WASHINGTON–The National Flood Insurance Program cannot afford tocontinue providing coverage against floods while paying off theclaims from Hurricane Katrina, according to the CongressionalBudget Office.

In a letter to Sen. Judd Gregg, R-N.H., the chairman of theSenate Budget Committee, CBO Acting Director Donald Marron said theNFIP's “current financial situation is unsustainable.”

Additionally, Mr. Marron said the Federal Emergency ManagementAgency, which oversees the NFIP, “lacks the financial resources tocover the program's costs and the authority to make changes thatmight ensure that future obligations could be met.”

Specifically, Mr. Marron pointed to the NFIP's need for “about$3 billion more' to pay claims related to Hurricane Katrina andother storms in 2005, which must be provided by Congress.

He also noted that the interest alone on what the NFIP hasalready borrowed to pay claims will amount to roughly $1 billionannually. “Even if FEMA increases the premiums charged for floodinsurance by the maximum percentage allowed by law, premium incomein the next several years is unlikely to cover claims, debt serviceand other costs of the program,” he said.

Compounding the problem, Mr. Marron said, is that the NFIP doesnot operate on an actuarial basis and many property owners paypremiums that do not reflect the full risk to their properties.“Thus, over the long term, premium income will be insufficient tocover the program's costs,” he said.

Mr. Marron added, “If this policy of subsidizing certain typesof properties continues, it can be expected to lead to a shortfallof about $1.3 billion a year over the long term for currentlyinsured properties.”

The CBO examined the main NFIP reform bill, HR 4973, the FloodInsurance Reform and Modernization Act, Mr. Marron said, and hasdetermined that the bill, which would gradually eliminate thesubsidies for nonresidential buildings and second or vacationhomes, would increase receipts from flood insurance premiums byabout $1.5 billion over the next ten years.

Although eliminating the subsidies entirely would put the NFIPon firmer ground financially for the future, Mr. Marron said theprogram still would not be able to make up for past losses.

The CBO also looked at a more radical idea–eliminating the NFIPentirely. Elimination of the program would save the governmentabout $1.3 billion annually, minus the increased amount of disasterrelief spending the government had to pay.

“For many years, the availability of flood insurance through theprivate market has been quite limited,” he said. “How the privateinsurance market for flood insurance might change in the absence ofa federal program is unknown.

“If private flood insurance did not become widely available, itis likely that the government would end up paying for some of thelosses from floods in the form of appropriations for disasterrelief.”