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Testimony:

Before the Committee on Resources, House of Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 9:30 a.m. EDT:

Thursday, July 10, 2003:

Compact of Free Association:

An Assessment of the Amended Compacts and Related Agreements:

Statement of Susan S. Westin, Managing Director International Affairs 
and Trade:

Compact of Free Association:

GAO-03-988T:


GAO Highlights:

Highlights of GAO-03-988T, a testimony before the House Committee on 
Resources

Why GAO Did This Study:

In 1986, the United States entered into a Compact of Free Association 
with the Pacific Island nations of the Federated States of Micronesia, 
or FSM, and the Republic of the Marshall Islands, or RMI. The Compact 
provided about $2.1 billion in U.S. funds, supplied by the Department 
of the Interior, over 17 years (1987-2003) to the FSM and the RMI. 
These funds were intended to advance economic development. In a past 
report, GAO found that this assistance did little to advance economic 
development in either country, and accountability over funding was 
limited. The Compact also established U.S. defense rights and 
obligations in the region and allowed for migration from both 
countries to the United States.

The three parties recently renegotiated expiring economic assistance 
provisions of the Compact in order to provide an additional 20 years 
of assistance (2004-2023). In addition, the negotiations addressed 
defense and immigration issues. The House International Relations and 
Resources Committees requested that GAO report on Compact 
negotiations.

This testimony discusses negotiated changes to the levels and 
structure of future assistance, including the potential cost to the 
U.S. government. Further, it reviews accountability, defense, and 
immigration changes brought about by the amended Compacts and related 
agreements.

What GAO Found:

The amended Compacts of Free Association between the United States and 
the FSM and the RMI to renew expiring U.S. assistance could 
potentially cost the U.S. government about $6.6 billion in new 
authorizations from the Congress. Of this amount, $3.5 billion would 
cover payments over a 20-year period (2004-2023), while $3.1 billion 
represents payments for U.S. military access to Kwajalein Atoll in the 
RMI for the years 2024 through 2086. While the level of annual grant 
assistance to both countries would decrease each year, contributions 
to trust funds–meant to eventually replace grant funding–would 
increase annually by a comparable amount. Nevertheless, at an assumed 
annual 6 percent rate of return, earnings from the FSM trust fund 
would be unable to replace expiring grant assistance in 2024, while 
earnings from the RMI trust fund would encounter the same problem by 
2040.

The amended Compacts strengthen reporting and monitoring measures that 
could improve accountability over assistance, if diligently 
implemented. These measures include the following: assistance grants 
would be targeted to priority areas such as health and education; 
annual reporting and consultation requirements would be expanded; and 
funds could be withheld for noncompliance with grant terms and 
conditions. The successful implementation of the many new 
accountability provisions will require appropriate resources and 
sustained commitment from the United States, the FSM, and the RMI.

Regarding defense, U.S. military access to Kwajalein Atoll in the RMI 
would be extended from 2016 through 2066, with an option to extend 
through 2086. Finally, Compact provisions addressing immigration have 
been strengthened. For example, FSM and RMI citizens entering the 
United States would need to carry a passport, and the U.S. Attorney 
General could, through regulations, specify the time and conditions of 
admission to the United States for these citizens.

www.gao.gov/cgi-bin/getrpt?GAO-03-988T.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Susan S. Westin at 
(202) 512-4148 or WestinS@gao.gov.

[End of section]

Mr. Chairman and Members of the Committee:

I am pleased to be here today to testify on the Compact of Free 
Association between the United States and the Pacific Island nations of 
the Federated States of Micronesia, or the FSM, and the Republic of the 
Marshall Islands, or the RMI.[Footnote 1] In 1986, the United States 
entered into this Compact with the two countries after almost 40 years 
of administering the islands under the United Nations Trust Territory 
of the Pacific Islands. The Compact has provided U.S. assistance to the 
FSM and the RMI in the form of direct funding as well as federal 
services and programs for almost 17 years. Further, the Compact 
establishes U.S. defense rights and obligations in the region and 
allows for migration from both countries to the United States. 
Provisions of the Compact that address economic assistance were 
scheduled to expire in 2001; however, they can remain and have remained 
in effect while the United States and each nation renegotiated the 
affected provisions.[Footnote 2]

