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Testimony: 

Before the Committee on the Budget, House of Representatives:     

United States Government Accountability Office:     

GAO:     

For Release on Delivery Expected at 10:00 a.m. EDT:     

Thursday, August 2, 2007:     

gulf coast rebuilding:     

Observations on Federal Financial Implications:     

Statement of Stanley J. Czerwinski, Director Strategic Issues:     

GAO-07-1079T:     

GAO Highlights:     

Highlights of GAO-07-1079T, a testimony before the Committee on the 
Budget, House of Representatives.     

Why GAO Did This Study:     

The devastation caused by the Gulf Coast hurricanes presents the nation 
with unprecedented challenges as well as opportunities to reexamine 
shared responsibility among all levels of government. All levels of 
government, together with the private and nonprofit sectors, will need 
to play a critical role in the process of choosing what, where, and how 
to rebuild. Agreeing on what the costs are, what federal funds have 
been provided, and who will bear the costs will be key to the overall 
rebuilding effort.     

This testimony (1) places federal assistance provided to date in the 
context of damage estimates for the Gulf Coast, and (2) discusses key 
federal programs that provide rebuilding assistance to the Gulf Coast 
states. In doing so, GAO highlights aspects of rebuilding likely to 
place continued demands on federal resources.     

GAO visited the Gulf Coast region, reviewed state and local documents, 
and interviewed federal, state, and local officials. GAO’s ongoing work 
on these issues focuses on the use of federal rebuilding funds and 
administration of federal programs in the Gulf Coast region.      

What GAO Found:     

To respond to the Gulf Coast devastation, the federal government has 
already committed a historically high level of resources—more than $116 
billion—through an array of grants, loan subsidies, and tax relief and 
incentives. A substantial portion of this assistance was directed to 
emergency assistance and meeting short-term needs arising from the 
hurricanes, leaving a smaller portion for longer-term rebuilding. To 
understand the long-term financial implications of Gulf Coast 
rebuilding, it is helpful to view potential federal assistance within 
the context of overall estimates of the damages incurred by the region. 
Some estimates put capital losses at a range of $70 billion to more 
than $150 billion, while the state of Louisiana estimated that the 
economic effect on its state alone could reach $200 billion. These 
estimates raise questions regarding how much additional assistance may 
be needed to help the Gulf Coast continue to rebuild, and who should be 
responsible for providing the related resources.     

Demands for additional federal resources to rebuild the Gulf Coast are 
likely to continue. The bulk of federal rebuilding assistance provided 
to the Gulf Coast states funds two key programs—the Federal Emergency 
Management Agency’s Public Assistance (PA) program and the Department 
of Housing and Urban Development’s Community Development Block Grant 
(CDBG) program. In addition to funding PA and CDBG, the federal 
government’s recovery and rebuilding assistance also includes payouts 
from the National Flood Insurance Program as well as funds for levee 
restoration and repair, coastal wetlands and barrier islands 
restoration, and benefits provided through Gulf Opportunity Zone tax 
expenditures.     

As states and localities continue to rebuild, there are difficult 
policy decisions that will confront Congress about the federal 
government’s continued contribution to the rebuilding effort and the 
role it might play over the long-term in an era of competing 
priorities. GAO’s ongoing and preliminary work on Gulf Coast rebuilding 
suggests the following questions:     

* How much could it ultimately cost to rebuild the Gulf Coast and how 
much of this cost should the federal government bear? 

* How effective are current funding delivery mechanisms—such as PA and 
CDBG—and should they be modified or supplemented by other mechanisms? 

* What options exist to effectively build in federal oversight to 
accompany the receipt of federal funds, particularly as federal funding 
has shifted from emergency response to rebuilding?

* How can the federal government further partner with state and local 
governments and the nonprofit and private sectors to leverage public 
investment in rebuilding? 

* What are the “lessons learned” from the Gulf Coast hurricanes, and 
what changes need to be made to help ensure a more timely and effective 
rebuilding effort in the future?     

What GAO Recommends:     

Although GAO is not making recommendations in this testimony, GAO 
raises questions that the committee should consider in its oversight of 
federal funding     

[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1079T].     

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Stanley J. Czerwinski, 
(202) 512-6806, czerwinskis@gao.gov.     

[End of section]

Mr. Chairman and Members of the Committee:     

I appreciate the opportunity to participate in today's hearing to 
discuss our preliminary observations on the federal financial 
implications of Gulf Coast rebuilding issues.[Footnote 1] The Gulf 
Coast and the nation continue to face daunting rebuilding costs, 
uncertainty surrounding numerous decisions linked to the availability 
of federal funds, and the complexity of integrating multiple public and 
private decisions that will influence the future of the region. The 
size and scope of the devastation caused by the Gulf Coast 
hurricanes[Footnote 2] presents the nation with unprecedented 
rebuilding challenges as well as opportunities to reexamine shared 
responsibility among all levels of government. Wide swaths of housing, 
infrastructure, and businesses were destroyed, leaving more than 1,500 
people dead and hundreds of thousands of others displaced without 
shelter and employment. Our ongoing work in Mississippi, southern 
Louisiana, and New Orleans confirms that some communities still lack 
fulfillment of basic needs, such as schools, hospitals, and other 
infrastructure, while the doors of many businesses remain closed. 
Almost 2 years since the hurricanes made landfall, many Gulf Coast 
neighborhoods and communities still need to be rebuilt--some from the 
ground up.     

