Disaster Assistance: Opportunities to Improve Cost-Effectiveness
Determinations for Mitigation Grants (Letter Report, 08/04/1999,
GAO/RCED-99-236).

Pursuant to a legislative requirement, GAO reviewed how the Federal
Emergency Management Agency (FEMA), in conjunction with the states,
ensures the cost-effectiveness of projects funded under the Hazard
Mitigation Grant Program, focusing on: (1) the approaches FEMA and the
states use to ensure that program grants are targeted to cost-effective
mitigation projects; and (2) whether the approaches ensure that the
mitigation measures are cost-effective.

GAO noted that: (1) the states and FEMA work together to help ensure
that Hazard Mitigation Grant Program grants are awarded for
cost-effective projects; (2) the states in GAO's review establish
procedures and priorities for identifying and selecting mitigation
projects; however, not all of them conduct a formal analysis of a
project's cost-effectiveness before submitting an application for the
project to FEMA; (3) FEMA uses benefit-cost analysis as its primary
approach for ensuring that mitigation projects submitted by the states
are cost-effective; (4) however, FEMA also excludes certain types of
hazard mitigation projects from benefit-cost analysis, including
projects that fund the removal of certain properties from floodways and
floodplains, hazard identification or mapping initiatives, and
mitigation planning efforts; (5) FEMA officials stress a need for
flexibility in assessing these projects, suggesting that benefit-cost
analysis does not always apply to all mitigation projects, because of
difficulties in quantifying the benefits of some projects and the time
needed to gather data for conducting analyses; (6) for these projects,
the states are instructed to include a narrative that identifies the
benefits of mitigation and establishes a reasonable expectation that the
projects will reduce or prevent future property damage, injury, or loss
of life; (7) GAO's review of 55 hazard mitigation projects in four
states found that 41 projects were judged as cost-effective on the basis
of the benefit-cost analyses conducted; (8) these 41 projects account
for $11.7 million, or 58 percent of the $20.1 million in project funding
GAO reviewed; (9) however, the officials conducting benefit-cost
analyses for some of the projects designed to mitigate future damage
from flooding did not always use the best available information, such as
flood damage information available from past insurance claims and
updated information on flood hazards, in conducting their analyses; (10)
GAO's review also found that 14 projects, accounting for $8.4 million,
or 42 percent, of the funding reviewed, were exempt from benefit-cost
analysis alert systems; (11) these projects included property
acquisitions, emergency systems, and a public awareness campaign; and
(12) while FEMA has explained its rationale for exempting these types of
mitigation projects from benefit-cost analysis, factors such as the lack
of an established analytical basis supporting the exemption limit the
agency's ability to demonstrate that some of these mitigation measures
are cost-effective.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-236
     TITLE:  Disaster Assistance: Opportunities to Improve
	     Cost-Effectiveness Determinations for Mitigation Grants
      DATE:  08/04/1999
   SUBJECT:  Federal/state relations
	     Relief agencies
	     Flood control
	     Emergency preparedness
	     Federal aid to states
	     Disaster relief aid
	     Cost effectiveness analysis
	     Grants to states
IDENTIFIER:  FEMA Hazard Mitigation Grant Program

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Cover
================================================================ COVER

Report to Congressional Committees

July 30, 1999

DISASTER ASSISTANCE -
OPPORTUNITIES TO IMPROVE
COST-EFFECTIVENESS DETERMINATIONS
FOR MITIGATION GRANTS

GAO/RCED-99-236

FEMA'S Hazard Mitigation Grant Program

(385772)

Abbreviations
=============================================================== ABBREV

  FEMA - Federal Emergency Management Agency
  OMB - Office of Management and Budget

Letter
=============================================================== LETTER

B-281730

August 4, 1999

The Honorable Christopher S.  Bond
Chairman
The Honorable Barbara A.  Mikulski
Ranking Minority Member
Subcommittee on VA, HUD, and
 Independent Agencies
Committee on Appropriations
United States Senate

The Honorable Tillie K.  Fowler
Chairman, Subcommittee on Oversight,
 Investigations, and Emergency Management
Committee on Transportation and Infrastructure
House of Representatives

For a number of years, the Congress has been concerned about the
increasing costs of federal disaster assistance.  One of the Federal
Emergency Management Agency's (FEMA) primary approaches for reducing
these costs is to promote mitigation measures that will reduce future
damage within communities, thereby potentially decreasing future
federal expenditures for disasters.  From its inception in fiscal
year 1989 through April 30, 1999, FEMA's program for funding state
and local measures to mitigate the impact of future disastersï¿½the
Hazard Mitigation Grant Program--received over $2.4 billion.  Under
FEMA's primary authorizing legislation, the Robert T.  Stafford
Disaster Relief and Emergency Assistance Act, these measures must be
cost-effective, meaning that they will ultimately save money for the
federal government.  As a condition of receiving a program grant, a
state must prepare an administrative plan that establishes its
procedures and priorities for identifying and selecting mitigation
projects.  FEMA, however, has the final authority to approve funding
for these projects. 

In the Subcommittee's June 12, 1998, report accompanying the fiscal
year 1999 appropriations bill and subsequent correspondence, you
requested that we review how FEMA, in conjunction with the states,
ensures the cost-effectiveness of projects funded under the Hazard
Mitigation Grant Program.  Specifically, this report

  -- examines the approaches FEMA and the states use to ensure that
     program grants are targeted to cost-effective mitigation
     projects and

  -- considers whether the approaches ensure that the mitigation
     measures are cost-effective. 

