Compact of Free Association: U.S. Assistance to Palau, Accountability Over Assistance Provided, and Palau's Prospects For Economic Self-Sufficiency
Published: 2008-06-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1995, when the Compact of Free Association between Palau and the United States entered into force, U.S. aid to Palau has included assistance provided for in the compact and related subsidiary agreements--direct assistance to the Palau national government, including investment in a trust fund intended to provide $15 million annually from 2010 through 2044; federal postal, weather, and aviation services; and construction of a major road--with the U.S. interest of promoting Palau's self-sufficiency and economic advancement. U.S. assistance to Palau has also included discretionary federal programs, such as health, education, and infrastructure services, that are not provided for in the compact. Compact direct assistance is scheduled to expire on September 30, 2009. In addition, the related subsidiary agreement providing for federal services to Palau will expire on that date unless renewed or extended. At that time, Palau's annual withdrawals from its trust fund can increase from $5 million to $15 million. The compact mandates that the U.S. and Palau governments review the terms of the compact and its related agreements in 2009 and concur on any modifications to those terms. 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. To provide accountability for compact funds, the compact's related agreements require an annual audit of Palau's use of compact funds and require Palau to submit economic development plans, identifying planned expenditures of compact assistance, and annual reports on, among other topics, its implementation of these plans. The U.S. and Palau governments are also required to hold annual economic consultations to review Palau's progress toward self-sufficiency and to consult regarding Palau's trust fund every 5 years. My statement is based on our report, which was released this week. In this report, we examined (1) the provision of compact and other U.S. assistance to Palau in 1995-2009, (2) Palau's and U.S. agencies' efforts to provide accountability over Palau's use of federal funds, and (3) Palau's prospects for achieving economic self-sufficiency. We conducted this performance audit from October 2007 to June 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
section_title: What GAO Found
paragraphs: U.S. aid to Palau in 1995-2009 is expected to exceed $852 million. Compact direct assistance, providing general budgetary support for Palau's government operations, is projected at $411 million, or 48 percent of the assistance provided. The provision of compact federal services--postal, weather, and aviation--is projected at about $25 million, or 3 percent of the assistance, and the compact road construction accounted for $149 million, or 17 percent of the assistance. Palau's receipt of discretionary federal program assistance is projected at $267 million, or 31 percent of the total assistance provided. In 1995-2006, five U.S. agencies--the Departments of Education (Education), Health and Human Services (HHS), Interior, Defense (DOD), and Transportation (DOT)--contributed the majority of discretionary federal program assistance to Palau. Palau has made progress in establishing financial accountability, despite limited capacity to address persistent internal control weaknesses, and has met most compact accountability requirements; however, Interior's monitoring of Palau's accountability has been limited. Palau's single audit reports for 1995-2006 show that it improved its timeliness in submitting the reports and improved the reliability of its financial statements. However, the reports show persistent weaknesses in Palau's internal controls over financial reporting; the reports also indicate that Palau has not complied with all federal award requirements and show persistent weaknesses in Palau's internal controls over compliance with these requirements. Although Palau has developed plans to correct these weaknesses, limited capacity in financial accounting resources and expertise puts at risk Palau's ability to sustain its improvements in financial accountability and to operate a major federal program within applicable requirements. Palau met the majority of the compact's and related agreements' accountability requirements, such as submitting annual reports and economic development plans. OIA and State officials, as well as officials from the government of Palau, reported that they participated in the required economic consultations but that the meetings were not held annually. Moreover, U.S. and Palau officials acknowledged that the required trust fund consultations were not held at all. According to OIA officials, OIA has used Palau's single audit results and compact annual reports to monitor Palau's use of compact funds and has provided technical assistance funds to train Palau employees as well as funds to enhance Palau's financial management systems and processes. However, OIA officials said that Interior views its oversight role as limited. To improve Palau's ability to sustain its improvements in financial reporting and address its internal control weaknesses, our report recommends that the Secretary of the Interior direct OIA to formally consult with the government of Palau regarding Palau's financial management challenges and target future technical assistance toward building Palau's financial management capacity. Responding to a draft of our report, Interior agreed with our recommendation and identified steps it will take to implement it.

