National Flood Insurance Program: Options for Providing Affordability Assistance
Released: 2016-03-10T00:00:00

Letter

Background

NFIP Overview

In 1968, Congress created NFIP to address the increasing cost of federal disaster assistance by providing flood insurance to property owners in flood-prone areas, where such insurance was either not available or prohibitively expensive. The 1968 law also authorized premium subsidies to encourage community and property owner participation. To participate in the program, communities must adopt and agree to enforce floodplain management regulations to reduce future flood damage. In exchange, federally backed flood insurance is offered to residents in those communities.

NFIP was subsequently modified by various amendments to strengthen certain aspects of the program. The Flood Disaster Protection Act of 1973 made the purchase of flood insurance mandatory for properties in SFHAs that are secured by mortgages from federally regulated lenders. This requirement expanded the overall number of insured properties, including those that qualified for subsidized premiums. The National Flood Insurance Reform Act of 1994 expanded the purchase requirement for federally backed mortgages on properties located in an SFHA.

Key Factors for NFIP Premium Rates

FEMA bases NFIP premium rates on a property’s flood risk and other factors. A FIRM is the official map of a community on which FEMA has delineated both the risk premium zones applicable to the participating community and SFHAs. FEMA studies and maps flood risks, assigning flood zone designations from high to low depending on the likelihood of flooding. Properties in SFHAs are at high risk, specifically a 1 percent or greater annual chance of flooding, and are designated as zones A, AE, V, or VE. FEMA also bases premium rates on property and policy characteristics. For example, FEMA bases premium rates on occupancy type (single-family or multifamily unit), number of floors, and elevation of the property—that is, the difference between the lowest elevation of the building relative to its base flood elevation—if applicable. Base flood elevation refers to the level relative to mean sea level at which there is a 1 percent or greater chance of flooding in a given year. Additionally, FEMA uses policy characteristics, such as building and content coverage amounts and policy deductible amounts, in setting premium rates.

NFIP has two basic categories of premium rates: those intended to reflect the full risk of flooding to the group of properties within a rate class (full- risk rates) and those that are not intended to reflect full risk (subsidized rates). Full-risk rate structures are mostly buildings constructed after a community’s FIRM was published and are referred to as post-FIRM. These structures have been built to flood-resistant building codes or have had their flood risks mitigated and generally are at or above base flood elevation. Structures with subsidized rates are mostly buildings constructed before a community joined NFIP and are generally referred to as pre-FIRM because they were built before the potential for flood damages was known and identified on the community’s FIRM. Unlike full- risk rates, subsidized rates do not take elevation of the property into consideration. Property elevation can be obtained through elevation certificates.

Status of Subsidies under the Biggert-Waters Act and HFIAA

More recent legislation—the Biggert-Waters Act and HFIAA—affected NFIP’s ability to charge subsidized premium rates on certain types of properties and will likely change the number of policies that are subsidized, as well as the size of the subsidy. For example, the Biggert- Waters Act prohibited subsidies from being extended for homes sold to new owners after July 6, 2012, (date of enactment) and removed subsidies if properties lapsed in coverage as a result of the policyholders’ deliberate choice. However, HFIAA reinstated premium subsidies for properties that were purchased after July 6, 2012, and properties not insured by NFIP as of July 6, 2012. Because new policyholders may join NFIP and receive subsidized rates, such as owners of pre-FIRM properties that previously were not insured, the number of subsidized policies could increase over time.

However, provisions under both acts gradually phase out subsidies by requiring FEMA to increase premiums annually until full-risk rates are reached. The Biggert-Waters Act requires FEMA to increase premiums by 25 percent each year until full-risk rates are reached for certain types of properties, including business properties, residential properties that are not a primary residence, properties that have sustained substantial damage or improvement, and severe repetitive loss properties. HFIAA did not affect the phase-out schedule for those properties, and the act also contains provisions requiring FEMA to increase premium rates on other subsidized policies, such as those for primary residences purchased after July 6, 2012, and primary residences not insured by NFIP as of the same date, by at least 5 percent but no more than 15 percent annually.

Mitigation

FEMA supports a variety of flood mitigation activities that are designed to reduce flood risk and thus NFIP’s financial exposure. These activities, which are implemented at the state and local levels, include hazard mitigation planning; the adoption and enforcement of floodplain management regulations and building codes; and the use of hazard control structures, such as levees, dams, and floodwalls or natural protective features such as wetlands and dunes. Community-level mitigation funding is available through FEMA via grant programs such as the Flood Mitigation Assistance Program. Through these programs, FEMA provides communities cost-sharing opportunities for mitigation activities. At the individual property level, mitigation options include elevating a building to or above the area’s base flood elevation, relocating the building to an area with less flood risk, or purchasing and demolishing the building and turning the property into green space.

Various Options Exist for Targeting Assistance, but Each Involves Challenges That FEMA Would Have to Overcome

Although any pre-FIRM property located in an SFHA in a participating community is currently generally eligible for a subsidy, according to some stakeholders we interviewed and our analysis of literature we reviewed, options for targeting assistance to subsidized NFIP policyholders who may experience difficulty paying full-risk rates include means testing based on the income level of policyholders or geographic areas, setting premium caps, and basing assistance on the cost of mitigating the risk of damage to a home. These options are not mutually exclusive and could be combined depending on Congress’s policy priorities for NFIP. However, they all involve trade-offs, and implementing any of them would likely be challenging.

Means-Tested Assistance Targets Those with Financial Need but Presents Data-Related Challenges

According to some stakeholders we interviewed and our analysis of literature we reviewed, means testing to determine eligibility for NFIP assistance could help directly address affordability concerns by targeting subsidies to those in need. According to a NAS report on NFIP affordability we reviewed, a means-tested program could be designed in various ways, including targeting assistance based on individual policyholders’ financial need or the financial characteristics of a local geographic area. Currently, NFIP subsidies are tied to the property, not the property owner, and any pre-FIRM property located in an SFHA in a participating community is eligible for a subsidy. In contrast, a means- tested program would decouple the subsidy from the property and instead attach it to the policyholder or a group of policyholders on the basis of need, as determined by specified financial requirements and eligibility criteria. In our July 2013 report on subsidized properties, we found that this approach would allow the federal government to provide assistance only to those NFIP policyholders deemed eligible, with the rest paying full- risk rates.

Means-tested programs that consider individuals’ financial need are not new to the federal government, and some stakeholders we interviewed suggested that a means-based assistance program for NFIP could be designed similarly to other existing programs. Over the years, Congress has established a number of programs to provide cash and noncash assistance based on the financial need of individuals and families. For example, to be eligible for certain federal housing programs, individual households must meet specific income limits. These limits reflect the financial characteristics of a local area because they are expressed as a percentage of the area median income (AMI) for the county or metropolitan area in which the household is located, and the limits range from 30 percent through 140 percent of AMI. For example, to be eligible for homeowner rehabilitation and homebuyer assistance under HUD’s HOME Investment Partnership Program, households must have incomes at or below 80 percent of AMI. Similarly, under the Federal Home Loan Bank System’s Community Investment Program, the income of a qualifying mortgage borrower may not exceed 115 percent of AMI. Some stakeholders we interviewed suggested that similar AMI limits could be used to determine eligibility for NFIP because these measures reflect local characteristics. An NFIP assistance program based on individuals’ or households’ income would require a similar threshold to be set.

