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Natural Hazards Mitigation and Insurance Hearing Summaries (8-4-00)


Legislative Hearing on H.R. 21, Homeowners' Insurance Availability Act
House Banking and Financial Institutions Committee
July 30, 1999

The Bottom Line
The Homeowners' Insurance Availability Act (H.R. 21) came before the House Banking and Financial Institutions Committee which passed nearly identical legislation last session.  The bill has support on both sides of the aisle, but is also strongly opposed by a number of Democrats and Republicans.  The majority of the insurance industry representatives who appeared before the committee at this hearing supported the proposal, but conflict still surrounds several components of the legislation including the triggers. Deputy Treasury Secretary Stuart Eizenstat testified in support of the bill's intent, but raised a series of concerns and offered a number of alternatives to the bill's current language.

Members Present
James Leach, chairman (R-IA) John LaFalce, ranking member (D-NY) 
Spencer Bachus (R-AL) Ken Bentsen (D-TX)
Richard Baker (R-LA) Michael Capuano (D-MA)
Doug Bereuter (R-NE) Charles Gonzalez (D-TX)
Merrill Cook (R-UT) Jay Inslee (D-WA)
Mark Green (R-WI) Paul Kanjorski (D-PA)
Rick Hill (R-MT) Jim Maloney (D-CT)
Sue Kelly (R-NY)  Dennis Moore (D-KS)
Rick Lazio (R-NY)  Jan Schakowsky (D-IL)
Bill McCollum (R-FL) Brad Sherman (D-CA) 
Edward Royce (R-CA) Bruce Vento (D-MN)
Paul Ryan (R-WI)
John Sweeney (R-NY)
Lee Terry (R-NE)
Dave Weldon (R-FL)

Opening Statements
Chairman James Leach (R-IA) noted in his short opening statement that H.R. 21 was introduced by Housing Subcommittee chairman Rick Lazio (R-NY) and committee vice-chair Bill McCollum (R-FL), and was co-sponsored by twenty members of the committee.  He said he hopes to bring legislation to the floor early in the fall, when Congress reconvenes.

The ranking Democratic member of the full committee, John LaFalce (D-NY), expressed concern in his opening statement over the high cost of insurance and reinsurance in high-risk markets.  He said "the federal government does have the capacity to spread the cost," which states do not have.  He also said he wants to reduce the cost of insurance, not just spread it around.  LaFalce noted that the state of New York does not have a state catastrophe fund.

Rep. Lazio expressed concern for citizens who cannot afford insurance because they live in high-risk areas.  He acknowledged concerns that federal insurance will encourage people to live in natural disaster prone areas, but said, "We cannot mandate where families live, and we cannot forcefully relocate families living in cities like Miami, New Orleans, Seattle, Los Angeles, St. Louis, Memphis, and New York City."  He concluded "we could wait to take action until Congress is forced to act in the wake of some future earthquake or hurricane, or we could proceed deliberately and calmly without the environment of crisis that would accompany a major catastrophe.  Mr. Chairman, one way is a responsible approach to public policy-making -- the other is not."

Rep. Bruce Vento (D-MN) urged his fellow committee members to be very careful in shaping this legislation.  He said the federal government can not "push mitigation."

Rep. Bill McCollum (R-FL) reminded the committee that last year a nearly identical bill was passed by the committee but reached the floor too late in the session to be voted upon.  "If we don't do something," he said, "there will be a huge loss to the American people....  Ultimately we need this legislation... before the once-in-one-hundred-year event occurs."

Rep. Brad Sherman (D-CA) said that "The current system is not completely broken down... but we are one earthquake away from a breakdown."  He cautioned that such a breakdown would be very expensive.

Rep. Spencer Bachus (R-AL) expressed concern that the proper balance between government involvement and the private sector be found.

Rep. Edward Royce (R-CA) told the committee that new reports say the capacity of private insurance to handle natural disasters is significantly higher than the report which H.R. 21 is based upon.  He said this legislation would only hinder the private sector.

Rep. Merrill Cook (R-UT) focused his remarks on the strong support which H.R. 21 has received, including that of 97 co-sponsors.

