oversight

Disaster Assistance: Opportunities to Improve Cost-Effectiveness Determinations for Mitigation Grants

Published by the Government Accountability Office on 1999-08-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Committees




August 1999
                  DISASTER
                  ASSISTANCE
                  Opportunities to
                  Improve
                  Cost-Effectiveness
                  Determinations for
                  Mitigation Grants




GAO/RCED-99-236
          United States
GAO       General Accounting Office
          Washington, D.C. 20548

          Resources, Community, and
          Economic Development Division

          B-281730

          August 4, 1999

          The Honorable Christopher S. Bond
          Chairman
          The Honorable Barbara A. Mikulski
          Ranking Minority Member
          Subcommittee on VA, HUD, and
            Independent Agencies
          Committee on Appropriations
          United States Senate

          The Honorable Tillie K. Fowler
          Chairman, Subcommittee on Oversight,
            Investigations, and Emergency Management
          Committee on Transportation and Infrastructure
          House of Representatives

          For a number of years, the Congress has been concerned about the
          increasing costs of federal disaster assistance. One of the Federal
          Emergency Management Agency’s (FEMA) primary approaches for reducing
          these costs is to promote mitigation measures that will reduce future
          damage within communities, thereby potentially decreasing future federal
          expenditures for disasters. From its inception in fiscal year 1989 through
          April 30, 1999, FEMA’s program for funding state and local measures to
          mitigate the impact of future disasters—the Hazard Mitigation Grant
          Program—received over $2.4 billion. Under FEMA’s primary authorizing
          legislation, the Robert T. Stafford Disaster Relief and Emergency
          Assistance Act, these measures must be cost-effective, meaning that they
          will ultimately save money for the federal government. As a condition of
          receiving a program grant, a state must prepare an administrative plan that
          establishes its procedures and priorities for identifying and selecting
          mitigation projects. FEMA, however, has the final authority to approve
          funding for these projects.

          In the Subcommittee’s June 12, 1998, report accompanying the fiscal year
          1999 appropriations bill and subsequent correspondence, you requested
          that we review how FEMA, in conjunction with the states, ensures the
          cost-effectiveness of projects funded under the Hazard Mitigation Grant
          Program. Specifically, this report

      •   examines the approaches FEMA and the states use to ensure that program
          grants are targeted to cost-effective mitigation projects and




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                   •   considers whether the approaches ensure that the mitigation measures are
                       cost-effective.

                       To address these issues, we performed audit work in Florida and in FEMA’s
                       Region 6 (for Arkansas, Louisiana, and Texas). We selected Florida
                       because of the sizeable amount of funds obligated for program grants
                       during fiscal year 1998 and the state’s role in analyzing projects for
                       cost-effectiveness. We selected the states in Region 6 because they have
                       addressed a wide range of disasters and have thus gained varied
                       experience in hazard mitigation.


                       The states and FEMA work together to help ensure that Hazard Mitigation
Results in Brief       Grant Program grants are awarded for cost-effective projects. The states in
                       our review establish procedures and priorities for identifying and selecting
                       mitigation projects; however, not all of them conduct a formal analysis of a
                       project’s cost-effectiveness before submitting an application for the
                       project to FEMA. FEMA uses benefit-cost analysis as its primary approach for
                       ensuring that mitigation projects submitted by the states are
                       cost-effective.1 However, FEMA also excludes certain types of hazard
                       mitigation projects from benefit-cost analysis, including projects that fund
                       the removal of certain properties from floodways and floodplains, hazard
                       identification or mapping initiatives, and mitigation planning efforts. FEMA
                       officials stress a need for flexibility in assessing these projects, suggesting
                       that benefit-cost analysis does not always apply to all mitigation projects,
                       because of difficulties in quantifying the benefits of some projects and the
                       time needed to gather data for conducting analyses. For these projects, the
                       states are instructed to include a narrative that identifies the benefits of
                       mitigation and establishes a “reasonable expectation” that the projects
                       will reduce or prevent future property damage, injury, or loss of life.

                       Our review of 55 hazard mitigation projects in four states found that 41
                       projects were judged as cost-effective on the basis of the benefit-cost
                       analyses conducted. These 41 projects account for $11.7 million, or 58
                       percent of the $20.1 million in project funding we reviewed. However, the
                       officials conducting benefit-cost analyses for some of the projects
                       designed to mitigate future damage from flooding did not always use the
                       best available information—such as flood damage information available
                       from past insurance claims and updated information on flood hazards—in

                       1
                        Benefit-cost analysis—an approach recommended by the Office of Management and Budget—is used
                       to determine how the anticipated dollar savings gained through implementing a project compare with
                       its cost. To be considered cost-effective under benefit-cost analysis, a project must return more money
                       over its life than it cost.



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                          conducting their analyses. Our review also found that 14 projects,
                          accounting for $8.4 million, or 42 percent, of the funding reviewed, were
                          exempt from benefit-cost analysis. These projects included property
                          acquisitions, emergency alert systems, and a public awareness campaign.
                          While FEMA has explained its rationale for exempting these types of
                          mitigation projects from benefit-cost analysis, factors such as the lack of
                          an established analytical basis supporting the exemption limit the agency’s
                          ability to demonstrate that some of these mitigation measures are
                          cost-effective. This report includes recommendations designed to improve
                          determinations of cost-effectiveness made under the Hazard Mitigation
                          Grant Program.


