COMPACT OF FREE 

ASSOCIATION 

Proposed U.S. Assistance to 

Palau through Fiscal Year 

2024 

Statement of David Gootnick, Director 

International Affairs and Trade 

Testimony 

Before the Subcommittee on Fisheries, 

Wildlife, Oceans, and Insular Affairs, 

Committee on Natural Resources, House 

of Representatives

For Release on Delivery 

Expected at 2:00 p.m. EDT 

Monday, September 10, 2012 

GAO-12-798T 

United States Government Accountability Office

GAO 
 United States Government Accountability Office 

Highlights of GAO-12-798T, a testimony 

before the Subcommittee on Fisheries, 

Wildlife, Oceans, and Insular Affairs, 

Committee on Natural Resources, House of 

Representatives 

September 10, 2012 

COMPACT OF FREE ASSOCIATION 

Proposed U.S. Assistance to Palau through Fiscal 

Year 2024 

Why GAO Did This Study 

The Compact of Free Association 

between the United States and the 

Republic of Palau, which entered into 

force in 1994, provided for several 

types of assistance aimed at promoting 

Palau’s self-sufficiency and economic 

advancement. Included were 15 years 

of direct assistance to the Palau 

government; contributions to a trust 

fund meant to provide Palau $15 

million each year in fiscal years 2010 

through 2044; construction of a road 

system, known as the Compact Road; 

and federal services such as postal, 

weather, and aviation. U.S. agencies 

also provided discretionary federal 

programs related to health, education, 

and infrastructure. In 2008, GAO 

projected that total assistance in fiscal 

years 1994 through 2009 would 

exceed $852 million. 

In September 2010, the United States 

and Palau signed an agreement (the 

Agreement) that would, among other 

things, provide for additional 

assistance to Palau beginning in fiscal 

year 2011 and modify its trust fund. 

Currently, there are two bills pending 

before Congress to implement the 

Agreement. 

In this testimony, GAO updates a 

November 2011 testimony on (1) the 

Agreement’s provisions for economic 

assistance to Palau, (2) its impact on 

the trust fund’s likelihood of sustaining 

scheduled payments through fiscal 

year 2044, (3) the projected role of 

U.S. assistance in Palau government 

revenues, and (4) the pending 

legislation to implement the 

Agreement. GAO reviewed current 

trust fund data and new pending 

legislation for this testimony. 

What GAO Found 

The Agreement would provide decreasing assistance, totaling approximately 

$215 million through fiscal year 2024 and includes the following: 

 direct economic assistance ($107.5 million) for Palau government operations; 

 infrastructure project grants ($40 million) to build mutually agreed projects; 

 infrastructure maintenance fund ($28 million) for maintaining the Compact 

Road, Palau’s primary airport, and certain other major U.S.-funded projects; 

 fiscal consolidation fund ($10 million) to assist Palau in debt reduction; and 

 trust fund contributions ($30.25 million) in addition to the $70 million 

contributed under the compact 

Assistance to Palau Specified in the Agreement 

Notes: All dollar amounts are in nominal dollars (i.e., unadjusted for inflation). Funds were not 

provided in fiscal years 2011 or 2012 to date for infrastructure projects, the infrastructure 

maintenance fund, or the fiscal consolidation fund. 

Under the Agreement, the United States would contribute to the trust fund in 

fiscal years 2013 through 2023, and Palau would reduce its withdrawals by $89 

million in fiscal years 2010 through 2023. GAO projects that the fund would have 

a 90 percent likelihood of sustaining payments through fiscal year 2044 with 

these changes, versus 40 percent without these changes. 

Estimates prepared for the Palau government project declining reliance on U.S. 

assistance under the Agreement—from 28 percent of government revenue in 

fiscal year 2011 to 2 percent in fiscal year 2024—and growing reliance on trust 

fund withdrawals and domestic revenues. The estimates show trust fund 

withdrawals rising from 5 percent to 24 percent and domestic revenues rising 

from 40 to 59 percent, of total government revenue. According to the estimates, 

U.S. assistance in fiscal years 2011 through 2024 would total $427 million, with 

discretionary federal programs accounting for about half of that amount. 

Congress has not approved legislation to implement the Agreement as of 

September 2012. Pending Senate legislation would implement the Agreement 

and appropriate funds to do so. Pending House legislation would implement the 

agreement, apply an inflation adjustment to assistance payments, and shift the 

timing of certain assistance payments to reflect the fact that 2011 has passed. 

View GAO-12-798T. For more information, 

contact David Gootnick at (202) 512-3149 or 

gootnickd@gao.gov. 
 

Page 1 GAO-12-798T 

Chairman Fleming, Ranking Member Sablan, and Members of the 

Subcommittee: 

I am pleased to be here today to discuss the September 2010 agreement 

between the U.S. and Palau governments.1

The Compact of Free Association between the Government of the United 

States and the Government of the Republic of Palau, which entered into 

force in 1994,2

 provided for several types of assistance aimed at 

promoting Palau’s economic advancement and eventual self-sufficiency.3

In addition to establishing Palauan sovereignty and U.S.-Palau security 

and defense arrangements, the compact provided economic assistance 

to Palau.4

 This assistance comprised, among other things, direct 

economic assistance for 15 years to the Palau government; the 

establishment of a trust fund intended to provide Palau $15 million 

annually from 2010 through 2044; investments in infrastructure, including 

a major road; and the provision of federal services, such as postal, 

weather, and aviation. The compact also established a basis for U.S. 

agencies to provide discretionary federal programs related to health, 

education, and infrastructure. In June 2008, we projected that U.S. 

assistance to Palau from 1995 through 2009 would exceed $852 million, 

with assistance under the compact accounting for about 68 percent and 

assistance through discretionary programs accounting for about 31 

percent.5

 We also reported in 2008 that the likelihood of the Palau trust 

 

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

The Compact of Free Association between the Government of the United States of 

America and the Government of the Republic of Palau (Oct. 1, 1994). 

