INNOVATIVE LOCAL FUNDING FOR DISASTER

By James Fielding Smith

American Military University and JSW Associates

Local funding for disasters and catastrophes is both simple and very
complicated. Much of the infrastructure and capabilities for disaster
preparedness are routine parts of local budgets, appearing as personnel,
operating, and capital items in departmental budgets such as fire
suppression, law enforcement, emergency medical services, and emergency
communications. These appropriations all support routine, non-disaster
functions of the departments, with the same personnel and equipment
mobilizing for disasters. Federal funds in the form of FEMA grants help,
particularly with equipment purchases, specialized training, and
planning. Preparedness is proactive; the other side of the coin is
reactive. Local reserve funds, state emergency funds, emergency
appropriations, insurance, and ultimately federal grants and
reimbursements fund part of response and all of recovery, remediation,
and reconstruction. The philosophy has always been spend what it takes,
then look to the federal government for financial assistance under the
Stafford Act.

On the surface, this sounds pretty good and complete. However, two key
stages of disaster response get left out. These are prevention and
mitigation. Funding for these activities is difficult as they are done
pre-need and often without the political momentum provided by a recent
disaster. Justification is probably the most difficult aspect.
Prevention activities have to be convincingly able to prevent damage
from the design disaster, and this is hard to demonstrate in advance.
Mitigation activities reduce the impacts of a disaster that cannot be
prevented. Both prevention and mitigation depend absolutely on risk
analysis and on the application of results gained from similar design
events in other locations or times. Despite these difficulties,
prevention and mitigation potentially offer huge benefits and fiscal
gains to communities. The problem is how to pay for them. Problems with
funding them by traditional governmental methods suggest that innovative
local funding may be needed for disaster prevention and mitigation.

Local and state funding methods for disaster preparedness and response
can generally be classified as customary or innovative. Unless otherwise
noted, all funds come out of general tax revenues---property tax, income
tax, business tax, sales tax, business and professional taxes, property
transfer tax, or utility tax---and pass through the general fund. Tax
revenues at the local level are rarely earmarked for specific purposes.
To get from the general fund to disaster preparedness and response fund,
they ordinarily have to be appropriated by the legislature or local
board. This is where the greatest difficulty arises in the case of
emergencies and catastrophes: the need is too big and overwhelms the
total revenues available locally, or the need is not publicly perceived
well enough to compete with other essential services, or both.
Prevention and mitigation are usually non-competitive and frequently too
big. Response, recovery, remediation, and reconstruction are all
typically too big. Only planning and preparedness typically fit into
locally appropriated budgets.

For an innovative funding method to be useful for disaster response, it
needs to meet certain criteria:

-   Based on realistic risk assessment.

-   Can be sold to the public as effective and appropriate, sometimes
    assisted by the aftermath of a disaster or catastrophe.

-   Links funding source to funding use logically and publicly.

-   Requires approval just once or rarely, not per event or annually.

-   Produces adequate recurring or continuous revenues for the project.

-   Protected from being squeezed out in budget battles.

-   Limited to directly relevant activities and not used to displace
    other appropriated funds.

-   Lead to tangible results.

It is highly unlikely that all eight criteria will be met by a funding
source. However, a good funding method will probably meet most of these
criteria. Of the criteria, the most essential are basis on a realistic
risk assessment, logical and visible linkage of funding source to
funding use, and tangible results. If the greatest source of local
government legitimacy is protecting its citizens, then innovative
funding methods must be clearly and fairly aimed at the protection of
life and property. This means that a realistic risk assessment must be
done to estimate the types of disasters that are most likely. Funding
for prevention and mitigation will be publicly supported if the source
is tied to the resource at risk. For example, the Florida Hurricane
Disaster Trust Fund is funded by a surcharge on property insurance on
all structures and has been used to greatly improve local preparedness.
It has also been supplemented by improved building codes and
improvements in the handling of insurance policies and claims. Florida
also illustrates the importance of tangible results: the trust fund was
born out of Hurricane Andrew and paid major dividends during the four
hurricane series in 2004. Programs, including hurricane deductibles and
the Florida Hurricane Catastrophe Fund, proved their effectiveness. They
helped the Florida insurance community handle all 1.7 million claims.
(FLAINS)

Examples of customary and innovative funding methods are listed in
Table 1. The table was meant to be exhaustive, but some methods may have
been overlooked, especially on the innovative side. The table is not
meant to imply equivalency by side-by-side placement of items in the two
columns---it is just two lists. The customary column is roughly arranged
by descending importance or frequency of use. The innovative column is
roughly arranged in order of increasing innovation or novelty.