                          FEMA has made disaster mitigation a primary goal in its efforts to reduce
Background                the long-term costs of disasters. According to FEMA’s September 1997
                          strategic plan, the agency is concentrating its activities on reducing
                          disaster costs through mitigation because no other approach is as effective
                          over the long term. Mitigation activities are undertaken to reduce losses
                          from disasters or to prevent such losses from occurring. To help mitigate
                          hazards, the agency provides grants and training for state and local
                          governments, funding for preventing damage to public facilities and for
                          purchasing and converting flood-prone properties to open space, and
                          federal flood insurance. It also supports the development of land-use plans
                          and zoning ordinances to discourage building in hazardous areas and
                          funds programs designed to reduce the loss of life and property from
                          earthquakes and fires. While a number of FEMA programs and initiatives
                          provide funding for hazard mitigation assistance, our review focused on
                          hazard mitigation measures funded under the Hazard Mitigation Grant
                          Program.


Hazard Mitigation Grant   Up to 15 percent of the total grant funds spent on a disaster may be spent
Program                   under the Hazard Mitigation Grant Program for hazard mitigation
                          measures. Subject to certain dollar limits, the Stafford Act generally allows
                          federal funding of up to 75 percent of the cost of hazard mitigation
                          measures within communities that have been affected by a disaster (the
                          state or local government pays the remaining portion of the costs).2 In



                          2
                            In an Oct. 10, 1997, Federal Register notice, FEMA announced that for disasters declared after Apr. 6,
                          1997, eligibility for program funding would be statewide rather than limited to the communities
                          affected by the disaster. FEMA was attempting to give the states enhanced flexibility in using the
                          funding for high-priority projects across the states and to close out the funding from older disasters as
                          soon as possible.



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                             fiscal year 1998, FEMA approved and obligated over $415 million in Hazard
                             Mitigation Grant Program grants.


Requirements That            The legislation authorizing FEMA’s use of funding for the Hazard Mitigation
Projects Be Cost-Effective   Grant Program—the Stafford Act (P.L. 93-288), as amended—states that the
                             funding can be used for hazard mitigation measures that have been
                             determined to be “cost-effective and which substantially reduce the risk
                             of future damage, hardship, loss, or suffering in any area affected by a
                             major disaster.” The Office of Management and Budget’s (OMB) guidelines,
                             contained in OMB Circular A-94, recommend the use of benefit-cost
                             analysis for determining cost-effectiveness. FEMA’s regulations for
                             administering the Hazard Mitigation Grant Program include eligibility
                             requirements that contain minimum criteria for projects, such as
                             documenting that a project “. . .will not cost more than the anticipated
                             value of the reduction in both direct damages and subsequent negative
                             impacts to the area if future disasters were to occur. Both costs and
                             benefits will be computed on a net present value basis.” Benefit-cost
                             analysis is used to determine “net present value.” Additionally, FEMA’s
                             guidance for determining the cost-effectiveness of hazard mitigation
                             projects states that “a key criterion for mitigation projects to be eligible
                             for funding is that they must be cost-effective” and that “benefit-cost
                             analysis is used for all cost-effectiveness determinations.”3


                             The states in our review establish procedures and priorities for identifying
The States and FEMA          and selecting mitigation projects; however, not all of them conduct a
Work Together in             formal analysis of a project’s cost-effectiveness before submitting an
Using Different              application for the project to FEMA. FEMA uses benefit-cost analysis—an
                             approach recommended by OMB—as its primary approach for ensuring
Approaches to Ensure         that mitigation projects are cost-effective. However, FEMA also exempts
That Grants Are              certain categories of projects from benefit-cost analysis for a number of
                             reasons, including the fact that some projects do not have proven or
Awarded for                  clearly measurable benefits. To demonstrate the cost-effectiveness of such
Cost-Effective               projects, FEMA asks the states to provide a narrative identifying the
Projects                     benefits of mitigation and establishing a “reasonable expectation” that
                             future property damage, injury, or loss of life will be reduced or prevented.




                             3
                             How to Determine Cost-Effectiveness of Hazard Mitigation Projects: A New Process for Expediting
                             Application Reviews, Interim Edition (Dec. 1996).



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States Identify and Select       The state administrative plans we reviewed exhibited a broad range of
Mitigation Projects              approaches for identifying and selecting mitigation projects. In general,
                                 the states screen their projects using various criteria, such as the overall
                                 cost of a project, its potential environmental effects, and its
                                 cost-effectiveness. For example, Louisiana calculates an initial benefit-cost
                                 ratio for projects, which it uses as a part of its criteria for evaluating and
                                 scoring them. The state’s scoresheet consists of three components—
                                 engineering (50 points), effectiveness (100 points), and environmental
                                 impact (50 points)—which combine to produce a total possible score of
                                 200 points. Projects that receive the highest scores are then given priority
                                 for funding.

                                 Several FEMA officials noted that the agency is initiating changes to
                                 improve the states’ planning efforts. For example, FEMA has developed a
                                 checklist of elements for a model state plan, which will be used to assess
                                 how well a state is doing in addressing the suggested elements. Some of
                                 the elements will help the states identify cost-effective projects. For
                                 instance, the checklist addresses whether a state plan ranks projects on
                                 the basis of the “greatest opportunity for loss reduction.” Additionally,
                                 some states, such as Florida, are providing incentives for localities to
                                 develop their own mitigation plans, hoping to improve the quality of the
                                 mitigation projects submitted in the future.


