Statement

of

David B. Cohen

Deputy Assistant Secretary for Insular Affairs

United States Department of the Interior

before the

House Committee on Resources

regarding

Compact of Free Association Negotiations

July 17, 2002

I will focus my comments on the fiscal and economic provisions found in Title Two of the Compact. In particular, I will discuss how proposed amendments to these provisions are designed to address the very legitimate concerns that the General Accounting Office (GAO), the Department of the Interior and others have raised with respect to the lack of accountability for federal funds provided under the Compact.

COMPACT DESCRIPTION

Under the direction of the Interagency Group on Micronesia, chaired by the Department of State, the President's Personal Representative for Micronesian Status Negotiations negotiated the original Compact with representatives of what would become the RMI and the FSM. As a result of the Compact, these nations are commonly referred to as the "freely associated states" (FAS). The Compact was implemented in 1986. Palau also became a freely associated state through a subsequent Compact of Free Association, but I will use the term FAS to refer only to the original freely associated states of the RMI and the FSM.

The documents that define the relationship between the United States and the FAS include: the Compact as negotiated; the numerous subsidiary agreements to the Compact; Public Law 99-239, through which the Congress approved the Compact; and other legislation subsequently enacted by the Congress.

The Compact sets forth the elements of the relationship between the United States and each of the FAS in four titles: Governmental Relations, Economic Relations, Security and Defense Relations and General Provisions. However, the Governmental Relations and Economic Relations titles were substantially altered by the Congress during and after the approval process. Title One of the negotiated Compact (Governmental Relations) did not originally envision recognition of the FAS as fully independent nations in the international community. Shortly after the Compact was implemented in 1986, the Administration, in office at the time, proposed legislation, which Congress approved, upgrading diplomatic relations so that they conformed to the standards of the Geneva Convention.

The role of the Department of the Interior is focused on Title Two - Economic Relations -- because the Congress, in section 105(b) (2) of Public Law 99-239, provided that all appropriations under the Compact must be made to the Secretary of the Interior. Congress also assigned responsibility to the Secretary of the Interior to coordinate and monitor United States domestic programs in the FAS.

Title Two of the existing Compact deals with both financial assistance and program assistance.

First, I will briefly describe financial assistance. Over the seventeen-year life of Compact funding, it is expected that the United States will ultimately have paid a total of $1.04 billion to the RMI and $1.54 billion to the FSM in direct financial assistance. These amounts exclude federal program assistance. Most of this financial assistance has been guaranteed by the full faith and credit of the United States. There have been few restrictions on the ability of each FAS to use this direct financial assistance; this approach was thought at the time to be consistent with each FAS's newly acquired rights of national sovereignty. One restriction, however, was a provision in the Compact requiring forty percent of the direct financial assistance under section 211 to be spent on capital development. Even this restriction was of questionable use because the requirement was over the life of the Compact, not annual; it did not include inflation adjustments even though such adjustments were identified with specific Compact provisions; and the definition of acceptable capital uses was extremely broad.

Second, with respect to program assistance, under section 221(a), the United States agreed to provide the FAS with the services of the Weather Service, the Federal Emergency Management Agency, the Postal Service, the Federal Aviation Administration and the Civil Aeronautics Board (which was abolished prior to Compact implementation). While the costs of these services cannot be exactly determined until after they are rendered, the Department of the Interior has provided partial reimbursement to these agencies of nearly $100 million for their operations in the two countries.

Section 224 of the Compact currently provides that additional United States program assistance may be extended from time to time by the Congress. The Congress has utilized its authority extensively. Section 105(h)(1) of the legislation approving the Compact (P.L. 99-239) extended to the FAS the programs of the Legal Services Corporation, the Public Health Service and the Farmers Home Administration. The Compact legislation, in sections 102(a) and 103(a), extended law enforcement and illegal drug enforcement programs to the RMI and the FSM, and section 103 also extended agricultural and food programs and radiological health care to the RMI. Additionally, as partial compensation for the removal by Congress of tax and trade incentives that had been negotiated into the Compact, the Congress extended to the FAS, in section 111(a) of the Compact legislation, the programs of the Federal Deposit Insurance Corporation, the Small Business Administration, the Economic Development Administration, the Rural Electrification Administration, the Job Training Partnership Act, the Job Corps and the marine resource and tourism programs of the Department of Commerce. The Compact legislation in section 105(l) authorizes the following federal agencies to provide technical assistance (nonreimbursable) to the FAS: the Forest Service, the Soil Conservation Service, the Fish and Wildlife Service,the National Marine Fisheries Service, the United States Coast Guard and agencies providing assistance under the national Historic Preservation Act. Finally, all United States domestic programs originally scheduled for immediate termination upon implementation of the Compact were instead subject to a three-year phase-out under sections 105(c)(2) and 105(i)(2) of the Compact legislation.