Today I will discuss our review of the amended Compacts and related 
agreements that the United States signed with the FSM and the RMI in 
May and April of 2003, respectively. (According to a Department of 
State official, while the original Compact was one document that 
applied to both the FSM and the RMI, the Compact that has been amended 
is now a separate Compact with each nation.) Specifically, I will 
discuss changes to levels and structure of future assistance, including 
the potential cost to the U.S. government. Further, I will comment on 
changes in accountability and other key issues addressed in the amended 
Compacts and related agreements.

Summary:

The amended Compacts of Free Association with the FSM and the RMI to 
renew expiring assistance would require about $3.5 billion in funding 
over the next 20 years with a total possible authorization through 2086 
of $6.6 billion from the U.S. Congress.[Footnote 3] The amended 
Compacts would provide decreasing levels of annual assistance over a 
20-year term (2004-2023) in order to encourage budgetary self-reliance. 
Simultaneously, the Compacts would require building up a trust fund 
(with contributions that would increase annually) for each country to 
generate annual earnings that would replace the grants that end in 
2023. Per capita grant assistance would fall over the 20-year period, 
particularly for the RMI. At an assumed trust fund rate of return of 6 
percent, in 2024 the RMI trust fund would cover expiring grant 
assistance, while the FSM trust fund would be insufficient to replace 
grants. By the year 2040, however, RMI trust fund returns also would be 
unable to replace grant funding.

The amended Compacts include many strengthened reporting and monitoring 
measures that could improve accountability if diligently implemented. 
The amended Compacts and related agreements have addressed most of the 
recommendations that we have made in past reports regarding assistance 
accountability. For example, assistance would be provided through 
grants targeted to priority areas, such as health and education, and 
with specific terms and conditions attached. Annual reporting and 
consultation requirements would be expanded, and funds could be 
withheld for noncompliance with Compact terms and conditions. However, 
the successful implementation of the many new accountability provisions 
will require a sustained commitment and appropriate resources from the 
United States, the FSM, and the RMI.

The amended Compacts address other key issues. One key change to 
Compact defense provisions would occur-U.S. military access to 
Kwajalein Atoll in the RMI could be extended from 2016 to 2086. This 
extension would cost $3.4 billion of the total possible authorization 
of $6.6 billion. Further, amended Compact provisions on immigration 
have been strengthened. FSM and RMI citizens entering the United States 
would need to carry a passport, and regulations could be promulgated 
that would impose time limits and other conditions on admission to the 
United States for these citizens.

Background:

The 1986 Compact of Free Association between the United States, the 
FSM, and the RMI provided a framework for the United States to work 
toward achieving its three main goals: (1) to secure self-government 
for the FSM and the RMI, (2) to assist the FSM and the RMI in their 
efforts to advance economic development and self-sufficiency, and (3) 
to ensure certain national security rights for all of the parties. The 
first goal has been met. The FSM and the RMI are independent nations 
and are members of international organizations such as the United 
Nations.

The second goal of the Compact-advancing economic development and self-
sufficiency for both countries-was to be accomplished primarily through 
U.S. direct financial payments (to be disbursed and monitored by the 
U.S. Department of the Interior) to the FSM and the RMI. For 1987 
through 2003, U.S. assistance to the FSM and the RMI to support 
economic development is estimated, on the basis of Interior data, to be 
about $2.1 billion.[Footnote 4] Economic self-sufficiency has not been 
achieved. Although total U.S. assistance (Compact direct funding as 
well as U.S. programs and services) as a percentage of total government 
revenue has fallen in both countries (particularly in the FSM), the two 
nations remain highly dependent on U.S. funds. U.S. direct assistance 
has maintained standards of living that are higher than could be 
achieved in the absence of U.S. support. Further, the U.S., FSM, and 
RMI governments provided little accountability over Compact 
expenditures.

