On July 29, Florida's State Board of Administration voted to spend
$224 million in return for a billionaire's pledge. Warren Buffett, the
"Oracle of Omaha," guaranteed that his Berkshire Hathaway firm would
buy $4 billion in state bonds if a storm caused more damage than
Florida's catastrophe fund could cover.
The 2-1 vote, with Attorney General Bill McCollum dissenting, gave
Floridians the clearest signal yet of the state government's precarious
Quite simply, Gov. Charlie Crist and the
Legislature have bet the state's fiscal future on remaining storm-free.
And, even with this deal, the state still faces enormous risks. The
agreement simply reduces the state's total Hurricane Catastrophe Fund
liability after a major storm to $28 billion from $32 billion.
given that no state has ever issued more than $11 billion in bonds all
at one time, even $28 billion is more than Florida taxpayers could
handle. With or without Buffett's funding — which won't even kick in
until the state spends a lot of its own money — the state would still
face an unprecedented fiscal crisis if a major storm hit.
the deal arguably could be marginally worth the investment under the
right set of circumstances: a major storm, but not too major. The Cat
Fund has $5 billion in reserves of its own, so the deal to provide $4
billion more does almost double its capacity. That slightly reduces the
risk that a major storm would bankrupt the state.
simply reducing the size of the Cat Fund, a measure state CFO Alex Sink
has advocated, would have had just about the same fiscal impact and
cost the state nothing. (The Legislature rejected it because insurance
premiums might have gone up a bit, especially for affluent homeowners
living in vulnerable coastal areas.)
Still, it's worth respecting
Attorney General McCollum's vote against the proposal. The money going
to Buffett's firm, for example, could have funded other priorities in
Florida's state budget — a 40-percent increase in programs for the
elderly, for instance, or health insurance coverage for more than
Some optimists evidently believe that the
federal government would approve a bailout for Florida if a major storm
exceeded the combined resources of the state's Cat Fund and Mr.
Buffett's bond purchase.
Although a plan has passed the U.S.
House of Representatives in two different forms — once as federal "wind
insurance," the other as a federally backed version of the Cat Fund
that's supposedly private — the plan couldn't even get 30 votes in the
Senate, where any proposal needs 60 votes out of 100 to pass against a
In the long term, Florida needs to follow
Ms. Sink's suggestion and phase out the Cat Fund. Florida Citizens
Property Insurance Corp., the state agency that serves as Florida's
largest provider of homeowners' insurance, also needs to go.
doing these things, the state also needs to let free-market competition
— rather than state bureaucrats — set the rates that private insurance
companies may charge. Unfortunately, in recent hearings on insurers'
proposed rate hikes, the state has not done so. However, a bigger test
of the regulatory climate will come in the weeks ahead, when two of the
largest companies — State Farm and Allstate — face rate-related
For coastal homeowners, the transition would not be
easy: Premiums would go up. But many of the homeowners facing higher
insurance premiums are comparatively well off. In fact, Dan Sutter of
the University of Texas-Pan American has shown that Florida's coastal
counties are wealthier than its inland areas.
residents of modest means may have a difficult time affording higher
premiums. There are several ways in which the state can help them.
First, the "My Safe Florida Home" program — intended to make homes
safer and more storm-resistant — ought to be renewed and expanded.
Lowering the risk of damage can make property insurance more
affordable. In connection with this, the state should set a goal of
conducting a safety inspection of every storm-vulnerable home by the
end of 2009.
Second, through tax credits and low-interest loans,
the state and federal government should help people pay for improving
the storm resistance of their homes. Studies conducted after Hurricane
Andrew devastated a wide swath of South Florida in 1992 revealed that
many structures failed because the region's strict building code was
not strictly enforced by local governments.
In short, when it
comes to property insurance, government ought to fix the mess that
government made by helping homeowners to weather storms while also
sparing the state a financial storm.
What Florida cannot do is
rely on bond deals with billionaires to save its fiscal future.
Instead, the state needs to buckle down and help its own citizens
secure their property against hurricanes.