[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


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                     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\
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    \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.
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    \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\
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    \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.
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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.)
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    \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.
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    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\
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    \17\ GAO-08-732.

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    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\
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    \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.
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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\
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    \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.
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    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.
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    \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.
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          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.
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    \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.
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          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\
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    \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.
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          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.
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    \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.
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    \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.

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   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.
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    \29\ All rates of return on the trust fund are net of fees and 
commissions unless otherwise noted.

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    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.

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    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.
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    \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).
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    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.
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    \32\ S. 343.
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    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:
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    \33\ H.R. 6040.
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          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.
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    \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.
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          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\
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    \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.
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          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\
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    \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.
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    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\
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    \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.
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    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 [email protected]. 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.

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    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.

                                 
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