Gulf Coast Rebuilding: Observations on Federal Financial	 
Implications (02-AUG-07, GAO-07-1079T). 			 
                                                                 
The devastation caused by the Gulf Coast hurricanes presents the 
nation with unprecedented challenges as well as opportunities to 
reexamine shared responsibility among all levels of government.  
All levels of government, together with the private and nonprofit
sectors, will need to play a critical role in the process of	 
choosing what, where, and how to rebuild. Agreeing on what the	 
costs are, what federal funds have been provided, and who will	 
bear the costs will be key to the overall rebuilding effort. This
testimony (1) places federal assistance provided to date in the  
context of damage estimates for the Gulf Coast, and (2) discusses
key federal programs that provide rebuilding assistance to the	 
Gulf Coast states. In doing so, GAO highlights aspects of	 
rebuilding likely to place continued demands on federal 	 
resources. GAO visited the Gulf Coast region, reviewed state and 
local documents, and interviewed federal, state, and local	 
officials. GAO's ongoing work on these issues focuses on the use 
of federal rebuilding funds and administration of federal	 
programs in the Gulf Coast region.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1079T					        
    ACCNO:   A73849						        
  TITLE:     Gulf Coast Rebuilding: Observations on Federal Financial 
Implications							 
     DATE:   08/02/2007 
  SUBJECT:   Cost analysis					 
	     Disaster relief aid				 
	     Federal aid for housing				 
	     Federal aid to localities				 
	     Federal aid to states				 
	     Federal funds					 
	     Financial analysis 				 
	     Flood insurance					 
	     Grants to states					 
	     Housing programs					 
	     Hurricane Katrina					 
	     Hurricanes 					 
	     Losses						 
	     Public assistance programs 			 
	     Program implementation				 
	     FEMA Public Assistance Program			 
	     Gulf Coast 					 
	     HUD Community Development Block Grant		 
	     Program						 
                                                                 
	     Louisiana						 
	     Mississippi					 
	     National Flood Insurance Program			 

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GAO-07-1079T

   

     * [1]Estimates Raise Questions Regarding Long-term Funding
     * [2]Demand for Federal Rebuilding Resources Likely to Continue

          * [3]Public Assistance Program Faces Increased Costs
          * [4]Additional Resource Demands Anticipated for CDBG Program

               * [5]Louisiana's Homeowner Assistance Program Anticipates
                 Shortfa
               * [6]Mississippi's Homeowner Assistance Program Proceeding in
                 Two

          * [7]Substantial Losses Affect National Flood Insurance Program A
          * [8]Billions Appropriated for Gulf Coast Hurricane Protection Pr
          * [9]Restoring Louisiana's Wetlands and Barrier Islands Will Like
          * [10]GO Zone Tax Incentives Provide Assistance for Recovery

     * [11]Observations
     * [12]GAO Contact and Staff Acknowledgments
     * [13]GAO's Mission
     * [14]Obtaining Copies of GAO Reports and Testimony

          * [15]Order by Mail or Phone

     * [16]To Report Fraud, Waste, and Abuse in Federal Programs
     * [17]Congressional Relations
     * [18]Public Affairs

Testimony

Before the Committee on the Budget, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, August 2, 2007

GULF COAST REBUILDING

Observations on Federal Financial Implications

Statement of Stanley J. Czerwinski, Director
Strategic Issues

GAO-07-1079T

Mr. Chairman and Members of the Committee:

I appreciate the opportunity to participate in today's hearing to discuss
our preliminary observations on the federal financial implications of Gulf
Coast rebuilding issues.^1 The Gulf Coast and the nation continue to face
daunting rebuilding costs, uncertainty surrounding numerous decisions
linked to the availability of federal funds, and the complexity of
integrating multiple public and private decisions that will influence the
future of the region. The size and scope of the devastation caused by the
Gulf Coast hurricanes^2 presents the nation with unprecedented rebuilding
challenges as well as opportunities to reexamine shared responsibility
among all levels of government. Wide swaths of housing, infrastructure,
and businesses were destroyed, leaving more than 1,500 people dead and
hundreds of thousands of others displaced without shelter and employment.
Our ongoing work in Mississippi, southern Louisiana, and New Orleans
confirms that some communities still lack fulfillment of basic needs, such
as schools, hospitals, and other infrastructure, while the doors of many
businesses remain closed. Almost 2 years since the hurricanes made
landfall, many Gulf Coast neighborhoods and communities still need to be
rebuilt--some from the ground up.

Major decisions still need to be made regarding infrastructure, housing,
levee protection, coastal restoration, and economic recovery, among other
issues. All levels of government, together with the private and nonprofit
sectors, will need to play a critical role in the process of choosing
what, where, and how to rebuild. Agreeing on what the costs are, what
rebuilding should be done and by whom, and who will bear the costs will be
key to the overall rebuilding effort.

My testimony today will offer some preliminary observations on the federal
financial implications of rebuilding efforts in the Gulf Coast. These
observations may assist you in your oversight of these activities--now and
over the longer term. I would like to: (1) place the federal assistance
provided to date in the context of varied damage estimates for the Gulf
Coast; and (2) discuss the key federal programs that provide rebuilding
assistance, with an emphasis on Public Assistance (PA) and Community
Development Block Grants (CDBG). In doing so, we will highlight aspects of
Gulf Coast rebuilding likely to place continued demands on federal
resources.

