**[Statement]{.smallcaps}**

**[of]{.smallcaps}**

**[Nikolao I. Pula]{.smallcaps}**

**[Acting deputy Assistant Secretary of the Interior]{.smallcaps}**

**[for Insular Affairs]{.smallcaps}**

**[Before the Senate Committee on]{.smallcaps}**

**[Energy and Natural Resources]{.smallcaps}**

**[Regarding]{.smallcaps}**

**[the Military build-up in Guam]{.smallcaps}**

**[Impact on the Civilian community, planning, and
response]{.smallcaps}**

**[Washington, D.C.]{.smallcaps}**

**May 1, 2008**

Mr. Chairman and members of the Committee, thank you for the opportunity
to testify on the military build-up in Guam and its impact on the
civilian community, planning and response.

**THE TRANSFER OF 8,000 MARINES**

Guam is to receive a large defense expansion in the next few years. The
proposed build-up is the result of an agreement between the United
States and Japan to relocate about 8,000 United States Marines and their
dependents from Okinawa to Guam. Construction of new defense facilities
is scheduled to start in 2010 with the relocation to be completed in
2014. The cost of new infrastructure to be installed to accommodate the
Marines and their dependents is currently estimated to be well over \$10
billion.

As a result of the construction, a formidable amount of new capital will
be injected into an island economy that currently produces \$3.7 billion
in Gross Domestic Product per year. This flow of capital has the
potential to lift Guam's economy to a substantially higher level of
output. There will be corresponding increases in local employment and
taxes for the Government of Guam (GovGuam). There will also be new
businesses to meet new demands for a whole host of goods and services
arising from the build-up.

In addition to the relocation of Marine Corps forces from Okinawa, which
will more than double the current number of active duty personnel on
Guam, the Air Force and the Navy will also see significant increases in
both personnel and capabilities. A new small contingent of active duty
Army personnel will also be posted to Guam.

This expansion holds enormous economic and financial promise for Guam at
a time when conventional income sources for a small and isolated island
economy are extremely limited. The economy will benefit from the
build-up in two stages: (1) initial facility building and improvements
will create a large number of high-paying construction-related jobs for
several years and (2) permanent new defense and non-defense jobs to
support the new military mission.

The build-up will present significant challenges for Guam's small and
isolated island economy. The first big challenge may occur in the early
stages of construction, in which labor of all skill levels will need to
be secured. The local work force may not be sufficiently able to satisfy
all of the labor needs. We are working with our partners to develop
training and apprenticeship programs for United States eligible labor in
the Guam region. After construction is completed and the Marines move
in, the continuing effect on Guam's economy will be large and
widespread.

The build-up also presents a challenge to the ongoing interdiction
efforts intended to prevent the inadvertent transport of brown tree
snakes to other Pacific islands or the mainland United States.
Cooperative efforts are aimed at suppressing the brown tree snake
population in strategic transportation and cargo facilities through the
construction of snake barriers, and other interdiction efforts. The
primary threat is that brown tree snakes are prone to hiding in cargo,
on aircraft, and in vehicles and could potentially be introduced in
other habitats that are snake-free and that support endangered or
threatened bird species. We will continue to work with our interagency
partners to suppress the tree snake populations in strategic areas,
secure military and cargo facilities through the construction of tree
snake barriers, and ramped up interdiction efforts as the military
build-up on Guam progresses.

**ECONOMIC EFFECTS OF BASE EXPANSION**

In a macroeconomic sense, an important question is how much the proposed
base expansion in Guam will contribute to the insular area's economy.
Roughly, evidence from defense spending history in the United States,
including Hawaii, which is relevant to Guam, suggests that each dollar
of defense spending could generate 75 cents of gross domestic product
(GDP), the final value of the economy's total output. The 75 cents
contribution to GDP from each defense dollar is what economists call the
multiplier effect on GDP, which is the sum of direct, indirect and
induced effects.

At present, Guam's defense establishment, mostly the Navy, is relatively
small. There are a total of 6,520 active duty personnel and 7,690
dependents on island. Defense spending on Guam was \$711.7 million in
fiscal year 2005, the latest year for which final figures are available.

Federal civilian payroll at the end of 2007 numbered 3,610, of which
3,040 or 84.2 percent were civilian DOD employees. Non-DOD Federal
employees were 570 or 15.8 percent of the total. There is roughly one
civilian employee for every two active duty persons.