Customary Funding Sources

Among customary funding methods for disasters, most are essentially
reactive in nature. This includes the biggest sources of cash\--state
emergency funds, emergency appropriations, insurance reimbursements, and
Stafford Act grants---and the dominant load-shifting
activities---charity, non-governmental organizations, and the
redirection of state or local assets. All of these mechanisms mostly
happen during response and recovery; thus, they are almost purely
reactive.

There are customary funding mechanisms that are proactive. The amounts
of money are generally much smaller than the reactive sources, although
the 911 phone taxes in aggregate generate huge funds. Proactive sources
include annual federal grants and state matching for federally mandated
programs (FEMA, SARA-Superfund, EPCRA, CERCLA), general revenues applied
to public services, special tax districts for beach enhancement or
restoration, government or volunteer organizations that have filed for
501(C)3 (non-profit organization) status in order to carry out
fundraising, Stafford Act grants set-asides for planning, municipal
bonds for prevention or mitigation activities, 911 phone taxes, flood
insurance (NFIP), and airport and cruise ship security fees.

There are some fiscally important support sources that never appear in
budgets. The sweat equity of volunteers may be the largest. Examples of
this are the CERT programs in New York and California. Perhaps this
should be viewed as a micro-scale case where the load is shifted to
individuals instead of organizations. A second customary but hidden
source of disaster funding is the prevention of damage-prone structures
or populations in fragile coastal areas by Coastal Zone Management Act
(CZMA), including dune preservation, building setbacks, building bans in
highly erodible areas. Flood insurance, property insurance, and mortgage
rules act similarly to prevent flood damage. The last "invisible"
funding source is the property taxes foregone by municipalities and
counties due to land use restrictions that reduce damage risk. Examples
of this are bans on floodplain development, density controls,
agricultural land protection, and natural areas protection. Foregone tax
revenues are not usually viewed as a proactive funding mechanism for
disasters. However, it has long been viewed as a post-disaster
consequence of property damage and business disruption.

Innovative Funding Sources

For this paper, innovative means fairly recently evolved, either unused
or used just a few places, and potentially worth doing. For example,
special taxes for beach enhancement or restoration have been used in
Miami and the Mississippi Gulf Coast, but they could be more widely
applied to raise funds for prevention and mitigation. Taxes on tourists
are widely used to fund visitors and convention bureaus; why should not
they also be used to protect the resort communities that draw the
tourists.

Florida has been a major innovator, largely motivated by the experiences
during and following Hurricane Andrew in 1992. By 1994 the Florida
legislature had created the Florida Emergency Management, Preparedness,
and Assistance Trust Fund, funding it with a surcharge---actually a
tax---on residential and business casualty loss insurance premiums. In
its first year (1993) approximately \$12 million was added to the fund.
The primary use of this money is to supplement county efforts to fund
highly professional emergency management programs in every county in the
state. The validity of this approach was demonstrated in 2004 when
Florida was hit by four major hurricanes. On drawback to this funding
approach is that it is based on a flat fee per insurance policy, so it
does not go up as property value rises.

Florida also led the way in mandating far tougher building code
requirements and enforcement. This is a major step up for hurricane
mitigation, and it mirrors similar long-term efforts by California to
control earthquake impacts through its building code. Such building
codes are funding mechanisms because they shift the costs to property
owners and developers, just as the hurricane catastrophe fund did.

The use of federal highway funds (SAFETEA-LU) for evacuation planning is
new, and it represents an interesting shift in viewing evacuations as a
transportation problem rather than a law enforcement or emergency
management problem. The confused evacuation of southeastern Louisiana
for Hurricane Katrina and the Galveston and Houston areas for Hurricane
Rita in 2005 demonstrated the appropriateness of this shift in funding
and viewpoint. SAFETEA-LU provided \$1 million to evaluate Gulf Coast
evacuation plans and needs.

