By Jay Landers

Created by Congress in 1968, the National Flood Insurance Program insures approximately 4.9 million policyholders in nearly 22,600 participating communities. Largely solvent for most of its history, the NFIP today is about $20.5 billion in debt, the result of such large-scale disasters as Hurricane Katrina in 2005, Hurricane Sandy in 2012, and Hurricane Harvey in 2017.

Congress last reauthorized the NFIP on a long-term basis in 2012. Since then, the program has been temporarily extended nearly 20 times, reflecting an inability on the part of Congress to fashion bipartisan approaches to reforming the program, which is overseen by the Federal Emergency Management Agency.

With the NFIP scheduled to expire at the end of September, a House subcommittee recently held a hearing to examine issues related to reauthorizing and reforming the NFIP, including the questions of what to do about its debt and how to make the program more affordable to people with low or moderate incomes.

However, since then key House Republicans have introduced legislation to temporarily extend the NFIP yet again, a move that casts doubt on the likelihood of Congress enacting major reauthorization legislation this year.

Interest, inflation, and the NFIP

Because of its massive debt, the NFIP is required to make interest payments to the U.S. Treasury, averaging approximately $400 million annually, according to the first-quarter, fiscal year 2022 edition of The Watermark, a FEMA publication. Since Hurricane Katrina, the program has paid more than $5.5 billion in interest.

Because the payments are made from the insurance premiums paid by policyholders, they reduce the amount of funding available to the NFIP for such activities as funding claims and conducting efforts to reduce risks associated with flooding. Essentially, 11 cents of every dollar paid in premiums goes toward interest payments on the debt, according to The Watermark.

The NFIP’s debt is only going to grow as inflation increases, said Roy Wright, the president and CEO of the Insurance Institute for Business and Home Safety and a former chief executive of the NFIP, during a May 25 hearing on the NFIP held by the Subcommittee on Housing, Community Development, and Insurance within the House Committee on Financial Services. Inflation “will negatively impact the fiscal underpinning of the program,” Wright said. “The debt held by the NFIP is about to get walloped by rising interest rates.”

Against this backdrop, some in Congress are seeking to forgive the entirety of the NFIP’s debt. For example, Rep. Maxine Waters, D-Calif., the chair of the Committee on Financial Services, released draft legislation intended for this purpose in advance of the May 25 hearing. Upon its cancellation, the NFIP’s existing debt “may be treated as a public debt of the United States,” according to the draft bill, essentially transferring responsibility for the debt from the NFIP’s policyholders to U.S. taxpayers in general.

A precedent for such a move does exist. In the wake of Hurricane Harvey, Congress passed and President Donald Trump signed legislation canceling $16 billion of the NFIP’s debt as part of a supplemental appropriations bill for disaster relief.

Dealing with debt

During the May 25 hearing, the idea of canceling the NFIP’s debt drew support from certain Democratic members of the subcommittee. “I just think it makes no sense whatsoever for us to walk around with a $20.5 billion indebtedness,” said Rep. Emanuel Cleaver, D-Mo., the chair of the subcommittee.

The idea also was supported by some of the witnesses testifying before the subcommittee, including Carolyn Kousky, Ph.D., the executive director of the Wharton Risk Management and Decision Processes Center. “I don’t think that the program is going to be able to repay (the debt) on its own,” Kousky said.

Cancellation of the NFIP’s debt also has the backing of the Association of State Floodplain Managers Inc. “I believe the current NFIP debt should be forgiven and some form of sufficiency standard must be adopted as an automatic long-term mechanism within the NFIP,” said Karen McHugh, the Missouri state NFIP coordinator, who testified on behalf of the ASFPM. Such a sufficiency standard would ensure that after a certain threshold of flood damages is met, any debt would be paid by the U.S. Treasury, McHugh said.

“At a minimum, the requirement for the NFIP to pay interest on the debt should be discontinued, or the interest and debt payments should be directed as reinvestments back into the program for needs such as flood mapping or mitigating flood-prone buildings, especially repeatedly flooded buildings,” according to McHugh’s written testimony to the subcommittee.

Improving affordability

Improving the affordability of flood insurance also drew discussion during the May 25 hearing. “Lower-income groups suffer disproportionately from disasters like floods and recover less quickly,” Kousky said. Although flood insurance helps individuals recover from flooding, the “people who need insurance the most are the least able to afford it,” she noted.