3

See Proclamation 6726, Placing into Full Force and Effect the Compact of Free 

Association with the Republic of Palau, 59 Fed. Reg. 49777 (Sept. 27, 1994). Congress 

approved the Compact of Free Association in Public Law 99-658 on November 14, 1986, 

and Public Law 101-219 on December 12, 1989. The grant funds specified by the 

compact are backed by the full faith and credit of the U.S. government. 

4

Unless otherwise noted, all years cited are fiscal years (Oct. 1-Sept. 30). In addition, all 

dollar amounts in this report are in nominal dollars (i.e., unadjusted for inflation). 

5

GAO, Compact of Free Association: Palau's Use of and Accountability for U.S. 

Assistance and Prospects for Economic Self Sufficiency, GAO-08-732 (Washington, D.C.: 

June 10, 2008). 

 
 

Page 2 GAO-12-798T 

fund’s being able to sustain the planned payments through 2044 was 

uncertain. 

The September 2010 agreement between the U.S. and Palau 

governments (the Agreement) followed a formal review of the compact’s 

terms required 15 years after the compact entered into force.6

 Provisions 

of the Agreement would, among other things, extend economic 

assistance to Palau beyond the original 15 years and modify trust fund 

arrangements. The Agreement establishes an assistance schedule 

beginning in 2011. There are currently two bills pending before the 

Congress to approve and implement the Agreement. A bill now pending 

before the U.S. Senate would approve the Agreement and also 

appropriate funds to implement it.7

 However, the Senate bill does not 

reflect the fact that fiscal year 2011 has passed.8

 A bill now pending 

before the House would approve the agreement, apply an inflation 

adjustment to assistance payments, and shift the timing of certain 

assistance payments to reflect the passage of fiscal year 2011.9

The Senate Committee on Energy and National Resources held a hearing 

to review the pending bill on June 16, 2011; the Subcommittee on Asia 

and the Pacific of the House Committee on Foreign Affairs held a hearing 

to assess the formal review and proposed Agreement on November 30, 

2011 We testified at both hearings and described the terms of the 

 

6

Section 432 of the compact provides for the U.S. and Palau governments to formally 

review the terms of the compact and its related agreements and to consider the overall 

nature and development of their relationship, on the 15th, 30th, and 40th anniversaries of 

the compact’s effective date. The governments are to consider the operating requirements 

of the government of Palau and its progress in meeting the development objectives set 

forth in section 231(a) of the compact. The terms of the compact shall remain in force until 

otherwise amended or terminated pursuant to title four of the compact. 

7

Senate Bill 343, as introduced in the Senate, amends Title I of Public Law 99-658; 

approves the results of the 15-year review of the compact, including the Agreement; and 

appropriates funds for the purposes of the amended Public Law 99-658 for fiscal years 

ending on or before September 30, 2024, to carry out the agreements resulting from the 

review. S. 343, 112th Cong. (2011). 

8

S. 343, as introduced in the Senate. 

9

House Bill 6040, as introduced in the House, amends Title I of Public Law 99-658; 

approves the results of the 15-year review of the compact, including the Agreement; shifts 

the schedule of certain assistance payments; creates an annual reporting requirement for 

the Department of the Interior; and includes an offset provision. H.R. 6040, 112th Cong. 

(2012). 
 

Page 3 GAO-12-798T 

Agreement, assessed trust fund balances and disbursement plans under 

various assumptions and investment returns, and examined single audit 

reports and budget estimates prepared for the Palau government.10

My statement today updates our November 2011 statement.11 In 

particular, it describes (1) the extension of economic assistance to Palau 

as outlined in the Agreement, (2) the impact that this assistance would 

have on the Palau trust fund’s sustainability, (3) the projected role of U.S. 

assistance in Palau government revenues, and (4) the pending legislation 

to implement the Agreement. We used recent data from the Palau trust 

fund to update its sustainability, and we reviewed the bill pending before 

the House that was introduced in July 2012.12 In addition, since Congress 

has not approved legislation implementing the agreement, we note that 

the Department of the Interior has provided direct economic assistance to 

Palau. We conducted this work from August and September 2012 in 

accordance with all sections of GAO’s Quality Assurance Framework that 

are relevant to our objectives. The framework requires that we plan and 

perform the engagement to obtain sufficient and appropriate evidence to 

meet our stated objectives and to discuss any limitations in our work. We 

believe that the information and data obtained, and the analysis we 

conducted, provide a reasonable basis for any findings and conclusions in 

this product. 

