[Federal Register Volume 82, Number 8 (Thursday, January 12, 2017)]
[Proposed Rules]
[Pages 4064-4097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00467]



[[Page 4063]]

Vol. 82

Thursday,

No. 8

January 12, 2017

Part IV





Department of Homeland Security





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Federal Emergency Management Agency





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44 CFR Part 206





Establishing a Deductible for FEMA's Public Assistance Program; 
Proposed Rule

  Federal Register / Vol. 82 , No. 8 / Thursday, January 12, 2017 / 
Proposed Rules  

[[Page 4064]]


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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

44 CFR Part 206

[Docket ID FEMA-2016-0003]
RIN 1660-AA84


Establishing a Deductible for FEMA's Public Assistance Program

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Supplemental advance notice of proposed rulemaking.

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SUMMARY: The Federal Emergency Management Agency (FEMA) is considering 
implementing a Public Assistance deductible that would condition 
States' receipt of FEMA reimbursement for the repair and replacement of 
public infrastructure damaged by a disaster event. The primary intent 
of the deductible concept is to incentivize greater State resilience to 
future disasters, thereby reducing future disaster costs nationally. On 
January 20, 2016, FEMA (the Agency) published an Advance Notice of 
Proposed Rulemaking (ANPRM) seeking comment on a Public Assistance 
deductible concept. The ANPRM provided a general description of the 
concept that many commenters found insufficient to provide meaningful 
comment. In an effort to offer the public a more detailed deductible 
concept upon which to provide additional feedback, the Agency is 
issuing a supplemental ANPRM (SANPRM) that presents a conceptual 
deductible program, including a methodology for calculating deductible 
amounts based on a combination of each State's fiscal capacity and 
disaster risk, a proposed credit structure to reward States for 
undertaking resilience-building activities, and a description of how 
FEMA could consider implementing the program. At this stage of the 
rulemaking process, the deductible remains only something that FEMA is 
considering. The policy conceived of in this document is not a 
proposal. In this document, FEMA is providing what is merely a 
description of a direction FEMA could take in future rulemaking in an 
effort to solicit further feedback from the public. After considering 
the comments it receives, or as a result of other factors, FEMA may 
expand on or redevelop this concept.

DATES: Comments must be submitted by April 12, 2017.

ADDRESSES: You may submit comments, identified by Docket ID FEMA-2016-
0003, by one of the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments.
    Mail/Hand Delivery/Courier: Regulatory Affairs Division, Office of 
Chief Counsel, Federal Emergency Management Agency, 8NE, 500 C Street 
SW., Washington, DC 20472.

FOR FURTHER INFORMATION CONTACT: Jotham Allen, Federal Emergency 
Management Agency, 500 C Street SW., Washington, DC 20472, 202-646-
1957.

SUPPLEMENTARY INFORMATION: 

I. Public Participation

    We encourage you to participate in this rulemaking by submitting 
comments and related materials. We will consider all comments and 
material received during the comment period.
    If you submit a comment, identify the agency name and the docket ID 
for this rulemaking, indicate the specific section of this document to 
which each comment applies, and give the reason for each comment. You 
may submit your comments and material by electronic means, mail, or 
delivery to the address under the ADDRESSES section. Please submit your 
comments and material by only one means.
    Regardless of the method used for submitting comments or material, 
all submissions will be posted, without change, to the Federal e-
Rulemaking Portal at http://www.regulations.gov, and will include any 
personal information you provide. Therefore, submitting this 
information makes it public. You may wish to read the Privacy Act 
notice that is available via a link on the homepage of 
www.regulations.gov.
    Viewing comments and documents: For access to the docket to read 
supporting documents, a supplemental guidance document, and an annual 
notice template, and comments received, go to the Federal e-Rulemaking 
Portal at http://www.regulations.gov. Background documents and 
submitted comments may also be inspected at FEMA, Office of Chief 
Counsel, 500 C Street SW., Washington, DC 20472-3100.

II. Executive Summary

    On January 20, 2016, FEMA published an Advance Notice of Proposed 
Rulemaking (ANPRM), 81 FR 3082, seeking comment on a concept that would 
incorporate a deductible requirement into the Public Assistance 
program. The ANPRM provided a general description of this concept, 
followed by a list of questions for the public, the answers to which 
would help FEMA assess all aspects of the deductible concept, including 
how to calculate the deductible, the scope of the deductible, how to 
satisfy the deductible, how this concept could influence change, 
implementation considerations and an estimated impact. With input 
received from the ANPRM, FEMA has developed a more detailed potential 
deductible concept and seeks further public comment via this SANPRM. 
The goal of this SANPRM is to gather additional public comment about 
the specific aspects of a programmatic approach that the Agency 
recognizes would represent a change to the existing Federal disaster 
support system.
    The Public Assistance deductible would condition the States' 
receipt of FEMA reimbursement for the permanent repair and replacement 
of public infrastructure damaged by a disaster event. FEMA believes the 
deductible requirement could incentivize State risk reduction efforts, 
mitigate future disaster impacts, and lower recovery costs for the 
whole community. In addition, the deductible requirement addresses 
concerns raised by Members of Congress, the Government Accountability 
Office (GAO), and the Department of Homeland Security's Office of the 
Inspector General (DHS OIG) over the last several years, and 
potentially addresses concerns that the current disaster declaration 
process inadequately assesses State capacity to respond to and recover 
from a disaster without Federal assistance.
    In this SANPRM, FEMA is presenting a model, or potential, 
deductible program to provide more specifics of what the deductible 
requirement may entail for detailed public feedback. Detailed public 
comments on this potential program, in particular on the methodologies 
for calculating each State's deductible and the estimates for each 
State's projected credits, could assist FEMA in the development of a 
future proposed rule.
    Under the deductible concept, each State would be expected to 
expend a predetermined, annual amount of its own funds on emergency 
management and disaster costs before FEMA would provide Public 
Assistance for the repair and replacement of public infrastructure 
damaged by a disaster event. This annually predetermined amount is the 
State's deductible. However, satisfying the deductible would not be 
required before FEMA would provide assistance for other types of 
assistance, such as debris removal or emergency protective measures. 
Importantly, States may

[[Page 4065]]

choose to earn credits toward satisfying their deductible through a 
variety of activities that could reduce risk and improve preparedness, 
thereby reducing future disaster costs to both the State and Federal 
government.
    FEMA could calculate annually the deductible amount (in dollars) 
for each State based on an index of State risk and fiscal capacity. 
FEMA anticipates a scaled implementation of a deductible requirement 
over a yet-to-be-determined period of years with starting deductibles 
in year one as follows in Table 1:
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    \1\ For a full explanation of how the first year starting 
deductibles could be calculated under this model program, please 
refer to Section V, Subsections A-F of this notice.

       Table 1--First Year Starting Deductibles Before Credits \1\
------------------------------------------------------------------------
            First year starting deductibles  (before credits)
-------------------------------------------------------------------------
                                                         Year 1 starting
                         State                           deductible (in
                                                            millions)
------------------------------------------------------------------------
Alabama...............................................             $6.74
Alaska................................................              1.00
Arizona...............................................              9.01
Arkansas..............................................              4.11
California............................................             52.53
Colorado..............................................              7.08
Connecticut...........................................              5.04
Delaware..............................................              1.27
Florida...............................................             26.51
Georgia...............................................             13.66
Hawaii................................................              1.92
Idaho.................................................              2.21
Illinois..............................................             14.43
Indiana...............................................              9.14
Iowa..................................................              4.30
Kansas................................................              4.02
Kentucky..............................................              6.12
Louisiana.............................................              6.39
Maine.................................................              1.87
Maryland..............................................              8.14
Massachusetts.........................................              9.23
Michigan..............................................             13.94
Minnesota.............................................              7.48
Mississippi...........................................              4.18
Missouri..............................................              8.44
Montana...............................................              1.40
Nebraska..............................................              2.58
Nevada................................................              3.81
New Hampshire.........................................              1.86
New Jersey............................................             12.40
New Mexico............................................              2.90
New York..............................................             27.32
North Carolina........................................             13.45
North Dakota..........................................              1.00
Ohio..................................................             16.27
Oklahoma..............................................              5.29
Oregon................................................              5.40
Pennsylvania..........................................             17.91
Rhode Island..........................................              1.48
South Carolina........................................              6.52
South Dakota..........................................              1.15
Tennessee.............................................              8.95
Texas.................................................             35.46
Utah..................................................              3.90
Vermont...............................................              1.00
Virginia..............................................             11.28
Washington............................................              9.48
West Virginia.........................................              2.61
Wisconsin.............................................              8.02
Wyoming...............................................              1.00
------------------------------------------------------------------------

    To offset the deductible requirement, FEMA could provide each State 
with an opportunity to apply for credits. The credits could incentivize 
States to dedicate resources on activities that are demonstrated to 
promote and support readiness, preparedness, mitigation, and 
resilience. Such activities could include adopting and enforcing 
building codes that promote disaster resilience, funding mitigation 
projects, or investing in disaster relief, insurance, and emergency 
management programs. FEMA believes that every State is already 
undertaking activities that would qualify them for credits and reduce 
their deductible requirement, such as investing in mitigation projects 
or granting tax incentives for projects that reduce risk. Based on 
FEMA's projection of possible credits for activities each State is 
presently engaged in, FEMA estimates a potential adjusted deductible 
requirement in year one as follows in Table 2:
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    \2\ For a full explanation of how each State's projected credits 
were calculated and how those credits impacted the projected first 
year's final deductibles under this model program, please refer to 
Section V, Subsections G-H of this notice.

 Table 2--Potential First Year Final Deductibles Adjusted for Projected
                               Credits \2\
------------------------------------------------------------------------
   Potential first year ``final'' deductibles (adjusted for projected
                                credits)
-------------------------------------------------------------------------
                                                            ``Final''
                                                            adjusted
                         State                           deductible (in
                                                            millions)
------------------------------------------------------------------------
Alabama...............................................              5.01
Alaska................................................              0.74
Arizona...............................................              4.88
Arkansas..............................................              2.49
California............................................              7.63
Colorado..............................................              5.24
Connecticut...........................................              3.72
Delaware..............................................              0.94
Florida...............................................             10.85
Georgia...............................................              9.99
Hawaii................................................              1.68
Idaho.................................................              1.66
Illinois..............................................              3.47
Indiana...............................................              2.81
Iowa..................................................              1.70
Kansas................................................              3.45
Kentucky..............................................              4.65
Louisiana.............................................              5.57
Maine.................................................              1.46
Maryland..............................................              5.78
Massachusetts.........................................              5.11
Michigan..............................................              8.53
Minnesota.............................................              1.25
Mississippi...........................................              2.51
Missouri..............................................              4.78
Montana...............................................              0.77
Nebraska..............................................              1.52
Nevada................................................              2.03
New Hampshire.........................................              0.91
New Jersey............................................              4.89
New Mexico............................................              2.02
New York..............................................             19.59
North Carolina........................................              2.48
North Dakota..........................................              0.30
Ohio..................................................             11.75
Oklahoma..............................................              3.33
Oregon................................................              3.91
Pennsylvania..........................................              5.52
Rhode Island..........................................              1.20
South Carolina........................................              4.92
South Dakota..........................................              0.92
Tennessee.............................................              7.06
Texas.................................................             26.99
Utah..................................................              1.99
Vermont...............................................              0.63
Virginia..............................................              4.89
Washington............................................              8.91
West Virginia.........................................              1.91
Wisconsin.............................................              6.17
Wyoming...............................................              0.71
------------------------------------------------------------------------

    Under the deductible concept, FEMA would continue to recommend 
whether a State should receive a major disaster declaration pursuant to 
the current factors outlined in Federal policy (44 CFR 206.48(a)). If a 
State receives a major disaster declaration authorizing Public 
Assistance reimbursement, the State would then be required to first 
satisfy its annual deductible requirement (as adjusted by credits) 
before FEMA would provide reimbursement for Public Assistance permanent 
work. If a State has not fully satisfied its deductible through earned 
credits, following a major disaster declaration the State would then 
identify one or more permanent work projects proposed under the 
disaster declaration to satisfy the remaining deductible amount (i.e., 
the State chooses the selected project(s) and the project(s) would be 
ineligible for FEMA assistance). In order to ensure timely

[[Page 4066]]

and complete response to the evacuation and immediate protection of 
life and property, FEMA would fund eligible emergency protective 
measures and debris removal regardless of whether or not the State has 
met its deductible requirement.
    FEMA could implement the deductible program by regulation, 
supplemented by a guidance document and annual notices. The regulation 
could set forth broadly that FEMA will annually calculate deductible 
and credit amounts and could describe how a deductible requirement 
could be applied post-declaration. The guidance document could set 
forth more specifically the annual schedule, and how FEMA will 
calculate deductible and credit amounts, and the annual notice could 
provide FEMA's determination on State deductible amounts for the 
following year. A draft guidance document and example annual notice are 
included in the docket for this rulemaking at www.regulations.gov under 
docket ID FEMA-2016-0003 for public review and comment.
    Under this concept, FEMA would condition the provision of grant 
assistance for the permanent repair and replacement of building 
infrastructure that is damaged by a major disaster upon the State's 
meeting a Public Assistance deductible. It would not apply to any other 
form of FEMA assistance, including emergency assistance, Individual 
Assistance, or the Hazard Mitigation Grant Program. Since the Public 
Assistance deductible would condition States' receipt of FEMA funds, it 
would not apply to Indian Tribes, the District of Columbia, or US 
territories. The deductible would not change the official disaster 
declaration request process, or the factors that FEMA considers when 
making disaster declaration recommendations to the President.
    A deductible program could leverage FEMA's Public Assistance 
program to reward States for investing in readiness, preparedness, 
mitigation, and resilience, thereby increasing the nation's ability to 
reduce disaster impacts and costs for all levels of government, 
individuals, and the private sector. FEMA seeks comment on all details 
of this concept, especially regarding how the deductible could be 
calculated and the types and amounts of deductible credit that could be 
granted.

III. Background and Development of the Deductible Concept

    Although the Federal government has been providing supplemental 
disaster relief to States and localities since the early 1800s, the 
Disaster Relief Act of 1974,\3\ which was amended and renamed the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act 
(Stafford Act) in 1988,\4\ formally established the foundation of the 
current disaster assistance system. Generally, FEMA directly provides 
or coordinates this assistance.
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    \3\ Disaster Relief Act of 1974, Public Law 93-288 (1974).
    \4\ Public Law 100-707 (1988). Robert T. Stafford Disaster 
Relief and Emergency Assistance Act, Public Law 93-288 (1974), as 
amended; 42 U.S.C. 5121 et seq.
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    Pursuant to this system, the Federal government provides various 
forms of financial and direct assistance following disasters. One of 
the primary types of support FEMA provides to affected jurisdictions is 
repair, restoration, and replacement assistance through the Public 
Assistance program.\5\ The Public Assistance program is FEMA's 
principal means for assisting jurisdictions that are financially 
overwhelmed by the costs of repairing, restoring, and replacing public 
facilities damaged by disasters, such as buildings, roads, bridges, and 
other types of publicly-owned infrastructure.
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    \5\ See 42 U.S.C. 5172.
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    On average, FEMA has distributed approximately $4.6 billion in 
grants each year through the Public Assistance program over the past 
decade. Of the nearly $60 billion awarded through the Public Assistance 
program between 2005 and 2014, over 65 percent was for eligible 
recovery projects termed ``permanent work'' and for project management 
costs. Permanent work includes expenses for repair, restoration, and 
replacement that are not related to debris removal or emergency 
protective measures.\6\
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    \6\ See 44 CFR 206.201(j).
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    Before an affected jurisdiction can receive funding through the 
Public Assistance program, the President of the United States must 
authorize it.\7\ The Governor typically makes a request through FEMA 
for a Presidential declaration of an emergency or major disaster 
authorizing the Public Assistance program.\8\ Upon receipt, FEMA is 
responsible for evaluating the Governor's request and providing a 
recommendation to the President regarding its disposition.\9\
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    \7\ See 42 U.S.C. 5170b, 5192; see also 44 CFR 206.38, 206.40.
    \8\ 42 U.S.C. 5170, 5191.
    \9\ See 44 CFR 206.37(c).
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    When considering a jurisdiction's request for a major disaster 
declaration authorizing the Public Assistance program, FEMA considers 
six factors.\10\ These factors include:
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    \10\ See 44 CFR 206.48(a).

    1. Estimated cost of the assistance; \11\
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    \11\ Id. at Sec.  206.48(a)(1).
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    2. Localized impacts; \12\
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    \12\ Id. at Sec.  206.48(a)(2).
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    3. Insurance coverage in force; \13\
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    \13\ Id. at Sec.  206.48(a)(3).
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    4. Hazard mitigation; \14\
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    \14\ Id. at Sec.  206.48(a)(4).
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    5. Recent multiple disasters; \15\ and
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    \15\ See 44 CFR 206.48(a)(5).
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    6. Programs of other Federal assistance.\16\
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    \16\ Id. at Sec.  206.48(a)(6).

