Saving the Basics: Municipal Infrastructure and Mitigation

Harris Beach PLLC

This post continues our ongoing series on extreme weather; and the varied ways in which municipalities throughout the country have handled recovery and future preparations.

Federal, state and local governments spent $440 billion on transportation and water infrastructure in 2017, according to the Congressional Budget Office. In September 2018, the Federal Emergency Management Agency (FEMA) reported that it provided an average of $4.7 billion in public assistance grants to state and local governments, and some non-profits, to fund “debris removal, life-saving emergency protective measures and the repair, replacement or restoration of disaster-damaged publicly-owned buildings and facilities, including schools, parks and infrastructure, as well as the facilities of certain private nonprofit organizations” to areas declared federal disaster areas. FEMA requires that structures repaired or rebuilt be elevated to “at least the 100 year flood level.” A 100-year flood is any flood event that has a one percent probability of occurring in any given year.

FEMA Public Assistance grants typically cover “no less than 75 percent of eligible costs” with the balance (up to 25 percent) coming from state and local funds. This means that in an “average” year up to approximately $5.875 billion of qualified recovery work is necessary in federally declared disaster areas (factoring in damage to private structures and insurance claims; during 2017 according to Munich Re, the cumulative costs were more than $306.2 billion).

Damage to municipal infrastructure may require quick repairs due to the nature of the infrastructure - water, sewer, roads - and the public need for its operation. Even presuming the damage is covered by insurance, coverage alone may not be sufficient to cover the local share of the costs of reconstruction. While most individuals or corporations have insurance to lessen large repair bills, and may pay large insurance premiums, efforts to mitigate potential damage to infrastructure can also be expensive.

The cost of insurance

While insurance may cover much of the remaining costs of reconstruction, insurance premiums usually rise, presuming the policy is renewed. Following Superstorm Sandy in New York, the Metropolitan Transit Authority (MTA) had a reported $4.8 billion in damage to its systems. It was reported at the time that while the MTA had insurance to cover $1 billion of costs, when it came time to renew the annual policy, the value of the coverage was cut in half while the insurance premium doubled.

Alternative to insurance: Catastrophe bonds

In reaction to the increasing costs of insurance for an annual policy, the use of catastrophe bonds has increased. Originally created in the 1990s, a catastrophe bond in essence transfers named risks to investors. Generally a catastrophe bond has a short life (maturity) of three years or less. Should a named event not occur, the investor is paid; while if a named event, does occur the principal is used to pay for the claims. In 2013, following Sandy, the MTA issued a $200 million catastrophe bond for a three-year period. In 2017, the MTA issued its second catastrophe bond in the amount of $125 million. According to The Financial Times, worldwide the catastrophe bond market now has approximately $98 billion of catastrophe bonds outstanding as of June 2018 including $30 billion issued worldwide in the first six months of 2018.

The costs of mitigation

• Train tracks are among the various types of infrastructure potentially at risk during storms and rising tides. Track ballast, basically crushed rock or stone used to slow vegetation which would otherwise interfere with operations, is used to bear the load from railroad ties, hold train tracks in place and drain water. It is generally important that the ballast easily drain to allow the trains to run smoothly for a long period of time. As ballast erodes, the stability of the track may be compromised and debris may clog train parts. Train tracks adjacent to waterways or in otherwise flood prone areas must be closely monitored for signs of deterioration; and is why tracks must be inspected following a flood.

• Amtrak’s Northeast Corridor (running from Boston to south of Washington, D.C.) carries more than 12 million people annually along more than 457 miles of track, many of which are adjacent to rivers, streams and bays. As recently reported in a variety of news outlets, many of these miles are now subject to periodic flooding. A recently released report recommends building temporary flood barriers in a study area near Wilmington, DE at a cost of $24 million per mile of track. These barriers could be removed following storms.

• The city of Miami has been undertaking efforts to raise roads by a reported two feet, install stormwater pumps and revamp building code to allow for higher buildings. As reported in the Miami Herald in 2017 the two year cost to raise roads, install stormwater pumps and upgrade sewer connections in several neighborhoods is $100 million over a two-year period. The estimated costs to continue this on a city-wide basis is a reported $400-$500 million.

• As readers may recall in an earlier posting in this series covering Sandy, the City of New York, in conjunction with the Department of Housing and Urban Development, announced a plan to develop protection along 10 miles of coastline along the southern tip of Manhattan. Among the improvements are levees, floodwalls and parks to protect that area of Manhattan from future flooding at a reported cost of $1.45 billion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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