^1This testimony updates and expands on GAO, Gulf Coast Rebuilding:
Preliminary Observations on Progress to Date and Challenges for the
Future, [19]GAO-07-574T (Washington, D.C.: Apr. 12, 2007); and GAO,
Preliminary Information on Rebuilding Efforts in the Gulf Coast,
[20]GAO-07-809R (Washington, D.C.: June 29, 2007).

^2In this testimony, unless otherwise noted, we refer to Hurricanes
Katrina, Rita, and Wilma collectively as the Gulf Coast hurricanes.

My statement is based largely on our completed and ongoing work in
Washington, D.C., as well as Louisiana and Mississippi--the two states
most directly affected by the Gulf Coast hurricanes. Specifically, we
analyzed state and local documentation related to funding for rebuilding
and interviewed state and local officials as well as representatives from
nongovernmental organizations in these two states. We also interviewed
various federal officials from the Federal Emergency Management Agency
(FEMA), the Department of Housing and Urban Development (HUD), and the
Coordinator of Federal Support for the Recovery and Rebuilding of the Gulf
Coast Region^3 within the Department of Homeland Security (DHS) and
analyzed federal regulations and state policies regarding funding for the
Gulf Coast. We performed our work in accordance with generally accepted
government auditing standards.

Estimates Raise Questions Regarding Long-term Funding

The total long-term funding for helping the Gulf Coast recover from the
2005 hurricanes hinges on numerous factors including policy choices made
at all levels of government, knowledge of spending across the federal
government, and the multiple decisions required to transform the region.
To understand the long-term federal financial implications of Gulf Coast
rebuilding it is helpful to view potential federal assistance within the
context of overall estimates of the damages incurred by the region.
Although there are no definitive or authoritative estimates of the amount
of federal funds that could be invested to rebuild the Gulf Coast, various
estimates of aspects of rebuilding offer a sense of the long-term
financial implications. For example, early damage estimates from the
Congressional Budget Office (CBO) put capital losses from Hurricanes
Katrina and Rita at a range of $70 billion to $130 billion^4 while another
estimate put losses solely from Hurricane Katrina--including capital
losses--at more than $150 billion.^5 Further, the state of Louisiana has
estimated that the economic effect on its state alone could reach $200
billion. The exact costs of damages from the Gulf Coast hurricanes may
never be known, but will likely far surpass those from the three other
costliest disasters in recent history--Hurricane Andrew in 1992, the 1994
Northridge earthquake, and the September 2001 terrorist attacks.^6 These
estimates raise important questions regarding how much additional
assistance may be needed to continue to help the Gulf Coast rebuild, and
who should be responsible for providing the related resources.

^3Throughout this report and unless otherwise noted, we refer to this
official as the Federal Coordinator for Gulf Coast Rebuilding.

^4According to CBO, capital losses include housing, consumer durable
goods, energy, other private-sector, and government losses.

To respond to the Gulf Coast devastation, the federal government has
already committed a historically high level of resources--more than $116
billion--through an array of grants, loan subsidies, and tax relief and
incentives. The bulk of this assistance was provided between September
2005 and May 2007 through five emergency supplemental appropriations.^7 A
substantial portion of this assistance was directed to emergency
assistance and meeting short-term needs arising from the hurricanes, such
as relocation assistance, emergency housing, immediate levee repair, and
debris removal efforts. The Brookings Institution has estimated that
approximately $35 billion of the federal resources provided supports
longer-term rebuilding efforts.^8

^5This estimate includes damages only to commercial structures and
equipment, residential structures and contents, electrical utilities,
highways, sewer systems, and commercial revenue losses. For more
information see, Mark L. Burton and Michael J. Hicks, Hurricane Katrina:
Preliminary Estimates of Commercial and Public Sector Damages (Huntington,
W.Va.: Marshall University, September 2005).

^6According to CBO, losses from Hurricane Andrew--a Category 5 hurricane
that struck the coast of Florida in 1992--totaled about $38.5 billion in
2005 dollars. The earthquake that struck Northridge, California in 1994,
which measured 6.7 on the Richter scale--resulted in $48.7 billion in
losses, as measured in 2005 dollars. Further, losses from the terrorist
attacks on September 11, 2001, were estimated at $87 billion in 2005
dollars, of which $35.2 billion were privately insured losses.

^7Pub. L. No. 109-61, 119 Stat. 1988 (Sept. 2, 2005); Pub. L. No. 109-62,
119 Stat, 1990 (Sept. 8, 2005); Pub. L. No. 109-148, 119 Stat. 2680 (Dec.
30, 2005); Pub. L. No. 109-234, 120 Stat. 418 (June 15, 2006); and Pub. L.
No. 110-28, 121 Stat. 169 (May 25, 2007). In addition to these five
supplemental appropriations acts, a number of authorizations and programs
in multiple federal agencies provided assistance. Congress also increased
the borrowing authority of the National Flood Insurance Program to cover
the large number of hurricane-related claims. Pub. L. No. 109-65, 119
Stat. 1998 (Sept. 20, 2005); Pub. L. No. 109-106, 119 Stat. 2288 (Nov. 21,
2005); and Pub. L. No. 109-208, 120 Stat. 317 (Mar. 23, 2006). In
addition, Congress passed the Gulf Opportunity Zone Act to provide tax
relief benefits and incentives to affected individuals and businesses.
Pub. L. No. 109-135, 119 Stat. 2577 (Dec. 21, 2005).

