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H.R. 6040, ‘‘CONTINUED FREE 

ASSOCIATION WITH PALAU 

ACT OF 2012’’; AND H.R. 6147, 

‘‘RONALD WILSON REAGAN 

EXCLUSIVE ECONOMIC ZONE 

OF THE UNITED STATES’’ 

LEGISLATIVE HEARING 

BEFORE THE

SUBCOMMITTEE ON FISHERIES, WILDLIFE, 

OCEANS AND INSULAR AFFAIRS 

OF THE

COMMITTEE ON NATURAL RESOURCES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

Monday, September 10, 2012 

Serial No. 112–127 

Printed for the use of the Committee on Natural Resources 

( 

Available via the World Wide Web: http://www.fdsys.gov 

or 

Committee address: http://naturalresources.house.gov 
(II) 

COMMITTEE ON NATURAL RESOURCES 

DOC HASTINGS, WA, Chairman 

EDWARD J. MARKEY, MA, Ranking Democratic Member 

Don Young, AK 

John J. Duncan, Jr., TN 

Louie Gohmert, TX 

Rob Bishop, UT 

Doug Lamborn, CO 

Robert J. Wittman, VA 

Paul C. Broun, GA 

John Fleming, LA 

Mike Coffman, CO 

Tom McClintock, CA 

Glenn Thompson, PA 

Jeff Denham, CA 

Dan Benishek, MI 

David Rivera, FL 

Jeff Duncan, SC 

Scott R. Tipton, CO 

Paul A. Gosar, AZ 

Rau ́l R. Labrador, ID 

Kristi L. Noem, SD 

Steve Southerland II, FL 

Bill Flores, TX 

Andy Harris, MD 

Jeffrey M. Landry, LA 

Jon Runyan, NJ 

Bill Johnson, OH 

Mark E. Amodei, NV 

Dale E. Kildee, MI 

Peter A. DeFazio, OR 

Eni F.H. Faleomavaega, AS 

Frank Pallone, Jr., NJ 

Grace F. Napolitano, CA 

Rush D. Holt, NJ 

Rau ́l M. Grijalva, AZ 

Madeleine Z. Bordallo, GU 

Jim Costa, CA 

Dan Boren, OK 

Gregorio Kilili Camacho Sablan, CNMI 

Martin Heinrich, NM 

Ben Ray Luja ́n, NM 

Betty Sutton, OH 

Niki Tsongas, MA 

Pedro R. Pierluisi, PR 

John Garamendi, CA 

Colleen W. Hanabusa, HI 

Paul Tonko, NY 

Vacancy 

Todd Young, Chief of Staff 

Lisa Pittman, Chief Counsel 

Jeffrey Duncan, Democratic Staff Director 

David Watkins, Democratic Chief Counsel 

SUBCOMMITTEE ON FISHERIES, WILDLIFE, OCEANS 

AND INSULAR AFFAIRS 

JOHN FLEMING, LA, Chairman 

GREGORIO KILILI CAMACHO SABLAN, CNMI, Ranking Democratic Member 

Don Young, AK 

Robert J. Wittman, VA 

Jeff Duncan, SC 

Steve Southerland, II, FL 

Bill Flores, TX 

Andy Harris, MD 

Jeffrey M. Landry, LA 

Jon Runyan, NJ 

Doc Hastings, WA, ex officio 

Eni F.H. Faleomavaega, AS 

Frank Pallone, Jr., NJ 

Madeleine Z. Bordallo, GU 

Pedro R. Pierluisi, PR 

Colleen W. Hanabusa, HI 

Dan Boren, OK 

Edward J. Markey, MA, ex officio 
(III) 

CONTENTS 

Page 

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

Statement of Members: 

Faleomavaega, Hon. Eni F.H., a Delegate in Congress from American 

Samoa, Prepared statement of ..................................................................... 41 

Fleming, Hon. John, a Representative in Congress from the State of 

Louisiana ....................................................................................................... 1 

Prepared statement of ............................................................................... 3 

Sablan, Hon. Gregorio Kilili Camacho, a Delegate in Congress from the 

Commonwealth of the Northern Mariana Islands ..................................... 4 

Prepared statement of ............................................................................... 5 

Statement of Witnesses: 

Babauta, Hon. Anthony M., Assistant Secretary, Office of Insular Affairs, 

U.S. Department of the Interior .................................................................. 9 

Prepared statement on H.R. 6040 and H.R. 6147 ................................. 11 

Gootnick, David, Director, International Affairs and Trade, U.S. 

Government Accountability Office ............................................................... 20 

Prepared statement on H.R. 6040 ........................................................... 22 

Issa, Hon. Darrell E., a Representative in Congress from the State of 

California, Statement submitted for the record on H.R. 6147 ................. 7 

Kagan, Hon. Edgard D., Deputy Assistant Secretary, Bureau of East 

Asian and Pacific Affairs, U.S. Department of State ................................. 14 

Prepared statement on H.R. 6040 ........................................................... 16 

Additional materials supplied: 

Bordallo, Hon. Madeleine Z., a Delegate in Congress from Guam, Maps 

and Washington Post article, ‘‘U.S. model for a future war fans tensions 

with China and inside Pentagon,’’ submitted for the record ..................... 44 

Manzullo, Hon. Donald A., Chairman, Subcommittee on Asia and the 

Pacific, House Committee on Foreign Affairs, Statement submitted for 

the record ....................................................................................................... 8 

Singh, Vikram J., Deputy Assistant Secretary of Defense for South and 

Southeast Asia, Office of the Secretary of Defense for Policy, U.S. 

Department of Defense, Statement submitted for the record ................... 65 

(1) 

LEGISLATIVE HEARING ON H.R. 6040, TO 

APPROVE THE AGREEMENT PROVIDING 

TERMS FOR A CONTINUATION OF THE 

FREE ASSOCIATION BETWEEN THE UNITED 

STATES AND PALAU, AND FOR OTHER PURPOSES. ‘‘CONTINUED FREE ASSOCIATION 

WITH PALAU ACT OF 2012’’; AND H.R. 6147, 

TO DESIGNATE THE EXCLUSIVE ECONOMIC 

ZONE OF THE UNITED STATES AS THE 

‘‘RONALD WILSON REAGAN EXCLUSIVE 

ECONOMIC ZONE OF THE UNITED STATES’’. 

Monday, September 10, 2012 

U.S. House of Representatives 

Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs 

Committee on Natural Resources 

Washington, D.C. 

The Subcommittee met, pursuant to call, at 2:28 p.m., in Room 

1334, Longworth House Office Building, Hon. John Fleming [Chairman of the Subcommittee] presiding. 

Present: Representatives Fleming, Sablan, Faleomavaega, and 

Bordallo. 

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

Dr. FLEMING. The Subcommittee will come to order. The Chairman notes the presence of a quorum. Good afternoon. Today we are 

holding a legislative hearing on H.R. 6040, the Continued Free Association with Palau Act of 2012. And because of some last minute 

changes, we will not be hearing our second panel today. H.R. 6040 

was introduced by Congressman Donald Manzullo, Chairman of the 

House Foreign Affairs Subcommittee on Asia and the Pacific. His 

legislation would implement the 15-year review that was conducted 

pursuant to Section 432 of the Compact. 

The Foreign Affairs and Natural Resources Committees shared 

jurisdiction over this issue. This Committee’s oversight responsibilities cover the Department of the Interior’s role in implementing 

the Compact’s funding provisions. 

It has been a long road in getting to this point to having a hearing on this issue. The Administration forwarded the proposal to 

Congress in January 2011. While the Administration’s draft bill 

was not introduced in the House, the intent of it and H.R. 6040 

are the same. Implementation of the 15-year review agreement 

signed by the U.S. and Palau. 
2 

The Compact with Palau went into effect in 1994. The first 15- 

year review was scheduled for 2009, but was delayed due to the 

transition between the Bush and Obama Administrations. The renegotiated agreement was signed by both parties in September 

2010. Under the Compact, Palau is self-governing, conducts its own 

foreign affairs and regulates its domestic and foreign communications. The Compact gives the U.S. full authority and responsibility 

for security and defense matters relating to Palau. 

As a member of the House Armed Services Committee, I am familiar with the Administration’s pivot to Asia, the current concerns 

within the region and how the Compact provides the U.S. with the 

options for forward positioning of military assets in the region. The 

Compact also provides financial assistance, including direct economic assistance and access to Federal programs to Palau. While 

the proposed financial package of $427 million, with $215 million 

in mandatory funds is substantially less than the $825 million, 

with $411 million in direct assistance provided to Palau in the first 

15-year period of the Compact, the new funding will need to be 

fully offset as required by the Rules of the House. 

H.R. 6040 is introduced and included in some offsets for the 

mandatory funding. At the Asia and Pacific Subcommittee markup, 

these offsets were replaced with an offset which would allow the 

Secretary of State to deny passports to individuals with tax debts 

over $50,000. It is my understanding that this offset may not work 

as drafted and an alternative approach may be necessary. 

I am interested to hear from the Administration witnesses to see 

if they can recommend any new offset proposals. The previously 

recommended offsets regarding net receipt sharing of energy and 

mineral receipts, coal mining reforms and fees on nonproducing oil 

and gas leases are not acceptable to either the House or Senate 

committees. 

Today’s hearing is an important opportunity to discuss the Palau 

Compact and provide Members with the information on the benefits of the agreement to the United States and the Republic of 

Palau. 

It is unfortunate that the Department of Defense decided to submit only written testimony. One of the points given to support the 

Compact is national defense. I believe their presence would have 

been useful at this hearing. 

The second bill—I am sorry, we are not going to take up the second bill. Oh, we are? OK, I am sorry. The second bill we will examine is H.R. 6147 introduced by the Chairman of the Committee on 

Oversight and Government Reform, Congressman Darrell Issa of 

California. This proposal will designate our exclusive economic 

zone as the Ronald Wilson Reagan Exclusive Economic Zone of the 

United States. This a fitting tribute to our 40th President who established our 200-mile zone by signing a Presidential Proclamation 

on March 10, 1983. 

Ronald Reagan was one of our Nation’s greatest Presidents. As 

someone who grew up during the darkest days of the Cold War, I 

will always be grateful that because of his peace through strength 

doctrine, the Cold War ended and the Soviet Union collapsed. 

President Reagan was also responsible for proposing the largest tax 

cut in our Nation’s history. And when he left office in 1989, our na-
3 

tional debt was $2.6 trillion. Today it is 8 times higher and has increased more than $5 trillion during just the last 4 years. While 

some may characterize this designation as trivial, I strongly disagree and I am pleased to support this effort. I compliment the 

gentleman from California for his leadership on behalf of the Great 

American patriot, who is fond of telling us that America was truly 

that shining city upon a hill. 

[The prepared statement of Dr. Fleming follows:] 

Statement of The Honorable John Fleming, Chairman, 

Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs 

Good afternoon, today we are holding a legislative hearing on H.R. 6040, the Continued Free Association with Palau Act of 2012 and H.R. 6147, the Ronald Wilson 

Reagan Exclusive Economic Zone of the United States. 

H.R. 6040 was introduced by Congressman Donald Manzullo, Chairman of the 

House Foreign Affairs Subcommittee on Asia and the Pacific. His legislation would 

implement the 15-year review that was conducted pursuant to Section 432 of the 

Compact. The Foreign Affairs and Natural Resources Committee’s share jurisdiction 

over this issue. This Committee’s oversight responsibilities cover the Department of 

the Interior’s role in implementing the Compact’s funding provisions. 

It’s been a long road in getting to this point to have a hearing on this issue. The 

Administration forwarded a proposal to Congress in January of 2011. While the Administration’s draft bill was not introduced in the House, the intent of it and 

H.R. 6040 are the same—implementation of the 15-year review agreement signed 

by the U.S. and Palau. 

The Compact with Palau went into effect in 1994. The first 15-year review was 

scheduled for 2009, but was delayed due to the transition between the Bush and 

Obama Administrations. The renegotiated agreement was signed by both parties in 

September of 2010. 

Under the Compact, Palau is self-governing, conducts its own foreign affairs and 

regulates its domestic and foreign communications. The Compact gives the U.S. full 

authority and responsibility for security and defense matters relating to Palau. As 

a member of the House Armed Services Committee, I am familiar with Administration’s pivot to Asia, the current concerns within the region and how the Compact 

provides the U.S. with options for forward positioning of military assets in the region. 

The Compact also provides financial assistance, direct economic assistance, and 

access to federal programs to Palau. While the proposed financial package of $215 

million is substantially less than the $852 million provided to Palau in the first 15- 

year period of the Compact, it is funding that will need to be fully offset as required 

by the Rules of the House. H.R. 6040 as introduced included some offsets for the 

mandatory funding. At the Asia and the Pacific Subcommittee markup, these offsets 

were replaced with an offset which would allow the Secretary of State to deny passports to individuals with tax debts over $50,000. It is my understanding that this 

offset may not work as drafted and an alternative approach may be necessary. 

I am interested to hear from the Administration witnesses to see if they can recommend any new offset proposals. The previously recommended offsets regarding 

‘‘net receipts sharing’’ of energy and mineral receipts, coal mining reforms and fees 

on nonproducing oil and gas leases are not acceptable to either the House or Senate 

Committees. 

Today’s hearing is an important opportunity to discuss the Palau Compact and 

provide Members with information on the benefits of the agreement to the United 

States and the Republic of Palau. 

The second bill we will examine is H.R. 6147, introduced by the Chairman of the 

Committee on Oversight and Government Reform, Congressman Darrell Issa of 

California. 

This proposal will designate our Exclusive Economic Zone as the Ronald Wilson 

Reagan Exclusive Economic Zone of the United States. This is a fitting tribute to 

our 40th President who established our 200-mile zone by signing a Presidential 

Proclamation on March 10, 1983. 

Ronald Reagan was one of our nation’s greatest Presidents. As someone who grew 

up during the darkest days of the Cold War, I will always be grateful that because 

of his ‘‘Peace through Strength’’ Doctrine, the Cold War ended, the Soviet Union collapsed. 
4 

President Reagan was also responsible for proposing the largest tax cut in our nation’s history and when he left office in 1989, our national debt was $2.6 trillion. 

Today, it is eight times higher and it has increased more than $5 trillion during 

just the last four years. 

While some may characterize this designation as trivial, I strongly disagree and 

I am pleased to support this effort. I compliment the gentleman from California for 

his leadership on behalf of a great American patriot who was fond of telling us that 

America was truly that ‘‘Shining City Upon A Hill’’. 

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

STATEMENT OF THE HON. GREGORIO KILILI CAMACHO 

SABLAN, A DELEGATE IN CONGRESS FROM THE TERRITORY 

OF THE NORTHERN MARIANA ISLANDS 

Mr. SABLAN. Thank you very much, Mr. Chairman, and good 

afternoon everyone. We are here today to receive testimony on two 

bills, H.R. 6040, to approve the agreement providing for a continuation of the free association between the United States and Palau, 

and H.R. 6147, to designate the Exclusive Economic Zone of the 

United States as the Ronald Wilson Reagan Exclusive Economic 

Zone of the United States. 

I want to begin by thanking you for calling this hearing so expeditiously after Foreign Affairs Committee Chairwoman RosLehtinen made the decision to discharge H.R. 6040 from the Committee. I also want to thank Asia and Pacific Subcommittee Chairman, Don Manzullo, and my Subcommittee colleague, Eni 

Faleomavaega for introducing H.R. 6040. 

I grew up in the territory, of which Palau was a part, and I represent islands that are close by. I have observed from the front line 

the relationship between the United States and Palau all my life. 

The Secretary of Foreign Affairs of Palau was my classmate in high 

school in Chook. And I feel a special closeness to Palau and responsibility for it beyond my role as the Ranking Member of this Subcommittee. 

When Palau was a territory, this subcommittee’s predecessor had 

lead jurisdiction in the House regarding legislation concerning it. 

Now that it is a sovereign state in free association with the United 

States, lead jurisdiction is in the Asia and Pacific Subcommittee. 

This bill has been referred to the Natural Resources Committee 

and our Subcommittee primarily because of the provision that 

would require the Secretary of the Interior to report to the Committees on Foreign Affairs and Natural Resources, and the Senate 

Committee on Energy and Natural Resources annually on newest 

programs in Palau otherwise considered domestic. The Secretary 

also has responsibility for administering special assistance given to 

Palau which implicates our jurisdiction. But the Committee on Foreign Affairs has the jurisdiction regarding the types and levels of 

assistance and other policies concerning Palau. 

The United States took Palau and other Micronesian Islands that 

became the territory I mentioned from Japan through some the 

bloodiest battles of World War II and governed it for half a century 

under an agreement with the United Nations that required economic and social assistance and eventual self-government. To preserve strategic control over the islands of the self-government, our 
5 

government encourages the status of free association as an alternative to independence and extended domestic programs. 

The Compact of Free Association negotiated by the Reagan Administration approved by law by the George H.W. Bush Administration preserved United States strategic authority over the lands 

and waters of Palau and confirms space rights for 50 years. It also 

requires bilateral negotiations on continuing their relationship and 

to determine United States assistance and the 15, 30 and 40-year 

marks of this 50 years. 

The Asia and Pacific Subcommittee bill would approve an agreement approved by the 15th anniversary negotiations, and slightly 

modified to address Palauan concerns. Continued arrangements, 

the Reagan negotiated compact and be consistent with the revised 

Compacts of Free Association with the two other Pacific states that 

came out of the territory as approved by the Republican Congress 

in 2003. That approval included some Congressional modifications 

to the negotiated Compact. 

President Toribiong of Palau wrote 3 months ago that the 21 

months that have elapsed since the agreement was signed has 

caused an increasing number of Palauans to question their agreement and the commitment of the United States to the free association relationship. And resulted in some Palauans being enticed by 

the potential assistance from China and offers of funding from 

Arab nations. 

The Defense Department has advised that failure to follow 

through under the commitments to Palau as reflected in the proposed agreed legislation would jeopardize our defense posture in 

the Western Pacific, which will become increasingly important. It 

says that Palau is irreplaceable because it covers a strategic expanse of the Pacific as large as the State of Texas, and the free association right of the U.S. to deny access to other nations prevents 

China from using ceilings that it wants to develop its economy and 

increase its military protection in the region. 

The State Department additionally said that continuing the association is vital, in addition because Palau votes with the United 

States in the United Nations more than any other member—which 

is especially important on issues such as Israel. 

Mr. Chairman, the agreement was signed 2 years and 1 week 

ago. The Executive Branch asked us to approve it at the beginning 

of this Congress. A number of leaders in both parties, in both 

Houses have supported the agreement from the first, and no Member has criticized it. The only problem with approval has been how 

to offset the cost. We should do our part and act to facilitate House 

passage as soon as possible. Mr. Chairman, I would like insert for 

the record my full statement, my opening statement, and I yield 

back the balance of my time. 

Dr. FLEMING. Without objection so ordered. The gentleman yields 

back. 

[The prepared statement of Mr. Sablan follows:] 

Statement of The Honorable Gregorio Kilili Camacho Sablan, Ranking 

Member, Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs 

Thank you Mr. Chairman. We are here today to receive testimony on two bills: 

H.R. 6040, to approve the Agreement providing for a continuation of the free association between the United States and Palau and H.R. 6147, to designate the exclu-
6 

sive economic zone of the United States as the ‘‘Ronald Wilson Reagan Exclusive 

Economic Zone of the United States’’. 

I want to begin by thanking you for calling this hearing so expeditiously after Foreign Affairs Committee Chairwoman Ros-Lehtinen took the decision to discharge 

H.R. 6040 from that committee. I also want to thank Asia and the Pacific Subcommittee Chairman Don Manzullo and our Subcommittee colleague, Eni 

Faleomavaega for introducing H.R. 6040. 

I grew up in the territory of which Palau was a part, and represent islands that 

are close by. I have observed from the front line the relationship between the United 

States and Palau all of my life. And I feel a special closeness to Palau and responsibility for it beyond my role as the Ranking Member of this Subcommittee. 

When Palau was a territory, this Subcommittee’s predecessor had lead jurisdiction 

in the House regarding legislation concerning it. Now that it is a sovereign state 

in free association with the U.S., lead jurisdiction is in the Asia and the Pacific Subcommittee. 

This bill has been referred to the Natural Resources Committee and our Subcommittee primarily because of the provision that would require the Secretary of the 

Interior to report to the Committees on Foreign Affairs and Natural Resources and 

the Senate Committee on Energy and Natural Resources annually on U.S. programs 

in Palau otherwise considered domestic. The Secretary also has responsibilities for 

administering special assistance given Palau, which implicates our jurisdiction. But 

the Committee on Foreign Affairs has the jurisdiction regarding the types and levels 

of assistance and other policies concerning Palau. 

The United States took Palau and the other Micronesian Islands that became the 

territory I mentioned from Japan through some of the bloodiest battles of World 

War Two and governed it for half a century under an agreement with the United 

Nations that required economic and social assistance and eventual self-government. 

To preserve strategic control over the islands after self-government, our government 

encouraged the status of free association as an alternative to independence and extended domestic programs. The Compact of Free Association negotiated by the 

Reagan Administration approved by law under the George H.W. Bush Administration preserved U.S. strategic authority over the lands and waters of Palau and confers base rights for 50 years. It also requires bilateral negotiations on continuing 

the relationship and to determine U.S. assistance at the 15, 30 & 40-year marks 

of this 50 years. 

The Asia and the Pacific Subcommittee bill would approve an agreement approved 

by the 15th anniversary negotiations and slightly modify it to address Palauan concerns, continue arrangements of the Reagan-negotiated Compact, and be consistent 

with the revised compacts of free association with the two other Pacific states that 

came out of the territory, as approved by the Republican Congress in 2003. That 

approval also included some congressional modifications to the negotiated compacts. 

