[Senate Hearing 112-121]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 112-121

                           REPUBLIC OF PALAU

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   TO

  REVIEW S. 343, A BILL TO AMEND TITLE I OF P.L. 99-658 REGARDING THE 
COMPACT OF FREE ASSOCIATION BETWEEN THE GOVERNMENT OF THE UNITED STATES 
 OF AMERICA AND THE GOVERNMENT OF PALAU, TO APPROVE THE RESULTS OF THE 
  15-YEAR REVIEW OF THE COMPACT, INCLUDING 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, TO APPROPRIATE FUNDS FOR THE PURPOSES OF THE AMENDED P.L. 99-
  658 FOR FISCAL YEARS ENDING ON OR BEFORE SEPTEMBER 30, 2024, AND TO 
          CARRY OUT THE AGREEMENTS RESULTING FROM THAT REVIEW

                               __________

                             JUNE 16, 2011







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               Committee on Energy and Natural Resources

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          JAMES E. RISCH, Idaho
MARIA CANTWELL, Washington           MIKE LEE, Utah
BERNARD SANDERS, Vermont             RAND PAUL, Kentucky
DEBBIE STABENOW, Michigan            DANIEL COATS, Indiana
MARK UDALL, Colorado                 ROB PORTMAN, Ohio
JEANNE SHAHEEN, New Hampshire        JOHN HOEVEN, North Dakota
AL FRANKEN, Minnesota                DEAN HELLER, Nevada
JOE MANCHIN, III, West Virginia      BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               McKie Campbell, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel












                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Babauta, Anthony M., Assistant Secretary of the Interior, Insular 
  Affairs, Department of the Interior............................    18
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Gootnick, David, Director, International Affairs and Trade, 
  Government Accountability Office...............................    27
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     3
Reed, Frankie, Deputy Assistant Secretary of State, Bureau of 
  East Asian and Pacific Affairs, Department of State............    13
Scher, Robert, Deputy Assistant Secretary of Defense, South & 
  Southeast Asia, Department of Defense..........................    23
Toribiong, Hon. H.E. Johnson, President, Republic of Palau.......     4

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    45

                              Appendix II

Additional material submitted for the record.....................    51

 
                           REPUBLIC OF PALAU

                              ----------                              


                        THURSDAY, JUNE 16, 2011

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:36 a.m., in 
room SH-216, Hart Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

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

    The Chairman. OK, why don't we get started? Good morning. 
Welcome to all of our witnesses.
    The committee will receive testimony on S. 343, which is 
the legislation to approve the agreement that was reached last 
year between the United States and the Republic of Palau.
    Senator Murkowski has been delayed with some testimony 
she's providing in the House, but will be here shortly and 
asked us to go ahead and proceed.
    Palau is one of the United States' closest and most 
reliable allies. This relationship began in 1944 at the Battle 
of Peleliu where over 1,700 U.S. servicemen lost their lives. 
The relationship grew during the 47 years that the U.S. 
administered Palau under the U.N. Trusteeship.
    Today, this close relationship continues under the Compact 
of Free Association that was entered into force in 1994 and 
which affirms our nations' shared commitment to democratic 
principles, economic development, and mutual security.
    The agreement to be approved by S. 343 was reached at the 
conclusion of the joint 15-year review, as called for in the 
50-year compact between the United States and Palau.
    This agreement would make several modifications to the 
compact, including an extension of U.S. annual financial 
assistance on a declining basis until being phased-out in 2025. 
The $215 million, or an average of $15 million annually, would 
be provided for operations, fiscal consolidation, construction, 
maintenance, and trust fund contributions. This proposed second 
term of assistance would be a substantial reduction from the 
average of $37 million annually that was provided during the 
first term of assistance.
    The agreement would also enhance accountability by 
requiring Palau to undertake financial and management reforms, 
and by authorizing the Secretary of Interior to delay payment 
of funds if the U.S. determines Palau has not made progress in 
implementing those reforms.
    The Departments of State and Defense have recently written 
to the committee to underscore the vital role of the compact in 
meeting the United States' security interests in the Pacific.
    The State Department wrote--this is a quotation from their 
letter. It says, ``This right of strategic denial under the 
compact is vital to our national security,'' end quote.
    The Defense Department wrote, quote, ``Failure to follow 
through on our commitments to Palau, as reflected in the 
proposed legislation, would jeopardize our defense posture in 
the Western Pacific.''
    We will insert the full text of these letters from the 
Departments of State and Defense into our record.
    Unfortunately, notwithstanding the close historical ties 
between the United States and Palau, and the vital role that 
the compact plays in regional security, the current fiscal and 
political situation here in the Congress means that this bill 
cannot move forward without a provision to offset the 10-year, 
$194 million increase in mandatory spending that is directed by 
the bill.
    So we look forward to hearing from the Administration 
witnesses today, specifically on proposals for this offset, and 
to continue to work with the Administration to consider what 
options are available, if that becomes necessary.
    Before turning to the President as our first witness today, 
let me call on Senator Murkowski for any statements she would 
like to make.
    [The prepared statement of Senator Bingaman follows:]
 Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico
    Good morning, and welcome to our witnesses. The Committee will 
receive testimony on S. 343, legislation to approve the Agreement 
reached last year between the United States and the Republic of Palau.
    Palau is one of the United States' closest and most reliable 
allies. This relationship began in 1944 at the battle of Peleliu (Pay-
lay-loo) where over 17-hundred U.S. servicemen lost their lives. The 
relationship grew during the 47 years that the U.S. administered Palau 
under the U.N. Trusteeship. Today, this close relationship continues 
under the Compact of Free Association which entered into force in 1994, 
and which affirms our nations' shared commitment to democratic 
principles, economic development, and mutual security.
    The Agreement to be approved by S. 343 was reached at the 
conclusion of the joint 15-year Review as called-for in the 50-year 
Compact between the U.S. and Palau. This Agreement would make several 
modifications to the Compact including an extension of U.S. annual 
financial assistance--on a declining basis--until being phased-out in 
2025. $215 million, or an average of $15 million annually, would be 
provided for operations, fiscal consolidation, construction, 
maintenance, and trust fund contributions. This proposed second term of 
assistance would be a substantial reduction from the average of $37 
million annually that was provided during the first term of assistance.
    The Agreement would also enhance accountability by requiring Palau 
to undertake financial and management reforms, and by authorizing the 
Interior Secretary to delay payment of funds if the U.S. determines 
Palau has not made progress in implementing those reforms.
    The Departments of State and Defense have recently written to the 
Committee to underscore the vital role of the Compact in meeting the 
United States' security interests in the Pacific. The State Department 
wrote, ``This right of strategic denial (under the Compact) is vital to 
our national security.'' The Defense Department wrote, ``Failure to 
follow through on our commitments to Palau, as reflected in the 
proposed legislation, would jeopardize our defense posture in the 
Western Pacific.'' I will insert the full text of these letters into 
the record.
    Unfortunately, notwithstanding the close historical ties between 
the U.S. and Palau, and the vital role that the Compact plays in 
regional security, the current fiscal and political situation in 
Congress means that this bill cannot move forward without a provision 
to offset the 10-year, $194 million increase in mandatory spending that 
is directed by the bill.
    I look forward to hearing from the Administration witnesses today, 
specifically on proposals for this offset, and to continue to work with 
the Administration to consider other options, if that becomes 
necessary.

        STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman. I do appreciate 
you holding this hearing on an issue of importance not just to 
this committee, but to the national security of the United 
States as a whole.
    I was pleased to join with you in introducing legislation 
to approve the agreement between the governments of the United 
States and the Republic of Palau following the Compact of Free 
Association Review.
    Mr. President, I welcome you. It was good to visit with you 
yesterday. We are honored to have you with us this morning.
    Palau's history, during and since World War II, is directly 
linked to the United States. Palau is the site of the Battle of 
Peleliu, fought between the United States and the Japanese 
forces for over 2 months with the highest casualty rate of any 
battle in the Pacific Theater. The U.S. designated Peleliu as a 
U.S. National Historic Landmark as a result of that horrific 
battle.
    In fact, we've got an Alaskan who visits the area about 
twice a year, working to clean up and preserve that 
battlefield. So there's a nice connection there.
    I won't go into all of the details of the compact between 
our 2 Nations, but as a result of the close strategic and 
economic ties between our countries and our peoples, hundreds 
of Palauan citizens serve in all branches of the United States 
Armed Forces. We greatly appreciate their willingness to serve 
in our Nation's military, in some cases giving their lives to 
defend our freedom.
    Section 432 of the compact provides that after the 15th, 
30th, and 40th anniversaries of the compact, the United States 
and Palau shall formally review the terms of the compact and 
shall consider the overall nature and development of their 
relationship, including Palau's operating requirements and its 
progress in meeting development objectives.
    Over the first 15 years of the compact, Palau's voting 
record in the U.N. has closely mirrored the United States. 
Palau, along with Israel, votes with the U.S. more times than 
any other member. Palau has been a steadfast ally of the United 
States in international forums, support that we should be 
mindful of and grateful for.
    It's also important to recognize Palau's leadership in 
working with the United States to resettle 6 ethnic Uighurs who 
were detained at the Guantanamo detention facility. Palau was 
the first country to offer a future home for these detainees.
    Now, turning to the agreement that is before us, the 
Administration is recommending continued assistance to Palau, 
but at lower levels. Overall assistance will be less than half 
of what was made available to Palau in the first 15 years, and 
accountability measures are included to ensure Palau continues 
its path toward long-term fiscal and economic stability.
    I do concur with the Administration's assessment that the 
enactment of this bill will ``protect the United States' 
interests and promote the continued well-being of our 2 
countries.''
    Mr. Chairman, I do look forward to working with you to move 
the agreement forward and for its consideration by the full 
Senate. But in order for that to happen, as you have noted, the 
Administration must provide a viable offset for the costs of 
this agreement.
    You and I have sent multiple letters to the Secretaries of 
State and Interior, as well as the Director of the OMB, 
requesting a politically workable offset. The realities of the 
Congress today are that without that offset, we will not be 
able to enact this important agreement between our 2 nations, 
and the United States' commitment to our allies in the region 
will be in question.
    That's not a position that I believe any of us wants to be 
in, so I am hopeful that the Administration witnesses today 
will be able to provide some hope that a viable offset is 
there.
    With that, Mr. Chairman, I thank you.
    Again, welcome the President.
    The Chairman. Thank you very much.
    Our first witness today is His Excellency Johnson 
Toribiong, who is the President of the Republic of Palau.
    We had the good opportunity to meet briefly with the 
President yesterday, and we welcome him before the full 
committee today.
    Please go right ahead and introduce your colleagues, if you 
would like, and give us any message that you think we need to 
understand. Thank you.