Assuming an addition of about 8,000 Marines and 4,510 active duty
personnel in other military services when the build-up is completed, the
number of active duty personnel would increase from 6,520 today to
19,330 in 2014. The number of dependents could rise from 7,690 today to
19,140 in 2014. The number of both active duty personnel and dependents
in Guam could rise from 14,210 today to 38,470 in 2014. Based on today's
total population estimate of 171,000 for Guam, the build-up will
increase the island's population some 22.3 percent to 218,000. These
population numbers do not include new businesses that will remain
on-island after 2014 which will add owners, employees, and their
families to the population.

Using the current ratios for Guam, defense spending for Guam will rise
from \$700-800 million to more than \$2 billion in 2014, when
construction is planned to be completed. Applying the defense spending
multiplier for Hawaii, the increase in defense spending could add \$900
million to \$1 billion annually to Guam's GDP. Assuming a \$3.7 billion
GDP and the prospect that the rest of the economy, namely tourism and
local government, will continue to perform at the same rate it does
today, the build-up could boost Guam's GDP by approximately 22.5
percent. Realistically, it would be hard to envision any other
alternative for Guam that would increase its total economic output by
nearly a quarter in such a relatively short time.

Naturally, Guam's economy will need time to adjust to this new level of
defense spending during the build-up. Once it does, it will be at a much
higher level than it has ever been or is conceivable to be under any
other scenario. More important, the mix of defense and civilian jobs
following the build-up will be of a higher pay grade than would be
feasible in the rest of the economy, which is mostly tourism and other
services that employ few advanced skills. Other good news for Guam is
that national defense, as has been the case in both Guam and Hawaii for
many decades, coexists in harmony with the rest of the economy and
population.

Again, using the current ratios for Guam, the 12,810 additional
active-duty personnel resulting from the build-up could create 6,000 new
civilian jobs for Guam. Given today's total payroll employment figure of
just over 60,000, this would be a 10 percent increase in civilian
employment.

Guam's other major income source is tourism, which is critical to jobs
and local tax revenue. As important as tourism is, it is subject to what
economists call leaks, that is, more of the money that mostly foreign
tourists spend in Guam leaks out of the system in the form of payment
for imports, air fares for foreign carriers and foreign-owned hotels.
Defense spending, on the contrary, is subject to fewer leaks as compared
to tourism, because more defense establishment payments, including
wages, salaries, payments to local contractors, and other base expenses,
are likely to remain in the system.

One way to look at the difference between defense and tourism is to look
at their average wages and salaries. In Guam, the average of wages and
salaries in defense is much higher than the average in tourism. The
average level of wages and salaries in defense for all active duty and
civilian employees together, based on fiscal year 2005 data, was
\$34,037. This figure is 74.8 percent higher than the average for
tourism, which, according to the Guam Visitors Bureau, is \$19,468. The
higher pay level, in combination with fewer leaks from the system, makes
the defense payroll more desirable for nearly every community.

Another way to look at what this expansion will do for Guam's economy is
to look at taxes that will be covered over to the Treasury of Guam.
Under current rules, Federal income taxes collected on Federal payrolls
on Guam are paid into the Treasury of Guam. Currently, this sum is about
\$40 million a year. With a near tripling of the number of active duty
personnel and about 6,000 new civilian employees at the end of the
build-up, tax revenue for Guam could increase significantly.

**PLANNING AND FINANCING**

It is too early to estimate fully all benefits and costs related to the
build-up. At this point, many of DOD's plans have not been finalized,
and studies evaluating the expected economic impact of the relocation
are also pending. However, DOD estimates that the realignment could add
as many as 40,000 persons to Guam's current population of 171,000. While
this prospect presents Guam with a tremendous source of revenue, it also
presents major challenges related to project funding.

The impacts of a military build-up are magnified in Guam because Guam is
an island. It is surrounded by water with no outlying jurisdictions that
can pick up some of the population increase and that can tap into a
larger electric grid. All of the effects are concentrated on one
jurisdiction - Guam.

Appreciating the challenges that the build-up will present, the
Department of Defense (DOD) established the Joint Guam Program Office
(JGPO), headed by Major General David Bice, USMC (Retired), under the
Assistant Secretary of the Navy (Installations and Environment. It was
decided that the Interagency Group on Insular Areas (IGIA) would
establish a Guam Task Force to coordinate military build-up issues that
cross jurisdictional lines of Federal agencies. Interior and JGPO are
leading the Task Force effort. The Task Force has established five
working groups: Labor, Infrastructure, Environment, Health and Human
Services, and Socio-Economic. The Department of Education forms a
sub-group within the Labor working group.