section_title: Letter
paragraphs: I am pleased to be here today to discuss compact and other U.S. assistance  to the Republic of Palau. Since 1995, when the Compact of Free  Association between Palau and the United States entered into force, U.S.  aid to Palau has included assistance provided for in the compact and  related subsidiary agreements—direct assistance to the Palau national  government, including investment in a trust fund intended to provide $15  million annually from 2010 through 2044; federal postal, weather, and  aviation services; and construction of a major road—with the U.S. interest  of promoting Palau’s self-sufficiency and economic advancement. U.S.  assistance to Palau has also included discretionary federal programs, such  as health, education, and infrastructure services, that are not provided for  in the compact.
Compact direct assistance is scheduled to expire on September 30, 2009.  In addition, the related subsidiary agreement providing for federal services  to Palau will expire on that date unless renewed or extended. At that time,  Palau’s annual withdrawals from its trust fund can increase from $5  million to $15 million. The compact mandates that the U.S. and Palau  governments review the terms of the compact and its related agreements  in 2009 and concur on any modifications to those terms. (See attachment I  for more information on key provisions of the compact and its related  agreements.) 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.
To provide accountability for compact funds, the compact’s related  agreements require an annual audit of Palau’s use of compact funds and  require Palau to submit economic development plans, identifying planned  expenditures of compact assistance, and annual reports on, among other  topics, its implementation of these plans. The U.S. and Palau governments  are also required to hold annual economic consultations to review Palau’s  progress toward self-sufficiency and to consult regarding Palau’s trust  fund every 5 years.
My statement is based on our report, which was released this week. In  this report, we examined (1) the provision of compact and other U.S.  assistance to Palau in 1995-2009, (2) Palau’s and U.S. agencies’ efforts to  provide accountability over Palau’s use of federal funds, and (3) Palau’s  prospects for achieving economic self-sufficiency. We conducted this  performance audit from October 2007 to June 2008 in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Background
paragraphs: Palau’s territory of about 190 square miles includes 8 main islands and  more than 250 smaller islands. As the westernmost cluster of the Caroline  Islands in the North Pacific Ocean, Palau is located approximately 500  miles southeast of the Philippines. Roughly 20,000 people live in Palau,  and more than one-quarter of the population is non-Palauan.
Palau’s economy is heavily dependent on its tourism sector and on foreign  aid from the United States, Japan, and Taiwan. Since 1994, Palau’s  economy has grown at a real annual average of 3 percent. In 2006, Palau’s  gross domestic product (GDP) was about $154 million and its GDP per  capita was about $7,500. International visitor arrivals—more than 82,000 in  2006—contributed about $97 million to the economy. Similar to many  small island economies, Palau also receives significant foreign aid, which  finances a large public sector.
In 2006, Palau’s national government expenditures were approximately  $89 million, equivalent to 58 percent of its GDP, and the United States and  other donors provided grants totaling about $44 million, equivalent to 28  percent of Palau’s GDP (see attachment II). Palau’s national government  employed about one-third of all workers in 2006, and the government’s  wage bill constituted 37 percent of its total expenditures. The national  government’s 2006 expenditures exceeded its total revenues; however,  Palau has access to financing through interest earned on government  assets and to annual withdrawals on the compact-provided trust fund.  Palau’s private sector relies heavily on foreign workers, mostly from the  Philippines; since 1994, foreign workers have grown to account for half of  Palau’s total labor force.
section_title: U.S. Assistance to Palau Is Projected to Exceed $852 Million in 1995-2009
paragraphs: The United States’ cost of providing assistance to Palau in 1995-2009 is  projected to exceed $852 million. The three categories of assistance  mandated by the compact—compact direct assistance, compact federal  services, and compact road construction—represent approximately 48  percent, 3 percent, and 17 percent, respectively, of total projected U.S.  assistance for 1995-2009. U.S. agencies provide the remaining 31 percent of  total assistance through discretionary federal programs. (See attachment  III.)
