The National Flood Insurance Program is nearly broke, and just at the worst possible time.
The U.S. government's 49-year-old flood-insurance program is about $25 billion in debt, with just $1.7 billion of cash and $5.8 billion of borrowing capacity. And that's before claims start coming in from Hurricane Harvey, which has flooded parts of the Texas coast with more than four feet of rain over the past week and caused devastating flooding in and around Houston, the nation's fourth-largest city.
What's more, the law authorizing the National Flood Insurance Program, or NFIP, is set to expire on Sept. 30, meaning lawmakers must vote to extend it even as they debate bills to raise the nation's $20 trillion national-debt limit and approve new spending to avoid a government shutdown.
At the same time, President Donald Trump has demanded funding for a wall along the border with Mexico, while pushing Congress to enact big tax cuts he argues will stimulate economic growth.
It's too early to estimate the potential claims from Harvey, which made landfall last week near Rockport, Texas, before moving back out into the Gulf of Mexico and coming back ashore Wednesday near the border of Texas and Louisiana. But just in Harris County, Texas, where Houston sits, NFIP holds more than 240,000 policies, representing more than $60 billion in coverage, according to risk-modeling firm AIR Worldwide.
Roy Wright, who oversees the flood-insurance program as a deputy associate administrator at the Federal Emergency Management Agency, said he's "already engaged with congressional leaders and members" on the pressing funding needs.
"From where I sit today, I don't know what the upper limit is on the event," Wright said in a telephone interview. "But Congress has never turned its back on flood-insurance policyholders before, and I can't imagine them doing that now."
Earlier this week, JPMorgan Chase & Co. (JPM) , the biggest U.S. bank, warned investors that Harvey is likely to rank among the top-10 costliest hurricanes in the country's history. The New York-based firm predicted claims on private insurers could range from $10 billion to $20 billion, an estimate that doesn't include costs for the federal flood-insurance program.
Few residential insurance policies include flood coverage, so the federal program is the primary provider for most homeowners. Nationwide, the NFIP provides flood insurance for about 5 million homes and businesses, with total coverage of $1.23 trillion.
For the first few decades of its existence, the NFIP was mostly able to cover claims with the premiums it collected from policyholders -- just as most private insurance companies do. More recently, so many storms have slammed the U.S. coastlines that the program could no longer cover its costs.
The triple-hit of Hurricanes Katrina, Rita and Wilma in 2005 led to some $17.8 billion of claims. And in 2012, when the northeastern U.S. was slammed by Hurricane Sandy, the NFIP had to pay out another $9.5 billion. Last year, the NFIP paid out $3.7 billion as Hurricane Matthew hit Florida and South Carolina, even as policyholder premiums totaled just $3.3 billion.
To cover the extra costs, the NFIP has gone heavily into debt to the U.S. Treasury Department, forcing Congress to increase the program's borrowing capacity several times to the current $30.4 billion.
The Department of Homeland Security, which encompasses the Federal Emergency Management Agency, telegraphed the flood-insurance program's funding crunch in an annual financial report for the fiscal year ended Sept. 30, 2016.
"Given the current rate structure, FEMA will not be able to pay its debt from the premium revenue alone," the report read. "Therefore, legislation will need to be enacted to provide funding to repay BFS or to forgive the debt."
And, like any debt, the problem is not just the principal amount of the debt; the NFIP also has to pay interest on its loans from the Treasury. Based on the current level of indebtedness, the NFIP has about $400 million of annual interest payments, according to a Government Accountability Office report in April.
"This will be front and center as the Congress debates," said Hardeep Manku, an insurance analyst at the rating firm Standard & Poor's. "The discussions would involve what level of support would be required."
Over the years, lawmakers have tried to address the flood program's chronic funding shortfall, as critics claimed it amounted to a subsidy for homeowners in flood-prone areas.
In 2012, former President Barack Obama the Biggert-Waters Flood Insurance Reform Act, setting a timeline for raising premiums deemed too low based on the flooding risk. Just two years later, amid an outcry from affected policyholders, Congress passed and Obama signed the Homeowner Flood Insurance Affordability Act, repealing many of the premium increases and in some cases even paying out refunds.
One concern with raising premiums is that many homeowners will simply drop their policies, leaving them more vulnerable when a flood actually hits. The insurance is mandatory for homeowners in areas that are especially flood-prone, and even then only if they have a federally-insured mortgage. For everyone else, the coverage is voluntary.
The Consumer Federation of America, for example, estimates that only one in five homes in the Houston area are covered by flood insurance.
As it is, most officials understand that premiums aren't sufficient to fund the NFIP, necessitating additional funds from the government, or an ever-expanding credit line, says Leonard Shabman, a resident scholar at Resources for the Future, an economic think tank in Washington. He says it's likely Congress will act quickly to raise the borrowing limits and that the NFIP will honor all claims.
"Ultimately if the NFIP is in debt, and the presumption is that it's going to pay off that debt, and the only revenue that the NFIP gets is through premiums, and the premiums need to remain affordable, then something has to give," he said.
In other words, the taxpayers will probably pick up the tab.
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