Major decisions still need to be made regarding infrastructure, 
housing, levee protection, coastal restoration, and economic recovery, 
among other issues. All levels of government, together with the private 
and nonprofit sectors, will need to play a critical role in the process 
of choosing what, where, and how to rebuild. Agreeing on what the costs 
are, what rebuilding should be done and by whom, and who will bear the 
costs will be key to the overall rebuilding effort.     

My testimony today will offer some preliminary observations on the 
federal financial implications of rebuilding efforts in the Gulf Coast. 
These observations may assist you in your oversight of these 
activities--now and over the longer term. I would like to: (1) place 
the federal assistance provided to date in the context of varied damage 
estimates for the Gulf Coast; and (2) discuss the key federal programs 
that provide rebuilding assistance, with an emphasis on Public 
Assistance (PA) and Community Development Block Grants (CDBG). In doing 
so, we will highlight aspects of Gulf Coast rebuilding likely to place 
continued demands on federal resources.     

My statement is based largely on our completed and ongoing work in 
Washington, D.C., as well as Louisiana and Mississippi--the two states 
most directly affected by the Gulf Coast hurricanes. Specifically, we 
analyzed state and local documentation related to funding for 
rebuilding and interviewed state and local officials as well as 
representatives from nongovernmental organizations in these two states. 
We also interviewed various federal officials from the Federal 
Emergency Management Agency (FEMA), the Department of Housing and Urban 
Development (HUD), and the Coordinator of Federal Support for the 
Recovery and Rebuilding of the Gulf Coast Region[Footnote 3] within the 
Department of Homeland Security (DHS) and analyzed federal regulations 
and state policies regarding funding for the Gulf Coast. We performed 
our work in accordance with generally accepted government auditing 
standards.     

Estimates Raise Questions Regarding Long-term Funding:     

The total long-term funding for helping the Gulf Coast recover from the 
2005 hurricanes hinges on numerous factors including policy choices 
made at all levels of government, knowledge of spending across the 
federal government, and the multiple decisions required to transform 
the region. To understand the long-term federal financial implications 
of Gulf Coast rebuilding it is helpful to view potential federal 
assistance within the context of overall estimates of the damages 
incurred by the region. Although there are no definitive or 
authoritative estimates of the amount of federal funds that could be 
invested to rebuild the Gulf Coast, various estimates of aspects of 
rebuilding offer a sense of the long-term financial implications. For 
example, early damage estimates from the Congressional Budget Office 
(CBO) put capital losses from Hurricanes Katrina and Rita at a range of 
$70 billion to $130 billion[Footnote 4] while another estimate put 
losses solely from Hurricane Katrina--including capital losses--at more 
than $150 billion.[Footnote 5] Further, the state of Louisiana has 
estimated that the economic effect on its state alone could reach $200 
billion. The exact costs of damages from the Gulf Coast hurricanes may 
never be known, but will likely far surpass those from the three other 
costliest disasters in recent history--Hurricane Andrew in 1992, the 
1994 Northridge earthquake, and the September 2001 terrorist 
attacks.[Footnote 6] These estimates raise important questions 
regarding how much additional assistance may be needed to continue to 
help the Gulf Coast rebuild, and who should be responsible for 
providing the related resources.     

To respond to the Gulf Coast devastation, the federal government has 
already committed a historically high level of resources--more than 
$116 billion--through an array of grants, loan subsidies, and tax 
relief and incentives. The bulk of this assistance was provided between 
September 2005 and May 2007 through five emergency supplemental 
appropriations.[Footnote 7] A substantial portion of this assistance 
was directed to emergency assistance and meeting short-term needs 
arising from the hurricanes, such as relocation assistance, emergency 
housing, immediate levee repair, and debris removal efforts. The 
Brookings Institution has estimated that approximately $35 billion of 
the federal resources provided supports longer-term rebuilding 
efforts.[Footnote 8]     

The federal funding I have mentioned presents an informative, but 
likely incomplete picture of the federal government's total financial 
investments to date. Tracking total funds provided for federal Gulf 
Coast rebuilding efforts requires knowledge of a host of programs 
administered by multiple federal agencies. We previously reported that 
the federal government does not have a governmentwide framework or 
mechanism in place to collect and consolidate information from the 
individual federal agencies that received appropriations in emergency 
supplementals for hurricane relief and recovery efforts or to report on 
this information.[Footnote 9] It is important to provide transparency 
by collecting and publishing this information so that hurricane 
victims, affected states, and American taxpayers know how these funds 
are being spent. Until such a system is in place across the federal 
government, a complete picture of federal funding streams and their 
integration across agencies will remain lacking.     

