Cost of Hurricane Katrina Relief and Rebuilding

Recently, the Congress has expressed renewed interest in the cost of the federal response to major disasters. Some of that interest may stem from the Budget Control Act of 2011, which allows some spending for disasters above the limits on discretionary appropriations without triggering sequestration (a cancellation of funding that Congress has previously provided). (CBO recently estimated that this allowance for disaster-related funding, which is based on the 10-year average of such funding excluding the highest and lowest years, is $12.1 billion for fiscal year 2014.) In addition, some Congressional interest may arise from the pace at which CBO generally expects disaster-related funding to be spent—a pace that looks surprisingly slow to some observers. For example, CBO estimated that about one-quarter of the $51 billion in supplemental appropriations for Hurricane Sandy (later reduced to $48 billion as a result of sequestration) would not be disbursed until five years or more after enactment of the bill. That estimate did not imply any judgment by CBO about the appropriateness of such spending; it simply reflected historical patterns for the expenditure of disaster relief funds, most notably the pace of spending following the Gulf Coast hurricanes of 2005. This blog entry addresses some of the questions that CBO has received about these issues.

What was the federal government’s response to the 2005 hurricanes?

Eight years ago, Hurricane Katrina made landfall as one of the strongest storms to affect the United States in the last century. Hurricanes Rita and Wilma followed shortly thereafter. Insured losses from the three storms taken together were estimated by insurance companies to total $57 billion, not including $17 billion in claims paid by the National Flood Insurance Program.

Following those hurricanes, the federal government provided assistance to state and local governments, businesses, and individuals through both automatic increases in spending and reductions in tax collections (for example, as some people whose income fell became eligible for benefit payments and as more people claimed tax deductions for casualty losses) and through deliberate increases in spending and reductions in taxes.

The most significant deliberate response was additional appropriations of more than $100 billion targeted to disaster-affected areas. The largest share of those appropriations ($50 billion) was for the Federal Emergency Management Agency (FEMA). Significant funding also went to the Department of Housing and Urban Development (HUD, $20 billion), the U.S. Army Corps of Engineers ($16 billion), and the Department of Defense ($9 billion).

How quickly were appropriations for the 2005 hurricanes spent?

Today, eight years after Hurricane Katrina, CBO estimates that 93 percent—or $96 billion—of the total appropriations, or budget authority, for the 2005 hurricanes has been expended (see the figure below). Most of that spending occurred in the first few years, but outlays in the fifth year (2010) and beyond account for over 25 percent of the funding provided.

Why were some appropriations for the 2005 hurricanes spent so slowly?

Funding provided by the Congress after the 2005 hurricanes was meant to facilitate not only immediate relief but also long-term recovery. Assistance provided through FEMA’s Disaster Relief Fund (DRF) and HUD’s Community Development Fund (CDF) helped meet those two objectives.

CBO estimates that outlays from the DRF for Hurricanes Katrina, Rita, and Wilma will total about $44 billion by the end of 2013 (see the figure below). Expenditures for operations and human services encompassed much of the immediate relief provided by FEMA, including food and shelter, search and rescue operations, and protection of critical infrastructure. Not surprisingly, most of that spending occurred quickly. In contrast, outlays for infrastructure assistance have occurred more slowly. Debris removal made up the bulk of such expenditures in the first year; afterward, expenditures for reconstruction of public infrastructure (such as bridges, schools, and utilities) and post-disaster hazard mitigation have accounted for most of the spending in that category.

Through the CDF, the Congress provided almost $20 billion to the five states most affected by the 2005 hurricanes for “disaster relief, long-term recovery, and restoration of infrastructure.” About $13 billion of that amount went for immediate relief in the form of direct payments to homeowners and utilities. After an initial delay, that spending occurred fairly quickly (see the figure below). However, outlays for other housing programs, infrastructure, and economic development increased over time through the fifth year after the storms and are expected to continue for several more years beyond 2013.

It is also worth noting that outlays for large-scale construction projects—whether related to disasters or not—naturally occur over several years as costs are incurred. Of the $48 billion allocated through the DRF to areas affected by the 2005 hurricanes, over three-quarters was obligated (that is, made available for expenditure on specific projects) by the end of fiscal year 2006.

Other factors may also tend to slow spending following disasters. For example, efforts to ensure eligibility for benefits and to prevent duplication of benefits (such as a homeowner receiving both a grant and a private insurance payout for the same loss) may lengthen the process for providing individual assistance. Similarly, the availability of matching funds and federal, state, and local laws regarding environmental compliance, zoning, and public comment may slow down infrastructure and other community-level projects. CBO considers all of those factors when projecting the timing of spending from appropriations following disasters.

What spending related to past disasters does CBO anticipate in the future?

CBO expects that federal spending related to the 2005 hurricanes will continue beyond 2013 but will total no more than a few billion dollars annually. That remaining spending will come mainly from the DRF, the CDF, and the Corps of Engineers.

However, even as spending for Hurricanes Katrina, Rita, and Wilma winds down, spending for activities related to Hurricane Sandy will be gearing up. CBO estimates that spending by FEMA, HUD, the Corps of Engineers, and the Department of Transportation will represent more than 90 percent of all appropriations specifically targeted to respond to that storm, and that the spending by those agencies will total about $5 billion in 2013, nearly $9 billion in 2014, and nearly $8 billion in 2015. As of the beginning of September, FEMA has spent over $4 billion in response to Hurricane Sandy; all other agencies have spent less than $1 billion.

Dan Hoople is an analyst in CBO’s Budget Analysis Division