This pattern of extending FAS eligibility for United States domestic programs and services under Compact section 224 has continued since the enactment of the legislation that originally approved the Compact. Under the terms of the Compact as originally negotiated, FAS citizens would have been eligible for Pell post-secondary education grants only for the first four years of the Compact; this four-year limitation was removed by Congress in legislation enacted in 1988. The FAS also were allowed to receive Department of Education programs through the Pacific Regional Education Laboratory.

It is important to note that the Compact, as originally negotiated, anticipated that all United States domestic assistance programs would be terminated and the few remaining services would be budgeted under Compact section 221(a) through the Department of the Interior. When the Congress extended additional domestic assistance programs to the FAS, however, it did not direct that they be budgeted and administered through this unified appropriation to the Department of the Interior. They were instead budgeted and administered by each United States federal agency. These individual extensions by the Congress compromised the concept of a supervisory role for the Department of the Interior as stated in section 105(b)(3) of the legislation approving the Compact. This lack of budgeting through a unified appropriation for the FAS made it difficult to track such programs, and made it virtually impossible for the Department of the Interior to direct or even influence programatic decisions of other federal agencies. The GAO estimates that from 1987 through 2001, federal agencies have provided approximately $700 million in federal program benefits to the RMI and FSM.

GENERAL ACCOUNTING OFFICE ASSESSMENT

Over the last several years, the GAO has issued a number of reports that have raised valid concerns about the effectiveness of the federal assistance that has been provided to the FAS under the Compact. We at the Department of the Interior have had similar concerns for quite some time. The Department of the Interior, and particularly the staff at the Office of Insular Affairs, has been greatly frustrated with not having the tools to properly administer or track federal assistance in a manner that could reasonably ensure that such assistance is having the intended effect. Most importantly, we have been hampered by the fact that the Compact provides for large, loosely-defined grants to be provided to the FAS, backed by the full faith and credit of the United States, and with no enforcement mechanism to ensure the efficient and effective expenditure of funds. I'm pleased that the United States' proposal in this round of Compact negotiations has been very focused on addressing the concerns raised by the GAO, by the Department of the Interior and by others.

ADDRESSING CONCERNS

The Office of Insular Affairs has endured years of frustration with having been given an ill-defined mission with respect to the Compact and with not having the tools to do its job. Officials of the Office of Insular Affairs began insisting, prior to the current negotiations and before the issuance of the GAO reports, that the "no strings attached" grants of the original Compact be replaced by a program with clearly defined goals, clear and detailed terms and conditions, effective reporting and monitoring provisions and effective enforcement procedures, including the withholding of funds. The United States' proposal addresses these concerns.

Specifically, the United States' proposal is that direct financial assistance to the FAS under the amended Compact and related agreements will be provided as follows:

First, United States assistance will be in the form of annual, performance-based sector grants for each of the following purposes: education, health, private sector development, capacity building in the public sector, environment, and public infrastructure.

Second, the allocation of the sector grants for each FAS initially will be proposed by the applicable FAS, but must be approved by a joint committee of representatives of the United States and the applicable FAS. The majority of the members on these joint committees will represent the United States. This joint committee will be obligated to ensure that United States funds are allocated in a manner consistent with the goals and objectives set forth in the Compact. In addition to approving the allocation of the sector grants, the joint committee would (1) review macroeconomic progress against FAS goals and objectives, (2) coordinate programatic assistance from other donor countries and organizations, (3) address issues raised in audits, (4) review sector grant performance outcomes, budgets, and terms and conditions and (5) evaluate progress with an eye to increasing the effectiveness of United States assistance.

