Taxpayers will foot big share of post-Irene flooding costs

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Even if you don’t live in the Northeast, Hurricane Irene is going to cost you.

The storm left behind a swath of destruction that will prove extremely expensive, with early estimates pegging the damage between $2 billion and $7 billion. And taxpayers will be left footing much of the rebuilding bill.

Blame a lack of flood insurance coverage in the Northeast, and a flawed federal insurance program that’s billions of dollars in debt.

Vermont illustrates the first problem. The state faces some of the worst flooding in its history and -– according to one analysis of 2010 flood insurance data –- could have a scant 3,600 federal flood insurance policies. That means people looking to rebuild will rely on payouts from the Federal Emergency Management Agency and subsidized loans from the Small Business Administration.

But those loans and payouts are unlikely to cover the cost of reconstruction, experts said.

‘The bottom line is, taxpayers are going to be left holding the bag due to the number of folks in the Eastern Seaboard that did not have flood insurance for this catastrophic event,’ said Mike Chaney, an insurance commissioner for Mississippi who has called for reforms to the troubled National Flood Insurance Program.

Even for the states along Irene’s path, such as New York and New Jersey, that bear hundreds of thousands of policies, the damages paid out from the National Flood Insurance Program’s coffers in the coming months may still ultimately come from taxpayers’ pockets in the form of a bailout, experts said.

‘Many people will be paid through the NFIP, which is already bankrupt, so I think that will hurt the [program’s] deficit,’ said Erwann Michel-Kerjan, a managing director at the Wharton Risk Management and Decision Processes Center who has extensively studied the flood program. He added, ‘People will get money, and they will get the money very quickly.’

The National Flood Insurance Program is the largest flood insurance provider in the nation, with $1.2 trillion in covered property. The program began in 1968 as a way to provide flood insurance where none privately existed and to shield taxpayers from paying for policy owners in flood-prone areas. After all, the latter group’s insurance premiums, in the long run, should theoretically pay for themselves.

But today, analysts say the program is more than $17 billion in debt, is plagued by management problems and -- as with healthcare, some experts argue -- doesn’t cover enough people.

Borrowing to cover payouts

If the program borrows from the Treasury to cover payouts for Hurricane Irene, it deepens the program’s need for some kind of bailout, meaning U.S. taxpayers will bear a greater brunt of the hurricane’s damage on the Eastern Seaboard than they would have if the program wasn’t underwater, so to speak.

The flood program is also due to expire at the end of September, and insurance and real-estate lobbyists told the Wall Street Journal on Monday that a long-term congressional extension and significant reform of the program seem unlikely. That would mean continued taxpayer exposure to disasters such as Hurricane Irene and another failure to fully address a system that experts agree has been broken since hurricanes plunged the program into debt in 2005.

‘It’s time for all of us as a country to get together and ask ourselves, do we expect people to be more responsible for their actions?’ Michel-Kerjan said. ‘Do we expect people to pay for people living in disaster areas?’

The storm’s devastation has already stoked the ongoing debate about the government’s role in providing financial assistance after disasters, which has often been a given, even in a tough economic climate.

In a way, the coming federal response to the hurricane will act like an impromptu economic stimulus. An army of insurance agents, federal relief employees and construction workers soon will descend on the Eastern Seaboard and set about putting it back together, just as they’ve done for disasters all over the United States in recent years.

Part of the recovery effort includes injecting federal relief funds into impacted areas, and if history is a guide, having a federal flood insurance plan will likely be a blessing for policy owners in Irene’s path. A year after Hurricane Katrina, the program’s biggest natural disaster, 95% of 162,000 flood claims had been settled, according to a 2006 U.S. Government Accountability Office study.

But when it came to the program’s solvency, that particular blessing was its biggest curse. Katrina, along with the other hurricanes in 2005, plunged the program into debt that required $19.3 billion in loans from the U.S. Treasury between 2005 and 2008.

‘Because of structural weaknesses in the way the program is funded and operated, NFIP is unlikely to be able to repay this debt in the near future, if ever,’ the GAO wrote the Senate Committee on Banking, Housing and Urban Affairs on June 9.

For those reasons, the NFIP has been on the GAO’s ‘high-risk list’ since 2006.

What it means to be ‘high-risk’

‘This huge debt is going to have to be forgiven to keep the program going,’ said Carolyn Kousky, a fellow at Resources for the Future, a nonprofit think tank, adding that a lot of the major changes needed to reform the program will require congressional approval.

The GAO said the flood program relies on ‘an ineffective and inefficient’ 30-year-old policy-and-claims system, having recently ditched a $40-million overhaul that failed to live up to expectations. The program also has weak oversight of its contractors, according to a June report, and many have criticized its inability to prevent repeat flood victims from taking multiple claims.

In recent years, Congress was unable to reauthorize the flood program before its authority periodically ran out, a situation that officials told the GAO was partially to blame for the program’s largest private partner walking out on administering 840,000 policies.

‘Congress and the Senate have done a very poor job of renewing the NFIP,’ said Mississippi’s Chaney, who earlier this month requested that Congress extend the program for five years with a few reforms to provide stability for the housing market in flood-impacted areas.

Hurricane Irene’s pressure on the program also underscores a more menacing problem facing the United States in the years to come.

More and more Americans live in hurricane-prone areas such as Florida, and experts say that climate change may result in more extreme weather phenomena that could make expensive, once-in-a-generation events -- like a hurricane threatening New York City -- more common.

Combined with the increased value of property in disaster-prone areas, disaster insurance, such as that offered by the NFIP, may become more of a necessity than it once was; it’s already more important than when the program began.

‘The same hurricane will have much more impact today or elsewhere than it would have 50 or 60 years ago,’ said Wharton’s Michel-Kerjan. ‘I think it’s time for America to wake up, because we are at war with ourselves. We want to live on the coast, and we’re going to have to pay for it when the big one hits.’

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-- Matt Pearce