Compact direct assistance. Compact direct assistance accounts for  roughly half of projected U.S. assistance to Palau in 1995-2009, amounting  to more than $411 million. This assistance flows as a direct transfer  payment to the government of Palau. The compact specifies general  purposes for these funds—for example, current account operations and  maintenance, energy production self-sufficiency, maritime zone  surveillance and enforcement, and initial funding of the trust fund—but  gives the Palau government broad discretion regarding their use. Some  direct assistance is provided annually for 15 years from the effective date  of the compact (i.e., 1995-2009). However, more than half of the direct  assistance was provided in the first 3 years of the compact, allowing Palau  to invest some of these funds to generate additional income. All compact  direct assistance will terminate in 2009. (See attachment IV.)
Compact federal services. The compact provides for federal postal,  weather, and aviation services in Palau at a level equivalent to the services  provided the year before the compact was implemented. In 1995-2009, U.S.  agencies provided compact federal services at a total cost of  approximately $25.3 million: the U.S. Postal Service spent about $12.3  million, the National Weather Service spent about $8.6 million, and the  Federal Aviation Administration spent about $4.4 million.
Compact road. The compact required the United States to build a road  system in Palau, based on specifications mutually agreed upon with the  government of Palau, which was to be completed by October 1, 2000. The  road project incurred several planning and construction delays and was  completed on October 1, 2007, at a cost of approximately $149 million.  When the road was completed, Palau accepted responsibility for its  operation and maintenance. Palau has since made efforts to maintain the  road; however, both U.S. and Palau officials expressed concerns regarding  Palau’s ability to maintain the road in a condition that will allow for the  desired economic development.
Discretionary federal programs. Discretionary federal programs are  projected to contribute approximately $266.7 million, or almost a third of  U.S. assistance to Palau in 1995-2009. In 1995-2006, more than 14 U.S.  agencies provided approximately $203 million in federal grants and other  in-kind services to assist in areas such as education, health, infrastructure  improvement, and telecommunications. Five agencies—Education, HHS,  Interior, DOD, and DOT—contributed the majority of this assistance (see  attachment V). Most grants went to the Palau national government; the  Palau Community College and the Palau Community Action Agency, a  nonprofit organization, also received grants.
section_title: Palau Made Progress in Accountability but Has Limited Capacity to Address Internal Control Weaknesses, and Interior’s Oversight Has Been Limited
paragraphs: Although Palau’s more recent single audit reports show improvement in its  financial accountability, the reports show persistent weaknesses in its  internal control over financial reporting, its compliance with some federal  award requirements, and its internal control over compliance with these  requirements. However, Palau has limited capacity to address these  weaknesses in a timely way, putting Palau at risk of being unable to  sustain its improvements in financial accountability and to operate a major  federal program according to applicable requirements. Palau met the  majority of the compact’s and related agreements’ reporting requirements  for accountability over compact funds, but Palau and the U.S. government  did not meet all of the consultation requirements. Interior’s oversight of  Palau’s accountability for compact assistance was limited.
Palau’s timeliness in submitting single audit reports has improved in  recent years. Although Palau submitted its single audit reports for 1998- 2004 after the established deadlines, Palau submitted reports for 2005 and  2006 on time. Timely submission of single audit reports gives U.S. agencies  current knowledge of the Palau government’s ability to account for federal  grant monies received and current knowledge of the government’s internal  control and compliance challenges.
In addition, the recent single audits show that the reliability of Palau’s  financial statements has improved. For 1995-2002, Palau received qualified  audit opinions on its government’s financial statements, indicating that  significant issues prevented the auditor from concluding that the financial  statements were reliable overall. For 2003-2006, Palau’s financial  statements consistently received unqualified audit opinions, indicating  that the auditor considered the statements reliable.
However, despite the improved reliability of its financial statements, Palau  has long-standing and significant weaknesses in its internal control over  financial reporting and has limited capacity to address these weaknesses.  Palau’s 2006 single audit report cited a number of significant weaknesses  in basic internal control that impact its financial reporting, many of which  were cited in previous audit reports. Palau has developed corrective action  plans to address these weaknesses and is also updating its financial  reporting policies and procedures. However, according to Palau’s  controller and Palau’s current external auditor, Palau has inadequate staff  and expertise to properly address its financial reporting weaknesses and  make other necessary improvements in a timely manner. As a result, Palau  is at risk of being unable to sustain its improvements in financial  accountability.