Palau consists of 8 main islands and more than 250 smaller islands, with 

a total land area of roughly 190 square miles, located approximately 500 

miles southeast of the Philippines. About 20,000 people live in Palau, 

concentrated largely in one urban center around the city of Koror, and 

more than one-quarter of the population is non-Palauan.13 Palau’s 

 

10GAO, Compact of Free Association: Proposed U.S. Assistance to Palau and Its Likely 

Impact, GAO-11-559T (Washington, D.C.: June 16, 2011). 

11GAO, Compact of Free Association: Proposed U.S. Assistance to Palau for Fiscal Years 

2011-2024, GAO-12-249T (Washington, D.C.: Nov. 30, 2011). 

12H.R. 6040. 

13Palau’s private sector relies heavily on foreign workers, mostly from the Philippines. We 

reported in 2008 that since 1994, foreign workers, as registered with Palau’s Social 

Security Office, had grown to account for half of Palau’s total labor force. Because many 

of these foreign workers send wage income back to their home nations, in 2005 the 

annual net outflow of remittances from Palau equaled an estimated 5.5 percent of its 

gross domestic product (GDP). 

Background 
 

Page 4 GAO-12-798T 

economy is heavily dependent on its tourism sector and on foreign aid 

from the United States, Japan, and Taiwan.14 Similar to many small island 

economies, Palau’s public sector spending represents a significant 

percentage of its gross domestic product (GDP).15

U.S. relations with Palau began when American forces liberated the 

islands near the end of World War II. In 1947, the United Nations 

assigned the United States administering authority over the Trust 

Territory of the Pacific Islands, which included what are now the 

Federated States of Micronesia, the Republic of the Marshall Islands, the 

Commonwealth of the Northern Mariana Islands, and Palau. Palau 

adopted its own constitution in 1981. The U.S. and Palau governments 

concluded a Compact of Free Association in 1986; the compact entered 

into force on October 1, 1994. The Department of the Interior’s (Interior) 

Office of Insular Affairs (OIA) has primary responsibility for monitoring and 

coordinating all U.S. assistance to Palau, and the Department of State 

(State) is responsible for government-to-government relations. 

Key provisions of the compact and its subsidiary agreements address the 

sovereignty of Palau, types and amounts of U.S. assistance, security and 

defense authorities, and periodic reviews of compact terms. Table 1 

summarizes key provisions of the Palau compact and related subsidiary 

agreements. 

 

14The 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). 

15According to the IMF, in 2010, Palau’s public sector spending was projected at 

approximately 42 percent of its GDP. 
 

Page 5 GAO-12-798T 

Table 1: Key Provisions of Palau Compact of Free Association and Subsidiary Agreements 

Compact section Description of key provisions 

Title one: 

Government Relations 

Sovereignty 

Established Palau as a self-governing nation with the capacity to conduct its own foreign affairs. 

Immigration privileges 

Provided Palauan citizens with certain immigration privileges, such as the rights to work and live in the 

United States indefinitely and to enter the United States without a visa or passport. This privilege remains in 

effect as long as the compact agreement is not amended by mutual agreement or mutually or unilaterally 

terminated. 

Title two: 

Economic Relations 

Compact direct assistance 

Established 15-year term of budgetary support for Palau, beginning on compact’s effective date. This 

support included direct assistance for current account operations and maintenance and for specific needs 

such as energy production, capital improvement projects, health, and education. 

Trust fund 

Required the United States to contribute to a trust fund for Palau. 

Compact Road 

Required the United States to construct a road system (the Compact Road).a 

Compact federal services 

Required the United States to make available certain federal services and related programs to Palau, such 

as postal, weather, and aviation. The compact subsidiary agreement implementing such services was in 

force until October 1, 2009.b 

Accountability for compact funds 

Required Palau to report on its use of compact funds and required the U.S. government, in consultation with 

Palau, to implement procedures for periodic audits of all grants and other assistance.c

Title three: 

Security and Defense 

Relations 

U.S. authority for security and defense matters 

Established that the United States has full authority and responsibility for security and defense matters in or 

relating to Palau, would take action to meet the danger of an attack on Palau, and may conduct activities on 

land, water, and airspace as necessary. 

Strategic denial 

Foreclosed Palau to the military of any nation except the United States, unless they are invited by the United 

States and under the control of the U. S. armed forces. 

U.S. defense sites and operating rights 

Established that the United States may establish land and sea defense sites in Palau and has certain military 

operating rights. The subsidiary agreement implementing this provision provides the United States exclusive 

use of certain land adjoining the airport and certain submerged land in Malakal Harbor and remains in effect 

through 2044. 

Service in the armed forces 

Established eligibility of Palau citizens to serve in the U.S. armed forces. 

The provisions on U.S. authority for security and defense matters, U.S. defense sites and operating rights, 

and service in the armed forces remain in effect unless the compact is terminated by mutual agreement or, if 

the compact is unilaterally terminated, until October 1, 2044, and thereafter as mutually agreed. The 

strategic denial provision remains in effect through 2044 and thereafter until terminated or otherwise 

amended by mutual consent. 
 

Page 6 GAO-12-798T 

Compact section Description of key provisions 

Title four: 

General Provisions 

Established general provisions regarding approval and effective date of the compact, conference and 

dispute resolution procedures, and compact termination procedures. Required reviews of its terms on the 

15th, 30th, and 40th anniversaries of the compact’s entry into force—that is, in 2009, 2024, and 2034, 

respectively. 

