[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

                             15-YEAR REVIEW 



                               BEFORE THE


                                 OF THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION


                           NOVEMBER 30, 2011


                           Serial No. 112-84

        Printed for the use of the Committee on Foreign Affairs

 Available via the World Wide Web: http://www.foreignaffairs.house.gov/


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                      COMMITTEE ON FOREIGN AFFAIRS

                 ILEANA ROS-LEHTINEN, Florida, Chairman
DAN BURTON, Indiana                  GARY L. ACKERMAN, New York
ELTON GALLEGLY, California           ENI F.H. FALEOMAVAEGA, American 
DANA ROHRABACHER, California             Samoa
DONALD A. MANZULLO, Illinois         DONALD M. PAYNE, New Jersey
EDWARD R. ROYCE, California          BRAD SHERMAN, California
STEVE CHABOT, Ohio                   ELIOT L. ENGEL, New York
RON PAUL, Texas                      GREGORY W. MEEKS, New York
MIKE PENCE, Indiana                  RUSS CARNAHAN, Missouri
JOE WILSON, South Carolina           ALBIO SIRES, New Jersey
CONNIE MACK, Florida                 GERALD E. CONNOLLY, Virginia
JEFF FORTENBERRY, Nebraska           THEODORE E. DEUTCH, Florida
MICHAEL T. McCAUL, Texas             DENNIS CARDOZA, California
TED POE, Texas                       BEN CHANDLER, Kentucky
GUS M. BILIRAKIS, Florida            BRIAN HIGGINS, New York
JEAN SCHMIDT, Ohio                   ALLYSON SCHWARTZ, Pennsylvania
BILL JOHNSON, Ohio                   CHRISTOPHER S. MURPHY, Connecticut
DAVID RIVERA, Florida                FREDERICA WILSON, Florida
MIKE KELLY, Pennsylvania             KAREN BASS, California
TIM GRIFFIN, Arkansas                WILLIAM KEATING, Massachusetts
TOM MARINO, Pennsylvania             DAVID CICILLINE, Rhode Island
JEFF DUNCAN, South Carolina
RENEE ELLMERS, North Carolina
                   Yleem D.S. Poblete, Staff Director
             Richard J. Kessler, Democratic Staff Director

                  Subcommittee on Asia and the Pacific

                 DONALD A. MANZULLO, Illinois, Chairman
RON PAUL, Texas                      ENI F.H. FALEOMAVAEGA, American 
BILL JOHNSON, Ohio                       Samoa
DAN BURTON, Indiana                  FREDERICA WILSON, Florida
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
STEVE CHABOT, Ohio                   BRAD SHERMAN, California
MIKE KELLY, Pennsylvania             GREGORY W. MEEKS, New York
JEFF DUNCAN, South Carolina          DENNIS CARDOZA, California

                            C O N T E N T S



Mr. James L. Loi, Deputy Assistant Secretary, Bureau of East 
  Asian and Pacific Affairs, U.S. Department of State............    14
Mr. Thomas Bussanich, Director of Budget, Office of Insular 
  Affairs, U.S. Department of the Interior.......................    24
Brigadier General Richard L. Simcock, II, Principal Director, 
  South and Southeast Asia, Office of the Deputy Under Secretary 
  of Defense, U.S. Department of Defense.........................    31
Mr. David B. Gootnick, Director, International Affairs and Trade, 
  U.S. Government Accountability Office..........................    38


The Honorable Donald A. Manzullo, a Representative in Congress 
  from the State of Illinois, and chairman, Subcommittee on Asia 
  and the Pacific: Prepared statement............................     3
The Honorable Eni F.H. Faleomavaega, a Representative in Congress 
  from American Samoa: Prepared statement........................     8
Mr. James L. Loi: Prepared statement.............................    16
Mr. Thomas Bussanich: Prepared statement.........................    26
Brigadier General Richard L. Simcock, II: Prepared statement.....    33
Mr. David B. Gootnick: Prepared statement........................    40


Hearing notice...................................................    80
Hearing minutes..................................................    81
The Honorable Dan Burton, a Representative in Congress from the 
  State of Indiana: Prepared statement...........................    82
The Honorable Eni F.H. Faleomavaega, a Representative in Congress 
  from American Samoa: Washington Post article dated November 28, 
  2011...........................................................    83
Brigadier General Richard L. Simcock, II: Map....................    86
Questions submitted for the record by the Honorable Eni F.H. 
  Faleomavaega and written responses from:
  Mr. James L. Loi...............................................    87
  Mr. Thomas Bussanich...........................................    90

                             15-YEAR REVIEW


                      WEDNESDAY, NOVEMBER 30, 2011

                  House of Representatives,
              Subcommittee on Asia and the Pacific,
                              Committee on Foreign Affairs,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:43 a.m., in 
room 2226 Rayburn House Office Building, Hon. Donald A. 
Manzullo (chairman of the subcommittee) presiding.
    Mr. Manzullo. The subcommittee will come to order.
    In 1994, the United States and the Republic of Palau 
established a Compact of Free Association ending 49 years of 
direct American administration of that country and other island 
nations under the auspices of the U.N.'s Trust Territory of the 
Pacific Islands.
    Palau consists of eight main islands and more than 250 
smaller islands, with a total population of approximately 
20,000 people. The Compact with Palau was negotiated in the 
1980s, at the height of the Cold War, with the goal of 
establishing democratic self-governance and economic self-
sufficiency in Palau while preserving strategic control of the 
Western Pacific.
    The original Compact of Free Association was completed in 
1986 but did not enter into force for another 8 years. The 
Compact provided for several types of assistance, including 
direct economic assistance for 15 years to the Palau 
Government; establishment of a trust fund to provide Palau $15 
million in annual payments from 2010 to 2044; infrastructure 
investments; and the provision of Federal services such as 
postal, weather, and aviation. The Government Accounting 
Office, which is represented here today, estimated that Palau 
received a total of $852 million between 1995 and 2009.
    Under the Compact, citizens of Palau are granted 
uninhibited access to reside and work in the United States and 
its territories as ``lawful non-immigrants,'' and eligibility 
to volunteer for service in the U.S. Armed Forces. It should be 
noted that a number of volunteers from Palau have paid the 
ultimate sacrifice in service of our nation, and our hearts and 
thoughts go out to their families.
    Last year, the administration completed a 15-year review of 
the Compact, as required under the terms of the agreement, with 
a total cost of $215 million. The revised agreement does not 
change the fundamental provisions of the original Compact; 
however, it does gradually reduce the financial support 
provided by the U.S. and extends the life of the agreement to 
    More importantly, the revised agreement greatly improves 
the likelihood of the existing trust fund's ability to sustain 
payments through 2044 as originally planned. The revised 
agreement also requires visitors from Palau to have a machine-
readable passport to enter the U.S., and it conditions future 
financial assistance on Palau's progress in achieving key 
economic reforms.
    Just 2 weeks ago, the President announced a dramatic 
expansion of the U.S.-Australia defense relationship in part to 
counter China's rapid development of its military forces. Palau 
is indeed an important friend in the region. It is one of six 
Pacific Island nations to have diplomatic ties with Taiwan, 
rather than China. Palau also consistently supports the U.S. 
and Israel at the United Nations by voting with us over 90 
percent of the time.
    The relationship with Palau has evolved into a strong 
partnership with people who share American values. It is my 
hope that the witnesses today will provide acceptable offsets 
for the funding request that accompanies the revised Compact 
    With our national debt now over $15 trillion, increases in 
expenditures must be justified and offsets found to balance the 
costs. Funding to Palau is no different.
    I thank the witnesses for appearing today. I now recognize 
Ranking Member Faleomavaega for his opening remarks.
    [The prepared statement of Mr. Manzullo follows:]

