For other versions of this document, see http://wikileaks.org/wiki/CRS-RL33174 ------------------------------------------------------------------------------ Order Code RL33174 FEMA's Community Disaster Loan Program: Action in the 109th Congress Updated June 28, 2007 Nonna A. Noto Specialist in Public Finance Government and Finance Division Steven Maguire Analyst in Public Finance Government and Finance Division FEMA's Community Disaster Loan Program: Action in the 109th Congress Summary Areas struck by disaster often experience a destruction of property and decline in economic activity. Local revenue collections may fall substantially as a consequence. This report examines the federal Community Disaster Loan (CDL) program, authorized by Section 417 of the Stafford Act and administered by the Federal Emergency Management Agency (FEMA). The CDL program is intended to assist local governments that experience revenue losses as the result of a presidentially declared major disaster. The traditional CDL program provides for loan forgiveness (cancellation) when it is determined for three fiscal years following a disaster that the affected government will not be able to repay the loan. From the start of the program in August 1976 through September 30, 2005, of the $233.5 million in principal advanced, $225.7 million, or 97%, was for loan amounts that were cancelled. Five loans in excess of $5 million accounted for 90% of cancelled principal. In 2000, a $5 million limit was placed on a loan that any one jurisdiction can receive through the traditional CDL program for a single disaster. On October 7, 2005, both houses of Congress approved and President Bush signed the Community Disaster Loan Act of 2005 (CDLA), P.L. 109-88. The CDLA provided for "special" community disaster loans, up to an aggregate of $1 billion in principal amount, to local governments so that they could continue to provide essential services in the aftermath of Hurricanes Katrina and Rita. For these special loans, the new law removed the $5 million per loan limit but prohibited their cancellation. FEMA approved 136 special CDLs that summed to $739 million for Louisiana communities, including $120 million for New Orleans, and $261 million for Mississippi communities. All of the loans received a subsidized interest rate. Soon after the CDLA was enacted, bills to remove the prohibition on the cancellation of the special CDLs were introduced but were not voted upon in the 109th Congress. The Emergency Supplemental Appropriations Act of 2006 (P.L. 109-234), enacted on June 15, 2006, included an appropriation to support an additional $371.733 million in CDLs. These loans were available only to communities that had lost 25% or more of their tax revenues as the result of Hurricane Katrina or Rita. Cancellation of these loans was again prohibited. The law removed the $5 million per loan limit and raised the other size limit from 25% to 50% of a community's operating budget. Louisiana communities received $261 million in loans, including another $120 million for New Orleans, and Mississippi communities $9 million. The SAFE Port Act (P.L. 109-347), enacted on October 13, 2006, increased the size limit on a traditional CDL from 25% to 50% of the local government's annual operating budget if that government has lost 75% or more of its tax and other revenues due to a major disaster. The $5 million per loan limit and the cancellation option still apply to traditional CDLs. This report will no longer be updated. For subsequent activity involving CDLs, see CRS Report RL34065, FEMA's Community Disaster Loan Program: Action in the 110th Congress, by Nonna A. Noto. Contents Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Traditional Community Disaster Loans: Section 417 of the Stafford Act . . . . . . . 2 Legislation Enacted in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Special Community Disaster Loans Enacted in October 2005 . . . . . . . . . . . 5 Emergency Supplemental Appropriations Enacted in June 2006 . . . . . . . . . 7 SAFE Port Act Enacted in October 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Other Bills Introduced in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 House Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Senate Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Analysis of the CDL Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Budgetary Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Loan or Grant Program? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Experience with Traditional Loans and Their Cancellation . . . . . . . . . . . . 19 Eliminating the $5 Million Per Loan Cap . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Lowering the Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Experience with the Special CDL Program . . . . . . . . . . . . . . . . . . . . . . . . . 23 Experience with the Emergency Supplemental CDLs . . . . . . . . . . . . . . . . . 24 Number of Loans Approved by State and Size of Loan . . . . . . . . . . . . . . . 24 Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Disaster Relief Act of 1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Alternative Senate Proposal for a Loan Program Not Adopted . . . . . . 26 Disaster Relief Act of 1974: The Robert T. Stafford Disaster Relief and Emergency Assistance Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Disaster Mitigation Act of 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 List of Tables Table 1. Community Disaster Loan Program from the First Loans in August 1976 through September 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Table 2. Community Disaster Loan Program from the First Loans in August 1976 through September 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Table 3. CDLs Greater than $5 Million and Amount Cancelled . . . . . . . . . . . . 21 Table 4. Total Number and Dollar Amount of Combined 2005 Special and 2006 Supplemental CDLs Approved by FEMA, by State . . . . . . . . . . 25 Table 5. Size Distribution of Combined Special and Supplemental CDLs Approved by FEMA, by State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 FEMA's Community Disaster Loan Program: Action in the 109th Congress Overview In addition to the heavy loss of lives and the dislocation of hundreds of thousands of families, Hurricane Katrina on August 29, 2005, and Hurricane Rita on September 24, 2005, caused devastating damage to property and seriously disrupted the economic activity that normally provided the tax and revenue base of the affected areas, especially in Louisiana and Mississippi. There was concern in Congress and elsewhere, but particularly in the tax-exempt bond community, that the destruction of the underlying tax base would impair the ability of Gulf Coast communities to make the payments on their outstanding debt, let alone their ability to issue new debt.1 These communities also faced the loss of revenues needed to finance normal operating expenses and possibly additional operating expenses engendered by the hurricane disasters. This point was brought home when New Orleans Mayor C. Ray Nagin announced on October 4, 2005, that he would have to lay off 3,000 municipal employees -- 50% of the city's work force -- due to lack of revenue.2 This report focuses on the Federal Emergency Management Agency's (FEMA's) Community Disaster Loan (CDL) program. This is a program of federal aid available to local governments specifically to replace revenues lost as the result of a natural or man-made disaster. These are the revenues needed to pay for normal operating expenses, such as fire and police services, public schools, and debt servicing. This aid is available in addition to the federal disaster aid provided to replace damaged public infrastructure and to address special storm-related expenses such as debris removal. On October 7, 2005, both the Senate and the House of Representatives approved, and President Bush signed into law, the Community Disaster Loan Act of 2005, P.L. 109-88. The act provided for up to $750 million -- of the $50 billion previously appropriated for disaster assistance following Hurricane Katrina -- to be available to support up to $1 billion in special CDLs to local governments affected by the hurricanes. In addition, it made two important changes in the conditions governing these loans compared with traditional CDLs: it removed the $5 million 1 Leslie Wayne, "Tax Bases Shattered, Gulf Region Faces Debt Crisis," New York Times, September 13, 2005, pp. C1, C4. Frank Shafroth, "Meteorological Taxes -- Taxing Issues in Katrina's Wake," State Tax Notes by Tax Analysts, September 26, 2005, pp. 955-960. Frank Shafroth, "The Big Easy -- The Taxing Aftermath of Katrina," State Tax Notes, October 3, 2005, pp. 149-153. 2 Christine Hauser, "Mayor Announces Layoffs of City Workers, New York Times, October 5, 2005, p. A24. CRS-2 per loan limit and prohibited the cancellation (forgiveness) of these loans. Loans totaling the full $1 billion were approved by FEMA. Soon after the enactment of P.L. 109-88 a bill was introduced in each house of Congress to repeal the provision that disallows the cancellation of the special CDLs, but neither was voted upon in the 109th Congress. The Emergency Supplemental Appropriations Act of 2006 (P.L. 109-234), enacted on June 15, 2006, included an appropriation of $279.8 million to support an additional $371.733 million in direct loans to communities affected by hurricanes during the 2005 season. These supplemental loans were available to communities that lost 25% or more of their tax revenues as the result of Hurricanes Katrina or Rita. This law again removed the $5 million per loan limit but prohibited cancellation of these loans. It also raised the size limit for a loan from 25% to 50% of a community's operating budget. FEMA approved loans totaling $271 million, for all eligible applicants; $101 million of the loan authorization was not used. The SAFE Port Act (P.L. 109-347), enacted on October 13, 2006, raised the size limit for a traditional CDL from 25% to 50% of a local government's annual operating budget if that government lost 75% or more of its tax and other revenue as the result of a major disaster. The $5 million per loan limit and the cancellation option still apply to traditional CDLs. Traditional Community Disaster Loans: Section 417 of the Stafford Act This section describes the law and regulations which governed all community disaster loans before October 2005. These rules will continue to govern traditional community disaster loans (CDLs) made outside of the provisions for special CDLs. The rules not amended by the laws enacted in 2005 and 2006 will continue to apply to the special CDLs as well. The Robert T. Stafford Disaster Relief and