oversight

Buildings at Three Public Housing Authorities Did Not Have Flood Insurance Before Hurricane Sandy

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-12-21.

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

      Buildings at Three Public Housing
       Authorities Did Not Have Flood
      Insurance Before Hurricane Sandy




Office of Evaluation   Evaluation Report Number: 2015-OE-0007S
Washington, DC                                December 17, 2015
                    Evaluation Report Number: 2015-OE-0007S
                    Date: December 17, 2015

                    Buildings at Three Public Housing Authorities Did Not Have Flood Insurance
                    Before Hurricane Sandy




Highlights

What We Evaluated and Why
We evaluated public housing authorities (PHA) that did not have flood insurance before
Hurricane Sandy to determine why some buildings were not insured as required. Flood insurance
is necessary to ensure that PHAs remain financially viable, continue to provide safe and
habitable housing to low-income residents, and minimize costs to taxpayers for keeping public
housing units operational.

What We Found
We identified three PHAs with some buildings in a flood zone that did not have flood insurance
before Hurricane Sandy. For two PHAs, not all of the buildings were covered by flood insurance
because the PHAs relied upon insurance companies to keep abreast of the Federal Emergency
Management Agency’s (FEMA) updates to flood plain maps. The third PHA was aware of the need
to obtain flood insurance but did not do so. As a result, one PHA incurred debt to pay for Hurricane
Sandy-related repairs, and another operated at a loss. FEMA deducted the amount the third PHA
would have received from flood insurance from a FEMA grant.

What We Recommend
We recommend that the Office of Public and Indian Housing (1) require field offices to verify
that PHAs have flood insurance policies for buildings in a flood zone, (2) establish procedures to
obtain updated flood plain maps and distribute them to PHAs, and (3) require the Crisfield, MD,
PHA to procure full flood insurance coverage.
Table of Contents
Background and Objectives ......................................................................................................... 3
Evaluation Results ........................................................................................................................ 5
           Fifty-Three Buildings Did Not Have Flood Insurance at the Crisfield, MD, PHA..... 5
           Twelve Buildings Did Not Have Flood Insurance at the Carteret, NJ, PHA .............. 6
           Seven Buildings Did Not Have Flood Insurance at the Freeport, NY, PHA ............... 7
           Conclusion ......................................................................................................................... 7
           Recommendations ............................................................................................................. 8
Scope and Methodology................................................................................................................ 9
Appendixes................................................................................................................................... 10
           A. States and Territories With PHAs in Flood Zones ................................................ 10
           B. Comments and OIG’s Response .............................................................................. 12




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Background and Objectives
Hurricane Sandy
In October 2012, Hurricane Sandy damaged hundreds of thousands of homes, forced tens of
thousands of survivors into shelters, and caused billions of dollars in damage to vital infrastructure
systems. Further, some public housing residents were displaced from their homes due to flood
damage caused by the hurricane.
The Office of Public and Indian Housing
The U.S. Department of Housing and Urban Development’s (HUD) Office of Public and Indian
Housing (PIH) administers public housing. Its programs are designed to help some of the Nation’s
most vulnerable households obtain housing for eligible low-income families, the elderly, and
persons with disabilities. Public housing comes in all sizes and types, from scattered single-family
houses to highrise apartments for the elderly.
PIH oversees and relies on public housing authorities (PHA) to ensure safe living conditions. There
are approximately 1.2 million households living in public housing units, managed by some 3,937
PHAs. HUD administers Federal aid to local PHAs that manage the housing for low-income
residents at rents they can afford. HUD furnishes technical and professional assistance in planning,
developing, and managing these developments. PHAs monitor compliance with the home-
ownership program and oversee living conditions in 234,590 public housing buildings.
Federal Emergency Management Agency National Flood Insurance Program
To limit the effects of flooding, the Federal Government established the Federal Emergency
Management Agency’s (FEMA) National Flood Insurance Program. This program aims to reduce
the impact of flooding on private and public structures by providing affordable insurance for
property owners and encouraging communities to adopt and enforce flood plain1 management
regulations.
The National Flood Insurance Program requires property owners to purchase flood insurance when
they are assisted by Federal programs and the property is located in identified areas having special
flood hazards.2 PHAs can purchase flood insurance directly from the Federal Government or
through an insurance company. FEMA provides high quality flood maps to help communities take
action to reduce flood risk. FEMA’s Flood Map Service Center is the online location for all flood
maps.
Risk to Public Housing
HUD acknowledged the risks of flood events and the importance of flood insurance in its
October 2014 Climate Change Adaptation Plan. This plan identifies flooding as an extreme
weather event that could affect public housing structures, residents, and administration. It states


1
 FEMA defines a flood plain as any land area susceptible to submersion by floodwaters from any source.
2
 FEMA defines a special flood hazard area as an area having special flood, mudflow, or flood-related erosion
hazards and shown on a flood hazard boundary map or a flood insurance rate map zone.