The third goal of the Compact-securing national security rights for all 
parties-has been achieved. The Compact obligates the United States to 
defend the FSM and the RMI against an attack or the threat of attack in 
the same way it would defend its own citizens. The Compact also 
provides the United States with the right of "strategic denial," the 
ability to prevent access to the islands and their territorial waters 
by the military personnel of other countries or the use of the islands 
for military purposes. In addition, the Compact grants the United 
States a "defense veto." Finally, through a Compact-related agreement, 
the United States secured continued access to military facilities on 
Kwajalein Atoll in the RMI through 2016.[Footnote 5] In a previous 
report, we identified Kwajalein Atoll as the key U.S. defense interest 
in the two countries.[Footnote 6] Of these rights, only the defense 
veto is due to expire in 2003 if not renewed.

Another aspect of the special relationship between the FSM and the RMI 
and the United States involves the unique immigration rights that the 
Compact grants. Through the original Compact, citizens of both nations 
are allowed to live and work in the United States as "nonimmigrants" 
and can stay for long periods of time, with few restrictions.[Footnote 
7] Further, the Compact exempted FSM and RMI citizens from meeting U.S. 
passport, visa, and labor certification requirements when entering the 
United States. In recognition of the potential adverse impacts that 
Hawaii and nearby U.S. commonwealths and territories could face as a 
result of an influx of FSM and RMI citizens, the Congress authorized 
Compact impact payments to address the financial impact of these 
nonimmigrants on Guam, Hawaii, and the Commonwealth of the Northern 
Mariana Islands (CNMI).[Footnote 8] By 1998, more than 13,000 FSM and 
RMI citizens had made use of the Compact immigration provisions and 
were living in the three areas. The governments of the three locations 
have provided the U.S. government with annual Compact nonimmigrant 
impact estimates; for example, in 2000 the total estimated impact for 
the three areas was $58.2 million. In that year, Guam received $7.58 
million in impact funding, while the other two areas received no 
funding.[Footnote 9]

In the fall of 1999, the United States and the two Pacific Island 
nations began negotiating economic assistance and defense provisions of 
the Compact that were due to expire. Immigration issues were also 
addressed. According to the Department of State, the aims of the 
amended Compacts are to (1) continue economic assistance to advance 
self-reliance, while improving accountability and effectiveness; (2) 
continue the defense relationship, including a 50-year lease extension 
(beyond 2016) of U.S. military access to Kwajalein Atoll in the RMI; 
(3) strengthen immigration provisions; and (4) provide assistance to 
lessen the impact of Micronesian migration on Hawaii, Guam, and the 
CNMI.

Amended Compacts Would Alter Assistance Levels and Structure:

Under the amended Compacts with the FSM and the RMI, new congressional 
authorizations of approximately $3.5 billion in funding would be 
required over the next 20 years, with a total possible authorization 
through 2086 of $6.6 billion. Economic assistance would be provided to 
the two countries for 20 years-from 2004 through 2023-with all 
subsequent funding directed to the RMI for continued U.S. access to 
military facilities in that country. Under the U.S. proposals, annual 
grant amounts to each country would be reduced each year in order to 
encourage budgetary self-reliance and transition the countries from 
receiving annual U.S. grant funding to receiving annual trust fund 
earnings. This decrease in grant funding, combined with FSM and RMI 
population growth, would also result in falling per capita grant 
assistance over the funding period-particularly for the RMI. If the 
trust funds established in the amended Compacts earn a 6 percent rate 
of return, the FSM trust fund would be insufficient to replace expiring 
annual grants. The RMI trust fund would replace grants in fiscal year 
2024 but would become insufficient for this purpose by fiscal year 
2040.

Amended Compacts Could Cost the U.S. Government $6.6 Billion:

Under the amended Compacts with the FSM and the RMI, new congressional 
authorizations of approximately $6.6 billion could be required for U.S. 
payments from fiscal years 2004 to 2086, of which $3.5 billion would be 
required for the first 20 years of the Compacts (see table 1). The 
share of new authorizations to the FSM would be about $2.3 billion and 
would end after fiscal year 2023. The share of new authorizations to 
the RMI would be about $1.2 billion for the first 20 years, with about 
$300 million related to extending U.S. military access to Kwajalein 
Atoll through 2023. Further funding of $3.1 billion for the remainder 
of the period corresponds to extended grants to Kwajalein and payments 
related to U.S. military use of land at Kwajalein Atoll.[Footnote 10] 
The cost of this $6.6 billion new authorization, expressed in fiscal 
year 2004 U.S. dollars, would be $3.8 billion.