The federal funding I have mentioned presents an informative, but likely
incomplete picture of the federal government's total financial investments
to date. Tracking total funds provided for federal Gulf Coast rebuilding
efforts requires knowledge of a host of programs administered by multiple
federal agencies. We previously reported that the federal government does
not have a governmentwide framework or mechanism in place to collect and
consolidate information from the individual federal agencies that received
appropriations in emergency supplementals for hurricane relief and
recovery efforts or to report on this information.^9 It is important to
provide transparency by collecting and publishing this information so that
hurricane victims, affected states, and American taxpayers know how these
funds are being spent. Until such a system is in place across the federal
government, a complete picture of federal funding streams and their
integration across agencies will remain lacking.

Demand for Federal Rebuilding Resources Likely to Continue

Demands for additional federal resources to rebuild the Gulf Coast are
likely to continue, despite the substantial federal funding provided to
date. The bulk of federal rebuilding assistance provided to the Gulf Coast
states funds two key programs--FEMA's Public Assistance (PA) program and
HUD's Community Development Block Grant (CDBG) program. These two programs
follow different funding models. PA provides funding for restoration of
the region's infrastructure on a project-by-project basis involving an
assessment of specific proposals to determine eligibility. In contrast,
CDBG affords broad discretion and flexibility to states and localities for
restoration of the region's livable housing. In addition to funding PA and
CDBG, the federal government's recovery and rebuilding assistance also
includes payouts from the National Flood Insurance Program (NFIP) as well
as funds for levee restoration and repair, coastal wetlands and barrier
islands restoration, and benefits provided through Gulf Opportunity Zone
(GO Zone) tax expenditures.

^8Amy Liu, "Building a Better New Orleans: A Review of and Plan for
Progress One Year after Hurricane Katrina." Special Analysis in
Metropolitan Policy (Washington, D.C.: The Brookings Institution, August
2006).

^9GAO, Disaster Relief: Governmentwide Framework Needed to Collect and
Consolidate Information to Report on Billions in Federal Funding for the
2005 Gulf Coast Hurricanes, [21]GAO-06-834 (Washington, D.C.: Sept. 6,
2006).

Public Assistance Program Faces Increased Costs

The PA Grant program provides assistance to state and local governments
and eligible nonprofit organizations on a project-by-project basis for
emergency work (e.g., removal of debris and emergency protective measures)
and permanent work (e.g., repairing roads, reconstructing buildings, and
reestablishing utilities).^10 After the President declares a disaster, a
state becomes eligible for federal PA funds through FEMA's Disaster Relief
Fund. Officials at the local, state, and federal level are involved in the
PA process in a variety of ways. The grant applicant, such as a local
government or nonprofit organization, works with state and FEMA officials
to develop a scope of work and cost estimate for each project that is
documented in individual project worksheets. In addition to documenting
scope of work and cost considerations, each project worksheet is reviewed
by FEMA and the state to determine whether the applicant and type of
facility are eligible for funding. Once approved, funds are obligated,
that is, made available, to the state. PA generally operates on a
reimbursement basis. Reimbursement for small projects (up to $59,700) are
made based on the project's estimated costs, while large projects (more
than $59,700) are reimbursed based upon actual eligible costs when they
are incurred.^11

As of the middle of July 2007, FEMA had approved a total of 67,253 project
worksheets for emergency and permanent work, making available about $8.2
billion in PA grants to the states of Louisiana, Mississippi, Texas, and
Alabama. A smaller portion of PA program funds are going toward
longer-term rebuilding activities than emergency work. Of the
approximately $8.2 billion made available to the Gulf Coast states
overall, about $3.4 billion (41 percent) is for permanent work such as
repairing and rebuilding schools and hospitals and reestablishing sewer
and water systems, while about $4.6 billion (56 percent) is for emergency
response work such as clearing roads for access and sandbagging low-lying
areas. The remaining amount of PA funds, about $0.2 billion (3 percent) is
for administrative costs. (See fig. 1.) Of the funds made available by
FEMA to the states for permanent rebuilding, localities have only received
a portion of these funds since many projects have not yet been completed.
Specifically, in Louisiana and Mississippi, 26 and 22 percent of obligated
funds, respectively, have been paid by the state to applicants for these
projects.

^10PA is typically a cost-share program between the federal and state and
local governments. However, for Hurricanes Katrina and Rita, the state and
local match requirements were waived for eligible emergency work in the
immediate aftermath of the storms and the federal government provided 100
percent funding. In addition, Congress recently passed, and the President
signed into law, legislation to adjust the federal cost-share of certain
eligible rebuilding projects to 100 percent. U.S. Troop Readiness,
Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations
Act, 2007, Pub. L. No. 110-28 S 4501, 121 Stat. 112, 156 (May 25, 2007).

^11Under the Robert T. Stafford Disaster Relief and Emergency Assistance
Act (Stafford Act), project funds cover the restoration or rebuilding of
damaged facilities to their predisaster design and capacity. 42 U.S.C. S
5172(e)(1)(A)(i).

Figure 1: Breakdown of Public Assistance Grants Made Available to the Gulf
Coast States as of the middle of July 2007 (billions of dollars)

Note: Data included are as of the following dates: Alabama, July 19, 2007;
Louisiana, July 19, 2007; Mississippi, July 18, 2007; and Texas, July 19,
2007.