Emergency Assistance Act3 is popularly known as the Stafford Act. The Stafford Act ...authorizes the President to issue major disaster declarations that authorize federal agencies to provide assistance to states overwhelmed by disasters. Through executive orders, the President has delegated to the Federal Emergency Management Agency (FEMA), within the Department of Homeland Security (DHS), responsibility for administering the major provisions of the Stafford Act. Assistance authorized by the statute is available to individuals, families, state and local governments, and certain nonprofit organizations.4 3 P.L. 93-288, as amended; 42 U.S.C. 5121 et seq.. 4 CRS Report RL33053, Federal Stafford Act Disaster Assistance: Presidential Declarations, Eligible Activities, and Funding, by Keith Bea. CRS-3 Of particular relevance to local governments is Section 417 of the Stafford Act.5 Sec. 417 authorizes the President ...to make loans to any local government which may suffer a substantial loss of tax and other revenues as a result of a major disaster, and has demonstrated a need for financial assistance in order to perform its governmental functions. A loan may be approved in either the fiscal year in which the disaster occurs or the immediately following fiscal year. Only one CDL may be approved for any one local government as the result of a single disaster.6 The amount of a loan is based on need and is not to exceed 25% of the annual operating budget of the local government for the (local government's) fiscal year in which the major disaster occurs. The SAFE Port Act (P.L. 109-347), enacted on October 13, 2006, raised the size limit for a traditional CDL from 25% to 50% of a local government's annual operating budget if that government lost 75% or more of its tax and other revenue as the result of a major disaster. In addition, as a result of an amendment made in 2000, the dollar amount of any loan is limited to $5 million.7 The obligation to repay the loan is to be cancelled if the locality's revenues in the three fiscal years following the disaster are deemed insufficient by FEMA or its outside auditors. The normal term of a CDL is five years. The loan typically takes the form of a five-year balloon. That is, the full principal and accumulated interest are due all together at the end of the five-year term. The Associate Director of FEMA may consider requests for an extension, based on the local government's financial condition. However, the total term of a loan normally may not exceed 10 years, except under extenuating circumstances.8 The interest rate on CDLs is based on the average rate, on the date of the loan approval, for U.S. Treasury obligations with maturities of five years. The interest rate on CDLs is higher than the average rate on municipal (state and local) bonds of similar maturity. This is because the federal tax exemption of interest on state and local government bonds enables those governments to sell bonds at lower interest rates than comparable federal bonds. The relatively higher CDL rate implies that localities with strong credit ratings would be better off borrowing from the private credit market, if they were permitted to borrow to cover operating expenses. Only communities with a weak credit rating -- or those hoping for or anticipating a loan cancellation -- would be attracted to traditional CDLs. A locality that is in arrears on its repayment of a CDL is not eligible to receive any additional loans under Section 417. Receiving loans under Section 417 does not 5 42 U.S.C. 5184, Community Disaster Loans. 6 44 C.F.R. 206.361(d). 7 Section 207(5) of P.L. 106-390, the Disaster Mitigation Act of 2000. 8 44 C.F.R. 206.361(e) and 206.367(c). CRS-4 reduce or otherwise affect any grants or other assistance available to a locality under other parts of the Stafford Act. A local government may use the borrowed funds to carry on existing local government functions of a municipal operation character or to expand such functions to meet disaster-related needs.9 The funds are not to be used to finance capital improvements or the repair or restoration of damaged public facilities. Neither the loans nor any cancelled portion of the loans may be used as the non-federal share of any federal program, including those under the Stafford Act.10 For loan cancellation purposes, unreimbursed expenses of a municipal operating character are those incurred for general government purposes, such as police and fire protection, trash collection, revenue collection, maintenance of public facilities, and other expenses normally budgeted for the general fund.11 Disaster-related expenses that are eligible for reimbursement under project applications or other federal programs are not eligible for loan cancellation.12 In addition, expenditures associated with debt service, any major repairs, rebuilding, replacement, or reconstruction of public facilities or other capital projects, intragovernmental services, special assessments, and trust and agency fund operations are not eligible for loan cancellation. The state must co-sign the promissory note or else the local government must pledge collateral security to cover the principal amount of the note. In the event of default, FEMA may request administrative offset against other federal funds due the borrower and/or referral to the Department of Justice for judicial enforcement and collection. CDLs are not available to states or non-profit organizations. A community must submit an application to FEMA either to receive a CDL or to have a loan cancelled. Typically, FEMA hires an outside auditing firm to perform the required analysis of the community's operating budget. This outside analysis is combined with data and information that the jurisdiction provides to FEMA in support of its loan application or cancellation application. The Code of Federal Regulations (CFR) assigns the primary responsibility for both making and canceling CDLs to the Associate Director of FEMA for State and Local Programs and Support. However, according to FEMA's Office of General 9 The Code of Federal Regulations sets forth the policies and procedures concerning the Community Disaster Loan program in 44 C.F.R. Ch. 1, Subpart K, Secs. 206.361-206.367 (10-1-04 Edition). 10 44 C.F.R. 206.361 (f). 11 General fund as defined by the Municipal Finance Officers Association. See 44 C.F.R. 206.366 (b) (1). 12 44 C.F.R. 206.366 (b) (2). CRS-5 Counsel, these functions are currently performed by the Director of the Recovery Division. The regulations provide that FEMA shall ...cancel repayment of all or part of a Community Disaster Loan to the extent that the Associate Director determines that revenues of the local government during the full three fiscal year period following the disaster are insufficient, as a result of the disaster, to meet the operating budget for the local government, including additional unreimbursed disaster-related expenses of a municipal operating character.13 Accordingly, a community cannot seek to, and FEMA cannot, cancel the obligation to repay a loan until at least three years following a disaster. Legislation Enacted in the 109th Congress To address the immediate needs of the local governments affected by Hurricanes Katrina and Rita, the 109th Congress modified the CDL program and allocated funding for $1 billion in special loans through the Community Disaster Loan Act of 2005 (P.L. 109-88), enacted on October 7, 2005. The Emergency Supplemental Appropriations Act for FY2006 (P.L. 109-234), enacted on June 15, 2006, provided funding for an additional $372 million in special loans to communities that lost tax revenues as a result of the 2005 hurricanes; this law included another change in the rules governing the size of these disaster loans. The SAFE Port Act (P.L. 109-347) raised the percent-of-budget limit on the size of a traditional CDL that will now be available to a local government that suffers a severe loss of tax and other revenue from a major disaster. Special Community Disaster Loans Enacted in October 2005 The Community Disaster Loan Act of 2005 (CDLA), S. 1858 (Vitter), was passed by Congress and signed by President Bush as P.L. 109-88, on Friday, October 7, 2005, the eve of the week-long Columbus Day recess.14 The motivation for the expedited treatment was reportedly to have the money available to affected communities by Monday, October 10.15 P.L. 109-62, the second emergency supplemental appropriations act adopted following Hurricane Katrina, provided for $50 billion in "disaster relief."16 The 13 44 C.F.R. 206.366. See also Sec. 206.361(g). 14 S. 1858 was introduced by Senator Vitter, passed without amendment by unanimous consent in the Senate, then agreed to in the House and passed without objection, and signed by President Bush, all on October 7, 2005. 15 Statement by Representative Baker, Congressional Record, daily edition, vol. 151, no. 130, October 7, 2005, p. H8797. 16 P.L. 109-62 (H.R. 3673) Second Emergency Supplemental Appropriations Act to Meet (continued...) CRS-6 Community Disaster Loan Act of 2005 provided for up to $750 million of those funds to be transferred to FEMA's Disaster Assistance Direct Loan (DADL) Program. These funds, in turn, were to be used to make direct loans to local governments to assist them in providing "essential services," as authorized under Section 417 of the Stafford Act.17 The transfer of $750 million could subsidize gross obligations for the principal amount of direct loans not to exceed $1 billion.18 The CDLA also allowed for an additional $1 million of the disaster relief funds provided by P.L. 109-62 to be transferred to the Disaster Assistance Direct Loan Program for administrative expenses to carry out the direct loan program.19 The new law made three changes to the CDL program law with respect to the Special Community Disaster Loans (SCDLs) to be made under this section. First, an SCDL may exceed the $5 million limit placed on traditional loans made under Section 417. (The limit of 25% of the locality's operating budget still applied.) Second, the cancellation (forgiveness) of such loans was prohibited. Third, the law directed that the loans be used to assist local governments in providing essential services. The provision eliminating the possibility of loan cancellation was reportedly insisted upon by the Bush Administration (Office of Management and Budget) and the Republican leadership in the House as a condition for providing the loan assistance.20 Several Members made statements on the House and Senate floors objecting to the requirement that the loans be repaid.21 Representative Obey requested that a requirement be included to report to Congress about the size and use 16 (...continued) Immediate Needs Arising from the Consequences of Hurricane Katrina. Passed by both the House and Senate and enacted on September 8, 2005. For more information on the two emergency supplemental laws enacted, see CRS Report RS22239, Emergency Supplemental Appropriations for Hurricane Katrina Relief, by Keith Bea. 17 The CDLA does not define the term "essential services." The Stafford Act does include the term within its definition of "private nonprofit facility." 