Source: GAO analysis of the Compact of Free Association between the Government of the United States and the Government of the 

Republic of Palau. 

Notes: 

The compact’s subsidiary agreements relate to specific titles of the compact and, in many cases, 

contain implementing details of compact provisions. 

Years are fiscal (Oct. 1-Sept. 30). 

a

The compact called for the United States to build the Compact Road according to mutually agreed 

specifications before October 1, 2000. The road was completed and turned over to Palau on 

October 1, 2007. See GAO-08-732, appendix V, for more information. 

b

Federal Programs and Services Agreement Concluded Pursuant to Article II of Title Two and Section 

232 of the Compact of Free Association, which took effect in 1995, established the legal status of 

programs and related services, federal agencies, U.S. contractors, and personnel of U.S. agencies 

implementing both compact federal services and discretionary federal programs in Palau. Under this 

agreement, the United States Postal Service (USPS) conveys mail between the United States and 

Palau and offers other services such as Priority Mail®, Collect on Delivery, and USPS Domestic 

Money Orders. Palau maintains its own postal service for internal mail delivery. Under this 

agreement, the National Weather Service reimburses Palau for the cost of operating its weather 

station in Palau, which performs upper air observations twice daily and as requested for the purpose 

of Palau’s airport operations and the tracking of cyclones that may impact other U.S. territories such 

as Guam; and the Federal Aviation Administration provides aviation services to Palau, including enroute air traffic control from the mainland United States, flight inspection of airport navigation aids, 

and technical assistance and training. 

c

In August 2012, the government of Palau submitted its annual single audit for fiscal year 2010 that 

was due in June 2011. However, the government of Palau has not yet submitted its annual single 

audit for fiscal year 2011 that was due in June 2012. 

In addition to the U.S. assistance provided under the compact, U.S. 

agencies—the Department of Education, the Department of Health and 

Human Services (HHS), and Interior, among others—provide 

discretionary federal programs in Palau as authorized by U.S. legislation16

and with appropriations from Congress. (See app. II for a complete listing 

of these programs in Palau.) 

In our 2008 report, we projected that U.S. assistance to Palau from 1995 

through 2009 would exceed $852 million. Of this total, economic 

assistance under the compact accounts for a projected 68 percent and 

 

16The compact’s federal programs and services agreement, establishing the legislative 

framework for the provision of discretionary federal programs in Palau, was in force until 

October 1, 2009. These services continued under program authority in 2010 and 2011. 
 

Page 7 GAO-12-798T 

discretionary federal programs account for a projected 31 percent (see 

fig. 1).17

Figure 1: U.S. Assistance to Palau in 1995-2009 as Projected in 2008 

Notes: 

Years are fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

Percentages may not sum to 100 because of rounding. 

Amounts shown for compact direct assistance, compact trust fund contributions, and the Compact 

Road are based on Interior’s Office of Insular Affairs’ actual and estimated payments to Palau for 

1995-2009, as reported in Interior’s budget justification to Congress for 2009. 

Amount shown for compact federal services is based on GAO estimates of past expenditures by the 

National Weather Service, U.S. Postal Service, and Federal Aviation Administration. 

 

17GAO-08-732. 
 

Page 8 GAO-12-798T 

Amount shown for estimated discretionary federal programs is the sum of (1) U.S. agency program 

expenditures as reported in single audits for 1995-2006 for the Palau national government and for 

1997-2006 for the Palau Community Action Agency and the Palau Community College, (2) GAO 

estimates of U.S. agency program expenditures for 2007-2009, and (3) GAO estimates of DOD Civic 

Action Team costs for 1995-2009. Estimated and projected federal program expenditures do not 

include the value of U.S. loans to Palau. For more information, see GAO-08-732. 

The September 2010 Agreement between the U.S. and Palau 

governments would extend assistance to Palau to 2024 but steadily 

reduce the annual amount provided. The Agreement would also extend 

the authority and framework for U.S. agencies to continue compact 

federal services and discretionary federal programs.18

Key provisions of the Agreement would include, among others, extending 

direct economic assistance to Palau, providing infrastructure project 

grants and contributions to an infrastructure maintenance fund, 

establishing a fiscal consolidation fund, and making changes to the trust 

fund. U.S. assistance to Palau under the Agreement would total 

approximately $215 million through 2024.19

Legislation implementing the Agreement was not approved by Congress 

during 2011. Department of the Interior provided $13.1 million for direct 

economic assistance in 2011 and again in 2012; however, funds were not 

provided either year for infrastructure projects, the infrastructure 

maintenance fund, or the fiscal consolidation fund. 

 Direct economic assistance ($107.5 million). Under the Agreement, 

the U.S. government would provide direct economic assistance—

 

18Other 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. 

19The compact provided for direct assistance to Palau only through 2009. For 2010 

through 2012, Interior provided $13.1 million for direct assistance to Palau each year. For 

2013, Interior’s Budget Justification proposed $34 million in direct assistance, while the 

Agreement provides for $25.5 million. 

Agreement Would 

Extend U.S. 

Assistance for 15 

Years, with Annual 

Decreases 

Assistance to Palau Would 

Decline through 2024 
 

Page 9 GAO-12-798T 

budgetary support for Palau government operations and specific 

needs such as administration of justice and public safety, health, and 

education—amounting to $13 million in 2011 and declining to $2 

million by 2023.20 The Agreement also calls for the U.S. and Palau 

governments to establish a five-member Advisory Group to provide 

annual recommendations and timelines for economic, financial, and 

management reforms. The Advisory Group must report on Palau’s 

progress in implementing these or other reforms, prior to annual U.S.-

Palau economic consultations.21 These consultations are to review 

Palau’s progress in achieving reforms22 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. 

