[Federal Register Volume 82, Number 8 (Thursday, January 12, 2017)]
[Proposed Rules]
[Pages 4064-4097]
[FR Doc No: 2017-00467]

Vol. 82

Thursday,

No. 8

January 12, 2017

Part IV

Department of Homeland Security

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Federal Emergency Management Agency

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44 CFR Part 206

Establishing a Deductible for FEMA's Public Assistance Program;
Proposed Rule

Federal Register / Vol. 82 , No. 8 / Thursday, January 12, 2017 /
Proposed Rules

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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

44 CFR Part 206

[Docket ID FEMA-2016-0003]
RIN 1660-AA84

Establishing a Deductible for FEMA's Public Assistance Program

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Supplemental advance notice of proposed rulemaking.

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SUMMARY: The Federal Emergency Management Agency (FEMA) is considering
implementing a Public Assistance deductible that would condition
States' receipt of FEMA reimbursement for the repair and replacement of
public infrastructure damaged by a disaster event. The primary intent
of the deductible concept is to incentivize greater State resilience to
future disasters, thereby reducing future disaster costs nationally. On
January 20, 2016, FEMA (the Agency) published an Advance Notice of
Proposed Rulemaking (ANPRM) seeking comment on a Public Assistance
deductible concept. The ANPRM provided a general description of the
concept that many commenters found insufficient to provide meaningful
comment. In an effort to offer the public a more detailed deductible
concept upon which to provide additional feedback, the Agency is
issuing a supplemental ANPRM (SANPRM) that presents a conceptual
deductible program, including a methodology for calculating deductible
amounts based on a combination of each State's fiscal capacity and
disaster risk, a proposed credit structure to reward States for
undertaking resilience-building activities, and a description of how
FEMA could consider implementing the program. At this stage of the
rulemaking process, the deductible remains only something that FEMA is
considering. The policy conceived of in this document is not a
proposal. In this document, FEMA is providing what is merely a
description of a direction FEMA could take in future rulemaking in an
effort to solicit further feedback from the public. After considering
the comments it receives, or as a result of other factors, FEMA may
expand on or redevelop this concept.

DATES: Comments must be submitted by April 12, 2017.

ADDRESSES: You may submit comments, identified by Docket ID FEMA-2016-
0003, by one of the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
    Mail/Hand Delivery/Courier: Regulatory Affairs Division, Office of
Chief Counsel, Federal Emergency Management Agency, 8NE, 500 C Street
SW., Washington, DC 20472.

FOR FURTHER INFORMATION CONTACT: Jotham Allen, Federal Emergency
Management Agency, 500 C Street SW., Washington, DC 20472, 202-646-
1957.

SUPPLEMENTARY INFORMATION:

I. Public Participation

    We encourage you to participate in this rulemaking by submitting
comments and related materials. We will consider all comments and
material received during the comment period.
    If you submit a comment, identify the agency name and the docket ID
for this rulemaking, indicate the specific section of this document to
which each comment applies, and give the reason for each comment. You
may submit your comments and material by electronic means, mail, or
delivery to the address under the ADDRESSES section. Please submit your
comments and material by only one means.
    Regardless of the method used for submitting comments or material,
all submissions will be posted, without change, to the Federal e-
Rulemaking Portal at http://www.regulations.gov, and will include any
personal information you provide. Therefore, submitting this
information makes it public. You may wish to read the Privacy Act
notice that is available via a link on the homepage of
www.regulations.gov.
    Viewing comments and documents: For access to the docket to read
supporting documents, a supplemental guidance document, and an annual
notice template, and comments received, go to the Federal e-Rulemaking
Portal at http://www.regulations.gov. Background documents and
submitted comments may also be inspected at FEMA, Office of Chief
Counsel, 500 C Street SW., Washington, DC 20472-3100.

II. Executive Summary

    On January 20, 2016, FEMA published an Advance Notice of Proposed
Rulemaking (ANPRM), 81 FR 3082, seeking comment on a concept that would
incorporate a deductible requirement into the Public Assistance
program. The ANPRM provided a general description of this concept,
followed by a list of questions for the public, the answers to which
would help FEMA assess all aspects of the deductible concept, including
how to calculate the deductible, the scope of the deductible, how to
satisfy the deductible, how this concept could influence change,
implementation considerations and an estimated impact. With input
received from the ANPRM, FEMA has developed a more detailed potential
deductible concept and seeks further public comment via this SANPRM.
The goal of this SANPRM is to gather additional public comment about
the specific aspects of a programmatic approach that the Agency
recognizes would represent a change to the existing Federal disaster
support system.
    The Public Assistance deductible would condition the States'
receipt of FEMA reimbursement for the permanent repair and replacement
of public infrastructure damaged by a disaster event. FEMA believes the
deductible requirement could incentivize State risk reduction efforts,
mitigate future disaster impacts, and lower recovery costs for the
whole community. In addition, the deductible requirement addresses
concerns raised by Members of Congress, the Government Accountability
Office (GAO), and the Department of Homeland Security's Office of the
Inspector General (DHS OIG) over the last several years, and
potentially addresses concerns that the current disaster declaration
process inadequately assesses State capacity to respond to and recover
from a disaster without Federal assistance.
    In this SANPRM, FEMA is presenting a model, or potential,
deductible program to provide more specifics of what the deductible
requirement may entail for detailed public feedback. Detailed public
comments on this potential program, in particular on the methodologies
for calculating each State's deductible and the estimates for each
State's projected credits, could assist FEMA in the development of a
future proposed rule.
    Under the deductible concept, each State would be expected to
expend a predetermined, annual amount of its own funds on emergency
management and disaster costs before FEMA would provide Public
Assistance for the repair and replacement of public infrastructure
damaged by a disaster event. This annually predetermined amount is the
State's deductible. However, satisfying the deductible would not be
required before FEMA would provide assistance for other types of
assistance, such as debris removal or emergency protective measures.
Importantly, States may

choose to earn credits toward satisfying their deductible through a
variety of activities that could reduce risk and improve preparedness,
thereby reducing future disaster costs to both the State and Federal
government.
    FEMA could calculate annually the deductible amount (in dollars)
for each State based on an index of State risk and fiscal capacity.
FEMA anticipates a scaled implementation of a deductible requirement
over a yet-to-be-determined period of years with starting deductibles
in year one as follows in Table 1:
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    \1\ For a full explanation of how the first year starting
deductibles could be calculated under this model program, please
refer to Section V, Subsections A-F of this notice.

       Table 1--First Year Starting Deductibles Before Credits \1\
------------------------------------------------------------------------
            First year starting deductibles  (before credits)
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                                                         Year 1 starting
                         State                           deductible (in
                                                            millions)
------------------------------------------------------------------------
Alabama...............................................             $6.74
Alaska................................................              1.00
Arizona...............................................              9.01
Arkansas..............................................              4.11
California............................................             52.53
Colorado..............................................              7.08
Connecticut...........................................              5.04
Delaware..............................................              1.27
Florida...............................................             26.51
Georgia...............................................             13.66
Hawaii................................................              1.92
Idaho.................................................              2.21
Illinois..............................................             14.43
Indiana...............................................              9.14
Iowa..................................................              4.30
Kansas................................................              4.02
Kentucky..............................................              6.12
Louisiana.............................................              6.39
Maine.................................................              1.87
Maryland..............................................              8.14
Massachusetts.........................................              9.23
Michigan..............................................             13.94
Minnesota.............................................              7.48
Mississippi...........................................              4.18
Missouri..............................................              8.44
Montana...............................................              1.40
Nebraska..............................................              2.58
Nevada................................................              3.81
New Hampshire.........................................              1.86
New Jersey............................................             12.40
New Mexico............................................              2.90
New York..............................................             27.32
North Carolina........................................             13.45
North Dakota..........................................              1.00
Ohio..................................................             16.27
Oklahoma..............................................              5.29
Oregon................................................              5.40
Pennsylvania..........................................             17.91
Rhode Island..........................................              1.48
South Carolina........................................              6.52
South Dakota..........................................              1.15
Tennessee.............................................              8.95
Texas.................................................             35.46
Utah..................................................              3.90
Vermont...............................................              1.00
Virginia..............................................             11.28
Washington............................................              9.48
West Virginia.........................................              2.61
Wisconsin.............................................              8.02
Wyoming...............................................              1.00
------------------------------------------------------------------------

    To offset the deductible requirement, FEMA could provide each State
with an opportunity to apply for credits. The credits could incentivize
States to dedicate resources on activities that are demonstrated to
promote and support readiness, preparedness, mitigation, and
resilience. Such activities could include adopting and enforcing
building codes that promote disaster resilience, funding mitigation
projects, or investing in disaster relief, insurance, and emergency
management programs. FEMA believes that every State is already
undertaking activities that would qualify them for credits and reduce
their deductible requirement, such as investing in mitigation projects
or granting tax incentives for projects that reduce risk. Based on
FEMA's projection of possible credits for activities each State is
presently engaged in, FEMA estimates a potential adjusted deductible
requirement in year one as follows in Table 2:
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    \2\ For a full explanation of how each State's projected credits
were calculated and how those credits impacted the projected first
year's final deductibles under this model program, please refer to
Section V, Subsections G-H of this notice.

 Table 2--Potential First Year Final Deductibles Adjusted for Projected
                               Credits \2\
------------------------------------------------------------------------
   Potential first year ``final'' deductibles (adjusted for projected
                                credits)
-------------------------------------------------------------------------
                                                            ``Final''
                                                            adjusted
                         State                           deductible (in
                                                            millions)
------------------------------------------------------------------------
Alabama...............................................              5.01
Alaska................................................              0.74
Arizona...............................................              4.88
Arkansas..............................................              2.49
California............................................              7.63
Colorado..............................................              5.24
Connecticut...........................................              3.72
Delaware..............................................              0.94
Florida...............................................             10.85
Georgia...............................................              9.99
Hawaii................................................              1.68
Idaho.................................................              1.66
Illinois..............................................              3.47
Indiana...............................................              2.81
Iowa..................................................              1.70
Kansas................................................              3.45
Kentucky..............................................              4.65
Louisiana.............................................              5.57
Maine.................................................              1.46
Maryland..............................................              5.78
Massachusetts.........................................              5.11
Michigan..............................................              8.53
Minnesota.............................................              1.25
Mississippi...........................................              2.51
Missouri..............................................              4.78
Montana...............................................              0.77
Nebraska..............................................              1.52
Nevada................................................              2.03
New Hampshire.........................................              0.91
New Jersey............................................              4.89
New Mexico............................................              2.02
New York..............................................             19.59
North Carolina........................................              2.48
North Dakota..........................................              0.30
Ohio..................................................             11.75
Oklahoma..............................................              3.33
Oregon................................................              3.91
Pennsylvania..........................................              5.52
Rhode Island..........................................              1.20
South Carolina........................................              4.92
South Dakota..........................................              0.92
Tennessee.............................................              7.06
Texas.................................................             26.99
Utah..................................................              1.99
Vermont...............................................              0.63
Virginia..............................................              4.89
Washington............................................              8.91
West Virginia.........................................              1.91
Wisconsin.............................................              6.17
Wyoming...............................................              0.71
------------------------------------------------------------------------