42 U.S.C. 5122(9). 18 The $1 billion amount is based on the assumption by the Office of Management and Budget that the new loan program will have a credit subsidy rate of 75%. This is explained in greater detail in the section on Budgetary Treatment later in this report. 19 For comparison, FEMA's budget request for FY2006 was for $567,000 to administer the entire Disaster Assistance Direct Loan Program which includes "state share" loans in addition to CDLs. Under the state share program, FEMA may lend to a state or other eligible applicant the amount it is responsible for under cost-sharing provisions of the Stafford Act. U.S. Department of Homeland Security, Emergency Preparedness and Response Directorate, Federal Emergency Management Agency, Fiscal Year 2006 Congressional Justification, 2005, pp. FEMA 156-157. 20 Statements by Senator Clinton on Relief for the Gulf Coast and by Senator Frist, Congressional Record, daily edition, vol. 151, no. 130, October 7, 2005, on p. S11280 and p. S11282, respectively. 21 Statements regarding the Community Disaster Loan Act of 2005, Congressional Record, daily edition, vol. 151, no. 130, October 7, 2005, pp. S11279-S11285 and H8794-H8796. CRS-7 of the loans made.22 There were assurances from Representative Baker that this concern would be addressed after the Columbus Day recess,23 but it was not. The interim rules implementing the Special Community Disaster Loans Program were published on October 18, 2005.24 The standard interest rate on SCDLs was, again, the average rate on Treasury issues with five-year maturities. However, the rules provided that FEMA would have the discretion to allow localities facing unique economic hardships to receive discounted interest rates, at levels consistent with the lowest rate offered by the Small Business Administration's disaster loan program.25 A formula was provided for determining the discounted interest rate. The subsidized rate would be the U.S. Treasury's five-year maturity rate plus one percentum, adjusted to the nearest 1/8%, and reduced by one-half. For example, assume that the yield on five-year Treasury bonds were 4.32%, as it was on October 21, 2005. Adding one percentum would give 5.32%. Rounding that to the nearest 1/8% would give 5-3/8%. Reducing that by one-half would give 2-11/16% (2.69%) as the subsidized interest rate on SCDLs. The federal budget for FY2007 assumed that the borrower interest rate for the CDL program would be 2.70% during FY2006.26 The term of the SCDLs was to remain, as for traditional CDLs, at five years, with the option for the Associate Director of FEMA to extend the term to up to 10 years. Only under extenuating circumstances may the repayment period exceed 10 years. Also as with traditional CDLs, the state must co-sign the promissory note or else the local government must pledge collateral security to cover the principal amount of the note. In the event of default, FEMA may request administrative offset against other federal funds due the borrower and/or referral to the Department of Justice for judicial enforcement and collection. Emergency Supplemental Appropriations Enacted in June 2006 The Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006 (H.R. 4939 as amended, P.L. 109-234) was 22 Congressional Record, daily edition, vol. 151, no. 130, October 7, 2005, pp. H8797- H8798. 23 Congressional Record, daily edition, vol. 151, no. 130, October 7, 2005, p. H8798. 24 Department of Homeland Security, Emergency Preparedness and Response Directorate, Federal Emergency Management Agency, "Special Community Disaster Loans Program," 70 Federal Register 60443, October 18, 2005; 44 C.F.R. 206.370-206.377. 25 For businesses not able to obtain credit elsewhere, the law sets a maximum interest rate of four percent per year on federal physical disaster loans to small businesses. Explained on the SBA website at [http://www.sba.gov], visited October 18, 2005. 26 U.S. Executive Office of the President, Office of Management and Budget, Budget of the United States Government Fiscal Year 2007, Federal Credit Supplement (Washington: February 2006), p. 10. CRS-8 enacted on June 15, 2006.27 Among its many provisions, it appropriated an additional $279.8 million for the Disaster Assistance Direct Loan Program Account, of which $1 million was for administrative expenses. The remaining $278.8 million was to subsidize gross obligations for the principal amount of direct loans up to $371.733 million. As with the Special Community Disaster Loan (SCDL) program authorized under the CDLA of 2005, this numerical relationship was based on the assumption of a 75% credit subsidy rate for the loans. The funds were to be used to assist local governments affected by Hurricane Katrina and other hurricanes of the 2005 season in providing essential services. As with the SCDLs, the loans made under this law could not be cancelled. Loans were available only to local governments that suffered a loss of 25% or more in tax revenues due to Hurricane Katrina or Hurricane Rita. This is in contrast to the reference in Section 417 of the Stafford Act to "a substantial loss of tax and other revenues." As was provided for the special CDLs, a loan could exceed the $5 million limit placed on traditional CDLs. In addition, the loan could equal not more than 50% of the annual operating budget of the local government. This is in contrast to the 25%-of-budget limit that applies to both traditional and special CDLs. Because no specific language was included to indicate that the funds would be available until expended, it was interpreted by FEMA that the loans must be made by September 30, 2006, the end of FY2006, to take advantage of the supplemental appropriation. (The same time limit applied to the original SCDLs.) This placed time pressure on the loan application, approval, and dispersal process. Because the percent-of-budget limit was raised to 50%, communities that had applied in the first round for SCDLs of up to 25% of their operating budget could apply for an additional 25% under the emergency supplemental loans. A variety of special districts that rely on revenues other than taxes (such as charges and fees) were not eligible to apply for the supplemental appropriations loans. This included, for example, hospital, port, airport, water, regional transit, and communications authorities. SAFE Port Act Enacted in October 2006 The Security and Accountability For Every Port Act of 2006 or SAFE Port Act (H.R. 4954, P.L. 109-347) was enacted on October 13, 2006. Section 608 of the act, added in the conference on the bill,28 addresses community disaster loans. The act increased the size limit on a traditional CDL from 25% to 50% of the annual operating budget of the local government for the fiscal year in which the major disaster occurs, under the following condition: the local government's loss of tax and other revenues as a result of the major disaster must equal at least 75% of the annual operating budget of that local government for the fiscal year in which the major disaster occurs. The $5 million cap on the size of an individual loan and the option 27 For detailed information about that act, see CRS Report RL33298, FY2006 Supplemental Appropriations: Iraq and Other International Activities; Additional Hurricane Katrina Relief, coordinated by Paul M. Irwin and Larry Nowels. 28 SAFE Port Act, conference report to accompany H.R. 4954, 109th Cong., 2nd sess., H.Rept. 109-711, printed in Congressional Record, daily edition, vol. 152, No. 125 -- Book II, September 29, 2006, p.H8540. CRS-9 for FEMA to cancel the loan still apply to traditional CDLs. The conference report stated that this provision would primarily help small local governments with annual budgets of under $10 million. Other Bills Introduced in the 109th Congress Several other bills introduced on or around October 7, 2005, would have made other changes to the rules governing the Community Disaster Loan program. Three of the comprehensive Katrina relief bills -- H.R. 3958, S. 1765, and S. 1766 -- contained identical CDL provisions. These would have lifted limits on the size of a loan and allocated specific dollar amounts to five named parishes in Louisiana. Senator Landrieu introduced four other bills at that time that addressed CDLs: S. 1846, S. 1855, S. 1856, and S. 1857. The last three -- which allocated $750 million in disaster relief funds to support $1 billion in loans -- were superseded by the bill enacted, S. 1858/P.L. 109-88. Two bills would have lifted the $5 million per loan limit but imposed the condition of approval by either Congress (S. 1857) or OMB (S. 1856) for loans to be cancelled. H.R. 4024 would have removed the $5 million cap and the automatic cancellation provision for all CDLs, not just the special new loan program. Soon after the CDLA was enacted, companion bills were introduced in each house specifically to repeal the provision that prohibits cancellation of the special CDLs (H.R. 4117 and S. 1872). Part of a more comprehensive Gulf Coast recovery bill would have raised the percentage-of-budget limit on a CDL from 25% to 50% (H.R. 4438). Part of a FEMA overhaul bill (S. 3721) would have removed the $5 million per loan limit and raised the percentage-of-budget limit from 25% to 50% for a loan made to a local government located in an area determined to have suffered catastrophic damages from a major disaster. These two provisions were included in the Emergency Supplemental Appropriations Act for 2006 (P.L. 109-234). Cancellation would have remained a possibility for loans made under S. 3721. Representative Maloney of New York City introduced three bills that would have made CDLs available to state as well as local governments, removed size limits on loans, and turned the loans into grants from the outset by not requiring any payment of interest or principal in the case of a major disaster. The first bill (H.R. 1795) addressed the revenue losses experienced by the city and state of New York after the terrorist disaster of September 11, 2001. The other two bills responded to the effects of the hurricanes (H.R. 4012 and H.R. 4090). Following are short descriptions of the individual bills addressing CDLs that were introduced but not enacted. House Bills H.R. 1795 (Maloney). The Whatever It Takes To Rebuild Act of 2005. Introduced April 21, 2005; referred