 Infrastructure projects ($40 million). Under the Agreement, the U.S. 

government would provide U.S. infrastructure project grants to Palau 

for mutually agreed infrastructure projects—$8 million annually through 

2013,23 $6 million in 2014, and $5 million in both 2015 and 2016. The 

Agreement requires Palau to provide a detailed project budget and 

certified scope of work for any projects receiving these funds. 

 Infrastructure maintenance fund ($28 million). Under the Agreement, 

the U.S. government would make contributions to a fund to be used 

for maintenance of U.S.-financed major capital improvement projects, 

 

20Congress did not pass legislation appropriating funds for this assistance in 2011 and 

therefore the earliest this assistance can begin is 2012. 

21The 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. 

22The 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. 

23Under the Agreement, the U.S. government would have provided U.S. infrastructure 

project grants amounting to $8 million in 2011; however, Congress did not pass legislation 

appropriating such funds in 2011. 
 

Page 10 GAO-12-798T 

including the Compact Road and Airai International Airport.24 Through 

2024,25 the U.S. government would contribute $2 million annually, and 

the Palau government would contribute $600,000 annually to the 

fund.26

 Fiscal consolidation fund ($10 million). Under the Agreement, the U.S. 

government would provide grants of $5 million each in 201127 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). Under the Agreement, the U.S. 

government would contribute $30.25 million to the fund from 2013 

through 2023. The government of Palau will reduce its previously 

scheduled withdrawals from the fund by $89 million.28 From 2024 

through 2044, Palau can withdraw up to $15 million annually, as 

originally scheduled. Moneys from the trust fund account cannot be 

spent on state block grants, operations of the office of the President of 

Palau, the Olibiil Era Kelulau (Palau National Congress), or the Palau 

 

24In 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. 

25The Agreement states that the United States shall provide a grant beginning in 2011. 

However, Congress did not pass legislation appropriating funds for this purpose in 2011 

and therefore the earliest the U.S. contributions can begin is 2012. 

26Under 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. 

27Although the Agreement states that the United States shall provide a grant beginning in 

2011, Congress did not pass legislation appropriating funds for this purpose in 2011 and 

therefore the earliest the U.S. contributions can begin is 2012. 

28Under 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. 
 

Page 11 GAO-12-798T 

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. 

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: U.S. Assistance to Palau for 2011-2024, as Outlined in the Agreement 

Notes: 

Years are fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

Compact federal services and discretionary federal programs are not included in this analysis. 

Funds were not provided in 2011 or 2012 to date for infrastructure projects, the infrastructure 

maintenance fund, or the fiscal consolidation fund. 
 

Page 12 GAO-12-798T 

The Agreement would extend the authority for the provision of compact 

federal services and discretionary programs in Palau. 

 Federal services. The Agreement would amend the compact’s 

subsidiary agreements regarding federal services. Specifically, the 

Agreement amends the terms of postal, weather, and aviation 

services to Palau. 

 Federal discretionary programs. The Agreement would extend the 

framework for U.S. agencies to provide discretionary federal programs 

to Palau, with implementation of the programs contingent on annual 

appropriations to those agencies. 

The addition of $30.25 million in U.S. contributions and the delay of $89 

million in Palau withdrawals through 2023, as provided by the Agreement, 

would improve the fund’s prospects for sustaining scheduled payments 

through 2044. At the end of June 2012, the fund had a balance of 

approximately $163 million. The trust fund would need a 5.0 percent 

annual return to yield the proposed withdrawals from 2011 through 2044 

under the Agreement. This rate is well below the 7.9 percent return that 

the fund earned from its inception to June 30, 2012.29 Figure 3 shows 

projected trust fund balances in 2012 through 2044 under the Agreement, 

with varying rates of return. 

 

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

noted. 

Agreement Would 

Continue Compact Federal 

Services and Extend 

Framework for 

Discretionary Federal 

Programs 

Agreement’s 

Provisions Would 

Significantly Improve 

Prospects for Palau 

Trust Fund 
 

Page 13 GAO-12-798T 

Figure 3: Projected Palau Trust Fund Balance under the Agreement, with Varying Rates of Return, 2012-2044 

Notes: 

Years are fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

The analysis shown is based on the fund’s balance as of September 30, 2011, and assumes that the 

Agreement’s provisions related to the trust fund—including additional U.S. contributions and reduced 

Palau withdrawals through 2023—are approved. 

The additional contributions and reduced withdrawals scheduled in the 

Agreement would also make the trust fund a more reliable source of 

revenue under conditions of market volatility. With these changes, the 

trust fund would have an approximately 90 percent probability of 

sustaining payments through 2044. In comparison, the fund has a 40 

percent probability of sustaining the $15 million annual withdrawals 

scheduled under the compact through 2044. 

Figure 4 compares the probability that the trust fund will sustain the 

proposed withdrawals under the terms outlined in the Agreement with the 

probability that the trust fund will sustain the withdrawals scheduled under 

the compact. 
 