Further, Palau has limited capacity to address weaknesses in its  compliance with federal award requirements. Since 1995, Palau’s single  audit reports have consistently contained qualified opinions on its  compliance with federal award requirements, owing to long-standing and  significant internal control weaknesses over its compliance with such  requirements. These weaknesses could adversely affect Palau’s ability to  operate a major federal program within the applicable requirements of  laws, regulations, contracts, and grants. Palau has developed corrective  action plans to address the 2006 single audit findings regarding its  compliance with, as well as its internal control over compliance with,  federal grant requirements. However, Palau’s limited staff and expertise  hinder its ability to address the single audit report’s findings in a timely  manner.
Regarding compliance with the compact and its related agreements, Palau  met the majority of the reporting requirements, submitting the required  economic development plans and annual reports. Palau and U.S. officials  reported holding the required economic consultations but in most cases  did not document their compliance. However, according to Palau and U.S.  officials, the required trust fund consultations did not take place.
Interior provided limited oversight of Palau’s accountability for compact  and other U.S. assistance. Interior’s OIA and Office of Inspector General  (OIG) reported efforts to assist or oversee Palau’s accountability for  federal funds. For example, according to Interior officials, Interior has  monitored Palau’s progress in completing and issuing its single audit  reports; used Palau’s single audit and compact annual reports to monitor  Palau’s use of compact funds; and worked with Palau to track single audit  findings and resolve issues. Also, according to Interior officials, OIA has  provided general technical assistance funds to train Palau employees as  well as funds to enhance Palau’s financial management systems and  processes. However, an OIA official said that its oversight of compact  funding has not been extensive and that the compact gives Palau broad  discretion in compact spending. Moreover, in a 2006 memorandum,  Interior’s OIG criticized OIA for its minimal oversight and monitoring of  Palau’s compact funding. Although the memorandum did not contain  recommendations, it suggested that OIA commit additional resources,  such as a full-time staff member, to oversee accountability for compact  funds and any other U.S. assistance provided to Palau.
section_title: Palau’s Prospects for Economic Self- sufficiency Depend on Multiple Factors
paragraphs: Palau’s prospects for achieving long-term economic self-sufficiency  depend on at least four factors: levels of continuing U.S. assistance, the  availability and value of trust fund withdrawals, fiscal reform to reduce  Palau’s long-term dependence on these withdrawals, and private sector  growth through an improved business environment.
subsections: section_title: Levels of U.S. Assistance
paragraphs: Palau’s prospects for economic self-sufficiency depend in part on levels of  continuing discretionary federal program assistance and compact federal  services. We estimate that in 2009, the Palau national government’s  potential revenues—compact direct assistance, discretionary federal  programs, other donor assistance, and domestic revenues—will total  about $87 million (see attachment VI).
Although the expiration of compact direct assistance at the end of 2009  will reduce the national government’s revenues by about $13.3 million,  Palau will gain access to an additional $10 million in annual financing  when its yearly trust fund withdrawals increase in 2010 from $5 million to  $15 million. As a result, the net fiscal impact of expiring compact direct  assistance will be about $3.3 million annually, or less than 4 percent of the  national government’s revenues in 2009.
Any changes in the levels of discretionary federal program assistance and  compact federal services after 2009 will affect Palau’s fiscal condition.  Discretionary federal program assistance, which grew from $7.3 million in  2000 to $18.8 million in 2006, is projected at $11.3 million in 2008 and may  total almost $12 million, or 14 percent of the national government  revenues, in 2009. However, the level of discretionary program funding  after 2009 will depend on Palau’s program eligibility status and the  availability of appropriations; changes in either factor may increase or  reduce the amounts received. Absent affirmative action by Congress,  Palau’s eligibility for some federal programs could expire. The expiration  of the compact’s federal programs and services agreement in 2009 may  also impact U.S. agencies’ implementation of discretionary federal  programs in Palau, although agency officials we interviewed expressed  uncertainty about the extent of any such impact. Moreover, unless the  federal programs and services agreement is renewed or extended past  2009, Palau will lose postal, weather, and aviation services that are  estimated to cost U.S. agencies almost $1.6 million in 2009.