To address these issues, we performed audit work in Florida and in
FEMA's Region 6 (for Arkansas, Louisiana, and Texas).  We selected
Florida because of the sizeable amount of funds obligated for program
grants during fiscal year 1998 and the state's role in analyzing
projects for cost-effectiveness.  We selected the states in Region 6
because they have addressed a wide range of disasters and have thus
gained varied experience in hazard mitigation. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The states and FEMA work together to help ensure that Hazard
Mitigation Grant Program grants are awarded for cost-effective
projects.  The states in our review establish procedures and
priorities for identifying and selecting mitigation projects;
however, not all of them conduct a formal analysis of a project's
cost-effectiveness before submitting an application for the project
to FEMA.  FEMA uses benefit-cost analysis as its primary approach for
ensuring that mitigation projects submitted by the states are
cost-effective.\1 However, FEMA also excludes certain types of hazard
mitigation projects from benefit-cost analysis, including projects
that fund the removal of certain properties from floodways and
floodplains, hazard identification or mapping initiatives, and
mitigation planning efforts.  FEMA officials stress a need for
flexibility in assessing these projects, suggesting that benefit-cost
analysis does not always apply to all mitigation projects, because of
difficulties in quantifying the benefits of some projects and the
time needed to gather data for conducting analyses.  For these
projects, the states are instructed to include a narrative that
identifies the benefits of mitigation and establishes a ï¿½reasonable
expectationï¿½ that the projects will reduce or prevent future property
damage, injury, or loss of life. 

Our review of 55 hazard mitigation projects in four states found that
41 projects were judged as cost-effective on the basis of the
benefit-cost analyses conducted.  These 41 projects account for $11.7
million, or 58 percent of the $20.1 million in project funding we
reviewed.  However, the officials conducting benefit-cost analyses
for some of the projects designed to mitigate future damage from
flooding did not always use the best available informationï¿½such as
flood damage information available from past insurance claims and
updated information on flood hazardsï¿½in conducting their analyses. 
Our review also found that 14 projects, accounting for $8.4 million,
or 42 percent, of the funding reviewed, were exempt from benefit-cost
analysis.  These projects included property acquisitions, emergency
alert systems, and a public awareness campaign.  While FEMA has
explained its rationale for exempting these types of mitigation
projects from benefit-cost analysis, factors such as the lack of an
established analytical basis supporting the exemption limit the
agency's ability to demonstrate that some of these mitigation
measures are cost-effective.  This report includes recommendations
designed to improve determinations of cost-effectiveness made under
the Hazard Mitigation Grant Program. 

--------------------
\1 Benefit-cost analysisï¿½an approach recommended by the Office of
Management and Budgetï¿½is used to determine how the anticipated dollar
savings gained through implementing a project compare with its cost. 
To be considered cost-effective under benefit-cost analysis, a
project must return more money over its life than it cost. 

   BACKGROUND
------------------------------------------------------------ Letter :2

FEMA has made disaster mitigation a primary goal in its efforts to
reduce the long-term costs of disasters.  According to FEMA's
September 1997 strategic plan, the agency is concentrating its
activities on reducing disaster costs through mitigation because no
other approach is as effective over the long term.  Mitigation
activities are undertaken to reduce losses from disasters or to
prevent such losses from occurring.  To help mitigate hazards, the
agency provides grants and training for state and local governments,
funding for preventing damage to public facilities and for purchasing
and converting flood-prone properties to open space, and federal
flood insurance.  It also supports the development of land-use plans
and zoning ordinances to discourage building in hazardous areas and
funds programs designed to reduce the loss of life and property from
earthquakes and fires.  While a number of FEMA programs and
initiatives provide funding for hazard mitigation assistance, our
review focused on hazard mitigation measures funded under the Hazard
Mitigation Grant Program. 

      HAZARD MITIGATION GRANT
      PROGRAM
---------------------------------------------------------- Letter :2.1

Up to 15 percent of the total grant funds spent on a disaster may be
spent under the Hazard Mitigation Grant Program for hazard mitigation
measures.  Subject to certain dollar limits, the Stafford Act
generally allows federal funding of up to 75 percent of the cost of
hazard mitigation measures within communities that have been affected
by a disaster (the state or local government pays the remaining
portion of the costs).\2 In fiscal year 1998, FEMA approved and
obligated over $415 million in Hazard Mitigation Grant Program
grants. 

--------------------
\2 In an Oct.  10, 1997, Federal Register notice, FEMA announced that
for disasters declared after Apr.  6, 1997, eligibility for program
funding would be statewide rather than limited to the communities
affected by the disaster.  FEMA was attempting to give the states
enhanced flexibility in using the funding for high-priority projects
across the states and to close out the funding from older disasters
as soon as possible. 

      REQUIREMENTS THAT PROJECTS
      BE COST-EFFECTIVE
---------------------------------------------------------- Letter :2.2

The legislation authorizing FEMA's use of funding for the Hazard
Mitigation Grant Programï¿½the Stafford Act (P.L.  93-288), as
amendedï¿½states that the funding can be used for hazard mitigation
measures that have been determined to be ï¿½cost-effective and which
substantially reduce the risk of future damage, hardship, loss, or
suffering in any area affected by a major disaster.ï¿½ The Office of
Management and Budget's (OMB) guidelines, contained in OMB Circular
A-94, recommend the use of benefit-cost analysis for determining
cost-effectiveness.  FEMA's regulations for administering the Hazard
Mitigation Grant Program include eligibility requirements that
contain minimum criteria for projects, such as documenting that a
project ï¿½.  .  .will not cost more than the anticipated value of the
reduction in both direct damages and subsequent negative impacts to
the area if future disasters were to occur.  Both costs and benefits
will be computed on a net present value basis.ï¿½ Benefit-cost analysis
is used to determine ï¿½net present value.ï¿½ Additionally, FEMA's
guidance for determining the cost-effectiveness of hazard mitigation
projects states that ï¿½a key criterion for mitigation projects to be
eligible for funding is that they must be cost-effectiveï¿½ and that
ï¿½benefit-cost analysis is used for all cost-effectiveness
determinations.ï¿½\3

--------------------
\3 How to Determine Cost-Effectiveness of Hazard Mitigation Projects: 
A New Process for Expediting Application Reviews, Interim Edition
(Dec.  1996). 

