Term Paper on "Financial Concepts Used to Execute the Obligations and Expenditures Related to Hurricane Katrina"

Term Paper 10 pages (3131 words) Sources: 3

[EXCERPT] . . . .

Financial Concepts Used to Execute the Obligations and Expenditures Related to Hurricane Katrina

Hurricane Katrina, one of the biggest disasters that America has faced till date due to natural causes, also turned out to be one of the costliest ones as well. It also exposed many flaws in the responding capability and readiness that American government agencies displayed both before and in the aftermath of the incidence. This hurricane started out as a depression over the Bahamas on the 23rd of August 2005 and was initially categorized as a Category 1 hurricane moving towards Florida. By August 29th, Hurricane Katrina had developed into a Category 5 hurricane and moved directly towards New Orleans, Louisiana, hitting it at around 6 a.m. On 29th August. The levees along the Mississippi River Gulf Outlet, Industrial Canal, 17th Street Canal and London Avenue Canal were breached flooding approximately eighty percent of this famous American city. Katrina also battered the coastal regions of Mississippi and Alabama. (Palser, 35); (Walker, 42); (Brown, 10)

As per official records, 1833 known fatalities could be attributed to Katrina's wrath. Several indirect fatalities were also reported and a number of people were also reported missing. However, it is not because of the number of fatalities and the environmental impact that Katrina was ranked among the most deadliest of storms since other hurricanes had claimed far more number of lives in the past; it is considered devastating because of the huge economic loss and the financial problems that this posed to the American government and the people in the aftermath of the incident. (Knabb; Rhome; Brown, 11)

It is estimated that the total cost caused by the damage amounted to around $81 billion of which $40.6 alone could be attributed to insured losses. More than a million people were probably evacuated and many of them shifted to other regions of the U.S. And many remained homeless. The entire economy along that region was shattered. The U.S. government thus had to execute a number of financial concepts and schemes in order to execute staggering volume of expenditures and obligations caused by the devastating hurricane. (Knabb; Rhome; Brown, 12)

Creating funds to provide coverage for the industrial losses and to finance rebuilding activities was one such financial concept used by the state and federal governments to cope with the damage caused by Katrina. For instance, the Florida legislature created the "FHCF" of "Florida Hurricane Catastrophe Fund." This was a tax-exempt fund and its limit was around $15 billion which was later increased to $32 billion in 2007. Another financial concept was that of flood insurance. Conventional insurance companies do not provide any sort of flood insurance and therefore the onus falls on the federal-government-backed flood insurance policies in the form of "NFIP" or "National Flood Insurance Program." (Agnew, 29)

NFIP, which is administered by the Mitigation Department operating within "FEMA" or "Federal Emergency Management Agency" which is a part of the "Department of Homeland Security," can be availed by renters, homeowners and owners of businesses which operate in regions affected by Hurricanes like Katrina and Rita." (Agnew, 30) In the aftermath of Hurricane Katrina, the borrowing authority of NFIP was raised three times in a period of six months in order to pay insurance claims which amounted to around $23 billion. Despite the increase, NFIP was unable to pay insurance money to all claimants due to the severe fund crunch. (Agnew, 30)

Prepaid debit cards issued by JPMorgan Chase on behalf of FEMA were yet another financial scheme launched by FEMA. Despite the fact that issuance of cards were stopped within a few days of the launch of this scheme, the "American Red Cross," indiGOCARD in Fort Worth and a few other card marketing companies continued with the task of distributing such prepaid cards to evacuees along the entire Gulf Coast. Approximately 500,000 of these cards were estimated to have been delivered to the evacuees. Every card offered approximately $2,000 which was preloaded on it. Relief payment using prepaid cards provides major benefits in such disaster situations. (Tescher, 1)