section_title: Availability and Value of Trust Fund Withdrawals
paragraphs: Palau’s prospects for economic self-sufficiency also depend in part on the  availability of the planned $15 million annual trust fund withdrawals and  the value of those withdrawals over time. Palau will be able to withdraw  $15 million per year from its trust fund for the planned 35 years—from  2010 through 2044—if the fund earns a compounded annual return of at  least 8.1 percent. To grow in perpetuity, the trust fund must earn a  compounded return rate of 8.6 percent or higher. Both of these rates are  lower than the 9 percent rate the trust fund has earned from its inception  in 1995 through March 2008, however, forecasts of future returns are  subject to considerable uncertainty. The historical rates of return for the  asset classes held in the fund’s portfolio differ depending on the time  period considered. For example, the compounded rate of return was 8.1  percent for 1926-2007, 9.1 percent for 1970-2007, and 5.2 percent for 1998- 2007. If the trust fund continues to earn the 9 percent annual return it has  earned thus far, or any rate equal or greater than 8.6 percent, the trust fund  will likely grow in perpetuity from its balance as of March 2008 (see  attachment VII).
However, market volatility adds uncertainty regarding the availability of  the trust fund withdrawals. Despite its historical compounded annual  return rate of 9 percent as of March 2008, the trust fund’s annual  investment returns have ranged from 24 percent in 1998 to negative 12  percent in 2002. Future returns to the trust fund portfolio are uncertain.  Even if the trust fund earns a favorable long-run return which could allow  the fund to grow in perpetuity without market volatility, a few consecutive  years of poor stock market performance could lead to the depletion the  fund. Attachment VIII illustrates results from our analysis with the  assumption that future returns are drawn from distributions based on the  historical 1970-2007 return of the asset classes in which Palau’s trust fund  is invested. Our analysis shows that the trust fund will be able to disburse  $15 million per year through 2016 but is increasingly likely to be exhausted  after 2016.
In addition, inflation will diminish the value of the annual trust fund  withdrawals: because the withdrawals are not adjusted for inflation, they  will lose real value over time. We estimate that by 2044—the last year of  planned trust fund assistance—the value of the annual withdrawal will  have decreased by about half compared with its value in 2010.
section_title: Fiscal Reform
paragraphs: Palau’s prospects for economic self-sufficiency depend in part on fiscal  reform to reduce Palau’s long-term dependence on trust-fund withdrawals.  Government officials and International Monetary Fund (IMF) experts have  defined fiscal sustainability for Palau after 2009 as having sufficient  domestic revenues, such as tax and fee income, to pay for operating  expenditures, such as those for wages, goods, and services. In 2000-2006,  domestic revenues provided an average of 50 percent of national  government revenue, while operating expenditures accounted for an  average of 79 percent of national government spending. Palau could seek  continued donor assistance to pay for capital expenditures; moreover,  beginning in 2010, Palau will have access to the $15 million annual trust  fund withdrawals to finance the gap between its revenues and  expenditures. However, Palau’s long-term fiscal sustainability relies on  reduced dependence on the full trust fund withdrawal, given (a) the  uncertainty of continued donor assistance for capital spending, (b) the  declining real value of the annual withdrawal, and (c) the expected  exhaustion of the trust fund after 2044 as well as the risk of its earlier  exhaustion due to market volatility.
To close the gap between Palau’s revenue and expenditures,  implementation of tax and expenditure reforms will be needed according  to economic experts, Palau officials, and the country’s economic plans.
However, full implementation of such reforms is expected to require 10 to  15 years.
Tax revenue. In 2006, Palau’s tax revenue provided about $30 million and  was equivalent to 19 percent of GDP, a level broadly comparable to that of  other Pacific island nations. However, according to IMF and Asian  Development Bank (ADB) experts, Palau’s tax system is inefficient  because of, among other problems, weak tax administration and  ineffective tax policy. For example, fewer than 50 percent of active  taxpayers are fully compliant, according to the IMF and ADB; the  government rarely collects assessed penalties and interest or exercises its  authority to suspend or revoke business licenses; and the current system  does not tax nonwage income, such as that from profits, investment, or  property, and taxes businesses on gross, rather than net, earnings.