    Mr. Faleomavaega. Mr. Chairman, thank you for calling this 
hearing. I deeply appreciate again your leadership and your 
efforts in bringing this important issue before the members of 
our subcommittee.
    Thank you for calling the hearing on the 15th Anniversary 
Review of the Compact of Free Association with the Republic of 
    Just as a matter of observation, Mr. Chairman, I have 
followed this matter with Palau as well as with the Federated 
States of Micronesia and with the Republic of the Marshall 
Islands, having served previously as a staff member on the 
Committee on International Affairs.
    An interesting observation, Mr. Chairman, is that 
immediately after World War II, we would just simply grab these 
Micronesian islands and say, ``It is ours,'' and we put a fancy 
term like ``a strategic trust'' of our country. We didn't even 
have to ask permission from the United Nations. We just went 
ahead and took them.
    And in the process, becoming a strategic trust, we 
eventually then placed it before this trusteeship council, 
whereby we eventually worked up a very unique political 
relationship with these three Micronesian entities.
    The Compact of Free Association negotiations actually 
started with the Carter administration and was then continued 
on by the Reagan administration, which granted the islands 
sovereignty but retained military authority for the United 
States and in Palau and gave us some base rights for some 50 
    Programmatic and financial assistance were specified for 15 
years. And bilateral reviews of Palau's needs at the 15, 30, 
and 40th earmarks were required to determine assistance for the 
succeeding periods. Freely associated state citizens were also 
given free access, not only to come to the United States but 
they could also join the military.
    The extent of U.S. military authority in Palau raised 
questions there and at the United Nations. Palau has finally 
approved the Compact a few years after the Federated States of 
Micronesia and the Republic of the Marshall Islands gave 
approval of their own Compacts with our Government.
    The U.N. Security Council in 1994 finally left the 
trusteeship terminated. And this is where we are now.
    The Bush administration negotiated a revised Compact with 
the other two Micronesian entities: FSM and the RMI after their 
first 15-year periods were approved by Congress in the year 
2003, increasing financial assistance to 83 percent in one 
case, and the other one by a 47 percent increase for both FSM 
as well as RMI or the Republic of the Marshall Islands.
    In 2008, before the 15-year mark, the Bush administration 
began the review with Palau to ensure a seamless transition. 
However, there were a number of delays in the review on the 
U.S. side, but it finally produced an agreement that was signed 
15 months ago by the President of Palau and an authorized 
representative of our Government.
    The State Department says this agreement was sent to 
Congress in January of this year but the last I heard, it still 
had not been received by the Speaker's office. So I don't know 
where this document is, Mr. Chairman, but we really need to 
follow up on this.
    At the insistence of the current administration, the 
agreement would provide 62 percent less financial assistance 
than during the first period of free association and would 
phase out these decisions before the next review in Fiscal Year 
2024. This will require cuts in Palau's budget, decrease in its 
revenues, and reduce GDP in the short term.
    This is shortsighted in my opinion, Mr. Chairman, in light 
of the stakes involved. The record will show that the levels of 
assistance are arbitrary and, in my humble opinion, without 
    The agreement would also amend the Compact for U.S. border 
security and revise seven agreement subsidiaries to the Compact 
in response to U.S. requests concerning civil aviation, Weather 
and Postal Service operations, as well as telecommunications. 
The stakes are primarily that Palau gives the U.S. military 
control over our military strategic interests in this part of 
the Pacific.
    The Pentagon had stated for the record that this ``security 
arrangement'' is ``very critical and irreplaceable'' for ``the 
United States in an increasingly contested region.'' Ever since 
we left Suvla Bay and Clark Air Force Base in Guam, the other 
Micronesian islands have now become very, very key and 
important parts of our strategic overall defense system in this 
part of the Pacific.
    I just want to give my colleagues a little sense of where 
Palau is located, Mr. Chairman. I brought a little map here. 
This is Palau. I know it doesn't show it, but it is the same 
size as the State of Texas if we take the dimensions of the 
people, 20,000 population, but this is the capacity in terms of 
their EEZs or their zones that make them as the Republic of 
    This is why these islands are so important, Mr. Chairman, I 
don't know how else to say it but it is very, very critical 
that we not do the things that we are doing, especially in our 
current process of negotiating in good faith. I would hope that 
we are doing this in good faith with the leaders and the people 
of Palau.
    I will come back to the map again when I finish my opening 
statement, Mr. Chairman. And I thank you for this.
    Year after year, the State Department reports that Palau 
votes with the U.S. more than any other country, including on 
issues we are often isolated, such as Israel, Cuba, and even 
the Uyghurs. I am very, very curious to find out where we are 
with the Uyghurs given the effort the President of Palau made, 
despite all of the criticisms that they received on that.
    In my opinion, Palauans have become very Americanized in 
half a century. Despite our relationship with this important 
ally, they are becoming discouraged at the time the review and 
the agreements have taken. A few of the people of Palau and 
their leaders are wondering whether Palau should become more 
independent and benefit from the desires of China and other 
countries that are not necessarily friendly, but are interested 
in this part of the world.
    So yes, you mentioned earlier, Mr. Chairman, that we need 
to look at the offset that seems to be the crucial issue that 
we are going to be discussing here. The fact that this issue 
covers the jurisdictions of three committees, the Foreign 
Affairs Committee, the House Resources Committee, the Armed 
Services Committee, my gosh, you cannot have a more complicated 
issue than this. If it was possible in the 1970s and '80s to 
work out an agreement, the fact of the matter is, it was the 
arguments made by the Department of Defense in the 1970s that 
made these Micronesian entities a very, very critical part of 
our strategic and overall importance to our defense system.
    Mr. Manzullo. You are at 7 minutes.
    Mr. Faleomavaega. I am on 7 minutes already, Mr. Chairman? 
I will wait for my 5 minutes, then. Thank you for giving me a 
couple of more minutes.
    I look forward to hearing from our witnesses this afternoon 
and hope that this hearing will produce some good results. 
Thank you, Mr. Chairman.
    [The prepared statement of Mr. Faleomavaega follows:]

    Mr. Manzullo. Without objection, Mr. Rohrabacher is welcome 
to join the subcommittee.
    Mr. Rohrabacher. Thank you very much. Thank you very much 
for allowing me to sit in on your hearing today. I am here.
    I want to make sure that I express a deep-felt appreciation 
that I have for Palau. My father was a Marine during the second 
world war. And he landed in Palau many times. And the Marines 
paid a very heavy price for these islands. And you might say 
that they implanted the American spirit there. And we should 
never ever take that for granted, that sacrifice and the 
friendship that that sacrifice bought for our country.
    It has been 15 years since we signed, last signed. And it 
is the last element of the Compact of Free Association. And I 
think that the free association has served us well.
    And now that we are entering a time when we face an 
economic crisis in our country and a potential threat and a 
gathering storm with China entering the Pacific in a very, very 
dramatic way, it pays us to maintain that friendship and that 
relationship with Palau, both on economic terms in the long 
run, having such a relationship with the country there in the 
vast Pacific, which I see as a tremendous economic resource as 
well as the expansion of the Chinese military. If we have Palau 
on our side, we are a safer country. So those things taken for 
granted are taken into consideration.
    I think that I appreciate this hearing and hope that we do 
justice by this relationship.
    Mr. Manzullo. Thank you.
    Mr. Sablan?
    Mr. Sablan. Thank you very much, Mr. Chairman and Ranking 
Member Faleomavaega, for the opportunity to join you and other 
members of the subcommittee on Asia and the Pacific in 
assessing the 15-year review of the Compact of Free Association 
with the Republic of Palau.
    The Compact of Free Association with Palau was originally 
negotiated by the Reagan administration because of the 
strategic importance of the western Pacific. The Compact gives 
the United States military control of an area as large as, as 
Congressman Faleomavaega said, the State of Texas. The Pentagon 
says that this security arrangement provides a foundation for 
the United States in an increasingly contested region, allowing 
critical access, influence, and a strategic position.
    The relationship between the United States and the Republic 
of Palau will only grow in importance. Together with our 
partnership with the other freely associated states and in 
conjunction with the U.S. Territory of Guam and the 
Commonwealth of the Northern Mariana Islands, which I 
represent, we have built a network of strategic alignments here 
in the western Pacific. This gives the United States presence 
and position in an area of the world that is more and more a 
center of commerce and a source of economic resource.
    The Compact the Reagan administration negotiated promised 
assistance to Palau for 50 years. It specified programs and 
grants for the first 15 years and required periodic bilateral 
review to assess the relationship and to determine future 
assistance. Talks initiated under President George W. Bush 
produced an agreement which was finally sent to Congress this 
year that phases non-financial assistance during the current 
15-year period. This period ends with Fiscal Year 2024 and 
reduces assistance to Palau by 62 percent.
    This hearing comes at a critical time. Delays in approving 
the agreement negotiated by the Bush administration and the 
proposed cuts in assistance are causing some in Palau to 
question their relationship with the United States.
    The Palauan people are a very patient people, but, as we 
all know, patience sometimes has its limits.
    The present Government of Palau stands firm in wanting to 
maintain these strategic ties, but we in Congress need to be 
aware that other voices are asking whether Palau should be more 
independent and develop relationships with other powers in the 
region. This would be a very dangerous outcome.
    As our Department of Defense has advised, failure to follow 
through on our commitments to Palau, as reflected in the 
agreement under consideration today, would jeopardize our 
defense posture.
    The Natural Resources Committee Subcommittee on Fisheries, 
Wildlife, Oceans, and Insular Affairs, of which I am ranking 
member, shares jurisdiction with respect to the Compact with 
    In addition, the relationship with Palau is very close to 
my heart because the islands that I represent in Congress were 
once part of the United Nations trust territory of the Pacific 
islands, along with Palau. And, to this day, the Northern 
Marianas is home to many citizens of Palau. And, to this day, I 
am the only Micronesian Member of Congress, of which Palau is a 
part of.
    So as someone who knows Palau and the western Pacific and 
understands the history and strategic importance of our region, 
I strongly urge the Subcommittee on Asia and the Pacific to 
approve the agreement now before us.
    Again, thank you, Mr. Chairman, Mr. Faleomavaega, and other 
members of the committee, for the courtesy extended to me in 
allowing me to be part of today's hearing. I look forward to 
the testimony of the witnesses. Thank you.
    Mr. Manzullo. Thank you, Mr. Sablan.
    Mr. Duncan?
    Mr. Duncan. Thank you, Mr. Chairman.
    Reading through some of the opening statements and whatnot, 
in listening to the gentleman's from California comments, it 
sparked something that I am interested in hearing about. And 
that is the fact that some of the detainees from Guantanamo Bay 
have been repatriated here. And I would love to hear how that 
is working out, how those gentlemen are adapting to the 
society. If somebody could just throw that in at some point in 
time during your testimony, it would be great. Thanks.
    Mr. Manzullo. Thank you.
    Our witnesses are James Loi, who became Deputy Assistant 
Secretary for the Bureau of East Asia and Pacific Affairs at 
the U.S. Department of State on July 18, 2011. He is 
responsible for relations with Australia, New Zealand, and the 
Pacific islands.
    Previously, Mr. Loi served as chief of staff and special 
assistant to Dr. Kurt Campbell, Assistant Secretary of State. 
He has also served at the National Security Council as Director 
for Australia, New Zealand, and Pacific Island Affairs and as 
Director for East Asian Economic Affairs.
    Prior to the NSC, he was a visiting fellow with the Freeman 
Chair in China Studies at the Center for Strategic and 
International Studies. From 1986 through 2005, he served in 
various capacities with the U.S. Navy in both enlisted and 
commissioned officer status and on active and reserve duty, 
attaining the rank of Commander.
    Thomas Bussanich is the Director of the Budget and Grants, 
Management Division of the Department of Interior's Office of 
Insular Affairs. His responsibilities include management of the 
Compact of Free Association funding to Palau, the Federated 
States of Micronesia, and the Marshall Islands, and of capital 
improvement programs in the U.S. territories.
    Mr. Bussanich has been involved with U.S.-affiliated 
Pacific islands since 1978 when he served as a Peace Corps 
volunteer in Micronesia. He is a graduate of the University of 
    Brigadier General Richard Simcock currently serves in the 
Office of the Secretary of Defense, Asia and Pacific Security 
Affairs, as the Principal Director of South and Southeast Asia.
    Prior to that, he served as the legislative assistant to 
the Commandant at the U.S. Marine Headquarters. In 2008, 
General Simcock served as the director of the Tactical Training 
and Exercise Control Group in Palms, California after 
relinquishing command of the 6th Marine Regiment.
    In 2003, General Simcock graduated from the top-level 
school at the Naval War College in Newport, Rhode Island, after 
which he reported to the U.S. Marine Corps Headquarters as a 
Congressional Liaison Officer to the U.S. House of 
    He first joined the Marines in 1983 and had a long and 
successful career filling a wide variety of positions on bases 
in California, Florida, Hawaii, Virginia, and Japan.
    David Gootnick has been Director of International Affairs 
and Trade at the Government Accountability Office since 2001. 
His portfolio includes insular affairs, humanitarian aid, 
development assistance, economic assistance, and global health.
    From 1994 through 2001, he served as Director of the Office 
of Medical Services at the U.S. Peace Corps. Prior to that, he 
was a practicing physician and director of the University 
Health Services at New York University.
    We welcome our witnesses. The lights show 5-minutes for 
your testimony. When it turns yellow, you have 1 minute 
remaining. When it turns to red, then you supposedly should 
stop at that point, although I am not going to throw the gavel 
at you.
    We will start with our first witness, Mr. Loi. Thank you 
for coming here.
    Mr. Loi. Thank you, Chairman. I do have a----
    Mr. Manzullo. Please start. All the witnesses' testimonies, 
in written form, will be made part of the record. Eni, this 
includes your complete opening statement, which you didn't have 
a chance to read.
    Mr. Faleomavaega. Thank you, Mr. Chairman.
    Mr. Manzullo. Proceed.