to the Committee on Transportation and Infrastructure, Subcommittee on Economic Development, Public Buildings and Emergency Management, on April 22. H.R. 1795 was introduced with the intention CRS-10 of increasing federal aid to the governments of New York City and the state of New York to help compensate them for the losses of tax and other revenues related to the terrorist attacks of September 11, 2001. H.R. 1795 would have amended the Stafford Act to make community disaster loans available to states as well as local governments. It would have retained the restriction that the loan not exceed 25% of the annual operating budget of the (state or local) governmental entity. But it would have removed the limit of $5 million on the size of the loan that could be made to an individual government. The bill would effectively have turned into grants loans made as a result of a major disaster caused by terrorist attacks occurring on or after October 30, 2000. The bill provided that The President shall not require the payment of any interest or principal on a loan made under this section to a State or local government which may suffer a substantial loss of tax and other revenues as a result of a major disaster caused by a terrorist attack.29 Finally, Section 4 of H.R. 1795 would specifically have authorized the President to make loans to New York City and the state of New York for losses of tax and other revenues as a result of the terrorist attacks of September 11, 2001. The total amount of the loans would have been set at $8.8 billion, or a greater amount if determined by the President to be necessary to cover the losses, subject to the availability of appropriations. The President would not have required the payment of any interest or principal on these loans. Representative Maloney had introduced identical legislation in the 108th Congress (H.R. 1542) and nearly identical legislation in the 107th Congress (H.R. 5523, without Section 4, the explicit funding for New York City and New York State). H.R. 3958 (Melancon). Louisiana Katrina Reconstruction Act. Introduced September 29, 2005; referred to numerous committees and subcommittees. The CDL provisions were identical to those in S. 1765 and S. 1766. Section 114 of the general provisions of this comprehensive bill addressed CDLs. Sec. 114(a) would have prohibited any dollar or percentage limit on a CDL made to assist a local government in which a major disaster relating to Hurricane Katrina was declared to exist. Of the funds appropriated for CDLs in FY2006, Sec. 114(b) of H.R. 3958 listed specific dollar amounts to be used for loans to five named parishes in Louisiana, totaling just over $1 billion. H.R. 4012 (Maloney). Community Disaster Loan Equity Act of 2005. Introduced October 7, 2005; referred to the Committee on Transportation and Infrastructure, Subcommittee on Economic Development, Public Buildings and Emergency Management. H.R. 4012 would have amended Section 417 of the Stafford Act to make CDLs available to states as well as local governments. It would have removed the limit of $5 million per loan. In addition, two special conditions 29 Section 3(c) of H.R. 1795 in the 109th Congress. CRS-11 were provided for a loan made to a state or local government which has suffered a substantial loss of tax and other revenues as a result of a major disaster that the President determines to be an "incident of national significance." First, the loan would not have been subject to the limit of 25% of the government's operating budget. Second, the President would not have required the payment of any interest or principal on the loan. (This would effectively have made the loan a grant from the outset.) The amendments would have applied to any major disaster occurring after August 24, 2005. The findings section nonetheless referred to revenue losses experienced by the city and state of New York following the terrorist attack of September 11, 2001, as well as the effects of Hurricane Katrina, which occurred on August 29, 2005. H.R. 4024 (Baker). Community Disaster Loan Act of 2005. Introduced October 7, 2005; referred to the Committee on Transportation and Infrastructure, Subcommittee on Economic Development, Public Buildings and Emergency Management. Of the funds appropriated for disaster relief by P.L. 109-62, H.R. 4024 would have allocated $300 million to subsidize loan amounts not to exceed $400 million, and another $1 million for loan administration. Like the CDLA (P.L. 109- 88) and the Emergency Supplemental (P.L. 109-234) bills enacted, H.R. 4024 would have removed the limit of $5 million per loan and prohibited the cancellation of the special loans made from these funds. But it would also have removed the $5 million cap and the requirement that loans be cancelled if the local government is in poor fiscal condition for all loans made under the traditional CDL program. H.R. 4090 (Maloney). Whatever It Takes to Rebuild Act of 2005, Part II. Introduced October 20, 2005; referred to the Committee on Transportation and Infrastructure, Subcommittee on Economic Development, Public Buildings and Emergency Management. H.R. 4090 built upon H.R. 4012. H.R. 4090 would have repealed the recently passed Community Disaster Loan Act of 2005, P.L. 109-88. Like H.R. 4012, H.R. 4090 would have made state as well as local governments eligible for CDLs. It would have removed the $5 million cap on a CDL. In the case of a loan made as a result of a major disaster that the President determines to be an "incident of national significance," the loan limit of 25% of the community's operating budget would not have applied. Also, the President would not have required payment of any interest or principal on the loan. In addition to the provisions of H.R. 4012, H.R. 4090 would have authorized the appropriation of $1 billion and such additional sums as may be necessary for CDLs to state and local governments which suffer a substantial loss of tax and other revenues as a result of Hurricane Katrina or Hurricane Rita. H.R. 4117 (Melancon). Introduced October 20, 2005; referred to the Committee on Transportation and Infrastructure, Subcommittee on Economic Development, Public Buildings and Emergency Management. Companion to S. 1872. H.R. 4117 would have repealed the provision in the CDLA of 2005 that disallows cancellation of the loans. H.R. 4438 (Shuster). Gulf Coast Recovery Act of 2005. Introduced December 6, 2005; referred to the Committee on Transportation and Infrastructure; ordered to be reported by voice vote, December 7, 2005. H.R. 4438 would have governed the distribution of money already appropriated for the Federal Disaster Relief Fund by CRS-12 the two emergency supplemental appropriations acts enacted following Hurricane Katrina, P.L. 109-61 and P.L. 106-62. Section 2 of the bill would have amended the CDLA of 2005 to raise the limit on the size of CDLs to 50% (rather than 25%) of the community's operating budget for the fiscal year in which the disaster occurs. In addition, H.R. 4438 would have authorized the President, under the Stafford Act, to reimburse expenses incurred by an eligible state or local government for the base pay and overtime expenses of employees who provide essential governmental services for response and recovery operations with respect to disaster declarations made for Hurricane Katrina and Hurricane Rita on or after August 29, 2005. This would have applied to expenses incurred during the six-month period from January 1, 2006, through June 30, 2006. The rate of reimbursement would have been 75% of the expenses incurred. (As a general rule, straight- or regular-time salaries for "force account labor" -- regular state or local government employees, in contrast to contractors -- are not eligible for reimbursement by FEMA. See 44 C.F.R. 206.228(a)(4).) The assistance would have been available to state and local governments that have experienced a loss of 25% or more of their annual operating revenues as a result of the disaster(s). Again with respect to disaster declarations made for Hurricanes Katrina and Rita on or after August 29, 2005, H.R. 4438 would have provided that the federal share of assistance for debris removal under the Stafford Act be 100% (rather than not less than 75%). The federal share for the hazard mitigation program would have been not less than 75% (rather than up to 75%) for measures approved during the one-year period following enactment. The limit on hazard mitigation grants for a major disaster would have been 15% of the estimated aggregate amount of grants made for relief with respect to the major disaster. Unemployment assistance would have been available for 52 weeks (rather than no longer than 26 weeks) after the date of the disaster declaration. The amount of assistance would have been not less than 50% of the national average weekly unemployment benefit provided to an individual on the date of the disaster declaration (rather than not to exceed the maximum weekly amount authorized under the unemployment compensation law of the state in which the disaster occurred). Finally, H.R. 4438 would have authorized appropriations of $200 million for each of the three fiscal years 2006, 2007, and 2008, for grants to states and local governments throughout the country to purchase interoperable communications equipment and mobile equipment for the generation of emergency power, and to train first responders and emergency personnel in the use of that equipment. Senate Bills S. 1765 (Landrieu). Louisiana Katrina Reconstruction Act. Introduced September 22, 2005; referred to the Committee on Finance. The CDL provisions were identical to those in S. 1766 and H.R. 3958. Section 114 of the general provisions of this comprehensive bill addressed CDLs. Sec. 114(a) would have prohibited any dollar or percentage limit on a CDL made to assist a local government in which a major disaster relating to Hurricane Katrina was declared to exist. Of the funds appropriated for CDLs in FY2006, Sec. 114(b) of S. 1765 listed specific dollar CRS-13 amounts to be used for loans to five named parishes in Louisiana, totaling just over $1 billion. S. 1766 (Vitter). Louisiana Katrina Reconstruction Act. S. 1766 was introduced September 22, 2005; referred to the Committee on Finance. The CDL provisions in Sec. 114 were identical to those in S. 1765 and H.R. 3958. S. 1846 (Landrieu). Introduced October 6, 2005; referred to the Committee on Homeland Security and Governmental Affairs. S. 1846 would have prohibited any dollar or percentage limit on a CDL made to assist a local government dealing with a major disaster area related to Hurricane Katrina or Hurricane Rita. It would have treated a sheriff department in the state of Louisiana as a local government. It would have