[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE ROLE OF GOVERNMENT
ASSISTANCE FOR DISASTER VICTIMS:
A REVIEW OF H.R. 3042
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC GROWTH,
TAX AND CAPITAL ACCESS
of the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD
FEBRUARY 16, 2012
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 112-055
Available via the GPO Website: www.fdsys.gov/house
_____
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
ROBERT SCHILLING, Illinois
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
JANICE HAHN, California
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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OPENING STATEMENTS
Page
Hon. Joe Walsh................................................... 1
Hon. Kurt Schrader............................................... 2
WITNESSES
Doug Hoell, Director, North Carolina Division of Emergency
Management, Raleigh, N.C....................................... 3
Gene Tighe, Owner, GT Fabrication, Inc., Pittston, PA............ 5
Howard Kunreuther, Ph.D., James G. Dinan Professor of Decision
Sciences & Public Policy, Co-Director Risk Management and
Decision Processes Center, University of Pennsylvania,
Philadelphia, PA............................................... 8
David B. Muhlhausen, Ph.D., Research Fellow in Empirical Policy
Analysis, The Heritage Foundation, Washington, DC.............. 10
APPENDIX
Prepared Statements:
Doug Hoell, Director, North Carolina Division of Emergency
Management, Raleigh, N.C................................... 22
Gene Tighe, Owner, GT Fabrication, Inc., Pittson, PA......... 28
Howard Kunreuther, Ph.D., James G. Dinan Professor of
Decision Sciences & Public Policy, Co-Director Risk
Management and Decision Processes Center, University of
Pennsylvania, Philadelphia, PA............................. 31
David B. Muhlhausen, Ph.D., Research Fellow in Empirical
Policy Analysis, The Heritage Foundation, Washington DC.... 38
Questions for the Record:
None
Answers for the Record:
None
Additional Materials for the Record:
``Redesigning Flood Insurance,'' by Erwann Michel-Kerjan and
Howard Kunreuther.......................................... 45
``People Get Ready: Disaster Preparedness,'' by Howard
Kunreuther and Erwann Michel-Kerjan........................ 46
EXAMINING THE ROLE OF GOVERNMENT ASSISTANCE FOR DISASTER VICTIMS: A
REVIEW OF H.R. 3042
----------
THURSDAY, FEBRUARY 16, 2012
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax and Capital Access,
Washington, DC.
The Committee met, pursuant to call, at 10 a.m., in room
2360, Rayburn House Office Building. Hon. Joe Walsh (chairman
of the subcommittee) presiding.
Present: Representatives Walsh, Barletta, Chabot, and
Schrader.
Chairman Walsh. Good morning, everyone. Welcome. I call
this hearing of the Committee on Small Business, Subcommittee
on Economic Growth and Access to Capital to Order.
I would like to thank all of our witnesses for being here
today. We look forward to your testimony. Let me give just a
very brief opening statement.
How to help our fellow citizens in their time of need is
one of the most important questions we deal with as a society
and as it relates to government. In the aftermath of a
disaster, when a storm takes everything you have, the true test
of resiliency is revealed. After a storm, homeowners and
businesses grab a broom, a power washer, a chainsaw, and get to
work trying to rebuild their lives. To do this disaster victims
need money to rent a generator and purchase construction
supplies. One thing they do not need is endless paperwork
delays and confusing directions on how to obtain assistance.
Under the current system, both state and federal resources
are mobilized to respond to a disaster where they work hand-in-
hand to conduct search and rescue operations, offer immediate
food and shelter needs, and long-term rebuilding assistance. To
help rebuild, the government offers both subsidized and
unsubsidized financial assistance. This allows our neighbors
access to funds when they need it most.
Today we are here to try to answer a couple important
questions. Is this assistance appropriate? And if so, how can
it be given most effectively? How do we balance the American
ideal of self-reliance with the practice of we as taxpayers
paying to ensure the extra resources are available for those
trying to rebuild.
To help us answer these questions we have a distinguished
panel of witnesses here today. These witnesses will inform us
about their experience in the aftermath of a disaster and
provide their thoughts about the proper role of government. I
look forward to this discussion today and I now yield to the
ranking member for his opening statement.
Mr. Schrader. Thank you, Mr. Chairman.
In today's era of modern technology and all the comforts we
enjoy we sometimes think we are beyond Mother Nature's reach
and we get reminded again and again, whether it is Katrina or
Irene, that indeed Mother Nature can make a huge difference in
each and every one of our lives. This disaster, Hurricane
Irene, of course, started down in North Carolina, came all the
way up the coast through New York and into New England causing
unprecedented amounts of damage to people's homes and America's
small businesses. The recovery tools that we have at our
disposal in SBA for small businesses and homeowners are only
effective if our agency utilizes them correctly. In the wake of
Irene, the SBA deployed 398 disaster assistance workers to
staff 160 recovery centers all up and down the Eastern
seaboard.
As of the beginning of this month, SBA issued over 183,000
loan applications and already approved 8,000 loans, totaling
over $200 million. Most of these loans were processed within
the agency's target timeframe of 10 days or less. And that was
a big improvement over Hurricane Katrina. And while the
response I think was a step in the right direction, we also
have some improvements that need to happen. For the victims of
Irene only one out of every three applications for assistance
was approved. That is lower than the Hurricane Katrina rate of
51 percent. It is also about half of the agency's historical
approval rate so we would like to understand that. And despite
the fact this disaster happened over eight months ago, only 60
percent of the funds that have been allocated have actually
been dispersed. So that amounts to about $77 million of actual
assistance that has found its way into the pockets of disaster
victims so far.
So these figures do suggest we need some reforms. We look
forward to hearing from the panel about what form those should
take. It is, I think, for those reasons that H.R. 3042, the
Disaster Loan Fairness Act has been introduced. It is hopefully
going to address some of the shortcomings that we have
identified so far. We will play off of what we hear today from
our witnesses about any other improvements that need to happen.
And I think it is just really bottom-line important to
understand that it is the small businesses that are job
creators here for our country right now. The Northeast and
Eastern seaboard are a big part of this great country's job
creation machine that we want to get back on track, and a lot
of businesses, you know, 40, 60 percent of them do not recover
after a disaster in the small business area. So we really need
to make sure these programs work. Between Katrina and Irene,
unfortunately we have gotten some great lessons to hopefully
learn from. We do not want to learn away again in a bad way. I
am looking forward to hearing this hearing help us understand
things a little bit better.
And with that I yield back, Mr. Chair.
Chairman Walsh. Thank you, Mr. Schrader.
I understand that there is a request for Mr. Barletta from
Pennsylvania, a member of the Small Business Committee, to join
us for today's Subcommittee hearing. If that is okay with the
ranking member, welcome, Mr. Barletta.
Let me just quickly go over the rules for our witnesses. If
any of the other committee members have an opening statement
prepared I ask that it be submitted for the record. You will
each have about five minutes to deliver your testimony. The
light will start out as green. When you have one minute
remaining the light will turn yellow, and finally it will turn
red at the end of your five minutes. Do your best to keep it
within that five minutes.
