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

    H.R. 6040, ``CONTINUED FREE ASSOCIATION WITH PALAU ACT OF 2012''; AND
       H.R. 6147, ``RONALD WILSON REAGAN EXCLUSIVE ECONOMIC ZONE OF THE
                                UNITED STATES''

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

                              LEGISLATIVE HEARING

                                   before the

                      SUBCOMMITTEE ON FISHERIES, WILDLIFE,
                           OCEANS AND INSULAR AFFAIRS

                                     of the

                         COMMITTEE ON NATURAL RESOURCES
                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   __________

                           Monday, September 10, 2012

                                   __________

                               Serial No. 112-127

                                   __________

           Printed for the use of the Committee on Natural Resources

             Available via the World Wide Web: http://www.fdsys.gov
                                       or
              Committee address: http://naturalresources.house.gov

                                   ----------
                             U.S. GOVERNMENT PRINTING OFFICE

    75-940 PDF                       WASHINGTON : 2013

    For sale by the Superintendent of Documents, U.S. Government Printing
    Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
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    Washington, DC 20402-0001

                         COMMITTEE ON NATURAL RESOURCES

                           DOC HASTINGS, WA, Chairman
                EDWARD J. MARKEY, MA, Ranking Democratic Member

    Don Young, AK                        Dale E. Kildee, MI
    John J. Duncan, Jr., TN              Peter A. DeFazio, OR
    Louie Gohmert, TX                    Eni F.H. Faleomavaega, AS
    Rob Bishop, UT                       Frank Pallone, Jr., NJ
    Doug Lamborn, CO                     Grace F. Napolitano, CA
    Robert J. Wittman, VA                Rush D. Holt, NJ
    Paul C. Broun, GA                    Raul M. Grijalva, AZ
    John Fleming, LA                     Madeleine Z. Bordallo, GU
    Mike Coffman, CO                     Jim Costa, CA
    Tom McClintock, CA                   Dan Boren, OK
    Glenn Thompson, PA                   Gregorio Kilili Camacho Sablan,
    Jeff Denham, CA                          CNMI
    Dan Benishek, MI                     Martin Heinrich, NM
    David Rivera, FL                     Ben Ray Lujan, NM
    Jeff Duncan, SC                      Betty Sutton, OH
    Scott R. Tipton, CO                  Niki Tsongas, MA
    Paul A. Gosar, AZ                    Pedro R. Pierluisi, PR
    Raul R. Labrador, ID                 John Garamendi, CA
    Kristi L. Noem, SD                   Colleen W. Hanabusa, HI
    Steve Southerland II, FL             Paul Tonko, NY
    Bill Flores, TX                      Vacancy
    Andy Harris, MD
    Jeffrey M. Landry, LA
    Jon Runyan, NJ
    Bill Johnson, OH
    Mark E. Amodei, NV

                           Todd Young, Chief of Staff
                          Lisa Pittman, Chief Counsel
                   Jeffrey Duncan, Democratic Staff Director
                    David Watkins, Democratic Chief Counsel
                                     ------

                  SUBCOMMITTEE ON FISHERIES, WILDLIFE, OCEANS
                              AND INSULAR AFFAIRS

                           JOHN FLEMING, LA, Chairman
        GREGORIO KILILI CAMACHO SABLAN, CNMI, Ranking Democratic Member

    Don Young, AK                        Eni F.H. Faleomavaega, AS
    Robert J. Wittman, VA                Frank Pallone, Jr., NJ
    Jeff Duncan, SC                      Madeleine Z. Bordallo, GU
    Steve Southerland, II, FL            Pedro R. Pierluisi, PR
    Bill Flores, TX                      Colleen W. Hanabusa, HI
    Andy Harris, MD                      Dan Boren, OK
    Jeffrey M. Landry, LA                Edward J. Markey, MA, ex officio
    Jon Runyan, NJ
    Doc Hastings, WA, ex officio

                                    ---------

                                    CONTENTS

                                   ----------
                                                                       Page

    Hearing held on Monday, September 10, 2012.......................     1

    Statement of Members:
        Faleomavaega, Hon. Eni F.H., a Delegate in Congress from
          American Samoa, Prepared statement of......................    41
        Fleming, Hon. John, a Representative in Congress from the
          State of Louisiana.........................................     1
            Prepared statement of....................................     3
        Sablan, Hon. Gregorio Kilili Camacho, a Delegate in Congress
          from the Commonwealth of the Northern Mariana Islands......     4
            Prepared statement of....................................     5

    Statement of Witnesses:
        Babauta, Hon. Anthony M., Assistant Secretary, Office of
          Insular Affairs, U.S. Department of the Interior...........     9
            Prepared statement on H.R. 6040 and H.R. 6147............    11
        Gootnick, David, Director, International Affairs and Trade,
          U.S. Government Accountability Office......................    20
            Prepared statement on H.R. 6040..........................    22
        Issa, Hon. Darrell E., a Representative in Congress from the
          State of California, Statement submitted for the record on
          H.R. 6147..................................................     7
        Kagan, Hon. Edgard D., Deputy Assistant Secretary, Bureau of
          East Asian and Pacific Affairs, U.S. Department of State...    14
            Prepared statement on H.R. 6040..........................    16

    Additional materials supplied:
        Bordallo, Hon. Madeleine Z., a Delegate in Congress from
          Guam, Maps and Washington Post article, ``U.S. model for a
          future war fans tensions with China and inside Pentagon,''
          submitted for the record...................................    44
        Manzullo, Hon. Donald A., Chairman, Subcommittee on Asia and
          the Pacific, House Committee on Foreign Affairs, Statement
          submitted for the record...................................     8
        Singh, Vikram J., Deputy Assistant Secretary of Defense for
          South and Southeast Asia, Office of the Secretary of
          Defense for Policy, U.S. Department of Defense, Statement
          submitted for the record...................................    65

     LEGISLATIVE HEARING ON H.R. 6040, TO APPROVE THE AGREEMENT PROVIDING
      TERMS FOR A CONTINUATION OF THE FREE ASSOCIATION BETWEEN THE UNITED
    STATES AND PALAU, AND FOR OTHER PURPOSES. ``CONTINUED FREE ASSOCIATION
      WITH PALAU ACT OF 2012''; AND H.R. 6147, TO DESIGNATE THE EXCLUSIVE
       ECONOMIC ZONE OF THE UNITED STATES AS THE ``RONALD WILSON REAGAN
                EXCLUSIVE ECONOMIC ZONE OF THE UNITED STATES''.

                                  ----------

                           Monday, September 10, 2012

                         U.S. House of Representatives

        Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs

                         Committee on Natural Resources

                                Washington, D.C.

                                  ----------

        The Subcommittee met, pursuant to call, at 2:28 p.m., in
    Room 1334, Longworth House Office Building, Hon. John Fleming
    [Chairman of the Subcommittee] presiding.
        Present: Representatives Fleming, Sablan, Faleomavaega, and
    Bordallo.

        STATEMENT OF THE HON. JOHN FLEMING, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF LOUISIANA

        Dr. Fleming. The Subcommittee will come to order. The
    Chairman notes the presence of a quorum. Good afternoon. Today
    we are holding a legislative hearing on H.R. 6040, the
    Continued Free Association with Palau Act of 2012. And because
    of some last minute changes, we will not be hearing our second
    panel today. H.R. 6040 was introduced by Congressman Donald
    Manzullo, Chairman of the House Foreign Affairs Subcommittee on
    Asia and the Pacific. His legislation would implement the 15-
    year review that was conducted pursuant to Section 432 of the
    Compact.
        The Foreign Affairs and Natural Resources Committees shared
    jurisdiction over this issue. This Committee's oversight
    responsibilities cover the Department of the Interior's role in
    implementing the Compact's funding provisions.
        It has been a long road in getting to this point to having
    a hearing on this issue. The Administration forwarded the
    proposal to Congress in January 2011. While the
    Administration's draft bill was not introduced in the House,
    the intent of it and H.R. 6040 are the same. Implementation of
    the 15-year review agreement signed by the U.S. and Palau.
        The Compact with Palau went into effect in 1994. The first
    15-year review was scheduled for 2009, but was delayed due to
    the transition between the Bush and Obama Administrations. The
    renegotiated agreement was signed by both parties in September
    2010. Under the Compact, Palau is self-governing, conducts its
    own foreign affairs and regulates its domestic and foreign
    communications. The Compact gives the U.S. full authority and
    responsibility for security and defense matters relating to
    Palau.
        As a member of the House Armed Services Committee, I am
    familiar with the Administration's pivot to Asia, the current
    concerns within the region and how the Compact provides the
    U.S. with the options for forward positioning of military
    assets in the region. The Compact also provides financial
    assistance, including direct economic assistance and access to
    Federal programs to Palau. While the proposed financial package
    of $427 million, with $215 million in mandatory funds is
    substantially less than the $825 million, with $411 million in
    direct assistance provided to Palau in the first 15-year period
    of the Compact, the new funding will need to be fully offset as
    required by the Rules of the House.
        H.R. 6040 is introduced and included in some offsets for
    the mandatory funding. At the Asia and Pacific Subcommittee
    markup, these offsets were replaced with an offset which would
    allow the Secretary of State to deny passports to individuals
    with tax debts over $50,000. It is my understanding that this
    offset may not work as drafted and an alternative approach may
    be necessary.
        I am interested to hear from the Administration witnesses
    to see if they can recommend any new offset proposals. The
    previously recommended offsets regarding net receipt sharing of
    energy and mineral receipts, coal mining reforms and fees on
    nonproducing oil and gas leases are not acceptable to either
    the House or Senate committees.
        Today's hearing is an important opportunity to discuss the
    Palau Compact and provide Members with the information on the
    benefits of the agreement to the United States and the Republic
    of Palau.
        It is unfortunate that the Department of Defense decided to
    submit only written testimony. One of the points given to
    support the Compact is national defense. I believe their
    presence would have been useful at this hearing.
        The second bill--I am sorry, we are not going to take up
    the second bill. Oh, we are? OK, I am sorry. The second bill we
    will examine is H.R. 6147 introduced by the Chairman of the
    Committee on Oversight and Government Reform, Congressman
    Darrell Issa of California. This proposal will designate our
    exclusive economic zone as the Ronald Wilson Reagan Exclusive
    Economic Zone of the United States. This a fitting tribute to
    our 40th President who established our 200-mile zone by signing
    a Presidential Proclamation on March 10, 1983.
        Ronald Reagan was one of our Nation's greatest Presidents.
    As someone who grew up during the darkest days of the Cold War,
    I will always be grateful that because of his peace through
    strength doctrine, the Cold War ended and the Soviet Union
    collapsed. President Reagan was also responsible for proposing
    the largest tax cut in our Nation's history. And when he left
    office in 1989, our national debt was $2.6 trillion. Today it
    is 8 times higher and has increased more than $5 trillion
    during just the last 4 years. While some may characterize this
    designation as trivial, I strongly disagree and I am pleased to
    support this effort. I compliment the gentleman from California
    for his leadership on behalf of the Great American patriot, who
    is fond of telling us that America was truly that shining city
    upon a hill.
        [The prepared statement of Dr. Fleming follows:]

              Statement of The Honorable John Fleming, Chairman,
        Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs

        Good afternoon, today we are holding a legislative hearing on H.R.
    6040, the Continued Free Association with Palau Act of 2012 and H.R.
    6147, the Ronald Wilson Reagan Exclusive Economic Zone of the United
    States.
        H.R. 6040 was introduced by Congressman Donald Manzullo, Chairman
    of the House Foreign Affairs Subcommittee on Asia and the Pacific. His
    legislation would implement the 15-year review that was conducted
    pursuant to Section 432 of the Compact. The Foreign Affairs and Natural
    Resources Committee's share jurisdiction over this issue. This
    Committee's oversight responsibilities cover the Department of the
    Interior's role in implementing the Compact's funding provisions.
        It's been a long road in getting to this point to have a hearing on
    this issue. The Administration forwarded a proposal to Congress in
    January of 2011. While the Administration's draft bill was not
    introduced in the House, the intent of it and H.R. 6040 are the same--
    implementation of the 15-year review agreement signed by the U.S. and
    Palau.
        The Compact with Palau went into effect in 1994. The first 15-year
    review was scheduled for 2009, but was delayed due to the transition
    between the Bush and Obama Administrations. The renegotiated agreement
    was signed by both parties in September of 2010.
        Under the Compact, Palau is self-governing, conducts its own
    foreign affairs and regulates its domestic and foreign communications.
    The Compact gives the U.S. full authority and responsibility for
    security and defense matters relating to Palau. As a member of the
    House Armed Services Committee, I am familiar with Administration's
    pivot to Asia, the current concerns within the region and how the
    Compact provides the U.S. with options for forward positioning of
    military assets in the region.
        The Compact also provides financial assistance, direct economic
    assistance, and access to federal programs to Palau. While the proposed
    financial package of $215 million is substantially less than the $852
    million provided to Palau in the first 15-year period of the Compact,
    it is funding that will need to be fully offset as required by the
    Rules of the House. H.R. 6040 as introduced included some offsets for
    the mandatory funding. At the Asia and the Pacific Subcommittee markup,
    these offsets were replaced with an offset which would allow the
    Secretary of State to deny passports to individuals with tax debts over
    $50,000. It is my understanding that this offset may not work as
    drafted and an alternative approach may be necessary.
        I am interested to hear from the Administration witnesses to see if
    they can recommend any new offset proposals. The previously recommended
    offsets regarding ``net receipts sharing'' of energy and mineral
    receipts, coal mining reforms and fees on nonproducing oil and gas
    leases are not acceptable to either the House or Senate Committees.
        Today's hearing is an important opportunity to discuss the Palau
    Compact and provide Members with information on the benefits of the
    agreement to the United States and the Republic of Palau.
        The second bill we will examine is H.R. 6147, introduced by the
    Chairman of the Committee on Oversight and Government Reform,
    Congressman Darrell Issa of California.
        This proposal will designate our Exclusive Economic Zone as the
    Ronald Wilson Reagan Exclusive Economic Zone of the United States. This
    is a fitting tribute to our 40th President who established our 200-mile
    zone by signing a Presidential Proclamation on March 10, 1983.
        Ronald Reagan was one of our nation's greatest Presidents. As
    someone who grew up during the darkest days of the Cold War, I will
    always be grateful that because of his ``Peace through Strength''
    Doctrine, the Cold War ended, the Soviet Union collapsed.
        President Reagan was also responsible for proposing the largest tax
    cut in our nation's history and when he left office in 1989, our
    national debt was $2.6 trillion. Today, it is eight times higher and it
    has increased more than $5 trillion during just the last four years.
        While some may characterize this designation as trivial, I strongly
    disagree and I am pleased to support this effort. I compliment the
    gentleman from California for his leadership on behalf of a great
    American patriot who was fond of telling us that America was truly that
    ``Shining City Upon A Hill''.
                                     ______

        Dr. Fleming. I now recognize the Ranking Member for any
    statement he would like to make at this time.

        STATEMENT OF THE HON. GREGORIO KILILI CAMACHO SABLAN, A
    DELEGATE IN CONGRESS FROM THE TERRITORY OF THE NORTHERN MARIANA
                                ISLANDS

        Mr. Sablan. Thank you very much, Mr. Chairman, and good
    afternoon everyone. We are here today to receive testimony on
    two bills, H.R. 6040, to approve the agreement providing for a
    continuation of the free association between the United States
    and Palau, and H.R. 6147, to designate the Exclusive Economic
    Zone of the United States as the Ronald Wilson Reagan Exclusive
    Economic Zone of the United States.
        I want to begin by thanking you for calling this hearing so
    expeditiously after Foreign Affairs Committee Chairwoman Ros-
    Lehtinen made the decision to discharge H.R. 6040 from the
    Committee. I also want to thank Asia and Pacific Subcommittee
    Chairman, Don Manzullo, and my Subcommittee colleague, Eni
    Faleomavaega for introducing H.R. 6040.
        I grew up in the territory, of which Palau was a part, and
    I represent islands that are close by. I have observed from the
    front line the relationship between the United States and Palau
    all my life. The Secretary of Foreign Affairs of Palau was my
    classmate in high school in Chook. And I feel a special
    closeness to Palau and responsibility for it beyond my role as
    the Ranking Member of this Subcommittee.
        When Palau was a territory, this subcommittee's predecessor
    had lead jurisdiction in the House regarding legislation
    concerning it. Now that it is a sovereign state in free
    association with the United States, lead jurisdiction is in the
    Asia and Pacific Subcommittee. This bill has been referred to
    the Natural Resources Committee and our Subcommittee primarily
    because of the provision that would require the Secretary of
    the Interior to report to the Committees on Foreign Affairs and
    Natural Resources, and the Senate Committee on Energy and
    Natural Resources annually on newest programs in Palau
    otherwise considered domestic. The Secretary also has
    responsibility for administering special assistance given to
    Palau which implicates our jurisdiction. But the Committee on
    Foreign Affairs has the jurisdiction regarding the types and
    levels of assistance and other policies concerning Palau.
        The United States took Palau and other Micronesian Islands
    that became the territory I mentioned from Japan through some
    the bloodiest battles of World War II and governed it for half
    a century under an agreement with the United Nations that
    required economic and social assistance and eventual self-
    government. To preserve strategic control over the islands of
    the self-government, our government encourages the status of
    free association as an alternative to independence and extended
    domestic programs.
        The Compact of Free Association negotiated by the Reagan
    Administration approved by law by the George H.W. Bush
    Administration preserved United States strategic authority over
    the lands and waters of Palau and confirms space rights for 50
    years. It also requires bilateral negotiations on continuing
    their relationship and to determine United States assistance
    and the 15, 30 and 40-year marks of this 50 years.
        The Asia and Pacific Subcommittee bill would approve an
    agreement approved by the 15th anniversary negotiations, and
    slightly modified to address Palauan concerns. Continued
    arrangements, the Reagan negotiated compact and be consistent
    with the revised Compacts of Free Association with the two
    other Pacific states that came out of the territory as approved
    by the Republican Congress in 2003. That approval included some
    Congressional modifications to the negotiated Compact.
        President Toribiong of Palau wrote 3 months ago that the 21
    months that have elapsed since the agreement was signed has
    caused an increasing number of Palauans to question their
    agreement and the commitment of the United States to the free
    association relationship. And resulted in some Palauans being
    enticed by the potential assistance from China and offers of
    funding from Arab nations.
        The Defense Department has advised that failure to follow
    through under the commitments to Palau as reflected in the
    proposed agreed legislation would jeopardize our defense
    posture in the Western Pacific, which will become increasingly
    important. It says that Palau is irreplaceable because it
    covers a strategic expanse of the Pacific as large as the State
    of Texas, and the free association right of the U.S. to deny
    access to other nations prevents China from using ceilings that
    it wants to develop its economy and increase its military
    protection in the region.
        The State Department additionally said that continuing the
    association is vital, in addition because Palau votes with the
    United States in the United Nations more than any other
    member--which is especially important on issues such as Israel.
        Mr. Chairman, the agreement was signed 2 years and 1 week
    ago. The Executive Branch asked us to approve it at the
    beginning of this Congress. A number of leaders in both
    parties, in both Houses have supported the agreement from the
    first, and no Member has criticized it. The only problem with
    approval has been how to offset the cost. We should do our part
    and act to facilitate House passage as soon as possible. Mr.
    Chairman, I would like insert for the record my full statement,
    my opening statement, and I yield back the balance of my time.
        Dr. Fleming. Without objection so ordered. The gentleman
    yields back.
        [The prepared statement of Mr. Sablan follows:]

      Statement of The Honorable Gregorio Kilili Camacho Sablan, Ranking
    Member, Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs

        Thank you Mr. Chairman. We are here today to receive testimony on
    two bills: H.R. 6040, to approve the Agreement providing for a
    continuation of the free association between the United States and
    Palau and H.R. 6147, to designate the exclusive economic zone of the
    United States as the ``Ronald Wilson Reagan Exclusive Economic Zone of
    the United States''.
        I want to begin by thanking you for calling this hearing so
    expeditiously after Foreign Affairs Committee Chairwoman Ros-Lehtinen
    took the decision to discharge H.R. 6040 from that committee. I also
    want to thank Asia and the Pacific Subcommittee Chairman Don Manzullo
    and our Subcommittee colleague, Eni Faleomavaega for introducing H.R.
    6040.
        I grew up in the territory of which Palau was a part, and represent
    islands that are close by. I have observed from the front line the
    relationship between the United States and Palau all of my life. And I
    feel a special closeness to Palau and responsibility for it beyond my
    role as the Ranking Member of this Subcommittee.
        When Palau was a territory, this Subcommittee's predecessor had
    lead jurisdiction in the House regarding legislation concerning it. Now
    that it is a sovereign state in free association with the U.S., lead
    jurisdiction is in the Asia and the Pacific Subcommittee.
        This bill has been referred to the Natural Resources Committee and
    our Subcommittee primarily because of the provision that would require
    the Secretary of the Interior to report to the Committees on Foreign
    Affairs and Natural Resources and the Senate Committee on Energy and
    Natural Resources annually on U.S. programs in Palau otherwise
    considered domestic. The Secretary also has responsibilities for
    administering special assistance given Palau, which implicates our
    jurisdiction. But the Committee on Foreign Affairs has the jurisdiction
    regarding the types and levels of assistance and other policies
    concerning Palau.
        The United States took Palau and the other Micronesian Islands that
    became the territory I mentioned from Japan through some of the
    bloodiest battles of World War Two and governed it for half a century
    under an agreement with the United Nations that required economic and
    social assistance and eventual self-government. To preserve strategic
    control over the islands after self-government, our government
    encouraged the status of free association as an alternative to
    independence and extended domestic programs. The Compact of Free
    Association negotiated by the Reagan Administration approved by law
    under the George H.W. Bush Administration preserved U.S. strategic
    authority over the lands and waters of Palau and confers base rights
    for 50 years. It also requires bilateral negotiations on continuing the
    relationship and to determine U.S. assistance at the 15, 30 & 40-year
    marks of this 50 years.
        The Asia and the Pacific Subcommittee bill would approve an
    agreement approved by the 15th anniversary negotiations and slightly
    modify it to address Palauan concerns, continue arrangements of the
    Reagan-negotiated Compact, and be consistent with the revised compacts
    of free association with the two other Pacific states that came out of
    the territory, as approved by the Republican Congress in 2003. That
    approval also included some congressional modifications to the
    negotiated compacts.
        President Toribiong of Palauwrote three months ago that ``[t]he 21
    months that have elapsed since the Agreement was signed has caused an
    increasing number of Palauans to question the Agreement and the
    commitment of the United States to the free association relationship''
    and ``resulted in some Palauans being enticed by the potential of
    assistance from China and offers of funding from Arab nations.''
        The Defense Department has advised that ``[f]ailure to follow
    through on our commitments to Palau, as reflected in the proposed
    legislation, would jeopardize our defense posture in the Western
    Pacific'' which ``will become increasingly important''. It says that
    Palau is ``irreplaceable'' because it covers a strategic expanse of the
    Pacific as large as Texas, and the free association right of the U.S.
    to deny access to other nations prevents China from using sea-lanes
    that it wants to develop its economy and increase its military
    projection in the region. The State Department additionally says that
    continuing the association is ``vital'', in addition because Palau
    votes with the United States in the United Nations more than any other
    member--which is especially important on issues such as Israel.
        Mr. Chairman, the Agreement was signed two years and one week ago.
    The Executive branch asked us to approve it at the beginning of this
    Congress. A number of leaders of both parties in both houses have
    supported the Agreement from the first, and no Member has criticized
    it. The only problem with approval has been how to offset the cost. We
    should do our part and act to facilitate House passage as soon as
    possible.
        Our second bill, H.R. 6147, was introduced by our colleague
    Representative Darrell Issa, would rename the U.S. Exclusive Economic
    Zone (E.E.Z.) after our 40th President, Ronald Wilson Reagan. As we all
    know, the framework that allows countries to peacefully claim as
    sovereign territory the E.E.Z.s off of their shores is the United
    Nations Convention on the Law of the Sea (Convention). Since it was
    adopted in 1982, Presidents and Secretaries of State from both
    political parties, as well as top U.S. military leaders have expressed
    strong support for joining Convention. Unfortunately, President Reagan
    was not among them.
        Ratifying the Convention is critical for our economy and our
    national security. While claiming the E.E.Z. was a step in the right
    direction, our grade on ensuring the American people a seat at the
    table when global ocean governance issues are being discussed is an
    `incomplete.' 162 other countries have ratified the Convention, and are
    deciding on rules for accessing outer continental shelf resources,
    mining the seabed and navigating in international waters. We are on the
    outside looking in. I hope that, as we recognize the importance of our
    E.E.Z., we can also express our support to the Senate as they consider
    ratification of the Convention this fall.
        Thank you again Mr. Chairman. I look forward to hearing from our
    witnesses.
                                     ______

