Moves by Florida lawmakers to provide a federal backstop to the state's severely underfunded Hurricane Catastrophe Fund are running into strong headwinds on Capitol Hill.
The latest effort is a bill introduced by Sen. Bill Nelson, D-Fla., that was filed after the Treasury Department declined recently to issue a line of credit to his home state's cat fund, which provides reinsurance to Florida's homeowners insurer of last resort–Citizen's Property Insurance Corp.
The Treasury would not comment, but Sen. Nelson's office confirmed that Assistant Treasury Secretary Alan Krueger told state officials in a phone call several weeks ago that the department doesn't have the authority to issue a line of credit.
Sen. Nelson's new legislation would create a consortium similar to that of a government-sponsored enterprise that would give the Treasury Department authority to provide aid to any state that suffers a catastrophe. The bill–S. 505–also contains a second provision that would create a National Homeowners Insurance Stabilization Program.
Mr. Nelson's measure came under immediate criticism. According to Eli Lehrer, a fellow at the Competitive Enterprise Institute–a conservative think tank–this bill's second provision likely applies only to Florida. It would authorize the secretary of the Treasury to provide loans to a state that suffers a catastrophe.
The measure allows the Treasury to provide the funds if the loan is backed by the full faith and credit of the state that receives it, and if the state demonstrates that it has the ability to repay the loan.
It mandates that the funds be repaid over five-to-10 years, but the payback provision is "meaningless, because there is no means of enforcing it, because Congress could always extend the loan," according to Mr. Lehrer, who decried the bill as "a special program for one state." The cat fund is the only one of its type in the United States, he observed.
According to Mr. Lehrer, Citizens' sells more property insurance than any carrier in Florida and ranks among America's 100-largest home insurers.
In a statement, Sen. Nelson's representative said that "we're confident a way will be found to shore up the cat fund."
"We've got one bill already filed giving Treasury the authority to issue a line of credit, and we're working on a second one with a number of state insurance commissioners to allow Treasury to guarantee private-sector loans to cat funds," the senator's aide added.
According to Mr. Lehrer, the Florida cat fund has an estimated $29 billion in liabilities but only $3 billion in available assets to cover potential losses in the event of a bad storm.
However, in a paper issued last week, Mr. Lehrer said it would be a mistake for Congress to pass such legislation. "It would potentially impose huge liabilities on the Treasury, it encourages development where it shouldn't happen, and it guts the private reinsurance market," he charged.
He also argued in his paper that "Florida's current insurance system, which [Republican] Gov. Charles Crist and the state legislature created in order to reduce prices, simply does not work. It has no way to fund its liabilities and has resulted in nearly all large private insurers leaving the state."
Under the current system, if a major hurricane occurs, Florida plans to finance the operations of its cat fund by selling bonds and then paying them off by imposing enormous special taxes, called "assessments," on nearly all insurance policies in the state, he noted.
"Although Florida could sell some cat fund bonds, it is almost inconceivable that it could sell anything close to the $25 billion it might need," according to Mr. Lehrer, who said that "no state has ever sold more than $12.3 billion in bonds all at the same time."
He further argued that if federal loans to Florida are intended to be paid back, then they will have little advantage over private lending, adding that while the federal government might offer slightly lower rates than the private sector, federal loans would still have to be repaid or forgiven.
"Florida does not have a practical plan or the proper tools to pay them back, so all U.S. taxpayers would end up footing the bill for whatever Florida borrows," he said.
Noting that Florida has "no state income tax, a statewide cap on property taxes and a roughly average state sales tax," he concluded that "while the merits of Florida's tax policies are beyond the scope of this paper, Florida simply does not have many revenue-producing tools at its disposal. If it did, it could sell debt on the private market."
However, loosening credit markets have boosted the cat fund's anticipated post-event bonding capacity by an additional $5 billion, easing the shortfall in its projected claims-paying ability, a fund representative said.
The fund had projected it had $3 billion in post-event bonding capacity heading into the upcoming hurricane season, according to Dennis MacKee, director of communications. But it is now projected to have as much as $8 billion, he added.
Mr. MacKee said the additional bonding capacity has "significantly altered the picture." Essentially, with the $8 billion combined with pre-existing capacity, the mandatory layer of the cat fund has an estimated $15.6 billion in claims-paying ability, versus $10.6 billion in previous estimates.
That $15.6 billion–combined with the $7 billion deductible the insurance industry would have to pay in the event of a major hurricane–means Florida would now be able to handle an event comparable to 1992′s Hurricane Andrew, which would cost $22 billion in today's dollars, Mr. MacKee said.
If the credit markets continue to loosen, the capacity could increase further, he added.
However, Sam Miller, executive vice president of the Florida Insurance Council, noted that the mandatory layer of the catastrophe fund still has over a $2 billion shortfall to cover its maximum obligation of $17.7 billion.
He also said while the $8 billion bonding capacity figure is a "good-faith estimate," there is a chance Florida will not be able to sell $8 billion in bonds after a hurricane.
Additionally, the optional cat fund layer that sits above the mandatory layer remains unfunded, according to Mr. Miller.
Every homeowner insurer in the state has to buy into the mandatory layer of the cat fund, Mr. Miller noted, charging that companies are essentially buying "phantom insurance."
He explained the layer by stating that if a major hurricane strikes Florida, an insurance company or Citizens would be responsible for its share of a $7 billion total deductible.
Once the company pays that amount, it can access its share of the $17.7 billion mandatory cat fund layer. If the company still has losses, the excess layer kicks in to cover losses over the mandatory program, up to an additional $12 billion total.
To sum up the cat fund's financial woes, Mr. Miller said there is still a shortfall in the mandatory program, although it is "hopefully a lot less than we thought a month ago," while the upper layer is not funded at all.
A financial services team consisting of investment banks, reinsurance brokers, legal counsel and financial advisor Raymond James & Associates Inc. (hired to look into options to close the fund's shortfall) recommended against purchasing financial products in the private market to reduce the funding gap.
The team reported that no financial products appear to meet the fund's cost and capacity parameters at this time.
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