    Mr. Loi. Thank you, Mr. Chairman, Ranking Member 
Faleomavaega, and members of the subcommittee. Thank you for 
the opportunity to appear before you today to discuss the 
Pacific, sometimes the overshadowed second part of Asia-Pacific 
but, nonetheless, an integral part of the administration's 
enhanced focus on and engagement with the Asia-Pacific region.
    The vast stretch of the Pacific and the island countries 
that reside within it are critical to our national security, 
with our close friends and allies like Palau forming a security 
arc that stretches from California to the Philippines, 
safeguarding our interests in the Pacific as well as critical 
sea lines of communication, through which much of our trade 
    Of our many friends and partners in the region, we have 
perhaps none stronger than Palau, a country which paid a dear 
price in blood and treasure to liberate in 1944, a country to 
which we made a solemn promise to help transition from 
trusteeship to independence through our Compact of Free 
Association, and a country which provides us strong support, 
whether that be in regional fora, multilateral institutions 
through the many Palauan sons and daughters that joined the 
U.S. military at per capita rates higher than any U.S. state, 
or through its voluntary actions, such as the decision in 2009 
to accept 6 Guantanamo detainees when few others would step up 
to the plate.
    And perhaps let me just break here and respond to 
Congressman Duncan's question. Sir, from what I understand, a 
number of the Uyghurs have adjusted well to life in Palau with 
one or two perhaps still struggling to find permanent 
employment. I think it is safe to say that most, if not all, of 
them, though, are interested in permanently relocated to a 
third country.
    And I know my colleague Ambassador Fried at the State 
Department is working that. I also know that there is a 
representative from the Palauan Government in Washington this 
week who will be meeting with Ambassador Fried to talk about 
next steps on the detainees. But beyond that, I don't have much 
additional information.
    With respect to foreign policy goals, I think we have two 
critical ones with respect to Palau: Firstly, continuity in 
reinforcement of our full authority and responsibility for the 
security and defense of Palau; and, secondly, ensuring that we 
continue to earn and enjoy Palau's strong support in regional 
and multilateral fora.
    On the first, my colleague General Simcock will speak in 
detail, but suffice it to say that Palau does enjoy, as the 
ranking member Faleomavaega said, a strategic position in the 
western Pacific as part of the so-called Second Island Chain.
    Our Compact of Free Association provides the United States 
the critical right of strategic denial foreclosing access to 
Palau by military forces and personnel of any nation except the 
United States. In light of the evolving security climate in the 
Asia-Pacific, the relatively modest annual cost associated with 
the proposed legislation approving the results of the 15-year 
Compact review are worth this rate of strategic denial alone.
    With respect to the second goal, Palau is amongst our 
strongest supporters in regional and multilateral fora. In the 
former, Palau has been an ardent advocate for enhanced U.S. 
participation and engagement in the Pacific Islands Forum and a 
positive partner as we were to ascend the South Pacific Tuna 
Treaty, an agreement that provides access for the U.S. tuna 
fleet to the rich waters of the South Pacific and which 
supports thousands of tuna industry jobs here in the U.S. and 
American Samoa.
    At the United Nations, Palau's voting confidence with the 
United States is about 90 percent. This compares to 67 percent 
for the United Kingdom, 66 percent for Canada, 49 percent for 
Japan and South Korea. So it is markedly higher.
    Despite enticements from others interested in enhancing 
their engagement in the region, China, Russia, the Arab League 
nations, Palau has not only supported us 100 percent on Israel 
and consistently on human rights in Cuba-related votes but has 
been at the forefront of actively helping us garner the support 
of others.
    My colleague from the Department of the Interior will 
discuss in greater detail the specifics of the Compact and the 
legislation the administration has submitted, but let me just 
state that over two decades ago, the framers of the Compact 
undertook a promise to help this young nation through financial 
and other assistance to achieve self-governance and a 
sustainable economic development path. They were wise in 
recognizing that any plan would require review and its 
necessary adjustments.
    The 15-year review finds us at a point where the goal of 
self-governance is firmly in place but the goal of sustainable 
economic development, while progressing well, remains a work in 
progress and requires additional financial support.
    The tiered nature of the support agreed to in this 15-year 
review is designed to ease Palau off dependence on U.S. direct 
economic assistance and toward that sustainable reliance and 
economic development.
    Importantly, the resulting agreement will require the 
Palauan Government to undertake economic and fiscal reforms. 
And should the United States believe that progress toward such 
reform is adequate, we will be able to withhold assistance.
    In closing, members of the subcommittee, since that bloody 
battle in Peleliu in 1944, the United States has embarked on a 
long road of partnership with the people of Palau, from 
liberation to trusteeship and, finally, to independence.
    The United States and the American people are admired 
around the world for our sense of duty, commitment to the well-
being of others, and integrity in upholding our word. With 
Palau, one can see all three of these threads woven into the 
fabric of our bilateral relationship.
    It was a sense of duty that led thousands of Marines to pay 
the ultimate price in freeing Palau from colonialism and 
occupation. It was a commitment to Palau's future that led us 
to help Palau transition from trusteeship to independence. And 
it is our integrity that has driven us and must drive us to 
uphold our commitment.
    The implementation of the results of the Compact review 
will help ensure that our hard-fought investments in this young 
country achieve their intended returns. Importantly, as the 
generation for which the second world war was a defining 
experience passes and other emerging powers seek to increase 
their influence in the region, passage of this legislation will 
send a reassuring signal to others that the United States is 
and will be engaged and remains a faithful friend and ally 
through both good and challenging times.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Mr. Loi follows:]

    Mr. Manzullo. Thank you.
    Mr. Bussanich?
    Mr. Bussanich. Thank you, Mr. Chairman.