Demand for Federal Rebuilding Resources Likely to Continue:     

Demands for additional federal resources to rebuild the Gulf Coast are 
likely to continue, despite the substantial federal funding provided to 
date. The bulk of federal rebuilding assistance provided to the Gulf 
Coast states funds two key programs--FEMA's Public Assistance (PA) 
program and HUD's Community Development Block Grant (CDBG) program. 
These two programs follow different funding models. PA provides funding 
for restoration of the region's infrastructure on a project-by-project 
basis involving an assessment of specific proposals to determine 
eligibility. In contrast, CDBG affords broad discretion and flexibility 
to states and localities for restoration of the region's livable 
housing. In addition to funding PA and CDBG, the federal government's 
recovery and rebuilding assistance also includes payouts from the 
National Flood Insurance Program (NFIP) as well as funds for levee 
restoration and repair, coastal wetlands and barrier islands 
restoration, and benefits provided through Gulf Opportunity Zone (GO 
Zone) tax expenditures.     

Public Assistance Program Faces Increased Costs:     

The PA Grant program provides assistance to state and local governments 
and eligible nonprofit organizations on a project-by-project basis for 
emergency work (e.g., removal of debris and emergency protective 
measures) and permanent work (e.g., repairing roads, reconstructing 
buildings, and reestablishing utilities).[Footnote 10] After the 
President declares a disaster, a state becomes eligible for federal PA 
funds through FEMA's Disaster Relief Fund. Officials at the local, 
state, and federal level are involved in the PA process in a variety of 
ways. The grant applicant, such as a local government or nonprofit 
organization, works with state and FEMA officials to develop a scope of 
work and cost estimate for each project that is documented in 
individual project worksheets. In addition to documenting scope of work 
and cost considerations, each project worksheet is reviewed by FEMA and 
the state to determine whether the applicant and type of facility are 
eligible for funding. Once approved, funds are obligated, that is, made 
available, to the state. PA generally operates on a reimbursement 
basis. Reimbursement for small projects (up to $59,700) are made based 
on the project's estimated costs, while large projects (more than 
$59,700) are reimbursed based upon actual eligible costs when they are 
incurred.[Footnote 11]     

As of the middle of July 2007, FEMA had approved a total of 67,253 
project worksheets for emergency and permanent work, making available 
about $8.2 billion in PA grants to the states of Louisiana, 
Mississippi, Texas, and Alabama. A smaller portion of PA program funds 
are going toward longer-term rebuilding activities than emergency work. 
Of the approximately $8.2 billion made available to the Gulf Coast 
states overall, about $3.4 billion (41 percent) is for permanent work 
such as repairing and rebuilding schools and hospitals and 
reestablishing sewer and water systems, while about $4.6 billion (56 
percent) is for emergency response work such as clearing roads for 
access and sandbagging low-lying areas. The remaining amount of PA 
funds, about $0.2 billion (3 percent) is for administrative costs. (See 
fig. 1.) Of the funds made available by FEMA to the states for 
permanent rebuilding, localities have only received a portion of these 
funds since many projects have not yet been completed. Specifically, in 
Louisiana and Mississippi, 26 and 22 percent of obligated funds, 
respectively, have been paid by the state to applicants for these 
projects.     

Figure 1: Breakdown of Public Assistance Grants Made Available to the 
Gulf Coast States as of the middle of July 2007 (billions of 
dollars):     

[See PDF for image]     

Source: GAO analysis of FEMA data.     

Note: Data included are as of the following dates: Alabama, July 19, 
2007; Louisiana, July 19, 2007; Mississippi, July 18, 2007; and Texas, 
July 19, 2007.     

[End of figure]

The total cost of PA funding for the Gulf Coast hurricanes will likely 
exceed the approximately $8.2 billion already made available to the 
states for two reasons: (1) the funds do not reflect all current and 
future projects, and (2) the cost of some of these projects will likely 
be higher than FEMA's original estimates. According to FEMA, as of the 
middle of July 2007, an additional 1,916 project worksheets were in 
process (these projects are in addition to the 67,253 approved project 
worksheets mentioned above). FEMA expects that another 2,730 project 
worksheets will be written. FEMA expects these worksheets to increase 
the total cost by about $2.1 billion, resulting in a total expected PA 
cost of about $10.3 billion.     

Some state and local officials have also expressed concerns about 
unrealistically low cost estimates contained in project worksheets, 
which could lead to even higher than anticipated costs to the federal 
government. A senior official within the Louisiana Governor's Office of 
Homeland Security and Emergency Preparedness recently testified that 
some of the projects were underestimated by a factor of 4 or 5 times 
compared to the actual cost.[Footnote 12] For example, the lowest bids 
on 11 project worksheets for repairing or rebuilding state-owned 
facilities, such as universities and hospitals, totaled $5.5 million 
while FEMA approved $1.9 million for these projects.     

The extent to which the number of new project worksheets and actual 
costs that exceed estimated costs will result in demands for additional 
federal funds remains unknown. In addition, PA costs may increase until 
a disaster is closed, which can take many years in the case of a 
catastrophic disaster.[Footnote 13] For instance, PA costs from the 
Northridge earthquake that hit California in January 1994 have not been 
closed out more than 13 years after the event. Our ongoing work on the 
PA program will provide insights into efforts to complete 
infrastructure projects, the actual costs of completed projects, and 
the use of federal funds to complete PA projects.     

