Budget Reform in Reverse: Congress Prepares to Hike Flood Insurance Subsidies

Like Uncle Sam, NFIP is broke. It should be killed, not reformed.
February 24, 2014 • Commentary
This article appeared on Forbes on February 24, 2014.

Uncle Sam is essentially broke. Washington has run $5 trillion in deficits over the last five years. It has unfunded liabilities of over $200 trillion.

But the federal government keeps spending. It just can’t help itself. When an interest group with letterhead and at least three members shows up on Capitol Hill, Congress reflexively starts tossing money. So it has been for people who build in flood plains. The House is voting this week on a measure already passed by the U.S. Senate to suspend money‐​saving reforms adopted less than two years ago.

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 didn’t. Five years later Capitol Hill made the purchase of flood insurance mandatory for people who lived in Special Flood Hazard Areas.

Over time, observed Eli Lehrer of the Competitive Enterprise Institute, there was “continued erosion of premiums intended to get more people into the program coupled with the program’s long term financial deterioration.” Congress regularly cut premiums. By 1982 two‐​thirds of participants received a subsidy, which in turn “attracted people who took greater risks,” further increasing deficits. Although private companies administered the program, Uncle Sam covered the risks.

NFIP turned into foolishness squared. The first cost is financial: the federal government wastes taxpayer funds to keep insurance premiums low for people who choose to build where they otherwise wouldn’t. The Congressional Research Service figured that 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. Explained CRS: “if property owners had to incur more of the cost of locating in flood‐​prone areas, they would make more efficient location decisions.”

Of course, encouraging risky behavior further inflates expenses. Explained Robert Moore of the Natural Resources Defense Council: “We’ve been subsidizing people to live in some of the riskiest parts of the country and that is one of the reasons the national flood insurance program is so deeply in debt.”

Uncle Sam also has a propensity to rebuild public buildings and infrastructure in flood zones. CRS suggested that this issue “may merit future congressional oversight” too since “Rebuilding of infrastructure like roads, bridges, and utilities in disaster‐​prone areas in the aftermath of Hurricane Sandy is expected to cost taxpayers tens of billions of dollars” but “experts have expressed concerns about taxpayer‐​financed rebuilding that duplicates the vulnerability that existed before Hurricane Sandy.” Unfortunately, added CRS, this possibility “is not always incorporated in risk management decision making at all levels of the government and in the private sector.” Government shouldn’t rebuild anything and everything just because it was flooded.

Although not every NFIP beneficiary is wealthy, CRS noted: “Some critics point out that the costs—financial risk and ecological damage—are widely distributed to taxpayers across the country and the benefits, by contrast are disproportionately enjoyed by wealthy counties and by owners of vacation homes.”

NFIP is responsible for 5.6 million policies. The program’s overall liability is $1.3 trillion, $527 billion of which involves coastal property. Between 1978 and 2011 NFIP paid more than $24 billion in flood claims. In eight of those years losses exceeded premiums, with 2005 the worst year, when Hurricane Katrina and Rita alone cost the program $22 billion. Then came Hurricane Sandy, which cost NFIP as much as $15 billion. Today total program 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.” A year ago legislators hiked the program’s borrowing authority from $20.7 billion to $30.4 billion.

This doesn’t mean no one should build in a flood plain. Risks vary dramatically as do the benefits of coastal and river‐​front living. People should be free to make choices—as long as they pay the cost of their decisions. Advocates of subsidies complain that market‐​pricing of insurance would push homeowners off of America’s coast. However, if it isn’t economical for people to insure their property against predictable losses, they should move. Why should the rest of us pay the tab instead?

So disastrous were the program’s finances that even Congress felt the need to act. The Congressional Research Service pointed to several problems: most people required to purchase insurance failed to do so, premiums covered just one‐​third of program costs, legislators under‐​funded the program, there were many “repetitive loss properties” with multiple claims, one‐​tenth of those homes had made claims which cumulatively exceeded the houses’ value, one percent of properties accounted for one‐​third of total costs, and the government’s flood insurance rate maps were inaccurate.

In July 2012 legislators approved the Biggert‐​Waters WAT -0.88% Flood Insurance Reform Act in an attempt to make the NFIP more accurate, efficient, and solvent. For pre‐​flood insurance rate map properties, rates were to increase 25 percent a year to reach the full cost. Subsidies for other lands also would be phased out. Uncle Sam would continue to underwrite people living in SFHAs, though the subsidies would lapse if they sold the property or other specified conditions occurred. Overall, the legislation was expected to save about $25 billion.

The amendment worked—too well. Insurance bills began increasing. Only eight 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. “It’s going to be a tremendous hardship” Hank Iori, president of a property association, told the New York Daily News. Interest groups which profit from property sales also raced to Capitol Hill: the National Association of Professional Insurance Agents, Independent Insurance Agents and Brokers of America, and American Bankers Association,

So now reform co‐​sponsor Rep. Maxine Waters (D‐​Ca.) is pushing to delay the reforms until 2018. Of course, in 2018 no one would be more willing to pay higher premiums, and undoubtedly policyholders would again lobby to win further relief from Congress.

Explained Waters: “Never in our wildest dreams did we think the premium increases would be what they appear to be today.” Her new 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 going into effect.” 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. Mississippi Commissioner of Insurance Mike Chaney said the NFIP should not make up its shortfall from homeowners who “simply followed the rules.” But if not them, who? After all, they received the benefits of the subsidized insurance.

At the end of January, the Senate approved the “Homeowner Flood Insurance Affordability Act” proposed by Robert Menendez (D-NJ) and Johnny Isakson (R-GA) to effectively kill the 2012 reform. “It will return the program to a state of insolvency,” Shai Akabas of the Bipartisan Policy Center told the New York Times, with the bill again sent to the taxpayers.

The Republican House leadership has approved a vote on a similar measure. Even the White House has criticized Congress’ potential U‐​turn; the president should veto any retreat on reform.

In fact, the 2012 measure didn’t go far enough. For instance, Lehrer proposed buying out some NFIP‐​insured property‐​owners, shifting the land to alternative, less vulnerable uses. Flood mapping could be diversified and privatized, program assets could be sold, and tax credits offered to help offset the cost of flood mitigation (e.g., protecting homes), purchase of more costly private insurance, and lost home value.

Similarly, Kildow and Scorse called on policymakers to “challenge the status quo and make some tough decisions, like providing subsidies or buyouts to encourage people to move out of the most disaster‐​prone areas, and eliminating other government incentives that support living in high risk areas.” Of course, the best way to do the latter would be to 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.

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