FEMA evaluates every request with regard to each of these delineated 
factors, to the extent applicable. However, there is a very strong 
correlation between the first factor, estimated cost of the assistance, 
and the likelihood that FEMA will recommend that the President issue a 
major disaster declaration.
    Under the current system, if a State demonstrates that an incident 
has caused a certain level of damage to a State to address the damage 
caused, FEMA would likely recommend that the President declare a major 
disaster. A major disaster indicates that the President has determined 
that the incident has caused ``damage of sufficient severity and 
magnitude to warrant major disaster assistance under [the Stafford Act] 
to supplement the efforts and available resources of States, local 
governments, and disaster relief organizations in alleviating the 
damage, loss, hardship, or suffering caused thereby.'' \17\ 
Consequently, if the President declares a major disaster authorizing 
Public Assistance, FEMA will provide supplemental financial assistance 
grants, which pay for not less than 75 percent of eligible costs.\18\
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    \17\ 42 U.S.C. 5122(2) (defining a major disaster for purposes 
of the Act).
    \18\ 42 U.S.C. 5170b(b).
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    Conversely, if the President does not issue a major disaster 
declaration, the amount of damage is presumed to be within the 
capabilities of the affected jurisdictions and any supporting disaster 
relief organizations. In that case, the affected State is responsible 
for all of the costs of the incident, although the State will often 
pass many of the costs on to local jurisdictions. For example, under 
current regulations FEMA may determine a particular State based on its 
population is able to independently handle up to $1,000,000 in damage 
without the need for supplemental Federal assistance. Under the current 
approach, an incident need only identify damage at that amount to 
suggest that supplemental Federal assistance is needed. If the governor 
of that State requests a major disaster declaration for an incident 
causing $999,999 in damage, it is likely that

[[Page 4067]]

supplemental Federal assistance will not be authorized and the State 
will be responsible for the entirety of the loss. However, if instead 
the incident caused exactly $1,000,000 in damage, supplemental Federal 
assistance may be authorized and FEMA would provide reimbursement 
grants through the Public Assistance program for at least $750,000 (75 
percent of eligible costs). This has the effect of FEMA providing 
Public Assistance funding for activities and damage that are identified 
to be within State capabilities.
    Since 1986, FEMA has used a per capita indicator to compare the 
estimated cost of the incident and the capabilities of the requesting 
jurisdiction.\19\ This per capita indicator was originally set at $1.00 
per person and is based on the jurisdiction's decennial census 
population. FEMA selected $1.00 because it appeared at the time to be a 
reasonable portion of per capita personal income (PCPI) for a State to 
contribute towards the cost of a disaster.\20\ Collectively, this 
amount also ``correlate[d] closely to about one-tenth of one percent of 
estimated General Fund expenditures by States.'' \21\ The per capita 
indicator remained at $1.00 from 1986 until 1999 when FEMA began to add 
inflation to the value annually. FEMA did not, however, adjust the per 
capita indicator for inflation retroactively. Consequently, since 1999, 
the per capita indicator has risen to its 2016 value of $1.41.\22\
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    \19\ The per capita indicator is applied at the State level for 
major disaster declarations; however, a second indicator is also 
used at the local level to determine which counties are declared 
within the State.
    \20\ Disaster Assistance; Subpart C, the Declaration Process and 
State Commitments, 51 FR 13332, Apr. 18, 1986.
    \21\ Id.
    \22\ Notice of Adjustment of Statewide Per Capita Indicator, 80 
FR 61836, Oct. 14, 2015.
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    FEMA publishes the updated per capita indicator in the Federal 
Register each year. FEMA then multiplies the indicator by the State's 
most recent decennial population to determine the amount of damage that 
a State is expected to be able to independently manage without the need 
for supplemental Federal assistance. For example, if a State had a 
population at the time of the 2010 decennial census population of 
1,500,000, FEMA would multiply that by the 1.41 indicator and arrive at 
a State-level indicator of 2,115,000. In other words, FEMA would expect 
that the State would be able to handle at least 2,115,000 in eligible 
damage without the need for supplemental Federal assistance.
    FEMA has established, through regulation, a 1,000,000 minimum for 
any major disaster, regardless of the calculated indicator.\23\ The 
1,000,000 floor is not subject to inflationary adjustments. Although 
FEMA considers every request for a Presidential major disaster 
declaration in the light of each applicable regulatory factor, the 
probability of an incident being declared based on the amount of 
disaster damage and the State-specific per capita indicator has been 
over 80 percent for the past 10 years (494 of 589 declared major 
disasters). In other words, whether damage assessments find an amount 
of damage that meets or exceeds the Public Assistance per capita 
indicator is highly correlated to whether that State will ultimately 
receive supplemental Federal assistance for that incident.
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    \23\ 44 CFR 206.48(a)(1).
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    Since the per capita indicator was initially adopted in 1986, it 
has lost its relation to both of the metrics upon which it was first 
calculated. In 1986, PCPI in the United States was 11,687.\24\ By 2015, 
PCPI had risen to 48,112, an increase of over 300 percent.\25\ FEMA has 
applied inflation adjustments since 1999, and the per capita indicator 
has risen by just 41 percent over that same period.
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    \24\ See Disaster Assistance; Subpart C, the Declaration Process 
and State Commitments, 51 FR 13332, Apr. 18, 1986
    \25\ Per Capita Personal Income (PCPI) is calculated annually by 
the United States Department of Commerce's Bureau of Economic 
Analysis. The 2015 PCPI data is available at http://www.bea.gov/ 
iTable/iTable.cfm?reqid=70&step=1&isuri= 1&acrdn=6%20-
%20reqid=70&step=30&isuri=1& 7022=21&7023=0&7024=non-industry&7033=- 
1&7025=0&7026=00000&7027=2015&7001= 421&7028=3&7031=0&7040=-1&7083= 
levels&7029=21&7090=70#reqid=70&step= 
30&isuri=1&7022=21&7023=0&7024=non- industry&7033=-
1&7025=0&7026=00000&7027= 2015&7001=421&7028=3&7031=0&7040=- 
1&7083=levels&7029=21&7090=70. [1) Select Annual State Personal 
Income and Employment. 2) Select Personal Income, Population, Per 
Capita Personal Income, Disposable Personal Income, and Per Capita 
Disposable Personal Income (SA1, SA51). 3) Select SA1--Personal 
Income Summary: Personal Income, Population, Per Capita Personal 
Income. 4) Select United States, Levels, and Per Capita Personal 
Income (Dollars). 5) Select 2015.
---------------------------------------------------------------------------

    A retrospective analysis conducted by FEMA suggests that if the per 
capita indicator had kept pace with PCPI, 70 percent of the major 
disasters between 2005 and 2014 would not have been declared. This 
would have transferred all of the costs for 408 disasters to the 49 
States that would likely have each had at least one less major disaster 
declared. As an example, Missouri and Oklahoma would have each have had 
19 fewer major disasters declared.
    Overall, Public Assistance grants would have been reduced by 10 
percent had these 408 major disasters not been declared, resulting in 5 
billion dollars less in Federal disaster assistance to the States.\26\ 
Twenty-one States would have each received over 100 million less in 
Public Assistance, with California having received 761 million less, 
New York more than 600 million less, and Texas over 366 million less.
---------------------------------------------------------------------------

    \26\ Dollar amounts were adjusted to 2015 dollars (2015).
---------------------------------------------------------------------------

    Table 3 presents a State-by-State retrospective synopsis of the 
likely impacts a PCPI-adjusted per capita indicator would have had on 
declared major disasters between 2005 and 2014. To conduct this 
analysis, FEMA adjusted the per capita indicator for each year by 
multiplying the previous year's national per capita personal income 
value for each State by 0.0001. This maintains the 0.01% ratio of the 
per capita indicator to per capita personal income that FEMA noted when 
it established the original per capita indicator.

 Table 3--Impact of PCPI-Adjusted per Capita Indicator on Past Disaster
                                Activity
                               [2005-2014]
------------------------------------------------------------------------
                                                             Public
                                          Change in        assistance
                State                    numbers of      change (actual
                                          disasters         in 2015$)
------------------------------------------------------------------------
Alabama.............................               -12     -$156,634,854
Alaska..............................                -8       -16,686,176
Arizona.............................                -5       -32,864,734
Arkansas............................               -15      -105,560,705
California..........................               -12      -761,414,191
Colorado............................                -3       -12,035,081

[[Page 4068]]

 
Connecticut.........................                -4       -34,539,160
Delaware............................                -2        -2,734,920
Florida.............................                -7      -170,847,001
Georgia.............................                -5      -105,365,782
Hawaii..............................                -5       -19,758,046
Idaho...............................                -5       -11,113,622
Illinois............................               -11      -279,253,502
Indiana.............................                -8       -98,604,662
Iowa................................               -13      -103,292,537
Kansas..............................               -12       -74,419,056
Kentucky............................               -11       -98,057,973
Louisiana...........................                -6       -40,610,199
Maine...............................               -11       -31,102,969
Maryland............................                -7      -120,907,360
Massachusetts.......................                -7      -135,316,467
Michigan............................                -3       -36,000,794
Minnesota...........................               -10      -114,692,904
Mississippi.........................                -7       -37,337,169
Missouri............................               -19      -275,421,878
Montana.............................                -5       -11,589,893
Nebraska............................               -16       -67,235,065
Nevada..............................                -4       -15,984,383
New Hampshire.......................               -11       -39,448,267
New Jersey..........................               -11      -207,572,077
New Mexico..........................                -6       -37,173,106
New York............................               -15      -600,294,475
North Carolina......................                -8      -124,991,358
North Dakota........................                -6       -11,015,041
Ohio................................                -6      -131,629,728
Oklahoma............................               -19      -120,128,934
Oregon..............................                -8       -61,741,829
Pennsylvania........................                -7      -144,293,529
Rhode Island........................                -1          -641,448
South Carolina......................                -1       -12,859,770
South Dakota........................                -8       -11,791,000
Tennessee...........................               -13      -113,576,960
Texas...............................                -9      -366,759,151
Utah................................                -6       -33,421,146
Vermont.............................                -8       -10,790,332
Virginia............................                -8      -159,073,446
Washington..........................                -8      -158,351,021
West Virginia.......................               -10       -59,884,181
Wisconsin...........................                -6       -55,046,806
                                     -----------------------------------
    Total...........................              -408    -5,429,864,688
------------------------------------------------------------------------

    The Public Assistance per capita indicator has also fallen short of 
keeping pace with State general fund expenditures. According to the 
National Association of State Budget Officers (NASBO), State general 
fund spending in 2015 totaled 759.4 billion.\27\ Collectively, the 
States' per capita indicators equaled 435.3 million in 2015. 
Consequently, the relation of the per capita indicator to State general 
fund expenditures is just 57 percent of what it was in 1986.
---------------------------------------------------------------------------

    \27\ NASBO, Fiscal Survey of States, Fall 2015, located at 
https://higherlogicdownload.s3.amazonaws.com/NASBO/9d2d2db1-c943-4f1b-b750-fca152d64c2/UploadedImages/Fiscal%20Survey/Fall%202015%20Fiscal%20Survey%20of%20States%20(S).pdf.
---------------------------------------------------------------------------

    The failure of the per capita indicator to keep pace with changing 
economic conditions and the increasing frequency and costs of disasters 
has led to criticism of the per capita indicator. Those critiques have 
emphasized that the per capita indicator is artificially low. Many have 
called for FEMA to find ways to decrease the frequency of disaster 
declarations and Federal disaster costs, by increasing the per capita 
indicator to transfer costs back to State and local jurisdictions. 
These have included recommendations from GAO,\28\ reports of the DHS 
OIG,\29\ and proposed legislation.\30\
---------------------------------------------------------------------------

    \28\ See, e.g., GAO, Disaster Assistance: Improvements Needed in 
Disaster Declaration Criteria and Eligibility Assurance Procedures, 
GAO-01837 (2001); See also, GAO, GAO-12-838, Federal Disaster 
Assistance: Improved Criteria Needed to Assess Eligibility and a 
Jurisdiction's Capability to Respond and Recover On Its Own, 29 
(2012).
    \29\ See Office of Inspector General, OIG-12-79, Opportunities 
to Improve FEMA's Public Assistance Preliminary Damage Assessment 
Process 3, Department of Homeland Security (2012).
    \30\ See, e.g., S.1960, Fairness in Federal Disaster 
Declarations Act of 2014, 113th Cong.; H.R. 3925, Fairness in 
Federal Disaster Declarations Act of 2014, 113th Cong. (establishing 
criteria for FEMA to incorporate in rulemaking with specific 
weighted factors); H.R. 1859, Disaster Declaration Improvement Act 
of 2013, 113th Cong. (requiring new regulations concerning major 
disaster declarations).

---------------------------------------------------------------------------

[[Page 4069]]

    Concluding that the per capita indicator is artificially low,\31\ 
the GAO recommended that the FEMA Administrator ``develop and implement 
a methodology that provides a more comprehensive assessment of a 
jurisdiction's capability to respond and to recover from a disaster 
without federal assistance.'' \32\
---------------------------------------------------------------------------

    \31\ GAO 12-838, supra FN22, at 24.
    \32\ Id. at 50.
---------------------------------------------------------------------------

    As FEMA considered these observations and recommendations, FEMA was 
finalizing its 2014-2018 Strategic Plan \33\ that includes Strategic 
Priority 4: Enable Disaster Risk Reduction Nationally.\34\ Objective 
4.2 of the Strategic Plan is to ``incentivize and facilitate 
investments to manage current and future risk'' \35\ through 
``facilitate[ing] collaboration to strengthen risk standards, leverage 
market forces, and guide resilient investments'' \36\ as well as 
through ``reshap[ing] funding agreements with States, tribal 
governments, and localities to expand cost-sharing and deductibles,'' 
\37\ inter alia.
---------------------------------------------------------------------------

    \33\ See generally FEMA Strategic Plan: 2014-2018, available at 
http://www.fema.gov/media-library-data/1405716454795-3abe60aec989ecce518c4cdba67722b8/July18FEMAStratPlanDigital508HiResFINALh.pdf.
    \34\ Id. at 23.
    \35\ Id. at 26.
    \36\ Id. at 27.
    \37\ Ibid.
---------------------------------------------------------------------------

    FEMA also considered the President's emphasis on advancing national 
resilience. The President issued three related Executive Orders in the 
past two years to build resilience through (1) establishing a Federal 
flood risk management standard,\38\ (2) establishing a Federal 
earthquake risk management standard,\39\ and (3) requiring agencies to 
enhance the resilience of buildings to wildfire in the wildland-urban 
interface.\40\ FEMA has been seeking ways to leverage its programs and 
resources to further other resilience-building efforts as well. For 
example, FEMA has instituted a policy to establish hazard resistant 
minimum standards for Public Assistance projects.\41\
---------------------------------------------------------------------------

    \38\ Executive Order 13,690, 80 FR 6425, Feb. 4, 2015.
    \39\ Executive Order 13,717, 81 FR 6407, Feb. 2, 2016.
    \40\ Executive Order 13,728, 81 FR 32223, May 20, 2016.
    \41\ Public Assistance Required Minimum Standards Policy, FP-
104-109-4, Sep. 30, 2016, available at https://www.fema.gov/media-library/assets/documents/124326.
---------------------------------------------------------------------------

    In early 2014, FEMA began to explore the possibility of introducing 
a deductible to the Public Assistance program as a way to leverage the 
program to encourage resilience and address some of the concerns raised 
by GAO. Accordingly, FEMA convened a working group of subject-matter 
experts from within the agency. During the ensuing months, the working 
group extensively explored the declaration process, the policies and 
workings of the Public Assistance program, the applicable legal 
authorities and limitations, and many other areas that would be 
necessary to inform the development of a deductible concept.
    In the course of this research, FEMA reviewed a related rulemaking 
effort that was a contemporary to the 1986 development of the per 
capita indicator. FEMA had proposed a regulation that sought to 
establish (1) ``capability indicators'' for the major disaster 
declaration decision-making process, (2) a requirement for Governors to 
make commitments on behalf of their States and local governments to 
assume a portion of the Public Assistance costs, and (3) a sliding 
cost-share based on the capability indicators.\42\ The proposed rule 
was met with vocal and widespread criticism by Congress and the 
emergency management community and FEMA ultimately abandoned the 
effort.\43\ Two of the primary criticisms of FEMA's proposed 1986 
rulemaking:
---------------------------------------------------------------------------

    \42\ See Disaster Assistance; Subpart C, the Declaration Process 
and State Commitments, 51 FR 13332, Apr. 18, 1986; see also Disaster 
Assistance; Subpart E--Public Assistance--Eligibility Criteria, 51 
FR 13341, Apr. 18, 1986; Disaster Assistance; Subpart H, Public 
Assistance Project Administration, 51 FR 13357, Apr. 18, 1986.
    \43\ Inquiry into FEMA's Proposed Disaster Relief Regulations: 
Hearing Before the Subcomm. on Investigations and Oversight of the 
H. Comm. On Public Works and Transportation, 99th Cong. (1986).
---------------------------------------------------------------------------

    1. FEMA did not recognize the efforts and expenditures that States 
were already committing to disaster response and recovery; and
    2. FEMA did not offer sufficient engagement with key stakeholders 
during the developmental process.
    Considering this background, the FEMA working group developed three 
guiding principles that were designed to control and direct the impact 
of the deductible concept:
    1. Encourage and incentivize risk-informed mitigation strategies on 
a broad scale, while also recognizing current State activities;
    2. Incentivize consistent fiscal planning by all States for 
disasters and establish mechanisms to better assess State fiscal 
capacity to respond to disasters; and
    3. Ensure the supplemental nature of FEMA assistance.
    Through these guiding principles, the working group designed an 
initial deductible concept that could leverage the Public Assistance 
program to recognize risk reduction investments that the States were 
already undertaking and to incentivize risk reduction best practices 
nationwide as a means to reduce future disaster impacts and costs for 
the whole community rather than simply transferring response and 
recovery costs from the Federal government to State and local 
jurisdictions. The working group also determined further exploration of 
the deductible concept should be cognizant of the two primary 
criticisms of FEMA's proposed 1986 rulemaking: The failure to recognize 
the efforts and expenditures that States were already committing to 
disaster response and recovery and the insufficient engagement with key 
stakeholders.
    In its 2015 updated response to the GAO recommendations, FEMA 
presented three options that it planned to continue investigating:
    1. Adjust the per capita indicator to better reflect current 
national and State-specific economic conditions;
    2. Develop an improved methodology for considering factors in 
addition to the per capita indicator; and
    3. Implement a State-specific deductible concept for States to 
satisfy before qualifying for Public Assistance.
    After further investigation and consideration of the alternatives, 
FEMA decided to further develop the deductible concept because of its 
relationship to Strategic Priority 4 and its potential for reducing 
risk and disaster costs for the whole community through incentivizing 
targeted investments. Moving forward, FEMA plans to pursue closeout of 
the GAO recommendation through development of the deductible concept 
for the Public Assistance program. However, FEMA will continue to 
consider alternatives to the deductible concept going forward, 
including the GAO's recommendation to significantly increase the 
current per capita indicator as described in Sections III and VI(A).