        Dr. Fleming. We are now ready for our panel of witnesses,
    which includes The Honorable Anthony M. Babauta, Assistant
    Secretary of the Interior for Insular Affairs. Department of
    the Interior; The Honorable Edward D. Kagan, Deputy Assistant
    Secretary, Bureau of East Asian and Public Affairs with the
    Department of State; and Mr. David Gootnick, hopefully that is
    correct, Director, International Affairs and Trade with the
    Government Accountability Office.
        And before we call upon them to testify, I ask unanimous
    consent to add the statements from both Congressman Manzullo
    and Issa to the hearing record. Hearing no objection, so
    ordered.
        [The prepared statement of Mr. Issa follows:]

        Statement of The Honorable Darrell E. Issa, a Representative in
                     Congress from the State of California

        I would like to start by thanking Chairman Fleming and Ranking
    Member Sablan for bringing up my bill H.R. 6147, the ``Ronald Wilson
    Reagan Exclusive Economic Zone of the United States,'' for
    consideration. I would also like to thank Chairman Hastings and Ranking
    Member Markey, of the full committee.
        On March 10, 1983 President Ronald Reagan nearly doubled the size
    of the United States with the stroke of his pen, at no cost to
    taxpayers, when he issued Proclamation 5030, establishing the United
    States Exclusive Economic Zone (EEZ). The EEZ extends U.S. sovereignty
    over all waters, animals, the seabed and the subsoil, up to 200
    nautical miles off America's coast, as well as off the coasts of Puerto
    Rico, the Northern Marianna Islands and other U.S. territories and
    possessions. The EEZ is consistent with domestic and international law,
    and ensures that the United States has sovereign rights for the purpose
    of exploring, exploiting, conserving, and managing living and nonliving
    resources off our coasts.
        We currently have the largest EEZ in the world, spanning over
    13,000 miles of coastline and reaching the Gulf of Mexico, Caribbean
    Sea, Atlantic Ocean, and Pacific Ocean. President Reagan appreciated
    that America is blessed with an abundance of natural resources and
    understood that to remain competitive and to promote strong economic
    growth, we need to effectively develop and responsibly make use of our
    natural wealth.
        While policy debates about the management of our EEZ will certainly
    continue, the establishment of an EEZ is widely recognized around the
    world to be an essential component of marine conservation, resource
    management, and national competitiveness. As we strive to meet the
    challenges of maintaining our vast sovereign areas, we must also
    recognize the abundant opportunity that Ronald Reagan provided our
    nation when he first established our EEZ.
        In closing, I would once again like to thank Chairman Fleming and
    Ranking Member Sablan for bringing this bill before the Subcommittee on
    Fisheries, Wildlife, Oceans, and Insular Affairs and for the chance to
    be here. This legislation will honor President Reagan's leadership and
    foresight in protecting U.S. interests and I look forward to seeing
    this bill brought to the House floor and eventually signed into law.
                                     ______

        [The prepared statement of Mr. Manzullo follows:]

    Statement submitted for the record by The Honorable Donald A. Manzullo,
      Chairman, Subcommittee on Asia and the Pacific, House Committee on
                                Foreign Affairs

        Chairman Fleming, thank you for allowing me the opportunity for me
    to address the Subcommittee. The revised Compact of Free Association
    agreement with the Republic of Palau is a significant topic of
    discussion, and I am grateful your Subcommittee is holding this hearing
    to bring more attention to the issue.
        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. Although it was completed in 1986, it
    did not enter into force for another eight years. Thus in 1994, the
    United States and the Republic of Palau implemented a Compact of Free
    Association ending 49 years of direct American administration under the
    auspices of the United Nations' Trust Territory of the Pacific Islands.
        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 Accountability Office, which is represented here today,
    estimated that Palau received a total of $852 million between 1995 and
    2009.
        In late 2010, the Administration completed a 15-year review of the
    Compact, as required under the terms of the agreement, and intended to
    provide Palau a total of $215 million through the next 15-year
    agreement period. This 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 2024. More importantly, the revised
    agreement greatly improves the likelihood of the existing trust fund's
    ability to sustain payments through to 2044, as originally planned. It
    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.
        In late June of this year I introduced H.R. 6040, which will
    approve the revised Compact agreement, certify the United States'
    commitment to Palau, and secure our vital interests in the Western
    Pacific. It is with utmost urgency that your committee moves this bill
    forward and helps push the approval of the Compact with Palau out of
    its nearly two-year deadlock in Congress.
        Palau is an important friend in the Asia-Pacific region. It is one
    of six Pacific Island nations to have diplomatic ties with Taiwan
    rather than China. According to the Department of Defense, Palau is
    irreplaceable because it covers a strategic expanse of the Pacific as
    large as Texas and gives the U.S. the right to deny other nations
    access to Palau's land and waterways. This prevents nations like China
    from using sea-lanes that it wants to develop its economic and military
    projection in the region. In addition, Palau supports the U.S. on 90
    percent of the votes regarding Israel at the United Nations.
        In a letter to President Obama, President Toribiong of Palau
    describes that during the 21 months that have lapsed since the
    agreement was signed, an increasing number of Palauans have begun to
    question the United States' commitment to the relationship, resulting
    in the temptation to accept assistance offers from China, various Arab
    nations, or Cuba. I request that this letter be included in the record
    and stress that we cannot let this happen.
        Over the past few decades, the relationship with Palau has evolved
    into a strong partnership with people who share American values and
    closely identify with the U.S. With a number of leaders on both sides
    of the aisle in both chambers of Congress supporting the agreement, it
    is critical that Congress approves the agreement, outlined in H.R.
    6040, to ensure the relationship stays steadfast and strong.
        Chairman Fleming, thank you again for your continued support and I
    look forward to working with you in the near future to finally approve
    the revised Compact of Free Association with Palau.
                                     ______

        Dr. Fleming. Of course, you guys have appeared before us a
    number of times, you are well experienced with how we run our
    clocks and our microphones. As you know, your written testimony
    will appear in full in the hearing record, so I ask that you
    keep your oral statements to 5 minutes as outlined in our
    invitation letter to you and under Committee Rule 4(a). Our
    microphones are not automatic, so please press the button when
    you are ready to begin. And the most common mistake is the
    mouthpiece is not close enough to the mouth, so please observe
    that.
        I also want to explain how our timing lights work, very
    simply, you have 5 minutes, you are in the green light for the
    first 4, yellow light for the last 1 minute, and if you are
    still giving your testimony at that point and the light turns
    red, we ask that you go ahead and conclude your remarks. Your
    entire statement will be entered into the record.
        Secretary Babauta, I now recognize you, sir, for 5 minutes
    to present your testimony on behalf of the Department of the
    Interior.

      STATEMENT OF HON. ANTHONY M. BABAUTA, ASSISTANT SECRETARY,
       OFFICE OF INSULAR AFFAIRS, U.S. DEPARTMENT OF THE INTERIOR

        Mr. Babauta. Thank you very much, Mr. Chairman, and members
    of the Subcommittee. I am pleased to be here today to discuss
    H.R. 6040 and H.R. 6147. With regard to H.R. 6040, my statement
    will focus on the financial assistance in the new agreement
    with Palau. The Compact of Free Association with Palau 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 self-
    government was restored; a stable democratic state was
    established; third countries were denied military influence in
    the region of Palau; and with the United States financial
    assistance a base for economic growth has been provided.
        The original financial terms and conditions of the Compact
    have been fully implemented by the U.S. and Palau, and Palau
    has made strong economic gains under the Compact of Free
    Association. Its growth in real terms has averaged just over 2
    percent per year. Palau has taken control of its destiny and is
    moving in the right direction. As both the U.S. and Palau began
    their Compact review several years ago, the U.S. and Palau
    agreed that economic growth would rely on four key factors.
        The first is the trust fund's ability to return $15 million
    a year; the second, fiscal reforms to shrink Palau's public
    sector and raise revenue; the third, increase foreign
    investment and private sector growth; and four, continuation of
    certain U.S. assistance. The new agreement addresses these
    concerns. It extends U.S. assistance in declining annual
    amounts through Fiscal Year 2024. The total of direct financial
    assistance to Palau under this agreement is $229 million.
    Although $26.2 million of that amount has already been
    appropriated for direct economic assistance by Congressional
    action in Fiscal Year 2010 and in Fiscal Year 2011. An
    additional $13.1 million in direct economic assistance has been
    appropriated to Palau for Fiscal Year 2012.
        The amount of direct assistance will decline every year.
    The declining amount of assistance is intended to provide an
    incentive for Palau to develop other sources of local revenue
    and the Palauan Government will need to make systemic
    adjustments in order to live within the same resources. The
    agreement contains five categories of financial assistance for
    Palau: The first is direct economic assistance for education,
    health and the administration of justice and public safety; the
    second is infrastructure projects that are mutually agreed in
    the amount of $8 million in 2011 through 2013; $6 million in
    2014; and $5 million in both 2015 and 2016.
        The third category is infrastructure maintenance funds for
    capital projects previously financed by the United States. From
    2011 through 2024, the U.S. Government will have contributed $2
    million annually, and the Palau government will have
    contributed $600,000 annually to the fund.
        The fourth category is the fiscal consolidation fund. The
    United States will have provided grants of $5 million in each
    2011 and 2012 to help the Palau government reduce its debt.
    Category 5 is the trust fund. The United States will contribute
    $3 million annually from 2013 to 2022 and contribute $250,000
    in 2023 and Palau will delay withdrawals from the trust fund.
    Under the agreement withdrawals from the trust fund may only be
    used for education, health, administration of justice and
    public safety.
        We recommend several changes to H.R. 6040 with regard to
    the subsidy for the United States Postal Service, we recommend
    striking the second sentence of subsection 105(e). We also
    propose language to facilitate financing of the agreement.
        And finally, in language concerning an annual report we
    recommend that the consultation provisions be amended to
    require Federal agencies that administer such programs to
    submit annually to the Secretary of the Interior appropriate
    material ready for inclusion in the reports.
        Under the new agreement, the U.S. and Palau will work
    cooperatively through one, an advisory group on economic
    financial and management reform, annual bilateral economic
    consultations and the provision of other U.S. services and
    programs to the U.S. Postal Service, the National Weather
    Service, and FAA and the Departments of Education and Health
    and Human Services. The Palau Compact legislative proposal does
    have PAYGO costs. In the past, the Administration has proposed
    a number of offsets and H.R. 6040 would provide a number of
    offsets to provide offsets for the Palau agreement.
        The Administration looks forward to continuing the U.S.
    partnership of Palau, and the Department of the Interior is
    proud of the positive advancements U.S. assistance has achieved
    in Palau since 1995 and looks forward to the progress that we
    anticipate will be made over the period of new agreement.
        With regard to H.R. 6147, the exclusive economic zone of
    the United States is a zone contiguous of the territorial sea
    of the United States which generally extends 200 nautical miles
    from the U.S. coastline. The EEZ applies to waters adjacent to
    the United States and United States territories and
    possessions. It is the largest in the world spanning over
    13,000 miles of coastline, larger than combined land area of
    all 50 States.
        H.R. 6147 would designate the EEZ as the Ronald Wilson
    Reagan Exclusive Economic Zone of the United States. And
    although the geographic range of the EEZ is relevant to certain
    elements of the Department's jurisdiction, the naming of EEZ
    does not affect any of the Department's existing authorities or
    programs. The Department notes that it is not aware of my
    precedence for a designation of this type and therefore the
    Department takes no position on H.R. 6147. Thank you very much,
    Mr. Chairman.
        Dr. Fleming. Thank you Mr. Babauta, thank you for your
    testimony.
        [The prepared statement of Mr. Babauta follows:]

     Statement of Anthony M. Babauta, Assistant Secretary of the Interior-
                 Insular Areas, U.S. Department of the Interior

        Chairman Fleming and members of the Subcommittee, I am pleased to
    be here today to discuss H.R. 6040 which would approve the agreement
    between the Government of the United States and the Government of the
    Republic of Palau following the Compact of Free Association section 432
    review, and H.R. 6147 designating the U.S. Exclusive Economic Zone as
    the ``Ronald Wilson Reagan Exclusive Economic Zone of the United
    States. My colleagues from the Departments of State and Defense will
    discuss the importance of the United States--Palau relationship as it
    relates to national security and our policies in the Pacific. My
    statement today regarding Palau will focus on the financial assistance
    components of the new agreement with Palau for which the Department of
    the Interior will be responsible.

                                   H.R. 6040

                     THE UNITED STATES--PALAU RELATIONSHIP

        The Department of the Interior and the Government of Palau have
    been partners since 1951, when the Navy transferred to the Department
    of the Interior the administration of the United Nations Trust
    Territory of the Pacific Islands. Since the end of World War II, Palau
    has emerged from its status as a war-ravaged protectorate to become a
    sovereign nation and member of the world community. Consistent with the
    provisions of the 1994 Compact of Free Association, Palau has exercised
    its sovereignty in accordance with the principles of democracy and in a
    firm alliance with the United States.
        The Compact of Free Association has proven to be a very successful
    framework for United States--Palau relations. The goals of the first
    fifteen 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 of Palau; and with United States financial assistance, a
    base for economic growth has been provided.
        The original financial terms and conditions of the Compact have
    been fully implemented by the United States and Palau. The United
    States, through the Department of the Interior, has provided over $600
    million of assistance including $149 million used to construct the 53-
    mile road system on the island of Babeldoab and $38.7 million for
    health care and education block grants. Most of the funding, $400
    million, was expended on activities defined under Title Two of the
    Compact, which included general government operations, energy
    production, communications, capital improvements, health and education
    programs and establishment of the Compact Trust Fund.
        The Compact Trust Fund was an important feature of U.S. assistance.
    Capitalized with $70 million during the first three years of the
    agreement in the 1990s, the objective of the trust fund was to produce
    an average annual amount of $15 million as revenue for Palau government
    operations for the thirty-five year period fiscal year 2010 through
    fiscal year 2044. The fund also generated $5 million in annual
    operational revenue for Palau since the fourth year of the agreement,
    totaling $60 million for the years 1998 through 2009.
        Palau has made strong economic gains under the Compact of Free
    Association. Its growth, in real terms, has averaged just over two
    percent per year. Palau's governmental services are meeting the needs
    of its community. Palau has taken control of its destiny and is moving
    in the right direction.

                                 COMPACT REVIEW

        As both the United States and Palau began the required Compact
    section 432 review several years ago, each side took pride in the
    growth evident in Palau. However, the review, which examined the terms
    of the Compact and its related agreements and the overall nature of the
    bilateral relationship, also focused attention on several important
    issues. The United States and Palau agreed that prospects for continued
    economic growth relied on four key factors: 1) the viability of the
    Compact trust fund and its ability to return $15 million a year; 2) the
    implementation of fiscal reforms to close the gap between Palau's
    revenues and expenditures by shrinking its public sector and raising
    revenue; 3) the promotion of increased foreign investment and private
    sector growth, and, 4) the continuation of certain United States
    assistance, including access to United States Federal domestic programs
    and services.
        From the perspective of the United States, the viability of the
    Compact Trust Fund was of paramount concern. The economies of Pacific
    Islands are always fragile; their size, distance from markets and
    relative lack of resources make growth a perennial problem. Although
    Palau has some relative advantages in contrast to other Pacific island
    countries, the Compact Trust Fund was established with the intention of
    providing a relatively secure revenue base for Palau's government
    through fiscal year 2044. 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 pay $15 million annually to the
    Government of Palau through fiscal year 2044.

                               COMPACT AGREEMENT

        The condition of the Compact Trust Fund, the need for fiscal and
    economic reforms, and the goal of strengthening conditions for private
    sector growth became the focus of the bilateral review. The Agreement
    Between the Government of the United States of America and the
    Government of the Republic of Palau Following the Compact of Free
    Association Section 432 Review (Agreement) that arose from the 15-year
    review, will address these concerns, maintain stability, promote
    economic growth and increase the progress already made under the
    Compact of Free Association.
        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 $229 million, although $26.2
    million of that amount has already been appropriated for direct
    economic assistance by congressional action in fiscal year 2010 and in
    fiscal year 2011. An additional $13.1 million in direct economic
    assistance has been appropriated to Palau in FY 2012.
        Under the Agreement, in 2011 the United States was to provide Palau
    $28 million, of which $13 million is the aforementioned direct
    assistance. The amount will decline every year thereafter. The
    declining amount of assistance is intended to provide an incentive for
    Palau to develop other sources of local revenue and serves notice that
    the Palauan government has agreed that it will need to make systemic
    adjustments to its government in order to live within those same
    resources.
        The Agreement contains five categories of financial assistance for
    Palau. Although I will discuss the Agreement as written, I note that
    H.R. 6040 appropriately shifts funding from the originally stated
    fiscal years to allow for implementation in the current year.
        Direct economic assistance. The Agreement provides for direct
    assistance for education, health, administration of justice and public
    safety, in amounts starting at $13 million in 2011, declining to $2
    million, the last payment, in 2023. As discussed below, this
    ``glidepath'' is coupled with a gradual increase in how much Palau can
    withdraw from it's trust fund. The timing of direct assistance payments
    is conditioned on Palau's making certain fiscal reform efforts. If the
    United States government determines that Palau has not made meaningful
    progress in implementing meaningful reforms, direct assistance payments
    may be delayed until the United States Government determines that Palau
    has made sufficient progress on the reforms.
        Infrastructure projects. Under the Agreement the United States is
    to provide grants to Palau for mutually agreed infrastructure
    projects--$8 million in 2011 through 2013, $6 million in 2014, and $5
    million in both 2015 and 2016. The Agreement does not name any
    projects.
        Infrastructure maintenance fund. Under the Agreement, a trust fund
    will be established to be used for maintenance of capital projects
    previously financed by the United States, including the existing
    Compact Road. From 2011 through 2024, the United States government will
    have contributed $2 million annually and the Palau government will
    contribute $600,000 annually to the fund. This will protect crucial
    United States investments in Palau that significantly contribute to
    economic development.
        Fiscal consolidation fund. The United States will have provided
    grants of $5 million each in 2011 and 2012 to help the Palau government
    reduce its debt. United States creditors must receive priority, and the
    Government of Palau must report quarterly on the use of the grants
    until they are expended. This fund will also simplify needed economic
    adjustments to Palau's fiscal policies.
        Trust fund. The Agreement increases the size of Palau's trust fund
    directly and indirectly to bolster the likelihood that the trust fund
    will yield payments of up to $15 million annually through 2044. First,
    the United States will contribute $3 million annually from 2013 through
    2022 and contribute $250,000 in 2023. Second, the Government of Palau
    will delay withdrawals from the fund, drawing $5 million annually
    through 2013 and gradually increasing its withdrawal ceiling from $5.25
    million in 2014 to $13 million in 2023. From 2024 through 2044, Palau
    is expected to withdraw up to $15 million annually, as originally
    scheduled. Under the Agreement, withdrawals from the trust fund may
    only be used for education, health, administration of justice and
    public safety.

                              RECOMMENDED CHANGES

        We recommend several changes to the bill.
        At present, the subsidy for the United States Postal Service (USPS)
    is a partial subsidy for domestic postage. The Agreement permits the
    USPS, under certain conditions, to impose international postal rates in
    the future. A subsidy would still be necessary in that event. Thus, in
    the amending language we recommend striking the language ``so long as
    domestic postage may be used for mail to Palau, the Federated States of
    Micronesia, and the Marshall Islands'' from the second sentence of
    subsection 105(e).
        Additionally, in order to facilitate financing of the agreement we
    would recommend including the following language in the bill:
            Funding For Certain Provisions Under Section 105 of Compact of
            Free Association.--On the date of enactment of this section,
            out of any funds in the Treasury not otherwise appropriated,
            the Secretary of the Treasury shall transfer to the Secretary
            of the Interior such sums as are necessary for the Secretary of
            the Interior to implement sections 1, 2(a), 3, 4(a), and 5 of
            the Agreement, which sums shall remain available until expended
            without any further appropriation.
        Furthermore, in the amending language that would insert a paragraph
    (2) of subsection 105(f), the Secretary of the Interior would be
    required to submit an annual report to committees of jurisdiction on
    the effectiveness of assistance to Palau under certain United States
    domestic programs. We recommend that the consultation provision be
    amended to require Federal agencies that administer such programs to
    submit annually to the Secretary of the Interior appropriate material
    ready for inclusion in the reports.

                             CONTINUING COOPERATION

        The United States and Palau will work cooperatively on economic
    reform. The Agreement requires the two governments to establish an
    advisory group to recommend economic, financial and management reforms.
    Palau is committed to adopting and implementing reforms. Palau will be
    judged on its progress in such reforms as the elimination of operating
    deficits, reduction in its annual budgets, reducing the number of
    government employees, implementing meaningful tax reform and reducing
    subsidies to public utilities.
        Palau's progress in implementing reforms will be addressed at
    annual bilateral economic consultations. If the government of the
    United States determines that Palau has not made significant progress
    on reforms, the United States may delay payment of economic assistance
    under the Agreement.
        The Agreement also continues to provide Palau with access to other
    United States services and grant programs, including the United States
    Postal Service, the National Weather Service, and the Federal Aviation
    Administration. The Postal Service moves mail between the United States
    and Palau, and offers other related services. Palau maintains its own
    postal service for internal mail delivery. The National Weather Service
    reimburses Palau for the cost of operating its weather station in
    Palau, which performs upper air observations twice daily, as requested,
    for the purpose of Palau's airport operations and the tracking of
    cyclones that may affect other United States territories, such as Guam.
    The Federal Aviation Administration provides aviation services to
    Palau, including en-route air traffic control from the mainland United
    States, flight inspection of airport navigation aids, and other
    services.
        The proposed legislation will also allow the continuance of other
    Federal program services currently available to Palau under separate
    authorizing legislation, including programs of the Departments of
    Education and Health and Human Services. The general authorization for
    Palau to receive such services was created by the Compact, but
    individual program eligibility has been created by specific laws that
    include Palau as an eligible recipient.