In order for FEMA to implement a means-tested option that considers individual policyholders’ financial need, it would need income information at the individual or household level for policyholders who receive a subsidized rate under the current NFIP structure. Because the current NFIP structure attaches the assistance to the property rather than the policyholder, FEMA does not collect income information for policyholders who receive subsidies. As a result, a system to collect this information would need to be designed and implemented. We identified two primary ways FEMA could obtain income data, but gathering such information could be challenging. According to some stakeholders we interviewed, IRS could provide FEMA with income data it collects from tax filers. For example, some stakeholders said that a partnership between FEMA and IRS could be established, similar to the partnership IRS and the Department of Education have for the Free Application for Federal Student Aid (FAFSA) form. The Department of Education began coordinating with IRS in 2010 to provide an option for tax filers to prepopulate the FAFSA using an automatic data transfer from their tax returns.

However, restrictions set forth in the Internal Revenue Code prohibit the disclosure of taxpayer information to other federal agencies without a statutorily specified purpose, and new processes would need to be established if taxpayer data were to be used. Under section 6103 of the Internal Revenue Code, federal tax information must be kept confidential and may not be disclosed, except as otherwise specifically authorized. In December 2011, we developed a guide that Congress could use for screening and assessing proposals to disclose confidential tax information to specific parties for specific purposes. Specifically, the guide consists of key questions that can help in screening a proposal for basic facts and identifying policy factors to consider. Further, according to IRS officials, certain processes would need to be developed to provide federal tax information to another agency, such as FEMA, including entering into required agreements, such as data-sharing agreements. Moreover, IRS officials told us that FEMA would need to develop a system to accept and safeguard the information, and IRS would need to make modifications to its own information technology systems in order to interface with the agency, which they described as a significant effort, and provide oversight of the assistance program. If this approach were used, information on the cost of making these changes to FEMA’s and IRS’s information technology systems would need to be balanced against the costs of the existing subsidy approach.

Another way to obtain household income information would be to collect it from individual policyholders, but doing so could be complex and challenging. First, a definition of income for the program would need to be determined (e.g., what sources of income would be considered when determining eligibility), as well as whether and which exclusions and deductions would be allowed. Second, FEMA would then need to develop an infrastructure and new processes to collect the information, which would likely increase the cost of administering the program. In addition, FEMA would need to determine how it would verify the information. For example, HUD’s Housing Choice Voucher (Voucher) program, which provides rental assistance to participating low-income households, is administered by almost 2,300 local public housing authorities (program administrators). These program administrators must obtain and verify comprehensive information on tenants’ household composition, level and sources of income, assets, public assistance, and some types of expenses (e.g., medical and child care expenses) to determine their household adjusted gross incomes, their eligibility for income exclusions and deductions, and their rental payments. We have previously found that complex processes for determining income can lead to compliance issues. For example, in a February 2005 report on rental subsidy improper payments in HUD’s rental programs, we found that HUD’s complex policies for determining rent subsidies have led to improper payments. Similarly, in an August 2013 report on farm and conservation programs, we found that complex income determination and verification processes may have led to improper payments to participants whose incomes exceed statutory limits.

In addition to income, a few stakeholders we spoke with said that wealth, such as value of the insured property, could be considered when determining eligibility based on individuals’ financial need. For example, one stakeholder we interviewed said that an assistance program for NFIP could be designed using a two-step process that considers income and other factors as a proxy for wealth, such as property value. Under this process, according to the stakeholder, a policyholder’s eligibility would first be assessed using a means-tested approach, and then property value would be evaluated to help ensure that only those with modest income and wealth receive the assistance. However, other stakeholders we interviewed said that property values may not be an adequate measure to determine a policyholder’s ability to pay the premium. For example, some stakeholders said that the value of a modest home could be high because it is located in an area with a high land value. One stakeholder we interviewed said that a low-income policyholder could have purchased a home at a modest price, but over the years the value of the home could have significantly increased. The stakeholder further suggested that if the policyholder was lower-income and did not have any other assets besides the home, it would be appropriate to exclude the value of the home when determining eligibility.

An alternative to using individuals’ income to determine financial need would be to determine eligibility based on the income characteristics of a specific geographic area. For example, a NAS report on the affordability of NFIP suggested that all homeowners in a geographic area, such as a community, could be eligible for assistance if, for instance, the median income of the area was “sufficiently low.” The federal government has established a similar approach for the provision of school lunches. For example, the Healthy, Hunger-Free Kids Act of 2010 includes a community eligibility provision that allows school districts with high poverty rates to provide free breakfast and lunch to all students, regardless of their household income. This provision eliminates the burden of collecting household applications to determine eligibility for school meals, relying instead on information from other means-tested programs such as the Supplemental Nutrition Assistance Program. The NAS affordability report also notes that determining assistance at the community level would help to protect the vitality of an eligible community with a high concentration of currently subsidized policyholders because if the subsidies were not available, the resulting higher flood insurance premiums would likely depress the value of properties. For example, according to information from the National Association of Realtors, the Biggert-Waters Act negatively affected the housing market in certain areas where many buyers walked away from purchasing a home because of the high flood insurance premium increases. However, because this option does not consider individuals’ financial need, some policyholders who do not face an affordability issue with their flood premiums, as defined by a potential assistance program, may continue to receive assistance, while policyholders who have affordability issues but do not live in a community eligible for the assistance would no longer receive a subsidy. In addition, similar to determining eligibility using individuals’ financial need, some policyholders who could be eligible for the assistance under this approach could have high-value homes.

Under any means-tested approach, FEMA would need to know the full- risk rate for the properties of those policyholders deemed eligible in order to determine how much assistance to provide. However, FEMA does not collect data needed to calculate the full-risk rate of currently subsidized properties, such as elevation data obtained through an elevation certificate. As a result, these data are not currently available, which would be another challenge to implementing and determining the cost of a means-tested approach to providing NFIP assistance.

Other Options for Targeting Assistance May Be Simpler to Implement but Would Target Those with Financial Need Less Directly

Premium Caps

Other approaches to targeting assistance with NFIP premiums could be simpler to implement than means-tested approaches or might help reduce risk, but they would target those with financial need less directly. According to our analysis of a NAS report on NFIP affordability, one of these methods would be to provide assistance to those policyholders whose premium exceeds a certain percentage of the amount of coverage purchased. Under this option, policyholders could receive assistance if it were greater than a certain percentage of coverage provided by the policy, and the premium would effectively be capped at that percentage. For example, HFIAA states that FEMA should strive to minimize the number of policies with annual premiums that exceed 1 percent of the total coverage provided by the policy. Using this option would help ensure that the premiums do not go above a certain amount—for example, 1 percent of coverage—which could help lower the premiums of eligible policyholders who live in high-risk areas.

While capping premiums could be simpler to implement than some other options, it would likely involve trade-offs. For example, capping premiums does not consider policyholders’ resources and certain expenses (e.g., household income, assets, and expenditures for housing, food, medical care, or other goods and services) and therefore does not take into account their financial need. As a result, similar to the current subsidy method, this option could provide subsidies to some individuals who may not have a financial need. In addition, this option may discourage mitigation efforts because premiums would not reflect the actual flood risk of a property. As with the means-tested options, an appropriate threshold for the cap would need to be established if premium capping were implemented. Further, FEMA would need to know the full-risk premium rate of a property to determine whether it is above or below the defined cap. As previously discussed, FEMA does not collect the necessary elevation data needed to calculate the full-risk rate of properties subsidized under the current structure, and so these data are not currently available. As discussed later in this report, we have previously recommended that FEMA collect these data.