Additional Resource Demands Anticipated for CDBG Program:     

HUD's CDBG program provides funding for neighborhood revitalization and 
housing rehabilitation activities, affording states broad discretion 
and flexibility in deciding how to allocate these funds and for what 
purposes. Congress has provided even greater flexibility when 
allocating additional CDBG funds to affected communities and states to 
help them recover from presidentially-declared disasters, such as the 
Gulf Coast hurricanes.[Footnote 14] To date, the affected Gulf Coast 
states have received $16.7 billion in CDBG funding from supplemental 
appropriations--so far, the largest federal provider of long-term Gulf 
Coast rebuilding funding.[Footnote 15] As shown in figure 2, Louisiana 
and Mississippi were allocated the largest shares of the CDBG 
appropriations, with $10.4 billion allocated to Louisiana, and another 
$5.5 billion allocated to Mississippi. Florida, Alabama, and Texas 
received the remaining share of CDBG funds.[Footnote 16]     

Figure 2: Breakdown of Total CDBG Allocations to Gulf Coast States:     

[See PDF for image]     

Source: GAO analysis of Louisiana Recovery Authority and Mississippi 
Development Authority.

[End of figure]     

To receive CDBG funds for Gulf Coast rebuilding, HUD required that each 
state submit an action plan describing how the funds would be used, 
including how the funds would address long-term "recovery and 
restoration of infrastructure." Accordingly, the states had substantial 
flexibility in establishing funding levels and designing programs to 
achieve their goals. As shown in figure 3, Mississippi set aside $3.8 
billion to address housing priorities within the state while Louisiana 
dedicated $8 billion for its housing needs.     

Figure 3: Most CDBG Funding Allocated to Housing Needs in Louisiana and 
Mississippi:     

[See PDF for image]     

Source: GAO analysis of agency-provided data.     

Note: Totals may not add due to rounding.     

[A] In Mississippi, "other" refers to wind insurance mitigation and 
funds not yet programmed by the state. In Louisiana, "other" refers to 
funding for planning and administrative activities.     

[End of figure]

Each state also directed the majority of its housing allocations to 
owner-occupied homes and designed a homeowner assistance program to 
address the particular conditions in their state. As discussed below, 
each state used different assumptions in designing its programs, which 
in turn affects the financial implications for each state.     

Louisiana's Homeowner Assistance Program Anticipates Shortfall:     

Using $8.0 billion in CDBG funding, the Louisiana Recovery Authority 
(LRA) developed a housing assistance program called the Road Home to 
restore the housing infrastructure in the state.[Footnote 17] As shown 
in figure 4, Louisiana set aside about $6.3 billion of these funds to 
develop the homeowner assistance component of the program and nearly 
$1.7 billion for rental, low-income housing, and other housing-related 
projects. Louisiana anticipated that FEMA would provide the homeowner 
assistance component with another $1.2 billion in grant assistance. 
Louisiana based these funding amounts on estimates of need within the 
state. Accordingly, Louisiana estimated that $7.5 billion would be 
needed to assist 114,532 homeowners with major or severe damage. 
Louisiana also estimated these funds would provide an average grant 
award of $60,109 per homeowner.     

Figure 4: Louisiana's Estimated Funding Distribution for Homeowner 
Assistance (billions of dollars):     

[See PDF for image]     

Source: Louisiana Recovery Authority data.     

[End of figure]

The LRA launched the Road Home homeowner assistance program in August 
2006. Under the program, homeowners who decide to stay in Louisiana and 
rebuild are eligible for the full amount of grant assistance--up to 
$150,000. Aside from the elderly, residents who choose to sell their 
homes and leave the state will have their grant awards reduced by 40 
percent, while residents who did not have insurance at the time of the 
hurricanes will have their grant awards reduced by 30 percent. To 
receive compensation, homeowners must comply with applicable code and 
zoning requirements and FEMA advisory base flood elevations when 
rebuilding and agree to use their home as a primary residence at some 
point during a 3-year period following closing. Further, the amount of 
compensation that homeowners can receive depends on the value of their 
homes before the storms and the amount of flood or wind damage that was 
not covered by insurance or other forms of assistance.     

As of July 16, 2007, the Road Home program had received 158,489 
applications and had held 36,655 closings with an average award amount 
of $74,216. With the number of applications exceeding initial estimates 
and average award amounts higher than expected, recent concerns have 
been raised about a potential funding shortfall and the Road Home 
program's ability to achieve its objective of compensating all eligible 
homeowners. Concerns over the potential shortfall have led to questions 
about the Road Home program's policy to pay for uninsured wind damage 
instead of limiting compensation to flood damage. In recent 
congressional hearings, the Executive Director of the LRA testified 
that the Road Home program will require additional funds to compensate 
all eligible homeowners, citing a higher than projected number of 
homeowners applying to the program, higher costs for homeowner repairs, 
and a smaller percentage of private insurance payouts than 
expected.     

According to the Federal Coordinator for Gulf Coast Rebuilding, CDBG 
funds were allocated to Louisiana on the basis of a negotiation with 
the state conducted between January and February 2006. That negotiation 
considered the provision of federal funding for the state's need to 
conduct a homeowner assistance program covering homes that experienced 
major or severe damage from flooding. The state requested the 
allocation of federal funding at that time to expand the program to 
assist homeowners who experienced only wind damage. That request to 
provide federal funds to establish a homeowner program for homes which 
only experienced wind damage was denied, as were similar requests from 
Gulf Coast states such as Texas. The Administration requested the 
negotiated amount from Congress on February 15, 2006. Congress approved 
that amount and it was signed into law by the President on June 15, 
2006. Subsequently, Louisiana announced the expansion of the Road Home 
program to cover damage exclusively from wind regardless of the stated 
intention of the federal allocation, but fully within their statutory 
authority.     

