USA - As disasters become more costly, the US needs a better way to distribute the burden

BI Editor's note:This is the fourth post in a series on national disaster reforms. Previous posts outlined principles for reform, examined changes to the federal disaster declaration process, and recommended improvements in federal disaster management.

Disasters are economically costly. Many of these costs are well documented, such as the need to repair and replace damaged property, relocation expenses, and lost income or revenue for households and businesses. After a disaster, the public sector will have to rebuild or repair infrastructure and public buildings, and may lose tax revenue at the very moment they must also increase assistance to households. And with the increasing frequency, severity, and variety of climate-change-related disasters, these costs are only growing.

In this piece, we examine who pays which costs along the disaster continuum, including not just recovery, but also mitigation. Disasters are a shared burden and, as such, costs are inevitably spread across many actors. But the country’s current spending is missing opportunities to better align incentives, drive more cost-effective risk reduction, and more equitably distribute cost burdens.

Disaster reform should not remove all risk-sharing, as it reduces the costs for some of the most vulnerable and, if designed well, can increase the likelihood of risk reduction investments. Instead, we must better assign the cost of decisions that increase risk—such as developing on highly exposed land—to those who benefit from such decisions, including developers, their financiers, and political backers. We must also enable households and organizations to reduce their individual risk, especially populations facing higher costs due to historical disinvestment. But these strategies require us to document whose decisions are increasing risk and hold those stakeholders accountable.

So, where are we falling short in the current distribution of costs and allocation of responsibilities?

We lack an accurate understanding of the distribution of disaster costs

Comprehensive data on how disaster costs are distributed across stakeholders is lacking. The fact that disasters activate spending across multiple agencies at all scales of government makes tracking difficult, especially since most disaster spending is not explicitly marked as disaster-related dollars. Many public and private entities simply do not comprehensively track their spending on disasters. Collecting private sector spending on the full range of the disaster continuum would be an impossible task.

This is true for costs across the disaster continuum, which includes activities from before the event (mitigation and preparedness), during (relief and response), and after (recovery and reconstruction). And though all parties benefit from investments at every stage, costs are not evenly distributed.

While taxpayer dollars typically fund risk reduction, there are myriad private actors that benefit without contributing, from property and infrastructure developers to insurers. Further, our accounting frameworks—which keep disaster impacts and recovery as an incidental and unpredictable cost—make it difficult to capture the return on investment from risk reduction. Since we do not track disaster liabilities, reducing them is an expenditure, not a benefit.

Most disaster costs are federalized

With the federal government bearing many post-disaster costs, state and local governments may underinvest in risk reduction.

The federal government shoulders a substantial share of large disasters’ costs, though it has little influence, and no direct say, in policies such as building codes or local zoning. This cost burden is driven by the disaster declaration process as well as congressional choices about activating and funding other programs. When a declaration is issued, FEMA Public Assistance (PA) supports state, tribal, and local governments in clean-up, repairs, and rebuilding of public infrastructure. This can be quite generous, but typically comes with cost shares of 25% for the state or tribal government unless waived. Beyond PA grants, local governments are recipients of generous community disaster loans, repayment of which is often waived through loan forgiveness—essentially turning them, too, into grants. When activated, other programs direct even more dollars to local governments post-disaster. The Department of Housing and Urban Development’s (HUD) Community Development Block Grant Disaster Recovery (CDBG-DR) program can funnel substantial dollars to local governments, as do programs in the Department of Transportation, Department of Commerce, and other agencies.

Local governments are not completely fiscally insulated. For example, research has documented that severe wildfires can have negative impacts on local budgets. Some states have annually funded disaster accounts or contingency budgets for certain agencies, and many will appropriate additional dollars or transfer funds between agencies post-disaster. Across the board, state and local governments pay a higher share of disaster costs for less severe events that do not exceed the federal declaration threshold. For all kinds of events, local governments also suffer longer-term losses in housing, economic activity, and other sources of revenue. Few of these costs are documented or analyzed across disasters. However, the federal government’s emergency response, recovery framework, and assistance programs are designed with significant redundancies—suggesting it can pay for a sizeable share of repairs and rebuilding after a disaster, including in communities that could have mitigated the damages.

When you dissociate the benefits and costs of an activity, it misaligns incentives. If disaster costs are paid by others, there is less incentive to pay to lower them, even when it would be cost-effective overall. Economists refer to this as “moral hazard.”

‍ Local and state governments make land use and building code decisions, and cities, counties, and special districts also directly fund and control much of our public infrastructure—even where federal agencies also provide funding. If those entities capture the benefits of risky choices—such as higher tax revenues and lower expenditures—but bear none of the disaster costs, excess development and underinvestment in hazard mitigation in high-risk areas will occur. Disasters will then wreak avoidable havoc—but evidence of contributions to that havoc are buried and accountability is elusive.

Under certain circumstances, moral hazard is less concerning; for example, when actors bear risk but do not have the ability to lower it. This could be because they lack decisionmaking power—take renters, who have limited ability to retrofit the homes they occupy. Some groups, such as low-income homeowners or nonprofits with little income and savings, simply do not have the funds to invest in reducing risks, even with the motivation and opportunity. Some jurisdictions have been so under-resourced (and some communities within them have been so underinvested) that disaster mitigation investments are well beyond their reach. Further, some elected officials overlook communities’ mitigation opportunities. And in some rural communities, there are insufficient resources for effective and fair disaster relief and response, let alone mitigation.

Federal assistance to households for disaster recovery is limited to prevent purported dependency

In larger disasters, households and businesses may get some assistance from the public sector, but they pay much of the costs themselves. Households often receive a lower share of total losses covered by federal support than local governments. The amount each household typically receives from FEMA’s Individual Assistance (IA) is limited: average grants for major storms range from only $1,000 to $8,000. The IA program can also be difficult for households to navigate, and has been shown to have administrative inequities.

Federal disaster loans to households and businesses will need to be repaid, limiting any federal subsidy to the interest rate. And while HUD dollars may ultimately make their way to households, it is uncertain and typically takes many years. This lack of immediate support for the most economically vulnerable can leave them struggling. Those with insurance fare better, but those without can spiral. This lopsided approach to disaster management is also inequitable: It traps under-resourced households and widens inequality post-disaster.

Our system prioritizes expensive recovery rather than prudent risk reduction

Community-level investments in risk reduction benefit all residents and, in turn, reduce public financial exposures. Given their scale, these investments are unlikely to be funded by any one actor, which underscores the need for public investment. Yet the public sector spends far less on risk reduction than on recovery, and it fails to target scarce risk reduction dollars to the highest-need and highest-risk areas.

Historically, investments in risk reduction have paled in comparison to spending on disaster recovery. FEMA’s pre-disaster mitigation spending has been minimal, and spending from the U.S. Army Corps of Engineers for flood mitigation has focused on a limited number of flood control projects around the country.

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