Gulf Coast Rebuilding
Observations on Federal Financial Implications Gao ID: GAO-07-1079T August 2, 2007The devastation caused by the Gulf Coast hurricanes presents the nation with unprecedented challenges as well as opportunities to reexamine shared responsibility among all levels of government. All levels of government, together with the private and nonprofit sectors, will need to play a critical role in the process of choosing what, where, and how to rebuild. Agreeing on what the costs are, what federal funds have been provided, and who will bear the costs will be key to the overall rebuilding effort. This testimony (1) places federal assistance provided to date in the context of damage estimates for the Gulf Coast, and (2) discusses key federal programs that provide rebuilding assistance to the Gulf Coast states. In doing so, GAO highlights aspects of rebuilding likely to place continued demands on federal resources. GAO visited the Gulf Coast region, reviewed state and local documents, and interviewed federal, state, and local officials. GAO's ongoing work on these issues focuses on the use of federal rebuilding funds and administration of federal programs in the Gulf Coast region.
To respond to the Gulf Coast devastation, the federal government has already committed a historically high level of resources--more than $116 billion--through an array of grants, loan subsidies, and tax relief and incentives. A substantial portion of this assistance was directed to emergency assistance and meeting short-term needs arising from the hurricanes, leaving a smaller portion for longer-term rebuilding. To understand the long-term financial implications of Gulf Coast rebuilding, it is helpful to view potential federal assistance within the context of overall estimates of the damages incurred by the region. Some estimates put capital losses at a range of $70 billion to more than $150 billion, while the state of Louisiana estimated that the economic effect on its state alone could reach $200 billion. These estimates raise questions regarding how much additional assistance may be needed to help the Gulf Coast continue to rebuild, and who should be responsible for providing the related resources. Demands for additional federal resources to rebuild the Gulf Coast are likely to continue. The bulk of federal rebuilding assistance provided to the Gulf Coast states funds two key programs--the Federal Emergency Management Agency's Public Assistance (PA) program and the Department of Housing and Urban Development's Community Development Block Grant (CDBG) program. In addition to funding PA and CDBG, the federal government's recovery and rebuilding assistance also includes payouts from the National Flood Insurance Program as well as funds for levee restoration and repair, coastal wetlands and barrier islands restoration, and benefits provided through Gulf Opportunity Zone tax expenditures. As states and localities continue to rebuild, there are difficult policy decisions that will confront Congress about the federal government's continued contribution to the rebuilding effort and the role it might play over the long-term in an era of competing priorities. GAO's ongoing and preliminary work on Gulf Coast rebuilding suggests the following questions: How much could it ultimately cost to rebuild the Gulf Coast and how much of this cost should the federal government bear? How effective are current funding delivery mechanisms--such as PA and CDBG--and should they be modified or supplemented by other mechanisms? What options exist to effectively build in federal oversight to accompany the receipt of federal funds, particularly as federal funding has shifted from emergency response to rebuilding? How can the federal government further partner with state and local governments and the nonprofit and private sectors to leverage public investment in rebuilding? What are the "lessons learned" from the Gulf Coast hurricanes, and what changes need to be made to help ensure a more timely and effective rebuilding effort in the future?
GAO-07-1079T, Gulf Coast Rebuilding: Observations on Federal Financial Implications
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Testimony:
Before the Committee on the Budget, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, August 2, 2007:
gulf coast rebuilding:
Observations on Federal Financial Implications:
Statement of Stanley J. Czerwinski, Director Strategic Issues:
GAO-07-1079T:
GAO Highlights:
Highlights of GAO-07-1079T, a testimony before the Committee on the
Budget, House of Representatives.
Why GAO Did This Study:
The devastation caused by the Gulf Coast hurricanes presents the nation
with unprecedented challenges as well as opportunities to reexamine
shared responsibility among all levels of government. All levels of
government, together with the private and nonprofit sectors, will need
to play a critical role in the process of choosing what, where, and how
to rebuild. Agreeing on what the costs are, what federal funds have
been provided, and who will bear the costs will be key to the overall
rebuilding effort.
This testimony (1) places federal assistance provided to date in the
context of damage estimates for the Gulf Coast, and (2) discusses key
federal programs that provide rebuilding assistance to the Gulf Coast
states. In doing so, GAO highlights aspects of rebuilding likely to
place continued demands on federal resources.
GAO visited the Gulf Coast region, reviewed state and local documents,
and interviewed federal, state, and local officials. GAO‘s ongoing work
on these issues focuses on the use of federal rebuilding funds and
administration of federal programs in the Gulf Coast region.
What GAO Found:
To respond to the Gulf Coast devastation, the federal government has
already committed a historically high level of resources”more than $116
billion”through an array of grants, loan subsidies, and tax relief and
incentives. A substantial portion of this assistance was directed to
emergency assistance and meeting short-term needs arising from the
hurricanes, leaving a smaller portion for longer-term rebuilding. To
understand the long-term financial implications of Gulf Coast
rebuilding, it is helpful to view potential federal assistance within
the context of overall estimates of the damages incurred by the region.
Some estimates put capital losses at a range of $70 billion to more
than $150 billion, while the state of Louisiana estimated that the
economic effect on its state alone could reach $200 billion. These
estimates raise questions regarding how much additional assistance may
be needed to help the Gulf Coast continue to rebuild, and who should be
responsible for providing the related resources.