    Mr. Bussanich. Chairman Manzullo and members of the 
subcommittee, thank you. I am pleased to be here today to 
discuss the agreement between the United States and Palau 
following the Compact of Free Association section 432 review. 
My statement today will focus on financial assistance for 
    The Compact of Free Association has proven to be a very 
successful framework for United States-Palau relations. The 
goals of the first 15 years of the Compact have been met: The 
trusteeship was terminated; Palau's self-government was 
restored; a stable democratic state was established; third 
countries were denied military influence in the region; and the 
United States financial assistance provided a base for economic 
    The United States, through the Department of the Interior, 
has provided $600 million in assistance to Palau, including 
$149 million for a road system, in the capitalization of the 
Compact trust fund.
    The Compact trust fund was an important feature of U.S. 
assistance. Capitalized at $70 million, the objective was to 
produce $15 million annually as revenue for Palau's Government 
operations from 2010 through 2044.
    Palau has made economic gains under the Compact of Free 
Association. Its growth, in real terms, has averaged just over 
2 percent per year. Palau's governmental services are meeting 
the needs of its community. And the country has taken control 
of its destiny and is moving in the right direction.
    As the United States and Palau began the section 432 
review, both countries agreed that prospects for economic 
growth relied on four key factors: The viability of the trust 
fund to return $15 million a year; the implementation of fiscal 
reform; increased foreign investment and private sector growth; 
and, the continuation of some United States assistance and 
domestic programs.
    For the United States, the viability of the Compact trust 
fund was of paramount concern. As the 15-year review began, 
Palau's trust fund, which had earned roughly 9 percent annually 
since its inception, had suffered significant losses. As GAO 
reported in 2008, it was uncertain that the trust fund could 
meet its goal of providing $15 million annually through 2044.
    The condition of the trust fund, fiscal and economic 
reforms, and private sector growth became the focus of the 
bilateral review. The agreement that arose from the 15-year 
review will address these concerns, maintain stability, and 
promote economic growth.
    The agreement extends United States assistance, in 
declining annual amounts, through Fiscal Year 2024. The total 
of direct financial assistance to Palau under the agreement is 
over $200 million. The declining amount of assistance is 
intended to provide an incentive for Palau to develop other 
sources of revenue and serves notice that the Palau has agreed 
to make systemic adjustments to its government.
    The agreement contains five categories of financial 
assistance: First, direct economic assistance for education, 
health, public safety, and justice in amounts starting at $13 
million, declining to $2 million, the last payment, in 2023. 
The timing of payments is conditioned on Palau's making certain 
fiscal reforms.
    Second, infrastructure projects are provided in the amount 
of $40 million spread over 6 years.
    Third, the agreement creates an infrastructure maintenance 
fund using annual grants of $2 million to protect crucial 
United States investments in Palau that significantly 
contribute to economic development. Palau will contribute 
matching funds of $150,000 annually to this fund.
    Fourth, a fiscal consolidation fund of $10 million to help 
Palau reduce its debt. The United States creditors must receive 
first priority.
    Fifth, the trust fund. The agreement aims to bolster the 
viability of the trust fund to yield payments of up to $15 
million annually through 2044. The United States will 
contribute $3 million from 2013 through 2022 and contribute 
$250,000 in 2023.
    Palau will delay withdrawals from the fund, drawing only $5 
million annually through 2013, and gradually increasing 
withdrawals to $13 million in 2023. From 2024 through 2044, 
Palau is expected to withdraw up to $15 million annually, as 
originally scheduled.
    Withdrawals from the trust fund may only be used for 
education, health, and administration of justice and public 
    The United States and Palau will work cooperatively on 
economic, financial, and management reforms. Palau will be 
judged on the elimination of operating deficits, reductions in 
its annual budgets, reducing the number of government 
employees, implementing meaningful tax reform, and reducing 
subsidies to public utilities. If the United States has 
determined that Palau has not made significant progress on 
reforms, the United States may delay payment of economic 
    The Palau Compact legislative proposal does have PAYGO 
costs. These costs are included in the President's budget along 
with a number of legislative proposals with PAYGO savings. The 
offset proposals include: Net receipt sharing, termination of 
payments for reclaiming abandoned coal mines, and production 
incentives, fees on non-producing Federal oil and gas leases.
    The administration looks forward to continuing our 
partnership with Palau. The Department of the Interior is proud 
of the positive advancements our assistance to Palau has 
provided over the last 15 years and looks forward to the 
progress that we anticipate will be made over the next 15 
    Thank you.
    [The prepared statement of Mr. Bussanich follows:]

    Mr. Manzullo. Thank you.
    General Simcock?


    General Simcock. Chairman Manzullo, Congressman 
Faleomavaega, other members of the subcommittee, thank you for 
the opportunity to talk with you today.
    It is obvious from the comments I have heard already that 
there is an in-depth knowledge about Palau today. I think with 
a lot of stories, it is difficult to start a book in a middle 
chapter. And there is a history of Palau from a security 
perspective that I would like to talk about just a little bit 
today, if I may.
    Sir, I also brought a map with me using technology you can 
see on that one. If I could ask you to think about today. Let's 
say today is 30 November 1940. And I am talking to Members of 
Congress about Palau. I feel pretty confident that none of the 
members would know where Palau is. I wouldn't have the benefit 
of having two Pacific island nation representatives here.
    So, even if I brought a map and pointed it to it, most of 
the members would say, ``General, so what?'' I would basically 
be told, ``Thank you for your interest in national defense. We 
here on Capitol Hill have more pressing issues. In 1940 fiscal 
considerations at that time are more important. Please go back 
to the Pentagon and do what you do.''
    Now, gentlemen, if I can roll the clock forward to 7 
December 1941 and the attack, the empire Japan on Pearl Harbor. 
All of a sudden, we started paying attention to the Pacific 
region. And we watched Japan occupy large areas within the 
Pacific region. Islands that we had never heard of were all of 
a sudden were on headlines throughout papers throughout this 
    Now I ask you to roll the clock forward one more time to 
September 1944, when the United States paid the price of 10,000 
casualties, U.S. Marines and sailors, to liberate Peleliu, 
modern-day Palau, from the empire of Japan. Everyone knew where 
Peleliu was at that time.
    The strategy that the empire Japan had at that time was to 
cripple our fleet and to set up a defense-in-depth for the 
purpose of securing resources, resources that Japan did not 
have and could not get through peaceful means. So they took by 
force. The empire of Japan misread the United States in our 
will to fight through that defense-in-depth and liberate those 
islands and actually defeat the aggression of Japan.
    Now, Mark Twain said that history doesn't repeat, but it 
certainly rhymes. I ask you now to roll the clock forward to 30 
November this year and why is Palau important.
    The map behind me depicts two island chains. The first 
island chain is the island chain closest to mainland Asia. 
Second island chain is the one moving eastward, further out in 
the Pacific. Palau is part of that second island chain.
    Today China is securing resources around the globe. And I 
know you members are very familiar with that. But the physical 
characteristics of the Pacific Ocean have not changed. It will 
be used by China the same way that the Japanese used it 60 
years ago, as a way to bring resources back to the homeland. 
And China is very concerned about that.
    The map behind me was not produced at the Pentagon. That is 
not my map. That map was produced in China by an organization I 
can loosely affiliate to a think tank.
    What the Chinese are concerned about when they look at the 
map, are those island chains and a defense-in-depth, if you 
will, in reverse because they look at those lines are ways of 
stopping them from getting the resources around the world that 
they are purchasing today back to mainland China. And they are 
very, very concerned about that.
    So when I talk to the defense attache from China, he talks 
to me about Cold War strategies and strategies of containment 
that our country is trying to do to their country. And it is an 
issue that he brings up with me on a daily basis when I see 
    So I would say to you that when you look at Palau and the 
strategic importance from a security aspect, I think you can 
use the strategy of 60 years ago. And it is very applicable 
today in what one of the countries in the region is trying to 
    And the last thing I would just say, sir--and that is to 
Congressman Rohrabacher and your father--when we liberated 
Palau, as I said, it was 10,000 Marines and sailors. Jim Loi 
and I were there about 4 or 5 months ago. And you talk about, 
sir, a homecoming. And it wasn't because it was Rich Simcock. 
It was because a U.S. Marine was coming to Palau. And you want 
to talk about being treated like royalty, very similar to what 
the chairman talked about with the Ambassador from South Korea.
    I have never had to be on the receiving end of being 
liberated from occupation, but the South Koreans understand it. 
And I am here to tell you, sir, that the Palauans understand 
it. And they pay off that type of response to our nation. 
Approximately 500 Palauans serve in the military today. That is 
how they say thank you. So there is tremendous strategic 
importance to Palau.
    Gentlemen, I look forward to your questions. Thank you.
    [The prepared statement of General Simcock follows:]

    Mr. Manzullo. Thank you, General.
    Mr. Gootnick?
    Mr. Gootnick. Thank you, Mr. Chairman.


