Develop if You Dare: Congress Relaxes the Economic Sanctions of the Flood Insurance Program

Early this summer, Congress attached an amendment to the Housing and Community Development bill¹ eliminating restrictions on federally-related mortgage and construction loans in flood hazard areas in communities which choose not to participate in the National Flood Insurance Program.² The amendment, sponsored by Sen. Eagleton (D-Mo.) and Rep. Taylor (D-Mo.), disappointed environmentalists who view the program as an important mechanism for promoting wiser land use in flood plains. The new provisions substitute a denial of all flood disaster relief for the present controls on lending by federally assisted, supervised, or approved lending institutions.³ If a developer and his banker in a non-participating community choose to take on the risk of being denied disaster relief in the event of a flood, they will now be allowed to build in a flood hazard area without having to comply with the land use and construction restrictions imposed by the flood insurance program.

A Non-Structural Approach to Flood Control

The National Flood Insurance Act of 1984⁴ was enacted in response to a growing awareness that the billions of dollars spent on structural solutions to flooding (such as dams, levees, and dikes) had failed to stem the tide of ever-increasing flood losses.⁵ Development in flood plains had simply increased as control structures made areas appear to be more secure from flooding. Filling of wetlands and modifications to floodways had reduced the ability of the natural ecosystem to contain floodwaters. Floods which occurred in spite of the control measures caused even more serious destruction because of the greater number of buildings in the flood plain. In spite of the cost of disaster relief, little effort had been made to encourage victims to rebuild [7 ELR 10172] away from the dangers of future flooding. The cost of the recurrent flooding was being borne by the taxpayers, who provided the money for disaster relief and costly flood-control projects, instead of by those who built in the flood plain.

The 1968 Act introduced a radically different, but essentially voluntary, approach to flood control. Congress recognized that costs to the federal government could be reduced only if irresponsible flood plain development was curtailed and costs were internalized through a flood insurance program.⁶ The original act addressed only the problem of riverine flooding, but Congress extended it in 1969 to include damages from mudslides⁷ and in 1973 to erosion caused by coastal storms.⁸

Communities which chose to participate in the program became eligible for subsidized insurance on existing structures by enacting minimum flood plain management measures. After rate studies were completed, new structures could be insured at actuarial rates.

Slow Start to the Insurance Program

The insurance program is administered in two separate stages. When a community expresses a desire to participate or is informed by the Federal Insurance Administration (FIA) of its flood-prone status, it must enact a building permit system, regulate construction methods and materials, and require new utility lines and sewers to be placed so as to preclude flood damage.⁹ After the FIA completes studies determining base flood elevations¹⁰ and issues the Flood Insurance Rate Map (FIRM) for the area, the community enters into the regular stage of the program. At that point, the community must impose stricter land use regulations,¹¹ maximum available coverage is doubled, and insurance for new structures is available only at actuarial rates. Existing structures continue to receive subsidized insurance for half the maximum coverage.

Communities were not quick to take advantage of the voluntary program. By the end of 1973, fewer than 3,000 of the 17,000 targeted communities had qualified for insurance, and just over 300,000 policies had been purchased.¹² The reasons for the lack of participation may have been lack of awareness of the program, delays on the federal level, or resistance from developers who wished to be free of the restrictions and the added cost of compliance with the program. Whatever the causes, in 1973 Congress made it much harder for a community to refuse to participate by enacting the Flood Disaster Protection Act of 1973¹³ which forbade federal agencies and federally related financial institutions from making mortgage or construction loans in a flood hazard area unless the community was participating in the program and unless the property was covered by insurance.¹⁴ By June 1977, 15,610 (or about 70 percent) of the targeted communities were in at least the energency stage of the program and over one million policies had been purchased.¹⁵ In addition, over 3,000 communities had refused to participate in the program within one year of being designated as flood prone by the FIA and were therefore unable to obtain federally related financing for flood plain development.¹⁶

Effects of the Mandatory Program

The mandatory nature of the 1973 Act is credited with much of the growth of the program. While other factors, such as increased awareness of the program, heightened environmental concern, and a series of serious floods in the early 1970s may have contributed to the increase, it is safe to say that the threat of loss of both federal and federally related private funds was instrumental. Despite initial frustration caused by lack of information and delay in mapping affected areas, bankers have not been overly resistant to enforcing the Act since the program gives them added security for their loans.¹⁷ The communities, themselves the biggest losers in any flood disaster, were given new planning opportunities with the federal government backing them up.

