Outrageous: Your Tax Dollars Bailing People Out

Who bails out homeowners after they build or buy in flood zones? You do.

If you crash your car repeatedly, you can count on your insurance premium shooting up. Crash often enough and your insurer will drop you. But there's a special kind of insurance that doesn't punish you for having the same accident over and over again. And here's the punch line: It's a government program that's already left tax-payers like you on the hook for $17 billion—and counting.

This boondoggle is called the National Flood Insurance Program. Over the past three decades, the NFIP has paid out more than $9 billion in flood insurance claims to the owners of more than 140,000 properties that have flooded more than once within a ten-year period. Some of these properties have flooded a dozen times. One house in Houston has flooded 16 times; repairs have totaled $807,000, seven times the market value of the property. Yet very few of these owners have lost their policies or seen their premiums go up substantially.

This is a case of good intentions gone wrong. Created by Congress in 1968 to reduce spending on disaster relief and discourage development in high-risk areas, the NFIP requires homeowners in flood-prone areas who have federally insured mortgages (that includes the vast majority of housing loans) to buy government-sponsored flood insurance. The program also includes incentives designed to persuade flood victims to rebuild on higher ground.

 

The NFIP never worked. Even today, many homeowners avoid buying flood insurance. Efforts to coax more buyers into the system have led to artificially low premiums. And the government has relied on laughably outdated flood maps, many of them decades old, to determine eligibility for insurance, further distorting the costs of the program.

As a result, policyholders now pay about $400 for every $100,000 in coverage (up to $250,000 for a house, plus $100,000 for belongings). You're definitely not going to get that deal from your insurance agent.

Like its parent agency, FEMA, the NFIP has been rocked in recent years by a succession of storms, especially Hurricanes Katrina and Rita in 2005, leaving the program $17 billion in debt. So what began as a way to limit relief costs has become a very expensive bailout. In fact, by providing coverage at low rates in areas where private insurers are unwilling to operate, the NFIP has caused what it was intended to stop-development in danger zones. "By subsidizing flood insurance, we're encouraging more people to live in harm's way," says Steve Ellis, vice president of Taxpayers for Common Sense, a budget watchdog group. "Not all of us can have a water view, but all of us get stuck with the tab."

Read FEMA's response to Michael Crowley's column.

Even nuttier is the way the government pays to rebuild properties that flood year after year. By 1998 the National Wildlife Federation had already identified nearly 32,000 properties in 300 cities that had been flooded and repaired two or more times. By unintentionally encouraging development, the NFIP has contributed to environmental damage that worsens the impact of storms. Building in or near fragile areas like marshlands and coasts erodes the buffers that can prevent more severe inland flooding—one of the likely culprits behind the damage wrought by Hurricane Katrina.

Of the properties destroyed by floods, almost 5,600 were worth less than what it cost to repair them.

According to a 2005 report by the nonpartisan Congressional Research Service, owners of properties that flood repeatedly receive 30 percent of the money paid out annually by the NFIP. But why should they care? There's little chance they'll lose their insurance or see premiums go up.

FEMA is reluctant to punish communities that ignore federal guidelines for building in flood-prone areas by canceling flood insurance. And good old Uncle Sam is quick to replace flood-damaged roads and restore washed-away beaches. Is it any wonder that government statistics show that America's coastal areas have grown in population by seven million over the past five years?

Experts across the political spectrum say it's time to make the system more like a private insurance program. Even Robert Hunter, a former director of the NFIP, has called the current program "a danger to the nation" and says it is "just unbelievable" that Congress has taken no action to fix it.

One approach is to raise premiums. About one in four policyholders is paying a premium that's less than 40 percent of what a private insurance company would likely charge, according to David Conrad, a researcher at the National Wildlife Federation. The government could also use an income test to determine eligibility for federal insurance—so the rest of us wouldn't have to pay to protect swank summer homes. As Eli Lehrer of the conservative Competitive Enterprise Institute says, "If it's well-off people in their oceanfront mansions … well, tough!"

There are those in Congress who want to rein in this crazy program, but their efforts have failed, thanks in part to business and real estate lobbyists. Meanwhile, Washington being Washington, some have decided that the solution is to expand the NFIP—by covering wind damage, an idea that the Government Accountability Office says could be a fiscal disaster.

And then there's this: After Katrina clobbered the Gulf Coast, one congressman introduced a "Buy-In Act" that would have let people buy flood insurance retroactively. Kind of defeats the point of insurance, doesn't it? The bill went nowhere, but that's the kind of brilliant thinking that got us here in the first place. You might even say it's all wet.

DO MORE

• Visit the National Flood Insurance Program at floodsmart.gov (yes, that's really its name).
• Worried about government waste? Visit the Action Center of Taxpayers for Common Sense (taxpayer.net), or report wasteful spending at the Citizens Against Government Waste website (cagw.org; click on Get Involved).
• Concerned about natural resources? Visit the National Wildlife Federation (nwf.org) to adopt a wildlife acre, or find local offices of the Conservation Fund (conservationfund.org) to see what you can do in your community.