The Federal Emergency Management Agency (FEMA) is considering a move to require states to put up something like an insurance deductible before seeking disaster relief. The burden-sharing proposal aims to reduce federal taxes and strain on the agency. FEMA is saddled with an antiquated financial arrangement while contending with more floods, fires, and wind damage than ever before.

FEMA posted a notice of proposed rulemaking in the Federal Register last week, requesting public comment. “This would be a dramatic change from how our Public Assistance Program to states and local governments has worked in the past,” said Joshua Batkin, FEMA's Director of External Affairs.

Instead, he argues, a deductible would give states an incentive to prepare for the worst, financially or materially. The deductible in its simplest form would be a rainy day fund or self-insurance plan, but states might also earn credits toward a predetermined obligation by adopting stricter training standards, building codes and zoning rules, or by building more resilient infrastructure. Batkin emphasized that relief to individuals wouldn’t be affected should the reforms under discussion be adopted.

While a simple fund might seem easier to evaluate by insurers, bond analysts and fiscal watchdogs, there are vulnerabilities in that approach, according to economist Robert Hartwig, president of the Insurance Information Institute. “You want to ensure that funds are allocated year in and year out, or roll over, and are kept at 200% of anticipated costs, or some factor like that," he said. "The funds have to be safeguarded so they aren’t used for other purposes. We need legislation to prohibit raiding.” Hartwig cited New Jersey’s pension fund operations as a cautionary example. He also noted that states like Utah and Wyoming, which experience few disasters, might be better served than others by a simple rainy day fund.

Harvard Kennedy School lecturer in public policy Juliette Kayyem more saltily said the reforms should end the “thank you ma’am, may I please have another philosophy” of rebuilding in the same way and in the same place. Kayyem, who served President Obama as Assistant Secretary for Intergovernmental Affairs at the Department of Homeland Security and was Massachusetts Governor Deval Patrick’s homeland security advisor, outlined her reform ideas in the current issue of the journal Democracy. In it, she argues, “It is time to rescind or fundamentally revise the Stafford Act.” That 1988 legislation was lambasted in the wake of Hurricane Katrina for hamstringing attempts to build back smarter.

“Our response system is based on the concept that disasters are rare and random, and that we’d all want to benefit from federal help if it was us," Kayyem said. "That thinking is just not accurate anymore. Look at the number of disasters in recent years. The system is set up in a way that does not promote good behavior and in some ways promotes bad behavior. We’re telling people, ‘We’re going to help you get back to making things normal,’ and we make it hard to build better. We need to get out of this idea of getting back to normal as a philosophy.”

FEMA is part of the Department of Homeland Security. A disaster can be declared by the President after receiving a plea from a state governor or tribal leader. FEMA’s calculations weigh heavily in that decision, but in the end, it’s a matter of the President’s discretion. Before 1950, federal funds to afflicted states had to pass through Congress. FEMA was created through executive orders by President Jimmy Carter in 1979 and folded into the Department of Homeland Security by President George W. Bush in 2003.

Though the number of disaster declarations has lowered a bit in recent years, declarations in this new century have far outstripped those in the latter part of the 20th. TheStreet reviewed federally declared disasters and found that the average annual caseload between 1976 and 1995 was 39, but between 1996 and 2015 it was 121.

On January 15, 2015, Congressman Lou Barletta (R-Penn.), Chair of the Transportation and Infrastructure subcommittee on Economic Development, Public Buildings, and Emergency Management, tasked FEMA Administrator W. Craig Fugate with exploring ways to reduce claims on federal disaster funds.

The rise in declared disasters reflects a combination of the increasing frequency of extreme weather events and a peculiarly rigid fiscal method FEMA uses to reach a recommendation to assist.

Recent mega-storm costs aren’t absolutely attributable to human-driven global climate change, according to NASA, but this will likely be a major factor going forward. Nowhere in FEMA’s notice is carbon or CO2 mentioned, because the document focuses on resiliency, not sustainability. It’s worth noting that FEMA’s most prominent early disasters were man-made -- Three Mile Island and Love Canal.