STATEMENT OF HON H.E. JOHNSON TORIBIONG, PRESIDENT, REPUBLIC OF 
                             PALAU

    President Toribiong. Thank you, Mr. Chairman, Senator 
Murkowski, distinguished members of the committee. With me 
today are my Ambassador to the United States, Hersey Kyota, and 
my Washington-based consultant, Jeffrey Farrow. Behind me are 
members of my delegation, a member of the House of Delegates, 
Gibson Kanai; and Senator Alfonso Diaz; and my attorney, Kevin 
N. Kirk. Also with me is Haruo Wilter, a former Department of 
Interior staff who is now my financial adviser. So with that, 
let me begin my presentation.
    We also have with me Ambassador Stuart Beck, our Ambassador 
to the United Nations.
    Thank you very much.
    Chairman Bingaman, Senator Murkowski, and distinguished 
members of the committee, thank you for this opportunity for me 
to address your committee on behalf of the people of the freely 
associated state of the Republic of Palau regarding S. 343.
    Mr. Chairman, Senator Murkowski, thank you for sponsoring 
this bill.
    This bill is of critical importance to the future of Palau. 
The people of Palau are most grateful to you for all that you 
have done to support the United States relationship with Palau, 
which is a closer relationship than that which the United 
States has with any other place outside of its territory.
    Mr. Chairman, Senator Murkowski, let me first convey our 
warm greetings from the people of the Republic of Palau and 
their best wishes for a stronger and more prosperous America.
    Palau and our region of the world have been safe, secure, 
and in peace since the end of World War II thanks to the strong 
presence of the United States and its leadership in our region.
    Mr. Chairman, and distinguished members, having experienced 
the devastation and horror of one of the bloodiest battles of 
World War II, Palau is committed to cooperate fully with the 
United States to preserve and promote peace and security around 
the world.
    Palau is the last trust territory to achieve nationhood 
under the international trusteeship system. When the Compact of 
Free Association took effect in 1994, Palau was the only 
strategic territory in the world which was part of the former 
Trust Territory of the Pacific Islands because of its strategic 
importance.
    The compact represents Palau's liberation from its colonial 
past and became the basis of our current political status. The 
compact was negotiated over a prolonged period of time, and due 
to concerns of many of our people, it took 2 U.S. laws and 7 
referenda supervised by the United Nations over a decade before 
it was actually approved and took effect on October 1, 1994.
    We cherish our unique relationship with the United States, 
and we'll do all that we can to preserve it.
    Under the compact, Palau agreed to give the United States 
exclusive control over our territory in the Western Pacific, 
the size of Texas, based upon the United States' desire to 
preserve its strategic position in our region, as well as 
Palau's need for the strong defense protection of the United 
States in our region.
    Besides offering our territory to the United States, Palau 
sends many of its sons and daughters every year to join the 
United States military to help fight terrorism around the world 
and defend our freedom. We understand that the cost of freedom 
and democracy come at a very high price. We know this from the 
sacrifice made by about 11,000 young Americans who spilled 
their blood on our soil during World War II, including 
approximately 2,000 who made the ultimate sacrifice in Palau.
    We now observe the same Memorial Day with the United States 
to honor and remember those who gave their lives for our 
freedom, including half a dozen of our sons who have made the 
ultimate sacrifice fighting in Vietnam, Iraq, and Afghanistan 
for freedom enjoyed by the Americans, its allies, and 
ourselves.
    In the 15th year of our relationship with the United 
States, Palau and the United States were mandated by section 
432 of the Compact of Free Association to review the 
relationship and Palau's needs for assistance.
    The review was concluded on September 3 of last year in 
Honolulu, when the United States official representative and 
myself signed the compact review agreement. That agreement now 
awaits the approval of the U.S. Congress.
    I thank you, Mr. Chairman, and Senator Murkowski, for 
initiating the process for the approval of this agreement.
    Chairman Bingaman, Senator Murkowski, Palau is most 
grateful that through your understanding and support, and those 
of your colleagues, the U.S. Congress already has provided 
financial assistance to Palau for years 16 and 17 of the 
compact, in line with the compact review agreement, even before 
that agreement is approved by the U.S. Congress.
    Such direct financial assistance has prevented our 
government from having to reduce the essential public services 
to our people, especially health, education, and public safety 
programs and services, below the acceptable minimum standard.
    Besides the financial assistance, there are specified 
economic and budgetary reform measures provided in the compact 
review agreement, intended to place Palau on the path to 
economic self-sufficiency over the remaining 35 years of the 
compact. The compact review agreement is a roadmap for Palau 
toward economic self-sufficiency.
    During the compact review, it became clear that 
supplemental financial assistance to Palau from the United 
States was necessary to meet the original expectations of the 
United States and Palau under the Compact of Free Association.
    The trust fund established under the compact in its early 
years lost about $60 million of its value between November 2008 
and February 2009, when the United States money market suffered 
substantial losses.
    At the time the compact was first negotiated, we were 
advised that the trust fund would generate a growth of 12.5 
percent annually to sustain our government financial 
requirements from years 15 through 50, but those expectations 
have fallen far short of the reality.
    The assistance provided by the compact review agreement is 
not only essential, it is prudent. The compact review agreement 
will require specific reforms for our economic development 
policy and review and spending practices. Most of the financial 
assistance is earmarked for public safety, health, education, 
and the maintenance of infrastructure the United States 
considers essential, including critical new infrastructure.
    The financial assistance is not intended to make Palau more 
dependent. It is intended to make Palau more and more 
economically self-sufficient.
    The economic and political consequences of this assistance 
are to make a stronger Palau, and, hence, further strengthen 
and enhance our relationship under the Compact of Free 
Association.
    Chairman Bingaman, Senator Murkowski, Palau will faithfully 
honor all of its obligations and responsibilities under the 
Compact of Free Association, including those prescribed in the 
compact review agreement. We will honor in every respect our 
side of the bargain. We are committed to make Palau a 
prosperous state, not a failed state, in free association with 
the United States of America.
    Because of the extended period of our association with the 
United States since the end of World War II, Palau has adopted 
wholly the American values and ideals of freedom, democracy, 
and the rule of law. This is evident from the fact that Palau 
has the highest voting coincidence in the United Nations of any 
United Nations member.
    Palau is proud and honored to have a seat in the United 
Nations and to vote with United States in view of the fact that 
until 1994 Palau was a ward of the United Nations under the 
administration of the United States.
    Finally, Mr. Chairman, Senator Murkowski, and distinguished 
members, you are always welcome to visit Palau, some 11 time 
zones to the west of Washington, DC.
    I extend to you a standing invitation to Palau, considered 
one of the 7 underwater wonders of the world; the world's first 
shark sanctuary; a place of refuge for political refugees, 
including 6 Chinese Muslims from Guantanamo Bay; and a place 
where some of the most historic war memorial monuments are 
found, the most prominent of which is the one built by the 
survivors of the Battle of Peleliu atop its rugged ridge known 
as the Bloody Nose Ridge. On that monument, these words are 
boldly written, ``Lest we forget.''
    Honorable Senators, Palau shall never forget. We shall 
always be the most loyal ally of the United States, its true 
friend in time of peace and in time of war.
    Notwithstanding my personal commitment to our relationship, 
which reflects the sentiments of most Palauans, there are some 
Palauans who are enticed by the overtures and promises of 
China, which clearly wants more influence in our islands.
    I am concerned that a failure or undue delay in the 
approval of the agreement will encourage those among us who 
argue that we should look elsewhere. This will unnecessarily 
confuse our people.
    In closing, let me say that it is my firm belief that the 
speedy approval of the S. 343 will certainly advance the mutual 
interest of Palau in the United States now and in the future.
    I ask for your favorable action on this bill.
    Thank you, and may God bless the United States of America 
and the Republic of Palau.
    [The prepared statement of President Toribiong follows:]
     Prepared Statement of Hon. H.E. Johnson Toribiong, President, 
                           Republic of Palau
    Chairman Bingaman, Ranking Minority Member Murkowski, and 
Distinguished Members: Thank you for this opportunity to testify on S. 
343, the bill introduced by Senators Bingaman and Murkowski to approve 
the Agreement Between the United States and Palau reached in the 15th 
Anniversary Review of the relationship between the United States and 
Palau and Palau's assistance needs required by Section 432 of the 
Compact of Free Association between our states. I am here to urge its 
expeditious approval.
    Mr. Chairman, I wrote you in February expressing my deep 
appreciation for your attention to Palau over the years, your 
sponsorship of this bill, and your leadership in continuing assistance 
to our islands while the Congress considers the Agreement. I reiterate 
this appreciation today.
    Senator Murkowski, you are also owed Palau's profound gratitude for 
your leadership regarding the Agreement.
    Committee staff members Allen Stayman and Isaac Edwards are as 
well.
    Palau's thanks apply for the letters that the Committee's 
bipartisan leadership sent United States executive branch officials 
asking about the importance of the Compact and the Agreement to United 
States security interests and requesting a proposed amendment to the 
legislation to provide the budgetary offset that is needed under United 
States law and congressional rules to enable the legislation to be 
considered.
    In response, the Departments of Defense and State wrote that the 
legislation is ``vital'' to United States security, also using words 
such as ``critical,'' ``increasingly important,'' and ``invaluable.'' 
In the words of the Defense Department, a failure to pass it would 
``jeopardize'' United States defense--which understands the situation 
in Palau. The State Department also wrote that the Department of the 
Interior has assured that congressional budget requirements would be 
met.
    I hope that the Interior Department makes a proposal for this 
purpose soon.
    To help explain why and why this legislation is needed, I will 
outline the background of the relationship between the United States 
and Palau and the Agreement that the bill would approve.
    It began with the Battle of the island of Peleliu in 1944 when the 
United States liberated Palau from Japan in one of the bloodiest 
battles of World War II. Originally expected to be over in four days, 
it lasted for more than two months, also resulting in casualties on 
Angaur and Ngesebus, two other islands of Palau. All told, the United 
States Armed Forces, consisting of 1st Marine Division, later relieved 
by the Army's 81st Infantry Division, suffered a total of approximately 
9,500 casualties in Palau, including almost 2,000 killed in action.
    Through this, valiant Americans liberated Palau from the yoke of 
colonialism that had weighed heavily on my people for almost 100 years, 
from the time that the Spanish wrenched freedom from our ancestors, 
through the era of German rule, and lastly, under the Empire of Japan. 
Liberation also set in motion events that 50 years later would lead to 
Palau regaining its sovereignty.
    Nevertheless, the gargantuan battle devastated our islands and left 
our people destitute. Many Palauans were killed. At the end of World 
War II, fewer than 5,000 Palauans remained alive.
    Having taken Palau, the United States governed it; first, under 
Naval Administration and then as a part of the United Nations Trust 
Territory of the Pacific Islands. The territory was the U.N.'s only 
strategic trusteeship at the request of the United States. This made it 
the only trusteeship subject to U.N. Security Council as well as 
Trusteeship Council jurisdiction. A Trusteeship Agreement committed the 
United States to develop Palau socially, economically, and into a self-
governing status--but also gave the United States complete control over 
the islands for which so many Americans had lost their lives and which 
had tremendous continuing strategic importance to the United States and 
international peace.
    At first, the territory was governed under a policy that closed the 
islands off from the world, invested little, and only permitted a 
subsistence economy. As the years went on, however, the United States 
began to be pressured by the inherent conflict between its obligation 
to develop Palau into self-government and its desire to maintain 
military control over a vast, strategic expanse of the Pacific.
    The Kennedy Administration's two-pronged solution--continued by 
succeeding administrations--was, one, to extend substantial assistance, 
particularly several domestic United States programs, to bind the 
islands to the United States, and, two, to encourage the idea of free 
association instead of independence. This status would enable the 
territory to become self-governing, but retain for the United States 
full military authority almost as if the islands were United States 
territory. Compacts of Free Association were negotiated with Palau and 
two other groups of islands of the Trust Territory.
    The Compact with Palau, which was signed in 1985, ultimately made 
Palau a nation, but gave the United States the desired control over a 
strategic expanse of the western Pacific the size of Texas between the 
Philippines, Guam, and Indonesia, as well as military basing rights for 
50 years. In consideration, it also committed to give Palau budgetary, 
developmental, and program assistance, and permits Palauans to enter 
and work in the United States, as well as to join the United States 
Armed Forces as--many do.
    The Compact as negotiated was not universally embraced in Palau. It 
took two United States laws, the second enacted in 1989 addressing 
concerns of many of our people, and seven referenda in Palau before it 
was finally approved in our islands.
    And then it took years to obtain United Nations Security Council 
approval because of questions as to whether the Compact's United States 
military rights were more extensive than can exist in another sovereign 
nation and inconsistent with the fundamental principle of free 
association.
    Palau finally became a state in free association with the United 
States on October 1st, 1994.
    The Compact specified assistance for 15 years and provides, in 
Section 432, that subsequent assistance for at least the duration of 
the 50 years of base rights would be determined in periodic joint 
reviews of Palau's needs. Some of Palau's needs during Years 15 through 
50 of free association were to be met through a trust fund. But the 
framers of the Compact wisely recognized that more would be needed and 
Palau's needs could not be projected so far into the future. The 
reviews were also mandated so that both of our freely associated states 
could re-evaluate the relationship as a whole on a periodic basis. So, 
the Compact provides for assessments of our association and of the 
assistance that Palau needs at the 15, 30, and 40-year marks. It also 
commits the United States to act on the needs of Palau identified in 
the reviews.
    The 15th anniversary of the Compact occurred on October 1, 2009. 
Because the assistance specified in the Compact was to expire September 
30, 2009, Palau sought to begin the 15th Anniversary Review in 2008. 
However, although some United States officials agreed to take steps in 
this regard, the effort failed.
    The process did not get seriously started until early 2009 when I 
visited new Secretaries Clinton and Salazar. Then, beginning in May 
2009, my Compact Review Advisory Group began to meet with a team of 
United States representatives led by the Department of State.
    The Review was protracted due to delays on the United States side. 
This necessitated a continuation of assistance to Palau for essential 
government services in Fiscal Year 2010 based on Fiscal Year 2009 
funding which you, Mr. Chairman, others, and, then, the United States 
Administration requested.
    Agreement was finally reached last September 3rd after the personal 
involvement of Secretary Clinton, Assistant Secretary of the Interior 
Babauta, Deputy Secretary of the Interior Hayes, then Deputy Secretary 
of State Lew, Deputy Assistant Secretary of State Reed, and others, and 
constructive work done by all involved with the United States team.
    Senior United States officials encouraged me to sign the Agreement 
last summer so that it could be approved by the United States Congress 
in time for Fiscal Year 2011 appropriations. Ultimately, however, it 
was not submitted to you for approval until this past January. This 
necessitated another continuation of assistance to Palau for essential 
services based on Fiscal Year 2009 funding, which I appreciate you, Mr. 
Chairman, urging and Chairman Inouye of the Appropriations Committee 
insisting upon.
    It also resulted in new requirements regarding the Agreement's 
approval in the United States Congress. The assistance that the 
Agreement would provide would be considered mandatory appropriations. 
Last year's PAYGO Act created a requirement that the cost be offset. 
New House rules require that the offset be in the form of a reduction 
in other mandatory spending to make the legislation even eligible for 
consideration--and leaders of the new House majority have made clear 
that this is important politically as well.
    Under the Agreement, Palau would be provided assistance totaling 
$215.75 million from Fiscal Years 2011 through 2024--although more than 
$13 million of this was already appropriated in the continuing 
appropriations for Fiscal Year 2011.
    The total amount is critical for Palau but it is much less than 
what was provided during the first 15 years of the Compact. In 
addition, the Agreement would, in response to demands of the United 
States negotiators, phase out assistance for essential government 
services and infrastructure by Fiscal Year 2024, with assistance for 
government services totally ending in Fiscal Year 2023, a year before 
the next review.
    There are other issues: There is no provision to adjust amounts for 
inflation as in the Compact and the revised compacts with the other 
freely associated states; the subsidy for the United States Postal 
Service would continue even if institutes international rates for Palau 
delivery; and Palau would have to begin paying for audits the United 
States wants.
    The Agreement would also require mutually and expertly determined 
substantial Palauan spending and revenue reforms. These reforms will 
require tough measures but are intended--and needed--to strengthen 
Palau's budgetary practices and its economy. The reforms would 
ultimately lessen our islands' absolute need for United States 
assistance. This will create a stronger, more self-reliant Palau, which 
is what our islands should be and which would be a better partner for 
the United States.
    Finally, the Agreement would also make changes in United States 
programs and services in response to requests of various United States 
agencies in areas including civil aviation, postal service, 
telecommunications, and weather reporting, amending seven of the 
Compact's subsidiary agreements. The Agreement would, additionally, 
amend the Compact to reflect Palau's current practice of issuing 
machine-readable passports, which enhance United States border 
security.
    Strategic control of Palau and its extensive waters and base rights 
are not all that are at stake for the United States.  Our relationship 
is based upon our common interests and ideals. For example, year in and 
year out, Palau votes with the United States in the United Nations more 
than any other member state. It has stood alone with the United States 
on key votes, including those concerning Israel and Cuba, despite 
pressure and entreaties from other nations that have offered 
friendship.
    The Government of Palau's agreement to the request of the United 
States that we provide a home for Chinese Muslims that the Bush 
Administration determined it had erroneously detained at Guantanamo is 
another example of the unmatched alliance between Palau and the United 
States. We agreed to provide this sanctuary when no other nation would. 
Many Palauans had strong reservations, however, and we also did so over 
the strong objections of the Government of China, which had made 
economic overtures to our islands. In fact, Palau has provided third-
country refuge to more former Guantanamo detainees than any nation 
other than predominantly Muslim Albania to assist the United States.
    And there is no more telling demonstration of the closeness Palau 
feels to the United States than the record of Palauans serving in the 
Armed Forces of the United States, which I have been told is at a 
higher rate than any other state of or associated with the United 
States. Palauans have fought alongside their American comrades-in-arms 
in Lebanon, Vietnam, Iraq, Afghanistan, and in other theaters of war, 
and have given their lives and limbs in this service. Just last month, 
I attended the funeral of another young Palauan who was killed in the 
Afghanistan. Three of his siblings continue to serve in the United 
States Army.
    Palau is the United States' closest and most loyal ally. The vast 
majority of Palauans are happy and proud to be able to help the United 
States and give back to a nation that has done so much for them.
    But there are elements that who would use any failure of the United 
States to live up to its commitments under the Compact to try to 
diminish the confidence of Palauans and others in the strong 
relationship between our freely associated states and to encourage 
Palau in a different direction.
    A failure of the United States Congress to approve this Agreement 
or an undue delay in assistance which now constitutes 24% of Palau's 
budget would encourage some--including some in Palau who questioned the 
Compact even when it was approved--to argue that Palau should move away 
from the United States and look elsewhere.
    And if there is no agreement or an end to essential assistance, 
many Palauans would insist on an end to the United States military 
rights under the Compact that the Department of Defense has advised are 
essential to United States security and for maintaining regional peace.
    Already some Palauans are enticed by the new economic power of 
China, which clearly wants more influence in Palau. We all want greater 
economic interaction with China, but it should be without compromising 
the close alliance between Palau and the United States
    I, personally, have a fundamental and enduring commitment to 
strengthen the relationship between Palau and the United States. This 
reflects the real desires of the majority of my people. But we will all 
face a very serious challenge if this Agreement is not approved, and it 
is simple logic that United States military rights under the Compact 
and other Palauan support for the United States under the current 
association could not be expected to continue if the United States does 
not continue to meet the promise of the Compact.
    The relationship will also be significantly--and very unadvisedly--
undermined if assistance that the Government of Palau absolutely needs 
to continue critical services to its people is allowed to lapse even if 
the Agreement is subsequently approved by the United States Congress. 
In this regard, United States officials should plan to continue 
assistance on at least the current basis if they do not act to enable 
the Agreement to be approved by United States law soon.
    The delay in United States action on the Agreement has already led 
to substantial questions about it being raised by influential leaders 
of our island. The danger of the growing doubts should be recognized by 
United States officials. The history of the Compact in Palau should not 
be forgotten.
    I am, however, hopeful that this hearing will be at a catalyst for 
the United States executive branch and congressional action needed to 
approve the Agreement, and am confident that Palau will reflect its 
appreciation for the United States by approving the Agreement.
    I respectfully request the Committee to favorably report the bill 
and lead the Congress in its enactment.
    Thank you for your attention and consideration.

