Thursday, July 24, 2008

FEMA NFIP: The Most Expensive Federal Grant Progam

Federal Flood Insurance Grants Exceed $700 Billion per Year

July 24, 2008
Michael Jordan

Federal Grants by Agency (2006)
Almost a third of all federal grant money goes to paying for flood insurance every year.

Federal spending reports show that the Federal Emergency Management Agency (FEMA), now under the US Department of Homeland Security (DHS), has purchased or subsidized over $4.4 trillion in flood insurance services in the last eight years. The following sample data is for 2006, alone:

Fiscal Year: 2006
Federal (grant) dollars:
The amount for this search is
29.8% of total Federal dollars for the fiscal year.

Drilling down into the specific federal programs involved reveals that 98% of this amount is specifically for "Flood Insurance", not direct disaster relief :

83.100: FLOOD INSURANCE$717,078,730,100
83.516: DISASTER ASSISTANCE$8,080,193,958
97.036: Disaster Grants - Public Assistance (Presidentially Declared Disasters)$3,540,915,531

Amazingly, Florida alone received $276 billion in flood insurance grants in 2006 (the most recent fully-reported year). By comparison, all federal defense contracts awarded that same year totaled $298 billion. With their grants increasing at a rate of roughly $55 billion per year for the past 7-8 years, the National Flood Insurance Program (NFIP) became the most expensive grant program in government in 2005, eclipsing even Medicare/Medicaid and Social Security. The trend indicates that 2007 insurance grants will top three-quarters of a trillion dollars. The total for all federal spending accounted for since 2000 is a staggering $18.7 trillion.

The data was provided by, a partner site to OMBWatch, which is a watchdog group that has been reporting on federal spending for 25 years. The same data is available at the government's own new reporting site, (Required by the 2006 Federal Funding Accountability and Transparency Act). Both sites pull from the same federal database of spending figures.

Flood Insurance: $4.4 Trillion in 8 Years

Why this astonishing number has not been reported on by the mainstream press remains a mystery. In the last decade, the federal government has spent more money subsidizing the flood insurance industry than it has on either the Iraq war, Social Security payments, or Medicare. While these well-known programs attract mass media attention and foment public debate, billions more were quietly spent on federally-backed flood insurance. While little of this amount is actually payed out to policy holders, hundreds of billions of dollars are made by the financiers of the government's payout funds. According to the spending database, this has amounted to over four trillion dollars of federal debt -- and that is just in the last eight years. The program has been in place for much longer than that (40 years), so a trillion dollars in interest (on about $20 trillion in debt) is not an unrealistic estimate of its long-term cost.

The data shows that DHS' grants for flood insurance annually exceed that of all other federal agencies. Overall, the top five federal agencies in grant funding for fiscal years 2000-2007 are:

1. Dept. of Homeland Security$4.4002 Trillion
2. Dept. of Health and Human Services$4.1445 Trillion
3. Social Security Administration$4.0859 Trillion
4. Dept. of Agriculture$969.2 Billion
5. Dept. of Housing and Urban Development$936.1 Billion

Nation Flood Insurance Program

In 1968, the National Flood Insurance Program (NFIP) was created, ostensibly to "to make federally backed flood insurance available to property owners who live in eligible communities." Five years later, the Flood Disaster Protection Act required "federally regulated lending institutions to make sure that mortgage loans secured by buildings in high-flood-risk areas are protected by flood insurance". In other words, the federal government promised:
  1. To subsidize flood insurance premium payments to make them more affordable for property owners
  2. To financially back (bail out) private insurance companies in the event of a large payout event (flood)
  3. To require home loan applicants living in a high-risk area to purchase flood insurance
So with one hand, they mandated the purchase of flood insurance, while with the other, they offered to pay our premiums for us. And then with their third hand (or tentacle, if you prefer), they guaranteed that if an insurer did not have sufficient reserves to make a payout, then FEMA would come to the rescue with more grant money. Help the insurer make its payments to the insured, help the insured make his payments to the insurer, and then require the two to do business -- by law.

Hurricane Katrina

According to NFIP, DHS/FEMA is only supposed to help insurers make payments when the insurer doesn't have the money. Estimates for the total payouts for Hurricane Katrina range from $20-40 billion. This would be the biggest payout in FEMA/NFIP history, and the agency claims it needs to borrow more money to make the payments. FEMA had even ordered insurers to cease payments until Congress increases its credit line.

But how can they not have the money, when so much has been paid to them in premiums? Just where is all this insurance grant money going? This has to be one of the biggest black holes of financial accountability in all of government and industry.

According to a 2003 Government Accountability Office (GAO) report entitled "Challenges Facing the National Flood Insurance Program":

"The program has lost money and is not actuarially sound because about 29 percent of the policies in force are subsidized but appropriations are not provided to cover the subsidies."

Homeland Security

Also in the GAO report is a brief but highly relevant note on the 2003 reorganization that put FEMA under DHS:

"FEMA’s Federal Insurance and Mitigation Administration has been
responsible for managing the flood insurance program. However, the
Homeland Security Act of 2002 transferred this responsibility to the
Department of Homeland Security (DHS). As part of the largest
reorganization of the federal government in over 50 years, the legislation
combined about 170,000 federal employees, 22 agencies, and various
missions—some that have not traditionally been considered security
related—into the new department. FEMA’s responsibilities, including the
flood insurance program, were placed in their entirety into DHS, effective
March 1, 2003. Responsibility for the flood insurance program now resides
in DHS’s Emergency Preparedness and Response Directorate."