IV. Advance Notice of Proposed Rulemaking

    FEMA issued the ANPRM to introduce the deductible concept with the 
emergency management community and the public. The ANPRM consisted of 
basic background information concerning the declarations process and a 
very high-level overview of a deductible concept. In keeping with the 
preliminary and developmental state of the concept at that time, the 
ANPRM offered few specifics concerning the

[[Page 4070]]

organization or implementation of a deductible. Chiefly, the ANPRM 
included an extensive list of questions that FEMA was seeking to answer 
regarding how a deductible program could be best structured and applied 
to achieve the principles outlined above. These questions were wide 
ranging in specificity to address all potential aspects of the 
deductible concept. FEMA presented these questions in an impartial 
manner to solicit as many relevant responses as possible. This was 
effective in generating varied responses to questions upon which 
opinions differed, but in many cases commenters noted it was difficult 
if not impossible to answer specific questions without a more detailed 
description of the deductible concept. As a result, commenters provided 
more general and conceptual responses to the questions asked. FEMA 
believes that it would have benefited from receiving more specific and 
detailed feedback, and that the information contained in those types of 
comments would have been very helpful to the rulemaking process.
    In all, FEMA received approximately 150 comments on the ANPRM.\44\ 
These comments came from 35 entities representing 28 individual States, 
28 local jurisdictions, and 2 Indian Tribal Nations. FEMA also received 
comments from 19 professional industry groups, 3 governmental 
associations, and 9 research and policy organizations.
---------------------------------------------------------------------------

    \44\ The comments can be viewed on the docket for this 
rulemaking at www.regulations.gov under docket ID FEMA-2016-0003.
---------------------------------------------------------------------------

    FEMA reviewed the comments that were received and incorporated the 
concerns and suggestions into the potential deductible program 
presented in this SANPRM. FEMA noted many concerns in the comments 
regarding how the deductible could be applied, or the burdens, either 
financial or administrative, that it could create for the States. FEMA 
addressed these concerns in the design concept. In other cases, it was 
clear that FEMA had not provided enough background information for 
commenters to offer practicable suggestions. Some comments may have 
benefited from FEMA providing additional explanation of the current 
disaster declaration processes, more specificity regarding the Public 
Assistance program, and a more expansive description of the deductible 
concept itself. FEMA concluded that it had not offered sufficient 
information in the ANPRM to enable the public to fully participate in 
commenting on all aspects of the concept. Consequently, FEMA is 
providing the public more detail on its concept for a deductible 
program in this SANPRM.
    Notwithstanding the limitations on specificity in the ANPRM, FEMA 
received support for the concept as a means by which to achieve the 
goals of reducing disaster impacts and costs through improved 
preparedness activities and expanded investments in mitigation and risk 
reduction. Many commenters pointed out that the deductible program 
could be a preferred outcome compared to increasing the per capita 
indicator and the potential transfer of financial responsibility to 
State and local governments that would result. Some commenters found 
merit in the deductible concept as a way through which to reduce costs, 
but also to improve disaster resiliency by investing before an incident 
and incurring reduced costs related to response and recovery over the 
long term.
    In addition to seeking comment via the ANPRM, FEMA continued to 
conduct research to inform the design of the deductible concept. FEMA 
recognizes that establishing the methodology for calculating the 
deductible in an equitable, accurate, and transparent way is essential 
to any future deductible proposal. Further, for any approach to sustain 
the rigors of analytic and economic review, FEMA recognized that it 
would benefit from leveraging external expertise to better develop a 
methodology that was defensible and reproducible.
    With the assistance of the Department of Homeland Security (DHS) 
Science and Technology Directorate's Office of University Programs, 
FEMA contracted with the Center for Risk and the Economic Analysis of 
Terrorism Events (CREATE), a DHS Center of Excellence, to support 
development of the deductible calculation. CREATE is known for its 
experience in hazard assessment research, as well as statistical and 
economic modeling capabilities. CREATE dedicated a team of research and 
academic experts to develop a reliable methodology for calculating a 
deductible that is cognizant of the principles established by the FEMA 
working group; namely that the proposed formula be reflective of the 
individual capabilities and risks unique to each State and that the 
calculus function in a transparent and replicable way utilizing 
publically available information and data.
    FEMA also contracted with a leading emergency management consulting 
firm to conduct additional research pertinent to developing the 
deductible. With the assistance of the National Emergency Management 
Association, this firm reached out to nine States on FEMA's behalf to 
assist those States with identifying information pertinent to the 
development of the deductible concept.\45\ At the next stage of 
development, FEMA will make every effort to gather data from a larger 
sample of States, preferably all States, so that the proposal may be as 
representative as possible. FEMA also invites States to specifically 
correct any erroneous assumptions made for purposes of developing this 
SANPRM deductible concept during the comment period.
---------------------------------------------------------------------------

    \45\ The States contacted were California, Florida, Minnesota, 
New York, Pennsylvania, Texas, Washington, Wyoming, and Vermont.
---------------------------------------------------------------------------

    Specifically, the consulting firm assisted FEMA with understanding 
the methods and strategies currently used by these nine States to pay 
for the costs of emergency management programs, mitigation initiatives, 
and disaster response and recovery. The firm also researched innovative 
preparedness programs that the nine States have developed to further 
encourage planning and resiliency-building, such as tax credit 
incentive programs for individuals, localities, and State entities.
    FEMA primarily used the information it obtained from the consulting 
firm to estimate baselines of current State investments that FEMA then 
used to set initial credit approvals at levels likely to encourage 
additional investment and program growth. FEMA also leveraged the 
information to assist in preparing targeted outreach efforts during the 
comment period of the ANRPM, such as those held with the National 
Governor's Association, the National Association of Counties, the 
National Emergency Management Association, Big City Emergency Managers, 
National League of Cities, and the International Association of 
Emergency Managers. These targeted engagements enabled FEMA to draw 
attention to the ANPRM, explain the purpose and background of the 
deductible concept with key stakeholders, and to solicit additional 
details that could be particularly pertinent to informing FEMA's 
deductible design considerations.
    Following closure of the ANPRM comment period, FEMA compiled the 
comments received, the research performed by CREATE, and the research 
on State disaster funding and incentive programs and formulated the 
potential deductible program concept described in this SANPRM.
    FEMA believes that this deductible concept is capable of 
meaningfully reducing the nation's overall risk profile over time. 
Calculating a deductible is, however, complex. FEMA also

[[Page 4071]]

understands a deductible could be a significant change to FEMA's 
largest supplemental disaster assistance program. FEMA is therefore 
committed to continuing to dialogue with its emergency management 
partners on how best to design a program that will achieve mutually-
beneficial goals without the undue transfer of responsibility or the 
creation of unnecessarily burdensome administrative bureaucracy.

V. Potential Deductible Program

A. Calculation Methodology

    There is innate uncertainty in the likelihood of disaster events 
that prevents perfection in a deductible concept and complicates a 
complete understanding of the complex disaster environment within which 
the deductible program would operate. However, not unlike the 
commercial insurance markets, these uncertainties can be quantified and 
analyzed over geographic areas and over long periods of time with 
increasing precision. These calculations could be used to approximate 
the relative exposure of certain regions, in this case the States, to 
future disaster costs. These estimates could then be reflected in the 
relative value of a State's deductible.
    Arriving at a calculation methodology is thus one of the most 
critical aspects of moving the deductible program beyond the conceptual 
stage and requires public comment. FEMA believes that the methodology 
should be transparent, reproducible, defensible, and equitable. 
Additionally, FEMA believes that the approach should reflect 
fundamental purposes of the Stafford Act, namely that the Federal 
government support those States that are overwhelmed by the response to 
and recovery from a natural disaster. Therefore, it is most appropriate 
to calculate each State's deductible based upon the aspects of fiscal 
capacity and disaster risk that are unique to the State. FEMA could do 
this through a four-step process: (1) Establishing the base deductible, 
(2) calculating the fiscal capacity index, (3) calculating the risk 
index, and (4) normalizing the deductible amounts. FEMA has included a 
step-by-step table in the rulemaking docket that demonstrates how each 
State's starting deductible amount was calculated for purposes of this 
SANPRM. That table and those deductible amounts are included only as an 
example of how the deductible concept may function. If implemented, the 
actual deductible amounts will be dictated by the parameters of the 
proposal ultimately adopted.

B. Establishing the Base Deductible

    As with the rest of the SANPRM all numbers, figures, criteria and 
processes detailed in this section are notional. They are intended to 
aid the public in understanding how a potential deductible program 
could operate and to spur discussion and feedback.
    FEMA begins its conceptual methodology by establishing an annual 
base deductible that would be shared nationwide (i.e., the same amount 
for each State), and would then be increased or decreased for each 
State based upon a State's fiscal capacity and risk profile relative to 
the other States. FEMA utilized historic annual amounts of Public 
Assistance provided to States to establish the model base deductible. 
Although FEMA hopes to incentivize risk reduction and resilience that 
could reduce overall disaster impacts and costs, not solely those 
eligible for reimbursement through the Public Assistance program, FEMA 
believes it is important that the base deductible for the Public 
Assistance program shares a nexus with the program itself.\46\
---------------------------------------------------------------------------

    \46\ See generally Section 406 of the Stafford Act which 
authorizes FEMA to provide funding to assist State, territorial, 
Tribal and local governments, as well as certain private nonprofit 
organizations that provide governmental-type services, with the 
restoration of disaster damaged infrastructure. Because this 
underlying authority for the program is for public infrastructure, 
FEMA believes that it is important that the deductible remains 
connected to Public Assistance funding for that infrastructure.
---------------------------------------------------------------------------

    As developed by FEMA, the base deductible utilized in this 
conceptual model is the median average amount of Public Assistance 
received across all 50 States in the past 17 years.\47\ FEMA summed the 
total amount of Public Assistance delivered to each State from 1999 to 
2015 and then divided by 17 to determine the per State average annual 
amount of Public Assistance. FEMA then created a ranked list of those 
average amounts and determined the median value. Because there are 50 
States, the median value is the average of the results for the States 
situated at the 25th and 26th positions, which was 22,202,726. FEMA 
rounded the median average amount to 22.2M and imputed this amount to 
every State as the initial base deductible for the subsequent year.
---------------------------------------------------------------------------

    \47\ FEMA used Public Assistance data from 1999 to 2015 adjusted 
for inflation to 2015 dollars where necessary using the Consumer 
Price Index inflation calculator provided by the Bureau of Labor 
Statistics and available at http://www.bls.gov/data/inflation_calculator.htm. Prior to 1999, FEMA utilized a data 
management process that was different from the current system. 
Furthermore, prior to 1999, FEMA had different policies in place 
that would have also affected the way that Public Assistance was 
awarded. The data from the 1999-2015 period is the most reliable 
that FEMA has available. FEMA expects to add additional data to the 
calculation each year to increase accuracy over time and to account 
for long-term shifts in Public Assistance, rather than using a 
rolling window of data for the annual calculation. This will also 
limit the impact of any outlier years in terms of Public Assistance 
awards, both for high and low extremes.
---------------------------------------------------------------------------

    FEMA believes that this may be a reasonable approach to 
establishing a base deductible because it would leverage approximately 
25 percent of the average amount that FEMA awards in Public Assistance 
each year to incentivize reducing risk. Based on comments received in 
response to the ANPRM, FEMA believes that States are already making 
investments that would offset a portion of this amount through credits. 
By adjusting each State's base deductible amount to account for its 
individual risk and fiscal capacity, as described in the subsequent 
subsections, this approach could yield a meaningful deductible amount 
for each State, while still providing the greatest incentive to States 
that have the greatest potential for effectively reducing risk and 
future disaster costs. FEMA believes this could balance the potential 
benefits of the disaster deductible program with the need to continue 
supporting our State partners when disasters exceed their capabilities. 
See Table 4 for a breakdown of the cumulative and average amount of 
Public Assistance that each State received from 1999 through 2015.

                            Table 4--State Rank of Federal Assistance From 1999-2015
                                                [In 2015 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                  Total federal share     Annual average federal
           No.                            State                  obligated (1999-2015)       share obligated
----------------------------------------------------------------------------------------------------------------
1........................  New York...........................          $21,671,388,334           $1,274,787,549
2........................  Louisiana..........................           16,621,415,286              977,730,311
3........................  Florida............................            6,399,822,001              376,460,118

[[Page 4072]]

 
4........................  Mississippi........................            4,180,836,633              245,931,567
5........................  Texas..............................            4,094,422,168              240,848,363
6........................  New Jersey.........................            2,357,737,579              138,690,446
7........................  Iowa...............................            1,826,578,453              107,445,791
8........................  California.........................            1,437,292,282               84,546,605
9........................  Oklahoma...........................            1,131,691,340               66,570,079
10.......................  Kansas.............................            1,080,772,444               63,574,850
11.......................  North Carolina.....................              953,206,418               56,070,966
12.......................  Missouri...........................              888,379,570               52,257,622
13.......................  Alabama............................              841,956,023               49,526,825
14.......................  Arkansas...........................              744,651,963               43,803,057
15.......................  North Dakota.......................              679,833,405               39,990,200
16.......................  Virginia...........................              643,863,349               37,874,315
17.......................  Kentucky...........................              615,307,272               36,194,545
18.......................  Tennessee..........................              602,295,312               35,429,136
19.......................  Pennsylvania.......................              557,230,633               32,778,273
20.......................  Nebraska...........................              435,308,536               25,606,384
21.......................  Washington.........................              428,584,871               25,210,875
22.......................  Minnesota..........................              426,982,553               25,116,621
23.......................  Massachusetts......................              422,663,583               24,862,564
24.......................  Colorado...........................              408,338,653               24,019,921
25.......................  South Carolina.....................              384,041,986               22,590,705
M........................  Median.............................              377,446,341               22,202,726
26.......................  Ohio...............................              370,850,697               21,814,747
27.......................  Georgia............................              328,820,892               19,342,405
28.......................  West Virginia......................              311,011,683               18,294,805
29.......................  Illinois...........................              309,990,918               18,234,760
30.......................  Vermont............................              297,996,556               17,529,209
31.......................  Connecticut........................              284,870,352               16,757,080
32.......................  South Dakota.......................              284,612,022               16,741,884
33.......................  New Mexico.........................              274,303,673               16,135,510
34.......................  Maryland...........................              265,115,281               15,595,017
35.......................  Indiana............................              237,955,033               13,997,355
36.......................  Alaska.............................              203,258,189               11,956,364
37.......................  Wisconsin..........................              174,472,096               10,263,064
38.......................  Oregon.............................              144,641,218                8,508,307
39.......................  New Hampshire......................              137,674,702                8,098,512
40.......................  Maine..............................               91,683,905                5,393,171
41.......................  Hawaii.............................               87,697,345                5,158,667
42.......................  Montana............................               70,196,126                4,129,184
43.......................  Arizona............................               68,642,964                4,037,821
44.......................  Rhode Island.......................               63,361,303                3,727,135
45.......................  Michigan...........................               42,583,629                2,504,919
46.......................  Delaware...........................               39,007,437                2,294,555
47.......................  Utah...............................               34,208,312                2,012,254
48.......................  Nevada.............................               30,275,261                1,780,898
49.......................  Wyoming............................               12,973,750                  763,162
50.......................  Idaho..............................               11,695,737                  687,985
----------------------------------------------------------------------------------------------------------------

    After establishing this base deductible that is shared by every 
State, FEMA differentiated the States and ascribed individual 
deductibles according to each State's relative fiscal capacity and 
unique disaster risk profile. Fiscal capacity is important because the 
intent of FEMA's Stafford Act programs, including Public Assistance, is 
to supplement the capabilities of State and local jurisdictions. 
Disaster risk is important because it is the primary driver of Public 
Assistance expenditures and its reduction is the primary purpose of the 
deductible concept.
    Because FEMA is seeking to reduce risk through the deductible, and 
it is precisely through this risk reduction that the nation could 
realize the promise of the deductible program in decreasing disaster 
impacts and costs, FEMA has considered in this calculation prioritizing 
the risk portion of the deductible calculation by a ratio of 3:1 
compared to the fiscal capacity portion. In other words, when a State's 
base deductible is adjusted, 75 percent of the adjustment results from 
the State's relative risk profile and the remaining 25 percent stems 
from the State's relative fiscal capacity.