Rep. Paul Ryan (R-WI) spoke of concern for his own constituents during his statement.  "My biggest concern is that, under H.R. 21, my constituents in Wisconsin would be cross-subsidizing the residents of Florida or North Carolina or California, who chose to build their homes in areas of higher risk....  This already happens at the state level in disaster-prone states and is one of the greatest reasons for the shortage of affordable private insurance in these areas."  He concluded, "For every well intended manipulation of the private insurance market, there are many unintended consequences."  He argued for further "exploration of private industry solution."  If that is not successful, he would like to see state or regional programs considered, before the federal government becomes involved.  "At the very least," he said, "I would like to see H.R. 21 incorporate higher triggers."

Rep. Rick Hill (R-MT) urged that different triggers be used in different regions.  He also questioned whether a one-in-one-hundred-year event would be determined on a national or local scale.

Several members submitted their opening statements for the record without reading them during the hearing.  Rep. Ron Paul (R-TX) was among this group.  In his statement he announced that he and Rep. Hill will soon be introducing the Policyholder Disaster Protection Act of 1999.  Paul stated that H.R. 21 "goes in the wrong direction" because it "would spend some of the oft-touted budget 'surplus' and would fail to address underlying regulatory and tax policies that have limited the amount of coverage that can be offered and underwritten by natural disaster insurers in the private market."  He also stated that if this legislation passes, "when the next disaster hits, more people will be put in danger and the casualties will likely be higher."  In contrast, Paul stated his bill will "correct Federal tax policies that have ignored the nature of disasters as long-term risks."  More specifically he stated the bill "would encourage pre-event, tax-deferred catastrophe reserves for future disasters intended to give incentives to property-casualty insurers to increase their capability to manage catastrophic losses."  Paul added that this plan would not shift responsibility to tax-payers not living in high risk areas, and would lower premiums and increase the availability of insurance.  In conclusion, Paul said H.R. 21 "would only distort the market further and exacerbate the problems presented by natural disasters."

Panel I
Stuart Eizenstat, Deputy Secretary, U.S. Department of Treasury

Mr. Eizenstat told the committee during his testimony that the administration believes H.R. 21 is "a generally positive step forward."  He said the administration wants to develop a policy "prior to a catastrophic event [that] will not only serve the public interest better than one adopted in the immediate aftermath, but also enhance the ability of private insurance markets to cope with the threat of loss from such an event."  Eizenstat agreed with the bill's sponsors that the federal government "is uniquely capable of spreading risk across the population and over time."  He also noted that "the federal government would likely bear part of the cost associated with stabilizing distressed insurance markets in a truly cataclysmic event regardless of whether legislation" of this type is enacted.  He urged that federal involvement support, but not supplant private insurance markets and share, but not subsidize risk.

Although praising the intent of the bill, Eizenstat said the executive branch still has several concerns about key provisions of H.R. 21.  He told the committee that while "a hard limit on the potential draw on the Treasury is an essential component of fiscal prudence... a cap on annual insurance payouts may not be the best mechanism for limiting the Federal liability."  He testified:

To see why, consider what would happen if a covered event were to occur.  In the aftermath of such an event, people and communities in the affected area might be financially devastated, and the insurance industry might be under great financial stress.  It would be difficult for the Federal government to withhold payouts on claims under this program on the argument that such a payout might later need to be pro-rated against claims from another event.  If a second event were to occur within the same insurance year, it is entirely plausible that future Congresses and Administrations would make full payment on all claims stemming from the second event, notwithstanding the requirement to pro-rate.  The only alternative would be either to recall monies that were paid out pursuant to the first event, or impose the full burden of the annual cap on the victims of the second event.  Neither alternative seems realistic....  The Federal government and the American taxpayer should not be placed in this position.
Instead, Eizenstat proposed "limiting the amount of insurance to be sold, rather than the amount of payout."  He detailed how this would work and said it would "provide a realistic guarantee of fiscal control."  He added, "Under the approach we are proposing, the government would sell only a limited amount of insurance, but, having sold it, would make good on all of it."

Eizenstat also recommended amending the legislation so as not to depend on appropriations bills.    "We believe that all involved in this process intend that, if the program is established, the government should meet its financial obligations under the program, in full.  However, the requirement that payouts be subject to appropriation would cast a shadow over the certainty of full payout," he said.  Eizenstat argued that payments should be made from program reserves, and funds borrowed from the Treasury when necessary.

Eizenstat testified that like the pro-rating provision, the continued purchase requirement "could place the federal government in an extremely difficult position."  Instead, he said the administration favors offering multiple-year, as well as one-year, contracts if the treasury determines that "market conditions indicate that such contracts would be appropriate and desirable."

