What makes a major disaster?

What constitutes a major disaster?  The Senate Subcommittee on Emergency Management, Intergovernmental Affairs, and the District of Columbia takes up this question this week, and the answer significantly affects our nation’s response to disasters.  The Federal Emergency Management Agency (FEMA) currently responds to too many disasters, contributing to rising disaster loses.  Congress should significantly raise the threshold for federal disaster declarations to ensure the sufficiency of federal assistance when truly needed.

First some background.  Governors of affected states apply under the Stafford Act for a presidential major disaster declaration.  FEMA provides two types of aid, public assistance to state and local governments for losses to property and equipment, debris removal, and emergency protective measures, and individual assistance, typically for temporary living expenses.  Public assistance constitutes 60% of total assistance and is authorized twice as often.

{mosads}Presidents have declared an average of 60 major disasters per year since 1996, so “major disasters” occur weekly.  The Government Accountability Office (GAO) reports that 36% of declarations between 2004 and 2011 involved less than $10 million in Federal assistance, confirming that many major disasters are relatively minor.

Small disasters dissipate FEMA’s resources and energy.  Disasters with total assistance under $50 million have distressingly high administrative costs: an average of 20 percent, compared with 12-13 percent for larger disasters.  Administrative costs exceeded total federal aid for 12 small disasters.  We pay a high price for FEMA assisting with these events.

This involvement increases disaster costs.  For instance, FEMA’s administrative costs rose from 9 percent to 18 percent of assistance between 1989-1995 and 2004-2011.  Audits by the Department of Homeland Security’s Office of Inspector General uncovered $300 million in improper FEMA payments in 2013, and $1.4 billion over the last five years.  The GAO recently observed that state and local governments have been professionalizing their emergency management staffs to help seek federal assistance.”  State and local governments will naturally seek to qualify for available federal monies.

Public assistance is third party payment of state and local government disaster costs.  Third party payment increases costs due to moral hazard, as exemplified by health insurance and medical costs.  Rising administrative costs and improper payments reflect third party payment cost inflation.  Federal assistance also undermines the incentive for state and local governments to prepare financially for tornadoes, hurricanes, floods, and other inevitable disasters.

The low damage threshold FEMA uses to evaluate governors requests allows the declaration of small events as major disasters.  FEMA set a threshold of $1 per capita for a state in 1986 and adjusted it for inflation since 1999; it stands at $1.39 per capita today.  The threshold for public assistance should have been tied to per capita income since 1986, consistent with the normalization of disaster losses by natural hazards researchers.  Forty four percent of all declared disasters between 2004 and 2011 would not have met an income-adjusted threshold.

Diligence, oversights, and audits can only help control third party payment costs.  The wiser approach avoids third party payment when possible, as insurance does through deductibles for small, regular expenses.  Congress should raise the damage threshold and end FEMA involvement with weekly disasters.

Yet Congress should not merely adjust an arbitrary baseline, and instead thoroughly reassess the potential for state and local governments to respond to disasters.  Adequate insurance can cover much of state and local governments’ property and equipment losses.  Innovative financial instruments like weather derivatives and catastrophe bonds allow businesses and insurers to manage catastrophe risk, and could help state and local governments to do the same.

Financial preparation affects whether a disaster overwhelms local response capacity.  The Joplin, Missouri public school district suffered $150 million in damage to eight schools in the deadly May 2011 tornado, $25 per capita for the state of Missouri (and $3,000 for Joplin).  Insurance allowed the school district to access private sector funds for rebuilding.

Americans have grown to expect federal government assistance with many of life’s challenges.  We pay a high price for FEMA involvement with weekly disasters.  A reasoned reassessment of the ability of state and local governments to deal with disasters will help stem rising disaster costs and ensure the availability of federal assistance when truly needed.

Sutter is a professor of economics at the Manuel H. Johnson Center for Political Economy at Troy University and author of over two dozen scholarly papers and two books on the economic and societal impacts of extreme weather and natural disasters.