Expenditures. Economic experts and government officials suggest that  Palau could lower its operating expenditures, at around $67 million in  2006, by reducing the public sector wage bill. Although Palau has slightly  reduced its nonwage operating expenditures since 2000, it has been less  successful in reducing the wage bill. From 2000 through 2006, Palau’s  national government wage bill grew from 46 percent to 50 percent of its  operating expenditures, with wage levels nearly twice those in the private  sector. According to government officials, Palau instituted a freeze on  public sector employment in 2001 that has not been observed, and recent  public sector reclassification efforts will result in a further increase in  wage expenditures.
section_title: Private Sector Growth
paragraphs: Palau’s prospects for economic self-sufficiency depend in part on the  growth of its economy through private sector expansion, which will  require an improved business environment. Palau’s strategy for expanding  its private sector focuses primarily on pursuing environmentally  sustainable growth by promoting high-end tourism and capitalizing on  growth opportunities from the new compact road. Officials, experts, and  private sector representatives view the tourism sector as offering the most  potential for growth. For example, the IMF estimates that every 2 percent  increase in tourist arrivals creates a 1 percent increase in tourism-related  employment and that more than a third of foreign direct investment occurs  in this sector. Current Palau tourism strategies aim to capitalize on  opportunities for high-end tourists from Asia and from U.S. military bases  on Guam. The marine and agricultural industries together provide less  than 5 percent of GDP; however, Palau is pursuing opportunities in  aquaculture and considering whether foreign fishing license fees could be  raised. In all cases, private sector development is dependent on sustained  exploitation of Palau’s fragile environmental resources.
However, according to Palau government officials, economic experts, and  private sector representatives, problems related to Palau’s foreign  investment policies, financial systems, land ownership system, labor  market, and commercial conditions create a costly business environment  that discourages private sector growth. For example, Palau imposes  stringent requirements on foreign investment, restricting foreign  investment in certain activities; Palau’s financial markets do not effectively  finance investment but instead supply large amounts of consumer credit;  Palau’s system of land ownership prevents the effective use of land for  development; available skilled labor is lacking in Palau and Palau  government officials expressed concern about illegal importation of  unskilled foreign workers; and Palau’s commercial legal system is  outdated, lacking laws for bankruptcy, sales, and consumer privacy  protection, and the government often reportedly delays payment of  vendors for several years.
section_title: Conclusions and Recommendations
paragraphs: In 2009, the U.S. and Palau governments will formally review the terms of  the compact and its related agreements. Although compact direct  assistance will expire that year, the provision of federal postal, weather,  and aviation services may continue if the federal programs and services  agreement is renewed or extended. Some discretionary federal programs  will also likely continue. Interior’s OIA will remain the cognizant agency  for Palau for compact direct assistance through 2009 and will continue to  review Palau’s single audits as long as U.S. federal program funds are  expended in Palau. However, unless Palau strengthens its financial  accounting resources and expertise, its ability to sustain recent progress in  financial accountability and to operate a major federal program according  to applicable requirements is at risk. To strengthen Palau’s ability to  provide accountability and meet applicable requirements for federal  assistance, our recent report recommends that the Secretary of the  Interior direct the Office of Insular Affairs to formally consult with the  government of Palau regarding Palau’s financial management challenges  and to target future technical assistance toward building Palau’s financial  management capacity. Interior agreed with our recommendation and  identified steps it will take to implement it.
Madame Chairwoman, this completes my prepared statement. I would be  happy to respond to any questions you or other Members of the  Subcommittee may have at this time.
section_title: Attachment I: Key Provisions of the Palau Compact of Free Association and Related Agreements
paragraphs: Establishes Palau as a self-governing nation with the capacity to conduct its own foreign  affairs.