This new authorized funding would be provided to each country in the 
form of (1) annual grant funds targeted to priority areas (such as 
health, education, and infrastructure); (2) contributions to a trust 
fund for each country such that trust fund earnings would become 
available to the FSM and the RMI in fiscal year 2024 to replace 
expiring annual grants; (3) payments the U.S. government makes to the 
RMI government that the RMI transfers to Kwajalein landowners to 
compensate them for the U.S. use of their lands for defense sites; and 
(4) an extension of federal services that have been provided under the 
original Compact but are due to expire in fiscal year 2003.

Table 1: Estimated New U.S. Authorizations for the FSM and the RMI, 
Fiscal Years 2004-2086 (U.S. dollars in millions):

Fiscal years 2004-2023:

Grants for priority areas; FSM: $1,612; RMI: $701[A]; Total: $2,313.

Trust fund contributions; FSM: 517; RMI: 276; Total: 793.

Payments for U.S. military use of Kwajalein Atoll land[B]; FSM: Not 
applicable; RMI: 191; Total: 191.

Compact-authorized federal services[C]; FSM: 167; RMI: 37; Total: 204.

New U.S. authorization for 2004-2023; FSM: 2,296; RMI: 1,204; Total: 
3,500.

Fiscal years 2024-2086:

Grants to Kwajalein; FSM: Not applicable; RMI: 948[A]; Total: 948.

Payments for U.S. military use of Kwajalein Atoll land; FSM: Not 
applicable; RMI: 2,133; Total: 2,133.

New U.S. authorization for 2024-2086; FSM: Not applicable; RMI: 3,081; 
Total: 3,081.

Fiscal years 2004-2086, total new U.S. authorizations for the FSM and 
the RMI; FSM: ; $2,296; RMI: ; $4,285; Total: ; $6,581.

Source: GAO estimate based on information in the amended Compacts. 
Under the amended Compacts, U.S. payments are adjusted for inflation at 
two-thirds of the percentage change in the U.S. gross domestic product 
implicit price deflator.

Note: Numbers may not sum due to rounding.

[A] The 1986 U.S.-RMI Military Use and Operating Rights Agreement 
(MUORA) grants the United States access to certain portions of 
Kwajalein Atoll and provides $24.7 million of funding for development 
and impact on Kwajalein from 2004 to 2016. Approximately $112 million 
of the new proposed U.S. grant assistance of $701 million is for 
increasing this funding to Kwajalein from 2004 to 2016 and for 
continuation of the increased level of funding through 2066 and 
possibly to 2086 if the agreement is extended.

[B] As part of the 1986 MUORA, the RMI government has also allocated 
$162 million of U.S. funding from 2004 to 2016 under this agreement to 
landowners via a traditional distribution system to compensate them for 
the U.S. use of their lands for defense sites. The amended Compact 
increases these payments from 2004 to 2016 and continues the increased 
level of payments through 2066 and possibly to 2086 if the agreement is 
extended.

[C] Federal services authorized in the Compact include weather, 
aviation, and postal services. Services associated with the Federal 
Emergency Management Agency have been excluded. An estimate of 
assistance from the U.S. Agency for International Development's Office 
of Disaster Assistance has not been included.

[End of table]

Amended Compacts Would Reduce U.S. Grant Support Annually:

Under the U.S. proposals, annual grant amounts to each country would be 
reduced each year in order to encourage budgetary self-reliance and 
transition the countries from receiving annual U.S. grant funding to 
receiving annual trust fund earnings. Thus, the amended Compacts 
increase annual U.S. contributions to the trust funds each year by the 
grant reduction amount. This decrease in grant funding, combined with 
FSM and RMI population growth, would also result in falling per capita 
grant assistance over the funding period-particularly for the RMI (see 
fig. 1). Using published U.S. Census population growth rate projections 
for the two countries, the real value of grants per capita to the FSM 
would begin at an estimated $687 in fiscal year 2004 and would further 
decrease over the course of the Compact to $476 in fiscal year 2023. 
The real value of grants per capita to the RMI would begin at an 
estimated $627 in fiscal year 2004 and would further decrease to an 
estimated $303 in fiscal year 2023. The reduction in real per capita 
funding over the next 20 years is a continuation of the decreasing 
amount of available grant funds (in real terms) that the FSM and the 
RMI had during the 17 years of prior Compact assistance.