FEMA Uses Benefit-Cost           FEMA uses benefit-cost analysis to assess whether the expected costs of
Analysis as the Preferred        investing in a hazard mitigation project are justified.4 That is, to what
Approach for Determining         extent will the project help avoid the costs of damage expected from
                                 future disasters (the benefits)? FEMA generally conducts the benefit-cost
Cost-Effectiveness               analysis for the projects that states submit for approval.5 FEMA’s guidance
                                 describes four main elements of a benefit-cost analysis:

                             •   an estimate of damage and loss before mitigation,
                             •   an estimate of damage and loss after mitigation,
                             •   an estimate of the frequency and severity of the hazard causing the
                                 damage (such as the risk of flooding), and


                                 4
                                  The benefit-cost analysis is used to determine a benefit-cost ratio—the ratio of the expected benefits
                                 divided by the expected costs. If the expected benefits are greater than the expected costs, the ratio is
                                 greater than 1.0 and the project is considered cost-effective. If the expected benefits are less than the
                                 expected costs, the ratio is less than 1.0 and the project is not considered cost-effective.
                                 5
                                  As participants in a pilot program called the “managing state concept,” three states (Florida, North
                                 Dakota, and Ohio) typically conduct benefit-cost analyses for projects from their communities and
                                 submit summaries of the analyses for FEMA’s review.



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                          •   economic factors used in the analysis (the project’s expected life span, for
                              example).

                              After all of these elements are considered, along with the project’s
                              expected costs, the project’s cost-effectiveness can be determined.
                              However, factors outside the benefit-cost analysis, such as the project’s
                              potential impact on environmental conditions, can also influence whether
                              the project is approved for funding.

                              FEMA developed several computer programs (known as modules) to
                              simplify the calculations needed to determine a project’s benefit-cost ratio.
                              Each module employs established economic principles, OMB guidance, and
                              risk calculations to determine a proposed project’s benefits (discounted to
                              present-day dollars) over its expected life. FEMA has provided these
                              computer programs to regional, state, and local mitigation staff and
                              trained them in how to use the modules.


Certain Categories of         While the Stafford Act requires that projects funded through the Hazard
Mitigation Projects Are       Mitigation Grant Program be cost-effective, the act does not define how to
Exempted From                 make this determination. FEMA’s regulations and other guidance establish
                              that benefit-cost analysis is the preferred approach for determining
Benefit-Cost Analysis         cost-effectiveness. However, since September 1996, FEMA has exempted
                              four categories of Hazard Mitigation Grant Program projects from
                              benefit-cost analysis. Table 1 summarizes information on the four
                              categories of projects.




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Table 1: Types of Exemptions and Potential Funds Available, by Project Category, From Fiscal Year 1989 Through
April 30, 1999
Dollars in millions
                             Potential                                                          Basis for
                                funds                                 Support for               cost-effectiveness        Exemption policy
Type of exemption            available Intent of policy               cost-effectiveness        approach                  time frames
                                      a
Property acquisition                      To identify structures in   Located in 100-year       Follows National          September 1996 to
(substantially damaged                    floodways and               floodplain and ≥50        Flood Insurance           present
structures)                               floodplains as strong       percent substantially     Program policy
                                          candidates for funding      damaged
5-percent initiative           $113.5 To give states                  Narrative justification   Difficult to evaluate     September 1996 to
(includes a variety of                discretionary funds                                       against traditional       present
projects)                                                                                       criteria for
                                                                                                cost-effectiveness
Tornado-related                 $56.5 To provide additional           Narrative justification   Difficult to evaluate     August 1998 to
projects                              funds for warning                                         against traditional       present
                                      systems                                                   criteria for
                                                                                                cost-effectiveness
Planning projects               $88.3 To expedite the                 No support required       Considered                October 1997 to
                                      closeout of older                                         cost-effective            present
                                      disasters
                                             a
                                              Because FEMA cannot break out the funds available for this category, the specific amount is
                                             unknown.



                                             FEMA’s  rationale for the exemptions varies, although the agency’s policy
                                             guidance indicates that two of the exemptions were established because
                                             some mitigation projects were often difficult to evaluate against traditional
                                             quantitative criteria for determining cost-effectiveness and eligibility
                                             criteria. FEMA officials stress a need for flexibility in assessing these
                                             projects, suggesting that benefit-cost analysis models do not always apply
                                             to all mitigation projects.


Projects Involving the                       Through policy guidance established in September 1996, FEMA exempted
Purchase of Substantially                    projects that involved purchasing structures located in floodways and
Damaged Structures                           floodplains if the cost of restoring the damaged structures equaled or
                                             exceeded 50 percent of the structures’ market value and the structures
                                             were located in a 100-year floodplain. A senior FEMA mitigation official
                                             explained that under the National Flood Insurance Program, these
                                             substantially damaged structures had to be either elevated or relocated.
                                             Thus, the Hazard Mitigation Grant Program was simply following the
                                             policy already established by the flood insurance program. According to
                                             the official, however, the flood insurance program does not require that




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                                mitigation measures be cost-effective. The official also stated that the
                                exemption was intended to speed the delivery of hazard mitigation grants
                                to the states. This particular exemption has been criticized by FEMA’s
                                Inspector General. In a March 1998 report,6 the Inspector General noted
                                the lack of analytical data supporting the exemption’s contention that
                                acquisition projects involving substantially damaged properties in a
                                100-year floodplain are cost-effective. While FEMA officials have begun to
                                retroactively analyze some of the acquisition projects exempted under this
                                policy and agency officials expect to complete this analysis by the end of
                                August 1999,7 the agency is currently unable to provide data that would
                                support the exemption of all substantially damaged structures in a
                                100-year floodplain. Without this analytical basis, it is difficult for FEMA to
                                demonstrate that the exempted acquisition projects it is funding are
                                cost-effective.


