Sunk costs: THe high prices of superstorms
Just as New York City planners had data showing that a superstorm could devastate the city, the federal government has plenty of data on the climate cliff—the looming budgetary catastrophe from emergency spending. In January, the National Climate Assessment and Development Advisory Committee released a draft of its latest report, warning of the "high vulnerability of coasts to climate change." The report optimistically added that "proactively managing the risks will reduce costs over time." But with congressional Republicans actively derisive of climate science, the odds of that are not great.
The closest thing to a federal effort to mitigate climate risk may be the 25-year-old FEMA grant program that pays for the house raisings in Virginia. But most of the money is designed to kick in after a disaster, to prevent recurrence—and it doesn't take into account whether houses in the floodplain are viable in the long term. Still, it's more proactive than the lion's share of FEMA's post-disaster spending, which allows people to rebuild in high-risk areas as if a storm or flood will never happen again.
I visited Rep. Earl Blumenauer (D-Ore.) in his office the day after the $60 billion Sandy relief package passed the House, nearly three months after the storm. He wasn't happy with it. "What Sandy illustrated is both the increasing vulnerability—and the costs and consequences," he told me. "But we really didn't condition the recovery on making sure that we minimize people going back in harm's way."
A slight, bookish lawmaker whose lapel often sports a bright plastic bike pin, Blumenauer has been Congress' loudest critic of disaster policy. Even the Sandy package, he notes, had no incentives to consider climate change as part of rebuilding plans. If Blumenauer had his way, the federal government wouldn't rebuild any of its facilities in the floodplain—no post offices, no office buildings. Counties that get disaster relief would be required to enforce better building and zoning codes. And the feds wouldn't pay to keep rebuilding homes exactly as they were before a storm.
"In the aftermath of a disaster, the instinct is to reach out to people, to try to help them," he adds. "And so many people, their first instinct is to just go right back. It is devastating to look at all the things we do that keep people anchored in very dangerous places."
True, he says, it's hard to challenge people's yearning to rebuild. But at some point, lawmakers need to start thinking about the next cataclysm. "Before the next big wildfire, before part of the coast washes away, before the predictable unpredictable storm hits, what are the principles we're going to have?" Blumenauer asks. "What is going to be the condition of federal assistance?" With that in mind, he has been trying to expand mitigation programs for years, with limited success. Under the 1988 Stafford Act, 15 percent of the emergency relief funding Congress allocates to FEMA must be used for mitigation, but that money is only allocated after disaster strikes.
I asked Blumenauer if it's even practical, in the long run, to raise or relocate all of the homes that need it. "It's expensive," he says, "but it's a fraction of what we're routinely spending."
Why, then, do we keep spending more? One reason is that most disaster spending doesn't actually show up in the federal budget; it's treated as "emergency spending," which isn't included in regular appropriations. So while fiscal hawks in Congress leave disaster preparedness programs chronically underfunded, disaster relief is treated as a budget freebie. The obsession with deficit reduction—codified in the 2011 Budget Control Act, which capped federal spending as part of the debt ceiling debate—has reinforced that trend. "You lowball it so you can spend the money elsewhere, but then you come in with the disaster supplemental, which is free money," Blumenauer says. Congress has had to pencil in extra funding for FEMA's Disaster Relief Fund in 8 of the last 10 years, after the appropriated amount fell short of the actual need. And it keeps happening; the Obama administration's proposed 2013 budget, for example, shaved 3 percent—$1 billion—off the Disaster Relief Fund.
Chronically underfunding disaster spending is shortsighted in the extreme, says Blumenauer. "We're just cannibalizing programs," he says. "We save arguably $5 for each dollar we invest."