Figure 1: Estimated FSM and RMI Per Capita Grant Assistance for Fiscal 
Years 1987-2023 (Fiscal Year 2004 U.S. Dollars):

[See PDF for image]

Note: This analysis includes only Compact funds available to 
governments. Therefore, the analysis excludes investment development 
funds provided under section 111 of Public Law 99-239, trust fund 
contributions, federal programs and services, audit assistance, and 
MUORA-related lease payments that the RMI government transfers to 
Kwajalein landowners. U.S. Census population historical and projected 
population growth rates are used in conjunction with the most recent 
country Census data. U.S. Census projections are subject to revision.

[End of figure]

The decline in annual grant assistance could impact FSM and RMI 
government budget and service provision, employment prospects, 
migration, and the overall gross domestic product (GDP) outlook, though 
the immediate effect is likely to differ between the two countries. For 
example, the FSM is likely to experience fiscal pressures in 2004, when 
the value of Compact grant assistance drops in real terms by 8 percent 
relative to the 2001 level (a reduction equal to 3 percent of 
GDP).[Footnote 11] For the RMI, however, the proposed level of Compact 
grant assistance in 2004 would actually be 8 percent higher in real 
terms than the 2001 level (an increase equal to 3 percent of GDP). 
According to the RMI, this increase would likely be allocated largely 
to the infrastructure investment budget and would provide a substantial 
stimulus to the economy in the first years of the new Compact.

Trust Funds May Be Insufficient to Replace Expiring Grants:

The amended Compacts were designed to build trust funds that, beginning 
in fiscal year 2024, yield annual earnings to replace grant assistance 
that ends in 2023. Both the FSM and the RMI are required to provide an 
initial contribution to their respective trust funds of $30 million. In 
designing the trust funds, the Department of State assumed that the 
trust fund would earn a 6 percent rate of return.[Footnote 12] The 
amended Compacts do not address whether trust fund earnings should be 
sufficient to cover expiring federal services, but they do create a 
structure that sets aside earnings above 6 percent, should they occur, 
that could act as a buffer against years with low or negative trust 
fund returns. Importantly, whether the estimated value of the proposed 
trust funds would be sufficient to replace grants or create a buffer 
account would depend on the rate of return that is realized.[Footnote 
13]

* If the trust funds earn a 6 percent rate of return, then the FSM 
trust fund would yield a return of $57 million in fiscal year 2023, an 
amount insufficient to replace expiring grants by an estimated value of 
$27 million. The RMI trust fund would yield a return of $33 million in 
fiscal year 2023, an estimated $5 million above the amount required to 
replace grants in fiscal year 2024. Nevertheless, the RMI trust fund 
would become insufficient for replacing grant funding by fiscal year 
2040.

* If the trust funds are comprised of both stocks (60 percent of the 
portfolio) and long-term government bonds (40 percent of the portfolio) 
such that the forecasted average return is around 7.9 percent, then 
both trust funds would yield returns sufficient to replace expiring 
grants and to create a buffer account. However, while the RMI trust 
fund should continue to grow in perpetuity, the FSM trust fund would 
eventually deplete the buffer account and fail to replace grant funding 
by fiscal year 2048.

Amended Compacts Have Strengthened Accountability Over U.S. Assistance:

I will now discuss provisions in the amended Compacts designed to 
provide improved accountability over, and effectiveness of, U.S. 
assistance. This is an area where we have offered several 
recommendations in past years, as we have found accountability over 
past assistance to be lacking.[Footnote 14] In sum, most of our 
recommendations regarding future Compact assistance have been addressed 
with the introduction of strengthened accountability measures in the 
signed amended Compacts and related agreements. I must emphasize, 
however, that the extent to which these provisions will ultimately 
provide increased accountability over, and effectiveness of, future 
U.S. assistance will depend upon how diligently the provisions are 
implemented and monitored by all governments.