Cost of Mitigating Risk to a Property

According to some stakeholders we interviewed, our prior work, and our analysis of some of the literature we reviewed, another option to target NFIP policyholders would be to provide assistance based on the cost of mitigating flood risk, where policyholders with mitigation costs above a certain level could receive assistance to help mitigate the risk of damage to the property. This option would help policyholders finance mitigation of flood risk to their homes—whether through elevation, relocation, or demolition—which could reduce risk in ways that would likely be reflected in a lower insurance premium. In a November 2008 report on options for addressing the financial impact of subsidized premium rates, we found that mitigation efforts could be used to help reduce or eliminate the long- term risk of flood damage, especially if FEMA targeted the properties that were most costly to the program. We concluded that increasing mitigation efforts could have a number of advantages, including that it could produce savings for policyholders and for federal taxpayers through reduced flood insurance losses and federal disaster assistance, increase the number of property owners paying full-risk rates, and build on FEMA’s existing mitigation programs.

However, we also identified several disadvantages associated with this option, including the following:

Mitigating flood risk to a large number of properties could take a number of years to complete under the current mitigation process, which could require premium subsidies to also be offered.

Increasing mitigation efforts would likely be costly and require increased funding, and even if this funding were made available, property owners could still be required to pay a portion of the mitigation expenses.

Buyouts and relocations, two other types of mitigation, would likely be more costly in certain areas of the country, and in some cases the cost for mitigating the structures’ flood risk might be prohibitive.

Certain types of mitigation, such as relocation or demolition, might be met with resistance by communities that rely on those properties for tax revenues, such as coastal communities with significant development in areas prone to flooding.

Further, not all properties can be modified to mitigate flood risk. For example, according to a 2013 RAND report, some mitigation activities that have been used in other areas of the country would pose challenges in New York City because of the particular characteristics of the city’s building stock. An initial analysis by the New York City Mayor’s Office found that 39 percent of buildings (approximately 26,300) in the high-risk zones of the city’s new floodplain would be difficult to elevate because they are on narrow lots or are attached or semiattached buildings. To help address this challenge, HFIAA requires that FEMA establish guidelines for alternative methods of mitigation (other than building elevation) to reduce potential flood damages to residential buildings that cannot be elevated due to their structural characteristics. As a result, in September 2015, FEMA issued guidance that describes alternative mitigation measures intended for a variety of housing types that cannot feasibly be elevated. According to the report, there are a number of alternative methods of mitigation that may result in flood insurance premium reductions, such as filling a basement located below the base flood elevation to ground level, abandoning or elevating the lowest floor of certain residential buildings, and installing openings in foundation and enclosure walls located below the base flood elevation that allow automatic entry and exit of floodwaters.

Similar to the other options previously discussed, implementing mitigation as an option for targeting assistance would also require elevation data that are currently unavailable because these data would be needed to determine the cost of mitigating the risk of damage to a property. Once the mitigation cost was determined, FEMA could compare this amount to the established threshold for mitigation costs to determine eligibility.

For all of the options we have discussed, including the means-tested options, administering an assistance program could add to FEMA’s existing management challenges. In our June 2011 report on the administration of NFIP, we found that FEMA faces management challenges in areas that affect NFIP, and we made 10 recommendations to, among other things, improve the effectiveness of FEMA’s planning and oversight efforts for NFIP and increase the usefulness and reliability of NFIP’s flood insurance policy and claims processing system—5 of which FEMA has implemented. Further, FEMA continues to work on implementing required changes under the Biggert-Waters Act, as amended by HFIAA. In a February 2015 report on the status of FEMA’s implementation of the Biggert-Waters Act, as amended, we found that FEMA faces a number of challenges in implementing the new requirements, including resource issues, the complexity of the legislation, and the need to balance NFIP’s financial solvency and affordability goals. As a result, FEMA would likely face challenges in designing and implementing any new assistance program.

Many Policyholders Could Be Eligible for Assistance under Various Approaches, but FEMA Lacks Data to Estimate Costs

Our analysis of available data suggests that, under several of the options discussed in the previous section, many subsidized policyholders would potentially be eligible for assistance with their NFIP premiums. However, estimating the cost of providing assistance under various targeting options with precision is difficult because FEMA lacks the elevation data needed to calculate full-risk rates for currently subsidized properties. Using the limited data that are available, we estimated that the cost could vary widely, depending on various factors such as which option and threshold are used.

Available Data Suggest Many Subsidized Policyholders Could Be Eligible for Assistance Using Various Targeting Options and Thresholds

Our analysis of available FEMA data suggests that many subsidized policyholders would potentially be eligible for assistance under three of the options previously discussed: (1) means testing based on individual policyholders’ financial need, (2) means testing based on income characteristics of a local geographic area, and (3) capping premiums based on a percentage of coverage.

Estimation of Eligible Policyholders Based on Individuals’ Financial Need

Our analysis of ACS data showed that, depending on the income threshold used, 47 percent to 74 percent of subsidized policyholders (approximately 285,000 to 451,000) would likely be eligible to receive assistance under a means-tested approach that considers individuals’ financial need. As described previously, to implement this approach, individual or household-level income information is needed; however, these data were publicly unavailable. Instead, using household homeowner data from the 2009 through 2013 5-year ACS at the county level, we estimated that roughly 47 percent of subsidized policyholders have incomes below 80 percent of AMI and, therefore, would likely be eligible to receive assistance if this approach and threshold were implemented. This estimate is based on the assumption that the distribution of household income levels among subsidized policyholders in a given county as of September 30, 2013, was similar to the distribution of household income among all homeowners in the county. We recognize this is a potential limitation of the estimates, and the actual numbers of policyholders likely to receive assistance under this approach would vary depending on how similar the income distribution of subsidized policyholders is to the income distribution of homeowners overall in a county. Further, as figure 1 indicates, adjusting the threshold would affect the estimated percentage of policyholders that would likely be eligible for the assistance. For example, if the eligibility threshold were increased to 140 percent of AMI, we estimated that the percentage of policyholders who would likely be eligible to receive assistance would increase to about 74 percent.

As of September 30, 2013, the actual number of subsidized policies was about 609,000. The states with the highest numbers of subsidized policies as of that date were Florida (102,193), Louisiana (60,692), California (50,018), New Jersey (41,259), and Texas (40,805) (see fig. 2).

Using household homeowner data from the 2009 through 2013 5-year ACS at the county level, Florida would still have the greatest number of policyholders likely to be eligible to receive assistance if the income limit for this approach were set at 80 percent of AMI, with nearly 48,000 policyholders likely to be eligible, followed by Louisiana and California (see fig. 3).

Three of the top five states with the most subsidized policies—Florida, Louisiana, and New Jersey—would also be states with the greatest number of policyholders likely to be eligible to receive assistance if the income threshold were set at 115 percent of AMI (see fig. 4).

If the threshold were increased to 140 percent of AMI, Florida, Louisiana, and California would have the greatest number of policyholders likely to be eligible to receive assistance (see fig. 5).

Our analysis of ACS data showed that, depending on the income threshold used, 23 percent to 87 percent of subsidized policyholders (approximately 139,000 to 527,000) would likely be eligible to receive assistance if a means-tested approach that considers the income characteristics of a local geographic area were implemented. Using ACS data at the census-tract level, we estimated that as of September 2013, about 23 percent of subsidized policyholders lived in a census tract that had an estimated median household income below 80 percent of AMI and, therefore, would likely be eligible to receive assistance under this approach. Unlike the previous approach, which is based on individual or household income, this estimate is based on the median income characteristics of an entire local geographic area. As such, all policyholders in a particular local geographic area, such as a census tract, would be eligible for assistance if the median household income of the area were below a selected threshold.