C. Calculating the Fiscal Capacity Index

    As with the rest of the SANPRM all numbers, figures, criteria and 
processes detailed in this section are notional. They are intended to 
aid the public in understanding how a potential deductible program 
could operate and to spur discussion and feedback.
    To calculate a State's relative fiscal capacity, FEMA, with the 
assistance of CREATE, developed a composite of four individual fiscal 
capacity indices. FEMA and CREATE considered multiple potential 
indicators of fiscal capacity. The four indicators selected to

[[Page 4073]]

comprise the composite fiscal capacity index were each determined to 
represent a separate and distinct aspect of a State's economy and 
governmental resources; however. FEMA welcomes comment on whether these 
are the best indicators to leverage and whether there are others that 
should be considered as well. The four fiscal capacity indices that 
FEMA includes in the model deductible calculation are based on each 
State's per capita Total Taxable Resources (TTR), per capita surplus/
deficit, per capita reserve funding, and the State's bond rating. FEMA 
will use the most recent indices.
    TTR is an annual measure of fiscal capacity calculated by the 
United States Department of Treasury.\48\ Essentially, TTR considers 
all of the income streams available within each State, including gross 
domestic product, corporate withheld earnings, and other capturable 
revenue. TTR does not measure how much revenue a State actually 
captures, but instead, measures how much revenue, in real dollars, a 
State has access to as compared to other States. As a per capita index, 
the State's total TTR in real dollars is then divided by the State's 
population. This places high-population States on equal footing with 
low-population States with regard to the index.
---------------------------------------------------------------------------

    \48\ Additional information regarding Total Taxable Resources 
(TTR), including the methods for calculating and the current TTR 
estimates, can be found on the Web site of the Department of the 
Treasury at https://www.treasury.gov/resource-center/economic-policy/taxable-resources/Pages/Total-Taxable-Resources.aspx.
---------------------------------------------------------------------------

    The surplus/deficit and the reserve fund indices operate in similar 
fashion. In each case, the State's value (surplus/deficit or reserve) 
is divided by the State's population. That amount is then compared with 
the per capita value of the median State. This creates indices of 
relative strength for each.
    The surplus/deficit index is built using data provided by the 
Annual Survey of State Government Finances provided by the United 
States Census Bureau of the Department of Commerce.\49\ The reserve 
fund index is built using data provided by the Fiscal Survey of the 
States conducted regularly by NASBO.\50\ FEMA believes that both the 
surplus or deficit that a State is running and the amount of funding 
that a State holds in reserve are relevant indicators of a State's 
overall fiscal well-being and ability to independently address the 
financial costs of disasters.
---------------------------------------------------------------------------

    \49\ Additional information concerning the Annual Survey of 
State Government Finances, including the survey methodology and 
latest survey results, can be found on the Web site of the United 
States Census Bureau at https://www.census.gov/govs/state/.
    \50\ Additional information concerning the Fiscal Survey of 
States, including the survey methodology and latest survey results, 
can be found on the Web site of the National Association of State 
Budget Officers at https://www.nasbo.org/mainsite/reports-data/fiscal-survey-of-states.
---------------------------------------------------------------------------

    Finally, the bond rating index is similarly calculated by dividing 
the State's bond rating by the median State's bond rating. In this 
model, FEMA calculates the bond rating index based upon data provided 
by the Pew Charitable Trusts from Standard & Poor's State Credit 
Ratings.\51\ FEMA believes that the resulting relative index is an 
indicative proxy of the State's ability to quickly raise the funding 
liquidity necessary to respond to and recover from disaster incidents.
---------------------------------------------------------------------------

    \51\ Additional information concerning the data provided by the 
Pew Charitable Trusts can be found on their Web site at http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2014/06/09/sp-ratings-2014.
---------------------------------------------------------------------------

    FEMA averaged these four indices of relative fiscal strength into a 
consolidated fiscal capacity index, each factor being equally weighted. 
This index accounts for 25 percent of a State's base deductible 
adjustment. However, FEMA also realized that, due to diversity in 
economic drivers and varying population sizes, some States may 
demonstrate a particular fiscal capacity indicator that is a 
statistical outlier compared with its other factors and the indicators 
of other States. To minimize the impact of these outliers on the 
disaster deductible formula, FEMA capped the impact of any individual 
fiscal capacity indicator at five times the median State's relative 
strength. In other words, if the median State's per capita reserve fund 
is $100 and is ascribed a value of 1.0 on the index, a State with an 
outlier per capita reserve fund value of $800 could be imputed the 
maximum per capita reserve fund value of $500, and therefore still 
receive an index value of 5.0, instead of the 8.0 index value that 
could otherwise be warranted. FEMA capped each fiscal capacity 
indicators in this way to contain the variability of the overall index 
and smooth the impact on outlier States.

D. Calculating the Composite Risk Index

    As with the rest of the SANPRM, all numbers, figures, criteria and 
processes detailed in this section are notional. They are intended to 
aid the public in understanding how a potential deductible program 
could operate and to spur discussion and feedback.
    FEMA explored multiple leading alternatives for predicting disaster 
losses. For the model described in this SANPRM, FEMA used an Average 
Annualized Loss (AAL) methodology for calculating each State's relative 
disaster risk level.
    AAL is a proxy for risk commonly used in risk modeling that 
considers the expected losses from a particular hazard per year when 
averaged over many years. Generally, AAL is calculated by multiplying 
the likelihood of the hazard occurring in a particular year by the 
likely cost of the event if it does occur. For example, if the 
likelihood of a hazard occurring is 0.2 percent, such as for a 500-year 
event, and the likely loss generated by that level of event is $1 
billion, the AAL for the hazard in the vulnerable area would be $2 
million ($1B x 0.002).\52\
---------------------------------------------------------------------------

    \52\ A 500-year event is an event that has the statistical 
likelihood of occurring once every 500 years, or in other words, a 1 
in 500 chance (0.2%).
---------------------------------------------------------------------------

    There are numerous sources of AAL data for hazards. Proprietary 
catastrophic risk models developed by companies such as AIR Worldwide 
(AIR), Risk Management Solutions (RMS), and CoreLogic (EQECAT) are 
three primary sources of AAL and risk information used by the 
reinsurance industry.\53\ FEMA considered these sources, but did not 
pursue them due to the proprietary, closed nature of the underlying 
risk models. Instead, FEMA used the AAL values produced using FEMA's 
Hazus platform.
---------------------------------------------------------------------------

    \53\ A short discussion about catastrophic modeling and a 
description of the three proprietary AAL models identified here can 
be found on the Marsh, LLC Web site at https://www.marsh.com/content/dam/marsh/Documents/PDF/US-en/Marsh-Insights-Property-Fall-2012.pdf.
---------------------------------------------------------------------------

    Hazus is a nationally applicable standardized methodology that 
contains models for estimating potential losses from earthquakes, 
floods, and hurricanes. Hazus uses Geographic Information Systems (GIS) 
technology to estimate physical, economic, and social impacts of 
disasters.\54\ FEMA used AAL estimates generated using Hazus because it 
is a well-established and familiar platform for many emergency managers 
and, most importantly, it is an open-source platform that will provide 
complete transparency to stakeholders concerning FEMA's deductible 
calculations.
---------------------------------------------------------------------------

    \54\ For additional information, visit FEMA's Hazus Web site at 
http://www.fema.gov/hazus.
---------------------------------------------------------------------------

    FEMA used the Hazus-based AAL estimates to create a simplified risk 
index for each State. Specifically, FEMA summed the most recently 
available AAL estimates \55\ for each State for each

[[Page 4074]]

of the three Hazus hazards: Earthquakes,\56\ floods (both coastal and 
riverine),\57\ and hurricanes (wind only).\58\ Collectively, these 
three hazards accounted for more than 75 percent of all Public 
Assistance awarded during the 10-year period between 2005 and 2014.
---------------------------------------------------------------------------

    \55\ FEMA uses estimates of AAL generated using FEMA's Hazus 
software. Cited AAL estimates were inflation-adjusted to 2015 
dollars where necessary using the Consumer Price Index inflation 
calculator provided by the Bureau of Labor Statistics and available 
at http://www.bls.gov/data/inflation_calculator.htm.
    \56\ KS Jaiswal, et al. (2015). Estimating Annualized Earthquake 
Losses for the Conterminous United States. Earthquake Spectra: 
December 2015, Vol. 31, No. S1, pp. S221-S243. FEMA is unable to 
post a copy of the document in the docket due to copyright 
restrictions. A summary of the document and purchase information is 
available at http://dx.doi.org/10.1193/010915EQS005M.
    \57\ Hazus AAL results for flood (coastal and riverine) are 
available at https://data.femadata.com/Hazus/FloodProjects/AAL/StateAAL_proj.zip and http://www.arcgis.com/home/item.html?id=cb8228309e9d405ca6b4db6027df36d9. Accessed June 2, 
2016. Note that Hazus flood AAL estimates are not available for 
Hawaii and Alaska; these losses are estimated by indexing against 
National Oceanic and Atmospheric Administration (NOAA) flood loss 
estimates from 2011-2014, available at http://www.nws.noaa.gov/hic/summaries/.
    \58\ FEMA Mitigation Directorate, Hazus-MH Estimated Annualized 
Hurricane Losses for the United States (unpublished draft report), 
September 2006.
---------------------------------------------------------------------------

    FEMA created a composite risk index around the median cumulative 
AAL. FEMA arranged each State's cumulative AAL (the sum of the State's 
earthquake, flooding, and hurricane AALs) in order from the largest 
cumulative AAL to the smallest. Because there is an even number of 
States, FEMA averaged the cumulative AALs of the States in the 25th and 
26th positions to determine the overall median cumulative AAL. FEMA 
assigned this amount a value of 1.0 and indexed each State's relative 
cumulative AAL to determine the State's risk index score.
    For example, consider a State with the following Hazus-based AALs:

Hurricane: $875 million
Flooding: $2 billion
Earthquake: $25 million

    Cumulative: $2.9 billion (Hurricane AAL + Flooding AAL + Earthquake 
AAL) FEMA conducted the same calculation for each State and then 
ordered them from largest to smallest in terms of each State's 
cumulative AAL.
    If the median cumulative AAL across all of the States is $1.45 
billion, that would be ascribed a score of 1.0 on the risk index, the 
hypothetical State above would receive a risk index score of 2.0 
because its cumulative AAL is twice as large as the median cumulative 
AAL ($2.9 billion versus $1.45 billion, respectively). For purposes of 
calculating the State's Public Assistance deductible, the State could 
be considered to have twice the risk of the median State.
    The AALs produced using Hazus vary from State to State depending 
upon the types of hazards that each State is prone to and the levels of 
loss that those hazards have the ability to create in those States. 
Consequently, the per capita cumulative AALs are not evenly distributed 
across the States and a few States have higher risk index scores 
because of that. Every State should be assigned a deductible that is 
reasonable and achievable. In this model, FEMA capped the composite 
risk index values in a manner similar to the way FEMA capped the 
components of the fiscal capacity index.
    FEMA capped the fiscal capacity components at a value of 5.0. This 
means that FEMA ignored any computed fiscal capacity that is greater 
than five times the median State's fiscal capacity for that factor. 
Because of the overall emphasis on risk, and similar to the deductible 
formula ratio of 3:1 risk to fiscal capacity, FEMA capped a State's 
risk index at a score of 15.0. In other words, FEMA ignored any 
calculated risk that is in excess of 15 times the risk of the median 
State.

E. Normalizing the Deductible Amounts

    As with the rest of the SANPRM, all numbers, figures, criteria and 
processes detailed in this section are notional. They are intended to 
aid the public in understanding how a potential deductible program 
could operate and to spur discussion and feedback.
    FEMA used the base deductible, composite risk index, and fiscal 
capacity index established above to calculate the post-indexed 
deductible value for each State. As explained previously, 75 percent of 
the total index adjustment to the base deductible is determined by the 
State's relative risk profile and the remaining 25 percent is 
determined by the State's relative fiscal capacity. For the final step 
in the deductible calculation process, FEMA normalized the post-indexed 
values to establish each State's final deductible amount. Normalization 
is a statistical term that can mean different things in different 
contexts. In the case of the deductible, FEMA uses normalization to 
mean adjusting the post-indexed values to equal the pre-indexed values 
overall.
    Specifically, FEMA multiplied the base deductible that it 
established in the first step by 50 to establish the overall deductible 
ceiling for the 50 States. FEMA then summed all of the post-indexed 
deductible values of each State. If the sum of these post-indexed 
values exceeded the deductible ceiling established by the base 
deductible, FEMA made a downward adjustment to each State's post-
indexed deductible so that its final amount remained the same relative 
to every other State, but so that the sum of all of the States' post-
indexed deductibles equaled the base deductible ceiling.
    For example, assume that the base deductible is calculated to be 
$25 million. This is the amount that each State begins with prior to 
the application of the fiscal capacity index and risk index. FEMA 
multiplies the base deductible ($25 million) by 50 to calculate the 
cumulative deductible ceiling for that year. In this case the 
deductible ceiling would be $1.25 billion for the year ($25 million x 
50 = $1.25 billion).
    If, after applying the indices to each State's base deductible, the 
sum of all of the resulting, post-indexed deductibles exceeded the 
$1.25 billion dollar ceiling, FEMA would normalize the deductible 
amounts so that the sum of all of them equals $1.25 billion. This would 
decrease the final deductible amounts of every State, but each State 
would remain in the same position relative to every other State. If a 
State had a post-indexed deductible that was twice that of another 
State that State would still have a final deductible that was twice the 
deductible of the other State, but both final deductibles would be 
lower.
    Normalization is a common statistical approach for addressing 
variations that occur when adjustments are made to values through 
indices of relativity, which both the fiscal capacity and risk index 
are. This important step could ensure that the Public Assistance 
deductibles remain rooted in their nexus to the Public Assistance 
program. This final step, normalization, will establish the Starting 
Deductible for each state.

F. Calculating Each State's Starting Deductible

    As with the rest of the SANPRM, all numbers, figures, criteria and 
processes detailed in this section are notional. They are intended to 
aid the public in understanding how a potential deductible program 
could operate and to spur discussion and feedback.
    As summarized above, the base deductible will be multiplied by the 
sum of: 0.75 multiplied by the State's Composite Risk Index and 0.25 
multiplied by the State's Composite Fiscal Capacity Index. That 
calculation establishes an adjusted deductible for each State. FEMA 
will then normalize the adjusted deductibles to ensure that the total 
sum of all of the adjusted deductibles equals the sum of the base 
deductibles. This methodology yields

[[Page 4075]]

the following model normalized deductibles for each State in 2016:

                Table 5--Model 2016 Starting Deductibles
------------------------------------------------------------------------
                                                             Starting
                          State                             deductible
                                                               ($M)
------------------------------------------------------------------------
Alabama.................................................          $12.96
Alaska..................................................           19.42
Arizona.................................................           18.67
Arkansas................................................            8.01
California..............................................          141.03
Colorado................................................            7.08
Connecticut.............................................           20.85
Delaware................................................            8.03
Florida.................................................          141.53
Georgia.................................................           17.65
Hawaii..................................................            9.17
Idaho...................................................            7.68
Illinois................................................           14.43
Indiana.................................................           12.23
Iowa....................................................           10.63
Kansas..................................................            9.54
Kentucky................................................            9.47
Louisiana...............................................           73.90
Maine...................................................            8.52
Maryland................................................            9.26
Massachusetts...........................................           30.34
Michigan................................................           23.20
Minnesota...............................................            9.44
Mississippi.............................................           13.32
Missouri................................................           11.38
Montana.................................................            6.23
Nebraska................................................            9.93
Nevada..................................................            8.81
New Hampshire...........................................            7.92
New Jersey..............................................           29.28
New Mexico..............................................           11.11
New York................................................           51.70
North Carolina..........................................           17.50
North Dakota............................................           10.09
Ohio....................................................           25.86
Oklahoma................................................           10.40
Oregon..................................................           24.62
Pennsylvania............................................           21.88
Rhode Island............................................           12.30
South Carolina..........................................           11.60
South Dakota............................................            8.25
Tennessee...............................................           16.68
Texas...................................................           73.72
Utah....................................................            7.73
Vermont.................................................            8.64
Virginia................................................           13.51
Washington..............................................           27.30
West Virginia...........................................           23.39
Wisconsin...............................................           13.50
Wyoming.................................................           10.47
                                                         ---------------
    Average.............................................           22.20
    Median..............................................           12.26
    Minimum.............................................            6.23
    Maximum.............................................          141.53
------------------------------------------------------------------------

    These deductibles represent FEMA's assessment of each State's 
fiscal capacity and risk profile as of 2016. FEMA has included a table 
in the rulemaking docket for this SANPRM that shows every step for each 
State with regard to how these notional deductibles were calculated for 
purposes of this concept. These deductibles would be reduced by any 
credits that FEMA approves for the State pursuant to the annual 
deductible credit menu. The following section will detail the types of 
credits that FEMA expects to initially offer.