provided that there would be no prohibition or limitation on the reimbursement of straight and regular-time salaries of public personnel that provide essential public services in the state of Louisiana on behalf of that state, on or after August 29, 2005. It would have authorized the appropriation of $1.5 billion of the funds provided for disaster relief by P.L. 109-62 to be made available to the appropriate federal agencies to carry out the programs and activities authorized under this act, with the funds to remain available until expended. S. 1855 (Landrieu). Community Disaster Loan Act of 2005. Introduced October 7 (legislative day, October 6, 2005); referred to the Committee on Homeland Security and Governmental Affairs. S. 1855 would have allocated $750 million of the disaster relief funds provided in P.L. 109-62 to support up to $1 billion in loans to help local communities provide essential services, plus $1 million for administrative expenses. For further action, see the description of S. 1858, which became P.L. 109-88 on October 7, 2005. S. 1856 (Landrieu). Community Disaster Loan Act of 2005. Introduced October 7 (legislative day, October 6, 2005); referred to the Committee on Homeland Security and Governmental Affairs. S. 1856 would have allocated $750 million of the disaster relief funds provided in P.L. 109-62 to support up to $1 billion in loans to help local communities provide essential services, plus $1 million for administrative expenses. In addition, it would have permitted a loan made from these funds to exceed $5 million and provided that such loans could only be cancelled with the approval of the Office of Management and Budget (OMB). For further action, see the description of S. 1858, which became P.L. 109-88 on October 7, 2005. S. 1857 (Landrieu). Community Disaster Loan Act of 2005. Introduced October 7 (legislative day, October 6, 2005); referred to the Committee on Homeland Security and Governmental Affairs. S. 1857 would have allocated $750 million of the disaster relief funds provided in P.L. 109-62 to support up to $1 billion in loans to help local communities provide essential services, plus $1 million for administrative expenses. In addition, it would have permitted a loan made from these funds to exceed $5 million and provided that such loans could only be cancelled with the approval of Congress. For further action, see the description of S. 1858, which became P.L. 109-88 on October 7, 2005. S. 1872 (Landrieu). Introduced October 17, 2005; referred to the Committee on Homeland Security and Governmental Affairs. Companion to H.R. 4117. S. CRS-14 1872 would have repealed the provision in the CDLA of 2005 that disallows cancellation of the loans. S. 3721 (Collins). Post Katrina Emergency Management Reform Act of 2006. Introduced July 25, 2006; referred to the Committee on Homeland Security and Governmental Affairs. Reported by Senator Collins with an amendment in the nature of a substitute on August 3, 2006. Section 211 of S. 3721 would have added to the Stafford Act a new section, Sec. 705, applying to the CDL program in the case of a local government located in an area that the President has determined has suffered "catastrophic damages" from a major disaster. The provision would have permitted the President to waive the $5 million limit on the size of a loan made under Sec. 417 of the Stafford Act. It would also have raised the other limit on the size of a loan set forth in Sec. 417(b) from 25% to 50% of the local government's annual operating budget for the fiscal year in which the disaster occurs. It would have provided that the President could establish additional criteria as conditions for eligibility for loans in excess of these limitation(s). (The text of the amended bill referred to a limitation, in the singular. But it did not specify which of the two limitations it might be referring to. The absence of the plural may be an error.) These additional criteria were intended to focus the assistance on those jurisdictions most impacted. The bill further specified that a local government receiving aid under this program for catastrophic damage assistance could use the funds for salaries, including overtime, for its own employees. (As a general rule, straight- or regular-time salaries for "force account labor" -- regular state or local government employees, in contrast to contractors -- are not eligible for reimbursement by FEMA. See 44 C.F.R. 206.228(a)(4).) The bill language did not prohibit cancellation of these loans. Consequently, it appears that the loans for catastrophic damage assistance would have been eligible for cancellation under the provisions of Sec. 417(c) of the Stafford Act (42 U.S.C. 5184(c)). The catastrophic damage assistance section was not among the provisions of S. 3721 included in the amendment approved by the Senate on July 11, 2006. This was S.Amdt. 4560 (Collins) to H.R. 5441, the Department of Homeland Security Act, 2007. Analysis of the CDL Program The federal role in aiding particular local governments in budgetary distress has typically been to subsidize borrowing costs. This has taken the form of providing a federal guarantee of loans made to the local government -- as in the case of the loan guarantee enacted for New York City in 1978 in the midst of its fiscal crisis. It has also taken the form of permitting a locality to issue federally tax-exempt bonds for private activities in order to augment its tax base over the long run -- as in the case of Liberty Zone bonds issued by New York City after the terrorist attack of September 11, 2001. The Community Disaster Loan program is unique in permitting local governments struck by disasters to borrow directly from the federal government. It has also been unique in giving the federal administrators of the loan program the CRS-15 authority to cancel the borrower's obligation to repay the loan under specified local budget conditions. State and local governments are generally prohibited by state constitutions or laws from issuing municipal debt to finance deficits in their operating budgets. Indeed, the regulations governing traditional CDLs prohibit loan cancellation to finance a budget deficit that was anticipated before the disaster.30 Instead, the CDL program is intended specifically to permit a community to borrow to pay for operating expenses when its revenue base has been damaged by a disaster. Budgetary Treatment Financing for the activities authorized by the Stafford Act is provided through funds appropriated to the Disaster Relief Fund (DRF), which is administered by the Department of Homeland Security (DHS) through the Federal Emergency Management Agency (FEMA). Funds appropriated to the DRF remain available until expended (termed a "no-year" account). Typically there is supplemental appropriations legislation to meet the needs of especially catastrophic disasters, as occurred with Hurricane Katrina.31 Accordingly, FEMA's budget request for FY2007 included only routine administrative expenses of $569,000 for the Disaster Assistance Direct Loan Program Account.32 The CDLA of 2005 (P.L. 109-88) provided $1 million from disaster relief funds to help administer the special CDLs. However, FEMA expected to spend an additional $2.5 million in FY2006 for "advisory and assistance services" to help process the $1 billion in special CDLs.33 The CDL program is a direct loan program of the federal government (in contrast to a loan guarantee program). The CDL program is classified as a discretionary program (in contrast to a mandatory program) under the Budget Enforcement Act of 1990. The CDL program is subject to the Federal Credit Reform Act of 1990 (FCRA).34 The FCRA changed the accounting method for measuring the cost of federal direct loans and loan guarantees from cash flow to accrual accounting, starting in FY1992. Under FCRA, discretionary programs providing new direct loan 30 44 C.F.R. 206.366 (a)(5). 31 For more information on the FY2005 emergency legislation, see CRS Report RS22239, Emergency Supplemental Appropriations for Hurricane Katrina Relief, by Keith Bea. 32 The DADL program oversees State Share Loans as well as Community Disaster Loans. The FY2007 administrative expense request for $569,000 covers three FTE positions, the same number of positions as in FY2005 and FY2006. U.S. Department of Homeland Security, Federal Emergency Management Agency, Disaster Assistance Direct Loan Program Account, Fiscal Year 2007 Congressional Justification (Washington, February 2006), pp. FEMA-1 - FEMA-2. 33 FEMA, DADL Program Account, Fiscal Year 2007 Congressional Justification, pp. FEMA-5 and FEMA-11. 34 The Omnibus Budget Reconciliation Act of 1990, P.L. 101-508, added Title V to the Congressional Budget Act. Title V is also known as the Federal Credit Reform Act of 1990. CRS-16 obligations or new loan guarantee commitments require appropriations of budget authority equal to their estimated subsidy costs. Furthermore, the appropriations bill must include an estimate of the dollar amount of the new direct loan obligations that are supportable by the subsidy budget authority appropriated to the agency for its credit program.35 These requirements of the FCRA explain the language used in the CDLA of 2005 and the Emergency Supplemental Appropriations Act of 2006. In February 2005 the Office of Management and Budget (OMB) estimated the credit subsidy rate of the traditional CDL program at 93% for FY2005 and FY2006.36 Roughly speaking, this means that for every $100 million of loans made and interest due, $93 million in principal or interest was cancelled or forgiven.37 This was by far the highest subsidy rate among all of the federal government's direct loan and loan guarantee programs. In contrast, a subsidy rate of 75% was used in the calculations for the CDLA of 2005 and the Emergency Supplemental Appropriations Act of 2006. This lower rate was based on the assumption that the special CDLs could not be cancelled. The 75% subsidy rate was used to determine that $750 million in budget authority could support total loans of $1 billion, as provided in the language of P.L. 109-88. This language conforms to the requirements of the FCRA. In February 2006 the Administration's FY2007 budget reported a subsidy rate of 75% and obligations limit of $1 billion for FY2006 as enacted by the CDLA; the budget contained no CDL 35 For further explanation, see CRS Report RL30346, Federal Credit Reform: Implementation of the Changed Budgetary Treatment of Direct Loans and Loan Guarantees, by James M. Bickley, especially Appendix B, Budgetary Treatment of a Hypothetical Direct Loan. 36 For FY2005, the traditional CDL program had an estimated credit subsidy rate of 93.43%. This subsidy rate was attributed 3.72 to the interest rate and 89.72 to all other. The interest rate subsidy accounts for the borrower's interest rate being below the federal government's cost of borrowed funds. "All other" reflects cancellations of interest and principal payments. (No part of the subsidy was attributed to defaults net of recoveries or to fees.) The average borrower's interest rate assumed for the purpose of calculating the subsidy rate for the CDL program during FY2005 was 4.30%. This was lower than the borrower interest rates that applied to most of the other federal direct loan and loan guarantee programs. In early 2005, the subsidy rate of the traditional CDL program for FY2006 was estimated just slightly lower at 93.30%, assuming a borrower interest rate of 4.66%, and attributing 3.75 of the subsidy to the interest rate, and 89.55 to all other. U.S. Executive Office of the President, Office of Management and Budget, Budget of the United States Government, Fiscal Year 2006, Federal Credit Supplement (Washington: GPO, 2005), pp. 2, 10, 16. 