CQ WEEKLY – IN FOCUS
Nov. 3, 2012 – 1:33 p.m.
After Sandy: Reassessing the Nation’s Flood Fund
By Jennifer Scholtes, CQ Staff
Until a week ago, it looked as if Congress had acted in the nick of time this summer to save the government-run flood insurance program from busting through the $20.8 billion cap on how much it’s allowed to borrow from the Treasury Department.
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After a few years of relatively moderate flood damage, the National Flood Insurance Program was gradually digging out of the nearly $18 billion hole created by claims payouts after Hurricane Katrina mangled the Gulf Coast in 2005. And budget experts estimated that higher premium rates and new flood mapping set to be phased in through the legislation enacted in July would pay down about $4 billion over the next decade.
The numbers showed the insurance program being able to bump along barely below its borrowing cap, continuing slowly toward solvency because of the new law — as long as there wasn’t another major flooding disaster.
And then came Sandy.
The hurricane-turned-superstorm that pounded the Eastern Seaboard with record rainfall and devastating winds last week could end up resulting in, as Homeland Security Secretary
“This obviously has been one of the largest and most serious storms ever to affect the United States, with very broad and significant impacts,” Napolitano told reporters after federal officials began assessing the damage.
With entire towns and neighborhoods in New Jersey and New York under water, disaster modeling agencies say it’s too soon to accurately determine how much the flood insurance fund will owe in claims and payments to the homes and businesses that are covered. But with predictions ranging from $7 billion to as much as $20 billion, it’s likely the program won’t have enough to cover the tab.
Of course, none of this does much for those without flood insurance. Experts say the storm’s historic surge means that many more flood victims than usual live beyond the Federal Emergency Management Agency’s 100-year flood zones. Those not covered by insurance can apply for disaster assistance, which sometimes needs to be repaid.
Initial Estimates
FEMA, which runs the flood fund, says the program can pay out about $4 billion right now, including roughly $920 million on hand from premium payments. FEMA Administrator Craig Fugate explained last week that the agency is doing remote sensing to find areas with severe flooding and then applying map overlays to determine which properties are covered under the insurance program.
If the damage tops $4 billion, the agency will have to ask Congress to approve a higher borrowing limit. FEMA did this in 2005, for an increase from $3.5 billion to $18.5 billion following Katrina, and again in 2006 to reach the current limit.
Louisiana Republican Sen.
After Sandy: Reassessing the Nation’s Flood Fund
“If we had passed this, quite frankly, four or five years ago, when we started having the need for a complete reauthorization — rather than these short-term approaches without significant reforms built in — we’d have a lot more money in the system,” Vitter says. “We’d be in a much better position to deal with Sandy.”
The law, signed in July, reauthorized the flood program for five years, after Congress had let its authority lapse more than a dozen times in between short-term extensions over the last half-decade.
Now, the program will boost premiums in phases over five years on properties with the highest risk of flooding, which were previously billed at well below what it costs to insure them. Premiums can be increased more quickly and, once FEMA updates its flood maps, more properties are likely to be required to buy coverage.
Although the overhaul came later than he wanted, Vitter says the changes could still be beneficial in the short term, even if the fund’s debt ends up spilling over its borrowing limit.
If the fund does need more money, he says, lawmakers will likely be more willing to sign off on additional borrowing authority knowing the program’s structure has been tweaked to pay down that debt.
“I think it should be some solace and some reassurance to lawmakers because this sort of long-term reform bill will much more effectively deal with those cost issues over time,” Vitter says. “If increased borrowing authority is necessary, there would have been increased hesitation about that without reforms being in place.”
Vitter and other lawmakers involved in the flood insurance issue say they’re not going to assume, however, that FEMA will come asking for more money, until there is data to show the fund is going to be maxed out.
“We don’t know if this is going to be a live issue,” Vitter says. “And since we’ve been out of session, I’ve had zero conversations with other members who have been involved.”
It will probably take a few weeks to get an accurate idea of how much the flooding from Sandy will cost the federal insurance program, says Chris Hackett, a director with the Property Casualty Insurers Association of America. And if that figure nudges the fund above its borrowing ceiling, he adds, there could be a push for Congress to consider further adjustments to the program’s structure.
“They’re trying their best to pay down the debt, but obviously with an incident like Sandy, it may add to the debt in a year like 2012,” Hackett says. “Larger incidents like this will highlight the need to further shore up financial stability of the NFIP.”
One previous point of disagreement that could pop back up now is whether or not to simply forgive the program’s debt. Senators favored that approach because the fund has to pay loan interest totaling as much as $800 million annually, but House negotiators were opposed and ultimately prevailed.
Residual Risk
Another way authors of the overhaul law wanted to replenish the fund was by requiring insurance coverage for all properties in areas prone to major flooding, even those protected by levees or dams. Those “residual risk” provisions were yanked at the last minute, however, after Arkansas Democratic Sen.
After Sandy: Reassessing the Nation’s Flood Fund
“There’s no doubt at all,” Pryor said on the Senate floor this summer, “that these folks who live behind levees are in a better position than folks that aren’t behind levees, and the flood insurance program should recognize that fact.”
Pryor acknowledged that some flood control structures in the United States aren’t up to par with standards set by the Army Corps of Engineers and that Congress might want to mandate insurance for affected properties.
Just such an uncertified system was tested in New Jersey during Sandy. Levees and berms were unable to hold back the storm surge in several towns about 15 miles north of Newark, filling streets knee-high and flooding thousands of homes.
“The efforts of Sen. Pryor and Sen. Hoeven really will have done a disservice to a lot of people in New Jersey and other places around the country” because they were not covered for flood damage, says Steve Ellis, vice president of Taxpayers for Common Sense. “This is exactly what we were afraid of.”
Besides prompting legislators to reconsider requiring insurance for vulnerable properties near flood control structures, Sandy should make them consider further raising premiums on vacation and second homes, Ellis suggests.
“The half-life of a disaster and disaster memory is quite brief, so hopefully we can try to make some improvements and not wait for five years from now,” he says.
But since many of the provisions enacted to revamp the flood program will be phased in over the next few years, legislators are unlikely to seek major changes until Congress can examine how the new requirements play out, says Zachary Cikanek, spokesman for Illinois Republican Rep.
“We will be watching how FEMA responds to this crisis,” Cikanek says, “and what sort of stress the NFIP comes under financially as a result of the storm.”
If congressional interest in FEMA’s handling of claims payouts after previous storms is any indication, agency officials can expect legislators to be both impatient and critical of the way the fund doles out cash this time around. After Katrina, lawmakers pushed the agency to quickly process claims, complained when letting up on verification controls resulted in some payments going to ineligible recipients and then chided FEMA for trying to get that money back.
Chad Berginnis, associate director of the Association of State Floodplain Managers, remembers watching lawmakers question the former administrator of the flood insurance program, David Maurstad, during a hearing after Katrina.
“He was just pummeled because of the speed of getting payments out, but also pummeled because of the errors,” Berginnis says. “It’s always a tough balancing act because, as we’ve seen in previous events, citizens and politicians start hammering FEMA if the money isn’t there in a certain expected timeframe.”
FOR FURTHER READING: Flood insurance overhaul (PL 112-141), CQ Weekly, p. 1388. The 2005 borrowing authority increase is PL 109-106, and the 2006 increase is PL 109-208.