Environmental Valuation & Cost-Benefit News

Part of the mission of the Federal Emergency Management Agency (FEMA) is to promote steps by communities, businesses, and individuals to reduce their vulnerability to natural disasters. In keeping with that objective, FEMA’s Pre-Disaster Mitigation (PDM) program provides grants to help communities plan and carry out projects that are intended to lessen casualties and property damage from earthquakes, floods, hurricanes, and other natural hazards. Since 2004, the PDM program has awarded about $310 million for mitigation projects and roughly $50 million for planning activities. The program is predicated on the idea that mitigation can be cost-effective in protecting people and property from natural disasters.

The Disaster Mitigation Act of 2000, as amended, requires the Congressional Budget Office (CBO) to study the reduction in federal disaster assistance that has resulted and is likely to result from enactment of that law, which created the PDM program.1 CBO’s analysis of the
PDM program points to the following conclusions:

B The total dollar value of the expected reduction in disaster losses from the projects funded so far exceeds the projects’ costs. The best available information suggests that, on average, future losses are reduced by about $3 (measured in discounted present value) for
each $1 spent on those projects, including both federal and nonfederal spending. Significant uncertainty surrounds that estimate, however, and the information available on past projects may not reliably indicate the effectiveness of additional mitigation projects in the future. The benefits of federal spending on such projects could be lower than the benefits of the
projects themselves if some of the projects (or other mitigation efforts) would have been undertaken by state and local governments or the private sector in the absence of federal grants. Conversely, the benefits of federal spending could be higher if such spending helps encourage additional mitigation efforts by other parties.

B If federal funding for postdisaster assistance declines in proportion to the decrease in property damage, the existing PDM-funded projects could lower federal spending by an average of roughly $10 million to $20 million per year over the next 50 years, CBO estimates. Such amounts would be small relative to the size of federal disaster aid—which, in the decade
before Hurricane Katrina, averaged about $5.3 billion a year from FEMA alone. But those savings would be large enough to make the federal investment of $310 million in the projects cost-effective in budgetary terms.

B Any federal savings from PDM-funded mitigation projects would occur largely in FEMA’s disaster relief programs (which are funded from discretionary appropriations) and in its National Flood Insurance Program (which ordinarily is not funded through the appropriation process). The savings to the flood insurance program (net of cuts in insurance premiums)
would depend on the extent to which the mitigation projects focused on properties that were insured at subsidized rates. Because reductions in discretionary spending for disaster relief would depend on future Congressional action, they could not be counted for scorekeeping purposes as an offset to the costs of mitigation; by contrast, estimated net savings in direct (mandatory) spending for the flood insurance program could be counted as an offset under some circumstances.

Perry Beider of CBO’s Microeconomic Studies Division wrote this report under the supervision
of Joseph Kile and David Moore. Tony Hake, Karen Magnino, Kim Rogers, Cecelia
Rosenberg, Shabbar Saifee, and Jody Springer of the Federal Emergency Management Agency
provided and helped to interpret the data on PDM projects. Keith Porter of the California
Institute of Technology and Adam Z. Rose of the University of Southern California provided
information on the methodology and results of the MMC study. Robert Dennis, Peter
Fontaine, Arlene Holen, Daniel Hoople, Nathan Musick, Robert Sunshine, David Torregrosa,
and G. Thomas Woodward of CBO offered helpful comments on various drafts of this report.
Christian Howlett edited the report, and Kate Kelly proofread it. Maureen Costantino
designed the cover. Lenny Skutnik prepared the printed copies, Linda Schimmel coordinated
the print distribution, and Simone Thomas prepared the electronic version for CBO’s Web
site (www.cbo.gov).

Peter R. Orszag, Director
United States Congressional Budget Office (CBO) www.cbo.gov
http://www.cbo.gov/ftpdocs/86xx/doc8653/09-28-Disaster.pdf
September 2007