James Madison Institute: Hurricane could wreak fiscal havoc

The Florida Times-Union–August 12, 2008

By
Special to the Times-Union

On July 29, Florida’s Board of Administration voted to spend $224 million in return for a well-known billionaire’s pledge.
————————————————–
    ————————————————–

Warren Buffett, the “Oracle of Omaha,” guaranteed that his Berkshire Hathaway firm would buy $4 billion in state bonds if a storm caused more damage than Florida’s catastrophe fund could cover.

The 2-1 vote, with Attorney General Bill McCollum dissenting, gave Floridians the clearest signal yet of the state government’s precarious fiscal condition.

Quite simply, Gov. Charlie Crist and the Legislature have bet the state’s fiscal future on remaining storm-free.

And, even with this deal, the state still faces enormous risks. The agreement simply reduces the state’s total Hurricane Catastrophe Fund liability after a major storm to $28 billion from $32 billion.

Yet, given that no state has ever issued more than $11 billion in bonds all at one time, even $28 billion is more than Florida taxpayers could handle.

With or without Buffett’s funding – which won’t even kick in until the state spends a lot of its own money – the state would still face an unprecedented fiscal crisis if a major storm hit.

In the long term, Florida needs to follow Chief Financial Officer Alex Sink’s suggestion and phase out the Cat Fund.

While doing these things, the state also needs to let free-market competition – rather than state bureaucrats – set the rates that private insurance companies may charge.

However, a bigger test of the regulatory climate will come in the weeks ahead when two of the largest companies – State Farm and Allstate – face rate-related hearings.

Some residents of modest means may have a difficult time affording higher premiums. There are several ways in which the state can help them.

First, the “My Safe Florida Home” program – intended to make homes safer and more storm resistant – ought to be renewed and expanded. In connection with this, the state should set a goal of conducting a safety inspection of every storm-vulnerable home by the end of 2009.

Second, through tax credits and low-interest loans, the state and federal government should help people pay for improving the storm resistance of their homes.

Studies conducted after Hurricane Andrew devastated a wide swath of South Florida in 1992 revealed that many structures failed because the region’s strict building code was not strictly enforced by local governments.

In short, when it comes to property insurance, government ought to fix the mess that government made by helping homeowners to weather storms while also sparing the state a financial storm.

Eli Lehrer is an adjunct scholar of The James Madison Institute, a policy center based in Tallahassee, and a senior fellow at the Competitive Enterprise Institute.