Congress had good intentions when it passed legislation in July 2012 to reduce federal liabilities for subsidized flood insurance. The Biggert-Waters Flood Insurance Reform Act, passed by a 373-52 vote, was aimed at shrinking the $20 billion in debt the federal government assumed after Hurricane Katrina devastated New Orleans in 2005. That debt increased later in 2012 when Hurricane Sandy smashed into the Northeast.
There’s little doubt the flood insurance program, created in 1968, is outdated and in need of reform. Subsidized insurance has encouraged developers and property owners to build in the wrong places, and it has done little to encourage them to elevate houses and take other measures to limit damage from floods and hurricanes.
Yet it’s also become clear that Biggert-Waters, which Congress passed with little attention to detail, moves too quickly in reducing federal liability and transferring it to individual property owners. With the law taking effect Oct. 1, homeowners across the country have become alarmed by dramatically higher premiums and uncertainty about which areas will be affected.
U.S. Rep. Maxine Waters, a Los Angeles Democrat who co-authored the law with Rep. Judy Biggert – a Republican from Illinois no longer in Congress – released a statement saying she is “outraged by the increased costs of flood insurance premiums that have resulted from the Biggert-Waters Act.” Mississippi has sued the federal government. U.S. Rep. John Garamendi, a former California insurance commissioner, said “the new flood insurance rates demanded by FEMA are absolutely unaffordable.’
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Although there is a fair amount of confusion of which property owners would be subject to the higher rates, there is no doubt that hundreds of thousands of policyholders could face steep hikes if they were forced to quickly pay full-risk actuarial rates.
On his website, Garamendi has a chart, prepared by the Dewberry firm, showing the impact of higher premium on houses in different locales. A $200,000 house 1 foot below the “base flood elevation” could see insurance rates rise from $2,235 to $5,623 yearly. The same house 10 feet below base flood elevation could see rates rise from $2,235 to $25,000 or more annually.
Garamendi and some others in the House are co-sponsoring HR 2199, the Flood Insurance Implementation Reform Act of 2013, which would delay the rate hike. That may be a needed move, but it hardly resolves the question of how to reduce federal liabilities over the long term.
The Association of State Floodplain Managers last week released a set of nine principles aimed at improving flood insurance affordability, without a delay in the phase-in of rates. Congress should give these ideas full consideration.
Indeed, some actually think that Congress was too timid in 2012, even with its aggressive schedule of moving floodplain dwellers to full-risk actuarial rates.
In a Nov. 28 op-ed in The New York Times, Judith Kildow and Jason Scorse urged Congress to “end federal flood insurance,” arguing that overbuilding, climate change and ever-rising subsidies has created $527 billion in vulnerable assets nationwide for which federal taxpayers should not be on the hook. “Homeowners and business should be responsible for purchasing their own flood insurance on the private market,” wrote the two economists. “If they can’t, then the market is telling them that where they live is too dangerous.”
There are two problems with that argument. First, it assumes that markets are perfect and insurance companies make sound actuarial decisions. If that were the case, then insurers long ago would have jacked up rates for people who live in fire zones. Instead, such companies, increasing wary of global climate change, are just now starting to rethink the actuarial risks.
Secondly, it ignores the reality of urban development in the United States. Cities were formed along rivers and natural ports to expedite shipping and commerce. While we may wish they had been built on higher ground, historic cities such as St. Louis, New Orleans, New York and, yes, Sacramento, were built where they are and are now centers of regional economies. Would opponents of federal flood insurance advocate that such cities be abandoned and relocated?
Congress clearly has to balance national and local interests in putting the insurance program on a sounder financial footing.
In the meantime, residents of low-lying Sacramento and other parts of the Central Valley should prepare themselves. One way or another, insurance rates will rise higher. The question is how high, and how fast they will rise.