STATEMENTS OF DOUG HOELL, DIRECTOR, NORTH CAROLINA DIVISION OF
EMERGENCY MANAGEMENT, TESTIFYING ON BEHALF OF NATIONAL
EMERGENCY MANAGEMENT ASSOCIATION; GENE TIGHE, OWNER, GT
FABRICATION, INC.; HOWARD KUNREUTHER, PROFESSOR, WHARTON
SCHOOL, UNIVERSITY OF PENNSYLVANIA; DAVID B. MUHLHAUSEN, PH.D.,
RESEARCH FELLOW IN EMPIRICAL POLICY ANALYSIS, THE HERITAGE
FOUNDATION
Chairman Walsh. Let me introduce our first witness today,
Doug Hoell, director of the North Carolina Division of
Emergency Management. In this position Doug is responsible for
disaster response for the state of North Carolina. Doug began
his career in emergency management in 1976 and worked for the
Raleigh Wake County Emergency Preparedness, the North Carolina
Division of Emergency Management and FEMA. Doug became
assistant director of the North Carolina Division of Emergency
Management in 1998 and director in 2005. Mr. Hoell is
testifying on behalf of the National Emergency Managers
Association. Welcome. I look forward to your testimony.
STATEMENT OF DOUG HOELL
Mr. Hoell. Thank you, Chairman Walsh. Good morning to all
of you. And thank you Ranking Member Schrader for the
opportunity to talk and to all the distinguished members of the
Committee or the Subcommittee.
My name is Doug Hoell. I am director of the North Carolina
Division of Emergency Management, and again, thank you for the
opportunity to present testimony today on behalf of the
National Emergency Management Association.
NEMA represents the state emergency management directors of
all 50 states, the District of Columbia, and the U.S.
territories. I have included my full statement for the record,
so I will give you a quick overview now and look forward to
answering your questions.
While not a traditional first responder agency, the Small
Business Administration is a critical partner to states and
localities affected by a wide variety of disasters. Following a
disaster, Small Business Administration has the capability to
mobilize staff from the Office of Disaster Assistance to begin
disseminating public information about what services the SBA
can provide to supplement many long-term federal recovery
programs.
While a major disaster declaration is awarded by the
president, affected citizens begin the registration and
eligibility determination process through FEMA. The entry point
to FEMA assistance is through FEMA's individual assistance
program. The first step in that process is to have the
applicant complete an application for a Small Business
Administration loan. An applicant may have insurance, but it
may not be enough to return them to their pre-disaster standard
of living. Often, citizens encounter damages and devastation
from disasters which are ineligible under FEMA disaster
recovery programs. SBA loans can help return a damaged home to
its pre-disaster condition, including implementation of
mitigation measures.
Following Hurricane Irene last year in North Carolina, SBA
loaned more than $43 million to eligible North Carolina
citizens. Due to the importance of small business in a local
community, SBA's Economic Injury Disaster Loan is a program
that supports the whole community approach to disaster
recovery. The Economic Injury Disaster Loan affords business
owners continuity of operations by loaning to eligible
businesses the funds to meet their ongoing obligations and to
pay ordinary and necessary operating expenses.
SBA was a critical resource in the state of North Carolina
when a landslide on U.S. Highway 129 impeded traffic and
prevented the day-to-day operations of business owners between
North Carolina and Tennessee. The Economic Injury Disaster Loan
Declaration made it possible for the businesses in both states
to continue critical trade and accessibility functions.
Programs designed to help disaster survivors are useless unless
citizens understand the options available to them. SBA does a
considerable amount of work in communities around the country,
making personal contacts with Chambers of Commerce, with
congressional offices, with state and local elected officials,
with business organizations, and with community groups. SBA and
state agency public information officers develop press releases
announcing availability of disaster loans in affected areas.
Media outlets are also informed of the declaration, and
they are enlisted to alert the affected citizens to every
opportunity to seek and receive assistance for their disaster
recovery. In testimony given by the General Accounting Office
before this Committee back in November 2011, William Shear
referenced steps SBA continues to take to improve their
marketing and outreach efforts. We look forward to continuing
dialogue with SBA and are encouraged by their increased
attention to the needs of individuals and communities.
As a profession, emergency management stakeholders have
focused a great deal on partnerships, which help us achieve a
resilient and sustainable nation. FEMA administrator Craig
Fugate has stressed the importance of the whole of community,
and FEMA's position as a member of a much larger team to
support the response and recovery to all hazards. There is no
doubt that the SBA Office of Disaster Assistance is a vital
member of the emergency management team, and we value their
contributions to our communities. The continued challenge of
protecting the nation from a variety of hazards within the
reality of fiscal uncertainty elevates the importance of
cooperation throughout the emergency management community and
makes leveraging resources from across the federal family even
more critical. Positive relationships between federal, state,
and local government stakeholders are the lynchpin to
coordinated recovery efforts supporting resilient individuals,
prosperous businesses, and thriving economies.
Thank you for the opportunity to testify today and your
continued attention to disaster assistance matters under your
purview. Your attention and leadership in this matter are
greatly appreciated, and NEMA remains a ready resource for the
Committee as you tackle tough issues of recovery from
disasters.
Chairman Walsh. Perfect timing, Mr. Hoell. Thank you for
your testimony.
Mr. Hoell. You are welcome.
Chairman Walsh. I would now like to yield to Mr. Barletta
from Pennsylvania to introduce our next witness.
Mr. Barletta. Thank you, Mr. Chairman. And thank you for
allowing me to participate today.
I am pleased to welcome Mr. Gene Tighe, a constituent and
small business owner from Pittstown, Pennsylvania. Mr. Tighe
manages sales for his family business, GT Fabrication, Inc., a
precision metal fabricating business serving clients around the
United States. His family has run the company for over two
decades and I am proud to say they have a reputation for
reliability, precision, quality, and competitiveness throughout
the entire industry. Despite strong competition from abroad,
this American owned and operated business continues to serve
our citizens despite the tough economic climate and the
devastating flooding that ravaged Pennsylvania and the
Northeast. I am glad Mr. Tighe accepted the Committee's
invitation to hear what his family and company went through in
order to reopen after the flooding. His testimony will
contribute to the debate over the role of the federal
government in providing disaster relief to our nation's
citizens when they are most vulnerable.
Thank you, Mr. Tighe.
STATEMENT OF GENE TIGHE
Mr. Tighe. Thank you. Mr. Chairman, Ranking Member
Schrader, thank you for inviting me here today to tell my story
about the flood caused by Tropical Storm Lee.
My name is Gene O. Tighe. I manage sales for our family
business, GT Fabrication, Inc., a precision metal fabricating
and powder coating business. My parents, Gene and Debbie Tighe,
started the company more than 20 years ago. My sister Tracey
and I have joined the family operation.