President Toribiong of Palauwrote three months ago that ‘‘[t]he 21 months that 

have elapsed since the Agreement was signed has caused an increasing number of 

Palauans to question the Agreement and the commitment of the United States to 

the free association relationship’’ and ‘‘resulted in some Palauans being enticed by 

the potential of assistance from China and offers of funding from Arab nations.’’ 

The Defense Department has advised that ‘‘[f]ailure to follow through on our commitments to Palau, as reflected in the proposed legislation, would jeopardize our defense posture in the Western Pacific’’ which ‘‘will become increasingly important’’. 

It says that Palau is ‘‘irreplaceable’’ because it covers a strategic expanse of the Pacific as large as Texas, and the free association right of the U.S. to deny access to 

other nations prevents China from using sea-lanes that it wants to develop its economy and increase its military projection in the region. The State Department additionally says that continuing the association is ‘‘vital’’, in addition because Palau 

votes with the United States in the United Nations more than any other member— 

which is especially important on issues such as Israel. 

Mr. Chairman, the Agreement was signed two years and one week ago. The Executive branch asked us to approve it at the beginning of this Congress. A number 

of leaders of both parties in both houses have supported the Agreement from the 

first, and no Member has criticized it. The only problem with approval has been how 

to offset the cost. We should do our part and act to facilitate House passage as soon 

as possible. 

Our second bill, H.R. 6147, was introduced by our colleague Representative Darrell Issa, would rename the U.S. Exclusive Economic Zone (E.E.Z.) after our 40th 

President, Ronald Wilson Reagan. As we all know, the framework that allows countries to peacefully claim as sovereign territory the E.E.Z.s off of their shores is the 

United Nations Convention on the Law of the Sea (Convention). Since it was adopted in 1982, Presidents and Secretaries of State from both political parties, as well 
7 

as top U.S. military leaders have expressed strong support for joining Convention. 

Unfortunately, President Reagan was not among them. 

Ratifying the Convention is critical for our economy and our national security. 

While claiming the E.E.Z. was a step in the right direction, our grade on ensuring 

the American people a seat at the table when global ocean governance issues are 

being discussed is an ‘incomplete.’ 162 other countries have ratified the Convention, 

and are deciding on rules for accessing outer continental shelf resources, mining the 

seabed and navigating in international waters. We are on the outside looking in. I 

hope that, as we recognize the importance of our E.E.Z., we can also express our 

support to the Senate as they consider ratification of the Convention this fall. 

Thank you again Mr. Chairman. I look forward to hearing from our witnesses. 

Dr. FLEMING. We are now ready for our panel of witnesses, which 

includes The Honorable Anthony M. Babauta, Assistant Secretary 

of the Interior for Insular Affairs. Department of the Interior; The 

Honorable Edward D. Kagan, Deputy Assistant Secretary, Bureau 

of East Asian and Public Affairs with the Department of State; and 

Mr. David Gootnick, hopefully that is correct, Director, International Affairs and Trade with the Government Accountability Office. 

And before we call upon them to testify, I ask unanimous consent 

to add the statements from both Congressman Manzullo and Issa 

to the hearing record. Hearing no objection, so ordered. 

[The prepared statement of Mr. Issa follows:] 

Statement of The Honorable Darrell E. Issa, a Representative in Congress 

from the State of California 

I would like to start by thanking Chairman Fleming and Ranking Member Sablan 

for bringing up my bill H.R. 6147, the ‘‘Ronald Wilson Reagan Exclusive Economic 

Zone of the United States,’’ for consideration. I would also like to thank Chairman 

Hastings and Ranking Member Markey, of the full committee. 

On March 10, 1983 President Ronald Reagan nearly doubled the size of the 

United States with the stroke of his pen, at no cost to taxpayers, when he issued 

Proclamation 5030, establishing the United States Exclusive Economic Zone (EEZ). 

The EEZ extends U.S. sovereignty over all waters, animals, the seabed and the subsoil, up to 200 nautical miles off America’s coast, as well as off the coasts of Puerto 

Rico, the Northern Marianna Islands and other U.S. territories and possessions. The 

EEZ is consistent with domestic and international law, and ensures that the United 

States has sovereign rights for the purpose of exploring, exploiting, conserving, and 

managing living and nonliving resources off our coasts. 

We currently have the largest EEZ in the world, spanning over 13,000 miles of 

coastline and reaching the Gulf of Mexico, Caribbean Sea, Atlantic Ocean, and Pacific Ocean. President Reagan appreciated that America is blessed with an abundance of natural resources and understood that to remain competitive and to promote strong economic growth, we need to effectively develop and responsibly make 

use of our natural wealth. 

While policy debates about the management of our EEZ will certainly continue, 

the establishment of an EEZ is widely recognized around the world to be an essential component of marine conservation, resource management, and national competitiveness. As we strive to meet the challenges of maintaining our vast sovereign 

areas, we must also recognize the abundant opportunity that Ronald Reagan provided our nation when he first established our EEZ. 

In closing, I would once again like to thank Chairman Fleming and Ranking 

Member Sablan for bringing this bill before the Subcommittee on Fisheries, Wildlife, 

Oceans, and Insular Affairs and for the chance to be here. This legislation will 

honor President Reagan’s leadership and foresight in protecting U.S. interests and 

I look forward to seeing this bill brought to the House floor and eventually signed 

into law. 

[The prepared statement of Mr. Manzullo follows:] 
8 

Statement submitted for the record by The Honorable Donald A. Manzullo, 

Chairman, Subcommittee on Asia and the Pacific, House Committee on 

Foreign Affairs 

Chairman Fleming, thank you for allowing me the opportunity for me to address 

the Subcommittee. The revised Compact of Free Association agreement with the Republic of Palau is a significant topic of discussion, and I am grateful your Subcommittee is holding this hearing to bring more attention to the issue. 

The Compact with Palau was negotiated in the 1980s at the height of the Cold 

War with the goal of establishing democratic self-governance and economic self-sufficiency in Palau, while preserving strategic control of the Western Pacific. Although 

it was completed in 1986, it did not enter into force for another eight years. Thus 

in 1994, the United States and the Republic of Palau implemented a Compact of 

Free Association ending 49 years of direct American administration under the auspices of the United Nations’ Trust Territory of the Pacific Islands. 

The Compact provided for several types of assistance, including direct economic 

assistance for 15 years to the Palau government, establishment of a trust fund to 

provide Palau $15 million in annual payments from 2010 to 2044, infrastructure investments, and the provision of federal services such as postal, weather, and aviation. The Government Accountability Office, which is represented here today, estimated that Palau received a total of $852 million between 1995 and 2009. 

In late 2010, the Administration completed a 15-year review of the Compact, as 

required under the terms of the agreement, and intended to provide Palau a total 

of $215 million through the next 15-year agreement period. This revised agreement 

does not change the fundamental provisions of the original Compact; however, it 

does gradually reduce the financial support provided by the U.S. and extends the 

life of the agreement to 2024. More importantly, the revised agreement greatly improves the likelihood of the existing trust fund’s ability to sustain payments through 

to 2044, as originally planned. It also requires visitors from Palau to have a machine readable passport to enter the U.S., and it conditions future financial assistance on Palau’s progress in achieving key economic reforms. 

In late June of this year I introduced H.R. 6040, which will approve the revised 

Compact agreement, certify the United States’ commitment to Palau, and secure our 

vital interests in the Western Pacific. It is with utmost urgency that your committee 

moves this bill forward and helps push the approval of the Compact with Palau out 

of its nearly two-year deadlock in Congress. 

Palau is an important friend in the Asia-Pacific region. It is one of six Pacific Island nations to have diplomatic ties with Taiwan rather than China. According to 

the Department of Defense, Palau is irreplaceable because it covers a strategic expanse of the Pacific as large as Texas and gives the U.S. the right to deny other 

nations access to Palau’s land and waterways. This prevents nations like China 

from using sea-lanes that it wants to develop its economic and military projection 

in the region. In addition, Palau supports the U.S. on 90 percent of the votes regarding Israel at the United Nations. 

In a letter to President Obama, President Toribiong of Palau describes that during the 21 months that have lapsed since the agreement was signed, an increasing 

number of Palauans have begun to question the United States’ commitment to the 

relationship, resulting in the temptation to accept assistance offers from China, various Arab nations, or Cuba. I request that this letter be included in the record and 

stress that we cannot let this happen. 

Over the past few decades, the relationship with Palau has evolved into a strong 

partnership with people who share American values and closely identify with the 

U.S. With a number of leaders on both sides of the aisle in both chambers of Congress supporting the agreement, it is critical that Congress approves the agreement, 

outlined in H.R. 6040, to ensure the relationship stays steadfast and strong. 

Chairman Fleming, thank you again for your continued support and I look forward to working with you in the near future to finally approve the revised Compact 

of Free Association with Palau. 

Dr. FLEMING. Of course, you guys have appeared before us a 

number of times, you are well experienced with how we run our 

clocks and our microphones. As you know, your written testimony 

will appear in full in the hearing record, so I ask that you keep 

your oral statements to 5 minutes as outlined in our invitation letter to you and under Committee Rule 4(a). Our microphones are 

not automatic, so please press the button when you are ready to 
9 

begin. And the most common mistake is the mouthpiece is not close 

enough to the mouth, so please observe that. 

I also want to explain how our timing lights work, very simply, 

you have 5 minutes, you are in the green light for the first 4, yellow light for the last 1 minute, and if you are still giving your testimony at that point and the light turns red, we ask that you go 

ahead and conclude your remarks. Your entire statement will be 

entered into the record. 

Secretary Babauta, I now recognize you, sir, for 5 minutes to 

present your testimony on behalf of the Department of the Interior. 

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

OF THE INTERIOR 

Mr. BABAUTA. Thank you very much, Mr. Chairman, and members of the Subcommittee. I am pleased to be here today to discuss 

H.R. 6040 and H.R. 6147. With regard to H.R. 6040, my statement 

will focus on the financial assistance in the new agreement with 

Palau. The Compact of Free Association with Palau has proven to 

be a very successful framework for United States-Palau relations. 

The goals of the first 15 years of the Compact have been met. The 

trusteeship was terminated; Palau self-government was restored; a 

stable democratic state was established; third countries were denied military influence in the region of Palau; and with the United 

States financial assistance a base for economic growth has been 

provided. 

The original financial terms and conditions of the Compact have 

been fully implemented by the U.S. and Palau, and Palau has 

made strong economic gains under the Compact of Free Association. Its growth in real terms has averaged just over 2 percent per 

year. Palau has taken control of its destiny and is moving in the 

right direction. As both the U.S. and Palau began their Compact 

review several years ago, the U.S. and Palau agreed that economic 

growth would rely on four key factors. 

The first is the trust fund’s ability to return $15 million a year; 

the second, fiscal reforms to shrink Palau’s public sector and raise 

revenue; the third, increase foreign investment and private sector 

growth; and four, continuation of certain U.S. assistance. The new 

agreement addresses these concerns. It extends U.S. assistance in 

declining annual amounts through Fiscal Year 2024. The total of 

direct financial assistance to Palau under this agreement is $229 

million. Although $26.2 million of that amount has already been 

appropriated for direct economic assistance by Congressional action 

in Fiscal Year 2010 and in Fiscal Year 2011. An additional $13.1 

million in direct economic assistance has been appropriated to 

Palau for Fiscal Year 2012. 

The amount of direct assistance will decline every year. The declining amount of assistance is intended to provide an incentive for 

Palau to develop other sources of local revenue and the Palauan 

Government will need to make systemic adjustments in order to 

live within the same resources. The agreement contains five categories of financial assistance for Palau: The first is direct economic assistance for education, health and the administration of 

justice and public safety; the second is infrastructure projects that 
10 

are mutually agreed in the amount of $8 million in 2011 through 

2013; $6 million in 2014; and $5 million in both 2015 and 2016. 

The third category is infrastructure maintenance funds for capital projects previously financed by the United States. From 2011 

through 2024, the U.S. Government will have contributed $2 million annually, and the Palau government will have contributed 

$600,000 annually to the fund. 

The fourth category is the fiscal consolidation fund. The United States will have provided grants of $5 million in each 2011 and 

2012 to help the Palau government reduce its debt. Category 5 is 

the trust fund. The United States will contribute $3 million annually from 2013 to 2022 and contribute $250,000 in 2023 and Palau 

will delay withdrawals from the trust fund. Under the agreement 

withdrawals from the trust fund may only be used for education, 

health, administration of justice and public safety. 

We recommend several changes to H.R. 6040 with regard to the 

subsidy for the United States Postal Service, we recommend striking the second sentence of subsection 105(e). We also propose language to facilitate financing of the agreement. 

And finally, in language concerning an annual report we recommend that the consultation provisions be amended to require 

Federal agencies that administer such programs to submit annually to the Secretary of the Interior appropriate material ready for 

inclusion in the reports. 

Under the new agreement, the U.S. and Palau will work cooperatively through one, an advisory group on economic financial and 

management reform, annual bilateral economic consultations and 

the provision of other U.S. services and programs to the U.S. Postal 

Service, the National Weather Service, and FAA and the Departments of Education and Health and Human Services. The Palau 

Compact legislative proposal does have PAYGO costs. In the past, 

the Administration has proposed a number of offsets and 

H.R. 6040 would provide a number of offsets to provide offsets for 

the Palau agreement. 

The Administration looks forward to continuing the U.S. partnership of Palau, and the Department of the Interior is proud of the 

positive advancements U.S. assistance has achieved in Palau since 

1995 and looks forward to the progress that we anticipate will be 

made over the period of new agreement. 

With regard to H.R. 6147, the exclusive economic zone of the 

United States is a zone contiguous of the territorial sea of the 

United States which generally extends 200 nautical miles from the 

U.S. coastline. The EEZ applies to waters adjacent to the United 

States and United States territories and possessions. It is the largest in the world spanning over 13,000 miles of coastline, larger 

than combined land area of all 50 States. 

H.R. 6147 would designate the EEZ as the Ronald Wilson 

Reagan Exclusive Economic Zone of the United States. And although the geographic range of the EEZ is relevant to certain elements of the Department’s jurisdiction, the naming of EEZ does not 

affect any of the Department’s existing authorities or programs. 

The Department notes that it is not aware of my precedence for a 

designation of this type and therefore the Department takes no position on H.R. 6147. Thank you very much, Mr. Chairman. 
11 

Dr. FLEMING. Thank you Mr. Babauta, thank you for your testimony. 

[The prepared statement of Mr. Babauta follows:] 

Statement of Anthony M. Babauta, Assistant Secretary of the Interior– 

Insular Areas, U.S. Department of the Interior 

Chairman Fleming and members of the Subcommittee, I am pleased to be here 

today to discuss H.R. 6040 which would approve the agreement between the Government of the United States and the Government of the Republic of Palau following the Compact of Free Association section 432 review, and H.R. 6147 designating the U.S. Exclusive Economic Zone as the ‘‘Ronald Wilson Reagan Exclusive 

Economic Zone of the United States. My colleagues from the Departments of State 

and Defense will discuss the importance of the United States—Palau relationship 

as it relates to national security and our policies in the Pacific. My statement today 

regarding Palau will focus on the financial assistance components of the new agreement with Palau for which the Department of the Interior will be responsible. 

H.R. 6040 

THE UNITED STATES—PALAU RELATIONSHIP 

The Department of the Interior and the Government of Palau have been partners 

since 1951, when the Navy transferred to the Department of the Interior the administration of the United Nations Trust Territory of the Pacific Islands. Since the end 

of World War II, Palau has emerged from its status as a war-ravaged protectorate 

to become a sovereign nation and member of the world community. Consistent with 

the provisions of the 1994 Compact of Free Association, Palau has exercised its sovereignty in accordance with the principles of democracy and in a firm alliance with 

the United States. 

The Compact of Free Association has proven to be a very successful framework 

for United States—Palau relations. The goals of the first fifteen years of the Compact have been met: the trusteeship was terminated; Palau’s self-government was 

restored; a stable democratic state was established; third countries were denied 

military influence in the region of Palau; and with United States financial assistance, a base for economic growth has been provided. 

The original financial terms and conditions of the Compact have been fully implemented by the United States and Palau. The United States, through the Department of the Interior, has provided over $600 million of assistance including $149 

million used to construct the 53-mile road system on the island of Babeldoab and 

$38.7 million for health care and education block grants. Most of the funding, $400 

million, was expended on activities defined under Title Two of the Compact, which 

included general government operations, energy production, communications, capital 

improvements, health and education programs and establishment of the Compact 

Trust Fund. 

The Compact Trust Fund was an important feature of U.S. assistance. Capitalized 

with $70 million during the first three years of the agreement in the 1990s, the objective of the trust fund was to produce an average annual amount of $15 million 

as revenue for Palau government operations for the thirty-five year period fiscal 

year 2010 through fiscal year 2044. The fund also generated $5 million in annual 

operational revenue for Palau since the fourth year of the agreement, totaling $60 

million for the years 1998 through 2009. 

Palau has made strong economic gains under the Compact of Free Association. Its 

growth, in real terms, has averaged just over two percent per year. Palau’s governmental services are meeting the needs of its community. Palau has taken control 

of its destiny and is moving in the right direction. 

COMPACT REVIEW 

As both the United States and Palau began the required Compact section 432 review several years ago, each side took pride in the growth evident in Palau. However, the review, which examined the terms of the Compact and its related agreements and the overall nature of the bilateral relationship, also focused attention on 

several important issues. The United States and Palau agreed that prospects for 

continued economic growth relied on four key factors: 1) the viability of the Compact 

trust fund and its ability to return $15 million a year; 2) the implementation of fiscal reforms to close the gap between Palau’s revenues and expenditures by shrinking its public sector and raising revenue; 3) the promotion of increased foreign investment and private sector growth, and, 4) the continuation of certain United 
12 

States assistance, including access to United States Federal domestic programs and 

services. 

From the perspective of the United States, the viability of the Compact Trust 

Fund was of paramount concern. The economies of Pacific Islands are always fragile; their size, distance from markets and relative lack of resources make growth a 

perennial problem. Although Palau has some relative advantages in contrast to 

other Pacific island countries, the Compact Trust Fund was established with the intention of providing a relatively secure revenue base for Palau’s government through 

fiscal year 2044. As the 15-year review began, Palau’s trust fund, which had earned 

roughly 9 percent annually since its inception, had suffered significant losses. As 

GAO reported in 2008, it was uncertain that the trust fund could pay $15 million 

annually to the Government of Palau through fiscal year 2044. 

COMPACT AGREEMENT 

The condition of the Compact Trust Fund, the need for fiscal and economic reforms, and the goal of strengthening conditions for private sector growth became the 

focus of the bilateral review. The Agreement Between the Government of the United 

States of America and the Government of the Republic of Palau Following the Compact of Free Association Section 432 Review (Agreement) that arose from the 15-year 

review, will address these concerns, maintain stability, promote economic growth 

and increase the progress already made under the Compact of Free Association. 

The Agreement extends United States assistance, in declining annual amounts, 

through fiscal year 2024. The total of direct financial assistance to Palau under the 

Agreement is $229 million, although $26.2 million of that amount has already been 

appropriated for direct economic assistance by congressional action in fiscal year 

2010 and in fiscal year 2011. An additional $13.1 million in direct economic assistance has been appropriated to Palau in FY 2012. 

Under the Agreement, in 2011 the United States was to provide Palau $28 million, of which $13 million is the aforementioned direct assistance. The amount will 

decline every year thereafter. The declining amount of assistance is intended to provide an incentive for Palau to develop other sources of local revenue and serves notice that the Palauan government has agreed that it will need to make systemic adjustments to its government in order to live within those same resources. 

The Agreement contains five categories of financial assistance for Palau. Although 

I will discuss the Agreement as written, I note that H.R. 6040 appropriately shifts 

funding from the originally stated fiscal years to allow for implementation in the 

current year. 

Direct economic assistance. The Agreement provides for direct assistance for 

education, health, administration of justice and public safety, in amounts starting 

at $13 million in 2011, declining to $2 million, the last payment, in 2023. As discussed below, this ‘‘glidepath’’ is coupled with a gradual increase in how much Palau 

can withdraw from it’s trust fund. The timing of direct assistance payments is conditioned on Palau’s making certain fiscal reform efforts. If the United States government determines that Palau has not made meaningful progress in implementing 

meaningful reforms, direct assistance payments may be delayed until the United 

States Government determines that Palau has made sufficient progress on the reforms. 

Infrastructure projects. Under the Agreement the United States is to provide 

grants to Palau for mutually agreed infrastructure projects—$8 million in 2011 

through 2013, $6 million in 2014, and $5 million in both 2015 and 2016. The Agreement does not name any projects. 

Infrastructure maintenance fund. Under the Agreement, a trust fund will be 

established to be used for maintenance of capital projects previously financed by the 

United States, including the existing Compact Road. From 2011 through 2024, the 

United States government will have contributed $2 million annually and the Palau 

government will contribute $600,000 annually to the fund. This will protect crucial 

United States investments in Palau that significantly contribute to economic development. 

Fiscal consolidation fund. The United States will have provided grants of $5 

million each in 2011 and 2012 to help the Palau government reduce its debt. United 

States creditors must receive priority, and the Government of Palau must report 

quarterly on the use of the grants until they are expended. This fund will also simplify needed economic adjustments to Palau’s fiscal policies. 

Trust fund. The Agreement increases the size of Palau’s trust fund directly and 

indirectly to bolster the likelihood that the trust fund will yield payments of up to 

$15 million annually through 2044. First, the United States will contribute $3 million annually from 2013 through 2022 and contribute $250,000 in 2023. Second, the 
13 

Government of Palau will delay withdrawals from the fund, drawing $5 million annually through 2013 and gradually increasing its withdrawal ceiling from $5.25 million in 2014 to $13 million in 2023. From 2024 through 2044, Palau is expected to 

withdraw up to $15 million annually, as originally scheduled. Under the Agreement, 

withdrawals from the trust fund may only be used for education, health, administration of justice and public safety. 

