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 2 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. 3 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. 4 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 5 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. 6 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. 7 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. 8 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. 9 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. 14
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)