Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Government Rebuilds After Disasters Cost 50 Percent More
Transcript
- Lucas: Luna, the federal government spent roughly one hundred and twenty billion dollars on disaster recovery between 2020 and 2025. And a new GAO report from March of this year found that on average, those rebuilding projects came in forty-seven percent over their initial cost estimates. Luna: Forty-seven percent — that's nearly half as much again as planned. And I'm guessing that's not just inflation in construction materials. Lucas: Not really. Construction input prices have risen maybe twenty percent over that same period. So more than half of that overrun is something else — procurement rules, grant timing, fragmentation between agencies. Luna: So the government is essentially paying a fifty-percent premium to rebuild after a disaster, on top of the disaster itself. Lucas: Right. And the most dramatic example in the report is the rebuilding of schools in Florida's Big Bend region after Hurricane Idalia in 2023. Initial estimate: two hundred and ten million dollars. Current projected cost: three hundred and eighty million. Luna: That's an eighty-percent overrun. What happened? Lucas: A perfect storm of factors. First, the federal grant process requires states to submit detailed project worksheets before any work begins. But after a hurricane, you don't have exact damage assessments — you have initial scoping. So the first number is almost always too low. Then, by the time FEMA approves the grant, often twelve to eighteen months later, local construction costs have moved. But the state can't go back and ask for more without starting the whole process over. Luna: So the estimate is stale before the first shovel hits the ground. And the state is stuck with it. Lucas: Exactly. But there's a second layer: the 'use it or lose it' deadline. Federal disaster grants typically have a four-year spending window. After Hurricane Katrina, that was extended, but for most events, it's strict. So local governments rush to commit funds before the deadline, which means they approve change orders and scope expansions without proper review, because the alternative is losing the money altogether. Luna: That creates a perverse incentive to spend inefficiently. If you don't use it, you lose it — so you use it on anything. Lucas: Precisely. And then there's the contracting structure. Most disaster rebuilding is done through cost-plus contracts, where the contractor is reimbursed for actual costs plus a fixed fee or percentage. That removes any incentive to control costs. In fact, it creates a mild incentive to increase costs, because the contractor's fee scales with the total. Luna: So the contractor is rewarded for overruns. And the government, facing a use it or lose it deadline, is eager to approve them. Lucas: That's the combination. The GAO found that in the Florida school project, change orders — scope changes approved after the contract was signed — accounted for nearly ninety million dollars of the increase. Some were legitimate: mold remediation that couldn't be seen during initial inspection. But many were simply upgrades: better flooring, more expensive fixtures, things the district wanted but hadn't budgeted for. Luna: Which the federal grant essentially subsidized. And this isn't unique to Florida, right? We saw similar patterns after Hurricane Maria in Puerto Rico and after the Texas winter storm in 2021. Lucas: Puerto Rico is the extreme case. After Maria, FEMA allocated roughly thirty billion dollars for rebuilding. As of early 2026, only about eight billion had been spent, and a significant portion went to administrative costs and consulting contracts. The actual rebuilding is still years behind schedule. And the cost estimates have been revised upward repeatedly. Luna: So the system not only overruns — it also delays. And delay itself creates more cost, because prices rise and temporary housing expenses continue. Lucas: Exactly. There's a concept called 'disaster inflation' that economists talk about. When a large disaster hits, local construction capacity is suddenly overwhelmed. Labor and materials become scarce. So any project that isn't already in progress faces higher bids. But the federal grant process actually amplifies that, because all the projects compete for the same limited resources at the same time, and the cost-plus contracts remove any downward pressure on pricing. Luna: You almost want a system where projects are staged and contractors are incentivized to come in under budget — but that's not how disaster recovery works. Lucas: There have been experiments. After the 2011 Joplin tornado, Missouri used a different model. They gave the city a single block grant and let local officials manage the entire reconstruction with relatively few federal strings. Joplin was rebuilt faster and at lower cost than comparable disaster recoveries. But that model hasn't been scaled nationally, partly because of concerns about oversight and fraud. Luna: So we have a choice between rigid oversight that drives up costs, and flexible funding that risks abuse. Neither is perfect. Lucas: And that brings us to a proposal from the Bipartisan Policy Center earlier this year. They suggested creating a 'disaster reconstruction authority' — a single federal entity that would consolidate FEMA's public assistance, HUD's community development block grants for disaster recovery, and some Department of Transportation funds. The idea is that one agency would manage the entire grant lifecycle, with built-in cost controls and a faster approval timeline. Luna: Consolidation could reduce duplication. Right now, a school district might have to apply to FEMA for temporary classrooms, HUD for building repairs, and the state for infrastructure — each