    The Chairman. Thank you very much for your excellent 
statement, Mr. President.
    Let me ask a couple of questions. I think on page 5 of your 
written testimony you say, if there is no agreement or an end 
to essential assistance by the United States, many in Palau 
would insist on an end to the U.S. military rights under the 
compact.
    Under the first term of the compact, which ended in 2009, 
since then, as you pointed out, we have had year-by-year 
funding. I guess the question would be, what do you think the 
impact would be on the political debate in Palau if the United 
States continues to provide assistance at the fiscal year 2009 
levels on an annual discretionary basis, rather than going 
ahead with the legislation we've proposed?
    President Toribiong. Mr. Chairman, let me answer the last 
part of your question.
    For Palau to seek financial assistance from the United 
States on a year-to-year basis would be promoting more sense of 
dependence on the United States. The compact review agreement 
is a roadmap, through reforms and other assistance, toward 
economic self-sufficiency, which is the intended goal of the 
Compact of Free Association.
    So I'm concerned that to go from year-to-year will make 
Palau more dependent on the United States and disregard the 
long-term goals of the compact.
    Regarding the defense rights of the United States in Palau, 
legally, the United States has that right beyond the terms of 
the compact until mutually terminated. But politically, the 
debate will be raging that, since one side is not honoring its 
obligation, perhaps that justifies seeking modification of the 
defense and military rights of the United States.
    With that, I can defer to my consultant, if he has anything 
to add to my response.
    But all in all, I would say that the compact review is 
intended to promote the goals of the compact, economic self-
sufficiency, a roadmap toward that goal. A year-to-year 
assistance basis will be to promote more and more a sense of 
dependency, which we'd like to move away from.
    The Chairman. Very good.
    Mr. Farrow, did you wish to add anything?
    Mr. Farrow. Just briefly, Mr. Chairman. The President and 
other leaders of Palau have advised me that a failure to 
approve the agreement and year-to-year funding on a continuing 
basis would undermine confidence in the relationship, and, as 
the President said, lead to people suggesting that the U.S. 
military rights in Palau should not be continued and that Palau 
should look elsewhere.
    So if they are not certain in the long term about what 
United States' assistance will be, if it's on a year-to-year 
basis, then some Palauans would want to have the military 
commitment that Palau has made to the United States reevaluated 
and would feel the necessity of looking to other countries for 
a longer-term assistance package.
    So it's important that--and the framers of the compact 
understood this--it's important that there be a long-term 
relationship between Palau and the United States on a bilateral 
basis, and a relationship in which both sides could have 
confidence for the long term. Thank you.
    President Toribiong. May I say something?
    The Chairman. Mr. President, sure.
    President Toribiong. We do appreciate the extension of 
financial assistance on an interim basis, on the condition that 
the U.S. Government will honor the compact review agreement.
    My concern is the legal integrity and viability of the 
compact as a treaty between the United States and Palau, were 
one side to appear not to honor the integrity of that document.
    The Chairman. Very good.
    Senator Murkowski.
    Senator Murkowski. I just want to follow on this 
conversation here.
    Mr. President, you have suggested that China may show an 
increasing influence or desire to influence Palau. Perhaps that 
has something to do with Palau's official recognition of 
Taiwan. I don't know that.
    Mr. Farrow, you have also mentioned that others might be 
looking to step in and fill that role in terms of assistance.
    Are there any other Nations or regions that are looking at 
Palau now, perhaps hoping to have more influence than they do 
currently?
    President Toribiong. As you may know, Palau has diplomatic 
ties with the Republic of China, Taiwan, 1 of the 20-some 
Nations which do that. So besides China, the powerhouse of 
Asia, we've been approached directly by UAE.
    The minister of state from Abu Dhabi flew to Palau, invited 
Palauans to meet with them in Abu Dhabi, with the Arab League. 
They've been making suggestions that they would like to invest 
extensively in Palau, but nothing has come from that country as 
of late, perhaps because of the troubles in the Middle East.
    They also said that they insist that we support the 
position of the Arab world against Israel, which is a very 
serious issue for us to consider.
    Senator Murkowski. It is somewhat sobering to hear that 
those might be the conditions attached.
    Let me ask one more question, Mr. President. The agreement 
designates $10 million for a financial consolidation fund to 
reduce the government payment arrears of Palau that have been 
accumulated. Can you describe what debts these funds would be 
used to pay?
    President Toribiong. Yes. Let me say this, that when I took 
office in January 2009, Palau was in debt to the vendors and 
other utilities corporations to the tune of about $13 million. 
That has been reduced about $11 million.
    So the $10 million was estimated to cover all the 
outstanding deficits, which were incurred over the years. The 
deficit occurred because our Congress and our previous 
administration always overestimate the local revenues above and 
beyond their expenditures.
    This year, for the first time, we are ahead of our 
projection by about 5 to 10 percent. So I hope to be able to 
put Palau in a position where we live within our means.
    One of the conditions in the compact review agreement is a 
reform on our revenue and spending practices. That's why I call 
it a roadmap for economic self-sufficiency and economic 
responsibility.
    Senator Murkowski. Thank you, Mr. President.
    Thank you, Mr. Chairman.
    The Chairman. Mr. President, if you are running a surplus, 
I'm inclined to ask if we could get a loan from you, but maybe 
that's inappropriate at today's hearing.
    Thank you very much for your excellent testimony.
    We do have 4 Administration witnesses now who we wanted to 
hear from and learn what we can from them.
    Let me ask if there's any other statement that you would 
want to make to the committee before going to the second panel.
    President Toribiong I'd just like to express my profound 
gratitude to both of you, Senators, and to the United States 
for its generous support and protection of Palau since the end 
of World War II. We shall always remain your most loyal ally 
and a friend.
    Thank you.
    The Chairman. We congratulate you on the leadership you're 
providing to your country, and we will do all we can to move 
this legislation forward. Thank you very much.
    Why don't we go ahead with our second panel? I will 
introduce them as they come forward.
    Ms. Frankie Reed is the Deputy Assistant Secretary with the 
Bureau of East Asian and Pacific Affairs with the U.S. 
Department of State; Mr. Anthony Marion Babauta, who is the 
Assistant Secretary for Insular Affairs in the U.S. Department 
of Interior; the Honorable Robert Scher, who is the Deputy 
Assistant Secretary of Defense for South and Southeast Asia in 
the Department of Defense; and Mr. David Gootnick, who is 
director of International Affairs and Trade with the Government 
Accountability Office.
    So we appreciate all of you being here. We obviously will 
include your full statements in the record as if read, but if 
you could give us the short version of your statements and make 
the main points you think we need to understand in about 5 
minutes each, that would be useful. Then Senator Murkowski and 
I will have some questions.
    Ms. Reed, do you want to start? We'll just go across the 
table that way.

STATEMENT OF FRANKIE REED, DEPUTY ASSISTANT SECRETARY OF STATE, 
 BUREAU OF EAST ASIAN AND PACIFIC AFFAIRS, DEPARTMENT OF STATE