Page 14 GAO-12-798T 

Figure 4: Probability That Palau Trust Fund Will Sustain Scheduled Withdrawals under Two Scenarios 

Notes: 

Years are fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

This figure depicts results from 10,000 trial runs. For each run, the returns of each asset class are 

randomly drawn from a distribution based on the historical returns. The account balances and the 

withdrawal amount from the trust fund are then calculated based on the returns and the withdrawal 

schedule. The probability of the trust fund’s being able to disburse the scheduled amount is then 

generated from a distribution of 10,000 disbursements each year. 

The figure’s upper line shows the probability that the trust fund will sustain scheduled withdrawals 

under the Agreement’s provisions of (1) annual U.S. contributions of $3 million from 2013 through 

2022 and $250,000 in 2023 and (2) annual Palau withdrawals of $5 million in 2011, gradually 

increasing to $13 million in 2023, and $15 million from 2024 through 2044. The figure’s lower line 

shows the probability that the trust fund will sustain scheduled payments under the compact’s 

provision of $15 million annual withdrawals through 2044. 
 

Page 15 GAO-12-798T 

Estimates prepared for the government of Palau project that Palau’s 

reliance on U.S. assistance provided under the Agreement will decline, 

while its reliance on trust fund withdrawals and domestic revenue will 

increase.30 These estimates show U.S. assistance, as provided under the 

Agreement, declining from 28 percent of government revenue in 2011 to 

less than 2 percent of government revenue in 2024. The estimates also 

show Palau’s trust fund withdrawals growing from 5 percent of 

government revenue in 2011 to 12 percent in 2024. In addition, the 

estimates indicate that Palau’s domestic revenue will rise from 40 percent 

of all government revenue in 2011 to 59 percent in 2024.31 Finally, the 

estimates prepared for Palau project a relatively steady reliance on U.S. 

discretionary federal programs, ranging from 12 percent of all government 

revenue in 2011 to 14 percent in 2024. The estimates assume that 

discretionary federal programs will grow at the rate of inflation; however, 

discretionary programs are subject to annual appropriations and may not 

increase over time. 

Figure 5 shows the types and amounts of Palau’s estimated revenues for 

2011 and 2024. 

 

30The 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. 

31In March 2011, the IMF reported that Palau government revenues as a percentage of 

GDP are below average for island nations in the Pacific. The report cited opportunities for 

increased tax revenues by eliminating the gross revenue tax, replacing it with a corporate 

income tax, introducing a Value Added Tax, and increasing the level of taxation on high 

earners. The IMF also noted that Palau could reform its civil service to decrease wage 

expenditures. IMF, “Staff Visit to Republic of Palau—Concluding Statement of the IMF 

Mission” (Mar. 8, 2011). 

Estimates Prepared 

for Palau Project 

Declining Reliance on 

U.S. Assistance under 

the Agreement 
 

Page 16 GAO-12-798T 

Figure 5: Estimated Palau Government Revenues for 2011 and 2024 

Notes: 

Years are fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

The years shown were chosen to illustrate the trend in Palau’s revenues from 2011, when the terms 

proposed by the Agreement would begin, through 2024, when assistance provided by the Agreement 

would expire. 

Federal services were not included in the estimates prepared for Palau. 

“Trust fund withdrawal” includes the maximum withdrawal for 2011 and 2024 as specified in the 

Agreement. 

“Assistance provided by the Agreement” includes all funding specified in the Agreement. 

“Discretionary federal programs” includes estimates prepared for the government of Palau for 

program funding and grants from U.S. agencies in 2011 and 2024. 

“Other donor assistance” includes estimates for assistance from other foreign donors for 2011 and 

2024. 

“Domestic revenue” includes estimates of taxes and fees to be collected by the Palau government in 

2011 and 2024. 
 

Page 17 GAO-12-798T 

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 from 1995 through 2009. 

Figure 6: U.S. Assistance to Palau in 2011-2024 as Estimated for Palau and as 

Provided under the Agreement 

Notes: 

Years are fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

The analysis depicted is based on the estimates prepared for the government of Palau and on the 

Agreement’s provisions. This analysis does not include federal services, which are not addressed in 

the estimate prepared for Palau and generally are not specified in the Agreement. 

Estimates Prepared for 

Palau Project 

Discretionary Program 

Funding as Half of U.S. 

Assistance 
 

Page 18 GAO-12-798T 

“Discretionary federal programs” includes all funds appropriated to federal agencies for assistance to 

Palau. The discretionary federal program estimates prepared for the government of Palau include 

annual adjustments for inflation, but not for population growth, from 2009 through 2024. Although the 

Agreement does not specify funding for discretionary federal programs, it extends authority for U.S. 

agencies to provide them in Palau subject to annual appropriations. 

Legislation has been introduced in both the Senate and the House that 

would approve and implement the September 2010 agreement between 

the U.S. and Palau governments. 

In February 2011, a bill was introduced in the Senate that would 

implement the Agreement, as written.32 The Senate bill would authorize 

and appropriate funds to Interior for specified assistance. The Senate bill 

would also extend the authority, and authorize appropriations, for the 

provision of compact federal services in Palau. However, the proposed 

legislation does not appropriate funds for compact federal services. As of 

September 2012, the Senate has not acted on this bill. 