Our company has had its ups and downs. We supplied large
clients, like Pride Mobility. However, like so many other
manufacturers, we lost many of our main customers to overseas
competitors. We have not given up; we have adapted. We widened
our customer base and produced more products in new industries.
Our family business has survived many hurdles, but most
recently natural disaster threatened to close our doors.
My story begins on September 7, 2011, at 2 in the
afternoon. Projections showed the Susquehanna River would rise
to 35 feet by 3 p.m. the next day. Just two hours later,
predictions changed, bumping it up to 38 feet by 3 o'clock. My
family and our employees immediately knew our company would
face heavy damages because our building is located 100 yards
away from the Susquehanna River in Pittstown, Pennsylvania.
We have been flooded before. We knew that this time we
could not move some of our equipment. We had six machines in
the excess of 25,000 pounds, so we started moving smaller
equipment, materials, computers, and files. We worked through
the night to move materials up to our back building. When our
back building was built four feet higher because of past
floods, we stored materials on pallet racking to try to keep
them out of harm's way. After working through the night, by
September 8th at 8 a.m., the water crept into our parking lot.
By 9 a.m., we had a foot of water in our downstairs building.
We did all we possibly could do and exited the facility. Water
levels were rising at a breakneck speed.
In four previous floods, the river has never risen so
quickly. Millions of dollars of equipment left in the building
and we knew we were in trouble. Despite paying $15,000 for
flood insurance every year, we knew we could only expect to
collect a maximum half million dollars in contents and a half
million dollars in building damages. By the time the
Susquehanna River crested at 1 a.m., September 9th, all I could
see of GT Fabrication was the very top of our building.
My family and I were devastated. Our 30 employees were
devastated. We did not know if our family business could
survive this, and that is a horrible feeling. The watermark on
GT Fabrication's building was recorded at 15 feet. On our back
building, which was raised 4 feet to serve as a precaution
against flooding, the watermark was recorded at 9 feet.
On September 10th, almost two days after flooding began,
the water finally receded to 12 inches. I was the first one to
enter the building to see the damage. As soon as I got into the
building my heart sank. The destruction that the flood caused
was by far the worst it has ever been. I really could not
believe what I was seeing. Simply put, it looked like a bomb
went off.
My family, friends, and several of our employees were
waiting outside for me to tell them the news. All I could say
to them was it is bad but we will bounce back. But they had no
idea. I pulled my father aside to warn him that we had a lot of
work ahead of us if we wanted to stay in business. I could see
defeat in his eyes. The successful business he had built from
the ground up was wiped out just like that. The next day we did
the only thing we knew to do; we got to work. We ordered three
40-yard trash hoppers, a three-phase generator, power washers,
brooms. We spent tens of thousands of dollars to start the
cleanup process. We had the dry gut clean both buildings but
almost everything was destroyed.
At the exact same time we also had to do damage control
with our customers. We had to outsource all of our work to
finish our pending orders. We set our customers up with our
other vendors, our competitors, until GT Fabrication could get
back on its feet. Additionally, I knew that we desperately
needed financial help because we were not doing any business
and we were draining the company's funds on cleanup efforts.
I spoke to a Small Business Administration Disaster
representative, who told me to quickly complete the application
for a disaster loan. As soon as I could fill out the documents
I brought the paperwork to the SBA Disaster Response site. The
SBA staff looked it over and told me I was missing a few
documents. I immediately brought the missing documents back
down to the disaster site. The SBA official even complimented
me on my thorough completion of the application.
We had to throw almost $1 million worth of supplies and
demolish the inside lobby and office. After almost three weeks
of backbreaking cleaning, an SBA inspector visited GT
Fabrication to assess the damages and take pictures. A few days
after the inspector's visit we received an SBA Disaster
Assistance packet which stated they wanted us to provide
monthly sales figures for the past three years. Additionally,
SBA noted that they again needed Tax Form 8821. More than a
month after filling our original application out, we received
an SBA loan request to complete Tax Form 8821 for the third
time. This time we included a letter stating we had completed
this document twice previously. When you are in disaster mode
working 15 hours a day, 7 days a week to save your family
business, you do not have time to fill out all this paperwork,
especially after many of our records were destroyed by 15 feet
of water during the flood. Regardless, we provided the SBA with
information that they needed as quickly as possible. It
actually seemed as though the SBA was trying to purposefully
discourage us from applying for an SBA loan.
We had to find something else in the meantime. GT
Fabrication was fully not back to business and we had not yet
received an SBA loan. The company bank account was running dry.
Then, Pennsylvania state senator, Senator Yudichak called us to
tell us about the Luzerne County Flood Recovery Loan Program.
This is a $4 million low interest loan program that had a
borrowing limit of $100,000. The program applies a 1 percent
interest rate with no borrower's fee. This quick, easy loan
saved GT Fabrication by providing us an infusion of cash that
we so desperately needed.
Today, GT Fabrication is back in business, though we are
only operating at 70 percent. I have been able to get almost
two-thirds of my employees back to work. We look forward to
getting back to 100 percent and growing our business so we can
do our part in turning around our local, state, and national
economy. It is my belief that small businesses like ours will
add jobs to the U.S. economy, but I am disappointed that the
federal government has not provided more effective assistance
to small businesses at this time of greatest need. Our
experience was marked by bureaucratic red tape and an
ineffective disaster loan program.
The City of Pittstown has been very helpful retaining
consultants to help us relocate to a larger facility and a safe
distance from the river, and Luzerne County provided us the
loan that saved our business. But sadly, the federal
government, in my view, failed. I hope that my story can shed
some light on the problems that other small businesses face.
I want to thank the members of this Committee, particularly
Congressman Barletta, for working to improve the effectiveness
of the SBA Loan Programs. Thank you again for the opportunity
to be here today, and I will be happy to answer any questions.
Chairman Walsh. Thank you, Mr. Tighe. Thank you for that
powerful, powerful testimony.
I would now like to recognize Ranking Member Schrader, who
is going to introduce our next witness.
Mr. Schrader. Thank you, Mr. Chairman.
Howard Kunreuther, James G. Dinan Professor of Decision
Sciences and Public Policy at Wharton School, University of
Pennsylvania. In addition to his research, writing, and
teaching, he has also been co-director of the Wharton Risk
Management Decision Process Center, where he works on improving
the roles of public and private sectors in reducing losses from
natural disasters and aiding the recovery process following a
catastrophic disaster. Thank you for joining us.
STATEMENT OF HOWARD KUNREUTHER
Mr. Kunreuther. Thank you very much, Representative
Schrader and Chairman Walsh, and other members of the
Committee.
I appreciate the invitation to testify here on this
particular bill. And I do want to make a point right at the
outset that I am very sympathetic to what Mr. Tighe has said
with respect to the challenges and problems that he faced. But
I want to raise really three points in my testimony.