                                    OFFSETS

        The Palau Compact legislative proposal does have PAYGO costs. In
    the past, the Administration proposed a number of offsets to fund the
    Palau legislation, including:
              Net Receipt Sharing, which takes into account the
            costs of managing Federal oil and gas leases before revenues
            are shared with the States;
              Terminate payments for reclaiming abandoned coal
            mines to states that are already certified as having cleaned up
            all of their priority sites; and
              Production incentive fees on non-producing Federal
            oil and gas leases.
        Each example by itself could provide more than enough savings to
    offset the costs of the Palau Compact. Net Receipt Sharing, for
    example, which has been enacted for five years through annual
    appropriations language, would be more than sufficient to offset the
    cost.
        H.R. 6040 would provide for an offset to fund the Palau agreement.
    The Administration is still reviewing the specific language of that
    provision.
        The Administration looks forward to continuing the United States
    partnership with Palau. The Department of the Interior is proud of the
    positive advancements United States assistance has achieved in Palau
    since 1995 and looks forward to the progress that we anticipate will be
    made over the period of the new agreement.

                                   H.R. 6147

        The Exclusive Economic Zone (EEZ) of the United States is a zone
    contiguous to the territorial sea of the United States, which generally
    extends 200 nautical miles from the U.S. coast line, unless it would
    extend into or overlap with a 200 EEZ of an adjacent nation. The EEZ
    applies to waters adjacent to the United States, the Commonwealth of
    Puerto Rico, the Commonwealth of the Northern Mariana Islands
    (consistent with the Covenant and UN Trusteeship Agreement), and United
    States territories and possessions. The U.S. EEZ is the largest in the
    world, spanning over 13,000 miles of coastline and containing 3.4
    million square nautical miles of ocean--larger than the combined land
    area of all fifty states.
        The 200 nautical mile EEZ was established by President Reagan
    through Proclamation 5030 of March 10, 1983, which affirmed that within
    the EEZ, the U.S. had sovereign rights for the purpose of exploring,
    exploiting, conserving and managing natural resources, whether living
    and nonliving, of the seabed and subsoil and the superjacent waters and
    with regard to other activities for the economic exploitation and
    exploration of the zone, such as the production of energy from the
    water, currents and winds. The Proclamation also affirmed that the U.S.
    had jurisdiction as provided for in international law with regard to
    the establishment and use of artificial islands, installations, and
    structures, marine scientific research, and the protection and
    preservation of the marine environment, and other rights and duties
    provided for under international law. Many government agencies,
    including the Department of the Interior and its bureaus, carry out
    functions in the EEZ.
        H.R. 6147 would designate the EEZ as the ``Ronald Wilson Reagan
    Exclusive Economic Zone of the United States''. The bill would deem any
    reference to the EEZ in a law, map regulation, document, paper, or
    other record of the United States to be a reference to the ``Ronald
    Wilson Reagan Exclusive Economic Zone of the United States''. Although
    the geographical range of the EEZ is relevant to certain elements of
    the Department's jurisdiction, the naming of the EEZ does not affect
    any of the Department's existing authorities or programs. The
    Department notes that it is not aware of any precedence for a
    designation of this type. Therefore, the Department takes no position
    on H.R. 6147.
                                     ______

        Dr. Fleming. Next, Mr. Kagan, you have 5 minutes, sir.

    STATEMENT OF HON. EDWARD D. KAGAN, DEPUTY ASSISTANT SECRETARY,
     BUREAU OF EAST ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF
                                 STATE

        Mr. Kagan. Mr. Chairman, Ranking Member Sablan and members
    of the Subcommittee, thank you very much for inviting me to
    appear before you today to testify on our important bilateral
    relationship with Palau. We are grateful for the sustained
    bipartisan commitment to the Compact and to that relationship.
    As a valuable contribution to this process made so far by
    Members of Congress----
        Dr. Fleming. Excuse me just a moment. We are not able to
    hear you, is the mic close enough to your mouth?
        Mr. Kagan. Sorry about that.
        Dr. Fleming. Always an easy mistake to make. So thank you.
        Mr. Kagan. We are grateful for the sustained bipartisan
    commitment to the Compact and to the relationship with Palau,
    and particularly to the valuable contribution to this process
    made so far by Members of Congress, including leadership of
    several key Committees. And although we have concerns about
    some of the specific provisions in H.R. 6040, we hope the
    Compact legislation will be passed by Congress and signed by
    the President as soon as possible.
        As you know, our relationship with Palau as well as with
    the rest of the Pacific Island nations is the key aspect of
    Administration's focus on expending the scope and the pace of
    our engagement in the Asia-Pacific region. I just returned from
    accompanying Secretary Clinton to the Pacific Islands post
    forum dialog in the Cook Islands where I was grateful to be
    joined by my fellow witness, close colleague and good friend,
    Assistant Secretary Babauta.
        Secretary Clinton's presence at the forum was the first by
    a Secretary of State in its 41-year history and highlighted our
    sustained commitment to enhancing our relationship with our
    Pacific partners, including Palau as part of our broader
    engagement with the Asia-Pacific region. While there, I met
    with Palau's Minister of Justice and other senior officials and
    they raised the status of this legislation, passage of which is
    their highest priority in working with the United States.
        Mr. Chairman, as you know, the Pacific and the island
    countries that reside there are critical to our national
    security and are vital to our connection to the Asia-Pacific
    region. Among our many friends in the region, we have perhaps
    none closer than Palau, a country for which we paid a steep
    price to liberate in 1944.
        In terms of our foreign policy interests, we have two
    critical tasks with Palau. First is to sustain our full and
    reinforce our full authority and responsibility for the
    security and defense of Palau. And the second is to continue to
    strengthen our close cooperation with Palau which helps support
    our common goals in everything from fisheries management to
    human rights to countering proliferation of weapons of mass
    destruction.
        Under the Compact of Free Association, the United States
    provides for the security of Palau. The security relationship
    gives us access to Palau and its waters and the authority to
    deny such access by foreign military forces. The relatively
    modest annual cost associated with proposed legislation is
    leveraged many times over in the important strategic advantages
    this arrangement confers on the United States.
        In addition, as you know, under the terms of the Compact,
    Palauans are eligible to serve in the U.S. Armed Forces and
    they volunteer at the U.S. Military at a rate higher than any
    individual U.S. State. We are very grateful for their
    dedication and honor their sacrifices.
        Now Palau is, as you know, one of our closest friends and
    supporters. Palau is an ardent advocate for enhanced U.S.
    Engagement in the region and has been a very strong supporter
    at the United Nations. Palau's voting coincidence in the most
    recent U.N. General Assembly with the United States on all
    votes is approximately 97 percent, which is quite high.
        Our partnership goes beyond defense, we work closely with
    Palau in the fight against international crime and terror and
    on other issues. And we are particularly grateful that in 2009,
    Palau accepted for temporary resettlement, six ethnic Uyghur
    detainees from Guantanamo when few other countries would.
        As you know, our compact with Palau took effect in 1994. It
    does not have a termination date and requires a review on the
    15-year, 30-year, and 40-year anniversaries. The direct
    economic assistance provisions expired in 2009, and our two
    governments have worked very closely over 20 months of
    discussions and negotiations to conclude the 15-year review
    which resulted in the agreement signed in September 2010. The
    legislation will implement the outcomes of the review, and is
    important to reflect the shared commitment of our two
    governments to our continued partnership.
        I would note that there are some provisions in the current
    draft of H.R. 6040 that exceed the agreement reached between
    the United States and the Government of Palau by extending
    additional benefits and supplemental funding to Palau, which
    would run counter to the carefully calibrated goals of the
    Administration negotiating this agreement. We are prepared to
    work with the Subcommittee with interested Members to ensure
    legislation reflects the bilateral agreement reached during the
    Compact review.
        Palau--it is crucial that we provide Palau the assistance
    agreed to in the Compact review, and as part of agreement, as
    you know, Palauans will be required to have machine readable
    passports to travel to the United States in the future. Palau
    has been a staunch ally and is essential that we stand by our
    commitments. The Palauan people have been loyal and dedicated
    partners. They share our interest in regional international
    security. Failing to implement the 15-year review of the
    Compact with Palau would undermine our national interests. And
    in today's dynamic Pacific environment, failure to live up to
    our commitments and to stand by our partners and longstanding
    friends would not go unnoticed. We believe it is strongly in
    the national interest to move quickly. We appreciate the
    interest and leadership of this Subcommittee in considering
    this legislation promptly and hope both the House and Senate
    will pass it as soon as possible.
        Thank you again, Mr. Chairman, for giving me the
    opportunity to testify before you today and to clarify the
    importance of this legislation. I look forward to answering
    your questions.
        Dr. Fleming. Mr. Kagan, you came very close to the record
    of perfection on ending your testimony at the right moment
    there. We appreciate that.
        Mr. Kagan. Thank you.
        [The prepared statement of Mr. Kagan follows:]

       Statement of Edgard D. Kagan Deputy Assistant Secretary of State,
       Bureau of East Asian and Pacific Affairs, U.S. Department of State

        Chairman Fleming, Ranking Member Sablan, and Members of the
    Subcommittee, thank you for inviting me to appear before you today to
    testify on the importance of our bilateral relationship with Palau as
    well as to discuss the Compact with Palau and proposed legislation
    approving the results of the mandated 15-year Compact review. Although
    we are concerned about specific provisions in H.R. 6040, the Continued
    Free Association with Palau Act of 2012, we hope the Compact review
    legislation will be passed by the Congress and signed by the President
    as soon as possible.
        Our relationship with Palau, as well as that with other Compact
    nations and independent states in the Pacific, is a key aspect of the
    Administration's focus on expanding the scope and pace of our
    engagement with the Asia-Pacific region, and specifically on ensuring
    that we increase our engagement with Pacific Island nations as we look
    forward to what the President has called the ``Pacific Century.'' I was
    fortunate during the first few weeks in my current position to be able
    to travel with Assistant Secretary for East Asian and Pacific Affairs
    Kurt Campbell to the region, including to Palau. My visit to Palau
    demonstrated to me the excellent relationship we enjoy with the people
    of Palau and President Toribiong. I just returned from accompanying
    Secretary Clinton to the Pacific Islands Forum Post-Forum Dialogue and
    participating in the latest round of Tuna Treaty negotiations in
    Vanuatu. Secretary Clinton's presence at the Pacific Islands Forum was
    the first by a Secretary of State in its 41-year history and marked a
    historic level of effort and attention being paid by the Administration
    to working with our Pacific partners, including Palau, to address many
    of the problems they are facing. I was able to meet with Palau's
    Minister of Justice and other senior officials, and they raised the
    status of the legislation, passage of which is their highest priority
    in working with the United States.
    Palau Remains a Friend and Reliable Partner
        Mr. Chairman, the vast stretch of the Pacific and the island
    countries that reside within it share an integral connection to our
    western border and are critical to our national security. Linking many
    of our close friends and allies, from Japan and Australia to Palau,
    Papua New Guinea, and Tonga, the Pacific region forms a crucial
    security arc that stretches from California to the Philippines, from
    Alaska to New Zealand. Our presence and ties to our partners in the
    Pacific not only safeguard our security interests, they also guarantee
    access to the critical sea lanes through which much of our trade flows.
    Among our many friends and partners in the region, we have perhaps none
    stronger than Palau, a country for which we paid a steep price in blood
    and treasure to liberate in 1944.
        Our relations with our Pacific partners are unfolding against the
    backdrop of a shifting strategic environment, where emerging powers in
    Asia and elsewhere seek to exert a greater influence in the Pacific
    region, through development aid, people-to-people contacts, and
    security cooperation. There is greater uncertainty in the region about
    the United States' willingness and ability to sustain the robust
    forward presence in the Pacific that has been a hallmark of much of the
    20th century. That is why the Administration is putting such an effort
    into increasing our engagement not only with mainland and maritime
    Asia, but with the Pacific as well.
        With respect to our foreign policy goals in the region, I think we
    have two critical tasks that touch on our historic relationship with
    Palau. First, we have to sustain and reinforce our full authority and
    responsibility for the security and defense of Palau. We have no
    greater responsibility in the eyes of the Palauan people, and I know
    that we, and the other federal agencies that work with Palau, take that
    responsibility very seriously. Second, we have to ensure that our
    partners in the Pacific, including Palau, continue to work with us and
    support our common goals in regional and multilateral fora, on
    everything from fisheries management to human rights to countering the
    proliferation of weapons of mass destruction.
        Under the Compact of Free Association, the United States provides
    for the security of Palau, which occupies a strategic position in the
    Western Pacific. This security relationship gives us access to Palau
    and its waters, along with the critical authority to deny such access
    by military forces and personnel of other nations. While we have
    welcomed for many decades a peaceful and positive approach to relations
    in the Pacific by all parties, the relatively modest annual cost
    associated with the proposed legislation is leveraged many times over
    in the important strategic advantages this arrangement confers on the
    United States.
        As a result of our security guarantee, Palau does not maintain its
    own military forces, but under the terms of our Compacts, their
    citizens are eligible to, and do, serve voluntarily in the U.S. Armed
    Forces. Palauan citizens volunteer in the U.S. military at a rate
    higher than in any individual U.S. state. Approximately 500 Palauan men
    and women serve in our military today, out of a population of about
    14,000. We are grateful for their sacrifices and dedication to
    promoting peace and fighting terrorism. Palau has deployed soldiers for
    U.S. coalition missions and participated in U.S.-led combat operations
    in the world's most difficult and dangerous places, including
    Afghanistan and Iraq, where several Palauans have lost their lives in
    combat.
        President Toribiong's niece and Minister Jackson Ngiraingas' son
    both serve in the U.S. Navy. The son of Minoru Ueki, Palau's Ambassador
    to Japan, serves in the U.S. Army. Palau Paramount Chief Reklai has a
    daughter and son in the Army. Palau's Ambassador to the United States,
    Hersey Kyota, has two adult children serving in the Armed Forces. He
    has several nephews serving in the Army and Marine Corps. Similarly,
    many other Palauan sons and daughters of other government officials and
    of ordinary Palauan citizens served honorably in U.S. military units
    since the Compact has been in place, most recently in Afghanistan and
    Iraq.
        In addition to our specific responsibility for the safety and
    security of the Palauan people under the Compact, given the wide range
    of U.S. strategic interests and equities in the Western Pacific,
    security developments in the region require our sustained presence and
    engagement. The Reagan Ballistic Missile Defense Test Site on Kwajalein
    Atoll, the presence of U.S. Armed Forces, including the U.S. Coast
    Guard, in Guam and in the waters of the Pacific, and our disaster
    relief operations throughout the region are all crucial to peace and
    security not only for the region, but for the United States. Keeping
    our commitments to Palau, as reflected in the proposed legislation,
    reinforces our defense posture in the Western Pacific, and therefore
    our strategic interests. Access to Palauan waters, lands, airspace, and
    its Exclusive Economic Zones (EEZ), grants us economic benefits and
    allows us to guard and protect our long-term defense interests in the
    region.
        With respect to the second goal of maintaining and strengthening
    our relationship, Palau is among 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 constructive partner as we work to extend the South Pacific
    Tuna Treaty.
        At the 66th General Assembly of the United Nations, Palau's voting
    coincidence with the United States on all votes is approximately 97
    percent, which is markedly higher than 80 percent for the United
    Kingdom, 88 percent for Australia, and 70 percent for both Japan and
    South Korea. Despite an increase in assistance from others interested
    in enhancing their engagement with the region, such as China, Russia,
    and the Arab League nations, Palau has not only supported the United
    States' on Israel and Cuba-related votes but has been at the forefront
    of actively helping garner the support of others. Palau has supported
    UN resolutions seeking to combat the spread of weapons of mass
    destruction, and joined in efforts to address systematic human rights
    abuses in North Korea, Syria, and Iran.
    Our Partnership Extends Beyond Defense
        The importance of our strong relationship with Palau is not limited
    to defense. We work closely with Palau in the fight against
    international crime and terror. In 2009, Palau resettled six ethnic
    Uighur detainees from Guantanamo when few other countries would. Palau
    was our first island partner to sign the U.S. ship rider and ship-
    boarding agreements that are successfully increasing maritime
    surveillance and law enforcement cooperation in the Pacific Islands.
        Palau is a key and constructive player in helping set the tone of
    our negotiations with 16 Pacific Island nations on the extension of our
    South Pacific Tuna Treaty. This treaty guarantees access to South
    Pacific waters to our tuna fleet in return for specific obligations in
    terms of environmental regulation, conservation measures, and other
    important efforts to sustain the viability of South Pacific tuna stocks
    long-term. The value of this treaty to the United States has averaged
    more than $360 million a year over the past three years, and I am glad
    to report that we have made significant progress toward reaching an
    agreement that will ensure that access, and the support for thousands
    of tuna industry jobs here in the United States and American Samoa, for
    some time to come.
        Our people-to-people connections continue to grow strong. Since
    1966, more than 4,200 Peace Corps Volunteers have served in Palau,
    teaching English and life skills and supporting economic development,
    education, capacity building, and marine and terrestrial resource
    conservation in Palau and in the two other Freely Associated States.
    Today approximately 55 Peace Corps volunteers serve in Micronesia and
    Palau.
    Responsibility as a Compact Partner
        The original process that led to our Compact with Palau was based
    on a solemn promise to help this young nation through financial,
    security, and other assistance to achieve self-governance and a
    sustainable economic development path. The effort that has gone into
    the 15-year Compact review, and the positive contribution of Members of
    both Houses of Congress to work towards implementing those arrangements
    is a symbol of our good faith and partnership, not just in Palau, but
    also among all our Pacific partners.
        The timing of this review could not be more important. We are now
    at a point where the goal of self-governance and democracy in Palau is
    firmly in place. The goal of sustainable economic development and
    independence, however, remains a work in progress. The tiered nature of
    the support agreed to in this 15-year review is designed to reduce
    Palau's dependence on U.S. direct economic assistance and assist Palau
    in moving towards sustainable economic development. Importantly, it
    also requires the Palauan government to undertake serious economic and
    fiscal reforms, and, should the United States determine that progress
    towards such reform is inadequate, we are able to withhold further
    assistance until they are implemented.
        Our Compact with Palau took effect in 1994. It does not have a
    termination date and requires a review on the 15-year, 30-year, and 40-
    year anniversaries. The direct economic assistance provisions of the
    Compact, however, expired on September 30, 2009. Our two governments
    worked closely over 20 months of discussions and negotiations to
    conclude the 15-year review, which resulted in an Agreement signed by
    former Deputy Assistant Secretary Frankie Reed and President Toribiong
    in September 2010. The legislation will implement the outcomes of the
    review and is the manifestation of the shared commitment between our
    two governments. I would note, however, that the provisions in the
    current draft of H.R. 6040 exceed the agreement reached between the
    United States and the Government of Palau by extending additional
    benefits and supplemental funding to Palau, which would run counter to
    the carefully calibrated goals of the Administration in negotiating the
    agreement. We are prepared to work with this Subcommittee and with
    interested Members to ensure that the legislation reflects the
    bilateral agreement reached during the Compact review.
        Those provisions notwithstanding, the proposed Compact Review
    legislation would amend Title I of Public Law 99-658 regarding the
    Compact of Free Association between the Government of the United States
    of America and the Government of Palau. In formal language, this bill
    would approve the results of the 15-year review of the Compact,
    including the Agreement between our two governments following the
    Compact of Free Association Section 432 Review.
        The assistance package within the Agreement is designed to relieve
    Palau from its dependence upon U.S. direct economic assistance as it
    continues to grow and reform its economy. The Agreement provides a
    glide path for Palau to move from reliance on the over $18 million it
    has been receiving to a sustainable $15 million level, provides for
    U.S. contributions to the Trust Fund from FY 2013 through FY 2023 and
    decreases the amount Palau may withdraw from the Trust Fund during this
    period, to allow the Trust Fund to grow. The terms of the agreement
    also commit Palau to a range of economic reforms designed to help
    increase fiscal transparency, combat corruption, and create a stronger
    foundation for economic sufficiency in the future. If the United States
    determines that insufficient progress has been made on economic reform,
    we may delay assistance payments until we deem sufficient progress has
    been made. The Agreement has other provisions that supplement the
    Compact, resulting from a review of how the Compact worked over its
    first 15 years. For example, Palau will continue to be eligible for a
    wide range of federal programs and services from agencies such as the
    U.S. Postal Service, federal weather services, the Federal Aviation
    Administration, the Department of Agriculture, and Health and Human
    Services. The Agreement will also require Palauan nationals coming to
    the United States under the Compact to have machine readable passports
    (instead of allowing them to come to the United States without
    passports).
        If the bilateral Agreement between our two countries is not
    implemented, the trust fund would be unable to provide a steady outlay
    of $15 million per year, from now until 2044, which was the intended
    purpose of the Compact negotiators in the 1980s. To ensure smooth
    continuation of our bilateral relationship as well as the continued
    economic development and advance of its self sufficiency, it is crucial
    we provide Palau the assistance agreed to in the Compact review.
    Supporting Palau's Transition to Independence
        Our history with Palau began in bloody battle in 1944. It was a
    sense of duty, and the understanding that Palau was important to our
    strategy in the Pacific, that led thousands of Marines ashore to free
    Palau from colonialism and occupation. Palau remains important now, and
    that same duty has led the United States down a long road of
    partnership with the people of Palau from liberation to trusteeship
    and, finally, to independence. That steadfast commitment to our friends
    has been noted not just in Palau, but across the Pacific.
        Shortly after the end of World War II, the United Nations assigned
    the United States administering authority over the Trust Territory of
    the Pacific Islands, which included Palau and island districts of
    Micronesia that we had liberated from Japanese occupation. Palau
    adopted its own constitution in 1981, and the governments of the United
    States and Palau concluded a Compact of Free Association that entered
    into force on October 1, 1994.
        With a government modeled on our own, Palau shares our goals for
    human rights and democracy throughout the world. Palau has shown
    maturity of a much older nation in its democratic processes, which is a
    testament to the commitment to strong values the people of the Pacific
    have, and reinforces the value of the Compact as a vehicle for
    transition.
        Palau has been a staunch ally to the United States, and it is
    essential we stand by our commitment to the people of Palau. The
    Palauan people have been loyal and dedicated partners, but they are
    concerned about their future and that of their grandchildren. Palau is
    as interested in regional and international security as we are. Failing
    to affirm the results of the 15-year review of the Compact with Palau
    is not in our national interest. We appreciate the interest and
    leadership of this Subcommittee in considering this legislation
    promptly and hope both the House and the Senate will pass it as quickly
    as possible.
        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 that the United States is and will be engaged in the
    Pacific and will remain a faithful friend and ally through both good
    and challenging times.
    The Importance of Implementing the Agreement
        Mr. Chairman, the President, Secretary Clinton, and others in this
    Administration deeply appreciate not only the rich and historic World
    War II legacy of the Pacific, but also the continuing strategic role
    those islands and waters play globally. The Administration places great
    importance on continuing our strong alliance with Pacific Island
    partners. I recently visited the battlefield of Peleliu, where more
    than 3,000 U.S. Marines were lost liberating the island, a necessary
    step towards the eventual liberation of the Philippines and the seizure
    of other key island bases that helped bring the war to a close. I met
    with Palauans who are working with partners in the United States to
    identify personal effects that still remain on the battlefield and to
    return them to family members in the United States nearly seventy years
    later. These efforts are emblematic of our shared history and the deep
    connections that have been forged in the decades since World War II. In
    the current political environment in the Pacific region, it is
    paramount that we maintain those ties and continue to develop our
    strategic framework for a peaceful future in the region. Our investment
    will help to ensure that Palau becomes financially independent over
    time and continues to stand with us as a loyal, trustworthy, and
    democratic ally.
        If the Agreement is not implemented, Palau will not have had time
    to adjust to the reduction from $18 million to $15 million in combined
    direct assistance and trust fund withdrawals on which it has been
    relying and will not have embarked on the reforms called for in the
    September 2010 agreement. Palau's economy would suffer a serious blow
    from the $3 million reduction in assistance (between direct assistance
    and trust fund withdrawals), which would seriously damage our bilateral
    relationship in a key region of the world. In today's dynamic Pacific
    environment, our inability to stand by our partners would not go
    unnoticed, and it is likely that Palau would face offers of assistance
    from other nations expanding their reach in the Pacific to fill the
    void we would leave.
        I hope that my testimony today gives you an understanding and sense
    of how the Compact deepens our partnership with Palau and serves the
    interests of the United States. I look forward to working with you and
    other Members of Congress to secure and advance U.S. interests in Palau
    by passing the legislation implementing the results of the Compact
    review.
        Thank you again for giving me the opportunity to testify before you
    today and to clarify the importance of this legislation. I look forward
    to answering your questions.
                                     ______

        Dr. Fleming. Next, we have Mr. Gootnick. Sir, you have 5
    minutes.