In June 2012, a bill was introduced in the House that would approve and 

implement the Agreement, with some modifications.33 Specifically, the 

pending House bill: 

 Shifts the timing of the provision of some specified Agreement 

assistance to account for the fact that fiscal year 2011 has passed. 

 Extends the full faith and credit provision of the compact34 to the U.S. 

commitments of assistance under the Agreement for direct economic 

assistance, the trust fund, the infrastructure maintenance fund, the 

fiscal consolidation fund, and infrastructure projects. 

 Applies an inflation adjustment to the Agreement assistance for direct 

economic assistance and infrastructure project grants, and payments 

 

32S. 343. 

33H.R. 6040. 

34Pursuant to this compact provision, should the United States fail to provide a payment 

covered by the pledge, Palau would be able to seek relief in the U.S. Claims Court or its 

successor court. 

Pending Legislation 

Would Approve and 

Implement the 

Agreement 
 

Page 19 GAO-12-798T 

to the trust fund, infrastructure maintenance fund, and fiscal 

consolidation fund.35 

 Extends a pledge of the full faith and credit of the United States for the 

full payment of the amounts necessary to conduct the audits of the 

assistance provided, as called for under the Agreement.36

In addition, the Senate and House bills implementing the Agreement 

would amend the sections of the Agreement that extend the authority for 

the provision of compact federal services and discretionary programs in 

Palau. The proposed Senate and House legislation would authorize 

annual appropriations for weather and aviation services.37 The proposed 

Senate and House legislation would extend the eligibility of the people, 

government, and institutions of Palau for certain discretionary programs, 

including special education and Pell grants.38 However, the proposed bills 

differ in how they would authorize appropriations to subsidize postal 

service to Palau, the Republic of the Marshall Islands, and the Federated 

States of Micronesia. The Senate legislation would have authorized 

appropriations of $1.5 million to Interior for 2011 through 2024, to 

subsidize postal services provided by the U.S. Postal Service.39 The 

proposed House legislation would authorize appropriations of $1.5 million 

to Interior beginning in 2012 and through 2024, to subsidize postal 

services. Under the proposed House bill, Interior would be authorized to 

transfer these funds to the U.S. Postal Service under the condition that 

domestic postage may be used for mail to these countries.40

 

35Adjusting direct economic assistance, infrastructure project grants, and payments to the 

trust fund, infrastructure maintenance fund, and fiscal consolidation fund for inflation would 

increase the value of U.S. assistance to Palau. Our analysis shows that adjusting for 

inflation and reducing fiscal consolidation fund as outlined in H.R. 6040, the value of U.S. 

contributions would increase approximately $12 million. 

36Under the Agreement, the government of Palau is to bear the cost of these audits. 

According to an Interior official, the cost of the audits is approximately $500,000 per year. 

37S. 343 as introduced in the Senate and H.R. 6040 as introduced in the House. 

38Ibid. 

39S. 343.

40H.R. 6040.
 

Page 20 GAO-12-798T 

Chairman Fleming, Ranking Member Sablan, and Members of the 

Subcommittee, this completes my prepared statement. I would be happy 

to respond to any questions you may have at this time. 

For further information about this statement, please contact David 

Gootnick at (202) 512-3149 or gootnickd@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this statement. 

Emil Friberg (Assistant Director), Ming Chen, David Dayton, Brian 

Hackney, Reid Lowe, Grace Lui, and Valérie L. Nowak made key 

contributions to this statement. Robert Alarapon, Benjamin Bolitzer, 

Rhonda Horried, Farahnaaz Khakoo, Jeremy Sebest, Cynthia Taylor, and 

Anu Mittal provided technical assistance. 

GAO Contact and 

Staff 

Acknowledgments 
Appendix I: U.S. Assistance to Palau Provided 

Under the Compact and Outlined in the 

Agreement 

Page 21 GAO-12-798T 

Table 2 shows the assistance provided to Palau under the compact from 

1995 through 2009. Table 3 shows the proposed assistance to Palau for 

2011 through 2024, as outlined in the Agreement. 

Table 2: Compact Assistance Provided to Palau in 1995-2009 

Dollars in millions 

Types of 

assistance 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total

Direct 

assistance $126.5 $23.5 $22.4 $21.2 $13.6 $13.6 $13.8 $13.9 $14.1 $14.1 $12.7 $12.8 $12.9 $13.0 $13.1 $341.1

Infrastructure 53.0 0 96.0 0 0 0 0 0 0 0 0 0 0 0 0 149.0

Trust fund 

contributions 66.0 0 4.0 0 0 0 0 0 0 0 0 0 0 0 0 70.0

Total $245.5 $23.5 $122.4 $21.2 $13.6 $13.6 $13.8 $13.9 $14.1 $14.1 $12.7 $12.8 $12.9 $13.0 $13.1 $560.1

Source: GAO analysis of the Interior OIA Budget Justifications and Performance Information fiscal year 2012. 

