WASHINGTON – Like the proverbial Little Dutch Boy who stuck his finger in a leaking dike, Congress set up a national flood insurance program in 1969 to plug the insurance gap caused by reluctant private insurers and to help homeowners in flood-prone areas get reasonable rates against water damage.

But 43 years later, critics contend that the stopgap action has expanded into a fiscally unsustainable federal program – affecting 5.6 million homeowners in 21,000 communities – that has amassed an $18 billion pool of red ink and exposed taxpayers to potential losses of over $1 trillion.

Nearly paralyzed by political tides, the gap-plugging Congress has put off significant reform of the program in 15 short-term extensions it has approved over the last five years. But the worsening indebtedness of the program, coupled with heightened concerned over the federal deficit, may finally spur action this year.

“This program is not financially sound and it is not self-sustaining. It runs a $900 million deficit every year,” said U.S. Sen. Tom Coburn, R-Okla., a fiscal conservative from a mostly dry state who has been one of the program’s leading critics.

The future financial stability of the flood insurance program, which is administered by the Federal Emergency Management Agency (FEMA), is important to both Missouri and Illinois – although even more crucial in coastal states that are exposed to hurricanes. (See charts on flood insurance claims and policies.)

While 25 states rank higher than Missouri in the number of flood insurance policies (Missourians have about 20,000 policies, dwarfed by Louisiana’s 492,000), FEMA figures show that Missourians collected the seventh highest statewide total in claim payments ($44 million, compared to the $495 million paid to coastal New Jersey homeowners) in the last fiscal year, from Oct. 1, 2010 to Sept. 30, 2011.

Of course, Missouri’s insurance payouts were unusually high because of damage caused by the major floods along the Mississippi and Missouri rivers in the spring and summer of 2011. Illinoisans, who account for nearly 50,000 flood insurance policies, collected about $16 million in claims payments during that fiscal year.)

That is chump change compared to the massive payouts to homeowners in coastal states such as Louisiana and New Jersey. In a Senate speech, Coburn contended that “the vast majority of the money . . . goes to subsidize the insurance for homeowners for second and vacation homes,” which, on average, have eight times the value of other homes covered by flood insurance. “This subsidy should be taken away.”

When Congress passed its latest stopgap extension of the program – which expires late next month unless further action is taken – it tacked on a Coburn-sponsored provision that calls for a gradual reduction of rate subsidies for people buying second homes and vacation homes. In theory, that could save the flood insurance program as much as $2.7 billion over a decade.

As part of the deal allowing for the short-term extension, Senate Majority Leader Harry Reid, D-Nev., said both sides agreed to consider “a dozen or so” amendments to the flood insurance legislation and avoid a filibuster of the Senate vote, expected later this month. “This is a program that needs to be changed,” Reid said.

A prime sponsor of the Senate extension, U.S. Sen. David Vitter, R-La., said a lapse in the flood insurance program would be “disastrous” – and the nation’s insurance and real estate industries agree, lobbying hard for an extension. While private insurers sell the policies and manage claims under the program, the government bears the risk. Flood insurance is required for government-backed mortgages on certain properties.

Reid explained: “If there’s no flood insurance, that’s 20,000 loans every day that will not be approved” because the home mortgages require such coverage.

Hurricanes undermined program’s financial stability

The nation’s flood-insurance program was mostly self-financing until about six years ago, when massive claims resulting from the billions of dollars in damage wreaked by Hurricanes Katrina and Rita in 2005 overwhelmed the system.

That flood of red ink led FEMA to reassess its flood maps – which determine whether homeowners and businesses need flood insurance – and to consider increases in premiums for structures in high-risk areas.

But congressional action is needed to put the flood insurance program on a firmer financial footing. Lawmakers must agree on how quickly rates can be raised, whether some of the program's debt should be forgiven, and whether areas such as Metro East should be granted delays in mandatory insurance related to new FEMA flood maps.