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that PIH should evaluate and improve the policy on insurance requirements for PHAs to
anticipate a variety of climate change impacts. It further states that PIH should train its staff to
evaluate the best way to ensure that PHAs have adequate insurance coverage.
According to the Office of Policy Development and Research (PD&R), approximately 14 percent of
PHAs have at least one building located in a flood zone (556 of 3,937), and about 5 percent of
public housing buildings are in flood zones (11,591 of 234,590). 3 PD&R believes an additional
3,940 buildings may be located in flood zones but has been unable to determine the exact number
because PIH does not have geocoded location data for all public housing assets.

Evaluation Objectives
Our objectives were to determine

       •    How oversight and monitoring of flood insurance requirements for PHAs were carried out,
       •    How PIH can ensure that PHAs are notified of changes in flood maps,
       •    The status of flood insurance coverage for PHAs,
       •    What costs are associated with PHAs needing flood insurance, and
       •    The primary reasons for PHAs’ failure to pay their flood insurance premiums.




3
    Figures as of June 1, 2015. See Appendix A for a listing of States and territories with PHAs in flood zones.




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Evaluation Results
We identified three PHAs with some buildings located in a flood zone that did not have flood
insurance before Hurricane Sandy. For two PHAs, not all of the buildings were covered by flood
insurance because the PHAs relied upon insurance companies to keep abreast of FEMA’s updates to
flood plain maps. The third PHA was aware of the need to obtain flood insurance but did not do so.
As a result, one PHA incurred debt to pay for Hurricane Sandy-related repairs, and another operated
at a loss. FEMA deducted the amount the third PHA would have received from flood insurance
from a FEMA grant.

In addition to the National Flood Insurance Program’s requirement for flood insurance, HUD
required PHAs to purchase flood insurance. HUD’s consolidated annual contributions contract, a
contract between PHAs and HUD, required flood insurance for properties located in a flood plain as
determined by the National Flood Insurance Program.

PIH staff, located at HUD field offices, was responsible for the oversight and management of PHAs.
The PHAs provided flood insurance self-certifications and proofs of insurance to PIH field offices.
However, PIH did not verify that PHAs had flood insurance policies for all buildings in flood zones.
We were unable to determine how much the PHAs would have received from flood insurance claim
payments if all buildings had been insured. A flood insurance claim requires a detailed estimate by
an insurance adjustor and a proof of loss supporting the damages.

Fifty-Three Buildings Did Not Have Flood Insurance at the Crisfield, MD, PHA
All of the Crisfield, MD, PHA’s 105 buildings were in a flood plain when Hurricane Sandy hit,
but it only maintained flood insurance on 52. The PHA’s executive director believed the
Crisfield PHA was sufficiently insured based on a 1983 FEMA letter that identified buildings
located in the flood zone. Since receiving the letter, the Crisfield PHA had maintained flood
insurance on the buildings. Following Hurricane
Sandy, the Maryland Emergency Management
Agency informed the Crisfield PHA that it was not           In Maryland, there are 120
fully insured due to an updated flood plain map,            public housing buildings
which broadened the flood plain to include 53               containing 540 units in flood
additional PHA buildings. The executive director            zones. [As of June 1, 2015]
relied on FEMA to send flood plain map update
notifications to the PHA and for its insurance
company to update it on flood insurance needs.

In accordance with requirements of the annual contributions contract, the Crisfield PHA self-
certified that it had obtained the necessary flood insurance and provided flood insurance policies
to the PIH Baltimore field office. The PIH Baltimore field office reviewed the flood insurance
documentation but did not verify its adequacy. Following Hurricane Sandy, the Crisfield PHA
increased the policy limits to the required amounts on the buildings that it insured before the
hurricane but had not obtained insurance for the newly identified buildings because funds were



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not available. The executive director estimated that it would cost an additional $24,000 per year
to insure the remaining buildings.