G. Credit Structure

    As with the rest of the SANPRM all numbers, figures, criteria and 
processes detailed in this section are notional. They are intended to 
aid the public in understanding how a potential deductible program 
could operate and to spur discussion and feedback.
    A potential credit structure could offer States the ability to 
partially or fully satisfy their deductible in advance of a major 
disaster declaration. While simply raising the per capita indicator to 
qualify for Public Assistance would reduce Federal costs, a potential 
credit structure, if successful, could eventually deliver the true 
benefits of reduced risk and realized disaster response and recovery 
cost savings nationwide. FEMA's goal is to design a model credit 
structure that would create financial and economic incentives for 
meaningful State investments in preparedness and risk-reduction 
measures.
    FEMA believes that the model credit structure described in this 
SANPRM would allow every State to earn credits for activities that each 
would already be undertaking, and also improve risk reduction and 
resilience building for States that choose to expand those activities. 
To that end, the deductible model described in this SANPRM includes 
seven potential categories of credits.
    Due to the differences among the credit categories and their likely 
effects upon reducing risk, each category offers a unique credit-to-
cost ratio, and a few have caps to provide States with an opportunity 
to develop a potentially diverse portfolio of risk reduction 
strategies.
    FEMA would monitor which credits States elect to earn and would 
continue to refine its credit offerings each year. FEMA would provide 
an annual notice of credit offerings so that States would have ample 
opportunity to carefully consider all of their options. FEMA would also 
continue to engage with the States and with key intergovernmental 
organizations to ensure that the credit structure is calibrated to 
provide the right levels of reward to incentivize continuous 
improvement for each State in the disaster resilience and emergency 
management contexts.
    FEMA recognizes that any additional program could create some 
additional administrative burden to State and Federal governments. 
However, FEMA is committed to limiting that burden to successfully 
carry out the program and ensure that it is applied effectively. The 
following sections detail the administrative steps and timelines 
currently envisioned for the program. FEMA has carefully considered 
both the likely burden and the likely benefit underlying each of the 
seven credit categories and believes that each category represents 
potential activities worth pursuing and incentivizing. Each of the 
seven credit categories received generally favorable support from those 
who commented on the ANPRM. FEMA seeks additional public input on these 
categories and on the potential administrative burdens of assembling 
the supporting information.
1. Dedicated Funding for Emergency Response/Recovery Activities
    A State that has planned for and taken fiscal steps to address the 
financial impacts of potential disasters ahead of time is better 
prepared to immediately respond to and to rapidly recover from a major 
disaster. FEMA recognizes that States use multiple strategies for 
addressing the financial consequences of a disaster, including: 
Supplemental State appropriations, issuing recovery bonds, diverting 
funding from other State programs or cutting State agency operating 
budgets, and imposing special tax assessments to raise recovery 
resources. FEMA, however, has also observed that the time required to 
enact many of these ad-hoc funding strategies can significantly delay a 
State's ability to rapidly respond to a disaster.
    FEMA believes that response and recovery efforts could be improved 
if the affected States maintain dedicated disaster relief funds. By 
having this funding available, these States also could potentially 
obviate the need to reduce or eliminate other planned State services to 
divert funding to disaster operations and infrastructure repair. For 
example, a State could divert funding for summer roadway maintenance or 
improvements to cover debris removal costs following a hurricane or 
snow removal costs following a major winter storm. States that maintain 
a dedicated disaster relief fund may be able to more rapidly ameliorate 
disaster consequences, leverage supplemental Federal assistance 
programs, and repair public buildings and infrastructure, without 
diverting funding from other important initiatives.
    Furthermore, States without dedicated disaster relief funds could 
find themselves in the position of incurring new public obligations, or 
in some cases debt, while simultaneously suffering from the tax losses 
of disaster-

[[Page 4076]]

induced decreased economic activity. By having a dedicated fund 
available to address the direct costs of disaster response and damage 
restoration, States could be better positioned to address these 
secondary disaster consequences.
    In order to incentivize States to take the proactive step of 
establishing and funding a dedicated disaster relief fund in advance, 
this potential model credit structure includes $1.00 in deductible 
credit for every $1.00 of State funding that the State has appropriated 
and deposited in a qualifying disaster relief fund during the course of 
the previous year. This credit may account for up to 20 percent of the 
State's annual deductible. Funds that are carried over or that expire 
and are reappropriated for the same limited purpose could still qualify 
for the credit.
2. Expenditures for Non-Stafford Act Response and Recovery Activities
    FEMA received multiple comments during the ANPRM comment period 
that emphasized that FEMA does not fully understand or appreciate the 
amount of investment that States already make in emergency management 
and disaster recovery. Commenters pointed out that for every major 
disaster declared, that there are multiple smaller incidents that do 
not rise to the level of warranting supplemental Federal assistance, 
but nonetheless exceed local capabilities and often require State 
funding support for response and recovery activities. FEMA seeks to 
encourage States to continue providing State-level assistance to 
overwhelmed localities, even when Federal assistance may be 
unavailable.
    Commenters also noted that counties and cities often lack the 
independent ability to raise the necessary financial resources to 
address the costs of significant localized impacts. In these cases, the 
support provide by their State partners is invaluable to ensuring that 
adequate funding is available to support the response and recovery 
operations necessary to assist the affected localities and survivors. 
Additionally, commenters explained that, even following a major 
disaster declaration, supplemental Federal assistance is typically only 
made available to the most severely impacted jurisdictions within the 
affected State. However, there are other communities that are not 
designated, but nonetheless have experienced damage resulting from the 
same incident. The commenters postulated that the damage experienced 
within these non-declared jurisdictions may nevertheless still exceed 
their individual capacities to effectively respond and recover, 
necessitating additional support from their State partners. This is, 
the commenters offered, an additional burden upon the State that the 
current system of Public Assistance does not recognize or incentivize.
    FEMA seeks to preserve and strengthen this important State-local 
relationship and to incentivize States to continue providing assistance 
when jurisdictional capabilities are exceeded, regardless of the 
availability of supplemental Federal assistance. In order to do so, 
this potential deductible model includes $1.00 in deductible credit for 
every $1.00 of annual State funding that the State expends to respond 
and/or recover from an incident that either: (1) Does not receive a 
Stafford Act declaration or, (2) affects a locality not designated for 
Public Assistance by a major disaster declaration. In either case, the 
Governor of the State would be required to declare a State of 
emergency, or issue a similar proclamation, pursuant to applicable 
State law. In this model, this credit could account for up to 20 
percent of the State's annual deductible.
3. Expenditures for Mitigation Activities
    Integral to any effort to lessen the risks associated with and 
consequences of disaster is effective mitigation. Mitigation is the act 
of lessening or avoiding the impacts of a hazard, typically through 
engineered solutions. The linkage between advanced mitigation and 
lowering disaster impacts and costs has been demonstrated many times, 
both through academia and research, and also in practical application.
    FEMA provides funding assistance for mitigation projects through 
several programs, including the Hazard Mitigation Grant Program and the 
Pre-Disaster Mitigation Grant Program, as well as to mitigation-
enhanced restoration projects through the Public Assistance program 
authorized by Section 406 of the Stafford Act.\59\ FEMA recognizes, 
however, that States often invest significantly in mitigation efforts 
apart from these Federal assistance programs. FEMA seeks to recognize 
those continued investments and incentivize additional investments by 
providing significant credit for direct mitigation-related expenditures 
through the Public Assistance deductible program.
---------------------------------------------------------------------------

    \59\ 42 U.S.C. 5172.
---------------------------------------------------------------------------

    This model includes $3.00 in deductible credit for every $1.00 in 
State spending on qualifying mitigation activities. FEMA will not count 
State matching funds toward the calculation of the credit, so therefore 
these State expenditures must be either independent of any other 
Federal assistance program or must be in excess of the minimum cost-
share requirement of any applicable Federal assistance program. For 
purposes of this credit, FEMA defined qualifying mitigation activities 
as it does under FEMA's Hazard Mitigation Assistance Guidance.\60\
---------------------------------------------------------------------------

    \60\ See Hazard Mitigation Assistance Guidance, Part III, 
section E.1.3.1, available at this link https://www.fema.gov/media-library-data/1424983165449-38f5dfc69c0bd4ea8a161e8bb7b79553/HMA_Guidance_022715_508.pdf.
---------------------------------------------------------------------------

    Due to the importance of incentivizing mitigation activities to the 
success of the deductible program in reducing future disaster impacts 
and costs nationwide, FEMA is not currently considering capping the 
potential mitigation credit that may be earned in this model. In other 
words, a State could fully satisfy its annual deductible by investing 
at least one-third of its deductible amount in qualifying mitigation 
activities each year. This could not only fully satisfy the State's 
deductible well in advance of any declaration activity, thereby 
eliminating application of the deductible in the State for that year, 
but could also deliver the State future savings by reducing the 
severity or consequences of forthcoming disasters. FEMA also seeks 
comment specifically on whether incentivizing further spending by State 
governments using credit mechanisms of mitigation expenditure credits 
and non-Stafford expenditure credits could potentially dampen or crowd 
out private mitigation expenditures.
4. Insurance Coverage for Public Facilities, Assets, and Infrastructure
    States have choices when it comes to how they elect to address 
their disaster risks. Some States have chosen to establish dedicated 
disaster relief funds that can be leveraged to address the costs of 
disasters without jeopardizing other services and operations. Other 
States have elected to purchase third-party insurance to cover some of 
those costs, while others have established self-insurance risk pools to 
better distribute the risk. Regardless of the choice that is made, FEMA 
may choose to encourage pre-disaster financial preparedness through the 
deductible program.
    The model FEMA is currently contemplating includes percentage 
deductible credits for States that elect to utilize insurance policies 
as a means to address future disaster costs. To qualify for credit, the 
insurance policy must cover costs related to losses that would 
otherwise qualify for reimbursement

[[Page 4077]]

assistance through the Public Assistance program. For purposes of the 
credit, the policies must provide guaranteed coverage for losses from 
natural hazards, fires, explosions, floods, or terrorist attacks. For a 
self-insurance fund or risk pool, FEMA would verify through the State 
Insurance Commissioner, or similar State official, that the fund or 
pool is actuarially sound and solvent.
    This model includes credit based on the aggregate limits of 
applicable State policies, rather than on the premiums paid for 
coverage. Consequently, FEMA believes that States choosing to insure 
against future disaster risk would have very large overall limits, even 
though a particular incident would likely only affect a fraction of the 
total insured property. For example, if a State maintains $1M policies 
on 10 facilities across the State, the aggregate limit of the policy 
coverage is $10M, even though it is unlikely that all 10 facilities 
will suffer an insured loss at the same time. FEMA believes this could 
be a reasonable and equitable approach because both the deductible and 
insurance coverage levels should largely be driven by each State's 
individual risk profile.
    This model includes a potential three-tier incentive structure for 
insurance coverage based upon multiples of each State's annual 
deductible amount as follows:

               Table 6--Insurance Coverage Credit Schedule
------------------------------------------------------------------------
                                                              Credit
                     Coverage amount                      (percentage of
                                                            deductible)
------------------------------------------------------------------------
50x Deductible <= Coverage <100x Deductible.............               5
100x Deductible <=Coverage <150x Deductible.............              10
150x Deductible <= Coverage.............................              15
------------------------------------------------------------------------

    For example, if a State has an annual deductible of $30 million and 
carries insurance policies on public facilities with an aggregate limit 
of $3.6 billion, the State could receive a credit equal to 10 percent 
of its initial deductible, or $3 million. This is because $3.6 billion 
is 120 times the amount of the State's deductible ($30 million) and is 
within the range of 100 to 150 times the deductible that FEMA suggests 
should receive a 10 percent credit. This outcome could be the same 
whether the State chose to purchase its insurance through third-party 
insurers or reinsurers or chose to self-insure and self-manage the 
risk. FEMA could confirm coverage level through the insurance contract 
or, for self-insurance, through the appropriate State official that the 
self-insurance fund is actuarially sound up to the $3.6 billion limit. 
Given the specific goal of incentivizing mitigation, FEMA seeks comment 
on the inclusion of insurance coverage credits in the deductible model.
5. Building Code Effectiveness Grade Schedule (BCEGS[supreg])
    The Insurance Services Office, Inc. (ISO), a leading provider of 
information concerning risk assessment and property and casualty 
insurance, has explored the relationship of building codes to risk 
reduction. According to a recent ISO report:

    [M]odel building codes have most clearly addressed the hazards 
associated with wind, earthquake, and fire. Experts maintain that 
buildings constructed according to the requirements of model 
building codes suffer fewer losses from those perils. If 
municipalities adopt and rigorously enforce up-to-date codes, losses 
from other risks (including man-made perils) may also decrease.\61\
---------------------------------------------------------------------------

    \61\ Insurance Services Office, Inc., National Building Code 
Assessment Report: ISO's Building Code Effectiveness Grading 
Schedule (2015), 8, available at https://www.isomitigation.com/downloads/ISO-BCEGS-State-Report_web.pdf.

FEMA agrees with the ISO's analysis that building codes, when adopted 
and properly enforced, have the ability to reduce future disaster risk 
on a broad scale. Consequently, in this model FEMA incorporated 
deductible credits to States that have committed to adopting, 
promoting, and enforcing building codes.
    This model includes an escalating credit structure that provides 
moderate incentive to simply participate in ISO's Building Code 
Effectiveness Grading Schedule (BCEGS[supreg]) program and increasing 
incentives as States reach higher levels of adoption and enforcement. 
ISO provides BCEGS[supreg] scores for both residential and commercial 
codes and enforcement, each on an improving scale from 10 to 1. In 
2015, over 60 percent of States had BCEGS[supreg] scores of 4 or 5 in 
each category.
    The following model incentive structure is based on each State's 
annual BCEGS[supreg] score for both residential and commercial building 
codes:

                     Table 7--BCEGS Credit Schedule
------------------------------------------------------------------------
                                            Residential     Commercial
                                              credit          credit
           BCEGS[supreg] score            (percentage of  (percentage of
                                            deductible)     deductible)
------------------------------------------------------------------------
1.......................................              20              20
2.......................................              15              15
3.......................................              12              12
4.......................................               9               9
5.......................................               8               8
6.......................................               6               6
7.......................................               5               5
8.......................................               4               4
9.......................................               3               3
10......................................               2               2
------------------------------------------------------------------------

    This structure could allow States to earn between 4 percent and 40 
percent credits based upon their residential and commercial 
BCEGS[supreg] scores. As of 2015, 45 States participate in the 
BCEGS[supreg] program and could have received, at a minimum, the 4 
percent credit for doing so under this structure. Based on 2015 scores, 
the average participating State could receive a 16 percent reduction to 
their deductible amount. The smallest credit would have been 7 percent 
and the largest would have been 24 percent. The following chart depicts 
the number of States per credit level in 2015.

[[Page 4078]]

[GRAPHIC] [TIFF OMITTED] TP12JA17.023

6. Tax Incentive Programs
    FEMA recognizes that the most effective ways to reduce risk across 
the entire nation employ a whole-community approach that involves every 
level of government, the private sector, and the citizenry in taking 
steps to promote and increase resilience. With that in mind, FEMA 
included in this model credit to States for tax-incentive programs 
designed to encourage preparedness or mitigation activities.
    For example, a State may offer an income tax credit for elevating 
homes or host a sales-tax holiday for personal preparedness supplies. 
FEMA would defer to the States to decide what types of programs would 
be most successful and appropriate given each State's unique 
considerations and risks, however the program would still need to 
maintain a clear nexus with preparedness, mitigation, or resilience 
building. In some cases, a State may offer a program that incentivizes 
general preparedness, or it may decide to target a program to a 
specific hazard, such as the installation of hurricane straps or 
seismic retrofits to existing building foundations.
    Regardless, this model includes credits to States for these types 
of innovative tax incentive programs. FEMA would allow States to 
request credit for both the direct costs of the program 
(administration, advertising, etc.), and for the indirect costs, such 
as forgone tax revenue. In both cases, FEMA would approve $2.00 in 
deductible credit for every $1.00 in State funding expended or 
foregone.
    Because FEMA sees this credit as a type of whole-community risk 
reduction, in this model FEMA is not currently including a cap on this 
particular credit. In other words, a State with a large enough tax 
incentivize program(s) could largely offset its deductible by annually 
foregoing tax revenue, through credits/deductions offered to businesses 
and/or citizens, equal to half of its deductible amount. FEMA 
specifically requests comment on the types of tax incentive programs 
that have a nexus to preparedness and disaster risk reduction and their 
effectiveness, both in terms of cost effectiveness and outcome 
effectiveness.
7. Expenditures on State Emergency Management Programs
    Perhaps the most visible factor in a State's ability to address 
disasters in the broad sense is the quality of its emergency management 
program. States have organized their emergency management function in a 
number of different ways. In some States, emergency management is a 
standalone office, whereas in other States the function is embedded in 
a broader public safety or military organization.
    The Federal government provides numerous types of assistance to 
States to develop, maintain, and implement their emergency management 
programs. At FEMA, assistance is generally available through the 
Emergency Management Performance Grant Program,\62\ the Homeland 
Security Grant Program,\63\ including both the State Homeland Security 
Program \64\ and the Urban Area Security Initiative,\65\ and through 
management costs awarded in administering Stafford Act declarations.
---------------------------------------------------------------------------

    \62\ 6 U.S.C. 762.
    \63\ 6 U.S.C. 603.
    \64\ 6 U.S.C. 605.
    \65\ 6 U.S.C. 604.
---------------------------------------------------------------------------

    In order to further incentivize States to allocate their own 
resources to their emergency management enterprises, this model 
includes a deductible credit for annual State expenditures supporting 
State emergency management programs beyond any cost-share required by a 
Federal assistance program or grant. FEMA solicits comments on what 
types of emergency management enterprises and activities could be 
eligible for deductible credit within this category and information 
relating to the current level of State investment in these enterprises 
and activities.
    FEMA includes in this model $1.00 in deductible credit for every 
$1.00 that a State invests in emergency management beyond the cost-
share required by a Federal program. A State could satisfy up to 20 
percent of its annual Public Assistance deductible through this credit.
8. Emergency Management Accreditation Program (EMAP[supreg]) Credit 
Enhancement
    The Emergency Management Accreditation Program (EMAP[supreg]) is an 
independent non-profit organization

[[Page 4079]]

that offers an emergency management program review and recognition 
program.\66\ EMAP[supreg] is a completely voluntary program and 
accreditation is not presently a factor in any FEMA program. However, 
FEMA recognizes that EMAP[supreg] provides a valuable resource to 
accredited programs by establishing best practices and offering a level 
of independent accountability.
---------------------------------------------------------------------------

    \66\ Additional information on EMAP can be found at https://www.emap.org/index.php.
---------------------------------------------------------------------------

    This model includes a credit enhancement to States that voluntarily 
seek and achieve provisional or full EMAP[supreg] accreditation. FEMA 
could increase the credit amount by 5 percent for three credit types 
for EMAP[supreg] accreditation, but specifically seeks comment on the 
appropriate value of this credit amount. These three credits could be:
    1. Dedicated funding for emergency response and recovery 
activities;
    2. expenditures for non-Stafford Act response and recovery 
activities; and
    3. expenditures on State emergency management programs.
    Specifically, instead of offering $1.00 in deductible credit for 
each $1.00 in qualifying State funding and expenditures, FEMA would 
instead approve $1.05 for each $1.00 in qualifying State funding and 
expenditures for States maintaining current EMAP[supreg] provisional or 
full accreditation. The credit caps applicable to each credit category 
would remain unchanged. FEMA believes that applying the credit 
enhancement in this manner could encourage States to seek and/or 
maintain EMAP[supreg] accreditation and that by doing so, could 
demonstrate improved readiness to confront the consequences of 
disasters.
9. Credit Summary
    Table 8 provides an overview of the credits that FEMA is 
envisioning, the amount of credit that could be approved, any cap that 
FEMA envisions applying, and whether an enhancement is available to the 
credit.

