Impact of Military Build-up In Guam

Statement

of

Nikolao I. Pula

Acting deputy Assistant Secretary of the Interior

for Insular Affairs

Before the Senate Committee on

Energy and Natural Resources

Regarding

the Military build-up in Guam

Impact on the Civilian community, planning, and response

Washington, D.C.

May 1, 2008

Mr. Chairman and members of the Committee, thank you for the opportunity to testify on the military build-up in Guam and its impact on the civilian community, planning and response.

THE TRANSFER OF 8,000 MARINES

Guam is to receive a large defense expansion in the next few years. The proposed build-up is the result of an agreement between the United States and Japan to relocate about 8,000 United States Marines and their dependents from Okinawa to Guam. Construction of new defense facilities is scheduled to start in 2010 with the relocation to be completed in 2014. The cost of new infrastructure to be installed to accommodate the Marines and their dependents is currently estimated to be well over $10 billion.

As a result of the construction, a formidable amount of new capital will be injected into an island economy that currently produces $3.7 billion in Gross Domestic Product per year. This flow of capital has the potential to lift Guam's economy to a substantially higher level of output. There will be corresponding increases in local employment and taxes for the Government of Guam (GovGuam). There will also be new businesses to meet new demands for a whole host of goods and services arising from the build-up.

In addition to the relocation of Marine Corps forces from Okinawa, which will more than double the current number of active duty personnel on Guam, the Air Force and the Navy will also see significant increases in both personnel and capabilities. A new small contingent of active duty Army personnel will also be posted to Guam.

This expansion holds enormous economic and financial promise for Guam at a time when conventional income sources for a small and isolated island economy are extremely limited. The economy will benefit from the build-up in two stages: (1) initial facility building and improvements will create a large number of high-paying construction-related jobs for several years and (2) permanent new defense and non-defense jobs to support the new military mission.

The build-up will present significant challenges for Guam's small and isolated island economy. The first big challenge may occur in the early stages of construction, in which labor of all skill levels will need to be secured. The local workforce may not be sufficiently able to satisfy all of the labor needs. We are working with our partners to develop training and apprenticeship programs for United States eligible labor in the Guam region. After construction is completed and the Marines move in, the continuing effect on Guam's economy will be large and widespread.

The build-up also presents a challenge to the ongoing interdiction efforts intended to prevent the inadvertent transport of brown tree snakes to other Pacific Islands or the mainland United States. Cooperative efforts are aimed at suppressing the brown tree snake population in strategic transportation and cargo facilities through the construction of snake barriers, and other interdiction efforts. The primary threat is that brown tree snakes are prone to hiding in cargo, on aircraft, and in vehicles and could potentially be introduced in other habitats that are snake-free and that support endangered or threatened bird species. We will continue to work with our interagency partners to suppress the treesnake populations in strategic areas, secure military and cargo facilities through the construction of treesnake barriers, and ramped up interdiction efforts as the military build-up on Guam progresses.

ECONOMIC EFFECTS OF BASE EXPANSION

In a macroeconomic sense, an important question is how much the proposed base expansion in Guam will contribute to the insular area's economy. Roughly, evidence from defense spending history in the United States and Hawaii, which is relevant to Guam, suggests that each dollar of defense spending could generate 75 cents of gross domestic product (GDP), the final value of the economy's total output. The 75 cents contribution to GDP from each defense dollar is what economists call the multiplier effect on GDP, which is the sum of direct, indirect and induced effects.

At present, Guam's defense establishment, mostly the Navy, is relatively small. There are a total of 6,520 active duty personnel and 7,690 dependents on island. Defense spending on Guam was $711.7 million in fiscal year 2005, the latest year for which final figures are available.

Federal civilian payroll at the end of 2007 numbered 3,610, of which 3,040, or 84.2 percent were civilian DOD employees. Non-DOD Federal employees were 570, or 15.8 percent of the total. There is roughly one civilian employee for every two active duty persons.