While waiting for flood insurance payments and grants, the Crisfield PHA acquired a 5-year
recovery loan to pay for Sandy-related repairs. The PHA used a portion of its Public Housing
Capital Fund to repay the loan. Capital funds are used for improvements and debt service
payments. PHAs may borrow private capital to make improvements and pledge a portion of their
future year annual capital funds to make debt service payments for a conventional bank loan
transaction. In total, the Crisfield PHA had more than $8.5 million in flood-related damages and
received more than $4.7 million from flood insurance claims, FEMA grants, and HUD grants.
The PHA required nearly $3.8 million to bring its housing up to standards. In the past, the PHA
used capital funds to renovate housing. Now, the housing improvement funds will repay the loan
while tenants live in unrenovated units.

Twelve Buildings Did Not Have Flood Insurance at the Carteret, NJ, PHA
The Carteret, NJ, PHA had insured 1 of its 13 buildings located in a flood zone. The executive
director relied on a risk management company to identify buildings located in a flood zone and
acquire flood insurance for those buildings. The Carteret PHA’s Edward J. Dolan Homes and
Jeanette Smith Village properties had buildings in a
flood zone. The risk management company identified        In New Jersey, there are 358
10 of the 13 buildings as being in the flood zone but
wrote the policy to cover 1 building. Since it            public housing buildings
sustained the Hurricane Sandy damages, Carteret has       containing 5,808 units in flood
insured 10 of the 13 buildings in the flood zone. The     zones. [As of June 1, 2015]
remaining three buildings were condemned as a result
of damages caused by Hurricane Sandy.

In accordance with the requirements of its annual contributions contract, the Carteret PHA self-
certified that it had obtained flood insurance and provided a flood insurance policy to the PIH
Newark field office. The PIH Newark field office reviewed the flood insurance documentation
but did not verify its adequacy.

The Carteret PHA sustained more than $1 million in flood-related damages and received $96,359
from flood insurance claims. As a result of Hurricane Sandy damage, the Carteret PHA operated
at a loss and was unable to rebuild three condemned buildings estimated to cost at least $8
million in the Edward J. Dolan Homes. Tenants relocated to other housing authorities, found
housing through the Housing Choice Voucher program, 4 or left without HUD assistance. The
Carteret PHA laid off employees so it could reallocate funds. Eventually, the PHA will lose
subsidies for the vacant units, which will lead to a greater financial burden.




4
    HUD previously referred to the Housing Choice Voucher program as Section 8.




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To mitigate future flood losses, the PHA submitted a Rental Assistance Demonstration Program 5
proposal to rebuild the condemned buildings in a location outside the flood zone. According to
the executive director, the Carteret PHA’s financial situation would improve if it received a
Rental Assistance Demonstration Program subsidy. If HUD and the City of Carteret do not
accept the proposal, the Carteret PHA may not be able to maintain operations, and as a result,
HUD will have to determine the future of the PHA.

Seven Buildings Did Not Have Flood Insurance at the Freeport, NY, PHA
The Freeport, NY, PHA did not have flood insurance for
seven buildings in a flood zone, located at its Moxey A. In New York, there are 244
Rigby property. This property had flood damage from      public housing buildings
Hurricane Irene in 2011. After Hurricane Irene, the PIH
New York field office instructed the PHA’s executive
                                                         containing 19,863 units in
director and board to purchase the required flood        flood zones. [As of June 1, 2015]
insurance, but the board and executive director did not
do so. 6 When Hurricane Sandy hit the property in 2012,
buildings were again damaged by flooding and were not covered by flood insurance.

In March 2014, the PHA hired a new executive director and a HUD-approved agent and broker
for flood insurance. The executive director purchased the appropriate flood insurance, which
became effective in May 2015. He also relocated the decommissioned administrative building.
The PHA is seeking a long-term solution to flooding by relocating the property to a higher
elevation. This action will require approvals from local authorities, HUD, and FEMA. The PHA
applied for a FEMA grant of more than $6.2 million to build the new property. FEMA approved
this grant but deducted $667,750 because the Freeport PHA did not have flood insurance before
Hurricane Sandy.

Conclusion
Seventy-two buildings at three PHAs were located in flood zones but did not have flood
insurance before Hurricane Sandy. While PHAs are responsible for buying necessary flood
insurance, PIH field offices should review policies to determine whether all buildings in flood
zones are covered by a PHA’s insurance policy.
HUD also believes PIH can do more to ensure flood insurance coverage. In its October 2014
Climate Change Adaptation Plan, HUD identifies flooding as an extreme weather event that
could affect public housing structures, residents, and administration. The plan states that PIH
should evaluate and improve the policy on insurance requirements for PHAs to anticipate a


5
  The Rental Assistance Demonstration Program was created to give PHAs a tool to preserve and improve public
housing properties. The program also gives owners of three HUD “legacy” programs (Rent Supplement, Rental
Assistance Payment, and Section 8 Moderate Rehabilitation) the opportunity to enter into long-term contracts that
facilitate the financing of improvements.
6
  Our Office of Audit reported this issue in December 2014 in Audit Report 2015-NY-1002, The Freeport Housing
Authority, Freeport, NY, Did Not Administer Its Low-Rent Housing and Homeownership Programs in Accordance
With HUD’s Regulations.