The total cost of PA funding for the Gulf Coast hurricanes will likely
exceed the approximately $8.2 billion already made available to the states
for two reasons: (1) the funds do not reflect all current and future
projects, and (2) the cost of some of these projects will likely be higher
than FEMA's original estimates. According to FEMA, as of the middle of
July 2007, an additional 1,916 project worksheets were in process (these
projects are in addition to the 67,253 approved project worksheets
mentioned above). FEMA expects that another 2,730 project worksheets will
be written. FEMA expects these worksheets to increase the total cost by
about $2.1 billion, resulting in a total expected PA cost of about $10.3
billion.

Some state and local officials have also expressed concerns about
unrealistically low cost estimates contained in project worksheets, which
could lead to even higher than anticipated costs to the federal
government. A senior official within the Louisiana Governor's Office of
Homeland Security and Emergency Preparedness recently testified that some
of the projects were underestimated by a factor of 4 or 5 times compared
to the actual cost.^12 For example, the lowest bids on 11 project
worksheets for repairing or rebuilding state-owned facilities, such as
universities and hospitals, totaled $5.5 million while FEMA approved $1.9
million for these projects.

The extent to which the number of new project worksheets and actual costs
that exceed estimated costs will result in demands for additional federal
funds remains unknown. In addition, PA costs may increase until a disaster
is closed, which can take many years in the case of a catastrophic
disaster.^13 For instance, PA costs from the Northridge earthquake that
hit California in January 1994 have not been closed out more than 13 years
after the event. Our ongoing work on the PA program will provide insights
into efforts to complete infrastructure projects, the actual costs of
completed projects, and the use of federal funds to complete PA projects.

Additional Resource Demands Anticipated for CDBG Program

HUD's CDBG program provides funding for neighborhood revitalization and
housing rehabilitation activities, affording states broad discretion and
flexibility in deciding how to allocate these funds and for what purposes.
Congress has provided even greater flexibility when allocating additional
CDBG funds to affected communities and states to help them recover from
presidentially-declared disasters, such as the Gulf Coast hurricanes.^14
To date, the affected Gulf Coast states have received $16.7 billion in
CDBG funding from supplemental appropriations--so far, the largest federal
provider of long-term Gulf Coast rebuilding funding.^15 As shown in figure
2, Louisiana and Mississippi were allocated the largest shares of the CDBG
appropriations, with $10.4 billion allocated to Louisiana, and another
$5.5 billion allocated to Mississippi. Florida, Alabama, and Texas
received the remaining share of CDBG funds.^16

^12Testimony before the Subcommittee on Disaster Recovery of the U.S.
Senate Committee on Homeland Security and Governmental Affairs, July 10,
2007.

^13A disaster is considered to be closed when all projects are approved,
all appeals are resolved, and all funds are obligated.

^14CDBG funds supported recovery efforts in New York City following the
terrorist attacks of September 11, 2001; in Oklahoma City following the
bombing of the Alfred Murrah Building in 1995; and in the city and county
of Los Angeles following the riots of 1992.

Figure 2: Breakdown of Total CDBG Allocations to Gulf Coast States

To receive CDBG funds for Gulf Coast rebuilding, HUD required that each
state submit an action plan describing how the funds would be used,
including how the funds would address long-term "recovery and restoration
of infrastructure." Accordingly, the states had substantial flexibility in
establishing funding levels and designing programs to achieve their goals.
As shown in figure 3, Mississippi set aside $3.8 billion to address
housing priorities within the state while Louisiana dedicated $8 billion
for its housing needs.

^15Pub. L. No. 109-148, 119 Stat. 2680, 2779-80 (Dec. 30, 2005); Pub. L.
No. 109-234, 120 Stat. 418, 472-73 (June 15, 2006).

^16Texas received more than $503 million, Florida received about $183
million, and Alabama received nearly $96 million. HUD Notice of
Allocations and Waivers 71 Fed. Reg. 7666 (Feb. 13, 2006); 71 Fed. Reg.
63,337 (Oct. 30, 2006).

Figure 3: Most CDBG Funding Allocated to Housing Needs in Louisiana and
Mississippi

Note: Totals may not add due to rounding.

aIn Mississippi, "other" refers to wind insurance mitigation and funds not
yet programmed by the state. In Louisiana, "other" refers to funding for
planning and administrative activities.

Each state also directed the majority of its housing allocations to
owner-occupied homes and designed a homeowner assistance program to
address the particular conditions in their state. As discussed below, each
state used different assumptions in designing its programs, which in turn
affects the financial implications for each state.

  Louisiana's Homeowner Assistance Program Anticipates Shortfall

Using $8.0 billion in CDBG funding, the Louisiana Recovery Authority (LRA)
developed a housing assistance program called the Road Home to restore the
housing infrastructure in the state.^17 As shown in figure 4, Louisiana
set aside about $6.3 billion of these funds to develop the homeowner
assistance component of the program and nearly $1.7 billion for rental,
low-income housing, and other housing-related projects. Louisiana
anticipated that FEMA would provide the homeowner assistance component
with another $1.2 billion in grant assistance. Louisiana based these
funding amounts on estimates of need within the state. Accordingly,
Louisiana estimated that $7.5 billion would be needed to assist 114,532
homeowners with major or severe damage. Louisiana also estimated these
funds would provide an average grant award of $60,109 per homeowner.