     STATEMENT OF DAVID GOOTNICK, DIRECTOR, INTERNATIONAL AFFAIRS
           AND TRADE, U.S. GOVERNMENT ACCOUNTABILITY   OFFICE

        Mr. Gootnick. Thank you, Mr. Chairman. Mr. Chairman and
    members of the Subcommittee, 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, and provided for
    postal, weather and aviation services. Importantly, the Compact
    also established the basis for discretionary Federal programs
    such as Head Start, community health centers, Pell Grants,
    airport improvements, special education and numerous others.
    Taken together since 1994, the Compact and U.S. programs are
    valued at more than $850 million, of which U.S. program
    assistance was about one-third.
        My statement which I will briefly summarize describes one,
    the economic provisions of the agreement; two, the impact of
    the agreement on Palau's trust fund; three, projected Palau
    government revenues under the agreement. In the statement, we
    have also provided some descriptive information on 6040 and 343
    which we can discuss.
        As has been stated the agreement would provide $215 million
    in assistance with a steady annual decrement from roughly $28
    million to $2 million in 2024. One hundred seven million,
    roughly half of the assistance would support government
    operations. The agreement also provides $40 million for
    infrastructure projects, $28 million for the maintenance fund,
    $10 million to debt relief and adds $30 million to the trust
    fund.
        Importantly the agreement extends postal, weather and
    aviation, and the authority to continue discretionary Federal
    programs. 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 under the agreement, an advisory group would be
    appointed and tasked to make recommendations for fiscal and
    management reforms. And the U.S. made to lay funding condition
    on the progress of these reforms.
        For the infrastructure fund, projects must have land title
    and a certified scope of work to get funding, and the
    maintenance fund is primarily for U.S. finance projects, in
    particular, the Compact road and the international airport.
        Debt relief prioritizes U.S. creditors and requires U.S.
    concurrence on debts to be paid. Regarding the trust fund, the
    proposed U.S. contributions and the delay in schedule
    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 this agreement, the trust fund would need
    only a 5 percent return to yield its new schedule withdrawals.
    This is well below the nearly 8 percent it has earned to date.
        Last, 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, growing from roughly 40 to nearly 60 percent
    of government revenue by 2024, and the estimates project that
    discretionary Federal programs will grow at roughly the rate of
    inflation. They are projected at half of all U.S. assistance
    over the next 15 years. As you know, unlike other components of
    this agreement these programs depend on annual appropriations.
        In summary, Mr. Chairman, 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 conditions that rely on increased revenue and
    the continuation of U.S. Federal programs.
        Mr. Chairman, this completes my remarks ahead of schedule,
    and I am happy to answer any questions.
        Dr. Fleming. Thank you, Mr. Gootnick, both for your
    testimony and for ending it early. We thank you for that.
        [The prepared statement of Mr. Gootnick follows:]

    Statement of David Gootnick, Director, International Affairs and Trade,
                  U.S. Government Accountability Office (GAO)

        Chairman Fleming, Ranking Member Sablan, and Members of the
    Subcommittee:
        I am pleased to be here today to discuss the September 2010
    agreement between the U.S. and Palau governments.\1\
    ---------------------------------------------------------------------------
        \1\ The Agreement between the Government of the United States of
    America and the Government of the Republic of Palau Following the
    Compact of Free Association Section 432 Review (Sept. 3, 2010).
    ---------------------------------------------------------------------------
        The Compact of Free Association between the Government of the
    United States and the Government of the Republic of Palau, which
    entered into force in 1994,\2\ provided for several types of assistance
    aimed at promoting Palau's economic advancement and eventual self-
    sufficiency.\3\ In addition to establishing Palauan sovereignty and
    U.S.-Palau security and defense arrangements, the compact provided
    economic assistance to Palau.\4\ This assistance comprised, among other
    things, direct economic assistance for 15 years to the Palau
    government; the establishment of a trust fund intended to provide Palau
    $15 million annually from 2010 through 2044; investments in
    infrastructure, including a major road; and the provision of federal
    services, such as postal, weather, and aviation. The compact also
    established a basis for U.S. agencies to provide discretionary federal
    programs related to health, education, and infrastructure. In June
    2008, we projected that U.S. assistance to Palau from 1995 through 2009
    would exceed $852 million, with assistance under the compact accounting
    for about 68 percent and assistance through discretionary programs
    accounting for about 31 percent.\5\ We also reported in 2008 that the
    likelihood of the Palau trust fund's being able to sustain the planned
    payments through 2044 was uncertain.
    ---------------------------------------------------------------------------
        \2\ The Compact of Free Association between the Government of the
    United States of America and the Government of the Republic of Palau
    (Oct. 1, 1994).
        \3\ See Proclamation 6726, Placing into Full Force and Effect the
    Compact of Free Association with the Republic of Palau, 59 Fed. Reg.
    49777 (Sept. 27, 1994). Congress approved the Compact of Free
    Association in Public Law 99-658 on November 14, 1986, and Public Law
    101-219 on December 12, 1989. The grant funds specified by the compact
    are backed by the full faith and credit of the U.S. government.
        \4\ Unless otherwise noted, all years cited are fiscal years (Oct.
    1-Sept. 30). In addition, all dollar amounts in this report are in
    nominal dollars (i.e., unadjusted for inflation).
        \5\ GAO, Compact of Free Association: Palau's Use of and
    Accountability for U.S. Assistance and Prospects for Economic Self
    Sufficiency, GAO-08-732 (Washington, D.C.: June 10, 2008).
    ---------------------------------------------------------------------------
        The September 2010 agreement between the U.S. and Palau governments
    (the Agreement) followed a formal review of the compact's terms
    required 15 years after the compact entered into force.\6\ Provisions
    of the Agreement would, among other things, extend economic assistance
    to Palau beyond the original 15 years and modify trust fund
    arrangements. The Agreement establishes an assistance schedule
    beginning in 2011. There are currently two bills pending before the
    Congress to approve and implement the Agreement. A bill now pending
    before the U.S. Senate would approve the Agreement and also appropriate
    funds to implement it.\7\ However, the Senate bill does not reflect the
    fact that fiscal year 2011 has passed.\8\ A bill now pending before the
    House would approve the agreement, apply an inflation adjustment to
    assistance payments, and shift the timing of certain assistance
    payments to reflect the passage of fiscal year 2011.\9\
    ---------------------------------------------------------------------------
        \6\ Section 432 of the compact provides for the U.S. and Palau
    governments to formally review the terms of the compact and its related
    agreements and to consider the overall nature and development of their
    relationship, on the 15th, 30th, and 40th anniversaries of the
    compact's effective date. The governments are to consider the operating
    requirements of the Government of Palau and its progress in meeting the
    development objectives set forth in section 231(a) of the compact. The
    terms of the compact shall remain in force until otherwise amended or
    terminated pursuant to title four of the compact.
        \7\ Senate Bill 343, as introduced in the Senate, amends Title I of
    Public Law 99-658; approves the results of the 15-year review of the
    compact, including the Agreement; and appropriates funds for the
    purposes of the amended Public Law 99-658 for fiscal years ending on or
    before September 30, 2024, to carry out the agreements resulting from
    the review. S. 343, 112th Cong. (2011).
        \8\ S. 343, as introduced in the Senate.
        \9\ House Bill 6040, as introduced in the House, amends Title I of
    Public Law 99-658; approves the results of the 15-year review of the
    compact, including the Agreement; shifts the schedule of certain
    assistance payments; creates an annual reporting requirement for the
    Department of the Interior; and includes an offset provision. H.R.
    6040, 112th Cong. (2012).
    ---------------------------------------------------------------------------
        The Senate Committee on Energy and National Resources held a
    hearing to review the pending bill on June 16, 2011; the Subcommittee
    on Asia and the Pacific of the House Committee on Foreign Affairs held
    a hearing to assess the formal review and proposed Agreement on
    November 30, 2011 We testified at both hearings and described the terms
    of the Agreement, assessed trust fund balances and disbursement plans
    under various assumptions and investment returns, and examined single
    audit reports and budget estimates prepared for the Palau
    government.\10\
    ---------------------------------------------------------------------------
        \10\ GAO, Compact of Free Association: Proposed U.S. Assistance to
    Palau and Its Likely Impact, GAO-11-559T (Washington, D.C.: June 16,
    2011).
    ---------------------------------------------------------------------------
        My statement today updates our November 2011 statement.\11\ In
    particular, it describes (1) the extension of economic assistance to
    Palau as outlined in the Agreement, (2) the impact that this assistance
    would have on the Palau trust fund's sustainability, (3) the projected
    role of U.S. assistance in Palau government revenues, and (4) the
    pending legislation to implement the Agreement. We used recent data
    from the Palau trust fund to update its sustainability, and we reviewed
    the bill pending before the House that was introduced in July 2012.\12\
    In addition, since Congress has not approved legislation implementing
    the agreement, we note that the Department of the Interior has provided
    direct economic assistance to Palau. We conducted this work from August
    and September 2012 in accordance with all sections of GAO's Quality
    Assurance Framework that are relevant to our objectives. The framework
    requires that we plan and perform the engagement to obtain sufficient
    and appropriate evidence to meet our stated objectives and to discuss
    any limitations in our work. We believe that the information and data
    obtained, and the analysis we conducted, provide a reasonable basis for
    any findings and conclusions in this product.
    ---------------------------------------------------------------------------
        \11\ GAO, Compact of Free Association: Proposed U.S. Assistance to
    Palau for Fiscal Years 2011-2024, GAO-12-249T (Washington, D.C.: Nov.
    30, 2011).
        \12\ H.R. 6040.
    ---------------------------------------------------------------------------
    Background
        Palau consists of 8 main islands and more than 250 smaller islands,
    with a total land area of roughly 190 square miles, located
    approximately 500 miles southeast of the Philippines. About 20,000
    people live in Palau, concentrated largely in one urban center around
    the city of Koror, and more than one-quarter of the population is non-
    Palauan.\13\ Palau's economy is heavily dependent on its tourism sector
    and on foreign aid from the United States, Japan, and Taiwan.\14\
    Similar to many small island economies, Palau's public sector spending
    represents a significant percentage of its gross domestic product
    (GDP).\15\
    ---------------------------------------------------------------------------
        \13\ Palau's private sector relies heavily on foreign workers,
    mostly from the Philippines. We reported in 2008 that since 1994,
    foreign workers, as registered with Palau's Social Security Office, had
    grown to account for half of Palau's total labor force. Because many of
    these foreign workers send wage income back to their home nations, in
    2005 the annual net outflow of remittances from Palau equaled an
    estimated 5.5 percent of its gross domestic product (GDP).
        \14\ The International Monetary Fund (IMF) projected that in 2010,
    Palau's GDP was an estimated $218 million and reported that Palau's GDP
    per capita was about $10,500. Business and tourist arrivals were
    projected to be 78,000 in 2010. See IMF, Republic of Palau Staff Report
    for the Article IV Consultation (Apr. 12, 2010).
        \15\ According to the IMF, in 2010, Palau's public sector spending
    was projected at approximately 42 percent of its GDP.
    ---------------------------------------------------------------------------
        U.S. relations with Palau began when American forces liberated the
    islands near the end of World War II. In 1947, the United Nations
    assigned the United States administering authority over the Trust
    Territory of the Pacific Islands, which included what are now the
    Federated States of Micronesia, the Republic of the Marshall Islands,
    the Commonwealth of the Northern Mariana Islands, and Palau. Palau
    adopted its own constitution in 1981. The U.S. and Palau governments
    concluded a Compact of Free Association in 1986; the compact entered
    into force on October 1, 1994. The Department of the Interior's
    (Interior) Office of Insular Affairs (OIA) has primary responsibility
    for monitoring and coordinating all U.S. assistance to Palau, and the
    Department of State (State) is responsible for government-to-government
    relations.
        Key provisions of the compact and its subsidiary agreements address
    the sovereignty of Palau, types and amounts of U.S. assistance,
    security and defense authorities, and periodic reviews of compact
    terms. Table 1 summarizes key provisions of the Palau compact and
    related subsidiary agreements.

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        .epsIn addition to the U.S. assistance provided under the compact,
    U.S. agencies--the Department of Education, the Department of Health
    and Human Services (HHS), and Interior, among others--provide
    discretionary federal programs in Palau as authorized by U.S.
    legislation \16\ and with appropriations from Congress. (See app. II
    for a complete listing of these programs in Palau.)
    ---------------------------------------------------------------------------
        \16\ The compact's federal programs and services agreement,
    establishing the legislative framework for the provision of
    discretionary federal programs in Palau, was in force until October 1,
    2009. These services continued under program authority in 2010 and
    2011.
    ---------------------------------------------------------------------------
        In our 2008 report, we projected that U.S. assistance to Palau from
    1995 through 2009 would exceed $852 million. Of this total, economic
    assistance under the compact accounts for a projected 68 percent and
    discretionary federal programs account for a projected 31 percent (see
    fig. 1).\17\
    ---------------------------------------------------------------------------
        \17\ GAO-08-732.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Agreement Would Extend U.S. Assistance for 15 Years, With Annual
            Decreases
        The September 2010 Agreement between the U.S. and Palau governments
    would extend assistance to Palau to 2024 but steadily reduce the annual
    amount provided. The Agreement would also extend the authority and
    framework for U.S. agencies to continue compact federal services and
    discretionary federal programs.\18\
    ---------------------------------------------------------------------------
        \18\ Other provisions in the Agreement would define reporting and
    auditing requirements and passport requirements. The Agreement would
    require that, by 2018, Palau resolve all deficiencies identified in
    annual single audit reports, which are required by the Compact's fiscal
    procedures agreement, such that no single audit report recommendations
    or deficiencies dating from before 2016 remain. In addition, the
    Agreement alters the entry procedures for citizens of Palau visiting
    the United States, requiring them to present a valid machine-readable
    passport to travel to the United States.
    ---------------------------------------------------------------------------
    Assistance to Palau Would Decline through 2024
        Key provisions of the Agreement would include, among others,
    extending direct economic assistance to Palau, providing infrastructure
    project grants and contributions to an infrastructure maintenance fund,
    establishing a fiscal consolidation fund, and making changes to the
    trust fund. U.S. assistance to Palau under the Agreement would total
    approximately $215 million through 2024.\19\
    ---------------------------------------------------------------------------
        \19\ The compact provided for direct assistance to Palau only
    through 2009. For 2010 through 2012, Interior provided $13.1 million
    for direct assistance to Palau each year. For 2013, Interior's Budget
    Justification proposed $34 million in direct assistance, while the
    Agreement provides for $25.5 million.
    ---------------------------------------------------------------------------
        Legislation implementing the Agreement was not approved by Congress
    during 2011. Department of the Interior provided $13.1 million for
    direct economic assistance in 2011 and again in 2012; however, funds
    were not provided either year for infrastructure projects, the
    infrastructure maintenance fund, or the fiscal consolidation fund.
              Direct economic assistance ($107.5 million). Under
            the Agreement, the U.S. government would provide direct
            economic assistance--budgetary support for Palau government
            operations and specific needs such as administration of justice
            and public safety, health, and education--amounting to $13
            million in 2011 and declining to $2 million by 2023.\20\ The
            Agreement also calls for the U.S. and Palau governments to
            establish a five-member Advisory Group to provide annual
            recommendations and timelines for economic, financial, and
            management reforms. The Advisory Group must report on Palau's
            progress in implementing these or other reforms, prior to
            annual U.S.-Palau economic consultations.\21\ These
            consultations are to review Palau's progress in achieving
            reforms \22\ such as improvements in fiscal management,
            reducing the public sector workforce and salaries, reducing
            government subsidization of utilities, and tax reform. If the
            U.S. government determines that Palau has not made significant
            progress in implementing meaningful reforms, direct assistance
            payments may be delayed until the U.S. government determines
            that Palau has made sufficient progress.
    ---------------------------------------------------------------------------
        \20\ Congress did not pass legislation appropriating funds for this
    assistance in 2011 and therefore the earliest this assistance can begin
    is 2012.
        \21\ The Agreement requires that Palau undertake economic,
    legislative, financial, and management reforms giving due consideration
    to those identified by the IMF; the Asian Development Bank; and other
    creditable institutions, organizations, or professional firms.
        \22\ The compact requires that the United States and Palau consult
    annually regarding Palau's economic activities and progress in the
    previous year, as described in a report that Palau must submit each
    year. Our 2008 report noted that Palau had met reporting conditions
    associated with direct assistance but that, contrary to compact
    requirements, the bilateral economic consultations had not occurred on
    an annual basis; and had been informal and resulted in no written
    records. See GAO-08-732.
    ---------------------------------------------------------------------------
              Infrastructure projects ($40 million). Under the
            Agreement, the U.S. government would provide U.S.
            infrastructure project grants to Palau for mutually agreed
            infrastructure projects--$8 million annually through 2013,\23\
            $6 million in 2014, and $5 million in both 2015 and 2016. The
            Agreement requires Palau to provide a detailed project budget
            and certified scope of work for any projects receiving these
            funds.
    ---------------------------------------------------------------------------
        \23\ Under the Agreement, the U.S. government would have provided
    U.S. infrastructure project grants amounting to $8 million in 2011;
    however, Congress did not pass legislation appropriating such funds in
    2011.
    ---------------------------------------------------------------------------
              Infrastructure maintenance fund ($28 million). Under
            the Agreement, the U.S. government would make contributions to
            a fund to be used for maintenance of U.S.-financed major
            capital improvement projects, including the Compact Road and
            Airai International Airport.\24\ Through 2024,\25\ the U.S.
            government would contribute $2 million annually, and the Palau
            government would contribute $600,000 annually to the fund.\26\
    ---------------------------------------------------------------------------
        \24\ In 2008, we reported that Palau and U.S. officials had
    expressed concerns about Palau's ability to maintain the Compact Road
    in a condition that would allow for the desired economic development.
    We also reported that Palau made initial efforts to maintain the road,
    but at levels that would cause the road to deteriorate over time and
    would not provide the economic development benefits envisioned for the
    people of Palau. See GAO-08-732.
        \25\ The Agreement states that the United States shall provide a
    grant beginning in 2011. However, Congress did not pass legislation
    appropriating funds for this purpose in 2011 and therefore the earliest
    the U.S. contributions can begin is 2012.
        \26\ Under the compact, Palau owes the United States a total of $3
    million. Under the Agreement, Palau would deposit $3 million in the
    infrastructure maintenance fund but not expend it. Any future income
    derived from the $3 million must be used exclusively for the
    maintenance of the Compact Road.
    ---------------------------------------------------------------------------
              Fiscal consolidation fund ($10 million). Under the
            Agreement, the U.S. government would provide grants of $5
            million each in 2011 \27\ and 2012, respectively, to help the
            Palau government reduce its debts. Unless agreed to in writing
            by the U.S. government, these grants cannot be used to pay any
            entity owned or controlled by a member of the government or his
            or her family, or any entity from which a member of the
            government derives income. U.S. creditors must receive
            priority, and the Government of Palau must report quarterly on
            the use of the grants until they are expended.
    ---------------------------------------------------------------------------
        \27\ Although the Agreement states that the United States shall
    provide a grant beginning in 2011, Congress did not pass legislation
    appropriating funds for this purpose in 2011 and therefore the earliest
    the U.S. contributions can begin is 2012.
    ---------------------------------------------------------------------------
              Trust fund ($30.25 million). Under the Agreement, the
            U.S. government would contribute $30.25 million to the fund
            from 2013 through 2023. The Government of Palau will reduce its
            previously scheduled withdrawals from the fund by $89
            million.\28\ From 2024 through 2044, Palau can withdraw up to
            $15 million annually, as originally scheduled. Moneys from the
            trust fund account cannot be spent on state block grants,
            operations of the office of the President of Palau, the Olibiil
            Era Kelulau (Palau National Congress), or the Palau Judiciary.
            Palau must use $15 million of the combined total of the trust
            fund disbursements and direct economic assistance exclusively
            for education, health, and the administration of justice and
            public safety.
    ---------------------------------------------------------------------------
        \28\ Under the Agreement, Palau would withdraw $5 million annually
    through 2013 and gradually increase its maximum withdrawal from $5.25
    million in 2014 to $13 million in 2023.
    ---------------------------------------------------------------------------
        Annual U.S. assistance to Palau under the Agreement would decline
    from roughly $28 million in 2011 to $2 million in 2024. Figure 2
    details the timeline and composition of assistance outlined in the
    Agreement.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Agreement Would Continue Compact Federal Services and Extend
            Framework for Discretionary Federal Programs
        The Agreement would extend the authority for the provision of
    compact federal services and discretionary programs in Palau.
              Federal services. The Agreement would amend the
            compact's subsidiary agreements regarding federal services.
            Specifically, the Agreement amends the terms of postal,
            weather, and aviation services to Palau.
              Federal discretionary programs. The Agreement would
            extend the framework for U.S. agencies to provide discretionary
            federal programs to Palau, with implementation of the programs
            contingent on annual appropriations to those agencies.
    Agreement's Provisions Would Significantly Improve Prospects for Palau
            Trust Fund
        The addition of $30.25 million in U.S. contributions and the delay
    of $89 million in Palau withdrawals through 2023, as provided by the
    Agreement, would improve the fund's prospects for sustaining scheduled
    payments through 2044. At the end of June 2012, the fund had a balance
    of approximately $163 million. The trust fund would need a 5.0 percent
    annual return to yield the proposed withdrawals from 2011 through 2044
    under the Agreement. This rate is well below the 7.9 percent return
    that the fund earned from its inception to June 30, 2012.\29\ Figure 3
    shows projected trust fund balances in 2012 through 2044 under the
    Agreement, with varying rates of return.
    ---------------------------------------------------------------------------
        \29\ All rates of return on the trust fund are net of fees and
    commissions unless otherwise noted.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The additional contributions and reduced withdrawals scheduled
    in the Agreement would also make the trust fund a more reliable source
    of revenue under conditions of market volatility. With these changes,
    the trust fund would have an approximately 90 percent probability of
    sustaining payments through 2044. In comparison, the fund has a 40
    percent probability of sustaining the $15 million annual withdrawals
    scheduled under the compact through 2044.
        Figure 4 compares the probability that the trust fund will sustain
    the proposed withdrawals under the terms outlined in the Agreement with
    the probability that the trust fund will sustain the withdrawals
    scheduled under the compact.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Estimates Prepared for Palau Project Declining Reliance on U.S.
            Assistance Under the Agreement
        Estimates prepared for the Government of Palau project that Palau's
    reliance on U.S. assistance provided under the Agreement will decline,
    while its reliance on trust fund withdrawals and domestic revenue will
    increase.\30\ These estimates show U.S. assistance, as provided under
    the Agreement, declining from 28 percent of government revenue in 2011
    to less than 2 percent of government revenue in 2024. The estimates
    also show Palau's trust fund withdrawals growing from 5 percent of
    government revenue in 2011 to 12 percent in 2024. In addition, the
    estimates indicate that Palau's domestic revenue will rise from 40
    percent of all government revenue in 2011 to 59 percent in 2024.\31\
    Finally, the estimates prepared for Palau project a relatively steady
    reliance on U.S. discretionary federal programs, ranging from 12
    percent of all government revenue in 2011 to 14 percent in 2024. The
    estimates assume that discretionary federal programs will grow at the
    rate of inflation; however, discretionary programs are subject to
    annual appropriations and may not increase over time.
    ---------------------------------------------------------------------------
        \30\ The Government of Palau provided fiscal projections through
    2024 to the Senate Committee on Energy and Natural Resources in January
    2011. The estimates were prepared by an independent economist retained
    by the Government of Palau.
        \31\ In March 2011, the IMF reported that Palau government revenues
    as a percentage of GDP are below average for island nations in the
    Pacific. The report cited opportunities for increased tax revenues by
    eliminating the gross revenue tax, replacing it with a corporate income
    tax, introducing a Value Added Tax, and increasing the level of
    taxation on high earners. The IMF also noted that Palau could reform
    its civil service to decrease wage expenditures. IMF, ``Staff Visit to
    Republic of Palau--Concluding Statement of the IMF Mission'' (Mar. 8,
    2011).
    ---------------------------------------------------------------------------
        Figure 5 shows the types and amounts of Palau's estimated revenues
    for 2011 and 2024.