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variety of climate change impacts. It further states that PIH should train its staff to evaluate the
best way to ensure that PHAs have adequate insurance coverage.
There are 556 PHAs with 11,591 buildings in flood zones. We did not determine how many of
these buildings were covered by a flood insurance policy. These three PHAs are examples of
what can occur when a PHA does not have flood insurance coverage for all necessary buildings.
Flood insurance is necessary to ensure that PHAs remain financially viable, continue to provide
safe and habitable housing to low-income residents, and minimize costs to taxpayers for keeping
public housing units operational.

Recommendations
We recommend that the Principal Deputy Assistant Secretary for Public and Indian Housing

       1. Require field offices to review PHA-provided flood insurance documents to verify that
       PHAs have flood insurance policies for those buildings in flood zones.
       2. Establish procedures to obtain updated flood plain maps and distribute them to PHAs.
       3. Require the Crisfield, MD, PHA to procure full flood insurance coverage to protect
       itself and HUD’s investments from financial loss.




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Scope and Methodology
While researching the disaster-related needs of PHAs, we identified 15 PHAs with unmet needs
after receiving insurance payments and FEMA assistance. Through interviews, we determined
that three PHAs had some buildings located in a flood zone that did not have flood insurance
before the hurricane. We evaluated why these buildings did not have flood insurance.
We interviewed staff from

   •   HUD PIH;
   •   HUD PD&R;
   •   Baltimore, Newark, and New York field offices;
   •   Crisfield, MD, Carteret, NJ, and Freeport, NY, PHAs;
   •   FEMA’s New York regional office; and
   •   FEMA’s National Flood Insurance Program.
We reviewed and analyzed the following documentation:

   •   Consolidated annual contributions contracts;
   •   Flood insurance policies, statements of loss, and claim settlements;
   •   HUD’s Climate Change Adaptation Plan, October 2014; and
   •   PD&R flood zone data.
We conducted our fieldwork from April to July 2015. We conducted this evaluation under the
authority of the Inspector General Act of 1978, as amended, and according to the Quality
Standards for Inspection and Evaluation issued by the Council of the Inspectors General on
Integrity and Efficiency.




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Appendix B
               Comments and OIG’s Response



Reference
to OIG       Office of Public and Indian Housing Comments
Response




Comment 1



Comment 2




                              12
Appendix B – continued
                    Comments and OIG’s Response



Reference
to OIG            Office of Public and Indian Housing Comments
Response




Comment 3




Comment 4




                                   13
Appendix B – continued
                             Comments and OIG’s Response


                              OIG’s Response to Comments


Comment 1   PIH supported a recommendation that field offices review flood insurance
            documents to verify that a flood insurance policy is in force. We agree that PIH
            field staff does not have the expertise to determine whether the level of insurance
            coverage is adequate. The intent of our recommendation is to ensure each
            building in a flood zone is covered by a flood insurance policy, not to ask PIH to
            determine how much coverage is needed. Therefore, we removed the word
            “adequate” from recommendation 1.
Comment 2   PIH requested that the Office of Management and Budget add flood insurance
            verification to its Circular A-133 Compliance Supplement. While we agree that
            this measure would add valuable controls, a proactive verification by PIH field
            offices would better prepare PHAs to deal with flooding caused by natural
            disasters. To fully meet the intent of recommendation 1, we repeat that PIH
            should develop a flood insurance coverage verification process to be followed by
            PIH field offices.
Comment 3   On September 29, 2015, the Deputy Assistant Director of the Office of Field
            Operations sent an email to PHA executive directors discussing disaster
            preparedness. This email reminded PHAs to check the most recent flood zone
            maps and submit flood insurance policies to the field office. It also noted that the
            field office will verify that the policy provides adequate coverage. The email
            contained a link to FEMA’s Web site for the National Flood Insurance Program.
            PIH also says it will add instructions for subscribing to FEMA notifications on its
            Web site. Once these instructions are posted, PIH’s actions will satisfy the intent
            of recommendation 2.
Comment 4   PIH said it will present options that will enable the Crisfield Housing Authority to
            obtain the proper flood insurance. Recommendation 3 will be satisfied when
            policies are in place to cover all of the Crisfield Housing Authority’s buildings in
            a flood zone.




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