220. Memorandum From Jake Stewart of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)1
SUBJECT
- Costs of Implementing the Panama Canal Treaty
You asked that I get on top of the Panama Canal Treaty cost issue. Off and on over the last week, I’ve tried to do so.
Background
As you may recall, last year as the debate on the Canal Treaty began, questions arose in the Senate about additional financial obligations the United States would incur as a result of the treaty. In a February 10, 1978 letter signed by Cy Vance, Harold Brown and Army Secretary Alexander2 (known as the Three Secretaries Letter) certain assurances were made to the Senate concerning treaty implementation costs:
—the Canal could meet its financial obligations under the new treaty arrangement;
—the total appropriations impact over 21 years would not be much more than $350M; and
—none of the appropriated $350M would go to Panama.
Within the Administration the validity of the three Secretaries’ $350M figure was immediately called into question by OMB for two reasons—Defense costs were probably not fully reflected in the estimate, and OMB had not been afforded the opportunity to review, scrub, or clear the number before its presentation to the Senate. When the President’s 1980 budget was submitted to Congress containing specific treaty implementation costs, it became apparent that $350M was low. In response to questions raised by the House Committee on Merchant Marine and Fisheries, the State Department forwarded a “reviewed and refined” treaty cost estimate of $870.7M for the period FY 1979–2000, which represented a 150% increase from the earlier $350M figure. House opponents of the treaty seized the “cost growth” issue to illustrate the Administration’s deceptive practices in selling the treaty to the Senate. In a Dear Colleague letter,3 Congressman Bauman (R–MD) stated that the $350–$871M implementing costs would continue to grow over time to more than $4B. Since the House didn’t take part in the treaty ratification process, most members and their staffs are unfamiliar with treaty provisions. Cynically, some members are convinced that actual treaty costs will fall nearer the $4B than the Administration’s $870.7M figure. Senator Church, unfortunately, has lent some additional credibility to the $4B by requesting from Cy Vance an explanation of Bauman’s estimate.4
Explanation of Costs
The $870.7M figure for treaty implementation costs (detailed at Tab A)5 is essentially in three parts—Defense costs in the near term, FY 79–84; outyear Defense costs, FY 1985–2000; and personnel costs that principally cover the preferential retirement benefits as specified in Article X(9) of the Treaty. The DOD costs result from the need to relocate certain military facilities and to take over the operation of schools, hospitals and some community services from the present Canal Zone Government. Other federal agencies also have additional costs, the most significant being the special retirement benefits to be offered to the currently employed members of the Canal work force. This expenditure ($205M) would compensate employees whose careers are interrupted as the result of the treaty, and would provide an incentive to others to continue to lend their skills to ensure the efficient operation of the Canal.
[Page 526]Strategy for Handling the Cost Issue
In marginal notes on Cy Vance’s recent Panama memo, the President indicated his desire to hold the $870.7M down since it seemed excessive to him.6 Bob Beckel of Frank Moore’s staff has noted that the President’s basic concern is that we insure that costs or programs unrelated to the Canal Treaty not be allowed to be included in DOD or other agency Panama cost figures. While OMB and State have reviewed the costs at Tab A and are confident that these estimates are all related to treaty requirements, the Senate’s reservations to the treaty, or to promises made to Zone residents or Canal employees during the treaty ratification process, they also admit that the estimate contains some “padding” that covers the uncertainty of planning 21 years into the future.
If the $870.7M figure is to be reduced—and it can be—we have several options: a) let OMB squeeze the DOD portion of the implementation costs yielding cuts as high as $40M (cost cuts would fall mainly in the base operations area); b) fund the major non-DOD cost, the $205M for the preferential retirement benefits from the Canal toll base, not from US appropriations, thus reducing implementation costs to the USG; or c) a combination of both the above techniques.
I am concerned that by simply squeezing the DOD numbers to obtain at most $40M in cuts we will lose even more credibility on the Hill and create additional confusion among House members who are now struggling to sort out the $350M to $870.7M to $4B puzzle. Funding the retirement benefit out of tolls seems a more fruitful approach to cost reduction. Simply acquiescing to Merchant Marine Committee mark-up of the Administration’s Canal bill (HR 1716)—which would pay these benefits by increasing Canal tolls by some 7%—is the easiest course of action. Congress takes the credit for cost cuts—we probably get an acceptable bill. Defense favors this tack and State, while not terribly keen on the idea since they tend to think such actions violate the spirit of the treaty, will go along.
Another way of making the $205M disappear from US appropriations, would be to retain in the Canal toll base the interest charge on the US direct net investment in the Canal (a payment to the USG of about $20M paid annually since 1951). The Administration’s bill (HR 1716) proposed that this charge to the Canal Commission be dropped in the future. This payment by the Canal to the US Treasury is retained in the HR 1716 mark-up. If the interest was directed specifically to fund the preferential retirement costs, the Treasury would then see about an $8M annual increase in revenue above that which would [Page 527] have been expected, if the Administration’s bill had passed Congress unamended.
The key though to getting a bill out of Congress that does not raise the issue of treaty violation is to continue to educate the staffs and members of the House about the treaty provisions—and not to make the $870.7M become $830M by some budgetary magic. There is a new slant that can be put on our $870.7M figure that may put it in better light and thus help us to “sell” the Canal implementing bill. A useful way to look at costs in this case would be to compare total Canal associated costs to the United States with and without a treaty over the period FY 1979–2000. If an adjustment for decreased DOD activities (say 3% annually) can be assumed in the 1990–2000 period with a treaty, instead of a steady DOD activity level without a treaty, a net cost of the treaty of about $320M can be demonstrated.
While this is not exactly what the three Secretaries meant by their $350M appropriations estimate last year, it at least puts the $870.7M sum in better perspective. The danger is that the net cost of $320M may get mixed up with last year’s $350M appropriations estimate and this year’s $870.7M appropriations request causing additional confusion in the interagency arena and on the hill.
At this time it appears that it is going to be difficult to arrive at a cost strategy acceptable to Defense, State and OMB, and it is likely that the President will have to resolve the issue. I will stay abreast of the situation for you.7
- Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 60, Panama: 4/78–5/79. No classification marking. Sent for information through Albright. A copy was sent to Pastor. Aaron initialed the memorandum.↩
- See Document 144.↩
- Not found.↩
- Not found.↩
- Tab A, entitled, “Net Additional Cost Requirements to the U.S. Government, Payable from the General Fund of the Treasury through the Life of the Treaty,” is attached but not printed.↩
- See Document 215.↩
- Brzezinski highlighted this paragraph and wrote beneath it: “Action? Next steps? Short report to the P? Or OMB report?”↩