The first is why is the proposed legislation to extend SBA
disaster loans at 1 percent to cover both disaster losses and
other outstanding debts likely to increase future losses from
natural disasters? Second, can we utilize mechanisms, like
insurance, coupled with other policy tools, to reduce future
losses so that the SBA can play a secondary role in providing
funds for disaster recovery? And there is no question SBA may
have a role to play. Third, how can the National Flood
Insurance Program, which is now up for renewal and discussion,
be modified so as to set a tone as to ways that the public and
private sectors can work together to reduce losses from floods
and other disasters like storm surge from hurricanes?
So those are the three points I would like to emphasize.
Let me talk about the first point and raise two issues. Dr.
Muhlhausen may be saying more about one of them.
With respect to the SBA provision of 1 percent loan, it
creates a moral hazard problem in the following sense. It
encourages people to locate their home and businesses in hazard
prone areas while at the same time reducing the economic
incentive to purchase insurance and invest in mitigation
measures prior to a disaster. So we have to be aware of the
fact that if you are going to get very low interest loans
people may say I do not need to be protected.
The proposed program also has the potential of creating a
situation where people actually may be better off after the
disaster than before financially. If you receive a 1 percent
loan for retiring your old debts as well as your disaster
losses, the actual payments would be lower than they were
before the disaster if you had previous SBA loans. I have an
example in my testimony to highlight this point.
Let me turn to the second point on the role of insurance
and other policy tools to reduce future losses. Insurance has
three basic purposes that it can actually aid in this process.
One is it provides a signal of risk to individuals and firms in
their current location. If you have premiums that reflect risk,
then you will actually be able to know whether or not you have
a very severe hazard. Second, it will encourage property owners
to invest in loss reducing measures. If you can get a premium
discount--because you should if you invest in something that
reduces your losses--then you may be in a position where you
will be encouraged to do so. And the third point is insurance
supports economic resiliency. Insured individuals and firms can
make a claim to obtain funds to help pay for the loss caused by
the catastrophe. I recognize that the Flood Insurance Program
may have to extend coverage limits.
Let me provide two guiding principles that have reflected
our work in this area with respect to insurance. Principle No.
1 is that insurance premiums should reflect risk for the
reasons that I have stated. So people have a signal of how
hazardous it is and they will want to invest in mitigation
measures. Principle No. 2 is just as important and it is called
equity and affordability. When you have premiums that reflect
risk, there may be people who need special treatment. They
should not be given a subsidized insurance premium; they should
be given an insurance voucher, like a food stamp. It enables
one to still see what the premium is on the basis of the risk,
and have an opportunity to obtain a premium discount if they
invest in mitigation measures.
I would like to put forward a few ideas for the National
Flood Insurance Program reform which have been discussed with
Congress that would actually try to move in that direction. The
first is multi-year insurance not tied to the individual but to
the property because people cancel their policies if they turn
out that they have not received a claim. It is hard to convince
people that the best return on an insurance policy is no return
at all. You should celebrate not having a loss.
The second point is we would want insurance vouchers for
those needing special treatment. Third, you may want to
consider required insurance for property owners because many
people do not have policies. And the fourth point is multi-year
loans for mitigation. If the mitigation measure to reduce the
losses is a cost effective one, the actual cost of the loan may
be actually less than the premium reduction one receives, so it
will be financially attractive for people to invest in
mitigation. And finally, well-enforced building codes. Having
said all of that, there certainly will be a role that the SBA
will have to play after a disaster, but the emphasis should be
to place more attention on reducing these losses beforehand.
To conclude, our country has entered a new era of
catastrophes. Our exposure is growing and the damage from
disasters over the next few years is likely to be more
devastating than what we experienced during this past decade.
When the next catastrophe occurs, the federal government will
very likely come to the rescue again. If the public's response
to recent disasters is an indicator of their future behavior,
new spending records will be spent with respect to federal
assistance unless steps are taken to reduce future losses, and
they should be undertaken now. And so with all due respect to
all of the challenges after a disaster I would like to at least
argue that we better try to do more to prevent these losses
from occurring.
Thank you very much.
Chairman Walsh. Thank you, Doctor.
Our final witness that I have the pleasure of introducing
is Dr. Muhlhausen, research fellow in Empirical Policy Analysis
at The Heritage Foundation here in town. Dr. Muhlhausen joined
Heritage in 1999 after serving on the staff for the Senate
Judiciary Committee. He holds a doctorate in Public Policy from
the University of Maryland, Baltimore County, and a bachelor's
degree in Political Science and Justice Studies from Frostburg
State University. Dr. Muhlhausen is also an adjunct professor
at George Mason University.
Welcome, sir. You have five minutes.
STATEMENT OF DAVID B. MUHLHAUSEN
Mr. Muhlhausen. Thank you. My name is David Muhlhausen. I
am a research fellow in Empirical Policy Analysis in the Center
for Data Analysis at the Heritage Foundation. I thank Chairman
Joe Walsh, Ranking Member Kurt Schrader, and the rest of the
Committee for the opportunity to testify today on the Disaster
Loan Fairness Act. The views I express in this testimony are my
own and should not be construed as representing any official
position of The Heritage Foundation.
After the president declares a major disaster, the Disaster
Loan Fairness Act would set the interest rates for the Small
Business Administration's Disaster Loan Program at 1 percent
for eligible applicants. Unfortunately, as my testimony will
illustrate, the Disaster Loan Fairness Act does not provide the
necessary reform to our nation's disaster prevention and
recovery programs.
My testimony focuses on three deficiencies of the
legislation. First, by providing more generous benefits, the
legislation does nothing to reduce the overreliance of state
and local governments on the federal government for the
provision of recovery assistance. Far too frequently the
federal government has been the primary source of recovery
efforts for natural disasters that are inherently localized in
small geographic areas and do not rise to the level that should
require action by the federal government. Increasingly,
Americans are becoming overly dependent on federal assistance
after natural disasters occur.
Further, disaster assistance appears to have become a
political tool because the number of disaster declarations is
significantly higher in election years compared to nonelection
years. Since 1996, the year President Clinton sought
reelection, the number of disaster declarations issued by FEMA
dramatically increased. The chart in my written testimony
demonstrates this trend. The previous record of the most
declarations in a year was set by President Clinton in 1996
with 158 incidences. President Obama smashed this record with
242 declarations in 2011. Given that 2012 is a presidential
election year, I doubt this record is going to last very long.
Essentially, this trend is the result of disaster responses
that were once entirely local in nature and handled by state
and local governments becoming nationalized and thus, the
responsibility of the federal government.
Second, with out-of-control spending surging and public
debt threatening our nation's stability, Disaster Loan Fairness
Act increases federal spending. Instead of practicing fiscal
constraint, the legislation does not reduce the cost of future
disaster recoveries. Reform should be focused on preventative
measures that limit the cost of disasters. Contrarily, this
legislation puts the federal taxpayer on the hook for more
spending.