As figure 6 indicates, similar to the other means-tested approach, adjusting the threshold would also affect the estimated percentage of policyholders who could be eligible for the assistance. For example, if the eligibility threshold were increased to 140 percent of AMI, we estimated that the percentage of policyholders who would likely be eligible to receive assistance would increase to about 87 percent.

Because this approach targets areas with certain geographic characteristics, it could also include policyholders with relatively high incomes or high property values. For example, in one census tract that would potentially be eligible for assistance, where subsidized policyholders comprised approximately 50 percent of the homeowners in the community, an estimated 27 percent of homeowners had an income that exceeded $150,000. In another tract that would potentially be eligible for assistance, where subsidized policyholders comprised about 36 percent of homeowners in the community, the median home value exceeded $1 million. However, we also found that some low-income subsidized policyholders resided in census tracts not eligible for assistance under this approach, including census tracts in Puerto Rico.

Estimation of Eligible Policyholders under the Capped Premium Option

We were unable to estimate the number of subsidized policyholders who would likely be eligible for assistance under the capped premium option because implementing it would require information on the full-risk premium rates of currently subsidized policies, which as previously discussed, FEMA does not calculate. However, our analysis of available data on the subsidized premiums paid on these policies, and their total coverage (building and content) amounts, as of September 30, 2013, showed that, as table 1 indicates, about 23 percent of policyholders who paid subsidized premiums as of September 30, 2013, were paying above 1 percent of their total coverage amounts. Our analysis also showed that almost none of the subsidized policyholders were paying premiums that were more than 2 percent of their total coverage amounts.

FEMA Lacks Information Needed to Estimate the Cost of Assistance

As previously discussed, FEMA does not collect certain flood risk information that would be needed to calculate the full-risk rate for most subsidized policies; as a result, estimating the cost of providing subsidy assistance under various targeting options is difficult. Elevation certificates are needed to determine the full-risk rate for a property. However, because FEMA does not use this information in rating subsidized policies, it does not currently require elevation certificates for subsidized policyholders, although policyholders may obtain an elevation certificate voluntarily. As a result, FEMA cannot accurately determine the actual forgone premiums for subsidized policies—the difference between subsidized premiums paid and the premiums that would be required to cover the expected losses associated with subsidized policies. Likewise, without full-risk rate premiums for these properties, it is difficult to estimate the actual subsidy cost of implementing various options that could be used to target assistance for NFIP. Because it is not possible to calculate the actual amount of assistance each policyholder could be eligible for, estimating the aggregate cost of providing assistance under the various targeting options is not possible with any specificity.

Although we were unable to estimate the subsidy cost of implementing these targeting options with any precision, we have previously estimated forgone premiums for subsidized policies using various statements published by FEMA that describe the size of the subsidies and expenses. In our December 2014 report on forgone premiums for subsidized policies, using available data, we estimated that the cumulative forgone premiums net of expenses ranged roughly from $8 billion to $17 billion over the period from 2002 through 2013. In particular, we estimated that the forgone premiums net of expenses for all policies subsidized in 2013 roughly range from $575 million to $1.8 billion. While the number of policyholders who could be eligible could vary widely depending on the selected targeting option and threshold, only a subset of all subsidized policyholders would likely be eligible to receive assistance. Using the means-tested targeting option and thresholds mentioned earlier in this report, the cost could have ranged from $40 million to $1.7 billion in 2013. For example, the estimated cost for the approach that considers individuals’ financial need could have ranged from $161 million to $1.7 billion in 2013, and the estimated cost for the approach that considers the income characteristics of the local geographic area could have ranged from $40 million to $1.7 billion. We could not calculate a potential cost under the capped premium method because, as noted earlier, determining eligibility for assistance would require information on full-risk rates for currently subsidized properties, which FEMA does not collect.

In our July 2013 report on subsidized properties, we found that NFIP lacked the information needed to determine the full-risk rates for subsidized properties. As a result, we recommended that FEMA develop and implement a plan to obtain information needed to determine full-risk rates for subsidized properties. FEMA generally agreed with the recommendation and has taken limited action to implement it. For example, FEMA noted that the agency would evaluate the appropriate approach for obtaining or requiring the submittal of this information. FEMA also said it would explore technological advancements and engage with industry to determine the availability of technology, building information data, readily available elevation data, and current flood hazard data that could be used to implement the recommendation. However, in a subsequent meeting, FEMA officials also said that the agency faced a cost challenge with respect to elevation certificates and that obtaining these certificates could take considerable time and cost several hundred million dollars. They noted that requiring policyholders to incur the cost of obtaining elevation certificates would not be consistent with NFIP’s policy objective to promote affordability. The officials added that the agency encourages subsidized policyholders who seek to ensure the appropriateness of their NFIP rates to voluntarily submit elevation documentation. We acknowledge the difficulty and expense involved in obtaining precise information about flood risk, but we maintain that implementing this recommendation is important. Information about flood risk is needed to correctly charge full-risk rates for an increasing number of policies as FEMA phases out subsidies. Further, such information could help FEMA inform policyholders about their flood risk, as required by HFIAA.

Several Mechanisms Could Be Used to Deliver NFIP Assistance, but Each Involves Public Policy Trade-offs

Based on our analysis of studies, interviews with stakeholders, and prior GAO reviews, FEMA could potentially use a variety of mechanisms to deliver assistance to NFIP policyholders who could be deemed eligible based on the various targeting options previously discussed. These mechanisms include: discounted rates, through which the government charges recipients less than the full cost of the service received; vouchers, through which the government would disburse funds that allow recipients to pay for a restricted set of goods or services; tax expenditures, through which the government would reduce recipients’ tax liability based on eligible expenses; and grants and loans for mitigation, through which the government would disburse funds to recipients under a contract.

Each mechanism involves trade-offs among affordability and four policy goals for federal involvement in natural catastrophe insurance. We identified these four policy goals, which have not changed, in our 2007 report on the federal role in natural catastrophe insurance: (1) charging premium rates that fully reflect actual risks; (2) encouraging private markets to provide natural catastrophe insurance; (3) encouraging broad participation in natural catastrophe insurance programs; and (4) limiting costs to taxpayers before and after a disaster. For the fourth goal, we focused only on administrative costs because total program costs would be affected by undetermined factors such as eligibility criteria and caps on assistance. As summarized in figure 8, we determined that each mechanism fully supports at least two of the four natural catastrophe insurance policy goals, but none of the mechanisms fully support all four of these policy goals.

All Mechanisms Except Discounted Rates Could Reflect Actual Risk and Encourage Private Market Participation

FEMA’s current discounted rate mechanism does not help FEMA charge premiums that reflect actual risks or encourage the private market to provide flood insurance. The other delivery mechanisms we identified— vouchers, tax expenditures, and grants and loans for mitigation—would likely help support these goals.

Discounted Rates

NFIP’s current discounted rate mechanism does not support the policy goal of charging premiums that reflect actual risk, according to our prior reports, a study we reviewed, and most stakeholders we interviewed. As we have previously found, NFIP’s discounted rates do not fully reflect actual risks because the premiums are not intended to contribute sufficient revenues to cover potential losses. In addition, the discounted rate mechanism hides actual risk because it builds a subsidy within the rate structure, meaning that policyholders who have discounted rates do not know their full-risk rate or the amount of subsidy they receive. We have previously found that discounted rates for NFIP, as well as for the federal crop insurance program, do not provide all policyholders with accurate price signals about their chances of incurring losses. As a result, some policyholders may perceive their risk of loss to be lower than it really is and may have less financial incentive to mitigate risk of damage to a property or to decide not to purchase a property at higher risk of flooding.