Finally, Eizenstat addressed the commission to advise the Secretary of Treasury that is described in the bill's language.  He said "Congress has wisely chosen to delegate to the Secretary the determination of annual adjustments to trigger levels, but did not explicitly give the Commission a role in advising the Secretary on this issue.  This strikes us as an issue where advice from the Commission would be welcome and constructive."

In conclusion, Eizenstat raised a number of minor technical concerns with the legislation including funding the start-up of the program.  He assured the committee of the administration's commitment to working further on this legislation.

In response to questions from committee chairman James Leach (R-IA), Eizenstat said it is likely there will be no net cost to taxpayers.  He also said "there is a market gap here... and it ought to be filled in the interim" before the private market takes over.  Leach promised to look carefully at Eizenstat's alternative proposals.

Rep. LaFalce said he did not see how Eizenstat's proposed alternative caps "will be any more effective at curbing congressional tendency to break caps."  Eizenstat attempted to explain his proposal further, but LaFalce was not convinced.

Rep. McCollum asked "Why do we need this [legislation]?"  He questioned whether Eizenstat's proposed caps would be marketable.  Eizenstat said there are, and that they would leave room for private insurance and create responsible deductibles.  He said annual adjustments could be made in case the private sector develops sooner than expected.

Rep. Vento asked if this proposed program would in any way affect flood insurance.  Eizenstat assured him it would not.  He said it applies to earthquakes, volcanoes and hurricanes.  He also said it would not affect state and local programs because it applies only to catastrophic events.

While questioning Eizenstat, Rep. Bereuter announced that he is pushing for reform of the national flood insurance program.  He clarified that the program proposed in H.R. 21 would not make state participation mandatory.  He expressed concern that a regional system has not been drawn and said he is "not willing to leave that up to the executive branch."

Rep. Dave Weldon (R-FL) asked if this proposal would encourage construction in high risk areas.  Eizenstat said the Federal Emergency Management Agency (FEMA) is working with local communities, in a pre-crisis situation, to prevent overbuilding.  He said mitigation is "terribly important" and that this proposal includes "sufficient incentives, including private pricing, to deter" growth in these areas.   The congressman said he supports the legislation and added "one has to consider the costs of doing nothing."

Rep. Paul Kanjorski (D-PA) remarked that committee Republicans seemed to be arguing for "more government," while Democrats were arguing that government should not be involved in the private sector.  He said the Republicans were being "hypocritical and inconsistent."  He asked Eizenstat why individual states do not fund such a program, especially since most states have balanced budgets and surpluses.  Eizenstat said the federal government should be involved only when the private market "fails to meet a need," as he perceives the situation to be in this case.  He said adjustable deductibles and caps would allow the federal role to diminish over time as the private sector developed.  Eizenstat argued that individual states' surpluses would be dwarfed by catastrophe, noting that the combined surpluses of 38 states total only $33 million and a catastrophe would likely only affect one or two states.  Furthermore, he said catastrophes that strike one region do have a national effect.  Kanjorski said he thinks the proposal is "premature" and "not well thought out."  He agreed with other representatives who said the private sector can handle this situation.

Rep. Hill stated he thinks regional rather than state auctioning should be used.  He said "if we want to have more affordable insurance available to customers, we ought to support the primary insurance markets."

Rep. Lazio reminded the committee that they passed this legislation last year by a vote of 33-12.  He also noted that in ten years it is predicted that seventy-five percent of the population will live within one hundred miles of the coastline.  He said a catastrophe would have "a terrible ripple effect" on the nation.  Eizenstat agreed that the impact of a catastrophe is felt by insurance markets all over the country, as well as on the federal government which provides emergency relief.  Lazio concluded, "We're going to produce a product, I suspect."

Panel II
Roger Joslin, Chairman of the Board, State Farm Fire and Casualty Co. Bloomington, Illinois
Ronald Hanna, Deputy Commissioner, Mississippi Insurance Department
Frank Nutter, President, Reinsurance Association of America
Don Beery, Vice President of Eustis Insurance Inc., New Orleans, Louisiana on behalf of The
    Independent Insurance Agents of America
Mary Fran Myers, Co-Director, Natural Hazards Research and Applications Information Center,
    University of Colorado
Travis Plunkett, Legislative Director, Consumer Federation of America on behalf of J. Robert
    Hunter, Director of Insurance, Consumer Federation of America
Jack Weber, President, Home Insurance Federation of America

Mr. Joslin testified that State Farm "strongly supports a federal role in providing a financial backstop in the event of very large natural catastrophes."  He said H.R. 21 is "a very sound approach to the natural disaster issue."  He said legislation should cover events less frequent than once in 100 years which would include events like Hurricanes Andrew and Iniki, and the Northridge, California earthquake.