   THE STATES AND FEMA WORK
   TOGETHER IN USING DIFFERENT
   APPROACHES TO ENSURE THAT
   GRANTS ARE AWARDED FOR
   COST-EFFECTIVE PROJECTS
------------------------------------------------------------ Letter :3

The states in our review establish procedures and priorities for
identifying and selecting mitigation projects; however, not all of
them conduct a formal analysis of a project's cost-effectiveness
before submitting an application for the project to FEMA.  FEMA uses
benefit-cost analysisï¿½an approach recommended by OMBï¿½as its primary
approach for ensuring that mitigation projects are cost-effective. 
However, FEMA also exempts certain categories of projects from
benefit-cost analysis for a number of reasons, including the fact
that some projects do not have proven or clearly measurable benefits. 
To demonstrate the cost-effectiveness of such projects, FEMA asks the
states to provide a narrative identifying the benefits of mitigation
and establishing a ï¿½reasonable expectationï¿½ that future property
damage, injury, or loss of life will be reduced or prevented. 

      STATES IDENTIFY AND SELECT
      MITIGATION PROJECTS
---------------------------------------------------------- Letter :3.1

The state administrative plans we reviewed exhibited a broad range of
approaches for identifying and selecting mitigation projects.  In
general, the states screen their projects using various criteria,
such as the overall cost of a project, its potential environmental
effects, and its cost-effectiveness.  For example, Louisiana
calculates an initial benefit-cost ratio for projects, which it uses
as a part of its criteria for evaluating and scoring them.  The
state's scoresheet consists of three components-- engineering (50
points), effectiveness (100 points), and environmental impact (50
points)ï¿½which combine to produce a total possible score of 200
points.  Projects that receive the highest scores are then given
priority for funding. 

Several FEMA officials noted that the agency is initiating changes to
improve the states' planning efforts.  For example, FEMA has
developed a checklist of elements for a model state plan, which will
be used to assess how well a state is doing in addressing the
suggested elements.  Some of the elements will help the states
identify cost-effective projects.  For instance, the checklist
addresses whether a state plan ranks projects on the basis of the
ï¿½greatest opportunity for loss reduction.ï¿½ Additionally, some states,
such as Florida, are providing incentives for localities to develop
their own mitigation plans, hoping to improve the quality of the
mitigation projects submitted in the future. 

      FEMA USES BENEFIT-COST
      ANALYSIS AS THE PREFERRED
      APPROACH FOR DETERMINING
      COST-EFFECTIVENESS
---------------------------------------------------------- Letter :3.2

FEMA uses benefit-cost analysis to assess whether the expected costs
of investing in a hazard mitigation project are justified.\4 That is,
to what extent will the project help avoid the costs of damage
expected from future disasters (the benefits)?  FEMA generally
conducts the benefit-cost analysis for the projects that states
submit for approval.\5 FEMA's guidance describes four main elements
of a benefit-cost analysis: 

  -- an estimate of damage and loss before mitigation,

  -- an estimate of damage and loss after mitigation,

  -- an estimate of the frequency and severity of the hazard causing
     the damage (such as the risk of flooding), and

  -- economic factors used in the analysis (the project's expected
     life span, for example). 

After all of these elements are considered, along with the project's
expected costs, the project's cost-effectiveness can be determined. 
However, factors outside the benefit-cost analysis, such as the
project's potential impact on environmental conditions, can also
influence whether the project is approved for funding. 

FEMA developed several computer programs (known as modules) to
simplify the calculations needed to determine a project's
benefit-cost ratio.  Each module employs established economic
principles, OMB guidance, and risk calculations to determine a
proposed project's benefits (discounted to present-day dollars) over
its expected life.  FEMA has provided these computer programs to
regional, state, and local mitigation staff and trained them in how
to use the modules. 

--------------------
\4 The benefit-cost analysis is used to determine a benefit-cost
ratioï¿½the ratio of the expected benefits divided by the expected
costs.  If the expected benefits are greater than the expected costs,
the ratio is greater than 1.0 and the project is considered
cost-effective.  If the expected benefits are less than the expected
costs, the ratio is less than 1.0 and the project is not considered
cost-effective. 

\5 As participants in a pilot program called the ï¿½managing state
concept,ï¿½ three states (Florida, North Dakota, and Ohio) typically
conduct benefit-cost analyses for projects from their communities and
submit summaries of the analyses for FEMA's review. 

      CERTAIN CATEGORIES OF
      MITIGATION PROJECTS ARE
      EXEMPTED FROM BENEFIT-COST
      ANALYSIS
---------------------------------------------------------- Letter :3.3

While the Stafford Act requires that projects funded through the
Hazard Mitigation Grant Program be cost-effective, the act does not
define how to make this determination.  FEMA's regulations and other
guidance establish that benefit-cost analysis is the preferred
approach for determining cost-effectiveness.  However, since
September 1996, FEMA has exempted four categories of Hazard
Mitigation Grant Program projects from benefit-cost analysis.  Table
1 summarizes information on the four categories of projects. 