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      Estimates Prepared for Palau Project Discretionary Program Funding
            as Half of U.S. Assistance
        The estimates prepared for the Government of Palau project that
    U.S. assistance to Palau from 2011 through 2024, including
    discretionary federal programs, will total approximately $427 million.
    The estimates further project that discretionary programs will account
    for nearly half of U.S. assistance through 2024, with assistance
    amounts specified in the Agreement accounting for the other half. (See
    fig. 6.) In contrast, in 2008, we estimated discretionary program
    funding accounted for less than one-third of total U.S. assistance to
    Palau from 1995 through 2009.

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        Pending Legislation Would Approve and Implement the Agreement
        Legislation has been introduced in both the Senate and the House
    that would approve and implement the September 2010 agreement between
    the U.S. and Palau governments.
        In February 2011, a bill was introduced in the Senate that would
    implement the Agreement, as written.\32\ The Senate bill would
    authorize and appropriate funds to Interior for specified assistance.
    The Senate bill would also extend the authority, and authorize
    appropriations, for the provision of compact federal services in Palau.
    However, the proposed legislation does not appropriate funds for
    compact federal services. As of September 2012, the Senate has not
    acted on this bill.
    ---------------------------------------------------------------------------
        \32\ S. 343.
    ---------------------------------------------------------------------------
        In June 2012, a bill was introduced in the House that would approve
    and implement the Agreement, with some modifications.\33\ Specifically,
    the pending House bill:
    ---------------------------------------------------------------------------
        \33\ H.R. 6040.
    ---------------------------------------------------------------------------
              Shifts the timing of the provision of some specified
            Agreement assistance to account for the fact that fiscal year
            2011 has passed.
              Extends the full faith and credit provision of the
            compact \34\ to the U.S. commitments of assistance under the
            Agreement for direct economic assistance, the trust fund, the
            infrastructure maintenance fund, the fiscal consolidation fund,
            and infrastructure projects.
    ---------------------------------------------------------------------------
        \34\ Pursuant to this compact provision, should the United States
    fail to provide a payment covered by the pledge, Palau would be able to
    seek relief in the U.S. Claims Court or its successor court.
    ---------------------------------------------------------------------------
              Applies an inflation adjustment to the Agreement
            assistance for direct economic assistance and infrastructure
            project grants, and payments to the trust fund, infrastructure
            maintenance fund, and fiscal consolidation fund.\35\
    ---------------------------------------------------------------------------
        \35\ Adjusting direct economic assistance, infrastructure project
    grants, and payments to the trust fund, infrastructure maintenance
    fund, and fiscal consolidation fund for inflation would increase the
    value of U.S. assistance to Palau. Our analysis shows that adjusting
    for inflation and reducing fiscal consolidation fund as outlined in
    H.R. 6040, the value of U.S. contributions would increase approximately
    $12 million.
    ---------------------------------------------------------------------------
              Extends a pledge of the full faith and credit of the
            United States for the full payment of the amounts necessary to
            conduct the audits of the assistance provided, as called for
            under the Agreement.\36\
    ---------------------------------------------------------------------------
        \36\ Under the Agreement, the Government of Palau is to bear the
    cost of these audits. According to an Interior official, the cost of
    the audits is approximately $500,000 per year.
    ---------------------------------------------------------------------------
        In addition, the Senate and House bills implementing the Agreement
    would amend the sections of the Agreement that extend the authority for
    the provision of compact federal services and discretionary programs in
    Palau. The proposed Senate and House legislation would authorize annual
    appropriations for weather and aviation services.\37\ The proposed
    Senate and House legislation would extend the eligibility of the
    people, government, and institutions of Palau for certain discretionary
    programs, including special education and Pell grants.\38\ However, the
    proposed bills differ in how they would authorize appropriations to
    subsidize postal service to Palau, the Republic of the Marshall
    Islands, and the Federated States of Micronesia. The Senate legislation
    would have authorized appropriations of $1.5 million to Interior for
    2011 through 2024, to subsidize postal services provided by the U.S.
    Postal Service.\39\ The proposed House legislation would authorize
    appropriations of $1.5 million to Interior beginning in 2012 and
    through 2024, to subsidize postal services. Under the proposed House
    bill, Interior would be authorized to transfer these funds to the U.S.
    Postal Service under the condition that domestic postage may be used
    for mail to these countries.\40\
    ---------------------------------------------------------------------------
        \37\ S. 343 as introduced in the Senate and H.R. 6040 as introduced
    in the House.
        \38\ Ibid.
        \39\ S. 343.
        \40\ H.R. 6040.
    ---------------------------------------------------------------------------
        Chairman Fleming, Ranking Member Sablan, and Members of the
    Subcommittee, this completes my prepared statement. I would be happy to
    respond to any questions you may have at this time.
    GAO Contact and Staff Acknowledgments
        For further information about this statement, please contact David
    Gootnick at (202) 512-3149 or gootnickd@gao.gov. Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on
    the last page of this statement.
        Emil Friberg (Assistant Director), Ming Chen, David Dayton, Brian
    Hackney, Reid Lowe, Grace Lui, and Valerie L. Nowak made key
    contributions to this statement. Robert Alarapon, Benjamin Bolitzer,
    Rhonda Horried, Farahnaaz Khakoo, Jeremy Sebest, Cynthia Taylor, and
    Anu Mittal provided technical assistance.
        This is a work of the U.S. government and is not subject to
    copyright protection in the United States. The published product may be
    reproduced and distributed in its entirety without further permission
    from GAO. However, because this work may contain copyrighted images or
    other material, permission from the copyright holder may be necessary
    if you wish to reproduce this material separately.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        GAO's Mission
        The Government Accountability Office, the audit, evaluation, and
    investigative arm of Congress, exists to support Congress in meeting
    its constitutional responsibilities and to help improve the performance
    and accountability of the federal government for the American people.
    GAO examines the use of public funds; evaluates federal programs and
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    values of accountability, integrity, and reliability.
                                     ______

    HIGHLIGHTS
    September 10, 2012

                          COMPACT OF FREE ASSOCIATION

           Proposed U.S. Assistance to Palau through Fiscal Year 2024

    Why GAO Did This Study
        The Compact of Free Association between the United States and the
    Republic of Palau, which entered into force in 1994, provided for
    several types of assistance aimed at promoting Palau's self-sufficiency
    and economic advancement. Included were 15 years of direct assistance
    to the Palau government; contributions to a trust fund meant to provide
    Palau $15 million each year in fiscal years 2010 through 2044;
    construction of a road system, known as the Compact Road; and federal
    services such as postal, weather, and aviation. U.S. agencies also
    provided discretionary federal programs related to health, education,
    and infrastructure. In 2008, GAO projected that total assistance in
    fiscal years 1994 through 2009 would exceed $852 million.
        In September 2010, the United States and Palau signed an agreement
    (the Agreement) that would, among other things, provide for additional
    assistance to Palau beginning in fiscal year 2011 and modify its trust
    fund. Currently, there are two bills pending before Congress to
    implement the Agreement.
        In this testimony, GAO updates a November 2011 testimony on (1) the
    Agreement's provisions for economic assistance to Palau, (2) its impact
    on the trust fund's likelihood of sustaining scheduled payments through
    fiscal year 2044, (3) the projected role of U.S. assistance in Palau
    government revenues, and (4) the pending legislation to implement the
    Agreement. GAO reviewed current trust fund data and new pending
    legislation for this testimony.
    What GAO Found
        The Agreement would provide decreasing assistance, totaling
    approximately $215 million through fiscal year 2024 and includes the
    following:
              direct economic assistance ($107.5 million) for Palau
            government operations;
              infrastructure project grants ($40 million) to build
            mutually agreed projects;
              infrastructure maintenance fund ($28 million) for
            maintaining the Compact Road, Palau's primary airport, and
            certain other major U.S.-funded projects;
              fiscal consolidation fund ($10 million) to assist
            Palau in debt reduction; and
              trust fund contributions ($30.25 million) in addition
            to the $70 million contributed under the compact
    Assistance to Palau Specified in the Agreement
        Notes: All dollar amounts are in nominal dollars (i.e., unadjusted
    for inflation). Funds were not provided in fiscal years 2011 or 2012 to
    date for infrastructure projects, the infrastructure maintenance fund,
    or the fiscal consolidation fund.
        Under the Agreement, the United States would contribute to the
    trust fund in fiscal years 2013 through 2023, and Palau would reduce
    its withdrawals by $89 million in fiscal years 2010 through 2023. GAO
    projects that the fund would have a 90 percent likelihood of sustaining
    payments through fiscal year 2044 with these changes, versus 40 percent
    without these changes.
        Estimates prepared for the Palau government project declining
    reliance on U.S. assistance under the Agreement--from 28 percent of
    government revenue in fiscal year 2011 to 2 percent in fiscal year
    2024--and growing reliance on trust fund withdrawals and domestic
    revenues. The estimates show trust fund withdrawals rising from 5
    percent to 24 percent and domestic revenues rising from 40 to 59
    percent, of total government revenue. According to the estimates, U.S.
    assistance in fiscal years 2011 through 2024 would total $427 million,
    with discretionary federal programs accounting for about half of that
    amount.
        Congress has not approved legislation to implement the Agreement as
    of September 2012. Pending Senate legislation would implement the
    Agreement and appropriate funds to do so. Pending House legislation
    would implement the agreement, apply an inflation adjustment to
    assistance payments, and shift the timing of certain assistance
    payments to reflect the fact that 2011 has passed.
                                     ______

        Dr. Fleming. All kidding aside, we do appreciate the time
    and effort that you put into your testimonies, and I realize
    sometimes it is difficult to get it all in timely. At this
    point, we will begin Member questioning of witnesses. To allow
    all Members to participate and ensure we hear from all of our
    witnesses today, Members are limited to 5 minutes for their
    questions. However, if Members have additional questions, we
    can have more than one round of questioning and we usually do.
    I now recognize myself for 5 minutes.
        Free association did not exist before it was used for the
    Republic of Palau and the other two compacts with the Republic
    of the Marshall Islands and Federated States of Micronesia. Can
    either Secretary here today discuss why this type of
    association was agreed to by the United States? And a second
    part of that question, was it the intent of the Compact for the
    United States to provide funding to Palau for the life of the
    Compact outside of the trust fund?
        Mr. Babauta. I will attempt to answer the question, Mr.
    Chairman. As I understand the history of the trust territories
    and eventually maturing to a point they were granted free
    association which is the relationship between us and them. It
    was the United States responsibility at the time----
        Dr. Fleming. Make sure your mic is close to you.
        Mr. Babauta. It was my understanding the United States took
    on the responsibility shortly after World War II and it
    received those areas that were designated as trust territories
    of the Pacific Islands under the United Nations with an
    agreement that under the United States, our country would
    attempt to assist them to a point where they are mature
    politically and can seek a different status, a different
    relationship. As you know we have the three freely associated
    states and the Commonwealth of the Northern Mariana Islands and
    they elected to go a different route in its maturation process.
        Dr. Fleming. OK. It was the intent of the Compact, I am not
    sure if I heard----
        Mr. Babauta. About funding outside?
        Dr. Fleming. About the funding outside of the trust fund?
        Mr. Babauta. I would not know the answer to that question,
    sir.
        Dr. Fleming. Secretary Kagan?
        Mr. Kagan. Unfortunately Mr. Chairman I don't know the
    answer either in terms of what the original intent was, but we
    would certainly be happy to go and look for that to get you a
    good answer.
        Dr. Fleming. Yes, I would appreciate you getting back to
    us. Again, for historical perspective, really all three
    compacts, Marshall Islands, Micronesia and Palau were very
    important areas during World War II. Micronesia, Palau were
    great staging areas for bombing, and they prove even today to
    be very important strategic areas. And so this is certainly
    something that we need to focus on.
        Secretary Babauta, you mentioned in your testimony that
    Palau has made strong economic gains under the Compact that its
    growth in real terms has averaged over 2 percent per year,
    which really looks pretty good compared to what we are seeing
    today on Conis. And Palau's governmental services are a meeting
    the needs of the community. What funding or revenue support
    these Palau government services, local revenues our outside
    funding?
        Mr. Babauta. Well, under the new agreement, sir?
        Dr. Fleming. Well, I guess really what I am asking about is
    the economy itself, it has 2 percent GDP growth right? So what
    is sustaining that? Is this outside flow of money? Is this
    growth in the economy internally? What is driving that GDP?
        Mr. Babauta. What is driving Palau's economy is tourism.
    Back in 2005, when we turned over the Compact road to them, at
    the time, Palau was receiving tourists at 76,000 per year. I
    just recently went to Palau in the beginning of August and
    talked to their leadership and President Toribiong. And they
    report now their tourism is up at 110,000 tourists per year.
    And they have managed to contain their government growth so
    that they are able to provide money for education in the
    community college and make the right investments to take care
    of their people.
        Dr. Fleming. And where are the bulk of visitors coming
    from?
        Mr. Babauta. They actually come from all over, sir. I think
    the most recent spike in their tourism has been from China, but
    generally, it is one of the top five dive spots in the world so
    they are frequented from visitors all over the globe.
        Dr. Fleming. I recall back in the day, Japanese visitors
    were the main source. I guess it has changed over to Chinese
    visitors. Is it still a very sought after scuba diving haven?
        Mr. Babauta. I have not scuba dived there yet, but yes,
    apparently with their visitors who frequent there yes, it still
    is.
        Dr. Fleming. Well, it is legendary in its scuba diving and
    I myself never got make it there, even though I was fairly
    close. Well, these are important things, we will revisit some
    of them in a moment when we get back to our second round. Every
    time we start these trust funds and we have this flow of money
    to various islands, island states around the world, it is
    obviously important that we create a sustainable economy, and
    that is certainly something that we will need to focus on more
    in these discussions. I now yield to gentleman, Mr. Sablan, for
    5 minutes.
        Mr. Sablan. Thank you very much, Mr. Chairman. And let me
    just say something, while it may not be written in the law on
    the intention to continue reviewing and continue to provide
    assistance to the Republic of Palau, I think there is this
    spirit of the arrangement, the Compact arrangements that the
    United States would look at ways to assist the Republic of
    Palau and their needs in the 15-, 30-, and 40-year period.
        Mr. Chairman, coming from an islander, I learned how to
    scuba dive just to dive in Palau, so we should all go out there
    together, sir, and I will watch you dive.
        Welcome, Secretary Babauta, Secretary Kagan and Dr.
    Gootnick. Let me start with you, Secretary Kagan. The Compact
    provides that the United States will conduct audits at once of
    its compact assistance. It says the agreement now shifts the
    costs to Palau. I understand that this provision doesn't exist
    with the Republic, for the Marshalls and the Federated States
    of Micronesia, so the cost can be less than $500,000 for an
    audit.
        So wouldn't it be in our best interest for the United
    States, would we have a greater assurance of getting the audits
    at once if the United States continued to provide for these
    audits? And why should Palau have greater responsibility for
    audits of the used funds that the U.S. wants than the other two
    freely associated states?
        Mr. Kagan. Mr. Sablan, thank you very much for the
    question, it is an excellent question, and reflects your focus
    and understanding of these issues. I think the first thing I
    would say is that while obviously the three Compact states
    share a number of similarities, from our standpoint we do
    believe that it is very important to treat them separately for
    a number of reasons having do with different circumstances in
    each country as well as obviously the different histories of
    our engagement there.
        In terms of specific provisions, I should note we strongly
    support the regular audits, and these audits we think have been
    very effective at promoting our shared interest ensuring
    efficient use of Compact funds. As to the question of cost,
    this was something that was negotiated between us. There were
    obviously discussions on this, and I think that the, very
    fundamentally, I think the feeling was that this reflected some
    of the circumstances that evolved in the last 15 years.
        You know, we believe that Palau has a very strong
    commitment to ensuring transparency and integrity in the use of
    Compact funds and don't believe that this is a particular
    challenge in terms of the possibility that shifting the burden
    of cost might lead to a change in the audit.
        Mr. Sablan. I am going to run out of time, Secretary, and
    that is why you are the diplomat here. Let me say something,
    you are speaking to a Micronesian, and $500,000 is a lot of
    money anywhere, but $500,000 for a small country like Palau is
    a huge amount of money that they could use better. So I am
    asking, why are you treating them differently than you do the
    Republic of Marshall or FSM? That is a concern I have and could
    we eventually get an answer?
        My second issue here, Secretary Kagan, is that the
    Department of State is concerned about specific provisions in
    the bill and that the bill would extend benefits and funding to
    Palau that would run counter to the carefully calibrated goals
    of the Administration and the negotiations. The provisions to
    which you refer are continuations of provisions of the Compact,
    similar to provisions included in the revised compacts with the
    other two freely associated nations negotiated by the Executive
    Branch, approved by Republican Congress in 2003. And in one
    case, through a Congressional addition to the negotiated
    revised compacts, there are millions more in costs that would
    not add to the cost of the bill and would be offsetting costs
    by the intended amount of offsets to the bill.
        My understanding, sir, is that the negotiators for the
    Republic of Palau were just ready to throw their arms up
    because of the negotiating tactics and things like that. But
    what consideration does the Administration's carefully
    calibrated goals give to those factors, outside related to the
    provisions to which you referred, would you recommend to veto
    the bill with this provision? And do you think the Department
    would? The additions to the bill separate from the negotiated
    bill, the agreement?
        Mr. Kagan. I think that our view is first that this was
    negotiated over some period of time, and I think it is usual in
    negotiations for both sides at times to be frustrated with the
    other. I think we are happy that we have reached agreement and
    there was strong support both by the Government of Palau and by
    the Administration. Our view is that in doing this, as in any
    negotiation, there were trade-offs that were made on a variety
    of issues, and we believed the resulting agreement was one that
    reflected those trade-offs accurately. As I said before, we do
    have concerns about this. As to your final question, I would
    note we stand ready to work with the Committee and with Members
    to address those. Obviously we very strongly support----
        Mr. Sablan. Thank you. Because in exchange for this
    agreement we have--our relationship with Palau is significant
    in terms of the United States national security interest in the
    Pacific. It starts at Hawaii and goes all the way up to the
    Northern Marianas and up to Okinawa in Japan and the
    Philippines. I will yield back the balance of my time to the
    second round of questions. Thank you. Thank you, Secretary.
        Dr. Fleming. The gentleman yields back. Mr. Faleomavaega
    you have 5 minutes, sir.
        Mr. Faleomavaega. Thank you, Mr. Chairman, and our Ranking
    Member for your leadership and initiative in calling this
    important hearing concerning the proposed legislation we are
    now considering. I want to focus specifically on H.R. 6040,
    which is concerning the Palau situation.
        Mr. Chairman, I would like unanimous consent to have the
    full text of my statement be made part of the record.
        Dr. Fleming. I am sorry, sir I didn't hear.
        Mr. Faleomavaega. I would like to request that the full
    text of my statement be made a part of the record.
        Dr. Fleming. Without objection, so ordered.
        [The prepared statement of Mr. Faleomavaega follows:]

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

        Mr. Chairman:
        Thank you and our Ranking Member, Mr. Sablan, for your leadership
    in holding today's hearing on this important legislation to continue
    free association with Palau through Fiscal Year 2024. Enactment of this
    legislation without further delay is imperative for security,
    diplomatic, and economic reasons.
        As Ranking Member of the Foreign Affairs' Subcommittee on Asia and
    the Pacific, I co-authored H.R. 6040 with Chairman Manzullo. For the
    record, fourteen other Members have joined us as original co-sponsors.
    Seven Members of the Subcommittee on Fisheries, Wildlife, Oceans and
    Insular Affairs have formally supported the bill.
        H.R. 6040 would approve and slightly modify terms for continuing
    free association with Palau developed pursuant to the Compact of Free
    Association negotiated by the Reagan Administration and approved by law
    under the George H.W. Bush Administration. The Department of Defense
    has written to the Congress that ``[f]ailure to follow through on our
    commitments to Palau, as reflected in the proposed legislation, would
    jeopardize our defense posture in the Western Pacific''.
        According to the DoD, Palau is ``irreplaceable'' because the
    islands cover a strategic expanse of the Pacific as big as Texas. The
    Compact right of the United States to deny access to other nations
    prevents countries like China from using sea-lanes that needs for
    economic and military expansion. The Pentagon has made this very clear
    with a translation of a Chinese sea strategy map, which I include with
    this statement. It shows Palau as a key link in an island chain running
    from Japan down to Indonesia that China wants to break through. It has
    no chance, other than if the Congress fails to approve this bill. If we
    fail to do so, China will fill the gap and shatter the chain of defense
    by offering their own kind of assistance to Palau.
        The Department of State has similarly written that continuing free
    association with Palau is ``vital'' for the United States. It is
    important to know that Palau votes with the U.S. in the United Nations
    more than any other member. This is critical on issues such as those
    concerning Israel and Cuba on which we would otherwise be isolated. The
    Arab League and Cuba have offered Palau aid in return for changing its
    votes. But as you know, the current administration in Palau has
    declined, standing firmly with the United States.
        Under the Compact, the decision of whether to continue free
    association and Palau's U.S. assistance needs through FY 2024 were to
    be determined in a bilateral review and was implemented in FY 2010.
    However, the review was not completed until two years ago. It settled
    upon a phase out of direct assistance, which would total much less than
    during the first period of free association, in contrast to the
    substantial increases agreed to by the George W. Bush Administration
    and the Republican Congress in 2003 in the revised compacts with the
    two other freely associated states.
        Leaders on both sides of the aisle on both sides of the Capitol
    have expressed strong support for legislation to provide at least what
    was agreed to in the review and no Member of Congress has questioned
    it.
        The Administration's draft bill did not include measures to offset
    the cost. After being pressed for such measures, it suggested proposals
    that Ranking Member Markey as well as Chairman Hastings said could
    still not pass the Committee on Natural Resources, their counterparts
    in the Senate committee agreed that they were not viable, and chairmen
    of both appropriations committees also agreed that the offsets were not
    acceptable.
        Chairman Manzullo introduced new legislation with other offsets.
    One is in the Foreign Affairs bill before you and is agreed to by the
    Senate. It is intended to more than cover the costs of the bill and
    would make this a net savings measure. The Speaker and the Majority
    Leader are now discussing the options with Foreign Affairs Chairwoman
    Ros-Lehtinen and Manzullo to enable the bill to pass the House as soon
    as possible.
        They understand that the long delay has led some Palauans to
    question the Compact Review Agreement and the commitment of the United
    States to the association and the serious potential losses for our
    country, especially under the full faith and credit clause of the U.S.
    constitution.
        The Compact was not approved in Palau until the Congress under
    President George H. W. Bush added some provisions to the negotiated
    Compact to address Palauan concerns. In fact, all free association
    agreement laws to date have had such provisions.
        H.R. 6040 includes only a few but they are very much needed. They
    address concerns increasingly raised by Palauans and are prudent since
    Palau, too, needs to approve the Agreement. Members of Congress said
    these provisions should be included in the Agreement when it was being
    negotiated. The provisions would be consistent with the Agreement to
    the Compact and also include the revised compacts approved by the
    Republican Congress in 2003. The bill's cost offset is intended to more
    than make up for the cost.
        Mr. Chairman, these provisions are modest, well justified, and
    precedented. They perfect a very good Agreement. I respectfully urge
    you to act so that the bill can be enacted into law very soon as it
    needs to be in the interests of our great nation.
                                     ______