    Ms. Reed. Thank you, Mr. Chairman, Senator.
    Before I begin, I would like to say that in support of 
this, what I call a partnership, with our very good friends in 
Palau, I was in Palau over 12 years ago. I'm pleased to say 
that I returned only several months ago, after signing this 
agreement in Honolulu. I was heartened to see a very much 
improved Palau. I'm talking about infrastructure and not just 
atmospherics, with the good use to which the compact funds have 
been put.
    I'd like to talk to you about the special relationship, 
this partnership that we have had over the years, a partnership 
between the Government of the United States and the Government 
of Palau, in support of S. 343. The proposed legislation 
nurtures our unique relationship, and it is a small fraction of 
what we feel it will cost us if we lose the special 
relationship that exists between the United States and Palau.
    For almost 4 decades, from the inception of World War II, 
Palau was a United Nations Trust Territory under the 
administration of the United States.
    Following lengthy negotiations, the United States and Palau 
recast their relationship; the result, the Compact of Free 
Association. It marked Palau's emergence from trusteeship to 
independence.
    Palau is a relatively young state. However, its democratic 
process is mature and a testament to the strong values of the 
people of the Pacific. This reinforces the value of the compact 
as a vehicle for their transition to greater self-sufficiency.
    In return, the compact reinforces an important element of 
our Pacific strategy, that is, the defense of the U.S. 
homeland. It allows us to carry out very important foreign 
policy objectives.
    The agreement that I signed with President Toribiong in 
September and the proposed legislation for your consideration 
addresses the outcome of the review and is a manifestation of 
the United States following through on its commitments to 
Palau.
    Located in the westernmost point, Palau is a part of a 
security zone that stretches from California to the 
Philippines. We paid in blood in World War II to free Palau 
from Japan, and we fought to counter Japan's control over the 
region. Palau rebuilt its government upon the principles of 
democracy, individual rights, and freedom.
    The President, Secretary Clinton, and others in this 
Administration deeply appreciate the historic legacy of the 
Pacific and the strategic role it plays, particularly in 
keeping the Pacific Islands allied with the United States.
    On controversial issues in multilateral fora, as both of 
you have so aptly noted, the United States has been able to 
consistently count on Palau's vote. This is not a small thing. 
In a number of resolutions in the General Assembly passed over 
the past year, when the United States was isolated by 
overwhelming numbers, Palau was at our side.
    In 2009, Palau resettled 6 ethnic Uighur detainees from 
Guantanamo at a time when few other countries were willing to 
step up. Two hundred (200) Palauan men and women serve in our 
U.S. military.
    Only 2 months ago, a Palauan soldier, Sergeant Sonny Moses, 
was killed in Afghanistan while serving. I would note, 
respectfully, that President Toribiong's niece also serves in 
the U.S. Navy.
    A failure to implement the results of the 15-year review 
would cast significant doubt on the U.S. commitment to the 
compact relationship. It is crucial that we provide Palau the 
assistance to which we have agreed, for the smooth continuation 
of our bilateral relationship.
    So I urge you to pass the legislation approving and funding 
the results of the review. I look forward to ongoing 
cooperation with the Congress to advance U.S. interests in 
Palau and the greater Pacific, and our contribution to a 
secure, prosperous future for the Nations and people of Palau 
and the Pacific.
    Thank you.
    [The prepared statement of Ms. Reed follows:]
   Prepared Statement of Frankie Reed, Deputy Assistant Secretary of 
  State, Bureau of East Asian and Pacific Affairs, Department of State
    Chairman Bingaman, Senator Murkowski, and Members of the Committee, 
I am here 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. History has proven that this small Pacific island 
nation remains indispensable to our national security and other core 
interests in the Pacific. Current and future challenges convince us we 
must remain steadfast and true to a thriving relationship that delivers 
much more than it costs in dollars and cents.
    Our Compact with Palau was concluded in 1994. It does not have a 
termination date and requires a review on the 15-year, 30-year, and 40-
year anniversaries. Our two governments worked closely over 20 months 
of negotiations to conclude the 15-year review last September, which 
resulted in an agreement I signed with President Toribiong. The 
legislation now proposed to implement the agreement is the outcome of 
that review and is the manifestation of the shared commitments between 
our two governments.
    The Palau Compact Review legislation amends 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 approves 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. It appropriates 
funds for the purposes of the amended PL 99-658 for fiscal years ending 
on or before September 30, 2024, to carry out the agreements resulting 
from the review.
    Palau has been and continues to be a strong partner with the United 
States. Its location on the westernmost point of an arc from California 
to the Philippines creates a security zone that safeguards U.S. 
interests in the Pacific. That relationship was born in World War II 
and has been built over the decades since 1945.
                       transition to independence
    Allow me to look back to 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 Palau and 
island districts of Micronesia that we had liberated from Japanese 
occupation. During that period, the United States built roads, 
hospitals and schools and extended eligibility for U.S. federal 
programs in the Trust Territory. In the following years, the trustee 
islands sought changes in their political status. 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. The Compact fulfills our solemn commitment to 
Palau's self-governance in accordance with the freely expressed wishes 
of the Palauan people. The Compact also provides for an important 
element of our Pacific strategy for defense of the U.S. homeland and 
allows us to carry out important foreign policy objectives.
                  palau's support of the united states
    Mr. Chairman, the United States paid dearly in blood in WWII to 
free Palau. It is a story that every American should understand and 
that generations before us have seen as creating a sacred trust to 
remember and honor.
    Rising from those ashes, with the strong and steady support of the 
American people, Palau rebuilt its infrastructure and modeled its 
government upon the principles of democracy, human rights, and 
fundamental freedoms. President Toribiong recently signed an Executive 
Order designating the last Monday of May Memorial Day in Palau, an 
official holiday. On this day, the people of Palau honor those who paid 
the ultimate sacrifice to defend the freedom and democratic principles 
we all enjoy today. On May 30, President Toribiong and our U.S. 
Ambassador to Palau laid wreaths on the grounds of the WW II monument 
in Peleliu State. More than 2,000 American soldiers lost their lives 
and more than 10,000 were wounded in the Battle of Peleliu, one of the 
bloodiest battles of WW II. Palau remains a strong reliable partner and 
continues to share our values through these historic ties.
    The United States can count on Palau to vote with us on 
controversial issues in multilateral fora. On a number of important 
resolutions in the General Assembly over the past year, Palau stood by 
us and provided critical votes. For example, Palau has voted with the 
United States on controversial resolutions related to Israel 100 
percent of the time and on human rights issues, 93 percent of the time. 
Palau's overall voting coincidence with us is at 87 percent.
    Although Palau is a steadfast and committed friend of the United 
States, China, the Arab states, Cuba and others are actively courting 
Palau, and the other Pacific island nations, as they seek to build 
influence in the region. The United States must maintain and strengthen 
its relationship with Palau by maintaining our strong friendship and 
upholding our commitments as set forth in the Compact.
    The results of the 15-year Compact Review as reflected in the 
subsequent legislation nurture our unique relationship. By supporting 
the Compact Trust Fund, the United States contributes to Palau's 
development and secures our security interests. Our contribution 
represents a vital link between our two countries. Implementation of 
the results of the Compact review sends a reassuring signal to Palau 
and others in the Pacific region and beyond that the United States 
follows through on its commitments, in good times and in difficult 
times. These are indeed difficult times for us. However, it is 
essential to our long-term national interests to make sure that the 
United States remains true to its identity as a Pacific power. Meeting 
vital interests more than six decades ago, the United States invested 
blood and treasure. Today, it remains in our strategic, political and 
economic interests to nurture Palau's young democracy, support its 
development, and increase its self-sufficiency.
U.S. Defense Interests in Palau
    Mr. Chairman, the United States and the people of the Pacific have 
fought side-by-side. Our identity as a ``Pacific power'' was, in many 
ways, forged on the beaches of the Pacific during World War II.
    The importance of our special relationship with Palau is most 
clearly manifested in the U.S. defense posture in the Asia--Pacific 
region, which forms a north-south arc from Japan and South Korea to 
Australia. Maintaining U.S. primacy in the Pacific depends on our 
strong relationship with the Freely Associated States of Palau, the 
Marshall Islands and the Federated States of Micronesia, which along 
with Hawaii, Guam, the Commonwealth of the Northern Mariana Islands, 
American Samoa and the smaller U.S. territories comprise an invaluable 
east-west strategic security zone that spans almost the entire width of 
the Pacific Ocean.
    Additionally, critical security developments in the region require 
the United States' sustained presence and engagement, particularly 
given the range of U.S. strategic interests and equities in the Western 
Pacific. Essential elements of our presence include the Reagan 
Ballistic Missile Defense Test Site on U.S. Army Kwajalein Atoll and 
disaster relief operations throughout the region. This posture will 
become increasingly important as regional powers become increasingly 
active and seek to supplant U.S. military leadership and economic 
interests in the region. Following through on our commitments to Palau, 
as reflected in the proposed legislation, buttresses our defense 
posture in the Western Pacific.
    Palau does not maintain its own military forces, but under the 
terms of our Compacts, their citizens are eligible to serve in the U.S. 
Armed Forces. And they do. Palauan citizens volunteer in the U.S. 
military at a rate higher than in any individual U.S. state. 
Approximately 200 Palauan men and women serve in our military today, 
out of a population of about 14,000. Palau is indeed a strong partner 
who punches well above its weight. 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. Since 9/11, at least six Palauans lost their lives in combat.
    Just this year, Sgt. Sonny Moses was killed in Afghanistan while 
serving with his comrades providing computer training to Afghan 
citizens. Sgt. Moses was the youngest of eight children of Mr. and Mrs. 
Sudo Moses and when his body came to Palau for burial, three of his 
siblings came home in U.S. uniform. Of the family of eight, four chose 
to serve in the United States military. And during the motorcade for 
his procession to the Capitol the streets of Koror were lined with 
citizens waving U.S. and Palauan flags. This sad occasion shows just 
how close the ties between the United States and Palau truly are.
    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 our 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 over 
the past decades and most recently in Afghanistan and Iraq.
    The Compact and our continued commitment to Palau, as manifested in 
the proposed legislation, will reinforce an important element of our 
Pacific strategy for defense of the U.S. homeland. As you will hear 
from Deputy Assistant Secretary of Defense Robert Scher, the U.S.-Palau 
Compact includes provisions that close Palau to the military forces of 
any nation, except the United States. The United States enjoys access 
to Palauan waters, lands, airspace, and its Exclusive Economic Zones 
(EEZ), a vital asset for our defense and security needs. Our 
relationship with Palau allows the United States to guard its long-term 
defense interests in the region.
Beyond Defense Interests
    The importance of our strong relationship with Palau extends beyond 
defense considerations. Palau works closely with the U.S. to detect and 
combat international crime and terror. In 2009, Palau resettled six 
ethnic Uighur detainees from Guantanamo at a time when few other 
countries were willing to step up. Palau was the first island partner 
to sign the U.S. Coast Guard ship rider and ship boarding agreements 
that bolster law enforcement in the vast Pacific region.
    Our people-to-people ties continue to grow. Since 1966, more than 
4,200 Peace Corps Volunteers taught English, offered life skills 
education, and supported 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.
                 the administration's pacific strategy
    Mr. Chairman, the President, Secretary Clinton, and others in this 
Administration deeply appreciate the historic World War II legacy of 
the Pacific and the strategic role it plays, particularly in keeping 
the Pacific Islands allied with the United States. Today, we find 
ourselves in a tumultuous global political environment that calls for 
wisdom and long-term strategic vision. An investment in Palau today 
will help to ensure Palau will continue to stand with us as a staunch, 
dependable, democracy tomorrow.
Palau is important, but why enact the U.S.-Palau Legislation now?
    Palau's stable government is modeled on our own. Palau shares our 
vision on important international goals for human rights and democracy. 
The maturity of the democratic process in as relatively young a state 
as Palau is a testament to the strong values of the people of the 
Pacific and reinforces the value of the Compact as a vehicle for their 
transition to greater self-sufficiency.
    Palau was the first insular area, including the U.S. territories, 
to get a clean audit opinion on the government's financial statements. 
Public facilities are in good repair, and Palau puts a great deal of 
care into maintaining a pristine environment, especially by addressing 
critical areas of energy, water, sewer, and transportation. They 
understand the importance of continuing efforts to operate within a 
balanced budget.
    We must remain true to our commitment to the people of Palau. The 
bottom line is that Palau is an irreplaceable and loyal partner, who 
shares our interests in preserving regional and international security. 
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 Committee in considering this legislation promptly 
and hope both the Senate and the House will pass it this session.
    Although the Department of the Interior is responsible for 
implementing and funding the Compact programs, I would like to say a 
few words about the assistance package resulting from the 15-year 
review. The direct economic assistance provisions of the Compact 
expired on September 30, 2009. The outcome of the 15-year review 
resulted in an assistance agreement that provides $215.75M to Palau 
over the next 14 years and enables Palau to transition to reliance on a 
$15 million a year withdrawal from its trust fund; instead of the $13 
million in direct assistance and $5 million from its trust fund that it 
has come to rely on, The assistance package included in the 
legislation, which provides approximately $215 million to Palau divided 
over the next 14 years, reflects an effort to ease Palau off of U.S. 
direct economic assistance as it continues to grow and reform its 
economy. As a result of the Compact review, Palau will have continued 
eligibility 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.
    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 a year from now until 2044, which was the intended 
purpose of the Compact negotiators in the 1980s. The Trust Fund 
suffered considerable shrinkage as a result of the recent global 
financial crisis. For the smooth continuation of our bilateral 
relationship, it is crucial that we provide Palau the assistance agreed 
to in the Compact review.
    Mr. Chairman, in closing I would like to emphasize that Palau, a 
small island country far away in the Pacific, was our protectorate and 
is now our ally. The people of Palau are woven into the American 
fabric, serving with distinction and honor in our military and living 
and working beside us in the United States. Thanks to its geography, 
Palau is a unique outpost in our security arc in the Pacific. It is a 
place America liberated with its blood and that now helps us protect 
the western flank of our homeland. The economic center of gravity 
continues to shift to the Asia Pacific, and the vital importance of a 
stable, increasingly prosperous and democratic Palau to U.S. interests 
in this dynamic region continue to grow.
    I hope that my testimony today, coupled with that of my colleagues 
from the Department of the Interior and the Department of Defense, has 
given you a more robust and complete picture of the key role played by 
the Compact in not only cementing our partnership with Palau, but also 
in serving 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.

    The Chairman. Thank you very much.
    Mr. Babauta, go right ahead.

  STATEMENT OF ANTHONY M. BABAUTA, ASSISTANT SECRETARY OF THE 
     INTERIOR, INSULAR AFFAIRS, DEPARTMENT OF THE INTERIOR

    Mr. Babauta. Thank you very much.
    Chairman Bingaman and Ranking Member Murkowski, I am 
pleased to be here today to discuss S. 343. My written 
statement has been submitted for the record, and my statement 
today will focus on the financial assistance components of the 
new agreement with Palau for which the Department of the 
Interior will be responsible.
    The department and the Government of Palau have been 
partners since 1951. 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 U.S.
    The compact has proven to be a very successful framework 
for U.S.-Palau relations. The goals of the first 15 years of 
the compact have been met: The trusteeship was terminated; 
Palau's self-government was restored; a stable democratic state 
was established; third countries were denied military influence 
in the region of Palau; and with U.S. 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. The U.S., 
through the department, 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.
    Palau has made strong economic gains under the compact, and 
its growth in real terms has averaged just over 2 percent per 
year.
    The U.S. and Palau agree that prospects for continued 
economic growth rely on 4 key factors: the viability of the 
compact trust fund and its ability to return $15 million 
annually; the implementation of fiscal reforms to close the gap 
between Palau's revenues and expenditures by shrinking its 
public sector and raising revenue; the promotion of increased 
foreign investment and private sector growth; and, the 
continuation of certain U.S. assistance, including access to 
U.S. Federal domestic programs and services.
    The agreement extends U.S. assistance in declining annual 
amounts through fiscal year 2024. The total of direct financial 
assistance to Palau under the agreement is $229 million, 
although $13.1 million of that amount has already been 
appropriated for direct economic assistance by congressional 
action in fiscal year 2010 and $13 million in fiscal year 2011.
    Under the agreement, in 2011, the U.S. is to provide Palau 
$28 million and 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 5 categories of financial assistance 
to Palau.
    Direct economic assistance in amounts starting at $13 
million in 2011, declining to $2 million by 2023 for education, 
health, administration of justice, and public safety. The 
timing of direct assistance payments is conditioned on Palau's 
making certain fiscal reform efforts.
    Mutually agreed upon infrastructure projects, which will 
provide $8 million in grants for 2011 through 2013, $6 million 
in 2014, and $5 million in 2015 and 2016.
    The infrastructure maintenance fund is a trust fund with 
both U.S. and Palau contributing. It will be established to be 
used for maintenance of capital projects previously financed by 
the United States.
    Fiscal consolidation fund: The U.S. will provide grants of 
$5 million each in 2011 and 2012 to help Palau reduce its debt.
    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.
    The U.S. and Palau will work cooperatively on economic 
reform. The agreement requires the 2 governments to establish 
an advisory group to recommend economic, financial, and 
management reforms.
    Palau is committed to adopting and implementing such 
reforms. Palau will be judged on its progress in such reforms 
as the elimination of operating deficits, reduction in 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.
    The agreement also continues to provide other U.S. services 
and grant programs, including U.S. Postal Service, the National 
Weather Service, and the FAA.
    The Palau compact legislative proposal does have PAYGO 
costs. These costs are included in the President's budget along 
with a number of legislative proposals with PAYGO savings. Some 
proposals that fall under this committee's jurisdiction include 
net receipt sharing, which takes into account the costs of 
managing Federal oil and gas leases before revenues are shared 
with States; termination of 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 of non-producing Federal oil and gas leases.
    Each example by itself could provide more than enough 
savings to offset the cost of the Palau compact. These 
proposals are also viable. Net receipt sharing, for example, 
has been enacted for 4 years through annual appropriations 
language.
    The Administration looks forward to continuing our 
partnership with Palau. The department is proud of the positive 
advancements our assistance to Palau has provided over the last 
15 years and looks forward to the progress that we anticipate 
will be made over the next 15 years.
    Thank you, Mr. Chairman, Senator Murkowski.
    [The prepared statement of Mr. Babauta follows:]
 Prepared Statement of Anthony M. Babauta, Assistant Secretary of the 
         Interior, Insular Affairs, Department of the Interior
    Chairman Bingaman and members of the Committee on Energy and 
Natural Resources, I am pleased to be here today to discuss S. 343, a 
bill that would amend Public Law 99-658 and approve the results of the 
review of fifteen-years of the Compact of Free Association between the 
Government of the United States and the Government of the Republic of 
Palau (ROP). 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 will focus on the financial assistance components of 
the new agreement with Palau for which the Department of the Interior 
will be responsible.
                 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 2 
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. I believe that 
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, and which is embodied in S. 343 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 $13.1 
million of that amount has already been appropriated for direct 
economic assistance by congressional action in fiscal year 2010 and $13 
million in fiscal year 2011.
    Under the Agreement, in 2011 the United States is to provide Palau 
$28 million (of which $13 million is the aforementioned direct 
assistance), and 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 to 
Palau.
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. 
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 contribute $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 provide 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.
                         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 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 technical 
assistance and training.
    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.
    The Palau Compact legislative proposal does have PAYGO costs. These 
costs are included in the President's Budget along with a number of 
legislative proposals with PAYGO savings. Some proposals that fall 
under this Committee's jurisdiction include:

   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. These proposals are also viable; 
Net Receipt Sharing, for example, has been enacted for four years 
through annual appropriations language.
    The Administration looks forward to continuing our partnership with 
Palau. The Department of the Interior is proud of the positive 
advancements our assistance to Palau has provided over the last fifteen 
years and looks forward to the progress that we anticipate will be made 
over the next fifteen years.