                                         Table 1
                         
                         Types of Exemptions and Potential Funds
                           Available, by Project Category, From
                                 Fiscal Year 1989 Through
                                      April 30, 1999

                                  (Dollars in millions)

                                                             Basis for
Type of                                      Support for     cost-           Exemption
exemptio         Potential  Intent of        cost-           effectiveness   policy time
n          funds available  policy           effectiveness   approach        frames
--------  ----------------  ---------------  --------------  --------------  ------------
Property                \a  To identify      Located in      Follows         September
acquisit                    structures in    100-year        National Flood  1996 to
ion                         floodways and    floodplain and  Insurance       present
(substan                    floodplains as   ï¿½50 percent     Program policy
tially                      strong           substantially
damaged                     candidates for   damaged
structur                    funding
es)

5-                  $113.5  To give states   Narrative       Difficult to    September
percent                     discretionary    justification   evaluate        1996 to
initiati                    funds                            against         present
ve                                                           traditional
(include                                                     criteria for
s a                                                          cost-
variety                                                      effectiveness
of
projects
)

Tornado-             $56.5  To provide       Narrative       Difficult to    August 1998
related                     additional       justification   evaluate        to present
projects                    funds for                        against
                            warning systems                  traditional
                                                             criteria for
                                                             cost-
                                                             effectiveness

Planning             $88.3  To expedite the  No support      Considered      October 1997
projects                    closeout of      required        cost-           to present
                            older disasters                  effective
-----------------------------------------------------------------------------------------
\a Because FEMA cannot break out the funds available for this
category, the specific amount is unknown. 

FEMA's rationale for the exemptions varies, although the agency's
policy guidance indicates that two of the exemptions were established
because some mitigation projects were often difficult to evaluate
against traditional quantitative criteria for determining
cost-effectiveness and eligibility criteria.  FEMA officials stress a
need for flexibility in assessing these projects, suggesting that
benefit-cost analysis models do not always apply to all mitigation
projects. 

      PROJECTS INVOLVING THE
      PURCHASE OF SUBSTANTIALLY
      DAMAGED STRUCTURES
---------------------------------------------------------- Letter :3.4

Through policy guidance established in September 1996, FEMA exempted
projects that involved purchasing structures located in floodways and
floodplains if the cost of restoring the damaged structures equaled
or exceeded 50 percent of the structures' market value and the
structures were located in a 100-year floodplain.  A senior FEMA
mitigation official explained that under the National Flood Insurance
Program, these substantially damaged structures had to be either
elevated or relocated.  Thus, the Hazard Mitigation Grant Program was
simply following the policy already established by the flood
insurance program.  According to the official, however, the flood
insurance program does not require that mitigation measures be
cost-effective.  The official also stated that the exemption was
intended to speed the delivery of hazard mitigation grants to the
states.  This particular exemption has been criticized by FEMA's
Inspector General.  In a March 1998 report,\6

the Inspector General noted the lack of analytical data supporting
the exemption's contention that acquisition projects involving
substantially damaged properties in a 100-year floodplain are
cost-effective.  While FEMA officials have begun to retroactively
analyze some of the acquisition projects exempted under this policy
and agency officials expect to complete this analysis by the end of
August 1999,\7 the agency is currently unable to provide data that
would support the exemption of all substantially damaged structures
in a 100-year floodplain.  Without this analytical basis, it is
difficult for FEMA to demonstrate that the exempted acquisition
projects it is funding are cost-effective. 

--------------------
\6 Improvements Are Needed in the Hazard Mitigation Buyout Program,
FEMA OIG, Inspection Report I-01-98 (Mar.  1998). 

\7 The officials explained that FEMA would be reviewing acquisition
projects in communities within three states.  These projects
encompass thousands of individual properties. 

      THE 5-PERCENT INITIATIVES
---------------------------------------------------------- Letter :3.5

In September 1996, FEMA established another policy that exempted
projects from benefit-cost analysis.  Known as the ï¿½5 percent Hazard
Mitigation Grant Program initiatives,ï¿½ this policy allows the states
to use up to 5 percent of their Hazard Mitigation Grant Program
project funding for a variety of hazard mitigation projects. 

Projects eligible for funding under this initiative can have benefits
that are not proven or not clearly measurable, making it difficult to
evaluate the projects under traditional criteria for determining
cost-effectiveness and eligibility.  FEMA's policy memorandum for
this exemption explained that evaluating the need for funding certain
mitigation measures required a large amount of time at the state and
federal levels, although it was generally recognized that such
measures reduced the potential losses from a future disaster. 
Examples cited in the memorandum included

  -- new, unproven mitigation techniques and technologies;

  -- disaster warning equipment and systems;

  -- hazard identification or mapping efforts; and

  -- studies or plans to reduce disaster losses. 

To be eligible, a project type had to be identified in the state's
hazard mitigation plan and reduce or prevent future property damage,
injury, or the loss of life.  The policy's intent was to provide the
states with discretion in deciding which mitigation measures to fund,
as well as make them responsible for providing the rationale for the
cost-effectiveness of the projects.  FEMA officials explained that
the policy was meant to spur creativity and avoid the time and
expense involved in conducting benefit-cost analyses. 

FEMA's guidance instructs prospective grantees to apply for 5-percent
funding if a project was previously denied funding because of
difficulty in measuring its cost-effectiveness.  However, projects
denied funding for other reasons may also be submitted under the
5-percent funding policy.  For example, a project to retrofit a
homeless assistance center with items such as shutters, a generator,
a well, and a storage tank was originally denied funding by FEMA
because it was submitted more than 2 years past the agency's deadline
for submitting projects.  However, after the project was resubmitted
under the 5-percent initiative, it was approved for over $220,000 in
federal funding. 

