Association for Public Policy Analysis & Management

There is a growing concern that the current institutional arrangement in the United States for dispensing post-disaster assistance is unsustainable in the face of higher disaster losses and tighter federal budgets. At the crux of the issue is the moral hazard problem induced by FEMA’s policy of covering the vast majority of disaster losses once a formal Disaster Declaration is made. This paper designs and analyzes a significant reform of the current FEMA Public Assistance Program that would establish a Deductible against the coverage of losses to reduce the moral hazard problem and would offer Credits for expenditures on risk reduction by states as an incentive to offset the Deductible. Risk Reduction strategies analyzed are pre-disaster mitigation, insurance, relief funds, and post-disaster resilience.

We begin by providing a foundation for setting the Deductible itself, which is then adjusted for each state’s fiscal capacity and risk exposure. We also examine various assumptions and parameters in the design of the Deductible/Credit System (DCS). We develop a Mathematical Programming Model to analyze the potential state response and a Burden Analysis to analyze the impact of the DCS on both federal and state budgets. Sensitivity tests are undertaken to determine the implications of variations in assumptions/parameters on the bottom-line costs, on federal/state expenditure shares, and on various other evaluative criteria. The final step of the analysis is a discussion of DCS implementation issues. In the course of the presentation, we analyze important policy issues such as the tradeoff between preventing property damage vs. enhancing life-safety, and between pre-disaster and post-disaster risk reduction strategies.