    The Chairman. Thank you very much.
    Mr. Scher, go right ahead.

   STATEMENT OF ROBERT SCHER, DEPUTY ASSISTANT SECRETARY OF 
     DEFENSE, SOUTH & SOUTHEAST ASIA, DEPARTMENT OF DEFENSE

    Mr. Scher. Thank you. Mr. Chairman, Senator Murkowski, 
thank you for the opportunity to appear before you today to 
discuss the importance of the Palau Compact Agreement.
    In short, our compact with Palau, coupled with our compacts 
with the Federated States of Micronesia and the Republic of the 
Marshall Islands, is a critical arrangement that enables DOD to 
maintain access and influence in the Asia-Pacific region.
    Passage of S. 343 is critical to allowing the department to 
continue to benefit from the security arrangement afforded by 
the compact.
    Today, I'd like to take the opportunity to discuss the 
importance of Palau and the compact to preserving national 
security interests in the Asia-Pacific region. As noted, I have 
submitted a fuller statement for the record but will mention 
just the highlights here briefly.
    Let me begin by discussing Palau in the context of regional 
security environment of the Western Pacific. Palau lies at a 
pivotal crossroads 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.
    Our strategic interests and equities are 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, as 
you heard, some Arab Nations are actively courting the 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 the passage of this legislation and would 
ensure that the United States has the unique advantage to deny 
other militaries access to Palau.
    For these reasons, it is imperative that the U.S. 
Government sustain our commitment to Palau.
    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 and U.S. Government 
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.
    I would also be remiss if I did not highlight, as my 
colleagues have done, the extraordinary service of Palauans in 
the U.S. Armed Forces and their individual contributions to 
U.S. security.
    Under the provisions of the compact, Palauans are able to 
serve in the Armed Forces and, in fact, Palauans serve in the 
Armed Forces in impressive numbers. Currently, at least 200 
Palauan men and women serve on active duty in the U.S. Armed 
Forces.
    Sadly, 5 Palauans have been killed in action and numerous 
others have been wounded fighting on the battlefields in 
Afghanistan and Iraq. Their sacrifice in the defense of the 
United States homeland and U.S. security interests cannot go 
unnoticed.
    Furthermore, as also noted, in 2009, Palau stepped up to 
offer resettlement to 6 Uighur detainees from Guantanamo Bay at 
a time when other countries were hesitant to take these 
individuals.
    Together with the 2 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, along with Guam and the Commonwealth of the 
Northern Mariana Islands, spans the entire width of the Western 
Pacific.
    Palau's location makes it an important part of U.S. 
strategic presence in this region.
    In conclusion, U.S. power projection in the Asia-Pacific 
region will continue to be essential to our national security 
interests, and the U.S.-Palau compact is a strategic asset for 
that presence in the Western Pacific.
    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. Passage 
of the proposed legislation approving the results of the 15-
year compact review would ensure this important security 
agreement continues and would reassure Palau of our sustained 
commitment to the Nation and its people. Further, it would 
reinforce our shared interests in regional and global security.
    I urge you to support the continued security agreement the 
United States has developed with Palau over the years and ask 
for your support of the proposed legislation.
    Thank you.
    [The prepared statement of Mr. Scher follows:]
   Prepared Statement of Robert Scher, Deputy Assistant Secretary of 
         Defense, South & Southeast Asia, Department of Defense
                              introduction
    Members of the Committee, thank you for the opportunity to appear 
before you to discuss the importance of the Palau Compact Agreement. 
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 S. 343, 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. Today, I would like 
to take the opportunity to discuss the importance of Palau and the 
Compact to preserving U.S. national security interests in the Asia-
Pacific region.
         palau's contributions to american and global security
    Let me begin by discussing Palau in the context of the regional 
security environment in the Western Pacific. 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 in 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
    I would also like to highlight the extraordinary service of 
Palauans in the U.S. Armed Forces and contributions to U.S. security. 
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 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 Exclusive Economic 
Zone (EEZ). This kind of shiprider 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 II 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, pre-
planned 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
    In conclusion, U.S. power projection in the Asia-Pacific region 
will continue to be essential 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. Passage of the proposed legislation 
approving the results of the 15-year Compact Review would ensure this 
important security agreement continues and would reassure Palau of our 
sustained commitment to Palau and its people and of our shared interest 
in regional and global security. I urge you to support the continued 
security agreement the United States has developed with Palau over the 
years and ask for your support of the proposed legislation.

    The Chairman. Thank you very much.
    Mr. Gootnick, go right ahead. Tell us what GAO's view on 
this situation is.

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

    Mr. Gootnick. Thank you, Mr. Chairman and Ranking Member 
Murkowski.
    Thank you for asking GAO to participate in this hearing. I 
will be returning to some of the economic provisions under the 
agreement.
    As has been stated, the 1994 compact provided 15 years of 
economic assistance. It also established the trust fund, built 
the Compact Road, and provided U.S. postal, weather and 
aviation services.
    Importantly, the compact established the basis for 
discretionary U.S. Federal programs, such as Head Start, 
community health centers, Pell Grants, the airport improvement 
program, special education, and numerous others.
    Taken together, compact funds, in-kind services, such as 
delivery of the road, and U.S. program assistance since 1994 is 
valued at roughly $850 million.
    My written statement, which I'll briefly summarize, 
describes, first, the funding and conditions as outlined in the 
September 2010 agreement; second, the impact of the agreement 
on Palau's trust fund; and, third, projected Palau Government 
revenues under the agreement.
    Regarding future economic assistance, the agreement will 
provide $250 million, as has been said, with a steady annual 
decrement, from roughly $28 million in 2011 to $2 million in 
2024.
    About half of this assistance would directly support 
government operations and be directed to specific needs, such 
as health, education, and public safety.
    Along with these funds, an advisory group would be 
appointed and tasked to make recommendations for economic, 
fiscal, and management reforms. The agreement cites reductions 
in the national budget, in government employment, and in 
operating deficits, as well as tax reform, as examples of 
meaningful reforms. The U.S. may delay funding conditioned on 
progress of these reforms.
    The agreement also provides $40 million for mutually agreed 
infrastructure projects. Projects must have land title, 
budgets, and certified scopes of work to receive funding.
    Also, a maintenance fund is established and designated to 
be used for U.S.-financed capital projects, principally the 
Compact Road and the international airport.
    The agreement also provides $10 million toward Palau's 
debt. It prioritizes U.S. creditors for repayment and requires 
U.S. concurrence of the debts to be paid.
    Finally, the agreement provides an additional $30 million 
to the trust fund. It requires Palau to reduce scheduled trust 
fund withdrawals by $89 million. It directs disbursements to 
health, education, justice, and public safety.
    The agreement also extends the framework to continue 
discretionary Federal programs.
    Regarding the trust fund, the additional U.S. contributions 
and the delay in scheduled withdrawal, as provided in the 
agreement, will 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 withdrawals through 
2044. However, under this agreement, the trust fund would need 
only 4.9 percent to yield its new schedule of withdrawals. This 
is well below the 8.2 percent it has earned to date.
    Last, regarding projected Palau Government revenues under 
this agreement, to offset the steady decline and budget support 
from 2010--excuse me, from 2011 through 2024, estimates 
prepared for the Government of Palau project a growing reliance 
on trust fund withdrawals and domestic revenues, and continued 
access to Federal programs. The estimates project domestic 
revenue to increase sharply from roughly 40 percent of total 
government revenues to nearly 60 percent by 2024.
    In addition, due to the steady reliance on discretionary 
Federal programs, these programs, which are subject to annual 
appropriations, are projected at half of all U.S. assistance.
    In summary, the economic provisions of the agreement extend 
and gradually reduce compact assistance through 2024, establish 
new conditions for the use of U.S. funds, and reset the trust 
fund to significantly improve its long-term prospects.
    Palau has employed projections of its long-term fiscal 
condition that rely on increased domestic revenue and 
continuation of U.S. Federal programs.
    Mr. Chairman, this completes my remarks. I'm happy to 
answer your questions.
    [The prepared statement of Mr. Gootnick follows:]
 Prepared Statement of David Gootnick, Director, International Affairs 
              and Trade, Government Accountability Office
        proposed u.s. assistance to palau and its likely impact
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 from 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 total assistance from 1994 
though 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 and modify its trust fund.
    This statement describes (1) the Agreement's provisions for 
economic assistance to Palau, (2) its impact on the trust fund's 
likelihood of sustaining scheduled payments through 2044, and (3) the 
projected role of U.S. assistance in Palau government revenues. GAO 
reviewed the Agreement; examined Palau's recent single audit reports 
and budget projections; and assessed trust fund balances and 
disbursement plans under various assumptions and investment returns.
What GAO Found
    The Agreement would provide steadily decreasing assistance totaling 
approximately $215 million from 2011 through 2024 (see figure).* This 
would include the following:
---------------------------------------------------------------------------
    * Figure has been retained in committee files.

   direct economic assistance ($107.5 million) for 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.

    Under the Agreement, the United States would contribute to the 
trust fund from 2013 through 2023, and Palau would delay its 
withdrawals by $89 million from 2010 through 2023. GAO projects that 
with these changes the fund would have a 90 percent likelihood of 
sustaining payments through 2044, versus 25 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 2011 to under 2 percent in 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 from 2011 though 
2024 would total $427 million, with discretionary federal programs 
accounting for about half of that amount.
    Chairman Bingaman, Ranking Member Murkowski, and Members of the 
Committee:
    I am pleased to be here today to discuss the September 2010 
agreement between the U.S. and Palau governments.\1\ 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 
October 1994, provided for several types of assistance aimed at 
promoting Palau's economic advancement and eventual self-
sufficiency.\2\ In addition to establishing Palauan sovereignty and 
U.S.-Palau security and defense arrangements, the compact provided 
economic assistance to Palau.\3\ 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.\4\ We also reported, in 2008, that the 
likelihood of the Palau trust fund being able to sustain the planned 
payments through 2044 was uncertain.
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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.
    \2\ 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 of Nov. 14, 1986, and Public Law 101-
219 of Dec. 12, 1989. The grant funds specified by the compact are 
backed by the full faith and credit of the U.S. government.
    \3\ Unless otherwise noted, all years cited are fiscal years (Oct. 
1-Sept. 30). In addition, all dollar amounts in this report are in 
current (i.e., nominal) dollars.
    \4\ 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 it entered into force.\5\ Provisions of the 
Agreement would, among other things, extend economic assistance to 
Palau beyond the original 15 years and modify trust fund arrangements. 
A bill now pending before the U.S. Senate would approve the Agreement 
and appropriate funds to implement it.\6\
---------------------------------------------------------------------------
    \5\ 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.
    \6\ The pending bill, Senate Bill 343, 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 Sept. 
30, 2024, to carry out the agreements resulting from the review.
---------------------------------------------------------------------------
    My statement today 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, 
and (3) the projected role of U.S. assistance in Palau government 
revenues.
    For this statement, we reviewed 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. We determined that these 
data were sufficiently reliable for the purposes of our review. We 
conducted our work from February to June 2011 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.
                               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.\7\ Palau's economy is heavily dependent on its tourism sector 
and on foreign aid from the United States, Japan, and Taiwan.\8\ 
Similar to many small island economies, Palau's public sector spending 
represents a significant percentage of its gross domestic product 
(GDP).\9\
---------------------------------------------------------------------------
    \7\ 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, 
have 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 GDP.
    \8\ 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).
    \9\ 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 governments of the United 
States and Palau 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. 



    In addition to the U.S. assistance provided under the compact, U.S. 
agencies--Education, Health and Human Services (HHS), and Interior, 
among others--provide discretionary federal programs in Palau as 
authorized by U.S. legislation\10\ and with appropriations from 
Congress. (See app. II for a complete listing of these programs in 
Palau.)
---------------------------------------------------------------------------
    \10\ 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 Oct. 1, 
2009. These services continued under program authority in 2010 and 
2011.
---------------------------------------------------------------------------
    In our 2008 report, we projected that from 1995 through 2009, U.S. 
assistance to Palau would exceed $852 million, with economic assistance 
provided under the compact accounting for 68 percent and discretionary 
federal programs accounting for 31 percent of this total (see fig. 
1*).\11\
---------------------------------------------------------------------------
    * Figure 1 has been retained in committee files.
    \11\ GAO-08-732.
---------------------------------------------------------------------------
    agreement would extend u.s. assistance for 15 years, decreasing 
                                annually
    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.\12\
---------------------------------------------------------------------------
    \12\ Other provisions in the Agreement would define reporting and 
auditing requirements and passport requirements. The Agreement would 
require that, by 2018, Palau resolve all deficiencies identified in 
annual single audit reports, which are required by the Compact's fiscal 
procedures agreement, such that no single audit report recommendations 
or deficiencies dating from before 2016 remain. In addition, the 
Agreement alters the entry procedures for citizens of Palau visiting 
the United States, requiring them to present a valid machine-readable 
passport to travel to the United States.
---------------------------------------------------------------------------
Assistance to Palau Would Decline through 2024
    Key provisions of the Agreement would include, among others, 
extending direct economic assistance to Palau; providing for further 
investments in infrastructure; 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 from 2011 
through 2024.\13\ The pending legislation would authorize and 
appropriate funds to Interior for this assistance.\14\
---------------------------------------------------------------------------
    \13\ The compact provided for direct assistance to Palau only 
through 2009. Since then, Interior's 2010 annual budget provided $13.25 
million for direct assistance to Palau and other agencies provided 
additional funds. For 2011, Interior provides $13 million in direct 
assistance. For 2012, Interior's Budget Justification proposes $29.25 
million in direct assistance, while the Agreement provides for $27.75 
million.
    \14\ The pending implementing legislation 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.