    Under the deductible concept, FEMA would continue to recommend
whether a State should receive a major disaster declaration pursuant to
the current factors outlined in Federal policy (44 CFR 206.48(a)). If a
State receives a major disaster declaration authorizing Public
Assistance reimbursement, the State would then be required to first
satisfy its annual deductible requirement (as adjusted by credits)
before FEMA would provide reimbursement for Public Assistance permanent
work. If a State has not fully satisfied its deductible through earned
credits, following a major disaster declaration the State would then
identify one or more permanent work projects proposed under the
disaster declaration to satisfy the remaining deductible amount (i.e.,
the State chooses the selected project(s) and the project(s) would be
ineligible for FEMA assistance). In order to ensure timely

and complete response to the evacuation and immediate protection of
life and property, FEMA would fund eligible emergency protective
measures and debris removal regardless of whether or not the State has
met its deductible requirement.
    FEMA could implement the deductible program by regulation,
supplemented by a guidance document and annual notices. The regulation
could set forth broadly that FEMA will annually calculate deductible
and credit amounts and could describe how a deductible requirement
could be applied post-declaration. The guidance document could set
forth more specifically the annual schedule, and how FEMA will
calculate deductible and credit amounts, and the annual notice could
provide FEMA's determination on State deductible amounts for the
following year. A draft guidance document and example annual notice are
included in the docket for this rulemaking at www.regulations.gov under
docket ID FEMA-2016-0003 for public review and comment.
    Under this concept, FEMA would condition the provision of grant
assistance for the permanent repair and replacement of building
infrastructure that is damaged by a major disaster upon the State's
meeting a Public Assistance deductible. It would not apply to any other
form of FEMA assistance, including emergency assistance, Individual
Assistance, or the Hazard Mitigation Grant Program. Since the Public
Assistance deductible would condition States' receipt of FEMA funds, it
would not apply to Indian Tribes, the District of Columbia, or US
territories. The deductible would not change the official disaster
declaration request process, or the factors that FEMA considers when
making disaster declaration recommendations to the President.
    A deductible program could leverage FEMA's Public Assistance
program to reward States for investing in readiness, preparedness,
mitigation, and resilience, thereby increasing the nation's ability to
reduce disaster impacts and costs for all levels of government,
individuals, and the private sector. FEMA seeks comment on all details
of this concept, especially regarding how the deductible could be
calculated and the types and amounts of deductible credit that could be
granted.

III. Background and Development of the Deductible Concept

    Although the Federal government has been providing supplemental
disaster relief to States and localities since the early 1800s, the
Disaster Relief Act of 1974,\3\ which was amended and renamed the
Robert T. Stafford Disaster Relief and Emergency Assistance Act
(Stafford Act) in 1988,\4\ formally established the foundation of the
current disaster assistance system. Generally, FEMA directly provides
or coordinates this assistance.
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    \3\ Disaster Relief Act of 1974, Public Law 93-288 (1974).
    \4\ Public Law 100-707 (1988). Robert T. Stafford Disaster
Relief and Emergency Assistance Act, Public Law 93-288 (1974), as
amended; 42 U.S.C. 5121 et seq.
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    Pursuant to this system, the Federal government provides various
forms of financial and direct assistance following disasters. One of
the primary types of support FEMA provides to affected jurisdictions is
repair, restoration, and replacement assistance through the Public
Assistance program.\5\ The Public Assistance program is FEMA's
principal means for assisting jurisdictions that are financially
overwhelmed by the costs of repairing, restoring, and replacing public
facilities damaged by disasters, such as buildings, roads, bridges, and
other types of publicly-owned infrastructure.
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    \5\ See 42 U.S.C. 5172.
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    On average, FEMA has distributed approximately $4.6 billion in
grants each year through the Public Assistance program over the past
decade. Of the nearly $60 billion awarded through the Public Assistance
program between 2005 and 2014, over 65 percent was for eligible
recovery projects termed ``permanent work'' and for project management
costs. Permanent work includes expenses for repair, restoration, and
replacement that are not related to debris removal or emergency
protective measures.\6\
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    \6\ See 44 CFR 206.201(j).
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    Before an affected jurisdiction can receive funding through the
Public Assistance program, the President of the United States must
authorize it.\7\ The Governor typically makes a request through FEMA
for a Presidential declaration of an emergency or major disaster
authorizing the Public Assistance program.\8\ Upon receipt, FEMA is
responsible for evaluating the Governor's request and providing a
recommendation to the President regarding its disposition.\9\
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    \7\ See 42 U.S.C. 5170b, 5192; see also 44 CFR 206.38, 206.40.
    \8\ 42 U.S.C. 5170, 5191.
    \9\ See 44 CFR 206.37(c).
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    When considering a jurisdiction's request for a major disaster
declaration authorizing the Public Assistance program, FEMA considers
six factors.\10\ These factors include:
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    \10\ See 44 CFR 206.48(a).

    1. Estimated cost of the assistance; \11\
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    \11\ Id. at Sec.  206.48(a)(1).
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    2. Localized impacts; \12\
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    \12\ Id. at Sec.  206.48(a)(2).
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    3. Insurance coverage in force; \13\
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    \13\ Id. at Sec.  206.48(a)(3).
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    4. Hazard mitigation; \14\
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    \14\ Id. at Sec.  206.48(a)(4).
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    5. Recent multiple disasters; \15\ and
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    \15\ See 44 CFR 206.48(a)(5).
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    6. Programs of other Federal assistance.\16\
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    \16\ Id. at Sec.  206.48(a)(6).

FEMA evaluates every request with regard to each of these delineated
factors, to the extent applicable. However, there is a very strong
correlation between the first factor, estimated cost of the assistance,
and the likelihood that FEMA will recommend that the President issue a
major disaster declaration.
    Under the current system, if a State demonstrates that an incident
has caused a certain level of damage to a State to address the damage
caused, FEMA would likely recommend that the President declare a major
disaster. A major disaster indicates that the President has determined
that the incident has caused ``damage of sufficient severity and
magnitude to warrant major disaster assistance under [the Stafford Act]
to supplement the efforts and available resources of States, local
governments, and disaster relief organizations in alleviating the
damage, loss, hardship, or suffering caused thereby.'' \17\
Consequently, if the President declares a major disaster authorizing
Public Assistance, FEMA will provide supplemental financial assistance
grants, which pay for not less than 75 percent of eligible costs.\18\
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    \17\ 42 U.S.C. 5122(2) (defining a major disaster for purposes
of the Act).
    \18\ 42 U.S.C. 5170b(b).
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    Conversely, if the President does not issue a major disaster
declaration, the amount of damage is presumed to be within the
capabilities of the affected jurisdictions and any supporting disaster
relief organizations. In that case, the affected State is responsible
for all of the costs of the incident, although the State will often
pass many of the costs on to local jurisdictions. For example, under
current regulations FEMA may determine a particular State based on its
population is able to independently handle up to $1,000,000 in damage
without the need for supplemental Federal assistance. Under the current
approach, an incident need only identify damage at that amount to
suggest that supplemental Federal assistance is needed. If the governor
of that State requests a major disaster declaration for an incident
causing $999,999 in damage, it is likely that

supplemental Federal assistance will not be authorized and the State
will be responsible for the entirety of the loss. However, if instead
the incident caused exactly $1,000,000 in damage, supplemental Federal
assistance may be authorized and FEMA would provide reimbursement
grants through the Public Assistance program for at least $750,000 (75
percent of eligible costs). This has the effect of FEMA providing
Public Assistance funding for activities and damage that are identified
to be within State capabilities.
    Since 1986, FEMA has used a per capita indicator to compare the
estimated cost of the incident and the capabilities of the requesting
jurisdiction.\19\ This per capita indicator was originally set at $1.00
per person and is based on the jurisdiction's decennial census
population. FEMA selected $1.00 because it appeared at the time to be a
reasonable portion of per capita personal income (PCPI) for a State to
contribute towards the cost of a disaster.\20\ Collectively, this
amount also ``correlate[d] closely to about one-tenth of one percent of
estimated General Fund expenditures by States.'' \21\ The per capita
indicator remained at $1.00 from 1986 until 1999 when FEMA began to add
inflation to the value annually. FEMA did not, however, adjust the per
capita indicator for inflation retroactively. Consequently, since 1999,
the per capita indicator has risen to its 2016 value of $1.41.\22\
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    \19\ The per capita indicator is applied at the State level for
major disaster declarations; however, a second indicator is also
used at the local level to determine which counties are declared
within the State.
    \20\ Disaster Assistance; Subpart C, the Declaration Process and
State Commitments, 51 FR 13332, Apr. 18, 1986.
    \21\ Id.
    \22\ Notice of Adjustment of Statewide Per Capita Indicator, 80
FR 61836, Oct. 14, 2015.
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    FEMA publishes the updated per capita indicator in the Federal
Register each year. FEMA then multiplies the indicator by the State's
most recent decennial population to determine the amount of damage that
a State is expected to be able to independently manage without the need
for supplemental Federal assistance. For example, if a State had a
population at the time of the 2010 decennial census population of
1,500,000, FEMA would multiply that by the 1.41 indicator and arrive at
a State-level indicator of 2,115,000. In other words, FEMA would expect
that the State would be able to handle at least 2,115,000 in eligible
damage without the need for supplemental Federal assistance.
    FEMA has established, through regulation, a 1,000,000 minimum for
any major disaster, regardless of the calculated indicator.\23\ The
1,000,000 floor is not subject to inflationary adjustments. Although
FEMA considers every request for a Presidential major disaster
declaration in the light of each applicable regulatory factor, the
probability of an incident being declared based on the amount of
disaster damage and the State-specific per capita indicator has been
over 80 percent for the past 10 years (494 of 589 declared major
disasters). In other words, whether damage assessments find an amount
of damage that meets or exceeds the Public Assistance per capita
indicator is highly correlated to whether that State will ultimately
receive supplemental Federal assistance for that incident.
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    \23\ 44 CFR 206.48(a)(1).
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    Since the per capita indicator was initially adopted in 1986, it
has lost its relation to both of the metrics upon which it was first
calculated. In 1986, PCPI in the United States was 11,687.\24\ By 2015,
PCPI had risen to 48,112, an increase of over 300 percent.\25\ FEMA has
applied inflation adjustments since 1999, and the per capita indicator
has risen by just 41 percent over that same period.
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    \24\ See Disaster Assistance; Subpart C, the Declaration Process
and State Commitments, 51 FR 13332, Apr. 18, 1986
    \25\ Per Capita Personal Income (PCPI) is calculated annually by
the United States Department of Commerce's Bureau of Economic
Analysis. The 2015 PCPI data is available at http://www.bea.gov/
iTable/iTable.cfm?reqid=70&step=1&isuri= 1&acrdn=6%20-
%20reqid=70&step=30&isuri=1& 7022=21&7023=0&7024=non-industry&7033=-
1&7025=0&7026=00000&7027=2015&7001= 421&7028=3&7031=0&7040=-1&7083=
levels&7029=21&7090=70#reqid=70&step=
30&isuri=1&7022=21&7023=0&7024=non- industry&7033=-
1&7025=0&7026=00000&7027= 2015&7001=421&7028=3&7031=0&7040=-
1&7083=levels&7029=21&7090=70. [1) Select Annual State Personal
Income and Employment. 2) Select Personal Income, Population, Per
Capita Personal Income, Disposable Personal Income, and Per Capita
Disposable Personal Income (SA1, SA51). 3) Select SA1--Personal
Income Summary: Personal Income, Population, Per Capita Personal
Income. 4) Select United States, Levels, and Per Capita Personal
Income (Dollars). 5) Select 2015.
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    A retrospective analysis conducted by FEMA suggests that if the per
capita indicator had kept pace with PCPI, 70 percent of the major
disasters between 2005 and 2014 would not have been declared. This
would have transferred all of the costs for 408 disasters to the 49
States that would likely have each had at least one less major disaster
declared. As an example, Missouri and Oklahoma would have each have had
19 fewer major disasters declared.
    Overall, Public Assistance grants would have been reduced by 10
percent had these 408 major disasters not been declared, resulting in 5
billion dollars less in Federal disaster assistance to the States.\26\
Twenty-one States would have each received over 100 million less in
Public Assistance, with California having received 761 million less,
New York more than 600 million less, and Texas over 366 million less.
---------------------------------------------------------------------------

    \26\ Dollar amounts were adjusted to 2015 dollars (2015).
---------------------------------------------------------------------------

    Table 3 presents a State-by-State retrospective synopsis of the
likely impacts a PCPI-adjusted per capita indicator would have had on
declared major disasters between 2005 and 2014. To conduct this
analysis, FEMA adjusted the per capita indicator for each year by
multiplying the previous year's national per capita personal income
value for each State by 0.0001. This maintains the 0.01% ratio of the
per capita indicator to per capita personal income that FEMA noted when
it established the original per capita indicator.