RECOMMENDED CHANGES 

We recommend several changes to the bill. 

At present, the subsidy for the United States Postal Service (USPS) is a partial 

subsidy for domestic postage. The Agreement permits the USPS, under certain conditions, to impose international postal rates in the future. A subsidy would still be 

necessary in that event. Thus, in the amending language we recommend striking 

the language ‘‘so long as domestic postage may be used for mail to Palau, the Federated States of Micronesia, and the Marshall Islands’’ from the second sentence of 

subsection 105(e). 

Additionally, in order to facilitate financing of the agreement we would recommend including the following language in the bill: 

FUNDING FOR CERTAIN PROVISIONS UNDER SECTION 105 OF COMPACT OF

FREE ASSOCIATION.—On the date of enactment of this section, out of any 

funds in the Treasury not otherwise appropriated, the Secretary of the 

Treasury shall transfer to the Secretary of the Interior such sums as are 

necessary for the Secretary of the Interior to implement sections 1, 2(a), 3, 

4(a), and 5 of the Agreement, which sums shall remain available until expended without any further appropriation. 

Furthermore, in the amending language that would insert a paragraph (2) of subsection 105(f), the Secretary of the Interior would be required to submit an annual 

report to committees of jurisdiction on the effectiveness of assistance to Palau under 

certain United States domestic programs. We recommend that the consultation provision be amended to require Federal agencies that administer such programs to 

submit annually to the Secretary of the Interior appropriate material ready for inclusion in the reports. 

CONTINUING COOPERATION 

The United States and Palau will work cooperatively on economic reform. The 

Agreement requires the two governments to establish an advisory group to recommend economic, financial and management reforms. Palau is committed to adopting and implementing reforms. Palau will be judged on its progress in such reforms 

as the elimination of operating deficits, reduction in its annual budgets, reducing 

the number of government employees, implementing meaningful tax reform and reducing subsidies to public utilities. 

Palau’s progress in implementing reforms will be addressed at annual bilateral 

economic consultations. If the government of the United States determines that 

Palau has not made significant progress on reforms, the United States may delay 

payment of economic assistance under the Agreement. 

The Agreement also continues to provide Palau with access to other United States 

services and grant programs, including the United States Postal Service, the National Weather Service, and the Federal Aviation Administration. The Postal Service moves mail between the United States and Palau, and offers other related services. Palau maintains its own postal service for internal mail delivery. The National 

Weather Service reimburses Palau for the cost of operating its weather station in 

Palau, which performs upper air observations twice daily, as requested, for the purpose of Palau’s airport operations and the tracking of cyclones that may affect other 

United States territories, such as Guam. The Federal Aviation Administration provides aviation services to Palau, including en-route air traffic control from the mainland United States, flight inspection of airport navigation aids, and other services. 

The proposed legislation will also allow the continuance of other Federal program 

services currently available to Palau under separate authorizing legislation, including programs of the Departments of Education and Health and Human Services. 

The general authorization for Palau to receive such services was created by the 

Compact, but individual program eligibility has been created by specific laws that 

include Palau as an eligible recipient. 

OFFSETS 

The Palau Compact legislative proposal does have PAYGO costs. In the past, the 

Administration proposed a number of offsets to fund the Palau legislation, including: 
14 

• Net Receipt Sharing, which takes into account the costs of managing Federal 

oil and gas leases before revenues are shared with the States; • Terminate payments for reclaiming abandoned coal mines to states that are 

already certified as having cleaned up all of their priority sites; and • Production incentive fees on non-producing Federal oil and gas leases. 

Each example by itself could provide more than enough savings to offset the costs 

of the Palau Compact. Net Receipt Sharing, for example, which has been enacted 

for five years through annual appropriations language, would be more than sufficient to offset the cost. 

H.R. 6040 would provide for an offset to fund the Palau agreement. The Administration is still reviewing the specific language of that provision. 

The Administration looks forward to continuing the United States partnership 

with Palau. The Department of the Interior is proud of the positive advancements 

United States assistance has achieved in Palau since 1995 and looks forward to the 

progress that we anticipate will be made over the period of the new agreement. 

H.R. 6147 

The Exclusive Economic Zone (EEZ) of the United States is a zone contiguous to 

the territorial sea of the United States, which generally extends 200 nautical miles 

from the U.S. coast line, unless it would extend into or overlap with a 200 EEZ of 

an adjacent nation. The EEZ applies to waters adjacent to the United States, the 

Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands 

(consistent with the Covenant and UN Trusteeship Agreement), and United States 

territories and possessions. The U.S. EEZ is the largest in the world, spanning over 

13,000 miles of coastline and containing 3.4 million square nautical miles of ocean— 

larger than the combined land area of all fifty states. 

The 200 nautical mile EEZ was established by President Reagan through Proclamation 5030 of March 10, 1983, which affirmed that within the EEZ, the U.S. had 

sovereign rights for the purpose of exploring, exploiting, conserving and managing 

natural resources, whether living and nonliving, of the seabed and subsoil and the 

superjacent waters and with regard to other activities for the economic exploitation 

and exploration of the zone, such as the production of energy from the water, currents and winds. The Proclamation also affirmed that the U.S. had jurisdiction as 

provided for in international law with regard to the establishment and use of artificial islands, installations, and structures, marine scientific research, and the protection and preservation of the marine environment, and other rights and duties provided for under international law. Many government agencies, including the Department of the Interior and its bureaus, carry out functions in the EEZ. 

H.R. 6147 would designate the EEZ as the ‘‘Ronald Wilson Reagan Exclusive Economic Zone of the United States’’. The bill would deem any reference to the EEZ 

in a law, map regulation, document, paper, or other record of the United States to 

be a reference to the ‘‘Ronald Wilson Reagan Exclusive Economic Zone of the United 

States’’. Although the geographical range of the EEZ is relevant to certain elements 

of the Department’s jurisdiction, the naming of the EEZ does not affect any of the 

Department’s existing authorities or programs. The Department notes that it is not 

aware of any precedence for a designation of this type. Therefore, the Department 

takes no position on H.R. 6147. 

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

STATEMENT OF HON. EDWARD D. KAGAN, DEPUTY ASSISTANT 

SECRETARY, BUREAU OF EAST ASIAN AND PACIFIC 

AFFAIRS, U.S. DEPARTMENT OF STATE 

Mr. KAGAN. Mr. Chairman, Ranking Member Sablan and members of the Subcommittee, thank you very much for inviting me to 

appear before you today to testify on our important bilateral relationship with Palau. We are grateful for the sustained bipartisan 

commitment to the Compact and to that relationship. As a valuable 

contribution to this process made so far by Members of Congress—— 

Dr. FLEMING. Excuse me just a moment. We are not able to hear 

you, is the mic close enough to your mouth? 

Mr. KAGAN. Sorry about that. 
15 

Dr. FLEMING. Always an easy mistake to make. So thank you. 

Mr. KAGAN. We are grateful for the sustained bipartisan commitment to the Compact and to the relationship with Palau, and particularly to the valuable contribution to this process made so far by 

Members of Congress, including leadership of several key Committees. And although we have concerns about some of the specific 

provisions in H.R. 6040, we hope the Compact legislation will be 

passed by Congress and signed by the President as soon as possible. 

As you know, our relationship with Palau as well as with the 

rest of the Pacific Island nations is the key aspect of Administration’s focus on expending the scope and the pace of our engagement 

in the Asia-Pacific region. I just returned from accompanying Secretary Clinton to the Pacific Islands post forum dialog in the Cook 

Islands where I was grateful to be joined by my fellow witness, 

close colleague and good friend, Assistant Secretary Babauta. 

Secretary Clinton’s presence at the forum was the first by a Secretary of State in its 41-year history and highlighted our sustained 

commitment to enhancing our relationship with our Pacific partners, including Palau as part of our broader engagement with the 

Asia-Pacific region. While there, I met with Palau’s Minister of 

Justice and other senior officials and they raised the status of this 

legislation, passage of which is their highest priority in working 

with the United States. 

Mr. Chairman, as you know, the Pacific and the island countries 

that reside there are critical to our national security and are vital 

to our connection to the Asia-Pacific region. Among our many 

friends in the region, we have perhaps none closer than Palau, a 

country for which we paid a steep price to liberate in 1944. 

In terms of our foreign policy interests, we have two critical 

tasks with Palau. First is to sustain our full and reinforce our full 

authority and responsibility for the security and defense of Palau. 

And the second is to continue to strengthen our close cooperation 

with Palau which helps support our common goals in everything 

from fisheries management to human rights to countering proliferation of weapons of mass destruction. 

Under the Compact of Free Association, the United States provides for the security of Palau. The security relationship gives us 

access to Palau and its waters and the authority to deny such access by foreign military forces. The relatively modest annual cost 

associated with proposed legislation is leveraged many times over 

in the important strategic advantages this arrangement confers on 

the United States. 

In addition, as you know, under the terms of the Compact, 

Palauans are eligible to serve in the U.S. Armed Forces and they 

volunteer at the U.S. Military at a rate higher than any individual 

U.S. State. We are very grateful for their dedication and honor 

their sacrifices. 

Now Palau is, as you know, one of our closest friends and supporters. Palau is an ardent advocate for enhanced U.S. Engagement in the region and has been a very strong supporter at the 

United Nations. Palau’s voting coincidence in the most recent U.N. 

General Assembly with the United States on all votes is approximately 97 percent, which is quite high. 
16 

Our partnership goes beyond defense, we work closely with Palau 

in the fight against international crime and terror and on other 

issues. And we are particularly grateful that in 2009, Palau accepted for temporary resettlement, six ethnic Uyghur detainees from 

Guantanamo when few other countries would. 

As you know, our compact with Palau took effect in 1994. It does 

not have a termination date and requires a review on the 15-year, 

30-year, and 40-year anniversaries. The direct economic assistance 

provisions expired in 2009, and our two governments have worked 

very closely over 20 months of discussions and negotiations to conclude the 15-year review which resulted in the agreement signed 

in September 2010. The legislation will implement the outcomes of 

the review, and is important to reflect the shared commitment of 

our two governments to our continued partnership. 

I would note that there are some provisions in the current draft 

of H.R. 6040 that exceed the agreement reached between the 

United States and the Government of Palau by extending additional benefits and supplemental funding to Palau, which would 

run counter to the carefully calibrated goals of the Administration 

negotiating this agreement. We are prepared to work with the Subcommittee with interested Members to ensure legislation reflects 

the bilateral agreement reached during the Compact review. 

Palau—it is crucial that we provide Palau the assistance agreed 

to in the Compact review, and as part of agreement, as you know, 

Palauans will be required to have machine readable passports to 

travel to the United States in the future. Palau has been a staunch 

ally and is essential that we stand by our commitments. The 

Palauan people have been loyal and dedicated partners. They share 

our interest in regional international security. Failing to implement 

the 15-year review of the Compact with Palau would undermine 

our national interests. And in today’s dynamic Pacific environment, 

failure to live up to our commitments and to stand by our partners 

and longstanding friends would not go unnoticed. We believe it is 

strongly in the national interest to move quickly. We appreciate the 

interest and leadership of this Subcommittee in considering this 

legislation promptly and hope both the House and Senate will pass 

it as soon as possible. 

Thank you again, Mr. Chairman, for giving me the opportunity 

to testify before you today and to clarify the importance of this legislation. I look forward to answering your questions. 

Dr. FLEMING. Mr. Kagan, you came very close to the record of 

perfection on ending your testimony at the right moment there. We 

appreciate that. 

Mr. KAGAN. Thank you. 

[The prepared statement of Mr. Kagan follows:] 

Statement of Edgard D. Kagan Deputy Assistant Secretary of State, 

Bureau of East Asian and Pacific Affairs, U.S. Department of State 

Chairman Fleming, Ranking Member Sablan, and Members of the Subcommittee, 

thank you for inviting me to appear before you today to testify on the importance 

of our bilateral relationship with Palau as well as to discuss the Compact with 

Palau and proposed legislation approving the results of the mandated 15-year Compact review. Although we are concerned about specific provisions in H.R. 6040, the 

Continued Free Association with Palau Act of 2012, we hope the Compact review 

legislation will be passed by the Congress and signed by the President as soon as 

possible. 
17 

Our relationship with Palau, as well as that with other Compact nations and 

independent states in the Pacific, is a key aspect of the Administration’s focus on 

expanding the scope and pace of our engagement with the Asia-Pacific region, and 

specifically on ensuring that we increase our engagement with Pacific Island nations 

as we look forward to what the President has called the ‘‘Pacific Century.’’ I was 

fortunate during the first few weeks in my current position to be able to travel with 

Assistant Secretary for East Asian and Pacific Affairs Kurt Campbell to the region, 

including to Palau. My visit to Palau demonstrated to me the excellent relationship 

we enjoy with the people of Palau and President Toribiong. I just returned from accompanying Secretary Clinton to the Pacific Islands Forum Post-Forum Dialogue 

and participating in the latest round of Tuna Treaty negotiations in Vanuatu. Secretary Clinton’s presence at the Pacific Islands Forum was the first by a Secretary 

of State in its 41-year history and marked a historic level of effort and attention 

being paid by the Administration to working with our Pacific partners, including 

Palau, to address many of the problems they are facing. I was able to meet with 

Palau’s Minister of Justice and other senior officials, and they raised the status of 

the legislation, passage of which is their highest priority in working with the United 

States. 

Palau Remains a Friend and Reliable Partner 

Mr. Chairman, the vast stretch of the Pacific and the island countries that reside 

within it share an integral connection to our western border and are critical to our 

national security. Linking many of our close friends and allies, from Japan and Australia to Palau, Papua New Guinea, and Tonga, the Pacific region forms a crucial 

security arc that stretches from California to the Philippines, from Alaska to New 

Zealand. Our presence and ties to our partners in the Pacific not only safeguard our 

security interests, they also guarantee access to the critical sea lanes through which 

much of our trade flows. Among our many friends and partners in the region, we 

have perhaps none stronger than Palau, a country for which we paid a steep price 

in blood and treasure to liberate in 1944. 

Our relations with our Pacific partners are unfolding against the backdrop of a 

shifting strategic environment, where emerging powers in Asia and elsewhere seek 

to exert a greater influence in the Pacific region, through development aid, peopleto-people contacts, and security cooperation. There is greater uncertainty in the region about the United States’ willingness and ability to sustain the robust forward 

presence in the Pacific that has been a hallmark of much of the 20th century. That 

is why the Administration is putting such an effort into increasing our engagement 

not only with mainland and maritime Asia, but with the Pacific as well. 

With respect to our foreign policy goals in the region, I think we have two critical 

tasks that touch on our historic relationship with Palau. First, we have to sustain 

and reinforce our full authority and responsibility for the security and defense of 

Palau. We have no greater responsibility in the eyes of the Palauan people, and I 

know that we, and the other federal agencies that work with Palau, take that responsibility very seriously. Second, we have to ensure that our partners in the Pacific, including Palau, continue to work with us and support our common goals in 

regional and multilateral fora, on everything from fisheries management to human 

rights to countering the proliferation of weapons of mass destruction. 

Under the Compact of Free Association, the United States provides for the security of Palau, which occupies a strategic position in the Western Pacific. This security relationship gives us access to Palau and its waters, along with the critical authority to deny such access by military forces and personnel of other nations. While 

we have welcomed for many decades a peaceful and positive approach to relations 

in the Pacific by all parties, the relatively modest annual cost associated with the 

proposed legislation is leveraged many times over in the important strategic advantages this arrangement confers on the United States. 

As a result of our security guarantee, Palau does not maintain its own military 

forces, but under the terms of our Compacts, their citizens are eligible to, and do, 

serve voluntarily in the U.S. Armed Forces. Palauan citizens volunteer in the U.S. 

military at a rate higher than in any individual U.S. state. Approximately 500 

Palauan men and women serve in our military today, out of a population of about 

14,000. We are grateful for their sacrifices and dedication to promoting peace and 

fighting terrorism. Palau has deployed soldiers for U.S. coalition missions and participated in U.S.-led combat operations in the world’s most difficult and dangerous 

places, including Afghanistan and Iraq, where several Palauans have lost their lives 

in combat. 

President Toribiong’s niece and Minister Jackson Ngiraingas’ son both serve in 

the U.S. Navy. The son of Minoru Ueki, Palau’s Ambassador to Japan, serves in the 

U.S. Army. Palau Paramount Chief Reklai has a daughter and son in the Army. 
18 

Palau’s Ambassador to the United States, Hersey Kyota, has two adult children 

serving in the Armed Forces. He has several nephews serving in the Army and Marine Corps. Similarly, many other Palauan sons and daughters of other government 

officials and of ordinary Palauan citizens served honorably in U.S. military units 

since the Compact has been in place, most recently in Afghanistan and Iraq. 

In addition to our specific responsibility for the safety and security of the Palauan 

people under the Compact, given the wide range of U.S. strategic interests and equities in the Western Pacific, security developments in the region require our sustained presence and engagement. The Reagan Ballistic Missile Defense Test Site on 

Kwajalein Atoll, the presence of U.S. Armed Forces, including the U.S. Coast Guard, 

in Guam and in the waters of the Pacific, and our disaster relief operations throughout the region are all crucial to peace and security not only for the region, but for 

the United States. Keeping our commitments to Palau, as reflected in the proposed 

legislation, reinforces our defense posture in the Western Pacific, and therefore our 

strategic interests. Access to Palauan waters, lands, airspace, and its Exclusive Economic Zones (EEZ), grants us economic benefits and allows us to guard and protect 

our long-term defense interests in the region. 

With respect to the second goal of maintaining and strengthening our relationship, Palau is among our strongest supporters in regional and multilateral fora. In 

the former, Palau has been an ardent advocate for enhanced U.S. participation and 

engagement in the Pacific Islands Forum and a constructive partner as we work to 

extend the South Pacific Tuna Treaty. 

At the 66th General Assembly of the United Nations, Palau’s voting coincidence 

with the United States on all votes is approximately 97 percent, which is markedly 

higher than 80 percent for the United Kingdom, 88 percent for Australia, and 70 

percent for both Japan and South Korea. Despite an increase in assistance from others interested in enhancing their engagement with the region, such as China, Russia, and the Arab League nations, Palau has not only supported the United States’ 

on Israel and Cuba-related votes but has been at the forefront of actively helping 

garner the support of others. Palau has supported UN resolutions seeking to combat 

the spread of weapons of mass destruction, and joined in efforts to address systematic human rights abuses in North Korea, Syria, and Iran. 

Our Partnership Extends Beyond Defense 

The importance of our strong relationship with Palau is not limited to defense. 

We work closely with Palau in the fight against international crime and terror. In 

2009, Palau resettled six ethnic Uighur detainees from Guantanamo when few other 

countries would. Palau was our first island partner to sign the U.S. ship rider and 

ship-boarding agreements that are successfully increasing maritime surveillance 

and law enforcement cooperation in the Pacific Islands. 

Palau is a key and constructive player in helping set the tone of our negotiations 

with 16 Pacific Island nations on the extension of our South Pacific Tuna Treaty. 

This treaty guarantees access to South Pacific waters to our tuna fleet in return for 

specific obligations in terms of environmental regulation, conservation measures, 

and other important efforts to sustain the viability of South Pacific tuna stocks longterm. The value of this treaty to the United States has averaged more than $360 

million a year over the past three years, and I am glad to report that we have made 

significant progress toward reaching an agreement that will ensure that access, and 

the support for thousands of tuna industry jobs here in the United States and American Samoa, for some time to come. 

Our people-to-people connections continue to grow strong. Since 1966, more than 

4,200 Peace Corps Volunteers have served in Palau, teaching English and life skills 

and supporting economic development, education, capacity building, and marine and 

terrestrial resource conservation in Palau and in the two other Freely Associated 

States. Today approximately 55 Peace Corps volunteers serve in Micronesia and 

Palau. 

Responsibility as a Compact Partner 

The original process that led to our Compact with Palau was based on a solemn 

promise to help this young nation through financial, security, and other assistance 

to achieve self-governance and a sustainable economic development path. The effort 

that has gone into the 15-year Compact review, and the positive contribution of 

Members of both Houses of Congress to work towards implementing those arrangements is a symbol of our good faith and partnership, not just in Palau, but also 

among all our Pacific partners. 

The timing of this review could not be more important. We are now at a point 

where the goal of self-governance and democracy in Palau is firmly in place. The 

goal of sustainable economic development and independence, however, remains a 
19 

work in progress. The tiered nature of the support agreed to in this 15-year review 

is designed to reduce Palau’s dependence on U.S. direct economic assistance and assist Palau in moving towards sustainable economic development. Importantly, it 

also requires the Palauan government to undertake serious economic and fiscal reforms, and, should the United States determine that progress towards such reform 

is inadequate, we are able to withhold further assistance until they are implemented. 

Our Compact with Palau took effect in 1994. It does not have a termination date 

and requires a review on the 15-year, 30-year, and 40-year anniversaries. The direct 

economic assistance provisions of the Compact, however, expired on September 30, 

2009. Our two governments worked closely over 20 months of discussions and negotiations to conclude the 15-year review, which resulted in an Agreement signed by 

former Deputy Assistant Secretary Frankie Reed and President Toribiong in September 2010. The legislation will implement the outcomes of the review and is the 

manifestation of the shared commitment between our two governments. I would 

note, however, that the provisions in the current draft of H.R. 6040 exceed the 

agreement reached between the United States and the Government of Palau by extending additional benefits and supplemental funding to Palau, which would run 

counter to the carefully calibrated goals of the Administration in negotiating the 

agreement. We are prepared to work with this Subcommittee and with interested 

Members to ensure that the legislation reflects the bilateral agreement reached during the Compact review. 