Just as disaster relief funding ignores the fact that today's disasters are tomorrow's normal, the NFIP is virtually designed to ignore dramatic changes in weather and flood patterns. Created in 1968, it was made to help people in the most flood-prone areas acquire insurance—policies that private insurers were not willing to underwrite. In 1973, flood insurance was made mandatory for anyone who had a federally backed mortgage in an area considered at risk for a 100-year flood; those already living in those areas were grandfathered in at heavily subsidized rates. Today, the Property Casualty Insurers Association of America estimates that homeowners covered by federal flood insurance pay just half of the "true-risk cost" to insure their properties. In the highest-risk areas, they pay just a third.
No surprise, then, that the federal insurance program is now $25 billion in the hole. In the Sandy supplemental spending bill, Congress upped the program's borrowing authority by $9.7 billion, to $30.4 billion, to meet new claims—money that is unlikely ever to be paid back. And because the subsidy is so great, there's no incentive for private insurers to enter the market, says Frank Nutter, president of the trade group Reinsurance Association of America. "If you had a program that is fiscally sound, you'd probably find more insurance companies willing to write the risk," he says. "They wouldn't be competing with a government program that is underpricing the risk."
The other problem with subsidized insurance is that it encourages people to build—and stay—in high-risk areas, since they'll be bailed out even if they incur disaster after disaster. It's what economists call a moral hazard, a circumstance that encourages people to engage in risky behavior because the costs are borne by others.
"In many cases," says water consultant Conrad, "we've removed the most important element in our marketplace that forces the responsibility on the decision maker him- or herself." Conrad has been documenting the flood insurance program's problems since 1992. In 1998 he found that "repetitive loss" properties—those that had more than $1,000 worth of damages from a storm two or more times in a 10-year period—made up 2 percent of insured properties but were responsible for 40 percent of what the program was paying out. For 1 in 10 of those properties, the program had paid claims that totaled more than the house's market value. (In response, in 1999 Blumenauer introduced the "Two Floods and You're Out of the Taxpayers' Pocket Act," which never made it out of committee.)
The NFIP has long been a sore spot for both environmentalists and small-government conservatives. "It has been a very long-term subsidy for development in places where we simply shouldn't be developing at all," says Eli Lehrer, president of R Street, a libertarian think tank based in Washington. "There are areas that we've developed that probably shouldn't have been developed in the first place, and wouldn't have been if we had private insurance, or even actuarial rates in a public program." But reform has been tough—because every attempt at change meets firm opposition from politicians representing flood-prone districts, and from local governments that rely on coastal properties for property taxes and economic development. "Every time they'd try to raise the rate, there would be a roar from up on Capitol Hill," says Conrad.
In 2004, Blumenauer did push through a major overhaul of the insurance program, including incentives to raise or buy out houses that had been damaged multiple times. But it took hurricanes Rita and Katrina, and a more deficit-minded Congress, to pass another flood insurance reform bill last year that finally limited subsidies for second homes and for properties that were damaged repeatedly.
Under that 2012 reform, such homes will see premiums rise dramatically over the next five years, eventually bringing 400,000 of the most heavily subsidized properties up to market rates. The new law also lets FEMA buy homes that are considered "severe repetitive losses" at their full pre-disaster price, rather than the 75 percent it offered before.
But perhaps the most significant change in the reform involved maps—specifically, FEMA's floodplain maps, which determine who must buy flood insurance. Those maps can now for the first time include "future changes in sea levels, precipitation, and intensity of hurricanes." But there's a catch: Those changes don't affect the new flood maps FEMA is currently releasing, the first in 30 years. Floodplain maps issued for New York City and coastal New Jersey in late 2012 and early 2013, for example, don't account for sea level rise. Maps for the rest of the country are rolling out slowly, and it's unclear when they will start including sea level projections.
Back during the Bush administration, in 2007, FEMA began a major assessment of how climate change would affect the flood insurance program, with a projected completion date of 2010. When FEMA finally released the report in June 2013, it included a number of alarming findings. Rising seas and severe weather are expected to increase the area of the United States at risk of floods by up to 45 percent by 2100, doubling the number of people insured by an already insolvent program.