The land use approach of the law promotes several important environmental values. Emphasis on non-structural solutions avoids the damage caused to riverine and coastal ecosystems by the construction of dams, levees, and dikes. Restrictions on the alteration of floodways allow the natural flood carrying capacity of the flood plain to be maintained, preserves the natural storage capacity of flood waters, and protects the natural recharge of underground water supplies. Restrictions on development can provide open space for recreation and wildlife habitat. To the optimistic, the Act may encourage an eventual retreat of man's intrusion on the flood plain.¹⁸

Though the approach of the insurance program seems to be basically sound, important questions have been raised about the efficacy of the program in discouraging flood plain development. An FIA sponsored study of [7 ELR 10173] several coastal communities has indicated that, while the Act is being strictly enforced, the actuarial rates and building restrictions have had little effect on whether or not a person choses to build in a hazard area. Bankers have noticed no decline in demand for loans, and the availability of insurance may in some cases have increased their willingness to make loans in high-risk areas.¹⁹ The FIA has responded to the study with some stricter coastal regulations but will need to continue to monitor results to determine if more changes are necessary.

As the figure of 3,000 communities under economic sanction indicates, not all have been pleased at finding themselves designated as flood prone. The communities claim that though they may never have had a serious flood, they have been designated as flood prone on the basis of the 100-year flood standard. They also complain that industries have threatened to move rather than comply with the restrictions of the Act. They claim that the Act is a punitive measure, deprivingthem of all opportunity for natural growth.²⁰ The Eagleton-Taylor amendment was designed to remedy the distress of these communities.

The Eagleton-Taylor Amendment

Congressional debate on the amendment centered on the advisability of using federal power over certain financial institutions as a tool for imposing the federal will on local governments. Opponents of the amendment mainly questioned the possible cost to the government in the event of a disaster, making only passing reference to the environmental benefits of the land management program.²¹

The argument that the federal power over federally-related banks should not be misused is an attractive one. Indeed, the spectre of the government curtailing the money supply for inappropriate reasons was raised by the amendment's sponsors. In this case, however, a requirement that banks not risk federally insured deposits on uninsured projects which may be destroyed by flood seems to be a reasonable use of the federal authority.

If a community disagrees with FIA flood plain determinations, it is not without recourse under the Act. The contours of a flood hazard area may be challenged at any time by submitting data for review.²² After the FIRM has been issued, citizens have 90 days to appeal the designated flood elevations.²³

Critics of the amendment claim that denial of disaster aid to a nonparticipating community is unworkable because Congress would be under pressure to pass emergency legislation if such a community were to have a truly devastating flood. The argument does not go far enough. Even assuming that Congress would turn its back on the victims of such a disaster, the desirability of that result is questionable. The government's function of providing aid when it is needed should not be conditioned on the foresight, or lack thereof, of its citizens. The aid should be tied to steps to prevent future disasters, but when it is necessary it should be forthcoming.

Even positing this vision of an I-told-you-so Congress, the federal government and local communities will sustain losses in the event of a disaster whether or not federal disaster assistance is provided. There may be lost tax revenues and increased unemployment insurance costs. Participating downstream communities may be subject to increased flood levels due to the additional development in the floodway and will consequently sustain higher losses. Prevention is both morally and economically preferable to the after-the-fact sanctions of the new amendment.