Demands for additional federal resources to rebuild the Gulf Coast are
likely to continue. The bulk of federal rebuilding assistance provided
to the Gulf Coast states funds two key programs”the Federal Emergency
Management Agency‘s Public Assistance (PA) program and the Department
of Housing and Urban Development‘s Community Development Block Grant
(CDBG) program. In addition to funding PA and CDBG, the federal
government‘s recovery and rebuilding assistance also includes payouts
from the National Flood Insurance Program as well as funds for levee
restoration and repair, coastal wetlands and barrier islands
restoration, and benefits provided through Gulf Opportunity Zone tax
expenditures.
As states and localities continue to rebuild, there are difficult
policy decisions that will confront Congress about the federal
government‘s continued contribution to the rebuilding effort and the
role it might play over the long-term in an era of competing
priorities. GAO‘s ongoing and preliminary work on Gulf Coast rebuilding
suggests the following questions:
* How much could it ultimately cost to rebuild the Gulf Coast and how
much of this cost should the federal government bear?
* How effective are current funding delivery mechanisms”such as PA and
CDBG”and should they be modified or supplemented by other mechanisms?
* What options exist to effectively build in federal oversight to
accompany the receipt of federal funds, particularly as federal funding
has shifted from emergency response to rebuilding?
* How can the federal government further partner with state and local
governments and the nonprofit and private sectors to leverage public
investment in rebuilding?
* What are the ’lessons learned“ from the Gulf Coast hurricanes, and
what changes need to be made to help ensure a more timely and effective
rebuilding effort in the future?
What GAO Recommends:
Although GAO is not making recommendations in this testimony, GAO
raises questions that the committee should consider in its oversight of
federal funding
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1079T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Stanley J. Czerwinski,
(202) 512-6806, czerwinskis@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to participate in today's hearing to
discuss our preliminary observations on the federal financial
implications of Gulf Coast rebuilding issues.[Footnote 1] The Gulf
Coast and the nation continue to face daunting rebuilding costs,
uncertainty surrounding numerous decisions linked to the availability
of federal funds, and the complexity of integrating multiple public and
private decisions that will influence the future of the region. The
size and scope of the devastation caused by the Gulf Coast
hurricanes[Footnote 2] presents the nation with unprecedented
rebuilding challenges as well as opportunities to reexamine shared
responsibility among all levels of government. Wide swaths of housing,
infrastructure, and businesses were destroyed, leaving more than 1,500
people dead and hundreds of thousands of others displaced without
shelter and employment. Our ongoing work in Mississippi, southern
Louisiana, and New Orleans confirms that some communities still lack
fulfillment of basic needs, such as schools, hospitals, and other
infrastructure, while the doors of many businesses remain closed.
Almost 2 years since the hurricanes made landfall, many Gulf Coast
neighborhoods and communities still need to be rebuilt--some from the
ground up.
Major decisions still need to be made regarding infrastructure,
housing, levee protection, coastal restoration, and economic recovery,
among other issues. All levels of government, together with the private
and nonprofit sectors, will need to play a critical role in the process
of choosing what, where, and how to rebuild. Agreeing on what the costs
are, what rebuilding should be done and by whom, and who will bear the
costs will be key to the overall rebuilding effort.
My testimony today will offer some preliminary observations on the
federal financial implications of rebuilding efforts in the Gulf Coast.
These observations may assist you in your oversight of these
activities--now and over the longer term. I would like to: (1) place
the federal assistance provided to date in the context of varied damage
estimates for the Gulf Coast; and (2) discuss the key federal programs
that provide rebuilding assistance, with an emphasis on Public
Assistance (PA) and Community Development Block Grants (CDBG). In doing
so, we will highlight aspects of Gulf Coast rebuilding likely to place
continued demands on federal resources.
My statement is based largely on our completed and ongoing work in
Washington, D.C., as well as Louisiana and Mississippi--the two states
most directly affected by the Gulf Coast hurricanes. Specifically, we
analyzed state and local documentation related to funding for
rebuilding and interviewed state and local officials as well as
representatives from nongovernmental organizations in these two states.
We also interviewed various federal officials from the Federal
Emergency Management Agency (FEMA), the Department of Housing and Urban
Development (HUD), and the Coordinator of Federal Support for the
Recovery and Rebuilding of the Gulf Coast Region[Footnote 3] within the
Department of Homeland Security (DHS) and analyzed federal regulations
and state policies regarding funding for the Gulf Coast. We performed
our work in accordance with generally accepted government auditing
standards.
Estimates Raise Questions Regarding Long-term Funding:
The total long-term funding for helping the Gulf Coast recover from the
2005 hurricanes hinges on numerous factors including policy choices
made at all levels of government, knowledge of spending across the
federal government, and the multiple decisions required to transform
the region. To understand the long-term federal financial implications
of Gulf Coast rebuilding it is helpful to view potential federal
assistance within the context of overall estimates of the damages
incurred by the region. Although there are no definitive or
authoritative estimates of the amount of federal funds that could be
invested to rebuild the Gulf Coast, various estimates of aspects of
rebuilding offer a sense of the long-term financial implications. For
example, early damage estimates from the Congressional Budget Office
(CBO) put capital losses from Hurricanes Katrina and Rita at a range of
$70 billion to $130 billion[Footnote 4] while another estimate put
losses solely from Hurricane Katrina--including capital losses--at more
than $150 billion.[Footnote 5] Further, the state of Louisiana has
estimated that the economic effect on its state alone could reach $200
billion. The exact costs of damages from the Gulf Coast hurricanes may
never be known, but will likely far surpass those from the three other
costliest disasters in recent history--Hurricane Andrew in 1992, the
1994 Northridge earthquake, and the September 2001 terrorist
attacks.[Footnote 6] These estimates raise important questions
regarding how much additional assistance may be needed to continue to
help the Gulf Coast rebuild, and who should be responsible for
providing the related resources.