Provides Palauan citizens with certain immigration privileges, such as the rights to work and  live in the United States indefinitely and to enter the United States without a visa or passport.    15-year term of budgetary support for Palau, including direct assistance for current account  operations and maintenance, and for specific needs such as energy production, capital  improvement projects, health, and education.
Requires the United States to set up a trust fund for Palau.
This assistance expires in 2009.
Requires the United States to build a road system for Palau (the “compact road”).
Requires the United States to make available certain federal services and related programs to  Palau, such as postal, weather, and aviation services.
The compact federal programs and services agreement—establishing the legal status of  programs and related services, federal agencies, U.S. contractors, and personnel of U.S.  agencies implementing both compact federal services and discretionary federal programs in  Palau—expires in 2009.
Requires Palau to report annually on its use of compact funds.
Requires the U.S. government, in consultation with Palau, to implement procedures for  periodic audit of all grants and other assistance.
Establishes that the United States has full authority and responsibility for security and defense  matters in or relating to Palau.
Forecloses Palau to the military of any other nation except the United States.
The United States may establish defense sites in Palau and has certain military operating  rights.
Security provisions specified in the subsidiary status of force agreementa are binding until  2044, 50 years from the effective date of the compact, or until the termination of title three of  the compact, whichever is longer.
Establishes general provisions regarding approval and effective date of the compact,  conference and dispute resolution procedures, amendment and review requirements, and  compact termination procedures.
Status of Forces Agreement Concluded Pursuant to Section 323 of the Compact of Free Association.
section_title: Attachment II: Palau National Government Expenditures and Revenues, 2000-2006
paragraphs: million ($)
Percentage of GDP (%) million ($)
Percentage of GDP (%)
Figures and tables exclude (a) component units, such as the Palau Community College; (b) in-kind  foreign assistance, such as compact federal services; and (c) annual net financing, such as Palau’s  $5 million trust fund withdrawal from 2002-2006, to pay for the gap between revenues and  expenditures. Net financing is excluded as a revenue source given that the trust fund was designed to  provide Palau with financing only until 2044, in addition to the market volatility associated with  investment earnings.  “Other operating” expenditures includes those for goods and services and “Other domestic” revenues  include fees and charges, licenses, permits, and other direct revenues.
All years cited are fiscal years (Oct. 1-Sept. 0). All dollar amounts are in current (i.e., nominal)  dollars.
section_title: Attachment III: Projected U.S. Assistance to Palau, 1995-2009
paragraphs: Compact direct assistance ($411.0)
Compact federal services 3% ($25.3)
Compact road ($149.0)
Discretionary federal programs ($266.7)
Figure shows funding for fiscal years (Oct. 1- Sept. 0). All dollar amounts are in current (i.e.,  nominal) dollars.
Our calculations of direct compact assistance and the compact road are based on Interior’s Office of  Insular Affairs’ actual and estimated payments to Palau for 1995-2009, as reported in its budget  justification to Congress for 2009. Compact federal services are estimates of past and future  expenditures by the National Weather Service, the U.S. Postal Service, and the Federal Aviation  Administration. The calculation of estimated discretionary federal programs is the sum of U.S. agency  program expenditures as reported in single audits for 1995-2006 for the Palau national government  and for 1997-2006 for the Palau Community Action Agency and the Palau Community College. GAO  projected U.S. agency program expenditures for 2007-2009. To this, we added an estimated cost of  the Department of Defense’s (DOD) Civic Action Teams for 1995-2009. Estimated and projected  federal program expenditures do not include the value of U.S. loans to Palau. (For more details of our  methodology, see GAO-0-72, appendix I.)
section_title: Attachment IV: Compact Direct Assistance to Palau, 1995-2009
paragraphs: Amount  provided  1995–2009  (projected)
Current account operations and maintenance  $12 million annually for 10 years (1995-2004) and $11 million annually for the next 5 years  (2005-2009). Beginning in 1999, $5 million of this amount shall come from the trust fund set up  in 211(f).   $2 million annually for 14 years (1995-2008).  $150,000 annually for 15 years (1995-2009) for current account operations and maintenance  of communications systems plus a sum of $1.5 million in 1995 for acquiring communications  hardware or for another operating or capital account activity as Palau selects.