Assuming an addition of about 8,000 Marines and 4,510 active duty personnel in other military services when the build-up is completed, the number of active duty personnel would increase from 6,520 today to 19,330 in 2014. The number of dependents could rise from 7,690 today to 19,140 in 2014. The number of both active duty personnel and dependents in Guam could rise from 14,210 today to 38,470 in 2014. Based on today's total population estimate of 171,000 for Guam, the build-up will increase the island's population some 22.3 percent to 218,000. These population numbers do not include new businesses that will remain on-island after 2014 which will add owners, employees, and their families to the population.

Using the current ratios for Guam, defense spending for Guam will rise from $700-800 million to more than $2 billion in 2014 construction is planned to be completed. Applying the defense spending multiplier for Hawaii, the increase in defense spending could add $900 million to $1 billion annually to Guam's GDP. Assuming a $3.7 billion GDP and the prospect that the rest of the economy, namely tourism and local government, will continue to perform at the same rate it does today, the build-up could boost Guam's GDP by approximately 22.5 percent. Realistically, it would be hard to envision any other alternative for Guam that would increase its total economic output by nearly a quarter in such a relatively short time.

Naturally, Guam's economy will need time to adjust to this new level of defense spending during the build-up. Once it does, it will be at a much higher level than it has ever been or is conceivable to be under any other scenario. More important, the mix of defense and civilian jobs following the build-up will be of a higher pay grade than would be feasible in the rest of the economy, which is mostly tourism and other services that employ few advanced skills. Other good news for Guam is that national defense, as has been the case in both Guam and Hawaii for many decades, coexists in harmony with the rest of the economy and population.

Again, using the current ratios for Guam, the 12,810 additional active-duty personnel resulting from the build-up could create 6,000 new civilian jobs for Guam. Given today's total payroll employment figure of just over 60,000, this would be a 10 percent increase in civilian employment.

Guam's other major income source is tourism, which is critical to jobs and local tax revenue. As important as tourism is, it is subject to what economists call leaks, that is, more of the money that mostly foreign tourists spend in Guam leaks out of the system in the form of payment for imports, air fares for foreign carriers and foreign-owned hotels. Defense spending, on the contrary, is subject to fewer leaks as compared to tourism, because more defense establishment payments, including wages, salaries, payments to local contractors, and other base expenses, are likely to remain in the system.

One way to look at the difference between defense and tourism is to look at their average wages and salaries. In Guam, the average of wages and salaries in defense is much higher than the average in tourism. The average level of wages and salaries in defense for all active duty and civilian employees together, based on fiscal year 2005 data, was $34,037. This figure is 74.8 percent higher than the average for tourism, which, according to the Guam Visitors Bureau, is $19,468. The higher pay level, in combination with fewer leaks from the system, makes the defense payroll more desirable for nearly every community.

Another way to look at what this expansion will do for Guam's economy is to look at taxes that will be covered over to the Treasury of Guam. Under current rules, Federal income taxes collected on Federal payrolls on Guam are paid into the Treasury of Guam. Currently, this sum is about $40 million a year. With a near tripling of the number of active duty personnel and about 6,000 new civilian employees at the end of the build-up, tax revenue for Guam could increase significantly.

PLANNING AND FINANCING

It is too early to fully estimate all benefits and costs related to the build-up. At this point, many of DOD's plans have not been finalized, and studies evaluating the expected economic impact of the relocation are also pending. However, DOD estimates that the realignment could add as many as 40,000 persons to Guam's current population of 171,000. While this prospect presents Guam with a tremendous source of revenue, it also presents major challenges related to project funding.

The impacts of a military buildup are magnified in Guam because Guam is an island. It is surrounded by water with no outlying jurisdictions that can pick up some of the population increase and that can tap into a larger electric grid. All of the effects are concentrated on one jurisdiction - Guam.

Appreciating the challenges that the build-up will present, the Department of Defense (DOD) established the Joint Guam Program Office (JGPO), headed by Major General David Bice, USMC (Retired), under the Assistant Secretary of the Navy (Installations and Environment. It was decided that the Interagency Group on Insular areas (IGIA) would establish a Guam Task Force to coordinating military build-up issues that cross jurisdictional lines of Federal agencies. Interior and JGPO are leading the Task Force effort. The Task Force has established five working groups: Labor, Infrastructure, Environment, Health and Human Services, and Socio-Economic. The Department of Education forms a sub-group within the Labor working group.

