Fortifying the Financial Infrastructure

In one convincing and catastrophic stroke, Hurricane Sandy proved in 2012 that hurricanes are not simply about sand, boardwalk planks, and expensive mansions being swept out to sea. Television cameras always seem to capture those images first, and that tendency often leaves a lasting impression on the nation – that only businesses and wealthy beach towns need rescuing. Nothing could be further from the truth. What the public does not see is the magnitude of the losses experienced by lower- and middle- families that remain devastated after the cameras leave.

A March 2013 study carried out by the New York University Furman Center for Real Estate and Urban Policy showed that low- to mid-income families were hit hardest by Sandy. In fact, 54 percent of the New York City homeowners who applied for aid from the Federal Emergency Management Agency make less than $60,000 per year.

Hurricane Sandy illustrated the fact that a majority of the citizens living in the areas most likely to be harmed by natural catastrophes are working families. Helping people recover from a natural catastrophe is therefore an issue of fiscal responsibility that concerns homeowners across the nation.

The massive storm also illustrated not only how much reliance the nation now places on emergency response agencies, but also how tirelessly the responders themselves worked during the immediate hours after the storm made landfall. Fire officers in the Rockaways, for example, heeded their individual calls to action even while many of them lived in the very neighborhoods hit hardest by the storm.

On 18 April 2013, U.S. Department of Homeland Security (DHS) Secretary Janet Napolitano provided written testimony for a House Committee on Homeland Security hearing on the department’s FY 2014 budget. “This funding will sustain resources for fire and emergency management programs,” she pointed out, “while consolidating all other grants into the new, streamlined [National Preparedness Grant Program].” Such consolidations, and other recent budget cuts necessitated by the recent sequestration, are now adversely affecting the funding available to state and municipality first responder agencies and organizations throughout the nation.

One potential solution for the states and municipalities – creating and maintaining a privately funded national catastrophe fund – would leverage a strong public-private partnership to ensure that the U.S. financial infrastructure as a whole is fully prepared to cope with future catastrophes such as Sandy before they occur. A national catastrophe fund that serves as a major component of a comprehensive and well-integrated program would help address insurance affordability and could be used to expand coverage options for all homeowners – while at the same time protecting taxpayers from the seemingly endless need to provide emergency relief.

Fortunately, there is already a bill – the Homeowners and Taxpayers Protection Act of 2013, recently introduced by Rep. Albio Sires (D-NJ-8) – that proposes a better and more comprehensive catastrophe-management approach. That bill builds upon legislation (Homeowners’ Defense Act of 2007) that passed the House of Representatives in 2007 by an overwhelming bipartisan vote of 258-155, but stalled in the Senate. The bill was reintroduced and approved by the House Financial Services Committee as the Homeowners’ Defense Act of 2010, but once again failed to pass both houses of Congress and be signed into law. The new bill would, among other things, provide significant funding for emergency medical technicians and the public safety officials who work to strengthen vital first responder training.

A national catastrophe fund, which is a major component of this comprehensive legislative solution, would be somewhat like a “catastrophe IRA.” The way it would work is as follows: Insurance industry money would prudently be set aside and built up for a speedy and well-resourced recovery from a true natural catastrophe whenever and wherever it hits. Because the fund would be financed through private insurance premiums, it would provide the protection needed without imposing an extra financial burden on the nation’s taxpayers.

During these difficult economic times and with the frequency of natural catastrophes, building a privately funded backstop rather than relying on another taxpayer-funded bailout will lessen the economic risk facing the nation’s homeowners. This type of public-private partnership would strengthen the stability and capacity of the private sector and allow more private companies to participate in the market.

In short, a catastrophe fund program such as that proposed here would help fortify the nation’s overall financial infrastructure. At the same time, the program would strengthen and upgrade U.S. national preparedness in general, before the next major crisis erupts, by providing greater protection for homeowners now and far into the future.