Joslin detailed why the private insurance market cannot handle the situation, saying "theoretically, there is more than enough capacity (capital) in private markets to insure/reinsure the worst of natural disasters.  Reality, for a number of reasons, is otherwise."  He added that "events of this magnitude far exceed the claims paying capacity of most private insurers and all existing state funds."  Joslin added, "Except for a single isolated event, the insurance business in Florida has been profitable.  That single event [Hurricane Andrew] consumed more capital in half an hour than State Farm Fire and Casualty had accumulated countrywide in its 60 years of existence."  He argued that because a 100-year, or 10,000-year event could occur at any time, "no private enterprise can earn a competitive rate of return in the business of insurance sitting on this quantity of stagnant capital."

Joslin urged the committee to consider extending their plan to cover non-residential property.  Like Eizenstat he foresaw a problem with the $25 billion limit on yearly payouts.  He suggested a per event, rather than per year, limitation.

Mr. Hanna described for the committee how difficulties in securing reinsurance for primary carriers have made insurance inaccessible to Mississippi residents.  He said "while there may be some technical issues with H.R. 21 that need to be resolved, the basis for the legislation is sound and we encourage the committee to move forward with enactment."  He cautioned that "We cannot afford another series of insurer insolvencies similar to those which occurred in Florida after Hurricane Andrew... that placed eleven insurers in rehabilitation and/or liquidation."

Mr. Nutter testified on behalf of the Reinsurance Association of America (RAA) which he said "believes that H.R. 21 is a sound foundation for addressing a federal role in financing natural catastrophe losses."  However, he said the committee should "fully consider the capacity of both the primary and reinsurance marketplace to bear catastrophic risk."  He proposed that higher triggers be set.  Nutter said, "The RAA believes that such a change will help ensure that the private marketplace is not unnecessarily infringed upon and that the federal Treasury is not at risk by assuming too much of the cost of financing these disasters."  He went on to explain that he believes reinsurance is abundant and affordable, but added that "the threat of a mega-catastrophe that exceeds the resources of the insurance and reinsurance markets" remains.

Mr. Beery, an insurance agent for more than thirty years, told the committee of the difficulties experienced by Louisiana residents trying to get insurance and reinsurance.  "Most of the companies we [the Independent Insurance Agents of Louisiana] represent have placed severe restrictions on the number of new policies that we can place with them," he said.  "Many insurers will only allow us to write one or two new policies a month.  Some will only allow us to write three or four new policies a year!  Several insurers will not write any policies for homes valued at more than $100,000.  Others will not write any policies on homes worth less than $400,000.  Many of our customers are caught in between."  Beery urged passage of H.R. 21 and said "I don't pretend to understand the actuarial pricing for a 100-year hurricane.  What I do know is that a federal program would allow for a more stable homeowners insurance marketplace."  While some witnesses raised concern over the triggers of H.R. 21, Beery said the bill's approach "is correct, because it bases the trigger is not on a fixed dollar amount which applies to all states regardless of size, but on each states' or regions' 1-in-100-year event threshold.  It is the most equitable approach, and the least likely to discriminate against a particular state or region, either large or small.

Ms. Myers testified that "losses from natural disasters are continuing to rise because our hazard reduction programs have been too narrowly focused on simple 'loss reduction.'"  She cited a recent study by the Natural Hazards Reduction and Applications Information Center which found that "current loss reduction and mitigation programs are short-sighted and too reliant on technology."  She argued that analysis of mitigation programs must be completed.  She pointed out that the National Flood Insurance Program, "arguably the nation's largest mitigation program, has been in operation for 31 years, yet its effectiveness has never been thoroughly appraised."  She also called for a "holistic government framework" saying that, "To facilitate sustainable hazard mitigation, all policies and programs, especially at the federal level, should be integrated and consistent."  Although Myers did not comment on the proposed legislation she did say that "To establish a new national policy that affects hazard mitigation without considering its impacts on our complex society, and  the broad range of other mitigation strategies, simply continues the band-aid approach to dealing with disaster problems this country has traditionally pursued."

Mr. Plunkett testified that "no bill may be necessary at this time."  He argued that H.R. 21 will only affect large companies like State Farm and All State, but said "they don't really need it either."  He argued that insurance and reinsurance is already being well handled by the private sector.  Instead of H.R. 21, Plunkett said Congress should be developing a national verification of building code enforcement and other disaster mitigation plans.