 Table 3--Impact of PCPI-Adjusted per Capita Indicator on Past Disaster
                                Activity
                               [2005-2014]
------------------------------------------------------------------------
                                                             Public
                                          Change in        assistance
                State                    numbers of      change (actual
                                          disasters         in 2015$)
------------------------------------------------------------------------
Alabama.............................               -12     -$156,634,854
Alaska..............................                -8       -16,686,176
Arizona.............................                -5       -32,864,734
Arkansas............................               -15      -105,560,705
California..........................               -12      -761,414,191
Colorado............................                -3       -12,035,081

Connecticut.........................                -4       -34,539,160
Delaware............................                -2        -2,734,920
Florida.............................                -7      -170,847,001
Georgia.............................                -5      -105,365,782
Hawaii..............................                -5       -19,758,046
Idaho...............................                -5       -11,113,622
Illinois............................               -11      -279,253,502
Indiana.............................                -8       -98,604,662
Iowa................................               -13      -103,292,537
Kansas..............................               -12       -74,419,056
Kentucky............................               -11       -98,057,973
Louisiana...........................                -6       -40,610,199
Maine...............................               -11       -31,102,969
Maryland............................                -7      -120,907,360
Massachusetts.......................                -7      -135,316,467
Michigan............................                -3       -36,000,794
Minnesota...........................               -10      -114,692,904
Mississippi.........................                -7       -37,337,169
Missouri............................               -19      -275,421,878
Montana.............................                -5       -11,589,893
Nebraska............................               -16       -67,235,065
Nevada..............................                -4       -15,984,383
New Hampshire.......................               -11       -39,448,267
New Jersey..........................               -11      -207,572,077
New Mexico..........................                -6       -37,173,106
New York............................               -15      -600,294,475
North Carolina......................                -8      -124,991,358
North Dakota........................                -6       -11,015,041
Ohio................................                -6      -131,629,728
Oklahoma............................               -19      -120,128,934
Oregon..............................                -8       -61,741,829
Pennsylvania........................                -7      -144,293,529
Rhode Island........................                -1          -641,448
South Carolina......................                -1       -12,859,770
South Dakota........................                -8       -11,791,000
Tennessee...........................               -13      -113,576,960
Texas...............................                -9      -366,759,151
Utah................................                -6       -33,421,146
Vermont.............................                -8       -10,790,332
Virginia............................                -8      -159,073,446
Washington..........................                -8      -158,351,021
West Virginia.......................               -10       -59,884,181
Wisconsin...........................                -6       -55,046,806
                                     -----------------------------------
    Total...........................              -408    -5,429,864,688
------------------------------------------------------------------------

    The Public Assistance per capita indicator has also fallen short of
keeping pace with State general fund expenditures. According to the
National Association of State Budget Officers (NASBO), State general
fund spending in 2015 totaled 759.4 billion.\27\ Collectively, the
States' per capita indicators equaled 435.3 million in 2015.
Consequently, the relation of the per capita indicator to State general
fund expenditures is just 57 percent of what it was in 1986.
---------------------------------------------------------------------------

    \27\ NASBO, Fiscal Survey of States, Fall 2015, located at
https://higherlogicdownload.s3.amazonaws.com/NASBO/9d2d2db1-c943-4f1b-b750-fca152d64c2/UploadedImages/Fiscal%20Survey/Fall%202015%20Fiscal%20Survey%20of%20States%20(S).pdf.
---------------------------------------------------------------------------

    The failure of the per capita indicator to keep pace with changing
economic conditions and the increasing frequency and costs of disasters
has led to criticism of the per capita indicator. Those critiques have
emphasized that the per capita indicator is artificially low. Many have
called for FEMA to find ways to decrease the frequency of disaster
declarations and Federal disaster costs, by increasing the per capita
indicator to transfer costs back to State and local jurisdictions.
These have included recommendations from GAO,\28\ reports of the DHS
OIG,\29\ and proposed legislation.\30\
---------------------------------------------------------------------------

    \28\ See, e.g., GAO, Disaster Assistance: Improvements Needed in
Disaster Declaration Criteria and Eligibility Assurance Procedures,
GAO-01837 (2001); See also, GAO, GAO-12-838, Federal Disaster
Assistance: Improved Criteria Needed to Assess Eligibility and a
Jurisdiction's Capability to Respond and Recover On Its Own, 29
(2012).
    \29\ See Office of Inspector General, OIG-12-79, Opportunities
to Improve FEMA's Public Assistance Preliminary Damage Assessment
Process 3, Department of Homeland Security (2012).
    \30\ See, e.g., S.1960, Fairness in Federal Disaster
Declarations Act of 2014, 113th Cong.; H.R. 3925, Fairness in
Federal Disaster Declarations Act of 2014, 113th Cong. (establishing
criteria for FEMA to incorporate in rulemaking with specific
weighted factors); H.R. 1859, Disaster Declaration Improvement Act
of 2013, 113th Cong. (requiring new regulations concerning major
disaster declarations).

---------------------------------------------------------------------------

    Concluding that the per capita indicator is artificially low,\31\
the GAO recommended that the FEMA Administrator ``develop and implement
a methodology that provides a more comprehensive assessment of a
jurisdiction's capability to respond and to recover from a disaster
without federal assistance.'' \32\
---------------------------------------------------------------------------

    \31\ GAO 12-838, supra FN22, at 24.
    \32\ Id. at 50.
---------------------------------------------------------------------------

    As FEMA considered these observations and recommendations, FEMA was
finalizing its 2014-2018 Strategic Plan \33\ that includes Strategic
Priority 4: Enable Disaster Risk Reduction Nationally.\34\ Objective
4.2 of the Strategic Plan is to ``incentivize and facilitate
investments to manage current and future risk'' \35\ through
``facilitate[ing] collaboration to strengthen risk standards, leverage
market forces, and guide resilient investments'' \36\ as well as
through ``reshap[ing] funding agreements with States, tribal
governments, and localities to expand cost-sharing and deductibles,''
\37\ inter alia.
---------------------------------------------------------------------------

    \33\ See generally FEMA Strategic Plan: 2014-2018, available at
http://www.fema.gov/media-library-data/1405716454795-3abe60aec989ecce518c4cdba67722b8/July18FEMAStratPlanDigital508HiResFINALh.pdf.
    \34\ Id. at 23.
    \35\ Id. at 26.
    \36\ Id. at 27.
    \37\ Ibid.
---------------------------------------------------------------------------

    FEMA also considered the President's emphasis on advancing national
resilience. The President issued three related Executive Orders in the
past two years to build resilience through (1) establishing a Federal
flood risk management standard,\38\ (2) establishing a Federal
earthquake risk management standard,\39\ and (3) requiring agencies to
enhance the resilience of buildings to wildfire in the wildland-urban
interface.\40\ FEMA has been seeking ways to leverage its programs and
resources to further other resilience-building efforts as well. For
example, FEMA has instituted a policy to establish hazard resistant
minimum standards for Public Assistance projects.\41\
---------------------------------------------------------------------------

    \38\ Executive Order 13,690, 80 FR 6425, Feb. 4, 2015.
    \39\ Executive Order 13,717, 81 FR 6407, Feb. 2, 2016.
    \40\ Executive Order 13,728, 81 FR 32223, May 20, 2016.
    \41\ Public Assistance Required Minimum Standards Policy, FP-
104-109-4, Sep. 30, 2016, available at https://www.fema.gov/media-library/assets/documents/124326.
---------------------------------------------------------------------------

    In early 2014, FEMA began to explore the possibility of introducing
a deductible to the Public Assistance program as a way to leverage the
program to encourage resilience and address some of the concerns raised
by GAO. Accordingly, FEMA convened a working group of subject-matter
experts from within the agency. During the ensuing months, the working
group extensively explored the declaration process, the policies and
workings of the Public Assistance program, the applicable legal
authorities and limitations, and many other areas that would be
necessary to inform the development of a deductible concept.
    In the course of this research, FEMA reviewed a related rulemaking
effort that was a contemporary to the 1986 development of the per
capita indicator. FEMA had proposed a regulation that sought to
establish (1) ``capability indicators'' for the major disaster
declaration decision-making process, (2) a requirement for Governors to
make commitments on behalf of their States and local governments to
assume a portion of the Public Assistance costs, and (3) a sliding
cost-share based on the capability indicators.\42\ The proposed rule
was met with vocal and widespread criticism by Congress and the
emergency management community and FEMA ultimately abandoned the
effort.\43\ Two of the primary criticisms of FEMA's proposed 1986
rulemaking:
---------------------------------------------------------------------------

    \42\ See Disaster Assistance; Subpart C, the Declaration Process
and State Commitments, 51 FR 13332, Apr. 18, 1986; see also Disaster
Assistance; Subpart E--Public Assistance--Eligibility Criteria, 51
FR 13341, Apr. 18, 1986; Disaster Assistance; Subpart H, Public
Assistance Project Administration, 51 FR 13357, Apr. 18, 1986.
    \43\ Inquiry into FEMA's Proposed Disaster Relief Regulations:
Hearing Before the Subcomm. on Investigations and Oversight of the
H. Comm. On Public Works and Transportation, 99th Cong. (1986).
---------------------------------------------------------------------------

    1. FEMA did not recognize the efforts and expenditures that States
were already committing to disaster response and recovery; and
    2. FEMA did not offer sufficient engagement with key stakeholders
during the developmental process.
    Considering this background, the FEMA working group developed three
guiding principles that were designed to control and direct the impact
of the deductible concept:
    1. Encourage and incentivize risk-informed mitigation strategies on
a broad scale, while also recognizing current State activities;
    2. Incentivize consistent fiscal planning by all States for
disasters and establish mechanisms to better assess State fiscal
capacity to respond to disasters; and
    3. Ensure the supplemental nature of FEMA assistance.
    Through these guiding principles, the working group designed an
initial deductible concept that could leverage the Public Assistance
program to recognize risk reduction investments that the States were
already undertaking and to incentivize risk reduction best practices
nationwide as a means to reduce future disaster impacts and costs for
the whole community rather than simply transferring response and
recovery costs from the Federal government to State and local
jurisdictions. The working group also determined further exploration of
the deductible concept should be cognizant of the two primary
criticisms of FEMA's proposed 1986 rulemaking: The failure to recognize
the efforts and expenditures that States were already committing to
disaster response and recovery and the insufficient engagement with key
stakeholders.
    In its 2015 updated response to the GAO recommendations, FEMA
presented three options that it planned to continue investigating:
    1. Adjust the per capita indicator to better reflect current
national and State-specific economic conditions;
    2. Develop an improved methodology for considering factors in
addition to the per capita indicator; and
    3. Implement a State-specific deductible concept for States to
satisfy before qualifying for Public Assistance.
    After further investigation and consideration of the alternatives,
FEMA decided to further develop the deductible concept because of its
relationship to Strategic Priority 4 and its potential for reducing
risk and disaster costs for the whole community through incentivizing
targeted investments. Moving forward, FEMA plans to pursue closeout of
the GAO recommendation through development of the deductible concept
for the Public Assistance program. However, FEMA will continue to
consider alternatives to the deductible concept going forward,
including the GAO's recommendation to significantly increase the
current per capita indicator as described in Sections III and VI(A).