^17The LRA was created at the direction of Governor Blanco by executive
order in October of 2005 and subsequently authorized by the state
legislature in early 2006.

Figure 4: Louisiana's Estimated Funding Distribution for Homeowner
Assistance (billions of dollars)

The LRA launched the Road Home homeowner assistance program in August
2006. Under the program, homeowners who decide to stay in Louisiana and
rebuild are eligible for the full amount of grant assistance--up to
$150,000. Aside from the elderly, residents who choose to sell their homes
and leave the state will have their grant awards reduced by 40 percent,
while residents who did not have insurance at the time of the hurricanes
will have their grant awards reduced by 30 percent. To receive
compensation, homeowners must comply with applicable code and zoning
requirements and FEMA advisory base flood elevations when rebuilding and
agree to use their home as a primary residence at some point during a
3-year period following closing. Further, the amount of compensation that
homeowners can receive depends on the value of their homes before the
storms and the amount of flood or wind damage that was not covered by
insurance or other forms of assistance.

As of July 16, 2007, the Road Home program had received 158,489
applications and had held 36,655 closings with an average award amount of
$74,216. With the number of applications exceeding initial estimates and
average award amounts higher than expected, recent concerns have been
raised about a potential funding shortfall and the Road Home program's
ability to achieve its objective of compensating all eligible homeowners.
Concerns over the potential shortfall have led to questions about the Road
Home program's policy to pay for uninsured wind damage instead of limiting
compensation to flood damage. In recent congressional hearings, the
Executive Director of the LRA testified that the Road Home program will
require additional funds to compensate all eligible homeowners, citing a
higher than projected number of homeowners applying to the program, higher
costs for homeowner repairs, and a smaller percentage of private insurance
payouts than expected.

According to the Federal Coordinator for Gulf Coast Rebuilding, CDBG funds
were allocated to Louisiana on the basis of a negotiation with the state
conducted between January and February 2006. That negotiation considered
the provision of federal funding for the state's need to conduct a
homeowner assistance program covering homes that experienced major or
severe damage from flooding. The state requested the allocation of federal
funding at that time to expand the program to assist homeowners who
experienced only wind damage. That request to provide federal funds to
establish a homeowner program for homes which only experienced wind damage
was denied, as were similar requests from Gulf Coast states such as Texas.
The Administration requested the negotiated amount from Congress on
February 15, 2006. Congress approved that amount and it was signed into
law by the President on June 15, 2006. Subsequently, Louisiana announced
the expansion of the Road Home program to cover damage exclusively from
wind regardless of the stated intention of the federal allocation, but
fully within their statutory authority.

In addition, the Executive Director of the LRA testified that Louisiana
had not received $1.2 billion in funds from FEMA--assistance that had been
part of the Road Home program's original funding design. Specifically, the
state expected FEMA to provide grant assistance through its Hazard
Mitigation Grant Program (HMGP)--a program that generally provides
assistance to address long-term community safety needs.^18 Louisiana had
planned to use this funding to assist homeowners with meeting elevation
standards and other storm protection measures, as they rebuilt their
homes.^19 However, FEMA has asserted that it cannot release the money
because the Road Home program discriminates against younger residents.
Specifically, the program exempts elderly recipients from the 40 percent
grant reduction if they choose to leave the state or do not agree to
reside in their home as a primary residence at some point during a 3-year
period.

Although we have not assessed their assumptions, recent estimates from the
Road Home program^20 and Louisiana's state legislative auditor's office
have estimated a potential shortfall in the range of $2.9 billion to $5
billion.

While these issues will not be immediately resolved, they raise a number
of questions about the potential demands for additional federal funding
for the states' rebuilding efforts. Our ongoing work on various aspects of
the CDBG program--including a review of how the affected states developed
their funding levels and priorities--will provide insights into these
issues.

  Mississippi's Homeowner Assistance Program Proceeding in Two Phases

In Mississippi, Katrina's storm surge destroyed tens of thousands of
homes, many of which were located outside FEMA's designated flood plain
and not covered by flood insurance. Using about $3 billion in CDBG funds,
Mississippi developed a two-phase program to target homeowners who
suffered losses due to the storm surge. Accordingly, Phase I of the
program was designed to compensate homeowners whose properties were
located outside the floodplain and had maintained hazard insurance at a
minimum.^21 Eligible for up to $150,000 in compensation, these homeowners
were not subject to a requirement to rebuild. Phase II of the program is
designed to award grants to those who received flood surge damage,
regardless of whether they lived inside or outside the flood zone or had
maintained insurance on their homes. Eligible applicants must have an
income at or below 120 percent of the Area Median Income (AMI). Eligible
for up to $100,000 in grant awards, these homeowners are not subject to a
requirement to rebuild.^22 In addition, homeowners who do not have
insurance will have their grant reduced by 30 percent, although this
penalty does not apply to the "special needs" populations as defined by
the state (i.e., elderly, disabled, and low-income).^23

^18Authorized under section 404 of the Stafford Act, the HMGP provides
grants to states, which in turn provide funds to eligible applicants to
implement measures that substantially reduce the risk of future damages,
hardship, loss, or suffering in an area affected by a major disaster. 42
U.S.C. S 5172c.