Third, increasing the generosity of SBA disaster loans
creates a moral hazard by providing greater encouragement for
homeowners, renters, and businesses to avoid purchasing
adequate disaster insurance because natural disasters are low
probability events. Clearly, having adequate insurance before
disasters occur is the responsible course of action. SBA
disaster loans are intended to help applicants return their
property to the same condition as before the disaster. The
unintended consequence of this requirement is applicants are
forced to rebuild in the same disaster-prone location. For
example, instead of relocating out of a town sitting in a major
flood zone, applicants are required to rebuild in the same
exact location. Thus, applicants are still located in a high-
risk area, preventing a long-term solution from taking place.
While this dilemma exists with or without the passage of the
Disaster Loan Fairness Act, the legislation only increases the
incentive to rebuild in high-risk areas.
In conclusion, the Disaster Loan Fairness Act is neither
fair to the federal taxpayer, nor an effective reform of our
nation's disaster prevention recovery policies. Instead of
considering this legislation, Congress should focus on reforms
that will make American more resilient to disasters and reduce
recovery costs imposed on the federal taxpayer.
That is all. Thank you.
Chairman Walsh. Thank you, Dr. Muhlhausen for your
testimony.
Let me begin with just a couple questions. Mr. Hoell, Dr.
Muhlhausen alluded to and as did Dr. Kunreuther alluded to the
fact that federal government is seemingly taking more of the
responsibility for disaster assistance away from the states.
How would you respond to that? Good thing? Bad thing? And do
you see the same sort of trend?
Mr. Hoell. I would say to you that there are criteria that
we have to meet for a presidential disaster declaration under
the Stafford Act. And so when we have disasters that affect the
state of North Carolina, we look to those criteria. There is a
certain per capital cost, you know, to the individuals in the
state of North Carolina. Our threshold for public assistance,
for example, is over $10 million. And, you know, that is
statewide. And then you have to meet the criteria on a county-
by-county basis for a county to be declared. So that is on the
public assistance side. On the individual assistance side more
where the SBA would come to bear would be, you know, you have
got to have numbers of people affected--businesses and people.
And so again, I think that there are criteria that we have to
meet.
I favor the mitigation efforts. I think mitigation is a
good thing but I would tell you that the mitigation program,
the way it is established is a very slow process and it takes
us two or three years probably to buy properties or elevate
properties and things of that nature.
Chairman Walsh. Has that criteria changed?
Mr. Hoell. The hazard mitigation criteria? Or the criteria
for federal declaration? Yes, it has. In fact, the figures keep
going up and they just changed this year and in fact, went up a
little bit higher. I do not know exact numbers. I am certain we
can get them for you if you like.
Chairman Walsh. Would you concur with Dr. Muhlhausen that
the trend is toward much greater federal assistance?
Mr. Kunreuther. I think that is absolutely the case and I
think that what Mr. Hoell indicated is an important direction
one has to go. We really do have to encourage mitigation using
the National Flood Insurance Program (NFIP) as a starting
point. If you can reform the NFIP, mitigation can be a lot more
attractive than it currently is. That is why the whole idea of
long-term contracts, long-term multi-year insurance tied to the
property, along with a multi-year loan, could change that
situation radically so that people will then appreciate the
fact that when they have a loan they do not have to necessarily
pay the upfront cost. This is what discourages many homeowners
from investing in mitigation. They will now know that they have
a longer term payment and they will get something back in the
context of an insurance premium. So it is in that direction
that we would want to go. Then the SBA program would have a
perspective that I think it does not have today. It is being
used because people have not taken this action and everyone is
then demanding assistance after the fact.
Chairman Walsh. Dr. Muhlhausen, expand briefly on this
notion of overly dependent on disaster relief. Why is that? How
does that play out?
Mr. Muhlhausen. Well, I think there is a political benefit.
I think after each natural disaster occurs, I think
politicians, unfortunately, are upping the ante, wanting to
provide more disaster assistance to outdo what was done
previously. And so I think Americans have come to expect the
federal government to act.
And I think Mr. Tighe's case is a case study that should be
considered where state and local governments provide assistance
to his business, not the federal government. And it sounds like
his business is doing well and existing and is continuing and
was relocated out of a flood plain. And if he did get an SBA
disaster loan, would he have been allowed to relocate his
business or would it still be sitting in the same area that was
so prone to flooding?
And so I think that disaster assistance first must be local
in nature based on state and local governments, and then only
rise to the level of federal assistance when it overwhelms the
capacity of state and local governments to handle the
situation. And so I think there has definitely been a normative
change when the Stafford Act has been declared by FEMA.
Chairman Walsh. Last question. Mr. Tighe, let us bring this
to you. It is a fascinating policy discussion.
Mr. Tighe. Yes.
Chairman Walsh. But you can bring this home like nobody
else in this room.
Mr. Tighe. Yes.
Chairman Walsh. Expand on what Dr. Muhlhausen said. I mean,
is there--in your testimony you clearly expressed greater
pleasure with the way that local and state reacted to you as
opposed to federal. I mean, but as you now look back is there
anything differently you would have or could have done?
Mr. Tighe. At the time, I mean, if anybody has ever been
through a disaster--we have actually been through four of them.
By far this one was the worst. When you are in a disaster mode
you really are not thinking about filling out paperwork and
doing this and doing that, but also in the same breath you have
to be very conscious of how much money you are pulling out of
your bank account before you go below the zero line. You know,
at the time I went to the local Chamber of Commerce. I spoke to
a SBA disaster official. He told me to fill it out and get it
in. You know, I was a little leery about the 6 percent loan
but, you know, I said would it be good for me to just get in
the system? He said absolutely. Get in the system and then, you
know, if something happens down the road, you know, we will
look at it.
My biggest problem with them was just the communication
back and forth. You know, they have had me fill out the same
documents four or five times. And then, you know, at the end of
the day, you know, we were draining our bank account. I had to
go somewhere else. The Luzerne County Flood Recovery Program, I
mean, it was not enough money by far; it was very little but it
did give us a quick infusion of cash. And we were able to get
back in business. And like I said, we are not back in business
by any means. Seventy percent, mostly powder coating and some
manufacturing, but I have a million dollars worth of machines
in that building and, you know, I have been trying to get
relocated for years. And, you know, I just keep getting
stonewalled. I mean, obviously I would like not to be flooded
ever again. You know, we have a 35,000 square foot building
with machines that weigh 25,000 pounds. You would have to give
me two weeks to move that equipment. I need cranes to come in.
I need riggers to come in. When I find out the day before that
the river is going to flood, there is nothing I can do. My
hands are tied.
So, I mean, you know, going forward I think, you know, the
state did help us out but, you know, if I was able to get the
SBA loan for a disaster, I mean, we are an established company.
We have been in business for over 20 years.
Chairman Walsh. If you had gone to your local bank do you
know what your interest rate would have been?
Mr. Tighe. I do not know exactly but I think it would have
been around the same.
Chairman Walsh. Okay. Great. Thank you.
Mr. Schrader.
Mr. Schrader. Thank you, Mr. Chairman.