In addition, the Executive Director of the LRA testified that Louisiana 
had not received $1.2 billion in funds from FEMA--assistance that had 
been part of the Road Home program's original funding design. 
Specifically, the state expected FEMA to provide grant assistance 
through its Hazard Mitigation Grant Program (HMGP)--a program that 
generally provides assistance to address long-term community safety 
needs.[Footnote 18] Louisiana had planned to use this funding to assist 
homeowners with meeting elevation standards and other storm protection 
measures, as they rebuilt their homes.[Footnote 19] However, FEMA has 
asserted that it cannot release the money because the Road Home program 
discriminates against younger residents. Specifically, the program 
exempts elderly recipients from the 40 percent grant reduction if they 
choose to leave the state or do not agree to reside in their home as a 
primary residence at some point during a 3-year period.     

Although we have not assessed their assumptions, recent estimates from 
the Road Home program[Footnote 20] and Louisiana's state legislative 
auditor's office have estimated a potential shortfall in the range of 
$2.9 billion to $5 billion.     

While these issues will not be immediately resolved, they raise a 
number of questions about the potential demands for additional federal 
funding for the states' rebuilding efforts. Our ongoing work on various 
aspects of the CDBG program--including a review of how the affected 
states developed their funding levels and priorities--will provide 
insights into these issues.     

Mississippi's Homeowner Assistance Program Proceeding in Two 
Phases:     

In Mississippi, Katrina's storm surge destroyed tens of thousands of 
homes, many of which were located outside FEMA's designated flood plain 
and not covered by flood insurance. Using about $3 billion in CDBG 
funds, Mississippi developed a two-phase program to target homeowners 
who suffered losses due to the storm surge. Accordingly, Phase I of the 
program was designed to compensate homeowners whose properties were 
located outside the floodplain and had maintained hazard insurance at a 
minimum.[Footnote 21] Eligible for up to $150,000 in compensation, 
these homeowners were not subject to a requirement to rebuild. Phase II 
of the program is designed to award grants to those who received flood 
surge damage, regardless of whether they lived inside or outside the 
flood zone or had maintained insurance on their homes. Eligible 
applicants must have an income at or below 120 percent of the Area 
Median Income (AMI). Eligible for up to $100,000 in grant awards, these 
homeowners are not subject to a requirement to rebuild.[Footnote 22] In 
addition, homeowners who do not have insurance will have their grant 
reduced by 30 percent, although this penalty does not apply to the 
"special needs" populations as defined by the state (i.e., elderly, 
disabled, and low-income).[Footnote 23]     

As of July 18, 2007, Mississippi had received 19,277 applications for 
Phase I of its program and awarded payments to 13,419 eligible 
homeowners with an average award amount of $72,062. In addition, 
Mississippi had received 7,424 applications for Phase II of its program 
and had moved an additional 4,130 applications that did not qualify for 
Phase I assistance to Phase II. The State had awarded 234 grants to 
eligible homeowners in Phase II with an average award amount of 
$69,448.     

Substantial Losses Affect National Flood Insurance Program Ability to 
Repay:     

The National Flood Insurance Program (NFIP) incurred unprecedented 
storm losses from the 2005 hurricane season. NFIP estimated that it had 
paid approximately $15.7 billion in flood insurance claims as of 
January 31, 2007, encompassing approximately 99 percent of all flood 
claims received.[Footnote 24] The intent of the NFIP is to pool risk, 
minimize costs and distribute burdens equitably among those who will be 
protected and the general public.[Footnote 25] The NFIP, by design, is 
not actuarially sound. Nonetheless, until recent years, the program was 
largely successful in paying flood losses and operating expenses with 
policy premium revenues--the funds paid by policyholders for their 
annual flood insurance coverage. However, because the program's premium 
rates have been set to cover losses in an average year based on program 
experience that did not include any catastrophic losses, the program 
has been unable to build sufficient reserves to meet future expected 
flood losses.[Footnote 26]     

Historically, the NFIP has been able to repay funds borrowed from the 
Treasury to meet its claims obligations. However, the magnitude and 
severity of losses from Hurricane Katrina and other 2005 hurricanes 
required the NFIP to obtain borrowing authority of $20.8 billion from 
the Treasury, an amount NFIP will unlikely be able to repay while 
paying future claims with its current premium income of about $2 
billion annually.     

In addition to the federal funding challenge created by the payment of 
claims, key concerns raised from the response to the 2005 hurricane 
season include whether or not some property-casualty insurance claims 
for wind-related damages were improperly shifted to NFIP at the expense 
of taxpayers. For properties subjected to both high winds and flooding, 
determinations must be made to assess the damages caused by wind, which 
may be covered through a property-casualty homeowners policy, and the 
damages caused by flooding, which may be covered by NFIP.[Footnote 27] 
Disputes over coverage between policyholders and property-casualty 
insurers from the 2005 hurricane season highlight the challenges of 
determining the appropriateness of claims for multiple-peril events. 
NFIP may continue to face challenges in the future when servicing and 
validating flood claims from disasters such as hurricanes that may 
involve both flood and wind damages. Our ongoing work addresses 
insurance issues related to wind versus flood damages, including a 
review of how such determinations are made, who is making these 
determinations and how they are regulated, and the ability of FEMA to 
verify the accuracy of flood insurance claims payments based on the 
wind and flood damage determinations.     