37 More precisely, the credit subsidy rate is equal to 1.00 minus the ratio of the present value of expected cash inflows to the government, relative to the present value of cash outflows. In essence, it reflects the extent of nonpayment by the borrowers. The estimate is based on both actual and projected repayments by borrowers. U.S. General Accounting Office (now named the Government Accountability Office), Letter to The Honorable Christopher S. Bond, Chairman, Subcommittee on VA, HUD and Independent Agencies, Committee on Appropriations, U.S. Senate, June 5, 1996, GAO/RCED-96-148R Community Disaster Loans, p. 5. CRS-17 subsidy or obligation entries for FY2007.38 Similarly, the 2006 Supplemental Appropriations Act (P.L. 109-234) provided that $278.8 million in appropriations could support direct loans of up to $371.733 million. This again assumed a 75% subsidy rate.39 Even at 75% the special and supplemental CDL programs have the second highest subsidy rate assumed for FY2006 among all of the federal direct loan and loan guarantee programs.40 The interest rate component of the subsidy should be higher under the special CDL program and the emergency supplemental CDLs than under the traditional CDL program because all of the Gulf-area jurisdictions will get the discounted interest rate.41 The FY2007 budget assumes a borrower interest rate of 2.70% for the CDL program in FY2006. This is half or less of the borrower rate reported for other federal direct loan programs. Despite this apparent interest subsidy, the FY2007 budget attributes all of the 75% subsidy rate to defaults (net of recoveries) and none to interest.42 The actual subsidy outcome will not be known for five or 10 years, depending upon the maturity period set for the special CDLs. Historically, CDLs have been made on an "as-needed" basis, without a pre- specified aggregate limit. Furthermore, from 1974 until 2000 there was no dollar limit on the size of a loan that could be made to an individual local government through the traditional CDL program. The 2000 amendment limited the loan to any individual local government to $5 million and provided that no additional loan would be made to a community that is in arrears on payments under a previous loan.43 Congress made these changes to help control program costs. The 2005 CDLA took another approach to controlling the cost of the special CDL program that it created. While it lifted the $5 million cap on an individual loan, the new law prohibited the cancellation of any loan made under its auspices. It also set an aggregate limit of $1 billion on the principal amount of loans that could be made, based upon a set-aside of $750 million from funds already appropriated for disaster relief. The FY2007 budget assumed that the average loan size under the 38 U.S. Executive Office of the President, Office of Management and Budget, Budget of the United States Government Fiscal Year 2007, Federal Credit Supplement (Washington: February 2006), pp. 2-3. 39 $371,733,000 x .75 = $278,799,750. Even if up to 75% of the $371,733,000 in loans authorized were defaulted upon, the $279.8 million appropriation would be sufficient to subsidize the losses. 40 Only the Transitional Housing Program for Homeless Veterans had a higher subsidy rate, 79.89%. OMB, FY2007 Federal Credit Supplement, p. 11. 41 Credit analysts at OMB suggested that roughly five percentage points of the total estimated credit subsidy of 75% is attributable to the interest rate subsidy and 70 percentage points to the expected default on principal and interest payments. 42 OMB, FY2007 Budget, Federal Credit Supplement, p. 10. 43 Disaster Mitigation Act of 2000, P.L. 106-390, 114 Stat. 1571. CRS-18 CDL program in FY2006 would be $5.714 million.44 Similarly, the Emergency Supplemental Appropriations Act of 2006 set a $371.733 million limit on the principal amount of loans that could be made, based upon an appropriation of $279.8 million (minus $1 million for loan administration). Loan or Grant Program? There has been considerable controversy in Congress over whether the CDL monies to be advanced to the local governments affected by Hurricanes Katrina and Rita should be treated as loans that must be repaid or as loans that may be cancelled (forgiven). Cancellation of loan repayment obligation in effect results in a grant to the community. The community disaster program for local governments began in 1970 as a program of community disaster grants. In 1974, Congress replaced the grant program with a program of community disaster loans.45 However, the loan program was accompanied by a provision requiring mandatory cancellation of the obligation to repay all or part of the loan under specified local budget conditions. In contrast, the funds advanced under the 2005 CDLA or the 2006 Emergency Supplemental would be treated strictly as repayable loans. A 1995 report by FEMA's Office of Inspector General recommended considering the conversion of the community disaster loan program into a grant program because so few of the loans were expected to be repaid and because it requires much less time, effort, and expense to administer a grant program than a loan program.46 In 1996, FEMA's Director of the Office of Policy and Regional Operations noted that the subsidy rate for the CDL program was close to 90% for FY1996 and close to 100% for FY1997. He said that FEMA's goal was to terminate the loan program or, if not terminated, to administer it as a grant program.47 In 1997 congressional testimony, then FEMA director James Lee Witt asked rhetorically ... then let it be a grant program if they can't pay the money back. Why spend all the money we are having to spend administratively to support these loans and to 44 OMB, FY2007 Budget, Federal Credit Supplement, p. 2. 45 The evolution of the CDL program is explained in more detail at the end of this report, in the Legislative History section. 46 Federal Emergency Management Agency (FEMA), Office of Inspector General, Audit of FEMA's Disaster Relief Fund, H-16-95 (July 27, 1995). Cited in U.S. General Accounting Office (now named the Government Accountability Office), Letter to The Honorable Christopher S. Bond, Chairman, Subcommittee on VA, HUD and Independent Agencies, Committee on Appropriations, U.S. Senate, June 5, 1996, GAO/RCED-96-148R Community Disaster Loans, p. 5. 47 Op. cit. CRS-19 have accounting firms go in and do audits of the cities or governments that are getting the loans if they are not being repaid?48 With a grant program, immediate revenue relief could be provided to local jurisdictions in a disaster area without saddling them with additional debt. With no possibility of interest or principal repayments, a grant program would cost more per dollar of aid delivered than a loan program. In addition, a grant program would likely be used by more jurisdictions than a loan program and could thus be considerably more expensive for federal taxpayers. A larger program would redistribute more resources from non-affected areas to areas affected by disaster. However, even though administrative accounting costs may be lower with grants than loans, grants may require more federal control and oversight of the use of funds. Monitoring compliance could increase the cost of administering a grant program. Experience with Traditional Loans and Their Cancellation The traditional CDL program has been used infrequently relative to the number of declared disasters. From the first loans made in August 1976 through September 30, 2005, a period of 29 years, FEMA received 64 loan applications related to 21 separate disasters. Of those 64 applications, four were withdrawn by the community and five were suspended because another federal aid program was then available to school districts through the Department of Education. FEMA approved the remaining 55 loan requests and disbursed funds. In contrast, over the same time period there were 1,104 declared major disasters, many of which affected more than one local jurisdiction. No community disaster loans were made from FY1999 through FY2005. The FEMA data summarized in Table 1 (in millions of dollars) and Table 2 (as a percentage of total for loans disbursed) suggest that the traditional CDL program is more accurately described as a grant program with a small loan component. This is because the CDL program has experienced a high rate of loan cancellation, measured in dollar terms. Of the $233.5 million in total loan principal disbursed, $168.7 million, or 72.2%, went to 16 loans that were fully cancelled. Another $57.0 million, or 24.4%, was the amount of principal cancelled for the 6 loans that were partially cancelled. Adding these two categories together indicates that $225.7 million, or 96.6%, of the total loan principal disbursed was cancelled. The repayment experience looks better when measured simply by the number of loans. Thirty-six, or two-thirds, of the 55 individual loans made have been paid back in part or in full. However, many of these loans were for amounts as small as $500 or $1,000. Altogether, these loans repaid only $5.5 million, or 2.3%, of the total principal amount loaned by the CDL program. 