To respond to the Gulf Coast devastation, the federal government has
already committed a historically high level of resources--more than
$116 billion--through an array of grants, loan subsidies, and tax
relief and incentives. The bulk of this assistance was provided between
September 2005 and May 2007 through five emergency supplemental
appropriations.[Footnote 7] A substantial portion of this assistance
was directed to emergency assistance and meeting short-term needs
arising from the hurricanes, such as relocation assistance, emergency
housing, immediate levee repair, and debris removal efforts. The
Brookings Institution has estimated that approximately $35 billion of
the federal resources provided supports longer-term rebuilding
efforts.[Footnote 8]
The federal funding I have mentioned presents an informative, but
likely incomplete picture of the federal government's total financial
investments to date. Tracking total funds provided for federal Gulf
Coast rebuilding efforts requires knowledge of a host of programs
administered by multiple federal agencies. We previously reported that
the federal government does not have a governmentwide framework or
mechanism in place to collect and consolidate information from the
individual federal agencies that received appropriations in emergency
supplementals for hurricane relief and recovery efforts or to report on
this information.[Footnote 9] It is important to provide transparency
by collecting and publishing this information so that hurricane
victims, affected states, and American taxpayers know how these funds
are being spent. Until such a system is in place across the federal
government, a complete picture of federal funding streams and their
integration across agencies will remain lacking.
Demand for Federal Rebuilding Resources Likely to Continue:
Demands for additional federal resources to rebuild the Gulf Coast are
likely to continue, despite the substantial federal funding provided to
date. The bulk of federal rebuilding assistance provided to the Gulf
Coast states funds two key programs--FEMA's Public Assistance (PA)
program and HUD's Community Development Block Grant (CDBG) program.
These two programs follow different funding models. PA provides funding
for restoration of the region's infrastructure on a project-by-project
basis involving an assessment of specific proposals to determine
eligibility. In contrast, CDBG affords broad discretion and flexibility
to states and localities for restoration of the region's livable
housing. In addition to funding PA and CDBG, the federal government's
recovery and rebuilding assistance also includes payouts from the
National Flood Insurance Program (NFIP) as well as funds for levee
restoration and repair, coastal wetlands and barrier islands
restoration, and benefits provided through Gulf Opportunity Zone (GO
Zone) tax expenditures.
Public Assistance Program Faces Increased Costs:
The PA Grant program provides assistance to state and local governments
and eligible nonprofit organizations on a project-by-project basis for
emergency work (e.g., removal of debris and emergency protective
measures) and permanent work (e.g., repairing roads, reconstructing
buildings, and reestablishing utilities).[Footnote 10] After the
President declares a disaster, a state becomes eligible for federal PA
funds through FEMA's Disaster Relief Fund. Officials at the local,
state, and federal level are involved in the PA process in a variety of
ways. The grant applicant, such as a local government or nonprofit
organization, works with state and FEMA officials to develop a scope of
work and cost estimate for each project that is documented in
individual project worksheets. In addition to documenting scope of work
and cost considerations, each project worksheet is reviewed by FEMA and
the state to determine whether the applicant and type of facility are
eligible for funding. Once approved, funds are obligated, that is, made
available, to the state. PA generally operates on a reimbursement
basis. Reimbursement for small projects (up to $59,700) are made based
on the project's estimated costs, while large projects (more than
$59,700) are reimbursed based upon actual eligible costs when they are
incurred.[Footnote 11]
As of the middle of July 2007, FEMA had approved a total of 67,253
project worksheets for emergency and permanent work, making available
about $8.2 billion in PA grants to the states of Louisiana,
Mississippi, Texas, and Alabama. A smaller portion of PA program funds
are going toward longer-term rebuilding activities than emergency work.
Of the approximately $8.2 billion made available to the Gulf Coast
states overall, about $3.4 billion (41 percent) is for permanent work
such as repairing and rebuilding schools and hospitals and
reestablishing sewer and water systems, while about $4.6 billion (56
percent) is for emergency response work such as clearing roads for
access and sandbagging low-lying areas. The remaining amount of PA
funds, about $0.2 billion (3 percent) is for administrative costs. (See
fig. 1.) Of the funds made available by FEMA to the states for
permanent rebuilding, localities have only received a portion of these
funds since many projects have not yet been completed. Specifically, in
Louisiana and Mississippi, 26 and 22 percent of obligated funds,
respectively, have been paid by the state to applicants for these
projects.
Figure 1: Breakdown of Public Assistance Grants Made Available to the
Gulf Coast States as of the middle of July 2007 (billions of
dollars):
[See PDF for image]
Source: GAO analysis of FEMA data.
Note: Data included are as of the following dates: Alabama, July 19,
2007; Louisiana, July 19, 2007; Mississippi, July 18, 2007; and Texas,
July 19, 2007.
