On June 23, the U.S. Senate Banking, Housing, and Urban Affairs committee held a hearing to discuss legislative proposals to reform the Federal Emergency Management Agency’s (FEMA) National Flood Insurance Program (NFIP). There were 17 proposals included in FEMA’s 104-page document, sent to Senate President Kamala Harris and the Senate’s majority and minority leaders, as well as to the speaker, majority and minority leaders of the House of Representatives. Collectively, the 17 proposals constitute a wide-ranging reform package for a government program that has generated $37 billion of debt since its creation in 1968. Although there are some issues in the reform package, it is the most comprehensive reform effort to date for the seriously flawed program. But there is no guarantee that the reforms will be passed by Congress, as several lawmakers are opposed to change that would deprive their constituents of subsidies and discounts afforded by the program.

In his opening statement, Committee Chairman Sherrod Brown (D-Ohio) underscored the importance and timeliness of improving the nation’s response to flood risk by citing a catalogue of severe flooding events in recent weeks, including extensive flooding in Wyoming and Montana at Yellowstone National Park; flash flooding in West Virginia and Alabama; ice jam flooding in Alaska; heavy rainfall flooding in Oklahoma and Arkansas; and severe flooding in North Dakota and Minnesota. Brown mentioned that flood risk has been exacerbated by climate change, and indicated that there remain many climate change deniers in the Senate. He also emphasized that communities should be more resilient, so as to reduce potential losses from flood events, and that dealing with flood risk is not a partisan issue.

In his oral and written testimony, Committee Ranking Member Pat Toomey (R-Pa.) outlined several symptoms of the NFIP’s structural weakness. It had to borrow from the Treasury 11 times in the past 22 years; it has badly designed subsidies; and it systematically underprices business, creating a barrier preventing the private market from offering competitive flood insurance products. Toomey was especially critical of the drain on the program’s finances caused by severe repetitive loss properties. He was supportive of some of the 17 reform measures in the FEMA proposal, such as elimination of subsidies that encourage people to live in flood-prone areas; prohibitions on construction of commercial properties in high-risk areas; and improvement in flood risk communication so homeowners and homebuyers know the true flood risk of their homes.

The June 23 hearing had only one witness: David Maurstad, Deputy Associate Administrator for Federal Insurance and Mitigation and Senior Executive of the NFIP. Maurstad’s oral testimony tracked closely with his written testimony. The fireworks began when two of the most vocal opponents of changes to the NFIP—Sens. John Kennedy (R-La.) and Bob Menendez (D-N.J.) posed questions to Maurstad.

Kennedy maintained that the details of the NFIP’s new rating methodology, Risk Rating 2.0, are being withheld from Congress. Maurstad asserted that the algorithm, or rating formula, is indeed in the public domain, and is freely available on the NFIP website. In fact, the rating factors constituting the algorithm are identified in the Risk Rating 2.0 Methodology and Data Sources—Appendix D Rating Factors are found here on FEMA’s website.

Sen. Menendez maintained that Risk Rating 2.0 would cause flood premiums to rise. Breaking down the numbers in the senator’s state, 23.1 percent of New Jersey NFIP policyholders are seeing a decrease in premiums; 63.2 percent are experiencing a range from no change to their premiums to a $120/year increase; 10.3 percent are seeing an increase of between $120 to $240/year; and 5.3 percent are seeing an increase greater than $240/year to a maximum 18 percent increase.

The most problematic feature of the reform proposal bill is the annual premium equalization payment. This is the difference between the premium the NFIP charges and the amount of expected losses the NFIP would obtain via appropriation. The large number of premium reductions not offset by increases means that the NFIP will lose more money with Risk Rating 2.0 than it does currently. NFIP expects to accelerate rate increases in future years, but not in the immediate future, with a fiscally questionable one-step back, two-steps forward dance step—and that does not include the forgiveness of the program’s current $20.5 billion debt to the Treasury. Maurstad maintains debt forgiveness is necessary to “clean the slate,” allowing the NFIP to become fiscally sound. But that’s not how limited government or pro-market policy should work. It’s doubtful that reducing premiums and forgiving the NFIP’s debt will result in sound management. More likely, this government program will produce much more red ink.

Image: jzajic