Do people have unreasonable expectations about federal aid when disaster strikes? In this week's RFF Policy Commentary, RFF experts Carolyn Kousky and Leonard Shabman look at federal aid after flood events. They hypothesize that property owners may underinvest in insurance, incorrectly believing federal aid will cover their losses. This raises important questions about aid programs, flood insurance, and public information.
Both media accounts and political rhetoric about federal disaster aid suggest that owners of property damaged by flooding receive significant sums of money for repair and replacement. Headlines tout multi-million dollar amounts coming to disaster-stricken communities while press releases and statements by politicians assure victims that they will get meaningful aid. Meanwhile, some academic researchers uncritically assume that aid is generous and, accordingly, argue that such aid discourages the purchase of flood insurance and encourages building in flood prone locations.
An examination of U.S. disaster aid programs, however, demonstrates that there are limited sums of money available to flood victims and that there are stringent requirements restricting the ability of individuals, businesses, and communities to receive these funds. There appears to be a gap between perceptions about the availability and generosity of disaster aid and the realities of such aid. Closing the perception gap must be a focus for flood risk management policy.
Current procedures for administering federal disaster aid (this applies to all disasters, not just floods) are outlined in the 1988 Robert T. Stafford Disaster Relief and Emergency Assistance Act. When an event is judged to be beyond the capabilities of the state and local governments to respond, governors can request a presidential disaster declaration. The Federal Emergency Management Agency (FEMA) makes a recommendation to the president on these requests. If a declaration is issued, FEMA distributes money from the Disaster Relief Fund. Supplemental appropriations may be added to the fund for events causing widespread and significant damage.
A portion of total disaster spending is for emergency response, cleanup, and meeting short-term needs. We are instead focused on the aid that goes directly to individuals and businesses to help them repair and replace damaged property and the incentives such aid may (or may not) create. FEMA and the Small Business Administration (SBA) are the two agencies primarily responsible for disbursement of aid to individuals and businesses after a disaster, although other agencies may provide relief for specific purposes and individuals are allowed to take a tax deduction for the cost of repair of flood damaged property.
SBA offers loans with subsidized interest rates for repair and rebuilding. SBA loans are often considered the first line of help for homeowners and businesses. The loans are available up to $200,000 for primary residences and up to $40,000 for contents (there are larger limits for businesses). Although rates are below market rates, these are loans that must be repaid.
Direct aid to individuals is available from FEMA to repair or replace damaged homes or property but is strictly limited to $31,400 (in 2012 dollars; this number is indexed to inflation) per household. Average amounts of aid, however, are closer to $4,000 to $5,000. Also, a household might not be eligible for FEMA aid if they could instead take out an SBA loan. In addition to the limitation on the amount, aid is only available for primary residences (so, second or vacation homes are ineligible) and for damage not covered by insurance. In addition to FEMA grants, twice—once in New York City after 9/11 and once in Louisiana and Mississippi after Hurricane Katrina—Community Development Block Grant money from the U.S. Department of Housing and Urban Development was used to provide direct grants to individuals. In both of these cases, homeowners received much more than the FEMA limits, but both of these were unique situations and such measures are unlikely to be available for smaller-scale disasters.
For flood events, almost all disaster aid is also tied to requirements for flood insurance purchase. Flood insurance is available through the National Flood Insurance Program (NFIP). Direct aid to repair or replace property is not available to homeowners in communities that do not participate in the NFIP. Even in communities that do participate, if home or business owners are required to have flood insurance but do not own a policy, they may not be eligible for some types of aid. And if they are eligible for aid, purchasing and maintaining a flood insurance policy going forward is often a requirement of receiving that aid.
For small amounts of damage—in the range of a few thousand dollars—it may be the case that FEMA aid can substitute for insurance payouts. For greater damage amounts, however, FEMA aid will not cover losses. One hypothesis is that when smaller events are more common and more readily reimbursed, it may feed a perception that aid would also be forthcoming for large-scale events, leading homeowners to underinsure for larger events.
The limitations on the amount of aid available to individuals and the requirements to receive aid are not widely understood. While there is an ongoing effort by multiple federal agencies to educate the public about the probabilities and magnitudes of flood events, we argue that flood risk communication efforts by federal agencies need to include information on the realities of federal aid. Because flood insurance is a federal program, private companies likely do not have the incentive to invest in providing this type of information. (Private companies do write policies and process claims, while the risk is underwritten by the federal program. They receive a flat fee for doing so and it is probably not large enough to cause them to invest much in increasing purchases of flood insurance.)
We are not certain that improved understanding about the aid would lead to dramatic changes in decisions to locate in flood prone areas or increase purchases of flood insurance. Individual risk management decisions depend not only on one’s perceptions of aid, but also on one’s expectation of damages that might be sustained, the likelihood of a flood event, one’s attitudes toward risk, budget constraints, and other variables. And it is possible that some individuals and businesses have a good understanding of the aid they could receive. We simply argue that further research should focus on learning more about perceptions of aid and on whether understanding the limits of aid would affect the decisions of individuals, businesses, and local governments to locate in flood prone areas or purchase flood insurance.
Kousky, C., and L. Shabman. 2012. The Realities of Federal Disaster Aid: The Case of Floods. Issue brief 12-
Shabman, L., P. Scoadari, C. Kousky, and D. Woolley. Forthcoming. Improving the Corps of Engineers’