[End of figure]
The total cost of PA funding for the Gulf Coast hurricanes will likely
exceed the approximately $8.2 billion already made available to the
states for two reasons: (1) the funds do not reflect all current and
future projects, and (2) the cost of some of these projects will likely
be higher than FEMA's original estimates. According to FEMA, as of the
middle of July 2007, an additional 1,916 project worksheets were in
process (these projects are in addition to the 67,253 approved project
worksheets mentioned above). FEMA expects that another 2,730 project
worksheets will be written. FEMA expects these worksheets to increase
the total cost by about $2.1 billion, resulting in a total expected PA
cost of about $10.3 billion.
Some state and local officials have also expressed concerns about
unrealistically low cost estimates contained in project worksheets,
which could lead to even higher than anticipated costs to the federal
government. A senior official within the Louisiana Governor's Office of
Homeland Security and Emergency Preparedness recently testified that
some of the projects were underestimated by a factor of 4 or 5 times
compared to the actual cost.[Footnote 12] For example, the lowest bids
on 11 project worksheets for repairing or rebuilding state-owned
facilities, such as universities and hospitals, totaled $5.5 million
while FEMA approved $1.9 million for these projects.
The extent to which the number of new project worksheets and actual
costs that exceed estimated costs will result in demands for additional
federal funds remains unknown. In addition, PA costs may increase until
a disaster is closed, which can take many years in the case of a
catastrophic disaster.[Footnote 13] For instance, PA costs from the
Northridge earthquake that hit California in January 1994 have not been
closed out more than 13 years after the event. Our ongoing work on the
PA program will provide insights into efforts to complete
infrastructure projects, the actual costs of completed projects, and
the use of federal funds to complete PA projects.
Additional Resource Demands Anticipated for CDBG Program:
HUD's CDBG program provides funding for neighborhood revitalization and
housing rehabilitation activities, affording states broad discretion
and flexibility in deciding how to allocate these funds and for what
purposes. Congress has provided even greater flexibility when
allocating additional CDBG funds to affected communities and states to
help them recover from presidentially-declared disasters, such as the
Gulf Coast hurricanes.[Footnote 14] To date, the affected Gulf Coast
states have received $16.7 billion in CDBG funding from supplemental
appropriations--so far, the largest federal provider of long-term Gulf
Coast rebuilding funding.[Footnote 15] As shown in figure 2, Louisiana
and Mississippi were allocated the largest shares of the CDBG
appropriations, with $10.4 billion allocated to Louisiana, and another
$5.5 billion allocated to Mississippi. Florida, Alabama, and Texas
received the remaining share of CDBG funds.[Footnote 16]
Figure 2: Breakdown of Total CDBG Allocations to Gulf Coast States:
[See PDF for image]
Source: GAO analysis of Louisiana Recovery Authority and Mississippi
Development Authority.
[End of figure]
To receive CDBG funds for Gulf Coast rebuilding, HUD required that each
state submit an action plan describing how the funds would be used,
including how the funds would address long-term "recovery and
restoration of infrastructure." Accordingly, the states had substantial
flexibility in establishing funding levels and designing programs to
achieve their goals. As shown in figure 3, Mississippi set aside $3.8
billion to address housing priorities within the state while Louisiana
dedicated $8 billion for its housing needs.
Figure 3: Most CDBG Funding Allocated to Housing Needs in Louisiana and
Mississippi:
[See PDF for image]
Source: GAO analysis of agency-provided data.
Note: Totals may not add due to rounding.
[A] In Mississippi, "other" refers to wind insurance mitigation and
funds not yet programmed by the state. In Louisiana, "other" refers to
funding for planning and administrative activities.
[End of figure]
Each state also directed the majority of its housing allocations to
owner-occupied homes and designed a homeowner assistance program to
address the particular conditions in their state. As discussed below,
each state used different assumptions in designing its programs, which
in turn affects the financial implications for each state.
Louisiana's Homeowner Assistance Program Anticipates Shortfall:
Using $8.0 billion in CDBG funding, the Louisiana Recovery Authority
(LRA) developed a housing assistance program called the Road Home to
restore the housing infrastructure in the state.[Footnote 17] As shown
in figure 4, Louisiana set aside about $6.3 billion of these funds to
develop the homeowner assistance component of the program and nearly
$1.7 billion for rental, low-income housing, and other housing-related
projects. Louisiana anticipated that FEMA would provide the homeowner
assistance component with another $1.2 billion in grant assistance.
Louisiana based these funding amounts on estimates of need within the
state. Accordingly, Louisiana estimated that $7.5 billion would be
needed to assist 114,532 homeowners with major or severe damage.
Louisiana also estimated these funds would provide an average grant
award of $60,109 per homeowner.
Figure 4: Louisiana's Estimated Funding Distribution for Homeowner
Assistance (billions of dollars):
[See PDF for image]
Source: Louisiana Recovery Authority data.
[End of figure]
The LRA launched the Road Home homeowner assistance program in August
2006. Under the program, homeowners who decide to stay in Louisiana and
rebuild are eligible for the full amount of grant assistance--up to
$150,000. Aside from the elderly, residents who choose to sell their
homes and leave the state will have their grant awards reduced by 40
percent, while residents who did not have insurance at the time of the
hurricanes will have their grant awards reduced by 30 percent. To
receive compensation, homeowners must comply with applicable code and
zoning requirements and FEMA advisory base flood elevations when
rebuilding and agree to use their home as a primary residence at some
point during a 3-year period following closing. Further, the amount of
compensation that homeowners can receive depends on the value of their
homes before the storms and the amount of flood or wind damage that was
not covered by insurance or other forms of assistance.
