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January 2018 Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas Final Report Prepared for Office of Insular Affairs U.S. Department of the Interior 1849 C Street, NW Washington, DC 20240 Prepared by Brian Lim Alan C. O’Connor Carson Moss Ryan Callihan RTI International 3040 E. Cornwallis Road Research Triangle Park, NC 27709 RTI Project Number 0216218 _________________________________ RTI International is a registered trademark and a trade name of Research Triangle Institute. RTI Project Number 0216218 Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas Final Report January 2018 Prepared for Office of Insular Affairs U.S. Department of the Interior 1849 C Street, NW Washington, DC 20240 Prepared by Brian Lim Alan C. O’Connor Carson Moss Ryan Callihan RTI International 3040 E. Cornwallis Road Research Triangle Park, NC 27709 iii Contents Section Page Executive Summary ES-1 1. Introduction 1-1 1.1 FY 2017 OIA Payments to Insular Areas ...................................................... 1-2 1.2 Study Objectives ...................................................................................... 1-3 1.3 Overview of Study Methodology ................................................................. 1-3 1.4 Methodological Limitations ........................................................................ 1-6 1.5 Data Limitations ....................................................................................... 1-7 1.6 Report Organization .................................................................................. 1-8 2. American Samoa 2-1 2.1 FY 2017 OIA Payments Summary ............................................................... 2-1 2.2 Economic Impacts of OIA Payments Using Input-Output Analysis ................... 2-2 3. Guam 3-1 3.1 FY 2017 OIA Payments Summary ............................................................... 3-1 3.2 Economic Impacts of OIA Payments Using Input-Output Analysis ................... 3-2 4. Commonwealth of the Northern Mariana Islands (CNMI) 4-1 4.1 FY 2017 OIA Payments Summary ............................................................... 4-1 4.2 Economic Impacts of OIA Payments Using Input-Output Analysis ................... 4-2 5. U.S. Virgin Islands (USVI) 5-1 5.1 FY 2017 OIA Payments Summary ............................................................... 5-1 5.2 Economic Impacts of OIA Payments Using Input-Output Analysis ................... 5-2 6. Federated States of Micronesia (FSM) 6-1 6.1 FY 2017 OIA Payments Summary ............................................................... 6-1 6.2 Direct Economic Impacts ........................................................................... 6-2 6.3 Employment and Employee Compensation Base Multipliers ............................ 6-3 6.4 GDP Base Multipliers ................................................................................. 6-5 6.5 EBA Economic Impact Estimate .................................................................. 6-6 iv 7. Republic of the Marshall Islands (RMI) 7-1 7.1 FY 2017 OIA Payments Summary ............................................................... 7-1 7.2 Economic Impacts of OIA Payments Using Economic Base Analysis ................. 7-2 7.3 GDP Base Multipliers ................................................................................. 7-6 7.4 EBA Economic Impact Estimate .................................................................. 7-6 8. Republic of Palau 8-1 8.1 FY 2017 OIA Payments Summary ............................................................... 8-1 8.2 Direct Economic Impacts of Payments......................................................... 8-2 8.3 Employment and Employee Compensation Base Multipliers ............................ 8-3 8.4 GDP Base Multipliers ................................................................................. 8-5 8.5 EBA Economic Impact Estimate .................................................................. 8-7 9. District of Columbia and Hawaii 9-1 9.1 Economic Impact Assessment of OIA Operations in District of Columbia .......... 9-1 9.2 Economic Impact Assessment of OIA Operations in Hawaii ............................ 9-1 10. Analysis Summary 10-1 References R-1 Appendix A Allocation of FY 2017 Technical Assistance and Other Payments by Insular Area ....................................................................................................... A-1 v Tables Number Page ES-1. Economic Impact Summary of OIA Grants and Payments (FY 2017) .................. ES-2 ES-2. Economic Characteristics by Insular Area ....................................................... ES-3 ES-3. FY 2017 OIA Payments by Insular Area .......................................................... ES-4 ES-4. Estimated Employment Impact of OIA Payments (FY 2017) .............................. ES-5 ES-5. Estimated Employee Compensation Impact of OIA Payments (FY 2017) ............ ES-6 ES-6. Estimated GDP Impact of OIA Payments (FY 2017) .......................................... ES-6 1-1. Economic Characteristics by Insular Area ......................................................... 1-1 1-2. FY 2017 OIA Payments by Insular Area ............................................................ 1-3 2-1. OIA Payments and Estimated Spending within American Samoa (FY 2017) ........... 2-2 2-2. American Samoa: Direct Economic Impacts of OIA Payments Using I/O Analysis (FY 2017) ........................................................................................ 2-3 2-3. American Samoa: Selected IMPLAN Multipliers by Industry ................................. 2-3 2-4. American Samoa: Total Economic Impacts Using I/O Analysis (FY 2017) .............. 2-4 2-5. American Samoa: Estimated Impact Relative to National Economy (FY2017) ........ 2-4 3-1. OIA Payments and Estimated Spending within Guam (FY 2017) .......................... 3-2 3-2. Guam: Direct Economic Impacts of OIA Payments Using I/O Analysis (FY 2017) .......................................................................................................... 3-3 3-3. Guam: Selected IMPLAN Multipliers by Industry ................................................ 3-3 3-4. Guam: Total Economic Impacts Using I/O Analysis (FY 2017) ............................. 3-4 3-5. Guam: Estimated Impact Relative to National Economy (FY 2017) ....................... 3-4 4-1. OIA Payments and Estimated Spending within CNMI (FY 2017) ........................... 4-1 4-2. CNMI: Direct Economic Impacts of OIA Payments Using I/O Analysis (FY 2017) .......................................................................................................... 4-3 4-3. CNMI: Selected IMPLAN Multipliers by Industry ................................................. 4-4 4-4. CNMI: Total Economic Impacts Using I/O Analysis (FY 2017) .............................. 4-4 4-5. CNMI: Estimated Impact Relative to National Economy (FY2017) ........................ 4-5 5-1. OIA Payments and Estimated Spending within USVI (FY 2017) ............................ 5-2 5-2. USVI: Direct Economic Impacts of OIA Payments Using I/O Analysis (FY 2017) .......................................................................................................... 5-3 5-3. USVI: Selected IMPLAN Multipliers by Industry .................................................. 5-3 5-4. USVI: Total Economic Impacts Using I/O Analysis (FY 2017) ............................... 5-4 5-5. USVI: Estimated Impact Relative to National Economy (FY 2017) ........................ 5-4 vi 6-1. OIA Payments and Estimated Spending within FSM (FY 2017) ............................. 6-1 6-2. FSM: Estimated Direct Economic Impacts Using EBA (FY 2017) ........................... 6-3 6-3. FSM: Employment and Employee Compensation by Industry (2016 estimates) .................................................................................................... 6-4 6-4. FSM: GDP by Industry (2016) ......................................................................... 6-6 6-5. FSM: Total Estimated Economic Impact Using EBA (FY 2017) .............................. 6-7 6-6. FSM: Estimated Impact Relative to National Economy Using EBA (FY2017) ........... 6-7 7-1. OIA Payments and Estimated Spending within RMI (FY 2017) ............................. 7-1 7-2. RMI: Estimated Direct Economic Impacts Using EBA (FY 2017) ........................... 7-4 7-3. RMI: Employment and Employee Compensation by Industry (2017 estimates) .................................................................................................... 7-5 7-4. RMI: Total Estimated Economic Impact Using EBA (FY 2017) .............................. 7-6 7-5. RMI: Estimated Impacts Relative to National Economy Using EBA (FY2017) .......... 7-7 8-1. OIA Payments and Estimated Spending within Palau (FY 2017) ........................... 8-2 8-2. Palau: Estimated Direct Economic Impacts (FY 2017) ........................................ 8-3 8-3. Palau: Estimated Employment and Employee Compensation by Industry (2017) ......................................................................................................... 8-4 8-4. Palau: GDP by Industry (2017) ....................................................................... 8-6 8-5. Palau: Total Estimated Economic Impact Using EBA (FY 2017) ............................ 8-7 8-6. Palau: Estimated Impacts Relative to National Economy Using EBA (FY 2017) ....... 8-7 9-1. Economic Impact Assessment of OIA Operations in District of Columbia (FY 2017) ..................................................................................................... 9-2 9-2. 2017 OIA Operations in Hawaii and Corresponding IMPLAN Codes ....................... 9-2 9-3. Direct Economic Impacts of OIA Operations in Hawaii (FY 2017) ......................... 9-3 9-4. Selected Multipliers by Industry, Hawaii ........................................................... 9-3 9-5. Total Economic Impacts of OIA Payments, Hawaii .............................................. 9-4 10-1. Estimated Employment Impact of OIA Payments (FY 2017) .............................. 10-1 10-2. Estimated Employee Compensation Impact of OIA Payments (FY 2017) ............. 10-1 10-3. Estimated GDP Impact of OIA Payments (FY 2017) .......................................... 10-2 ES-1 EXECUTIVE SUMMARY The Office of Insular Affairs (OIA) carries out the Department of the Interior’s responsibilities for U.S.-affiliated insular areas. These areas are the territories of American Samoa, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands as well as the Freely Associated States (FAS)1 of the Federated States of Micronesia, the Republic of the Marshall Islands, and the Republic of Palau. The total budget of the OIA for fiscal year (FY) 2017 was $653 million, of which $614 million was direct grants and payments to the insular areas. This assistance played an important role in the economies of each of these areas by providing financial and technical assistance to promote economic growth, education, and public health and the development of more efficient and effective government. Generally, a lack of sophisticated economic data series for these insular areas deprived territorial and federal leaders of the type of thorough economic analysis that would help them make more informed policy decisions. For the FY 2017 analysis, input-output data from the Bureau of Economic Analysis (BEA) are available for U.S. territories. For FAS, RTI International used the economic base analysis approach employed in previous years’ studies. The following economic aggregates were calculated for each insular area: ▪ Total employment: the number of individuals employed, which typically consists of full-time and part-time employees but excludes subsistence agriculture and fishing ▪ Total employee compensation: payments made to all employees during the year, including salaries, wages, and other forms of compensation ▪ Gross domestic product (GDP): a measure of each area’s economic output—typically defined as the value of all final goods and services made within the borders of the insular area in a particular year Table ES-1 summarizes the results of this analysis. 1 FAS are independent nations that were at one time governed by the United States and continue to maintain a close relationship with the United States through the Compact of Free Association, which makes them eligible to receive funds and assistance from U.S. federal agencies. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas ES-2 Table ES-1. Economic Impact Summary of OIA Grants and Payments (FY 2017) Total OIA Payments ($’000, 2017$) Total OIA Employment Impact National Employment Supported by OIA Payments (%) Total OIA Employee Compensation Impact ($’000, 2017$) National Employee Compensation Supported by OIA Payments (%) Total OIA GDP Impact ($’000, 2017$) National GDP Supported by OIA Payments (%) American Samoa $35,400 1,099 8% $29,568 15% $31,884 5% Guam $111,559 3,859 6% $113,172 8% $111,057 2% Northern Mariana Islands $16,088 789 3% $16,043 3% $15,330 1% U.S. Virgin Islands $246,587 6,441 17% $262,874 19% $247,215 6% Micronesia $111,038 7,938 52% $73,328 56% $209,147 64% Marshall Islands $78,636 5,018 46% $54,624 46% $130,214 70% Palau $13,960 838 7% $10,627 8% $33,248 11% Total $613,268 25,983 $560,238 $778,095 Note: Total impacts are the sum of estimated direct, indirect, and induced impacts associated with OIA grants and payments. Approximately $39.1 million of a total $652.8 million was spent outside the seven insular areas that were the primary focus of this study. Source: RTI estimates. ES.1 FY 2017 OIA Payments to the Insular Areas OIA’s responsibilities are framed by the long-term security interests of the United States in the western Pacific and serious economic and fiscal problems affecting the U.S. territories and FAS. Although each insular areas situation is unique, they share common challenges, including limited land and resources; small populations; limited local technical expertise; narrow economic bases; and exposure to natural disasters, such as hurricanes and typhoons. OIA strives to empower the local communities, foster economic development, promote sound management, and improve quality of life while respecting and preserving local cultures. Per capita GDP for the insular areas averages less than $20,000, although there is great variability in income across areas (Table ES-2). In contrast, U.S. per capita GDP was estimated to be approximately $58,620 in 2016, presented in 2017 dollars (World Bank, 2017a). Executive Summary ES-3 Table ES-2. Economic Characteristics by Insular Area Estimated Population (# in 2017) Estimated Employment (#) Estimated Employee Compensation ($’000, 2017$) GDP ($’000, 2017$) GDP per Capita (2017$) American Samoa 55,599 13,692 $197,633 $671,206 $12,072 Guam 162,896 61,520 $1,494,258 $5,909,268 $36,276 Northern Mariana Islands 55,023 27,970 $513,371 $1,266,927 $23,025 U.S. Virgin Islands 102,951 38,454 $1,393,577 $3,949,712 $38,365 Micronesia 104,937 15,339 $131,490 $328,463 $3,130 Marshall Islands 53,066 10,895 $118,227 $186,673 $3,518 Palau 21,503 11,610 $127,047 $298,881 $13,899 United States 323,127,513 $58,620 Sources: 2017 population estimates were obtained from the World Bank (2017b). Data on estimated 2017 GDP and GDP per capita for the four U.S. territories were collected from the Bureau of Economic Analysis (BEA) (2017) and are presented in 2016 terms inflated to 2017 dollars. Data on estimated employment and employee compensation for the four U.S. territories are RTI estimates based on IMPLAN (2013). Data on estimated 2016 population, 2017 GDP, and 2017 GDP per capita for the three FAS were obtained from World Bank Indicators (2017a, 2017b). 