   Direct economic assistance ($107.5 million).--The Agreement 
        provides for direct assistance--budgetary support for 
        government operations and specific needs such as administration 
        of justice and public safety, health, and education--of $13 
        million in 2011, declining to $2 million by 2023. 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.\15\ These consultations are to review 
        Palau's progress in achieving reforms\16\ 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.
---------------------------------------------------------------------------
    \15\ 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.
    \16\ The compact requires that the United States and Palau consult 
annually regarding Palau's economic activities and progress in the 
previous year, as described in a report that Palau must submit each 
year. Our 2008 report noted that Palau had met reporting conditions 
associated with direct assistance but that, contrary to compact 
requirements, the bilateral economic consultations had not occurred on 
an annual basis; and had been informal and resulted in no written 
records. See GAO-08-732.
---------------------------------------------------------------------------
   Infrastructure projects ($40 million).--The Agreement 
        mandates U.S. infrastructure project 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 requires Palau to provide a detailed 
        project budget and certified scope of work for any projects 
        receiving these funds.
   Infrastructure maintenance fund ($28 million).--The 
        Agreement stipulates that the United States 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.\17\ From 2011 through 2024, the 
        U.S. government will contribute $2 million annually, and the 
        Palau government will contribute $600,000 annually to the 
        fund.\18\
---------------------------------------------------------------------------
    \17\ 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.
    \18\ Under the compact, Palau owes the United States a total of $3 
million. Under the Agreement, Palau would deposit $3 million in the 
infrastructure maintenance fund but not expend it. Any future income 
derived from the $3 million must be used exclusively for the 
maintenance of the Compact Road.
---------------------------------------------------------------------------
   Fiscal consolidation fund ($10 million).--The Agreement 
        states that the United States shall provide grants of $5 
        million each in 2011 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.
   Trust fund ($30.25 million).--The Agreement provides for the 
        United States to 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.\19\ 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.
---------------------------------------------------------------------------
    \19\ 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.
---------------------------------------------------------------------------
    * Figure 2 has been retained in committee files.
---------------------------------------------------------------------------
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. The proposed 
        legislation implementing the Agreement would authorize annual 
        appropriations for weather and aviation services. The proposed 
        legislation would also authorize appropriations of $1.5 million 
        to Interior for 2011 through 2024, to subsidize postal services 
        to Palau, the Republic of the Marshall Islands, and the 
        Federated States of Micronesia.
   Federal discretionary programs.--The Agreement would extend 
        the framework for U.S. agencies to provide discretionary 
        federal programs to Palau and the implementation of these 
        programs is contingent on annual appropriations to those 
        agencies. The implementing legislation would extend the 
        eligibility of the people, government, and institutions of 
        Palau for certain discretionary programs, including special 
        education and Pell grants.
  agreement 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 2010, the fund had a balance of 
nearly $160 million. Under the Agreement, the trust fund would need a 
4.9 percent annual return to yield the proposed withdrawals from 2011 
through 2044. This rate is well below the 8.2 percent return it earned 
from its inception to December 31, 2010.\20\ Figure 3* shows projected 
trust fund balances in 2011 through 2044 under the Agreement, with 
varying rates of return.
---------------------------------------------------------------------------
    \20\ All rates of return on the trust fund are net of fees and 
commissions unless otherwise noted.
    * Figure 3 has been retained in committee files.
---------------------------------------------------------------------------
    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 had a 25 
percent probability, at the end of 2010, of sustaining the $15 million 
annual withdrawals scheduled under the compact through 2044.\21\
---------------------------------------------------------------------------
    \21\ The probability of the fund's sustaining $15 million annual 
payments through 2044 under the original compact terms has diminished 
since 2008, when we determined that the probability was 46 percent. See 
GAO-08-732.
---------------------------------------------------------------------------
    Figure 4 compares the trust fund's probability of sustaining the 
proposed withdrawals under the terms outlined in the Agreement with its 
probability of sustaining the withdrawals scheduled under the compact.
    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.\22\ These estimates show U.S. assistance, as provided under 
the Agreement, declining from 28 percent of government revenue in 2011 
to under 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 revenues in 2011 to 59 percent in 2024.\23\ 
Finally, the estimates prepared for Palau project a relatively steady 
reliance on U.S. discretionary federal programs, ranging from 12 
percent of all government revenues 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.
---------------------------------------------------------------------------
    \22\ 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.
    \23\ 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. See IMF, Staff Visit 
to Republic of Palau--Concluding Statement of the IMF Mission (Mar. 8, 
2011)
---------------------------------------------------------------------------
    Figure 5* shows the types and amounts of Palau's estimated revenues 
for 2011 and 2024.
---------------------------------------------------------------------------
    * Figures 5 and 6 have been retained in committee files.
---------------------------------------------------------------------------
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 onethird of total U.S. assistance to 
Palau in 1995 through 2009.
    Chairman Bingaman, Ranking Member Murkowski, and Members of the 
Committee, this completes my prepared statement. I would be happy to 
respond to any questions you may have at this time.




    The Chairman. Thank you.
    [The prepared closing statement of Senator Bingaman 
follows:]
    Prepared Closing Statement of Hon. Jeff Bingaman, U.S. Senator 
                            From New Mexico
    I thank all of the witnesses for their testimony, but I have to say 
the offsets proposed today are not new, and I don't believe that they 
have the support needed to move this bill forward. I urge each 
Administration witness to take the message back to OMB--Congress will 
need other options to move forward and they should look across the 
entire budget.

    The Chairman. Let me start with a few questions.
    Ms. Reed, let me ask you first. On page 16 of the bill that 
we've introduced, the agreement provides that, quote, ``This 
agreement may be amended at any time by the mutual written 
consent of the Government of the United States and the 
Government of Palau.''
    As you interpret that, would such amendment to the 
agreement require any action by Congress or any consent by the 
Congress?
    Ms. Reed. The response--it would depend upon the 
circumstances, but once the agreement is in force, whether any 
congressional action would be required if there's an amendment 
or change would depend upon the nature of the change or 
amendment.
    Certainly, financial, if we're talking about the amount, 
any change there, congressional action would be required.
    So, I would have to say that I'm nuancing the answer, 
because it would depend on what type of change we were talking 
about.
    The Chairman. Very good.
    Mr. Babauta, let me ask you about the various options that 
have been put forward for offsets. You mentioned those.
    Senator Murkowski and I wrote to you in April, April 5, I 
believe, indicating that, in our view, these were not 
politically viable options, these offsets.
    Can you tell us whether the unacceptability of these 
options is something understood in the Office of Management and 
Budget?
    Mr. Babauta. Mr. Chairman, we're aware of the letter that 
you and Senator Murkowski sent to the Office of Management and 
Budget. It's something that continues to be worked internally 
within the Administration.
    We have heard the message, though, that was contained in 
the letter and will, of course, continue to work with the 
committee as this legislation----
    The Chairman. So there is an ongoing effort to see if there 
are other options that could be looked to?
    Mr. Babauta. I would say that we're aware of the concerns 
that have been expressed by the chairman and the ranking 
member, as well as the staff. It's something that we continue 
to work on internally across Federal agencies but also within 
OMB.
    The Chairman. Thank you very much.
    Mr. Scher, let me ask you, you say on page 2 of your 
testimony, quote, ``We must take note of critical security 
developments in the Pacific that require the department's 
sustained presence and engagement.'' Are you able to elaborate 
at all on what you're referring to there?
    Mr. Scher. A little bit. I think there's certainly 2 
important security developments that I, in this session, would 
be happy to talk to you about.
    One is the increasing engagement of other global players, 
and certainly China among those, and the growing transnational 
crime that we're seeing throughout there.
    In particular, we are seeing increased Chinese military 
activity that is going out further than what they would refer 
to as the first island chain and into the second island chain.
    In the past, we've actually seen there have been more port 
calls by Chinese warships in the islands, including Fiji, Papua 
New Guinea, and Tonga. We've even noticed some developments in 
China-Fiji defense relations.
    Obviously, we have no concern about countries having good 
and cooperative relations with China on the defense side. We, 
certainly, seek the same thing. But it's a change in the 
security environment that we are, obviously, watching.
    Second, many of the island states really lack sort of a 
sufficient legal structure in law enforcement capability to 
manage a lot of their own security matters. This is especially 
notable in terms of resources and fisheries. So we've seen an 
uptick in this and really think that this is a significant 
change in terms of the environment that require us to have 
closer relations with these countries to help them and also to 
help our interests in defeating transnational crime.
    The Chairman. Thank you.
    Mr. Gootnick, let me ask you, I believe Ms. Reed referred 
to what she perceived as the improvements that had occurred in 
Palau in the 12 years since she was last there.
    Are you in a position to give us any kind of a summary of 
the trends in Palau's economic development under the first term 
of the compact assistance? Has the situation improved? Has 
their deficit debt situation improved? What has growth rate 
been?
    Mr. Gootnick. Over the term of the compact, there has been 
actually remarkable growth and development in Palau. There was 
a significant setback in 2008 with the global recession, with 
rising gas prices and food prices, and inflation, but over the 
longer term, as has been alluded to, annual growth rate in the 
range of 2 percent.
    I can tell you that per capita income since 1994 has 
roughly doubled. Per capita income in Palau is now over $10,000 
annually.
    Tourist arrivals, which is a key indicator, of course, of 
the vibrancy of the key private sector activity, have doubled 
to nearly 80,000 annually.
    So with some challenges, Palau has made steady growth. They 
do run small operating deficits and have through most of the 
term of the compact.
    The Chairman. Thank you very much.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Thank you all for your testimony.
    Mr. Babauta, I think we heard very clearly from all 4 at 
the table here today how important this relationship is between 
the United States and Palau, how important, essentially, the 
compact is. So I join the chairman in encouraging you within 
the department to look critically at how we find the 
appropriate offset, and, as we mentioned, one that is 
politically viable, politically achievable.
    Whether it is from a national security perspective, whether 
it is just from the perspective of keeping the commitment that 
we have made to the people of Palau, we need to make sure that 
we're able to honor this. As both of us have made very clear in 
our opening statements, this can't happen until we find that 
offset. So I hope that everyone is quite committed to digging 
through and figuring out how we resolve the offset.
    Let me ask both you and Mr. Gootnick something, because 
both of you have discussed in your testimony a great deal about 
the trust fund. But as I understand it, we've got 4 key factors 
in Palau's continued economic growth, and the viability of the 
trust fund seems to be the most important from the U.S. 
perspective.
    But if the other 3 factors, if fiscal reform, foreign 
investment, and continued access to the U.S. Federal programs 
are successful, how necessary or how important will the trust 
fund then be? If we continue to do well and be successful with 
things like the fiscal reforms?
    Mr. Babauta. Thank you very much, Senator Murkowski. I can 
assure you that the department's long relationship with Palau 
is fully appreciated.
    What my colleagues from the Department of Defense and 
Department of State have mentioned is, you know, Palau's 
important role in the Pacific for strategic purposes for our 
country is fully appreciated at the department.
    Again, we are committed to working with the committee as we 
move forward with the legislation on finding an offset that is 
acceptable.
    With respect to the question about how important the trust 
fund will be if there is success in the other 4 areas, I would 
think that it continues to be a very important element for the 
Government of Palau to know that at a time certain into the 
future, even with the success of these 4 other things--the 
fiscal reform and foreign investment and being able to reduce 
expenditures and get rid of old debt--that knowing that there 
is a continued reliable source of funding, that a source from 
the trust fund is going to be made available to them, at the 
very least would be important knowledge for the leaders of 
Palau to know that it's there as a term of the compact 
financial assistance ends.
    Senator Murkowski. Mr. Gootnick, any comments on that?
    Mr. Gootnick. As the agreement is structured, the trust 
fund appears to be the key mechanism to offset the decline in 
direct economic assistance that will occur. So direct budgetary 
support will go down. The withdrawals from the trust fund will 
make up that difference.
    There's also, again, the presumption that domestic revenues 
will increase steadily and more steeply than they have in the 
past. So to the extent that that does not fully materialize--
domestic taxation, essentially, does not fully grow in the way 
that's projected--the trust fund will be a key mechanism to 
offset and diminish any national deficit that would exist in 
that setting.
    Senator Murkowski. OK, I appreciate that.
    Ms. Reed, all of the panel here have mentioned the 
importance of the relationship between Palau and the United 
States. I think it is important to recognize that others are 
watching what direction the United States will take with this 
agreement.
    Secretary Clinton has been very active, very engaged, in 
the Pacific and working to enhance and build on those 
relationships that we have in the Asia-Pacific region.
    What impact would congressional inaction on this agreement 
have on the Asia-Pacific view of the United States? If we don't 
act on this, how are we viewed within the region?
    Ms. Reed. It's very interesting when you mention that so 
many others are watching. I think it's important to note that 
not only are the other so-called compact countries--the 
Federated States of Micronesia and then the Republic of the 
Marshall Islands--watching.
    I just left Papua New Guinea. We were in Port Moresby. I 
was part of a delegation for the Global Women's Initiative. 
There were Pacific women leaders from all of the small island 
states there, and it's true that they are watching the U.S. 
commitment.
    This has to do a lot with a perceived lack of attention 
over the past 20 years to many of the small island states, and 
perhaps, in part, because of an excellent response on the part 
of the U.S. during a number of disasters, tsunamis that have 
occurred recently and cyclones. So, I think the impact is 
enormous.
    It's probably larger than life. I say that having lived on 
an island. A lot of actions are magnified simply because of the 
distance, geographically. You fly 29 hours to get to many of 
these locations.
    So the perception becomes a large part of the reality. I 
think the steps that we are taking today will reverberate.
    Senator Murkowski. I appreciate that.
    Let me ask one final question here, if I may. This is to 
you, Mr. Scher.
    In your testimony, you touched briefly on the difficulty 
that Palau has in providing maritime surveillance and the 
enforcement issues. More generally, you spoke about the lack of 
a military presence, lack of law enforcement.
    But in Alaska, our Coast Guard is utilizing UAVs for aerial 
surveillance of our maritime boundaries. Is this something that 
is being considered or being utilized in the Pacific areas 
there?
    Mr. Scher. We work very closely with the department, DHS, 
and the Coast Guard, in terms of how to figure out how best to 
support, in all of the Pacific Islands, the security concerns, 
since so many of them do overlap with law enforcement issues.
    I honestly do not know in the particular case of UAVs or 
surveillance. Obviously, maritime domain awareness is a big 
part of maritime security and how we approach that issue 
throughout the region.
    DHS, in terms of Coast Guard, especially, has a ship rider 
program to help Pacific Island countries conduct fisheries 
patrol.
    That is all wrapped up--we tend to view security issues, as 
I said, holistically within the U.S. Government as we approach 
the South Pacific Islands because they overlap.
    But I don't know the specifics of what elements the Coast 
Guard might use for that. But it wouldn't surprise me, since 
they are highly engaged in this area.
    Senator Murkowski. Can you give me any more information 
about what type of transnational crime we're beginning to see 
in the region?
    Mr. Scher. Throughout the region, overall, we have seen 
this transnational crime in different parts and different 
cases--and Ms. Reed knows this very well, as well. For a while 
there, we, actually, were seeing that lax legislation and 
regulation in terms of money laundering made this a very 
fruitful area for that. In fact, terrorists, we saw there was 
some indication that terrorists were looking at easy access and 
transit through.
    So I think money laundering and terrorism for a while, when 
we were very focused on terrorism, that they looked around to 
see where were the easy targets, if you will. So that.
    Obviously, illegal fishing is a big piece of this as well.
    Frankie, do you have others?
    Ms. Reed. Transshipment, narcotics, trafficking. Islands 
are an easy place in which to hide and often very porous. Lack 
of funding for the security apparatus, and poor communications 
also.
    Senator Murkowski. If you don't have law enforcement there, 
it's pretty easy to move things through, regardless of what it 
is. It's an important issue for us.
    Mr. Chairman, I have no further questions, but I thank all 
those who have testified this morning.
    The Chairman. Thank you all very much. It's been very 
useful testimony.
    I'm informed that we do have a group of Close Up students 
here who are from Palau, and we welcome all of them. Why don't 
you all stand up so we can give you some applause?
    Thank you for being here.
    [Applause.]
    The Chairman. All right, that will conclude our hearing, 
and we will try to move this legislation forward.
    Thank you.
    [Whereupon, at 11:47 a.m., the hearing was adjourned.]
                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