The following summary describes key accountability measures included in 
the amended Compacts and related agreements:

* The amended Compacts would require that grants be targeted to 
priority areas such as health, education, the environment, and public 
infrastructure. In both countries, 5 percent of the amount dedicated to 
infrastructure, combined with a matching amount from the island 
governments, would be placed in an infrastructure maintenance fund.

* Compact-related agreements with both countries (the so-called "fiscal 
procedures agreements") would establish a joint economic management 
committee for the FSM and the RMI that would meet at least once 
annually. The duties of the committees would include (1) reviewing 
planning documents and evaluating island government progress to foster 
economic advancement and budgetary self-reliance; (2) consulting with 
program and service providers and other bilateral and multilateral 
partners to coordinate or monitor the use of development assistance; 
(3) reviewing audits; (4) reviewing performance outcomes in relation to 
the previous year's grant funding level, terms, and conditions; and (5) 
reviewing and approving grant allocations (which would be binding) and 
performance objectives for the upcoming year. Further, the fiscal 
procedures agreements would give the United States control over the 
annual review process: The United States would appoint three government 
members to each committee, including the chairman, while the FSM or the 
RMI would appoint two government members.

* Grant conditions normally applicable to U.S. state and local 
governments would apply to each grant. General terms and conditions for 
the grants would include conformance to plans, strategies, budgets, 
project specifications, architectural and engineering specifications, 
and performance standards. Other special conditions or restrictions 
could be attached to grants as necessary.

* The United States could withhold payments if either country fails to 
comply with grant terms and conditions. In addition, funds could be 
withheld if the FSM or RMI governments do not cooperate in U.S. 
investigations regarding whether Compact funds have been used for 
purposes other than those set forth in the amended Compacts.

* The fiscal procedures agreements would require numerous reporting 
requirements for the two countries. For example, each country must 
prepare strategic planning documents that are updated regularly, annual 
budgets that propose sector expenditures and performance measures, 
annual reports to the U.S. President regarding the use of assistance, 
quarterly and annual financial reports, and quarterly grant performance 
reports.

* The amended Compacts' trust fund management agreements would grant 
the U.S. government control over trust fund management: The United 
States would appoint three members, including the chairman, to a 
committee to administer the trust funds, while the FSM or the RMI would 
appoint two members. After the initial 20 years, the trust fund 
committee would remain the same, unless otherwise agreed by the 
original parties.

The fiscal procedures agreements would require the joint economic 
management committees to consult with program providers in order to 
coordinate future U.S. assistance. However, we have seen no evidence 
demonstrating that an overall assessment of the appropriateness, 
effectiveness, and oversight of U.S. programs has been conducted, as we 
recommended.[Footnote 15]

The successful implementation of the many new accountability provisions 
will require a sustained commitment by the three governments to fulfill 
their new roles and responsibilities. Appropriate resources from the 
United States, the FSM, and the RMI represent one form of this 
commitment. While the amended Compacts do not address staffing issues, 
officials from Interior's Office of Insular Affairs have informed us 
that their office intends to post six staff in a new Honolulu office. 
Further, an Interior official noted that his office has brought one new 
staff on board in Washington, D.C., and intends to post one person to 
work in the RMI (one staff is already resident in the FSM). We have not 
conducted an assessment of Interior's staffing plan and rationale and 
cannot comment on the adequacy of the plan or whether it represents 
sufficient resources in the right location.