Those provisions notwithstanding, the proposed Compact Review legislation would 

amend Title I of Public Law 99–658 regarding the Compact of Free Association between the Government of the United States of America and the Government of 

Palau. In formal language, this bill would approve the results of the 15-year review 

of the Compact, including the Agreement between our two governments following 

the Compact of Free Association Section 432 Review. 

The assistance package within the Agreement is designed to relieve Palau from 

its dependence upon U.S. direct economic assistance as it continues to grow and reform its economy. The Agreement provides a glide path for Palau to move from reliance on the over $18 million it has been receiving to a sustainable $15 million level, 

provides for U.S. contributions to the Trust Fund from FY 2013 through FY 2023 

and decreases the amount Palau may withdraw from the Trust Fund during this 

period, to allow the Trust Fund to grow. The terms of the agreement also commit 

Palau to a range of economic reforms designed to help increase fiscal transparency, 

combat corruption, and create a stronger foundation for economic sufficiency in the 

future. If the United States determines that insufficient progress has been made on 

economic reform, we may delay assistance payments until we deem sufficient 

progress has been made. The Agreement has other provisions that supplement the 

Compact, resulting from a review of how the Compact worked over its first 15 years. 

For example, Palau will continue to be eligible for a wide range of federal programs 

and services from agencies such as the U.S. Postal Service, federal weather services, 

the Federal Aviation Administration, the Department of Agriculture, and Health 

and Human Services. The Agreement will also require Palauan nationals coming to 

the United States under the Compact to have machine readable passports (instead 

of allowing them to come to the United States without passports). 

If the bilateral Agreement between our two countries is not implemented, the 

trust fund would be unable to provide a steady outlay of $15 million per year, from 

now until 2044, which was the intended purpose of the Compact negotiators in the 

1980s. To ensure smooth continuation of our bilateral relationship as well as the 

continued economic development and advance of its self sufficiency, it is crucial we 

provide Palau the assistance agreed to in the Compact review. 

Supporting Palau’s Transition to Independence 

Our history with Palau began in bloody battle in 1944. It was a sense of duty, 

and the understanding that Palau was important to our strategy in the Pacific, that 

led thousands of Marines ashore to free Palau from colonialism and occupation. 

Palau remains important now, and that same duty has led the United States down 

a long road of partnership with the people of Palau from liberation to trusteeship 

and, finally, to independence. That steadfast commitment to our friends has been 

noted not just in Palau, but across the Pacific. 

Shortly after the end of World War II, the United Nations assigned the United 

States administering authority over the Trust Territory of the Pacific Islands, which 

included Palau and island districts of Micronesia that we had liberated from Japanese occupation. Palau adopted its own constitution in 1981, and the governments 

of the United States and Palau concluded a Compact of Free Association that entered into force on October 1, 1994. 
20 

With a government modeled on our own, Palau shares our goals for human rights 

and democracy throughout the world. Palau has shown maturity of a much older 

nation in its democratic processes, which is a testament to the commitment to 

strong values the people of the Pacific have, and reinforces the value of the Compact 

as a vehicle for transition. 

Palau has been a staunch ally to the United States, and it is essential we stand 

by our commitment to the people of Palau. The Palauan people have been loyal and 

dedicated partners, but they are concerned about their future and that of their 

grandchildren. Palau is as interested in regional and international security as we 

are. Failing to affirm the results of the 15-year review of the Compact with Palau 

is not in our national interest. We appreciate the interest and leadership of this 

Subcommittee in considering this legislation promptly and hope both the House and 

the Senate will pass it as quickly as possible. 

As the generation for which the Second World War was a defining experience 

passes and other emerging powers seek to increase their influence in the region, 

passage of this legislation will send a reassuring signal that the United States is 

and will be engaged in the Pacific and will remain a faithful friend and ally through 

both good and challenging times. 

The Importance of Implementing the Agreement 

Mr. Chairman, the President, Secretary Clinton, and others in this Administration deeply appreciate not only the rich and historic World War II legacy of the Pacific, but also the continuing strategic role those islands and waters play globally. 

The Administration places great importance on continuing our strong alliance with 

Pacific Island partners. I recently visited the battlefield of Peleliu, where more than 

3,000 U.S. Marines were lost liberating the island, a necessary step towards the 

eventual liberation of the Philippines and the seizure of other key island bases that 

helped bring the war to a close. I met with Palauans who are working with partners 

in the United States to identify personal effects that still remain on the battlefield 

and to return them to family members in the United States nearly seventy years 

later. These efforts are emblematic of our shared history and the deep connections 

that have been forged in the decades since World War II. In the current political 

environment in the Pacific region, it is paramount that we maintain those ties and 

continue to develop our strategic framework for a peaceful future in the region. Our 

investment will help to ensure that Palau becomes financially independent over 

time and continues to stand with us as a loyal, trustworthy, and democratic ally. 

If the Agreement is not implemented, Palau will not have had time to adjust to the reduction from $18 million to $15 million in combined direct assistance and 

trust fund withdrawals on which it has been relying and will not have embarked 

on the reforms called for in the September 2010 agreement. Palau’s economy would 

suffer a serious blow from the $3 million reduction in assistance (between direct assistance and trust fund withdrawals), which would seriously damage our bilateral 

relationship in a key region of the world. In today’s dynamic Pacific environment, 

our inability to stand by our partners would not go unnoticed, and it is likely that 

Palau would face offers of assistance from other nations expanding their reach in 

the Pacific to fill the void we would leave. 

I hope that my testimony today gives you an understanding and sense of how the 

Compact deepens our partnership with Palau and serves the interests of the United 

States. I look forward to working with you and other Members of Congress to secure 

and advance U.S. interests in Palau by passing the legislation implementing the results of the Compact review. 

Thank you again for giving me the opportunity to testify before you today and to 

clarify the importance of this legislation. I look forward to answering your questions. 

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

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

ACCOUNTABILITY OFFICE 

Mr. GOOTNICK. Thank you, Mr. Chairman. Mr. Chairman and 

members of the Subcommittee, thank you for asking GAO to participate in this hearing. As has been stated, the 1994 Compact provided 15 years of economic assistance, established the trust fund, 

built the compact road, and provided for postal, weather and avia-
21 

tion services. Importantly, the Compact also established the basis 

for discretionary Federal programs such as Head Start, community 

health centers, Pell Grants, airport improvements, special education and numerous others. Taken together since 1994, the Compact and U.S. programs are valued at more than $850 million, of 

which U.S. program assistance was about one-third. 

My statement which I will briefly summarize describes one, the 

economic provisions of the agreement; two, the impact of the agreement on Palau’s trust fund; three, projected Palau government revenues under the agreement. In the statement, we have also provided some descriptive information on 6040 and 343 which we can 

discuss. 

As has been stated the agreement would provide $215 million in assistance with a steady annual decrement from roughly $28 million to $2 million in 2024. One hundred seven million, roughly half 

of the assistance would support government operations. The agreement also provides $40 million for infrastructure projects, $28 million for the maintenance fund, $10 million to debt relief and adds 

$30 million to the trust fund. 

Importantly the agreement extends postal, weather and aviation, 

and the authority to continue discretionary Federal programs. The 

agreement puts certain conditions on the $215 million package. For 

example, economic assistance is directed to specific sectors such as 

health, education and public safety. Also under the agreement, an 

advisory group would be appointed and tasked to make recommendations for fiscal and management reforms. And the U.S. 

made to lay funding condition on the progress of these reforms. 

For the infrastructure fund, projects must have land title and a 

certified scope of work to get funding, and the maintenance fund 

is primarily for U.S. finance projects, in particular, the Compact 

road and the international airport. 

Debt relief prioritizes U.S. creditors and requires U.S. concurrence on debts to be paid. Regarding the trust fund, the proposed 

U.S. contributions and the delay in schedule withdrawals would 

markedly improve the fund’s prospects. In 2009, we reported that 

the trust fund would require an annual return above 10 percent to 

yield its proposed schedule through 2044. However, under this 

agreement, the trust fund would need only a 5 percent return to 

yield its new schedule withdrawals. This is well below the nearly 

8 percent it has earned to date. 

Last, to offset the steady decline in budget support through 2024, 

estimates prepared for the Government of Palau project a growing 

reliance on trust fund withdrawals and domestic revenue as well 

as steady access to U.S. Federal programs. Specifically the estimates project a steep rise in domestic revenue, growing from 

roughly 40 to nearly 60 percent of government revenue by 2024, 

and the estimates project that discretionary Federal programs will 

grow at roughly the rate of inflation. They are projected at half of 

all U.S. assistance over the next 15 years. As you know, unlike 

other components of this agreement these programs depend on annual appropriations. 

In summary, Mr. Chairman, the economic provisions of the 

agreement extend and gradually reduce compact assistance 

through 2024, establish new conditions for the use of U.S. funds, 
22 

1The 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). 2The Compact of Free Association between the Government of the United States of America and 

the Government of the Republic of Palau (Oct. 1, 1994). 3See 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). 5GAO, 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). 6Section 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. 7Senate 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). 

and reset the trust fund to significantly improve its long-term prospects. Palau has employed projections of its long-term fiscal conditions that rely on increased revenue and the continuation of U.S. 

Federal programs. 

Mr. Chairman, this completes my remarks ahead of schedule, 

and I am happy to answer any questions. 

Dr. FLEMING. Thank you, Mr. Gootnick, both for your testimony 

and for ending it early. We thank you for that. 

[The prepared statement of Mr. Gootnick follows:] 

Statement of David Gootnick, Director, International Affairs and Trade, 

U.S. Government Accountability Office (GAO) 

Chairman Fleming, Ranking Member Sablan, and Members of the Subcommittee: 

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

the U.S. and Palau governments.1

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

and the Government of the Republic of Palau, which entered into force in 1994,2

provided for several types of assistance aimed at promoting Palau’s economic advancement and eventual self-sufficiency.3 In addition to establishing Palauan sovereignty and U.S.-Palau security and defense arrangements, the compact provided 

economic assistance to Palau.4 This assistance comprised, among other things, direct economic assistance for 15 years to the Palau government; the establishment 

of a trust fund intended to provide Palau $15 million annually from 2010 through 

2044; investments in infrastructure, including a major road; and the provision of 

federal services, such as postal, weather, and aviation. The compact also established 

a basis for U.S. agencies to provide discretionary federal programs related to health, 

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

Palau from 1995 through 2009 would exceed $852 million, with assistance under the 

compact accounting for about 68 percent and assistance through discretionary programs accounting for about 31 percent.5 We also reported in 2008 that the likelihood 

of the Palau trust fund’s being able to sustain the planned payments through 2044 

was uncertain. 

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 
23 

8S. 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). 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). 12 H.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). 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). 15 According to the IMF, in 2010, Palau’s public sector spending was projected at approximately 42 percent of its GDP. 

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 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. 

Background 

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

land area of roughly 190 square miles, located approximately 500 miles southeast 

of the Philippines. About 20,000 people live in Palau, concentrated largely in one 

urban center around the city of Koror, and more than one-quarter of the population 

is non-Palauan.13 Palau’s economy is heavily dependent on its tourism sector and 

on foreign aid from the United States, Japan, and Taiwan.14 Similar to many small 

island economies, Palau’s public sector spending represents a significant percentage 

of its gross domestic product (GDP).15

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. 
24 

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. 
25 

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. 17GAO–08–732. 

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. legislation 16 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 discretionary federal programs account 

for a projected 31 percent (see fig. 1).17
26 

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

grants amounting to $8 million in 2011; however, Congress did not pass legislation appropriating such funds in 2011. 

Agreement Would Extend U.S. Assistance for 15 Years, With Annual 

Decreases 

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

extend assistance to Palau to 2024 but steadily reduce the annual amount provided. 

The Agreement would also extend the authority and framework for U.S. agencies 

to continue compact federal services and discretionary federal programs.18

Assistance to Palau Would Decline through 2024 

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

economic assistance to Palau, providing infrastructure project grants and contributions to an infrastructure maintenance fund, establishing a fiscal consolidation fund, 

and making changes to the trust fund. U.S. assistance to Palau under the Agreement would total approximately $215 million through 2024.19

Legislation implementing the Agreement was not approved by Congress during 

2011. Department of the Interior provided $13.1 million for direct economic assistance in 2011 and again in 2012; however, funds were not provided either year for 

infrastructure projects, the infrastructure maintenance fund, or the fiscal consolidation fund. 

• Direct economic assistance ($107.5 million). Under the Agreement, the U.S. 

government would provide direct economic assistance—budgetary support for 

Palau government operations and specific needs such as administration of 

justice and public safety, health, and education—amounting to $13 million in 

2011 and declining to $2 million by 2023.20 The Agreement also calls for the 

U.S. and Palau governments to establish a five-member Advisory Group to 

provide annual recommendations and timelines for economic, financial, and 

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

implementing these or other reforms, prior to annual U.S.-Palau economic 

consultations.21 These consultations are to review Palau’s progress in achieving reforms 22 such as improvements in fiscal management, reducing the public sector workforce and salaries, reducing government subsidization of utilities, and tax reform. If the U.S. government determines that Palau has not 

made significant progress in implementing meaningful reforms, direct assistance payments may be delayed until the U.S. government determines that 

Palau has made sufficient progress. 

• 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, including the 
27 

24 In 2008, we reported that Palau and U.S. officials had expressed concerns about Palau’s 

ability to maintain the Compact Road in a condition that would allow for the desired economic 

development. We also reported that Palau made initial efforts to maintain the road, but at levels 

that would cause the road to deteriorate over time and would not provide the economic development benefits envisioned for the people of Palau. See GAO–08–732. 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. 26 Under the compact, Palau owes the United States a total of $3 million. Under the Agreement, Palau would deposit $3 million in the infrastructure maintenance fund but not expend 

it. Any future income derived from the $3 million must be used exclusively for the maintenance 

of the Compact Road. 27 Although the Agreement states that the United States shall provide a grant beginning in 

2011, Congress did not pass legislation appropriating funds for this purpose in 2011 and therefore the earliest the U.S. contributions can begin is 2012. 28 Under the Agreement, Palau would withdraw $5 million annually through 2013 and gradually increase its maximum withdrawal from $5.25 million in 2014 to $13 million in 2023. 

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 2011 27 and 2012, respectively, to help the Palau government reduce its debts. Unless agreed to in 

writing by the U.S. government, these grants cannot be used to pay any entity owned or controlled by a member of the government or his or her family, 

or any entity from which a member of the government derives income. U.S. 

creditors must receive priority, and the Government of Palau must report 

quarterly on the use of the grants until they are expended. 

• Trust fund ($30.25 million). Under the Agreement, the U.S. government 

would contribute $30.25 million to the fund from 2013 through 2023. The 

Government of Palau will reduce its previously scheduled withdrawals from 

the fund by $89 million.28 From 2024 through 2044, Palau can withdraw up 

to $15 million annually, as originally scheduled. Moneys from the trust fund 

account cannot be spent on state block grants, operations of the office of the 

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

Palau Judiciary. Palau must use $15 million of the combined total of the trust 

fund disbursements and direct economic assistance exclusively for education, 

health, and the administration of justice and public safety. 

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. 
28 

29 All 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 

The Agreement would extend the authority for the provision of compact federal 

services and discretionary programs in Palau. 

• Federal services. The Agreement would amend the compact’s subsidiary agreements regarding federal services. Specifically, the Agreement amends the 

terms of postal, weather, and aviation services to Palau. 

• Federal discretionary programs. The Agreement would extend the framework 

for U.S. agencies to provide discretionary federal programs to Palau, with implementation of the programs contingent on annual appropriations to those 

agencies. 

Agreement’s Provisions Would Significantly Improve Prospects for Palau 

Trust Fund 

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

in Palau withdrawals through 2023, as provided by the Agreement, would improve 

the fund’s prospects for sustaining scheduled payments through 2044. At the end 

of June 2012, the fund had a balance of approximately $163 million. The trust fund 

would need a 5.0 percent annual return to yield the proposed withdrawals from 

2011 through 2044 under the Agreement. This rate is well below the 7.9 percent 

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

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

varying rates of return. 
29 

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. 
30 

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

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

tax revenues by eliminating the gross revenue tax, replacing it with a corporate income tax, introducing a Value Added Tax, and increasing the level of taxation on high earners. The IMF 

also noted that Palau could reform its civil service to decrease wage expenditures. IMF, ‘‘Staff 

Visit to Republic of Palau—Concluding Statement of the IMF Mission’’ (Mar. 8, 2011). 

Estimates Prepared for Palau Project Declining Reliance on U.S. Assistance 

Under the Agreement 

Estimates prepared for the Government of Palau project that Palau’s reliance on 

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

trust fund withdrawals and domestic revenue will increase.30 These estimates show 

U.S. assistance, as provided under the Agreement, declining from 28 percent of government revenue in 2011 to less than 2 percent of government revenue in 2024. The 

estimates also show Palau’s trust fund withdrawals growing from 5 percent of government revenue in 2011 to 12 percent in 2024. In addition, the estimates indicate 

that Palau’s domestic revenue will rise from 40 percent of all government revenue 

in 2011 to 59 percent in 2024.31 Finally, the estimates prepared for Palau project 

a relatively steady reliance on U.S. discretionary federal programs, ranging from 12 

percent of all government revenue in 2011 to 14 percent in 2024. The estimates assume that discretionary federal programs will grow at the rate of inflation; however, 

discretionary programs are subject to annual appropriations and may not increase 

over time. 

Figure 5 shows the types and amounts of Palau’s estimated revenues for 2011 and 

2024. 
31 

Estimates Prepared for Palau Project Discretionary Program Funding as Half of 

U.S. Assistance 

The estimates prepared for the Government of Palau project that U.S. assistance 

to Palau from 2011 through 2024, including discretionary federal programs, will 

total approximately $427 million. The estimates further project that discretionary 

programs will account for nearly half of U.S. assistance through 2024, with assistance amounts specified in the Agreement accounting for the other half. (See fig. 6.) 

In contrast, in 2008, we estimated discretionary program funding accounted for less 

than one-third of total U.S. assistance to Palau from 1995 through 2009. 
32 

32S. 343. 

Pending Legislation Would Approve and Implement the Agreement 

Legislation has been introduced in both the Senate and the House that would approve and implement the September 2010 agreement between the U.S. and Palau 

governments. 

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

Agreement, as written.32 The Senate bill would authorize and appropriate funds to 

Interior for specified assistance. The Senate bill would also extend the authority, 

and authorize appropriations, for the provision of compact federal services in Palau. 

However, the proposed legislation does not appropriate funds for compact federal 

services. As of September 2012, the Senate has not acted on this bill. 
33 

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

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

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

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

would increase approximately $12 million. 36 Under the Agreement, the Government of Palau is to bear the cost of these audits. According to an Interior official, the cost of the audits is approximately $500,000 per year. 37S. 343 as introduced in the Senate and H.R. 6040 as introduced in the House. 38 Ibid. 39S. 343. 40 H.R. 6040. 

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 compact 34 to the U.S. commitments of assistance under the Agreement for direct economic assistance, 

the trust fund, the infrastructure maintenance fund, the fiscal consolidation 

fund, and infrastructure projects. 

• Applies an inflation adjustment to the Agreement assistance for direct economic assistance and infrastructure project grants, and payments to the trust 

fund, infrastructure maintenance fund, and fiscal consolidation fund.35

• 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

Chairman Fleming, Ranking Member Sablan, and Members of the Subcommittee, 

this completes my prepared statement. I would be happy to respond to any questions you may have at this time. 

GAO Contact and Staff Acknowledgments 

For further information about this statement, please contact David Gootnick at 

(202) 512–3149 or gootnickd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. 

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

Reid Lowe, Grace Lui, and Vale ́rie L. Nowak made key contributions to this statement. Robert Alarapon, Benjamin Bolitzer, Rhonda Horried, Farahnaaz Khakoo, 

Jeremy Sebest, Cynthia Taylor, and Anu Mittal provided technical assistance. 

This is a work of the U.S. government and is not subject to copyright protection 

in the United States. The published product may be reproduced and distributed in 

its entirety without further permission from GAO. However, because this work may 

contain copyrighted images or other material, permission from the copyright holder 

may be necessary if you wish to reproduce this material separately. 
34 

Appendix I: U.S. Assistance to Palau Provided 

Under the Compact and Outlined in the 

Agreement 

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 

Direct 

assistance 

Infrastructure 

Trust fund 

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

$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 

53.0 96.0 149.0 

contributions 66.0 4.0 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 Intenor OIA Budget Justifications and Performance Informat'on 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 2.00 200 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 40.00 

Fiscal 

consolidation 

fund 5.00 5.00 10.00 

Direct 

economic 

assistance 13.00 12.75 12.50 12.00 11.50 10.00 8.50 7.25 6.00 500 4.00 3.00 2.00 107.50 

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 Agrooment between the U S govemment and the govemment of the RepubliC of Palau follQl'lmg ths 

Compact of Free AsSoclatloo Section 432 re\J1ew 

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

inflation). 
35 

Appendix II: U.S. Discretionary Program Funds 

Expended in 2009 

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 

Agriculture 

Agriculture 

Agriculture 

Commerce 

Commerce 

Education 

Education 

Education 

Education 

Education 

Education 

Education 

Education 

Education 

Education 

Education 

Education 

Education 

Education 

HHS 

HHS 

HHS 

HHS 

HHS 

HHS 

HHS 

HHS 

HHS 

HHS 

Federal program 

Cooperative Forestry Assistance 

Community Facilities Loans and Grants 

Unknown 

Special Oceanic and Atmospheric Projects 

Unallied Management Projects 

Pel! Grant 

Freely Associated States-Education Grant Program 

Special Education-Grants to States 

Upward Bound Program 

Talent Search 

Upward Bound Math and Science 

Gaining Early Awareness and Readiness for Undergraduate Programs 

Student Support Services Program 

Spe?ial Education-Grants to States 

Federal Work-Study 

Academic Competitiveness Grant 

Supplemental Educational Opportunity Grant 

Byrd Honors Scholarships 

Adult Education-State Grant Program 

Head Start 

CDC and Prevention-Investigations & Technical Assistance 

Consolidated Health Centers 

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

Significance 

National Bioterrorism Hospital Preparedness Program 

Public Health Emergency Preparedness 

Epidemiologic Research Studies of AIDS and HIV Infection in Selected Population 

Groups 

Material and Child Health Federal Consolidated Programs 

Family Planning-Services 

Maternal and Child Health Services Block Grant to the States 

2009 expenditure 

$155,422 

124,745 

1,604 

306,485 

2,250,348 

1, .324 

859,119 

315,164 

204,406 

198,998 

198,205 

189,771 

122,755 

109,923 

78,346 

52,600 

46,500 

29,038 

1,670,508 

976,068 

564,525 

431,171 

387,003 

343,717 

260,367 

201,257 

171,235 

149,718 
36 

GAO’s Mission 

The Government Accountability Office, the audit, evaluation, and investigative 

arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates 

federal programs and policies; and provides analyses, recommendations, and other 

assistance to help Congress make informed oversight, policy, and funding decisions. 

GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. 

HIGHLIGHTS 

September 10, 2012 

COMPACT OF FREE ASSOCIATION 

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

Why GAO Did This Study 

The Compact of Free Association between the United States and the Republic of 

Palau, which entered into force in 1994, provided for several types of assistance 

aimed at promoting Palau’s self-sufficiency and economic advancement. Included 

were 15 years of direct assistance to the Palau government; contributions to a trust 

fund meant to provide Palau $15 million each year in fiscal years 2010 through 

2044; construction of a road system, known as the Compact Road; and federal services such as postal, weather, and aviation. U.S. agencies also provided discretionary 

federal programs related to health, education, and infrastructure. In 2008, GAO pro-
37 

jected that total assistance in fiscal years 1994 through 2009 would exceed $852 million. 

In September 2010, the United States and Palau signed an agreement (the Agreement) that would, among other things, provide for additional assistance to Palau beginning in fiscal year 2011 and modify its trust fund. Currently, there are two bills 

pending before Congress to implement the Agreement. 

In this testimony, GAO updates a November 2011 testimony on (1) the Agreement’s provisions for economic assistance to Palau, (2) its impact on the trust fund’s 

likelihood of sustaining scheduled payments through fiscal year 2044, (3) the projected role of U.S. assistance in Palau government revenues, and (4) the pending 

legislation to implement the Agreement. GAO reviewed current trust fund data and 

new pending legislation for this testimony. 

What GAO Found 

The Agreement would provide decreasing assistance, totaling approximately $215 

million through fiscal year 2024 and includes the following: 

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

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

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

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

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

• trust fund contributions ($30.25 million) in addition to the $70 million contributed under the compact 

Assistance to Palau Specified in the Agreement 

Notes: All dollar amounts are in nominal dollars (i.e., unadjusted for inflation). 

Funds were not provided in fiscal years 2011 or 2012 to date for infrastructure 

projects, the infrastructure maintenance fund, or the fiscal consolidation fund. 

Under the Agreement, the United States would contribute to the trust fund in fiscal years 2013 through 2023, and Palau would reduce its withdrawals by $89 million in fiscal years 2010 through 2023. GAO projects that the fund would have a 

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

changes, versus 40 percent without these changes. 

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

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

year 2011 to 2 percent in fiscal year 2024—and growing reliance on trust fund withdrawals and domestic revenues. The estimates show trust fund withdrawals rising 

from 5 percent to 24 percent and domestic revenues rising from 40 to 59 percent, 

of total government revenue. According to the estimates, U.S. assistance in fiscal 

years 2011 through 2024 would total $427 million, with discretionary federal programs accounting for about half of that amount. 

Congress has not approved legislation to implement the Agreement as of September 2012. Pending Senate legislation would implement the Agreement and appropriate funds to do so. Pending House legislation would implement the agreement, 

apply an inflation adjustment to assistance payments, and shift the timing of certain assistance payments to reflect the fact that 2011 has passed. 

Dr. FLEMING. All kidding aside, we do appreciate the time and 

effort that you put into your testimonies, and I realize sometimes 

it is difficult to get it all in timely. At this point, we will begin 

Member questioning of witnesses. To allow all Members to participate and ensure we hear from all of our witnesses today, Members 

are limited to 5 minutes for their questions. However, if Members 

have additional questions, we can have more than one round of 

questioning and we usually do. I now recognize myself for 5 minutes. 

Free association did not exist before it was used for the Republic 

of Palau and the other two compacts with the Republic of the Marshall Islands and Federated States of Micronesia. Can either Secretary here today discuss why this type of association was agreed 

to by the United States? And a second part of that question, was 

it the intent of the Compact for the United States to provide funding to Palau for the life of the Compact outside of the trust fund? 
38 

Mr. BABAUTA. I will attempt to answer the question, Mr. Chairman. As I understand the history of the trust territories and eventually maturing to a point they were granted free association which 

is the relationship between us and them. It was the United States 

responsibility at the time—— 

Dr. FLEMING. Make sure your mic is close to you. 

Mr. BABAUTA. It was my understanding the United States took 

on the responsibility shortly after World War II and it received 

those areas that were designated as trust territories of the Pacific 

Islands under the United Nations with an agreement that under 

the United States, our country would attempt to assist them to a 

point where they are mature politically and can seek a different 

status, a different relationship. As you know we have the three 

freely associated states and the Commonwealth of the Northern 

Mariana Islands and they elected to go a different route in its maturation process. 

Dr. FLEMING. OK. It was the intent of the Compact, I am not 

sure if I heard—— 

Mr. BABAUTA. About funding outside? 

Dr. FLEMING. About the funding outside of the trust fund? 

Mr. BABAUTA. I would not know the answer to that question, sir. 

Dr. FLEMING. Secretary Kagan? 

Mr. KAGAN. Unfortunately Mr. Chairman I don’t know the answer either in terms of what the original intent was, but we would 

certainly be happy to go and look for that to get you a good answer. 

Dr. FLEMING. Yes, I would appreciate you getting back to us. 

Again, for historical perspective, really all three compacts, Marshall Islands, Micronesia and Palau were very important areas 

during World War II. Micronesia, Palau were great staging areas 

for bombing, and they prove even today to be very important strategic areas. And so this is certainly something that we need to 

focus on. 

Secretary Babauta, you mentioned in your testimony that Palau 

has made strong economic gains under the Compact that its growth 

in real terms has averaged over 2 percent per year, which really 

looks pretty good compared to what we are seeing today on Conis. 

And Palau’s governmental services are a meeting the needs of the 

community. What funding or revenue support these Palau government services, local revenues our outside funding? 

Mr. BABAUTA. Well, under the new agreement, sir? 

Dr. FLEMING. Well, I guess really what I am asking about is the 

economy itself, it has 2 percent GDP growth right? So what is sustaining that? Is this outside flow of money? Is this growth in the 

economy internally? What is driving that GDP? 

Mr. BABAUTA. What is driving Palau’s economy is tourism. Back 

in 2005, when we turned over the Compact road to them, at the 

time, Palau was receiving tourists at 76,000 per year. I just recently went to Palau in the beginning of August and talked to their 

leadership and President Toribiong. And they report now their 

tourism is up at 110,000 tourists per year. And they have managed 

to contain their government growth so that they are able to provide 

money for education in the community college and make the right 

investments to take care of their people. 

Dr. FLEMING. And where are the bulk of visitors coming from? 
39 

Mr. BABAUTA. They actually come from all over, sir. I think the 

most recent spike in their tourism has been from China, but generally, it is one of the top five dive spots in the world so they are 

frequented from visitors all over the globe. 

Dr. FLEMING. I recall back in the day, Japanese visitors were the 

main source. I guess it has changed over to Chinese visitors. Is it 

still a very sought after scuba diving haven? 

Mr. BABAUTA. I have not scuba dived there yet, but yes, apparently with their visitors who frequent there yes, it still is. 

Dr. FLEMING. Well, it is legendary in its scuba diving and I myself never got make it there, even though I was fairly close. Well, 

these are important things, we will revisit some of them in a moment when we get back to our second round. Every time we start 

these trust funds and we have this flow of money to various islands, island states around the world, it is obviously important that 

we create a sustainable economy, and that is certainly something 

that we will need to focus on more in these discussions. I now yield 

to gentleman, Mr. Sablan, for 5 minutes. 

Mr. SABLAN. Thank you very much, Mr. Chairman. And let me 

just say something, while it may not be written in the law on the 

intention to continue reviewing and continue to provide assistance 

to the Republic of Palau, I think there is this spirit of the arrangement, the Compact arrangements that the United States would 

look at ways to assist the Republic of Palau and their needs in the 

15-, 30-, and 40-year period. 

Mr. Chairman, coming from an islander, I learned how to scuba 

dive just to dive in Palau, so we should all go out there together, 

sir, and I will watch you dive. 

Welcome, Secretary Babauta, Secretary Kagan and Dr. Gootnick. 

Let me start with you, Secretary Kagan. The Compact provides 

that the United States will conduct audits at once of its compact 

assistance. It says the agreement now shifts the costs to Palau. I 

understand that this provision doesn’t exist with the Republic, for 

the Marshalls and the Federated States of Micronesia, so the cost 

can be less than $500,000 for an audit. 

So wouldn’t it be in our best interest for the United States, would 

we have a greater assurance of getting the audits at once if the 

United States continued to provide for these audits? And why 

should Palau have greater responsibility for audits of the used 

funds that the U.S. wants than the other two freely associated 

states? 

Mr. KAGAN. Mr. Sablan, thank you very much for the question, 

it is an excellent question, and reflects your focus and understanding of these issues. I think the first thing I would say is that 

while obviously the three Compact states share a number of similarities, from our standpoint we do believe that it is very important 

to treat them separately for a number of reasons having do with 

different circumstances in each country as well as obviously the different histories of our engagement there. 

In terms of specific provisions, I should note we strongly support 

the regular audits, and these audits we think have been very effective at promoting our shared interest ensuring efficient use of Compact funds. As to the question of cost, this was something that was 

negotiated between us. There were obviously discussions on this, 
40 

and I think that the, very fundamentally, I think the feeling was 

that this reflected some of the circumstances that evolved in the 

last 15 years. 

You know, we believe that Palau has a very strong commitment 

to ensuring transparency and integrity in the use of Compact funds 

and don’t believe that this is a particular challenge in terms of the 

possibility that shifting the burden of cost might lead to a change 

in the audit. 

Mr. SABLAN. I am going to run out of time, Secretary, and that 

is why you are the diplomat here. Let me say something, you are 

speaking to a Micronesian, and $500,000 is a lot of money anywhere, but $500,000 for a small country like Palau is a huge 

amount of money that they could use better. So I am asking, why 

are you treating them differently than you do the Republic of Marshall or FSM? That is a concern I have and could we eventually 

get an answer? 

My second issue here, Secretary Kagan, is that the Department 

of State is concerned about specific provisions in the bill and that 

the bill would extend benefits and funding to Palau that would run 

counter to the carefully calibrated goals of the Administration and 

the negotiations. The provisions to which you refer are continuations of provisions of the Compact, similar to provisions included 

in the revised compacts with the other two freely associated nations negotiated by the Executive Branch, approved by Republican 

Congress in 2003. And in one case, through a Congressional addition to the negotiated revised compacts, there are millions more in 

costs that would not add to the cost of the bill and would be offsetting costs by the intended amount of offsets to the bill. 

My understanding, sir, is that the negotiators for the Republic of 

Palau were just ready to throw their arms up because of the negotiating tactics and things like that. But what consideration does 

the Administration’s carefully calibrated goals give to those factors, 

outside related to the provisions to which you referred, would you 

recommend to veto the bill with this provision? And do you think 

the Department would? The additions to the bill separate from the 

negotiated bill, the agreement? 

Mr. KAGAN. I think that our view is first that this was negotiated 

over some period of time, and I think it is usual in negotiations for 

both sides at times to be frustrated with the other. I think we are 

happy that we have reached agreement and there was strong support both by the Government of Palau and by the Administration. 

Our view is that in doing this, as in any negotiation, there were 

trade-offs that were made on a variety of issues, and we believed 

the resulting agreement was one that reflected those trade-offs accurately. As I said before, we do have concerns about this. As to 

your final question, I would note we stand ready to work with the 

Committee and with Members to address those. Obviously we very 

strongly support—— 

Mr. SABLAN. Thank you. Because in exchange for this agreement 

we have—our relationship with Palau is significant in terms of the 

United States national security interest in the Pacific. It starts at 

Hawaii and goes all the way up to the Northern Marianas and up 

to Okinawa in Japan and the Philippines. I will yield back the bal-
41 

ance of my time to the second round of questions. Thank you. 

Thank you, Secretary. 

Dr. FLEMING. The gentleman yields back. Mr. Faleomavaega you 

have 5 minutes, sir. 

Mr. FALEOMAVAEGA. Thank you, Mr. Chairman, and our Ranking 

Member for your leadership and initiative in calling this important 

hearing concerning the proposed legislation we are now considering. I want to focus specifically on H.R. 6040, which is concerning the Palau situation. 

Mr. Chairman, I would like unanimous consent to have the full 

text of my statement be made part of the record. 

Dr. FLEMING. I am sorry, sir I didn’t hear. 

Mr. FALEOMAVAEGA. I would like to request that the full text of 

my statement be made a part of the record. 

Dr. FLEMING. Without objection, so ordered. 

[The prepared statement of Mr. Faleomavaega follows:] 

Statement of The Honorable Eni F.H. Faleomavaega, a Delegate in 

Congress from American Samoa 

Mr. Chairman: 

Thank you and our Ranking Member, Mr. Sablan, for your leadership in holding 

today’s hearing on this important legislation to continue free association with Palau 

through Fiscal Year 2024. Enactment of this legislation without further delay is imperative for security, diplomatic, and economic reasons. 

As Ranking Member of the Foreign Affairs’ Subcommittee on Asia and the Pacific, 

I co-authored H.R. 6040 with Chairman Manzullo. For the record, fourteen other 

Members have joined us as original co-sponsors. Seven Members of the Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs have formally supported the bill. 

H.R. 6040 would approve and slightly modify terms for continuing free association with Palau developed pursuant to the Compact of Free Association negotiated 

by the Reagan Administration and approved by law under the George H.W. Bush 

Administration. The Department of Defense has written to the Congress that 

‘‘[f]ailure to follow through on our commitments to Palau, as reflected in the proposed legislation, would jeopardize our defense posture in the Western Pacific’’. 

According to the DoD, Palau is ‘‘irreplaceable’’ because the islands cover a strategic expanse of the Pacific as big as Texas. The Compact right of the United States 

to deny access to other nations prevents countries like China from using sea-lanes 

that needs for economic and military expansion. The Pentagon has made this very 

clear with a translation of a Chinese sea strategy map, which I include with this 

statement. It shows Palau as a key link in an island chain running from Japan 

down to Indonesia that China wants to break through. It has no chance, other than 

if the Congress fails to approve this bill. If we fail to do so, China will fill the gap 

and shatter the chain of defense by offering their own kind of assistance to Palau. 

The Department of State has similarly written that continuing free association 

with Palau is ‘‘vital’’ for the United States. It is important to know that Palau votes 

with the U.S. in the United Nations more than any other member. This is critical 

on issues such as those concerning Israel and Cuba on which we would otherwise 

be isolated. The Arab League and Cuba have offered Palau aid in return for changing its votes. But as you know, the current administration in Palau has declined, 

standing firmly with the United States. 

Under the Compact, the decision of whether to continue free association and 

Palau’s U.S. assistance needs through FY 2024 were to be determined in a bilateral 

review and was implemented in FY 2010. However, the review was not completed 

until two years ago. It settled upon a phase out of direct assistance, which would 

total much less than during the first period of free association, in contrast to the 

substantial increases agreed to by the George W. Bush Administration and the Republican Congress in 2003 in the revised compacts with the two other freely associated states. 

Leaders on both sides of the aisle on both sides of the Capitol have expressed 

strong support for legislation to provide at least what was agreed to in the review 

and no Member of Congress has questioned it. 
42 

The Administration’s draft bill did not include measures to offset the cost. After 

being pressed for such measures, it suggested proposals that Ranking Member Markey as well as Chairman Hastings said could still not pass the Committee on Natural Resources, their counterparts in the Senate committee agreed that they were 

not viable, and chairmen of both appropriations committees also agreed that the offsets were not acceptable. 

Chairman Manzullo introduced new legislation with other offsets. One is in the 

Foreign Affairs bill before you and is agreed to by the Senate. It is intended to more 

than cover the costs of the bill and would make this a net savings measure. The 

Speaker and the Majority Leader are now discussing the options with Foreign Affairs Chairwoman Ros-Lehtinen and Manzullo to enable the bill to pass the House 

as soon as possible. 

They understand that the long delay has led some Palauans to question the Compact Review Agreement and the commitment of the United States to the association 

and the serious potential losses for our country, especially under the full faith and 

credit clause of the U.S. constitution. 

The Compact was not approved in Palau until the Congress under President 

George H. W. Bush added some provisions to the negotiated Compact to address 

Palauan concerns. In fact, all free association agreement laws to date have had such 

provisions. 

H.R. 6040 includes only a few but they are very much needed. They address concerns increasingly raised by Palauans and are prudent since Palau, too, needs to 

approve the Agreement. Members of Congress said these provisions should be included in the Agreement when it was being negotiated. The provisions would be consistent with the Agreement to the Compact and also include the revised compacts 

approved by the Republican Congress in 2003. The bill’s cost offset is intended to 

more than make up for the cost. 

Mr. Chairman, these provisions are modest, well justified, and precedented. They 

perfect a very good Agreement. I respectfully urge you to act so that the bill can 

be enacted into law very soon as it needs to be in the interests of our great nation. 

Mr. FALEOMAVAEGA. Thank you. I have listened with tremendous 

interest in terms of the statements made by our friends from the 

Interior Department, and also from the State Department, quite 

complimentary, and all have stated a sense that Palau and this region of the world is vitally important to the interest of the United 

States. 

Mr. Chairman, I submit I just wish the rhetoric would match the 

substance in terms of how we really have been treating these island countries of this region. 

With all due respect, Secretary Kagan, since you are new on the 

job, I have been very, very disappointed, both Democratic and Republican Administrations have never really taken the Pacific Island 

countries of this region of the world seriously. The only real foreign 

policy we have toward this region, Mr. Chairman, is really toward 

New Zealand and Australia. These island countries are only incidental to our foreign policy, which we have no foreign policy for the 

Pacific Island countries. It is primarily toward New Zealand and 

Australia. 

The question that the Chairman raised earlier, the reason why 

we have authority over these islands was specifically after World 

War II, unilaterally we just declared this region as a strategic 

trust. With or without the United Nations’ approval, we just took 

over. It was vital and it was part of our strategic and military interest, that is the reason why we are there, that is the reason why 

we ended up with three Compact associations because the Russians 

and the Cubans and the Communists in the United Nations were 

constantly criticizing the United States for having a colonial rule 

over the island countries. So rather than continue the trust territory, the Pacific Islands, we negotiated these Compacts of Free As-
43 

sociation and we have three entities: Republic of the Marshall Islands, Federated States of Micronesia, and the Republic of Palau. 

So now, what is it that we have? Primarily our number one priority is to make sure that our strategic and military interests are 

protected. It is not because of these islands have oil and gas or resources and such that we have any real economic interest, it is primarily strategic and military. And I will say that I am utterly disappointed, the fact that for 2 years we have been dragging this 

issue, finally having to come to the Congress to do something by 

trying to find some sort of offsets to meet the requirements that we 

have under the terms of the Compact. 

My understanding Mr. Chairman, the U.S. Constitution pledges 

its full faith in credit clauses in whatever the government of the 

United States has obligations, and one is toward Palau as part of 

the Compact agreements that we had with this country, guaranteeing our presence in times of war and emergency for 50 years 

that we could use Palau. And I might also add, Mr. Chairman, that 

this issue is very critical when we are looking at the South China 

Sea, and the issues we are now confronted with China and all the 

problems with the Asian countries, I think the question that we 

have now that we have to answer, is Palau relevant to our overall 

strategic and military interest right now in the Pacific? And I say, 

Mr. Chairman, it better be, because right now a lot of Palauan 

leaders are seriously questioning the integrity of our own government whether or not we are willing to fulfill our obligations and 

commitments financially in terms of what we agreed upon in terms 

of the Compact. 

I realize my time is up, Mr. Chairman. I haven’t had a chance 

to even ask one question, but I really, really thank you for your 

leadership and wanted to see this through. But I have about 100 

questions that I want to wait for the second round. I just want to 

give that as an opener, and my real concern, Mr. Chairman, is that 

we are not paying enough attention. So we don’t even have USAID 

presence, if we did it was only a million dollars for the budget, Mr. 

Kagan, while China has a $600 million economic development program for these island nations. Do you think they are stupid not to 

realize that we really don’t care, we really don’t have interest except for New Zealand and Australia, that is basically our foreign 

policy toward the Pacific. I am sorry, Mr. Chairman, I will wait for 

the second round. 

Dr. FLEMING. I thank the gentleman. I believe the gentleman has 

framed the issue very well. The Chairman now recognizes Ms. 

Bordallo the gentlelady from Guam. 