IV. Advance Notice of Proposed Rulemaking

    FEMA issued the ANPRM to introduce the deductible concept with the
emergency management community and the public. The ANPRM consisted of
basic background information concerning the declarations process and a
very high-level overview of a deductible concept. In keeping with the
preliminary and developmental state of the concept at that time, the
ANPRM offered few specifics concerning the

organization or implementation of a deductible. Chiefly, the ANPRM
included an extensive list of questions that FEMA was seeking to answer
regarding how a deductible program could be best structured and applied
to achieve the principles outlined above. These questions were wide
ranging in specificity to address all potential aspects of the
deductible concept. FEMA presented these questions in an impartial
manner to solicit as many relevant responses as possible. This was
effective in generating varied responses to questions upon which
opinions differed, but in many cases commenters noted it was difficult
if not impossible to answer specific questions without a more detailed
description of the deductible concept. As a result, commenters provided
more general and conceptual responses to the questions asked. FEMA
believes that it would have benefited from receiving more specific and
detailed feedback, and that the information contained in those types of
comments would have been very helpful to the rulemaking process.
    In all, FEMA received approximately 150 comments on the ANPRM.\44\
These comments came from 35 entities representing 28 individual States,
28 local jurisdictions, and 2 Indian Tribal Nations. FEMA also received
comments from 19 professional industry groups, 3 governmental
associations, and 9 research and policy organizations.
---------------------------------------------------------------------------

    \44\ The comments can be viewed on the docket for this
rulemaking at www.regulations.gov under docket ID FEMA-2016-0003.
---------------------------------------------------------------------------

    FEMA reviewed the comments that were received and incorporated the
concerns and suggestions into the potential deductible program
presented in this SANPRM. FEMA noted many concerns in the comments
regarding how the deductible could be applied, or the burdens, either
financial or administrative, that it could create for the States. FEMA
addressed these concerns in the design concept. In other cases, it was
clear that FEMA had not provided enough background information for
commenters to offer practicable suggestions. Some comments may have
benefited from FEMA providing additional explanation of the current
disaster declaration processes, more specificity regarding the Public
Assistance program, and a more expansive description of the deductible
concept itself. FEMA concluded that it had not offered sufficient
information in the ANPRM to enable the public to fully participate in
commenting on all aspects of the concept. Consequently, FEMA is
providing the public more detail on its concept for a deductible
program in this SANPRM.
    Notwithstanding the limitations on specificity in the ANPRM, FEMA
received support for the concept as a means by which to achieve the
goals of reducing disaster impacts and costs through improved
preparedness activities and expanded investments in mitigation and risk
reduction. Many commenters pointed out that the deductible program
could be a preferred outcome compared to increasing the per capita
indicator and the potential transfer of financial responsibility to
State and local governments that would result. Some commenters found
merit in the deductible concept as a way through which to reduce costs,
but also to improve disaster resiliency by investing before an incident
and incurring reduced costs related to response and recovery over the
long term.
    In addition to seeking comment via the ANPRM, FEMA continued to
conduct research to inform the design of the deductible concept. FEMA
recognizes that establishing the methodology for calculating the
deductible in an equitable, accurate, and transparent way is essential
to any future deductible proposal. Further, for any approach to sustain
the rigors of analytic and economic review, FEMA recognized that it
would benefit from leveraging external expertise to better develop a
methodology that was defensible and reproducible.
    With the assistance of the Department of Homeland Security (DHS)
Science and Technology Directorate's Office of University Programs,
FEMA contracted with the Center for Risk and the Economic Analysis of
Terrorism Events (CREATE), a DHS Center of Excellence, to support
development of the deductible calculation. CREATE is known for its
experience in hazard assessment research, as well as statistical and
economic modeling capabilities. CREATE dedicated a team of research and
academic experts to develop a reliable methodology for calculating a
deductible that is cognizant of the principles established by the FEMA
working group; namely that the proposed formula be reflective of the
individual capabilities and risks unique to each State and that the
calculus function in a transparent and replicable way utilizing
publically available information and data.
    FEMA also contracted with a leading emergency management consulting
firm to conduct additional research pertinent to developing the
deductible. With the assistance of the National Emergency Management
Association, this firm reached out to nine States on FEMA's behalf to
assist those States with identifying information pertinent to the
development of the deductible concept.\45\ At the next stage of
development, FEMA will make every effort to gather data from a larger
sample of States, preferably all States, so that the proposal may be as
representative as possible. FEMA also invites States to specifically
correct any erroneous assumptions made for purposes of developing this
SANPRM deductible concept during the comment period.
---------------------------------------------------------------------------

    \45\ The States contacted were California, Florida, Minnesota,
New York, Pennsylvania, Texas, Washington, Wyoming, and Vermont.
---------------------------------------------------------------------------

    Specifically, the consulting firm assisted FEMA with understanding
the methods and strategies currently used by these nine States to pay
for the costs of emergency management programs, mitigation initiatives,
and disaster response and recovery. The firm also researched innovative
preparedness programs that the nine States have developed to further
encourage planning and resiliency-building, such as tax credit
incentive programs for individuals, localities, and State entities.
    FEMA primarily used the information it obtained from the consulting
firm to estimate baselines of current State investments that FEMA then
used to set initial credit approvals at levels likely to encourage
additional investment and program growth. FEMA also leveraged the
information to assist in preparing targeted outreach efforts during the
comment period of the ANRPM, such as those held with the National
Governor's Association, the National Association of Counties, the
National Emergency Management Association, Big City Emergency Managers,
National League of Cities, and the International Association of
Emergency Managers. These targeted engagements enabled FEMA to draw
attention to the ANPRM, explain the purpose and background of the
deductible concept with key stakeholders, and to solicit additional
details that could be particularly pertinent to informing FEMA's
deductible design considerations.
    Following closure of the ANPRM comment period, FEMA compiled the
comments received, the research performed by CREATE, and the research
on State disaster funding and incentive programs and formulated the
potential deductible program concept described in this SANPRM.
    FEMA believes that this deductible concept is capable of
meaningfully reducing the nation's overall risk profile over time.
Calculating a deductible is, however, complex. FEMA also

understands a deductible could be a significant change to FEMA's
largest supplemental disaster assistance program. FEMA is therefore
committed to continuing to dialogue with its emergency management
partners on how best to design a program that will achieve mutually-
beneficial goals without the undue transfer of responsibility or the
creation of unnecessarily burdensome administrative bureaucracy.

V. Potential Deductible Program

A. Calculation Methodology

    There is innate uncertainty in the likelihood of disaster events
that prevents perfection in a deductible concept and complicates a
complete understanding of the complex disaster environment within which
the deductible program would operate. However, not unlike the
commercial insurance markets, these uncertainties can be quantified and
analyzed over geographic areas and over long periods of time with
increasing precision. These calculations could be used to approximate
the relative exposure of certain regions, in this case the States, to
future disaster costs. These estimates could then be reflected in the
relative value of a State's deductible.
    Arriving at a calculation methodology is thus one of the most
critical aspects of moving the deductible program beyond the conceptual
stage and requires public comment. FEMA believes that the methodology
should be transparent, reproducible, defensible, and equitable.
Additionally, FEMA believes that the approach should reflect
fundamental purposes of the Stafford Act, namely that the Federal
government support those States that are overwhelmed by the response to
and recovery from a natural disaster. Therefore, it is most appropriate
to calculate each State's deductible based upon the aspects of fiscal
capacity and disaster risk that are unique to the State. FEMA could do
this through a four-step process: (1) Establishing the base deductible,
(2) calculating the fiscal capacity index, (3) calculating the risk
index, and (4) normalizing the deductible amounts. FEMA has included a
step-by-step table in the rulemaking docket that demonstrates how each
State's starting deductible amount was calculated for purposes of this
SANPRM. That table and those deductible amounts are included only as an
example of how the deductible concept may function. If implemented, the
actual deductible amounts will be dictated by the parameters of the
proposal ultimately adopted.

B. Establishing the Base Deductible

    As with the rest of the SANPRM all numbers, figures, criteria and
processes detailed in this section are notional. They are intended to
aid the public in understanding how a potential deductible program
could operate and to spur discussion and feedback.
    FEMA begins its conceptual methodology by establishing an annual
base deductible that would be shared nationwide (i.e., the same amount
for each State), and would then be increased or decreased for each
State based upon a State's fiscal capacity and risk profile relative to
the other States. FEMA utilized historic annual amounts of Public
Assistance provided to States to establish the model base deductible.
Although FEMA hopes to incentivize risk reduction and resilience that
could reduce overall disaster impacts and costs, not solely those
eligible for reimbursement through the Public Assistance program, FEMA
believes it is important that the base deductible for the Public
Assistance program shares a nexus with the program itself.\46\
---------------------------------------------------------------------------

    \46\ See generally Section 406 of the Stafford Act which
authorizes FEMA to provide funding to assist State, territorial,
Tribal and local governments, as well as certain private nonprofit
organizations that provide governmental-type services, with the
restoration of disaster damaged infrastructure. Because this
underlying authority for the program is for public infrastructure,
FEMA believes that it is important that the deductible remains
connected to Public Assistance funding for that infrastructure.
---------------------------------------------------------------------------

    As developed by FEMA, the base deductible utilized in this
conceptual model is the median average amount of Public Assistance
received across all 50 States in the past 17 years.\47\ FEMA summed the
total amount of Public Assistance delivered to each State from 1999 to
2015 and then divided by 17 to determine the per State average annual
amount of Public Assistance. FEMA then created a ranked list of those
average amounts and determined the median value. Because there are 50
States, the median value is the average of the results for the States
situated at the 25th and 26th positions, which was 22,202,726. FEMA
rounded the median average amount to 22.2M and imputed this amount to
every State as the initial base deductible for the subsequent year.
---------------------------------------------------------------------------

    \47\ FEMA used Public Assistance data from 1999 to 2015 adjusted
for inflation to 2015 dollars where necessary using the Consumer
Price Index inflation calculator provided by the Bureau of Labor
Statistics and available at http://www.bls.gov/data/inflation_calculator.htm. Prior to 1999, FEMA utilized a data
management process that was different from the current system.
Furthermore, prior to 1999, FEMA had different policies in place
that would have also affected the way that Public Assistance was
awarded. The data from the 1999-2015 period is the most reliable
that FEMA has available. FEMA expects to add additional data to the
calculation each year to increase accuracy over time and to account
for long-term shifts in Public Assistance, rather than using a
rolling window of data for the annual calculation. This will also
limit the impact of any outlier years in terms of Public Assistance
awards, both for high and low extremes.
---------------------------------------------------------------------------

    FEMA believes that this may be a reasonable approach to
establishing a base deductible because it would leverage approximately
25 percent of the average amount that FEMA awards in Public Assistance
each year to incentivize reducing risk. Based on comments received in
response to the ANPRM, FEMA believes that States are already making
investments that would offset a portion of this amount through credits.
By adjusting each State's base deductible amount to account for its
individual risk and fiscal capacity, as described in the subsequent
subsections, this approach could yield a meaningful deductible amount
for each State, while still providing the greatest incentive to States
that have the greatest potential for effectively reducing risk and
future disaster costs. FEMA believes this could balance the potential
benefits of the disaster deductible program with the need to continue
supporting our State partners when disasters exceed their capabilities.
See Table 4 for a breakdown of the cumulative and average amount of
Public Assistance that each State received from 1999 through 2015.