        Mr. Faleomavaega. Thank you. I have listened with
    tremendous interest in terms of the statements made by our
    friends from the Interior Department, and also from the State
    Department, quite complimentary, and all have stated a sense
    that Palau and this region of the world is vitally important to
    the interest of the United States.
        Mr. Chairman, I submit I just wish the rhetoric would match
    the substance in terms of how we really have been treating
    these island countries of this region.
        With all due respect, Secretary Kagan, since you are new on
    the job, I have been very, very disappointed, both Democratic
    and Republican Administrations have never really taken the
    Pacific Island countries of this region of the world seriously.
    The only real foreign policy we have toward this region, Mr.
    Chairman, is really toward New Zealand and Australia. These
    island countries are only incidental to our foreign policy,
    which we have no foreign policy for the Pacific Island
    countries. It is primarily toward New Zealand and Australia.
        The question that the Chairman raised earlier, the reason
    why we have authority over these islands was specifically after
    World War II, unilaterally we just declared this region as a
    strategic trust. With or without the United Nations' approval,
    we just took over. It was vital and it was part of our
    strategic and military interest, that is the reason why we are
    there, that is the reason why we ended up with three Compact
    associations because the Russians and the Cubans and the
    Communists in the United Nations were constantly criticizing
    the United States for having a colonial rule over the island
    countries. So rather than continue the trust territory, the
    Pacific Islands, we negotiated these Compacts of Free
    Association and we have three entities: Republic of the
    Marshall Islands, Federated States of Micronesia, and the
    Republic of Palau.
        So now, what is it that we have? Primarily our number one
    priority is to make sure that our strategic and military
    interests are protected. It is not because of these islands
    have oil and gas or resources and such that we have any real
    economic interest, it is primarily strategic and military. And
    I will say that I am utterly disappointed, the fact that for 2
    years we have been dragging this issue, finally having to come
    to the Congress to do something by trying to find some sort of
    offsets to meet the requirements that we have under the terms
    of the Compact.
        My understanding Mr. Chairman, the U.S. Constitution
    pledges its full faith in credit clauses in whatever the
    government of the United States has obligations, and one is
    toward Palau as part of the Compact agreements that we had with
    this country, guaranteeing our presence in times of war and
    emergency for 50 years that we could use Palau. And I might
    also add, Mr. Chairman, that this issue is very critical when
    we are looking at the South China Sea, and the issues we are
    now confronted with China and all the problems with the Asian
    countries, I think the question that we have now that we have
    to answer, is Palau relevant to our overall strategic and
    military interest right now in the Pacific? And I say, Mr.
    Chairman, it better be, because right now a lot of Palauan
    leaders are seriously questioning the integrity of our own
    government whether or not we are willing to fulfill our
    obligations and commitments financially in terms of what we
    agreed upon in terms of the Compact.
        I realize my time is up, Mr. Chairman. I haven't had a
    chance to even ask one question, but I really, really thank you
    for your leadership and wanted to see this through. But I have
    about 100 questions that I want to wait for the second round. I
    just want to give that as an opener, and my real concern, Mr.
    Chairman, is that we are not paying enough attention. So we
    don't even have USAID presence, if we did it was only a million
    dollars for the budget, Mr. Kagan, while China has a $600
    million economic development program for these island nations.
    Do you think they are stupid not to realize that we really
    don't care, we really don't have interest except for New
    Zealand and Australia, that is basically our foreign policy
    toward the Pacific. I am sorry, Mr. Chairman, I will wait for
    the second round.
        Dr. Fleming. I thank the gentleman. I believe the gentleman
    has framed the issue very well. The Chairman now recognizes Ms.
    Bordallo the gentlelady from Guam.
        Ms. Bordallo. Thank you, Mr. Chairman. I ask unanimous
    consent that an August 1st article from The Washington Post
    entitled, ``U.S. Model For a Future War Fans Tensions With
    China and Inside Pentagon,'' as well as an accompanied map
    illustrating the U.S. force posture in the Asia-Pacific region
    be included in the record. I believe this article and map
    highlight the importance of why we need to pass the Compact
    renewal with Palau.
        Dr. Fleming. We have a copy of that.
        Ms. Bordallo. I hope this doesn't cost me time.
        Dr. Fleming. We will reset the time for the gentlelady.
    Without objection so ordered so approved.
        [The article and maps follow:]
    The Washington Post Company

        U.S. model for a future war fans tensions with China and inside
                                    Pentagon