As of July 16, 2007, the Road Home program had received 158,489
applications and had held 36,655 closings with an average award amount
of $74,216. With the number of applications exceeding initial estimates
and average award amounts higher than expected, recent concerns have
been raised about a potential funding shortfall and the Road Home
program's ability to achieve its objective of compensating all eligible
homeowners. Concerns over the potential shortfall have led to questions
about the Road Home program's policy to pay for uninsured wind damage
instead of limiting compensation to flood damage. In recent
congressional hearings, the Executive Director of the LRA testified
that the Road Home program will require additional funds to compensate
all eligible homeowners, citing a higher than projected number of
homeowners applying to the program, higher costs for homeowner repairs,
and a smaller percentage of private insurance payouts than
expected.
According to the Federal Coordinator for Gulf Coast Rebuilding, CDBG
funds were allocated to Louisiana on the basis of a negotiation with
the state conducted between January and February 2006. That negotiation
considered the provision of federal funding for the state's need to
conduct a homeowner assistance program covering homes that experienced
major or severe damage from flooding. The state requested the
allocation of federal funding at that time to expand the program to
assist homeowners who experienced only wind damage. That request to
provide federal funds to establish a homeowner program for homes which
only experienced wind damage was denied, as were similar requests from
Gulf Coast states such as Texas. The Administration requested the
negotiated amount from Congress on February 15, 2006. Congress approved
that amount and it was signed into law by the President on June 15,
2006. Subsequently, Louisiana announced the expansion of the Road Home
program to cover damage exclusively from wind regardless of the stated
intention of the federal allocation, but fully within their statutory
authority.
In addition, the Executive Director of the LRA testified that Louisiana
had not received $1.2 billion in funds from FEMA--assistance that had
been part of the Road Home program's original funding design.
Specifically, the state expected FEMA to provide grant assistance
through its Hazard Mitigation Grant Program (HMGP)--a program that
generally provides assistance to address long-term community safety
needs.[Footnote 18] Louisiana had planned to use this funding to assist
homeowners with meeting elevation standards and other storm protection
measures, as they rebuilt their homes.[Footnote 19] However, FEMA has
asserted that it cannot release the money because the Road Home program
discriminates against younger residents. Specifically, the program
exempts elderly recipients from the 40 percent grant reduction if they
choose to leave the state or do not agree to reside in their home as a
primary residence at some point during a 3-year period.
Although we have not assessed their assumptions, recent estimates from
the Road Home program[Footnote 20] and Louisiana's state legislative
auditor's office have estimated a potential shortfall in the range of
$2.9 billion to $5 billion.
While these issues will not be immediately resolved, they raise a
number of questions about the potential demands for additional federal
funding for the states' rebuilding efforts. Our ongoing work on various
aspects of the CDBG program--including a review of how the affected
states developed their funding levels and priorities--will provide
insights into these issues.
Mississippi's Homeowner Assistance Program Proceeding in Two
Phases:
In Mississippi, Katrina's storm surge destroyed tens of thousands of
homes, many of which were located outside FEMA's designated flood plain
and not covered by flood insurance. Using about $3 billion in CDBG
funds, Mississippi developed a two-phase program to target homeowners
who suffered losses due to the storm surge. Accordingly, Phase I of the
program was designed to compensate homeowners whose properties were
located outside the floodplain and had maintained hazard insurance at a
minimum.[Footnote 21] Eligible for up to $150,000 in compensation,
these homeowners were not subject to a requirement to rebuild. Phase II
of the program is designed to award grants to those who received flood
surge damage, regardless of whether they lived inside or outside the
flood zone or had maintained insurance on their homes. Eligible
applicants must have an income at or below 120 percent of the Area
Median Income (AMI). Eligible for up to $100,000 in grant awards, these
homeowners are not subject to a requirement to rebuild.[Footnote 22] In
addition, homeowners who do not have insurance will have their grant
reduced by 30 percent, although this penalty does not apply to the
"special needs" populations as defined by the state (i.e., elderly,
disabled, and low-income).[Footnote 23]
As of July 18, 2007, Mississippi had received 19,277 applications for
Phase I of its program and awarded payments to 13,419 eligible
homeowners with an average award amount of $72,062. In addition,
Mississippi had received 7,424 applications for Phase II of its program
and had moved an additional 4,130 applications that did not qualify for
Phase I assistance to Phase II. The State had awarded 234 grants to
eligible homeowners in Phase II with an average award amount of
$69,448.
Substantial Losses Affect National Flood Insurance Program Ability to
Repay:
The National Flood Insurance Program (NFIP) incurred unprecedented
storm losses from the 2005 hurricane season. NFIP estimated that it had
paid approximately $15.7 billion in flood insurance claims as of
January 31, 2007, encompassing approximately 99 percent of all flood
claims received.[Footnote 24] The intent of the NFIP is to pool risk,
minimize costs and distribute burdens equitably among those who will be
protected and the general public.[Footnote 25] The NFIP, by design, is
not actuarially sound. Nonetheless, until recent years, the program was
largely successful in paying flood losses and operating expenses with
policy premium revenues--the funds paid by policyholders for their
annual flood insurance coverage. However, because the program's premium
rates have been set to cover losses in an average year based on program
experience that did not include any catastrophic losses, the program
has been unable to build sufficient reserves to meet future expected
flood losses.[Footnote 26]
Historically, the NFIP has been able to repay funds borrowed from the
Treasury to meet its claims obligations. However, the magnitude and
severity of losses from Hurricane Katrina and other 2005 hurricanes
required the NFIP to obtain borrowing authority of $20.8 billion from
the Treasury, an amount NFIP will unlikely be able to repay while
paying future claims with its current premium income of about $2
billion annually.