Ms. BORDALLO. Thank you, Mr. Chairman. I ask unanimous consent that an August 1st article from The Washington Post entitled, 

‘‘U.S. Model For a Future War Fans Tensions With China and Inside Pentagon,’’ as well as an accompanied map illustrating the 

U.S. force posture in the Asia-Pacific region be included in the 

record. I believe this article and map highlight the importance of 

why we need to pass the Compact renewal with Palau. 

Dr. FLEMING. We have a copy of that. 

Ms. BORDALLO. I hope this doesn’t cost me time. 

Dr. FLEMING. We will reset the time for the gentlelady. Without 

objection so ordered so approved. 
44 

[The article and maps follow:] 

The Washington Post Company 

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

By Greg Jaffe, Published: August 1, 2012 

When President Obama called on the U.S. military to shift its focus to Asia earlier 

this year, Andrew Marshall, a 91-year-old futurist, had a vision of what to do. 

Marshall’s small office in the Pentagon has spent the past two decades planning 

for a war against an angry, aggressive and heavily armed China. 

No one had any idea how the war would start. But the American response, laid 

out in a concept that one of Marshall’s longtime proteges dubbed ‘‘Air-Sea Battle,’’ 

was clear. 

Stealthy American bombers and submarines would knock out China’s long-range 

surveillance radar and precision missile systems located deep inside the country. 

The initial ‘‘blinding campaign’’ would be followed by a larger air and naval assault. 

The concept, the details of which are classified, has angered the Chinese military 

and has been pilloried by some Army and Marine Corps officers as excessively expensive. Some Asia analysts worry that conventional strikes aimed at China could 

spark a nuclear war. 

Air-Sea Battle drew little attention when U.S. troops were fighting and dying in 

large numbers in Iraq and Afghanistan. Now the military’s decade of battling 

insurgencies is ending, defense budgets are being cut, and top military officials, ordered to pivot toward Asia, are looking to Marshall’s office for ideas. 

In recent months, the Air Force and Navy have come up with more than 200 initiatives they say they need to realize Air-Sea Battle. The list emerged, in part, from 

war games conducted by Marshall’s office and includes new weaponry and proposals 

to deepen cooperation between the Navy and the Air Force. 

A former nuclear strategist, Marshall has spent the past 40 years running the 

Pentagon’s Office of Net Assessment, searching for potential threats to American 

dominance. In the process, he has built a network of allies in Congress, in the defense industry, at think tanks and at the Pentagon that amounts to a permanent 

Washington bureaucracy. 

While Marshall’s backers praise his office as a place where officials take the long 

view, ignoring passing Pentagon fads, critics see a dangerous tendency toward 

alarmism that is exaggerating the China threat to drive up defense spending. 

‘‘The old joke about the Office of Net Assessment is that it should be called the 

Office of Threat Inflation,’’ said Barry Posen, director of the MIT Security Studies 

Program. ‘‘They go well beyond exploring the worst cases. . . . They convince others 

to act as if the worst cases are inevitable.’’ 

Marshall dismisses criticism that his office focuses too much on China as a future 

enemy, saying it is the Pentagon’s job to ponder worst-case scenarios. 

‘‘We tend to look at not very happy futures,’’ he said in a recent interview. 

China tensions 

Even as it has embraced Air-Sea Battle, the Pentagon has struggled to explain 

it without inflaming already tense relations with China. The result has been an information vacuum that has sown confusion and controversy. 

Senior Chinese military officials warn that the Pentagon’s new effort could spark 

an arms race. 

‘‘If the U.S. military develops Air-Sea Battle to deal with the [People’s Liberation 

Army], the PLA will be forced to develop anti-Air-Sea Battle,’’ one officer, Col. 

Gaoyue Fan, said last year in a debate sponsored by the Center for Strategic and 

International Studies, a defense think tank. 

Pentagon officials counter that the concept is focused solely on defeating precision 

missile systems. 

‘‘It’s not about a specific actor,’’ a senior defense official told reporters last year. 

‘‘It is not about a specific regime.’’ 

The heads of the Air Force and Navy, meanwhile, have maintained that Air-Sea 

Battle has applications even beyond combat. The concept could help the military 

reach melting ice caps in the Arctic Circle or a melted-down nuclear reactor in 

Japan, Adm. Jonathan Greenert, the U.S. chief of naval operations, said in May at 

the Brookings Institution. 

At the same event, Gen. Norton Schwartz, the Air Force chief, upbraided a retired 

Marine colonel who asked how Air-Sea Battle might be employed in a war with 

China. 
45 

‘‘This inclination to narrow down on a particular scenario is unhelpful,’’ Schwartz 

said. 

Privately, senior Pentagon officials concede that Air-Sea Battle’s goal is to help 

U.S. forces weather an initial Chinese assault and counterattack to destroy sophisticated radar and missile systems built to keep U.S. ships away from China’s coastline. 

Their concern is fueled by the steady growth in China’s defense spending, which 

has increased to as much as $180 billion a year, or about one-third of the Pentagon’s 

budget, and China’s increasingly aggressive behavior in the South China Sea. 

‘‘We want to put enough uncertainty in the minds of Chinese military planners 

that they would not want to take us on,’’ said a senior Navy official overseeing the 

service’s modernization efforts. ‘‘Air-Sea Battle is all about convincing the Chinese 

that we will win this competition.’’ 

Like others quoted in this article, the official spoke on the condition of anonymity 

because of the sensitivity of the subject. 

A military tech ‘revolution’ 

Air-Sea Battle grew out of Marshall’s fervent belief, dating to the 1980s, that 

technological advancements were on the verge of ushering in a new epoch of war. 

New information technology allowed militaries to fire within seconds of finding 

the enemy. Better precision bombs guaranteed that the Americans could hit their 

targets almost every time. Together these advances could give conventional bombs 

almost the same power as small nuclear weapons, Marshall surmised. 

Marshall asked his military assistant, a bright officer with a Harvard doctorate, 

to draft a series of papers on the coming ‘‘revolution in military affairs.’’ The work 

captured the interest of dozens of generals and several defense secretaries. 

Eventually, senior military leaders, consumed by bloody, low-tech wars in Iraq 

and Afghanistan, seemed to forget about Marshall’s revolution. Marshall, meanwhile, zeroed in on China as the country most likely to exploit the revolution in 

military affairs and supplant the United States’ position as the world’s sole superpower. 

In recent years, as the growth of China’s military has outpaced most U.S. intelligence projections, interest in China as a potential rival to the United States has 

soared. 

‘‘In the blink of an eye, people have come to take very seriously the China threat,’’ 

said Andrew Hoehn, a senior vice president at Rand Corp. ‘‘They’ve made very rapid 

progress.’’ 

Most of Marshall’s writings over the past four decades are classified. He almost 

never speaks in public and even in private meetings is known for his long stretches 

of silence. 

His influence grows largely out of his study budget, which in recent years has 

floated between $13 million and $19 million and is frequently allocated to think 

tanks, defense consultants and academics with close ties to his office. More than 

half the money typically goes to six firms. 

Among the largest recipients is the Center for Strategic and Budgetary Assessments, a defense think tank run by retired Lt. Col. Andrew Krepinevich, the Harvard graduate who wrote the first papers for Marshall on the revolution in military 

affairs. 

In the past 15 years, CSBA has run more than two dozen China war games for 

Marshall’s office and written dozens of studies. The think tank typically collects 

about $2.75 million to $3 million a year, about 40 percent of its annual revenue, 

from Marshall’s office, according to Pentagon statistics and CSBA’s most recent financial filings. 

Krepinevich makes about $865,000 in salary and benefits, or almost double the 

compensation paid out to the heads of other nonpartisan think tanks such as the 

Center for Strategic and International Studies and the Brookings Institution. CSBA 

said its board sets executive compensation based on a review of salaries at other 

organizations doing similar work. 

The war games run by CSBA are set 20 years in the future and cast China as 

a hegemonic and aggressive enemy. Guided anti-ship missiles sink U.S. aircraft carriers and other surface ships. Simultaneous Chinese strikes destroy American air 

bases, making it impossible for the U.S. military to launch its fighter jets. The outnumbered American force fights back with conventional strikes on China’s mainland, knocking out long-range precision missiles and radar. 

‘‘The fundamental problem is the same one that the Soviets identified 30 years 

ago,’’ Krepinevich said in an interview. ‘‘If you can see deep and shoot deep with 

a high degree of accuracy, our large bases are not sanctuaries. They are targets.’’ 
46 

Some critics doubt that China, which owns $1.6 trillion in U.S. debt and depends 

heavily on the American economy, would strike U.S. forces out of the blue. 

‘‘It is absolutely fraudulent,’’ said Jonathan D. Pollack, a senior fellow at Brookings. ‘‘What is the imaginable context or scenario for this attack?’’ 

Other defense analysts warn that an assault on the Chinese mainland carries potentially catastrophic risks and could quickly escalate to nuclear armageddon. 

The war games elided these concerns. Instead they focused on how U.S. forces 

would weather the initial Chinese missile salvo and attack. 

To survive, allied commanders dispersed their planes to austere airfields on the 

Pacific Islands of Tinian and Palau. They built bomb-resistant aircraft shelters and 

brought in rapid runway repair kits to fix damaged airstrips. 

Stealthy bombers and quiet submarines waged a counterattack. The allied approach became the basis for the Air-Sea Battle. 

Think tank’s paper 

Although the Pentagon has struggled to talk publicly about Air-Sea Battle, CSBA 

has not been similarly restrained. In 2010, it published a 125-page paper outlining 

how the concept could be used to fight a war with China. 

The paper contains less detail than the classified Pentagon version. Shortly after 

its publication, U.S. allies in Asia, frustrated by the Pentagon’s silence on the subject, began looking to CSBA for answers. 

‘‘We started to get a parade of senior people, particularly from Japan, though also 

Taiwan and to a lesser extent China, saying, ‘So, this is what Air-Sea Battle is,’?’’ 

Krepinevich said this year at an event at another think tank. 

Soon, U.S. officials began to hear complaints. 

‘‘The PLA went nuts,’’ said a U.S. official who recently returned from Beijing. 

Told that Air-Sea Battle was not aimed at China, one PLA general replied that 

the CSBA report mentioned the PLA 190 times, the official said. (The actual count 

is closer to 400.) 

Inside the Pentagon, the Army and Marine Corps have mounted offensives 

against the concept, which could lead to less spending on ground combat. 

An internal assessment, prepared for the Marine Corps commandant and obtained 

by The Washington Post, warns that ‘‘an Air-Sea Battle-focused Navy and Air Force 

would be preposterously expensive to build in peace time’’ and would result in ‘‘incalculable human and economic destruction’’ if ever used in a major war with China. 

The concept, however, aligns with Obama’s broader effort to shift the U.S. military’s focus toward Asia and provides a framework for preserving some of the Pentagon’s most sophisticated weapons programs, many of which have strong backing in 

Congress. 

Sens. Joseph I. Lieberman (I-Conn.) and John Cornyn (R-Tex.) inserted language 

into the 2012 Defense Authorization bill requiring the Pentagon to issue a report 

this year detailing its plans for implementing the concept. The legislation orders the 

Pentagon to explain what weapons systems it will need to carry out Air-Sea Battle, 

its timeline for implementing the concept and an estimate of the costs associated 

with it. 

Lieberman and Cornyn’s staff turned to an unsurprising source when drafting the 

questions. 

‘‘We asked CSBA for help,’’ one of the staffers said. ‘‘In a lot of ways, they created 

it.’’ 

Julie Tate contributed to this report. 
47 

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48 

Ms. BORDALLO. Thank you. Secretary Kagan, I have a question 

for you, the Palau Compact adjusted certain amounts of U.S. assistance over time to split the cost of the diminished value between 

the U.S. and Palau. Now this was prudent for a measure that determines assistance for a long period of time. The Republican Congress in 2003 expanded the adjustment in the negotiated revised 

Compacts with the other two freely associated states. However, 

H.R. 6040 only includes the partial adjustment factor included in 

the Compact with Palau. 

The Economist cited by the GAO has calculated that the cost 

would be less than $1 million a year, using the CBO formula. This 

is intended by H.R. 6040 to be more than made up by the bill’s 

cost offset. Congress urged the Administration to include a cost adjustment provision in the agreement strongly desired by Palau. The 

lack of such a provision casts doubt whether the agreement could 

have obtained Palau acceptance. Can you elaborate why the Administration didn’t agree to include a cost adjustment provision in 

the agreement, especially after Congress added one in 2003, and 

Congress said one would be needed? 

Mr. KAGAN. Thank you, Madam Bordallo. Thank you very much 

for the question, Madam Bordallo. I think this goes back to what 

we discussed before, which is that the overall package which was 

negotiated between the United States and the Government of 

Palau was one that was carefully calibrated to address a variety of 

concerns as was foreseen in the original 15-year review period. We 

believe that the resulting agreement is one that accurately reflects 

the changes in Palau and is one that has been accepted by both 

governments. We obviously believe that the Government of Palau 

supports this agreement and are confident that once there is action 

in the United States that we are confident that Palau will accept 

it. 

As to the intent, I think the reason was that there was a feeling 

that Palau circumstances had evolved to a point where this approach now was appropriate. Clearly, our goal in doing negotiations 

was to safeguard broader U.S. interests, including trying to ensure 

the appropriate compensation was provided to Palau under the 

terms of the agreement. Now obviously, this is something that it 

reflects the different circumstances that prevailed with the other 

Compact states, but we believe this is one that is appropriate and 

is fair. 

Ms. BORDALLO. You say the Palau government agrees? 

Mr. KAGAN. Yes, the Palau government agrees. 

Ms. BORDALLO. This could be Secretary Babauta or Secretary 

Kagan, we all know that Palau is an important strategic ally to the 

United States. We should remember the thousands of Americans 

paid the ultimate sacrifice to free Palau from Japanese rule. The 

Compact about the security of America in the Pacific region, in the 

Asia-Pacific region, this capability directly aligns with the President’s broader, military diplomatic strategy for the region. So my 

colleagues and I want to get a Palau Compact passed. Can we expect engagement from the Administration on offset so that we can 

pass this Compact during this Congress? Also, with the delays in 

passing the Compact, what message does that send to our allies in 
49 

the region? And what diplomatic or political capital have we lost 

in not passing the agreement? 

Mr. KAGAN. Again, thank you very much for the question which 

I think goes to the very heart of the why the Administration very 

strongly supports prompt action to pass the Compact, the extension. We believe that failure to move forward has significant costs 

not just for our relationship with Palau, but in a region where people look very closely at how we treat our friends. So I fully agree 

with you and fully agree with Mr. Faleomavaega before that about 

the need for prompt action. We stand ready to engage and engage 

very actively to find appropriate offsets, I believe we have done 

that and we will continue to do so. 

Ms. BORDALLO. I did ask do you think it will be passed during 

this Congress? 

Mr. KAGAN. It is not for me to speak as to what the Congress 

will do. 

Ms. BORDALLO. Would you be ready? 

Mr. KAGAN. We stand ready to engage, we strongly support 

prompt action and will do whatever we can to support it. 

Ms. BORDALLO. Thank you. Mr. Chairman, are we going to have 

a second round on this? 

Dr. FLEMING. Indeed. 

Ms. BORDALLO. Good. I yield back. 

Dr. FLEMING. The gentlelady yields her time back. I think our 

panel seems up to it, so we will begin our second round here. You 

can tell this is all very engaging and important information. 

Secretary Kagan, both Mr. Sablan and Ms. Bordallo raised concerns, time not included in the Compact, for H.R. 6040. Are the annual audits, inflation rates and U.S. Postal Service’s subsidy language being tied to national rates? The added benefits you mentioned in your testimony. Are these the only added benefits? Tell 

us more about that. Can you expand upon that because obviously 

there are a lot of questions about that in the hearing? 

Mr. KAGAN. Certainly, Mr. Chairman. As you said, we welcome 

this opportunity to engage and discuss because we recognize that 

your role in this is critical and we want to try to be as supportive 

as possible. 

I think that our position is this was very painstakingly negotiated. As I said, there is a balance between the different elements. 

Both sides had to give as well as take. I think our view is we 

strongly object to Section 105(e)3. 

We made a deliberate decision to negotiate the compact review 

agreement as an amendment for several reasons. And one of these 

had to do with the desire not to extend the full faith and credit of 

the United States the obligations contained in the Compact. We believe that this is something that is very much in our interest. We 

do look forward to a continued discussion on this. 

We also object to the application of Section 215 of the Compact 

to the funding commitments in the agreement on the partial inflation adjustment. 

I think that this is in part because of the higher total dollar costs 

and also in part because, again, of maintaining the balance within 

the different elements of the Compact. 
50 

Dr. FLEMING. Let me interrupt you because we are all limited in 

time. 

So, in answer to my question, you read me language from the 

bill. I just want to get clarification here. These three things: Inflation adjustments; tie the U.S. Postal Service subsidy to retaining 

domestic U.S. postal rates; and require the U.S. to pay for annual 

audits. Do you support that? Does the Administration support that 

or not? 

Mr. KAGAN. Our view is we do not support the inflation adjustment. I defer to my colleague, Assistant Secretary Babauta on the 

postal rates. And on the audits, we believe that this is fair and appropriate and support the idea of transferring the financial responsibility for this to Palau. But again, we stand ready to remain engaged with the Committee because our goal is to reach prompt 

agreement so that we can have prompt action to pass the legislation. 

Dr. FLEMING. Mr. Babauta. 

Mr. BABAUTA. Mr. Chairman, I join my colleague, Mr. Kagan, on 

his thoughts with respect to the audit and who is going to pay for 

the cost of the audit. That is something I am trying to recall the 

negotiations themselves in Hawaii, where I was present, exactly 

why it fell on Palau, and we are happy to get back to you on exactly why that happened. An inflation adjustment wasn’t part of 

the finalized negotiated agreement with Palau, and the language 

that is referenced in H.R. 6040, which was amended by the Foreign Affairs Committee, the renegotiated agreement with the RMI 

and the FSM also did not contain the inflation adjustment, as Mrs. 

Bordallo points out, when it was submitted to Congress for consideration. And however, we recognize that Congress saw fit at the 

time to include such language in the RMI and FSM agreement. 

Dr. FLEMING. I got that you don’t support that. But what about 

the postal rates and the audits? 

He was deferring to you on that. 

Mr. BABAUTA. I join him in support of the audits. 

On the postal rates, the postal rate was something internal for 

us to negotiate on the U.S. side. And that was reflected eventually 

in the finalized negotiated agreement. There is nothing that we are 

subsidizing within the Postal Service that takes away from the 

substance and the financial assistance that we are going to give to 

Palau. 

Dr. FLEMING. So, of these three items, and again I am going to 

have to get a little more clarification as to what the answers are 

on it, what the Administration supports or what it doesn’t, but had 

these been agreed to by Palau? That is the question. 

The Administration’s position on these three items, have they 

been agreed to by Palau? 

Mr. KAGAN. Yes. This was agreed to and reflected in the final 

agreement between the Government of the United States and the 

Government of Palau. 

Dr. FLEMING. All right. Thank you, gentlemen. I yield back. 

Ranking Member, Mr. Sablan. 

Mr. SABLAN. Thank you very much, Mr. Chairman, and let me 

also go back, but again, Secretary Kagan, let me ask you two questions, and I need a short response. 
51 

What is the significance of Palau in the U.S. national security interests in the Pacific? 

Mr. KAGAN. We believe Palau is critical for two reasons. One is 

that it is a very strategically located piece of real estate that also 

has a very important economic, exclusive economic zone and that 

the Compact which provides us responsibility for security and defense of Palau also provides us very critical access for our military 

forces and the ability to deny such access to foreign military forces. 

The second is Palau is a very close friend and ally and supporter 

in a lot of different areas, including the United Nations but also 

in the Pacific, and has been a very critical supporter of our enhanced engagement in the Pacific in the past 3 years. 

Mr. SABLAN. Thank you. And also let me ask who among all our 

friends in the world were the first to take the Uyghur prisoners 

from Guantanamo Bay? 

Mr. KAGAN. I believe that we negotiated agreements with Bermuda and Palau. 

Mr. SABLAN. My question is who not—— 

Mr. KAGAN. Palau and Bermuda. 

Mr. SABLAN. Palau, right? 

Mr. KAGAN. Yes. 

Mr. SABLAN. And then we nickel and dime them in negotiations 

for the compact financial? That is how we treat our friends? 

Please I am Micronesian. I know how we have been treated. I 

grew up with people from Palau. We nickel and dime our very best 

friends, Mr. Kagan. I am not being disrespectful here. I am just 

being truthful here, what we are worried about is $500,000; we are 

worried about subsidies. I think the Assistant Secretary will take 

care of the subsidy. But is this how we treat our friends? Is this 

how we want to be known in the world as how we treat our 

friends? 

Mr. KAGAN. Mr. Sablan, I appreciate very much the question. I 

appreciate it, and I think that the fair response to that is that we 

went into this with the desire to enhance and strengthen the Compact. We wanted to reflect the different circumstances that prevailed. I do not believe we nickel and dimed our friends. I believe 

that what we did was try to negotiate something that we believed 

was fair for the people of Palau and fair for the people of the 

United States. 

Mr. SABLAN. But, as you said earlier, Secretary Kagan, and I am 

not being, I hope you don’t take this as being disrespectful—maybe 

I am a little passionate—but you would not recommend the Administration does not allow this to go into law, the Congress approves 

the legislation that is before us. You would be—you wouldn’t say 

object to it and say it is not good. 

Mr. KAGAN. I think we would want to try and work with you 

very respectfully to try and address our concerns. But we strongly 

support prompt passage of this legislation. 

Mr. SABLAN. Two years and 1 week, Mr. Secretary, and we still 

don’t have an offset that Congress agrees to, and this is, working 

with you, sir, is the language that means a sense of Congress. But 

anyway, I will work you with also, Mr. Secretary. 