The 5-percent initiative policy states that instead of conducting a
benefit-cost analysis, the states are to include a narrative that
identifies the project's mitigation benefits and establishes a
reasonable expectation that future property damage, injury, or loss
of life will be reduced or prevented.  While FEMA's guidance
instructs the states to identify a project's benefits, it does not
specifically suggest any comparison of the benefits with the
project's costs or with the benefits and costs of competing
alternative projects.  Without any measurement and subsequent
comparison of a project's expected benefits and expected costs, the
criteria the agency is using to determine cost-effectiveness are
unclear.  Additionally, the 5-percent initiative allows for funding
projects that were difficult to evaluate against traditional program
eligibility criteria, thus providing the appearance that any project
could be funded under the 5-percent initiative.  For example, a
mitigation project to develop a ï¿½Hurricane Information
Center/Partnership in Educationï¿½ was denied funding three times by
FEMA.  FEMA initially ruled that because the project was an
ï¿½education and awareness campaign,ï¿½ it did not meet the Hazard
Mitigation Grant Program's eligibility requirements and was thus
ineligible for funding.  However, after the project was submitted for
funding under the 5-percent initiative, it was approved for $4,700 in
federal funding. 

      TORNADO-RELATED PROJECTS
---------------------------------------------------------- Letter :3.6

In August 1998, FEMA announced a policy that temporarily exempted
certain projects from benefit-cost analysis.  In essence, FEMA
extended its 5-percent set-aside by another 5 percent to fund
tornado-related projects.  The agency noted an increase in tornado
activity that it associated with the 1997-98 El Nino weather pattern
and suggested that the additional funding was needed to provide
warning systems that could not be funded through existing programs. 
The additional 5 percent in Hazard Mitigation Grant Program funding
was available only to states in which a disaster involving tornadoes
had been declared by the President.  Furthermore, in the interest of
using the funding remaining from older disasters, FEMA applied the
exemption to all disasters with unobligated funds that were declared
before fiscal year 1998, as well as all fiscal year 1998 and future
declarations in which tornadoes or high winds played a role. 

In announcing this exemption, FEMA noted that tornado mitigation
projects, such as warning systems, were often difficult to evaluate
against traditional quantitative criteria for determining
cost-effectiveness and eligibility.  According to FEMA, it is
difficult to measure the risk of tornadoes as well as the dollar
value of benefits associated with tornado-related projects, such as
tornado warning systems and public education.  The policy memorandum
stated that in lieu of conducting a benefit-cost analysis, FEMA would
allow the states to include a narrative that identified a project's
mitigation benefits and established an expectation that the project
would reduce or prevent future property damage, injury, or loss of
life.  To receive funding, a project had to be identified in a
state's hazard mitigation plan and needed to reduce or prevent future
damage to property, injury, or loss of life from tornadoes. 
Additionally, among other requirements, states had to develop a
comprehensive plan for warning citizens that included a public
education component.  This policy will remain in effect until FEMA
adopts proposed regulatory changes stating that warning systems will
be funded only from the original 5-percent set-aside.  FEMA officials
expect that the regulatory changes will be made final in August 1999. 

      HAZARD MITIGATION PLANNING
      PROJECTS FOR OLDER DISASTERS
---------------------------------------------------------- Letter :3.7

In October 1997, FEMA exempted hazard mitigation planning projects
associated with older disasters from benefit-cost analysis.  FEMA
decided that in the interest of expediting the closeout of funding
for disasters that occurred on or before June 10, 1993, the agency
would make program funds remaining from these disasters available for
hazard mitigation planning purposes.\8 The states were invited to
submit applications for funding that would help them develop plans
for mitigating multiple hazards.  The policy memorandum stated that
planning projects would be considered cost-effective measures.  For
example, the initial phase of a stormwater management project
included developing a comprehensive stormwater study for two
counties.  Under the policy memorandum, this study was considered
cost-effective.  One senior FEMA mitigation official noted that under
the agency's deadlines limiting the timetables for funding projects,
the funding available for any additional planning projects is
decreasing. 

--------------------
\8 When the Hazard Mitigation Grant Program was established, it
provided federal matching grants on a cost-share basis of up to 50
percent for a project.  Thus, FEMA refers to these mitigation
projects as ï¿½50/50 planningï¿½ projects.  With the 1993 amendments to
the Stafford Act, the federal cost share was changed from up to 50
percent to up to 75 percent. 

      QUANTIFYING THE PROJECTS
      EXEMPTED FROM BENEFIT-COST
      ANALYSIS
---------------------------------------------------------- Letter :3.8

For a number of reasons, FEMA is unable to quantify the actual number
and dollar amount of the projects it has exempted from benefit-cost
analysis.  FEMA officials explain that, to present accurate data,
headquarters would need to make a special effort to gather the
information directly from project files in the regions.  However,
FEMA officials estimate that the maximum amount that has been or
could be spent for three categories of exempt projects is
approximately $258 million.  This $258 million estimate includes
$113.5 million for exempt 5-percent initiative projects, $56.5
million for exempt tornado-related projects, and $88.3 million for
planning projects using funding from older disasters.  FEMA does not
know the maximum potential funding for the fourth category of exempt
projectsï¿½acquisitions of substantially damaged propertiesï¿½though
agency officials state that some portion of an estimated $1.6
billion\9 in Hazard Mitigation Grant Program funding will be spent on
these projects. 

FEMA officials have expressed reservations about the accuracy of
certain data fields within the Hazard Mitigation Grant Program
database, explaining that they are currently undertaking a review to
correct inaccurate information and to fill in data gaps.  The
officials also said they expect to have better data for managing the
program as they continue to implement changes that correspond with
FEMA's new management information systemï¿½the National Emergency
Management Information System. 

--------------------
\9 FEMA's estimate of $1.6 billion is based on total program funds
(i.e., $2.5 billion) minus (1) $626 million for two large projects
that underwent benefit-cost analysis and (2) $258 million in
potential funding for projects in the other exempted
categoriesï¿½5-percent initiative, tornado-related, and planning. 