The 5-Percent Initiatives       In September 1996, FEMA established another policy that exempted
                                projects from benefit-cost analysis. Known as the “5 percent Hazard
                                Mitigation Grant Program initiatives,” this policy allows the states to use
                                up to 5 percent of their Hazard Mitigation Grant Program project funding
                                for a variety of hazard mitigation projects.

                                Projects eligible for funding under this initiative can have benefits that are
                                not proven or not clearly measurable, making it difficult to evaluate the
                                projects under traditional criteria for determining cost-effectiveness and
                                eligibility. FEMA’s policy memorandum for this exemption explained that
                                evaluating the need for funding certain mitigation measures required a
                                large amount of time at the state and federal levels, although it was
                                generally recognized that such measures reduced the potential losses from
                                a future disaster. Examples cited in the memorandum included

                            •   new, unproven mitigation techniques and technologies;
                            •   disaster warning equipment and systems;
                            •   hazard identification or mapping efforts; and
                            •   studies or plans to reduce disaster losses.

                                To be eligible, a project type had to be identified in the state’s hazard
                                mitigation plan and reduce or prevent future property damage, injury, or
                                the loss of life. The policy’s intent was to provide the states with discretion

                                6
                                  Improvements Are Needed in the Hazard Mitigation Buyout Program, FEMA OIG, Inspection Report
                                I-01-98 (Mar. 1998).
                                7
                                 The officials explained that FEMA would be reviewing acquisition projects in communities within
                                three states. These projects encompass thousands of individual properties.


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                           in deciding which mitigation measures to fund, as well as make them
                           responsible for providing the rationale for the cost-effectiveness of the
                           projects. FEMA officials explained that the policy was meant to spur
                           creativity and avoid the time and expense involved in conducting
                           benefit-cost analyses.

                           FEMA’s guidance instructs prospective grantees to apply for 5-percent
                           funding if a project was previously denied funding because of difficulty in
                           measuring its cost-effectiveness. However, projects denied funding for
                           other reasons may also be submitted under the 5-percent funding policy.
                           For example, a project to retrofit a homeless assistance center with items
                           such as shutters, a generator, a well, and a storage tank was originally
                           denied funding by FEMA because it was submitted more than 2 years past
                           the agency’s deadline for submitting projects. However, after the project
                           was resubmitted under the 5-percent initiative, it was approved for over
                           $220,000 in federal funding.

                           The 5-percent initiative policy states that instead of conducting a
                           benefit-cost analysis, the states are to include a narrative that identifies the
                           project’s mitigation benefits and establishes a reasonable expectation that
                           future property damage, injury, or loss of life will be reduced or prevented.
                           While FEMA’s guidance instructs the states to identify a project’s benefits, it
                           does not specifically suggest any comparison of the benefits with the
                           project’s costs or with the benefits and costs of competing alternative
                           projects. Without any measurement and subsequent comparison of a
                           project’s expected benefits and expected costs, the criteria the agency is
                           using to determine cost-effectiveness are unclear. Additionally, the
                           5-percent initiative allows for funding projects that were difficult to
                           evaluate against traditional program eligibility criteria, thus providing the
                           appearance that any project could be funded under the 5-percent initiative.
                           For example, a mitigation project to develop a “Hurricane Information
                           Center/Partnership in Education” was denied funding three times by FEMA.
                           FEMA initially ruled that because the project was an “education and
                           awareness campaign,” it did not meet the Hazard Mitigation Grant
                           Program’s eligibility requirements and was thus ineligible for funding.
                           However, after the project was submitted for funding under the 5-percent
                           initiative, it was approved for $4,700 in federal funding.


Tornado-Related Projects   In August 1998, FEMA announced a policy that temporarily exempted
                           certain projects from benefit-cost analysis. In essence, FEMA extended its
                           5-percent set-aside by another 5 percent to fund tornado-related projects.



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                             The agency noted an increase in tornado activity that it associated with the
                             1997-98 El Nino weather pattern and suggested that the additional funding
                             was needed to provide warning systems that could not be funded through
                             existing programs. The additional 5 percent in Hazard Mitigation Grant
                             Program funding was available only to states in which a disaster involving
                             tornadoes had been declared by the President. Furthermore, in the interest
                             of using the funding remaining from older disasters, FEMA applied the
                             exemption to all disasters with unobligated funds that were declared
                             before fiscal year 1998, as well as all fiscal year 1998 and future
                             declarations in which tornadoes or high winds played a role.

                             In announcing this exemption, FEMA noted that tornado mitigation
                             projects, such as warning systems, were often difficult to evaluate against
                             traditional quantitative criteria for determining cost-effectiveness and
                             eligibility. According to FEMA, it is difficult to measure the risk of
                             tornadoes as well as the dollar value of benefits associated with
                             tornado-related projects, such as tornado warning systems and public
                             education. The policy memorandum stated that in lieu of conducting a
                             benefit-cost analysis, FEMA would allow the states to include a narrative
                             that identified a project’s mitigation benefits and established an
                             expectation that the project would reduce or prevent future property
                             damage, injury, or loss of life. To receive funding, a project had to be
                             identified in a state’s hazard mitigation plan and needed to reduce or
                             prevent future damage to property, injury, or loss of life from tornadoes.
                             Additionally, among other requirements, states had to develop a
                             comprehensive plan for warning citizens that included a public education
                             component. This policy will remain in effect until FEMA adopts proposed
                             regulatory changes stating that warning systems will be funded only from
                             the original 5-percent set-aside. FEMA officials expect that the regulatory
                             changes will be made final in August 1999.


