Q&A with FEMA’s Fugate: Capitalism, Socialism and Disaster Mitigation

By | December 13, 2016

In January, Federal Emergency Management Agency administrator Craig Fugate gave states a choice for dealing with climate change. Option A: Do nothing about the rising toll of extreme weather, and hope Congress’s threats to restrict disaster aid — by raising the damage threshold required to receive that aid — never come to pass. Option B was more interesting.

FEMA suggested what it called a disaster deductible: State governments would be on the hook for some of the cost of cleaning up after hurricanes, floods and other calamities. But they could lower that deductible by taking steps to reduce their exposure — for example, by passing tougher building codes.

States balked. But as climate change puts more property at risk, the pressure to reform federal disaster policy will only increase. Fugate spoke with me last week about social welfare for developers, the futility of regulating where people can build, and why this issue won’t go away once Republicans are in charge. Our exchange has been condensed and lightly edited.

You’re about to conclude eight years as the head of FEMA. In that time, the effects of climate change have become less hypothetical: temperature records, more frequent and extreme weather. How has the agency’s mission changed in response?

The president gave me this charge after Hurricane Sandy. He said, ‘Craig, the debate about climate change is over. We’ve got to start talking about how we’re going to adapt.’

The problem with that is, it seems that we’re rebuilding the same things over and over again without substantially changing the outcome. Why? We’re looking only at past data. What about future data? What about future risk?

Federal disaster policy is built on a perverse incentive: Local governments have the greatest ability to reduce damage from storms but face little pressure to do so, because FEMA will pick up the tab.

Earlier this year, you proposed a disaster deductible. How would you characterize the response from states?

They felt this was a shifting of funding burden from the federal government back to the local. And I said, quite honestly, the answer is yes. We have set the threshold and the pain point of disasters so low, we’re not seeing a change in behavior.

Craig Fugate FEMA
Craig Fugate

The decisions about our built infrastructure are made at the local level on a daily basis, through land-use decisions, building-code decisions, permitting decisions. If they’re not looking at what that means as far as future stability in their tax base, future risk, a lot of times we get short-term development that is sold on the idea of jobs and growing the tax base — but also transferring more risk to the taxpayer.

There’s got to be a forcing mechanism. You’ve got to really look at this from the standpoint of, ‘Can you afford disasters?’

Are you moving forward on the deductible?

We’re going out now with another advanced notice of rule making because they didn’t give us enough comments. As I briefed the state directors, I said, ‘You may not like what I’m proposing, but what’s your alternative?’

Do you have any confidence that the next administrator will pursue this?

The organizations that seem to have a lot of influence with the incoming administration, like the Heritage Foundation, are certainly pushing to raise the threshold.

We offered the alternative — deductibles. There is a direct cause and effect between land use and building codes and disaster declarations.

Managed retreat — moving people away from at-risk areas — is the most aggressive form of that. Do you think that FEMA should have a role in it?

Every time we say we shouldn’t build somewhere, developers will see a profit. They will lobby, they will get people elected. They will play the long game. And they will succeed in developing those coastal areas.

The problem is, we’re subsidizing risk that allows that. Capital will not go to areas that don’t have protections. Things like the National Flood Insurance Program, things like disaster declarations — we’re subsidizing risk below the point where behavior will change. And then we can’t understand why it won’t change.

If you want to build and develop your coastal area, and you want to do it without any federal subsidy, backing or understanding you’re going to get a disaster declaration — unless you’re harming the environment, I don’t really have a dog in that fight anymore. I’ve really come to the conclusion that the more you try to fight things like that, the more you end up losing.

I think the better argument is, Why do we treat these areas with such deference and subsidies that nobody except for the taxpayer ends up on the hook?

Why is that so hard to change?

Because we won’t call people out and say they’re socialists.

Who’s socialist?