Mr. Weber appeared before the committee in support of H.R. 21.  In his testimony he focused on "how H.R. 21 will complement and encourage further growth of private insurance markets."  He stated, "The bill is not a substitute for private coverage.  It does not eliminate risk.  Ninety-nine percent of all earthquakes, hurricanes and other natural perils are not even covered by the program.  What the bill does, however, is provide a means for managing the 1% of exposures which present an unacceptably high risk that no insurance company or state enterprise can bear alone."  Weber said the bill contains provisions "which assure that federal reinsurance will not compete with the private market's current offerings or inhibit the private market's future growth."

Weber noted that some people have argued that federal reinsurance triggers should be raised from a 100-year event, to a 250-year event.  "We are flabbergasted by the concept," Weber stated.  "Raising the triggers to a 250-year threshold is tantamount to no program at all, which is precisely why it is being promoted by the bill's opponents."

Weber criticized the committee for reducing the level of reinsurance to 50% of eligible losses, a move made during consideration of an identical bill during the last session.  "This means that for events which are well beyond the limits of private reinsurance, the program still offers only half the solution," he said.  "In large events, private insurance markets will collapse, state programs will fail and many homeowners will not be fully compensated for their losses."

During the question and answer phase of the hearing, Joslin told the committee that his company did not have sufficient capital to cover their losses caused by Hurricane Andrew or the Northridge Earthquake.  In response to questions from Rep. Royce, Nutter said he supports raising the caps from 100-year events, to 250-year events.  Weber and Joslin both told Rep. Hill that they expect to write more insurance in high risk areas if H.R. 21 is enacted.  Joslin said that he expected other companies would also "come in and make it more competitive, which is good."  Chairman Leach remarked "I know of no bill that has more pros and cons than this one."

Panel III
Robert Pike, Executive Vice-President, Administration, Allstate Insurance Company
Darryl Hansen, Chairman, President and CEO, Guide One Insurance Group, West Des Moines,
    Iowa, on behalf of The National Association of Independent Insurers
Tom Miller, Director of Economic Policy Studies, Competitive Enterprise Institute
Barbara Connery, Member of the North Carolina Association of Realtors on behalf of the National
    Association of Realtors
Scott Gilliam, Assistant Secretary, Director of Government Relations, The Cincinnati Insurance
    Companies

Mr. Pike told the committee in his testimony that catastrophe insurance and reinsurance is not accessible to the insurance industry.  "We cannot buy enough," he said.  He testified that what insurance is available is too expensive to pass on to the consumer.  Pike pointed out to the committee that insurance in unavailable after "five years of the best of times" with a good economy and no outstanding catastrophes.  He said federal reinsurance will be all the more important "in the worst of times."

Mr. Hansen described himself to the committee as a President and CEO of a "small-to-medium size insurance company."  He told the representatives that "smaller companies may bear greater consequences than larger companies do when cats [catastrophes] occur."  Hansen said companies like State Farm, which insures approximately one out of every four homes across the nation, "can leverage its business in geographic areas with little or no cat exposures and spread the risk for those states with greater cat risks."

Hansen warned that in a "truly major" post-catastrophe environment, reinsurance coverage may not be available or affordable.  He also cautioned members that insurers may raise premiums, offering less protection to customers, or even begin withdrawing from high risk areas.  He concluded that "H.R. 21 can play a role in blunting or minimizing the worst potentials caused by cat losses."  He added, "This is not an insurance industry problem-- it is a national economic issue with far-reaching ramifications."

Mr. Miller represented a non-profit policy organization, "dedicated to the principles of free enterprise and limited government", at the hearing.  He said his organization believes H.R. 21 "has the potential to undermine private insurance markets and crowd out the development of better alternatives."  He said it is "likely to produce cross-subsidies from low-risk insurance policyholders to high-risk ones, distort incentives for loss control and loss mitigation, further subsidize development in catastrophe-prone areas, increase unnecessary federal intervention in state regulation of insurance, and impose significant financial risk on taxpayers throughout the country."  Miller argued that since Hurricane Andrew and the Northridge earthquake, the private insurance industry has grown and reinsurance has become increasingly available.  He cited preliminary research findings which supported that opinion.  He made a number of suggestions to the committee including revising tax rules.