Note: Years are fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

Table 3: Proposed Assistance to Palau as Outlined in the Agreement 

Dollars in millions 

Types of 

assistance 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total

Trust fund 

contributions $0 $0 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $0.25 $0 $30.25

Infrastructure 

maintenance 

fund 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 28.00

Infrastructure 

project 

grants 8.00 8.00 8.00 6.00 5.00 5.00 0 0 0 0 0 0 0 0 40.00

Fiscal 

consolidation 

fund 5.00 5.00 0 0 0 0 0 0 0 0 0 0 0 0 10.00

Direct 

economic 

assistance 13.00 12.75 12.50 12.00 11.50 10.00 8.50 7.25 6.00 5.00 4.00 3.00 2.00 0 107.50

Total $28.00 $27.75 $25.50 $23.00 $21.50 $20.00 $13.50 $12.25 $11.00 $10.00 $9.00 $8.00 $4.25 $2.00 $215.75

Source: GAO analysis of the Agreement between the U.S. government and the government of the Republic of Palau following the 

Compact of Free Association Section 432 review. 

Note: Years are fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

Appendix I: U.S. Assistance to Palau 

Provided Under the Compact and Outlined in 

the Agreement 
Appendix II: U.S. Discretionary Program Funds 

Expended in 2009 

Page 22 GAO-12-798T 

Table 4 lists discretionary U.S. federal program funds expended by the 

Palau national government, the Palau Community College, and the Palau 

Community Action Agency, as reported in the organizations’ single audit 

reports for 2009. 

Table 4: U.S. Federal Program Expenditure in Palau as Reported in 2009 Single Audit Reports 

U.S. agency Federal program 2009 expenditure

Agriculture Cooperative Forestry Assistance $155,422

Agriculture Community Facilities Loans and Grants 124,745

Agriculture Unknown 1,604

Commerce Special Oceanic and Atmospheric Projects 306,485

Commerce Unallied Management Projects 1

Education Pell Grant 2,250,348

Education Freely Associated States-Education Grant Program 1,309,324

Education Special Education-Grants to States 859,119

Education Upward Bound Program 315,164

Education Talent Search 204,406

Education Upward Bound Math and Science 198,998

Education Gaining Early Awareness and Readiness for Undergraduate Programs 198,205

Education Student Support Services Program 189,771

Education Special Education-Grants to States 122,755

Education Federal Work-Study 109,923

Education Academic Competitiveness Grant 78,346

Education Supplemental Educational Opportunity Grant 52,600

Education Byrd Honors Scholarships 46,500

Education Adult Education-State Grant Program 29,038

HHS Head Start 1,670,508

HHS CDC and Prevention-Investigations & Technical Assistance 976,068

HHS Consolidated Health Centers 564,525

HHS Substance Abuse and Mental Health Services-Projects of Regional and National 

Significance 

431,171

HHS National Bioterrorism Hospital Preparedness Program 387,003

HHS Public Health Emergency Preparedness 343,717

HHS Epidemiologic Research Studies of AIDS and HIV Infection in Selected Population 

Groups 

260,367

HHS Material and Child Health Federal Consolidated Programs 201,257

HHS Family Planning-Services 171,235

HHS Maternal and Child Health Services Block Grant to the States 149,718

Appendix II: U.S. Discretionary Program 

Funds Expended in 2009 
Appendix II: U.S. Discretionary Program Funds 

Expended in 2009 

Page 23 GAO-12-798T 

U.S. agency Federal program 2009 expenditure

HHS Project Grants and Cooperative Agreements for Tuberculosis Control Programs 116,313

HHS Immunization Grants 113,372

HHS Block Grants for Prevention and Treatment of Substance Abuse 111,340

HHS Universal Newborn Hearing Screening 95,591

HHS DEH-PHCI 72,266

HHS Cooperative Agreements to Support Comprehensive School Health Programs to 

Prevent the Spread of HIV and Other Important Health Problems 

67,785

HHS Basic/Core Area Health and Education Center 62,506

HHS Block Grants for Community Mental Health Services 58,245

HHS Consolidated Knowledge Development and Application (KD&A) Program 55,430

HHS Preventive Health Services - STD Control Grants 48,079

HHS Cooperative Agreements for State-Based Diabetes Control Programs and Evaluation 

and Surveillance Systems 

44,845

HHS HIV Care Grants 38,249

HHS ARRA-Grants to Health Center Programs 20,990

HHS HIV/Aids Surveillance 19,372

HHS Preventive Health and Health Services Block Grant 17,375

HHS Drug Free Communities Support Program Grants 12,759

HHS Civil Rights and Privacy Rule Compliance Activities 12,620

Interior Social, Economic and Political Development of the Territories 628,346

Interior Historical Preservation-Grants in Aid 254,436

Justice Juvenile Justice and Delinquency Prevention-Allocation to States 1

Labor ARRA WIA Dislocated Workers Program 128,027

Labor WIA Dislocated Workers Program 118,574

Labor ARRA WIA Youth Activities 81,112

Labor WIA Adult Program 63,241

Labor WIA Youth Activities 62,637

Labor ARRA WIA Adult Program 49,162

Transportation Airport Improvement Program $4,309,960

Total $18,370,956

Source: GAO analysis of Republic of Palau National Government Independent Auditor’s Reports on Internal Control and on Compliance 

Year Ended September 30, 2009; Palau Community College Comprehensive Annual Financial Report Fiscal Year Ended September 

30, 2009; and Palau Community Action Agency Report on the Audit of Financial Statements in Accordance with OMB Circular A-133 

Year Ended September 30, 2009. 

Notes: 

Year is fiscal (Oct. 1-Sept. 30), and dollar amounts are in nominal dollars (i.e., unadjusted for 

inflation). 

HHS = Department of Health and Human Services. 

(320917)
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