    Mr. Gootnick. It is a remarkable parable that Brigadier 
General Simcock has put forward. I am going to return to some 
of the much more mundane aspects of the economic provisions 
under the Compact. And thank you for asking GAO to participate 
in this hearing.
    As has been stated, the 1994 Compact provided 15 years of 
economic assistance; established the trust fund; built the 
Compact road; provided for postal, weather, and aviation; and, 
importantly, established the basis for discretionary U.S. 
Federal programs, including Head Start, Community Health 
Centers, Pell grants, airport improvements, Special Education, 
and numerous others.
    Taken together, Compact and U.S. program assistance is 
valued at more than $850 million, of which U.S. program 
assistance was nearly a third.
    My statement, which I will briefly summarize, describes 
first the economic provisions of the agreement; second, the 
impact of the agreement on Palau's trust fund; and, third 
projected Palau Government revenues under the agreement.
    First, as Mr. Bussanich has well-covered and well-stated, 
the agreement would provide $215 million in assistance, with a 
steady annual decrement from roughly $28 million in 2011 to $2 
million in 2024. If you have the graphic in the GAO testimony 
statement, the cover page or page 11 has a nice display and 
shows you that annual decrement.
    It shows that $107 million, roughly half of this 
assistance, would support government operations and that the 
agreement also provides $40 million for infrastructure 
projects, $28 million in the maintenance fund, $10 million to 
debt relief, and adds $30 million to the trust fund. And, 
importantly, the agreement extends postal, weather, and 
aviation, and the authority to continue discretionary Federal 
    The agreement puts certain conditions on the $215 million 
package. For example, economic assistance is directed to 
specific sectors, such as health, education, and public safety. 
Also, an advisory group would be appointed and tasked to make 
recommendations for fiscal and management reforms. And the U.S. 
may delay funding conditioned on the progress of reforms.
    For the infrastructure funds, a project must have a land 
title and a certified scope of work to get funding and the 
maintenance funds primarily for U.S.-financed projects, in 
particular the Compact road and the international airport.
    Debt relief prioritizes U.S. creditors, requires U.S. 
concurrence on debts to be paid.
    Second, regarding the trust fund, the proposed U.S. 
contributions and the $89 million delay in scheduled 
withdrawals would markedly improve the fund's prospects. In 
2009, we reported that the trust fund would require an annual 
return above 10 percent to yield its proposed schedule through 
2044. However, under the agreement, as of the end of Fiscal 
Year '11, the trust fund would need only 5.5 percent return to 
yield its new scheduled withdrawals. And this is well below the 
7.4 percent it has earned to date.
    Lastly, Mr. Chairman, to offset the steady decline in 
budget support through 2024, estimates prepared for the 
Government of Palau project a growing reliance on trust fund 
withdrawals and domestic revenue as well as steady access to 
U.S. Federal programs. Specifically, the estimates project a 
steep rise in domestic revenue from roughly 40 to nearly 60 
percent of total government revenues by 2024.
    And the estimates project that discretionary Federal 
programs will grow at roughly the rate of inflation. And they 
are projected at half of all U.S. assistance over the next 15 
    As you know, Mr. Chairman, unlike other components of this 
agreement, these programs, U.S. Federal programs, depend on 
annual appropriations.
    In summary, the economic provisions of the agreement extend 
and gradually reduce Compact assistance through 2024, establish 
new conditions for the use of U.S. funds, and reset the trust 
fund to significantly improve its long-term prospects. Palau 
has employed projections of its long-term fiscal condition that 
rely on increased domestic revenue and the continuation of U.S. 
Federal programs.
    This completes my remarks. I am happy to answer any 
    [The prepared statement of Mr. Gootnick follows:]

    Mr. Manzullo. Thank you so much.
    Mr. Faleomavaega, you are recognized for 5 minutes.
    Mr. Faleomavaega. Thank you, Mr. Chairman.
    I want to thank the members of the panel for their most 
eloquent statements. I would like to pose some questions that 
hopefully will give us a little better understanding of the 
situation that we currently face concerning Palau.
    Correct me if I am wrong on this because it seems that the 
basis that we dealt with these island entities immediately 
following the second world war, given the fact that there was 
no question about the importance of these islands when we 
entered in the war against Japan, when they invaded us in 1941.
    I do want to thank General Simcock for his testimony 
because it appears to me that we have three agencies involved. 
We have the Interior Department, the State Department and the 
Defense Department, all involved in some way or another not 
only with the administration but also have political ties with 
the Republic of Palau.
    And let me ask General Simcock, would it be fair to say our 
number one priority and the very reason why we have this 
relationship with the island entities is because of our 
strategic and military interest in this part of the world. 
Could that be considered the number one reason why we are 
    Put it another way. Is Palau important as part of our 
overall strategic importance in this part of the Pacific? 
Because here is another problem I am faced with, General. There 
is no way you can talk about Palau without discussing the 
Federated States of Micronesia, without discussing the Republic 
of the Marshall Islands, why we conducted 67 nuclear test bombs 
that we dropped in those island entities and the fact that Guam 
is now about a $40 billion military presence there in terms of 
its importance strategically when we look at Asia, if that is 
where the potential danger is posed and, of course, the 
Northern Mariana Islands. My good friend Mr. Sablan represents 
that important island group.
    General Simcock, is it fair for me to say that this is the 
very reason why we are there in the first place, because Palau 
is a very important part of our overall strategic military 
interest in this part of the Pacific? We are the size of Texas, 
even though 20,000 people there are scattered all over the 
    General Simcock. Congressman Faleomavaega, you are 
absolutely right. The quick answer to your question, yes. I 
would just expand on one more point. And I would just say that 
it always starts with security. Everything builds from 
security. If you don't have security, all of the other 
interests, be they economic, diplomatic, whichever you want to 
talk about, sir, they go away. But you are absolutely right. 
But today the scope is narrow on Palau, but Asia-Pacific region 
is very, very vast.
    Mr. Faleomavaega. I want to also note as a matter of 
interest--and correct me, General, if I am wrong on this--I 
read the summary reports that we currently have 700 military 
installations in and outside the United States. When I asked 
how many military bases does China have outside of China, the 
response I got was zero. Is that correct? We currently have 
well over 700 military installations in and outside the United 
States currently right now?
    General Simcock. Sir, I don't know the exact figure.
    Mr. Faleomavaega. Can you provide that for the record?
    General Simcock. Yes, sir.
    Mr. Faleomavaega. It is a very interesting situation. We 
currently have a $700 billion budget to defend our country for 
1 year, provide enough resources for our Navy, Army, Air Force 
for 1 year's time schedule?
    Would it be correct also for me to say that if there is any 
agency that should be part of the overall providing the 
necessary resources that we deal with, Palau should also be 
with the Department of Defense?
    Here is a problem that I am faced with. The State 
Department does the negotiations. Defense Department says it is 
very critical to our needs for national survival. Yet, the 
results of the negotiations totally does not match in terms of 
the importance of Palau.
    And, yet, the essence of what we are giving Palau, a 62 
percent decrease in funding. It just blows my mind. And, yet, 
in negotiations, renegotiations of the two contacts with the 
Republic of the Marshall Islands and the Federated States of 
Micronesia, the increases are 47 percent for one and 63 percent 
for the other. And we are decreasing Palau's needs by 62 