   FEMA'S APPROACHES DO NOT ALWAYS
   ENSURE THAT MITIGATION PROJECTS
   ARE COST-EFFECTIVE
------------------------------------------------------------ Letter :4

FEMA's use of benefit-cost analysis appears to demonstrate that
certain hazard mitigation projects are cost-effective, although the
agency could provide better information to the officials conducting
benefit-cost analyses for some projects.  However, several factors
are limiting the agency's ability to demonstrate the
cost-effectiveness of projects that are exempt from benefit-cost
analysis.  For example, our review of $20.1 million in hazard
mitigation project funding in two FEMA regions found that over
one-third of the funding was exempt from benefit-cost analysis, even
though the majority of this project funding lacked an established
analytical basis supporting the exemption.  Establishing the basis
for exempting these acquisition projects and reviewing the
cost-effectiveness of other exempt projects after they are
implemented would help FEMA better ensure that these mitigation
projects are cost-effective. 

      FEMA'S USE OF BENEFIT-COST
      ANALYSIS APPEARS TO
      DEMONSTRATE PROJECTS'
      COST-EFFECTIVENESS, ALTHOUGH
      THE BEST AVAILABLE DATA ARE
      NOT ALWAYS USED
---------------------------------------------------------- Letter :4.1

Forty-one (75 percent) of the 55 projects we reviewed were evaluated
using benefit-cost analysis.  The projects included wind retrofits
(shutter projects), drainage improvements, seismic retrofits of
buildings, and the installation of gas shut-off valves in structures. 
For example, the wind retrofit projects included installing hurricane
shutters on schools that were to be used as hurricane shelters and on
buildings such as water treatment and wastewater treatment plants,
fire departments, and emergency medical facilities (all of which are
considered ï¿½criticalï¿½ community facilities).  These projects, which
accounted for 58 percent of the funding we reviewed ($11.7 million of
$20.1 million), were judged as cost-effective.  However, we also
found that the best available data for estimating the benefits of
acquisition projects were not always used in benefit-cost analyses
because the best data were not readily available. 

For example, in determining flood hazard dataï¿½which establish the
probability and severity of a flood event--FEMA's guidance suggests
using the flood insurance rate maps available through the National
Flood Insurance Program.  The flood hazard data are found in flood
insurance studies, which sometimes accompany the flood insurance rate
maps.\10 This information helps to establish the number of times a
flood is expected to occur in a given area (the frequency of future
flooding) and the level of flooding (its severity).  The quality of
this information can influence the outcome of a benefit-cost analysis
because overestimating the frequency or severity of a flood can
inflate the estimated benefits attributed to an acquisition project. 
We found little evidence that this information was used in the
benefit-cost analyses we reviewed.  According to FEMA officials, the
availability of the information is a concern because many of the
agency's maps are out of date or incomplete.  As a result, analysts
must rely on evidence from local officials or residents to establish
flood levels. 

In an internal policy paper outlining fiscal year 1998 objectives for
modernizing its flood hazard mapping program, FEMA discussed the
possibility of evaluating and possibly revising its flood hazard maps
as part of its standard response to a presidentially declared
flooding disaster.  Conducting a postdisaster evaluation or
verification of flood hazard maps could provide needed data on the
availability of accurate flood insurance rate maps for use in
analyzing proposed hazard mitigation projects.  One FEMA headquarters
official told us that this type of evaluation was conducted after a
flood in Georgia, noting that the postdisaster flood hazard
verification provided valuable information for directing future
mitigation efforts. 

We also found that the officials conducting benefit-cost analyses may
not always use the best available data on damage claims from past
flooding.  The quality of this information can affect the outcome of
an analysis because overestimating the damage from a previous flood
event can inflate the estimated benefits attributed to an acquisition
project.  FEMA officials told us that information on flood claims
available from the National Flood Insurance Program was not always
used, suggesting that information supplied by project applicants was
used instead.\11 We also found that the officials conducting
benefit-cost analyses do not always validate the damage claims
information submitted by the applicants.  As a result, an analysis
may rely on testimonial evidence from the applicantï¿½the individual
most likely to benefit from the acquisition project. 

FEMA officials have stated that the agency can provide damage claims
information from the National Flood Insurance Program to regional
officials conducting benefit-cost analyses.  While acknowledging some
concerns about the accuracy of the data, several senior FEMA
officials stated that this is the best information available. 
Currently, only general information on a community's flood damage
claims can be provided easily through FEMA's on-line computer system,
though regional officials can request a special report that includes
information on specific addresses.  FEMA officials stated that it
would not be difficult to modify the information to give regional
staff better access to claims information on individual properties. 
FEMA officials were interested in attempting to use the claims
information on a trial basis, including looking into the possibility
of allowing regional access to the information through FEMA's on-line
computer system. 

--------------------
\10 FEMA officials told us that the flood insurance rate maps do not
always include the studies. 

\11 Since the National Flood Insurance Program's damage claims
information originates from insurance claims submitted by residents
in participating communities, nonparticipating communities would not
produce any insurance claims data. 

      SEVERAL FACTORS ARE LIMITING
      FEMA'S ABILITY TO
      DEMONSTRATE THE
      COST-EFFECTIVENESS OF
      PROJECTS EXEMPT FROM
      BENEFIT-COST ANALYSIS
---------------------------------------------------------- Letter :4.2

While FEMA has explained its reasons for exempting four types of
mitigation projects, there are factors limiting its ability to
demonstrate that these mitigation measures are, in fact,
cost-effective.  Of the 55 projects we reviewed, 14 underwent no
benefit-cost analysis.  Certain factors, such as the lack of an
analytical basis supporting the exemption for acquisition projects
and a broad approach for determining cost-effectiveness, limit FEMA's
ability to demonstrate cost-effectiveness.  The 14 projects account
for $8.4 million (42 percent) of the funding, and they include
funding for emergency satellite communications, all-weather radios,
emergency alert systems, a public awareness campaign, and property
acquisitions.  Figure 1 shows the breakout of the $8.4 million in
funding for these exempt projects. 