Ms. Connery testified that H.R. 21 will benefit the real estate industry because homeowners' insurance is required to secure a mortgage and buy or sell a home, directly affecting the cost of owning or renting a home.  She added, "when a young family is precluded from owning a home because homeowners' insurance is too difficult to obtain or too costly to afford, we all suffer the consequences."

Mr. Gilliam told the committee the insurance agencies he represents "do not disagree that there may be a need for high-level federal involvement in excess of private market capacity," but they do not support H.R. 21.  Gilliam said the "government's role should be to address insurer solvency in the event of a mega-catastrophe" and that "any federal proposal should include personal and commercial lines of insurance."  Specifically, he argued H.R. 21's triggers are "far below existing industry capacity."  He said the industry paid out $16 or $17 billion after Hurricane Andrew and $12.1 billion after the Northridge earthquake, and has a surplus of over $333 billion today, making a trigger of $2 billion far too low.  Gilliam stated, "Fact of the matter is, the industry has handled all catastrophes to date, regardless of their size, and has handled them totally within the private sector."  Instead, Gilliam suggested an "appropriate 'trigger'" of $39.9 billion, based on a "'conservative rule of thumb' often referenced in the private market."

The panelists briefly fielded questions from the committee.  Hansen told chairman Leach that without H.R. 21, his company is "basically out of the market" of catastrophe insurance.  Rep. Hill said he would be more willing to support a bill with higher triggers, but that the bill's language needed to be more specific.  The chairman noted that the Treasury Department opposes Hill's tax proposal and that since that proposal concerns taxes, it is not in his committee's jurisdiction.  Hill said he felt the Treasury Department "opened the door today" to his proposal.


Oversight Hearing on Effectiveness of Mitigation Spending
House Transportation and Infrastructure Committee
Oversight, Investigations and Emergency Management Subcommittee
August 4, 1999

The Bottom Line
This oversight hearing on the cost effectiveness of disaster mitigation spending by the Federal Emergency Management Agency's Hazard Mitigation Grant program focused on the extent to which funded projects, are reviewed to ensure they are cost effective.  The hearing coincided with release of the General Accounting Office (GAO) report Disaster Assistance: Opportunities to Improve Cost-Effectiveness Determinations for Mitigation Grants.  Members of the committee and the GAO witness praised FEMA for its hazard mitigation and emergency response work, and for its co-operation with GAO and responsiveness to the report's recommendations.

Members Present
Tillie Fowler, subcommittee chairwoman (R-FL) James Oberstar, full committee ranking member (D-MN)
Lee Terry (R-NE) James Traficant, subcommittee ranking member (D-OH)
John Doolittle (R-CA)
John Isakson (R-GA)

Opening Statements
Subcommittee chair Tillie Fowler (R-FL) stated in her opening remarks that the purpose of this oversight hearing was to review the Federal Emergency Management Agency's (FEMA) practice of exempting some projects from cost-benefit analyses.  She said that, according to FEMA and the General Accounting Office (GAO), approximately fifteen percent of funds distributed by FEMA's Hazard Grant Mitigation Program (HGMP) since 1988 have been exempted from traditional analysis.  These projects total between $325 and $480 million.  "These exemptions raise questions regarding the effectiveness and efficiency of measures being funded under HGMP," said Fowler.  "Without some analytic analysis, it is extremely difficult to determine whether exempted projects will result in saving of at least $1 for every $1 spent.  Further, it is more difficult to compare these projects with other projects that have been analyzed and are cost-effective."  Fowler also expressed her strong support for mitigation projects and praised FEMA's work.

The ranking member of the subcommittee, Rep. James Traficant (D-OH), also expressed concern, saying the the HGMP is "lacking in follow-up and analysis."  He praised the GAO's work and said their "recommendations should be taken seriously."  Like Fowler, he said mitigation funding is important and congratulated FEMA for its good work.

Rep. James Oberstar (D-MN), the ranking Democrat on the full committee, gave a history of FEMA legislation.  He praised FEMA's quick response to a July storm in northern Minnesota.