This power is truly awesome, for a six-year-old agency. DHS gives out more in flood insurance grants annually than all of the following federal agencies' grants, combined:

Dept of Agriculture
Dept of Housing and Urban Development
Dept of Education
Dept of Transportation
Dept of Veterans Affairs
Small Business Administration
Dept of Labor
Dept of Justice
Dept of Defense
Dept of the Interior
Dept of Energy
Dept of Commerce
Dept of State
Dept of the Treasury

Only the Social Security Administration and the Dept of Health and Human Services compare in federal grant awards given, and both programs are smaller than the federal flood insurance program. Everyone knows what Social Security and Medicare are. But who has ever heard of NFIP? Again, why is this massive grant program so totally unknown to the public, and so totally hidden in plain view?

Bailouts and Subsidies

So with the government's own spending figures as evidence, 3/4 of a trillion dollars per year is divided into little pie slices and handed out to state and local agencies for bureaucratic administration. There are many "individual recipients" -- for example, Miami-Dade County (FL) received almost $10 billion in "flood insurance" in 2006.

The NFIP program distributes real funds directly to individual local counties. The county governments then hire Write-Your-Own (WYO) private insurance companies that "participate" in NFIP to handle the administrative and operational tasks of actually providing the insurance service to end customers. These insurers write up their own coverage plans and market them to property owners, who will then pay their premiums (~$400/year) to the insurers -- with NFIP subsidizing the costs so they stay "affordable".

But the funding for the payouts does not really come from the premiums collected; it comes from the giant payout pot, which is "NFIP-backed". This is not unlike the idea of a bank being "FDIC-insured". Because they never collect enough in premiums to actually make their massive payouts honestly, the private insurers receive these funds from their county governments as a payout subsidy. It's like government bailing out the private insurers in advance of the disaster -- and they do it every year. What else could explain the incredible numbers involved? The dollar amounts in question are equal to the value of all flood-insured property in America. A 2006 Congressional Budget Office report on NFIP's subsidies states:

Established in 1968, the NFIP now includes over 20,000 communities that adhere to certain minimum standards for floodplain management. Within those participating communities, nearly 4.7 million policyholders pay more than $2.0 billion in premiums each year to receive over $800 billion in coverage.
If this isn't a racket, then what is? The federal government subsidizes the premium payments and fills the payout pots. And with what money? All this trillions in insurance spending is done with government debt. The taxes we pay only go to paying for the interest on that debt.

Undoubtedly, government financiers are the ultimate beneficiary of all this careless borrowing. For the government to "back" the flood insurance providers, it must have the total insured value of all concerned properties readily available in a payout fund -- known as the National Flood Insurance Fund (NFIF). Of course, the government must borrow the money to do this -- and the private banks that loan funds to the Federal Reserve always stand to benefit by any increase in government credit-spending. The interest earned on the flood insurance payouts loaned to the federal government must be astronomical. For example, if 5% interest is collected on the $729 billion in flood insurance expenses for 2006, that would be over $36 billion in interest payments that year. Annually keeping the NFIF payout pot full is a very profitable business. The banking institutions financing the US government's line of credit love the National Flood Insurance Program.

A Disastrous Flood of Funding

Furthermore, the federal aid has made us weaker in the long run. Nationalized flood insurance has made the American people impotent to deal adaptively with floods. NFIP has not improved our post-disaster rebuilding abilities; it has made them worse. Furthermore, it has encouraged reckless real estate development in flood-prone areas. If you know the government is going to bail you out with its monopoly money, then why bother building levees or investing in flood countermeasures? We have such amazing technology today, yet we can't keep our basements from flooding? It's because there's no money in it! Where government monopolizes, no private innovation can occur -- because there's no incentive.

As public debate is stirring over the viability of government bailout programs in the financial and housing sectors, this one has stayed under the radar. It has managed to resist or evade any serious public scrutiny for forty years. It is way past time now to put NFIP under the microscope and ask some serious questions about its future -- Is the National Flood Insurance Program viable? Is it necessary? The GAO has called it unsound, and the program accounts for almost a third of all federal grant money every year. Do insurance companies really need a helping hand from the government to offer affordable flood insurance? And does the hand need to be this big? Do property owners really have a "right" to flood insurance, no matter what?

And why is DHS claiming it needs to borrow more money to pay Katrina victims when it has paid so much already in premium subsidies to the private insurers, and fully funded the payout pot (with credit)? What are they doing with all these trillions in insurance grants, besides making their creditors rich?

It was 40 years ago that Congress created the National Flood Insurance Program. The NFIP Act is set to expire on September 30, 2008. The House of Representatives, the Senate, and the Senate Committee on Banking, Housing, and Urban affairs have each drafted and passed their own NFIP reform bills to expand the program's life and scope. President Bush will likely sign one of these extensions into law before October, setting the stage for even more growth for this already bloated program. Tens of billions of dollars per year will continue to be slipped to the NFIF's financing institutions as interest, and the Department of Homeland Security will continue its rapid, unchecked swelling into the largest and most debt-dependent agency in the United States government.

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