Sorry about what happened to you. That is a business
person's worst nightmare.
Mr. Tighe. Thank you.
Mr. Schrader. Not being able to get out of that.
Mr. Hoell, given some of the comments from Mr. Tighe on
this communication issue with SBA and having to fill the same
forms out several times, can you comment on why that would even
happen?
Mr. Hoell. You know, it is hard to say. The Small Business
Administration has been a good partner with us and they have
serviced a lot of people in the state of North Carolina. In
fact, after Hurricane Irene, over 19,000 people made
application to the Small Business Administration and received
$43 million in loans. So I cannot tell you that we have had a
lot of difficulty with the paperwork process.
Mr. Schrader. If you were to have difficulty, is there a
mechanism? You know, it is probably personality-driven in the
real world. Do you have a mechanism? Does SBA to your knowledge
have a mechanism to deal with that sort of thing so that if a
person in the middle of a disaster says, ``Man, I am filling
this form out again,'' they can call someone or they can get
somebody up the food chain, if you will?
Mr. Hoell. When we have a disaster there are community
outreach people that work for the Federal Emergency Management
Agency and SBA has people that also are out there in the
community outreach to deal with people who are having
difficulty. You know, but the challenge is, like Mr. Tighe
says, he is busy trying to recover his business and he may not
have the time to engage with them, you know, in more
conversation or more paperwork that they have to deal with. But
there are people who are trying to address the needs of the
disaster victims out there.
Mr. Schrader. Not well enough.
Mr. Tighe, do you want to comment on that?
Mr. Tighe. Yes. I actually talked to SBA field
representatives. I have talked to SBA staff members. As a
matter of fact, I went out of my way to talk to them and ask
them why I was filling this 8821 Tax Form out so many times.
And they could not answer the question.
And the same thing with I got a letter from them from Texas
and, you know, it was postmarked for Monday. It was due back in
their office on Sunday. Mail does not run on Sunday. Seven days
I have got to get it. I asked the lady, you know, can you
explain to me how I am supposed to do this? And she says----
Mr. Schrader. And why seven days?
Mr. Tighe. Yes. Exactly. And she said, ``I am sorry. That
is just the way it is.''
Mr. Schrader. All right.
Mr. Tighe. So we kind of get straight answers. You know,
they do not really want to get into it. And usually when you
ask somebody else they say, well, I do not know.
Mr. Schrader. Yes. Ask the next guy.
Mr. Tighe. Yes. Ask the next guy.
Mr. Schrader. Let us talk about the moral hazard issue.
That is something I am concerned about and I think that, you
know, what is the even proper role between SBA and flood
insurance? I mean, SBA would be a super disaster assistance,
when things go beyond the norm, and obviously our flood
insurance programs are not doing what they should be doing and
we do not want to give a very low--we all on this panel are
worried about our debt and deficit at the federal level and so
we are very conscious about the cost of this particular piece
of legislation potentially.
So what is the balance, if you will? I will be curious,
both Dr. Kunreuther and Dr. Muhlhausen on what is the right
balance? What is the role of the SBA versus flood insurance?
What specific mitigation changes do we need to make in either
program in your opinion to be more effective? And what is the
magic interest rate that gets the right point to avoid moral
hazard?
Mr. Kunreuther. Well, first I do want to say before I
respond to that, the sympathetic aspect that we have for your
particular position. And I think a lot of the work that we are
doing is very much in the spirit of the question that you are
raising. To the extent that one can take steps beforehand, even
in the sense of having enough insurance so that you would be
protected against the particular losses that one has, that is a
very important element. The SBA may have to come in at the end
of the day to provide disaster relief for those who need
special treatment. And the question of the interest rate is an
important one for people who can get credit and who may have
enough income. You may want to have a different interest rate
which is the current policy for ones who actually are in
special need.
I think Representative Schrader, the question you are
asking is the central one with respect to what has to be done.
Where do you find mitigation coming into play? Where do you
find insurance coming into play to avoid a number of problems
that we are hearing from Mr. Tighe and from others who suffer
these losses? If you can somehow make mitigation attractive
enough, if you can do things that let people understand, let
businesses understand and residents understand that there are
very good reasons for doing this. The moral hazard problem is
that victims are not going to get the kind of federal relief
that would otherwise be forthcoming that Dr. Muhlhausen
mentioned in his testimony and that we have lots of data to
suggest. In a presidential election you know that moreso than
at other times you are going to have an enormous amount of
support. We all have sympathy after a disaster. As we are
concerned about being in that situation.
So our feeling is that if you can take the steps
beforehand, if you can recognize that insurance has a vital
role to play in terms of letting people not only know about
what the risk is but at the same time rewarding people for
taking action to reduce their loss, then I think we can stem
these losses from natural catastrophes.
The other point I would want to make is that the
affordability issue is critically important here. So that
having a voucher, like a food stamp, that is designated for
insurance, for people in special need is central to making this
work for political reasons and for equity and efficiency
reasons. Let me give you just two examples.
The first is that if you have a better flood map or you
find a dam or levee is decommissioned, there is a resistance to
these changes by Congress because they feel their constituents
will have to pay higher premiums. We would say let everyone
know what the insurance premium is that reflects the risk, but
give these individuals an insurance voucher to recognize that
now you are increasing their premiums. The voucher could be
decreased over time but at least these communities will have
better flood maps and a better notion of what the risk is. The
same thing would happen with low income people, if Congress
raises the flood insurance premium to reflect the risk, one
needs a voucher for special treatment.
The last point I will make on the mitigation side. If you
have a voucher and a person still invests in a mitigation
measure, they still should get a premium discount. Just because
they have a voucher, there is no reason why they should not be
rewarded for reducing the losses. The voucher was given for
equity and affordability. If at that point a homeowner or a
business says we still want to mitigate, there is every reason
to want to reward it with a premium discount and with a long-
term loan to encourage it. So it is on those directions that we
believe you can address the moral hazard problem in a way that
will be effective from the point of view of businesses like Mr.
Tighe's and homeowners who are living in these hazard prone
areas.
Mr. Muhlhausen. I think Professor Kunreuther's policy ideas
are very encouraging and I think they need to be looked into at
a much greater depth. Right now I cannot sign off on them but I
am very enthusiastic about exploring his ideas more and working
with him in the future.
What I do think is that premiums should reflect risk. And
this means that there should be regulatory reform on the
federal and state level. And that is one of the first steps to
get us to a solution. For affordability, I think some of these
affordability solutions such as these vouchers would be best
worked at the local level since most disasters are inherently
occurring in small geographic areas. They are localized and can
be best dealt with in the first place by state and local
governments. And I think they best know their needs and maybe
the states can set up their own voucher programs. And whether
or not there will be another layer with the federal government
providing such assistance is something that may be explored.
But I think on a fundamental level I think these solutions need
to come from the ground up before they come from the top down
from the federal government.
Mr. Schrader. Thank you.
Chairman Walsh. Quickly.