Dr. Gootnick, now for the difficult questions, sir, I hope not. Of the $189 million remaining to be provided, because I think the $26 
52 

million has been appropriated already, isn’t $30 million to make up 

for the initial U.S. underfunding of the Compact Trust Fund to enable it to provide the revenue it is supposed to provide through the 

50 years of U.S. military base rights under the Compact? And isn’t 

$28 million for maintenance of infrastructure that the U.S. considered essential? 

Mr. GOOTNICK. Yes, to your first question, you are correct. The 

$30 million plus-up is intended to support the trust fund to better 

its prospects to get to 2044. So the agreement, the Palauans agreed 

to reduce their withdrawals from the trust fund in the short term, 

plus it up toward the end of this 15-year period to the $15 million 

but from there on out through 2044 to yield $15 million. 

I would point out that is also not inflation adjusted $15 million. 

So, by the time you get out to 2044, that $15 million looks quite 

different. 

With respect to the infrastructure maintenance fund, the fund 

stipulates that the priorities are to U.S.-funded projects, so that is 

the Compact road first and foremost but, in addition, improvements to the international airport. 

Mr. SABLAN. My time is up, Mr. Chairman. I hope there is another round of questioning. 

Dr. FLEMING. The gentleman yields his time back. 

The Chair recognizes Mr. Faleomavaega for 5 minutes. 

Mr. FALEOMAVAEGA. Thank you, Mr. Chairman. 

Secretary Kagan, from what I am hearing in your testimony, you 

are suggesting that the Administration is going to recommend a 

veto of this proposed bill H.R. 6040? 

Mr. KAGAN. As I have said, we look forward to working very 

closely with Congress on prompt passage of this legislation. I think 

it would be inappropriate to speculate on what our position would 

be until we see the final bill. 

Mr. FALEOMAVAEGA. Not to speculate, let me just give you a little 

sense of history here. This was 2 years ago, 2 years ago, Secretary 

Clinton wanted legislation enacted so that we could comply with 

the provisions of the Compact that we have agreed with the Republic of Palau. Both the Department of the Interior and State Departments did not submit a proposed bill until last year, but it didn’t 

include offsets. And according to our House Rules, both Houses rejected what the Administration had suggested. 

And now both, the Administration just has not even given any 

offerings in terms of what you are willing to do so we can get this 

thing done. And that is what forced myself and Chairman Manzullo 

and 14 other Members of the Congress on the Foreign Affairs Committee to propose 6040, so we could go through this impasse. 

Now you say you are willing to do this, but for the past 2 years, 

Secretary Kagan, that has not been the response of the Administration. You have been kicking the can down the alley, the highway, 

the mountains and the ocean. I don’t know what the heck is going 

on here. So now we find ourselves in this predicament. You say the 

Administration is more than willing to offer help, and we talk 

about these things. We are nitpicking over the assistance that 

Palau deserves and what we have agreed upon under the terms of 

the Compact. 
53 

And yet for the billions of dollars that we give in foreign aid in 

other countries, do we make demands such as this about audits? 

I don’t think so. 

And Secretary Babauta, I want to ask you this, you are saying 

that Palau agreed to these three things about the audits and about 

the Postal Service and about the inflationary costs? My understanding, they have not agreed unless, and that is the reason why 

we have these provisions added on the proposed bill. 

Mr. BABAUTA. Well, during the negotiations themselves, as Assistant Secretary Kagan pointed out, issues were raised, some were 

accepted by Palau, some were accepted or denied by the United 

States—— 

Mr. FALEOMAVAEGA. Here is an example, Secretary Babauta, on 

the audit issue. It is agreed with the Republic of the Marshall Islands and the Federated States—the joint funding of the auditing. 

And yet under this proposal we have, you are expecting Palau to 

pay for the entire audit process. Is that fair? 

Mr. BABAUTA. I would like to say that, during the negotiations, 

there was some finality to this issue, which was accepted by both 

parties—— 

Mr. FALEOMAVAEGA. Well, somebody screwed up here. Why are 

we treating Palau differently from the other two free states? The 

question of inflationary adjustment issue, this was already in the 

Compact, this provision about cost inflation, and you are objecting 

to this. 

Secretary Kagan, why are you objecting to the inflationary cost 

provision index? 

Mr. KAGAN. As I said before and as Assistant Secretary Babauta 

has said, this is part of a complex set of negotiations. There were 

trade-offs that were made, there were things that were accepted by 

the United States—— 

Mr. FALEOMAVAEGA. But why are you objecting to this inflationary index? 

Mr. KAGAN. We believe that—— 

Mr. FALEOMAVAEGA. Too costly? Eleven billion dollars too costly 

for a 12-year period? 

Mr. KAGAN. We have a responsibility to try and steward our 

funds carefully, and we believe this was part of an appropriate set 

of negotiations between our governments—— 

Mr. FALEOMAVAEGA. So, in other words, you are going to continue objecting and not even approve or have any sense of support 

for this proposed bill. 

Mr. KAGAN. I want to make very clear that we do not object to 

this proposed bill, that there are certain provisions within it that 

we have concerns about and that we look forward to working with 

Congress on, but we strongly support prompt action by Congress to 

pass this legislation. 

Mr. FALEOMAVAEGA. What kind of a time schedule are you looking at, Secretary Kagan, that we can get a firm answer from the 

Administration? How soon can you tell us it is yes or no, forget it, 

we don’t support it, so we know where to go? 

Mr. KAGAN. We want to make clear that we support this legislation. We believe there are elements in it—— 

Mr. FALEOMAVAEGA. Another 2 years? 
54 

Mr. KAGAN. We have absolutely no desire to wait. We would like 

to see prompt action. We recognize this is very important to the 

people of Palau. We have been pushing for action on this for some 

time, and we look forward to working with you to try and make 

sure that happens. 

Mr. FALEOMAVAEGA. Mr. Kagan, I appreciate your comments, but 

it just doesn’t simply add up to what we have had to endure for 

the last 2 years from the Administration. 

Mr. KAGAN. We look forward to working with you, and we look 

forward to prompt action on this. 

Mr. FALEOMAVAEGA. I am sorry, Mr. Chairman. My time is up. 

I will wait for the third round if there is a chance. Thank you. 

Dr. FLEMING. The gentleman yields his time, and he predicts 

there will be a third round. I suspect he is right. 

The Chair now recognizes Ms. Bordallo for 5 minutes. 

Ms. BORDALLO. Thank you, Mr. Chairman. 

Secretary Babauta, I am going to add to my colleague’s comments from American Samoa. He mentioned different concerns, and 

when is this U.S. Postal bill—Service—have Palauans expressed 

substantial concern about the cuts in and increased costs for the 

U.S. Postal Service delivery of mail to the islands under the agreement? 

Just a direct question. Have the Palauans expressed concern? 

And further, are you aware of appropriations for a subsidy to the 

U.S. Postal Service for mail to independent countries which requires international rate postage? 

Mr. BABAUTA. I believe, yes, Palau has expressed some concern 

over the subsidy of the Postal Service. It is within the renegotiated 

agreement. 

And to your second question, no, I am not aware of any subsidy 

that is provided to—— 

Ms. BORDALLO. You might check on that. 

Secretary Kagan, I wanted to ask, following up on Congressman 

Faleomavaega’s questions, what are your concerns on this legislation? Could you point them out? The biggest concerns you have? 

And there must be two or three that you are really stuck on in 

these negotiations. 

And again, I will ask the question that I asked earlier, will you 

be ready to present this to Congress? 

Mr. KAGAN. I think we have identified the concerns. 

Ms. BORDALLO. Before the end of the year? 

Mr. KAGAN. The answer on your final question is yes. We strongly support prompt action. 

Ms. BORDALLO. But you have concerns. 

Mr. KAGAN. We have some concerns on some specifics. We think 

they are relatively minor and can be very easily addressed. 

Ms. BORDALLO. Could you mention those minor concerns? 

Mr. KAGAN. Well, I think, very specifically, the one has to do 

with the full faith and credit of the United States. As my colleague 

has mentioned, this was not something that was extended to the 

other Compact states as part of the 2004 amended Compacts. 

And then the other concern has to do with the inflation adjustment. And we believe that it is very much in our national interest 

to try to stick to the overall dollar amounts that were negotiated. 
55 

But I think that fundamentally, our strongest concern is prompt 

passage of this legislation, so we can keep our faith with the people 

and the Government of Palau. 

Ms. BORDALLO. I have another question for you, Secretary 

Kagan. 

A major stated goal of the agreement in the negotiations was to 

phase out Palau’s dependence upon U.S. assistance for essential 

services provided by the Government of Palau. 

Would any of the provisions of H.R. 6040 run counter to that 

goal of the Administration in the negotiations? 

Mr. KAGAN. Not to the best of my knowledge. I would defer to 

my colleague, Assistant Secretary Babauta, who is more familiar 

with the specific details of how the Compact assistance works. 

Mr. BABAUTA. Congresswoman, I don’t believe any of the goals 

that are in the renegotiated agreement run counter, generally, to 

our goals for Palau, which is to continue to see them grow, to be 

able to assist them in providing funding for education, public 

health, public safety, which are all elements of the negotiated 

agreement. 

Palau and the United States were very specific with respect to 

the U.S. assistance that is going to go out there. It is going to be 

used for those areas only. It will not be used for the president’s office. It will not be used by the OEK nor by the judiciary. 

The U.S. funding is going to go straight in to the programs that 

are provided to the people of Palau. 

Ms. BORDALLO. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Dr. FLEMING. The gentlelady yields back. 

OK, we shall begin a third round, and we thank you gentlemen 

for hanging in there. 

Let me see if I can kind of bring some clarity to this discussion, 

begin to tie some things together. We are all, I think, on very similar tracks here. 

The whole idea behind the continued funding for Compacts and 

really other island situations—I mean, since I have been Chairman 

of insular affairs, this seems to come up constantly—and that is, 

how do we wean countries off of dependency by creating an economy on island that will sustain that island into the future? Part 

of this idea, of course, was to create a trust fund, but unfortunately, the return on investment is a little low right now, so that 

is a problem. 

So my question, I really have two questions, and certainly any 

of you on the panel are welcome to take a stab at this, is, number 

one, what are we doing to get that GDP up higher? 

What other sources, private economy, whether it is through 

bringing more visitors to the island, more commerce, are there 

other lines of economic growth that we can pursue, and the other 

is it really seems like to me there is only one real major sticking 

point here and that is the pay-for. And so I would love to have your 

response on both of these questions. 

Where do you think we are going GDP wise? How are we going 

to fix it in a way where this is going to be less and less an issue 

in the out years? 
56 

And then number two, how we can we get past this pay-for 

issue? 

Mr. BABAUTA. Thank you very much, Mr. Chairman. 

With respect to the first part of your question, during the negotiations themselves, the agreement has created an advisory group 

on economic reform, which will be comprised of both members from 

the United States and Republic of Palau. That group will meet annually and determine, make recommendations on reforms that 

need to occur within government and reforms that need to occur 

economically so that you are building, so you are continuing to 

have your economy grow. There is language in there that—— 

Dr. FLEMING. In real terms, though, do we have anything more 

than tourism that we are working with here? 

Mr. BABAUTA. Tourism is the largest part of their economy, sir. 

Dr. FLEMING. Is there agriculture, natural resources? 

Mr. BABAUTA. They are a haven for how they conserve their resources, and that is partly why their tourism is as it is, it is because of their conservation—— 

Dr. FLEMING. By natural resources, I mean any type of mining 

or perhaps fisheries, anything else that could utilize natural resources? 

Mr. BABAUTA. Fisheries, again, is a huge resource for them. I can 

ask Mr. Kagan to speak about that since this is an issue that is 

kind of more at the forefront. 

Dr. FLEMING. What can you tell us about the pay-for? Where can 

we get past the stumbling block that we are at with the pay-for? 

Mr. BABAUTA. The Department of the Interior and the OMB have 

identified several offsets, as you know. Alternative offsets have 

been developed by the House Foreign Affairs subcommittee which 

are incorporated into H.R. 6040, and in principle, we have no objection to the offset identified by the Foreign Affairs Subcommittee 

on Asia and the Pacific Islands in their version of H.R. 6040 that 

was marked up on July 18th and have been working with that subcommittee to modify the language for State Department purposes. 

The final language, of course would need to be reviewed by our 

OMB process, however, to ensure that equities of all Executive 

Branch agencies are safeguarded. 

Dr. FLEMING. So, basically, what you are saying is that these 

various departments are working with our Committees, and we 

continue the discussions, but, and you do support the latest 

version, the latest iteration. Although we have a problem on our 

side with that, obviously, which is I guess the reason why it is not 

moving forward, and that is the passport and the taxation issue. 

So your department supports that in theory; really the problem is 

internally here in Congress, is that correct? Am I correct about 

that? 

Mr. KAGAN. To be clear, we have no objection to it, and we have 

engaged with the Committee staff on the details of it. 

There are some specific details on how it would be applied that 

are of some concern to the State Department but that are very 

technical in nature and which we believe should be fairly easy to 

address. We recognize that this is obviously a critical piece of moving this forward, and we appreciate the leadership the Committee 
57 

has taken to try and find an appropriate offset that would allow 

this to move forward. 

Dr. FLEMING. Can you follow up on the passport issue? Can you 

provide the language to the Committee that we need that would 

make that acceptable, the passport taxation issue? 

Mr. KAGAN. Certainly, we are prepared to continue engaging on 

that, and I think, as we have told Committee staff, we have I believe four specific concerns that are very technical in nature on how 

that would be applied. 

Dr. FLEMING. Yes, if you would get us the language, that would 

certainly be appreciated. 

I yield back and recognize Mr. Sablan for 5 minutes. 

Mr. SABLAN. Thank you very much, Mr. Chairman. 

Secretary Kagan, I want to thank you, sir, for being engaged in 

this issue. Obviously, for us, sometimes it is not fast enough, but 

I know you are very engaged, and I appreciate your taking the time 

to fly to and go to Palau before Chairman Fleming did, and I have 

been inviting him since forever. But thank you, sir, for what you 

are doing, and I do have some questions that I would eventually 

like you to respond to. 

Dr. Gootnick, it is always nice to see you, sir. It is always good 

to see you. I also have questions that we will submit to you and 

get a response. 

Of course my favorite, Secretary Babauta, sir, thank you for 

many things that you do for Palau, for the Northern Marianas in 

particular, and I am sure for the other territories and Micronesia 

and the Pacific. 

But I do have some questions, Mr. Secretary. 

I hope that we could work out also the U.S. Postal Service means 

of delivering packages because this is truly important for my constituents because if we have to pay international to ship to Palau 

or pay international, you know those betel nuts that they ship from 

Palau to the Northern Marianas, trust me, I would have constituents knocking on my door about this issue. But we really appreciate the time that you are going to work on this, we are going to 

try and work together on the postal delivery issue so we can pay 

domestic rather than international rates, and I will work with you, 

sir. 

But let me ask you a question before I get to my other issue. 

How does the new agreement affect the Compact trust fund, in 

your own opinion, sir? 

Mr. BABAUTA. Well, it affects it in many ways. It strengthens the 

Compact trust fund; it makes it so that we are making investments 

throughout the life of the second term of the Compact, so that, at 

the end of that term, it can provide the $15 million that is needed 

after U.S. assistance ends. 

Mr. SABLAN. Why does the agreement deny the use of funding by 

the offices of the President, Palau’s congress, because I can’t say 

the Palau name, I apologize to the Ambassador, Palau’s congress, 

judiciary and state governments; was there a problem with Palau’s 

use of earlier resources? 

Mr. BABAUTA. There was no problem. I think it is simply a reflection of the fact that Palau believes that for those branches of government, the president or those offices of the presidency, the OEK, 
58 

and also the judiciary, that that should be funded by local funds 

generated by their own revenue and not with U.S. assistance. They 

believe, as does the U.S., that U.S. assistance should be going directly to programs, such as education, health care and public safety. 

Mr. SABLAN. Thank you. Now since we are talking about money, 

Mr. Secretary, let me just shift our attention to the Northern Mariana Islands. 

As you know, sir, the Commonwealth is in deep financial trouble. 

Our retirement fund, a United States District Court judge had to— 

is considering and will make an appointment of ad litem trustees 

because my Governor refuses to provide trustees for a quorum because he has issued an emergency order that he would seize the 

money for the retirement fund, for the pension fund. 

We have a hospital, sir, where there is a child, a young child, 

who is being fed through a tube and the hospital cannot even buy 

her the Pediasure and the remaining supply of tube that feeds her 

is actually the one in her body, and that people in the committee 

are now chipping in, so that they could provide and make sure this 

little girl survives. Her name is Dora. Where our Governor has terminated a very capable executive director of the Commonwealth 

Utilities Corporation because he said that this guy wasn’t doing 

enough for alternative energy and then turns around and signs a 

25-year, $190 million plus plus plus deal for fossil fuel. It is all 

about the money problem. 

His use, emergency after emergency—and recently, sir, your office paid for a fiscal study of the Commonwealth government apparently to get a better picture of what is going on. This document 

has not been made public. I got three pages of the report dealing 

with education. And obviously, I am very concerned because education is my number one agenda in Congress. We are spending less 

per capita in education than any other U.S. insular area. 

You are aware of this Federally funded report? 

Mr. BABAUTA. Yes, sir. 

Mr. SABLAN. May I have a copy, please? 

Mr. BABAUTA. Absolutely, Congressman. Right now, it is in draft 

form. We did this, we entered into kind of an arrangement with the 

Governor of CNMI about 4 months ago where our current contract 

with a graduate school, we used that to help assistance the CNMI 

and assist us in identifying exactly how their cash flow is laid out, 

how they are collecting revenue, and how they are spending their 

money. I have it in draft form right now. As soon as it is finalized, 

I will have my office come up, and we will brief you about it. 

Mr. SABLAN. Do we have any idea when? Are you waiting for— 

from what I understand, you are waiting for the Governor to say 

OK you can release it, right? 

Mr. BABAUTA. Absolutely not, sir. 

Mr. SABLAN. Any idea when you are going to release this, Mr. 

Secretary? Because the problem is the money. We need to know 

why and where it is going. 

Mr. BABAUTA. I will follow up when I get back to the office. I 

have seen it in draft form. Let me figure out exactly when we predict that it is going to be in the final form. But I can’t imagine it 

will take more than a week or two to become final. 
59 

Mr. SABLAN. Thank you very much, Mr. Secretary, and again, 

thank you, sir, for all that you do. I appreciate it. 

Secretary Kagan, please know I appreciate your engagement. 

Dr. Gootnick, it is always good to talk to you, sir, and get some— 

and differentiate unbiased opinion on several of the things going 

on. I appreciate it. 

If there is another round coming, I will ask my questions. But 

for now, I yield my time. 

Dr. FLEMING. The gentleman yields back. 

Mr. Faleomavaega has taken a couple of deep breaths. 

Mr. FALEOMAVAEGA. Mr. Chairman, I do want to say it is not 

every day that when having a congressional hearing, you get three 

rounds of questioning, but I deeply appreciate your patience and 

your forbearance in allowing us to continue the dialogue with our 

friends here from the Interior Department and also from the State 

Department. 

Again, I want to ask Secretary Kagan, Chairman Manzullo and 

I have had to search wide and low and whatever you want to call 

it trying to figure what would be a possible offset because apparently, the recommendations of offsets of both the Interior and State 

Department recommended were not acceptable to both Houses, the 

Senate as well as in the House. 

So, now, Chairman Manzullo and I thought, well, why do we 

have this offset dealing with passports? The flow or the stream of 

revenues that we gain from passports is well over $400 million a 

year. And what we are asking for here for this 10-year period that 

we are looking at the bill, that we are looking at about $183.5 million for a 10-year period from 2013 to 2022 or also, in addition, to 

$189 million if you add $6 million for infrastructure, maintenance 

as well as government operations. 

What I wanted to do is just to get a sense from you what—I 

guess, we have to put ourselves in the footings of the Palauans and 

their leaders. Supposing that we don’t approve this bill, no money 

comes to Palau; if you were a Palauan, what would you think your 

reaction is going to be to that effect? This small little tiny country, 

a lot of coconuts and coconut crabs and all of this and think of it 

as a little silly island community out there in the middle of nowhere, which is only about the size of Texas if you want to put in 

economic zones and the ocean, but what do you suppose is going 

to be the reaction to the Palauan leaders if we don’t honor our obligations and commitments under the provisions of the Compact? 

I had mentioned earlier in my statement, I think we do have an 

obligation under the Full Faith and Credit Clause of the Constitution to pay the Palauans what we do because what are we getting 

in exchange? Usage of Palauan waters and their resources in time 

of a national emergency in terms of whether or not we determine 

this area to be important as far as strategic and military interests 

are concerned, and we are funding, we are paying billions of dollars 

in what we do there as far as defense issues are concerned, and we 

are talking about $183 million, $184 million billing for a 10-year 

period, and we can’t even find a stream of revenue to pay for this. 

I am not suggesting that $183 million is peanuts. But when compared to the billions and billions of dollars that we give to foreign 

countries that we can’t even audit, and here we are diming and 
60 

nickeling or nickeling and diming for this amount for this country 

that really needs the resource. 

Mr. Kagan, how soon will we get an answer from the State Department whether or not they will support this bill? Because we 

really need to know where the Administration’s position is on this. 

Mr. KAGAN. Congressman Faleomavaega, again, I thank you for 

your leadership and particularly your very wise counsel and advice, 

which has been one of the reasons why we have significantly 

stepped up our engagement in the Pacific in the past 31⁄2 years, including Secretary Clinton’s meetings with the Pacific leaders on the 

margins of the U.N. General Assembly—— 

Mr. FALEOMAVAEGA. Mr. Secretary, you are not answering my 

question. How soon can we get a response to this bill? With all due 

respect, I admire Secretary Clinton’s trip to the Cook Islands and 

the foreign countries, all of that is nice and well. But I am talking 

about the needs of Palau, and we are not meeting these obligations. 