   Figure 1:  Breakout of the $8.4
   Million in Funding for Exempted
   Mitigation Projects Reviewed by
   GAO

   (See figure in printed
   edition.)

Note:  This figure does not include a category for exempt planning
projects because the 55 projects we selected did not include any such
projects. 

As figure 1 shows, the majority ($5.8 million of the $8.4 million, or
69 percent) of the funding for exempt projects in our review went for
property acquisition projects.  FEMA's Inspector General reported in
March 1998 that FEMA had not produced the data or analysis to
demonstrate the cost-effectiveness of buying out substantially
damaged structures in a 100-year floodplain, adding that the agency
lacked an analytical basis for exempting such projects from
benefit-cost analysis.  While FEMA officials have begun initiating
efforts to address this concern, over a year has passed since the
Inspector General's report was issued, and the analytical basis has
still not been established. 

For two other categories of exempt projectsï¿½the 5-percent initiative
and tornado-related projectsï¿½the states are asked to provide a
narrative that identifies their potential mitigation benefits and
establishes a reasonable expectation that the projects will reduce or
prevent future property damage, injury, or loss of life.  For
example, one of the exempt projects involved the development of a
tornado warning network and a tornado mitigation demonstration
project.  The demonstration project, which was approved for $2.3
million in Hazard Mitigation Grant Program funding, was expected to
reduce storm-related damages.  Another exempt project involved
$45,000 in funding for the development of a public awareness campaign
and a brochure, which were intended to educate residents about the
hazards of living in a floodplain.  While these projects may be
cost-effectiveï¿½because they could reasonably be expected to reduce or
prevent future property damage, injury, or loss of lifeï¿½it is
difficult to determine their cost-effectiveness.  In fact, given such
a broad approach for determining a project's cost-effectiveness, it
is difficult to provide an example of a project that would not be
considered cost-effective. 

FEMA also exempted planning projects associated with older disasters,
although the agency has not demonstrated that such projects are
cost-effective.  While we agree that it is difficult to determine the
cost-effectiveness of planning projects and that certain planning
projects could prove to be cost-effective, exempting all planning
projects allows for a wide range of project approvals. 

One means of determining the cost-effectiveness of exempt projects
would be to conduct periodic reviews of selected projects after they
had been implemented.  For example, FEMA could undertake targeted
reviews of projects that funded local efforts to establish mitigation
strategies or plans.  These reviews could be used to demonstrate the
value of the projectsï¿½whether they enabled the localities to better
identify future mitigation projects or helped reduce potential
disaster-related damage by alerting residents to certain hazards.  To
the extent that the reviews demonstrated the cost-effectiveness of
the projects, they would establish a basis for exempting similar
projects in the future. 

   CONCLUSIONS
------------------------------------------------------------ Letter :5

The majority of the projects that underwent benefit-cost analysis
appeared to be cost-effective, though we also found that the best
available informationï¿½such as flood hazard information from flood
insurance studies and flood damage information from past insurance
claimsï¿½was not always used in analyzing projects designed to mitigate
future damage from flooding.  FEMA could assist the officials
performing the analysis by conducting postdisaster reviews of flood
hazards that could be used to update flood hazard information and by
making information on past insurance claims more readily accessible. 

While FEMA has explained its rationale for exempting certain types of
projects from benefit-cost analysis, it is limited in its ability to
demonstrate their cost-effectiveness because it lacks an analytical
basis for exempting acquisitions of certain floodplain properties,
uses a broad approach to determine the cost-effectiveness of other
projects, and seldom reviews the cost-effectiveness of projects after
they have been implemented.  FEMA estimates that approximately $258
million could be spent on exempt projects, not counting the funding
for exempt acquisition projects.  Our review of $20.1 million in
funding for 55 mitigation projects found that $5.8 million, or 29
percent of the funding, was for acquisition projects that FEMA had
exempted from benefit-cost analysis.  Until FEMA establishes an
analytical basis supporting the cost-effectiveness of these projects,
it cannot ensure that it has allocated this funding cost-effectively. 
Although FEMA officials have begun initiating efforts to address this
concern, over a year has passed since the Inspector General
questioned the cost-effectiveness of exempt acquisition projects, and
an analytical basis remains to be established. 

   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

To ensure that only cost-effective projects are funded through the
Hazard Mitigation Grant Program, the Director of FEMA should
establish an analytical basis supporting the cost-effectiveness of
acquiring substantially damaged properties in floodplains.  Also, to
better ensure the cost-effectiveness of other types of projects
exempted from benefit-cost analysis, the Director should conduct
periodic reviews of the projects after they have been implemented to
determine whether they were cost-effective. 

Additionally, to provide the best available data for analyzing the
cost-effectiveness of proposed flood hazard mitigation projects, the
Director of FEMA should

  -- conduct postdisaster verifications of flood hazards for use in
     evaluating and possibly revising flood hazard map information
     and

  -- make the agency's information on past insurance claims more
     readily available for FEMA staff conducting benefit-cost
     analyses. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We provided the Federal Emergency Management Agency with a draft copy
of this report for review and comment.  The agency agreed with the
report's recommendations and noted that they complement activities
already under way at the agency.  For example, FEMA agrees that the
agency should periodically review and evaluate its policies for
determining the cost-effectiveness of hazard mitigation projects,
citing an agency evaluation of the benefits and costs of acquiring or
relocating substantially damaged structures in a floodplain.  We note
this effort in our report and agree that the evaluation complements
our first recommendation, since it represents an initial effort by
FEMA to establish an analytical basis for the cost-effectiveness of
acquiring substantially damaged properties.  Our report also notes
preliminary interest by the agency in providing the best available
data for analyzing the cost-effectiveness of proposed flood hazard
mitigation projectsï¿½our final recommendation.  However, FEMA has no
activities under way to complement our second recommendation for
periodic reviews of other types of hazard mitigation projects
exempted from benefit-cost analysis.  Therefore, we made no changes
to our report because either FEMA's activities do not fully address
our recommendations or no complementary activities are under way. 