    By Greg Jaffe, Published: August 1, 2012
        When President Obama called on the U.S. military to shift its focus
    to Asia earlier this year, Andrew Marshall, a 91-year-old futurist, had
    a vision of what to do.
        Marshall's small office in the Pentagon has spent the past two
    decades planning for a war against an angry, aggressive and heavily
    armed China.
        No one had any idea how the war would start. But the American
    response, laid out in a concept that one of Marshall's longtime
    proteges dubbed ``Air-Sea Battle,'' was clear.
        Stealthy American bombers and submarines would knock out China's
    long-range surveillance radar and precision missile systems located
    deep inside the country. The initial ``blinding campaign'' would be
    followed by a larger air and naval assault.
        The concept, the details of which are classified, has angered the
    Chinese military and has been pilloried by some Army and Marine Corps
    officers as excessively expensive. Some Asia analysts worry that
    conventional strikes aimed at China could spark a nuclear war.
        Air-Sea Battle drew little attention when U.S. troops were fighting
    and dying in large numbers in Iraq and Afghanistan. Now the military's
    decade of battling insurgencies is ending, defense budgets are being
    cut, and top military officials, ordered to pivot toward Asia, are
    looking to Marshall's office for ideas.
        In recent months, the Air Force and Navy have come up with more
    than 200 initiatives they say they need to realize Air-Sea Battle. The
    list emerged, in part, from war games conducted by Marshall's office
    and includes new weaponry and proposals to deepen cooperation between
    the Navy and the Air Force.
        A former nuclear strategist, Marshall has spent the past 40 years
    running the Pentagon's Office of Net Assessment, searching for
    potential threats to American dominance. In the process, he has built a
    network of allies in Congress, in the defense industry, at think tanks
    and at the Pentagon that amounts to a permanent Washington bureaucracy.
        While Marshall's backers praise his office as a place where
    officials take the long view, ignoring passing Pentagon fads, critics
    see a dangerous tendency toward alarmism that is exaggerating the China
    threat to drive up defense spending.
        ``The old joke about the Office of Net Assessment is that it should
    be called the Office of Threat Inflation,'' said Barry Posen, director
    of the MIT Security Studies Program. ``They go well beyond exploring
    the worst cases. . . . They convince others to act as if the worst
    cases are inevitable.''
        Marshall dismisses criticism that his office focuses too much on
    China as a future enemy, saying it is the Pentagon's job to ponder
    worst-case scenarios.
        ``We tend to look at not very happy futures,'' he said in a recent
    interview.
    China tensions
        Even as it has embraced Air-Sea Battle, the Pentagon has struggled
    to explain it without inflaming already tense relations with China. The
    result has been an information vacuum that has sown confusion and
    controversy.
        Senior Chinese military officials warn that the Pentagon's new
    effort could spark an arms race.
        ``If the U.S. military develops Air-Sea Battle to deal with the
    [People's Liberation Army], the PLA will be forced to develop anti-Air-
    Sea Battle,'' one officer, Col. Gaoyue Fan, said last year in a debate
    sponsored by the Center for Strategic and International Studies, a
    defense think tank.
        Pentagon officials counter that the concept is focused solely on
    defeating precision missile systems.
        ``It's not about a specific actor,'' a senior defense official told
    reporters last year. ``It is not about a specific regime.''
        The heads of the Air Force and Navy, meanwhile, have maintained
    that Air-Sea Battle has applications even beyond combat. The concept
    could help the military reach melting ice caps in the Arctic Circle or
    a melted-down nuclear reactor in Japan, Adm. Jonathan Greenert, the
    U.S. chief of naval operations, said in May at the Brookings
    Institution.
        At the same event, Gen. Norton Schwartz, the Air Force chief,
    upbraided a retired Marine colonel who asked how Air-Sea Battle might
    be employed in a war with China.
        ``This inclination to narrow down on a particular scenario is
    unhelpful,'' Schwartz said.
        Privately, senior Pentagon officials concede that Air-Sea Battle's
    goal is to help U.S. forces weather an initial Chinese assault and
    counterattack to destroy sophisticated radar and missile systems built
    to keep U.S. ships away from China's coastline.
        Their concern is fueled by the steady growth in China's defense
    spending, which has increased to as much as $180 billion a year, or
    about one-third of the Pentagon's budget, and China's increasingly
    aggressive behavior in the South China Sea.
        ``We want to put enough uncertainty in the minds of Chinese
    military planners that they would not want to take us on,'' said a
    senior Navy official overseeing the service's modernization efforts.
    ``Air-Sea Battle is all about convincing the Chinese that we will win
    this competition.''
        Like others quoted in this article, the official spoke on the
    condition of anonymity because of the sensitivity of the subject.
    A military tech `revolution'
        Air-Sea Battle grew out of Marshall's fervent belief, dating to the
    1980s, that technological advancements were on the verge of ushering in
    a new epoch of war.
        New information technology allowed militaries to fire within
    seconds of finding the enemy. Better precision bombs guaranteed that
    the Americans could hit their targets almost every time. Together these
    advances could give conventional bombs almost the same power as small
    nuclear weapons, Marshall surmised.
        Marshall asked his military assistant, a bright officer with a
    Harvard doctorate, to draft a series of papers on the coming
    ``revolution in military affairs.'' The work captured the interest of
    dozens of generals and several defense secretaries.
        Eventually, senior military leaders, consumed by bloody, low-tech
    wars in Iraq and Afghanistan, seemed to forget about Marshall's
    revolution. Marshall, meanwhile, zeroed in on China as the country most
    likely to exploit the revolution in military affairs and supplant the
    United States' position as the world's sole superpower.
        In recent years, as the growth of China's military has outpaced
    most U.S. intelligence projections, interest in China as a potential
    rival to the United States has soared.
        ``In the blink of an eye, people have come to take very seriously
    the China threat,'' said Andrew Hoehn, a senior vice president at Rand
    Corp. ``They've made very rapid progress.''
        Most of Marshall's writings over the past four decades are
    classified. He almost never speaks in public and even in private
    meetings is known for his long stretches of silence.
        His influence grows largely out of his study budget, which in
    recent years has floated between $13 million and $19 million and is
    frequently allocated to think tanks, defense consultants and academics
    with close ties to his office. More than half the money typically goes
    to six firms.
        Among the largest recipients is the Center for Strategic and
    Budgetary Assessments, a defense think tank run by retired Lt. Col.
    Andrew Krepinevich, the Harvard graduate who wrote the first papers for
    Marshall on the revolution in military affairs.
        In the past 15 years, CSBA has run more than two dozen China war
    games for Marshall's office and written dozens of studies. The think
    tank typically collects about $2.75 million to $3 million a year, about
    40 percent of its annual revenue, from Marshall's office, according to
    Pentagon statistics and CSBA's most recent financial filings.
        Krepinevich makes about $865,000 in salary and benefits, or almost
    double the compensation paid out to the heads of other nonpartisan
    think tanks such as the Center for Strategic and International Studies
    and the Brookings Institution. CSBA said its board sets executive
    compensation based on a review of salaries at other organizations doing
    similar work.
        The war games run by CSBA are set 20 years in the future and cast
    China as a hegemonic and aggressive enemy. Guided anti-ship missiles
    sink U.S. aircraft carriers and other surface ships. Simultaneous
    Chinese strikes destroy American air bases, making it impossible for
    the U.S. military to launch its fighter jets. The outnumbered American
    force fights back with conventional strikes on China's mainland,
    knocking out long-range precision missiles and radar.
        ``The fundamental problem is the same one that the Soviets
    identified 30 years ago,'' Krepinevich said in an interview. ``If you
    can see deep and shoot deep with a high degree of accuracy, our large
    bases are not sanctuaries. They are targets.''
        Some critics doubt that China, which owns $1.6 trillion in U.S.
    debt and depends heavily on the American economy, would strike U.S.
    forces out of the blue.
        ``It is absolutely fraudulent,'' said Jonathan D. Pollack, a senior
    fellow at Brookings. ``What is the imaginable context or scenario for
    this attack?''
        Other defense analysts warn that an assault on the Chinese mainland
    carries potentially catastrophic risks and could quickly escalate to
    nuclear armageddon.
        The war games elided these concerns. Instead they focused on how
    U.S. forces would weather the initial Chinese missile salvo and attack.
        To survive, allied commanders dispersed their planes to austere
    airfields on the Pacific Islands of Tinian and Palau. They built bomb-
    resistant aircraft shelters and brought in rapid runway repair kits to
    fix damaged airstrips.
        Stealthy bombers and quiet submarines waged a counterattack. The
    allied approach became the basis for the Air-Sea Battle.
    Think tank's paper
        Although the Pentagon has struggled to talk publicly about Air-Sea
    Battle, CSBA has not been similarly restrained. In 2010, it published a
    125-page paper outlining how the concept could be used to fight a war
    with China.
        The paper contains less detail than the classified Pentagon
    version. Shortly after its publication, U.S. allies in Asia, frustrated
    by the Pentagon's silence on the subject, began looking to CSBA for
    answers.
        ``We started to get a parade of senior people, particularly from
    Japan, though also Taiwan and to a lesser extent China, saying, `So,
    this is what Air-Sea Battle is,'?'' Krepinevich said this year at an
    event at another think tank.
        Soon, U.S. officials began to hear complaints.
        ``The PLA went nuts,'' said a U.S. official who recently returned
    from Beijing.
        Told that Air-Sea Battle was not aimed at China, one PLA general
    replied that the CSBA report mentioned the PLA 190 times, the official
    said. (The actual count is closer to 400.)
        Inside the Pentagon, the Army and Marine Corps have mounted
    offensives against the concept, which could lead to less spending on
    ground combat.
        An internal assessment, prepared for the Marine Corps commandant
    and obtained by The Washington Post, warns that ``an Air-Sea Battle-
    focused Navy and Air Force would be preposterously expensive to build
    in peace time'' and would result in ``incalculable human and economic
    destruction'' if ever used in a major war with China.
        The concept, however, aligns with Obama's broader effort to shift
    the U.S. military's focus toward Asia and provides a framework for
    preserving some of the Pentagon's most sophisticated weapons programs,
    many of which have strong backing in Congress.
        Sens. Joseph I. Lieberman (I-Conn.) and John Cornyn (R-Tex.)
    inserted language into the 2012 Defense Authorization bill requiring
    the Pentagon to issue a report this year detailing its plans for
    implementing the concept. The legislation orders the Pentagon to
    explain what weapons systems it will need to carry out Air-Sea Battle,
    its timeline for implementing the concept and an estimate of the costs
    associated with it.
        Lieberman and Cornyn's staff turned to an unsurprising source when
    drafting the questions.
        ``We asked CSBA for help,'' one of the staffers said. ``In a lot of
    ways, they created it.''
        Julie Tate contributed to this report.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Ms. Bordallo. Thank you. Secretary Kagan, I have a question
    for you, the Palau Compact adjusted certain amounts of U.S.
    assistance over time to split the cost of the diminished value
    between the U.S. and Palau. Now this was prudent for a measure
    that determines assistance for a long period of time. The
    Republican Congress in 2003 expanded the adjustment in the
    negotiated revised Compacts with the other two freely
    associated states. However, H.R. 6040 only includes the partial
    adjustment factor included in the Compact with Palau.
        The Economist cited by the GAO has calculated that the cost
    would be less than $1 million a year, using the CBO formula.
    This is intended by H.R. 6040 to be more than made up by the
    bill's cost offset. Congress urged the Administration to
    include a cost adjustment provision in the agreement strongly
    desired by Palau. The lack of such a provision casts doubt
    whether the agreement could have obtained Palau acceptance. Can
    you elaborate why the Administration didn't agree to include a
    cost adjustment provision in the agreement, especially after
    Congress added one in 2003, and Congress said one would be
    needed?
        Mr. Kagan. Thank you, Madam Bordallo. Thank you very much
    for the question, Madam Bordallo. I think this goes back to
    what we discussed before, which is that the overall package
    which was negotiated between the United States and the
    Government of Palau was one that was carefully calibrated to
    address a variety of concerns as was foreseen in the original
    15-year review period. We believe that the resulting agreement
    is one that accurately reflects the changes in Palau and is one
    that has been accepted by both governments. We obviously
    believe that the Government of Palau supports this agreement
    and are confident that once there is action in the United
    States that we are confident that Palau will accept it.
        As to the intent, I think the reason was that there was a
    feeling that Palau circumstances had evolved to a point where
    this approach now was appropriate. Clearly, our goal in doing
    negotiations was to safeguard broader U.S. interests, including
    trying to ensure the appropriate compensation was provided to
    Palau under the terms of the agreement. Now obviously, this is
    something that it reflects the different circumstances that
    prevailed with the other Compact states, but we believe this is
    one that is appropriate and is fair.
        Ms. Bordallo. You say the Palau government agrees?
        Mr. Kagan. Yes, the Palau government agrees.
        Ms. Bordallo. This could be Secretary Babauta or Secretary
    Kagan, we all know that Palau is an important strategic ally to
    the United States. We should remember the thousands of
    Americans paid the ultimate sacrifice to free Palau from
    Japanese rule. The Compact about the security of America in the
    Pacific region, in the Asia-Pacific region, this capability
    directly aligns with the President's broader, military
    diplomatic strategy for the region. So my colleagues and I want
    to get a Palau Compact passed. Can we expect engagement from
    the Administration on offset so that we can pass this Compact
    during this Congress? Also, with the delays in passing the
    Compact, what message does that send to our allies in the
    region? And what diplomatic or political capital have we lost
    in not passing the agreement?
        Mr. Kagan. Again, thank you very much for the question
    which I think goes to the very heart of the why the
    Administration very strongly supports prompt action to pass the
    Compact, the extension. We believe that failure to move forward
    has significant costs not just for our relationship with Palau,
    but in a region where people look very closely at how we treat
    our friends. So I fully agree with you and fully agree with Mr.
    Faleomavaega before that about the need for prompt action. We
    stand ready to engage and engage very actively to find
    appropriate offsets, I believe we have done that and we will
    continue to do so.
        Ms. Bordallo. I did ask do you think it will be passed
    during this Congress?
        Mr. Kagan. It is not for me to speak as to what the
    Congress will do.
        Ms. Bordallo. Would you be ready?
        Mr. Kagan. We stand ready to engage, we strongly support
    prompt action and will do whatever we can to support it.
        Ms. Bordallo. Thank you. Mr. Chairman, are we going to have
    a second round on this?
        Dr. Fleming. Indeed.
        Ms. Bordallo. Good. I yield back.
        Dr. Fleming. The gentlelady yields her time back. I think
    our panel seems up to it, so we will begin our second round
    here. You can tell this is all very engaging and important
    information.
        Secretary Kagan, both Mr. Sablan and Ms. Bordallo raised
    concerns, time not included in the Compact, for H.R. 6040. Are
    the annual audits, inflation rates and U.S. Postal Service's
    subsidy language being tied to national rates? The added
    benefits you mentioned in your testimony. Are these the only
    added benefits? Tell us more about that. Can you expand upon
    that because obviously there are a lot of questions about that
    in the hearing?
        Mr. Kagan. Certainly, Mr. Chairman. As you said, we welcome
    this opportunity to engage and discuss because we recognize
    that your role in this is critical and we want to try to be as
    supportive as possible.
         I think that our position is this was very painstakingly
    negotiated. As I said, there is a balance between the different
    elements. Both sides had to give as well as take. I think our
    view is we strongly object to Section 105(e)3.
        We made a deliberate decision to negotiate the compact
    review agreement as an amendment for several reasons. And one
    of these had to do with the desire not to extend the full faith
    and credit of the United States the obligations contained in
    the Compact. We believe that this is something that is very
    much in our interest. We do look forward to a continued
    discussion on this.
        We also object to the application of Section 215 of the
    Compact to the funding commitments in the agreement on the
    partial inflation adjustment.
        I think that this is in part because of the higher total
    dollar costs and also in part because, again, of maintaining
    the balance within the different elements of the Compact.
        Dr. Fleming. Let me interrupt you because we are all
    limited in time.
        So, in answer to my question, you read me language from the
    bill. I just want to get clarification here. These three
    things: Inflation adjustments; tie the U.S. Postal Service
    subsidy to retaining domestic U.S. postal rates; and require
    the U.S. to pay for annual audits. Do you support that? Does
    the Administration support that or not?
        Mr. Kagan. Our view is we do not support the inflation
    adjustment. I defer to my colleague, Assistant Secretary
    Babauta on the postal rates. And on the audits, we believe that
    this is fair and appropriate and support the idea of
    transferring the financial responsibility for this to Palau.
    But again, we stand ready to remain engaged with the Committee
    because our goal is to reach prompt agreement so that we can
    have prompt action to pass the legislation.
        Dr. Fleming. Mr. Babauta.
        Mr. Babauta. Mr. Chairman, I join my colleague, Mr. Kagan,
    on his thoughts with respect to the audit and who is going to
    pay for the cost of the audit. That is something I am trying to
    recall the negotiations themselves in Hawaii, where I was
    present, exactly why it fell on Palau, and we are happy to get
    back to you on exactly why that happened. An inflation
    adjustment wasn't part of the finalized negotiated agreement
    with Palau, and the language that is referenced in H.R. 6040,
    which was amended by the Foreign Affairs Committee, the
    renegotiated agreement with the RMI and the FSM also did not
    contain the inflation adjustment, as Mrs. Bordallo points out,
    when it was submitted to Congress for consideration. And
    however, we recognize that Congress saw fit at the time to
    include such language in the RMI and FSM agreement.
        Dr. Fleming. I got that you don't support that. But what
    about the postal rates and the audits?
        He was deferring to you on that.
        Mr. Babauta. I join him in support of the audits.
        On the postal rates, the postal rate was something internal
    for us to negotiate on the U.S. side. And that was reflected
    eventually in the finalized negotiated agreement. There is
    nothing that we are subsidizing within the Postal Service that
    takes away from the substance and the financial assistance that
    we are going to give to Palau.
        Dr. Fleming. So, of these three items, and again I am going
    to have to get a little more clarification as to what the
    answers are on it, what the Administration supports or what it
    doesn't, but had these been agreed to by Palau? That is the
    question.
        The Administration's position on these three items, have
    they been agreed to by Palau?
        Mr. Kagan. Yes. This was agreed to and reflected in the
    final agreement between the Government of the United States and
    the Government of Palau.
        Dr. Fleming. All right. Thank you, gentlemen. I yield back.
        Ranking Member, Mr. Sablan.
        Mr. Sablan. Thank you very much, Mr. Chairman, and let me
    also go back, but again, Secretary Kagan, let me ask you two
    questions, and I need a short response.
        What is the significance of Palau in the U.S. national
    security interests in the Pacific?
        Mr. Kagan. We believe Palau is critical for two reasons.
    One is that it is a very strategically located piece of real
    estate that also has a very important economic, exclusive
    economic zone and that the Compact which provides us
    responsibility for security and defense of Palau also provides
    us very critical access for our military forces and the ability
    to deny such access to foreign military forces.
        The second is Palau is a very close friend and ally and
    supporter in a lot of different areas, including the United
    Nations but also in the Pacific, and has been a very critical
    supporter of our enhanced engagement in the Pacific in the past
    3 years.
        Mr. Sablan. Thank you. And also let me ask who among all
    our friends in the world were the first to take the Uyghur
    prisoners from Guantanamo Bay?
        Mr. Kagan. I believe that we negotiated agreements with
    Bermuda and Palau.
        Mr. Sablan. My question is who not----
        Mr. Kagan. Palau and Bermuda.
        Mr. Sablan. Palau, right?
        Mr. Kagan. Yes.
        Mr. Sablan. And then we nickel and dime them in
    negotiations for the compact financial? That is how we treat
    our friends?
        Please I am Micronesian. I know how we have been treated. I
    grew up with people from Palau. We nickel and dime our very
    best friends, Mr. Kagan. I am not being disrespectful here. I
    am just being truthful here, what we are worried about is
    $500,000; we are worried about subsidies. I think the Assistant
    Secretary will take care of the subsidy. But is this how we
    treat our friends? Is this how we want to be known in the world
    as how we treat our friends?
        Mr. Kagan. Mr. Sablan, I appreciate very much the question.
    I appreciate it, and I think that the fair response to that is
    that we went into this with the desire to enhance and
    strengthen the Compact. We wanted to reflect the different
    circumstances that prevailed. I do not believe we nickel and
    dimed our friends. I believe that what we did was try to
    negotiate something that we believed was fair for the people of
    Palau and fair for the people of the United States.
        Mr. Sablan. But, as you said earlier, Secretary Kagan, and
    I am not being, I hope you don't take this as being
    disrespectful--maybe I am a little passionate--but you would
    not recommend the Administration does not allow this to go into
    law, the Congress approves the legislation that is before us.
    You would be--you wouldn't say object to it and say it is not
    good.
        Mr. Kagan. I think we would want to try and work with you
    very respectfully to try and address our concerns. But we
    strongly support prompt passage of this legislation.
        Mr. Sablan. Two years and 1 week, Mr. Secretary, and we
    still don't have an offset that Congress agrees to, and this
    is, working with you, sir, is the language that means a sense
    of Congress. But anyway, I will work you with also, Mr.
    Secretary.
        Dr. Gootnick, now for the difficult questions, sir, I hope
    not. Of the $189 million remaining to be provided, because I
    think the $26 million has been appropriated already, isn't $30
    million to make up for the initial U.S. underfunding of the
    Compact Trust Fund to enable it to provide the revenue it is
    supposed to provide through the 50 years of U.S. military base
    rights under the Compact? And isn't $28 million for maintenance
    of infrastructure that the U.S. considered essential?
        Mr. Gootnick. Yes, to your first question, you are correct.
    The $30 million plus-up is intended to support the trust fund
    to better its prospects to get to 2044. So the agreement, the
    Palauans agreed to reduce their withdrawals from the trust fund
    in the short term, plus it up toward the end of this 15-year
    period to the $15 million but from there on out through 2044 to
    yield $15 million.
        I would point out that is also not inflation adjusted $15
    million. So, by the time you get out to 2044, that $15 million
    looks quite different.
        With respect to the infrastructure maintenance fund, the
    fund stipulates that the priorities are to U.S.-funded
    projects, so that is the Compact road first and foremost but,
    in addition, improvements to the international airport.
        Mr. Sablan. My time is up, Mr. Chairman. I hope there is
    another round of questioning.
        Dr. Fleming. The gentleman yields his time back.
        The Chair recognizes Mr. Faleomavaega for 5 minutes.
        Mr. Faleomavaega. Thank you, Mr. Chairman.
        Secretary Kagan, from what I am hearing in your testimony,
    you are suggesting that the Administration is going to
    recommend a veto of this proposed bill H.R. 6040?
        Mr. Kagan. As I have said, we look forward to working very
    closely with Congress on prompt passage of this legislation. I
    think it would be inappropriate to speculate on what our
    position would be until we see the final bill.
        Mr. Faleomavaega. Not to speculate, let me just give you a
    little sense of history here. This was 2 years ago, 2 years
    ago, Secretary Clinton wanted legislation enacted so that we
    could comply with the provisions of the Compact that we have
    agreed with the Republic of Palau. Both the Department of the
    Interior and State Departments did not submit a proposed bill
    until last year, but it didn't include offsets. And according
    to our House Rules, both Houses rejected what the
    Administration had suggested.
        And now both, the Administration just has not even given
    any offerings in terms of what you are willing to do so we can
    get this thing done. And that is what forced myself and
    Chairman Manzullo and 14 other Members of the Congress on the
    Foreign Affairs Committee to propose 6040, so we could go
    through this impasse.
        Now you say you are willing to do this, but for the past 2
    years, Secretary Kagan, that has not been the response of the
    Administration. You have been kicking the can down the alley,
    the highway, the mountains and the ocean. I don't know what the
    heck is going on here. So now we find ourselves in this
    predicament. You say the Administration is more than willing to
    offer help, and we talk about these things. We are nitpicking
    over the assistance that Palau deserves and what we have agreed
    upon under the terms of the Compact.
        And yet for the billions of dollars that we give in foreign
    aid in other countries, do we make demands such as this about
    audits? I don't think so.
        And Secretary Babauta, I want to ask you this, you are
    saying that Palau agreed to these three things about the audits
    and about the Postal Service and about the inflationary costs?
    My understanding, they have not agreed unless, and that is the
    reason why we have these provisions added on the proposed bill.
        Mr. Babauta. Well, during the negotiations themselves, as
    Assistant Secretary Kagan pointed out, issues were raised, some
    were accepted by Palau, some were accepted or denied by the
    United States----
        Mr. Faleomavaega. Here is an example, Secretary Babauta, on
    the audit issue. It is agreed with the Republic of the Marshall
    Islands and the Federated States--the joint funding of the
    auditing. And yet under this proposal we have, you are
    expecting Palau to pay for the entire audit process. Is that
    fair?
        Mr. Babauta. I would like to say that, during the
    negotiations, there was some finality to this issue, which was
    accepted by both parties----
        Mr. Faleomavaega. Well, somebody screwed up here. Why are
    we treating Palau differently from the other two free states?
    The question of inflationary adjustment issue, this was already
    in the Compact, this provision about cost inflation, and you
    are objecting to this.
        Secretary Kagan, why are you objecting to the inflationary
    cost provision index?
        Mr. Kagan. As I said before and as Assistant Secretary
    Babauta has said, this is part of a complex set of
    negotiations. There were trade-offs that were made, there were
    things that were accepted by the United States----
        Mr. Faleomavaega. But why are you objecting to this
    inflationary index?
        Mr. Kagan. We believe that----
        Mr. Faleomavaega. Too costly? Eleven billion dollars too
    costly for a 12-year period?
        Mr. Kagan. We have a responsibility to try and steward our
    funds carefully, and we believe this was part of an appropriate
    set of negotiations between our governments----
        Mr. Faleomavaega. So, in other words, you are going to
    continue objecting and not even approve or have any sense of
    support for this proposed bill.
        Mr. Kagan. I want to make very clear that we do not object
    to this proposed bill, that there are certain provisions within
    it that we have concerns about and that we look forward to
    working with Congress on, but we strongly support prompt action
    by Congress to pass this legislation.
        Mr. Faleomavaega. What kind of a time schedule are you
    looking at, Secretary Kagan, that we can get a firm answer from
    the Administration? How soon can you tell us it is yes or no,
    forget it, we don't support it, so we know where to go?
        Mr. Kagan. We want to make clear that we support this
    legislation. We believe there are elements in it----
        Mr. Faleomavaega. Another 2 years?
        Mr. Kagan. We have absolutely no desire to wait. We would
    like to see prompt action. We recognize this is very important
    to the people of Palau. We have been pushing for action on this
    for some time, and we look forward to working with you to try
    and make sure that happens.
        Mr. Faleomavaega. Mr. Kagan, I appreciate your comments,
    but it just doesn't simply add up to what we have had to endure
    for the last 2 years from the Administration.
        Mr. Kagan. We look forward to working with you, and we look
    forward to prompt action on this.
        Mr. Faleomavaega. I am sorry, Mr. Chairman. My time is up.
    I will wait for the third round if there is a chance. Thank
    you.
        Dr. Fleming. The gentleman yields his time, and he predicts
    there will be a third round. I suspect he is right.
        The Chair now recognizes Ms. Bordallo for 5 minutes.
        Ms. Bordallo. Thank you, Mr. Chairman.
        Secretary Babauta, I am going to add to my colleague's
    comments from American Samoa. He mentioned different concerns,
    and when is this U.S. Postal bill--Service--have Palauans
    expressed substantial concern about the cuts in and increased
    costs for the U.S. Postal Service delivery of mail to the
    islands under the agreement?
        Just a direct question. Have the Palauans expressed
    concern? And further, are you aware of appropriations for a
    subsidy to the U.S. Postal Service for mail to independent
    countries which requires international rate postage?
        Mr. Babauta. I believe, yes, Palau has expressed some
    concern over the subsidy of the Postal Service. It is within
    the renegotiated agreement.
        And to your second question, no, I am not aware of any
    subsidy that is provided to----
        Ms. Bordallo. You might check on that.
        Secretary Kagan, I wanted to ask, following up on
    Congressman Faleomavaega's questions, what are your concerns on
    this legislation? Could you point them out? The biggest
    concerns you have? And there must be two or three that you are
    really stuck on in these negotiations.
        And again, I will ask the question that I asked earlier,
    will you be ready to present this to Congress?
        Mr. Kagan. I think we have identified the concerns.
        Ms. Bordallo. Before the end of the year?
        Mr. Kagan. The answer on your final question is yes. We
    strongly support prompt action.
        Ms. Bordallo. But you have concerns.
        Mr. Kagan. We have some concerns on some specifics. We
    think they are relatively minor and can be very easily
    addressed.
        Ms. Bordallo. Could you mention those minor concerns?
        Mr. Kagan. Well, I think, very specifically, the one has to
    do with the full faith and credit of the United States. As my
    colleague has mentioned, this was not something that was
    extended to the other Compact states as part of the 2004
    amended Compacts.
        And then the other concern has to do with the inflation
    adjustment. And we believe that it is very much in our national
    interest to try to stick to the overall dollar amounts that
    were negotiated. But I think that fundamentally, our strongest
    concern is prompt passage of this legislation, so we can keep
    our faith with the people and the Government of Palau.
        Ms. Bordallo. I have another question for you, Secretary
    Kagan.
        A major stated goal of the agreement in the negotiations
    was to phase out Palau's dependence upon U.S. assistance for
    essential services provided by the Government of Palau.
        Would any of the provisions of H.R. 6040 run counter to
    that goal of the Administration in the negotiations?
        Mr. Kagan. Not to the best of my knowledge. I would defer
    to my colleague, Assistant Secretary Babauta, who is more
    familiar with the specific details of how the Compact
    assistance works.
        Mr. Babauta. Congresswoman, I don't believe any of the
    goals that are in the renegotiated agreement run counter,
    generally, to our goals for Palau, which is to continue to see
    them grow, to be able to assist them in providing funding for
    education, public health, public safety, which are all elements
    of the negotiated agreement.
        Palau and the United States were very specific with respect
    to the U.S. assistance that is going to go out there. It is
    going to be used for those areas only. It will not be used for
    the president's office. It will not be used by the OEK nor by
    the judiciary.
        The U.S. funding is going to go straight in to the programs
    that are provided to the people of Palau.
        Ms. Bordallo. Thank you.
        Thank you, Mr. Chairman. I yield back.
        Dr. Fleming. The gentlelady yields back.
        OK, we shall begin a third round, and we thank you
    gentlemen for hanging in there.
        Let me see if I can kind of bring some clarity to this
    discussion, begin to tie some things together. We are all, I
    think, on very similar tracks here.
        The whole idea behind the continued funding for Compacts
    and really other island situations--I mean, since I have been
    Chairman of insular affairs, this seems to come up constantly--
    and that is, how do we wean countries off of dependency by
    creating an economy on island that will sustain that island
    into the future? Part of this idea, of course, was to create a
    trust fund, but unfortunately, the return on investment is a
    little low right now, so that is a problem.
        So my question, I really have two questions, and certainly
    any of you on the panel are welcome to take a stab at this, is,
    number one, what are we doing to get that GDP up higher?
        What other sources, private economy, whether it is through
    bringing more visitors to the island, more commerce, are there
    other lines of economic growth that we can pursue, and the
    other is it really seems like to me there is only one real
    major sticking point here and that is the pay-for. And so I
    would love to have your response on both of these questions.
        Where do you think we are going GDP wise? How are we going
    to fix it in a way where this is going to be less and less an
    issue in the out years?
        And then number two, how we can we get past this pay-for
    issue?
        Mr. Babauta. Thank you very much, Mr. Chairman.
        With respect to the first part of your question, during the
    negotiations themselves, the agreement has created an advisory
    group on economic reform, which will be comprised of both
    members from the United States and Republic of Palau. That
    group will meet annually and determine, make recommendations on
    reforms that need to occur within government and reforms that
    need to occur economically so that you are building, so you are
    continuing to have your economy grow. There is language in
    there that----
        Dr. Fleming. In real terms, though, do we have anything
    more than tourism that we are working with here?
        Mr. Babauta. Tourism is the largest part of their economy,
    sir.
        Dr. Fleming. Is there agriculture, natural resources?
        Mr. Babauta. They are a haven for how they conserve their
    resources, and that is partly why their tourism is as it is, it
    is because of their conservation----
        Dr. Fleming. By natural resources, I mean any type of
    mining or perhaps fisheries, anything else that could utilize
    natural resources?
        Mr. Babauta. Fisheries, again, is a huge resource for them.
    I can ask Mr. Kagan to speak about that since this is an issue
    that is kind of more at the forefront.
        Dr. Fleming. What can you tell us about the pay-for? Where
    can we get past the stumbling block that we are at with the
    pay-for?
        Mr. Babauta. The Department of the Interior and the OMB
    have identified several offsets, as you know. Alternative
    offsets have been developed by the House Foreign Affairs
    subcommittee which are incorporated into H.R. 6040, and in
    principle, we have no objection to the offset identified by the
    Foreign Affairs Subcommittee on Asia and the Pacific Islands in
    their version of H.R. 6040 that was marked up on July 18th and
    have been working with that subcommittee to modify the language
    for State Department purposes.
        The final language, of course would need to be reviewed by
    our OMB process, however, to ensure that equities of all
    Executive Branch agencies are safeguarded.
        Dr. Fleming. So, basically, what you are saying is that
    these various departments are working with our Committees, and
    we continue the discussions, but, and you do support the latest
    version, the latest iteration. Although we have a problem on
    our side with that, obviously, which is I guess the reason why
    it is not moving forward, and that is the passport and the
    taxation issue. So your department supports that in theory;
    really the problem is internally here in Congress, is that
    correct? Am I correct about that?
        Mr. Kagan. To be clear, we have no objection to it, and we
    have engaged with the Committee staff on the details of it.
        There are some specific details on how it would be applied
    that are of some concern to the State Department but that are
    very technical in nature and which we believe should be fairly
    easy to address. We recognize that this is obviously a critical
    piece of moving this forward, and we appreciate the leadership
    the Committee has taken to try and find an appropriate offset
    that would allow this to move forward.
        Dr. Fleming. Can you follow up on the passport issue? Can
    you provide the language to the Committee that we need that
    would make that acceptable, the passport taxation issue?
        Mr. Kagan. Certainly, we are prepared to continue engaging
    on that, and I think, as we have told Committee staff, we have
    I believe four specific concerns that are very technical in
    nature on how that would be applied.
        Dr. Fleming. Yes, if you would get us the language, that
    would certainly be appreciated.
         I yield back and recognize Mr. Sablan for 5 minutes.
        Mr. Sablan. Thank you very much, Mr. Chairman.
        Secretary Kagan, I want to thank you, sir, for being
    engaged in this issue. Obviously, for us, sometimes it is not
    fast enough, but I know you are very engaged, and I appreciate
    your taking the time to fly to and go to Palau before Chairman
    Fleming did, and I have been inviting him since forever. But
    thank you, sir, for what you are doing, and I do have some
    questions that I would eventually like you to respond to.
        Dr. Gootnick, it is always nice to see you, sir. It is
    always good to see you. I also have questions that we will
    submit to you and get a response.
        Of course my favorite, Secretary Babauta, sir, thank you
    for many things that you do for Palau, for the Northern
    Marianas in particular, and I am sure for the other territories
    and Micronesia and the Pacific.
        But I do have some questions, Mr. Secretary.
        I hope that we could work out also the U.S. Postal Service
    means of delivering packages because this is truly important
    for my constituents because if we have to pay international to
    ship to Palau or pay international, you know those betel nuts
    that they ship from Palau to the Northern Marianas, trust me, I
    would have constituents knocking on my door about this issue.
    But we really appreciate the time that you are going to work on
    this, we are going to try and work together on the postal
    delivery issue so we can pay domestic rather than international
    rates, and I will work with you, sir.
        But let me ask you a question before I get to my other
    issue. How does the new agreement affect the Compact trust
    fund, in your own opinion, sir?
        Mr. Babauta. Well, it affects it in many ways. It
    strengthens the Compact trust fund; it makes it so that we are
    making investments throughout the life of the second term of
    the Compact, so that, at the end of that term, it can provide
    the $15 million that is needed after U.S. assistance ends.
        Mr. Sablan. Why does the agreement deny the use of funding
    by the offices of the President, Palau's congress, because I
    can't say the Palau name, I apologize to the Ambassador,
    Palau's congress, judiciary and state governments; was there a
    problem with Palau's use of earlier resources?
        Mr. Babauta. There was no problem. I think it is simply a
    reflection of the fact that Palau believes that for those
    branches of government, the president or those offices of the
    presidency, the OEK, and also the judiciary, that that should
    be funded by local funds generated by their own revenue and not
    with U.S. assistance. They believe, as does the U.S., that U.S.
    assistance should be going directly to programs, such as
    education, health care and public safety.
        Mr. Sablan. Thank you. Now since we are talking about
    money, Mr. Secretary, let me just shift our attention to the
    Northern Mariana Islands.
        As you know, sir, the Commonwealth is in deep financial
    trouble. Our retirement fund, a United States District Court
    judge had to--is considering and will make an appointment of ad
    litem trustees because my Governor refuses to provide trustees
    for a quorum because he has issued an emergency order that he
    would seize the money for the retirement fund, for the pension
    fund.
        We have a hospital, sir, where there is a child, a young
    child, who is being fed through a tube and the hospital cannot
    even buy her the Pediasure and the remaining supply of tube
    that feeds her is actually the one in her body, and that people
    in the committee are now chipping in, so that they could
    provide and make sure this little girl survives. Her name is
    Dora. Where our Governor has terminated a very capable
    executive director of the Commonwealth Utilities Corporation
    because he said that this guy wasn't doing enough for
    alternative energy and then turns around and signs a 25-year,
    $190 million plus plus plus deal for fossil fuel. It is all
    about the money problem.
        His use, emergency after emergency--and recently, sir, your
    office paid for a fiscal study of the Commonwealth government
    apparently to get a better picture of what is going on. This
    document has not been made public. I got three pages of the
    report dealing with education. And obviously, I am very
    concerned because education is my number one agenda in
    Congress. We are spending less per capita in education than any
    other U.S. insular area.
        You are aware of this Federally funded report?
        Mr. Babauta. Yes, sir.
        Mr. Sablan. May I have a copy, please?
        Mr. Babauta. Absolutely, Congressman. Right now, it is in
    draft form. We did this, we entered into kind of an arrangement
    with the Governor of CNMI about 4 months ago where our current
    contract with a graduate school, we used that to help
    assistance the CNMI and assist us in identifying exactly how
    their cash flow is laid out, how they are collecting revenue,
    and how they are spending their money. I have it in draft form
    right now. As soon as it is finalized, I will have my office
    come up, and we will brief you about it.
        Mr. Sablan. Do we have any idea when? Are you waiting for--
    from what I understand, you are waiting for the Governor to say
    OK you can release it, right?
        Mr. Babauta. Absolutely not, sir.
        Mr. Sablan. Any idea when you are going to release this,
    Mr. Secretary? Because the problem is the money. We need to
    know why and where it is going.
        Mr. Babauta. I will follow up when I get back to the
    office. I have seen it in draft form. Let me figure out exactly
    when we predict that it is going to be in the final form. But I
    can't imagine it will take more than a week or two to become
    final.
        Mr. Sablan. Thank you very much, Mr. Secretary, and again,
    thank you, sir, for all that you do. I appreciate it.
        Secretary Kagan, please know I appreciate your engagement.
        Dr. Gootnick, it is always good to talk to you, sir, and
    get some--and differentiate unbiased opinion on several of the
    things going on. I appreciate it.
        If there is another round coming, I will ask my questions.
    But for now, I yield my time.
        Dr. Fleming. The gentleman yields back.
        Mr. Faleomavaega has taken a couple of deep breaths.
        Mr. Faleomavaega. Mr. Chairman, I do want to say it is not
    every day that when having a congressional hearing, you get
    three rounds of questioning, but I deeply appreciate your
    patience and your forbearance in allowing us to continue the
    dialogue with our friends here from the Interior Department and
    also from the State Department.
        Again, I want to ask Secretary Kagan, Chairman Manzullo and
    I have had to search wide and low and whatever you want to call
    it trying to figure what would be a possible offset because
    apparently, the recommendations of offsets of both the Interior
    and State Department recommended were not acceptable to both
    Houses, the Senate as well as in the House.
        So, now, Chairman Manzullo and I thought, well, why do we
    have this offset dealing with passports? The flow or the stream
    of revenues that we gain from passports is well over $400
    million a year. And what we are asking for here for this 10-
    year period that we are looking at the bill, that we are
    looking at about $183.5 million for a 10-year period from 2013
    to 2022 or also, in addition, to $189 million if you add $6
    million for infrastructure, maintenance as well as government
    operations.
        What I wanted to do is just to get a sense from you what--I
    guess, we have to put ourselves in the footings of the Palauans
    and their leaders. Supposing that we don't approve this bill,
    no money comes to Palau; if you were a Palauan, what would you
    think your reaction is going to be to that effect? This small
    little tiny country, a lot of coconuts and coconut crabs and
    all of this and think of it as a little silly island community
    out there in the middle of nowhere, which is only about the
    size of Texas if you want to put in economic zones and the
    ocean, but what do you suppose is going to be the reaction to
    the Palauan leaders if we don't honor our obligations and
    commitments under the provisions of the Compact?
        I had mentioned earlier in my statement, I think we do have
    an obligation under the Full Faith and Credit Clause of the
    Constitution to pay the Palauans what we do because what are we
    getting in exchange? Usage of Palauan waters and their
    resources in time of a national emergency in terms of whether
    or not we determine this area to be important as far as
    strategic and military interests are concerned, and we are
    funding, we are paying billions of dollars in what we do there
    as far as defense issues are concerned, and we are talking
    about $183 million, $184 million billing for a 10-year period,
    and we can't even find a stream of revenue to pay for this.
        I am not suggesting that $183 million is peanuts. But when
    compared to the billions and billions of dollars that we give
    to foreign countries that we can't even audit, and here we are
    diming and nickeling or nickeling and diming for this amount
    for this country that really needs the resource.
        Mr. Kagan, how soon will we get an answer from the State
    Department whether or not they will support this bill? Because
    we really need to know where the Administration's position is
    on this.
        Mr. Kagan. Congressman Faleomavaega, again, I thank you for
    your leadership and particularly your very wise counsel and
    advice, which has been one of the reasons why we have
    significantly stepped up our engagement in the Pacific in the
    past 3\1/2\ years, including Secretary Clinton's meetings with
    the Pacific leaders on the margins of the U.N. General
    Assembly----
        Mr. Faleomavaega. Mr. Secretary, you are not answering my
    question. How soon can we get a response to this bill? With all
    due respect, I admire Secretary Clinton's trip to the Cook
    Islands and the foreign countries, all of that is nice and
    well. But I am talking about the needs of Palau, and we are not
    meeting these obligations. How can soon can we get a commitment
    from the State Department whether or not they support this
    bill?
        Mr. Kagan. I was just informed that we have provided
    alternative language on the offsets to the House Foreign
    Affairs Committee. We strongly support prompt action on this
    legislation. We, as I said, we believe there is appropriate
    room to continue engaging in some of the details, but I think I
    want to make very clear that we strongly support prompt action
    to fulfill our obligations toward Palau.
        And as to your question on how they would feel, I think we
    feel very strongly. This is why we are looking for action on
    this because we recognize that failure to move quickly will
    have significant ramifications, not just for our relationship
    with Palau but also for the standing of the United States in
    the region.
        Mr. Faleomavaega. Secretary Babauta, how soon can we get
    the response from the Interior Department concerning this bill?
        Mr. Babauta. We strongly support the enactment of the
    pending legislation that comprises the negotiated agreement
    with Palau.
        Mr. Faleomavaega. What does that mean? Two weeks? Three
    weeks? A month? How soon can we get a commitment from the
    Administration, the Interior Department? I mean, look, we have
    been dallying with this thing for 2 years now and the last
    thing I want to hear is that we are going to run through this
    cycle again for another 2 years before we finally get a
    commitment from this Administration on this.
        Mr. Babauta. Congressman, this is the second time that I
    have testified on this bill, once in Senate and once now here.
    I have had staff testifying in front of your Committee. We
    strongly support the legislation and with regard to the new
    offsets that have been identified by your subcommittee, I said
    that we agree in principle, we know that our colleagues at the
    State Department are working with your Committee over at
    Foreign Affairs to fine tune some technicalities----
        Mr. Faleomavaega. What are the technicalities? I hear both
    of you gentlemen saying ``technicalities.''
        I would like to respectfully request, Mr. Chairman, I would
    like to request that both gentlemen submit to this Committee
    these technicalities they keep talking about that makes it so
    complex, the issue that is now before us. But I know my time is
    way over, Mr. Chairman, so I yield back.
        Dr. Fleming. The gentleman's time is expired. But quite
    frankly, we have some more questions, so if you would like an
    opportunity in a moment, you will get that opportunity.
        Ms. Bordallo, 5 minutes.
        Ms. Bordallo. Thank you.
        Thank you Mr. Chairman.
        I also want to thank the three witnesses today. It has been
    quite a grilling afternoon to Secretary Babauta, Secretary
    Kagan and Mr. Gootnick.
        I think what I want to say is that the Compact ended in
    2009; is that correct? And we are still 3 years later
    negotiating over current problems that we don't all agree on.
        Now I have been questioned by the President of Palau and
    other leaders of Palau to please, please, help in speeding the
    negotiations up. So the people of Palau are becoming very
    frustrated. And I think it is really up to us to be able to
    speed this up, now that the offsets offered by Mr. Faleomavaega
    and his committee, but so far, from the three of you,
    particularly Secretary Babauta and Kagan, we don't have any
    concrete time, and I realize that is difficult for you to speak
    about. You can't really say, well, on this particular date, it
    is all going to be concluded, but 3 years is a long time. Like
    I say, the people of Palau are becoming very, very concerned
    about this.
        So when you go back to your desks, I sure hope that you are
    going to keep it a top priority and be able to do something
    about it. But I do thank you for answering our questions this
    afternoon. But we, too, are very frustrated, and we want this
    to be concluded.
        And I would like to, Mr. Chairman, yield the rest of my
    time to my colleague from American Samoa because he said
    earlier he has 100 questions.
        Mr. Faleomavaega. I thank the gentlelady for yielding her
    time to me.
        And I want to make sure the record reflects this, Mr.
    Chairman, that this is not a personal vendetta against
    Secretary Kagan or Secretary Babauta. They are both friends.
        I think we need to look at the situation, Mr. Chairman, and
    our friends who are testifying before us this afternoon. It is
    not about the money that I am the concerned about, gentlemen;
    it is the principle. It is the principle, the fact that this
    great Nation, the most powerful country in the world, has made
    a commitment in writing, a Compact, a treaty relationship,
    whether it be with 15,000 people or 14 million people, the
    principle involved here that I am concerned about, and as I
    have said and it has been my criticism publicly for all these
    years, as a matter of our basic foreign policy to this region,
    we have no policy. Secretary Kagan, we have no policy. Our
    basic foreign policy toward this region is actually toward New
    Zealand and Australia.
        So treaty countries like Palau or the Marshalls or FSM are
    only incidental if it really comes to our attention to such an
    extent. By the way, the South China Sea crisis and the
    situation now definitely is going to impact and has serious
    implications in terms of how these Micronesian entities
    currently have their relationship with the United States, Palau
    being one of them, the size of Texas. And if we are really
    serious about our strategic and military interests, that maybe
    we are inviting the Palauans to shop somewhere else if the
    United States really has no interest in developing this close
    relationship.
        And I will say that the opportunities that I have had in
    discussing these issues with the President of Palau, he is very
    concerned, and he is a very strong supporter of the United
    States, but the opposition and those who are not necessarily
    favorable to us are simply saying, the United States doesn't
    care about us, so why should we care about them? We might as
    well break the Compact, let's go have relations with other
    foreign countries that really will address more seriously our
    interests. Because we are not doing it.
        A couple years ago, Mr. Chairman, we just forgave Jordan's
    $500 million debt that they owed to this government. And let's
    talk about billions of dollars that we have forgiven debts in
    other foreign countries--billions--I am not talking about
    millions--billions of dollars. And here we are haggling over
    $183 million for a 10-year period that we should be funding
    because it is part of our treaty agreements with this country.
    This is where I am really concerned about gentlemen. It is not
    the money; it is the principle that I am very concerned about.
        And with that, Mr. Chairman, I thank the gentlelady again
    for yielding her time.
        Dr. Fleming. The gentlelady yields her time back.
        Rather than go another round, what the Chair would like to
    do is simply to ask another question or so that may be left. I
    think we have covered just about everything. I know I have one
    question, and then I will open it up for other members of the
    panel who would like to ask a final question.
        My question, gentlemen, is back to H.R. 6040. Are there
    conditions in which the money would be provided, should we get
    it passed and find a pay-for, that are benchmarked on certain
    factors, certain economic issues, achieving certain benchmarks
    economically along the lines of what we have talked about,
    tourism and other things, are there such benchmarks,
    conditions, and what are they in a general way?
        Mr. Babauta. Certainly, there will be benchmarks. There
    aren't any current benchmarks where, that I recall that we are
    going to begin with. The meeting that we will have, after the
    Compact is passed, the advisory group on economic reforms, will
    take into consideration reports that have already been issued
    about economic reforms that need to take place that are Palau
    specific. Economic reforms, changes in government, some of
    those reports have been generated by the IMF and by the ADB. I
    think, in short measure, that will help initially guide the
    group as it moves forward and makes recommendations to put the
    Palauan Government itself on what reforms need to take place. I
    think that is where we are setting benchmarks.
        Dr. Fleming. Thank you and to follow up, does the full
    faith and credit language included in H.R. 6040 affect the
    ability of the Department of the Interior to withhold funds to
    insist on economic and financial improvements by Palau? I am
    sort of restating the question but in a more formal way. Again,
    back to the full faith and credit language.
        Mr. Babauta. I don't believe that it is necessary that that
    language needs to be present for the Department of the Interior
    to exercise its authority under the negotiated agreement. Under
    the negotiated agreement, if there are not meaningful reforms,
    not meaningful actions that have taken place in the year after,
    the economic group, the advisory group on economic reform had
    met, then that allows the Department of the Interior to
    withhold money based on whether or not and how much progress--
    reasonable and meaningful progress. I think we all recognize
    during the negotiations that there are going to be some reforms
    that either are going to take time or just are difficult issues
    to tackle. But as long as we see that there is an honest
    movement toward those reforms, either economic or government
    reform, then the U.S. assistance will continue to occur.
        Dr. Fleming. Secretary Kagan, do you have anything to add
    to that?
        Mr. Kagan. I think, with response to your specific
    question, Mr. Chairman, is that in fact was one of the concerns
    that we have had over the years and one of the reasons why the
    language was not in the renewals with FSI, FSM and the Republic
    of the Marshall Islands. So while we believe in principle that
    ability is there to exercise the appropriate oversight, it
    certainly is something that has been raised as a concern, and
    that is one of the reasons why we had issues with the full
    faith and credit language being in this legislation.
        Dr. Fleming. OK. The Chair yields back and opens the panel
    for any other questions that you may have.
        Mr. Sablan.
        Mr. Sablan. I just have one. Let me get something very
    clear here, Secretary Kagan and Secretary Babauta, if Congress
    passes H.R. 6040 in its present form, would either the
    Department of the Interior or the Department of State recommend
    its being signed into law? In its present form, the language as
    presently written?
        Mr. Kagan. I will go first. I think from the Department of
    State, there would need to be some greater precision in some of
    the details surrounding the offsets. In particular, we have
    concerns about some of the legal implications for the State
    Department with regard to the passport issues.
        Mr. Sablan. We are going back into the technical part, I
    think that is Dr. Gootnick's expertise.
        Mr. Kagan. Should those things be addressed? I think our
    view is it is very important that we proceed with living up to
    our obligations.
        Mr. Sablan. Thank you very much.
        Mr. Babauta. I was going to say I agree with my colleague
    and also agree with comments made by Mr. Faleomavaega and Ms.
    Bordallo earlier and thank the Congress actually for providing
    the funding that we have been able to continue giving to Palau
    in the years where the Compact agreement hasn't been passed by
    the Congress.
        Mr. Sablan. So, if we pass this, we will provide the
    funding, the Department of the Interior will administer or
    manage the funds transfer between the U.S. Government and the
    Republic of Palau; that is how we do it, correct?
        Mr. Babauta. Correct. And we do that in close cooperation
    with our Federal partners.
        Mr. Sablan. Mr. Secretary, one of the best things that
    happened in the covenant between the Commonwealth, the people
    of the Northern Mariana Islands and the United States was in
    the second 702 agreement--so I think some of us are old enough
    to remember this; I was one of the special representatives--is
    the provision of the full faith and credit one time. And with
    the Northern Marianas was able to go out and raise actually
    using the full faith and credit of the United States raise more
    money than was agreed to in the agreement. And of course,
    market conditions were much better then, and is this something
    that is being considered here? Would that be a possibility for
    the Republic of Palau?
        Mr. Babauta. Being able to utilize the language the full
    faith and credit?
        Mr. Sablan. Yes, they are going to upfront the funding, and
    it was then that Interior made the annual payment to the bond
    underwriters or whatever they call that.
        Mr. Babauta. I am not certain what the motivation would be
    if the Palau Government continues to seek full faith and credit
    and how different that would be from us seeking a permanent
    appropriation, which guarantees that the money is going to be
    there as well.
        Mr. Sablan. All right. Thank you.
        Thank you, Mr. Chairman. I yield back.
        Dr. Fleming. The gentleman yields back.
        Any other questions.
        Mr. Faleomavaega. Mr. Chairman, I can't believe we are
    going through the fourth round now. This will be the last, I
    promise.
        Secretary Babauta, you mentioned something about you have
    some kind of a joint committee of some sort with the Palauan
    Government to discuss economic issues or something? Can you
    explain that for the record?
        Mr. Babauta. It is not something that is in place right
    now. It will be in place. It is part of the renegotiated
    agreement. The only thing that we have been doing with respect
    to acting is----
        Mr. Faleomavaega. You said three--how many members of the
    U.S. Government? How many members from Palau? They meet as a
    joint committee or something?
        Mr. Babauta. If I recall correctly, sir, it would be equal
    members from both Palau and the U.S. Government. The deciding
    member will be recommended by the Palau Government, a list of
    two or three, and then from that list, the United States will
    choose the one person that Palau recommends.
        Mr. Faleomavaega. You don't think that it is going to upset
    Palau that the U.S. will always have the strong hand because
    they have the money? You know what they say about the golden
    rule? He who has the gold makes the rule.
        Mr. Babauta. No, I don't, sir, and one of the reasons why
    is because this particular part of negotiation was recognized
    both by the United States and Palau as being needed to continue
    economic growth in the Republic.
        Mr. Faleomavaega. Well, supposedly the Administration
    people, a portion of this Committee doesn't agree with what the
    Palauans say that this is the way it should go as far as
    economic development goes.
        Here is my concern, Secretary Babauta: How can we be making
    recommendations on economic improvements or reforms the
    Palauans make if we can't even handle our own economy? Does
    that make sense?
        Mr. Babauta. I hear what you are saying. The guiding
    principles I think initially with the Advisory Group on
    Economic Reforms will be guided by reports that have already
    been issued by the International Monetary Fund and also by the
    Asian Development Bank. So those are already there outstanding.
        Mr. Faleomavaega. Can I get assurance from you, sir, that
    there is going to be no undue influence on the part of the U.S.
    To say that this is the way it is going to go, you are not
    going to get any money?
        Mr. Babauta. You can have my assurance, absolutely.
        Mr. Faleomavaega. I thank you.
        Mr. Chairman, thank you.
        Dr. Fleming. The gentleman yields back.
        Any other panel members?
        Ms. Bordallo.
        Ms. Bordallo. Mr. Chairman, I have no further questions.
        Does my colleague want any more time?
        Mr. Faleomavaega. No.
        Ms. Bordallo. Then, Mr. Chairman, I yield back.
        Dr. Fleming. The gentlelady yields back.
        I want to thank the panel today for taking a lot of the
    hard questions. We put you through four rounds, but we thank
    you for standing up to the chore and giving us the best answers
    you can. I am convinced that you were very forthcoming. And
    while we don't know all the answers today, hopefully together
    we will be able to work them out.
        I would like to also thank the staff for their work today.
        Members of the Subcommittee may have additional questions
    for the witnesses, and we ask that you respond to these in
    writing. The hearing record will be open for 10 days to receive
    these responses.
        Again, I want to thank all of the staff members, Members
    here, two Members of the House that couldn't make it today, for
    all of their efforts as well.
        Thank you, and without objection, we are adjourned.
        [Whereupon, at 3:48 p.m., the subcommittee was adjourned.]