There is a cluster of innovative funding tools centered on insurance.
Several insurers have developed weather insurance. It is typically
purchased by event promoters to protect against weather disruption and
loss of business, but it could conceivably be expanded to cover
disasters. Some states and localities are considering making property
insurance mandatory, perhaps with subsidies where necessary. This would
shift costs to property owners and developers while also reinforcing the
effects of toughened building codes and environmental setbacks. In India
catastrophe bonds, which provide an alternative to reinsurance, are
popular, but not in the U.S. However, some states---Alabama, Florida,
and Hawaii, for example---have developed state hurricane and wind pools,
or funds, to back up the reinsurers in a disaster. This approach has
been highly successful, at least according to the insurance industry in
Florida, and seems likely to spread to other states and other types of
disasters.

General revenue or good faith bonds could be issued to pay for
prevention and mitigation activities, but this approach has not been
taken. Bonds are used to buy and develop parks, greenways, natural
areas, and open space, all of which can act to mitigate the losses in a
disaster, depending on how they interact with the forces involved.
Preserving wetlands can be a powerful form of mitigation against
flooding and coastal erosion. Wetlands can be protected by purchase
(perhaps with bond proceeds), regulation, or by mitigation policies on
permits.

A witty budget expert I know suggested two new revenue sources that
might be called the "yard sale" and "bake sale" options. A local
government could dedicate revenue from surplus property sales to
preparedness, prevention, and mitigation; this is the yard sale option.
Her second suggestion is already happening. Organizations including
governmental departments have filed for 501(C)3 (non-profit
organization) tax status, thus allowing them to do fund raising. This is
the bake sale option.

The most aggressive and expensive approach to funding prevention and
mitigation is to design or redesign communities to avoid or resist
damage from the types of disasters for which they have an appreciable
risk (Topping). In this option, many pieces come together---building
codes, insurance benefits, secure utilities, shelters, evacuation, and
communication and warning systems. Ultimately, the residents and
business owners in these communities would pay for the designed-in and
built-in preventive and mitigation measures. A few communities have been
built in Florida with hurricane survival and sustainability in mind, but
the same approach would work for earthquakes, wildfires, or most other
types of disasters. Gated communities are a well-known response to the
threat of civil unrest, so it is not a particularly new general concept.

By far the greatest funding source for planning, preparedness,
prevention, and mitigation is a matter of point of view. If the public
and its leaders accept that the costs of response, recovery,
remediation, and reconstruction can be lessened by intelligent
pre-disaster actions, the next step is to view some portion of the money
that will be saved as a legitimate source of funding for planning,
preparedness, prevention, and mitigation. This shift to a new point of
view has not happened in most communities or for most types of
disasters. Historical demonstration of savings due to prevention and
mitigation is been nearly impossible. Actual fiscal losses are rarely
documented and totaled. Look at the usual figures for hurricanes---they
show insured losses based on insurance claims and payments.
Documentation of how much damage was avoided or was reduced is often
sketchy, as is hard evidence on what preventive and mitigation measures
were actually in place before the disaster. One of the few good examples
is (again) Florida where comparison of the experience of Hurricane
Andrew in 1992 and the four hurricanes in 2004. Evacuations, insurance
claim processing, and structural damage are all claimed to have improved
as a result of the post-Andrew reforms to the building code,
insurance/reinsurance, and county emergency offices.

Conclusions

Not all funding methods are usable for all types of disasters. For
example, insurance works for fire, wind, flood, and even civil
disobedience, but some forms of terrorism and accidents such as nuclear,
biological, chemical and radiological exposures are uninsurable.
(Goldman) Another example would be extensive levees and floodwalls that
would have total costs far beyond the reach of any tools except federal
or state appropriations or long-term bonds. Size matters, but this is
covered in the innovative funding criterion of being able to lead to
tangible results.

The suggested criteria for evaluating innovative funding mechanisms have
to be applied separately to each type of disaster. The physical
mechanism of the disaster, risk, frequency, intensity, possible range of
intensities, geography, built environment, population density, and the
ratio of affected area to intact surrounding area all affect the costs
of prevention and mitigation as well as all other aspects of emergency
management.

