How a minor storm could bankrupt Florida

Here’s one scary Halloween scenario that could easily come true: By
trick-or-treat time, just past the hurricane season’s peak, Florida’s
state government easily could be bankrupt — and its taxpayers reeling
from enormous new costs — unless the Legislature abruptly changes

This particular risk of a fiscal meltdown doesn’t arise from the
housing crisis or the slumping national economy, although those factors
are causing the state’s revenue projections to be dire enough.

No, this particular danger arises from the state’s enormously
misguided stance on property insurance. If a storm — even a relatively
minor one — were to hit the wrong area of Florida, the Citizens
Property Insurance Corporation and Florida Hurricane Catastrophe Fund
could quickly run up bills topping $30 billion.

How does the state plan to pay those bills? By selling bonds — lots
of bonds. Yet no state has ever sold more than $11 billion in bonds at
one time, so it’s highly unlikely that today’s skittish bond markets
would buy that much debt from a storm-battered state with sluggish
economy and a shrunken tax base.

As a result, Florida would be faced with some unenviable choices:
massive tax increases, deep service cuts, or, most likely, some sort of
federally supervised bankruptcy. If Floridians think a botched election
soiled their reputation, just wait until the state goes broke.

The situation won’t get any better until Florida’s private insurance
market is restored so property owners can be compensated using private
capital gleaned from a broad base around the nation rather than from
public funds collected in Florida.

In the past year, however, nearly all of the insurance industry’s
major companies — State Farm, USAA, Nationwide, Allstate, Travelers,
and the Hartford — have reduced their exposure in Florida.

Meanwhile, Citizens’ artificially low rates, coupled with the Cat
Fund’s massive potential liabilities, virtually guarantee that there
won’t be enough money on hand to cover losses if even a minor storm
hits a densely populated areas.

So covering this shortage will require massive new taxes (called
special assessments on insurance premiums) that could easily double the
premiums that Floridians pay to insure their property and their

No plan that would solve these problems has even made it out of a
legislative committee to date, and nobody I talked to during a recent
visit to the Legislature believed that such a plan would emerge before
the House and Senate go home Friday.

Instead, the Legislature has concerned itself with a variety of
measures that would tweak things around the edges, and some of these
modest steps could pull the state back from the brink. For instance,
Chief Financial Officer Alex Sink’s proposal to reduce the size of the
Cat Fund should top the legislative priority list. Although that
wouldn’t solve all the state’s insurance problems tomorrow— something
the CFO herself readily concedes — it still reduces the chances of a
state bankruptcy.

Likewise, proposed legislation requiring that the state’s insurance
regulators reveal the methods they use to evaluate insurance companies’
rate filings might give some private companies enough regulatory
certainty to resume writing policies in the state.

But several bills advancing in the Legislature simply don’t make
sense. For example, proposals to remove insurers’ anti-trust exemptions
would destroy smaller Florida-based insurance companies and, in any
case, almost certainly violate longstanding federal law.

New penalties for “unfair competition” would create a bonanza for
lawyers. However, the costs of litigation would probably be enough to
drive up rates for everyone.

Finally, a plan to raid Citizens’ already near-empty coffers to
subsidize “private” startup insurers would allow private investors to
reap significant profits so long as Florida remains storm free, but
would likely leave taxpayers footing the bill if a storm came. At the
same time, it could destabilize already shaky Citizens and send it
tumbling towards bankruptcy.

Even if lawmakers defeated every bad proposal Florida still could
face bankruptcy if the wrong storm hit because a real fix evidently
will have to wait until 2009, which is not an election year.

Even so, if common-sense legislation were to pass this year, it
could at least reduce the risks to Florida’s taxpayers. Conversely, the
wrong proposals, coupled with the wrong storm, could make bankruptcy
almost inevitable.