Prioritizing Palau: Why the Compact Budget Matters

With the United States government in political deadlock over the budget, the debt ceiling, and healthcare, it is a tough time to be a freely associated state. The renewal of funding for Palau’s Compact of Free Association stands as a case in point. In theory, Palau, nestled between the Federated States of Micronesia (FSM) and the Philippines, should be receiving assured U.S. funding for vital infrastructure, healthcare, and education programs. Instead, it is caught in limbo because of political bickering in Washington. Politics are threatening to weaken a decades-long relationship that benefits both parties.

Palau was under U.S. stewardship following World War II until it became independent in 1994, after which it entered a period of free association. The compact agreement benefits both nations. The United States provides Palau’s security, supplements its government’s budget, and gives Palauan citizens the ability to work in the United States in return for privileged access to a strategic area of the western Pacific that is roughly the size of Texas.

There is consensus among Palau’s government, the White House, and Congress that the compact budget should be passed. Palau has proved itself a reliable partner, acting as a regional advocate for U.S. reengagement in the South Pacific and a key supporter in the Pacific Islands Forum and the United Nations. Meanwhile, the compact funding gives the island nation of 20,000 a viable opportunity to achieve self-sufficiency.

Palau’s new compact budget should have been passed by Congress in early 2011 but has faced severe obstacles. The newly proposed compact funding is designed to build on the original 1994 compact agreement by improving accountability for grant funding, giving grant funding in decreasing amounts, and feeding funds into a trust that will help sustain Palau’s government budget after the 20-year term of the compact concludes. If the compact is approved by year’s end, the United States will send Palau $189 million in aid between 2014 and 2023, which will have an enormous impact on the island state’s $60 million annual budget.

Unfortunately, Congress refuses to approve the compact without additional offsets to the proposed budget. The Obama administration has suggested that offsets could come from mining on federal lands in the United States and from fees on leases. But this was shot down by the Senate Committee on Energy and Natural Resources, which argues that those revenue sources need to benefit the states in which they are collected. Government functions in Palau are currently being bridged by $13 million of discretionary funding annually from the Department of the Interior, authorized by continuing resolutions in Congress. But the latest resolution for 2014 has been stalled by the current government shutdown, jeopardizing next year’s payment.

A recent report on the Federated States of Micronesia and the Republic of the Marshall Islands (RMI), both of which have free association compact agreements with the United States, will likely feed these budgetary concerns. The U.S. Government Accountability Office report, released in September, finds that there has been poor oversight over how the compact funding has been spent and raises severe concerns about whether FSM and RMI will become self-sufficient by 2023 on their current trajectory. Their compact agreements stipulate that the money must be spent on six key sectors: education, health, infrastructure, environment, private-sector development, and public-sector capacity building. But over the past 10 years, the majority of funding has helped maintain the bloated education and health sectors.

This mismanagement has been exacerbated by a lack of oversight. The Department of the Interior’s Office of Insular Affairs, which is charged with auditing the FSM and RMI governments, has been severely understaffed due to budget constraints and has not been monitoring expenditures closely. The reason this office has been underfunded is depressingly simple: it has not been a budget priority. What data have been collected have been inconsistent and therefore not useful in tracking development progress. It is thought that corruption in the two island states has also played a role.

Palau’s agreement is far more structured than those of FSM and RMI regarding where the money flows. In the past, Palau has also proved more responsible in how it handles its funding. That said, if Palau and the United States plan to honor their commitment to help the former achieve self-sufficiency, then the FSM and RMI experiences should serve as lessons that both sides must invest resources in adequate oversight.

Congress needs to look to the national interests of both the United States and Palau, and re-prioritize finding a solution to the disagreement over budget offsets. By passing the compact funding, the United States and Palau will be able to begin a planned reform process and invest in Palau’s future self-sufficiency. Without a new agreement, Palau is receiving just enough money to scrape by and important development projects are being delayed.

There are also strategic implications to continued delay. The longer the United States waits, the more it will be perceived as neglecting an important, reliable partner in the western Pacific. Palau has a special affinity for the United States, but if Washington’s indifference convinces Palau that its interests are better served by turning elsewhere, it will negatively affect the U.S. strategic position in the Pacific. Moreover, the Pacific Islands so far welcome renewed U.S. attention under the Obama administration. But by ignoring one of its most ardent supporters, and the host of the 2014 Pacific Islands Forum, Washington could make it difficult for Pacific nations to take its reengagement agenda seriously.

(This Commentary originally appeared in the October 2013 issue of Pacific Partners Outlook.)
Elke Larsen is a research assistant with the Pacific Partners Initiative at the Center for Strategic and International Studies in Washington, D.C.

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