In addition, building a subsidy into the rate structure means that the discounted rate mechanism makes it difficult to measure nonadministrative program costs (i.e., subsidy costs). We and the Congressional Budget Office have previously found that FEMA’s discounted rate mechanism disguises actual NFIP costs because the costs were evident only in FEMA’s need to borrow from Treasury.

Further, because the discounted rate mechanism builds assistance into the rate structure, it does not encourage the private sector to provide insurance, according to our prior work and a stakeholder we interviewed. We have previously found that discounted rates discourage private participation in the flood insurance market because private insurers cannot compete with NFIP’s highly discounted (subsidized) rates in some geographic areas. For example, one state insurance regulator we interviewed during this review indicated that HFIAA’s reinstatement of discounted rates eliminated by the Biggert-Waters Act inhibited the participation of private insurers who had begun to take a more active role in the state.

However, a discounted rate mechanism used to deliver assistance to policyholders who are deemed eligible could be modified to better address these limitations. Specifically, a full-risk rate could first be determined, and then the discount could be applied outside of the rate structure. Such an approach would better communicate the actual cost of the risk to policyholders and would make subsidy costs more transparent. For example, one stakeholder we interviewed said that billing statements could be modified to show policyholders both their full-risk rate and the assistance they receive. Further, the amount of the subsidy could be explicitly funded through an appropriation.

Vouchers, Tax Expenditures, and Grants and Loans

The other potential NFIP assistance delivery mechanisms we identified— vouchers, tax expenditures, and grants and loans for mitigation—would likely help promote premiums that reflect the actual risk of losses because they first require determination of a full-risk premium and then provide assistance outside of the rate structure. On the basis of our literature review and interviews with stakeholders, these other mechanisms would deliver assistance in the following ways:

With vouchers, policyholders would be charged a full-risk rate premium but would receive a subsidy through a voucher to cover the difference between what they are deemed able to pay and the full-risk rate premium.

With tax expenditures, policyholders would be charged a full-risk rate premium before having their tax liability reduced when they file their taxes.

With grants and loans, policyholders would receive grants or loans to help mitigate their homes, and then they would be charged a premium rate that reflects their lower risk.

These other potential NFIP assistance delivery mechanisms could help make existing NFIP subsidy costs more transparent because they separate assistance from premiums. We and the Congressional Budget Office have found that separating assistance from premiums could help the government and taxpayers understand actual program costs, in part because doing so would make NFIP subsidy costs explicit by requiring Congress to appropriate funds for them. Vouchers and grants and loans for mitigation meet these goals. However, the costs associated with tax expenditures may be somewhat less clear than costs associated with vouchers and grants and loans for mitigation. Tax expenditures would help make subsidy costs somewhat more transparent because they separate assistance from premiums, similar to vouchers and grants and loans for mitigation, but we and the Congressional Budget Office have previously found that tax expenditures can mask subsidy costs because they are not readily identifiable in the budget and are generally not subject to systematic performance measurement, similar to discounted rates.

In addition, vouchers, tax expenditures, and grants and loans for mitigation could help encourage the private sector to provide flood insurance, based on our analysis of prior GAO reports, studies we reviewed, and a stakeholder we interviewed. This is generally because these mechanisms would provide assistance outside the rate structure, enabling NFIP to charge rates that more fully reflect risk and are much closer to the rates private insurers would need to charge, which we have previously reported is a key private sector concern. In addition, vouchers and tax expenditures could potentially be designed in a way that would incentivize homeowners to consider private insurance: vouchers could be used with either NFIP or private insurance, and tax expenditures could be based on either NFIP or private insurance expenses. Further, grants and loans for mitigation could increase the number of homes at lower risk of flood damage and create a larger, more diverse risk pool, which would help private insurers be better able to manage their risk exposure—another issue we have previously identified as a key private sector concern about offering flood insurance.

Mechanisms Vary in Whether They Encourage Broad Participation and Limit Administrative Costs

FEMA’s current discounted rate mechanism helps encourage broad NFIP participation and limits administrative costs. The extent to which the other delivery mechanisms we identified—vouchers, tax expenditures, and grants and loans for mitigation—could encourage broad participation is unclear. In addition, their effect on administrative costs varies.

Discounted Rates

The discounted rate mechanism encourages broad participation. As we have previously reported, discounted rates have helped NFIP achieve a program goal of broad participation by providing assistance that lowers the cost of insurance. Further, discounted rates may encourage more participation than other potential delivery mechanisms, such as tax expenditures, because FEMA applies discounted rates that reduce premiums immediately and policyholders do not have to wait to receive their assistance.

In addition, continuing to use the discounted rate mechanism would likely help NFIP limit up-front administrative costs because the discounted rate mechanism is already in place and used to issue subsidies, which means that NFIP can avoid some costs that would be associated with creating a new delivery mechanism. Also, some stakeholders we interviewed said that discounted rates may be the most efficient delivery mechanism option for ongoing program administration, citing reasons such as FEMA’s ability to implement the mechanism without coordinating with other federal agencies.

Vouchers

Vouchers may have some characteristics that support the policy goal of broad NFIP participation and others that do not, according to examples cited in our previous work, studies we reviewed, and stakeholders we interviewed. For example, vouchers could help encourage broad participation in NFIP because they would immediately reduce premium costs and are unrelated to recipients’ tax-filing status. However, some stakeholders we interviewed noted other voucher characteristics that may discourage participation in NFIP. For example, FEMA officials we interviewed said that policyholders may perceive vouchers to have associated stigma, and another stakeholder expressed concern that a potentially burdensome application process could discourage eligible policyholders from applying.

In addition, vouchers would likely increase NFIP’s administrative costs to a certain extent, according to examples cited in our previous work, studies we reviewed, and stakeholders we interviewed. Because FEMA does not currently have an NFIP voucher program, it would need to dedicate additional resources to its creation and to its ongoing administration. For example, HUD is one agency with such a voucher program and a 2015 HUD study of costs incurred by the local public housing authorities that administer HUD’s Voucher program found that efficient public housing authorities spent an average of $70 per month to administer a voucher, with costs related to frontline labor representing the largest costs. To help FEMA limit such administrative costs, two studies we reviewed said that flood insurance vouchers could be administered through an existing voucher program, such as the HUD Voucher program. However, according to the 2015 HUD study and HUD officials we interviewed, the local public housing authorities that administer the HUD Voucher program do not receive adequate funding to efficiently and effectively administer the existing program. HUD officials we interviewed also said that there would be additional costs, which could be significant, associated with implementing a new program. As a result, establishing an assistance program for NFIP under HUD’s, or another program’s, infrastructure would likely require additional resources for agencies responsible for implementing the program. Any additional costs would have to be weighed against the costs of the existing program. According to HUD officials, other concerns in addition to costs—such as housing authorities’ lack of familiarity with FEMA and flood insurance—would also have to be addressed before determining the suitability of using an existing HUD program to deliver NFIP assistance.