48 U.S. Congress, House Committee on Appropriations, Subcommittee on VA, HUD, and Independent Agencies, hearings, part 4, 105th Cong., 1st sess., 1997 (Washington: GPO, 1997), pp. 64-65. CRS-20 When the loan principal was cancelled, generally so was the interest due. In addition to the $225.7 million in loan principal that was cancelled, so was $95.3 million in interest owed. In contrast, loans that were paid back in part or in full paid only $10.1 million in interest. CRS-21 Table 1. Community Disaster Loan Program from the First Loans in August 1976 through September 30, 2005 Amounts in $ millions Number Principal of Loans Principal Interest and Interest Loans applied for 64 -- -- -- Applications withdrawn or suspended -9 -- -- -- Loans approved 55 $279.7 -- -- Loans disbursed 55 233.5 $106.8 $340.3 Loans cancelled in full 16 168.7 74.4 243.1 Loans cancelled in part 6a 57.0 20.9 77.9 a Loans paid back in part 6 2.2 8.3 10.5 Loans paid back in full 30 3.3 1.8 5.1 Loans outstanding 4a 2.3 1.4 3.7 Source: Tabulated by CRS from data on individual loans, as of Sept. 30, 2005, provided by Gerry Miederhoff, FEMA program specialist. a. Five loans were counted as both cancelled in part and paid back in part. One outstanding loan has also been partially cancelled. Another outstanding loan has been partially repaid. The dollar amounts are assigned to their respective categories. Table 2. Community Disaster Loan Program from the First Loans in August 1976 through September 30, 2005 (as a percentage of total for loans disbursed) Principal Number Principal Interest and of Loans Interest Loans disbursed 100.0% 100.0% 100.0% 100.0% Loans cancelled in full 29.1 72.2 69.9 71.4 Loans cancelled in part 10.9 24.4 19.6 22.9 Loans paid back in part 10.9 0.9 7.8 3.0 Loans paid back in full 54.5 1.4 1.7 1.5 Loans outstanding 7.3 1.0 1.3 1.1 Note: Percentages may not sum to 100.0 due to rounding and, for number of loans, some double counting. See note a to Table 1. Source: Tabulated by CRS from data on individual loans, as of Sept. 30, 2005, provided by Gerry Miederhoff, FEMA program specialist. CRS-22 Eliminating the $5 Million Per Loan Cap Many large local governments in the Gulf region, including New Orleans, could not benefit significantly from the traditional CDL program because of the loan limit of $5 million per jurisdiction, per disaster. Removing the $5 million limit is likely to deliver more federal aid to large jurisdictions than would be allowed under traditional program rules. The primary argument against eliminating the $5 million cap is the greater potential cost to the federal government. A total of five of the 55 CDLs approved through September 2005 under the traditional CDL program exceeded the $5 million cap. Together they accounted for 90% of the cancelled principal and 93% of the cancelled principal and interest (see Table 3). This suggests that removal of the $5 million cap is likely to increase the federal cost of the program if there are defaults on large loans. Some argue that the other cap -- 25% of the borrowing government's operating budget in the fiscal year of the disaster event -- achieves the objective of capping the federal exposure, albeit at a higher level. That cap was raised to 50% for loans made under the 2006 Emergency Supplemental Appropriations Act. Table 3. CDLs Greater than $5 Million and Amount Cancelled (in $ millions) Principal Principal Date of Amount Disaster Event Amount and Interest Event Disbursed Cancelled Cancelled Hurricane Hugo, U.S.V.I. 9/20/89 $50.1 $48.2 $65.7 Hurricane Val, American Samoa 12/13/91 $10.2 $8.6 $12.0 Hurricane Andrew, Homestead, FL 8/24/92 $10.3 $10.3 $13.5 Hurricane Iniki, Kauai, HI 9/12/92 $15.0 $15.0 $19.1 Hurricane Marilyn, U.S.V.I. 9/16/95 $127.2 $127.2 $189.0 Total for CDLs over $5 million __ $212.8 $209.3 $299.3 (5 loan approvals) Total for all CDLs __ $233.5 $233.5 $321.0 (55 loan approvals) Source: Data as of Sept. 30, 2005, from Gerry Miederhoff, FEMA program specialist. Lowering the Interest Rate A consolation offered to those concerned about the non-cancellation provision for the special CDLs was that the administrators of the loan program would have considerable latitude in setting the terms of repayment for the loans which include CRS-23 both the interest rate and the time period of the loan.49 However, according to the interim regulations accompanying CDLA of 2005, the time period for repayment is the same for the special program as it is for the traditional program -- typically five years, and not to exceed 10 years except in cases of exceptional financial hardship.50 The special CDL program provides FEMA administrators the option of offering a lower interest rate to communities judged to be in more serious financial distress. According to FEMA, all Gulf jurisdictions will be eligible for the subsidized interest rate on the special and emergency supplemental CDLs. Lowering the interest rate is intended to reduce the burden of repaying the loan. This is counter to the usual practice in credit markets, where borrowers judged more financially risky typically face a higher interest rate than those judged more likely to repay. However, it does parallel the treatment of physical disaster business loans offered by the Small Business Administration (SBA) to businesses that have not been able to obtain credit elsewhere.51 A lower interest rate would, by design, increase the attractiveness of the CDL program to more governments. The likely increased demand for the loans would increase the federal cost of the program. The larger interest subsidy alone would add to the cost of the program even if the loans were repaid. Attracting less creditworthy borrowers is likely to raise the risk of default on the loans, further increasing the cost of the program. In contrast, a policy of linking the CDL interest rate to the underlying credit rating of the borrowing government could reduce the adverse selection that may exist under both the traditional and special CDL programs.52 For example, setting the interest rate at a fixed amount (number of basis points) or percentage below the local government's current five-year bond rate is a method that could be easily implemented by FEMA yet would still reduce the burden on the borrowing government. 49 Statement of Representative Baker, Congressional Record, daily edition, vol. 151, no. 130, October 7, 2005, p. H8796. 50 Department of Homeland Security, Emergency Preparedness and Response Directorate, Federal Emergency Management Agency, "Special Community Disaster Loans Program," 70 Federal Register 60443, October 18, 2005. 51 The SBA sets a maximum interest rate of 4% per year and a maximum maturity of 30 years on loans to borrowers judged unable to obtain credit elsewhere. For businesses that SBA determines can obtain credit elsewhere, the interest rate charged by SBA cannot exceed what is being charged in the private market at the time of the disaster, or 8%, whichever is less, and the maturity period cannot exceed three years. [http://www.sba.gov] visited October 18, 2005. 52 The term "adverse selection" refers to the concept in insurance markets whereby only those who will likely need insurance are most likely to purchase policies. In the context of CDLs, it suggests that jurisdictions with serious budget troubles will be more likely to use the federal loan program. CRS-24 Experience with the Special CDL Program With the authority to make up to $1 billion in loans, the special CDL program was nearly four times as large as the traditional CDL program was as of September 30, 2005 ($233.5 million loaned). As of October 4, 2006, FEMA had provided 84 special community disaster loans for local governments in Louisiana and 52 for Mississippi, for a total of 136 loans. Twenty-nine of the loans in Louisiana and 16 in Mississippi, or a total of 45 loans, exceeded $5 million apiece. The loan amounts summed to $739 million for Louisiana communities, including $120 million for New Orleans, and $261 million for Mississippi communities. Thus, the $1 billion limit on loans under the original special CDL program was reached and the program was considered completed.53 All of the loans received the subsidized interest rate calculated by the formula set forth in the interim rules implementing the special CDL program.54 The subsidized rates were in the range of 2.66% to 2.90%, based on five-year Treasury note rates in the range of 4.32% to 5.01%. The specific rate depended on the Treasury note rate on the date that the loan was approved. Concerned that applications were approaching the $1 billion limit, on November 16, 2005, FEMA officials placed a cap of $700 million on the aggregate amount of loans that could be approved for communities in Louisiana, with the remaining $300 million reserved for Mississippi communities. Applications approved as of November 16 were approved for the full amount requested. Nineteen applications totaling $250.8 million in loans had been approved for Louisiana communities as of that cutoff date.55 To stay within its limit, the state of Louisiana reduced by 30% every request for a loan of more than $2 million that was received after November 16. As of February 21, 2006, 14 communities in Louisiana had had a total of $126 million cut from their loan requests. The understanding was that if additional funds became available later on, the cuts would be restored. On April 13, 2006, FEMA transferred $25 million of Mississippi's allotment to Louisiana. Another $72 million was released from funds approved for but not borrowed by the New Orleans school board and other communities. The resulting $97 million was distributed proportionately to the communities whose requests had been trimmed by 30%.56 On September 5, 2006, there was roughly $57 million in underfunding of loans for Louisiana communities. Applicants from 2005 who qualified under the 2006 emergency supplemental rules were made whole with funds from that appropriation. Communities that did not qualify under the supplemental rules were provided funds from those unclaimed from the 2005 special CDL 53 Information from John Wilmot at FEMA, October 4, 2006. 54 44 C.F.R. 206.371(c). 55 Michelle Krupa, "Loan cuts threaten official agencies," The Times-Picayune, December 6, 2005, p. 1. Available at [http://www.nola.com/news/t-p/frontpage/index.ssf?/base/news- 4/1133854216307140.xml], visited December 13, 2005. 