2017 GDP per capita for the United States was from the World Bank (2017a, 2017b). RTI constructed estimated employment and employee compensation statistics for the three FAS based on data obtained from PITI-VITI (2017b, 2017c, 2017d). The construction of this data for each insular area is explained in more detail in the full report. For FY 2017, $614 million of OIA’s $653 million budget was distributed directly to insular areas for technical assistance, grants, and payments to the insular areas, of which a large majority is considered mandatory, essential assistance to provide basic services or defined by law, while only a small percentage is considered discretionary (OIA, 2017b). OIA payments fund health care, education, government operations, roads, and other types of social and physical infrastructure. From a budgetary standpoint, payments can be separated into three primary categories (Table ES-3): ▪ Fiscal payments, which are the return of taxes collected by the U.S. federal government to Guam and the U.S. Virgin Islands, as required by law ▪ Assistance to Territories, which provides general technical assistance; finances education and health care operations; funds and maintains essential infrastructure; and supports environmental initiatives, including brown tree snake control and the Coral Reef Initiative ▪ Compact of Free Association, which distributes annual payments to FAS, per their treaties with the United States, and provides support to the U.S. western Pacific territories and Hawaii to offset the impact the Compact has on regional social infrastructure Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas ES-4 Table ES-3. FY 2017 OIA Payments by Insular Area Assistance to Territories ($’000; 2017$) Compact of Free Association— Current ($’000; 2017$) Compact of Free Association— Permanent ($’000; 2017$) Fiscal Payments ($’000; 2017$) Total OIA Payments ($’000; 2017$) American Samoa $35,378 — $22 — $35,400 Guam $11,118 — $14,729 $85,712 $111,559 Northern Mariana Islands $13,806 — $2,282 — $16,088 U.S. Virgin Islands $4,488 — — $242,099 $246,587 Micronesia $903 — $110,135 — $111,038 Marshall Islands $2,071 $500 $76,065 — $78,636 Palau $250 $13,710 — — $13,960 Othera $23,911 $2,982 $12,967 — $39,860 a This other category represents payments being spent outside the seven insular areas, such as Washington, DC; Hawaii; and others. Source: RTI estimates based on detailed budget information provided by OIA (2017a, 2017b) ES.2 Study Methodology Total economic impacts are the sum of direct economic impact and indirect/induced economic impact resulting from recipient organizations’ consumption of goods and services and household spending by organizations’ employees. RTI reviewed employment, employee compensation, and activity trends for each insular area to estimate the direct impact of OIA payments. In 2012, economic data for the U.S. Territories—American Samoa, Guam, Northern Mariana Islands, and the U.S. Virgin Islands—became available. This was an indirect result of OIA funding given to BEA to develop more robust economic data for the U.S. territories. Unlike the economic base analysis model, an input/output (I/O) modeling framework allows specific multipliers to be calculated for each industry. Although the economic base analysis performed can use more recent data, it often relies on a mix of various sources. Using the input-output analysis to estimate the economic impacts of OIA payments produces more accurate results because data come from a single data source. For FAS—Micronesia, Marshall Islands, and the Republic of Palau—indirect/induced impacts were estimated using economic base analysis (EBA). The reasoning underlying EBA is that an individual region’s economic activity is derived from its “base” or “primary” sectors, which are defined as those sectors whose revenue is received primarily from outside the region. Base sectors often include manufacturing, mining, agriculture, and fisheries that produce goods for export and activities that are funded by the U.S. federal government and aid organizations. EBA is best applied to small, relatively specialized regions whose Executive Summary ES-5 economies rely to a larger extent on exports (Wang and vom Hofe, 2007). Consequently, this methodological approach is well suited to studying the economies of the FAS. RTI also conducted a supplemental analysis of the economic impact of OIA spending on Washington DC, and Hawaii. ES.3 Economic Impact Results RTI estimated the direct, indirect/induced, and total economic impacts of OIA payments on each insular area in terms of employment, employee compensation, and GDP. Estimates of local employment supported by OIA payments are presented in Table ES-4. Table ES-4. Estimated Employment Impact of OIA Payments (FY 2017) Direct Employment Impact (#) Indirect/Induced Employment Impact (#) Total Employment Impact (#) National Employment Supported by OIA Payments (%) American Samoa 984 115 1,099 8% Guam 3,709 150 3,859 6% Northern Mariana Islands 663 126 789 3% U.S. Virgin Islands 5,826 615 6,441 17% Micronesia 2,589 5,348 7,938 52% Marshall Islands 2,132 2,887 5,018 46% Palau 257 581 838 7% Source: RTI estimates for the four U.S. territories are based on IMPLAN (2013). Estimates for the three FAS were based on PITI-VITI (2017b, 2017c, 2017d). In the cases of the Marshall Islands and Micronesia, a significant portion of national employment is directly and indirectly supported by OIA payments. Approximately 52% of total recorded employment in Micronesia was either directly or indirectly supported by OIA payments. These data do not include subsistence agriculture or fishing. Estimates of the amount of employee compensation supported by OIA payments are presented in Table ES-5. In the cases of the Marshall Islands and Micronesia, a significant portion of national employee compensation is directly and indirectly supported by OIA payments. For example, approximately 56% of total estimated recorded employee compensation in the Federated States of Micronesia is either directly or indirectly supported by OIA payments. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas ES-6 Table ES-5. Estimated Employee Compensation Impact of OIA Payments (FY 2017) Direct Employee Compensation Impact ($’000, 2017$) Indirect/Induced Employee Compensation Impact ($’000, 2017$) Total Employee Compensation Impact ($’000, 2017$) National Employee Compensation Supported by OIA Payments (%) American Samoa $27,551 $2,017 $29,568 15% Guam $110,061 $3,112 $113,172 8% Northern Mariana Islands $14,150 $1,893 $16,043 3% U.S. Virgin Islands $244,406 $18,468 $262,874 19% Micronesia $26,585 $46,743 $73,328 56% Marshall Islands $25,981 $28,643 $54,624 46% Palau $3,425 $7,203 $10,627 8% Source: RTI estimates for the four U.S. territories are based on IMPLAN (2013). Estimates for the three FAS were based on PITI-VITI (2017b, 2017c, 2017d). Estimates of the amount of GDP supported by OIA payments are presented in Table ES-6. Based on RTI’s analysis of the economics of each insular area, we determined that for every $1.00 of GDP directly supported by OIA payments, approximately $0.42 of GDP was supported elsewhere in the insular economy, on average. As a result, a significant portion of national employee compensation is directly and indirectly supported by OIA payments. For example, approximately 70% of total GDP in the Marshall Islands is either directly or indirectly supported by OIA payments. Table ES-6. Estimated GDP Impact of OIA Payments (FY 2017) Direct GDP Impact ($’000, 2017$) Indirect/Induc ed GDP Impact ($’000, 2017$) Total GDP Impact ($’000, 2017$) National GDP Supported by OIA Payments (%) American Samoa $31,788 $95 $31,884 5% Guam $110,875 $182 $111,057 2% Northern Mariana Islands $15,262 $69 $15,330 1% U.S. Virgin Islands $245,612 $1,603 $247,215 6% Micronesia $76,478 $132,668 $209,147 64% Marshall Islands $59,188 $71,026 $130,214 70% Palau $9,390 $23,858 $33,248 11% Source: RTI estimates for the four U.S. territories are based on IMPLAN (2013). Estimates for the three FAS were based on PITI-VITI (2017b, 2017c, 2017d). Executive Summary ES-7 In addition to the analysis of the seven insular areas, RTI also conducted a supplemental analysis of the economic impact of OIA operations in Washington, DC, and Hawaii. RTI estimated that approximately $8.7 million of OIA’s operating budget was spent in Washington, DC, and nearly $22 million in Hawaii for OIA operations and to offset the impact Compact provisions have on Hawaii’s social infrastructure. To estimate the economic impacts, RTI used IMPLAN modeling software to construct input-output models of each region. Using these models, RTI estimated that OIA’s operations and payments would directly support 42 jobs in Washington, DC, receiving approximately $7.2 million of employee compensation, and supporting $8.7 million in GDP. In Hawaii, OIA spending in FY 2016 is estimated to directly support 182 employees, receiving $14.5 million of employee compensation, and supporting $16.8 million in GDP. 1-1 1. INTRODUCTION The Office of Insular Affairs (OIA) contracted with RTI International to estimate the economic impacts of federal payments and grants from fiscal year (FY) 2017 to U.S.-affiliated insular areas. These areas are the U.S. territories of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), and the U.S. Virgin Islands (USVI), and the freely associated states (FAS) of the Republic of the Marshall Islands (RMI), the Federated States of Micronesia (FSM), and the Republic of Palau. Out of its budget of $653 million, OIA distributed approximately $614 million in technical assistance, grants, and payments directly to the insular areas during FY 2017. These payments play an important role in each area’s economy, supporting local jobs and providing employee compensation in regions. The economic characteristics of these areas are displayed in Table 1-1. Table 1-1. Economic Characteristics by Insular Area Estimated Population (2016 #) Estimated Employment (#) Estimated Employee Compensation ($’000, 2017$) GDP ($’000, 2017) GDP per Capita (2017$) American Samoa 55,599 13,692 $197,633 $671,206 $12,072 Guam 162,896 61,520 $1,494,258 $5,909,268 $36,276 Northern Mariana Islands 55,023 27,970 $513,371 $1,266,927 $23,025 U.S. Virgin Islands 102,951 38,454 $1,393,577 $3,949,712 $38,365 Micronesia 104,937 15,339 $131,490 $328,463 $3,130 Marshall Islands 53,066 10,895 $118,227 $186,673 $3,518 Palau 21,503 11,610 $127,047 $298,881 $13,899 United States 323,127,513 $58,620 Sources: 2016 population estimates were obtained from the World Bank (2017b). Data on estimated 2016 GDP and GDP per capita for the four U.S. territories were collected from the Bureau of Economic Analysis (BEA) (2017) and are presented in 2017 terms. Data on estimated employment and employee compensation for the four U.S. territories are RTI estimates based on IMPLAN (2013). Data on estimated 2016 population, 2017 GDP, and GDP per capita for the three FAS were obtained from World Bank Indicators (2017a, 2017b). 2017GDP per capita for the United States was from the World Bank (2017a, 2017b). RTI constructed estimated employment and employee compensation statistics for the three FAS based on data obtained from PITI-VITI (2017b, 2017c, 2017d). Because the insular areas are not included in many U.S. statistical surveys of economic activity, critical data on local economic activity are often not captured. To some degree, this changed through OIA funding of the Bureau of Economic Analysis (BEA) to develop better economic data for U.S. territories under the Statistical Improvement Project. BEA provides benchmark I/O data for the United States. The benchmark accounts show how industries interact at the detailed level; specifically, they show how more than 500 industrial sectors Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 1-2 provide input to, and use output from, each other to produce gross domestic product (GDP).1 These data are now available for U.S. territories, and they were used for this report. In this study, RTI estimated direct economic impacts and multipliers for estimating total economic impact, which includes indirect and induced impacts, for each of the seven insular area’s economies. Analysis results were designed to be integrated into a larger report that estimates the economic benefits of lands and other resources managed by the Department of the Interior (DOI), thus enabling OIA to report on its economic impacts in the same manner as other Department offices and bureaus (DOI, 2013). 1.1 FY 2017 OIA Payments to Insular Areas In FY 2017, OIA’s total budget was $653 million, of which $614 million was spent directly in the insular areas to provide assistance, grants, and compacts to the insular areas during the fiscal year. In this report, all assistance, grants, and compacts are referred to collectively as “payments,” the majority of which are considered mandatory (OIA, 2017b). OIA payments fund health care, education, government operations, roads, and other types of social and physical infrastructure. From a budgetary standpoint, payments can be separated into three primary categories: ▪ Fiscal payments, which are the return of taxes collected by the U.S. federal government to Guam and the USVI, as required by law ▪ Assistance to Territories, which provides general technical assistance; finances education and health care operations; funds and maintains essential infrastructure; and supports environmental initiatives, including Brown Tree Snake Control and the Coral Reef Initiative ▪ Compact of Free Association, which distributes annual payments to FAS, per their treaties with the United States, and provides support to the U.S. western Pacific territories and Hawaii to offset the impact the Compact has on regional social infrastructure For the purposes of this analysis, RTI received detailed budget information from OIA, which was then used to estimate expenditures in each insular area related to OIA payments (Table 1-2). Although this determination was typically straightforward, in some cases determining where spending would be directed was not possible using readily available information. 1 These accounts provide detailed information on the flows of the goods and services that make up the production processes of industries. See http://www.bea.gov. Section 1 — Introduction 1-3 Table 1-2. FY 2017 OIA Payments by Insular Area Assistance to Territories ($’000, 2017$) Compact of Free Association -- Current ($’000, 2017$) Compact of Free Association -- Permanent ($’000, 2017$) Fiscal Payments ($’000, 2017$) Total OIA Payments ($’000, 2017$) American Samoa $35,378 — $22 — $35,400 Guam $11,118 — $14,729 $85,712 $111,559 Northern Mariana Islands $13,806 — $2,282 — $16,088 U.S. Virgin Islands $4,488 — — $242,099 $246,587 Micronesia $903 — $110,135 — $111,038 Marshall Islands $2,071 $500 $76,065 — $78,636 Palau $250 $13,710 — — $13,960 Othera $23,911 $2,255 $12,967 — $39,133 Total $91,925 $16,465 $216,200 $327,811 $653,128 a This other category represents payments being spent outside the seven insular areas, such as Washington, DC; Hawaii; and others. Sources: RTI estimates based on detailed budget information provided by OIA (2017a, 2017b). 1.2 Study Objectives The objectives of this study were to ▪ estimate the direct economic impacts of OIA payments and indirect/induced multipliers and impacts relevant for OIA grant and payment categories for each insular area; ▪ review FY 2017 grants and payments and determine affected economic sectors for the American Samoa Operations Grant, Brown Tree Snake Control, Compact of Free Association (permanent and current), Coral Reef Initiative, covenant grants, maintenance assistance fund, return of federal taxes to U.S. Virgin Islands and Guam, and technical assistance; ▪ model the direct and indirect/induced economic impacts of FY 2017 grants and payments for each insular area and for each payment category; ▪ prepare a final report that summarizes assumptions and provides tabular data on economic impacts. 1.3 Overview of Study Methodology In 2012, input-output data for the U.S. Territories—American Samoa, Guam, Northern Mariana Islands, and the U.S. Virgin Islands—became available following the Statistical Improvement Project. In contrast to the economic base analysis approach used for all insular areas in previous reports, an I/O modeling framework allows more specific Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 1-4 multipliers to be calculated for each industry.2 I/O models use multipliers to simulate how employment or income generated in one industry can generate additional jobs, income, and output in other industries and for the region’s economy as a whole. This allows for greater precision relative to using the economic base multiplier for all sectors. We used the IMPLAN software tool. Although the economic impacts of government spending for the U.S. territories are estimated using I/O models, no I/O data were available for the three Freely Associated States (FAS), Federated States of Micronesia, Marshall Islands, and the Republic of Palau. As such, RTI developed multipliers for the FAS using economic base analysis.3 The reasoning underlying EBA is that an individual region’s economic activity is derived from its “base” or “primary” sectors, which are defined as those sectors whose revenue is received primarily from outside the region—base sectors typically include manufacturing firms, mines, and farms that produce goods for export and activities that are funded by the federal government (Klosterman, 1990). As a result, EBA is best applied to small, relatively specialized regions whose economies rely to a larger extent on exports (Wang and vom Hofe, 2007). Consequently, this methodological approach is well suited to studying the economies of the insular areas. Estimating the economic impact of federal funds on economic aggregates like regional employment is typically accomplished using a simple mathematical representation of a region’s economy, such as ∆Y = s*∆X (1.1) where ∆Y is the change in total employment, ∆X is the change in base-sector employment (direct impact), and s is total employment/base-sector employment (the base employment multiplier). 