    Maybe Mr. Loi can help us with this. Can you give us a 
sense of why the discrepancy or is this a discrepancy on my 
part? Please correct me on that.
    Mr. Loi. Congressman, I am not--I don't know the specifics 
of the discrepancy. I mean, all I can say is this agreement was 
reached between two sovereign countries, negotiators agreeing 
on the specifics. You know, I was not in this position when the 
review agreement was----
    Mr. Faleomavaega. Mr. Secretary, I fully understand that 
and I don't want to blame you for this. Could you provide for 
the record why we had this problem?
    Here is another problem I would like to add on to my----
    Mr. Manzullo. You are at 6 minutes now. We can come back.
    Mr. Faleomavaega. Okay. I will wait for the second round. I 
am sorry. Thank you, Mr. Chairman.
    Mr. Manzullo. Do you have questions, Mr. Duncan?
    Mr. Duncan. According to Wikianswers, there are 761 U.S. 
military bases around the world, 156 countries.
    Anyway, recently I was in the Philippines. And we were 
talking with Filipinos about China's extension of their 
territorial waters and the Spratly Islands actively staking 
claim to some areas that historically were areas claimed by the 
Philippines. And so we see this growing extension of China into 
these waters. So, General, I know that the U.S. Coast Guard 
plays a role in patrolling the waters in and around Palau.
    Given this growing assertion, assertiveness of China within 
the Pacific theatre and really around the world when you get 
right down to it with them gobbling up control of resources, 
are we planning on increasing U.S. naval presence in and around 
the waters around Palau? I mean, what is our plan there to 
combat this?
    General Simcock. Sir, thank you for the question. Again the 
quick answer is yes. I mean, our national leadership has stated 
the vital interest within this region to the United States. As 
such, we are taking appropriate plans and actions to use our 
military to support U.S. interests in that region.
    In fact, the chairman mentioned in his statement we have 
concluded agreements with Australia to have rotational forces 
go through Australia. It is an increase, if you will, of forces 
in the region of southeast Asia conducting a rotational 
presence, training within that area.
    So, sir, yes, the quick answer is we are taking actions to 
increase military presence and commitment to the region.
    Mr. Duncan. Getting back to the U.S. military presence 
around the world, I am fine with that. Protect American 
national interests, wherever they may be. A lot of the 
countries have asked the United States to station military 
personnel there. So I personally don't have a problem with any 
of that.
    For my second question, given the difficulties in 
implementing the 2006 base realignment agreement with Japan to 
relocate the U.S. Marine Air Base from Okinawa to Guam, is 
Palau being considered as a potential location for that or any 
other resources, to your knowledge?
    General Simcock. To my knowledge, sir, not in the way that 
you posed the question that it would be directly tied to Guam 
or any other area. The answer would more accurately I think be 
that we are looking at all possibilities to increase engagement 
and to have ways to facilitate the commitment and presence 
within the region.
    Mr. Duncan. I have no further questions.
    Mr. Manzullo. Mr. Sablan?
    Mr. Sablan. Thank you very much, Mr. Chairman.
    I also would like to say thank you to the witnesses for, 
you know your testimonies and providing insight into the issue 
before us. I would like to think that sometimes, you know, like 
any business, for example, banks, they spend a fortune trying 
to bring in new customers. And then once they capture the 
customer, they charge a $5 monthly fee and lose that customer 
after they spent a fortune. It looks like this is something 
that we are headed here to.
    I have not heard anyone put any less importance to the 
relationship between the United States and Palau. It has been 
critical for what I hear.
    I also understand that the only impediment to approval of 
this agreement that any Member of Congress, from what I 
understand, has had the need for an offset of the relatively 
minor cost, now less than $184 million over 10 years because of 
appropriations to date.
    The administration has suggested offset proposals that the 
bipartisan leaders of the House and Senate Natural Resources 
Committees say it will not pass their committees. While one 
offset has shown to have support in Congress, the others, and 
this one included, seem to be standing at a stalemate.
    Either Mr. Loi or Mr. Bussanich, will the administration 
propose an offset that is more viable legislatively?
    Mr. Bussanich. Well, sir, I have to say that the offsets 
that have been proposed by the administration, the three that I 
mentioned have been vetted through the Department of the 
Interior and the Office of Management and Budget and are 
included in the overall budget of the President.
    So at this time, this is the recommendation of the 
administration to look at, particularly, these three elements, 
which are the abandoned mine land payments, the fee on non-
producing leases, and the net revenue receipt sharing on 
    But the position of Congress, as you have just related to 
me, is something that we will make aware, pass back up the 
chain as we discuss this. Certainly this is the proposal that 
is on the table at this point from the administration's point 
of view.
    Mr. Sablan. So there is a possibility of a more viable, 
much acceptable offsets?
    Mr. Bussanich. Well, all I can say, sir, is that the 
administration is firm in its support of this agreement and the 
continuation of the relationship with Palau.
    Mr. Sablan. Thank you.
    General Simcock, thank you very much for your testimony. 
Thank you for your service to our country through the Marines. 
That also liberated the Northern Marinas Saipan particularly.
    I appreciate your insight, sir, into the national defense 
perspective and why this agreement is important for the United 
States. You mentioned in your testimony Palau forms a part of 
that security zone under the exclusive U.S. control. That 
expands the second sort of like border or boundary. That 
includes the Northern Marianas and Guam.
    So can you give me a better understanding of the role Palau 
plays in the security of the Asia-Pacific in relation to the 
other islands, such as the Northern Marianas, that chain?
    General Simcock. Yes, sir. I think when you are trying to 
single out Palau, Palau is important, absolutely, but it plays 
a part of the overall regional perspective. And I would say to 
you that other locations are also important, but the map that I 
showed you, sir, again, that was not my map. That is another 
country's map and the way that they are looking at from their 
perspective U.S. presence in the region.
    And I think that their position is we have a strong 
position within the Pacific. And it is a strong position 
militarily we need to maintain.
    Mr. Sablan. So in their perspective, Palau is part of that 
chain that goes up to Guam and Northern Marinas, all the way up 
to Okinawa or Iwo Jima, for example?
    General Simcock. Yes, sir.
    Mr. Sablan. All right. So are you planning on increasing 
the U.S. naval engagements in the waters of Palau?
    General Simcock. Sir, we don't have plans to do that.
    Mr. Sablan. So how does this impact the defense strategy in 
relation to the rest of the islands?
    General Simcock. An example, sir, part of our training 
Pacific partnership, we have ship visits to Palau. We have 
small detachments of military personnel that provide 
engineering support on Palau. The relationships and the 
engagement that we conduct on Palau maintains that relationship 
so that we don't lose the position of strength that we enjoy in 
the Pacific today.
    Mr. Sablan. All right. Mr. Gootnick, I just want, Sir, to 
take this moment to thank you for the many things you do for us 
in the Northern Marianas and other parts of Micronesia. Thank 
you very much.
    I yield for now, Mr. Chairman.
    Mr. Manzullo. Thank you.
    Mr. Kelly?
    Mr. Kelly. Thank you, Chairman.
    And to all of the panel, thank you for being here. General, 
I was particularly interested in your comments. I can remember 
years ago listening to a tape of General MacArthur's address to 
a joint session of Congress in April 1951. And I had asked Mr. 
Fong to get me some of that information.
    Let me just read back to you because you referenced people 
who don't study history. In that address, General MacArthur, 
when he talked about the island chain and talked about our 
Westernmost defense, said,