                            Table 4--State Rank of Federal Assistance From 1999-2015
                                                [In 2015 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                  Total federal share     Annual average federal
           No.                            State                  obligated (1999-2015)       share obligated
----------------------------------------------------------------------------------------------------------------
1........................  New York...........................          $21,671,388,334           $1,274,787,549
2........................  Louisiana..........................           16,621,415,286              977,730,311
3........................  Florida............................            6,399,822,001              376,460,118

4........................  Mississippi........................            4,180,836,633              245,931,567
5........................  Texas..............................            4,094,422,168              240,848,363
6........................  New Jersey.........................            2,357,737,579              138,690,446
7........................  Iowa...............................            1,826,578,453              107,445,791
8........................  California.........................            1,437,292,282               84,546,605
9........................  Oklahoma...........................            1,131,691,340               66,570,079
10.......................  Kansas.............................            1,080,772,444               63,574,850
11.......................  North Carolina.....................              953,206,418               56,070,966
12.......................  Missouri...........................              888,379,570               52,257,622
13.......................  Alabama............................              841,956,023               49,526,825
14.......................  Arkansas...........................              744,651,963               43,803,057
15.......................  North Dakota.......................              679,833,405               39,990,200
16.......................  Virginia...........................              643,863,349               37,874,315
17.......................  Kentucky...........................              615,307,272               36,194,545
18.......................  Tennessee..........................              602,295,312               35,429,136
19.......................  Pennsylvania.......................              557,230,633               32,778,273
20.......................  Nebraska...........................              435,308,536               25,606,384
21.......................  Washington.........................              428,584,871               25,210,875
22.......................  Minnesota..........................              426,982,553               25,116,621
23.......................  Massachusetts......................              422,663,583               24,862,564
24.......................  Colorado...........................              408,338,653               24,019,921
25.......................  South Carolina.....................              384,041,986               22,590,705
M........................  Median.............................              377,446,341               22,202,726
26.......................  Ohio...............................              370,850,697               21,814,747
27.......................  Georgia............................              328,820,892               19,342,405
28.......................  West Virginia......................              311,011,683               18,294,805
29.......................  Illinois...........................              309,990,918               18,234,760
30.......................  Vermont............................              297,996,556               17,529,209
31.......................  Connecticut........................              284,870,352               16,757,080
32.......................  South Dakota.......................              284,612,022               16,741,884
33.......................  New Mexico.........................              274,303,673               16,135,510
34.......................  Maryland...........................              265,115,281               15,595,017
35.......................  Indiana............................              237,955,033               13,997,355
36.......................  Alaska.............................              203,258,189               11,956,364
37.......................  Wisconsin..........................              174,472,096               10,263,064
38.......................  Oregon.............................              144,641,218                8,508,307
39.......................  New Hampshire......................              137,674,702                8,098,512
40.......................  Maine..............................               91,683,905                5,393,171
41.......................  Hawaii.............................               87,697,345                5,158,667
42.......................  Montana............................               70,196,126                4,129,184
43.......................  Arizona............................               68,642,964                4,037,821
44.......................  Rhode Island.......................               63,361,303                3,727,135
45.......................  Michigan...........................               42,583,629                2,504,919
46.......................  Delaware...........................               39,007,437                2,294,555
47.......................  Utah...............................               34,208,312                2,012,254
48.......................  Nevada.............................               30,275,261                1,780,898
49.......................  Wyoming............................               12,973,750                  763,162
50.......................  Idaho..............................               11,695,737                  687,985
----------------------------------------------------------------------------------------------------------------

    After establishing this base deductible that is shared by every
State, FEMA differentiated the States and ascribed individual
deductibles according to each State's relative fiscal capacity and
unique disaster risk profile. Fiscal capacity is important because the
intent of FEMA's Stafford Act programs, including Public Assistance, is
to supplement the capabilities of State and local jurisdictions.
Disaster risk is important because it is the primary driver of Public
Assistance expenditures and its reduction is the primary purpose of the
deductible concept.
    Because FEMA is seeking to reduce risk through the deductible, and
it is precisely through this risk reduction that the nation could
realize the promise of the deductible program in decreasing disaster
impacts and costs, FEMA has considered in this calculation prioritizing
the risk portion of the deductible calculation by a ratio of 3:1
compared to the fiscal capacity portion. In other words, when a State's
base deductible is adjusted, 75 percent of the adjustment results from
the State's relative risk profile and the remaining 25 percent stems
from the State's relative fiscal capacity.

C. Calculating the Fiscal Capacity Index

    As with the rest of the SANPRM all numbers, figures, criteria and
processes detailed in this section are notional. They are intended to
aid the public in understanding how a potential deductible program
could operate and to spur discussion and feedback.
    To calculate a State's relative fiscal capacity, FEMA, with the
assistance of CREATE, developed a composite of four individual fiscal
capacity indices. FEMA and CREATE considered multiple potential
indicators of fiscal capacity. The four indicators selected to

comprise the composite fiscal capacity index were each determined to
represent a separate and distinct aspect of a State's economy and
governmental resources; however. FEMA welcomes comment on whether these
are the best indicators to leverage and whether there are others that
should be considered as well. The four fiscal capacity indices that
FEMA includes in the model deductible calculation are based on each
State's per capita Total Taxable Resources (TTR), per capita surplus/
deficit, per capita reserve funding, and the State's bond rating. FEMA
will use the most recent indices.
    TTR is an annual measure of fiscal capacity calculated by the
United States Department of Treasury.\48\ Essentially, TTR considers
all of the income streams available within each State, including gross
domestic product, corporate withheld earnings, and other capturable
revenue. TTR does not measure how much revenue a State actually
captures, but instead, measures how much revenue, in real dollars, a
State has access to as compared to other States. As a per capita index,
the State's total TTR in real dollars is then divided by the State's
population. This places high-population States on equal footing with
low-population States with regard to the index.
---------------------------------------------------------------------------

    \48\ Additional information regarding Total Taxable Resources
(TTR), including the methods for calculating and the current TTR
estimates, can be found on the Web site of the Department of the
Treasury at https://www.treasury.gov/resource-center/economic-policy/taxable-resources/Pages/Total-Taxable-Resources.aspx.
---------------------------------------------------------------------------

    The surplus/deficit and the reserve fund indices operate in similar
fashion. In each case, the State's value (surplus/deficit or reserve)
is divided by the State's population. That amount is then compared with
the per capita value of the median State. This creates indices of
relative strength for each.
    The surplus/deficit index is built using data provided by the
Annual Survey of State Government Finances provided by the United
States Census Bureau of the Department of Commerce.\49\ The reserve
fund index is built using data provided by the Fiscal Survey of the
States conducted regularly by NASBO.\50\ FEMA believes that both the
surplus or deficit that a State is running and the amount of funding
that a State holds in reserve are relevant indicators of a State's
overall fiscal well-being and ability to independently address the
financial costs of disasters.
---------------------------------------------------------------------------

    \49\ Additional information concerning the Annual Survey of
State Government Finances, including the survey methodology and
latest survey results, can be found on the Web site of the United
States Census Bureau at https://www.census.gov/govs/state/.
    \50\ Additional information concerning the Fiscal Survey of
States, including the survey methodology and latest survey results,
can be found on the Web site of the National Association of State
Budget Officers at https://www.nasbo.org/mainsite/reports-data/fiscal-survey-of-states.
---------------------------------------------------------------------------

    Finally, the bond rating index is similarly calculated by dividing
the State's bond rating by the median State's bond rating. In this
model, FEMA calculates the bond rating index based upon data provided
by the Pew Charitable Trusts from Standard & Poor's State Credit
Ratings.\51\ FEMA believes that the resulting relative index is an
indicative proxy of the State's ability to quickly raise the funding
liquidity necessary to respond to and recover from disaster incidents.
---------------------------------------------------------------------------

    \51\ Additional information concerning the data provided by the
Pew Charitable Trusts can be found on their Web site at http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2014/06/09/sp-ratings-2014.
---------------------------------------------------------------------------

    FEMA averaged these four indices of relative fiscal strength into a
consolidated fiscal capacity index, each factor being equally weighted.
This index accounts for 25 percent of a State's base deductible
adjustment. However, FEMA also realized that, due to diversity in
economic drivers and varying population sizes, some States may
demonstrate a particular fiscal capacity indicator that is a
statistical outlier compared with its other factors and the indicators
of other States. To minimize the impact of these outliers on the
disaster deductible formula, FEMA capped the impact of any individual
fiscal capacity indicator at five times the median State's relative
strength. In other words, if the median State's per capita reserve fund
is $100 and is ascribed a value of 1.0 on the index, a State with an
outlier per capita reserve fund value of $800 could be imputed the
maximum per capita reserve fund value of $500, and therefore still
receive an index value of 5.0, instead of the 8.0 index value that
could otherwise be warranted. FEMA capped each fiscal capacity
indicators in this way to contain the variability of the overall index
and smooth the impact on outlier States.

