Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Government Disaster Rebuilds Cost 50 Percent More
Transcript
- Lucas: When a hurricane tears through a town or a wildfire levels a neighborhood, the federal government rushes in with disaster relief. It's one of the most visible things government does, and there's a lot of political pressure to act fast. Luna: Right, and we hear the dollar figures — billions for this storm, billions for that fire. But what actually happens to that money once it enters the rebuilding pipeline? Lucas: That's exactly the question. And the data shows something frustrating: post-disaster reconstruction projects cost, on average, 50 percent more than comparable non-disaster projects. I'm not talking about a few bad apples — this is a systemic pattern. Luna: Fifty percent. That's enormous. Where does that extra money go? Lucas: Let's start with one concrete case. After Hurricane Maria hit Puerto Rico in 2017, the Federal Emergency Management Agency — FEMA — funded a bridge replacement in the mountainous interior. The state's own engineering department estimated the project at $4.6 million. FEMA's eventual cost was $14.2 million. Luna: Three times the estimate. That's not just inflation or supply chain issues. Lucas: No. The Government Accountability Office looked into it and found that FEMA's procurement rules essentially force local contractors to use a cost-plus model. They get reimbursed for actual costs plus a fixed fee. That removes any incentive to come in under budget. In fact, it incentivizes scope creep — add another lane, upgrade the materials, extend the timeline. Luna: So the system is wired to spend more. Meanwhile, a private developer building a similar bridge would have a fixed-price contract and eat any overruns. Lucas: Exactly. And it's not just bridges. The Department of Housing and Urban Development runs a separate disaster recovery program for housing. A 2021 study by the nonpartisan Pew Charitable Trusts looked at 14 large-scale rebuilding projects across five states. The average cost per square foot for publicly funded disaster housing was $287. The local market rate was $178. Luna: That's a 61 percent premium. So taxpayers are paying luxury prices for basic reconstruction. Lucas: And the delays compound the costs. The longer a community is in temporary housing, the more FEMA pays for rental assistance, trailers, and hotels. After Maria, some Puerto Ricans stayed in hotels for over two years. That alone added hundreds of millions. Luna: Why can't the government just write a check to the homeowner or the local government and let them manage the rebuild? Lucas: That's actually the logic behind a 2019 reform called the 'public assistance alternative procedures.' The idea was to give state and local governments a fixed grant upfront — a set dollar amount based on a formula — and let them manage the project themselves. If they came in under, they kept the savings. Luna: Sounds sensible. Did it work? Lucas: Mixed results. A 2023 FEMA Inspector General report found that in about a third of projects using the alternative procedures, costs actually increased. Why? Because local governments lacked the project management expertise to handle large-scale reconstruction. They hired expensive outside consultants, changed scopes, and still ran over. Luna: So you either have FEMA's inefficient centralized system or an unprepared local system. No good option. Lucas: Which brings us to the deeper structural issue. The Stafford Act — the law that governs federal disaster response — was written in 1988. It assumes disasters are rare, localized events. But climate change has made them frequent and widespread. The law hasn't kept up. Luna: And that creates perverse incentives. A town that reports $50 million in damage gets more federal money than a town that reports $20 million. So there's a built-in incentive to inflate damage estimates. Lucas: Right. Multiple audits have found that local officials systematically overestimate damage. A 2020 DHS Inspector General review of 50 FEMA projects found that 40 percent had inflated damage assessments, padding costs by an average of 25 percent. Luna: So the system encourages waste at every level. But there has to be at least one success story, right? Lucas: There is, and it's instructive. After Hurricane Andrew in 1992, Florida overhauled its building codes and its disaster contracting process. They created a pre-approved list of contractors who agreed to fixed prices for specific rebuilding tasks — roof replacement, electrical, framing. They also required competitive bids for any project over $500,000. Luna: And did that bring costs down? Lucas: Significantly. When Hurricane Irma hit Florida in 2017, the state's reconstruction costs were about 15 percent above market rates — compared to the national average of 50 percent. Still a premium, but much smaller. And projects finished faster. Luna: So the lesson is: fixed-price contracts, competitive bidding, and advance preparation. Why hasn't FEMA adopted that nationally? Lucas: Partly because every state has different building codes and contracting laws. And partly because Congress hasn't mandated it. FEMA has a pilot program called 'pre-qualified contractor lists' — it started in 2022 and covers only five states so far. Luna: Slow progress. Meanwhile, disasters keep coming. Lucas: And the spending keeps growing. In fiscal year 2025, FEMA's disaster relief fund had $27 billion. The Government Accountability Office estimates that at least $8 billion of that was lost to inefficiency and overpayment. Luna: Eight billion dollars. That's more than the entire budget of some federal agencies. Lucas: Look, we talk about a lot of government spending on this show, and we try to be fair — not everything is waste. But this is a case where the system is clearly broken, and the fixes are known. They just haven't been implemented at scale. Luna: Before we move on, I want to note something about why we can cover stories like this without pulling punches. This show doesn't run ads, and that's intentional. We don't have to worry about upsetting a sponsor who also does disaster contracting. Lucas: Yeah, that freedom is the whole point. If listening to these conversations has helped you see public finance more clearly, and you want to support keeping the show independent, you can do that at buy me a coffee dot com slash fexingo. No pressure — just an option. Luna: And it's because of listeners who do that that we can keep drilling into topics like this one, without any commercial constraints. Now, back to the numbers — you mentioned Florida's success. Are there any other bright spots? Lucas: Alaska's earthquake recovery in 2018 is another. The state had a centralized disaster recovery office that coordinated with FEMA, and they used a cost-reimbursement model with strict caps. They came in about 20 percent under the initial federal estimate. Luna: What made Alaska different? Lucas: Two things. First, the state had a pre-existing disaster recovery plan that was updated annually. Second, they assigned a single state official as the point person for every project, so there was accountability. When a project went over, that official had to explain why. Luna: Simple management reforms. Not expensive technology or new laws. Lucas: Exactly. The problem isn't that we don't know how to rebuild efficiently. The problem is that the federal system doesn't reward efficiency. It rewards speed and spending. Until Congress changes the Stafford Act's incentive structure, we'll keep seeing that 50 percent premium. Luna: And with climate change making disasters more frequent, that premium is going to cost taxpayers hundreds of billions over the next decade. Lucas: That's the bottom line. The question is whether the political will exists to fix it before the next big storm.