The agency also commented that our report is focused on the use of
benefit-cost analysis in determining the cost-effectiveness of hazard
mitigation projects, although cost-effectiveness determinations do
not always equate to the use of benefit-cost analysis.  The agency
noted that the decisions it makes in approving a project cannot
always be reduced to a single economic analysis, because determining
a project's eligibility also involves considering issues such as its
environmental and social benefits and the uncertainty associated with
the analytical methods used.  While our report acknowledges that the
Stafford Act does not define how to determine cost-effectiveness, it
mentions that OMB's guidelines, as well as the agency's regulations
and guidance, suggest that benefit-cost analysis is the primary
approach for ensuring that mitigation projects are cost-effective. 
We agree that there are difficulties inherent in using benefit-cost
analysis to determine the cost-effectiveness of some hazard
mitigation projectsï¿½such as the inability to estimate the value of
the benefits of some projects or the difficulties in considering
public policy issuesï¿½and that alternative approaches for determining
the cost-effectiveness of these projects can be used.  However, as
discussed in our recommendations, we believe that to ensure the
cost-effectiveness of hazard mitigation projects, either a sound
analytical basis must be established for the alternative approaches
before they are used, or the cost-effectiveness of the approaches
must be validated through periodic reviews of projects after they are
implemented.  FEMA's written comments appear in appendix I. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To determine the approaches FEMA and the states use to ensure that
hazard mitigation grants are targeted to cost-effective mitigation
measures, we examined

  -- FEMA's regulations, policy guidance, and handbooks on
     identifying and approving Hazard Mitigation Grant Program
     projects for funding, focusing particularly on the requirements
     for cost-effectiveness determinations;

  -- state policy and guidance papers, state hazard mitigation plans,
     and state Hazard Mitigation Grant Program administrative plans
     focusing on the states' procedures for determining the
     cost-effectiveness of proposed projects; and

  -- studies of the Hazard Mitigation Grant Program conducted by
     groups such as a university and a nonprofit organization. 

To determine whether the approaches used by FEMA and the states
ensure that mitigation measures are cost-effective, we interviewed
officials from FEMA's Mitigation Directorate; regional offices in
Atlanta, Georgia (Region 4), and Denton, Texas (Region 6); and Office
of the Inspector General.  We also interviewed Florida officials
because of their role in analyzing projects for cost-effectiveness. 
We reviewed 55 hazard mitigation projects that were submitted to
FEMA's regions 4 and 6 to document the extent to which formal
benefit-cost analyses were conducted and the degree to which the data
used in these analyses were validated.  Thirty-six of these projects
were Florida projects reviewed by Florida officials under a May 1998
memorandum of understanding between Florida and FEMA as part of a
pilot program called the ï¿½managing state concept.ï¿½ We chose Florida
because it was the first state authorized to conduct its own
benefit-cost analyses under this program and was responsible for over
8 percent ($34.2 million) of the Hazard Mitigation Grant Program
funds obligated in fiscal year 1998.  We reviewed 19 hazard
mitigation projects submitted to FEMA Region 6 by Arkansas,
Louisiana, and Texas.  The other two states in Region 6ï¿½New Mexico
and Oklahomaï¿½submitted no new projects during this period.  The 19
projects were those received by the region since March 1997, when the
staff began using FEMA's computerized benefit-cost analysis modules. 
We selected Region 6 because of the wide range of disaster types
represented and the states' experience in hazard mitigation. 

Furthermore, to determine the adequacy of the support provided to
establish the cost-effectiveness of projects exempted from formal
benefit-cost analysis, we judgmentally selected 20 additional Florida
projects that, from their descriptions, appeared to meet the criteria
for exemption.  We then requested and reviewed selected information
from FEMA's disaster management database and the project application
and cost-effectiveness narratives contained in Region 4's project
files.  Through our review of the documentation provided, we
identified 10 projects that were exempt from benefit-cost analysis. 

We performed our work from December 1998 through June 1999 in
accordance with generally accepted government auditing standards. 

---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the appropriate congressional
committees; the Honorable James Lee Witt, Director of the Federal
Emergency Management Agency; and the Honorable Jacob J.  Lew,
Director of the Office of Management and Budget.  We will also make
copies available to others on request. 

If you have any questions about this report, please contact me or Pat
Moore at (202) 512-7631.  Key contributors to this assignment were R. 
Tim Baden, Thom Barger, and John McGrail. 

Stanley J.  Czerwinski
Associate Director, Housing and
 Community Development Issues

(See figure in printed edition.)Appendix I
COMMENTS FROM THE FEDERAL
EMERGENCY MANAGEMENT AGENCY
============================================================== Letter 

(See figure in printed edition.)

Related GAO Products

Disaster Assistance:  Information on the Cost-Effectiveness of Hazard
Mitigation Projects (GAO/T-RCED-99-106, Mar.  4, 1999). 

Disaster Assistance:  Information on Federal Costs and Approaches for
Reducing Them (GAO/T-RCED-98-139, Mar.  26, 1998). 

Disaster Assistance:  Information on Federal Disaster Mitigation
Efforts (GAO/T-RCED-98-67, Jan.  28, 1998). 

Disaster Assistance:  Information on Expenditures and Proposals to
Improve Effectiveness and Reduce Future Costs (GAO/T-RCED-95-140,
Mar.  16, 1995). 

GAO Work on Disaster Assistance (GAO/RCED-94-293R, Aug.  31, 1994). 

*** End of document. ***