^19Specifically, the Road Home program would use HMGP funds to provide
homeowners with elevation grants of up to $30,000 and up to $7,500 for
individual storm protection measures such as storm shutters.

^20These estimates were developed by ICF International, Incorporated, a
company under contract with the state of Louisiana to administer the Road
Home program.

^21To receive an award, eligible applicants must place a covenant on their
property, providing that flood insurance and hazard insurance will be
maintained in perpetuity, the home will be rebuilt or repaired to local
building codes, and if rebuilt, the home will be elevated to FEMA
elevation standards.

As of July 18, 2007, Mississippi had received 19,277 applications for
Phase I of its program and awarded payments to 13,419 eligible homeowners
with an average award amount of $72,062. In addition, Mississippi had
received 7,424 applications for Phase II of its program and had moved an
additional 4,130 applications that did not qualify for Phase I assistance
to Phase II. The State had awarded 234 grants to eligible homeowners in
Phase II with an average award amount of $69,448.

Substantial Losses Affect National Flood Insurance Program Ability to Repay

The National Flood Insurance Program (NFIP) incurred unprecedented storm
losses from the 2005 hurricane season. NFIP estimated that it had paid
approximately $15.7 billion in flood insurance claims as of January 31,
2007, encompassing approximately 99 percent of all flood claims
received.^24 The intent of the NFIP is to pool risk, minimize costs and
distribute burdens equitably among those who will be protected and the
general public.^25 The NFIP, by design, is not actuarially sound.
Nonetheless, until recent years, the program was largely successful in
paying flood losses and operating expenses with policy premium
revenues--the funds paid by policyholders for their annual flood insurance
coverage. However, because the program's premium rates have been set to
cover losses in an average year based on program experience that did not
include any catastrophic losses, the program has been unable to build
sufficient reserves to meet future expected flood losses.^26

^22To receive an award, eligible applicants--similar to those in Phase
I--must place a covenant on their property, stipulating that (1) flood
insurance will be maintained in perpetuity, (2) the home will be rebuilt
or repaired to local building codes, and (3) if rebuilt, the home will be
elevated to FEMA elevation standards.

^23"Low-income" homeowners are those with incomes at or below 60 percent
of the AMI--which ranges by county.

^24See GAO, National Flood Insurance Program: Preliminary Views on FEMA's
Ability to Ensure Accurate Payments on Hurricane-Damaged Properties,
[22]GAO-07-991T (Washington, D.C.: June 12, 2007); and GAO, National Flood
Insurance Program: New Processes Aided Hurricane Katrina Claims Handling,
but FEMA's Oversight Should Be Improved, GAO-07-169 (Washington, D.C.:
Dec. 15, 2006).

^2542 U.S.C. S 4001(d); 42 U.S.C. S 4016.

Historically, the NFIP has been able to repay funds borrowed from the
Treasury to meet its claims obligations. However, the magnitude and
severity of losses from Hurricane Katrina and other 2005 hurricanes
required the NFIP to obtain borrowing authority of $20.8 billion from the
Treasury, an amount NFIP will unlikely be able to repay while paying
future claims with its current premium income of about $2 billion
annually.

In addition to the federal funding challenge created by the payment of
claims, key concerns raised from the response to the 2005 hurricane season
include whether or not some property-casualty insurance claims for
wind-related damages were improperly shifted to NFIP at the expense of
taxpayers. For properties subjected to both high winds and flooding,
determinations must be made to assess the damages caused by wind, which
may be covered through a property-casualty homeowners policy, and the
damages caused by flooding, which may be covered by NFIP.^27 Disputes over
coverage between policyholders and property-casualty insurers from the
2005 hurricane season highlight the challenges of determining the
appropriateness of claims for multiple-peril events. NFIP may continue to
face challenges in the future when servicing and validating flood claims
from disasters such as hurricanes that may involve both flood and wind
damages. Our ongoing work addresses insurance issues related to wind
versus flood damages, including a review of how such determinations are
made, who is making these determinations and how they are regulated, and
the ability of FEMA to verify the accuracy of flood insurance claims
payments based on the wind and flood damage determinations.

^26See GAO, Flood Insurance: Information on the Financial Condition of the
National Flood Insurance Program, [23]GAO-01-992T (Washington, D.C.: July
19, 2001).

^27Property owners in certain coastal regions subject to hurricanes and
flooding may have to purchase at least two, and sometimes more, different
types of insurance policies. Flood insurance is offered by NFIP, while
insurance for wind-related damages is generally offered by private
insurance companies or state-sponsored insurers. NFIP was established in
1968 in part to provide some insurance protection for flood victims
because the private insurers were and still are largely unwilling to
insure for flood risks.

Billions Appropriated for Gulf Coast Hurricane Protection Projects

Congress has appropriated more than $8 billion to the U.S. Army Corps of
Engineers (Corps) for hurricane protection projects in the Gulf Coast.
These funds cover repair, restoration and construction of levees and
floodwalls as well as other hurricane protection and flood control
projects. These projects are expected to take years and require billions
of dollars to complete.^28 Estimated total costs for hurricane protection
projects are unknown because the Corps is also conducting a study of flood
control, coastal restoration, and hurricane protection measures for the
southeastern Louisiana coastal region as required by the 2006 Energy and
Water Development Appropriations Act^29 and Department of Defense
Appropriations Act.^30 The Corps must propose design and technical
requirements to protect the region from a Category 5 hurricane.^31
According to the Corps, alternatives being considered include a structural
design consisting of a contiguous line of earthen or concrete walls along
southern coastal Louisiana, a nonstructural alternative involving only
environmental or coastal restoration measures, or a combination of those
alternatives. The Corps' final proposal is due in December 2007. Although
the cost to provide a Category 5 level of protection for the southeastern
Louisiana coastal region has not yet been determined, these costs would be
in addition to the more than $8 billion already provided to the Corps.