D. Calculating the Composite Risk Index

    As with the rest of the SANPRM, all numbers, figures, criteria and
processes detailed in this section are notional. They are intended to
aid the public in understanding how a potential deductible program
could operate and to spur discussion and feedback.
    FEMA explored multiple leading alternatives for predicting disaster
losses. For the model described in this SANPRM, FEMA used an Average
Annualized Loss (AAL) methodology for calculating each State's relative
disaster risk level.
    AAL is a proxy for risk commonly used in risk modeling that
considers the expected losses from a particular hazard per year when
averaged over many years. Generally, AAL is calculated by multiplying
the likelihood of the hazard occurring in a particular year by the
likely cost of the event if it does occur. For example, if the
likelihood of a hazard occurring is 0.2 percent, such as for a 500-year
event, and the likely loss generated by that level of event is $1
billion, the AAL for the hazard in the vulnerable area would be $2
million ($1B x 0.002).\52\
---------------------------------------------------------------------------

    \52\ A 500-year event is an event that has the statistical
likelihood of occurring once every 500 years, or in other words, a 1
in 500 chance (0.2%).
---------------------------------------------------------------------------

    There are numerous sources of AAL data for hazards. Proprietary
catastrophic risk models developed by companies such as AIR Worldwide
(AIR), Risk Management Solutions (RMS), and CoreLogic (EQECAT) are
three primary sources of AAL and risk information used by the
reinsurance industry.\53\ FEMA considered these sources, but did not
pursue them due to the proprietary, closed nature of the underlying
risk models. Instead, FEMA used the AAL values produced using FEMA's
Hazus platform.
---------------------------------------------------------------------------

    \53\ A short discussion about catastrophic modeling and a
description of the three proprietary AAL models identified here can
be found on the Marsh, LLC Web site at https://www.marsh.com/content/dam/marsh/Documents/PDF/US-en/Marsh-Insights-Property-Fall-2012.pdf.
---------------------------------------------------------------------------

    Hazus is a nationally applicable standardized methodology that
contains models for estimating potential losses from earthquakes,
floods, and hurricanes. Hazus uses Geographic Information Systems (GIS)
technology to estimate physical, economic, and social impacts of
disasters.\54\ FEMA used AAL estimates generated using Hazus because it
is a well-established and familiar platform for many emergency managers
and, most importantly, it is an open-source platform that will provide
complete transparency to stakeholders concerning FEMA's deductible
calculations.
---------------------------------------------------------------------------

    \54\ For additional information, visit FEMA's Hazus Web site at
http://www.fema.gov/hazus.
---------------------------------------------------------------------------

    FEMA used the Hazus-based AAL estimates to create a simplified risk
index for each State. Specifically, FEMA summed the most recently
available AAL estimates \55\ for each State for each

of the three Hazus hazards: Earthquakes,\56\ floods (both coastal and
riverine),\57\ and hurricanes (wind only).\58\ Collectively, these
three hazards accounted for more than 75 percent of all Public
Assistance awarded during the 10-year period between 2005 and 2014.
---------------------------------------------------------------------------

    \55\ FEMA uses estimates of AAL generated using FEMA's Hazus
software. Cited AAL estimates were inflation-adjusted to 2015
dollars where necessary using the Consumer Price Index inflation
calculator provided by the Bureau of Labor Statistics and available
at http://www.bls.gov/data/inflation_calculator.htm.
    \56\ KS Jaiswal, et al. (2015). Estimating Annualized Earthquake
Losses for the Conterminous United States. Earthquake Spectra:
December 2015, Vol. 31, No. S1, pp. S221-S243. FEMA is unable to
post a copy of the document in the docket due to copyright
restrictions. A summary of the document and purchase information is
available at http://dx.doi.org/10.1193/010915EQS005M.
    \57\ Hazus AAL results for flood (coastal and riverine) are
available at https://data.femadata.com/Hazus/FloodProjects/AAL/StateAAL_proj.zip and http://www.arcgis.com/home/item.html?id=cb8228309e9d405ca6b4db6027df36d9. Accessed June 2,
2016. Note that Hazus flood AAL estimates are not available for
Hawaii and Alaska; these losses are estimated by indexing against
National Oceanic and Atmospheric Administration (NOAA) flood loss
estimates from 2011-2014, available at http://www.nws.noaa.gov/hic/summaries/.
    \58\ FEMA Mitigation Directorate, Hazus-MH Estimated Annualized
Hurricane Losses for the United States (unpublished draft report),
September 2006.
---------------------------------------------------------------------------

    FEMA created a composite risk index around the median cumulative
AAL. FEMA arranged each State's cumulative AAL (the sum of the State's
earthquake, flooding, and hurricane AALs) in order from the largest
cumulative AAL to the smallest. Because there is an even number of
States, FEMA averaged the cumulative AALs of the States in the 25th and
26th positions to determine the overall median cumulative AAL. FEMA
assigned this amount a value of 1.0 and indexed each State's relative
cumulative AAL to determine the State's risk index score.
    For example, consider a State with the following Hazus-based AALs:

Hurricane: $875 million
Flooding: $2 billion
Earthquake: $25 million

    Cumulative: $2.9 billion (Hurricane AAL + Flooding AAL + Earthquake
AAL) FEMA conducted the same calculation for each State and then
ordered them from largest to smallest in terms of each State's
cumulative AAL.
    If the median cumulative AAL across all of the States is $1.45
billion, that would be ascribed a score of 1.0 on the risk index, the
hypothetical State above would receive a risk index score of 2.0
because its cumulative AAL is twice as large as the median cumulative
AAL ($2.9 billion versus $1.45 billion, respectively). For purposes of
calculating the State's Public Assistance deductible, the State could
be considered to have twice the risk of the median State.
    The AALs produced using Hazus vary from State to State depending
upon the types of hazards that each State is prone to and the levels of
loss that those hazards have the ability to create in those States.
Consequently, the per capita cumulative AALs are not evenly distributed
across the States and a few States have higher risk index scores
because of that. Every State should be assigned a deductible that is
reasonable and achievable. In this model, FEMA capped the composite
risk index values in a manner similar to the way FEMA capped the
components of the fiscal capacity index.
    FEMA capped the fiscal capacity components at a value of 5.0. This
means that FEMA ignored any computed fiscal capacity that is greater
than five times the median State's fiscal capacity for that factor.
Because of the overall emphasis on risk, and similar to the deductible
formula ratio of 3:1 risk to fiscal capacity, FEMA capped a State's
risk index at a score of 15.0. In other words, FEMA ignored any
calculated risk that is in excess of 15 times the risk of the median
State.

E. Normalizing the Deductible Amounts

    As with the rest of the SANPRM, all numbers, figures, criteria and
processes detailed in this section are notional. They are intended to
aid the public in understanding how a potential deductible program
could operate and to spur discussion and feedback.
    FEMA used the base deductible, composite risk index, and fiscal
capacity index established above to calculate the post-indexed
deductible value for each State. As explained previously, 75 percent of
the total index adjustment to the base deductible is determined by the
State's relative risk profile and the remaining 25 percent is
determined by the State's relative fiscal capacity. For the final step
in the deductible calculation process, FEMA normalized the post-indexed
values to establish each State's final deductible amount. Normalization
is a statistical term that can mean different things in different
contexts. In the case of the deductible, FEMA uses normalization to
mean adjusting the post-indexed values to equal the pre-indexed values
overall.
    Specifically, FEMA multiplied the base deductible that it
established in the first step by 50 to establish the overall deductible
ceiling for the 50 States. FEMA then summed all of the post-indexed
deductible values of each State. If the sum of these post-indexed
values exceeded the deductible ceiling established by the base
deductible, FEMA made a downward adjustment to each State's post-
indexed deductible so that its final amount remained the same relative
to every other State, but so that the sum of all of the States' post-
indexed deductibles equaled the base deductible ceiling.
    For example, assume that the base deductible is calculated to be
$25 million. This is the amount that each State begins with prior to
the application of the fiscal capacity index and risk index. FEMA
multiplies the base deductible ($25 million) by 50 to calculate the
cumulative deductible ceiling for that year. In this case the
deductible ceiling would be $1.25 billion for the year ($25 million x
50 = $1.25 billion).
    If, after applying the indices to each State's base deductible, the
sum of all of the resulting, post-indexed deductibles exceeded the
$1.25 billion dollar ceiling, FEMA would normalize the deductible
amounts so that the sum of all of them equals $1.25 billion. This would
decrease the final deductible amounts of every State, but each State
would remain in the same position relative to every other State. If a
State had a post-indexed deductible that was twice that of another
State that State would still have a final deductible that was twice the
deductible of the other State, but both final deductibles would be
lower.
    Normalization is a common statistical approach for addressing
variations that occur when adjustments are made to values through
indices of relativity, which both the fiscal capacity and risk index
are. This important step could ensure that the Public Assistance
deductibles remain rooted in their nexus to the Public Assistance
program. This final step, normalization, will establish the Starting
Deductible for each state.

F. Calculating Each State's Starting Deductible

    As with the rest of the SANPRM, all numbers, figures, criteria and
processes detailed in this section are notional. They are intended to
aid the public in understanding how a potential deductible program
could operate and to spur discussion and feedback.
    As summarized above, the base deductible will be multiplied by the
sum of: 0.75 multiplied by the State's Composite Risk Index and 0.25
multiplied by the State's Composite Fiscal Capacity Index. That
calculation establishes an adjusted deductible for each State. FEMA
will then normalize the adjusted deductibles to ensure that the total
sum of all of the adjusted deductibles equals the sum of the base
deductibles. This methodology yields

the following model normalized deductibles for each State in 2016:

                Table 5--Model 2016 Starting Deductibles
------------------------------------------------------------------------
                                                             Starting
                          State                             deductible
                                                               ($M)
------------------------------------------------------------------------
Alabama.................................................          $12.96
Alaska..................................................           19.42
Arizona.................................................           18.67
Arkansas................................................            8.01
California..............................................          141.03
Colorado................................................            7.08
Connecticut.............................................           20.85
Delaware................................................            8.03
Florida.................................................          141.53
Georgia.................................................           17.65
Hawaii..................................................            9.17
Idaho...................................................            7.68
Illinois................................................           14.43
Indiana.................................................           12.23
Iowa....................................................           10.63
Kansas..................................................            9.54
Kentucky................................................            9.47
Louisiana...............................................           73.90
Maine...................................................            8.52
Maryland................................................            9.26
Massachusetts...........................................           30.34
Michigan................................................           23.20
Minnesota...............................................            9.44
Mississippi.............................................           13.32
Missouri................................................           11.38
Montana.................................................            6.23
Nebraska................................................            9.93
Nevada..................................................            8.81
New Hampshire...........................................            7.92
New Jersey..............................................           29.28
New Mexico..............................................           11.11
New York................................................           51.70
North Carolina..........................................           17.50
North Dakota............................................           10.09
Ohio....................................................           25.86
Oklahoma................................................           10.40
Oregon..................................................           24.62
Pennsylvania............................................           21.88
Rhode Island............................................           12.30
South Carolina..........................................           11.60
South Dakota............................................            8.25
Tennessee...............................................           16.68
Texas...................................................           73.72
Utah....................................................            7.73
Vermont.................................................            8.64
Virginia................................................           13.51
Washington..............................................           27.30
West Virginia...........................................           23.39
Wisconsin...............................................           13.50
Wyoming.................................................           10.47
                                                         ---------------
    Average.............................................           22.20
    Median..............................................           12.26
    Minimum.............................................            6.23
    Maximum.............................................          141.53
------------------------------------------------------------------------

    These deductibles represent FEMA's assessment of each State's
fiscal capacity and risk profile as of 2016. FEMA has included a table
in the rulemaking docket for this SANPRM that shows every step for each
State with regard to how these notional deductibles were calculated for
purposes of this concept. These deductibles would be reduced by any
credits that FEMA approves for the State pursuant to the annual
deductible credit menu. The following section will detail the types of
credits that FEMA expects to initially offer.