Panel I
Stanley Czerwinski, Associate Director, Resource Community, and Economic Development
    Division, General Accounting Office

Mr. Czerwinski testified that "FEMA has made disaster mitigation a primary goal of its efforts to reduce the long-term costs of disasters."  He said the Robert T. Stafford Disaster Relief and Emergency Assistance Act "does not specify how to determine cost-effectiveness," but that FEMA and the Office of Management and Budget (OMB) agree cost-benefit analysis is the "recommended approach."  He summarized the findings of the GAO's report Disaster Assistance: Opportunities to Improve Cost-Effectiveness Determinations for Mitigation Grants, which was released the same day.  Czerwinski said HGMP has a "solid process, not fully followed."  He said there are four categories of projects exempted from cost-benefit analysis: property acquisition, 5-percent initiatives, tornado related projects and planning projects for previous disasters.  He said he does not think it appropriate for FEMA to conduct cost-benefit analyses of every proposal, but they should know how many projects have been exempted, and how much money has been spent on those projects.

Czerwinski described the hearing as "oversight at its best."  He said FEMA was very cooperative and has agreed to implement all of GAO's recommendations.   He added, "FEMA is doing its sincere best."

Rep. Fowler seconded Czerwinski's praise of FEMA.  She said "this is all about making a great agency better" and emphasized that it is not about polarizing the parties involved.

Rep. Traficant questioned if FEMA's cost-benefit analyses may be limited in their effectiveness by not using the best data available.  He expressed concern that the agency may rely on anecdotal, rather than verifiable, data.  Traficant asked Czerwinski simply, "Is FEMA doing a good job?"  The witness responded that the agency had shown "substantial improvement."  Traficant also asked if any indication was found that FEMA awarded cost-benefit analysis exemptions for political reasons.  Czerwinski said there was no indication that ever occurred.

Rep. Doolittle questioned why FEMA would not appraise structures it removes from flood plains.  Czerwinski explained that FEMA has made a class exemption for such projects because it has determined that they are worthwhile.  Doolittle said "a huge loophole is what that sounds like."

Rep. Oberstar noted that planning projects are not easily quantifiable and said perhaps periodic "after the fact" analyses could be completed to determine if the projects were worthwhile.  If the cost-benefit analysis is favorable, such projects could continue with no cost-benefit analysis.  He also raised concern that some people "deliberately put themselves in harm's way" by living in high risk areas.

Rep. Terry suggested that analyses be done on an "overall basis" for non-quantifiable projects such as education for those living in flood plains.  He said while the value of education cannot be measured, FEMA could analyze which forms of public education (pamphlets, or radio or TV spots) reached the most people.

Rep. Isakson inquired as to FEMA's reaction to the periodic review suggestion.  He also took time to thank FEMA for its response to disasters in Georgia.

Panel II
Michael Armstrong, Associate Director, Mitigation Directorate, Federal Emergency Management Agency

Mr. Armstrong said FEMA "whole heartedly embraces the recommendations of the GAO.  I would like to thank the GAO... for their professionalism and for the co-operative approach taken in conducting this review....  I would like to compliment the GAO on the fairness of the report and to thank them for their recommendations, many of which are already underway....  We are here, not to defend, but to celebrate this program."

Armstrong said mitigation is an increasing priority of the agency and that the 4-0-4 program in particular brings together federal, state and local governments.  He emphasized the importance FEMA places on cost-benefit analyses, but said some projects cannot be easily quantified.  "Sound public policy must encompass a broader perspective, particularly in the case of potentially life saving measures such as warning systems," he said.  Armstrong described a number of projects which were not subjected to cost-benefit analysis and explained why.

During a question and answer period Rep. Fowler said "obviously we need to tighten qualifications" for exemptions, "and train state and local officials how to handle exemptions."

In response to Rep. Traficant's questions, Armstrong said "is there room for better data? Absolutely."  He stressed the need to re-map and re-study flood mapping areas.  Traficant praised FEMA for "putting a human touch into a program where there was number crunching before."

Rep. Terry stressed the importance of leaving "a little leeway" for "experimental" mitigation projects such 5% Initiatives.
 


Hearing on H.R. 2728, the Two Floods And You Are Out of the Taxpayer's Pocket Act
House Committee on Banking and Financial Services
October 27, 1999