Amended Compacts Address Other Key Areas:

U.S. Military Access to Kwajalein Atoll Could Be Extended Until 2086:

The most significant defense-related change in the amended Compacts is 
the extension of U.S. military access to Kwajalein Atoll in the 
RMI.[Footnote 16] While the U.S. government had already secured access 
to Kwajalein until 2016 through the 1986 MUORA, the newly revised MUORA 
would grant the United States access until 2066, with an option to 
extend for an additional 20 years to 2086. According to a Department of 
Defense (DOD) official, recent DOD assessments have envisioned that 
access to Kwajalein would be needed well beyond 2016. He stated that 
DOD has not undertaken any further review of the topic, and none is 
currently planned. This official also stated that, given the high 
priority accorded to missile defense programs and to enhancing space 
operations and capabilities by the current administration, and the 
inability to project the likely improvement in key technologies beyond 
2023, the need to extend the MUORA beyond 2016 is persuasive. He also 
emphasized that the U.S. government has flexibility in that it can end 
its use of Kwajalein Atoll any time after 2023 by giving advance notice 
of 7 years and making a termination payment.

We have estimated that the total cost of this extension would be $3.4 
billion (to cover years 2017 through 2086).[Footnote 17] The majority 
of this funding ($2.3 billion) would be provided by the RMI government 
to Kwajalein Atoll landowners, while the remainder ($1.1 billion) would 
be used for development and impact on Kwajalein Atoll. According to a 
State Department official, there are approximately 80 landowners. Four 
landowners receive one-third of the annual payment, which is based on 
acreage owned. This landowner funding (along with all other Kwajalein-
related funds) through 2023 would not be provided by DOD but would 
instead continue as an Interior appropriation. Departmental 
responsibility for authorization and appropriation for Kwajalein-
related funding beyond 2023 has not been determined according to the 
Department of State. Of note, the Kwajalein Atoll landowners have not 
yet agreed to sign an amended land-use agreement with the RMI 
government to extend U.S. access to Kwajalein beyond 2016 at the 
funding levels established in the amended Compact.

Amended Compacts Would Strengthen Immigration Provisions:

While the original Compact's immigration provisions are not expiring, 
the Department of State targeted them as requiring changes. The amended 
Compacts would strengthen the immigration provisions of the Compact by 
adding new restrictions and expressly applying the provisions of the 
Immigration and Nationality Act of 1952, as amended (P.L. 82-414) to 
Compact nonimmigrants.[Footnote 18] There are several new immigration 
provisions in the amended Compacts that differ from those contained in 
the original Compact. For example, Compact nonimmigrants would now be 
required to carry a valid passport in order to be admitted into the 
United States. Further, children coming to the United States for the 
purpose of adoption would not be admissible under the amended Compacts. 
Instead, these children would have to apply for admission to the United 
States under the general immigration requirements for adopted children. 
In addition, the Attorney General would have the authority to issue 
regulations that specify the time and conditions of a Compact 
nonimmigrant's admission into the United States (under the original 
Compact, regulations could be promulgated to establish limitations on 
Compact nonimmigrants in U.S. territories or possessions).

In addition, the implementing legislation for the amended Compacts 
would provide $15 million annually for U.S. locations that experience 
costs associated with Compact nonimmigrants. This amount would not be 
adjusted for inflation, would be in effect for fiscal years 2004 
through 2023, and would total $300 million. Allocation of these funds 
between locations such as Hawaii, Guam, and the CNMI would be based on 
the number of qualified nonimmigrants in each location.

Mr. Chairman and Members of the Committee, this completes my prepared 
statement. I would be happy to respond to any questions you or other 
Members of the Committee may have at this time.

Contacts and Acknowledgments:

For future contacts regarding this testimony, please call Susan S. 
Westin or Emil Friberg, Jr., at (202) 512-4128. Individuals making key 
contributions to this testimony included Leslie Holen, Kendall 
Schaefer, Mary Moutsos, and Rona Mendelsohn.

FOOTNOTES

[1] The FSM had a population of about 107,000 in 2000, while the RMI 
had a population of 50,840 in 1999, according to each country's most 
recent census.

[2] Other Compact provisions are also due to expire in late 2003 if not 
renewed. These include (1) certain defense provisions, such as the 
requirement that the FSM and the RMI refrain from actions that the 
United States determines are incompatible with U.S. defense obligations 
(the defense veto) and (2) federal services listed in the Compact.

