Yes by law Israel must spend the bulk of the aid they get from America in America. But its a slight of hand. This frees up money that Israel does not have to spend on weapons to spent on things like Illegal settlements in the West Bank and to pay the salary of some bureaucrat that will deny some palestinian in East Jerusalem a building permit.
PLO official: Reports about Abbas' resignation from political life very premature (Haaretz)
from the article: Indyk: If Israel manages alone, it can decide alone