2 The IMPLAN data for each U.S. Territory is based on data calculated by the BEA for the territories in 2009. 3 Other researchers have used I/O models for Hawaii to model economic impacts for U.S. insular territories; however, RTI does not recommend this approach because it assumes that the economic structure of the insular area is the same as that for Hawaii (see Pike [2007]). The model is also static and does not adjust for sectoral responses to materially significant shocks. Another alternative, but one that requires extensive data collection, would be the same as that employed in a 2008 analysis performed for the Department of Commerce and American Samoa (see ASDC [2008]). This latter method is resource intensive but may narrow the confidence interval surrounding economic multipliers. Section 1 — Introduction 1-5 This model represents how an increase in base-sector employment will generate a larger increase in the region’s total employment because of the ripple effect as new base-sector employees spend money on locally produced goods and services. This ripple effect is quantified by the “s” term, called the “base employment multiplier,” which is typically estimated by taking the ratio of total employment to base-sector employment. Using this core approach as a starting point for modeling the economy of each FAS, RTI estimated economic impacts in a short time period using available economic data. First, RTI computed an estimate of direct impacts for each of the grant and payment categories. This entailed combining these data with existing information on employment and income associated with government spending and other economic activities. Direct impacts are usually computed using ratios of employment or income created per dollar of government funding that have been derived from historical data. Direct Total Value Added impacts were calculated for American Samoa, Guam, the Northern Mariana Islands, the US Virgin Islands, Hawaii, and DC by multiplying OIA payments to these countries by IMPLAN total value added direct effects. Second, to estimate the combined indirect and induced impact, RTI calculated multipliers for employment, income, and GDP by examining the economic structure and activities of each FAS. To obtain more accurate measures of the direct employment impact of OIA payments, one must obtain an understanding of who receives these payments and what they are being spent on. For example, OIA payments used to fund a construction project will have different employment impacts than OIA payments used to fund education. Therefore, the first question asked when creating a more refined analysis is how OIA payments should be classified or treated as direct impacts. For the purposes of this study, OIA payments can be classified in six different ways: ▪ Education: payments associated with training or education inside the relevant insular area. ▪ Construction: payments associated with building new or maintaining existing structures. ▪ Government: payments associated with general government operations or general technical assistance. ▪ Health care: payments associated with providing medical and other health care services. ▪ Private: this classification is used only for payments to the Prior Service Benefits program. Beneficiaries receive this money in appreciation for their service during World War II, and it generates an economic impact when recipients spend it on goods and services. Because data are not available on the spending behavior of these beneficiaries, precise output and employee compensation to employee ratios was difficult to obtain. Therefore, RTI typically used ratios that represented averages Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 1-6 for the private non-agricultural sector and assumed 100% of beneficiary funds were spent locally. ▪ Wholesale: payments associated with purchasing goods or equipment from local wholesalers (companies involved in the resale, sale without transformation, of new and used goods to retailers; to industrial, commercial, institutional, or professional users; or to other wholesalers). This treatment assumes that the goods or equipment themselves were not manufactured in the insular area. In addition to improving our classification of OIA payments, this study sought to refine economic impact estimates in a second way. Generally, only standard industries (agriculture, mining, manufacturing, and federal government) were assumed to be part of the economic base. However, many insular areas attract a number of tourists, which also contributes to the economic base. Similarly, government operations that are funded from external sources should also be included in measures of economic base employment and employee compensation. 1.4 Methodological Limitations Although I/O and EBA have several advantages that make them the most reasonable methodological approaches, several limitations are associated with it that one must keep in mind when interpreting analysis results. First, the quality of economic base multipliers relies heavily on the quality of the data being used. Most developing areas have a substantial informal sector composed of subsistence agriculture and fishing, domestic aids, street vendors, producers of clothing and handicrafts, and other workers whose occupation and income often go unreported. Although accurate data on the size and makeup of the informal sector are difficult to gather, the informal sector in developing island areas was assumed to make up a significant percentage of official employment and income statistics. In a study of 110 countries, Schneider (2002) found that the informal sector made up 41% of official gross national income in developing countries and 38% in transition countries. Lal and Raj (2006) compiled data on the informal sector in developing island nations (data on the insular areas were not included) and found that self-employment as a percentage of total non-agricultural employment averaged 35% for the six islands for which these data were available. Data on the informal sector in the Pacific Island areas may be particularly difficult to obtain because, as a result of the rural nature of these areas, most informal workers operate from homes rather than working as street vendors, transportation providers, or other typically urban occupations (Duncan and Voigt-Graf, 2008). Because of the size of the informal sector in the insular areas, much of the data used in this analysis likely underestimate employment, labor income, and GDP. Subsistence agriculture often makes up a substantial portion of unreported employment. A 1996 survey in Palau Section 1 — Introduction 1-7 estimated the value of the primarily agricultural informal sector at $5 million, or twice the size of the recorded agricultural sector in that year. Most of these goods, however, are consumed by the household and traded informally and do not reach the market (FAO, 2006). Second, with EBA, the division between base and non-base sectors is often unclear. In this analysis, RTI used standard assumptions for identifying which sectors are considered base and non-base. However, companies within these sectors are often engaged in satisfying both local and external demand. For example, local manufacturers may produce products that are exported and also consumed by local residents. This concern can often be minimized by using techniques for better estimating the portions of each sector that are truly base and non-base (for example, surveys can be used to collect this information directly from local businesses); however, given the time and data constraints, these techniques were not feasible for this analysis. Third, EBA in particular focuses exclusively on external demand. Therefore, supply constraints are assumed to not be binding, and non-demand factors that may contribute to regional growth are ignored (such as capital accumulation or productivity improvements). Because supply-side considerations are typically most important for long-term growth, EBA is best suited for short-term analyses. 1.5 Data Limitations For the FY 2017 analysis, we were able to better estimate GDP base multipliers for each insular area using newly available I/O data for U.S. territories. This higher level of analysis was possible because of new estimates of GDP released by the BEA in 2017. Up-to-date employment, employee compensation, and GDP data were available for the FAS through new reports released in 2017 by PITI-VITI. These reports helped better estimate aspects of the base economy.4 When possible, we incorporated new economic data into the FY 2017 EBA model in order to update the output-to-employee and employee compensation-to-employee ratios, as well as the base multipliers. These data are essential to determining the direct and indirect impacts of OIA payments, and we believed these inclusions would better describe the significance of funding given the changing economies of the insular areas. Incorporating these new data sets did, however, cause some of the data to come from differing years. For example, to achieve updated employee compensation-to-employee ratios for the U.S. territories, we used newly released data from the 2015 County Business Patterns (released by the U.S. Census in April 2017). However, these data sets lacked information about sales in each sector, and output-to-employee ratios could not be determined. RTI had to rely on the 2012 4 Employment and Employee compensation data for FSM has been updated with data from 2017 reports released by PITI-VITI. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 1-8 Economic Census for these ratios. During periods of decline and recovery, output-to- employee tends to increase (BEA, 2013); Bureau of Labor Statistics [BLS], 1986). The data from the Census also often exclude information about agricultural and public-sector employment, which leads to even more agglomeration of sources and assumptions to complete the employment statistics. For the FAS, economic data rely on studies that are funded by the OIA through the PITI- VITI educational program. Although we were able to update employment data and employment compensation-to-employee ratios for each of these areas, data on output were unavailable. Therefore, we had to assume that the output-to-employee for these three areas was comparable to that of American Samoa or in the case of Micronesia, the Commonwealth of Northern Marinas Islands (CNMI). These was chosen as the best U.S. Territory comparison because they were the most similar to the FAS in terms of GDP per capita and other economic measures. This assumption is also likely an overestimate of the FAS’s true output-to-employee ratio because they have a higher GDP per capita. The use of American Samoa and CNMI data as a proxy will likely underestimate the impacts of OIA spending because more jobs will be supported by each dollar of OIA spending. 1.6 Report Organization A separate report section detailing the payments, economic multipliers, and economic impacts was prepared for each insular area (Sections 2 through 8). In addition, a section for Washington, DC, and Hawaii was prepared (Section 9), because OIA locates significant operations in these regions. Section 10 summarizes economic impact data for all FY 2017 payments. 2-1 2. AMERICAN SAMOA 2.1 FY 2017 OIA Payments Summary American Samoa faces a number of obstacles to economic development, including limited land and resources, a small population, limited local technical expertise, a narrow economic base, and vulnerability to natural disasters. The average GDP per capita for American Samoa in 2016 was $12,072 (in 2017 U.S. dollars) compared with approximately $58,620 in the United States (BEA, 2017; World Bank, 2017a). OIA strives to foster economic development, promote sound management, and improve quality of life in American Samoa. OIA payments to American Samoa in FY 2017 totaled $35.4 million and were primarily directed toward the government and construction sectors with additional support for education and health care (Table 2-1). The largest block of OIA payments came in the form of Assistance to Territories funding, the largest proportion of which is operations grants that total $22.7 million. These grants are used to fund basic Samoan government operations and to support the American Samoa High Court (the highest court in American Samoa excluding the U.S. Supreme Court) and the operation of the LBJ Hospital. Other Assistance to Territories funding, totaling $10.1 million, was used to fund economic development programs, judicial training, and other initiatives such as the Compact Impact Discretionary, which provides funding to offset impacts to the educational systems from immigration of FAS citizens. In addition to funding received from OIA’s Assistance to Territories, American Samoa also received $22,000 through the Compact of Free Association Compact Impact Grant, which offsets costs incurred by American Samoan health, educational, and social systems from in- migration of FAS residents. American Samoa allocated its FY 2017 appropriated compact impact payments toward training materials and equipment for the education of college nursing students. RTI estimates that all spending associated with American Samoa was initiated within American Samoa. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 2-2 Table 2-1. OIA Payments and Estimated Spending within American Samoa (FY 2017) Appropriation Spending ($’000; 2017$) Economic Impact Treatment Compact of Free Association Compact impact $22 Education Assistance to Territories American Samoa operations grant—Basic operations $12,620 Government American Samoa operations grant—LBJ hospital operations $7,915 Health Care American Samoa operations grant—High court $1,361 Government American Samoa operations grant—ASCC Operations $857 Government Subtotal $22,752 General technical assistance - Direct Grants $1,327 Government Empowering Insular Communities Wholesale purchases (est.) $388 Wholesale Installations (est.) $388 Construction Capacity building (est.) $388 Government Subtotal $1,163 American Samoa construction $9,613 Construction Maintenance assistance $175 Government Coral Reef Initiative $95 Government Office of Insular Affairs $251 Government Compact Impact Discretionary $2 Education Subtotal, Other Assistance to Territories $10,136 Total, Assistance to Territories $35,378 Total Spending Inside American Samoa $35,400 Source: RTI estimates based on OIA (2017a, 2017b). 2.2 Economic Impacts of OIA Payments Using Input-Output Analysis To determine the direct impacts of OIA payments in American Samoa, the payments from Table 2-1 were each applied to a corresponding IMPLAN sector code. Direct impacts were estimated using output and employee compensation-to-employee ratios within the IMPLAN modeling system. The direct employment, employee compensation, and output inputs are reported in Table 2-2. We estimated that the $35.4 million spent in American Samoa directly supported 984 jobs and $27.6 million in employee compensation. Section 2 — American Samoa 2-3 Table 2-2. American Samoa: Direct Economic Impacts of OIA Payments Using I/O Analysis (FY 2017) Industry IMPLAN Code FY2017 Pay- ments ($’000, 2017$) Output-to- Employee Ratio ($/em- ployee) Employee Compen- sation-to- Employee Ratio ($/em- ployee) Direct Employ- ment Impact (#) Direct Employee Compen- sation Impact ($’000, 2017$) Direct Effectsa Direct Value Added Change ($’000, 2017$) State and local government, non-education 437 $16,216 $31,458 $31,458 515 $16,216 1.00 $16,216 State and local government, education 438 $881 $22,984 $22,984 38 $881 1.00 $881 Hospitals 397 $7,915 $37,583 $28,271 211 $5,954 0.88 $6,971 Wholesale trade business 319 $388 $1,066,949 $16,335 0 $6 0.66 $257 Maintenance and repair construction of non-residential structures 39 $10,001 $45,291 $20,532 221 $4,534 0.75 $7,505 Total $35,400 986 $27,590 $31,829 a According to IMPLAN documentation, “Effects represent the Total Value Added and various Value Added subset dollars per $1,000,000 of production in the Industry” (IMPLAN, 2015). Source: RTI estimates based on IMPLAN (2013). These direct impacts were multiplied by Type II Social Accounting Matrix multipliers to estimate the total impact of OIA payments on the region’s economy. These multipliers estimate the indirect and induced effects that occur throughout the local supply chain and as employees spend their wages. The relevant multipliers that were estimated for this analysis are reported in Table 2-3. Note the OIA payments from 2017 are treated as the output inputs. Table 2-3. American Samoa: Selected IMPLAN Multipliers by Industry Industry Description IMPLAN Code Total Employment Impact Multiplier Total Employee Compensation Multiplier Total Value Added Multiplier State and local government, non- education 437 1.12 1.07 1.003 State and local government, education 438 1.09 1.07 1.003 Hospitals 397 1.12 1.07 1.003 Wholesale trade business 319 1.90 1.89 1.002 Maintenance and repair construction of non-residential structures 39 1.11 1.10 1.002 Source: RTI estimates based on IMPLAN (2013). Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 2-4 The indirect and induced impacts of OIA payments are estimated to be an additional 115 jobs and $2 million in employee compensation. Therefore, the total economic impact of OIA payments to American Samoa is 1,101 jobs, $29.6 million in employee compensation, and $31.9 million in GDP. See Table 2-4. Table 2-4. American Samoa: Total Economic Impacts Using I/O Analysis (FY 2017) Description Total Employment Impact (# of workers) Total Employee Compensation Impact ($’000, 2017$) Total Value Added Impact ($’000, 2017$) Direct impacts 986 $27,590 $31,829 Indirect and induced impacts 115 $2,020 $96 Total economic impacts 1,101 $29,610 $31,925 Source: RTI estimates based on IMPLAN (2013). The significance of OIA’s economic contributions can be better understood when viewed in relation to the American Samoa economy, which is summarized in Table 2-5. As this table illustrates, the 1,101 jobs directly and indirectly supported by OIA payments represent 8% of American Samoa’s estimated total employment. Similarly, $29.6 million of employee compensation associated with these employees’ accounts for approximately 15% of total employee compensation inside the region, and the $31.9 million of GDP associated with these employees represents 5% of total GDP produced by the insular area. Table 2-5. American Samoa: Estimated Impact Relative to National Economy (FY2017) Total Economic Impact for FY2017 OIA Payments National Data Impact as Percentage of Total Economy Employment (#) 1,101 13,692 8% Employee compensation ($’000; 2017$) $29,610 $197,633 15% GDP ($’000; 2017$) $31,925 $671,206 5% Source: RTI estimates based on IMPLAN (2013). 3-1 3. GUAM 3.1 FY 2017 OIA Payments Summary Although among the wealthier of the insular areas, Guam continues to face challenges in implementing effective government, health care, and education systems. Guam’s economy is largely based on tourism from Asia and is, therefore, sensitive to regional consumer spending trends. Tourism sectors like accommodations and amusement have only recently begun to experience growth after years of decline. Guam is also experiencing growth due to proposed relocation of 5,000 U.S. Marines and roughly 1,300 dependents from the military base in Okinawa, Japan, to the insular area by 2021. The Department of Defense has been the largest contributor to GDP due to construction and infrastructure preparations on the island (BEA, 2012). The average GDP per capita for Guam in 2016 was $36,276 (2017$), about 62% of the GDP per capita of the United States ($58,620) (BEA, 2017; World Bank, 2017a). OIA payments to Guam in FY 2017 totaled $111.6 million and were primarily directed to the government sector with additional support for education and construction. A detailed breakdown of OIA payments is presented in Table 3-1. The largest block of OIA payments, totaling $85.7 million, came in the form of fiscal payments associated with Section 30 Income Taxes. These are funds transferred by OIA from the U.S. Treasury to Guam and largely consist of federal income taxes paid by military personnel stationed on Guam, immigration fees, and miscellaneous duties (Limtiaco, 2008). OIA also provided $14.7 million through the Compact of Free Association, which Guam intends to use for a variety of equipment purchases and infrastructure. RTI estimates that all spending associated with Guam was initiated within Guam. Guam received $1.5 million through the Assistance to Territories—General Technical Assistance payments, which provided direct grants, judicial training, and funding for the PITI-VITI and the Close-Up Foundation. The Close Up Foundation is a civic education program designed to teach democracy and citizenship and improve civic education in the insular areas. Other technical assistance programs, which made up about $9.6 million of the assistance to Territories payments, include infrastructure maintenance assistance, funding for Guam Construction, and Brown Tree Snake Control. The Brown Tree Snake Control program is intended to fund research and implementation techniques to eradicate this invasive species. OIA distributed funds for the Compact Impact Discretionary, which provides funding to offset impacts to the educational systems from immigration of FAS citizens. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 3-2 Table 3-1. OIA Payments and Estimated Spending within Guam (FY 2017) Appropriation Spending ($’000; 2017$) Impact Treatment Fiscal Payments Guam Section 30 income taxes $85,712 Government Total, Fiscal Payments $85,712 Compact of Free Association DOE/DPW Schools Leaseback $6,665 Education DOE/DPW Operations Offset $8,064 Government Total, Compact of Free Association $14,729 Assistance to Territories General technical assistance - Direct Grants $782 Government General technical assistance - USDA Grad School PITI-VITI $415 Education General technical assistance - Close-Up Foundation $147 Education General technical assistance - Judicial Training $189 Government Subtotal $1,532 Brown Tree Snake Control $148 Government Northern Mariana Covenant Grants—Guam construction $6,578 Construction Coral Reef Initiative $315 Government Compact Impact Discretionary $1,491 Education Empowering Insular Communities Wholesale Purchases $351 Education Installations $351 Education Capacity Building $351 Education Subtotal $1,054 Subtotal, Other $9,586 Total, Assistance to Territories $11,118 Total Spending Inside Guam 111,559 Source: RTI estimates based on OIA (2017a, 2017b). 3.2 Economic Impacts of OIA Payments Using Input-Output Analysis To determine the direct impacts of OIA payments in Guam, the payments from Table 3-1 were each applied to a corresponding IMPLAN sector code. Direct impacts were estimated using output and employee compensation-to-employee ratios from the IMPLAN modeling system. The direct employment, employee compensation, and output inputs are reported in Table 3-2. Section 3 — Guam 3-3 Table 3-2. Guam: Direct Economic Impacts of OIA Payments Using I/O Analysis (FY 2017) Industry IMPLAN Code FY2017 Pay- ments ($’000, 2017$) Output-to- Employee Ratio ($/em- ployee) Employee Compen- sation-to- Employee Ratio ($/em- ployee) Direct Employ- ment Impact (#) Direct Employee Compen- sation Impact ($’000, 2017$) Direct Effectsa Direct Value Added Change ($’000, 2017$) State and local government, non-education 437 $95,209 $30,451 $30,451 3,127 $95,209 1.00 $95,209 State and local government, education 438 $9,772 $22,248 $22,248 439 $9,772 1.00 $9,772 Maintenance and repair construc- tion of non- residential structures 39 $6,578 $45,978 $35,505 143 $5,080 0.90 $5,894 Total $111,559 3,709 $110,061 $110,875 a According to IMPLAN documentation, “Effects represent the Total Value Added and various Value Added subset dollars per $1,000,000 of production in the Industry” (IMPLAN, 2015). Source: RTI estimates based on IMPLAN (2013). We estimated that the $111.6 million spent in Guam directly supported 3,709 jobs and $110.1 million in employee compensation. These direct impacts were multiplied by Type II Social Accounting Matrix multipliers to estimate the total impact of OIA payments on the state’s economy. These multipliers estimate the indirect and induced effects that occur throughout the local supply chain and as employees spend their wages. The relevant multipliers that were estimated for this analysis are reported in Table 3-3. Table 3-3. Guam: Selected IMPLAN Multipliers by Industry Industry Description IMPLAN Code Total Employment Impact Multiplier Total Employee Compensation Multiplier Total Value Added Multiplier State and local government, non- education 437 1.04 1.03 1.002 State and local government, education 438 1.03 1.03 1.002 Maintenance and repair construction of non-residential structures 39 1.05 1.03 1.002 Health care 396 1.12 1.07 1.001 Source: RTI estimates based on IMPLAN (2013). Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 3-4 The indirect and induced impacts of OIA payments are estimated to be an additional 150 jobs and $3.1 million in employee compensation. Therefore, the total economic impacts of this activity in Guam support 3,859 employees, $113.2 million in employee compensation, and $111.1 million in GDP. These results are displayed in Table 3-4. Table 3-4. Guam: Total Economic Impacts Using I/O Analysis (FY 2017) Description Total Employment Impact (# of workers) Total Employee Compensation Impact ($’000, 2017) Total Value Added Impact ($’000, 2017) Direct impacts 3,709 110,061 110,875 Indirect and induced impacts 150 3,111 182 Total 3,859 $113,172 $111,057 Source: RTI estimates based on IMPLAN (2013). The significance of OIA’s economic contributions can be better understood when viewed in relation to the Guam economy, which is summarized in Table 3-5. As this table illustrates, the 3,859 jobs directly and indirectly supported by OIA payments represent 6% of Guam’s total employment. Similarly, $113.2 million of employee compensation associated with these employees’ accounts for approximately 8% of total employee compensation inside the region, and the $111.1 million of GDP associated with these employees represents 2% of total GDP produced by the region. Table 3-5. Guam: Estimated Impact Relative to National Economy (FY 2017) Total Economic Impact for FY2017 OIA Payments National Data Impact as Percentage of Total Economy Employment (#) 3,859 61,520 6% Employee compensation ($’000; 2017$) $113,172 $1,494,258 8% GDP ($’000; 2017$) $111,057 $5,909,268 2% Source: RTI estimates based on IMPLAN (2013). 4-1 4. COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS (CNMI) 4.1 FY 2017 OIA Payments Summary In 2016, the GDP per capita for CNMI was approximately $23,025 (2017$), approximately 39% of the U.S. GDP per capita $58,620 (BEA, 2017; World Bank, 2017a). From 2015 to 2016, CNMI saw large real GDP growth of 28.6 percent. This far outpaces the 3.8% increase from 2014 to 2015. Increases in private fixed investment and exports of services, like casino gambling, were some of the primary drivers of growth (BEA 2017). OIA payments to CNMI in 2017 totaled $16.1 million and were primarily directed to the construction and government sectors with additional support for education, wholesale trade, and the private sector (Table 4-1). Assistance to Territories payments, totaling about $13.8 million, made up the majority of funding to CNMI. General technical assistance, which made up $2.6 million of all Assistance to Territories, provided payments for direct grants, judicial training, and PITI-VITI. Also included in general technical assistance were the CNMI Ombudsman’s Office, CNMI Immigration, Labor and Law Enforcement General, Compact Impact (discretionary) and the Prior Service Benefits Program, which issues benefits to CNMI citizens who worked for the U.S. Navy or the U.S. Trust Territory of the Pacific Islands from 1944 through 1968. The remainder of the Assistance to Territories funding went to other activities such as the Coral Reef Initiative, maintenance assistance, construction, and Brown Tree Snake Control. Table 4-1. OIA Payments and Estimated Spending within CNMI (FY 2017) Appropriation Spending ($’000, 2017$) Impact Treatment Division of Youth Services Department of Public Health $920 Government Division of Youth Services $33 Government Department of Public Safety $423 Government Department of Corrections $205 Government Office of Public Defender $30 Government Northern Mariana College $74 Education Public School System $222 Education Karidat $54 Education Judiciary $150 Government Balance $172 Government Total, Compact of Free Association $2,282 (continued) Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 4-2 Table 4-1. OIA Payments and Estimated Spending within CNMI (FY 2017) (continued) Appropriation Spending ($’000, 2017$) Impact Treatment Assistance to Territories General technical assistance - Direct Grants $1,324 Government General technical assistance - USDA Grad School PITI-VITI $573 Education General technical assistance - Prior Service $310 Private General technical assistance - Judicial Training $354 Education Subtotal, General Technical Assistance $2,562 Empowering Insular Communities Wholesale Purchases $220 Wholesale Installations $220 Construction Capacity Building $220 Government Subtotal, Empowering Insular Communities $659 Brown Tree Snake Control $505 Government Coral Reef Initiative $190 Government Maintenance assistance $415 Government Northern Mariana Covenant Grants—CNMI construction $9,082 Construction Office of Insular Affairs $162 Government Compact Impact Discretionary $231 Education Subtotal Other $10,585 Total, Assistance to Territories $13,806 Total Spending Inside CNMI $16,088 Source: RTI estimates based on OIA (2017b). OIA also provided $2.3 million through the Compact of Free Association, which CNMI intends to use for a variety of government purposes, including funding for the Department of Public Health and Division of Youth Services. RTI estimates that all spending associated with CNMI was initiated within CNMI. 4.2 Economic Impacts of OIA Payments Using Input-Output Analysis To determine the direct impacts of OIA payments in CNMI, the payments from Table 4-1 were each applied to a corresponding IMPLAN sector code. Direct impacts were estimated using output and employee compensation-to-employee ratios from the IMPLAN model software. For the Prior Service Benefits we used the average ratios of the entire private Section 4 — CNMI 4-3 sector. The direct employment, employee compensation, and output inputs are reported in Table 4-2. Table 4-2. CNMI: Direct Economic Impacts of OIA Payments Using I/O Analysis (FY 2017) Industry IMPLAN Code FY2017 Pay- ments ($’000, 2017$) Output-to- Employee Ratio ($/em- ployee) Employee Compen- sation-to- Employee Ratio ($/em- ployee) Direct Employ- ment Impact (#) Direct Employee Compen- sation Impact ($’000, 2017$) Direct Effectsa Direct Value Added Change ($’000, 2017$) State and local government, non-education 437 $4,749 $31,458 $31,458 151 $4,749 1.00 $4,749 State and local government, education 438 $1,508 $22,613 $22,613 67 $1,508 1.00 $1,508 Wholesale trade business 319 $220 $178,399 $12,537 1 $15 0.68 $150 Maintenance and repair construction of non-residential structures 39 $9,302 $21,140 $17,751 440 $7,810 0.93 $8,621 Private sector — $310 $70,021 $15,346 4 $68 0.76 $235 Total $16,088 663 $14,150 $15,262 a According to IMPLAN documentation, “Effects represent the Total Value Added and various Value Added subset dollars per $1,000,000 of production in the Industry” (IMPLAN, 2015). Source: RTI estimates based on IMPLAN (2013). We estimated that the $16.1 million spent in CNMI directly supported 663 jobs and $14.2 million in employee compensation. These direct impacts were multiplied by Type II Social Accounting Matrix multipliers to estimate the total impact of OIA payments on the region’s economy. These multipliers estimate the indirect and induced effects that occur throughout the local supply chain and as employees spend their wages. For the private sector, we used the average multiplier across all private sector industries. The relevant multipliers that were estimated for this analysis are reported in Table 4-3. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 4-4 Table 4-3. CNMI: Selected IMPLAN Multipliers by Industry Industry Description IMPLAN Code Total Employment Impact Multiplier Total Employee Compensation Multiplier Total Value Added Multiplier State and local government, non- education 437 1.25 1.13 1.003 State and local government, education 438 1.18 1.13 1.003 Wholesale trade business 319 1.60 1.81 1.001 Maintenance and repair construction of non-residential structures 39 1.17 1.14 1.005 Private sector — 1.31 1.31 1.006 Source: RTI estimates based on IMPLAN (2013). The indirect and induced impacts of OIA payments are estimated to be an additional 126 jobs and $1.9 million in employee compensation. Therefore, the total economic impacts of this activity in CNMI support 789 employees, over $16 million in employee compensation, and $15.3 million in GDP. These results are displayed in Table 4-4. Table 4-4. CNMI: Total Economic Impacts Using I/O Analysis (FY 2017) Industry Description Total Employment Impact (# of workers) Total Employee Compensation Impact ($’000, 2017) Total Value Added Impact ($’000, 2017) Direct impacts 663 14,150 15,262 Indirect and induced impacts 126 1,893 69 Total 789 $16,043 $15,330 Source: RTI estimates based on IMPLAN (2017). The significance of OIA’s economic contributions can be better understood when viewed in relation to the CNMI economy, which is summarized in Table 4-5. As this table illustrates, the 789 jobs directly and indirectly supported by OIA payments represent 3% of CNMI’s total employment. Similarly, over $16 million of employee compensation associated with these employees’ accounts for approximately 3% of total employee compensation inside the region, and the $15.3 million of GDP associated with these employees represents 1% of total GDP produced by the region. Section 4 — CNMI 4-5 Table 4-5. CNMI: Estimated Impact Relative to National Economy (FY2017) Total Economic Impact for FY2016 OIA Payments National Data Impact as Percentage of Total Economy Employment (#) 789 27,970 3% Employee compensation ($’000; 2017$) $16,043 $513,371 3% GDP ($’000; 2017$) $15,330 $1,266,927 1% Source: RTI estimates based on IMPLAN (2013). 5-1 5. U.S. VIRGIN ISLANDS (USVI) 5.1 FY 2017 OIA Payments Summary In 2016, the GDP per capita in USVI was about $38,365 (2017$) compared with $58,620 in the United States (BEA, 2017; World Bank, 2017a). OIA payments to USVI in 2017 totaled $246.6 million (Table 5-1). The largest block of OIA payments to USVI came in the form of Rum Excise Tax Payments totaling $242.1 million. Under current U.S. law, excise taxes are collected on rum imported into the United States that is not of USVI or Puerto Rican origin. A fixed percentage of these excise taxes is distributed by the U.S. government to USVI. Although this funding is not designated for a particular purpose, USVI generally uses it to finance public infrastructure or provide support to the rum industry (Maguire and Teefy, 2010). The Assistance to Territories—General Technical Assistance payments totaled just over $1 million and provided for general technical assistance for direct grants, the Close Up Foundation, and the PITI-VITI, which are jointly managed by the USDA Graduate School. Through other Assistance to Territories programs, which made up $4.5 million in payments, OIA funds items such as USVI construction as part of the Northern Mariana Covenant Grant, and the Coral Reef Initiative, which pursues the sustainable maintenance and protection of coral reefs through education, outreach programs, and the establishment of protected areas. RTI estimates that all spending associated with USVI was initiated within USVI. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 5-2 Table 5-1. OIA Payments and Estimated Spending within USVI (FY 2017) Appropriation Spending ($’000; 2017$) Impact Treatment Fiscal Payment USVI rum excise tax payments $242,099 Government General technical assistance - Direct Grants $893 Government General technical assistance - USDA Grad School PITI- VITI $145 Education Subtotal, General Technical Assistance $1,038 Wholesale Purchases $198 Wholesale Installations $198 Construction Capacity Building $198 Government Subtotal, Empowering Insular Communities $595 Coral Reef Initiative $103 Government Northern Mariana Covenant Grants—USVI construction $2,447 Construction Maintenance assistance $305 Government Subtotal, Other $3,450 Total, Assistance to Territories $4,488 Total Spending Inside Virgin Islands $246,587 Source: RTI estimates based on OIA (2017b). 5.2 Economic Impacts of OIA Payments Using Input-Output Analysis To determine the direct impacts of OIA payments in the USVI, the payments from Table 5-1 were each applied to a corresponding IMPLAN sector code. Direct impacts were estimated using output and employee compensation-to-employee ratios from the IMPLAN modeling system. The direct employment, employee compensation, and output inputs are reported in Table 5-2. We estimated that the $246.6 million spent in USVI directly supported 5,826 jobs and $244.4 million in employee compensation. These direct impacts were multiplied by Type II Social Accounting Matrix multipliers to estimate the total impact of OIA payments on the region’s economy. These multipliers estimate the indirect and induced effects that occur throughout the local supply chain and as employees spend their wages. The relevant multipliers that were estimated for this analysis are reported in Table 5-3. Section 5 — USVI 5-3 Table 5-2. USVI: Direct Economic Impacts of OIA Payments Using I/O Analysis (FY 2017) Industry IMPLAN Code FY2016 Payments ($’000, 2017$) Output-to- Employee Ratio ($/em- ployee) Employee Compen- sation-to- Employee Ratio ($/em- ployee) Direct Employ- ment Impact (#) Direct Employee Compen- sation Impact ($’000, 2017$) Direct Effectsa Direct Value Added Change ($’000, 2017$) State and Local Government, non-Education 437 $243,598 $41,944 $41,944 5,808 $243,598 1.000 $243,598 State and Local Government, Education 438 $145 $30,150 $30,150 5 $145 1.000 $145 Maintenance and repair construction of nonresidential structures 39 $2,645 $209,741 $51,168 13 $645 0.655 $1,732 Wholesale Trade 319 $198 $385,514 $32,968 1 $17 0.687 $136 Total $246,587 5,826 $244,406 $245,612 a According to IMPLAN documentation, “Effects represent the Total Value Added and various Value Added subset dollars per $1,000,000 of production in the Industry” (IMPLAN, 2015). Source: RTI estimates based on IMPLAN (2013). Table 5-3. USVI: Selected IMPLAN Multipliers by Industry Industry Description IMPLAN Code Total Employment Impact Multiplier Total Employee Compensation Multiplier Total Value Added Multiplier State and local government, non- education 437 1.11 1.08 1.006 State and local government, education 438 1.08 1.08 1.006 Maintenance and repair construction of non-residential structures 39 1.27 1.17 1.029 Wholesale Trade 319 1.38 1.40 1.005 Source: RTI estimates based on IMPLAN (2013). The indirect and induced impacts of OIA payments are estimated to be an additional 615 jobs and $18.5 million in employee compensation Therefore, the total economic impacts of this activity in USVI support 6,441 employees, $262.9 million in employee compensation, and $247.2 million in GDP. These results are displayed in Table 5-4. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 5-4 Table 5-4. USVI: Total Economic Impacts Using I/O Analysis (FY 2017) Industry Description Total Employment Impact (# of workers) Total Employee Compensation Impact ($’000; 2017$) Total Value Added Impact ($’000; 2017$) Direct impacts 5,826 244,406 245,612 Indirect and induced impacts 615 18,468 1,603 Total 6,441 $262,874 $247,215 Source: RTI estimates based on IMPLAN (2013). The significance of OIA’s economic contributions can be better understood when viewed in relation to the USVI economy as a whole, which is summarized in Table 5-5. As this table illustrates, the 6,441 jobs directly and indirectly supported by OIA payments represent 17% of USVI’s total employment. Similarly, $262.9 million of employee compensation associated with these employees accounts for approximately 19% of total employee compensation inside the region, and the $247.2 million of GDP associated with these employees represents 6% of total GDP produced by the insular area. Table 5-5. USVI: Estimated Impact Relative to National Economy (FY 2017) Total Economic Impact for FY2017 OIA Payments National Data Impact as Percentage of Total Economy Employment (#) 6,441 38,454 17% Employee compensation ($’000; 2017$) $262,874 $1,393,577 19% GDP ($’000; 2017$) $247,215 $3,949,712 6% Source: RTI estimates based on IMPLAN (2013). 6-1 6. FEDERATED STATES OF MICRONESIA (FSM) 6.1 FY 2017 OIA Payments Summary FSM faces severe challenges in implementing effective government, education, and health care systems and relies heavily on OIA support. FSM’s economy is based on the fishing industry, which earns income through licensing fees charged to foreign tuna fishing vessels for fishing rights in FSM’s exclusive economic zone. The FSM had an average GDP per capita of about $3,130 (2017$) in 2016. OIA payments to FSM in 2017 totaled $111.2 million. A detailed breakdown of these payments is presented in Table 6-1. The largest block of OIA payments to FSM, totaling $110.3 million, came through the Compact of Free Association. The Compact provides essential funding for operating FSM’s education, health care, and government systems and improves the insular area’s infrastructure. Table 6-1. OIA Payments and Estimated Spending within FSM (FY 2017) Appropriation Spending ($’000, 2017$) Impact Treatment Compact of Free Association Education $25,647 Education Health $22,115 Health Care Capacity Building $2,010 Government Private Sector $1,656 Government Environment $1,792 Government Enhanced Reporting & Accountability $1,562 Government Infrastructure $14,972 Construction Balance $40,382 Government Total, Compact of Free Association $110,320 Assistance to Territories General technical assistance - Direct Grants $237 Government Subtotal, General Technical Assistance $237 Office of Insular Affairs $221 Government Maintenance assistance $224 Government Coral Reef Initiative $221 Government Subtotal, Other $666 Total, Assistance to Territories $903 Total Spending Inside FSM $111,038 Source: OIA, 2017b. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 6-2 Payments associated with Assistance to Territories totaled $0.9 million. General technical assistance provided direct grants and other Assistance to Territories programs included items such as the Coral Reef Initiative. RTI estimates that all spending associated with FSM was initiated within FSM. 6.2 Direct Economic Impacts Direct economic impacts of OIA payments were assigned to five economic sectors— education, construction, government, health care, and an assortment of private industries through the spending of Prior Service Benefits recipients. To calculate the employment and employee compensation impacts associated with this spending, as described in the methodology, we used the following output and employee compensation-to-employee ratios:1 ▪ Education: Based on employment and gross wage data provided in Fiscal Year 2016 Economic Review for FSM (PITI-VITI, 2017a), the employee compensation-to- employee ratio for workers in the education sector was $11,293 in 2017 dollars. Because information was not available for output associated with the education industry, the output-to-employee ratio for Commonwealth of North Marianna Islands was used ($39,919). CNMI was chosen to be the best point of comparison in this context because economic metrics, such as GDP per capita, were more similar to FSM than for any other area for which output-to-employee data were available. However, it should be noted that to the extent this proxy overestimates the true output-to-employee ratio for FSM the direct impacts of OIA spending will be underestimated because more jobs will be supported by each dollar of OIA spending. ▪ Construction: Based on employment and gross wage data provided in Fiscal Year 2016 Economic Review for FSM (PITI-VITI, 2017a), the employee compensation-to- employee ratio for r workers in the construction sector was $5,740 in 2017 dollars. Because information was not available for output associated with the construction industry, the output-to-employee ratio for CNMI was used ($48,355). ▪ Government: According to the Fiscal Year 2016 Economic Review for FSM (PITI-VITI 2017b), the government of Micronesia received approximately $226.6 million in revenue and employed approximately 6,095 individuals in 2016. Adjusting for inflation, this implies an output-to-employee ratio of $37,926. Similarly, according to information presented in the same report, these workers received approximately $64.6million in employee compensation in 2016. This implies an employee compensation-to-employee ratio of $10,809. ▪ Health care: Based on employment and gross wage data provided in Fiscal Year 2016 Economic Review for FSM (PITI-VITI, 2017a), the employee compensation-to- employee ratio for workers in the health care sector was $10,411 in 2017 dollars. Because information was not available for output associated with the health care industry, the output-to-employee ratio for CNMI was used ($60,816). 1 All adjustments for inflation were made using the U.S. Consumer Price Index for All Urban Consumers (BLS, 2016). Section 6 — FSM 6-3 ▪ Private: Based on employment and gross wage data provided in Fiscal Year 2016 Economic Review for FSM (PITI-VITI, 2017a), the average wage for a private-sector worker was $5,019 in 2017 dollars. Because information was not available for output associated with the private sector, the output-to-employee ratio for CNMI was used ($99,300). Dividing the payments directed toward each sector by the output-to-employee ratio yields the direct employment impacts, while multiplying the direct employment impacts by the employee compensation-to-employee ratio yields the direct employee compensation impacts. Direct impacts are reported in Table 6-2. Table 6-2. FSM: Estimated Direct Economic Impacts Using EBA (FY 2017) Industry FY 2017 Payments ($’000, 2017$) Output-to- Employee Ratio ($/employee) Employee Compensation- to-Employee Ratio ($/employee) Direct Employment Impact (#) Direct Employee Compensation Impact ($’000, 2017$) Education $25,647 $39,919 $11,293 642 $7,255 Construction $14,972 $48,355 $5,740 310 $1,777 Government $48,304 $37,926 $10,809 1,274 $13,767 Health care $22,115 $60,816 $10,411 364 $3,786 Private $0 $99,300 $5,019 0 $0 Total $111,038 2,594 $26,638 Sources: RTI estimates based on PITI-VITI (2017b), Census (2017a), and OIA (2017b). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). 6.3 Employment and Employee Compensation Base Multipliers The employment and employee compensation multipliers were developed using 2017 employment and gross wage data from the Micronesia Fiscal Year 2017 Economic Review performed by researchers at PITI-VITI (Table 6-3). The economic base of FSM is agriculture, fishing, manufacturing, and federal government activities. Industries supported by tourism can also be considered part of the economic base. Ideally, data would be available on the number of employees who are supported by tourism. However, because these data were unavailable, we assumed that the entire accommodation and food services industries are supported by tourism and are, therefore, part of the economic base.2 This is likely a conservative approach because, to the extent that this approximation over represents the portion of the economy supported by tourism, employment and employee compensation multipliers will be reduced. 2 A similar approach for creating a proxy for measuring the role of tourism in insular area economies was used in GAO (2006). Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 6-4 Table 6-3. FSM: Employment and Employee Compensation by Industry (2016 estimates) Industry Employment (#) Employee Compensation ($’000, 2017$) Economic Base Industries Agriculture, hunting, and forestry 32 $113 Mining and quarrying 0 $0 Fishing 265 $2,000 Extra-territorial organizations 65 $1,056 Government (public administration)a 6,101 $66,775 Manufacturing 165 $758 Tourism—Hotels and restaurants 756 $3,012 Non-economic Base Industries Construction 920 $5,345 Education 856 $9,793 Electricity, gas, and water supply 417 $4,792 Financial intermediation 277 $4,360 Health and social work 123 $1,291 Other services 530 $3,962 Private households with employed persons 40 $196 Real estate, renting, and business activities 438 $3,307 Transport, storage, and communications 1,035 $8,365 Wholesale and retail trade and repairs 3,321 $16,365 Total 15,339 $131,490 a Because 61% of FSM’s budget comes from external sources, it was assumed that only 61% of the employment and employee compensation associated with public administration was part of the base sector. The remaining employees and employee compensation were assumed to be part of the non- base sector. Note: A significant portion of employment across all sectors was accounted for by public enterprises. However, employee compensation statistics were only provided for private-sector workers. Therefore, to estimate total employee compensation for all workers across industries, we calculated the total earnings by industry for public enterprises in RMI. We then multiplied total earnings in FSM not associated with the private sector by the share of total earnings for each industry in RMI. This allowed us to distribute earnings from public enterprises to industries in FSM. The distributed earnings were then added to the private sector earnings for each industry. Source: RTI estimates based on PITI-VITI (2017b). In addition to these industries, a portion of FSM’s territorial government is considered part of the economic base. Specifically, because over half of FSM’s government revenue comes from external sources, approximately 61% of public administration was also included in the Section 6 — FSM 6-5 base employment for the purpose of calculating base multipliers (PITI-VITI, 2016a). Based on these assumptions and the data in Table 6-3, we calculated the following multipliers: ▪ Base employment multiplier: Base employment was calculated to include 5,004 employees out of a total of 15,339. Dividing total employment by base employment yields a multiplier of 3.07, meaning that for every base employment position supported by OIA funding, an estimated 2.07 additional jobs are formed elsewhere in the economy. ▪ Employee compensation multiplier: Employee compensation associated with base employment was estimated to be $47.7 million. Dividing total employee compensation by base employee compensation yields a base multiplier of 2.76, meaning that every dollar of employee compensation supported by the FY 2015 spending will create an additional $1.76 in employee compensation. Multiplying the direct employment and employee compensation impacts in Table 6-2 by these multipliers yields a total employment impact of 7,956 employees and $73.4 million of employee compensation. 6.4 GDP Base Multipliers As part of its strategic goals, OIA has funded the PITI-VITI to estimate more detailed and accurate economic indicators for the FAS. In September 2017, PITI-VITI released updated FY 2016 economic reports for the Freely Associated States, which included estimates of GDP by industry. Using this data, we were able to estimate GDP multipliers, making for a more detailed analysis of the GDP impacts of OIA payments. Direct GDP impacts are the sum of OIA payments to insular governments plus the impacts of OIA payments on private sectors. A GDP-to-employee ratio was used to determine the direct GDP impacts of OIA payments in the private sector. It is estimated that FSM’s GDP was $328 million in 2015 (World Bank, 2017a). Dividing this by the total number of employees estimated to be working in FSM (15,339) implies a GDP-to-employee ratio of $21,413. Multiplying this ratio by the direct employment impact in the private sector (1,316 employees) yields a direct private-sector GDP impact of $28.2 million. This private-sector impact is then added to the $48.5 million of OIA payments spent in the public sector to produce an estimate of approximately $76.7 million in direct GDP impacts. To determine the indirect and induced effects of OIA payments on GDP, we used the recent PITI-VITI data (Table 6-4) on GDP by industry to calculate a base multiplier using the same methodology as the employment and employee compensation base multipliers. It was assumed that the agriculture, hunting, and forestry; mining and quarrying; fishing; hotels and restaurants; and manufacturing sectors were economic base sectors, along with 58% of the territorial government. The remaining territorial government and other private sectors were included in the non-economic base industries. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 6-6 Based on these assumptions and the data in Table 6-4, base GDP was calculated to be $120.1 million. Dividing total GDP by base GDP yields a multiplier of 2.73, meaning that for every dollar of base GDP supported by OIA funding, an estimated 1.73 of additional GDP dollars are formed elsewhere in the economy. By multiplying the direct GDP impacts of OIA payments by the GDP base multiplier, we estimate the total impact on GDP is $209.7million. Table 6-4. FSM: GDP by Industry (2016) Industry GDP (in millions of 2017$) Economic Base Industries Agriculture, hunting, and forestry $50.5 Mining and quarrying $0.0 Fishing $40.6 Government (public administration) a $34.7 Manufacturing $1.9 Tourism—Hotels and restaurants $6.0 Non-economic Base Industries Construction $8.6 Education $33.7 Electricity, gas, and water supply $10.0 Financial intermediation $12.7 Health and social work $15.5 Other services -$0.6 Real estate, renting, and business activities $36.2 Transport, storage, and communications $20.6 Wholesale and retail trade and repairs $40.9 Total at Basic Prices $311.2 Taxes on products less subsidies $25.4 Total at Purchasers Prices $336.5 a Because 61% of FSM’s budget comes from external sources, it was assumed that only 61% of the employment and employee compensation associated with public administration was part of the base sector. The remaining employees and employee compensation were assumed to be part of the non- base sector. Sources: RTI estimates based on PITI-VITI (2017b). 6.5 EBA Economic Impact Estimate In summary, the $111.2 million spent by OIA inside FSM directly supports 2,589 jobs, $26.6 million in employee compensation, and $76.5 million in GDP. Accounting for secondary effects, we estimate that OIA spending supports a total of 7,938 jobs, $73.3 million in Section 6 — FSM 6-7 employee compensation, and $209.1 million in GDP. This information is summarized in Table 6-5. Table 6-5. FSM: Total Estimated Economic Impact Using EBA (FY 2017) Direct Economic Impact Indirect/Induced Economic Impact Total Economic Impact Employment (#) 2,589 5,348 7,938 Employee compensation ($’000; 2017$) $26,585 $46,743 $73,328 GDP ($’000; 2017$) $76,478 $132,668 $209,147 Sources: RTI estimates based on OIA (2017b), PITI-VITI (2017a, 2017b), and Census (2017b). All data were adjusted to 2016 dollars using the consumer price index (BLS, 2017). The significance of OIA’s economic contributions can be better understood when viewed in relation to the FSM economy as a whole, which is summarized in Table 6-6. The 7,938 jobs directly and indirectly supported by OIA payments represent 52% of FSM’s total employment in 2016. Similarly, $73.3 million of employee compensation associated with these employees’ accounts for approximately 56% of total employee compensation inside the region, and the $209.1 million of GDP associated with these employees represents 64% of the $328 million of total GDP produced by the region. Table 6-6. FSM: Estimated Impact Relative to National Economy Using EBA (FY2017) Total Economic Impact for FY 2017, OIA Payments National Data Impact as Percentage of Total Economy Employment (#) 7,938 15,339 52% Employee compensation ($’000; 2017$) $73,328 $131,490 56% GDP ($’000; 2017$) $209,147 $328,463 64% Sources: RTI estimates based on OIA (2017b), PITI-VITI (2017a, 2017b), and Census (2017a). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). 7-1 7. REPUBLIC OF THE MARSHALL ISLANDS (RMI) 7.1 FY 2017 OIA Payments Summary RMI faces severe challenges in implementing effective government, education, and health care systems and relies heavily on OIA support. RMI has an average GDP per capita of only about $3,518 ($2017) in 2016. OIA payments to RMI in 2017 totaled $78.8 million. A detailed breakdown of these payments is presented in Table 7-1. The largest block of OIA payments, totaling $76.3 million in spending inside RMI, came through the Compact of Free Association. The Compact provides essential funding for operating RMI’s education, government, and health care systems; improving infrastructure; and protecting the environment. In 2012, the Compact and Ebeye Special Needs contributed nearly 75% of the funding available for education in RMI and 37% of the budget for health care (OIA, 2014b). Assistance to Territories payments totaled $2.1 million. General technical assistance provided direct grants and other Assistance to Territories programs included items such as Maintenance Assistance. Table 7-1. OIA Payments and Estimated Spending within RMI (FY 2017) Appropriation Spending ($’000, 2017$) Impact Treatment Compact of Free Association Enewetak $500 69% Government, 31% Transfer Education $11,081 Education Health $7,170 Health care ESN Capital $9,132 Construction Environment $319 Government Ebeye Special Needs—Education $5,074 Education Kwajalein Environmental Impact $238 Government RMI Trust Fund $16,053 Government Kwajalein landowner payments $21,404 Government Disaster Assistance Emergency Fund $238 Government RMI Single Audit $500 Government Kwajalein Impact Fund $3,605 Government Balance $1,251 Government Total Compact of Free Association $76,065 (continued) Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 7-2 Table 7-1. OIA Payments and Estimated Spending within RMI (FY 2017) (continued) Appropriation Spending ($’000, 2017$) Impact Treatment Assistance to Territories General technical assistance - Direct Grants $394 Government General technical assistance - NEPA review $1,298 Government General technical assistance - USDA Grad School PITI- VITI $111 Education Subtotal, General Technical Assistance $1,803 Coral Reef Initiative $80 Government Office of Insular Affairs $188 Government Subtotal, Other $268 Total, Assistance to Territories $2,071 Total Payments $78,636 Spending Outside RMI $155 Total Spending Inside RMI $78,481 Source: RTI estimates based on OIA (2017b). RTI estimates that all spending associated with RMI was initiated within RMI. For the Enewetak assistance program, 31% of funding provides imported food for the citizens of this atoll and, thus, was not included in the analysis because this assistance is not being spent in the insular area. Therefore, the total amount of OIA payments spent within RMI is about $78.5 million. 7.2 Economic Impacts of OIA Payments Using Economic Base Analysis Direct economic impacts of OIA payments were assigned to five economic sectors— education, construction, government, health care, and an assortment of private industries through the spending of Prior Service Benefits recipients. To calculate the employment and employee compensation impacts associated with this spending, as described in the methodology, we used the following output and employee compensation-to-employee ratios:1 ▪ Education: Based on FY 2016 employment and wage cost data provided in the Fiscal Year 2016 Economic Review for RMI (released in August 2017), the employee compensation-to-employee ratio for private-sector workers in the education sector was $13,405 in 2016 (PITI-VITI, 2017c). Because information was not available for 1 All adjustments for inflation were made using the U.S. Consumer Price Index for All Urban Consumers (BLS, 2017). Section 7 — RMI 7-3 output associated with the education industry, the output-to-employee ratio for American Samoa was used ($76,103). American Samoa was chosen to be the best point of comparison in this context because economic metrics, such as GDP per capita, were more similar to RMI than for any other area for which output-to- employee data were available. However, it should be noted that to the extent this proxy overestimates the true output-to-employee ratio for RMI the direct impacts of OIA spending will be underestimated because more jobs will be supported by each dollar of OIA spending. ▪ Construction: Based on employment and wage cost data provided in the Fiscal Year 2016 Economic Review for RMI, the employee compensation-to-employee ratio for private-sector workers in the construction sector was estimated to be $8,325 in 2016 (PITI-VITI, 2017c). Because information was not available for output associated with the construction industry, the output-to-employee ratio for American Samoa was used ($77,514). ▪ Government: Based on data provided in the Fiscal Year 2016 Economic Review for RMI, the RMI government received approximately $122.4 million in revenue and employed approximately 3,689 individuals in 2016 (PITI-VITI, 2017c). Adjusting for inflation, this implies an output-to-employee ratio of $33,841 in 2017 dollars. Similarly, 3,689 government workers received $46.4 million in employee compensation in 2015. This implies an employee compensation-to-employee ratio of $12,839. ▪ Health care: Based on employment and wage cost data provided in the Fiscal Year 2016 Economic Review for RMI, the employee compensation-to-employee ratio for private-sector workers in the health care sector was estimated to be $10,641 in 2017 dollars (PITI-VITI, 2017c). Because information was not available for output associated with the health care industry, the output-to-employee ratio for American Samoa was used ($16,178). American Samoa was chosen to be the best point of comparison in this context because economic metrics, such as GDP per capita, were more similar to RMI than for any other area for which data were available. Private: According to the Fiscal Year 2016 Economic Review for RMI, the average wage for a private worker in RMI was estimated to be $5,846 in 2016 (PITI-VITI, 2017c). Because information was not available for output associated with the private industry, the output-to-employee ratio for American Samoa was used ($173,997). American Samoa was chosen to be the best point of comparison in this context because economic metrics, such as GDP per capita, were more similar to RMI than for any other area for which data were available. Dividing the payments directed toward each sector by the output-to-employee ratio yields the direct employment impacts, while multiplying the direct employment impacts by the employee compensation-to-employee ratio yields the direct employee compensation impacts. Direct impacts are reported in Table 7-2. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 7-4 Table 7-2. RMI: Estimated Direct Economic Impacts Using EBA (FY 2017) Industry FY 2017 Payments ($’000, 2017$) Output-to- Employee Ratio ($/employee) Employee Compensation-to- Employee Ratio ($/employee) Direct Employment Impact (#) Direct Employee Compensation Impact ($’000, 2017$) Education $16,266 $76,103 $13,405 214 $2,865 Construction $9,132 $77,514 $8,325 118 $981 Government $45,913 $33,841 $12,839 1,357 $17,419 Health care $7,170 $16,178 $10,641 443 $4,716 Private $0 $173,997 $5,846 0 $0 Total $78,481 2,132 $25,981 Sources: RTI estimates based on OIA (2017b), PITI-VITI (2017c), and Census (2017b). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). Employment and Employee Compensation Base Multipliers. The employment and employee compensation multipliers were developed for 2016 using data from the RMI Fiscal Year 2016 Economic Review performed by researchers at PITI-VITI (Table 7-3). The economic base of RMI is agriculture, hunting, forestry, manufacturing, and federal government activities. Industries supported by tourism can also be considered part of the economic base. Ideally, data would be available on the number of employees supported by tourism. However, because these data were unavailable, we assumed that the entire accommodation and food services industries are supported by tourism and are, therefore, part of the economic base.2 This is likely a conservative approach because, to the extent that this approximation over represents the portion of the economy supported by tourism, employment and employee compensation multipliers will be reduced. In addition to these industries, a portion of RMI’s territorial government is considered part of the economic base. Specifically, because approximately 63.9% of RMI’s government revenue comes from external sources, 63.9% of public administration was also included in the base employment for the purpose of calculating base multipliers (PITI-VITI, 2017b). Based on these assumptions and the data in Table 7-3, we calculated the following multipliers: ▪ Base employment multiplier: Base employment was calculated to include 4,627 employees out of a total of 10,895. Dividing total employment by base employment yields a multiplier of 2.35, meaning that for every base employment position supported by OIA funding, an estimated 1.35 additional jobs are formed elsewhere in the economy. 