Maritime zone surveillance and enforcement, health programs, and postsecondary scholarship  fund  $631,000 annually for 15 years (1995-2009).
Maritime zone surveillance and enforcement start-up activities  One-time contribution of $666,800.  $66 million in 1995 plus $4 million in 1997.
One-time contribution of $36 million in 1995.
One-time contribution of $5.5 million in 1995.
Yearly adjustment of amounts provided in sections 211(a), 211(b), 211(c), and 212(b).
Special block grants for health and education  $2 million annually for 15 years (1995-2009), $4.3 million in 1995, $2.9 million in 1996, and  $1.5 million in 1997.
section_title: Attachment V: U.S. Agencies’ Expenditures for Discretionary Programs in Palau, 1995- 2006
paragraphs: Education ($56.2)
DOT ($12.9)
Other agencies ($19.8)
DOD ($23.8)
Interior ($39.1)
HHS ($51.6)
Figure shows expenditures for fiscal years (Oct. 1-Sept. 0). All dollar amounts are in current (i.e.,  nominal) dollars.
Agencies’ expenditures sum to approximately $20 million. For all agencies except DOD, we used  expenditure information reported in the single audits from the Palau national government, the Palau  Community College, and the Palau Community Action Agency. We estimated DOD’s expenditures for  its Civic Action Team operating costs based on information provided by DOD officials. The figure  does not include the value of other in-kind assistance provided by DOD or any other U.S. agency and  does not include the value of U.S. loans extended to Palau.
section_title: Attachment VI: Palau National Government’s Potential Revenues in 2009
paragraphs: $13.3 Compct direct assnce $11.9 Dicretionry federl progr$17.8 Other donor assnce Compct direct assnce expire t the end of 2009 Dicretionry federl progrnnual level based on eligiility Domestic revenue includes taxes, fees and charges, licenses and permits, and other direct revenues  and excludes net investment earnings. Total revenues exclude revenues for component units and in- kind assistance, such as compact federal services. In addition to revenues, Palau will have access to  financing, including a $5 million annual trust fund withdrawal. See GAO-0-72, appendix III, for  additional information.
To estimate potential 2009 domestic revenue and the level of other donor assistance, we reviewed  Palau single audit data for 2000-2006 and Palau budgets for 2007 and 200 and applied the average  annual growth rate from 2000-200.
Discretionary federal programs exclude the value of DOD’s Civic Action Team program that is  provided in-kind. To estimate potential 2009 discretionary federal program levels, we reviewed Palau  budget data for 200 and assumed the same level of federal programs would be provided in 2009,  adjusted for inflation.
The 2009 level of compact direct assistance is based on U.S. agency budget data.
Years cited are fiscal years (Oct. 1-Sept. 0). All dollar amounts are in current (i.e., nominal) dollars.
section_title: Attachment VII: Palau’s Projected Trust Fund Account Balance with Three Rates of Return
paragraphs: ccont bance: $406 million ccont bance: $182 million ccont bance: $0 9.0% (the compond rte of retrn Pau trust fnd erned from inception to Mrch 2008)  8.6% (rte of retrn needed to grow the trust fnd in perpetity) 8.1% (rte of retrn needed to susin the trust fnd for 35 ye)
section_title: Attachment VIII: Probability That Palau Trust Fund Will Be Depleted Given Market Volatility, 2010-2044
paragraphs: This chart depicts results from 10,000 trial runs. For each run, the returns of each of the asset classes  are randomly drawn from a distribution based on the historical returns (1970-2007). The account  balances and the amount of disbursements from the trust fund are then calculated based on the  returns. The probability of not being able to disburse $15 million is then generated from a distribution  of 10,000 disbursements each year.
All years cited are fiscal years (Oct. 1-Sept. 0)
section_title: Attachment IX: GAO Contacts and Acknowledgments
subsections: section_title: GAO Contacts
paragraphs: 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. Staff making key contributions to this  statement were Emil Friberg, Assistant Director; Kate Brentzel; Ming  Chen; Cheryl Clark; Leslie Locke; Reid Lowe; Grace Lui; Matthew Reilly;  Kendall Schaefer; and Doris Yanger.
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