G. Credit Structure

    As with the rest of the SANPRM all numbers, figures, criteria and
processes detailed in this section are notional. They are intended to
aid the public in understanding how a potential deductible program
could operate and to spur discussion and feedback.
    A potential credit structure could offer States the ability to
partially or fully satisfy their deductible in advance of a major
disaster declaration. While simply raising the per capita indicator to
qualify for Public Assistance would reduce Federal costs, a potential
credit structure, if successful, could eventually deliver the true
benefits of reduced risk and realized disaster response and recovery
cost savings nationwide. FEMA's goal is to design a model credit
structure that would create financial and economic incentives for
meaningful State investments in preparedness and risk-reduction
measures.
    FEMA believes that the model credit structure described in this
SANPRM would allow every State to earn credits for activities that each
would already be undertaking, and also improve risk reduction and
resilience building for States that choose to expand those activities.
To that end, the deductible model described in this SANPRM includes
seven potential categories of credits.
    Due to the differences among the credit categories and their likely
effects upon reducing risk, each category offers a unique credit-to-
cost ratio, and a few have caps to provide States with an opportunity
to develop a potentially diverse portfolio of risk reduction
strategies.
    FEMA would monitor which credits States elect to earn and would
continue to refine its credit offerings each year. FEMA would provide
an annual notice of credit offerings so that States would have ample
opportunity to carefully consider all of their options. FEMA would also
continue to engage with the States and with key intergovernmental
organizations to ensure that the credit structure is calibrated to
provide the right levels of reward to incentivize continuous
improvement for each State in the disaster resilience and emergency
management contexts.
    FEMA recognizes that any additional program could create some
additional administrative burden to State and Federal governments.
However, FEMA is committed to limiting that burden to successfully
carry out the program and ensure that it is applied effectively. The
following sections detail the administrative steps and timelines
currently envisioned for the program. FEMA has carefully considered
both the likely burden and the likely benefit underlying each of the
seven credit categories and believes that each category represents
potential activities worth pursuing and incentivizing. Each of the
seven credit categories received generally favorable support from those
who commented on the ANPRM. FEMA seeks additional public input on these
categories and on the potential administrative burdens of assembling
the supporting information.
1. Dedicated Funding for Emergency Response/Recovery Activities
    A State that has planned for and taken fiscal steps to address the
financial impacts of potential disasters ahead of time is better
prepared to immediately respond to and to rapidly recover from a major
disaster. FEMA recognizes that States use multiple strategies for
addressing the financial consequences of a disaster, including:
Supplemental State appropriations, issuing recovery bonds, diverting
funding from other State programs or cutting State agency operating
budgets, and imposing special tax assessments to raise recovery
resources. FEMA, however, has also observed that the time required to
enact many of these ad-hoc funding strategies can significantly delay a
State's ability to rapidly respond to a disaster.
    FEMA believes that response and recovery efforts could be improved
if the affected States maintain dedicated disaster relief funds. By
having this funding available, these States also could potentially
obviate the need to reduce or eliminate other planned State services to
divert funding to disaster operations and infrastructure repair. For
example, a State could divert funding for summer roadway maintenance or
improvements to cover debris removal costs following a hurricane or
snow removal costs following a major winter storm. States that maintain
a dedicated disaster relief fund may be able to more rapidly ameliorate
disaster consequences, leverage supplemental Federal assistance
programs, and repair public buildings and infrastructure, without
diverting funding from other important initiatives.
    Furthermore, States without dedicated disaster relief funds could
find themselves in the position of incurring new public obligations, or
in some cases debt, while simultaneously suffering from the tax losses
of disaster-

induced decreased economic activity. By having a dedicated fund
available to address the direct costs of disaster response and damage
restoration, States could be better positioned to address these
secondary disaster consequences.
    In order to incentivize States to take the proactive step of
establishing and funding a dedicated disaster relief fund in advance,
this potential model credit structure includes $1.00 in deductible
credit for every $1.00 of State funding that the State has appropriated
and deposited in a qualifying disaster relief fund during the course of
the previous year. This credit may account for up to 20 percent of the
State's annual deductible. Funds that are carried over or that expire
and are reappropriated for the same limited purpose could still qualify
for the credit.
2. Expenditures for Non-Stafford Act Response and Recovery Activities
    FEMA received multiple comments during the ANPRM comment period
that emphasized that FEMA does not fully understand or appreciate the
amount of investment that States already make in emergency management
and disaster recovery. Commenters pointed out that for every major
disaster declared, that there are multiple smaller incidents that do
not rise to the level of warranting supplemental Federal assistance,
but nonetheless exceed local capabilities and often require State
funding support for response and recovery activities. FEMA seeks to
encourage States to continue providing State-level assistance to
overwhelmed localities, even when Federal assistance may be
unavailable.
    Commenters also noted that counties and cities often lack the
independent ability to raise the necessary financial resources to
address the costs of significant localized impacts. In these cases, the
support provide by their State partners is invaluable to ensuring that
adequate funding is available to support the response and recovery
operations necessary to assist the affected localities and survivors.
Additionally, commenters explained that, even following a major
disaster declaration, supplemental Federal assistance is typically only
made available to the most severely impacted jurisdictions within the
affected State. However, there are other communities that are not
designated, but nonetheless have experienced damage resulting from the
same incident. The commenters postulated that the damage experienced
within these non-declared jurisdictions may nevertheless still exceed
their individual capacities to effectively respond and recover,
necessitating additional support from their State partners. This is,
the commenters offered, an additional burden upon the State that the
current system of Public Assistance does not recognize or incentivize.
    FEMA seeks to preserve and strengthen this important State-local
relationship and to incentivize States to continue providing assistance
when jurisdictional capabilities are exceeded, regardless of the
availability of supplemental Federal assistance. In order to do so,
this potential deductible model includes $1.00 in deductible credit for
every $1.00 of annual State funding that the State expends to respond
and/or recover from an incident that either: (1) Does not receive a
Stafford Act declaration or, (2) affects a locality not designated for
Public Assistance by a major disaster declaration. In either case, the
Governor of the State would be required to declare a State of
emergency, or issue a similar proclamation, pursuant to applicable
State law. In this model, this credit could account for up to 20
percent of the State's annual deductible.
3. Expenditures for Mitigation Activities
    Integral to any effort to lessen the risks associated with and
consequences of disaster is effective mitigation. Mitigation is the act
of lessening or avoiding the impacts of a hazard, typically through
engineered solutions. The linkage between advanced mitigation and
lowering disaster impacts and costs has been demonstrated many times,
both through academia and research, and also in practical application.
    FEMA provides funding assistance for mitigation projects through
several programs, including the Hazard Mitigation Grant Program and the
Pre-Disaster Mitigation Grant Program, as well as to mitigation-
enhanced restoration projects through the Public Assistance program
authorized by Section 406 of the Stafford Act.\59\ FEMA recognizes,
however, that States often invest significantly in mitigation efforts
apart from these Federal assistance programs. FEMA seeks to recognize
those continued investments and incentivize additional investments by
providing significant credit for direct mitigation-related expenditures
through the Public Assistance deductible program.
---------------------------------------------------------------------------

    \59\ 42 U.S.C. 5172.
---------------------------------------------------------------------------

    This model includes $3.00 in deductible credit for every $1.00 in
State spending on qualifying mitigation activities. FEMA will not count
State matching funds toward the calculation of the credit, so therefore
these State expenditures must be either independent of any other
Federal assistance program or must be in excess of the minimum cost-
share requirement of any applicable Federal assistance program. For
purposes of this credit, FEMA defined qualifying mitigation activities
as it does under FEMA's Hazard Mitigation Assistance Guidance.\60\
---------------------------------------------------------------------------

    \60\ See Hazard Mitigation Assistance Guidance, Part III,
section E.1.3.1, available at this link https://www.fema.gov/media-library-data/1424983165449-38f5dfc69c0bd4ea8a161e8bb7b79553/HMA_Guidance_022715_508.pdf.
---------------------------------------------------------------------------

    Due to the importance of incentivizing mitigation activities to the
success of the deductible program in reducing future disaster impacts
and costs nationwide, FEMA is not currently considering capping the
potential mitigation credit that may be earned in this model. In other
words, a State could fully satisfy its annual deductible by investing
at least one-third of its deductible amount in qualifying mitigation
activities each year. This could not only fully satisfy the State's
deductible well in advance of any declaration activity, thereby
eliminating application of the deductible in the State for that year,
but could also deliver the State future savings by reducing the
severity or consequences of forthcoming disasters. FEMA also seeks
comment specifically on whether incentivizing further spending by State
governments using credit mechanisms of mitigation expenditure credits
and non-Stafford expenditure credits could potentially dampen or crowd
out private mitigation expenditures.
4. Insurance Coverage for Public Facilities, Assets, and Infrastructure
    States have choices when it comes to how they elect to address
their disaster risks. Some States have chosen to establish dedicated
disaster relief funds that can be leveraged to address the costs of
disasters without jeopardizing other services and operations. Other
States have elected to purchase third-party insurance to cover some of
those costs, while others have established self-insurance risk pools to
better distribute the risk. Regardless of the choice that is made, FEMA
may choose to encourage pre-disaster financial preparedness through the
deductible program.
    The model FEMA is currently contemplating includes percentage
deductible credits for States that elect to utilize insurance policies
as a means to address future disaster costs. To qualify for credit, the
insurance policy must cover costs related to losses that would
otherwise qualify for reimbursement

assistance through the Public Assistance program. For purposes of the
credit, the policies must provide guaranteed coverage for losses from
natural hazards, fires, explosions, floods, or terrorist attacks. For a
self-insurance fund or risk pool, FEMA would verify through the State
Insurance Commissioner, or similar State official, that the fund or
pool is actuarially sound and solvent.
    This model includes credit based on the aggregate limits of
applicable State policies, rather than on the premiums paid for
coverage. Consequently, FEMA believes that States choosing to insure
against future disaster risk would have very large overall limits, even
though a particular incident would likely only affect a fraction of the
total insured property. For example, if a State maintains $1M policies
on 10 facilities across the State, the aggregate limit of the policy
coverage is $10M, even though it is unlikely that all 10 facilities
will suffer an insured loss at the same time. FEMA believes this could
be a reasonable and equitable approach because both the deductible and
insurance coverage levels should largely be driven by each State's
individual risk profile.
    This model includes a potential three-tier incentive structure for
insurance coverage based upon multiples of each State's annual
deductible amount as follows:

               Table 6--Insurance Coverage Credit Schedule
------------------------------------------------------------------------
                                                              Credit
                     Coverage amount                      (percentage of
                                                            deductible)
------------------------------------------------------------------------
50x Deductible <= Coverage <100x Deductible.............               5
100x Deductible <=Coverage <150x Deductible.............              10
150x Deductible <= Coverage.............................              15
------------------------------------------------------------------------

    For example, if a State has an annual deductible of $30 million and
carries insurance policies on public facilities with an aggregate limit
of $3.6 billion, the State could receive a credit equal to 10 percent
of its initial deductible, or $3 million. This is because $3.6 billion
is 120 times the amount of the State's deductible ($30 million) and is
within the range of 100 to 150 times the deductible that FEMA suggests
should receive a 10 percent credit. This outcome could be the same
whether the State chose to purchase its insurance through third-party
insurers or reinsurers or chose to self-insure and self-manage the
risk. FEMA could confirm coverage level through the insurance contract
or, for self-insurance, through the appropriate State official that the
self-insurance fund is actuarially sound up to the $3.6 billion limit.
Given the specific goal of incentivizing mitigation, FEMA seeks comment
on the inclusion of insurance coverage credits in the deductible model.
5. Building Code Effectiveness Grade Schedule (BCEGS[supreg])
    The Insurance Services Office, Inc. (ISO), a leading provider of
information concerning risk assessment and property and casualty
insurance, has explored the relationship of building codes to risk
reduction. According to a recent ISO report:

    [M]odel building codes have most clearly addressed the hazards
associated with wind, earthquake, and fire. Experts maintain that
buildings constructed according to the requirements of model
building codes suffer fewer losses from those perils. If
municipalities adopt and rigorously enforce up-to-date codes, losses
from other risks (including man-made perils) may also decrease.\61\
---------------------------------------------------------------------------

    \61\ Insurance Services Office, Inc., National Building Code
Assessment Report: ISO's Building Code Effectiveness Grading
Schedule (2015), 8, available at https://www.isomitigation.com/downloads/ISO-BCEGS-State-Report_web.pdf.