         Responses of Hon. H.E. Johnson Toribiong to Questions 
                         From Senator Bingaman
    Question 1. On page 4, you say that Palau has stood with the U.S. 
on key U.N votes ``despite pressure and entreaties of other nations.''
    Could you elaborate on what other nations threaten, or offer, Palau 
to gain influence, and what policies they are seeking to change?
    Answer. Yes, but first I will elaborate on just how close Palau is 
to the U.S. in the U.N. According to the latest U.S. Department of 
State report on Voting Practices in the United Nations 2010 published 
March 31st, Palau's 99.1% overall voting coincidence with the U.S. is 
the highest among U.N. members, ahead of second-place Israel and 
significantly higher than the regional percentage of 89.3%. Palau's 
96.5% voting coincidence with the U.S. on contested votes is also the 
highest among U.N. members, and substantially higher than the regional 
percentage of 58.2%.
    A prime example of efforts of other nations attempts to influence 
Palau, in this instance, to get Palau to change its votes in the U.N., 
involves the United Arab Emirates and the Arab League. In February of 
last year, the Foreign Minister of the U.A.E. visited Palau as well as 
other small Pacific island states. He announced the availability of $50 
million annually from the U.A.E.
    The minister's visit was followed up with an invitation for me--and 
other leaders of the small Pacific island states--to meet with the Arab 
League in Abu Dhabi in June 2010. At the conclusion of that meeting, 
Palau was asked to sign a final communique specifically supporting the 
Arab Peace Initiative. Palau refused and only agreed to give due 
consideration to the proposal.
    There were other meetings initiated by Arab country governments 
during the 2010 session of the U.N. General Assembly. Last December, 
the U.A.E.'s foreign minister again lobbied Palau and other small 
Pacific island states to change our voting stance at the U.N. towards 
Israel. Palau, however, did not change its position regarding Israel or 
any other issue, and all of our efforts to obtain some of the $50 
million a year have been rejected. Palau understands what it would have 
to do to receive the assistance, but has chosen to remain true to our 
principles and friends.
    This is not the only instance of what I believe to be an effort to 
influence Palau. Palau has consistently voted with the U.S. in the U.N. 
on issues relating to Cuba, and as a result has forgone receiving 
assistance offered by Cuba to Palau. Cuba has several programs to help 
small Pacific island states, including medical scholarships and 
cultural programs, and has repeatedly offered to make those programs 
available to Palau. The Cuban Ambassador to the Philippines was in 
Palau just last week to renew the offer of assistance.
    Question 2. On page 5, you say that China ``clearly wants more 
influence in Palau.''
    Would you elaborate on what areas of policy China is interested in, 
and what offers, or pressure, they have used?
    Answer. I cannot say what China's primary interest in Palau might 
be or even whether there is a specific primary interest. One 
particularly noteworthy area of China's interest, however, concerns a 
deep-water port. Within the first few months of my Administration, we 
received word that a Chinese institution was prepared to finance and 
construct a deep-water port on the west coast of Babeldaob, the big 
island of Palau, at a cost exceeding $100 million. It is my 
understanding that the funds are still potentially available.
    Improved port facilities are vital to Palau's development, but the 
indication was that the Chinese interest in building these important 
facilities was--not surprisingly--primarily for Chinese benefit.
    The Chinese have pressured Palau on our decision to agree to the 
request of the U.S. to provide sanctuary to several Chinese Uighur 
Muslims whom the U.S., under both the Bush and Obama Administrations, 
determined had been wrongfully detained at Guantanamo. Palau agreed to 
do this even without hesitation when no other nation would even 
consider providing such refuge. In three separate meetings with Palau's 
U.N. Mission, the Government of China stated that it considered this 
``a very serious issue for Chinese-Palauan relations,'' that the issue 
was ``not a legal issue but a political one'', and, ominously, that 
China had ``a long memory''.
    Since the Chinese Uighur Muslims arrived in Palau a previously 
expected increase in Chinese tourist arrivals to Palau has never 
materialized. Moreover, the construction of the only Chinese investment 
in Palau, a one hundred room five star hotel, was halted shortly after 
Palau agreed to resettle the Chinese Uighur Muslims. Prior to that time 
the construction of the hotel was proceeding apace and had reached the 
finishing stage. No activity has taken place at the construction site 
for well over a year now. I am advised that the Chinese investor, who 
by that time had invested several million dollars into the project, can 
no longer get money out of China for the project.
    Question 3. On page 5, you say that ``if there is no agreement, or 
an end to essential assistance, many in Palau would insist on an end to 
the United States military rights under the Compact.''
    The first term of Compact assistance ended with fiscal year 2009 
and assistance has been continued on a stop-gap basis through this 
fiscal year.
    What do you think the impact will be on the political debate in 
Palau if the U.S. continues to provide assistance at FY09 levels on an 
annual, discretionary basis?
    Answer. Thank you for asking this question. There would be several 
unfortunate impacts upon the debate in Palau.
    For one, for Palau to have to seek financial assistance on a year-
to-year basis, would be to promote more dependence on the U.S. The 
Compact Review Agreement provides a road map towards greater economic 
self-sufficiency through required budgetary and infrastructure 
maintenance reforms, capital investments in essential infrastructure, 
fiscal consolidation, and overcoming deficiencies in the capitalization 
of the Compact Trust Fund. I am concerned that to go to year-to-year 
uncertainty will deprive Palau of the Agreement's tools for greater 
self-sufficiency and lead to a focus on obtaining assistance on an 
annual basis.
    Annual appropriations on a simple basis of continuing Fiscal Year 
2009 funding is, for example, already likely to cause Palau to lose the 
opportunity to secure at a highly discounted cost an underwater fiber 
optic cable to provide broadband Internet, has deprived Palau of 
funding for imperative infrastructure maintenance, has exacerbated 
Palau's debt problems, and has delayed the institution of reforms that 
would come with the terms of the Agreement. Over the long term, 
financial assistance on a year-to-year basis would leave the Compact 
Trust Fund in a precarious position.
    Incidentally, continuing assistance to Palau on an annual basis at 
the FY09 level--with the full faith and credit commitment of the U.S. 
and assurances similar to those provided by the U.S. in its compacts 
with the other two freely associated states--along with some additional 
CIP funding, was an option explored by Palau in the Review. However, 
the U.S. team firmly rejected this option and, instead, insisted on 
financial assistance on a declining basis that would `zero-out' before 
the next required joint review of Palau's assistance needs in FY24.
    More fundamentally, although discretionary assistance, even at the 
FY09 level, would be better than no assistance at all, it would be 
considered a poor substitute for the package of the Agreement, which 
was carefully and painstakingly negotiated by my Administration in full 
view of the Palauan public. Given all that has passed since the Review 
was begun in May 2009, assistance on an annual, discretionary basis 
would negatively impact the political debate in Palau respecting the 
integrity of the association between our states.
    Given the existing political debate within the U.S. regarding its 
own budget and expenditures and the possibility that such debate may 
extend well into the future, the ``discretionary'' aspects of annual 
assistance to Palau at the same level as FY09 will not be well received 
here in Palau. Since the approximate $13.125 million direct funding 
that Palau received in FY09 still constitutes about 24% of our annual 
budget, even one discretionary decision by the U.S. not to provide such 
funding to Palau would have catastrophic effect on the ability of the 
Palau Government to provide essential public services. This would 
further undermine the confidence of Palauans in the association, 
bolstering the confidence of those who already want to explore other 
international relationships to obtain financial assistance and 
encouraging more to agree with them. Assistance on a discretionary 
basis would indicate to those who are already skeptical of the Compact 
that the U.S. does not have the same long-term commitment to Palau that 
Palau has to the U.S. The failure of the U.S. to ratify the Agreement, 
regardless of the reason, would be very difficult for me to explain or 
justify.
    Regarding U.S. defense rights, if there is no agreement, or if 
there is an end to essential assistance, the consensus in Palau would 
be that Palau should not continue to let the U.S. have strategic 
control of our lands and waters. The U.S. Congress not approving the 
Agreement or not making an equivalent commitment would seriously 
undermine confidence in the relationship and lead to people suggesting 
that Palau should move in another direction. The framers of the Compact 
understood that it is critical that there be a reliable long-term 
relationship for the confidence of both Palau and the United States.
    We very much appreciate the financial assistance that has been 
extended while the Compact Review Agreement has been negotiated and is 
being considered by the U.S. Congress. My concern is the viability of 
the Compact will be called into serious question were the U.S. to 
appear to not to honor the promise of the association.
                                 ______
                                 
       Response of Robert Scher to Question From Senator Bingaman
                        impact on u.s. security
    Question 1. On page 1, you state that passage of S. 343 ``is vital 
to allowing the Department to continue to benefit from the security 
arrangement afforded by the Compact.''.hat would be the impact on U.S. 
security benefits under the Compact if this agreement is not approved 
this fiscal year?
    Answer. Failure to pass S. 343 could result in sending a negative 
signal to the region, contrary to Secretary Gates' pointed remarks 
about the U.S.' enduring and strategic interest and presence in the 
region. The Compact with Palau grants the U.S. defense rights and 
exclusive access, an advantage which allows us to prevent the 
establishment of a military presence of a third country on Palau. The 
fact that only the United States can maintain a military presence in 
this strategic area so close to Guam is a major security interest. 
Failure to pass S. 343 this year could threaten DoD's current military 
posture on Guam and the Commonwealth of the Northern Marianas Islands, 
as well as critical DoD military, space, and disaster relief operations 
in the Western Pacific.
                                 ______
                                 
     Responses of David Gootnick to Questions From Senator Bingaman
    Question 1. Would you please summarize the trends in Palau's 
economic development under the first term of Compact assistance--for 
example, their deficit/debt situation and GDP and per capita growth?
    Answer. The role of government expenditures in the Palau economy 
has fallen by about a third since 1994, from about 61 percent to about 
41 percent of the gross domestic product (GDP ) in 2010.\1\ According 
to the International Monetary Fund (IMF), Palau's GDP increased from 
$82.45 million in 1994, when the Compact entered into force, to $215.2 
million in 2010. According to our analysis of IMF data, per capita 
income in Palau more than doubled during that period, from roughly 
$4,900 in 1994 to $10,500 in 2010.
---------------------------------------------------------------------------
    \1\ Unless otherwise noted, years cited are fiscal years (Oct. 1-
Sept. 30).
---------------------------------------------------------------------------
    Question 2. On page 8 of the bill, the Agreement provides that 
``Palau shall undertake economic, legislative, financial, and 
management reforms. . .such as those described in (IMF and ADB 
reports).'' Would you summarize for us some of the key reforms 
recommended by the IMF and ADB?
    Answer. The reports cited in S.343 recommend that Palau undertake 
various reforms, focused largely on reducing the role of government in 
the economy and on reforming taxes. In 2007, the Asian Development Bank 
(ADB) made recommendations in seven broad categories:

          1. realigning and streamlining the role of government in the 
        economy by, among other things, limiting government payroll and 
        exploring public-private partnerships for infrastructure 
        projects;
          2. undertaking tax reforms, including replacing the gross 
        receipts tax with a simplified form of value-added tax and 
        transforming the country into a lowcost place for doing 
        business;
          3. overhauling foreign investment regulations, so that the 
        same rules apply to local and foreign businesses, among other 
        things;
          4. reviewing and reforming the legal system for commercial 
        activities;
          5. reforming the financial market, including reforming the 
        collateral framework to increase lending and refraining from 
        attempts to weaken creditors' rights;
          6. undertaking land reform; and
          7. articulating and implementing a policy to encourage high-
        end tourism.