Critics fear that the amendment will allow communities to withdraw from the program, develop their flood harzard areas, and then reenter the program with the newly developed areas qualifying for subsidized insurance as "existing structures" (or at least qualifying for insurance without meeting the land use requirements of the Act).As the law stands now, there is no legal barrier to such a course of action. In areas with relatively low risk of flooding, the prospect of new development may be attractive enough to encourage withdrawal from the program. What happens in those communities may finally come down to the relative political strengths of developers and those who advocate flood plain management. If past patterns reemerge, the result will be more flood plain development.

The amendment will probably not affect the momentum of the program in those areas which have higher flood risks. The success of the program there will continue to depend on the ability of the government to swiftly identify flood prone areas and complete the complex studies needed to move communities into the regular program with its stricter flood plain management requirements.

The success of the insurance program as a tool for environmental protection will also depend on the willingness of the officials in charge to coordinate their efforts with those of disaster relief agencies and to revise land use restrictions where necessary to truly discourage unwise development.

1. Amendment no. 335 to S.1523, 95th Cong., 1st Sess., 123 CONG. REC. S9041 (daily ed. June 7, 1977). The bill is presently in conference. Since the amendment was passed by both houses it will be part of the final bill which is expected to be signed by the President.

2. The amendment would revise 42 U.S.C. § 4106.

3. Federally related financial assistance includes conventional construction and mortgage loans from federally insured, regulated, supervised, or approved lending institutions, e.g., banks whose savings deposits are insured by FDIC, savings and loans institutions insured by FSLIC or regulated by the Federal Home Loan Bank Board, credit unions insured by the National Credit Union Administration, and banks regulated by the Comptroller of the Currency or the Federal Reserve Board. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, QUESTIONS AND ANSWERS, NATIONAL FLOOD INSURANCE PROGRAM 3 (HUD-471-FIA, June 1977).

4. Pub. L. No. 90-448, Title XIII, 82 Stat. 583 (Aug. 1, 1968).

5. Congressional findings and declaration of purpose, 42 U.S.C. § 4001. See also Remarks of Senator Williams, 123 CONG. REC. S8975 (daily ed. June 6, 1977).

6. Id.

7. Pub. L. No. 91-152, § 409(a), 83 Stat. 397 (Dec. 24, 1969), codified at 42 U.S.C. § 4001(f).

8. Pub. L. No. 93-234, § 108(a), 87 Stat. 979 (Dec. 31, 1973), codified at 42 U.S.C. § 4001(g).

9. 24 C.F.R. § 1910.3(a).

10. The "base flood" or "100-year flood" means the highest level of flooding that, on the average, is likely to occur once every 100 years (i.e., that has a 1 percent chance of occurring each year). 24 C.F.R. § 1909.1.

11. The current minimum land use criteria are codified at 24 C.F.R. part 1910.

12. Conversation with Richard Krimm, Assistant Federal Insurance Administrator for Flood Insurance (July 28, 1977).

13. Pub. L. No. 93-234, 87 Stat. 975 (Dec. 31, 1973).

14. Id., § 202, codified at 42 U.S.C. § 4106.

15. Conversation with Richard Krimm, supra note 11.

16. Remarks of Senator Eagleton, 123CONG. REC. S8971 (daily ed. June 6, 1977).

17. Miller, The National Flood Insurance Program: A Quest for Effective Coastal Floodplain Management, ENVIRONMENTAL COMMENT 5, (Urban Law Institute, June 1977).

18. The flood insurance program provides for purchase of property damaged substantially beyond repair. 42 U.S.C. § 4103. Yet no funds have been appropriated for the purpose. In addition, regulations promulgated under the Disaster Relief Act of 1974 require government officials to mitigate future effects of natural hazards by taking steps such as requiring safe land use and construction practices in reconstruction projects.

19. Miller, supra note 17.

20. Remarks of Senator Eagleton, supra note 16.

21. Senate debate on the Eagleton amendment, 123 CONG. REC. S8971 (daily ed. June 6, 1977) and 123 CONG. REC. S9040 (daily ed. June 7, 1977).

22. 24 C.F.R. part 1920.

23. 42 U.S.C. § 4104.