        ``A vast moat to protect us as long as we hold it . . . 
        [a] protective shield for all of the Americas and all 
        of the free lands of the Pacific Ocean area, a chain of 
        islands extending in an arc from the Aleutians to the 
        Marianas held by us and our free allies, from this 
        island chain, we can . . . prevent any hostile movement 
        into the Pacific.''

    And not to belabor this, but there is an old saying that an 
ounce of prevention is worth a pound of cure. We seem to 
always--when a war threat is over, we down-throttle. Then, all 
of a sudden, we have to traject way up again.
    If you can, if you can articulate because I think it is so 
critical that people understand, when I look at that, that 
chain of islands, the strategic importance to us as a nation 
and to our allies in the Pacific as we look into the future, 
the People's Republic of China and Arab states in Palau. So if 
we were to vacate that, if we were no longer to have our strong 
presence there, if we were to go away from what General 
MacArthur told us based on history, loss of life, wealth, and 
everything that we have invested in that area, long range, 
strategically from a defense standpoint, this is critical for 
us to maintain that presence, is it not?
    General Simcock. Congressman Kelly, you put me in a 
difficult position when you start comparing me to General 
MacArthur, probably one of the----[Laughter.]
    Mr. Kelly. Well, it is history.
    General Simcock [continuing]. Finest military minds that 
our nation has produced, sir.
    Can I put it in these terms?
    Mr. Kelly. Absolutely.
    General Simcock. Sir, I am in violent agreement with you. 
Everything that you just said is absolutely true. I am a 
product of the all-volunteer force. And one of the reasons the 
all-volunteer force was developed was so we wouldn't have to go 
through the cycle, sir, that you talk about, the deep downturns 
in defense, because post-war draw-downs and then just as the 
clock moved along be put into a position where we had to build 
back up again.
    So the all-volunteer force has done, arguably, a very good 
job of maintaining a very capable and credible military 
worldwide. If you narrow it down, sir, to the region that we 
are talking about, the argument is still the same. And, as I 
said to Congressman Sablan, we are in a good position now. And 
it is not a position that we want to relegate to anyone else. 
That's about as best as I can put it, sir.
    Mr. Kelly. And I appreciate that. I listened to that tape 
several times over and over and over again. And I keep thinking 
to myself as I go back. We just don't remember. Our memory 
falls short of what has happened to us before. And it kind of 
ensures the fact that we can lose it again in the future 
because of our refusal to believe what has happened in the 
past. And we keep backburnering these things.
    And I know the dollars are critical. I understand that. But 
my greatest fear is that we continue to believe that these 
threats don't exist. That is the part that bothers me.
    I really believe that we have lulled ourselves into 
believing that we are truly safe and we don't need to keep up a 
stronger front. But that western border extends far beyond 
California and the Western states. It goes way out beyond 
Hawaii, beyond the Aleutians. And that is where that island 
chain is so critical for us in defense as it goes forward.
    And I do know the People's Republic of China has great 
plans. Being a person who has been to Korea many times in the 
southern part of the peninsula, I again understand you are 
talking about the people from Palau when you stepped there. The 
Koreans are so thankful for our commitment in freeing them in 
1949 and 1950. So I'm with you on it.
    So thank you so much for your service. And all members of 
the panel, thank you so much for being here today. Thank you. 
Thank you, Mr. Chairman.
    Mr. Manzullo. Mr. Kelly, Mr. Loi has retired as a Commander 
in the Navy. He might feel slighted if you don't ask him that 
same question. [Laughter.]
    Mr. Kelly. I don't want to slight anybody that has 
performed a service for our country, but I just thought with 
the General sitting here today. And I am going to try to find 
that CD because if anybody has listened to General MacArthur's 
treatise on that and what he saw coming in the future--and his 
warning was, his fear was, that we would forget what we had 
just been through because time has a way of insulating us from 
the pain. And that is the problem that I see happening right 
now. We have to really be aware of how much pain that caused 
then and it can cause again if we don't keep our guard up. So 
thank you.
    And if I offended anybody who served before, I certainly 
did not mean to do that.
    Mr. Manzullo. I just wondered if Commander Loi wants to 
weigh in on it.
    Mr. Kelly. Would you, Commander?
    Mr. Loi. Congressman, I think the only thing I would add 
is, like the General, I violently agree with you. And I think I 
am happy to say that I think the administration understands 
that. If you read the Secretary's speech, Secretary Clinton's 
speech, that she gave in Hawaii a couple of weeks ago in the 
piece that she published in Foreign Policy talking about the 
pivot as we draw down from Afghanistan and Iraq, that the 
question that faces us is, do we do what we have done in the 
past after tragic campaigns and withdraw home and kind of tend 
to our domestic issues, which obviously are important, or do we 
pivot? Do we pivot to the region that is going to shape the 
history of this century beyond, and that is the Asia-Pacific?
    And so what we are very focused on--and it is not just the 
State Department. It is also other agencies at the table. It 
is, how do we pivot? How do we make sure that we don't do what 
we have done in the past and that we build up our presence, our 
engagements in the Asia-Pacific? And that is what we are trying 
to do? And that is why, you know, this agreement is important.
    Mr. Kelly. And I appreciate that. And I think it is so 
important. I think that one of the things that I have learned 
is that sometimes our allies start to wonder about where we 
are, when we are with them really strong for a while, and then 
we disappear. Geopolitically, we face a great deal of loss 
    I know in Korea, the southern part of the peninsula, it was 
great geopolitical consequences. And the course was very 
critical for us to get established for the people of Korea, 
southern Korea, to understand that we are still on board with 
them and how important they are to us in a geopolitical and 
from a defense strategy. So thank you again.
    Mr. Manzullo. Thank you, Mr. Kelly.
    The problem here is not the fact that Congress does not 
understand the strategic----
    Mr. Faleomavaega. Will the chairman yield? I just wanted to 
compliment Mr. Kelly for his keen insights and observation 
about this issue because I have been here 23 years now as a 
member of this committee and I have been saying the Pacific has 
been totally neglected by Washington for all of these years. 
And saying this with all sincerity, we keep saying it is very, 
very important. But we just don't match it with actually giving 
the proper resources that we need to do this with.
    But I want to compliment you, sir, for your observation----
    Mr. Loi. Thank you.
    Mr. Faleomavaega [continuing]. On what is happening here in 
the Pacific. And I thank the chairman for this.
    Mr. Manzullo. Okay. The problem is money. That is the 
problem with this entire city in these budgetary times.
    My question is technical, Mr. Bussanich. The offsets that 
you have listed on page 5 come out of the Interior budget. Is 
that correct?
    Mr. Bussanich. That is correct, sir.
    Mr. Manzullo. Is it necessary for the offsets to come out 
of the Interior budget or can they come out of other budgets?
    Mr. Bussanich. Well, sir, this issue has certainly been 
considered by the administration. And I think by the virtue of 
history and the relationship that the Interior Department has 
had with all the Pacific islands and the fact that it has been 
essentially the lead agency in the Micronesian region, 
including for Guam and the Northern Marianas. It has been the 
lead agency since the '50s, that that funding relationship is 
and remains appropriate.
    Mr. Manzullo. But, there are three committees of 
jurisdiction. There is State, which is well-known for wasting a 
lot of money; and Defense, which has a lot of issues as well. 
The Interior budget is a lot smaller--isn't that correct?--than 
the other two?
    Mr. Bussanich. Yes, sir.
    Mr. Manzullo. Maybe, Mr. Gootnick, you can help us on the 
technicalities of this. I mean, we really want to get this 
thing done. As I said, Congress is in agreement that Palau is 
extraordinarily important and the resources have to be there, 
but the issue is from--Mr. Gootnick, can you help us? Do you 
understand my question?
    Mr. Gootnick. Mr. Chairman, I have always had a persnickety 
relationship with cutting-edge technology.
    Mr. Manzullo. But you are a physician, so you should be 
able to figure that out.
    Mr. Gootnick. I can't speak directly to the offsets. It is 
my general understanding that the offset requirement really 
relates to a current rule of budgeting and the Congress.
    Mr. Manzullo. Okay.
    Mr. Gootnick. And so there would be flexibility to obtain 
the offsets wherever you rationally find them.
    Mr. Manzullo. So is it your understanding that if Congress 
wanted to, it could try to find the offsets in areas besides 
    Mr. Gootnick. Well, it would be good to get concurrence 
from my colleagues at the table, but that is my understanding.
    Mr. Manzullo. Well, it could be a legal issue and none of 
us has the exact answer at this point. It is something that we 
can explore unless anybody is comfortable in trying to answer 
    The other question is the--I tell you what. Eni, why don't 
you go ahead and I will just yield my time to you.
    Mr. Faleomavaega. Thank you, Mr. Chairman.
    I once read somewhere in the Bible, it says that if I were 
to talk between--well, anyway, it talks about Moses, you know, 
freeing the Israelites from the bondage from Pharaoh and it 
takes only 2 weeks to walk from Egypt to go to the Promised 
Land, where Israel is now located. But, in essence, it took the 
Israelites 40 years to finally get to the Promised Land.
    I want to ask Secretary Loi because I am a little fuzzy 
about this. The administration claims that you sent the 
agreement to Congress in January of this year. However, we 
contacted the Speaker's office, and they never received the 
    Please, this is not putting you on the spot, Mr. Secretary 
Loi but can you follow up on this and find out exactly where 
this agreement is between the White House and also here at the 
Speaker's office? Where is the agreement? Now, this was in 
January. This is almost 12 months.
    Mr. Loi. Sir, I mean, I can update you.
    Mr. Faleomavaega. Can you?
    Mr. Loi. Well, the Speaker's office has acknowledged 
receipt. In fact, they acknowledged receipt in January and told 
us that it had been sent to the committee in February. We 
confirmed that again yesterday. So I don't know----
    Mr. Faleomavaega. Okay.
    Mr. Loi [continuing]. Where the report is coming from, but 
at least what we are being told by the Speaker's office is that 
they did acknowledge receipt.
    Mr. Faleomavaega. Okay. I have a couple of laundry list 
items I would like for you, Secretary Loi, if you could follow 
up on this, I really would appreciate it. Again, you are not at 
all at fault for what has happened because you just came on 
board a couple of months ago so I fully understand your 
    The cost of conducting audits, for which this continues 
with the renegotiating of the two Compacts with the Marshall 
Islands and also with the Federated States of Micronesia, you 
rejected this to continue with Palau. That is one issue.
    The other issue is also dealing with the FCC requirements 
dealing with fiber optics, with which Palau really would like 
to work, for which was granted also to the Marshall Islands and 
the Federated States of Micronesia. And this again was rejected 
for Palau's needs. And then also the question of the postal 
service, the rates for domestic means of Palau. And this again 
is somewhat of a fuzzy situation YAD. This issue was done also 
by some way reconciling in the way that FSM and RMI also be 
given the same benefit in the uses of the postal service.
    And there is also the question of the excessive inflation 
if there is, tell me the time when something happens, that this 
kicks in and somehow we can work this thing out. Here again 
this is another issue that, as I understand, was not part of 
the agreement negotiations.
    Going back to General Simcock's observation, it is one of 
these ironies that the State Department is the primary 
negotiator with this agreement, also talking about the funding 
in all of this. And, yet, when it comes to the actual funding, 
it goes to the Interior Department for the administration.
    Do we have other activities like this that go on that State 
Department could bless the negotiations; yet, the funding comes 
out of Interior and the reason why we can't find an offset 
because the Interior budget obviously is much, much less than 
the State Department?
    And I would like to ask Mr. Bussanich, where does the 
Interior Department stand on this?
    Mr. Bussanich. Well, sir, actually, we were full partners 