Tax Expenditures

Tax expenditures may have some characteristics that support the policy goal of broad NFIP participation and others that do not, according to examples cited in our prior reports, many studies we reviewed, and some stakeholders we interviewed. For example, well-designed tax expenditures can be targeted to reach certain populations and provide incentives for taxpayers to engage in particular activities; do not have the stigma that some individuals may associate with government spending programs; and may be less burdensome than applying for assistance through other spending programs in some ways. However, our prior reports, many studies we reviewed, and some stakeholders we interviewed found that other characteristics of tax expenditures may not encourage broad participation because eligible policyholders may not be aware of the tax expenditure or their eligibility; would face the burden of navigating the complex tax system, which may result in limited take-up or pressure to hire professionals to help to navigate the system; would generally need to pay the full premium before they receive the tax expenditure, which could result in cash flow challenges; and may have lower incomes or may not be required to pay taxes, which means they may not receive as great of a benefit from nonrefundable tax credits, tax deductions, and tax-preferred savings vehicles.

Similarly, tax expenditures may have some characteristics that help NFIP limit administrative costs and others that do not, according to examples cited in our prior reports, many studies we reviewed, and some stakeholders we interviewed. We and others have previously stated that, in concept, using tax expenditures could help limit administrative costs to taxpayers for certain activities because much of the administrative infrastructure already exists for the government to collect and remit money to tax filers via the tax system, as compared to setting up separate spending programs. Additionally, one study we reviewed said that, in general, direct IRS access to policyholder income information would help limit administrative costs for the federal government. However, implementing a new tax expenditure would still create some additional burden for IRS in a time of tight budgetary resources. We previously found that IRS has scaled back activities and staff in response to declining appropriations, which could potentially reduce program effectiveness or increase risk to IRS and the federal government. We also previously found that administering complex tax rules can strain IRS’s ability to serve taxpayers because of the resources needed to modify related documents and procedures, develop guidance, clarify instructions, and address noncompliance. Further, there may be some administrative costs and inefficiencies associated with interagency collaboration between FEMA and IRS, according to two stakeholders we interviewed. For example, regarding potential NFIP tax expenditures, Treasury Office of Tax Policy officials said that IRS would have to dedicate resources to administering the program and coordinating with FEMA to set up a data-sharing agreement and verify nonincome-related information submitted by policyholders, such as premiums paid. We have previously found that the complex nature of some tax expenditures, such as the mortgage interest and other real estate deductions, may result in high error rates that create costs for taxpayers due to forgone revenues and IRS resources spent to enforce compliance.

We have produced a guide for evaluating tax expenditure performance that could be used if Congress were to decide that tax expenditures are the most appropriate way to deliver assistance to eligible NFIP policyholders. The guide discusses various tax expenditure design issues that should be considered before implementing a tax expenditure, including the tax expenditure’s purpose, how the tax expenditure would relate to other federal programs, consequences for the federal budget, and how the tax expenditure would be evaluated.

Grants and Loans

Grants and loans for mitigation may have some characteristics that support the policy goal of broad NFIP participation and others that may not, according to examples cited in prior GAO reports, a few studies we reviewed, and two stakeholders we interviewed. As mentioned previously, grants and loans could encourage policyholders to mitigate flood risk to their properties by helping them afford the significant up-front costs of mitigation, which may otherwise be a barrier. Because mitigation would likely result in significantly lower premiums, which homeowners could be more willing and able to pay, homeowners might be more likely to participate in NFIP. However, some characteristics of grants and loans may discourage broad participation. For example, potentially complex application processes could discourage eligible policyholders from applying; eligible policyholders may not be aware of their eligibility or of the programs; some potentially eligible policyholders may not be able to meet loan qualification criteria related to repayment, a challenge GAO has previously reported for Small Business Administration disaster assistance loans; and loans may not be appealing to some policyholders if rates are too high or policyholders are debt-averse.

Regarding the policy goal of limiting administrative costs, mitigation grants and loans would likely pose some additional administrative costs for NFIP. Similar to vouchers, FEMA would need to dedicate resources to setting up and administering a new grant or loan program or expanding an existing program to provide the assistance to eligible policyholders. Also, loans pose some other administrative costs, such as servicing outstanding loans and collecting on defaulted loans, among others.

Finally, it is important to remember that the delivery options discussed in this report are not mutually exclusive and could potentially be used in combination to address Congress’s priorities for NFIP. For example, according to two studies we reviewed, NFIP could offer assistance to policyholders experiencing affordability issues through a combination of mitigation loans and vouchers. The loans would help policyholders afford mitigation efforts, reducing premiums in the long term. The vouchers would help policyholders cover the costs of repaying the loans, and they could also be used to cover part of the remaining premium costs if they were still unaffordable.

If Congress were to consider an assistance program to address affordability issues experienced by NFIP policyholders, a number of policy decisions would be involved, each of which involves trade-offs and potentially difficult choices. In particular, decisions would need to be made to determine which policyholders would be eligible to receive the assistance, as well as other factors to consider when determining eligibility—for example, whether the assistance would only be provided to pre-FIRM principal residences located in high-risk areas. Also, the amount of assistance would have to be determined. For example, the assistance could be less than, equal to, or more than the difference between the subsidized premium rate eligible policyholders would pay under the current NFIP structure and the full-risk premium rate of the property. In addition, a decision would need to be made on the type of assistance (i.e., premium subsidy, mitigation assistance, or both). Further, decisions would have to be made on which delivery mechanism is most appropriate for NFIP, how the assistance would be paid for, and by whom.

Agency Comments

We provided a draft of this report to FEMA within the Department of Homeland Security for its review and comment. We also provided a draft of this report to HUD and Treasury for technical comment. FEMA and HUD provided technical comments, which we incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees and the Secretaries of Homeland Security, Housing and Urban Development, and the Treasury. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact Alicia Puente Cackley at (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last part of this report. GAO staff who made major contributions to this report are listed in appendix II.

Appendix I: Objectives, Scope, and Methodology

Our objectives in this report were to describe (1) options to target assistance to National Flood Insurance Program (NFIP) subsidized policyholders who may experience difficulty paying full-risk rates, (2) the number of currently subsidized policyholders who might be eligible for assistance under certain options and the cost of implementing these options, and (3) potential delivery mechanisms for providing assistance to eligible policyholders. For purposes of this report, we made the following assumptions:

Only current NFIP policyholders who pay subsidized premium rates established by the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) for their primary residences located in high-risk locations known as Special Flood Hazard Areas (SFHA) would be potentially eligible for assistance.

The starting point for premiums, before the provision of any assistance, would be a full-risk premium.

The maximum amount of the subsidy provided to those policyholders deemed eligible for assistance under the identified eligibility options would be the difference between the full-risk premium and the subsidized premium charged under the current NFIP structure.

