The Congressional Budget Office (CBO) has published a new analysis, “Federal Spending on Flood Adaptation,” in the face of increasing flood damage nationally.  Per CBO, “Over the past 10 years, damage from flooding in the United States has averaged $46 billion per year (in 2023 dollars). That damage is projected to be a quarter to a third greater in 2050 because of increases in flood risk due to climate change.”

In summary, CBO affirmed great payoff of federal investments in adaptation – “Although the effects of adaptation projects can vary widely, estimates from the Corps indicate that two-thirds of its projects—excluding those with the highest one-sixth and lowest one-sixth of benefit-cost ratios—were expected to reduce flood damage by $2 to $6 per dollar of spending over a 50-year project lifetime. For those projects, the average expected reduction in damage was $3 for each dollar spent. CBO’s assessment of FEMA’s flood adaptation projects indicates roughly $2 in expected reductions in damage for every dollar spent. (All of those estimates reflect the value of future costs and benefits at the time the projects were planned.)”

The analysis elaborated on FEMA’s projects – “The average project in the middle of the distribution of benefit-cost ratios had a ratio of 2.2, which translates to a $2.20 reduction in expected losses for each dollar spent.  CBO analyzed reported benefit-cost ratios for all of FEMA’s adaptation grant programs (including HMGP, FMA, and PDM/BRIC) from 2008 to 2019 (the most recent year for which data for all programs were available). Of 7,868 projects with calculated benefits, those in the middle two-thirds of the distribution reported an average benefit-cost ratio of 2.2, or $2.20 in future benefits for every dollar spent in the present (see Figure 10). For those projects, benefit-cost ratios ranged from 1 to 5. 

In considering direct impacts of adaptation on FEMA’s administration of NFIP, the CBO discussed how NFIP’s reinsurance payments change with perception of risk – “FEMA’s recent experiences with reinsurance illustrate how perceptions of risk and purchases of reinsurance can evolve (see Figure 12). In 2017, FEMA purchased reinsurance coverage worth $1 billion for a premium of $150 million. The policy for that year covered 26 percent of losses between $4 billion and $8 billion arising from a single flooding event, excluding the $4 billion in losses under the threshold for the claim. When Hurricane Harvey inflicted damage resulting in more than $8 billion in claims—making it the second-costliest hurricane in U.S. history— FEMA claimed the full $1 billion from its reinsurers. After that larger-than-expected loss, FEMA increased its reinsurance purchases. From 2018 to 2023, FEMA paid reinsurers a total of $2.1 billion, but conditions were not met for any further reinsurance claims. After a run of years without any catastrophic claims on the NFIP, FEMA has reduced its loss coverage and the premiums it pays.”

CBO articulates further federal benefits of adaption – “Adaptations that reduce the risk of flooding benefit the federal government in several ways. Improved community infrastructure can reduce damage to federal buildings and federally supported infrastructure such as roads. Reductions in flood damage also reduce the demand for relief spending. In addition, the federal government benefits from fewer claims from property owners participating in the NFIP (that is, until the NFIP transitions to no longer subsidizing policyholders). Moreover, reducing flood risk can prevent losses in economic activity that would affect the federal budget. Lower risk of flooding may also lead to a lower risk of default on federally backed mortgages. When homes are damaged by flooding, homeowners with mortgages may change their repayment behavior, resulting in defaults, loan modifications, or early repayment.”

And, CBO emphasizes benefits to state and local governments – “State and local governments may even benefit from lower borrowing costs if adaptations protect against future losses of state and local fiscal resources. After a hurricane strikes, local governments experience declines in revenues that are initially offset by intergovernmental transfers but later grow significantly. Local revenue sources (including taxes and fees) have been found to decline by an average of about 2 percent from 6 to 10 years after a hurricane— and by as much as 7 percent over that period after major hurricanes. The risk of lower future revenues can raise state and local governments’ borrowing costs. Studies have found evidence for an increase of 5 to 23 basis points in borrowing costs associated with a moderate increase in the risk of flooding.  Because flood adaptations reduce the risk of damage, they may reduce those costs. One study found that over a period of 20 years, county governments that had invested in flood adaptations saw their average borrowing costs decrease by 10 to 26 basis points per year.  Of course, state and local governments also have to pay for their share of the capital costs of adaptation project.”