Commentary

Federal Flood Insurance Costs a Disaster

Uncle Sam is essentially broke. He has unfunded liabilities of over $200 trillion.

But the federal government keeps spending. The House recently joined the Senate in voting to suspend money-saving reforms adopted less than two years ago.

Congress should eliminate federally-subsidized flood insurance — entirely.”

In 1968 Congress created the National Flood Insurance Program, shifting the cost of disasters from people who chose to live in flood-prone areas to taxpayers who don’t. Over time, observed Eli Lehrer of the Competitive Enterprise Institute, Congress kept cutting premiums. By 1982, two-thirds of participants received a subsidy, which in turn “attracted people who took greater risks,” further increasing deficits.

NFIP turned into foolishness squared. The first cost is financial: The federal government keeps insurance premiums low for people who choose to build where they otherwise wouldn’t. The Congressional Research Service figured the government charges about one-third of the market rate for flood insurance.

The second cost is environmental: Washington essentially pays participants to build on environmentally fragile lands that tend to flood. Of course, encouraging risky behavior further inflates expenses.

The program’s overall liability is $1.3 trillion. Between 1978 and 2011 it paid more than $24 billion in flood claims. Today total debt is about $25 billion. Economists Judith Kildow and Jason Scorse warned that “the flood insurance program is a fiscal time bomb for the government.”

So disastrous were the program’s finances that even Congress felt the need to act. The Congressional Research Service pointed to several problems: Premiums covered just one-third of program costs, there were many “repetitive loss properties” with multiple claims, one-tenth of those homes had made claims that cumulatively exceeded the houses’ value, and one percent of properties accounted for one-third of total costs.

In July 2012 legislators approved the Biggert-Waters Flood Insurance Reform Act in an attempt to make the NFIP more accurate, efficient, and solvent. For different properties rates were increased and subsidies cut. Overall, the legislation was expected to save about $25 billion.

The amendment worked — apparently too well. Insurance bills began increasing. Only 8 percent of the policyholders faced immediate rate hikes, but that still meant a lot people used to living well at taxpayer expense complained to their legislators.

Reform co-sponsor Rep. Maxine Waters, D-Los Angeles, led the push to delay the reforms until 2018.

Explained Waters: “Never in our wildest dreams did we think the premium increases would be what they appear to be today.” Her legislation, backed by a mix of Republicans and Democrats, would bar increases in premiums and reductions in subsidies for some properties, restore earlier subsidies for others, and mandate an “affordability study.”

Said Waters: “Neither Democrats nor Republican envisioned it would reap the kind of harm and heartache that may result from this law.” She was echoed by Nicholas Pinter, a professor at Southern Illinois University, who advocated reforms but also “compassion for Americans living on flood-prone lands.”

Actually, those people need to be held responsible for their actions. Compassion should be accorded taxpayers, who have suffered for decades.

Shai Akabas of the Bipartisan Policy Center told the New York Times that the congressional reversal would “return the program to a state of insolvency.” Yet the Republican House leadership approved the House vote.

Even the White House, not known for penny-pinching, criticized Congress’ potential U-turn.

In fact, the 2012 measure didn’t go far enough. Congress should eliminate federally-subsidized flood insurance — entirely. There is no justification for turning Uncle Sam into a back-stop for wealthy vacationers and other privileged recipients of federal largesse.

Like Uncle Sam, NFIP is broke. It should be killed, not reformed. Legislators should start exhibiting compassion for American taxpayers.

Doug Bandow is a Senior Fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).