Firstly, funds in the form of either government benefits or salaries can be transferred electronically. This was particularly helpful in light of the fact that seven out of ten people in the regions affected did not possess a savings/checking account and nor did they have valid credit cards. Thus it could function as foothold for people who did not have financial stability either before or after the hurricane. Another advantage of such prepaid credit cards lies in its potential as a link between underbanked and unbanked customers since the processing of such cards provides additional functions in the form of credit building, remittances, payments of bills and savings. However, one of the shortcomings of the cards issued by FEMA was that consumers could not reload the cards with money from other multiple sources. (Tescher, 2)

Another shortcoming of these cards was the misuse and abuse of the government funds by federal employees/agencies for luxurious and extravagant items and services which were far removed from the relief operations that they were initially intended for. These included iPods, beer brewing kits, time spent at luxurious resorts during training sessions and even a 63-inch plasma TV purchase by FEMA. (McNamara, Bill It to Uncle Sam)

A huge number of people who evacuated to other regions as well as the significant number of people who took shelter in the Astrodome and other shelters during the Hurricane were rendered homeless. Reconstruction of homes and rebuilding the lives of such people was amongst the top obligations of the federal and state governments. Issuing "emergency Section 8 Housing Choice Vouchers" was one of the ways in which part of the reconstruction work was financed by the government. (Greenstein, 2)

In the past, these vouchers were not meant to be used for long-term or permanent construction but were intended for providing temporary houses in the form of trailers, repair damaged roofs or facilitating the payment of mortgages by families. However, in case of Hurricane Katrina, such emergency housing vouchers were meant for making a federal payment to land-owners to include the expenses towards a house or decent apartment in the privately-run market. These vouchers could also be utilized to make available extra housing funds to local housing authorities who supply pre-authorized but unfunded vouchers to families affected by Hurricane Katrina. (Greenstein, 2)

The Department of Housing and Urban Development -- HUD also announced a tax-credit meant for developers of residential homes immediately after the Hurricane passed by. Another financial initiative launched by the Department of Homeland Security and Secretaries of HUD for the displaced families was the creation of KDHAP -- Katrina Disaster Housing Assistance Program. This was managed by HUD but funded by the Department of Homeland Security via FEMA. Locally, the KDHAP is managed by semi-governmental PHAs -- Public Housing Authorities. (McCarty, 4-5)

Such PHAs are paid $1,000 for every family that they assist through KDHAP vouchers. They are also given administrative fees which amounts to fifteen percent of the benefits. This program launched in September 2005 supplied a new type of voucher -- the KDHAP voucher -- to the displaced families receiving aid from HUD. Families eligible for such vouchers included the homeless ones as well as those whose houses were rendered uninhabitable by the hurricane. The KDHAP assistance was for a total period of eighteen months and comprised of 'utility deposit assistance', 'security deposit assistance', and a subsidy for the monthly rent which would be equal to hundred percent of the FMR or lesser than the actual rent. (McCarty, 5-6)

Other similar housing development financial concepts included the diversion of the unused $600 million from "Road Home funds" for repair/construction of low-income house-owners by the state of Louisiana. Louisiana also raised housing allocation funds from the existing 77% to 86%. (Steps, 3)

One more financial scheme that was launched by the government in order to provide financial assistance to victims of Hurricane Katrina was the tax relief measures as outlined in the Katrina Emergency Tax Relief Act of 2005. This bill was passed into legislation by President Bush on 23rd September 2005 and offered $6.11 billion in the form of tax relief for short-term not only to the hurricane victims but also for the taxpayers who had been willing to offer aid to them. As per the 'Internal Revenue Service -- IRS' taxpayer guidance, some of the provisions included in this new legislation involved a blanket extension from January 3rd 2006 to February 28, 2006 for paying taxes, filing returns, filing claims for tax refunds or a credit. This applied to income taxes as well as to federal taxes like excise and employment taxes which had an original/extended deadline on 29th August 2005 or after it. (Kess, Hurricane Katrina tax relief); (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma); (Hurricane Katrina Recovery Assistance Programs)

Since Hurricane Katrina was a "presidentially-declared disaster," a number of tax advantages were offered to those distressed taxpayers who had suffered… READ MORE

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