BY SEAN REILLY
Newhouse News Service
To some, it seemed obvious: after Hurricane Katrina pushed losses to unprecedented highs, Congress had to do something to salvage the government-subsidized National Flood Insurance Program.
"We stand at a crossroads," Senate Banking Committee Chairman Richard Shelby, R-Ala., said in May. "We can reform this program or we can continue to allow it to flounder."
Seven months later, lawmakers have quit for the year without throwing it so much as a life preserver.
Although the Senate Banking Committee, which Shelby chairs, approved an overhaul this spring, it was blocked in the full Senate by Louisiana lawmakers concerned about the potential cost to their constituents, several observers said. The Senate also failed to act on more modest House-passed legislation.
That lack of movement may be welcome news to thousands of policyholders who could have faced higher bills under either measure. But one consequence is that a hefty share of insurance premium revenues will continue to be spent on interest on $17.3 billion that the program has so far borrowed from the federal treasury, mainly to pay Katrina claims.
In fiscal 2006, those interest costs totaled $532 million, or about one-quarter of the NFIP's income, according to a spokesman for the Federal Emergency Management Agency, which oversees the program. For this fiscal year, which began in October, interest payments are expected to drain off another $718.4 million, according to FEMA.
Apart from raising the NFIP's borrowing limits, lawmakers have also done nothing to address a host of underlying ills that, in the view of experts, leave the program on a shaky financial footing, encourage development in flood-prone areas and give price breaks to people who could afford to pay full freight.
Congress' inaction "means that the national flood insurance program can be expected to run into the same problems in the future that it ran into in 2005," said Robert Hartwig, chief economist for the Insurance Information Institute, an industry research organization in New York. "That means in the not-too-distant future, it will go broke."
Already, some observers view it as effectively bankrupt, with responsibility resting in part with Capitol Hill.
"Traditionally, the Congress has tended to look at the flood insurance program as a service and not really as a program based on classical insurance principles," said David Conrad, a senior water resources specialist at the National Wildlife Federation.
Created in 1968 because private firms were reluctant to provide coverage, the flood insurance program now encompasses some 5.3 million policies across the country, according to the most recent available statistics.
During much of its history, the program had been self-supporting. But Katrina, which whacked the Gulf Coast in August 2005 and Hurricane Rita, which followed soon after, produced more than 226,000 claims, far outstripping the program's ability to cover losses out of existing revenues.
Under the Senate bill, Congress would have written off the program's debt to the treasury. In return, however, more people would have had to buy flood insurance, and FEMA would have had to phase out subsidies for vacation homes built before the early 1970s. In Alabama alone, some 3,700 such homes and other "non-primary residences" benefit from subsidized coverage, FEMA reported in May.
But after receiving unanimous banking committee approval that same month, the bill was blocked from going any further by Louisiana's two senators, said Larry Larson, executive director of the Wisconsin-based Association of State Floodplain Mangers Inc.
With almost a half million policyholders, Louisiana ranks third in the country, behind Florida and Texas. Through a parliamentary maneuver known as a "hold," a single senator can bottle up a measure indefinitely.
A spokesman for Sen. David Vitter, a Republican, did not return phone calls. But a spokeswoman for Sen. Mary Landrieu confirmed that the two-term Democrat employed a hold because she thought the measure would be "onerous" for people in flood-prone areas.
A spokesman for Shelby on banking issues could not be reached. Because of the Democratic takeover of Congress, Shelby will cede the chairmanship next month to Sen. Christopher Dodd, D-Conn.
In a rundown of his priorities released last week, Dodd said he wants to revive the bill approved by the panel this year, but placed flood insurance reform well below other challenges such as combating terrorist financing and ensuring that foreign investment does not damage the nation's security.
In the House, Rep. Barney Frank, D-Mass., is expected to take charge of the House Financial Services Committee. Last year, Frank co-sponsored legislation that would have increased fines on lenders who fail to enforce mandatory purchase requirements for flood insurance, but the proposal was otherwise considerably less ambitious than Shelby's.
Asked about Frank's interest in revamping the program, spokesman Steve Adamske said last week, "It's something that he wants to do, it's something that he will push for, but I can't give you specifics on the time frame."