LA delegation must balance between nation, state residents

The balancing act now conducted by Louisiana politicians on the issue of flood premiums demonstrates the tension between following good holistic policy and playing to electoral politics at home.

Plagued by frequent stopgap funding requests for the National Flood Insurance Program, last year Congress passed legislation designed to put the program on consistent footing for the next few years, as part of a larger bill which passed along billions of dollars to Louisiana related to the 2010 drilling rig explosion in the Gulf of Mexico that caused the state environmental problems. All homeowners in a flood zone must purchase it while others may do so optionally from the program established by the federal government 45 years ago in lieu of private insurers. The idea was to set a uniform rate nationwide covering a broad-based clientele to prevent wide variations in premiums, including prohibitively expensive ones.

But it also was supposed to be self-supporting, even though by statute this was not achieved in the initial pricing and has only crept towards that ever since. Last year’s legislation was supposed to achieve that by inducing rate hikes based somewhat on risk as high as 20 percent per year over several years. Louisiana’s congressional delegation unanimously approved of it even as a few reservations were voiced, most often from Sen. Mary Landrieu and from Sen. David Vitter through his competing legislation and negotiations to limit increases and to spread them out over more time and to make it easier to demonstrate greater protection from flooding.

Now, reality is starting to hit home as Louisiana residents, in the program in disproportionate numbers who historically have received more in payouts than have paid in premiums, experience the escalating rates. Some have put pressure on federal elected officials to find relief, some of whom are calling for and wanting to file legislation to accomplish slowing the increases while saying they felt compelled to vote for the original legislation in order to bring stability to the program and to snag the coastal recovery money – even though, as it turned out, the bill passed overwhelmingly so nay votes would have allowed them the benefit of symbolic opposition with the substantive concrete reforms.

At least one state official – where the state bears no connection to the program at all – opined that there shouldn’t be a need for increases at all. Using publicly-available data, Louisiana Governor’s Executive Assistant for Coastal Activities Garret Graves argued that, in adjusted 2012 dollars, the program had taken in from 1978-2012 $65.3 billion and paid out $56.4 billion, implying a net surplus was available.

However, this analysis overlooks several aspects. First, a constant dollar comparison can be misleading because while premium dollars can be hoarded and invested, dollars paid in claims go out at a discrete point in time. A premium dollar collected one year can sit and compound over years, but claim dollars cannot. Were flows in and out roughly equivalent and invariant over time, the comparison with unchained dollars – which show over this period premium exceeding $49 billion and claims of $43 billion – would be pretty close, but if they are not, and especially when you have more claims than premiums early on, this can distort the calculation to overweigh the amount of premiums. And in the 1978-83 period there were surplus claims.

Still, even if Graves’ calculations come up 50 percent higher than the actual numbers, a surplus did exist. However, this also does not factor in the 1968-77 data, which are not publicly available and also may have led to borrowing because no backstop funding existed from the start if claims exceeded premiums nor has reinsurance been purchased then or now. Thus, a debt overhang was created.

This points to the real problem, which is forced borrowing occurs when catastrophic losses factor in, for as the payments in median years match claims, claims spike highly in outlier years forcing more borrowing, which must be paid back at interest (and at a rate higher than the discount rate employed by Graves in his analysis, which was the Consumer Price Index). This is debt, now over $30 billion including principle and interest, and is not included in Graves’ analysis.

Nor does he include the 2013 claims figures and premium figures, which at halfway through the year would appear to add at least $3 billion in deficit spending (because of Hurricane Sandy devastation in the latter part of last year). Nor included are programmatic costs, which come out of premiums and have been an object of criticism by the federal Government Accounting Office. Even if operations could be performed more efficiently, as the GAO concluded, the fact is they have contributed to a debt that must be paid off, and that it makes more sense that policy-holders bear a greater burden of this than they have in the past.

Unfortunately, this especially is true of Louisiana. Only Mississippi is even close in per capita claims coverage history (through 2010; New York and New Jersey may have gotten somewhat closer as a result of 2012), where Louisiana’s have exceeded $2,000 (the national median was less than $125). In fact, Louisianans through the first half of this year have been paid a third of all claims dollars in the past 35 years. Assuming premiums (which will overstate considerably the actual amount paid because of inflation and infrequent rate changes upwards) across those 35 years are the same as the most recent year’s, the sum of them shows Louisiana still “owes” $4 billion over that time span.

The concept of insurance, of course, is that spreading out risk means, netting out premiums and claims, some will pay more and some will pay less as a matter of chance. Yet it also assumes that premiums paid bear some relationship to factors that aren’t chance and it should be clear that some, and disproportionately so in Louisiana, have gotten subsidized in their choices about where to live – much less factoring in all of the externalities borne by others still, such as the subsidization encouraging building in vulnerable ecosystems that cause environmental degradation that may affect a vastly broader population.

The proper course would be not to mend, but to end eventually, the entire program. Taxpayers already have subsidized the program in essence through the debt that may never get paid off, and the previous paradigm before program introduction was that special disaster relief bills would take care of catastrophes. That still continues, on top of the NFIP, rather than being replaced by it, so taxpayers still shift money to subsidize certain choices.

However, that option seems politically impossible. Therefore, the rate increases are appropriate from a national perspective, and while there can be debate over their timing, they should continue until the present subsidization has become much reduced and results in a structure that has a realistic chance of making the program paid up and self-sustainable over the next couple of decades. Some subsidization from one ratepayer to another can be desirable as the activities that occur in the high-risk areas carry economic benefits nationally, but not at the level it has operated.

That idea won’t make a lot of Louisianans happy and they would pressure their federal officers to do something about it legislatively. They may, knowing their bills to later the current trajectory are highly unlikely to go anywhere but then at least being able to say they tried. And that’s the best thing, for they must know it’s better policy for the nation as a whole and as national elected officials they should have that in mind first and foremost, while trying to insulate themselves from potential electoral retribution emanating from a home population that will be less favored as a result of this scenario. Louisianans have no extraordinary claim over the resources of all Americans.