Prevention and mitigation are the focus of this survey of innovative
funding methods for disasters because they are the most difficult
aspects of emergency management to fund. It is hard to sell citizens and
appropriating bodies on the need for spending on things that have not
happened and may never happen. Effective education, risk assessment, and
risk communication are essential, but so is timing and a funding
proposal that meets most of the suggested criteria. The excellent
innovative programs in Florida grew out of state and local experience
with Hurricane Andrew.

Bibliography

FLAINS. 2004. 2004 Hurricane Season Update.
<http://www.flains.org/public/caneswhitepaperlynne1118final.pdf>.
Downloaded 4/25/06.

Goldman. <http://media.corporate-ir.net/media_files/irol/17/177842/>
presentations/GoldmanPresentationDec2005FINAL.pdf

Mittler, Elliott. 1997. "A Case Study of Florida\'s Emergency Management
Since Hurricane Andrew." Natural Hazards Research Working Paper #98.
Boulder (CO): University of Colorado Natural Hazards Research and
Applications Information Center.
http://www.colorado.edu/hazards/wp/wp98.html

Safe, Accountable, Flexible, Efficient Transportation Equity Act: A
Legacy for Users (SAFETEA-LU), Public Law 109-59

Stafford Act of 1988 (42 U.S.C. §§ 5121-5206)

Topping, Ken. 1997. Mitigation from the Ground Up: Sustainable Cities in
California. Natural Hazards Observer 21(4), 1 May 1997.

+-----------------------------------+----------------------------------+
| **Table 1**                       |                                  |
|                                   |                                  |
| **State and Local Funding         |                                  |
| Methods**                         |                                  |
+-----------------------------------+----------------------------------+
| **Customary**                     | **Innovative**                   |
+-----------------------------------+----------------------------------+
| -   General revenues for public   | -   Beach enhancement or         |
|     services                      |     restoration---special taxes  |
|                                   |                                  |
| -   Annual federal grants and     | -   Taxes on tourists            |
|     state matching (FEMA,         |                                  |
|     SARA-Superfund, EPCRA,        | -   State catastrophe trust fund |
|     CERCLA)                       |     (FL)                         |
|                                   |                                  |
| -   Insurance reimbursement       | -   Tax/surcharge on insurance   |
|                                   |     premiums (FL)                |
| -   Redirection of state or local |                                  |
|     assets---deferral of normal   | -   Building code requirements   |
|     activities                    |     and enforcement              |
|                                   |                                  |
| -   Shifting responsibility to    | -   Highway funds (SAFETEA-LU)   |
|     individual citizens,          |     for evacuation planning      |
|     charities, NGOs               |                                  |
|                                   | -   Weather insurance            |
| -   911 phone taxes               |                                  |
|                                   | -   Making insurance mandatory   |
| -   State Emergency Fund          |     (with subsidies where        |
|                                   |     necessary)                   |
| -   Emergency appropriations      |                                  |
|                                   | -   Wetlands mitigation policies |
| -   Stafford Act grants           |                                  |
|                                   | -   Catastrophe bonds            |
| -   Grants from specialized       |     (alternative to reinsurance) |
|     federal statutes, e.g.        |                                  |
|     National Windstorm Hazard     | -   State hurricane and wind     |
|     Reduction Act of 2004         |     funds or pools (AL, FL, HI)  |
|                                   |                                  |
| -   Sweat equity---volunteers     | -   Bonds for prevention or      |
|     (e.g. NY's CERT program, CA   |     mitigation activities        |
|     Citizen Corps=CERT)           |                                  |
|                                   | -   Dedicate revenue from sales  |
| -   Zoning                        |     of surplus property          |
|                                   |                                  |
| -   CZMA setbacks, dune           | -   Organizations have filed for |
|     preservation                  |     501(C)3 (non-profit          |
|                                   |     organization) status, thus   |
| -   Foregone property taxes       |     allowing them to do fund     |
|     (floodplain development       |     raising---the "bake sale and |
|     foregone)---not usually       |     telethon" option             |
|     viewed this way.              |                                  |
|                                   | -   Community design/redesign    |
| -   Flood insurance NFIP          |                                  |
|                                   | -   Reduce future risk/loss      |
| -   Airport security fees         |     through mitigation           |
+-----------------------------------+----------------------------------+