Hazard Mitigation Planning   In October 1997, FEMA exempted hazard mitigation planning projects
Projects for Older           associated with older disasters from benefit-cost analysis. FEMA decided
Disasters                    that in the interest of expediting the closeout of funding for disasters that
                             occurred on or before June 10, 1993, the agency would make program
                             funds remaining from these disasters available for hazard mitigation
                             planning purposes.8 The states were invited to submit applications for
                             funding that would help them develop plans for mitigating multiple

                             8
                              When the Hazard Mitigation Grant Program was established, it provided federal matching grants on a
                             cost-share basis of up to 50 percent for a project. Thus, FEMA refers to these mitigation projects as
                             “50/50 planning” projects. With the 1993 amendments to the Stafford Act, the federal cost share was
                             changed from up to 50 percent to up to 75 percent.



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                           hazards. The policy memorandum stated that planning projects would be
                           considered cost-effective measures. For example, the initial phase of a
                           stormwater management project included developing a comprehensive
                           stormwater study for two counties. Under the policy memorandum, this
                           study was considered cost-effective. One senior FEMA mitigation official
                           noted that under the agency’s deadlines limiting the timetables for funding
                           projects, the funding available for any additional planning projects is
                           decreasing.


Quantifying the Projects   For a number of reasons, FEMA is unable to quantify the actual number and
Exempted From              dollar amount of the projects it has exempted from benefit-cost analysis.
                           FEMA officials explain that, to present accurate data, headquarters would
Benefit-Cost Analysis
                           need to make a special effort to gather the information directly from
                           project files in the regions. However, FEMA officials estimate that the
                           maximum amount that has been or could be spent for three categories of
                           exempt projects is approximately $258 million. This $258 million estimate
                           includes $113.5 million for exempt 5-percent initiative projects,
                           $56.5 million for exempt tornado-related projects, and $88.3 million for
                           planning projects using funding from older disasters. FEMA does not know
                           the maximum potential funding for the fourth category of exempt
                           projects—acquisitions of substantially damaged properties—though agency
                           officials state that some portion of an estimated $1.6 billion9 in Hazard
                           Mitigation Grant Program funding will be spent on these projects.

                           FEMA officials have expressed reservations about the accuracy of certain
                           data fields within the Hazard Mitigation Grant Program database,
                           explaining that they are currently undertaking a review to correct
                           inaccurate information and to fill in data gaps. The officials also said they
                           expect to have better data for managing the program as they continue to
                           implement changes that correspond with FEMA’s new management
                           information system—the National Emergency Management Information
                           System.




                           9
                            FEMA’s estimate of $1.6 billion is based on total program funds (i.e., $2.5 billion) minus
                           (1) $626 million for two large projects that underwent benefit-cost analysis and (2) $258 million in
                           potential funding for projects in the other exempted categories—5-percent initiative, tornado-related,
                           and planning.



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                             FEMA’s use of benefit-cost analysis appears to demonstrate that certain
FEMA’s Approaches            hazard mitigation projects are cost-effective, although the agency could
Do Not Always                provide better information to the officials conducting benefit-cost analyses
Ensure That                  for some projects. However, several factors are limiting the agency’s
                             ability to demonstrate the cost-effectiveness of projects that are exempt
Mitigation Projects          from benefit-cost analysis. For example, our review of $20.1 million in
Are Cost-Effective           hazard mitigation project funding in two FEMA regions found that over
                             one-third of the funding was exempt from benefit-cost analysis, even
                             though the majority of this project funding lacked an established analytical
                             basis supporting the exemption. Establishing the basis for exempting these
                             acquisition projects and reviewing the cost-effectiveness of other exempt
                             projects after they are implemented would help FEMA better ensure that
                             these mitigation projects are cost-effective.


FEMA’s Use of Benefit-Cost   Forty-one (75 percent) of the 55 projects we reviewed were evaluated
Analysis Appears to          using benefit-cost analysis. The projects included wind retrofits (shutter
Demonstrate Projects’        projects), drainage improvements, seismic retrofits of buildings, and the
                             installation of gas shut-off valves in structures. For example, the wind
Cost-Effectiveness,          retrofit projects included installing hurricane shutters on schools that
Although the Best            were to be used as hurricane shelters and on buildings such as water
Available Data Are Not       treatment and wastewater treatment plants, fire departments, and
Always Used                  emergency medical facilities (all of which are considered “critical”
                             community facilities). These projects, which accounted for 58 percent of
                             the funding we reviewed ($11.7 million of $20.1 million), were judged as
                             cost-effective. However, we also found that the best available data for
                             estimating the benefits of acquisition projects were not always used in
                             benefit-cost analyses because the best data were not readily available.