                                          Table 8--Summary Credit Menu
----------------------------------------------------------------------------------------------------------------
                                                                                                 EMAP[supreg]
           Credit No.                Credit name        Credit amount         Credit cap          enhancement
----------------------------------------------------------------------------------------------------------------
1..............................  Dedicated Funding   $1.00 in credit     20%................  Yes.
                                  for Emergency       for each $1.00 in
                                  Response/Recovery   qualifying
                                  Activities.         deposits.
2..............................  Expenditures for    $1.00 in credit     20%................  Yes.
                                  Non-Stafford Act    for each $1.00 in
                                  Response and        qualifying
                                  Recovery            expenditures.
                                  Activities.
3..............................  Expenditures for    $3.00 in credit     No Cap.............  No.
                                  Mitigation          for each $1.00 in
                                  Activities.         qualifying
                                                      expenditures.
4..............................  Insurance Coverage  % reduction based   N/A................  No.
                                  for Public          on qualifying
                                  Facilities,         coverage above
                                  Assets, and         deductible amount.
                                  Infrastructure.
5..............................  Building Code       % reduction to the  N/A................  No.
                                  Effectiveness       starting
                                  Grade Schedule      deductible based
                                  (BCEGS[supreg]).    on BCEGS[supreg].
6..............................  Tax Incentive       $2.00 in credit     No Cap.............  No.
                                  Programs.           for every $1.00
                                                      in qualifying
                                                      costs.
7..............................  Expenditures on     $1.00 in credit     20%................  Yes.
                                  State Emergency     for every $1.00
                                  Management          in qualifying
                                  Programs.           expenditures.
----------------------------------------------------------------------------------------------------------------

H. Estimates of Initial Credits

    Based upon the preliminary research discussed above and interviews 
with key stakeholders and subject matter experts, FEMA believes that 
every State would receive deductible credit under the preceding credit 
structure for activities and investments that each State is already 
undertaking; however, there may be some States that have been able to 
undertake more credit-qualifying activities than others.
    As with the rest of the SANPRM, all numbers, figures, criteria and 
processes detailed in this section are notional. They are intended to 
aid the public in understanding how a potential deductible program 
could operate and to spur discussion and feedback.
    FEMA has used the information that it has available to estimate the 
amount of credit that each State might qualify for initially. In many 
cases, however, FEMA anticipates offering credit for activities for 
which there is very little information readily available. Where 
information is lacking, FEMA attempted to use assumptions as to current 
State activities. For instance, FEMA was unable to identify annual 
amounts of forgone revenue from a State tax incentive program and thus 
assumed an amount equal to 1 percent of a State's starting 
deductible.\67\ FEMA intentionally utilized what it believes are 
conservative estimates where uncertainty exists and assumptions were 
needed. FEMA has attempted to estimate the amount of credit that each 
State might qualify for initially to provide context on the potential 
impact of the deductible requirement. FEMA welcomes comments on its 
assumptions with information more readily available to each State.
---------------------------------------------------------------------------

    \67\ For example, given Alabama's starting deductible of $12.96 
million, FEMA assumes forgone revenues from the State's tax 
incentive program of $129,574.
---------------------------------------------------------------------------

    Overall, based on this analysis, FEMA anticipates that the average 
State would receive initial credits worth approximately 40 percent of 
its first deductible without making any changes to its current spending 
or activities. Across the States, FEMA expects that these initial 
credits would range from a minimum of approximately 6 percent to a 
maximum of approximately 85 percent. Table 9 depicts FEMA's estimates 
for each State under this model. Specifically, Table 9 indicates each 
State's applicable model starting deductible, the credit amount from 
each of the seven categories of credits, the total estimated credits 
(shown both as a dollar value and percentage of the starting deductible 
amount), and the model final deductible amount that the State would 
carry into the new year.
    This potential final deductible amount represents what each State 
would potentially need to satisfy if it experiences a disaster that 
results in disaster damages that exceed the amount of credits that FEMA 
has approved. It is the remaining amount that is not offset by the 
credits that a State has earned.
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I. Deductible Program Timeline and Procedures

    FEMA is committed to developing a Public Assistance deductible 
program that is effective, but that also minimizes the cost and 
administrative burden required of our State partners. FEMA expects to 
request the minimum amount of information and reporting necessary for 
the program to be successful. To do this, FEMA's model concept could 
follow a strict and consistent programmatic schedule throughout the 
year so that States could have a clear understanding of current and 
upcoming expectations. FEMA designed this potential model schedule to 
operate on the calendar year to provide simplicity and standardization 
across jurisdictions that operate on various iterations of the fiscal 
year.
    As with the rest of the SANPRM all numbers, figures, criteria, 
timeframes, and processes detailed in this section are notional. They 
are intended to aid the public in understanding how a potential 
deductible program could operate and to spur discussion and feedback.
1. Model Timeline
    On August 1 of each year, FEMA could issue an Annual Notice of 
Public Assistance Deductible Amounts (Annual Notice). This notice could 
be published in the Federal Register and would indicate each State's 
pre-credit deductible amount. The Annual Notice could provide 
sufficient detail regarding the calculation methodology to provide 
transparency regarding the source of the deductible figures. If a State 
believes that FEMA has made a technical error in calculating its 
deductible, the State could be able to appeal the amount. In addition, 
FEMA would not expect to otherwise change the calculation methodology 
without advance notice to the States and an opportunity for each State 
to offer feedback.
    Contemporaneously with the issuance of the Annual Notice, FEMA 
would publish in the Federal Register the Application and Submission 
Information for Public Assistance Deductible credits to provide 
guidance concerning the deductible credits that could be offered during 
the next year and an application form for credits. FEMA does not 
anticipate making significant changes to the credit structure year over 
year, but could constantly and actively be monitoring credit types and 
amounts and may adjust the structure as necessary to improve the 
program's effectiveness over time. FEMA anticipates engaging 
extensively with States in making any adjustments to the credit 
structure.
    Credit applications could be due to FEMA by September 1 of each 
year. Because there might be a limited period of about one month to 
complete the application for deductible credits, it would be important 
that States assess and account for their past year's activities before 
the Annual Notice is published or quickly thereafter.
    The actual application could be minimal compared to other Federal 
applications, grant applications in particular. FEMA envisions a simple 
form in which a State could request the appropriate amount of credit 
for each credit category, include a brief description of the activity 
for which the credit is requested, provide the contact information for 
a subject matter expert that can answer questions about the activity, 
and affix the signatures of the appropriate State officials.
    For example, a State may request $1.5 million in credit for 
spending $500,000 moving a fire station out of a flood hazard area 
(mitigation would be credited $3.00:$1.00). Likewise, a State may 
request a 16 percent reduction for maintaining BCEGS[supreg] scores of 
5 for both the commercial and residential building code categories. 
Generally, the State would not need to submit any additional 
information or supporting documentation to support its request.
    FEMA would review the State's submission and make a determination 
of the amount of deductible credit to be approved. FEMA could actively 
reach out to the State-identified subject matter expert if any 
additional information would be needed for purposes of determining 
whether the activity would qualify for credit. If the activity appeared 
to qualify, either from the face of the credit application or after 
consulting with the State subject matter expert, FEMA would approve the 
appropriate amount of credit up to the credit category cap (for the 
categories to which a cap applies).
    FEMA envisions notifying each State individually by October 1 of 
the amount of credit approved and the remaining deductible, if any, 
that would apply during the subsequent calendar year. If FEMA approved 
any less credit than what the State requested, FEMA would include an 
explanation of the rationale for the discrepancy. In the case that FEMA 
did not fully approve the State's credit request, the State could be 
able to appeal the determination to FEMA. For this model timeline, FEMA 
envisions appeals of credit determinations would be due by December 1.
    Once FEMA has adjudicated any appeals and all credit has been 
approved, FEMA could issue a notice in the Federal Register no later 
than January 1 of the subsequent year announcing each State's beginning 
deductible amount, the amount of credit approved, and the final 
remaining deductible, if any.
---------------------------------------------------------------------------

    \68\ Activities undertaken after the cutoff date for applying 
for credits would be applied to the next year's deductible. For 
example, activities undertaken in October would not be applied to 
the deductible in effect 3 months later, but instead to the one in 
effect 15 months later.

                             Table 10--Notional Deductible Program Annual Milestones
----------------------------------------------------------------------------------------------------------------
                  Date                               Actor                              Activity
----------------------------------------------------------------------------------------------------------------
                                                                        FEMA publishes Annual Notice of
                                                                        Public Assistance Deductible Amounts in
                                                                        the Federal Register.
August 1................................  FEMA.......................   FEMA publishes Application and
                                                                        Submission information for Public
                                                                        Assistance Deductible Credits in the
                                                                        Federal Register, which provides formal
                                                                        credit guidance and the credit
                                                                        application form.
September 1.............................  States.....................   Deadline for States to submit
                                                                        the Application for Public Assistance
                                                                        Deductible Credits.\68\
October 1...............................  States.....................   Deadline for States to appeal
                                                                        FEMA's determination of the pre-credit
                                                                        deductible amounts.
October 1...............................  FEMA.......................   FEMA completes review of the
                                                                        credit applications and notifies each
                                                                        State of the credit amounts approved and
                                                                        FEMA's proposed final deductible amount.
November 1..............................  FEMA.......................   FEMA notifies States of the
                                                                        outcome of any pre-credit deductible
                                                                        amount appeals.
December 1..............................  States.....................   Deadline for States to appeal
                                                                        FEMA's approved credit amounts and/or
                                                                        proposed final deductible amount.
January 1...............................  FEMA.......................   FEMA notifies States of the
                                                                        outcome of any pending appeals and
                                                                        publishes each State's final deductible
                                                                        and credit amounts in the Federal
                                                                        Register.

[[Page 4084]]

 
Beginning January 1.....................  FEMA.......................   FEMA provides supplemental
                                                                        Public Assistance for all of the credits
                                                                        that a State has earned in every
                                                                        disaster.
                                                                        For any permanent work disaster
                                                                        costs exceeding the State's earned
                                                                        credits, FEMA applies the remaining
                                                                        final deductible amount, if any.
----------------------------------------------------------------------------------------------------------------

2. Post Disaster Deductible Procedures
    FEMA believes it is important that for every major disaster, the 
States receive assistance for emergency protective measures and debris 
removal. FEMA does not want to delay those essential activities in the 
immediate aftermath of a disaster incident. Under FEMA's deductible 
concept, FEMA assistance for debris removal and emergency protective 
measure projects could follow the normal procedures and receive funding 
at the applicable cost share for that disaster.
    FEMA envisions applying the deductible amount (i.e., the portion of 
a State's deductible not fully satisfied by the credits earned, if any) 
on an annual basis and only to the provision of supplemental Federal 
assistance for permanent repair and replacement activities. For repair 
and replacement assistance, the State would receive supplemental 
Federal assistance only after it has satisfied its deductible 
requirement.
    If in a given year the affected State has not fully satisfied its 
annual Public Assistance deductible with the credits that it earned and 
a major disaster is declared, after the declaration the State would be 
asked to identify projects that have a preliminary cost estimate 
(Federal and non-Federal share combined) equal to the unsatisfied 
deductible amount. With agreement by FEMA as to the preliminary cost 
estimate, those projects the State selects to satisfy the remaining 
deductible would be deemed ineligible under Section 406 of the Stafford 
Act.\69\ The State would assume responsibility for these projects.\70\ 
FEMA would require that the States identify these projects within the 
first 60 calendar days after a disaster declaration so as not to impede 
the provision of supplemental Federal assistance for other projects.
---------------------------------------------------------------------------

    \69\ Stafford Act, supra FN4, Sec.  406(b) (providing the 
``Federal share of assistance under this section shall be not less 
than 75 percent of the eligible cost of repair, restoration, 
reconstruction, or replacement carried out under this section'') 
(emphasis added).
    \70\ Costs of satisfying the deductible, like cost share costs, 
would not qualify for credit towards the next year's deductible.
---------------------------------------------------------------------------

    After the State satisfies its deductible in any major disaster 
event, any remaining eligible repair and replacement projects resulting 
from disasters declared in that year could receive supplemental Federal 
assistance in accordance with the standard procedures of the Public 
Assistance program. If there are insufficient projects to satisfy the 
full remaining deductible requirement, the unsatisfied portion of the 
deductible could be carried forward to any additional major disasters 
declared within the State that year. Any deductible that is remaining 
unsatisfied at the end of the year would expire. Each year could start 
the deductible cycle anew with regards to the starting deductibles, 
credits earned, and final deductibles.
    If a State has an unsatisfied deductible requirement remaining 
after a major disaster, and it receives a second major disaster 
declaration that year, pursuant to this initial version of the 
deductible concept, the State would be required to identify a project 
or grouping of projects that have a preliminary cost estimate (Federal 
and non-Federal share combined) equal to the unsatisfied deductible 
requirement. With agreement by FEMA as to the preliminary cost 
estimate, these projects would be deemed ineligible costs pursuant to 
Section 406 of the Stafford Act. Once the State has satisfied its 
annual deductible requirement, all eligible costs in subsequent 
disaster declarations could be processed for reimbursement through 
standard Public Assistance program procedures.
    Consider a State that has a starting deductible of $25 million and 
has earned credits of $15 million. The State's final deductible would 
be $10 million. This is the amount that the State would need to satisfy 
before it can receive permanent repair and replacement assistance. 
Suppose the State experiences a major disaster that requires $3 million 
in debris removal and causes $8 million in damage to public 
infrastructure. FEMA would document the debris removal costs on Project 
Worksheets and process all of those eligible costs for reimbursement 
assistance at the applicable disaster cost share, typically 75 percent 
Federal. The State could be responsible for paying for all of the 
permanent work repairs because the $8 million in damage is less than 
the State's $10 million final deductible for that calendar year.
    If the State receives a second major disaster declaration in the 
same calendar year, the State would need to identify $2 million in 
permanent work to satisfy the deductible remaining after the first 
disaster. After the deductible is fully met, all additional eligible 
costs could be documented on Project Worksheets and processed for 
reimbursement assistance pursuant to the applicable cost share and 
standard rules and procedures of FEMA's Public Assistance program.
    Any deductible amount remaining unsatisfied due to lack of eligible 
disaster costs at the end of a year would be canceled. For example, 
consider a State with a starting deductible of $30 million. The State 
then requests and is granted credits worth $20 million. FEMA notifies 
the State on January 1 that it has a final deductible amount of $10 
million for the following calendar year. The State does not experience 
any incidents during the calendar year for which the President declares 
a major disaster. The $10 million final deductible could expire and be 
cancelled at the end of the calendar year and the State could receive a 
new final deductible amount for the next year.

J. Validation Procedures

    FEMA desires for the deductible program to recognize, reward, and 
incentivize mitigation and resilience building best practices.
    As with the rest of the SANPRM all numbers, figures, criteria and 
processes detailed in this section are notional. They are intended to 
aid the public in understanding how a potential deductible program 
could operate and to spur discussion and feedback.
    In order to ensure that the program is both effective in truly 
incentivizing risk reduction and is being continually improved, FEMA 
would seek to validate a portion of the credits that States are 
approved each year.
    FEMA believes that its analysis will ultimately show that reviewing 
a sample of credit approvals would be sufficient to ensure the fidelity 
of the approvals and ultimately, confidence in the credibility of the 
deductible program. FEMA solicits comment on this

[[Page 4085]]

assumption and the ideal portion of credit submissions that would be 
subject to validation. Whatever the case, FEMA would notify the State 
of its intent to validate credits and would specify precisely which 
credits are to be validated.
    During the validation process, FEMA would review the records and 
documentation that States maintain to support their credit requests. 
Every State would likely have different standards for documentation and 
each credit may require a different type of documentation, none of 
which FEMA plans to prescribe; however, each State would be responsible 
for maintaining and providing, upon FEMA's notice of intent to validate 
a credit, sufficient documentation to reasonably and objectively 
substantiate the credit approval. FEMA anticipates that States would 
have to maintain the relevant documentation for at least 5 years. FEMA 
requests comment from States regarding the capital and startup costs 
that may be involved in this recordkeeping requirement as well as 
suggestions for how FEMA may minimize the burden on States to keep this 
information.
    In the event that FEMA is unable to validate a credit award, either 
because the underlying State activity did not actually qualify for 
deductible credit or because the State was unable to produce sufficient 
documentation to objectively validate the credit approval, FEMA would 
notify the State of its failure to validate the credit. FEMA would 
detail the applicable requirements of the deductible credit that was 
approved and specifically why FEMA was unable to validate it.
    Once FEMA notifies the State that FEMA was unable to validate a 
credit, FEMA could permit the State 60 days to appeal the 
determination. If the State's appeal is denied, FEMA would add any 
credit approval that could not be validated to the applicable State's 
deductible amount in the next year. If FEMA was able to validate the 
credit on appeal, the credit approval would stand and FEMA would make 
no further inquiry or take any other adverse action. FEMA seeks comment 
on whether and when further action could be appropriate in the case of 
a State which has submitted consistently unverifiable credits.
    For example, consider a State that has received a credit approval 
of $3 million for a tax incentive program that allows consumers to 
purchase hurricane preparedness supplies without paying sales tax 
during the first weekend of hurricane season each year. In this case, 
this particular credit has been included within the sample of credit 
approvals selected for validation. FEMA notifies the State of its 
intent to validate the credit and requests the necessary supporting 
documentation. The State is able to produce documentation for $100,000 
of qualifying advertising costs and $1.1 million worth of foregone 
sales tax receipts. Because the credit concept offers a deductible 
credit at a ratio of $2.00:$1.00 for this credit, FEMA would be able to 
validate $2.4 million worth of credit. FEMA notifies the State of its 
failure to validate $600,000 of credit and of FEMA's intent to increase 
the State's next annual deductible by $600,000 to compensate for the 
amount of the previous credit approval that FEMA was unable to 
validate.
    In this case, the State appeals the approval and is able to produce 
documentation of an additional $600,000 in forgone tax receipts from 
the sales tax holiday. FEMA is now able to validate the entire credit 
approval and would not add any additional amount to the State's next 
deductible.

