The U.S. and Palau governments  concluded a Compact of Free Association in 1986; the compact entered  into force on October 1, 1994. In addition to the U.S. assistance provided under the compact, U.S.  agencies—the Department of Education, the Department of Health and  Human Services (HHS), and Interior, among others—provide  discretionary federal programs in Palau as authorized by U.S. legislation  and with appropriations from Congress. In our 2008 report, we projected that U.S. assistance to Palau from 1995  through 2009 would exceed $852 million. Assistance to Palau Would Decline through 2024

Key provisions of the Agreement would include, among others, extending  direct economic assistance to Palau, providing infrastructure project  grants and contributions to an infrastructure maintenance fund,  establishing a fiscal consolidation fund, and making changes to the trust  fund. U.S. assistance to Palau under the Agreement would total  approximately $215 million through 2024.   Direct economic assistance ($107.5 million). Infrastructure projects ($40 million). Infrastructure maintenance fund ($28 million).   Fiscal consolidation fund ($10 million). Under the Agreement, the U.S.  government would provide grants of $5 million each in 2011 and  2012, respectively, to help the Palau government reduce its debts. Under the Agreement, the U.S.  government would contribute $30.25 million to the fund from 2013  through 2023.   Federal services. Agreement’s Provisions Would Significantly Improve Prospects for Palau Trust Fund

The addition of $30.25 million in U.S. contributions and the delay of $89  million in Palau withdrawals through 2023, as provided by the Agreement,  would improve the fund’s prospects for sustaining scheduled payments  through 2044. With these changes, the  trust fund would have an approximately 90 percent probability of  sustaining payments through 2044. Estimates Prepared for Palau Project Declining Reliance on U.S. Assistance under the Agreement

Estimates prepared for the government of Palau project that Palau’s  reliance on U.S. assistance provided under the Agreement will decline,  while its reliance on trust fund withdrawals and domestic revenue will  increase. The estimates also  show Palau’s trust fund withdrawals growing from 5 percent of  government revenue in 2011 to 12 percent in 2024. In addition, the  estimates indicate that Palau’s domestic revenue will rise from 40 percent  of all government revenue in 2011 to 59 percent in 2024. The estimates prepared for the government of Palau project that U.S.  assistance to Palau from 2011 through 2024, including discretionary  federal programs, will total approximately $427 million. Pending Legislation Would Approve and Implement the Agreement

Legislation has been introduced in both the Senate and the House that  would approve and implement the September 2010 agreement between  the U.S. and Palau governments. As of  September 2012, the Senate has not acted on this bill. Specifically, the  pending House bill:    Shifts the timing of the provision of some specified Agreement  assistance to account for the fact that fiscal year 2011 has passed.   Applies an inflation adjustment to the Agreement assistance for direct  economic assistance and infrastructure project grants, and payments  to the trust fund, infrastructure maintenance fund, and fiscal  consolidation fund. The proposed Senate and House legislation would authorize  annual appropriations for weather and aviation services.
Why GAO Did This Study

The Compact of Free Association between the United States and the Republic of Palau, which entered into force in 1994, provided for several types of assistance aimed at promoting Palaus self-sufficiency and economic advancement. Included were 15 years of direct assistance to the Palau government; contributions to a trust fund meant to provide Palau $15 million each year in fiscal years 2010 through 2044; construction of a road system, known as the Compact Road; and federal services such as postal, weather, and aviation. U.S. agencies also provided discretionary federal programs related to health, education, and infrastructure. In 2008, GAO projected that total assistance in fiscal years 1994 through 2009 would exceed $852 million.
In September 2010, the United States and Palau signed an agreement (the Agreement) that would, among other things, provide for additional assistance to Palau beginning in fiscal year 2011 and modify its trust fund. Currently, there are two bills pending before Congress to implement the Agreement.
In this testimony, GAO updates a November 2011 testimony on (1) the Agreements provisions for economic assistance to Palau, (2) its impact on the trust funds likelihood of sustaining scheduled payments through fiscal year 2044, (3) the projected role of U.S. assistance in Palau government revenues, and (4) the pending legislation to implement the Agreement. GAO reviewed current trust fund data and new pending legislation for this testimony.

What GAO Found

The Agreement would provide decreasing assistance, totaling approximately $215 million through fiscal year 2024 and includes the following:
direct economic assistance ($107.5 million) for Palau government operations;
infrastructure project grants ($40 million) to build mutually agreed projects;
infrastructure maintenance fund ($28 million) for maintaining the Compact Road, Palaus primary airport, and certain other major U.S.-funded projects;
fiscal consolidation fund ($10 million) to assist Palau in debt reduction; and
trust fund contributions ($30.25 million) in addition to the $70 million contributed under the compact
Under the Agreement, the United States would contribute to the trust fund in fiscal years 2013 through 2023, and Palau would reduce its withdrawals by $89 million in fiscal years 2010 through 2023. GAO projects that the fund would have a 90 percent likelihood of sustaining payments through fiscal year 2044 with these changes, versus 40 percent without these changes.
Estimates prepared for the Palau government project declining reliance on U.S. assistance under the Agreementfrom 28 percent of government revenue in fiscal year 2011 to 2 percent in fiscal year 2024and growing reliance on trust fund withdrawals and domestic revenues. The estimates show trust fund withdrawals rising from 5 percent to 24 percent and domestic revenues rising from 40 to 59 percent, of total government revenue. According to the estimates, U.S. assistance in fiscal years 2011 through 2024 would total $427 million, with discretionary federal programs accounting for about half of that amount.
Congress has not approved legislation to implement the Agreement as of September 2012. Pending Senate legislation would implement the Agreement and appropriate funds to do so. Pending House legislation would implement the agreement, apply an inflation adjustment to assistance payments, and shift the timing of certain assistance payments to reflect the fact that 2011 has passed.