                             For example, in determining flood hazard data—which establish the
                             probability and severity of a flood event—FEMA’s guidance suggests using
                             the flood insurance rate maps available through the National Flood
                             Insurance Program. The flood hazard data are found in flood insurance
                             studies, which sometimes accompany the flood insurance rate maps.10
                             This information helps to establish the number of times a flood is expected
                             to occur in a given area (the frequency of future flooding) and the level of
                             flooding (its severity). The quality of this information can influence the
                             outcome of a benefit-cost analysis because overestimating the frequency
                             or severity of a flood can inflate the estimated benefits attributed to an
                             acquisition project. We found little evidence that this information was
                             used in the benefit-cost analyses we reviewed. According to FEMA officials,

                             10
                               FEMA officials told us that the flood insurance rate maps do not always include the studies.



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the availability of the information is a concern because many of the
agency’s maps are out of date or incomplete. As a result, analysts must
rely on evidence from local officials or residents to establish flood levels.

In an internal policy paper outlining fiscal year 1998 objectives for
modernizing its flood hazard mapping program, FEMA discussed the
possibility of evaluating and possibly revising its flood hazard maps as part
of its standard response to a presidentially declared flooding disaster.
Conducting a postdisaster evaluation or verification of flood hazard maps
could provide needed data on the availability of accurate flood insurance
rate maps for use in analyzing proposed hazard mitigation projects. One
FEMA headquarters official told us that this type of evaluation was
conducted after a flood in Georgia, noting that the postdisaster flood
hazard verification provided valuable information for directing future
mitigation efforts.

We also found that the officials conducting benefit-cost analyses may not
always use the best available data on damage claims from past flooding.
The quality of this information can affect the outcome of an analysis
because overestimating the damage from a previous flood event can inflate
the estimated benefits attributed to an acquisition project. FEMA officials
told us that information on flood claims available from the National Flood
Insurance Program was not always used, suggesting that information
supplied by project applicants was used instead.11 We also found that the
officials conducting benefit-cost analyses do not always validate the
damage claims information submitted by the applicants. As a result, an
analysis may rely on testimonial evidence from the applicant—the
individual most likely to benefit from the acquisition project.

FEMA officials have stated that the agency can provide damage claims
information from the National Flood Insurance Program to regional
officials conducting benefit-cost analyses. While acknowledging some
concerns about the accuracy of the data, several senior FEMA officials
stated that this is the best information available. Currently, only general
information on a community’s flood damage claims can be provided easily
through FEMA’s on-line computer system, though regional officials can
request a special report that includes information on specific addresses.
FEMA officials stated that it would not be difficult to modify the
information to give regional staff better access to claims information on
individual properties. FEMA officials were interested in attempting to use

11
  Since the National Flood Insurance Program’s damage claims information originates from insurance
claims submitted by residents in participating communities, nonparticipating communities would not
produce any insurance claims data.



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                                         B-281730




                                         the claims information on a trial basis, including looking into the
                                         possibility of allowing regional access to the information through FEMA’s
                                         on-line computer system.


Several Factors Are                      While FEMA has explained its reasons for exempting four types of
Limiting FEMA’s Ability to               mitigation projects, there are factors limiting its ability to demonstrate that
Demonstrate the                          these mitigation measures are, in fact, cost-effective. Of the 55 projects we
                                         reviewed, 14 underwent no benefit-cost analysis. Certain factors, such as
Cost-Effectiveness of                    the lack of an analytical basis supporting the exemption for acquisition
Projects Exempt From                     projects and a broad approach for determining cost-effectiveness, limit
Benefit-Cost Analysis                    FEMA’s ability to demonstrate cost-effectiveness. The 14 projects account
                                         for $8.4 million (42 percent) of the funding, and they include funding for
                                         emergency satellite communications, all-weather radios, emergency alert
                                         systems, a public awareness campaign, and property acquisitions. Figure 1
                                         shows the breakout of the $8.4 million in funding for these exempt
                                         projects.


Figure 1: Breakout of the $8.4 Million
in Funding for Exempted Mitigation       Tornado-related
Projects Reviewed by GAO                 ($2.3 million)



                                                                                    Acquisitions
                                                                                   ($5.8 million)




                                           5-percent
                                            initiative
                                         ($0.3 million)


                                         Note: This figure does not include a category for exempt planning projects because the 55
                                         projects we selected did not include any such projects.




                                         As figure 1 shows, the majority ($5.8 million of the $8.4 million, or
                                         69 percent) of the funding for exempt projects in our review went for
                                         property acquisition projects. FEMA’s Inspector General reported in



                                         Page 14                          GAO/RCED-99-236 FEMA’S Hazard Mitigation Grant Program
B-281730




March 1998 that FEMA had not produced the data or analysis to
demonstrate the cost-effectiveness of buying out substantially damaged
structures in a 100-year floodplain, adding that the agency lacked an
analytical basis for exempting such projects from benefit-cost analysis.
While FEMA officials have begun initiating efforts to address this concern,
over a year has passed since the Inspector General’s report was issued,
and the analytical basis has still not been established.

For two other categories of exempt projects—the 5-percent initiative and
tornado-related projects—the states are asked to provide a narrative that
identifies their potential mitigation benefits and establishes a reasonable
expectation that the projects will reduce or prevent future property
damage, injury, or loss of life. For example, one of the exempt projects
involved the development of a tornado warning network and a tornado
mitigation demonstration project. The demonstration project, which was
approved for $2.3 million in Hazard Mitigation Grant Program funding, was
expected to reduce storm-related damages. Another exempt project
involved $45,000 in funding for the development of a public awareness
campaign and a brochure, which were intended to educate residents about
the hazards of living in a floodplain. While these projects may be
cost-effective—because they could reasonably be expected to reduce or
prevent future property damage, injury, or loss of life—it is difficult to
determine their cost-effectiveness. In fact, given such a broad approach for
determining a project’s cost-effectiveness, it is difficult to provide an
example of a project that would not be considered cost-effective.