K. Possible Implementation Strategy

    FEMA will gather the suggestions and concerns that have been 
expressed through the ANPRM and SANPRM and use them to determine 
whether it can design a deductible concept that achieves FEMA's overall 
guiding principles, but does so in a way that is both appreciative of 
and responsive to the needs and concerns of its emergency management 
partners, particularly the States to which it would apply. If FEMA 
decides the deductible program has continued merit, FEMA would issue a 
Notice of Proposed Rulemaking (NPRM) before possibly issuing a final 
rule. No aspect of the deductible concept would be implemented prior to 
publishing a final rule in the Federal Register.
    Even if a final rule is published, FEMA also recognizes that 
implementing such a fundamental change would require sufficient time to 
enable all parties to thoughtfully and strategically adapt to the new 
structure in the form best befitting each.
    Consequently, FEMA would likely not apply any deductible for at 
least one year following publication of a final rule. Thereafter, 
FEMA's concept envisions a phased implementation strategy that would 
make most States responsible for only a partial deductible amount in 
the beginning of the program and delaying full application of the 
deductible requirement for most States over a scheduled implementation 
period.
    Specifically, FEMA is considering capping the first year deductible 
at each State's then-current per capita indicator as determined by FEMA 
pursuant to 44 CFR 206.48(a)(1). FEMA could then increase each State's 
deductible by a share of the unapplied deductible, which for the 
purposes of this model is 50 percent, each year thereafter until the 
State reaches the full deductible amount. FEMA could recalculate the 
full deductible amount annually based on the fiscal capacity and risk 
index methodology described above. Through this method and based on the 
model FEMA provides in this SANPRM, half of the States could reach 
their full deductible within 4 years and all of the States could reach 
their full deductible within 9 years. Two States, Illinois and 
Colorado, could potentially reach their full deductible in the first 
year because the contemplated deductible methodology produces 
deductibles below their current Public Assistance per capita 
indicators. Figure 2 depicts the application of this implementation 
strategy over the first 3 years of the deductible program. Figure 3 
depicts the number of States that are forecast to reach their full 
deductible, as calculated in this model, in each year. Table 11 depicts 
the model starting deductibles for each State in each year based on 
current calculations.
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    FEMA believes that this approach would allow States the opportunity 
to adapt to the deductible concept and to take steps that would earn 
additional credits and begin to address their future disaster risk, 
without applying deductibles at levels that would be punitive.
    Similar to the phased implementation of the deductible amounts, 
FEMA envisions a phased application of credits in lockstep to each 
State's deductible amount. This would be done by applying the credits 
earned each year in the same proportion of the State's capped 
deductible to its full deductible. For example, if a State's starting 
deductible is equal to its full deductible in a given year, FEMA would 
apply all of the credits earned in that year. However, if because of 
phased implementation the starting deductible is a lesser amount, for 
example 25 percent of the full deductible, FEMA would apply the same 
percentage as a cap to the credits earned, or in this case 25 percent.
    Table 12 depicts each State's notional starting deductible for the 
first 9 years of the deductible program. It also depicts the model 
final deductibles that FEMA expects would be applied in each year. As 
described above, these model final deductibles are the model starting 
deductibles minus the amount of credits that each State earns in that 
particular year. For the purposes of this model, FEMA has estimated the 
amount of credit that each State might earn in the first year based on 
activities that FEMA believes every State is already undertaking. These 
amounts were depicted in Table 9. To extrapolate into the out years, 
FEMA assumed that each State would increase the amount of credit earned 
by 5 percent year-over-year. FEMA then deducted that amount, in 
proportion of the starting deductible to full deductible as described 
above, to calculate the model projected final deductible amounts for 
each State in each of the first 9 years.
    These amounts are only estimates, however, and will be affected by 
many factors, including changes to the base deductible, changes to each 
State's relative risk or fiscal capacity, the amount of credit each 
State earns in the first year for activities already underway, and 
changes to those activities that result in more or less than 5 percent 
year-over-year credit increases. All shaded values are capped.

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[[Page 4092]]



VI. Alternatives Considered

    Over the course of developing this deductible model, FEMA has 
considered many alternatives, and selected the attributes that FEMA 
believes could best achieve the intended outcomes of the program, 
adhere to the program's guiding principles, and minimize administrative 
burdens. The options that FEMA has considered included alternatives to 
specific aspects of the program, such as which credits could be offered 
or the value that FEMA could approve for those credits, but also 
included alternatives to the entire deductible concept itself. FEMA 
believes that the deductible program has the potential to improve the 
nation's resilience and reduce disaster risk and costs on a broad 
scale, but FEMA welcomes comment on alternative methodologies for 
achieving these results.
    The following subsections detail a few of the alternatives and 
options that FEMA is considering in developing its potential deductible 
program concept. FEMA did not use these alternatives in the model 
described in this SANPRM, but believes that they demonstrated enough 
promise that including a brief discussion of each could facilitate 
improved engagement and transparency in this process.
    FEMA has not made a final determination regarding the most 
appropriate approach moving forward. In addition to the potential 
deductible model described in this SANPRM, FEMA is still considering 
the alternatives described below and may consider and pursue other 
alternatives that may not necessarily be a logical outgrowth of this 
SANPRM.

A. Increasing the Per Capita Indicator

    FEMA originally began consideration of the deductible concept in 
the context of repeated calls--by the GAO, DHS OIG, Congress, and 
others--to change the Public Assistance per capita indicator.\71\ 
Instead, FEMA suggests that the Public Assistance deductible program 
may be a better option for reducing the costs of future disasters 
because it incentivizes State investments in risk reduction. FEMA 
believes simply increasing the per capita indicator, to the levels 
suggested by the GAO, would likely maintain the same level of disaster 
risk that exists today and transfer the future costs of disaster to 
impacted State and local governments. FEMA seeks comment on this 
assumption.
---------------------------------------------------------------------------

    \71\ See GAO, supra note 28; OIG supra note 29; see also 44 CFR 
206.48.
---------------------------------------------------------------------------

    However, recognizing that the status quo is unsustainable in the 
long term, FEMA has seriously considered adjusting the per capita 
indicator and may still do so in the future. Increasing the per capita 
indicator, to include an additional consideration of State fiscal 
capacity, is the only viable alternative to a deductible that FEMA has 
identified at this time.
    As was explained earlier in this SANPRM, the Public Assistance per 
capita indicator was initially set in 1986 at $1.00 based upon PCPI. At 
the time, that amount represented approximately one-hundredth of one 
percent (0.01% or 0.0001) of PCPI. Had FEMA adjusted the per capita 
indicator each year so that it maintained its ratio to rising PCPI, 
more than 70 percent of major disasters between 2005 and 2014 would not 
have been declared. Additionally, the per capita indicator would have 
risen to $4.81 for 2016.\72\ For comparison, the current 2016 per 
capita indicator is just $1.41. Switching to this alternative 
methodology would result in a nearly a 250-percent increase to the 
average per capita indicator, which could be phased in over a number of 
years or decades through accelerated upward adjustment of the per 
capita indicator at rates higher than inflation.
---------------------------------------------------------------------------

    \72\ Per Capita Personal Income in 2015 was $48,112 x 0.0001 = 
$4.81.
---------------------------------------------------------------------------

    Under this alternative FEMA has explored also adjusting the PCPI-
adjusted per capita indicator value by the current TTR index for each 
State.\73\ GAO recommended adjusting the per capita indicator values by 
the current TTR index.\74\ Finally, for purposes of comparison, because 
the Public Assistance per capita indicator is applied on a disaster-by-
disaster basis and FEMA envisions an annual deductible, under this 
alternative FEMA has multiplied the PCPI-adjusted per capita indicator 
by each State's 10-year average disaster frequency to provide a more 
comparable comparison. Table 13 indicates the amount of cumulative 
damage that a State would need to experience before FEMA would 
recommend that the President issue a major disaster declaration in 2016 
if the per capita indicator were raised to $4.81 and adjusted by the 
TTR Index.
---------------------------------------------------------------------------

    \73\ Per State PCPI Adjusted Total = $4.81 Per Capita Indicator 
x (State's TTR Index/100).
    \74\ See GAO, supra FN28, at 50.

                                  Table 13--Current Per Capita Indicator Compared With National PCPI Growth Adjustments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                Data by state                                     Current per     Indicator adjusted
------------------------------------------------------------------------------ capita indicator   for national PCPI
                                                                                 2016 = $1.41    growth 2016 = $4.81
                                                                              ---------------------------------------  Annual average   Annualized PCPI-
                                                                Current TTR                         National PCPI      major disaster     Adjusted per
                  State                     2010 population        index            Current         adjusted total      declarations    capita indicator
                                                                                indicator total       (with TTR
                                                                                                     adjustment)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama..................................         4,779,736              75.9        $6,739,428          $17,449,812               1.6       $27,919,700
Alaska...................................           710,231             126.8         1,001,426            4,331,756               1.6         6,930,809
Arizona..................................         6,392,017              70.7         9,012,744           21,737,140               0.9        19,563,426
Arkansas.................................         2,915,918              75.9         4,111,444           10,645,404               1.9        20,226,268
California...............................        37,253,956             104.9        52,528,078          187,971,913               1.5       281,957,870
Colorado.................................         5,029,196             107.9         7,091,166           26,101,477               0.7        18,271,034
Connecticut..............................         3,574,097             138.2         5,039,477           23,758,524               1.2        28,510,229
Delaware.................................           897,934             115.3         1,266,087            4,979,879               0.6         2,987,927
Florida..................................        18,801,310              82.2        26,509,847           74,336,996               1.6       118,939,193
Georgia..................................         9,687,653              90.7        13,659,591           42,264,033               0.8        33,811,226
Hawaii...................................         1,360,301              84.8         1,918,024            5,548,505               0.9         4,993,654
Idaho....................................         1,567,582              70.9         2,210,291            5,345,909               0.6         3,207,546
Illinois.................................        12,830,632             107.1        18,091,191           66,097,129               1.5        99,145,694
Indiana..................................         6,483,802              90.7         9,142,161           28,286,688               1.2        33,944,026
Iowa.....................................         3,046,355              98.8         4,295,361           14,477,132               2.3        33,297,403
Kansas...................................         2,853,118              93.3         4,022,896           12,804,023               2.3        29,449,253

[[Page 4093]]

 
Kentucky.................................         4,339,367              78.6         6,118,507           16,405,671               1.5        24,608,507
Louisiana................................         4,533,372              97.6         6,392,055           21,282,187               1.2        25,538,624
Maine....................................         1,328,361              77.6         1,872,989            4,958,187                 2         9,916,374
Maryland.................................         5,773,552             120.3         8,140,708           33,408,254                 1        33,408,254
Massachusetts............................         6,547,629             133.3         9,232,157           41,981,629               1.7        71,368,770
Michigan.................................         9,883,640              85.3        13,935,932           40,551,883               0.4        16,220,753
Minnesota................................         5,303,925             110.7         7,478,534           28,241,650               1.8        50,834,971
Mississippi..............................         2,967,297              68.1         4,183,889            9,719,708               1.4        13,607,591
Missouri.................................         5,988,927              89.6         8,444,387           25,810,838               2.4        61,946,011
Montana..................................           989,415              75.8         1,395,075            3,607,387               0.8         2,885,910
Nebraska.................................         1,826,341             105.5         2,575,141            9,267,859               2.3        21,316,075
Nevada...................................         2,700,551              82.3         3,807,777           10,690,482               0.7         7,483,338
New Hampshire............................         1,316,470             106.9         1,856,223            6,769,144               2.2        14,892,117
New Jersey...............................         8,791,894               129        12,396,571           54,552,823               1.4        76,373,952
New Mexico...............................         2,059,179              75.8         2,903,442            7,507,725               1.3         9,760,043
New York.................................        19,378,102             133.7        27,323,124          124,619,993               2.5       311,549,982
North Carolina...........................         9,535,483              86.7        13,445,031           39,765,539               1.2        47,718,646
North Dakota.............................           672,591             122.2           948,353            3,953,369                 2         7,906,738
Ohio.....................................        11,536,504              92.3        16,266,471           51,217,809                 1        51,217,809
Oklahoma.................................         3,751,351              85.3         5,289,405           15,391,531                 3        46,174,592
Oregon...................................         3,831,074              95.2         5,401,814           17,542,948                 1        17,542,948
Pennsylvania.............................        12,702,379              98.1        17,910,354           59,937,573               1.1        65,931,330
Rhode Island.............................         1,052,567             102.3         1,484,119            5,179,293               0.7         3,625,505
South Carolina...........................         4,625,364              73.2         6,521,763           16,285,537               0.3         4,885,661
South Dakota.............................           814,180              97.9         1,147,994            3,833,965               2.2         8,434,724
Tennessee................................         6,346,105              82.5         8,948,008           25,182,931               1.6        40,292,690
Texas....................................        25,145,561             106.7        35,455,241          129,053,808               1.7       219,391,474
Utah.....................................         2,763,885              83.4         3,897,078           11,087,435               0.7         7,761,205
Vermont..................................           625,741              87.1           882,295            2,621,548               1.6         4,194,477
Virginia.................................         8,001,024             114.6        11,281,444           44,103,725               1.2        52,924,469
Washington...............................         6,724,540             105.6         9,481,601           34,156,359               1.2        40,987,631
West Virginia............................         1,852,994              73.4         2,612,722            6,542,069               1.6        10,467,311
Wisconsin................................         5,686,986              95.1         8,018,650           26,014,037               0.9        23,412,633
Wyoming..................................           563,626             128.9           794,713            3,494,532               0.2           698,906
--------------------------------------------------------------------------------------------------------------------------------------------------------

    FEMA believes that the deductible concept has the potential to 
result in a better outcome for the nation than increasing the per 
capita indicator as it promotes State investment in risk reduction that 
will ultimately reduce the financial impact of future disasters.
    Compared with the alternative option of linking the Public 
Assistance per capita indicator to PCPI, the deductible model could 
deliver financial advantages to the States. These financial advantages 
could be even greater in the preliminary years over which the full 
deductible amount is phased in. Table 14 indicates the differences that 
FEMA expects might occur with each option.

 Table 14--Estimated Costs of the Notional Deductible Program Versus Adjusting the Per Capita Indicator for PCPI
----------------------------------------------------------------------------------------------------------------
                                                  Full estimated
                                                      credits                     National PCPI-    Annualized
        All amounts in $M          Full starting     (current          Final      Adjusted total   PCPI-Adjusted
                                    deductible      activities      deductible       (with TTR      per capita
                                                       only)                        adjustment)      indicator
----------------------------------------------------------------------------------------------------------------
Average State...................          $22.20           $9.74          $12.46          $29.37          $43.00
Median State....................           12.26            4.43            7.61           17.35           23.81
Minimum State...................            6.23            1.17            1.58            2.59       0.69 \75\
Maximum State...................          141.53          120.55           64.46          186.40          308.95
----------------------------------------------------------------------------------------------------------------

    FEMA recognizes that increasing the Public Assistance per capita 
indictor will likely lower the amount the Federal government spends on 
disasters. It is also simple to communicate and uses processes that 
everyone is already familiar with. However, FEMA currently believes the 
decrease in spending that the Federal government may see with the GAO's 
suggested indicators would not result because future incidents are any 
less devastating, but rather because the responsibility for that damage 
would be transferred to State and local jurisdictions. It is true that 
there is likely a level at which a high enough per capita indicator 
would transfer enough risk to the States that they would be forced to 
internalize sufficient disaster costs that may incentivize them to 
increase mitigation. We do not

[[Page 4094]]

believe that level of per capita indicator is viable at this time. 
Moreover, we believe that a deductible concept, which creates 
incentives for States both through a transfer of risk and through 
rewards provided by a credit system, will be more effective in driving 
risk reduction and will lower all disaster spending over time. FEMA 
will undertake more analysis over the course of this rulemaking and 
will make the ultimate decision based on the outcomes of this analysis, 
and not on the beliefs expressed in this section. Any direction 
commenters could provide to support that analysis would be appreciated.
---------------------------------------------------------------------------

    \75\ Although the application of the annualization calculation 
suggests a per capita indicator below $1 million due to low major 
disaster frequency in some States, 44 CFR 206.48(a)(1) would still 
set the minimum per capita indicator at $1 million. See supra FN23.
---------------------------------------------------------------------------

B. Alternative Deductible Approaches

    In developing this potential deductible concept, FEMA is 
considering many variations, including simpler ways to calculate the 
deductible amount, additional fiscal capacity indicators, alternative 
methodologies to determine relative risk among the States, altering the 
threshold, and additional possible activities that could be 
incentivized through the credit structure.
1. Calculation Alternatives
    There are many different methods by which FEMA could determine a 
State's deductible amount, and FEMA has considered the advantages and 
disadvantages of many options as it developed the potential deductible 
program. One of the simplest approaches would be to tie each State's 
Public Assistance deductible amount to its current per capita Public 
Assistance indicator in some way. Many commenters to the ANPRM remarked 
that they appreciated the simplicity, understandability, stability, and 
predictability of the current per capita indicator.
    While FEMA appreciates these values, the deductible concept, to be 
successful, must incentivize greater State resilience to future 
disasters. It is important, therefore, that the deductible amounts 
truly represent the States' individual characteristics that are 
relevant in the disaster context. Overall, FEMA believes that assessing 
fiscal capacity and relative risk is a better strategy for calculating 
deductibles than utilizing the current per capita indicator that lacks 
relevance to either of those gauges.
2. Fiscal Capacity Index
    FEMA considered two additional financial indicators before 
selecting the four contained in the fiscal capacity index included in 
this model. Those additional indicators included Total Actual Revenue 
(TAR),\76\ which FEMA defined as the amount of revenue a particular 
State actually raises in a typical year, and State Gross Domestic 
Product (GDP),\77\ which FEMA defined as the total value of the goods 
and services produced within the State in a particular year. Upon 
closer inspection, however, FEMA found that both of these indicators 
were closely correlated to TTR by factors of 0.981 and 0.998 
respectively.
---------------------------------------------------------------------------