56 Information from Mr. Chris Cerniauskas, Louisiana Governor's Office of Homeland Security and Emergency Preparedness, July 28, 2006. CRS-25 program. As of October 4, 2006, $22 million in approved loans for Louisiana communities remained underfunded.57 Experience with the Emergency Supplemental CDLs The Emergency Supplemental Appropriations Act for FY2006 (P.L. 109-234), enacted on June 15, 2006, authorized an additional $371.733 million in direct loans to local governments affected by Hurricanes Katrina and Rita. As of October 4, 2006, loans totaling $261 million had been provided for Louisiana communities, including an additional $120 million for New Orleans. All of the applicants from Louisiana that qualified under the supplemental had their loan requests fully funded. For Mississippi communities, loans totaling $9.5 million were provided for eligible applicants. No additional eligible applicants were identified in either Louisiana or Mississippi. Thus, $270.5 million of the $371.733 million authorized was provided to eligible applicants and the program was completed; $101.2 million of the loan authorization was not used. As of October 4, 2006, FEMA had approved 12 emergency supplemental loans for local governments in Louisiana and four for Mississippi, for a total of 16 loans. Seven of the loans in Louisiana and one loan in Mississippi, or a total of eight loans, exceeded $5 million apiece. All 12 of the loans in Louisiana and four of the loans in Mississippi were for 25% or more of the local government's budget. All of the loans received the subsidized interest rate available to the special CDLs. 58 Number of Loans Approved by State and Size of Loan Tables 4 and 5 summarize the experience under the two special CDL programs combined, with separate tabulations for Louisiana and Mississippi. FEMA approved 96 loans for Louisiana communities, totaling $1 billion in principal amount. Fifty-six loans totaling $271 million were approved for communities in Mississippi (Table 4). All together, FEMA approved 152 loans totaling $1,271 million. The full $1 billion of loan authority under the CDLA of 2005 was used. Of the $372 million in loans authorized by the 2007 emergency supplemental, $271 million was used, but $101 million was not. 57 Information from John Wilmot of FEMA, October 4, 2006. 58 Information from John Wilmot at FEMA, October 4, 2006. CRS-26 Table 4. Total Number and Dollar Amount of Combined 2005 Special and 2006 Supplemental CDLs Approved by FEMA, by State Number of Amount State Loans ($ millions) Louisiana 96 1,000 Mississippi 56 271 Total 152 1,271 Source: Data supplied by FEMA, June 18, 2007. Approximately two-thirds of the 152 loans approved were for amounts under $5 million, the previous cap on the size of a community disaster loan. Fifty-three loans were for more than $5 million. Of those, 18 loans were for between $5 million and $10 million, 21 between $10 million and $20 million, and 14 over $20 million. Louisiana dominated in both the smallest and largest loan size categories. Louisiana communities received 33 loans for under $1 million, compared with 10 for Mississippi communities. All of the 14 loans for over $20 million went to Louisiana entities (Table 5). Table 5. Size Distribution of Combined Special and Supplemental CDLs Approved by FEMA, by State (number of loans) Size of Loan Louisiana Mississippi Total (in $ millions) over 20 14 0 14 10-20 10 11 21 5-10 12 6 18 1-5 27 29 56 under 1 33 10 43 Total 96 56 152 Source: Tabulated by CRS from information on individual loans supplied by FEMA, June 18, 2007. Legislative History Over its history, the community disaster program has taken the form of both a grant program and a loan program. Several approaches have been used to limit the cost of the program. In addition, changes were made in the definitions of revenues to be replaced and expenses to be supported by the program. CRS-27 Disaster Relief Act of 1970 The CDL program originated as a grant program. Sec. 261 of the Disaster Relief Act of 1970 (P.L. 91-606) provided for community disaster grants. The grant provisions originated in a House amendment to S. 3619. The President was authorized to make grants to any local government which, as the result of a major disaster, had suffered a substantial loss of property tax revenue (both real and personal). A grant could be made for the year of the disaster and the following two tax years. The grants were intended to replace lost property tax revenue. The locality was expected to maintain its tax rate and assessed value factors at their pre-disaster levels. Specifically, the grant for any tax year could not exceed the difference between the annual average of property tax revenues received by the local government during the three tax years preceding the disaster and the actual property tax revenue received by the local government for the tax year of the disaster, and similarly for the next two tax years. However, if the government had reduced its tax rates or tax assessment valuation factors subsequent to the disaster, an adjustment would be made to remove the effect when measuring the shortfall in revenues. Alternative Senate Proposal for a Loan Program Not Adopted. The conference committee on S. 3619 did not adopt the provisions of the bill passed by the Senate which proposed a loan program instead of the grant program. The Senate- passed bill would have authorized $100 million to establish a Community Disaster Loan Fund in the Treasury. The Fund would have provided loans to local governments for three purposes: (1) meeting interest and principal payments on outstanding bonded indebtedness; (2) paying the local share of federal grant-in-aid programs necessary to restore the disaster area; and (3) providing and maintaining essential public services, such as fire and police protection. To qualify for a loan, a local government would have to have suffered a loss of more than 25% of its tax base or such a substantial amount that it could not otherwise meet payments on its debt obligations, its matching shares, or its essential public services. The size of the loan was linked to the loss of property tax revenues, in the same way as the grant program that was adopted. The loans would be interest-free for the first two years. The term of the loan could not exceed 20 years. The interest rate on the loans would be determined by the Secretary of the Treasury, based on the current average market yield on 10- to 12-year U.S. Treasury obligations less an adjustment not to exceed 2% per year. The President would be authorized to defer the initial payments on the loans for five years or half the term of the loan, whichever was less. Such sums as the President might determine necessary could be transferred to the Fund from disaster relief appropriations. In turn, the President could transfer excess monies in the Fund to the general fund of the Treasury or to disaster relief appropriations.59 59 Legislative History of P.L. 91-606, Disaster Relief Act of 1970, United States Code, Congressional and Administrative News, 91st Cong., 2nd Sess., 1970, vol. 3 (St. Paul, Minn.: West Publishing Co., 1971), pp. 5513-5514. CRS-28 Disaster Relief Act of 1974: The Robert T. Stafford Disaster Relief and Emergency Assistance Act60 The Disaster Relief Act of 1974 (P.L. 93-288, 42 U.S.C. 5121 et seq.) replaced the program of community disaster grants with a program of community disaster loans. However, the loan program was given a mandatory cancellation provision. This eliminated the locality's obligation to repay the loan, under specified budgetary conditions (Sec. 414(a)). The 1974 amendments broadened the consideration of revenues to be replaced from property taxes to "tax and other revenues." The amount of, and limit on, the loan was linked, not to lost revenues, but to the size of the operating budget. The budget could include additional disaster-related expenses if they were of a municipal operation nature. Specifically, the 1974 Act authorized the President to make loans to any local government which suffers a substantial loss of tax and other revenues (which the conferees intended to include utility revenues) as a result of a major disaster, and has demonstrated a need for financial assistance in order to perform its governmental functions. (The legislative history of the act gives as examples of municipal services the protection of public health and safety and the operation of the public school system.) The amount of the loan is to be based on need but may not exceed 25% of the annual operating budget of the local government for the fiscal year in which the major disaster occurs. Repayment of all or any part of the loan is to be cancelled to the extent that revenues of the local government during the three full fiscal years following the major disaster are insufficient to meet the operating budget of the local government. This budget may include additional disaster-related expenses of a municipal operation character. The 1974 Act also provided that any loans made under this section would not reduce or otherwise affect any grants or other assistance under the Stafford Act. The enacted provisions regarding CDLs originated in S. 3062, the Disaster Relief Act Amendments of 1974, as approved by the Senate. There was no counterpart in the House amendment to S. 3062. The conference substitute amendment made the cancellation of community disaster loans mandatory under the specified conditions. The Senate-passed bill had authorized the President to cancel all or part of the CDLs under the specified conditions.61 The Senate Report to accompany S. 3062 stated that the loan or any cancelled portion could not be used as the non-federal share of any federal program, including those programs under the act.62 60 The 1974 Act was renamed the Stafford Act by the Disaster Relief and Emergency Assistance Amendments of 1988, P.L. 100-707, Sec. 102. 61 Legislative History of P.L. 93-288, Disaster Relief Act of 1974, United States Code, Congressional and Administrative News, 93rd Cong., 2nd Sess., 1974, vol. 2 (St. Paul, Minn.: West Publishing Co., 1975), pp. 3077, 3086, and 3110. 62 Op. cit., p. 3077. Senate Report (Public Works Committee) No. 93-778, April 9, 1974, (continued...) CRS-29 Disaster Mitigation Act of 2000 Before 2000, there was no dollar limit on the amount of the loan that could be made to a local government under Sec. 417 of the Stafford Act. Sec. 207(5) of the Disaster Mitigation Act of 2000 (P.L. 106-390) placed a limit of $5 million on the size of the loan that could be made to a local government. (This dollar limit was in addition to the limit of 25% of the operating budget.) The 2000 amendments also provided that a local government cannot receive additional assistance under Sec. 417 if it is in arrears on payments for a previous loan.63 In placing these limits, Congress was reportedly reacting to two very large loans that had been made to the Virgin Islands in the aftermath of Hurricane Hugo in 1989 and Hurricane Marilyn in 1995, for which repayment was cancelled. See Table 3 earlier in this report. Section 204(a) of H.R. 707 as passed by the House would have repealed Sec. 417 of the Stafford Act and thereby eliminated the disaster loan program. It was Sec. 207 of H.R. 707 as passed by the Senate which contained the amendments to Sec. 417 that were adopted in the enacted bill. 62 (...continued) 12. Community Disaster Grants (Sec. 414). 63 CRS (archived) Report RS20736, Disaster Mitigation Act of 2000 (P.L. 106-390): Summary of New and Amended Provisions of the Stafford Disaster Relief Act, by Keith Bea, available from author upon request. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL33174