[3] Although the amended Compacts have been signed by the U.S., FSM, 
and RMI governments, they have not been approved by the legislature of 
any country. Therefore, in our testimony we describe the amended 
Compacts' requirements and potential impact in a conditional manner in 
recognition that the Compacts have not yet been enacted. The total 
possible cost to renew expiring assistance in fiscal year 2004 U.S. 
dollars would be $3.8 billion on the basis of the Congressional Budget 
Office's forecasted inflation rate.

[4] The cost of prior assistance in fiscal year 2004 U.S. dollars was 
$2.6 billion. This estimate does not include payments for Compact-
authorized federal services or U.S. military use of Kwajalein Atoll 
land, nor does it include investment development funds provided under 
section 111 of Public Law 99-239. Additionally, the Compact served as 
the vehicle to reach a full settlement of all compensation claims 
related to U.S. nuclear tests conducted on Marshallese atolls between 
1946 and 1958. In a Compact-related agreement, the U.S. government 
agreed to provide $150 million to create a trust fund. While the 
Compact and its related agreements represented the full settlement of 
all nuclear claims, it provided the RMI with the right to submit a 
petition of "changed circumstance" to the U.S. Congress requesting 
additional compensation. The RMI government submitted such a petition 
in September 2000, which the U.S. executive branch is still reviewing.

[5] U.S. access to Kwajalein Atoll is established through the U.S.-RMI 
Military Use and Operating Rights Agreement (MUORA). Funding provided 
for U.S. military access to Kwajalein for the years 1987 to 2003 is 
estimated, on the basis of Interior data, to be $64 million for 
development assistance and $144 million for the RMI government to 
compensate landowners for U.S. use of their lands.

[6] See U.S. General Accounting Office, Foreign Relations: Kwajalein 
Atoll Is the Key U.S. Defense Interest in Two Micronesian Nations, 
GAO-02-119 (Washington, D.C.: Jan. 22, 2002).

[7] Typically, nonimmigrants include those individuals who are in the 
United States temporarily as visitors, students, or workers.

[8] Payments were also authorized for American Samoa, but impact 
compensation has not been sought.

[9] See U.S. General Accounting Office, Foreign Relations: Migration 
From Micronesian Nations Has Had Significant Impact on Guam, Hawaii, 
and the Commonwealth of the Northern Mariana Islands, GAO-02-40 
(Washington, D.C.: Oct. 5, 2001).

[10] U.S. access to Kwajalein Atoll in the RMI has already been secured 
through 2016 through a Compact-related agreement. The amended Compact 
with the RMI extends this funding to 2066, with an additional 20-year 
optional lease extension at that point.

[11] The level of grant assistance in 2001 was converted into fiscal 
year 2004 dollars for comparison purposes.

[12] The State Department chose a 6 percent return in order to reflect 
a conservative investment strategy. This rate of return can be compared 
with the current average forecasted return for long-term U.S. 
government bonds of 5.8 percent by the Congressional Budget Office.

[13] This analysis does not take into account volatile or negative 
returns. The sufficiency of either the FSM or the RMI trust fund to 
replace grants has not been tested under conditions of market 
volatility.

[14] See U.S. General Accounting Office, Foreign Assistance: U.S. 
Funds to Two Micronesian Nations Had Little Impact on Economic 
Development, GAO/NSIAD-00-216 (Washington, D.C.: Sept. 22, 2000) for a 
review of the first 12 years of direct Compact assistance.


[15] This recommendation was included in U.S. General Accounting 
Office, Foreign Assistance: Effectiveness and Accountability Problems 
Common in U.S. Programs to Assist Two Micronesian Nations, GAO-02-70 
(Washington, D.C.: Jan. 22, 2002).

[16] A few expiring provisions would be extended indefinitely in the 
amended Compacts. The "defense veto" has been extended. In addition, 
the ability of FSM and RMI citizens to volunteer to serve in the U.S. 
military would be extended. 

[17] Our figure of $3.4 billion is adjusted for inflation.

[18] As noted in the background section, FSM and RMI citizens who enter 
the United States are legally classified as "nonimmigrants" - that is, 
individuals who are in the United States temporarily as visitors, 
students, or workers.