The builders and developers and all the people running around saying they’re capitalists and they’re Republicans and they’re conservatives, and it’s all about individual freedoms and making money and growing the tax base, and all the bullshit they throw at people, convincing them this is an economic boon activity. It’s nothing but socialism and social welfare for developers when you subsidize risk below which the public gets a benefit from. They’ve got to be called out.

Property rights and all of that are such a powerful argument in many parts of the country, I don’t want to get into the argument about telling people where they can and can’t build. What I want to talk about is, Why are we subsidizing that risk?

Do you see that changing with a Republican administration?

If you talk about climate change, they just shut you down. You’ve got to talk about risk, risk transference, socializing risk to the public where there’s no benefit.

What I like to talk about is insurable risk. If the private sector is not going to insure it, maybe you shouldn’t be building there the way you are.

What we try to do through the regulatory process is usually going to be fought, because people say, “I’ve lived here all my life, it’s never that bad, they always exaggerate, their data’s wrong, they’re crying wolf.” Fine — you get the reinsurance industry to back your risk.

Yet when Congress tried to reform the National Flood Insurance Program, they couldn’t sustain it.

No, because they wanted an actuarially sound program that was cheap. NFIP doesn’t work that way.

What you really want to do with the flood insurance program is move it to the program of insurance of last resort. And try and engage the private sector into writing more policies outside of the high-risk areas. And then if the private sector won’t cover it, maybe people will change their building codes or where they’re building, so that the private sector will cover it.

Our goal is to build back to insurable risk. For most public structures that we deal with, we only pay for uninsured losses. So the question is, ‘Why weren’t they insured in the first place? Why doesn’t a school or fire station have insurance? And the answer generally is, ‘It was not affordable or available.’ We go, ‘Why?’

What’s the answer?

Private insurance companies are in business to sell insurance and make money, so they must not think they can make money off your structure. Why? Is it too old? Is it in the wrong spot? Is it built not to good standards?

If we’re going to spend your taxpayer dollars to rebuild that fire station, wouldn’t it make sense to rebuild it in a way that the private sector can insure it? So you only pay for it one time?

And yet there are so many structures in this country that get repeat funds.

We have to tighten up our requirement that we require insurance for those losses that we reimburse you for when you rebuild, to carry insurance going forward on that structure.

We have fallen into the trap that we built ourselves: accepting, in many cases, state insurance commissioners certifying the lack of affordable or available insurance. We’re now putting a little more rigor into that, going, ‘Show us the market studies. Show us that this was a decision about not being affordable — or a business decision you made not to carry insurance, hoping that there would be somebody else paying in a disaster.’

Your successor will have two competing incentives: He or she will be working for an administration that maybe isn’t convinced climate change is real. On the other hand, he or she will have to protect Americans from extreme storms. Any advice?

The war on science in this country doesn’t ever seem to abate. At FEMA, we’re not the agency that any administration has charged with fixing or reducing greenhouse emissions, or moving to alternative energy. We clean up the mess.

I think our role in this debate about climate disruptions is, you gotta look to the future. Past weather data, past event data has always been a limiting factor. In many cases, it results in us building back in ways that only grow our risk, or continue to see property destroyed over and over again.

But past data is the only data we have.

That’s where I think, when you talk about insurance, particularly the reinsurance industry, if capitalism isn’t willing to invest in your risk, that’s a good indicator that we’re probably not accounting for that. And they are looking at future risk. They are calculating that.

I’ve talked to people from Swiss Re, Lloyd’s and others. They in many cases are starting to look at moving out of markets, or limiting exposures, or what they need on their end to continue to be able to get investors to put money at risk.

Insurance companies, it’s about getting people to take and buy your risk and hope it doesn’t happen, and make a profit off of it. And they’re not going to continue to put money in bad investments.

And you don’t want FEMA holding the bag.

FEMA is the euphemism for you, the taxpayer, holding the bag. That’s what people don’t understand: You the taxpayer hold the bag when we make bad investment decisions on where and how we’re going to build in a changing environment.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Christopher Flavelle writes editorials on health care, energy and environment for Bloomberg View.

Topics Flood Climate Change

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