Congress tried to cut subsidies for homes in flood zones. It was harder than they thought.

October 30, 2013

Back in 1968, Congress first began subsidizing flood-insurance policies for homeowners across the nation. That change allowed more Americans to move into coastal areas and floodplains without paying full price for the risks involved.

Flooding during Superstorm Sandy in 2012 (The Washington Post)
Flooding during Superstorm Sandy in 2012 (The Washington Post)

By 2012, however, lawmakers were rethinking the whole scheme. The National Flood Insurance Program was subsidizing premiums for 1.1 million policies and running multi-billion-dollar deficits. On top of that, scientists were predicting that sea-level rise would make flooding even more common in the years ahead. Environmentalists and fiscal conservatives alike argued that it made little sense to encourage building in high-risk areas.

So, that summer, Congress voted to revamp the program.* The Flood Insurance Reform Act of 2012 aimed to end subsidized rates for 438,000 insurance policies in flood zones  — mainly second homes, businesses, and repeatedly flooded properties. Subsidies for the rest (about 715,000 properties) would get rolled back more gradually, as the homes got sold. A separate set of properties could also face premium hikes as the government revises its flood maps.

But the story didn't end there. Fast forward to 2013, and Congress is finding that scrapping those flood subsidies isn't so easy — even though the flood program is now running a $28 billion deficit. After widespread public protests, lawmakers are scrambling to reconsider the reforms. Maxine Waters, a co-sponsor of the original bill, just announced a deal to delay the phase-out of discounted flood insurance until 2017.

Why the turnaround? Partly because so many homeowners rebelled when they saw big hikes in their flood-insurance premiums. Over at Salon, David Dayen has an excellent rundown of the situation:

If Congress was on board with reforming the [National Flood Insurance Program] in 2012, it wasn’t ready for complaints from homeowners in flood zones in 2013.

People across the country lost their subsidies, and saw their rates grow by 500 percent or more. One homeowner newly zoned into a flood area reported a $68,000 flood insurance bill. Real estate agents said the hikes were affecting home sales, because subsidized policyholders could not sell their properties to new purchasers who discovered huge rate increases.

Many of the properties affected were vacation homes and secondary residences. But poorer areas in Louisiana and places like Rockaway Beach in New York consist of modest, middle-class homes, and the residents could not afford the hefty increases. Protests broke out in these areas, and members of Congress, who casually passed Biggert-Waters as a fiscal and environmental imperative, took the message.

The about-face in Congress has been bipartisan. Fiscal conservatives in states like Louisiana are in favor of restoring the insurance subsidies. So are green-minded lawmakers who usually support efforts to limit the costs of global warming and rising sea-levels. Over at ClimateWire, Evan Lehmann reports that some environmentalists are now trying to devise ways of paring back flood subsidies that don't involve painful rate hikes.

"I think climate change is an important thing," Sen. Robert Menendez (R-N.J.) told Lehmann. "But for this coalition, we have one singular focus. And that focus is making sure that middle-class families do not get priced out of what they have spent a lifetime to achieve, which is their home."

Critics of the flood-insurance subsidies tend to point out that they disproportionately benefit wealthier homeowners. The libertarian R Street Institute, drawing on data from the GAO, notes that "78.8 percent of subsidized policies are in counties that rank in the top 30 percent of home values, while less than 1 percent are in counties that rank in the bottom 30 percent." That fact may also helps explain why the program is so difficult to repeal.

Correction: The Flood Insurance Reform Act of 2012 passed before Hurricane Sandy hit the East Coast, not after as I originally implied.

Further reading:

--Here's a long piece by Kate Sheppard on how Congress regularly pays billions to rebuild after natural disasters — but rarely considers policies to reduce the costs of the next disaster. The flood-insurance program gets plenty of discussion.

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Neil Irwin | October 30, 2013