In addition to the federal funding challenge created by the payment of
claims, key concerns raised from the response to the 2005 hurricane
season include whether or not some property-casualty insurance claims
for wind-related damages were improperly shifted to NFIP at the expense
of taxpayers. For properties subjected to both high winds and flooding,
determinations must be made to assess the damages caused by wind, which
may be covered through a property-casualty homeowners policy, and the
damages caused by flooding, which may be covered by NFIP.[Footnote 27]
Disputes over coverage between policyholders and property-casualty
insurers from the 2005 hurricane season highlight the challenges of
determining the appropriateness of claims for multiple-peril events.
NFIP may continue to face challenges in the future when servicing and
validating flood claims from disasters such as hurricanes that may
involve both flood and wind damages. Our ongoing work addresses
insurance issues related to wind versus flood damages, including a
review of how such determinations are made, who is making these
determinations and how they are regulated, and the ability of FEMA to
verify the accuracy of flood insurance claims payments based on the
wind and flood damage determinations.
Billions Appropriated for Gulf Coast Hurricane Protection Projects:
Congress has appropriated more than $8 billion to the U.S. Army Corps
of Engineers (Corps) for hurricane protection projects in the Gulf
Coast. These funds cover repair, restoration and construction of levees
and floodwalls as well as other hurricane protection and flood control
projects. These projects are expected to take years and require
billions of dollars to complete.[Footnote 28] Estimated total costs for
hurricane protection projects are unknown because the Corps is also
conducting a study of flood control, coastal restoration, and hurricane
protection measures for the southeastern Louisiana coastal region as
required by the 2006 Energy and Water Development Appropriations
Act[Footnote 29] and Department of Defense Appropriations Act.[Footnote
30] The Corps must propose design and technical requirements to protect
the region from a Category 5 hurricane.[Footnote 31] According to the
Corps, alternatives being considered include a structural design
consisting of a contiguous line of earthen or concrete walls along
southern coastal Louisiana, a nonstructural alternative involving only
environmental or coastal restoration measures, or a combination of
those alternatives. The Corps' final proposal is due in December 2007.
Although the cost to provide a Category 5 level of protection for the
southeastern Louisiana coastal region has not yet been determined,
these costs would be in addition to the more than $8 billion already
provided to the Corps.
Restoring Louisiana's Wetlands and Barrier Islands Will Likely Cost
Billions:
The Corps' December 2007 proposal will also influence future federal
funding for coastal wetlands and barrier islands restoration. Since the
1930s, coastal Louisiana lost more than 1.2 million acres of wetlands,
at a rate of 25-35 square miles per year, leaving the Gulf Coast
exposed to destructive storm surge. Various preliminary estimates
ranging from $15 billion to $45 billion have been made about the
ultimate cost to complete these restoration efforts. However, until the
Corps develops its plans and the state and local jurisdictions agree on
what needs to be done, no reliable estimate is available. We are
conducting work to understand what coastal restoration alternatives
have been identified and how these alternatives would integrate with
other flood control and hurricane protection measures, the challenges
and estimated costs to restore Louisiana's coastal wetlands, and the
opinions of scientists and engineers on the practicality and
achievability of large-scale, comprehensive plans and strategies to
restore coastal wetlands to the scale necessary to protect coastal
Louisiana.
GO Zone Tax Incentives Provide Assistance for Recovery:
The Gulf Opportunity Zone Act of 2005 provides tax benefits to assist
in the recovery from the Gulf Coast hurricanes.[Footnote 32] From a
budgetary perspective, most tax expenditure programs, such as the GO
Zones, are comparable to mandatory spending for entitlement programs,
in that federal funds flow based on eligibility and formulas specified
in authorizing legislation.[Footnote 33] The 5-year cost of the GO
Zones is estimated at $8 billion and the 10-year cost is estimated to
be $9 billion. Since Congress and the President must change substantive
law to change the cost of these programs, they are relatively
uncontrollable on an annual basis. The GO Zone tax benefits chiefly
extend, with some modifications, existing tax provisions such as
expensing capital expenditures, the Low Income Housing Tax Credit
(LIHTC), tax exempt bonds, and the New Markets Tax Credit (NMTC). The
2005 Act increases limitations in expensing provisions for qualified GO
Zone properties. The Act also increased the state limitations in
Alabama, Louisiana, and Mississippi on the amount of LIHTC that can be
allocated for low-income housing properties in GO Zones. Further, the
act allows these states to issue tax-exempt GO Zone bonds for
qualifying residential and nonresidential properties. Finally, the NMTC
limitations on the total amount of credits allocated yearly were also
increased for qualifying low-income community investments in GO
Zones.