Identifying Targeting Options and Delivery Mechanisms

To identify options for targeting assistance to policyholders who may experience difficulty paying full-risk rates and to identify potential mechanisms for delivering that assistance, we reviewed our prior related reports and analyzed relevant laws. We also conducted a literature review using the Proquest database and Internet searches using search terms such as “flood insurance,” “means test,” “ability to pay,” and “eligibility” for identifying reports that discuss options for targeting federal assistance. We reviewed 53 reports and determined 11 to be relevant by reviewing abstracts of the literature we found. Similarly, we conducted a literature review using the Proquest database using search terms such as “delivery,” “assistance,” “loan,” “voucher,” “grant,” and “discount” for identifying reports that discuss mechanisms used to deliver assistance. We reviewed 70 reports and identified 23 to be relevant by reviewing abstracts of the literature we found. In addition, we interviewed officials from the Federal Emergency Management Agency (FEMA), Department of Housing and Urban Development (HUD), the Department of the Treasury’s (Treasury) Federal Insurance Office (FIO), Florida Office of Insurance Regulation, Louisiana Department of Insurance, and New Jersey Department of Banking and Insurance and representatives from 18 organizations with flood insurance knowledge to obtain input on (1) options that could be used to target assistance for NFIP; (2) different mechanisms that other federal programs have used to deliver assistance and the extent to which they could be used to deliver assistance in NFIP; and (3) to the extent possible, any benefits and challenges of using these options and delivery mechanisms. To select the organizations to interview, we reviewed lists compiled for prior GAO reports on NFIP, identified organizations that have testified before Congress on the affordability of NFIP premiums, identified organizations through our literature review, and obtained recommendations from those we interviewed. We interviewed officials at the following 18 organizations:

Allstate Insurance Company

American Academy of Actuaries

Association of State Floodplain Managers, Inc.

Center for Economic Justice

Consumer Federation of America

National Academy of Sciences

National Association of Insurance Commissioners

National Association of Mutual Insurance Companies

National Association of Realtors

Property Casualty Insurers Association of America

RAND Corporation

SmartSafer.org

USAA General Indemnity Company

Risk Management and Decision Processes Center at the Wharton Independent Insurance Agents and Brokers of America Insurance Information Institute Joint Center for Housing Studies of Harvard University School of the University of Pennsylvania

Wright National Flood Insurance Company On the basis of our literature review and interviews, we identified three general options that could potentially be used to target assistance to NFIP policyholders who may experience difficulty paying full-risk rates: means testing based on the income level of policyholders or local geographic areas, setting premium caps based on a percentage of total insurance coverage, and basing assistance on the cost of mitigating the risk of damage to a home. We also identified four types of mechanisms that could potentially be used to deliver assistance: discounted rates, vouchers, tax expenditures, and loans and grants for flood risk mitigation.

A generally recognized definition of affordability does not currently exist for flood insurance; as a result, we interviewed representatives from HUD, FIO, the Florida Office of Insurance Regulation, Louisiana Department of Insurance, New Jersey Department of Banking and Insurance, Independent Community Bankers of America, and the Mortgage Bankers Association to determine potential ways affordability could be defined as it relates to flood insurance. Further, to obtain information on benefits and challenges of obtaining tax data from the Internal Revenue Service (IRS) and the implications certain delivery mechanisms may have for the tax system, we contacted representatives of Treasury’s Office of Tax Policy and IRS.

Illustration of the Effects of Certain Targeting Options

To address our second objective, we used NFIP’s policy data to identify policies for primary residences that would continue to receive subsidized premium rates as set by HFIAA. We analyzed data from NFIP’s policy database as of September 30, 2013. We applied the same algorithm that FEMA used to determine which policies were subsidized before enactment of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act), and we applied FEMA’s interpretation of the provision in the Biggert-Waters Act that eliminated subsidies and the provisions in HFIAA that restored subsidies. We further narrowed our analysis to subsidized policyholders located in SFHAs because the purchase of flood insurance is mandatory for properties in these areas that are secured by mortgages from federally regulated lenders. We assessed the reliability of the policy data by gathering and analyzing available information about how the data were created and maintained, and we performed electronic tests of required data elements. We determined that the data were sufficiently reliable for the purpose of determining the number of subsidized policies and the associated premiums. We did not use more recent data because in December 2014 we identified a number of discrepancies in NFIP’s fiscal year 2014 data and determined them to be not sufficiently reliable. We had begun our analysis before FEMA addressed those discrepancies. To determine the overall number of policyholders and how many of those are subsidized, we used data as of May 2015, which we deemed sufficiently reliable for our purposes based on gathering and analyzing available information about how the data were created and maintained, and we performed electronic tests of required data elements.

To estimate the number of currently subsidized policyholders that might be eligible for assistance under certain means-tested options, we attempted to obtain income information for these policyholders. Because FEMA does not collect income information for its NFIP policyholders, we attempted to obtain income data from IRS for subsidized policyholders as of September 30, 2013. We were unable to obtain access to IRS tax return data, which under section 6103 of the Internal Revenue Code, must be kept confidential and may not be disclosed, except as specifically authorized by law. We also attempted to obtain household income and other related data from a third-party vendor, including wealth, household size, and home value. To do this, we used prior GAO work on information resellers to identify and conduct market research with selected companies. We spoke with officials at three information resellers and gathered documentation on data modeling, coverage, match rate, and other relevant information to assess the accuracy and reliability of their data. We determined the data lacked sufficient precision and therefore found these data not to be reliable for purposes of estimating income and other homeowner and property characteristics of NFIP subsidized policies.

Because we were unable to obtain income information at the individual policyholder level, we used income data from the American Community Survey (ACS), a continuous survey of households conducted by the U.S. Census Bureau. Specifically, we used 5-year data from the 2009 through 2013 ACS for the 50 states, the District of Columbia, and Puerto Rico to estimate the number of subsidized policyholders who would likely receive assistance under the means-tested options we identified. We analyzed income levels of households and owner-occupied households (tables B19013 for household median income and table B25118 for owner- occupied household income distribution) obtained from ACS to provide a rough estimate of the income for subsidized policyholders in SFHAs. To examine the reliability of ACS data, we reviewed testing and documentation for a prior GAO report using much of the same data, including information from interviews with Census Bureau officials and experts. We also examined ACS technical documentation and conducted electronic testing and logic checks. As a result of our testing and reviews of related documentation, we determined the data were sufficiently reliable for our analyses.

Estimation of Eligible Policyholders Based on Individuals’ Financial Need

To develop possible thresholds for estimating the number of policyholders who might be eligible for assistance under the means-tested approaches, we reviewed documentation on the income limits used for various federal housing programs. These thresholds are expressed as a percentage of the area median income (AMI) for the county or metropolitan area in which an individual lives, and they range from 30 percent through 140 percent of AMI. Because HUD defines low-income households as those with income at or below 80 percent, we used this percentage as the lowest threshold when we conducted our analysis on the effect of implementing the means-tested approaches. We also illustrated the potential effect of using 115 percent and 140 percent of AMI, which are used in other government programs, as thresholds.

We used ACS data on the distribution of homeowner income at the county level to generate estimates of how many policyholders might be eligible for subsidies using different thresholds of the HUD AMI. Our estimation of eligible policyholders based on individuals’ financial need is based on the assumption that the distribution of household income among SFHA policyholders is similar to that of the distribution of household income among all homeowners in each county. To conduct the analysis, we used county-level data to generate estimates of the number of subsidized policyholders residing in areas with estimated income below the HUD AMI thresholds. Specifically, based on household income distribution, we estimated the proportion of homeowners with incomes above or below cut points based on the income distribution categories in the ACS data. We then applied the estimated proportion above and below the HUD AMI thresholds to the number of policyholders in our data to generate an estimate of the proportion that would be subsidized using a test of individuals’ financial need.

We used two different approaches to illustrate the sensitivity of our estimates. We first followed ACS technical guidance to generate 95 percent confidence intervals around the proportions of residents in each income category, and we tested these bounds against the HUD AMI or threshold. This method produced relatively narrow confidence bounds that depended heavily on the assumption that the distribution of policyholder and homeowner income was similar at the county level. Given that we do not have information on the accuracy of this assumption, we instead present the results from an alternative sensitivity test that allows for less correspondence between the homeowner and policyholder income distributions. This second sensitivity test illustrates the effect of shifting the income distribution within each county up or down a category, and provides a better, if still imperfect, sense of the uncertainty inherent in our estimates given that we lack information on individual policyholders’ incomes. Despite these tests, we cannot be sure that there are not systematic differences in the income distribution of policyholders compared to homeowners in general at the county level that would not be captured by such testing.

