How Flood Insurance Premiums Could Threaten Local Government Tax Revenues

WASHINGTON — If Congress doesn’t take steps to keep flood insurance premiums affordable, it could not only result in higher bills for some homeowners, but also lower property tax revenues for local governments.

A county official offered that warning Wednesday, during a briefing state and local leaders held on Capitol Hill to outline their priorities for legislation to reauthorize the National Flood Insurance Program. As part of the reauthorization process congressional lawmakers are eying changes to the program, which is billions in debt and is spending more than it collects from premiums.

Those who spoke at the briefing stressed the importance of keeping the price of flood insurance affordable, while ensuring the program remains financially solvent. They brought up other issues as well, like how flood mitigation investments might prevent property damage that leads to costly insurance claims and the possible expansion of private flood insurance options.

Discussion about the flood insurance program comes in the aftermath of Hurricane Harvey, which caused catastrophic flooding in the Houston area, beginning in the final days of August. And as another powerful hurricane, Irma, barrelled across the Caribbean and toward Florida.

Threat to Local Tax Revenues

George Hartwick, a commissioner in Dauphin County, Pennsylvania, where Harrisburg is located, said there had already been instances in the county where residents have asked that their assessed property values be lowered, citing high flood insurance premium costs.

When insurance premiums rise dramatically for a home, it becomes more expensive to own, which lowers its value. Because property taxes are linked to property values, upswings in premiums can threaten to drag down a locality’s tax collections.

“There may not be a single, larger potential impact to the ability to raise local government revenues,” Hartwick said.

The issue of sharply rising flood insurance premiums can especially come into play, Hartwick explained, when a home is sold and the buyer is ineligible for lower rates a previous owner may have been able to access under what are known as “grandfathering rules.”

In Dauphin County, about $4 billion of the county’s $20 billion in assessed property value is located in a floodplain.

As he discussed the prospect of high premiums eroding local tax revenues, Hartwick told Route Fifty after the briefing that “it would have to result in local school tax increases, and local property tax increases at the municipal and county level.”

Program is Under Financial Pressure

The Federal Emergency Management Agency oversees the flood insurance program, which was established in 1968 and now has about five million policies in effect. Over the past decade, the number of people buying insurance through the program has declined by about 800,000.

“That’s not because people think there’s less of a risk of flooding, that’s because there’s an affordability issue,” Jason Tuber, a senior adviser to U.S. Sen. Robert Menendez, a New Jersey Democrat, said of the decline in the number of policies people are purchasing.

Annual premiums for the central two-thirds of residential policies purchased through the program last year ranged from $420 to $1,330, according to the Congressional Budget Office.

Tuber noted that, with Harvey, there are some estimates suggesting that about 80 percent of affected residents lack flood insurance.

“We’re just paying for it on the back-end through disaster relief funds,” he added.

Central to debate about the insurance program are questions about how to appropriately price flood risk, while also balancing affordability for policyholders with the costs of the program.

A report the CBO issued this month said the program is expected to face an estimated $1.4 billion one-year shortfall—that’s the difference between all of its costs and premium income.

The program also owes the U.S. Treasury about $24 billion, according to the report.

One significant factor that contributed to this debt is that FEMA borrowed heavily from the Treasury to pay claims after hurricanes Katrina, Rita and Wilma all hit the U.S. in 2005.

The program’s current debt level is equivalent to about 0.6 percent of the roughly $4 trillion that the U.S. government plans to spend in the current fiscal year.

Congressional Legislation

There are bills in both the U.S. House and Senate to reauthorize the flood insurance program.

Menendez in June introduced The Sustainable, Affordable, Fair, and Efficient, or SAFE, National Flood Insurance Program Reauthorization Act. That bill has nine co-sponsors, including five Democrats and four Republicans.

It would reauthorize the flood insurance program for six years, capping annual premium increases at 10 percent. Currently, they can increase by as much as 25 percent each year, according to a summary of the bill issued by Menendez’s office.

The legislation would freeze interest payments on the debt that the program owes to the Treasury. These interest payments totaled about $300 million during the 2016 fiscal year, according to the Congressional Budget Office report.

Menendez’s bill would also authorize funding for Light Detection and Ranging, or LiDAR, technology that could be used to develop more accurate maps illustrating flood risk.

In the House, the Financial Services Committee has marked-up seven flood insurance bills.

Of these, the National Association of Counties is raising a red flag about the 21st Century Flood Reform Act. That bill is sponsored by U.S. Rep. Sean Duffy, a Wisconsin Republican. NACo wants to see its language stripped from the House package of legislation.

The National Association of Counties opposes provisions in Duffy’s bill that would raise the annual limitation for premium increases. The association says this would burden low-income property owners and potentially prompt some policyholders to abandon the program.

NACo is also concerned about a new surcharge in the bill for nonresidential properties. The charge could apply to businesses and public buildings, such as those local governments own.

Other State and Local Priorities

As legislation to reauthorize and rework the flood insurance program takes shape, there are a number of state and local groups pressing for their priorities.

One is Greater New Orleans, Inc, a  regional economic development organization for southeast Louisiana. Caitlin Berni, the group’s vice president of policy and communications and was among those who made remarks at Wednesday’s briefing.

“Flooding is happening with more frequency and severity,” Berni said. “We need to be thinking about how we’re getting more people covered.”

Greater New Orleans is involved in the Coalition for Sustainable Flood Insurance, a group formed in 2013 by elected and business leaders in response to flood insurance premium hikes.

The coalition supports a list of changes to the federal flood insurance program that fall into four main areas: mitigation efforts to prevent flood damage, mapping of flood-prone areas, premium affordability and policyholder participation.

One change the group would like to see is for program surcharges, or the money FEMA would use for interest payments on its Treasury debt, to be redirected toward flood mitigation work. The group also suggests making flood insurance coverage mandatory for properties where owners turn to federal disaster aid funding to cover flood losses or damage.

Meanwhile, the National Association of Insurance Commissioners is urging lawmakers to pass legislation aimed at promoting growth in the private flood insurance market to complement the federal program.

The association is supporting bills in the Senate and House that would give states certain regulatory authority over private flood insurance and that would allow consumers to go between private policies and the national program without paying penalties.

Thinking About Floods Like Fires

Berni floated the idea that policymakers should start thinking about floods in the same way people in past generations thought about the major urban fires that devastated U.S. cities, like the Chicago Fire of 1871. Blazes like these ushered in a new era of regulations.

“We updated building codes and zoning,” she said.

Requirements for sprinkler systems in large buildings are an example Berni pointed to of a modern fire safety measure. Possible equivalents for reducing flood risk might include infrastructure like retention ponds and pervious pavement, which allows water to seep through.

“Things that cost more money,” Berni said. “But that have proven benefit.” She added: “That needs to become something that property owners view as a value.”