in the negotiation. We were at the table on every occasion. In 
fact, it was I who was at the table on every occasion. For any 
of the discussions that took place with Palau, I was authorized 
to participate and was a full partner.
    And certainly the discussions going back to the 
negotiations and the liaising with the Office of Management and 
Budget and other budget officials was done through the 
Department and done through my office. So we are fully 
apprised. This is not a State Department deal that was done in 
the darkness without the Interior part of it, participating in 
it fully.
    I can, if you would like, answer I think some of the 
questions or at least provide a little information regarding a 
couple of the things you just raised----
    Mr. Faleomavaega. Sure.
    Mr. Bussanich [continuing]. Particularly the question of 
audits, the postal service, and inflation. Under the original--
I would like to point out that the Compacts between the 
financial provisions of----
    Mr. Faleomavaega. You know, I am sorry, Mr. Bussanich, but 
my time is running. So could you submit that for the record?
    Mr. Bussanich. Absolutely, sir.
    Mr. Faleomavaega. I would really like the response from the 
Interior Department concerning this issue.
    Mr. Bussanich. Very much.
    Mr. Faleomavaega. I also would like to have the GAO, Dr. 
Gootnick, your observation as to the GAO study that was 
conducted, was this before or after the negotiations took 
place? I am just curious where the GAO comes into play on this.
    Mr. Gootnick. The presentation I have offered you today is 
based on our current analysis of the agreement, the September 
2010 agreement. Previously we had done work at the request of 
Congress on the Compact of Free Association in the run-up to 
the 15-year review and reported out in 2008.
    Mr. Faleomavaega. Okay. You mentioned something about the 
trust fund that seems to have some problems and also seems to 
be one of the key issues in the negotiations. Can you elaborate 
on this again with the trust fund?
    Mr. Gootnick. Right. Well, we initially did an analysis of 
the status of the trust fund for our 2008 report and have 
updated that now three times. So what we are able to do is take 
the trust fund balance, the historic rate of return for the 
portfolio that is held by the fund, and run a variety of 
statistical simulations which help us understand essentially 
the health of the trust fund and are able to determine the rate 
or return it will require in order to achieve its projected----
    Mr. Faleomavaega. Let me just say, Mr. Chairman, at this 
point in the negotiation, what we are doing, in my humble 
opinion, the leaders of Palau are not very happy with the way 
negotiations are being conducted. And the fact that there seems 
to be such a fuzziness going on between the administration and 
the Congress, there's interest in trying to approve funding as 
part of the negotiations.
    General Simcock, many of my relatives are in the Marine 
Corps and are very proud of being part of the Marine Corps. But 
I think I need to weigh in, Mr. Chairman, as I represent the 
Army. I believe it is the most senior of all of the military 
agencies represented here.
    At any rate, General Simcock, we can talk about us 
currently having 11 nuclear super carriers, 21 altogether with 
carriers that we have. China only has one. In my opinion, the 
Chinese are not stupid, but they do have, what, close to 100 
nuclear submarines floating all over the place.
    As a very knowledgeable and strategic person, General 
Simcock, if you had a choice, would you rather have an aircraft 
carrier or a nuclear submarine running around the Pacific?
    Mr. Manzullo. You don't have to answer that question.
    Mr. Faleomavaega. Okay. You don't have to answer the 
question. I know my time is up. I just want to say one thing.
    Mr. Manzullo. Especially with the Navy present at the 
    Mr. Faleomavaega. I just want to say this. We spent almost 
$1 trillion when we went against Saddam Hussein. We are 
spending over $120 billion a year on the war in Afghanistan. 
And I cannot in trying to explain to the leaders of Palau the 
$184 million, whatever it is for the 10-year period, that my 
Government cannot come up with a solution to this very simple 
solution of giving what is proper and what is reasonable in our 
relationship that is important, if we really consider Palau 
just as important as Guam or the Northern Marianas or even the 
State of Hawaii, when it comes to our strategic and military 
    In my opinion, Mr. Chairman, the way things are going on 
now and as a--I am still learning how to speak English, Mr. 
Chairman. What do you call that? A hypothetical.
    What if the Chinese want to come and set up a marine 
submarine base in Palau? Wouldn't that be a good thing for 
studying how less important these islands are or maybe----
    Mr. Manzullo. On that question, I am going to have to----
    Mr. Faleomavaega [continuing]. Or even have Fiji come in, 
ask China to come and set up a submarine base. Wouldn't that be 
an important part of our national posture looking at how 
important these islands are to simply say they are not 
important as part of our national forum.
    So, with that, Mr. Chairman, I know my time is way, way 
    Mr. Manzullo. It is over.
    Mr. Faleomavaega. I thank you for your patience. And I want 
to thank the gentlemen from----
    Mr. Manzullo. But this is your area of the world.
    Mr. Faleomavaega. Well, thank you, Mr. Chairman.
    Mr. Manzullo. Mr. Sablan?
    Mr. Sablan. Thank you very much, Mr. Chairman.
    This morning I was talking to my staff about the question I 
posed earlier. And they inserted the word ``relatively minor 
cost,'' not less than $184 million.
    I agree with nickel and diming Palau, not just have we done 
that to one of our best allies and a very important partner in 
the Pacific. We can't seem to find a way to live up to that 
commitment we made in that agreement reached between our 
Government and the Government of Palau.
    And, again, I said earlier that the people of Palau are a 
very patient people. And I know them because I grew up with 
them. I was 11 years old when I first went to Palau. They are a 
very patient people, but patience has its limits. And we have I 
think invested a large sum of money in trying to capture Palau 
in the sense of and we are going to charge them that $5 bank 
fee, and they are going to walk away unless we get to do 
    We need to find our offsets because we can sit here and 
talk and talk until we turn blue, but I don't think this is 
going to go anywhere unless we find viable offsets that is 
acceptable to Congress. And somebody needs to do that because 
we all agree that this is important. And it is enough to nickel 
and dime them through the fine work of some of us here in this 
    I mean, I am not blaming anyone. You are doing your job. 
And then we turn around and talk among ourselves that we can't 
find the nickel that we need that we agreed 62 percent. Only 
Palau can give that kind of bargain, only the good people of 
Palau. And now we can't even live up to that commitment. Now, 
we should be ashamed of ourselves.
    I am not ashamed, but, you know, we should try and work 
hard and find a way to do this, Mr. Bussanich. I know Interior 
has the smallest pot. I agree with you. Maybe Mr. Loi and the 
General. I am not saying that we do, but we need to sit down at 
the table again and find something that is acceptable so that 
the committee of jurisdiction, Natural Resources, will move 
forward with this because I know the objection is already 
offset. And please, you know, this is in our interest, not in 
Palau's interest. We are talking about the interest of the 
United States.
    And I thank everyone for being here today. I appreciate the 
time and the testimony. Chairman Manzullo and Ranking Member 
Faleomavaega, thank you, sir, for including me in today's 
hearing. I am very grateful. Thank you very much.
    Mr. Manzullo. I appreciate that.
    Mr. Bussanich, I have a job or a request for you. We are 
going to mark this up next year, and I am going to put in the 
markup that the money comes from three departments: State, 
Defense, and Interior. If you consider yourself to be the point 
person to work with our committee on this, or somebody else in 
Interior, we want to get this thing done.
    It is too critical. It is too important. It is too 
strategic for us to have all this work done and then come down 
to these offsets which come out of a department that really 
doesn't have that much to work with the first place. I can 
appreciate the fact that you had to get creative to come up 
with these three offsets.
    Could you be willing to work with Mr. Su on the 
subcommittee and with the other two departments to see if they 
are willing to--I mean, I am going to try to put it into 
organic legislation that they have to take Palau into 
    Mr. Bussanich. Well, certainly, sir, I will do that. And I 
know that my colleagues here understand what you are saying. 
And we will work through the administration to find the most 
appropriate offsets for this.
    Mr. Manzullo. Okay. Well, thank you for a very enlightened 
hearing. Eni, you are correct. We don't spend enough time 
talking about what is going on in the Pacific.
    Mr. Faleomavaega. No. They are just a bunch of dinky 
islands. They are not that important to our overall strategic--
    Mr. Manzullo. No. Come on. I have corn in my district, and 
you have tuna. You know?
    Mr. Faleomavaega. I do want to thank you, Mr. Chairman, for 
your initiative. And I really look forward in working with you. 
Probably the best way that we can find the offsets is to have 
commitments from all three agencies in how best to resolve 
    I don't consider this problem so complicated from Palau. It 
is just that----
    Mr. Manzullo. I am sure we will get some feedback.
    Mr. Faleomavaega [continuing]. Why do we make it so 
complicated? This is what is really puzzling to me. I really 
look forward in working with you, Mr. Chairman, on this 
    Mr. Manzullo. Okay.
    Mr. Faleomavaega. If I may, Mr. Chairman, I would like to 
submit for the record, unanimous consent, a Washington Post 
article dated November 29, 2011. There is an article written by 
Mr. Walter Pincus. It is entitled ``Gauging the Asia-Pacific 
Region's Defense Levels.'' Very, very important.
    Mr. Manzullo. You want to make it for the record?
    Mr. Faleomavaega. Yes, for the record.
    Mr. Manzullo. For the record----
    Mr. Faleomavaega. Like I said, the President has made a 
pivot and I don't know if it is because he plays basketball. I 
suppose you pivot a lot from Afghanistan and Iraq. And now we 
are going to pivot to the Asia-Pacific region as if the Asia-
Pacific region is not important. So I am trying to see if there 
is another very, very good----
    Mr. Manzullo. Well, we will probably have a hearing, bring 
PAYCOM in. That whole area is to the extension of----
    Mr. Faleomavaega. Yes.
    Mr. Manzullo. China is extending its borders way beyond.
    Mr. Faleomavaega. Yes.
    Mr. Manzullo. Going into the interior of other countries I 
think is quite interesting. And it obviously saw part of this.
    Mr. Faleomavaega. Yes.
    Mr. Manzullo. General, thank you for coming up with this 
very fascinating diagram that demonstrates exactly what 
Congressman Kelly was talking about. I want to thank all four 
of you witnesses for bringing in material, your testimony. I am 
going to leave the record open for 10 days if anybody else 
wants to submit any additional testimony or additional remarks.
    Eni, did you still want the General to give you the 
information on the bases?
    Mr. Faleomavaega. I just want to share with the General----
    Mr. Manzullo. Well, first of all, did you still want the 
    Mr. Faleomavaega. Please, by all means.
    Mr. Manzullo. Okay.
    Mr. Faleomavaega. Yes.
    Mr. Manzullo. All right.
    Mr. Faleomavaega. I just want to share with the General 
that years ago I was privileged to go with the late Senator 
Chafee from Rhode Island. We went to Solomon Islands. And the 
Congress was appropriated $5 million to build a brand new 
parliamentary building for the Government of the Solomon 
Islands. As you know, General, this is where Guadalcanal was 
when Senator Chafee was a 19-year-old Marine. Let me tell you, 
Mr. Chairman, it was a very spiritual experience for me. And 
the irony of it all was when we asked who built the 
parliamentary building for the Solomon Islands, it was the 
Japanese, very ironic of the whole thing that we fought the 
Japanese in World War II and that when the bids went out, it 
was a Japanese company that built the parliamentary building 
for the Government of Solomon Islands.
    Guadalcanal, we can go on and on. I cannot say enough about 
the valor and the courage of our Marines for what they have 
done for our country. For that, General Simcock, you have my 
utmost respect for all that you do and all of our men and women 
in uniform. Thank you for your services to our country.
    Mr. Manzullo. Thank you very much. This subcommittee is 
    [Whereupon, at 1:14 p.m., the subcommittee was adjourned.]


                            A P P E N D I X


     Material Submitted for the Hearing Record Notice 


      Article submitted for the record by the Honorable Eni F.H. 
     Faleomavaega, a Representative in Congress from American Samoa


 Map submitted for the record by Brigadier General Richard L. Simcock, 
II, Principal Director, South and Southeast Asia, Office of the Deputy 
         Under Secretary of Defense, U.S. Department of Defense