2 A similar approach for creating a proxy for measuring the role of tourism in insular area economies was used in GAO (2006). Section 7 — RMI 7-5 ▪ Employee compensation multiplier: Employee compensation associated with base employment was estimated to be $56.2 million. Dividing total employee compensation by base employee compensation yields a base multiplier of 2.10, meaning that every dollar of employee compensation supported by the FY 2017 spending will create an additional $1.10 in employee compensation. Table 7-3. RMI: Employment and Employee Compensation by Industry (2017 estimates) Industry Employment (#) Employee Compensation ($’000, 2017$) Economic Base Industries Agriculture, hunting, and forestry 19 $77 Fishing 812 $3,774 Extra-territorial organizations 1,007 $19,320 Government (public administration)a 3,689 $47,356 Manufacturing 143 $1,097 Tourism—Hotels and restaurants 290 $1,705 Non-economic Base Industries Community, social & personal service activities 183 $1,415 Construction 462 $3,844 Education 513 $6,880 Electricity, gas and water supply 366 $5,009 Financial intermediation 277 $5,056 Health and social work 220 $2,340 Private households with employed person 21 $120 Real estate, renting, and business activities 160 $1,478 Transport, storage, and communications 775 $7,357 Wholesale and retail trade 1,959 $11,401 Total 10,895 $118,227 a Because 63.9% of RMI’s budget comes from external sources, we assumed that only 63.9% of the employment and employee compensation associated with public administration was part of the base sector. The remaining employees and employee compensation were assumed to be part of the non- base sector. Source: RTI estimates based on PITI-VITI (2017d). Multiplying the direct employment and employee compensation impacts in Table 7-2 by these multipliers yields a total employment impact of 5,031 employees and $54.8 million of employee compensation. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 7-6 7.3 GDP Base Multipliers Direct GDP impacts are the sum of OIA payments to insular governments plus the impacts of OIA payments on private sectors. A GDP-to-employee ratio was used to determine the direct GDP impacts of OIA payments in the private sector. It is estimated that RMI’s GDP was $187 million in 2016 (World Bank, 2017a). Dividing this by the total number of employees estimated to be working in RMI (10,895) implies a GDP-to-employee ratio of $17,134. Multiplying this ratio by the direct employment impact in the private sector (755 employees) yields a direct private-sector GDP impact of $13.3 million. This private-sector impact is then added to the $46.1 million of OIA payments spent in the public sector to produce an estimate of approximately $54.8 million in direct GDP impacts. Total GDP impacts are determined by multiplying the direct GDP impacts by a GDP base multiplier. Because of RMI’s high percentage of OIA payments compared with GDP (a ratio of 0.42, the highest of the insular areas), small size of economy, and small base sector (in terms of GDP), using a GDP base multiplier from the PITI-VITI FY 2016 Economic Report would create a high base GDP multiplier and potentially overestimate the impacts of OIA payments on GDP. Therefore, we used the smaller value employment base multiplier of 2.10 as a proxy GDP base multiplier. Using this multiplier created a total GDP impact that was consistent with previous analyses and the other FAS. By multiplying the direct GDP impacts of OIA payments by the proxy GDP base multiplier, we estimate the total impact on GDP is $130.6 million. 7.4 EBA Economic Impact Estimate In summary, the $78.5 million spent by OIA inside RMI directly supports 2,132 jobs, $26.0 million in employee compensation, and $59.2 million in GDP. Accounting for secondary effects, we estimate that OIA spending supports a total of 5,018 jobs, $54.6 million in employee compensation, and $130.2 million in GDP. This information is summarized in Table 7-4. Table 7-4. RMI: Total Estimated Economic Impact Using EBA (FY 2017) Direct Economic Impact Indirect/Induced Economic Impact Total Economic Impact Employment (#) 2,132 2,887 5,018 Employee compensation ($’000; 2017$) $25,981 $28,643 $54,624 GDP ($’000; 2017$) $59,188 $71,026 $130,214 Sources: RTI estimates based on OIA (2017b), PITI-VITI (2017a, 2017c), and Census (2017a). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). Section 7 — RMI 7-7 The significance of OIA’s economic contributions can be better understood when viewed in relation to the RMI economy as a whole, which is summarized in Table 7-5. As this table illustrates, the 5,018 jobs directly and indirectly supported by OIA payments represent 46% of RMI’s total employment in 2017. Similarly, $54.6 million of employee compensation associated with these employees’ accounts for approximately 46% of total employee compensation inside the region, and the $130.2 million of GDP associated with these employees represents 70% of total GDP produced by the insular area. Table 7-5. RMI: Estimated Impacts Relative to National Economy Using EBA (FY2017) Total Economic Impact for FY 2017 OIA Payments National Data Impact as Percentage of Total Economy Employment (#) 5,018 10,895 46% Employee compensation ($’000; 2017$) $54,624 $118,227 46% GDP ($’000; 2017$) $130,214 $186,673 70% Sources: RTI estimates based on OIA (2017b), PITI-VITI (2017a, 2017c), and Census (2017b). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). 8-1 8. REPUBLIC OF PALAU 8.1 FY 2017 OIA Payments Summary Like the other insular areas, Palau faces a number of obstacles to economic development, including limited land and resources, a small population, limited local technical expertise, a narrow economic base, and vulnerability to natural disasters. The average GDP per capita for Palau in 2016 was $13,899 (2017$) as compared with the GDP per capita of the United States, which was $58,620 (World Bank, 2017a). Through their funding and support, OIA strives to foster economic development, promote sound management, and improve quality of life in Palau. In September 2010, the governments of the United States and Palau signed a new 15-year compact agreement that offers $250 million in assistance through 2024. The assistance will fund direct economic assistance and infrastructural projects, and the amount of funding will decline each year to promote Palau’s self-sufficiency (OIA, 2017b). These payments, which are dispersed through OIA, were enacted in FY 2012. OIA payments made to Palau in 2017 totaled just under $14 million and were primarily dedicated to the government sector. A detailed breakdown of OIA payments to Palau is presented in Table 8-1. The largest block of OIA payments to Palau, totaling $13.7 million in spending inside the island, came through the Compact of Free Association. This includes funding for infrastructure improvements, economic assistance, and government fiscal support (OIA, 2016a). Under the new compact agreement, the OIA also funds a subsidy for the U.S. Postal Service to provide mail service to the insular area; because this payment is a direct transfer, this value was not included in the analysis of the direct impacts of OIA’s assistance. RTI estimates that all spending associated with Palau was initiated within Palau. Assistance to Territories payments totaled $0.3 million. General technical assistance provided direct grants, judicial training, the Prior Service Benefits Program, and the PITI- VITI. Therefore, the total amount of OIA payments spent within Palau is about $13.4 million. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 8-2 Table 8-1. OIA Payments and Estimated Spending within Palau (FY 2017) Appropriation Spending ($’000, 2017$) Impact Treatment Compact of Free Association Federal Services Assistance $563 Transfer Program Grant Assistance $2,000 Government Infrastructure Project $6,000 Construction Economic assistance $5,147 Government Total, Compact of Free Association $13,710 Assistance to Territories General technical assistance—Direct Grant $176 Government Subtotal, General Technical Assistance $176 Coral Reef Initiative $74 Government Total, Assistance to Territories $250 Total Payments $13,960 Spending Outside Palau $563 Total Spending Inside Palau $13,397 Source: RTI estimates based on OIA (2017b). 8.2 Direct Economic Impacts of Payments Direct economic impacts of OIA payments were assigned to four economic sectors— education, construction, government, and an assortment of private industries through the spending of Prior Service Benefits recipients. To calculate the employment and employee compensation impacts associated with this spending, as described in the methodology, we used the following output and employee compensation-to-employee ratios:1 ▪ Education: Based on data provided in the Fiscal Year 2017 Economic Review for Palau, the employee compensation-to-employee ratio in the education sector in 2017 was $11,059 (PITI-VITI, 2017d). Because information was not available for output associated with the education sector, the output-per-employee ratio for American Samoa was used ($76,103). American Samoa was chosen to be the best point of comparison in this context because economic metrics, such as GDP per capita, were more similar to Palau than for any other area for which data were available. However, it should be noted that to the extent this proxy overestimates the true output-to-employee ratio for Palau the direct impacts of OIA spending will be underestimated because more jobs would be supported by each dollar of OIA spending. 1 All adjustments for inflation were made using the U.S. Consumer Price Index for All Urban Consumers (BLS, 2017). Section 8 — Republic of Palau 8-3 ▪ Construction: According to the PITI-VITI (2017c) economic review, in 2016 878 workers were located in the construction sector who received $7.4 million in employee compensation in 2016. This implies an average employee compensation- to-employee ratio of $8,372 in 2017 dollars. Because information was not available for output associated with the construction sector, the output-to-employee ratio for American Samoa was used ($77,514). ▪ Government: Based on PITI-VITI FY 2016 Economic Review, the government of Palau received nearly $127.3 million in revenue in Fiscal Year 2016 and employed approximately 3,159 people that year (PITI-VITI, 2017d). This implies the ratio of government revenue to government employees was $41,106 in 2017 dollars. Similarly, based on 2016 average wage estimates from the PITI-VITI (2017d) Fiscal Year 2016 Economic Review, the employee compensation-to-employee ratio for government workers was estimated to be $15,429 in 2017 dollars. ▪ Private: Based on quarterly employment and gross wage/salary reports from PITI- VITI, 8,429 workers were located in the private sector who received $76.4 million in employee compensation in 2016. This implies an average employee compensation- to-employee ratio of $9,249 in 2017 dollars. Because information was not available for output associated with the private sector, the output-to-employee ratio for American Samoa was used ($173,997). Dividing the payments directed toward each sector by the output-to-employee ratio yields the direct employment impacts, while multiplying the direct employment impacts by the employee compensation-to-employee ratio yields the direct employee compensation impacts. Direct impacts are reported in Table 8-2. Table 8-2. Palau: Estimated Direct Economic Impacts (FY 2017) Industry FY 2017 Payments ($’000, 2017$) Output-to- Employee Ratio ($/employee) Employee Compensation-to- Employee Ratio ($/employee) Direct Employment Impact (#) Direct Employee Compensation Impact ($’000, 2017$) Education $0 $76,103 $11,059 0 $0 Construction $6,000 $77,514 $8,372 77 $648 Government $7,397 $41,106 $15,429 180 $2,776 Private $0 $173,997 $9,249 0 $0 Total $13,397 257 $3,425 Sources: RTI estimates based on OIA (2017b), ADB (2017), Census (2017b), and PITI-VITI (2017d). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). 8.3 Employment and Employee Compensation Base Multipliers The employment and employee compensation multipliers were developed using data from the PITI-VITI 2015 Economic Review of Palau (Table 8-3). Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 8-4 Table 8-3. Palau: Estimated Employment and Employee Compensation by Industry (2017) Industry Employment (#) Employee Compensation ($’000; 2017$) Economic Base Industries Agriculture, hunting, and forestry 136 $618 Fishing 85 $657 Extra-territorial organizations 22 $343 Government (Public administration)a 3,159 $48,740 Mining and quarrying 63 $802 Manufacturing 168 $1,326 Tourism - Hotels and restaurants 1,860 $18,183 Noneconomic Base Industries Construction 878 $7,352 Education 471 $5,207 Financial intermediation 100 $1,873 Health and social work 67 $707 Other service activities 291 $2,104 Private households with employed person 649 $1,573 Real estate, renting, and business activities 170 $1,242 Transport, storage, and communications 849 $8,871 Electricity, gas, steam and air conditioning supply 245 $3,749 Water supply; sewerage, waste management and remediation activities 0 $0 Information and communication 153 $2,401 Professional, scientific and technical activities 131 $1,948 Administrative and support service activities 428 $3,611 Arts, entertainment and recreation 97 $1,488 Wholesale and retail trade; repair of motorcycles; personal and household goods 1,589 $14,253 Total 11,610 $127,047 a Note that because 39% of Palau’s budget comes from external sources, it was assumed that only 39% of the employment and employee compensation associated with public administration was part of the base sector. The remaining employees and employee compensation were assumed to be part of the non-base sector. Source: RTI estimates based on PITI-VITI (2017d). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). Section 8 — Republic of Palau 8-5 The economic base of Palau is agriculture, hunting, forestry, manufacturing, and federal government activities. Industries supported by tourism can also be considered part of the economic base. Ideally, data would be available on measures of the number of employees who are supported by tourism. However, because these data were unavailable, we assumed that the entire accommodation and food services industries are supported by tourism and are, therefore, part of the economic base.2 This is likely a conservative approach because, to the extent that this approximation over represents the portion of the economy supported by tourism, employment and employee compensation multipliers will be reduced. In addition to these industries, a portion of Palau’s territorial government is considered part of the economic base. Because approximately 39% of Palau’s government revenue comes from external sources, 39% of public administration was included in the base employment for the purpose of calculating base multipliers (PITI-VITI, 2017d). Based on these assumptions and the data in Table 8-3, we calculated the following multipliers: ▪ Base employment multiplier: Base employment was calculated to include 3,565 employees out of a total of 11,610. Dividing total employment by base employment yields a multiplier of 3.26, meaning that for every base employment position supported by OIA spending, an estimated 2.26 additional jobs are formed elsewhere in the economy. ▪ Employee compensation multiplier: Employee compensation associated with base employment was estimated to be $40.9 million. Dividing total employee compensation by base employee compensation yields a base multiplier of 3.10, meaning that every dollar of employee compensation supported by the FY 2015 spending will create an additional $2.10 in employee compensation. Multiplying the direct employment and employee compensation impacts in Table 8-2 by these multipliers yields a total employment impact of 838 employees and $10.6 million of employee compensation. 8.4 GDP Base Multipliers As part of its strategic goals, OIA has funded the PITI-VITI to estimate more detailed and accurate economic indicators for the FAS. In June 2014, PITI-VITI released updated FY 2013 economic reports for the Freely Associated States. With this data, we were able to better estimate GDP multipliers, making for a more detailed analysis of the GDP impacts of OIA payments. Direct GDP impacts are the sum of OIA payments to insular governments plus the impacts of OIA payments on private sectors. A GDP-to-employee ratio was used to determine the direct GDP impacts of OIA payments in the private sector. It is estimated that Palau’s GDP 2 A similar approach for creating a proxy for measuring the role of tourism in insular area economies was used in GAO (2006). Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 8-6 was $299 million in 2016 (World Bank, 2017a). Dividing this by the total number of employees estimated to be working in Palau (11,610) implies a GDP-to-employee ratio of $25,744. Multiplying this ratio by the direct employment impact in the private sector (77 employees) yields a direct private-sector GDP impact of nearly $2 million. This private- sector impact is then added to the $7.4 million of OIA payments spent in the public sector to produce an estimate of approximately $9.4 million in direct GDP impacts. To determine the indirect and induced effects of OIA payments on GDP, we estimated the breakdown of GDP by industry using the proportion of GDP by industry from the PITI-VITI (2017a). We then used this estimate of GDP by industry (Table 8-4) to calculate a base multiplier using the same methodology as the employment and employee compensation base multipliers. It was assumed that the agriculture, mining, manufacturing, and trade sectors were economic base sectors, along with 39% of the territorial government. The remaining territorial government and other private sectors were included in the non- economic base industries. Table 8-4. Palau: GDP by Industry (2017) Industry GDP (in millions of 2017$) Economic Base Industries Agriculture $9.5 Mining $1.3 Manufacturing $2.9 Trade $54.2 Government (public administration)a $42.4 Non-economic Base Industries Electricity, gas, and water $4.0 Construction $15.3 Transport and communications $31.3 Finance $7.8 Other services $111.2 Total at Basic Prices $279.9 Taxes on imports less imputed bank service charges $36.6 Total at Purchasers Prices $316.5 a Note that because 47% of Palau’s budget comes from external sources, it was assumed that only 47% of the employment and employee compensation associated with public administration was part of the base sector. The remaining employees and employee compensation were assumed to be part of the non-base sector. Source: RTI estimates based on PITI-VITI (2017d). Based on these assumptions and the data in Table 8-4, base GDP was calculated to be $84.4 million. Dividing total GDP by base GDP yields a multiplier of 3.54, meaning that for Section 8 — Republic of Palau 8-7 every dollar of base GDP supported by OIA funding, an estimated 2.54 of additional GDP dollars are formed elsewhere in the economy. By multiplying the direct GDP impacts of OIA payments by the GDP base multiplier, we estimate the total impact on GDP is $33.2 million. 8.5 EBA Economic Impact Estimate In summary, the $13.4 million spent by OIA inside Palau directly supports 257 jobs, $3.4 million in employee compensation, and $9.4 million in GDP. Accounting for secondary effects, we estimate that OIA spending supports a total of 838 jobs, $10.6 million in employee compensation, and $33.2 million in GDP. A summary of the economic impacts associated with OIA payments is presented in Table 8-5. Table 8-5. Palau: Total Estimated Economic Impact Using EBA (FY 2017) Direct Economic Impact Indirect/Induced Economic Impact Total Economic Impact Employment (#) 257 581 838 Employee compensation ($’000; 2017$) $3,425 $7,203 $10,627 GDP ($’000; 2017$) $9,390 $23,858 $33,248 Sources: RTI estimates based on OIA (2017b), PITI-VITI (2017d), PITI-VITI (2017a), Census (2017b), ADB (2017), and World Bank (2017a). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). The significance of OIA’s economic contributions can be better understood when viewed in relation to the Palau economy as a whole, which is summarized in Table 8-6. Specifically, the 838 jobs directly and indirectly supported by OIA payments represent 7% of Palau’s total employment. Similarly, $10.6 million of employee compensation associated with these employees accounts for approximately 8% of total employee compensation inside the region, and the $33.2 million of GDP associated with these employees represents 11% of total GDP produced by the insular area. Table 8-6. Palau: Estimated Impacts Relative to National Economy Using EBA (FY 2017) Total Economic Impact for FY 2017 OIA Payments National Data Impact as Percentage of Total Economy Employment (#) 838 11,610 7% Employee compensation ($’000; 2017$) $10,627 $127,047 8% GDP ($’000; 2017$) $33,248 $298,881 11% Sources: RTI estimates based on OIA (2017b), PITI-VITI (2017d), POPS (2008), Census (2017b), ADB (2013), and World Bank (2017a). All data were adjusted to 2017 dollars using the consumer price index (BLS, 2017). 9-1 9. DISTRICT OF COLUMBIA AND HAWAII In addition to payments spent directly in the insular areas, the OIA operates and spends payments in the District of Columbia and Hawaii. The economic impact of OIA operations in the District of Columbia and Hawaii was calculated using IMPLAN I/O modeling software.1 Similarly to modeling for the US territories, IMPLAN uses an I/O modeling framework that allows specific multipliers to be calculated for each industry. 9.1 Economic Impact Assessment of OIA Operations in District of Columbia The FY 2017 budget for OIA operations and the Coral Reef Initiative in Washington, DC, was $8.7 million, which falls within the IMPLAN industry code 535: Federal Government, Non- military. Similar to the analysis used for the insular areas, direct employment and employee compensation impacts can be measured using the output-to-employee and employee compensation-to-employee ratios for this sector. Direct impacts were multiplied by IMPLAN-generated multipliers to estimate the total impact of OIA activity in Washington, DC. The relevant multipliers and total impacts that were estimated for this analysis are reported in Table 9-1. The total economic impacts of OIA operations on DC are ▪ 51 employees, ▪ $7.8 million in employee compensation, and ▪ $9.7 million in GDP. 9.2 Economic Impact Assessment of OIA Operations in Hawaii The FY 2017 budget for OIA operations in Hawaii was just under $22 million. The details of these payments and the IMPLAN codes to which they were assigned are reported in Table 9-2. As in the previous analysis, direct impacts were estimated using output and employee compensation-to-employee ratios from the IMPLAN model. The direct employment, employee compensation, and output inputs are reported in Table 9-3. 1 To estimate the total economic impact associated with this funding, we used 2013 I/O models of the Washington, DC, and Hawaii economies constructed using IMPLAN economic modeling software. IMPLAN categorizes businesses in these industries into a system of 536 industry codes. IMPLAN was selected because it is one of the most widely used I/O modeling software packages in economic development analysis. IMPLAN, like all I/O models, quantifies the economic impact using multipliers to represent indirect and induced impacts. Total impacts can be estimated by multiplying the direct impacts of the project by these multipliers. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 9-2 Table 9-1. Economic Impact Assessment of OIA Operations in District of Columbia (FY 2017) Employment (# of employees) Employee Compensation ($’000, 2017) Total Value Added ($’000, 2017) Direct Economic Impact OIA operations 42 $7,232 $8,720 Indirect and Induced Economic Impacts Multiplier 1.21 1.08 1.11 Total Economic Impact 51 $7,810 $9,719 Sources: RTI estimates based on OIA (2017b) and IMPLAN. Table 9-2. 2017 OIA Operations in Hawaii and Corresponding IMPLAN Codes Funding Description Funding Amount ($2017) Industry Description IMPLAN Code Compact of Free Association Compact Impact $12,610 Healthcare 482 Total, Compact of Free Association $12,610 Assistance to Territories General technical assistance—USDA Grad School PITI VITI $105 Education 472 General technical assistance—Pacific Basin Development Center $- Government 531 General technical assistance - Direct Grant $808 Government 531 General technical assistance - Close-Up Foundation $- Education 472 General technical assistance - NEPA review $- Government 531 General technical assistance - Judicial Training $- Education 531 Subtotal, General Technical Assistance $913 Coral Reef Initiative $- Government 531 Brown Tree Snake Control $1,745 Government 531 Office of Insular Affairs $2,637 Government 531 Compact of Free Association Compact Impact Discretionary $1,276 Education 472 Maintenance Assistance $2,807 Government 531 Subtotal Other $8,465 Total, Assistance to Territories $9,378 Total Spending Inside Hawaii $21,988 (continued) Section 9 — District of Columbia and Hawaii 9-3 Table 9-2. 2017 OIA Operations in Hawaii and Corresponding IMPLAN Codes (continued) Funding Description Funding Amount ($2017) Industry Description IMPLAN Code Compact Impact Discretionary $1,276 Education 472 Maintenance Assistance $2,807 Government 531 Subtotal Other $8,465 Total, Assistance to Territories $9,378 Total Spending Inside Hawaii $21,988 Sources: RTI estimates based on OIA (2017b) and IMPLAN. Table 9-3. Direct Economic Impacts of OIA Operations in Hawaii (FY 2017) Industry Description IMPLAN Code Employment (# of employees) Employee Compensation ($’000, 2017) Direct Total Value Added Impact ($’000, 2017) Hospitals 482 78 $6,742 $7,727 Education 472 25 $956 $1,028 State Gov’t—non-education 531 79 $6,837 $7,997 Total 182 $14,535 $16,752 Sources: RTI estimates based on OIA (2017b) and IMPLAN. As previously discussed, direct impacts were multiplied by Type II Social Accounting Matrix multipliers generated in IMPLAN to estimate the total impact of OIA payments on the state’s economy. The relevant multipliers that were estimated for this analysis are reported in Table 9-4. Table 9-4. Selected Multipliers by Industry, Hawaii Industry Description IMPLAN Code Total Employment Impact Multiplier Total Employee Compensation Multiplier Total Value Added Multiplier Hospitals 482 1.82 1.43 1.65 Education 472 1.28 1.30 1.54 State Gov’t—non-education 531 1.40 1.20 1.31 Source: IMPLAN. The indirect and induced impacts of OIA payments are estimated to be an additional 103 jobs and $4.6 million in employee compensation. Therefore, the total economic impact of Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 9-4 OIA payments to Hawaii is 284 jobs, $19.1 million in employee compensation, and $24.8 million in GDP. See Table 9-5. Table 9-5. Total Economic Impacts of OIA Payments, Hawaii Industry Description Employment (# of employees) Employee Compensation ($’000, 2017) Total Value Added Impact ($’000, 2017) Direct impacts 182 14,535 16,752 Indirect and induced impacts 103 4,589 8,061 Totala 284 $19,124 $24,813 a Values may not add to total because of rounding. Sources: RTI estimates based on OIA (2017b) and IMPLAN. 10-1 10. ANALYSIS SUMMARY The purpose of this study was to measure the economic impact of OIA payments on insular areas as measured by economic aggregates such as employment, employee compensation, and GDP. This task was accomplished primarily through the use of simple economic base models that were constructed for each of the seven insular areas. The results of this analysis are presented in the Tables 10-1 through 10-3 and in the Executive Summary. Table 10-1. Estimated Employment Impact of OIA Payments (FY 2017) Direct Employment Impact (#) Indirect/Induced Employment Impact (#) Total Employment Impact (#) Percentage of National Employment Supported by OIA Payments (%) American Samoa 984 115 1,099 8% Guam 3,709 150 3,859 6% Northern Mariana Islands 663 126 789 3% U.S. Virgin Islands 5,826 615 6,441 17% Micronesia 2,589 5,348 7,938 52% Marshall Islands 2,132 2,887 5,018 46% Palau 257 581 838 7% Source: RTI estimates. Table 10-2. Estimated Employee Compensation Impact of OIA Payments (FY 2017) Direct Employee Compensation Impact (‘000, 2017$) Indirect/ Induced Employee Compensation Impact (‘000, 2017$) Total Employee Compensation Impact (‘000, 2017$) Percentage of National Employee Compensation Supported by OIA Payments (%) American Samoa $27,551 $2,017 $29,568 15% Guam $110,061 $3,112 $113,172 8% Northern Mariana Islands $14,150 $1,893 $16,043 3% U.S. Virgin Islands $244,406 $18,468 $262,874 19% Micronesia $26,585 $46,743 $73,328 56% Marshall Islands $25,981 $28,643 $54,624 46% Palau $3,425 $7,203 $10,627 8% Source: RTI estimates. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas 10-2 Table 10-3. 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Economic Impacts Attributable to FY 2016 Federal Grants and Payments to Seven Insular Areas R-4 Wang, X., and R. vom Hofe. 2007. Research Methods in Urban and Regional Planning. Beijing, China: Tsinghua University Press. World Bank. 2017a. World Bank Data (Indicators—GDP). http://data.worldbank.org/indicator/NY.GDP.MKTP.CD. World Bank. 2017b. World Bank Data (Indicators—Population). http://data.worldbank.org/indicator/SP.POP.TOTL. A-1 APPENDIX A: ALLOCATION OF FY 2016 TECHNICAL ASSISTANCE AND OTHER PAYMENTS BY INSULAR AREA OIA grants and federal payments for technical assistance and other initiatives are made or distributed as needed during each fiscal year. For FY2017 payments we relied on two sources to determine payments to the insular areas. First we used the 2017 Congressional Report as the most recent estimate of FY2017 funding, we then used the 2018 Budget Justification from the OIA to further breakdown spending categories in order to understand which economic sector to apply certain payments. Table A-1 presents a breakdown of general technical assistance by grant/program and by the insular area receiving the funds. In several cases, the exact amount of funding going to each insular area was indicated in the Congressional Report or Budget Justification. However, in several cases, information was not available for how the funds associated with particular grants/programs would be distributed by area, so we made assumptions. These cases included the following: ▪ Allocation for the Direct Grants to Insular Areas, part of general technical assistance funding, was not available at the time of this report. Therefore, RTI applied a solver analysis through excel to distribute the funds based on the sub-totals from the congressional report, and the grant totals in the budget justification document. ▪ USDA Graduate School PITI-VITI: A total of $2.5 million was allocated to this program for FY 2017. Because the PITI-VITI serves all seven insular areas, this $2.5 million was distributed across all seven areas and Hawaii (where the PITI-VITI offices are located) based the solver program used earlier. ▪ Close Up Foundation: A total of $1.1 million was allocated to this program for FY 2017. This money is received directly by the Close Up Foundation, but no additional information for how these funds might be distributed across each insular areas was provided. Therefore, the $1.1 million was divided across all seven insular areas. ▪ Prior Service Benefits Program: A total of $800,000 was allocated to this program split between Guam, Federated States of Micronesia, Marshall Islands, and Palau ▪ In a few instances the OIA’s Congressional Report or Budget Justification did not explain where certain payments had been allocated, but further information about these payments was found using OIA’s website announcements. A statement made by the OIA’s Assistant Secretary of the Interior to Congress also provided details on payment allocations for Palau (OIA, 2012a). We assumed this distribution was similar for FY2018. For several other categories of OIA funding, the actual allocation by insular area was unknown, but information about the total amount of funding for the funding category was listed. Economic Impacts Attributable to FY 2017 Federal Grants and Payments to Seven Insular Areas A-2 Table A-1. Estimation of FY 2017 General Technical Assistance by Area Treatment American Samoa Guam CNMI U.S. Virgin Islands Federated States of Micronesia Republic of Marshall Islands Republic of Palau Hawaii Other Total Direct Grants To Insular Areas Government $1,327,000 $781,730 $1,324,482 $892,645 $237,000 $393,965 $176,000 $807,528 $1,115,236 $7,055,586 USDA Grad School PITI VITI Education $414,636 $573,458 $145,355  $110,829  $105,472 $531,249 $1,880,999 Close-up Foundation Education  $188,942 $353,821      $217,771 $760,534 Junior Statesmen Other  $146,692 $310,238      $164,743 $621,674 Prior Service Benefits Program Prior Service Benefits Program         $315,000 $315,000 Judicial Training Education      $1,298,206    $1,298,206 NEPA review and compliance Education         $1,699,000 $1,699,000 Total $1,327,000 $1,532,000 $2,562,000 $1,038,000 $237,000 $1,803,000 $176,000 $913,000 $4,043,000 $13,631,000