Billions Appropriated for Gulf Coast Hurricane Protection Projects:     

Congress has appropriated more than $8 billion to the U.S. Army Corps 
of Engineers (Corps) for hurricane protection projects in the Gulf 
Coast. These funds cover repair, restoration and construction of levees 
and floodwalls as well as other hurricane protection and flood control 
projects. These projects are expected to take years and require 
billions of dollars to complete.[Footnote 28] Estimated total costs for 
hurricane protection projects are unknown because the Corps is also 
conducting a study of flood control, coastal restoration, and hurricane 
protection measures for the southeastern Louisiana coastal region as 
required by the 2006 Energy and Water Development Appropriations 
Act[Footnote 29] and Department of Defense Appropriations Act.[Footnote 
30] The Corps must propose design and technical requirements to protect 
the region from a Category 5 hurricane.[Footnote 31] According to the 
Corps, alternatives being considered include a structural design 
consisting of a contiguous line of earthen or concrete walls along 
southern coastal Louisiana, a nonstructural alternative involving only 
environmental or coastal restoration measures, or a combination of 
those alternatives. The Corps' final proposal is due in December 2007. 
Although the cost to provide a Category 5 level of protection for the 
southeastern Louisiana coastal region has not yet been determined, 
these costs would be in addition to the more than $8 billion already 
provided to the Corps.     

Restoring Louisiana's Wetlands and Barrier Islands Will Likely Cost 
Billions:     

The Corps' December 2007 proposal will also influence future federal 
funding for coastal wetlands and barrier islands restoration. Since the 
1930s, coastal Louisiana lost more than 1.2 million acres of wetlands, 
at a rate of 25-35 square miles per year, leaving the Gulf Coast 
exposed to destructive storm surge. Various preliminary estimates 
ranging from $15 billion to $45 billion have been made about the 
ultimate cost to complete these restoration efforts. However, until the 
Corps develops its plans and the state and local jurisdictions agree on 
what needs to be done, no reliable estimate is available. We are 
conducting work to understand what coastal restoration alternatives 
have been identified and how these alternatives would integrate with 
other flood control and hurricane protection measures, the challenges 
and estimated costs to restore Louisiana's coastal wetlands, and the 
opinions of scientists and engineers on the practicality and 
achievability of large-scale, comprehensive plans and strategies to 
restore coastal wetlands to the scale necessary to protect coastal 
Louisiana.     

GO Zone Tax Incentives Provide Assistance for Recovery:     

The Gulf Opportunity Zone Act of 2005 provides tax benefits to assist 
in the recovery from the Gulf Coast hurricanes.[Footnote 32] From a 
budgetary perspective, most tax expenditure programs, such as the GO 
Zones, are comparable to mandatory spending for entitlement programs, 
in that federal funds flow based on eligibility and formulas specified 
in authorizing legislation.[Footnote 33] The 5-year cost of the GO 
Zones is estimated at $8 billion and the 10-year cost is estimated to 
be $9 billion. Since Congress and the President must change substantive 
law to change the cost of these programs, they are relatively 
uncontrollable on an annual basis. The GO Zone tax benefits chiefly 
extend, with some modifications, existing tax provisions such as 
expensing capital expenditures, the Low Income Housing Tax Credit 
(LIHTC), tax exempt bonds, and the New Markets Tax Credit (NMTC). The 
2005 Act increases limitations in expensing provisions for qualified GO 
Zone properties. The Act also increased the state limitations in 
Alabama, Louisiana, and Mississippi on the amount of LIHTC that can be 
allocated for low-income housing properties in GO Zones. Further, the 
act allows these states to issue tax-exempt GO Zone bonds for 
qualifying residential and nonresidential properties. Finally, the NMTC 
limitations on the total amount of credits allocated yearly were also 
increased for qualifying low-income community investments in GO 
Zones.     

We have a congressional mandate to review the practices employed by the 
states and local governments in allocating and utilizing the tax 
incentives provided in the Gulf Opportunity Zone Act of 2005. We have 
also issued reports on the tax provisions, such as LIHTC and NMTC, now 
extended to the GO Zones by the 2005 Act.[Footnote 34]     

Observations:     

Rebuilding efforts in the Gulf Coast continue amidst questions 
regarding the total cost of federal assistance, the extent to which 
federal funds will address the rebuilding demands of the region, and 
the many decisions left to be made by multiple levels of government. As 
residents, local and state leaders and federal officials struggle to 
respond to these questions, their responses lay a foundation for the 
future of the Gulf Coast. As states and localities continue to rebuild, 
there are difficult policy decisions that will confront Congress about 
the federal government's continued contribution to the rebuilding 
effort and the role it might play over the long-term in an era of 
competing priorities. Congress will be faced with many questions as it 
continues to carry out its critical oversight function in reviewing 
funding for Gulf Coast rebuilding efforts. Our ongoing and preliminary 
work on Gulf Coast rebuilding suggests the following questions:     

* How much could it ultimately cost to rebuild the Gulf Coast and how 
much of this cost should the federal government bear?     