        [Additional material submitted for the record follows:]

    Statement of Vikram J. Singh, Deputy Assistant Secretary of Defense for
    South & Southeast Asia, Office of the Secretary of Defense for Policy,
                           U.S. Department of Defense

    Introduction
        Since its enactment in 1994, the Compact has served as an important
    foundation for our security strategy in the Asia-Pacific region,
    providing the United States with critical access, influence, and
    strategic denial of access to other regional militaries. Our Compact
    with Palau, coupled with our compacts with the Federated States of
    Micronesia (FSM) and the Republic of the Marshall Islands (RMI), has
    enabled DoD to maintain critical access and influence in the Asia-
    Pacific region. Passage of H.R. 6040, a bill to amend Title I of PL 99-
    658 regarding the Compact of Free Association between the United States
    and Palau, is vital to allowing the Department to continue to benefit
    from the security arrangement afforded by the Compact.
    Palau's Contributions to American and Global Security
        The Pacific Islands region is sparsely populated, physically
    isolated, and geographically widespread. However, Palau lies at a
    pivotal crossroad in the Pacific, an area near critical sea lines of
    communication and rich fishing grounds. It is also located directly in
    the so-called ``Second Island Chain'' from Mainland Asia, close to all
    of the major East and Southeast Asian powers. With our strategic
    interests and equities expanding and shifting more toward the Asia-
    Pacific region, having Palau as a strong partner in the Pacific is
    increasingly important to maintaining military, as well as political
    and diplomatic, leadership in this quickly evolving strategic
    environment. We must take note of critical security developments in the
    Pacific that require the Department's sustained presence and
    engagement. Broadly speaking, countries such as China, Russia, and the
    Arab states are actively courting Pacific Island States, challenging
    the security status quo in the region, and increasing their economic,
    diplomatic, and military engagement with the island States. These
    critical security developments require sustained U.S. presence and
    engagement in the region. Our relationship with Palau under the Compact
    would be reinforced with passage of this legislation and would ensure
    the United States the extraordinary advantage to deny other militaries
    access to Palau. For these reasons, it is imperative that the U.S.
    Government sustain this advantage. Since the Compact of Free
    Association between the Government of the United States of America and
    the Government of Palau went into effect in 1994, the United States has
    taken full responsibility for the security and defense of Palau. This
    unique security arrangement has created a steadfast and reliable
    partner that helps the United States advance its national security
    goals in the region.
    Palau in the Regional Security Context
        Under the provisions of the Compact, Palauans are able to serve in
    the U.S. Armed Forces. In fact, Palauans serve in the U.S. Armed Forces
    in impressive numbers. Sadly, five Palauans have made the ultimate
    sacrifice, and numerous others wounded, fighting on the battlefield in
    Afghanistan and Iraq since 9/11. Their sacrifice in the defense of the
    U.S. homeland and U.S. and Coalition security interests should not go
    unnoticed. Furthermore, in 2009, Palau stepped up to offer resettlement
    to six Uighur detainees from Guantanamo Bay at a time when other
    countries were hesitant to take these individuals. Most notably, our
    commitment to the Compact with Palau allows the Department to leverage
    Palau's strategic geopolitical position to sustain U.S. security
    interests in the region. The United States exercises full authority
    over and responsibility for the security and defense of Palau, an
    arrangement similar to those that we have with the Federated States of
    Micronesia and the Republic of the Marshall Islands. With this
    authority and responsibility, the United States is entitled to military
    access to the lands, water, and airspace of Palau and retains the right
    to deny such access to the military forces of other nations. Our
    current security arrangement affords us expansive access, which will be
    an increasingly important asset in the defense and security interests
    of the United States in the Asia-Pacific region in coming years. The
    Department recognizes the strategic value of the Compact, and we hope
    to continue to utilize it to serve our national security interests.
    U.S.-Palau Defense Relations
        We have growing national security interests and equities in the
    Western Pacific, a region that is traditionally overlooked and
    undervalued. Together with the two other Compact States, the Federated
    States of Micronesia and the Republic of the Marshall Islands, Palau
    forms part of an important security zone under exclusive U.S. control
    that spans the entire width of the Pacific when we include Hawaii and
    the U.S. territories, Guam and the Commonwealth of the Northern Mariana
    Islands. Palau's location makes it an important part of the U.S.
    strategic presence in the Asia-Pacific, The Palau Compact affords us
    strategic positioning in a country with a unique geopolitical position
    in the Asia-Pacific, The region's lack of political and security
    infrastructure has given rise to a trend of growing transnational
    crime, which underscores the importance of continued DoD engagement in
    the Western Pacific. With this in mind, the Department seeks to develop
    creative ways to remain strategically engaged in the region.
    Recognizing that Palau has no military and only limited law enforcement
    capabilities and resources, the Department's engagement with Palau
    primarily focuses on helping them develop maritime security and
    humanitarian assistance capabilities. First, maritime security has been
    one of the most fruitful areas of cooperation between our two nations,
    DoD sends mobile training teams to Palau to help train local security
    personnel in maritime security-related matters, Palau's Exclusive
    Economic Zone (EEZ) is part of the Pacific's richest fishing grounds
    and has traditionally faced serious problems with foreign exploitation
    of the fishery resources. Large numbers far-ranging fishing vessels
    from other pacific nations threaten encroachment. Japan, China, Taiwan,
    and the United States participate in a highly competitive multi-million
    dollar tuna industry. The Department is currently reviewing ways to use
    existing DoD assets and cooperative mechanisms to enhance maritime
    domain awareness in the region. To combat illegal fishing, the U.S.
    Coast Guard has entered into a shiprider agreement with Palau, which
    enables Palauan security officials to embark on transiting U.S, Coast
    Guard vessels to conduct maritime patrol of its enormous, under-
    patrolled EEZ. This kind of ship rider agreement allows the U.S. Coast
    Guard to play a more active role in developing partner law enforcement
    capacity of the island States. In addition, we are cooperating with
    Japan, Australia, Palau, the Marshall Islands, and Micronesia to bring
    to fruition the Sasakawa Peace Foundation's $10 million initiative to
    support maritime surveillance in all three Compact States. Second, the
    Department's humanitarian programs have been very well-received in
    island communities. These programs primarily focus on the removal of
    explosive remnants of war from the World War'' era, humanitarian
    projects, and prisoner of war/missing in action operations. DoD's 12-
    person Civic Action Team maintains a rotational presence in Palau,
    conducting small to medium scale humanitarian and civic action projects
    in the health, education, and infrastructure areas. Especially notable
    are the large-scale, multinational, preplanned humanitarian missions,
    the U.S. Air Force's Pacific Angel and U.S.
        Navy's Pacific Partnership, which include medical and engineering
    projects in remote regions that are conducted in close coordination
    with local communities. In the summer of 2010, more than 1,900 Palauans
    were treated, 14 community service projects were completed, and more
    than 1,000 man hours spent across the three states of Koror, Peleliu
    and Angaur when USS BLUE RIDGE (LCC-19) stopped in Palau as part of
    Pacific Partnership 2010. Also, the longest running humanitarian
    campaign in the world, Operation Christmas Drop, which provides air-
    dropped supplies to the people of the remote Micronesian Islands each
    December, celebrated its 58th anniversary in December 2010 and
    continues annually to assist the remote islands of Palau, These
    humanitarian missions are evidence that the Department's engagement in
    Palau extends well beyond traditional security parameters.
    Conclusion
        U.S. power projection in the Asia-Pacific region will continue to
    be important to our national security interests. The U.S.-Palau Compact
    is a strategic asset for U.S. presence in the Western Pacific, an
    increasingly important region, Loss of the defense rights and exclusive
    access granted to the United States under the Compact would adversely
    affect U.S. national security, Our relationship with Palau is unique
    and reliable.