We have a congressional mandate to review the practices employed by the
states and local governments in allocating and utilizing the tax
incentives provided in the Gulf Opportunity Zone Act of 2005. We have
also issued reports on the tax provisions, such as LIHTC and NMTC, now
extended to the GO Zones by the 2005 Act.[Footnote 34]
Observations:
Rebuilding efforts in the Gulf Coast continue amidst questions
regarding the total cost of federal assistance, the extent to which
federal funds will address the rebuilding demands of the region, and
the many decisions left to be made by multiple levels of government. As
residents, local and state leaders and federal officials struggle to
respond to these questions, their responses lay a foundation for the
future of the Gulf Coast. As states and localities continue to rebuild,
there are difficult policy decisions that will confront Congress about
the federal government's continued contribution to the rebuilding
effort and the role it might play over the long-term in an era of
competing priorities. Congress will be faced with many questions as it
continues to carry out its critical oversight function in reviewing
funding for Gulf Coast rebuilding efforts. Our ongoing and preliminary
work on Gulf Coast rebuilding suggests the following questions:
* How much could it ultimately cost to rebuild the Gulf Coast and how
much of this cost should the federal government bear?
* How effective are current funding delivery mechanisms--such as PA and
CDBG--and should they be modified or supplemented by other
mechanisms?
* What options exist to effectively build in federal oversight to
accompany the receipt of federal funds, particularly as federal funding
has shifted from emergency response to rebuilding?
* How can the federal government further partner with state and local
governments and the nonprofit and private sectors to leverage public
investment in rebuilding?
* What are the "lessons learned" from the Gulf Coast hurricanes, and
what changes need to be made to help ensure a more timely and effective
rebuilding effort in the future?
Mr. Chairman and Members of the committee, this concludes my statement.
I would be happy to respond to any questions you may have at this
time.
GAO Contact and Staff Acknowledgments:
For information about this testimony, please contact Stanley J.
Czerwinski, Director, Strategic Issues, at (202) 512-6806 or
czerwinskis@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
statement. Individuals making key contributions to this testimony
include Kathleen Boggs, Peter Del Toro, Jeffrey Miller, Carol Patey,
Brenda Rabinowitz, Michelle Sager, and Robert Yetvin.
FOOTNOTES
[1] This testimony updates and expands on GAO, Gulf Coast Rebuilding:
Preliminary Observations on Progress to Date and Challenges for the
Future, GAO-07-574T (Washington, D.C.: Apr. 12, 2007); and GAO,
Preliminary Information on Rebuilding Efforts in the Gulf Coast, GAO-07-
809R (Washington, D.C.: June 29, 2007).
[2] In this testimony, unless otherwise noted, we refer to Hurricanes
Katrina, Rita, and Wilma collectively as the Gulf Coast hurricanes.
[3] Throughout this report and unless otherwise noted, we refer to this
official as the Federal Coordinator for Gulf Coast Rebuilding.
[4] According to CBO, capital losses include housing, consumer durable
goods, energy, other private-sector, and government losses.
[5] This estimate includes damages only to commercial structures and
equipment, residential structures and contents, electrical utilities,
highways, sewer systems, and commercial revenue losses. For more
information see, Mark L. Burton and Michael J. Hicks, Hurricane
Katrina: Preliminary Estimates of Commercial and Public Sector Damages
(Huntington, W.Va.: Marshall University, September 2005).
[6] According to CBO, losses from Hurricane Andrew--a Category 5
hurricane that struck the coast of Florida in 1992--totaled about $38.5
billion in 2005 dollars. The earthquake that struck Northridge,
California in 1994, which measured 6.7 on the Richter scale--resulted
in $48.7 billion in losses, as measured in 2005 dollars. Further,
losses from the terrorist attacks on September 11, 2001, were estimated
at $87 billion in 2005 dollars, of which $35.2 billion were privately
insured losses.
[7] Pub. L. No. 109-61, 119 Stat. 1988 (Sept. 2, 2005); Pub. L. No. 109-
62, 119 Stat, 1990 (Sept. 8, 2005); Pub. L. No. 109-148, 119 Stat. 2680
(Dec. 30, 2005); Pub. L. No. 109-234, 120 Stat. 418 (June 15, 2006);
and Pub. L. No. 110-28, 121 Stat. 169 (May 25, 2007). In addition to
these five supplemental appropriations acts, a number of authorizations
and programs in multiple federal agencies provided assistance. Congress
also increased the borrowing authority of the National Flood Insurance
Program to cover the large number of hurricane-related claims. Pub. L.
No. 109-65, 119 Stat. 1998 (Sept. 20, 2005); Pub. L. No. 109-106, 119
Stat. 2288 (Nov. 21, 2005); and Pub. L. No. 109-208, 120 Stat. 317
(Mar. 23, 2006). In addition, Congress passed the Gulf Opportunity Zone
Act to provide tax relief benefits and incentives to affected
individuals and businesses. Pub. L. No. 109-135, 119 Stat. 2577 (Dec.
21, 2005).
[8] Amy Liu, "Building a Better New Orleans: A Review of and Plan for
Progress One Year after Hurricane Katrina." Special Analysis in
Metropolitan Policy (Washington, D.C.: The Brookings Institution,
August 2006).
[9] GAO, Disaster Relief: Governmentwide Framework Needed to Collect
and Consolidate Information to Report on Billions in Federal Funding
for the 2005 Gulf Coast Hurricanes, GAO-06-834 (Washington, D.C.: Sept.
6, 2006).
[10] PA is typically a cost-share program between the federal and state
and local governments. However, for Hurricanes Katrina and Rita, the
state and local match requirements were waived for eligible emergency
work in the immediate aftermath of the storms and the federal
government provided 100 percent funding. In addition, Congress recently
passed, and the President signed into law, legislation to adjust the
federal cost-share of certain eligible rebuilding projects to 100
percent. U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and
Iraq Accountability Appropriations Act, 2007, Pub. L. No. 110-28 §
4501, 121 Stat. 112, 156 (May 25, 2007).