FEMA agrees with the ISO's analysis that building codes, when adopted
and properly enforced, have the ability to reduce future disaster risk
on a broad scale. Consequently, in this model FEMA incorporated
deductible credits to States that have committed to adopting,
promoting, and enforcing building codes.
    This model includes an escalating credit structure that provides
moderate incentive to simply participate in ISO's Building Code
Effectiveness Grading Schedule (BCEGS[supreg]) program and increasing
incentives as States reach higher levels of adoption and enforcement.
ISO provides BCEGS[supreg] scores for both residential and commercial
codes and enforcement, each on an improving scale from 10 to 1. In
2015, over 60 percent of States had BCEGS[supreg] scores of 4 or 5 in
each category.
    The following model incentive structure is based on each State's
annual BCEGS[supreg] score for both residential and commercial building
codes:

                     Table 7--BCEGS Credit Schedule
------------------------------------------------------------------------
                                            Residential     Commercial
                                              credit          credit
           BCEGS[supreg] score            (percentage of  (percentage of
                                            deductible)     deductible)
------------------------------------------------------------------------
1.......................................              20              20
2.......................................              15              15
3.......................................              12              12
4.......................................               9               9
5.......................................               8               8
6.......................................               6               6
7.......................................               5               5
8.......................................               4               4
9.......................................               3               3
10......................................               2               2
------------------------------------------------------------------------

    This structure could allow States to earn between 4 percent and 40
percent credits based upon their residential and commercial
BCEGS[supreg] scores. As of 2015, 45 States participate in the
BCEGS[supreg] program and could have received, at a minimum, the 4
percent credit for doing so under this structure. Based on 2015 scores,
the average participating State could receive a 16 percent reduction to
their deductible amount. The smallest credit would have been 7 percent
and the largest would have been 24 percent. The following chart depicts
the number of States per credit level in 2015.

[GRAPHIC] [TIFF OMITTED] TP12JA17.023

6. Tax Incentive Programs
    FEMA recognizes that the most effective ways to reduce risk across
the entire nation employ a whole-community approach that involves every
level of government, the private sector, and the citizenry in taking
steps to promote and increase resilience. With that in mind, FEMA
included in this model credit to States for tax-incentive programs
designed to encourage preparedness or mitigation activities.
    For example, a State may offer an income tax credit for elevating
homes or host a sales-tax holiday for personal preparedness supplies.
FEMA would defer to the States to decide what types of programs would
be most successful and appropriate given each State's unique
considerations and risks, however the program would still need to
maintain a clear nexus with preparedness, mitigation, or resilience
building. In some cases, a State may offer a program that incentivizes
general preparedness, or it may decide to target a program to a
specific hazard, such as the installation of hurricane straps or
seismic retrofits to existing building foundations.
    Regardless, this model includes credits to States for these types
of innovative tax incentive programs. FEMA would allow States to
request credit for both the direct costs of the program
(administration, advertising, etc.), and for the indirect costs, such
as forgone tax revenue. In both cases, FEMA would approve $2.00 in
deductible credit for every $1.00 in State funding expended or
foregone.
    Because FEMA sees this credit as a type of whole-community risk
reduction, in this model FEMA is not currently including a cap on this
particular credit. In other words, a State with a large enough tax
incentivize program(s) could largely offset its deductible by annually
foregoing tax revenue, through credits/deductions offered to businesses
and/or citizens, equal to half of its deductible amount. FEMA
specifically requests comment on the types of tax incentive programs
that have a nexus to preparedness and disaster risk reduction and their
effectiveness, both in terms of cost effectiveness and outcome
effectiveness.
7. Expenditures on State Emergency Management Programs
    Perhaps the most visible factor in a State's ability to address
disasters in the broad sense is the quality of its emergency management
program. States have organized their emergency management function in a
number of different ways. In some States, emergency management is a
standalone office, whereas in other States the function is embedded in
a broader public safety or military organization.
    The Federal government provides numerous types of assistance to
States to develop, maintain, and implement their emergency management
programs. At FEMA, assistance is generally available through the
Emergency Management Performance Grant Program,\62\ the Homeland
Security Grant Program,\63\ including both the State Homeland Security
Program \64\ and the Urban Area Security Initiative,\65\ and through
management costs awarded in administering Stafford Act declarations.
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    \62\ 6 U.S.C. 762.
    \63\ 6 U.S.C. 603.
    \64\ 6 U.S.C. 605.
    \65\ 6 U.S.C. 604.
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    In order to further incentivize States to allocate their own
resources to their emergency management enterprises, this model
includes a deductible credit for annual State expenditures supporting
State emergency management programs beyond any cost-share required by a
Federal assistance program or grant. FEMA solicits comments on what
types of emergency management enterprises and activities could be
eligible for deductible credit within this category and information
relating to the current level of State investment in these enterprises
and activities.
    FEMA includes in this model $1.00 in deductible credit for every
$1.00 that a State invests in emergency management beyond the cost-
share required by a Federal program. A State could satisfy up to 20
percent of its annual Public Assistance deductible through this credit.
8. Emergency Management Accreditation Program (EMAP[supreg]) Credit
Enhancement
    The Emergency Management Accreditation Program (EMAP[supreg]) is an
independent non-profit organization

that offers an emergency management program review and recognition
program.\66\ EMAP[supreg] is a completely voluntary program and
accreditation is not presently a factor in any FEMA program. However,
FEMA recognizes that EMAP[supreg] provides a valuable resource to
accredited programs by establishing best practices and offering a level
of independent accountability.
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    \66\ Additional information on EMAP can be found at https://www.emap.org/index.php.
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    This model includes a credit enhancement to States that voluntarily
seek and achieve provisional or full EMAP[supreg] accreditation. FEMA
could increase the credit amount by 5 percent for three credit types
for EMAP[supreg] accreditation, but specifically seeks comment on the
appropriate value of this credit amount. These three credits could be:
    1. Dedicated funding for emergency response and recovery
activities;
    2. expenditures for non-Stafford Act response and recovery
activities; and
    3. expenditures on State emergency management programs.
    Specifically, instead of offering $1.00 in deductible credit for
each $1.00 in qualifying State funding and expenditures, FEMA would
instead approve $1.05 for each $1.00 in qualifying State funding and
expenditures for States maintaining current EMAP[supreg] provisional or
full accreditation. The credit caps applicable to each credit category
would remain unchanged. FEMA believes that applying the credit
enhancement in this manner could encourage States to seek and/or
maintain EMAP[supreg] accreditation and that by doing so, could
demonstrate improved readiness to confront the consequences of
disasters.
9. Credit Summary
    Table 8 provides an overview of the credits that FEMA is
envisioning, the amount of credit that could be approved, any cap that
FEMA envisions applying, and whether an enhancement is available to the
credit.

                                          Table 8--Summary Credit Menu
----------------------------------------------------------------------------------------------------------------
                                                                                EMAP[supreg]
           Credit No.                Credit name        Credit amount         Credit cap          enhancement
----------------------------------------------------------------------------------------------------------------
1..............................  Dedicated Funding   $1.00 in credit     20%................  Yes.
                                  for Emergency       for each $1.00 in
                                  Response/Recovery   qualifying
                                  Activities.         deposits.
2..............................  Expenditures for    $1.00 in credit     20%................  Yes.
                                  Non-Stafford Act    for each $1.00 in
                                  Response and        qualifying
                                  Recovery            expenditures.
                                  Activities.
3..............................  Expenditures for    $3.00 in credit     No Cap.............  No.
                                  Mitigation          for each $1.00 in
                                  Activities.         qualifying
                                                      expenditures.
4..............................  Insurance Coverage  % reduction based   N/A................  No.
                                  for Public          on qualifying
                                  Facilities,         coverage above
                                  Assets, and         deductible amount.
                                  Infrastructure.
5..............................  Building Code       % reduction to the  N/A................  No.
                                  Effectiveness       starting
                                  Grade Schedule      deductible based
                                  (BCEGS[supreg]).    on BCEGS[supreg].
6..............................  Tax Incentive       $2.00 in credit     No Cap.............  No.
                                  Programs.           for every $1.00
                                                      in qualifying
                                                      costs.
7..............................  Expenditures on     $1.00 in credit     20%................  Yes.
                                  State Emergency     for every $1.00
                                  Management          in qualifying
                                  Programs.           expenditures.
----------------------------------------------------------------------------------------------------------------

H. Estimates of Initial Credits

    Based upon the preliminary research discussed above and interviews
with key stakeholders and subject matter experts, FEMA believes that
every State would receive deductible credit under the preceding credit
structure for activities and investments that each State is already
undertaking; however, there may be some States that have been able to
undertake more credit-qualifying activities than others.
    As with the rest of the SANPRM, all numbers, figures, criteria and
processes detailed in this section are notional. They are intended to
aid the public in understanding how a potential deductible program
could operate and to spur discussion and feedback.
    FEMA has used the information that it has available to estimate the
amount of credit that each State might qualify for initially. In many
cases, however, FEMA anticipates offering credit for activities for
which there is very little information readily available. Where
information is lacking, FEMA attempted to use assumptions as to current
State activities. For instance, FEMA was unable to identify annual
amounts of forgone revenue from a State tax incentive program and thus
assumed an amount equal to 1 percent of a State's starting
deductible.\67\ FEMA intentionally utilized what it believes are
conservative estimates where uncertainty exists and assumptions were
needed. FEMA has attempted to estimate the amount of credit that each
State might qualify for initially to provide context on the potential
impact of the deductible requirement. FEMA welcomes comments on its
assumptions with information more readily available to each State.
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    \67\ For example, given Alabama's starting deductible of $12.96
million, FEMA assumes forgone revenues from the State's tax
incentive program of $129,574.
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    Overall, based on this analysis, FEMA anticipates that the average
State would receive initial credits worth approximately 40 percent of
its first deductible without making any changes to its current spending
or activities. Across the States, FEMA expects that these initial
credits would range from a minimum of approximately 6 percent to a
maximum of approximately 85 percent. Table 9 depicts FEMA's estimates
for each State under this model. Specifically, Table 9 indicates each
State's applicable model starting deductible, the credit amount from
each of the seven categories of credits, the total estimated credits
(shown both as a dollar value and percentage of the starting deductible
amount), and the model final deductible amount that the State would
carry into the new year.
    This potential final deductible amount represents what each State
would potentially need to satisfy if it experiences a disaster that
results in disaster damages that exceed the amount of credits that FEMA
has approved. It is the remaining amount that is not offset by the