Notably, the infrastructure subgroup has identified significant project and budgetary challenges associated with the buildup. The facilities that will be built by the military on base will, in large part, be taken care of by the military. However, certain areas of infrastructure may overlap between the military base and the Guam community at large. Funding for many of these items has not yet been determined. A sample of this infrastructure includes --

Port facilities and capacity

Long-haul road between the Navy and Air Force bases

Housing for the construction workers (to be privately funded)

Healthcare facilities for construction workers

Furthermore, other potential infrastructure expenditures related to the buildup have been identified within the JGPO meetings. These include:

Schools for children of new civilian workers

Hospital facilities

Electric Power facilities

Water and Sewer facilities

Solid waste disposal facilities

Government Administrative facilities

Up to this point, Interior funding has been aimed at expediting the planning process. In March 2008, the Office of Insular Affairs provided Guam a technical assistance grant of $15,000 to aid the writing of a Guam grant application for U.S. Department of Labor funds to develop a regional labor plan. Such a plan must be in place before training and apprenticeship funds can be released for United States eligible labor in Guam and the surrounding United States-affiliated islands. Additionally, the Office of Insular Affairs has reprogrammed $2 million in GovGuam capital improvement funds so that Guam Port Authority can quickly acquire design and environmental studies for wharf modernization. The Department believes it is critical to get the port modernized in order to address future infrastructure issues.

The November 2007 meeting of the Task Force was intended to outline military realignment activities and associated costs, both for the military and GovGuam. At this meeting, GovGuam presented draft lists of prospective infrastructure needs with costs ranging from $1 billion to more than $4 billion.

A number of plans crucial in determining infrastructure improvement needs related to the buildup are still currently in development. These plans are a prerequisite for budgetary planning and need to be finalized before construction upgrades can begin. Within this context, facilities that will be crucial to the build-up but which will also benefit Guam's economy, such as the port and road facilities, may be the first priority upgrade projects. Once there is an agreed plan for GovGuam projects, these may be considered during the development of the 2010 budget.

Projects with Income

Among the available funding options for the construction of projects with expected income on Guam, private and USDA financing options show promise and merit more in-depth investigation.

Projects that have revenue streams may be able to borrow in their own right through public corporations, independent authorities, or other entities. Port activities, electric power, water, wastewater, solid waste disposal can all generate income, which allows them to finance through borrowing. Currently, the Guam Port Authority and Guam Power Authority are organized as independent entities, run their own affairs, and negotiate their own financing.

Independent entities can seek to provide a service at lowest cost. Thus, they plan for proper capacity and finance only what is necessary. Full cost recovery is a usual requirement. Such a structuring of activities refutes a “gold-plating” argument. Additionally if private sector financing seems scarce, the United States Department of Agriculture (USDA) offers a variety rural development loans that may be a viable resource for qualified borrowers. As typical for government loan programs, these require that the government get an appropriation only for the risk associated with the loan rather than the entire loan amount. Loans where there is a reasonable risk of default will have a higher cost than those that typically do not default. For instance, the renewable energy guaranteed loan program has a 10 percent subsidy rate compared to the hardship electric loan program which has a .12 percent subsidy rate. Because utilities typically have little risk of default, financing of electric loans is secure and carries a low up front financing cost on behalf of the Federal government. There is an additional administrative cost associated with all loan programs that is not reflected in the subsidy rate that we would have to consider with this option. For all USDA loans, the borrower would have to agree to the terms of the loan and will need to repay the loan in full.

Projects without Income

Construction of schools, roads, and social service facilities such as buildings to house courts and public safety offices, are another matter. They do not generate income, but are paid for with tax collections. USDA is a potential source for this type of financing as well through its community facilities grants and loans programs.

While Federal moneys may need to be appropriated for some aspects of some construction projects in the civilian areas of Guam, we are more confident today than earlier that a large portion of construction can be financed through borrowings or public/private ventures, including from USDA. However, such an approach is premised on sufficient federal funds being available to cover the subsidy and administrative costs of the loan programs as well as full repayment of the loans by the borrowers.

As Chair of the Interagency Group on Insular Areas, the Department understands the need to continue to facilitate discussions between the military and Guam, as well as assist in the procurement of necessary resources to address the impending pressures on the infrastructure of Guam.