* How effective are current funding delivery mechanisms--such as PA and 
CDBG--and should they be modified or supplemented by other 
mechanisms?     

* What options exist to effectively build in federal oversight to 
accompany the receipt of federal funds, particularly as federal funding 
has shifted from emergency response to rebuilding?     

* How can the federal government further partner with state and local 
governments and the nonprofit and private sectors to leverage public 
investment in rebuilding?     

* What are the "lessons learned" from the Gulf Coast hurricanes, and 
what changes need to be made to help ensure a more timely and effective 
rebuilding effort in the future?     

Mr. Chairman and Members of the committee, this concludes my statement. 
I would be happy to respond to any questions you may have at this 
time.     

GAO Contact and Staff Acknowledgments:     

For information about this testimony, please contact Stanley J. 
Czerwinski, Director, Strategic Issues, at (202) 512-6806 or 
czerwinskis@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
statement. Individuals making key contributions to this testimony 
include Kathleen Boggs, Peter Del Toro, Jeffrey Miller, Carol Patey, 
Brenda Rabinowitz, Michelle Sager, and Robert Yetvin.     

FOOTNOTES     

[1] This testimony updates and expands on GAO, Gulf Coast Rebuilding: 
Preliminary Observations on Progress to Date and Challenges for the 
Future, GAO-07-574T (Washington, D.C.: Apr. 12, 2007); and GAO, 
Preliminary Information on Rebuilding Efforts in the Gulf Coast, GAO-07-
809R (Washington, D.C.: June 29, 2007).     

[2] In this testimony, unless otherwise noted, we refer to Hurricanes 
Katrina, Rita, and Wilma collectively as the Gulf Coast hurricanes.     

[3] Throughout this report and unless otherwise noted, we refer to this 
official as the Federal Coordinator for Gulf Coast Rebuilding.     

[4] According to CBO, capital losses include housing, consumer durable 
goods, energy, other private-sector, and government losses.      

[5] This estimate includes damages only to commercial structures and 
equipment, residential structures and contents, electrical utilities, 
highways, sewer systems, and commercial revenue losses. For more 
information see, Mark L. Burton and Michael J. Hicks, Hurricane 
Katrina: Preliminary Estimates of Commercial and Public Sector Damages 
(Huntington, W.Va.: Marshall University, September 2005).      

[6] According to CBO, losses from Hurricane Andrew--a Category 5 
hurricane that struck the coast of Florida in 1992--totaled about $38.5 
billion in 2005 dollars. The earthquake that struck Northridge, 
California in 1994, which measured 6.7 on the Richter scale--resulted 
in $48.7 billion in losses, as measured in 2005 dollars. Further, 
losses from the terrorist attacks on September 11, 2001, were estimated 
at $87 billion in 2005 dollars, of which $35.2 billion were privately 
insured losses.      

[7] Pub. L. No. 109-61, 119 Stat. 1988 (Sept. 2, 2005); Pub. L. No. 109-
62, 119 Stat, 1990 (Sept. 8, 2005); Pub. L. No. 109-148, 119 Stat. 2680 
(Dec. 30, 2005); Pub. L. No. 109-234, 120 Stat. 418 (June 15, 2006); 
and Pub. L. No. 110-28, 121 Stat. 169 (May 25, 2007). In addition to 
these five supplemental appropriations acts, a number of authorizations 
and programs in multiple federal agencies provided assistance. Congress 
also increased the borrowing authority of the National Flood Insurance 
Program to cover the large number of hurricane-related claims. Pub. L. 
No. 109-65, 119 Stat. 1998 (Sept. 20, 2005); Pub. L. No. 109-106, 119 
Stat. 2288 (Nov. 21, 2005); and Pub. L. No. 109-208, 120 Stat. 317 
(Mar. 23, 2006). In addition, Congress passed the Gulf Opportunity Zone 
Act to provide tax relief benefits and incentives to affected 
individuals and businesses. Pub. L. No. 109-135, 119 Stat. 2577 (Dec. 
21, 2005).     

[8] Amy Liu, "Building a Better New Orleans: A Review of and Plan for 
Progress One Year after Hurricane Katrina." Special Analysis in 
Metropolitan Policy (Washington, D.C.: The Brookings Institution, 
August 2006).      

[9] GAO, Disaster Relief: Governmentwide Framework Needed to Collect 
and Consolidate Information to Report on Billions in Federal Funding 
for the 2005 Gulf Coast Hurricanes, GAO-06-834 (Washington, D.C.: Sept. 
6, 2006).     

[10] PA is typically a cost-share program between the federal and state 
and local governments. However, for Hurricanes Katrina and Rita, the 
state and local match requirements were waived for eligible emergency 
work in the immediate aftermath of the storms and the federal 
government provided 100 percent funding. In addition, Congress recently 
passed, and the President signed into law, legislation to adjust the 
federal cost-share of certain eligible rebuilding projects to 100 
percent. U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and 
Iraq Accountability Appropriations Act, 2007, Pub. L. No. 110-28 § 
4501, 121 Stat. 112, 156 (May 25, 2007).     

[11] Under the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act (Stafford Act), project funds cover the restoration or 
rebuilding of damaged facilities to their predisaster design and 
capacity. 42 U.S.C. § 5172(e)(1)(A)(i).      