FEMA also exempted planning projects associated with older disasters,
although the agency has not demonstrated that such projects are
cost-effective. While we agree that it is difficult to determine the
cost-effectiveness of planning projects and that certain planning projects
could prove to be cost-effective, exempting all planning projects allows for
a wide range of project approvals.

One means of determining the cost-effectiveness of exempt projects would
be to conduct periodic reviews of selected projects after they had been
implemented. For example, FEMA could undertake targeted reviews of
projects that funded local efforts to establish mitigation strategies or
plans. These reviews could be used to demonstrate the value of the
projects—whether they enabled the localities to better identify future
mitigation projects or helped reduce potential disaster-related damage by
alerting residents to certain hazards. To the extent that the reviews




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                  demonstrated the cost-effectiveness of the projects, they would establish a
                  basis for exempting similar projects in the future.


                  The majority of the projects that underwent benefit-cost analysis appeared
Conclusions       to be cost-effective, though we also found that the best available
                  information—such as flood hazard information from flood insurance
                  studies and flood damage information from past insurance claims—was
                  not always used in analyzing projects designed to mitigate future damage
                  from flooding. FEMA could assist the officials performing the analysis by
                  conducting postdisaster reviews of flood hazards that could be used to
                  update flood hazard information and by making information on past
                  insurance claims more readily accessible.

                  While FEMA has explained its rationale for exempting certain types of
                  projects from benefit-cost analysis, it is limited in its ability to demonstrate
                  their cost-effectiveness because it lacks an analytical basis for exempting
                  acquisitions of certain floodplain properties, uses a broad approach to
                  determine the cost-effectiveness of other projects, and seldom reviews the
                  cost-effectiveness of projects after they have been implemented. FEMA
                  estimates that approximately $258 million could be spent on exempt
                  projects, not counting the funding for exempt acquisition projects. Our
                  review of $20.1 million in funding for 55 mitigation projects found that
                  $5.8 million, or 29 percent of the funding, was for acquisition projects that
                  FEMA had exempted from benefit-cost analysis. Until FEMA establishes an
                  analytical basis supporting the cost-effectiveness of these projects, it
                  cannot ensure that it has allocated this funding cost-effectively. Although
                  FEMA officials have begun initiating efforts to address this concern, over a
                  year has passed since the Inspector General questioned the
                  cost-effectiveness of exempt acquisition projects, and an analytical basis
                  remains to be established.


                  To ensure that only cost-effective projects are funded through the Hazard
Recommendations   Mitigation Grant Program, the Director of FEMA should establish an
                  analytical basis supporting the cost-effectiveness of acquiring substantially
                  damaged properties in floodplains. Also, to better ensure the
                  cost-effectiveness of other types of projects exempted from benefit-cost
                  analysis, the Director should conduct periodic reviews of the projects after
                  they have been implemented to determine whether they were
                  cost-effective.




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                      B-281730




                      Additionally, to provide the best available data for analyzing the
                      cost-effectiveness of proposed flood hazard mitigation projects, the
                      Director of FEMA should

                  •   conduct postdisaster verifications of flood hazards for use in evaluating
                      and possibly revising flood hazard map information and
                  •   make the agency’s information on past insurance claims more readily
                      available for FEMA staff conducting benefit-cost analyses.


                      We provided the Federal Emergency Management Agency with a draft
Agency Comments       copy of this report for review and comment. The agency agreed with the
                      report’s recommendations and noted that they complement activities
                      already under way at the agency. For example, FEMA agrees that the agency
                      should periodically review and evaluate its policies for determining the
                      cost-effectiveness of hazard mitigation projects, citing an agency
                      evaluation of the benefits and costs of acquiring or relocating substantially
                      damaged structures in a floodplain. We note this effort in our report and
                      agree that the evaluation complements our first recommendation, since it
                      represents an initial effort by FEMA to establish an analytical basis for the
                      cost-effectiveness of acquiring substantially damaged properties. Our
                      report also notes preliminary interest by the agency in providing the best
                      available data for analyzing the cost-effectiveness of proposed flood
                      hazard mitigation projects—our final recommendation. However, FEMA has
                      no activities under way to complement our second recommendation for
                      periodic reviews of other types of hazard mitigation projects exempted
                      from benefit-cost analysis. Therefore, we made no changes to our report
                      because either FEMA’s activities do not fully address our recommendations
                      or no complementary activities are under way.

                      The agency also commented that our report is focused on the use of
                      benefit-cost analysis in determining the cost-effectiveness of hazard
                      mitigation projects, although cost-effectiveness determinations do not
                      always equate to the use of benefit-cost analysis. The agency noted that
                      the decisions it makes in approving a project cannot always be reduced to
                      a single economic analysis, because determining a project’s eligibility also
                      involves considering issues such as its environmental and social benefits
                      and the uncertainty associated with the analytical methods used. While
                      our report acknowledges that the Stafford Act does not define how to
                      determine cost-effectiveness, it mentions that OMB’s guidelines, as well as
                      the agency’s regulations and guidance, suggest that benefit-cost analysis is
                      the primary approach for ensuring that mitigation projects are



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                  B-281730




                  cost-effective. We agree that there are difficulties inherent in using
                  benefit-cost analysis to determine the cost-effectiveness of some hazard
                  mitigation projects—such as the inability to estimate the value of the
                  benefits of some projects or the difficulties in considering public policy
                  issues—and that alternative approaches for determining the
                  cost-effectiveness of these projects can be used. However, as discussed in
                  our recommendations, we believe that to ensure the cost-effectiveness of
                  hazard mitigation projects, either a sound analytical basis must be
                  established for the alternative approaches before they are used, or the
                  cost-effectiveness of the approaches must be validated through periodic
                  reviews of projects after they are implemented. FEMA’s written comments
                  appear in appendix I.


