Volume XVIII No. 23:

You can’t get something for nothing. Congress often forgets that. We saw it this week with some lawmakers hell bent on undoing last summer’s modest federal flood insurance reforms. Their latest reckless act was adding to the fiscal year 2014 Homeland Security spending bill an amendment delaying the phased-in implementation of risk based premiums.

First let’s step back. The National Flood Insurance Program (NFIP) provides federally backed flood insurance to homeowners and businesses across the country. Unlike private insurance companies that rely on catastrophic reserves or reinsurance (a kind of insurance for insurance companies) to pay claims that exceed their revenue from customers, NFIP can simply borrow from the Treasury. This inherent subsidy, coupled with charging low rates that weren’t commensurate with risks of flooding has left the program approximately $25 billion in debt to the treasury. The program takes in roughly $3.5 billion in premium revenue a year. It doesn’t take an accountant to realize the program needs reform to be sustainable.

Last year Congress adopted a reform package. We would have gone further, but the bill at least did require that many of the explicit program subsidies be stopped and that FEMA start using risk-based rates. Not surprisingly, lawmakers from particularly flood-prone areas got sticker shock as the subsidies went away. So, led by the Louisiana delegation, they set out to make this insolvent program even more insolvent.

Part of the lawmakers’ battle cry was that it didn’t cost a thing. The Congressional Budget Office said so. But what they didn’t tell the 281 lawmakers that voted for the amendment was that many of their constituents would be the chumps paying for it. That’s right, just because it has a budget score of zero doesn’t mean someone won’t have to pay.

Here’s how it works. FEMA is required to hit a revenue goal through risk-based rates that would raise enough premium revenue to pay for an average historical loss year (10 year rolling average). The amendment didn’t change the total revenue target for 2014. It just said that homeowners’ grandfathered subsidized rates can’t increase, even though their flood risk has. So to meet the revenue target, other policyholders will have to pay more. It’s like a teeter-totter, high risk rates go down, low risk rates go up. This amendment was about increasing cross-subsidies in the program, further subsidizing high risk properties, and sticking it to the chumps who happen to live in lower risk areas but responsibly carry flood insurance.

We get why lawmakers like Reps. Cassidy (R-LA) and Grayson (D-FL) are for it. Their constituents are the winners. Everyone else… suckers. Here’s the roll call.

Considering it’s not that likely that any FY14 appropriations bill (other than maybe defense) will get enacted, this may not mean much policy-wise. But it has put the House on record.

Senator Landrieu (D-LA) also offered a similar amendment to the Farm Bill (and on another bill before that). It would delay rate increases by three years. Her maneuvers were procedurally blocked. But she’ll be back.

A better way to deal with the affordability issue is to set up an account to help the truly needy deal with premium increases on a temporary basis. The account could be pre-funded by a very small surcharge on all policy premiums. That keeps the costs internalized to the program, maintains risk-based rates, and helps the truly needy. Under the Landrieu and Cassidy approach, millionaires, even billionaires, get the same break on the flood insurance premiums as someone at or near the poverty line.

Let’s face it. The National Flood Insurance Program is insolvent. Premiums that actually reflect the level of risk provide dollar and cents incentives for owners to mitigate and reduce risk. By delaying them, losses will only increase, and the program will continue down its death spiral of debt.