Brian M. Johnson
Congress will soon consider a $200 billion bailout aimed at protecting waterfront real estate owners in Florida. Introduced by Rep. Ron Klein, Florida Democrat, the Homeowners’ Defense Act, known as the “beach-house bailout,” is nothing more than a targeted TARP-style taxpayer-funded bailout Mr. Klein is using to help his home state.
Florida has about 5 percent of the nation’s population but more than 50 percent of its total exposure to hurricanes and “at risk” waterfront properties. When private insurance companies tried to raise premiums on those at-risk homes, the state Legislature intervened and established price controls for the private insurers. However, price controls never work. Once its policy to protect its wealthiest taxpayers failed, the Florida legislature established a “public option” for property insurance – a government agency, the Florida Citizens Property Insurance Corp. (FCPIC) – to assess property.
The problem is that the FCPIC uses actuarially false data, resulting in an astoundingly low rate to undercut its private-sector competitors. The outcome is that Mr. Klein wants to force American taxpayers to pay for a targeted beach-house bailout for his state.
Rather than charge realistic, actuarially sound rates based on comprehensive risk models and expert analysis, Florida has artificially lowered catastrophic insurance rates to provide Floridians with a fail-safe system – the FCPIC. With the state charging irresponsibly low rates, these policies are keeping the private sector from engaging in market-based competition.
The FCPIC currently has a potential liability of $28 billion but only enough assets to cover $4.5 billion, leaving it 84 percent underfunded. Not only are these funds financed by artificially low rates, but a study from Florida State University has found that policyholders with high-risk properties on the coast are paying comparatively less than their low-risk inland counterparts.
To alleviate this problem, Florida’s Legislature decided to sell $28 billion in bonds, more than double the amount of bonds ever sold by a state, to help FCPIC cover its potential liability if a storm were to wipe out its beach-front homeowners. The result is an underfunded state-run insurance program that, without a government bailout, will force Florida into bankruptcy after its first major storm.
Floridians with homes prone to the effects of natural disasters, i.e. expensive waterfront properties, purchase the inexpensive state-offered insurance, which does not have assets to support the covered liabilities. When these “at risk” properties are damaged, other plan participants in inland Florida, who are not affected by the disaster, will see their rates skyrocket to cover the costs before an inevitable bankruptcy sets in.
Mr. Klein claims his beach-house bailout bill will prevent this from happening not only in Florida, but in all states that face natural disasters. Only Florida and California would benefit from the taxpayer-funded bailout – but this benefit comes at the expense of every single taxpayer across the country – think Nebraska Democrat Sen. Ben Nelson’s “Cornhusker Kickback” in the health care bill.
Other proponents of this targeted bailout argue that despite the taxpayers being placed on the hook, it is justifiable because the bill will lower insurance costs and help low-income families. This could not be further from the truth. Lowering the insurance rates and premiums would substantially increase the overall cost of the bill for the American taxpayer. All policyholders, including charities, school districts, low-income car owners and businesses are taxed on their insurance policies to subsidize coastal property owners insured by the state fund.
Additionally, there are no income-level or home- or property-value restrictions on who benefits from this beach-house bailout. In fact, the Florida system provides massive subsidies to homeowners of $2-million-plus properties. The claim that this bill will help low-income families is so egregious that state Sen. Al Lawson of Tallahassee said, “You’re robbing from the poor to take care of the rich … to subsidize these million-dollar homes built on the coast.”
Taxpayers are not the only ones opposing this most recent bailout. Environmental organizations such as the National Wildlife Federation and the League of Conservation Voters oppose this bill as it sends mixed market signals to developers.
Mr. Klein’s beach-house bailout will not only continue to promulgate irresponsible and unsustainable policy, but will cost American taxpayers billions of dollars to bail out wealthy coastal property owners in the congressman’s home state.
Brian M. Johnson is federal affairs manager at Americans for Tax Reform in Washington.