Estimation of Eligible Policyholders Based on the Financial Characteristics of a Local Geographic Area

To estimate the number of eligible policyholders based on financial characteristics of a local geographic area, we used the same HUD AMI thresholds as in our estimates based on individuals’ financial need. However, unlike the analysis for the means-tested approach that considers individuals’ financial need, the estimation of eligible policyholders based on the financial characteristics of a local geographic area is based on the median household income of an entire local geographic area, the census tract. As such, it estimates the number of subsidized policyholders likely eligible for assistance using a “community” threshold test, in which the census tract median household income is compared to the HUD AMI. To conduct the analysis, we used tract-level data to test the estimated median income of each census tract against the relevant HUD AMI threshold, and we assumed that all policyholders living in tracts with estimated median incomes below the threshold would receive subsidies. To illustrate uncertainty in our estimates, we also tested the upper and lower bounds of the 95 percent confidence interval for the tract-level estimate of median homeowner income against the HUD AMI or threshold.

To illustrate potential consequences of using a community threshold test, we identified tracts where policyholders comprised a relatively large proportion of the estimated number of homeowners in the tract and that would be subsidized using the HUD AMI as the threshold. We use the threshold of 115 percent of HUD AMI to identify tracts eligible for subsidy under the local geographic area approach, as it is the middle of the three thresholds we test in our main analysis. We limited our analysis to tracts with 50 or more policies and with fairly precise estimates of homeowner income. We then identified those tracts where either the estimated home value was relatively high, or the estimate of the proportion of homeowners with high incomes was relatively large. From the tracts we identified, we selected examples that represented extreme values; while these tracts are not typical of tracts that would be subsidized under a community approach, they demonstrate that as a targeting mechanism, the community approach could have unintended consequences.

Estimation of Eligible Policyholders under the Capped Premium Option

We were unable to estimate the number of subsidized policyholders who would likely be eligible for assistance under the capped premium option because implementing it would require information on the full-risk premium rates of currently subsidized policies, which FEMA does not calculate. Instead, we estimated the number of subsidized policyholders that paid less than various thresholds, as of September 30, 2013. To identify a range of thresholds that could be used to develop estimates under the premium capped option, we used 1 percent as the lower threshold because HFIAA states that FEMA should strive to minimize the number of policies with annual premiums that exceed 1 percent of the total coverage. We also assessed the effect of increasing the threshold by 1 percent increments up to 5 percent. We compiled information on the amount of insurance coverage (both building and content coverage) and the premium cost associated with subsidized policies from the NFIP policy database. Specifically, we compared a range of percentages, from 1 percent to 5 percent, of total insurance coverage to the total subsidized premium and determined how many subsidized policyholders paid above and below each percentage limit.

Estimation of Eligible Policyholders Based on the Cost of Mitigation

We were unable to illustrate the effect of targeting assistance based on the cost of mitigating the primary residence of subsidized policyholders because data to determine this cost were not available. To determine the cost of mitigating the risk of damage to a property, information on its elevation—that is, the difference between the lowest elevation of the property relative to its base flood elevation—is needed, but FEMA does not currently collect this information for properties that pay subsidized rates.

Estimating the Cost of Assistance

To estimate the potential cost of implementing these options, we attempted to estimate the full-risk rate of subsidized properties by constructing information about flood risk that is not available in NFIP’s database. We attempted to calculate some flood risk information (i.e., elevation information) for subsidized properties located in North Carolina by obtaining two key elements: lowest floor elevation and base flood elevation—that is, the flood level relative to mean sea level at which there is a 1 percent or greater chance of flooding in a given year. We selected North Carolina because it is one of the only states that have collected elevation data in high-risk flood zones, which is necessary to determine the full-risk premium rates. Specifically, we obtained Light Detection and Ranging (LIDAR) data from the North Carolina Floodplain Mapping Program to determine if we could estimate the lowest floor elevation level of subsidized properties in the state. We also analyzed data from FEMA’s National Flood Hazard Layer database to determine if we could estimate the base flood elevation of these subsidized properties. However, both sources lacked the precision needed for purposes of our analysis.

LIDAR. While NFIP defines elevation difference as the difference between lowest occupied floor elevation and base flood elevation, North Carolina’s LIDAR data measures first floor elevation, which is inconsistent with NFIP’s measure for lowest floor elevation. According to North Carolina officials, its LIDAR does not measure the lowest floor elevation because it is measured from the outside of the structure to the bottom of the front door. Without measuring from the inside of the structure, North Carolina’s LIDAR data do not take into account a precise measurement of the lowest floor. For example, the bottom of the front door may be higher than the bottom of the lowest occupied floor, such as a furnished basement.

FEMA’s National Flood Hazard Layer. FEMA’s National Flood Hazard Layer data lack precision to correctly align the data to a property. The data are a geospatial file that shows the base flood elevations of areas, among other things. However, it simply shows them as lines on a map, which cannot be used to determine the base flood elevation for a particular building unless the building is intersected by the line. For all other buildings, base flood elevation would have to be estimated using the closest elevation lines. For example, if a building were located halfway between a 100 foot line and a 110 foot line, a base flood elevation of 105 feet could be estimated for the building. However, this estimate is not precise enough for purposes of our analysis.

Due to the unavailability of accurate estimates for lowest floor elevation and base flood elevation to calculate full-risk rate, we were unable to estimate with any precision the potential cost of implementing certain options we identified for targeting assistance to policyholders who may experience difficulty paying full-risk rates. However, we developed a rough estimate of the cost by multiplying the estimated percentage of subsidized policyholders likely to be eligible for assistance under the various options and thresholds and estimates on forgone premium net of expenses we had previously developed. Specifically, in our December 2014 report on forgone premiums for subsidized policies, we noted several limitations to using these statements to produce our estimates. We presented three separate estimates: (1) FEMA’s statement about the impact of eliminating subsidies on aggregate premiums, (2) the percentage of long-term expected losses covered by subsidized premiums, and (3) the percentage of long-term expected losses covered by subsidized premiums to estimate forgone premiums for only the policies that remained subsidized after HFIAA. The estimated total subsidy cost of implementing certain targeting options is based on the estimated lowest and highest forgone premium net of expenses in 2013 across the three estimates calculated in our 2014 report. We applied the range to the targeting options described earlier in this report. Specifically, we applied the cost range ($575 million to $1.8 billion) to the various targeting options and their ranges of percentage of eligible policyholders.

This cost estimate assumes that the difference between what subsidized policyholders would pay if they were charged full-risk rates and the subsidized rates they paid in 2013 are the same for all subsidized policyholders. Also, this estimated subsidy cost does not take into account the cost associated with implementing the selected targeting option. In addition to the limitations on the eligibility estimates discussed in this report, our 2014 report discusses potential constraints on our cost estimates.

We conducted this performance audit from July 2014 to February 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact above, Patrick A. Ward (Assistant Director), Josephine Perez (Analyst-in-Charge), Bethany Benitez, Chloe Brown, Pamela Davidson, Chir-Jen Huang, May Lee, John Mingus, Marc Molino, Anna Maria Ortiz, Jennifer Schwartz, and Jack Wang made key contributions to this report.