    In 2008, the IMF made several recommendations based on fiscal 
consolidation and tax reform. Regarding fiscal consolidation, the IMF 
reported that the Palau government would need to reduce its 
expenditures by about 15 percentage points of its GDP in order to 
achieve sustainability. The IMF also stated that although a piecemeal 
approach aimed mostly at revenue generation involves risks, it may be 
the only viable option in the current economic environment. Regarding 
tax reform, the IMF recommended short-term actions including abolishing 
exemptions from import taxes (except where prohibited by treaty); 
expanding the tax base to include in-kind benefits, which are a large 
part of employee compensation; increasing the hotel tax; increasing the 
fish export tax; unifying the foreign labor fee; and increasing the 
water fee. For the medium term, the IMF recommended replacing the gross 
revenue tax with a net profit tax and considering a value-added tax.
     Response of David Gootnick to Question From Senator Murkowski
    Question 1. The GAO report notes that under the proposed Agreement, 
between 2011 and 2024, 50 percent of U.S. assistance will come from 
discretionary federal programs. Given that the level of direct spending 
in the proposed Agreement is less than half of the previous fifteen 
years', could you clarify how the amount of discretionary spending for 
the next fourteen years compares to prior discretionary funding?
    Answer. Projections prepared for the Palau government project that 
from 2011 through 2024, discretionary federal programs will account for 
approximately $211.7 million dollars--on average, about $15.12 million 
annually--representing roughly 50 percent of an estimated $427.45 
million in total U.S. assistance to Palau during that time. These 
projections assume a steady level of funding from discretionary federal 
programs, rising at roughly the rate of inflation. We estimated that 
discretionary federal programs in 1995 through 2009 amounted to 
approximately $266.7 million dollars--on average, about $17.78 million 
annually--but accounted for a smaller proportion of assistance to 
Palau: 31 percent of the $852 million in U.S. assistance during that 
period.\2\
---------------------------------------------------------------------------
    \2\ Our estimates for 1995 through 2009 included federal funds 
reported in the single audits for the Palau national government, Palau 
Community Action Agency, and the Palau Community College; and estimates 
of the Department of Defense's Civic Action Teams. The 2011 through 
2024 projections prepared for the Palau government use data from a 2009 
financial statement and assume growth equivalent to inflation.
---------------------------------------------------------------------------
                                 ______
                                 
      Responses of Frankie Reed to Questions From Senator Bingaman
    Question 1. On page 16 of the bill, the Agreement provides that, 
``This Agreement may be amended at any time by the mutual written 
consent of the Government of the United States and the Government of 
Palau.''
    Would such an amendment require any congressional action or 
consent?
    Answer. We would seek action by Congress on those amendments that 
require additional implementing authority.
    Question 2. On page 9 of the bill, the Agreement provides for the 
establishment of an Advisory Group to make recommendations on economic, 
financial, and management reforms. On page 11, the Agreement authorizes 
the Government of the United States to delay the payment of economic 
assistance to Palau ``if the government of the United States 
determines. . .Palau has not made significant progress in implementing 
meaningful reforms.''
    In what form and manner will the Advisory Group present its 
recommendations for reform? More specifically, how will the Advisory 
Group formally communicate its recommendations and performance 
indicators so that both Palau and U.S. governments clearly understand 
what the performance expectations are?
    Answer. The Advisory Group (AG) will report to the two governments 
on the economic, financial and management reforms it recommends, and 
the schedule it recommends for their implementation. It will also 
report anually on the progress the Government of Palau is making in 
implementing the reforms recommended by the AG as well as on any other 
reforms the Government of Palau has taken. The agreement does not 
specify the form the AG's reports are to take, and we anticipate that 
the Advisory Group will determine how best to report to both 
governments to achieve the desired results. The agreement does, 
however, provide examples of the types of action that would be 
considered significant progress in a fiscal year: meaningful 
improvements in fiscal management, including the elimination and 
prevention of operating deficits; a meaningful reduction in the 
national operating budget from the previous fiscal year; a meaningful 
reduction in the number of government employees from the level the 
previous fiscal year; a meaningful reduction in the annual amount of 
the national operating budget dedicated to government salaries from the 
previous fiscal year; demonstrable reduction of government 
subsidization of utilities, and meaningful tax reform.
    Question 3. On page 3 of your statement you say that ``China, the 
Arab States, Cuba and others are actively courting Palau. . .'' Could 
you elaborate on their objectives and tactics?
    Answer. We are supportive of the efforts of other countries to be 
engaged with the Pacific Islands as long as the goal of their 
involvement is in support of increasing good governance, transparency, 
and the prosperity of the people of the region. We seek clarity from 
those nations that engage in an opaque fashion with Pacific Island 
nations.
    China, the Arab League states, and Cuba have expanded their 
influence in the region. These countries are actively courting Pacific 
Island states, including Palau, and increasing their economic, 
diplomatic, and military engagement with the island states. Palau's 
President Johnson Toribiong mentioned China's growing influence in 
Palau when he testified, stating that ``already some Palauans are 
enticed by the new economic power of China, which clearly wants more 
influence in Palau. We all want greater economic interaction with 
China.'' The Arab League states continue to lobby Pacific Island 
nations to vote against the United States in the United Nations on key 
issues. Cuba has actively increased its engagement with Palau by 
offering medical assistance. Strong, constructive relations with 
Pacific Island nations will help advance our national interests by 
maintaining our partnerships and our military relationships in a 
strategic zone that spans the Pacific.
                                 ______
                                 
   Responses of Anthony M. Babauta to Questions From Senator Bingaman
    Question 1a. The Administration witnesses have made a compelling 
case for approval of this legislation, but I'm concerned that with 
respect to an offset, you have reiterated three options which Senator 
Murkowski and I wrote in our April 5, 2011 letter that, ``none of these 
offsets are politically viable.''
    Can you tell us whether the unacceptability of these options is 
clear to OMB?
    Answer. The Department of the Interior is in receipt of your 
letters relating to the off sets for the Palau Compact legislative 
proposal. While the Department defers to the Office of Management and 
Budget for its specific views on this issue, as I noted in my written 
statement the legislative proposals included in the 2012 Budget were 
revenue generators that would be scored for savings by the 
Congressional Budget Office. These proposals include, for example, the 
repeal of net receipts sharing, which takes into account the costs of 
managing federal oil and gas leases before revenues are shared with the 
states and that by itself could provide more than enough savings to 
offset the costs of the Palau Compact. This proposal, in particular, 
has been enacted for four years through annual appropriations language 
and would be made permanent by this proposal.
    Question 1b. Can you tell us whether OMB looked outside of the 
Interior Department budget for possible offsets?
    Answer. The Department of the Interior is not aware of the extent 
to which efforts were made to secure offsets elsewhere.
    Question 2. On page 6 of the bill, the Agreement provides that the 
United States ``shall provide'' Direct Economic Assistance to Palau. It 
appears that this assistance will not be provided through the normal 
federal grant process and, therefore, the accountability mechanisms 
that accompany federal grants will not apply.
    What alternative mechanisms will be used to assure accountability 
in the management and use of this assistance?
    Answer. There are a number of reporting and financial management 
requirements contained in the new agreement.
    The agreement provides that Palau is to report on the status and 
use of all funds provided under the agreement and that the status and 
use will be discussed in the annual bilateral economic consultations. 
It provides that the financial information relating to the funding 
shall conform to the standards of the Government Accounting Standards 
Board.
    Palau will continue to adhere to the requirements of the Single 
Audit Act, which requires an independent annual audit of all government 
accounts. Palau has generally been a leader of the FAS and United 
States territories in its attention to audit requirements.
    The audit standards and responsibilities are further elaborated on 
in Appendix D to the agreement.
    The Government Accountability Office and the Inspector General of 
the Department of the Interior retain authority to audit Palau's 
programs and use of Compact funds.
    Overall, the accountability for this agreement with Palau will be 
examined by the United States and Palau representatives at the annual, 
bilateral meetings during which Palau's implementation of required 
reforms will be reviewed.
    The Direct Economic Assistance will be sufficiently safeguarded by 
the audit processes.
    Question 3. On page 11 of the bill, the Agreement provides that the 
U.S. will provide a total of $40 million for mutually agreed 
Infrastructure Projects.
    Has there been tentative agreement on what these projects will be--
can you tell us what Palau's priority needs are for the use of this 
construction assistance?
    Answer. Palau has not yet selected infrastructure projects for 
consideration. When they are selected, however, the projects must be 
mutually agreed upon by both Palau and the United States, and scope and 
funding will he identified.
   Response of Anthony M. Babauta to Question From Senator Murkowski
    Question 1. The Compacts with the FSM and the Marshall Islands 
focused funding in six sectors, with education, health, and 
infrastructure getting the bulk of the money. The Compact with Palau, 
however, provides direct assistance for education, health, justice, and 
public safety. Has one approach been more effective than the other?
    Answer. The proposed agreement, resulting from a review of the 
functioning of the Palau Compact over the first 15 years since it took 
effect, provides direct assistance in a manner similar to the provision 
of direct assistance under the first 15 years. Participants in the 15-
year compact review did not believe that a significant change of 
approach was warranted. During the negotiation of the amended compacts 
of free association with the Republic of the Marshall Islands and the 
Federated States of Micronesia in 2003, participants believed that a 
new, six-sector approach was necessary to properly focus the deployment 
of financial assistance in these two countries on the most important 
needs and in particular on primary and preventive health care, primary 
education, and infrastructure related to these two sectors. The 
different approaches are appropriately tailored to the circumstances in 
each of the three countries.
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                     Washington, DC, April 5, 2011.
Hon. Hillary Clinton,
Secretary of State, 2201 C Street NW, Washington, DC.
Hon. Ken Salazar,
Secretary of the Interior, 1849 C Street NW, Washington, DC.
    Dear Madam and Mr. Secretary:

    We are writing to follow-up on our letter of March 17, 2011 
regarding legislation to amend Public Law 99-658 which approved the 
Compact of Free Association between the United States and the Republic 
of Palau. The proposed legislation has been introduced in the Senate as 
S. 343 and hearings are scheduled for April 14. The bill would approve 
the Agreement reached between the United States and Palau following the 
15-year review that was conducted pursuant to Section 432 of the 
Compact and includes the appropriation of future financial assistance 
to Palau.
    In our March 17 letter we asked the Administration to provide 
language for an amendment that would offset the bill's estimated 10-
year budget impact of $194 million. Last week, our staffs received a 
list* (attached) from the Interior Department that described several 
possible offsets. Unfortunately, none of these offsets is politically 
viable.
---------------------------------------------------------------------------
    * List has been retained in committee files.
---------------------------------------------------------------------------
    We share your commitment to enacting legislation to strengthen the 
close and long-standing ties between the U.S. and Palau and to secure 
our strategic interests in the Western Pacific. However, recognizing 
that strong objections would be raised against the recently-transmitted 
offsets, we urge you to consult with the Office and Management and 
Budget to identify other possible offsets within the Interior, State, 
and Defense department budgets, and work with us to select an offset 
that can gain the support needed to pass Congress.
    We look forward to working with you to find a viable offset and 
move this bill forward as quickly as possible. Thank you again for your 
assistance.
            Sincerely,
                                             Jeff Bingaman,
                                                          Chairman.
                                            Lisa Murkowski,
                                                    Ranking Member.
                                 ______
                                 
                          U.S. Department of State,
                                       Legislative Affairs,
                                     Washington, DC, April 5, 2011.
    Dear Mr. Chairman:

    Thank you for your letter of March 17 regarding the proposed 
legislation to amend Public Law 99-658 regarding the Compact of Free 
Association with Palau. The Department of Defense and Department of 
Interior will respond separately to the specific points you raised 
regarding national security interests and funding for the Palau 
assistance agreement. We would like to comment on the broader 
significance of our relationship with Palau and the importance of the 
Compact agreement.
    The agreement reached with the Government of Palau to provide 
financial assistance to Palau pursuant to Section 432 of the Compact 
confirms our commitment to Palau and the special relationship between 
our countries from which the United States receives considerable 
benefit. Palau is a reliable voting ally of the United States in 
multilateral forums, particularly in the United Nations. Palauans 
contribute to international peacekeeping efforts and serve in U.S. 
military units in Afghanistan, Iraq and elsewhere. It takes great care 
of historical sites, visited by thousands of American visitors each 
year, that honor those who died protecting U.S. and global freedom 
during some of the bloodiest battles of World War II.
    Of urgent significance, as you note, the agreement reinforces an 
important element of our Pacific strategy for defense of the U.S. 
homeland. Palau is strategically located near the western edge of a 
U.S. security zone that stretches from California to the Philippines. 
Coupled with our assets in Hawaii and U.S. territories, our influence 
in the Freely Associated States of Palau, the Marshall Islands, and 
Micronesia creates an invaluable security zone that spans the entire 
width of the Pacific. The U.S.-Palau Compact includes provisions that 
give the United States military exclusive rights and access to 
facilities in Palau. This right of strategic denial is vital to our 
national security.
    Enacting and funding the proposed legislation will help confirm the 
United States' renewed commitment to the region and keep Palau allied 
with the United States at a time when other international actors are 
aggressively courting Pacific Island countries.
    The Compact Review agreement cannot enter into force until Congress 
passes necessary legislation approving and funding it. The Department 
of the Interior, the agency responsible for implementing most 
provisions of the proposed legislation, is addressing funding issues. 
The Department of Interior has assured us that congressional budget 
requirements will be met.
    Thank you again for sharing your views regarding the Palau Compact 
review and on this important bilateral relationship. We hope this 
information is useful to you. Please do not hesitate to contact us if 
we may be of further assistance.
            Sincerely,
                                       Miguel E. Rodriguez,
                                        Acting Assistant Secretary,
                                 ______
                                 
                        U.S. Department of Defense,
                                Under Secretary of Defense,
                                     Washington, DC, April 5, 2011.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman:

    I am writing to express the Department of Defense's support for S. 
343, a bill to 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. This bill would approve the 
results of the 15-year review of the Compact, including the Agreement 
Between the Government of the United States of America and the 
Government of the Republic of Palau, conducted pursuant to Section 432 
of Public Law 99-658, and appropriate 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 that 
review.
    Implementing the proposed legislation is vital to maintaining the 
bilateral security relationship between the United States and Palau. 
Since World War II, Palau has been a longstanding U.S. strategic 
partner. Under the 1994 Palau Compact, Palau provides the United States 
exclusive defense rights, and the United States has taken 
responsibility for the security and defense of Palau. This security 
arrangement provides an unyielding foundation that supports the 
position of the United States in an increasingly contested region and 
allows the United States to maintain critical access, influence, and 
strategic position in the Western Pacific region.
    Critical security developments in the region require the United 
States' sustained presence and engagement, particularly given the range 
of U.S. strategic interests and equities in the Western Pacific, 
including the Reagan Ballistic Missile Defense Test Site at the U.S. 
Army Kwajalein Atoll facility, and areas that are important to DoD when 
called upon to support disaster relief operations throughout the 
region. Failure to follow through on our commitments to Palau, as 
reflected in the proposed legislation, would jeopardize our defense 
posture in the Western Pacific. This posture will become increasingly 
important as the United States seeks to protect its interests and 
fulfill its commitments to Asia-Pacific security.
    Enactment of S. 343 would be an important expression of the U.S. 
commitment to Palau as an irreplaceable partner and a reinforcement of 
our shared interest in regional and international security.
    The Office of Management and Budget advises that, from the 
standpoint of the Administration's program, there is no objection to 
the presentation of this letter for the consideration of the committee.
    Thank you for your consideration.
            Sincerely,
                                        Michele A. Flournoy




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