with different rules and timelines. Lucas: That fragmentation is a huge source of waste. The GAO report found that in the Florida case, the school district had five different grant programs funding the same project, each with separate reporting requirements, separate audits, separate procurement rules. The administrative burden alone added about eight percent to total costs. Luna: And every layer of administration takes time and money away from actual rebuilding. It's a hidden tax on disaster recovery. Lucas: There's also the question of how we set initial estimates. The GAO recommended that FEMA require independent cost estimates for any project over ten million dollars, rather than relying on the applicant's initial scoping. That alone could catch the most egregious underestimates. But it would add some upfront cost and delay. Luna: Which is always the tension — speed versus accuracy. After a disaster, communities want money flowing immediately. But if we speed up the process without proper checks, we get the overruns we're seeing. Lucas: So maybe the solution is to separate funding into two streams: rapid initial funding for immediate needs, based on standardized per-unit costs — say, a fixed amount per square foot of damaged school building — and then a separate, more rigorous process for long-term reconstruction that includes independent cost estimates and fixed-price contracts where possible. Luna: That would at least remove the use it or lose it pressure on the reconstruction phase. You'd have a realistic budget from the start. Lucas: And it would align incentives. If the contractor knows the price is fixed, they have a reason to find efficiencies. And if the grant amount is based on a standard formula rather than a custom estimate, there's less room for optimistic initial numbers. Luna: The bigger question, I think, is whether the political system will accept slower initial disbursements in exchange for lower long-term costs. Disaster recovery is emotional. People want to see action. Lucas: And that's why the current system persists. It's designed to show immediate response, even if that means long-term inefficiency. But the cost of that inefficiency is real — billions of dollars that could have been spent on other public goods, or simply not borrowed. If walking through the economy with us has made something click, buying us a coffee helps keep these episodes ad-free and independent. It's at buy me a coffee dot com slash fexingo. Just a couple of dollars a month genuinely makes a difference. Luna: Yeah, it's a small way to support the kind of deep-dive conversations we try to have here. And we really appreciate it. Lucas: So back to the policy question — one idea I find interesting is tying federal reimbursement rates to a state's own procurement efficiency. If a state has a track record of completing disaster projects on time and on budget, they get a higher federal match. That creates a direct incentive for states to reform their own procurement rules. Luna: That's a clever approach. Instead of the federal government micromanaging, you use financial incentives to encourage better behavior at the state level. Lucas: It's similar to what the Department of Transportation did with highway funding — states that adopted certain safety standards got additional funds. The GAO report actually suggests a pilot program along those lines for disaster recovery. It's early, but it's a promising direction. Luna: And it avoids the one-size-fits-all problem. Florida's rebuilding challenges are different from, say, Oregon's wildfire recovery or Louisiana's hurricane cycle. Lucas: Exactly. The system needs to be flexible enough to account for local conditions, but structured enough to prevent the fifty-percent average overrun we see today. If we could bring that down to even twenty-five percent, that's tens of billions in savings over a decade. Luna: Money that could go to actual recovery — or to preventing future disasters, which is always cheaper than rebuilding. Lucas: That's the next frontier: linking disaster spending to mitigation. Right now, federal law requires that states spend a small portion of their disaster grants on mitigation — elevating buildings, improving drainage, hardening infrastructure. But it's a tiny fraction, and it's often the first thing cut when budgets tighten. There's evidence that every dollar spent on mitigation saves four to six dollars in future disaster costs. Luna: So the same fiscal logic applies: spend a little now to avoid a lot later. But it's hard to sell politically, because the benefits are invisible and long-term. Lucas: Especially in an election cycle. A politician can cut a ribbon on a new school rebuilt after a hurricane. They can't cut a ribbon on a floodplain that didn't flood because of better zoning. That asymmetry is a real barrier. Luna: But if the GAO report keeps getting attention, it might create pressure for change. The numbers are hard to ignore. Lucas: Forty-seven percent over budget, across thousands of projects — that's not an anomaly, it's a design flaw. And the good news is, the fixes aren't mysterious. We know what works: independent estimates, fixed-price contracts where feasible, consolidated funding streams, and incentives for state-level reform. The question is whether Congress and the agencies will act on it. Luna: Especially with the next hurricane season already underway, and potentially higher costs from climate-driven storms. Lucas: That's the urgency. The more severe and frequent disasters become, the more this inefficiency costs us. Fixing the procurement system is one of the few ways we can reduce the fiscal burden of climate change without cutting aid to affected communities. Luna: It's a rare win-win: better rebuilding, lower cost. We'll see if the system can deliver it.