Budget office paints grim fiscal portrait of flood insurance program

Program's debt was $17.5 billion as of May; Congress has authorized FEMA to borrow $20.8 billion from the Treasury.

A new Congressional Budget Office report finds that structures covered under the federal government's flood insurance program are twice as expensive as the typical American home and that the program provides significant subsidies for coastal homes that cost more than $1 million.

The report, requested by Senate Budget ranking member Judd Gregg, R-N.H., paints a grim fiscal portrait of the program that provides insurance for 5.4 million American policyholders.

Because of the claims from the 2005 hurricane season, the CBO noted that the program's current debt was $17.5 billion as of May. Congress has authorized the Federal Emergency Management Agency, which administers the program, to be able to borrow $20.8 billion from the U.S. Treasury.

But the agency said that over the long run, the program's debt is expected to grow about $900 million annually because of current policies.

Older structures in the program -- those that were built before 1975 -- receive less than fair-market rates compared to newer homes under the program, resulting in some high-priced coastal properties receiving a de facto subsidy.

The CBO has estimated that those subsidies contribute to an actuarial imbalance of $1.3 billion that does not go into the program. Legislation to revamp the program, sponsored by House Financial Services Chairman Barney Frank, D-Mass., would phase out subsidized rates on vacation and second homes and increase the amount FEMA can raise policy rates in any given year from 10 percent to 15 percent.

A similar bill passed the House last year, but stalled in the Senate at the behest of Louisiana Democratic Sen. Mary Landrieu, who thought the bill would be too punitive on constituents.

The report detailed that the median value for single-family homes in the program range from about $220,000 to $400,000, compared to the average U.S. home value of $160,000. It also found that the program provides subsidies for expensive homes in coastal areas; 40 percent of the subsidized coastal properties are worth more than $500,000 and 12 percent are worth more than $1 million.

The CBO found that 23 percent of the subsidized coastal properties are not a primary residence for the policyholder.

The report noted that policyholders with subsidies pay only up to 40 percent of their full-risk premium. FEMA has estimated that the annual subsidized premium of $721 last year would likely cost $1,800 to $2,060 when priced at its full risk.

The report also said that for properties in areas where the probability for flooding is high, subsidized properties could cost more than three times the average.