Last summer, the U.S. House approved a five-year extension, in a bipartisan vote of 406-22, that would have ended some subsidies and allowed premium increases. But the Senate has been unable to get a companion bill to the floor for a vote.

One key provision of the House bill would allow the flood-insurance program to buy “reinsurance” – a mechanism similar to that used by private insurance to share the burden where there is large-scale flooding. While it has numerous exemptions and delays, the legislation aims to move many holders of flood insurance to “risk-based” insurance rates that would not require massive government subsidies.

Metro East's special status

One area that would get special treatment under the House-passed bill is the Metro East.

A provision tacked onto the bill, backed by U.S. Reps. Jerry Costello, D-Belleville, and John Shimkus, R-Collinsville, would delay requirements for mandatory flood insurance in newly mapped areas by five years -- an extension from the previous three years.

The delay was a response to concerns in Metro East and elsewhere about FEMA's flood remapping process -- with many residents in new FEMA-mapped areas worrying they would get hit with expensive flood-insurance premiums if levees are not certified. Levees in Metro East are being upgraded, with work starting this summer.

“In the Metro East, local leaders have moved quickly to secure financing to take on this work, and these efforts should be recognized and assisted at the federal level," Costello said last summer.

In the Senate, Sen. Dick Durbin, D-Ill., has said he supported “a requirement that FEMA delay the flood insurance purchase requirement if a community is working toward improvement of its flood control infrastructure.”

While such initiatives make sense in Metro East, critics contend that exemptions and delays are making it harder for Congress to restore the fiscal integrity of the flood insurance program. Last year, the U.S. Government Accountability Office (GAO) reported that nearly one in four policyholders paid a subsidized rate that doesn't reflect the full risk of flooding.

Missouri's senators react

Missouri’s senators both want to extend and improve the financial stability of the flood insurance programs.

U.S. Sen. Claire McCaskill, D-Mo., says she supports renewal of the program but wants to amend the mandatory purchase requirements that face some communities behind levees. In a letter to the Senate Banking Committee, McCaskill joined U.S. Sen. Roy Blunt, R-Mo., and other senators asserted that “areas protected by properly constructed and maintained levees, dams and other flood control infrastructure should not be arbitrarily declared areas of special flood hazard,” subject to rate hikes.

If the federal flood insurance were allowed to expire, McCaskill said in a statement to the Beacon, “folks won't be able to purchase homes, and property owners in flood areas won't be able to plan for the future. Missouri families shouldn't be forced to stay in limbo.” She added: “We need to renew flood insurance for the long term and to give our communities certainty. I'm committed to doing that.”

Blunt also wants restrictions in insurance to vacation homes and second residences. He told reporters this week that he is “generally in agreement with the Coburn view that there should be a private [insurance] network for things like second homes, which are particularly vulnerable – often because they are built in appealing places that are hazardous.” Blunt added: “There should be another way for people who can afford to have second homes to look at how to insure those homes.”

But floodplain managers and some environmental groups worry that the House-passed bill and the main Senate bill won’t do enough to discourage people from building in flood-prone areas, rather than moving elsewhere and help clear the floodplains.

For example, Joshua Saks, an expert on water legislation at the National Wildlife Federation, argued that the flood-insurance program should provide incentives for "better land use planning" that would clear some floodplains in favor of wetlands.

SmarterSafer.org, a coalition of insurers, taxpayer advocates and environmental groups that lobbies for reforms in the nation’s flood insurance program, is pushing for changes in both the Senate and House-passed bills.

The group argues that lawmakers should promote “mitigation measures” to make sure properties are better protected against hurricanes and other storms. It also is fighting a public-insurance proposal that would shift most insured losses – now handled by the private sector through insurance and reinsurance – with federal government insurance.

In a statement, SmarterSafer.org said it was urging lawmakers “to pass comprehensive flood insurance reform, support mitigation, and reject expensive and unnecessary proposals to create a federal insurance backstop.”