Mr. Kunreuther. I am very sympathetic to what Dr.
Muhlhausen said except that since the Flood Insurance Program
since it is a national program. Vouchers may have to come from
FEMA or some government organization. So that would be the one
exception.
Chairman Walsh. Thank you. Let me turn to Mr. Barletta.
Mr. Barletta. Thank you very much.
Let me just go back for a few moments and tell you what I
experienced during this latest flood, Hurricane Irene, and
Tropical Storm Lee, which was really a double-barrel disaster
to our area. As I traveled throughout my district, I went from
community to community, walked the streets, and it was the same
scene everywhere I went. Mr. Tighe's story here is very
familiar but it was even further than that actually. I watched
as--I stood on porches and watched grown men cry. Literally
cry. I have had senior citizens tell me that they are not going
back into their homes again. I have had businesses telling me
we are going to collect the insurance and we are done. We are
not going back into business again. We are not going to go
through this again. We cannot do this anymore.
See, in my part of the state, in Pennsylvania, in
Northeastern Pennsylvania, we have the highest unemployment
rate in the state. And it sounds good here in Washington in
this beautiful building to say, well, Mr. Tighe, just move. Go
somewhere else. And when he does, what happens to the people
that worked there in our area that already is experiencing a
high unemployment? What happens to their jobs? What is the cost
to the economy if he takes your advice and he goes somewhere
far away so this does not happen again? Does that help or does
that hurt?
I have a couple questions. If you can look at those photos
over there, that is much what I saw throughout my entire
district. Now, I certainly do not believe that these people
would move into an area like this so that they could take
advantage of some government loan program that we are going to
be offering. But I want to ask. The question is, Dr.
Muhlhausen, do you believe that helping those folk would be
politically motivating?
Mr. Muhlhausen. I think upping the ante, making sure that
federal assistance becomes more generous throughout the year is
politically motivated.
Mr. Barletta. No, I am asking, these folk right here, these
are real people. These are real people. So do you think us
coming in to help them is politically motivated? That I would
say maybe these people would vote for me if I came and gave
them help? Do you think that enters anybody's mind? When you
are witnessing people carrying their life's possessions to the
sidewalk to be hauled away--their memories, their pictures,
memorabilia, things that have been given to them from
generation to generation--do you actually believe that when you
walk those streets that those folks--that political motivation
would be the reason for trying to help them?
Mr. Muhlhausen. No, I think there are people who come out
of the woodwork to help their neighbors. I think that is good.
I think local politicians, local programs can provide
assistance. But I think the fact that we see that there is an
uptick, a statistically significant increase in presidential
disaster declarations during an election year, we know that
some of this assistance is politically motivated. It is
empirically demonstrated.
Mr. Barletta. I am not talking about--this was not an
election year. What about these folks?
Mr. Muhlhausen. Well, I am sure we can always help them out
and that is good.
Mr. Barletta. Yes. Here is how we will help them out. Let
me tell you how we will help them out. If you can get--you have
a business and you can get credit somewhere else, this is what
the United States will do and this is what SBA will do. We will
help you out. If you can get credit somewhere else we will
offer you a 6 percent loan. Now, you ask the question is the
Disaster Loan Fairness Act fair to the taxpayers? Well, let me
ask you. Do you think this is fair to the American taxpayers?
In the last two years we gave Pakistan--Pakistan--$215 million
for flood disaster relief. Did we insist that Pakistan--did we
require them to have mitigation first before we use American
tax dollars? Did we ask them do they have insurance before we
give American tax dollars? Do you know what interest they are
paying? Not 6 percent like we would have offered Mr. Tighe; 0
percent. Zero percent. Is that fair to the American taxpayers?
And do you know what the payback is? There is no payback. They
do not have to pay it back.
So I would tell Mr. Tighe if he wanted to move, maybe we
want to say maybe you should move to Pakistan where we would
have offered a 0 percent loan and you would not have to pay the
money back. We are trying to keep manufacturers and people in
business, sir. We are not trying to make a profit or say, well,
maybe you are going to take advantage of it.
We gave Japan $94 million for the recent tsunami and
earthquake. We gave Haiti $838 million for disasters there. In
fact, we gave $4.98 billion--billion dollars in humanitarian
assistance.
Now, we are all very proud of that because when disasters
strike America is the first to help, and I am proud to say that
I am an American and we do that. But sir, I believe we should
be helping Americans first. Now, this loan disaster bill is not
going to cost the taxpayers anything because I am offsetting it
with aid, international aid, disaster aid, that would cover the
cost. So should we not--my question is should we not help
Americans firsts?
Mr. Muhlhausen. I think flaws in our foreign aid system are
an entirely different issue, and two wrongs do not make a
right. So if our foreign aid system has questionable policies
that is a separate issue for a separate hearing and actually a
separate committee. But I will add that we should be
compassionate to help people recover from disasters; the
question is the best way to do it. And the best way is to have
preventative measures, help people mitigate against future
disasters. And the problem with the SBA program is that it
presents a moral hazard that people--it is an incentive not to
have adequate insurance. It is an incentive not to----
Mr. Barletta. But you are not answering my question. Should
we not, if we could, take the money from international disaster
relief--before we help people who are affected by a flood in
Pakistan, not help our own neighbors, our own friends, if this
will not cost the American taxpayers? If a 1 percent loan--this
is not a small business loan. We are not encouraging people to
open up a risky business; we are saying your business has been
lost or your home has been lost to no fault of your own. And if
we could not have a cost directly on the taxpayers by
offsetting it with international disaster aid, why would we not
do that? I am just failing to miss--I understand what you are
saying and I am all for mitigation. And many of the people who
were affected here, sir, did not have flood insurance because
they were told they were not in a flood plain.
And do you know how long, Dr. Kunreuther, it takes before
you see a check? I have constituents that have waited six
months for an insurance check. Six months. What does that
business do in the meantime? This sounds good here but when you
are walking the streets and standing on the porches of these
people it does not work. And how do you justify that we help
other people before we help Americans?
Mr. Muhlhausen. Nowhere in my testimony have I justified
helping foreigners over Americans. So I think the question
right here does not pertain to me. Maybe you need to ask
Congress, your fellow congressmen, why aid is going to these
foreign countries that you think are so questionable.
Mr. Barletta. Well, can I ask you this then? If I told you
today that the 1 percent CBO has suggested that there will be
no affect on direct spending and that if we offset the
discretionary cost by taking it out of international foreign
disaster relief, if I told you that would you then think that
this bill maybe is a good idea that we are helping Mr. Tighe
stay in business and other people stay in business before we
help someone else?
Mr. Muhlhausen. I think Mr. Tighe stayed in business
without SBA loans and he would have stayed in business without
reforms.
Mr. Barletta. If we can offset the costs?
Mr. Muhlhausen. I think offsetting would be an improvement
in a flawed bill. It is not control for the moral hazard issue.
It does not account for the fact that we are having too many
disaster declarations that should be not nationalized; they
should be handled best by local governments.