In separate draft legislation released in advance of the hearing, Waters would direct FEMA

to establish a pilot program “to demonstrate the effectiveness of providing means-tested discounted rates for flood insurance coverage made available” through the NFIP, according to the legislation. More broadly, the draft bill would reauthorize the NFIP for another five years.

Although he voiced support for such a means-tested program, Wright cautioned lawmakers that the effort should be funded separately from the NFIP, lest it contribute to the program’s financial woes. “Congress has to decide how much money it wants to invest into an affordability program each year,” Wright said. “The NFIP cannot pay for such a program inside of its premium revenue. That would be inequitable and really undermine the financial stability of the program.”

Improving flood mapping, mitigation

Besides insurance, the NFIP is responsible for other critical efforts to prevent and reduce flood damages, including flood mapping and flood hazard mitigation. In her written testimony to the subcommittee, McHugh called on Congress to provide the funding necessary to ensure that FEMA is able to map the nation’s flood hazards adequately.

“Today, flood risk maps only exist for about one-third of the nation — only 1.2 million of 3.5 million miles of streams, rivers, and coastlines have been mapped,” according to McHugh’s testimony. “Also, even some of today’s maps are many decades old or were updated before the current standards to redraw boundaries based on more accurate study data and topography.”

“ASFPM urges consideration of an immediate surge of flood map funding investment to jump-start the completion of mapping the nation,” according to McHugh’s written testimony. “We conclude that it will cost between $3.2 (billion) and $11.8 billion to complete flood mapping in the nation and then cost between $107 (million) and $480 million to maintain these maps as accurate and up-to-date.”

“ASFPM supports an increased authorization for the National Flood Mapping Program to between $800 million to $1.8 billion annually in order to accelerate the completion of the job of initially mapping the nation in five years and getting to a steady-state maintenance phase,” McHugh’s testimony states. Currently, the program is authorized to receive $400 million annually.

Among recommendations to improve the NFIP’s flood hazard mitigation efforts, McHugh called on Congress to increase the existing limits for a type of coverage known as increased cost of compliance. Available to policyholders in special floodplain hazard areas, ICC coverage may be used to help offset the cost of bringing flood-damaged properties into compliance with floodplain management requirements. Typically, ICC coverage is used for elevating, demolishing, relocating, or floodproofing structures.

However, ICC coverage has been limited to $30,000 for the past 20 years, an amount inadequate to cover the costs of most actions funded by the coverage, McHugh noted. “Increasing the ICC limit to at least $90,000 is long overdue,” she said. “To allow adequate funding for structures to be brought out of harm’s way by elevating or being removed from the high-risk flood area has been proven to save lives and property and taxpayer costs from the devastating effects of flooding.”

Lowering expectations

For its part, FEMA has developed its own ideas for revamping the NFIP. “In May, FEMA provided Congress with 17 different legislative proposals to reform the National Flood Insurance Program and its long-term reauthorization,” says Jeremy Edwards, FEMA’s press secretary. “The proposals represent the agency’s vision to create a more resilient, sustainable program that is equipped to meet the increasing impacts of climate change. FEMA expects to release more information about the legislative proposals on its website in the near future.”

Whether NFIP reform proposals from Waters, FEMA, or anyone else become law this year remains to be seen. However, legislation proffered in mid-June by Republican lawmakers on the Committee on Financial Services would appear to cast cold water on such efforts.

On June 13, Rep. French Hill, R-Ark., the ranking member of the Subcommittee on Housing, Community Development, and Insurance, introduced the National Flood Insurance Program Extension Act (H.R. 8036). The bill would extend authorization of the NFIP through Dec. 31, 2023.

Opposition to canceling the NFIP’s debt was cited by Hill as one reason for seeking to extend the time that Congress has to reauthorize the program. “Congress must do the hard work of reforming the NFIP to ensure its long-term financial stability,” Hill said in a June 14 news release. “Taxpayers in Arkansas and around the country should not have to bail out this broken program year after year to the tune of billions of dollars each year.”

Among the 17 original co-sponsors of Hill’s legislation is Rep. Patrick McHenry, R-N.C., the ranking member of the Committee on Financial Services.