                  To determine the approaches FEMA and the states use to ensure that hazard
Scope and         mitigation grants are targeted to cost-effective mitigation measures, we
Methodology       examined

              •   FEMA’s  regulations, policy guidance, and handbooks on identifying and
                  approving Hazard Mitigation Grant Program projects for funding, focusing
                  particularly on the requirements for cost-effectiveness determinations;
              •   state policy and guidance papers, state hazard mitigation plans, and state
                  Hazard Mitigation Grant Program administrative plans focusing on the
                  states’ procedures for determining the cost-effectiveness of proposed
                  projects; and
              •   studies of the Hazard Mitigation Grant Program conducted by groups such
                  as a university and a nonprofit organization.

                  To determine whether the approaches used by FEMA and the states ensure
                  that mitigation measures are cost-effective, we interviewed officials from
                  FEMA’s Mitigation Directorate; regional offices in Atlanta, Georgia (Region
                  4), and Denton, Texas (Region 6); and Office of the Inspector General. We
                  also interviewed Florida officials because of their role in analyzing
                  projects for cost-effectiveness. We reviewed 55 hazard mitigation projects
                  that were submitted to FEMA’s regions 4 and 6 to document the extent to
                  which formal benefit-cost analyses were conducted and the degree to
                  which the data used in these analyses were validated. Thirty-six of these
                  projects were Florida projects reviewed by Florida officials under a May
                  1998 memorandum of understanding between Florida and FEMA as part of a
                  pilot program called the “managing state concept.” We chose Florida
                  because it was the first state authorized to conduct its own benefit-cost
                  analyses under this program and was responsible for over 8 percent



                  Page 18                  GAO/RCED-99-236 FEMA’S Hazard Mitigation Grant Program
B-281730




($34.2 million) of the Hazard Mitigation Grant Program funds obligated in
fiscal year 1998. We reviewed 19 hazard mitigation projects submitted to
FEMA Region 6 by Arkansas, Louisiana, and Texas. The other two states in
Region 6—New Mexico and Oklahoma—submitted no new projects during
this period. The 19 projects were those received by the region since
March 1997, when the staff began using FEMA’s computerized benefit-cost
analysis modules. We selected Region 6 because of the wide range of
disaster types represented and the states’ experience in hazard mitigation.

Furthermore, to determine the adequacy of the support provided to
establish the cost-effectiveness of projects exempted from formal
benefit-cost analysis, we judgmentally selected 20 additional Florida
projects that, from their descriptions, appeared to meet the criteria for
exemption. We then requested and reviewed selected information from
FEMA’s disaster management database and the project application and
cost-effectiveness narratives contained in Region 4’s project files. Through
our review of the documentation provided, we identified 10 projects that
were exempt from benefit-cost analysis.

We performed our work from December 1998 through June 1999 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to the appropriate congressional
committees; the Honorable James Lee Witt, Director of the Federal
Emergency Management Agency; and the Honorable Jacob J. Lew,
Director of the Office of Management and Budget. We will also make
copies available to others on request.




Page 19                  GAO/RCED-99-236 FEMA’S Hazard Mitigation Grant Program
B-281730




If you have any questions about this report, please contact me or Pat
Moore at (202) 512-7631. Key contributors to this assignment were R. Tim
Baden, Thom Barger, and John McGrail.




Stanley J. Czerwinski
Associate Director, Housing and
  Community Development Issues




Page 20                 GAO/RCED-99-236 FEMA’S Hazard Mitigation Grant Program
Page 21   GAO/RCED-99-236 FEMA’S Hazard Mitigation Grant Program
Appendix I

Comments From the Federal Emergency
Management Agency




             Page 22   GAO/RCED-99-236 FEMA’S Hazard Mitigation Grant Program
Appendix I
Comments From the Federal Emergency
Management Agency




Page 23                    GAO/RCED-99-236 FEMA’S Hazard Mitigation Grant Program
Related GAO Products


              Disaster Assistance: Information on the Cost-Effectiveness of Hazard
              Mitigation Projects (GAO/T-RCED-99-106, Mar. 4, 1999).

              Disaster Assistance: Information on Federal Costs and Approaches for
              Reducing Them (GAO/T-RCED-98-139, Mar. 26, 1998).

              Disaster Assistance: Information on Federal Disaster Mitigation Efforts
              (GAO/T-RCED-98-67, Jan. 28, 1998).

              Disaster Assistance: Information on Expenditures and Proposals to
              Improve Effectiveness and Reduce Future Costs (GAO/T-RCED-95-140, Mar. 16,
              1995).

              GAO   Work on Disaster Assistance (GAO/RCED-94-293R, Aug. 31, 1994).




(385772)      Page 24                    GAO/RCED-99-236 FEMA’S Hazard Mitigation Grant Program
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