Paying for Sandy, and Future Sandys

 

Robert Litan, BGOV director of research

Oct. 31 (Bloomberg) — Hurricane Sandy will cost an estimated $20 billion and the price keeps climbing. Private insurance, of course, will cover a chunk of the damage caused by the strong winds.

What will be harder to figure out is how to pay for the water damage and other costs that land on the government.
The water damage costs may themselves flood the federal government’s flood insurance program and prompt calls for additional funds.  That doesn’t even include the inevitable pressure on the federal government to find money to help victims and hard-pressed state and local governments.
Sandy inspired Bloomberg Government analyst Cameron Leuthy and me to do some research about the federal government and natural disasters.
Governors have been getting federal disaster assistance since 1953 under the Stafford Act. Not only are they rarely denied, the governors have been making more disaster funding requests.
The Congressional Research Service published an auspiciously timed report in August documenting the rising disaster trend: from an average of 19 a year in the 1960s to 56 annually from 2000 to 2009, and a record 99 in 2011.
Congress historically added the costs of the “disaster supplementals” to the budget without finding equal cuts elsewhere or raising taxes to pay for them.
In the new age of record budget deficits, the political winds can be as unmanageable as Sandy’s.
Congressional Republicans tried to pay for Hurricane Irene in 2011 by requiring some cuts elsewhere. The effort failed mostly because Irene came so late in the fiscal year. The Federal Emergency Management Administration was able to shuffle money around to cover the cleanup cost and then use the new fiscal year to sort out its own books.
Sandy took place in the first month of the fiscal year, making it harder for FEMA to repeat its 2011 experience.
It is not yet clear what tack Republicans will take on the “offset issue.”
More sensible, especially in a weak economy, is to budget in advance for disasters. At least some of the causes for the rising numbers of federally-declared disasters can be identified.
The CRS report said several factors appear to be at work: worse weather, possibly because of climate change; better reporting, especially with round the clock cable TV coverage; states’ diminished capacity to cover costs in weak economies; and larger populations at risk of harm.
Treating natural disasters and their substantial costs as one-offs may have made sense when they were rare. When they become routine, their costs should be estimated actuarially and built systematically into the budget.
The Budget Control Act of 2011 starts down the right path by requiring annual appropriations for disaster-related costs to be at the 10-year average and allowing spending cap adjustments only for costs above those averages. Even the 10-year average may be insufficient for budgets if the number of disasters and/or their costs keep increasing.
Anticipating rising disaster costs will complicate the upcoming deficit-reduction negotiations because it would require higher revenue or cuts elsewhere. But if the object of those negotiations is to stabilize or lower the ratio of federal debt to GDP, then it’s time to honestly account and pay for disasters.
Sandy’s timing and cost may create an opportunity to do so.

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