LA policy should encourage buying flood insurance

Reaction to a provision in the recovery action plan for 2016 in Louisiana highlights the moral hazard involved in disaster relief, and suggests how the state can reduce that by judicious future policy-making.

Through next Tuesday public comment remains open regarding the Gov. John Bel Edwards Administration plan to deal with the flooding that occurred mainly in northern part of the state in the spring and in the southern part in the summer. As the funding for relief comes not in the typical fashion – instead of through the Disaster Relief Fund administered by the Federal Emergency Management Administration rather by way of a Community Development Block Grant through the Department of Housing and Urban Development – the state must develop a plan according to HUD rules and solicit for two weeks’ commentary from the public. This approach also makes likely much higher payouts per home than through the standard FEMA use of the DRF.

As far as distribution eligibility, HUD has few rules, but given what state policy-makers consider a low amount appropriated for the size of the disaster in the first tranche of money, it established additional rules that it plans to submit to HUD. One is that aid will go only to those individuals who live outside the 100-year flood plain; that is, the area in question has a less than one percent chance of flooding in any given year. This rule has riled some who lived in such areas but declined purchasing insurance, who now must hope the second and any later tranches include them.

That stricture makes quite a bit of sense. Since the implementation of national flood insurance almost a half-century ago, disaster recovery policy has suffered from schizophrenia. On the one hand, having flood insurance – and until recently at well below actuarial rates in some areas – encouraged more building in hazardous areas. But on the other hand, eschewing it – lenders require it for those living in a 100-year zone, but no law mandates carrying it – brings no real risk, since government repeatedly has demonstrated it will provide recovery money anyway, if perhaps slower and possibly in smaller amounts than for insured properties. Indeed, holders of insurance cannot claim rebuilding disaster funds, so why not just save by having no premium costs?

Of course, given the suspect right afforded the federal government in NFIB v. Sebelius, it could require all homeowners in areas deemed risky enough to flood occasionally to buy flood insurance. But it doesn’t, and a state can’t make them do that.

However, after a disaster occurs, by taking the position the Edwards Administration has done here, that can encourage all owners to buy the insurance by giving priority to those in areas hardly, if ever, expected to flood. In saying those who had a chance to buy insurance in riskier areas go to the back of the line, the possibility exists they won’t see anything, and this provides incentive in the future to buy flood insurance.

And state government can go further. The Constitution provides for a statewide property tax up to 5.75 mills that Louisiana never has levied. Policy-makers could do so at the maximum but also provide that any structure in an area with a less than one percent chance of flooding according to FEMA flood maps and/or any home with flood insurance (basic plus additional coverage, depending upon the structure’s value) is exempt from the levy. Further, the gathered funds could go into a special account to draw upon if disaster-related costs pop up (usually a state must pay 10 or 25 percent of costs past certain levels to qualify for FEMA or HUD assistance).

As it turns out, even the cheapest rates for the least-risky structures would be higher than the levy, about double, so that would not prompt mass enrollment into program. Still, on the margins some owners would buy and for those who don’t the state would develop a ready-made pot of money to compensate for the effects of disasters. With more properties insured, whenever flooding occurs the state also can divert less of its time and effort to managing the aftermath and its taxpayers would have to pony up fewer dollars to fund disaster relief allocated by the federal government.

Since Louisiana’s geography puts it at special risk for flooding, state policy-makers should pursue a policy like this, that more fairly imposes costs upon those choosing to live and work in riskier areas.