Mr. Barletta. But for those that are. For those that are.
For these folks right here.
Mr. Muhlhausen. There is a case where if there is a natural
disaster that is so devastating that it is beyond the capacity
of state and local governments, there may be a case for SBA
disaster loans. But if it is just a tornado, if it is a flood
that people knew they were in a flood high-risk area for years
and they continued to have their business located there, that
presents a moral hazard issue. The policy should be we should
not encourage people to be in dangerous areas. We should
encourage people to be in safe areas.
Mr. Barletta. Well, when should they move? You know, there
could be an earthquake in California, so should everyone move
from California? People in the Midwest, you know, there could
be a tornado. Should they move out? Where will we move?
Mr. Muhlhausen. Well, in the case of hurricanes or, I mean,
earthquakes you have to have good building codes to make sure
the buildings can withstand a severe earthquake. So obviously
you would not have people leave California. But if you are
sitting in an area where it is easy to move, where if you can
move one mile up the road and be completely safe from a flood,
that is a better solution than continuing a business in an area
that is going to get flooded repeatedly.
Mr. Barletta. And for the folk who are not in a flood plain
but still lose everything to a flood, I guess my point is, you
know, there are people who lose their homes, their possessions,
their businesses, and choose to take the insurance. Because we
talked a lot about insurance today. And we seem to think that
that is going to solve the problem. But if Mr. Tighe takes his
insurance check and decides I am done, does that help America?
Is there not a return to the American taxpayer by helping
American businesses stay in business? Because of a disaster
that was no fault of their own and will not cost the American
taxpayers any money because we are going to take it from other
countries that we are helping rather than----
Chairman Walsh. Let me just interject, Mr. Barletta. Why do
you not take a breath, Dr. Muhlhausen. Dr. Kunreuther, why do
you not jump in here.
Mr. Kunreuther. I think you are raising issues that are
central to the challenges we face with natural disasters. When
we focus, as you are with your photos and with our example, Mr.
Tighe, on specific situations, we all want to help. We all want
to do something to assist on equity and sympathy grounds. But
Representative Barletta, I think that what Dr. Muhlhausen and I
have been saying is can we learn lessens from Mr. Tighe's
experience for others to think about these events beforehand in
a way that will be attractive but where there are actions they
are taking?
And what I mean by that is if it turns out that you had
higher limits, for example, on flood insurance, the private
sector may be able to even come in.
We finished a study suggesting the private sector can
supplement the federal government on that. And so you have full
protection if you were given incentives and we would have to
talk with Mr. Tighe--and each individual business and home will
be different on that--to take steps beforehand. In order to
reduce it we would avoid a lot of the situations that you are
talking about. And so I think we are all on the same page here.
Mr. Barletta. Where we are different--and I agree with you.
Mr. Kunreuther. Okay.
Mr. Barletta. I agree with exactly what you are saying. And
I am with you. I get it. Where the disconnect is is at the time
when we do offer an SBA loan, I mean, we are surely not
suggesting do away with SBA disaster loans. So if we do all
that you say, and I agree we should. That is a good idea. That
is good policy. But for the times when we do offer those SBA
loans, why would we not offer a 1 percent loan and give
Americans a chance and an opportunity to get back up on their
feet, to decide I am going to stay in business, and offset that
cost. We make good points here but if we are going to offset
the cost, what I am saying is let us not help that business in
Pakistan before we help somebody in Pittstown, Pennsylvania. I
cannot justify that and there is no argument--I do not believe
that as an American we can make--that we would rather help
businesses somewhere in the world before we will help our own
Americans here at home.
Mr. Kunreuther. I am not going to get into the foreign
domestic trade offs in my response.
Mr. Barletta. It is part of this bill.
Mr. Kunreuther. I understand the point and I think that
there are reasons to ask where should our money go. But let me
answer your point directly on the 1 percent loans. At the end
of the day when there is a disaster we have to ask ourselves
who is in need. There are likely to be businesses who could
afford to take out a loan at a normal interest rate. However,
affordability needs to be put on the table. If someone cannot
afford the premium and it happens to be a small business that
may be in real need, one has to consider whether there should
be special treatment given to it.
The SBA disaster loan program does exactly that today as
you know. It happens to have higher interest rates, 4 percent
and 8 percent, depending on whether there is an affordability
problem. The question that you are posing is should you go down
to 1 percent. That is a value judgment. It is a judgment that
everyone has to make as to how much assistance we want to give
and whether or not that money could have been spent better in
other ways. I will not answer that question directly because I
think at the end of the day we as a society, and Congress plays
that role, has to judge at what point do we want to provide
special relief. And it certainly could be argued that if it
turns out someone would not be able to stay in business unless
they were able to get a very, very small loan, a low interest
loan, then you may want to go in that direction.
But I think as a general policy, and I think that is what
we are talking about here in the way of the legislation, it
sets the tone that really argues for post-disaster relief
rather than protection beforehand. And that is the reason I
think Dr. Muhlhausen and I are making the comments we are. Let
us take some steps beforehand rather than focus purely after.
Mr. Kunreuther. And I appreciate the arguments that you are
making but we cannot ignore the fact that we give Pakistan
flood disaster relief at 0 interest. I know we are not here to
solve but we are. We are part of Congress and we do look at the
big picture. And the big picture is I am sitting here seeing
that we gave Pakistan $215 million with 0 interest. How can we
justify that and argue here in your testimony saying, well, if
an American business could afford to pay something else, why
should not an American business pay 6 percent interest if they
could? But why should somebody in Pakistan, who I do not even
know, pay 0 percent interest? That is the question that I am
asking my colleagues here. Do you think that is fair?
Chairman Walsh. It sounds like a wonderful topic as well
for another hearing. I will give you time for a very brief
answer because Mr. Barletta's time has expired. Go ahead, Dr.
Kunreuther, if you want to weigh into that at all.
Mr. Kunreuther. No, I am not going to weigh into that
because I really want to second what Dr. Muhlhausen said. I
think there are two separate issues. I think one has to ask the
question in Pakistan whether or not you are going to give a 0
percent interest rate if you are going to do it for other
reasons, rather than sort of make the comparison between what
we do in this country. I think that is an issue that should be
put on the table but not in the context of this particular
piece of legislation.
Chairman Walsh. Thank you. Mr. Barletta, thank you.
On behalf of the entire Subcommittee I would like to thank
all of our witnesses for being here today. The testimony that
you provided will be helpful as we continue to consider
amendments to SBA's Disaster Assistance Programs.
As was mentioned in the opening, we want to make sure that
our neighbors have the right tools to get back on their feet
after a disaster. None of us question that. The question is how
best to fund and supply those tools. The faster people get back
on their feet, the better off we will all be as a nation.
With that, without objection, I ask that the record be kept
open for five legislative days. Without objection, so ordered.
This hearing is now adjourned.
[Whereupon, at 11:10 a.m., the Subcommittee hearing was
adjourned.]
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