Restoring Louisiana's Wetlands and Barrier Islands Will Likely Cost Billions

The Corps' December 2007 proposal will also influence future federal
funding for coastal wetlands and barrier islands restoration. Since the
1930s, coastal Louisiana lost more than 1.2 million acres of wetlands, at
a rate of 25-35 square miles per year, leaving the Gulf Coast exposed to
destructive storm surge. Various preliminary estimates ranging from $15
billion to $45 billion have been made about the ultimate cost to complete
these restoration efforts. However, until the Corps develops its plans and
the state and local jurisdictions agree on what needs to be done, no
reliable estimate is available. We are conducting work to understand what
coastal restoration alternatives have been identified and how these
alternatives would integrate with other flood control and hurricane
protection measures, the challenges and estimated costs to restore
Louisiana's coastal wetlands, and the opinions of scientists and engineers
on the practicality and achievability of large-scale, comprehensive plans
and strategies to restore coastal wetlands to the scale necessary to
protect coastal Louisiana.

^28See GAO, Hurricane Katrina: Strategic Planning Needed to Guide Future
Enhancements Beyond Interim Levee Repairs, [24]GAO-06-934 (Washington,
D.C.: Sept. 6, 2006); and GAO, U.S. Army Corps of Engineers' Procurement
of Pumping Systems for the New Orleans Drainage Canals, [25]GAO-07-908R
(Washington, D.C.: May 23, 2007).

^29Pub. L. No. 109-103, 119 Stat. 2247, 2247 (Nov. 19, 2005).

^30Pub. L. No. 109-148, 119 Stat. 2680, 2761 (Dec. 30, 2005).

^31Pub. L. No. 109-103, 119 Stat. 2247, 2248.

GO Zone Tax Incentives Provide Assistance for Recovery

The Gulf Opportunity Zone Act of 2005 provides tax benefits to assist in
the recovery from the Gulf Coast hurricanes.^32 From a budgetary
perspective, most tax expenditure programs, such as the GO Zones, are
comparable to mandatory spending for entitlement programs, in that federal
funds flow based on eligibility and formulas specified in authorizing
legislation.^33 The 5-year cost of the GO Zones is estimated at $8 billion
and the 10-year cost is estimated to be $9 billion. Since Congress and the
President must change substantive law to change the cost of these
programs, they are relatively uncontrollable on an annual basis. The GO
Zone tax benefits chiefly extend, with some modifications, existing tax
provisions such as expensing capital expenditures, the Low Income Housing
Tax Credit (LIHTC), tax exempt bonds, and the New Markets Tax Credit
(NMTC). The 2005 Act increases limitations in expensing provisions for
qualified GO Zone properties. The Act also increased the state limitations
in Alabama, Louisiana, and Mississippi on the amount of LIHTC that can be
allocated for low-income housing properties in GO Zones. Further, the act
allows these states to issue tax-exempt GO Zone bonds for qualifying
residential and nonresidential properties. Finally, the NMTC limitations
on the total amount of credits allocated yearly were also increased for
qualifying low-income community investments in GO Zones.

We have a congressional mandate to review the practices employed by the
states and local governments in allocating and utilizing the tax
incentives provided in the Gulf Opportunity Zone Act of 2005. We have also
issued reports on the tax provisions, such as LIHTC and NMTC, now extended
to the GO Zones by the 2005 Act.^34

^32Pub. L. No. 109-135.

^33Tax expenditures may substitute for a federal spending program in that
the federal government "spends" some of its revenue on subsidies by
forgoing taxation on some income. See GAO, Government Performance and
Accountability: Tax Expenditures Represent a Substantial Federal
Commitment and Need to Be Reexamined, [26]GAO-05-690 (Washington, D.C.:
Sept. 23, 2005).

Observations

Rebuilding efforts in the Gulf Coast continue amidst questions regarding
the total cost of federal assistance, the extent to which federal funds
will address the rebuilding demands of the region, and the many decisions
left to be made by multiple levels of government. As residents, local and
state leaders and federal officials struggle to respond to these
questions, their responses lay a foundation for the future of the Gulf
Coast. As states and localities continue to rebuild, there are difficult
policy decisions that will confront Congress about the federal
government's continued contribution to the rebuilding effort and the role
it might play over the long-term in an era of competing priorities.
Congress will be faced with many questions as it continues to carry out
its critical oversight function in reviewing funding for Gulf Coast
rebuilding efforts. Our ongoing and preliminary work on Gulf Coast
rebuilding suggests the following questions:

           o How much could it ultimately cost to rebuild the Gulf Coast and
           how much of this cost should the federal government bear?
           o How effective are current funding delivery mechanisms--such as
           PA and CDBG--and should they be modified or supplemented by other
           mechanisms?
           o What options exist to effectively build in federal oversight to
           accompany the receipt of federal funds, particularly as federal
           funding has shifted from emergency response to rebuilding?
           o How can the federal government further partner with state and
           local governments and the nonprofit and private sectors to
           leverage public investment in rebuilding?
           o What are the "lessons learned" from the Gulf Coast hurricanes,
           and what changes need to be made to help ensure a more timely and
           effective rebuilding effort in the future?
			  