The accounting quirk underlying the surge of disaster declarations dates back to 1986, when FEMA determined that a state ought to be able to pony up at least a dollar per resident in disaster response before turning to the federal government for grants. Today, FEMA multiplies a state’s 2010 census by $1.41. For counties, the per capita bar is currently set at $3.57. A 2012 U.S. Government Accountability Office study blasted FEMA for not keeping pace with inflation and per capita income.

The storms and spreadsheets make for “a recipe for more and more declarations,” said Chris Currie, GAO Director of Emergency Management. But the new approach won’t have as much effect on how the U.S. contends with massive hurricanes like Katrina or Sandy, or perhaps even Winter Storm Jonas, for which Maryland is seeking FEMA funds.

“We’re not talking about catastrophic storms," Currie said. "Those blow way past that [per capita benchmark] in the first minute. What we’re talking about are those smaller events that states could get assistance for. In those cases states would pay more up front.”

GAO recommended using other measures, including the Total Taxable Resources metric developed by the Treasury Department. GAO released a subsequent report in 2015 spotlighting how ten representative states (Alaska, California, Florida, Indiana, Missouri, New York, North Dakota, Oklahoma, Vermont, and West Virginia) had become hooked on FEMA funds:

“None of the 10 states...maintained reserves dedicated solely for future disasters. Some state officials reported that they could cover disaster costs without dedicated disaster reserves because they generally relied on the federal government to fund most of the costs associated with disaster response and recovery.”

FEMA contributes 75% of total public recovery costs. That’s all damages from the first dollar, not just the costs beyond the per capita threshold. Batkin said that critics in Congress and the executive branch recommended raising the per capita fiscal bar -- perhaps even doubling it. That “blunt way” would cut the number of recommendations for disaster declarations by 54%, said Batkin, but wouldn’t “build capability to deal with emergencies.” Fugate, his boss, also told the magazine Emergency Management that doubling the per capita threshold would leave large states California, New York and Pennsylvania covered for only catastrophic events. Fugate instead directed staff to drum up alternatives.

Friction between states and resentment of federal fiat in FEMA allocations might not be resolved by a single round of reforms. “The issue of Federalism and ‘States’ Rights’ is as old as the nation,” said David Neal, professor of political science at Oklahoma State University and former director of the university’s Center for the Study of Disasters and Extreme Events.

FEMA’s request for comments includes a series of questions that get at how a state’s deductible should be calculated, but reform advocates say it’s the principle of a moral hazard that’s key. For Currie, “going to the deductible model will hopefully incentivize state and local authorities to buy down their risk or to show they’ve taken actions so that damages are less.”

The first comment period runs until March 21, and there will be at least two more comment periods before any rule changes become official. Major bond analysts contacted by The Street, including from Fitch and Standard and Poor’s, have yet to opine on whether the reform proposals up for discussion might impact municipal bonds.

A source at FEMA said care was being taken to not have reforms come across as punitive to states and local governments. New York's Mayor Bill de Blasio’s spokesperson Amy Spitalnick says his staff is still reviewing the proposal. Senator Maria Cantwell (D-Wash.) is approaching reform cautiously. Her state has been ravaged by wildfires, and she’s demanded that FEMA speed up issuing its new criteria for individual relief. Her focus is clearly on her constituents, and not the other Washington.

“Senator Cantwell believes we must improve disaster financing, especially in the wake of the devastating wildfires over the past several fire seasons," said press secretary Bryan Watt. "She will continue to work with local stakeholders, including Governor Inslee, to find solutions that do right by Washington communities affected by disasters. Something must be done to improve disaster assistance, especially individual disaster assistance, and help communities mitigate disasters.”

University of Delaware political science Professor Emeritus Richard Sylves, author of Disaster Policy and Politics: Emergency Management and Homeland Security, pointed out that “FEMA proposed state deductibles for disaster declarations qualification in the mid-1980s. It was soundly swatted down by a very angry Congress.”

Hartwig of the Insurance Information Institute shares that skepticism. “Even the most conservative of governors and communities willingly accept federal disaster aid,” he said, and inside the Capitol, “the reality of it is that each and every member of Congress sees their constituency as the most important in the country and seeks to get as large a piece of the disaster recovery pie as possible.”

But even Hartwig sees hope for some common ground. “This is not climate change legislation," he said. "This is work to limit the exposure of the federal taxpayer.” 

This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.

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