Notably, the Infrastructure subgroup has identified significant project
and budgetary challenges associated with the build-up. The facilities
that will be built by the military on base will, in large part, be taken
care of by the military. However, certain areas of infrastructure may
overlap between the military base and the Guam community at large.
Funding for many of these items has not yet been determined. A sample of
this infrastructure includes \--

Port facilities and capacity

Long-haul road between the Navy and Air Force bases

Housing for the construction workers (to be privately funded)

Health care facilities for construction workers

Furthermore, other potential infrastructure expenditures related to the
build-up have been identified within the JGPO meetings. These include:

Schools for children of new civilian workers

Hospital facilities

Electric Power facilities

Water and Sewer facilities

Solid waste disposal facilities

Government Administrative facilities

Up to this point, Interior funding has been aimed at expediting the
planning process. In March 2008, the Office of Insular Affairs provided
Guam a technical assistance grant of \$15,000 to aid the writing of a
Guam grant application for U.S. Department of Labor funds to develop a
regional labor plan. Such a plan must be in place before training and
apprenticeship funds can be released for United States eligible labor in
Guam and the surrounding United States-affiliated islands. Additionally,
the Office of Insular Affairs has reprogrammed \$2 million in GovGuam
capital improvement funds so that the Guam Port Authority can quickly
acquire design and environmental studies for wharf modernization. The
Department of the Interior believes it is critical to get the port
modernized in order to address future infrastructure issues.

The November 2007 meeting of the Task Force was intended to outline
military realignment activities and associated costs, both for the
military and GovGuam. At this meeting, GovGuam presented draft lists of
prospective infrastructure needs with costs ranging from \$1 billion to
more than \$4 billion.

A number of plans crucial in determining infrastructure improvement
needs related to the build-up are still currently in development. These
plans are a prerequisite for budgetary planning and need to be finalized
before construction upgrades can begin. Within this context, facilities
that will be crucial to the build-up but which will also benefit Guam's
economy, such as the port and road facilities, may be the first priority
upgrade projects. Once there is an agreed plan for GovGuam projects,
they may be considered during the development of the 2010 budget.

**Projects with Income**

Among the available funding options for the construction of projects
with expected income on Guam, private and USDA financing options show
promise and merit more in-depth investigation. Projects that have
revenue streams may be able to borrow in their own right through public
corporations, independent authorities, or other entities. Port
activities, electric power, water, wastewater, solid waste disposal can
all generate income, which allows them to finance through borrowing.
Currently, the Guam Port Authority and Guam Power Authority are
organized as independent entities, run their own affairs, and negotiate
their own financing.

Independent entities can seek to provide a service at the lowest cost.
Thus, they plan for proper capacity and finance only what is necessary.
Full cost recovery is a usual requirement. Such a structuring of
activities refutes a "gold-plating" argument. Additionally if private
sector financing seems scarce, the United States Department of
Agriculture (USDA) offers a variety of rural development loans that may
be a viable resource for qualified borrowers. As typical for government
loan programs, these require that the government get an appropriation
only for the risk associated with the loan rather than the entire loan
amount. Loans where there is a reasonable risk of default will have a
higher cost than those which typically do not default. For instance, the
renewable energy guaranteed loan program has a 10 percent subsidy rate
compared to the hardship electric loan program which has a .12 percent
subsidy rate. Because utilities typically have little risk of default,
financing of electric loans is secure and carries a low up-front
financing cost on behalf of the Federal government. There is an
additional administrative cost associated with all loan programs that is
not reflected in the subsidy rate that we would have to consider with
this option. For all USDA loans, the borrower would have to agree to the
terms of the loan and will need to repay the loan in full.

**Projects without Income**

Construction of schools, roads, and social service facilities such as
buildings to house courts and public safety offices, are another matter.
They do not generate income but are paid for with tax collections. USDA
is a potential source for this type of financing as well through its
community facilities grants and loans programs.

While Federal moneys may need to be appropriated for some aspects of
some construction projects in the civilian areas of Guam, we are more
confident today than earlier that a large portion of construction can be
financed through borrowings or public/private ventures, including from
USDA. However, such an approach is premised on sufficient Federal funds
being available to cover the subsidy and administrative costs of the
loan programs as well as full repayment of the loans by the borrowers.

As Chair of the Interagency Group on Insular Areas, the Department
understands the need to continue to facilitate discussions between the
military and Guam, and to assist in the procurement of necessary
resources to address the impending pressures on the infrastructure of
Guam.