^34See GAO, Tax Credits: Opportunities to Improve Oversight of the
Low-income Housing Program, [34]GAO/T-GGD/RCED-97-149 (Washington, D.C.,
Apr. 23, 1997); and GAO, Tax Policy: New Markets Tax Credit Appears to
Increase Investment by Investors in Low-Income Communities, but
Opportunities Exist to Better Monitor Compliance, [35]GAO-07-296
(Washington, D.C.: Jan. 31, 2007).

           Mr. Chairman and Members of the committee, this concludes my
           statement. I would be happy to respond to any questions you may
           have at this time.
			  
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           to this testimony include Kathleen Boggs, Peter Del Toro, Jeffrey
           Miller, Carol Patey, Brenda Rabinowitz, Michelle Sager, and Robert
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[36]www.gao.gov/cgi-bin/getrpt?GAO-07-1079T .

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Highlights of [37]GAO-07-1079T , a testimony before the Committee on the
Budget, House of Representatives

August 2, 2007

GULF COAST REBUILDING

Observations on Federal Financial Implications

The devastation caused by the Gulf Coast hurricanes presents the nation
with unprecedented challenges as well as opportunities to reexamine shared
responsibility among all levels of government. All levels of government,
together with the private and nonprofit sectors, will need to play a
critical role in the process of choosing what, where, and how to rebuild.
Agreeing on what the costs are, what federal funds have been provided, and
who will bear the costs will be key to the overall rebuilding effort.

This testimony (1) places federal assistance provided to date in the
context of damage estimates for the Gulf Coast, and (2) discusses key
federal programs that provide rebuilding assistance to the Gulf Coast
states. In doing so, GAO highlights aspects of rebuilding likely to place
continued demands on federal resources.

GAO visited the Gulf Coast region, reviewed state and local documents, and
interviewed federal, state, and local officials. GAO's ongoing work on
these issues focuses on the use of federal rebuilding funds and
administration of federal programs in the Gulf Coast region.

[38]What GAO Recommends

Although GAO is not making recommendations in this testimony, GAO raises
questions that the committee should consider in its oversight of federal
funding.

To respond to the Gulf Coast devastation, the federal government has
already committed a historically high level of resources--more than $116
billion--through an array of grants, loan subsidies, and tax relief and
incentives. A substantial portion of this assistance was directed to
emergency assistance and meeting short-term needs arising from the
hurricanes, leaving a smaller portion for longer-term rebuilding. To
understand the long-term financial implications of Gulf Coast rebuilding,
it is helpful to view potential federal assistance within the context of
overall estimates of the damages incurred by the region. Some estimates
put capital losses at a range of $70 billion to more than $150 billion,
while the state of Louisiana estimated that the economic effect on its
state alone could reach $200 billion. These estimates raise questions
regarding how much additional assistance may be needed to help the Gulf
Coast continue to rebuild, and who should be responsible for providing the
related resources.

Demands for additional federal resources to rebuild the Gulf Coast are
likely to continue. The bulk of federal rebuilding assistance provided to
the Gulf Coast states funds two key programs--the Federal Emergency
Management Agency's Public Assistance (PA) program and the Department of
Housing and Urban Development's Community Development Block Grant (CDBG)
program. In addition to funding PA and CDBG, the federal government's
recovery and rebuilding assistance also includes payouts from the National
Flood Insurance Program as well as funds for levee restoration and repair,
coastal wetlands and barrier islands restoration, and benefits provided
through Gulf Opportunity Zone tax expenditures.

As states and localities continue to rebuild, there are difficult policy
decisions that will confront Congress about the federal government's
continued contribution to the rebuilding effort and the role it might play
over the long-term in an era of competing priorities. GAO's ongoing and
preliminary work on Gulf Coast rebuilding suggests the following
questions:

           o How much could it ultimately cost to rebuild the Gulf Coast and
           how much of this cost should the federal government bear?
           o How effective are current funding delivery mechanisms--such as
           PA and CDBG--and should they be modified or supplemented by other
           mechanisms?
           o What options exist to effectively build in federal oversight to
           accompany the receipt of federal funds, particularly as federal
           funding has shifted from emergency response to rebuilding?
           o How can the federal government further partner with state and
           local governments and the nonprofit and private sectors to
           leverage public investment in rebuilding?
           o What are the "lessons learned" from the Gulf Coast hurricanes,
           and what changes need to be made to help ensure a more timely and
           effective rebuilding effort in the future?

References

Visible links
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-07-574T
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-07-809R
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-06-834
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-07-991T
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-01-992t
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-06-934
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-908R
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-05-690
  27. mailto:[email protected]
  28. http://www.gao.gov/
  29. http://www.gao.gov/
  30. http://www.gao.gov/fraudnet/fraudnet.htm
  31. mailto:[email protected]
  32. mailto:[email protected]
  33. mailto:[email protected]
  34. http://www.gao.gov/cgi-bin/getrpt?GAO/T-GGD/RCED-97-149
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-07-296
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1079T
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1079T
*** End of document. ***