On October 27, 1999, the House Committee on Banking and Financial Services Subcommittee on Housing and Community Opportunity held a hearing on H.R. 2728, the Two Floods And You Are Out of the Taxpayer's Pocket Act.  Representatives Doug Bereuter (R-NE) and Earl Blumenauer (D-OR) co-sponsored the bill that would amend the Stafford Act to charge repeat loss claimants the actuarial costs of insurance instead of a federal/state subsidize costs.  Under the current National Flood Insurance Program (NFIP), property that is damaged from flooding can apply for funds from the Federal Emergency Management Agency (FEMA) to help recover from the disaster with no limits of the number or frequency of claims made by one property owner.  For example, at the hearing Rep. Bereuter referred to a house in Baton Rouge, Louisiana, which was the subject of a NBC Nightly News "The Fleecing of America" segment on January 29, 1998, that is a repetitive loss property.  The property having been flooded 17 times in the last seven years, and the owner has collected roughly $200,000 from the NFIP.  As Bereuter said, this amount is "seven times more than they paid for [the] house."  Witnesses as the hearing included the two Representatives, James Lee Witt, Director of FEMA; Stan Czerwinski, Associate Director, Housing and Community Development Issues, Resources, Community, and Economic Development Division, U.S. General Accounting Office; Rebecca Quinn, Legislative Officer, Association of State Floodplain Managers, Inc.; and David Conrad, Water Resource Specialist, Office of Federal and International Affairs, National Wildlife Federation. The complete written testimony of these witnesses is available at the House Banking and Financial Services website.


Hearing on Cost Effectiveness of Hazard Mitigation Spending
House Oversight, Investigations, and Emergency Management Subcommittee
July 20, 2000

The Bottom Line
Following-up to an August 4, 1999, oversight hearing on the cost effectiveness of FEMA's Hazard Mitigation Grant Program (HMGP), the House Oversight, Investigations, and Emergency Management Subcommittee held a hearing on July 20th to examine why many HMGP projects fail to achieve desirable cost-benefit ratios.  Chairwoman Tillie Fowler (R-FL) praised FEMA's work, but wanted to ensure that the agency is spending public money wisely.  The FEMA witness defended the agency's record, assuring the subcommittee that the agency is working to improve its performance where necessary.

Summary
Responding to the House Oversight, Investigations, and Emergency Management Subcommittee's August 4, 1999, hearing, the Federal Emergency Management Agency (FEMA) created a database with information on all its Hazard Mitigation Grant Program (HMGP) projects.  The database included benefit-cost ratio (BCR) information for each project, for most HMGP projects are required to have a BCR of no less than 1.0.  According to the data, though, many FEMA HMGP projects are either not cost-effective (BCR < 1.0) or only marginally cost-effective (BCR > 1.5), prompting the subcommittee to hold this oversight hearing.  Additional background information is available at the subcommittee's website.

In her opening statement, Rep. Tillie Fowler (R-FL) stated that the hearing would only examine non-exempt HMGP projects subjected to BCR analysis.  Noting her concern about the many non-exempt programs with BCRs < 1.5, Fowler then proceeded to introduce FEMA's Associate Director for Mitigation, Michael Armstrong, as her only witness.

Praising the HMGP as the "forerunner of a comprehensive family of mitigation approaches," Armstrong defended the program's record by pointing out the limitations associated with a BCR.  In a typical buyout of a floodprone home, he noted, BCRs do not account for many ancillary benefits like future reduced emergency management costs, future environmental benefits, safety, and peace of mind.

It is also important to consider buy-out projects in aggregate, Armstrong continued.  When FEMA buys out a flood prone neighborhood, it makes no sense for them to leave one house even if the removal of that house has a BCR below 1.0.  If the agency leaves the house, Armstrong explained, "the infrastructure serving all the affected homes cannot be removed and the environmental benefits of clearing the land are compromised."  Some good public policy decisions have BCRs that are less than 1.0.

The question and answer period examined the accuracy of the HMGP database.  When Rep. Fowler noted a recent $200 million inaccuracy in the dataset, Michael Armstrong replied that FEMA is presently engaged in data quality control.  He later added that many of FEMA's BCR values are actually lower than they should be because the agency does not always do exhaustive cost-benefit analyses.  Once the agency determines that a project's BCR will be greater than 1.0, he said, it usually stops the analysis.  Concerned that FEMA is shirking its legislative responsibilities, Rep. Lee Terry (R-NE) asked Mr. Armstrong whether FEMA was following the HMGP's authorizing legislation, Section 404 of the Stafford Act, or whether it was simply following its own regulations.  Armstrong asserted that the agency is acting appropriately, for the Stafford Act merely requires a program to be "cost effective."  BCRs are simply one tool that the agency can use to measure a project's cost effectiveness.


Please send any comments or requests for information to the AGI Government Affairs Program.

Contributed by AGI/AIPG Geoscience Policy Intern Althea Cawley-Murphree, AGI/AIPG Geoscience and Public Policy Intern Michael Wagg, and Margaret Baker, AGI Government Affairs.

Last updated August 4, 2000


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