Third, the sector grants provided under the Compact would be subject, at a minimum, to terms and conditions similar to those applicable to grants provided by the federal government to state and local governments in the United States. The grants would include conditions and objective performance measures. A subsidiary fiscal procedures agreement would memorialize these procedures. Generally, grant terms and conditions will include conformance with plans, strategies, budgets, project specifications, architectural and engineering specifications and performance standards. Moreover, the United States may add requirements needed to achieve sector grant goals. Other special conditions or restrictions that may be imposed by the United States in appropriate circumstances include: (1) payment on a reimbursement basis, (2) denial of authority to proceed to the next phase of the grant until there is evidence of acceptable performance on the prior phase, (3) additional reporting, (4) additional project monitoring, (5) additional technical or management assistance and (6) additional prior approvals.

Fourth, United States assistance would be subject to appropriate remedies for noncompliance with conditions and requirements, including the withholding of assistance and the right to recover funds spent improperly. Thus, if an FAS government failed to cooperate on the prosecution of an individual responsible for improprieties with respect to Compact funds, the United States would have the right to withhold funds from either the specific sectoral grant involved, or, if serious enough, all of the funding for the country involved.

Fifth, United States assistance would be the subject of oversight by Department of the Interior officials. The Department has requested that the Congress appropriate funding to hire eight full-time employees who will analyze the spending of United States funds and ensure that such funds go to the prescribed sectors, for approved purposes, and according to express grant conditions.

It is not our intention to micromanage the affairs of the RMI or the FSM. Our highest duty, however, is to ensure that the hard-earned money of the American taxpayer is not wasted and that RMI and FSM become self-reliant. The United States proposed amended Compact would not undermine the sovereignty or policy choices of the governments of the RMI and FSM within the sector grant framework. To the extent, however, that either government chooses to accept United States financial assistance pursuant to the Compact, we intend to impose conditions that are reasonably designed to ensure that our taxpayer dollars will achieve the intended results.

On the related subject of federal program coordination, we are exploring within the Administration the establishment of a mechanism to clearly define the roles of federal agencies, including a requirement that those agencies providing program assistance report to the Departments of the Interior and State on relevant details of the programs they administer in the RMI and FSM.

Finally, Mr. Chairman, I would like to address the very important question of the impact of FAS migration on Hawaii and those United States territories that have experienced a heavy influx of people from the FAS. Since the Compact became effective in 1986, thousands of citizens of the RMI and FSM have migrated to Hawaii, Guam and the Northern Mariana Islands. This migration has brought us many hardworking tax paying individuals who have contributed significantly to these American economies. At the same time, however, these migrants have placed additional burdens on the state and territorial governments because of their utilization of education, health and law enforcement services. Hawaii, Guam, and the Northern Mariana Islands annually report on these impacts of the Compact. The General Accounting Office reported significant outlays by Hawaii, Guam, and the Northern Mariana Islands in aid of the migrants and their families.

With this history in mind, we are working to address the impact of FAS migration. We are considering three approaches to the issue. First, we are looking at ways to provide compensation to the affected jurisdictions of Guam, Hawaii, and the Northern Mariana Islands to mitigate the impact of migration. Second, we are working with the Compact negotiator to explore mechanisms to minimize the costs associated with migration, particularly including important Administration proposals for reform of the Compact to strengthen application of immigration laws. Third, the new financial assistance proposal is aimed at improving the health and education of potential migrants, which may reduce the volume and impact of migration.

Mr. Chairman, the Department of the Interior believes that, when the United States comes to full agreement with our negotiating partners, we will have the means to ensure that future United States financial assistance to the Marshall Islands and the Federated States of Micronesia will be spent in a manner that gives us a chance to achieve meaningful results. The Compact has already achieved its purpose in the geopolitical sphere, with components of the former Trust Territory having successfully transformed themselves into sovereign countries. We now have to duplicate that success in the economic arena, by helping these countries create conditions to achieve true economic empowerment and self-reliance.

The achievement of economic self-reliance will be not be easy for the isolated, resource-poor islands that make up these FAS. However, I am confident that the United States' proposal, with its creation of a trust fund, is adequate to meet our overall objective.