[12] Testimony before the Subcommittee on Disaster Recovery of the U.S. 
Senate Committee on Homeland Security and Governmental Affairs, July 
10, 2007.     

[13] A disaster is considered to be closed when all projects are 
approved, all appeals are resolved, and all funds are obligated.     

[14] CDBG funds supported recovery efforts in New York City following 
the terrorist attacks of September 11, 2001; in Oklahoma City following 
the bombing of the Alfred Murrah Building in 1995; and in the city and 
county of Los Angeles following the riots of 1992.     

[15] Pub. L. No. 109-148, 119 Stat. 2680, 2779-80 (Dec. 30, 2005); Pub. 
L. No. 109-234, 120 Stat. 418, 472-73 (June 15, 2006).     

[16] Texas received more than $503 million, Florida received about $183 
million, and Alabama received nearly $96 million. HUD Notice of 
Allocations and Waivers 71 Fed. Reg. 7666 (Feb. 13, 2006); 71 Fed. Reg. 
63,337 (Oct. 30, 2006).     

[17] The LRA was created at the direction of Governor Blanco by 
executive order in October of 2005 and subsequently authorized by the 
state legislature in early 2006.     

[18] Authorized under section 404 of the Stafford Act, the HMGP 
provides grants to states, which in turn provide funds to eligible 
applicants to implement measures that substantially reduce the risk of 
future damages, hardship, loss, or suffering in an area affected by a 
major disaster. 42 U.S.C. § 5172c.     

[19] Specifically, the Road Home program would use HMGP funds to 
provide homeowners with elevation grants of up to $30,000 and up to 
$7,500 for individual storm protection measures such as storm 
shutters.     

[20] These estimates were developed by ICF International, Incorporated, 
a company under contract with the state of Louisiana to administer the 
Road Home program.      

[21] To receive an award, eligible applicants must place a covenant on 
their property, providing that flood insurance and hazard insurance 
will be maintained in perpetuity, the home will be rebuilt or repaired 
to local building codes, and if rebuilt, the home will be elevated to 
FEMA elevation standards.     

[22] To receive an award, eligible applicants--similar to those in 
Phase I--must place a covenant on their property, stipulating that (1) 
flood insurance will be maintained in perpetuity, (2) the home will be 
rebuilt or repaired to local building codes, and (3) if rebuilt, the 
home will be elevated to FEMA elevation standards.     

[23] "Low-income" homeowners are those with incomes at or below 60 
percent of the AMI--which ranges by county.     

[24] See GAO, National Flood Insurance Program: Preliminary Views on 
FEMA's Ability to Ensure Accurate Payments on Hurricane-Damaged 
Properties, GAO-07-991T (Washington, D.C.: June 12, 2007); and GAO, 
National Flood Insurance Program: New Processes Aided Hurricane Katrina 
Claims Handling, but FEMA's Oversight Should Be Improved, GAO-07-169 
(Washington, D.C.: Dec. 15, 2006).     

[25] 42 U.S.C. § 4001(d); 42 U.S.C. § 4016.     

[26] See GAO, Flood Insurance: Information on the Financial Condition 
of the National Flood Insurance Program, GAO-01-992T (Washington, D.C.: 
July 19, 2001).     

[27] Property owners in certain coastal regions subject to hurricanes 
and flooding may have to purchase at least two, and sometimes more, 
different types of insurance policies. Flood insurance is offered by 
NFIP, while insurance for wind-related damages is generally offered by 
private insurance companies or state-sponsored insurers. NFIP was 
established in 1968 in part to provide some insurance protection for 
flood victims because the private insurers were and still are largely 
unwilling to insure for flood risks.      

[28] See GAO, Hurricane Katrina: Strategic Planning Needed to Guide 
Future Enhancements Beyond Interim Levee Repairs, GAO-06-934 
(Washington, D.C.: Sept. 6, 2006); and GAO, U.S. Army Corps of 
Engineers' Procurement of Pumping Systems for the New Orleans Drainage 
Canals, GAO-07-908R (Washington, D.C.: May 23, 2007).     

[29] Pub. L. No. 109-103, 119 Stat. 2247, 2247 (Nov. 19, 2005).      

[30] Pub. L. No. 109-148, 119 Stat. 2680, 2761 (Dec. 30, 2005).      

[31] Pub. L. No. 109-103, 119 Stat. 2247, 2248.     

[32] Pub. L. No. 109-135.     

[33] Tax expenditures may substitute for a federal spending program in 
that the federal government "spends" some of its revenue on subsidies 
by forgoing taxation on some income. See GAO, Government Performance 
and Accountability: Tax Expenditures Represent a Substantial Federal 
Commitment and Need to Be Reexamined, GAO-05-690 (Washington, D.C.: 
Sept. 23, 2005).     

[34] See GAO, Tax Credits: Opportunities to Improve Oversight of the 
Low-income Housing Program, GAO/T-GGD/RCED-97-149 (Washington, D.C., 
Apr. 23, 1997); and GAO, Tax Policy: New Markets Tax Credit Appears to 
Increase Investment by Investors in Low-Income Communities, but 
Opportunities Exist to Better Monitor Compliance, GAO-07-296 
(Washington, D.C.: Jan. 31, 2007).

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