[11] Under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act (Stafford Act), project funds cover the restoration or
rebuilding of damaged facilities to their predisaster design and
capacity. 42 U.S.C. § 5172(e)(1)(A)(i).
[12] Testimony before the Subcommittee on Disaster Recovery of the U.S.
Senate Committee on Homeland Security and Governmental Affairs, July
10, 2007.
[13] A disaster is considered to be closed when all projects are
approved, all appeals are resolved, and all funds are obligated.
[14] CDBG funds supported recovery efforts in New York City following
the terrorist attacks of September 11, 2001; in Oklahoma City following
the bombing of the Alfred Murrah Building in 1995; and in the city and
county of Los Angeles following the riots of 1992.
[15] Pub. L. No. 109-148, 119 Stat. 2680, 2779-80 (Dec. 30, 2005); Pub.
L. No. 109-234, 120 Stat. 418, 472-73 (June 15, 2006).
[16] Texas received more than $503 million, Florida received about $183
million, and Alabama received nearly $96 million. HUD Notice of
Allocations and Waivers 71 Fed. Reg. 7666 (Feb. 13, 2006); 71 Fed. Reg.
63,337 (Oct. 30, 2006).
[17] The LRA was created at the direction of Governor Blanco by
executive order in October of 2005 and subsequently authorized by the
state legislature in early 2006.
[18] Authorized under section 404 of the Stafford Act, the HMGP
provides grants to states, which in turn provide funds to eligible
applicants to implement measures that substantially reduce the risk of
future damages, hardship, loss, or suffering in an area affected by a
major disaster. 42 U.S.C. § 5172c.
[19] Specifically, the Road Home program would use HMGP funds to
provide homeowners with elevation grants of up to $30,000 and up to
$7,500 for individual storm protection measures such as storm
shutters.
[20] These estimates were developed by ICF International, Incorporated,
a company under contract with the state of Louisiana to administer the
Road Home program.
[21] To receive an award, eligible applicants must place a covenant on
their property, providing that flood insurance and hazard insurance
will be maintained in perpetuity, the home will be rebuilt or repaired
to local building codes, and if rebuilt, the home will be elevated to
FEMA elevation standards.
[22] To receive an award, eligible applicants--similar to those in
Phase I--must place a covenant on their property, stipulating that (1)
flood insurance will be maintained in perpetuity, (2) the home will be
rebuilt or repaired to local building codes, and (3) if rebuilt, the
home will be elevated to FEMA elevation standards.
[23] "Low-income" homeowners are those with incomes at or below 60
percent of the AMI--which ranges by county.
[24] See GAO, National Flood Insurance Program: Preliminary Views on
FEMA's Ability to Ensure Accurate Payments on Hurricane-Damaged
Properties, GAO-07-991T (Washington, D.C.: June 12, 2007); and GAO,
National Flood Insurance Program: New Processes Aided Hurricane Katrina
Claims Handling, but FEMA's Oversight Should Be Improved, GAO-07-169
(Washington, D.C.: Dec. 15, 2006).
[25] 42 U.S.C. § 4001(d); 42 U.S.C. § 4016.
[26] See GAO, Flood Insurance: Information on the Financial Condition
of the National Flood Insurance Program, GAO-01-992T (Washington, D.C.:
July 19, 2001).
[27] Property owners in certain coastal regions subject to hurricanes
and flooding may have to purchase at least two, and sometimes more,
different types of insurance policies. Flood insurance is offered by
NFIP, while insurance for wind-related damages is generally offered by
private insurance companies or state-sponsored insurers. NFIP was
established in 1968 in part to provide some insurance protection for
flood victims because the private insurers were and still are largely
unwilling to insure for flood risks.
[28] See GAO, Hurricane Katrina: Strategic Planning Needed to Guide
Future Enhancements Beyond Interim Levee Repairs, GAO-06-934
(Washington, D.C.: Sept. 6, 2006); and GAO, U.S. Army Corps of
Engineers' Procurement of Pumping Systems for the New Orleans Drainage
Canals, GAO-07-908R (Washington, D.C.: May 23, 2007).
[29] Pub. L. No. 109-103, 119 Stat. 2247, 2247 (Nov. 19, 2005).
[30] Pub. L. No. 109-148, 119 Stat. 2680, 2761 (Dec. 30, 2005).
[31] Pub. L. No. 109-103, 119 Stat. 2247, 2248.
[32] Pub. L. No. 109-135.
[33] Tax expenditures may substitute for a federal spending program in
that the federal government "spends" some of its revenue on subsidies
by forgoing taxation on some income. See GAO, Government Performance
and Accountability: Tax Expenditures Represent a Substantial Federal
Commitment and Need to Be Reexamined, GAO-05-690 (Washington, D.C.:
Sept. 23, 2005).
[34] See GAO, Tax Credits: Opportunities to Improve Oversight of the
Low-income Housing Program, GAO/T-GGD/RCED-97-149 (Washington, D.C.,
Apr. 23, 1997); and GAO, Tax Policy: New Markets Tax Credit Appears to
Increase Investment by Investors in Low-Income Communities, but
Opportunities Exist to Better Monitor Compliance, GAO-07-296
(Washington, D.C.: Jan. 31, 2007).
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