How can soon can we get a commitment from the State Department whether or not they support this bill? 

Mr. KAGAN. I was just informed that we have provided alternative language on the offsets to the House Foreign Affairs Committee. We strongly support prompt action on this legislation. We, 

as I said, we believe there is appropriate room to continue engaging 

in some of the details, but I think I want to make very clear that 

we strongly support prompt action to fulfill our obligations toward 

Palau. 

And as to your question on how they would feel, I think we feel 

very strongly. This is why we are looking for action on this because 

we recognize that failure to move quickly will have significant 

ramifications, not just for our relationship with Palau but also for 

the standing of the United States in the region. 

Mr. FALEOMAVAEGA. Secretary Babauta, how soon can we get the 

response from the Interior Department concerning this bill? 

Mr. BABAUTA. We strongly support the enactment of the pending 

legislation that comprises the negotiated agreement with Palau. 

Mr. FALEOMAVAEGA. What does that mean? Two weeks? Three 

weeks? A month? How soon can we get a commitment from the Administration, the Interior Department? I mean, look, we have been 

dallying with this thing for 2 years now and the last thing I want 

to hear is that we are going to run through this cycle again for another 2 years before we finally get a commitment from this Administration on this. 

Mr. BABAUTA. Congressman, this is the second time that I have 

testified on this bill, once in Senate and once now here. I have had 

staff testifying in front of your Committee. We strongly support the 

legislation and with regard to the new offsets that have been identified by your subcommittee, I said that we agree in principle, we 

know that our colleagues at the State Department are working 

with your Committee over at Foreign Affairs to fine tune some 

technicalities—— 

Mr. FALEOMAVAEGA. What are the technicalities? I hear both of 

you gentlemen saying ‘‘technicalities.’’ 

I would like to respectfully request, Mr. Chairman, I would like 

to request that both gentlemen submit to this Committee these 

technicalities they keep talking about that makes it so complex, the 
61 

issue that is now before us. But I know my time is way over, Mr. 

Chairman, so I yield back. 

Dr. FLEMING. The gentleman’s time is expired. But quite frankly, 

we have some more questions, so if you would like an opportunity 

in a moment, you will get that opportunity. 

Ms. Bordallo, 5 minutes. 

Ms. BORDALLO. Thank you. 

Thank you Mr. Chairman. 

I also want to thank the three witnesses today. It has been quite 

a grilling afternoon to Secretary Babauta, Secretary Kagan and 

Mr. Gootnick. 

I think what I want to say is that the Compact ended in 2009; 

is that correct? And we are still 3 years later negotiating over current problems that we don’t all agree on. 

Now I have been questioned by the President of Palau and other 

leaders of Palau to please, please, help in speeding the negotiations 

up. So the people of Palau are becoming very frustrated. And I 

think it is really up to us to be able to speed this up, now that the 

offsets offered by Mr. Faleomavaega and his committee, but so far, 

from the three of you, particularly Secretary Babauta and Kagan, 

we don’t have any concrete time, and I realize that is difficult for 

you to speak about. You can’t really say, well, on this particular 

date, it is all going to be concluded, but 3 years is a long time. Like 

I say, the people of Palau are becoming very, very concerned about 

this. 

So when you go back to your desks, I sure hope that you are 

going to keep it a top priority and be able to do something about 

it. But I do thank you for answering our questions this afternoon. 

But we, too, are very frustrated, and we want this to be concluded. 

And I would like to, Mr. Chairman, yield the rest of my time to 

my colleague from American Samoa because he said earlier he has 

100 questions. 

Mr. FALEOMAVAEGA. I thank the gentlelady for yielding her time 

to me. 

And I want to make sure the record reflects this, Mr. Chairman, 

that this is not a personal vendetta against Secretary Kagan or 

Secretary Babauta. They are both friends. 

I think we need to look at the situation, Mr. Chairman, and our 

friends who are testifying before us this afternoon. It is not about 

the money that I am the concerned about, gentlemen; it is the principle. It is the principle, the fact that this great Nation, the most 

powerful country in the world, has made a commitment in writing, 

a Compact, a treaty relationship, whether it be with 15,000 people 

or 14 million people, the principle involved here that I am concerned about, and as I have said and it has been my criticism publicly for all these years, as a matter of our basic foreign policy to 

this region, we have no policy. Secretary Kagan, we have no policy. 

Our basic foreign policy toward this region is actually toward New 

Zealand and Australia. 

So treaty countries like Palau or the Marshalls or FSM are only 

incidental if it really comes to our attention to such an extent. By 

the way, the South China Sea crisis and the situation now definitely is going to impact and has serious implications in terms of 

how these Micronesian entities currently have their relationship 
62 

with the United States, Palau being one of them, the size of Texas. 

And if we are really serious about our strategic and military interests, that maybe we are inviting the Palauans to shop somewhere 

else if the United States really has no interest in developing this 

close relationship. 

And I will say that the opportunities that I have had in discussing these issues with the President of Palau, he is very concerned, and he is a very strong supporter of the United States, but 

the opposition and those who are not necessarily favorable to us 

are simply saying, the United States doesn’t care about us, so why 

should we care about them? We might as well break the Compact, 

let’s go have relations with other foreign countries that really will 

address more seriously our interests. Because we are not doing it. 

A couple years ago, Mr. Chairman, we just forgave Jordan’s $500 

million debt that they owed to this government. And let’s talk 

about billions of dollars that we have forgiven debts in other foreign countries—billions—I am not talking about millions—billions 

of dollars. And here we are haggling over $183 million for a 10-year 

period that we should be funding because it is part of our treaty 

agreements with this country. This is where I am really concerned 

about gentlemen. It is not the money; it is the principle that I am 

very concerned about. 

And with that, Mr. Chairman, I thank the gentlelady again for 

yielding her time. 

Dr. FLEMING. The gentlelady yields her time back. 

Rather than go another round, what the Chair would like to do 

is simply to ask another question or so that may be left. I think 

we have covered just about everything. I know I have one question, 

and then I will open it up for other members of the panel who 

would like to ask a final question. 

My question, gentlemen, is back to H.R. 6040. Are there conditions in which the money would be provided, should we get it 

passed and find a pay-for, that are benchmarked on certain factors, 

certain economic issues, achieving certain benchmarks economically along the lines of what we have talked about, tourism and 

other things, are there such benchmarks, conditions, and what are 

they in a general way? 

Mr. BABAUTA. Certainly, there will be benchmarks. There aren’t 

any current benchmarks where, that I recall that we are going to 

begin with. The meeting that we will have, after the Compact is 

passed, the advisory group on economic reforms, will take into consideration reports that have already been issued about economic reforms that need to take place that are Palau specific. Economic reforms, changes in government, some of those reports have been 

generated by the IMF and by the ADB. I think, in short measure, 

that will help initially guide the group as it moves forward and 

makes recommendations to put the Palauan Government itself on 

what reforms need to take place. I think that is where we are setting benchmarks. 

Dr. FLEMING. Thank you and to follow up, does the full faith and 

credit language included in H.R. 6040 affect the ability of the Department of the Interior to withhold funds to insist on economic 

and financial improvements by Palau? I am sort of restating the 
63 

question but in a more formal way. Again, back to the full faith 

and credit language. 

Mr. BABAUTA. I don’t believe that it is necessary that that language needs to be present for the Department of the Interior to exercise its authority under the negotiated agreement. Under the negotiated agreement, if there are not meaningful reforms, not meaningful actions that have taken place in the year after, the economic 

group, the advisory group on economic reform had met, then that 

allows the Department of the Interior to withhold money based on 

whether or not and how much progress—reasonable and meaningful progress. I think we all recognize during the negotiations that 

there are going to be some reforms that either are going to take 

time or just are difficult issues to tackle. But as long as we see that 

there is an honest movement toward those reforms, either economic 

or government reform, then the U.S. assistance will continue to 

occur. 

Dr. FLEMING. Secretary Kagan, do you have anything to add to 

that? 

Mr. KAGAN. I think, with response to your specific question, Mr. 

Chairman, is that in fact was one of the concerns that we have had 

over the years and one of the reasons why the language was not 

in the renewals with FSI, FSM and the Republic of the Marshall 

Islands. So while we believe in principle that ability is there to exercise the appropriate oversight, it certainly is something that has 

been raised as a concern, and that is one of the reasons why we 

had issues with the full faith and credit language being in this legislation. 

Dr. FLEMING. OK. The Chair yields back and opens the panel for 

any other questions that you may have. 

Mr. Sablan. 

Mr. SABLAN. I just have one. Let me get something very clear 

here, Secretary Kagan and Secretary Babauta, if Congress passes 

H.R. 6040 in its present form, would either the Department of the 

Interior or the Department of State recommend its being signed 

into law? In its present form, the language as presently written? 

Mr. KAGAN. I will go first. I think from the Department of State, 

there would need to be some greater precision in some of the details surrounding the offsets. In particular, we have concerns about 

some of the legal implications for the State Department with regard to the passport issues. 

Mr. SABLAN. We are going back into the technical part, I think 

that is Dr. Gootnick’s expertise. 

Mr. KAGAN. Should those things be addressed? I think our view 

is it is very important that we proceed with living up to our obligations. 

Mr. SABLAN. Thank you very much. 

Mr. BABAUTA. I was going to say I agree with my colleague and 

also agree with comments made by Mr. Faleomavaega and Ms. 

Bordallo earlier and thank the Congress actually for providing the 

funding that we have been able to continue giving to Palau in the 

years where the Compact agreement hasn’t been passed by the 

Congress. 

Mr. SABLAN. So, if we pass this, we will provide the funding, the 

Department of the Interior will administer or manage the funds 
64 

transfer between the U.S. Government and the Republic of Palau; 

that is how we do it, correct? 

Mr. BABAUTA. Correct. And we do that in close cooperation with 

our Federal partners. 

Mr. SABLAN. Mr. Secretary, one of the best things that happened 

in the covenant between the Commonwealth, the people of the 

Northern Mariana Islands and the United States was in the second 

702 agreement—so I think some of us are old enough to remember 

this; I was one of the special representatives—is the provision of 

the full faith and credit one time. And with the Northern Marianas 

was able to go out and raise actually using the full faith and credit 

of the United States raise more money than was agreed to in the 

agreement. And of course, market conditions were much better 

then, and is this something that is being considered here? Would 

that be a possibility for the Republic of Palau? 

Mr. BABAUTA. Being able to utilize the language the full faith 

and credit? 

Mr. SABLAN. Yes, they are going to upfront the funding, and it 

was then that Interior made the annual payment to the bond underwriters or whatever they call that. 

Mr. BABAUTA. I am not certain what the motivation would be if 

the Palau Government continues to seek full faith and credit and 

how different that would be from us seeking a permanent appropriation, which guarantees that the money is going to be there as 

well. 

Mr. SABLAN. All right. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Dr. FLEMING. The gentleman yields back. 

Any other questions. 

Mr. FALEOMAVAEGA. Mr. Chairman, I can’t believe we are going 

through the fourth round now. This will be the last, I promise. 

Secretary Babauta, you mentioned something about you have 

some kind of a joint committee of some sort with the Palauan Government to discuss economic issues or something? Can you explain 

that for the record? 

Mr. BABAUTA. It is not something that is in place right now. It 

will be in place. It is part of the renegotiated agreement. The only 

thing that we have been doing with respect to acting is—— 

Mr. FALEOMAVAEGA. You said three—how many members of the 

U.S. Government? How many members from Palau? They meet as 

a joint committee or something? 

Mr. BABAUTA. If I recall correctly, sir, it would be equal members 

from both Palau and the U.S. Government. The deciding member 

will be recommended by the Palau Government, a list of two or 

three, and then from that list, the United States will choose the 

one person that Palau recommends. 

Mr. FALEOMAVAEGA. You don’t think that it is going to upset 

Palau that the U.S. will always have the strong hand because they 

have the money? You know what they say about the golden rule? 

He who has the gold makes the rule. 

Mr. BABAUTA. No, I don’t, sir, and one of the reasons why is because this particular part of negotiation was recognized both by the 

United States and Palau as being needed to continue economic 

growth in the Republic. 
65 

Mr. FALEOMAVAEGA. Well, supposedly the Administration people, 

a portion of this Committee doesn’t agree with what the Palauans 

say that this is the way it should go as far as economic development goes. 

Here is my concern, Secretary Babauta: How can we be making 

recommendations on economic improvements or reforms the 

Palauans make if we can’t even handle our own economy? Does 

that make sense? 

Mr. BABAUTA. I hear what you are saying. The guiding principles 

I think initially with the Advisory Group on Economic Reforms will 

be guided by reports that have already been issued by the International Monetary Fund and also by the Asian Development Bank. 

So those are already there outstanding. 

Mr. FALEOMAVAEGA. Can I get assurance from you, sir, that 

there is going to be no undue influence on the part of the U.S. To 

say that this is the way it is going to go, you are not going to get 

any money? 

Mr. BABAUTA. You can have my assurance, absolutely. 

Mr. FALEOMAVAEGA. I thank you. 

Mr. Chairman, thank you. 

Dr. FLEMING. The gentleman yields back. 

Any other panel members? 

Ms. Bordallo. 

Ms. BORDALLO. Mr. Chairman, I have no further questions. 

Does my colleague want any more time? 

Mr. FALEOMAVAEGA. No. 

Ms. BORDALLO. Then, Mr. Chairman, I yield back. 

Dr. FLEMING. The gentlelady yields back. 

I want to thank the panel today for taking a lot of the hard questions. We put you through four rounds, but we thank you for standing up to the chore and giving us the best answers you can. I am 

convinced that you were very forthcoming. And while we don’t 

know all the answers today, hopefully together we will be able to 

work them out. 

I would like to also thank the staff for their work today. 

Members of the Subcommittee may have additional questions for 

the witnesses, and we ask that you respond to these in writing. 

The hearing record will be open for 10 days to receive these responses. 

Again, I want to thank all of the staff members, Members here, 

two Members of the House that couldn’t make it today, for all of 

their efforts as well. 

Thank you, and without objection, we are adjourned. 

[Whereupon, at 3:48 p.m., the subcommittee was adjourned.] 

[Additional material submitted for the record follows:] 

Statement of Vikram J. Singh, Deputy Assistant Secretary of Defense for 

South & Southeast Asia, Office of the Secretary of Defense for Policy, U.S. 

Department of Defense 

Introduction 

Since its enactment in 1994, the Compact has served as an important foundation 

for our security strategy in the Asia-Pacific region, providing the United States with 

critical access, influence, and strategic denial of access to other regional militaries. 

Our Compact with Palau, coupled with our compacts with the Federated States of 
66 

Micronesia (FSM) and the Republic of the Marshall Islands (RMI), has enabled DoD 

to maintain critical access and influence in the Asia-Pacific region. Passage of 

H.R. 6040, a bill to amend Title I of PL 99–658 regarding the Compact of Free Association between the United States and Palau, is vital to allowing the Department 

to continue to benefit from the security arrangement afforded by the Compact. 

Palau’s Contributions to American and Global Security 

The Pacific Islands region is sparsely populated, physically isolated, and geographically widespread. However, Palau lies at a pivotal crossroad in the Pacific, an 

area near critical sea lines of communication and rich fishing grounds. It is also located directly in the so-called ‘‘Second Island Chain’’ from Mainland Asia, close to 

all of the major East and Southeast Asian powers. With our strategic interests and 

equities expanding and shifting more toward the Asia-Pacific region, having Palau 

as a strong partner in the Pacific is increasingly important to maintaining military, 

as well as political and diplomatic, leadership in this quickly evolving strategic environment. We must take note of critical security developments in the Pacific that require the Department’s sustained presence and engagement. Broadly speaking, 

countries such as China, Russia, and the Arab states are actively courting Pacific 

Island States, challenging the security status quo in the region, and increasing their 

economic, diplomatic, and military engagement with the island States. These critical 

security developments require sustained U.S. presence and engagement in the region. Our relationship with Palau under the Compact would be reinforced with passage of this legislation and would ensure the United States the extraordinary advantage to deny other militaries access to Palau. For these reasons, it is imperative 

that the U.S. Government sustain this advantage. Since the Compact of Free Association between the Government of the United States of America and the Government of Palau went into effect in 1994, the United States has taken full responsibility for the security and defense of Palau. This unique security arrangement has 

created a steadfast and reliable partner that helps the United States advance its 

national security goals in the region. 

Palau in the Regional Security Context 

Under the provisions of the Compact, Palauans are able to serve in the U.S. 

Armed Forces. In fact, Palauans serve in the U.S. Armed Forces in impressive numbers. Sadly, five Palauans have made the ultimate sacrifice, and numerous others 

wounded, fighting on the battlefield in Afghanistan and Iraq since 9/11. Their sacrifice in the defense of the U.S. homeland and U.S. and Coalition security interests 

should not go unnoticed. Furthermore, in 2009, Palau stepped up to offer resettlement to six Uighur detainees from Guantanamo Bay at a time when other countries 

were hesitant to take these individuals. Most notably, our commitment to the Compact with Palau allows the Department to leverage Palau’s strategic geopolitical position to sustain U.S. security interests in the region. The United States exercises 

full authority over and responsibility for the security and defense of Palau, an arrangement similar to those that we have with the Federated States of Micronesia 

and the Republic of the Marshall Islands. With this authority and responsibility, the 

United States is entitled to military access to the lands, water, and airspace of 

Palau and retains the right to deny such access to the military forces of other nations. Our current security arrangement affords us expansive access, which will be 

an increasingly important asset in the defense and security interests of the United 

States in the Asia-Pacific region in coming years. The Department recognizes the 

strategic value of the Compact, and we hope to continue to utilize it to serve our 

national security interests. 

U.S.-Palau Defense Relations 

We have growing national security interests and equities in the Western Pacific, 

a region that is traditionally overlooked and undervalued. Together with the two 

other Compact States, the Federated States of Micronesia and the Republic of the 

Marshall Islands, Palau forms part of an important security zone under exclusive 

U.S. control that spans the entire width of the Pacific when we include Hawaii and 

the U.S. territories, Guam and the Commonwealth of the Northern Mariana Islands. 

Palau’s location makes it an important part of the U.S. strategic presence in the 

Asia-Pacific, The Palau Compact affords us strategic positioning in a country with 

a unique geopolitical position in the Asia-Pacific, The region’s lack of political and 

security infrastructure has given rise to a trend of growing transnational crime, 

which underscores the importance of continued DoD engagement in the Western Pacific. With this in mind, the Department seeks to develop creative ways to remain 

strategically engaged in the region. Recognizing that Palau has no military and only 

limited law enforcement capabilities and resources, the Department’s engagement 

with Palau primarily focuses on helping them develop maritime security and hu-
67 

manitarian assistance capabilities. First, maritime security has been one of the most 

fruitful areas of cooperation between our two nations, DoD sends mobile training 

teams to Palau to help train local security personnel in maritime security-related 

matters, Palau’s Exclusive Economic Zone (EEZ) is part of the Pacific’s richest fishing grounds and has traditionally faced serious problems with foreign exploitation 

of the fishery resources. Large numbers far-ranging fishing vessels from other pacific nations threaten encroachment. Japan, China, Taiwan, and the United States 

participate in a highly competitive multi-million dollar tuna industry. The Department is currently reviewing ways to use existing DoD assets and cooperative mechanisms to enhance maritime domain awareness in the region. To combat illegal fishing, the U.S. Coast Guard has entered into a shiprider agreement with Palau, which 

enables Palauan security officials to embark on transiting U.S, Coast Guard vessels 

to conduct maritime patrol of its enormous, under-patrolled EEZ. This kind of ship 

rider agreement allows the U.S. Coast Guard to play a more active role in developing partner law enforcement capacity of the island States. In addition, we are cooperating with Japan, Australia, Palau, the Marshall Islands, and Micronesia to 

bring to fruition the Sasakawa Peace Foundation’s $10 million initiative to support 

maritime surveillance in all three Compact States. Second, the Department’s humanitarian programs have been very well-received in island communities. These 

programs primarily focus on the removal of explosive remnants of war from the 

World War’’ era, humanitarian projects, and prisoner of war/missing in action operations. DoD’s 12-person Civic Action Team maintains a rotational presence in Palau, 

conducting small to medium scale humanitarian and civic action projects in the 

health, education, and infrastructure areas. Especially notable are the large-scale, 

multinational, preplanned humanitarian missions, the U.S. Air Force’s Pacific Angel 

and U.S. 

Navy’s Pacific Partnership, which include medical and engineering projects in remote regions that are conducted in close coordination with local communities. In the 

summer of 2010, more than 1,900 Palauans were treated, 14 community service 

projects were completed, and more than 1,000 man hours spent across the three 

states of Koror, Peleliu and Angaur when USS BLUE RIDGE (LCC–19) stopped in 

Palau as part of Pacific Partnership 2010. Also, the longest running humanitarian 

campaign in the world, Operation Christmas Drop, which provides air-dropped supplies to the people of the remote Micronesian Islands each December, celebrated its 

58th anniversary in December 2010 and continues annually to assist the remote islands of Palau, These humanitarian missions are evidence that the Department’s 

engagement in Palau extends well beyond traditional security parameters. 

Conclusion 

U.S. power projection in the Asia-Pacific region will continue to be important to 

our national security interests. The U.S.-Palau Compact is a strategic asset for U.S. 

presence in the Western Pacific, an increasingly important region, Loss of the defense rights and exclusive access granted to the United States under the Compact 

would adversely affect U.S. national security, Our relationship with Palau is unique 

and reliable. 

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