Congress Watch: Taxpayers Underwater with National Flood Insurance Program

Joe Jansen

March 3, 2014

(Joe Jansen has a decade and a half of experience working as a staff member on Capitol Hill.  He has worked in almost every legislative capacity in both the House and Senate. Joe will be a frequent contributor to TPA’s blog.) The National Flood Insurance Program (NFIP) owes the treasury more than $24 billion.  In 2012, when NFIP’s debt was “only” $17 billion, Congress enacted a set of reforms to make the program more actuarially sound. The implementation of these reforms has begun and homeowners and local communities located in flood zones are beginning to feel their impacts.  The Senate has already bowed to the pressure and killed the reforms.  Taxpayers should demand better.

Prior to 1968, when a flood occurred in the United States, the Federal government provided disaster relief funding to the flooded areas.  In an attempt to rein in spending, Congress enacted the National Flood Insurance Program.  Under the program, the Federal Emergency Management Agency (FEMA) produces flood maps. If your home is in a flood zone, you are required to obtain flood insurance in order to get a mortgage.  Unfortunately, the premiums paid by homeowners are not necessarily linked to risk.  As an inducement to enter the program, some homeowners were given subsidized rates – rates that were “grandfathered” to prevent increases from reflecting actual flood risks.

In years without significant flooding, the premiums might cover the actual costs of the claims.  But, in years with significant events such as Hurricanes Katrina and Sandy, the program is forced to borrow funds from the treasury to pay claims.  The program now owes more than $24 billion – an amount it is unlikely to ever be able to repay.

After years of negotiations, Congress passed a bill that would bring flood insurance rates in line with the risk of actually being in a flood.  Among its reforms, the new law repealed “grandfathered” ratings and it did not allow for rate discounts on second homes or commercial buildings.  Realizing that these reforms were going to raise premium rates for some homeowners, the law caps rate increases to 25 percent annually for four years.  However, for new flood insurance policies, the increase would take effect immediately.  These increases are now beginning to be felt.

For the most part, the laws results have been predictable.  Rates have increased for many people.  But, for some, the increase has been larger and faster than expected.  Additionally, because rates take effect immediately for new policies and lower rates are no longer grandfathered, many communities are faced with the fact that homes cannot be sold due to the costs of flood insurance.

Once the new rates took effect, the complaints began rolling in.  The Senate responded rather quickly.  In late January it passed a bill that essentially killed the reforms it enacted less than two years earlier by delaying their implementation for four years.  Last week, the House was prepared to act on a bill that did not delay implementation of the bill, but actually repealed many of its reforms.  Last minute opposition to the House bill forced leaders to go back to the drawing board.

When Congress passes laws that have unintended consequences it is perfectly reasonable to expect it to go back and address egregious problems.  But, simply repealing needed reforms is not the best response.  Without the reforms enacted in 2012, the National Flood Insurance Program is not sustainable.  The Senate did not solve anything by its actions.  The House has a chance to do better.