Ways and Means Committee and Senate Committee 
on Finance have jurisdiction for any and all federal tax policy, I am 
concerned that DOI entered into murky waters by funding the drafting of 
legislation. Again, the DOI did not fund a report or a study but 
instead funded the drafting of a bill. It was my impression that this 
is not the role of federal agencies.
    I also have concerns that in addition to funding the writing of 
legislation, OIA has now provided ASG with $150,000 to develop an 
economic strategy to address the impact of the tuna cannery shutdown. 
Again, I want to point out that $600,000 was already set aside and 
expended for the establishment of the American Samoa Economic 
Development Commission which developed an economic plan based on the 
will of the people. OIA has also already published a report in July 
2006 entitled, ``The Economic and Financial Impact of American Samoa 
Cannery Shutdown on the Territory's Economy, Employment, Public Sector 
and the Federal Budget.'' I ask that this report be placed in the 
record and also all relevant correspondence relating to OIA's decision 
to spend another $150,000 to reinvent the wheel.
    I would also like to request oversight over OIA's use of technical 
assistance grant funds which have paid for the above mentioned 
activities. According to Assistant Secretary Cohen's testimony, ``the 
only funding that can be considered truly discretionary are OIA 
salaries and expenses ($8.2 million) and the Technical Assistance 
activity ($16.1 million), which account for $24.3 million out of the 
total OIA budget of $403.8 million in FY 2008.''
    Since OIA set aside $150,000 in 2007 to develop an economic 
strategy for American Samoa, then I believe Congress has a right to 
know what expert has been identified to develop this strategy. I also 
believe that if we're paying for a strategy we should get a strategy 
and there should be oversight to make sure we don't get another bill.
    Also, if OIA determines that $92,000 should be set aside for a 
study about IRS section 936, then I believe a study is what we should 
get. Instead, we got a bill which was slipped to the Senate Finance and 
Energy Committees. I might also add that the bill went nowhere because 
that is not the way we do business in Congress. In Congress, we 
introduce our bills in the light of day.
    As a complement to federal efforts to develop and diversify 
American Samoa's economy, I remain hopeful that ASG will propose and 
enact local tax reform. I believe the Territorial Tax Exemption Board 
has served its usefulness and ASG now needs to standardize, by law, 
corporate tax rates, exemptions, tax holidays, and capitalization 
requirements so that investors and companies that want to conduct 
business in the Territory will be treated equally under the law.
    On the federal side, I also want to say that the original purpose 
of the possession tax provisions was to enhance the ability of U.S. 
firms operating in the possessions to compete with foreign firms and 
section 936 encouraged our tuna industry to stay in American Samoa. 
However, we cannot be so naive as to think that by resolving the issue 
of section 936 that we have resolved American Samoa's dependency on the 
tuna industry. Nothing could be further from the truth. American 
Samoa's private sector economy continues to be more than 80% dependent, 
either directly or indirectly, on the U.S. tuna fishing and processing 
industries and, even with 30A tax credits in place, we have no 
guarantee that the tuna canneries will stay in American Samoa.
    Our tuna industry faces serious challenges as a result of one free 
trade agreement after another including the Andean and Thailand Free 
Trade agreements. Thailand is already the biggest exporter of tuna in 
the world and even the Andean countries can wipe out American Samoa's 
entire tuna industry. While we have been successful in making sure tuna 
is considered highly import sensitive, we must be successful in keeping 
canned tuna in the longest phase out possible and we must protect our 
albacore base or all of our efforts will be for naught.
    But even if we are successful in these areas, American Samoa cannot 
control world wage rates. For now, a tuna cannery worker in American 
Samoa is paid about $3.60 per hour. In Thailand and the Andean 
countries, cannery workers are paid 60 cents and less per hour. These 
are the realities facing American Samoa. And this is why almost ten 
years ago, Congress established a Secretarial Commission to help 
American Samoa develop a plan to diversify its economy. With its final 
report issued in 2002, I believe it is now time for OIA and ASG to take 
action.
    In November, the American people overwhelmingly voted to take our 
country in a New Direction. As a result, I believe it is our duty to 
make sure all federal agencies, including OIA, operate in a manner that 
is transparent and inclusive. In other words, I believe OIA should be 
obligated to make sure that the Fono has a voice in how federal funds 
from the Department of the Interior are expended in American Samoa and 
it is my intention to also bring these matters to the attention of the 
Subcommittee on Interior Appropriations.
                                 ______
                                 
    [NOTE: An explanatory memorandum dated August 2, 2005, 
submitted for the record by Mr. Faleomavaega has been retained 
in the Committee's official files.]

    [A letter submitted for the record by David B. Cohen, 
Deputy Assistant Secretary for Insular Affairs, follows:]
[GRAPHIC] [TIFF OMITTED] 33609.001


    [NOTE: Attachments to Mr. Cohen's letter have been retained 
in the Committee's official files.]

                                 
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