    \76\ The United States Census Bureau produces an annual State 
Government Finances report that details the amount and sources of 
actual revenue captured by each State. Additional information can be 
found at: https://www.census.gov/govs/state/.
    \77\ The Bureau of Economic Analysis produces annual estimates 
of each State's Gross Domestic Product. These estimates are 
available at: http://www.bea.gov/iTable/iTable.cfm?reqid= 
70&step=1&isuri= 1&acrdn=2#reqid= 70&step=1&isuri=1.
---------------------------------------------------------------------------

    FEMA believes that TTR, with its broad consideration of potential 
State revenue resources, was the best of these three indicators. FEMA 
also appreciated that TTR, as a measure of potential, does not suffer 
from complications of political choice in TAR or GDP that result from 
differences between States in State tax obligations and the services 
for which tax dollars are allocated. Since all three measures were so 
highly correlated, FEMA selected to include TTR as the preferred metric 
from this group. The other three fiscal capacity indicators used in the 
model were less correlated with one another and, consequently, 
represent a unique measure of State fiscal capacity that FEMA believes 
should be considered to inform that portion of the deductible 
calculation.
3. Risk Index
    The model methodology for establishing the risk index utilizes AAL 
values produced from Hazus to evaluate each State's relative risk 
level. One feature of the AAL approach is that AAL reflects the total 
amount of the loss caused by the hazard. This includes losses by 
individuals, businesses, economic drivers, and insured losses. However, 
because of limitations in the types of assistance that FEMA provides 
through the Public Assistance program, there is inherent variability 
between Hazus-based AAL estimates of overall disaster losses and any 
impact that reducing these broader disaster losses would have on Public 
Assistance costs.
    FEMA is willing to accept this attribute, however, because the 
intent of the deductible program is to reduce risk and build resilience 
to disasters overall. FEMA considers the non-Public Assistance cost 
reductions that would occur as a result of a deductible program to be 
ancillary benefits of the program. This is no less true if the indirect 
Public Assistance reduction benefits are just a fraction of the overall 
deductible improvements through reduced AALs. FEMA seeks comment on 
this approach.
    One shortcoming of the AAL methodology, at least at present, is 
that Hazus does not currently produce loss estimates of any kind for 
severe storms or tornadoes. Overall, these types of incidents account 
for the most frequently declared major disasters and count for 
approximately 20 percent of Public Assistance obligations between 2005 
and 2014. However, looking below the surface of the classification, 
FEMA has found that a significant amount of the damage that occurs in a 
major disaster declared for severe storms is actually caused by 
flooding. Consequently, just a small percentage of major disasters are 
actually issued for damage from storms that do not include some 
flooding. These would include damage resulting from wind (tornado, 
derecho, microburst, etc.), hail, or winter storms.
    Nevertheless, it is likely that the AAL-based approach to 
calculating the risk index will somewhat undervalue the risk to locals 
that are particularly prone to these types of incidents, such as the 
Midwest for tornadoes and the Northeast for snow and ice storms. FEMA 
plans to continue seeking ways to improve the Hazus model and expand 
the modeling capabilities through AAL estimates, but it also 
acknowledges this particular limitation of the current approach. FEMA 
is soliciting comment on ways to potentially overcome these limitations 
in the Hazus model.
    FEMA also considered a completely different approach to assessing a 
State's relative risk that looks specifically at the likelihood that a 
State will require Public Assistance and the amount of assistance that 
will likely be needed. FEMA engaged CREATE to assist in the statistical 
and economic aspects of designing the deductible concept. CREATE 
produced an alternative approach for modeling risk using historical 
Public Assistance obligations to estimate States' risk. Essentially, 
CREATE has developed a methodology for modeling the likely amounts of 
Public Assistance that every State will require by leveraging 
historical Public Assistance levels to forecast potential future need.
    Specifically, the CREATE model utilizes Public Assistance data from 
1999 to 2015 (the broadest range for which reliable data is available). 
CREATE's model assumes that both the magnitude and frequency of 
disasters are random variables while

[[Page 4095]]

simultaneously taking a State's characteristics into account, such as 
the amount of infrastructure. CREATE then developed statistical models, 
adjusting the modeling parameters so that the outputs best matched the 
frequency and magnitude of historical Public Assistance outlays. CREATE 
was then able to use those models to look forward and determine the 
likely frequency and amounts of Public Assistance that each State would 
require in the future, converting those amounts to an index of relative 
risk.
    CREATE's approach advanced FEMA's ability to forecast Public 
Assistance requirements. However, FEMA is considering using the Hazus-
based AAL methodology for establishing each State's score on the risk 
index instead for a number of reasons.
    First, FEMA was concerned with the small quantity of data that it 
was able to offer to CREATE and upon which CREATE relied to build its 
model. FEMA could only provide reliable data for 17 years' worth of 
Public Assistance. FEMA was concerned that this dataset was of 
insufficient length to form the basis for establishing long-term 
forecast trends for the Public Assistance program. Some types of 
disasters, in some areas occur on 100-year, 500-year, 1,000-year, or 
even longer cycles. It is likely that FEMA's 17-year dataset is 
insufficient to capture these types of events. This is particularly 
true of rare but devastating hazards, such as major earthquakes. 
Conversely, States that have happened to experience a major disaster in 
the past 17 years may have their relative risk overstated by this 
dataset compared to what may be expected from a longer-term trend.
    Likewise, it is also likely that the Public Assistance dataset will 
include incidents that are unlikely to occur again in the near future 
and that may be skewing the data. The costs associated with Hurricane 
Katrina is an example of this possibility. While the chances of the 
Gulf Coast being struck by a moderate to major hurricane in the coming 
years are reasonable, the likelihood that it will cause the level of 
destruction as Hurricane Katrina is much lower. This is because a 
significant portion of the costs from Katrina stemmed from the flooding 
that resulted from failure of the water management and levee systems in 
New Orleans, Louisiana. Following extensive improvements to those 
systems over the past decade, a hurricane of similar intensity to 
Katrina might not cause the same level of damage to public facilities 
and infrastructure today.
    FEMA was also concerned that because the CREATE approach is novel, 
it might not engender the same level of public confidence as the AAL-
based methodology. AAL estimates are used by many organizations within 
the risk management and insurance industries and are generally accepted 
and defensible approaches to modeling future hazard costs. 
Additionally, FEMA expects that many within the emergency management 
community will be familiar with Hazus and the capabilities of that 
platform. Hazus data is openly available and FEMA values the 
transparency and reproducibility that use of the existing Hazus 
platform offers to the deductible methodology.
    Finally, FEMA believes that utilizing Hazus-based AALs will offer 
benefits to other programs as well by creating a significant use of the 
Hazus platform. FEMA will enjoy an efficiency by leveraging an existing 
platform instead of designing and constructing a new one. Additionally, 
because the deductible program has the potential to become a major 
consumer of Hazus outputs, it increases the value of the Hazus platform 
to FEMA and to the nation. This likely would lead to future updates and 
improvements to Hazus capabilities that would benefit not only the 
deductible program, but also all other users of Hazus products. 
However, FEMA certainly welcomes comment on the use of Hazus data, and 
AALs generally, and their application to formulating a risk-informed 
deductible calculation.
    In deciding between the Hazus-based AAL approach and the CREATE 
historical Public Assistance approach, FEMA decided that the former was 
the better option to incorporate as the risk index into the broader 
potential deductible formula. FEMA believes that the advantages of 
using the Hazus-based AAL approach described above outweigh the 
disadvantages of slightly lessening the risk assessment portion of the 
deductible methodology's strict nexus to the Public Assistance program. 
In other words, FEMA believes that taking a more expansive view of risk 
through use of Hazus-based AALs, which include costs not typically 
associated with the Public Assistance program, is acceptable given the 
intent of the deductible concept is to reduce risk nationally.
4. Additional Credits
    FEMA carefully considered the credits included in the model 
described in this SANPRM. FEMA attempted to offer a menu of credits 
that cover a range of activities and that would support a diversified 
approach to risk reduction and improved preparedness. FEMA intended 
each model credit to independently contribute to those outcomes, but 
also to work within the broader system to create a cohesive structure 
of achievable progress for all States.
    When developing the model credit offerings, FEMA considered other 
credits as well. These credits were not ultimately selected for the 
model for a variety of reasons. In some cases, the credit was too 
complicated or could create an unreasonable burden upon the State or 
FEMA to administer. In other cases, the ability of the credit to 
actually reduce risk or improve resilience was dubious. Ultimately, 
FEMA believes it included in the model the best mix of credits 
available from what it considered.
    One credit in particular that FEMA considered at length would have 
been tied to FEMA's Community Rating System (CRS). Many of the comments 
that FEMA received from stakeholders when it published the ANPRM 
suggested that FEMA should offer deductible credit for CRS 
participation. CRS is a program administered by FEMA's National Flood 
Insurance Program (NFIP). The NFIP provides federally-backed flood 
insurance within communities that enact and enforce floodplain 
regulations. FEMA recognizes that CRS is an important program that 
incentivizes important floodplain management activities, many of which 
mirror or support activities that FEMA is looking to incentivize 
through deductible credits, and that inclusion as a separate credit 
could further incentivize those activities. At this point, however, as 
discussed below, FEMA does not believe that inclusion of CRS as a 
credit is appropriate at this time.
    A structure must be located within an NFIP community to be eligible 
for federally-backed NFIP coverage. NFIP communities may also elect to 
participate in the CRS program to receive a percentile reduction to the 
premiums for every NFIP policy within the community. As of October 
2015, 1,368 of the 21,600 NFIP communities have chosen to participate 
in the CRS program. This provides discounted flood insurance premiums 
to nearly 3.8 million policyholders.
    The CRS classifies each participating community on a scale from 10 
to 1 based on multiple scoring criteria relating to floodplain 
management, investments, and enforcement. Each CRS class receives a 
corresponding percentile reduction to the premiums of all of the NFIP 
flood insurance policies covering property within those communities. 
The lower the community's CRS class, the larger the

[[Page 4096]]

percentile premium reduction will be. For example, a CRS class 7 
community would receive a 15 percent premium reduction on all policies 
covering property within the community's Special Flood Hazard Area, 
whereas a CRS class 1 community would receive a 45 percent reduction.
    As of October 2015, more than 50 percent of CRS communities were 
assigned to either class 8 or 9. Less than 1 percent of CRS communities 
have reached beyond class 5. Figure 4 depicts the number of communities 
in each CRS class (as of October 2015).
[GRAPHIC] [TIFF OMITTED] TP12JA17.032

    FEMA examined multiple ways by which it could potentially include 
such a credit in the deductible model. The major problem with creating 
a deductible credit in this instance is that the CRS program is 
administered exclusively at the community level, and FEMA has never 
produced statewide CRS scores. FEMA would need to be able to translate 
participating community classes into statewide scores for purposes of 
the deductible. In considering the credit, FEMA developed a basic 
framework for how this process might work.
    FEMA has considered calculating statewide CRS scores by utilizing 
population-weighted averages of the participating communities' CRS 
classes compared to the statewide population. FEMA would multiply the 
population of each CRS community by its assigned CRS class. FEMA would 
then add all of those values together and divide by the population of 
the State. The resulting number would then be subtracted from 9, the 
lowest class for which credit would be offered, to derive the statewide 
CRS score.
    Consider for example the State of Iowa. As of October 2015, Iowa 
had seven CRS communities. Those communities are as follows:

                               Table 15--Example Statewide CRS Credit Score--Iowa
----------------------------------------------------------------------------------------------------------------
                                                                                                    Pop. x CRS
                          CRS community                             Population       CRS class         class
----------------------------------------------------------------------------------------------------------------
City of Cedar Falls.............................................          39,260               5         196,300
City of Cedar Rapids............................................         126,326               6         757,956
City of Coralville..............................................          18,907               7         132,349
City of Davenport...............................................          99,685               8         797,480
City of Des Moines..............................................         203,433               7       1,424,031
City of Iowa City...............................................          67,862               7         475,034
Linn County \78\................................................          84,900               8         679,200
                                                                 -----------------------------------------------

[[Page 4097]]

 
    Sum.........................................................  ..............  ..............       4,462,350
                                                                 -----------------------------------------------
        State of Iowa...........................................       3,046,355             7.5  ..............
----------------------------------------------------------------------------------------------------------------

    FEMA has also considered multiplying the population of each 
community by the community's CRS class. For example, the City of Cedar 
Falls would contribute 196,300 to the calculation (population of 39,260 
multiplied by CRS Class 5). FEMA would then add up all of those values 
from each CRS community. In this case, that would equal 4,462,350. This 
total would then be divided by the population of the entire State 
(4,462,350/3,046,355 = 1.5). The result is then subtracted from 9 to 
yield the statewide CRS score for purposes of the deductible. In this 
case, Iowa's CRS score would be 7.5 (9.00 - 1.5 = 7.5). This value 
could then be recognized with some level of credit based upon a 
standardized conversion schedule. At this time, FEMA has not developed 
a potential deductible credit schedule for the CRS.
---------------------------------------------------------------------------

    \78\ The population of Linn County included in this example 
excludes the population of the City of Cedar Rapids because it is 
accounted for separately as an independent CRS community.
---------------------------------------------------------------------------

    Ultimately, FEMA decided not to include a model CRS deductible 
credit in this SANPRM for three reasons. First, FEMA believes that the 
flood insurance premium reductions should sufficiently incentivize NFIP 
communities to participate or better their standing within the CRS 
program. Second, FEMA would need to develop a new methodology for 
creating statewide CRS classes. This would be a novel undertaking for 
FEMA and the agency seeks comment from its State partners and the 
public regarding this endeavor. Furthermore, creating such a 
methodology is complicated because CRS communities are not necessarily 
the same as census-based communities, meaning that population numbers 
will need to be validated on a community-by-community basis for the 
calculation. Finally, even if FEMA does create a methodology for 
statewide CRS scores, FEMA is concerned that doing so would be 
confusing to stakeholders because FEMA would not be offering any NFIP 
insurance premium discounts for those scores. In other words, if a 
statewide score is better than a particular NFIP community's CRS class, 
there may be an expectation that FEMA would use the statewide score in 
place of the community's CRS Class. In fact, FEMA would not be willing 
to use the statewide score in lieu of the community score for purposes 
of granting NFIP premium discounts and FEMA believes that the creation 
of statewide CRS scores solely for the purposes of the deductible 
program would be confusing, and ultimately disappointing, to some CRS 
communities and NFIP policyholders.

VII. Legal Authority

    FEMA administers the Public Assistance program pursuant to the 
President's statutory authority conferred in Section 406 of the 
Stafford Act to ``make contributions--(A) to a State or local 
government for the repair, restoration, reconstruction, or replacement 
of a public facility damaged or destroyed by a major disaster and for 
associated expenses incurred by the government.'' \79\ These 
contributions are limited to ``. . . not less than 75 percent of the 
eligible costs of repair, restoration, reconstruction, or replacement 
carried out under this section''--known as the Federal share.\80\ The 
President has delegated this authority to the Administrator of FEMA to 
authorize the Public Assistance program, inter alia.\81\
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    \79\ 42 U.S.C. 5172(a)(1)(A).
    \80\ 42 U.S.C. 5172(b)(1).
    \81\ Executive Order 12148, 44 FR 43239 (July 24, 1979).
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    ``Eligible'' is a term of qualification indicating that not all 
resultant costs are automatically reimbursable. Because the Stafford 
Act does not define ``eligible costs'' within the text of the law 
itself, it is within FEMA's discretion to define the term for purposes 
of its programs authorized pursuant to that provision. FEMA has, 
through regulation and policy, leveraged its discretion to determine 
which disaster costs are ``eligible.'' For purposes of the deductible 
program, FEMA is considering revising its regulations and policies to 
reflect a determination that disaster costs that cumulatively fall 
below the amount of the State's annual deductible, as adjusted by its 
earned credits, are not ``eligible costs'' as defined by the Stafford 
Act.

VIII. Conclusion

    The concept for a deductible program responds to calls for FEMA to 
address the increasing frequency of disaster declarations, particularly 
smaller events that should be within the capacity of State and local 
governments, and to decrease Federal disaster costs. While increasing 
the per capita indicator is one way to accomplish this, solely through 
the transfer of costs from the Federal government to State and local 
jurisdictions, FEMA believes that doing so would miss a valuable 
opportunity to increase the nation's overall disaster resilience, 
thereby reducing costs for all stakeholders.
    While FEMA seeks comment on all aspects of the deductible concept, 
in particular FEMA seeks detailed comment and supporting data on the 
methodology for calculating each State's deductible amount, including 
how FEMA should consider each State's individual risk and fiscal 
capacity; and on whether FEMA's estimates of projected credits for each 
State are accurate. Detailed stakeholder comment and supporting data 
are crucial to FEMA's development of a fair and transparent means to 
calculate deductible amounts and creation of an effective and efficient 
deductible program.

    Dated: January 6, 2017.
W. Craig Fugate,
Administrator, Federal Emergency Management Agency.
[FR Doc. 2017-00467 Filed 1-11-17; 8:45 am]
 BILLING CODE 9111-23-P