Testimony before the Senate Subcommittee on Clean Air, Climate Change, and Nuclear Safety

 

Hearing on Federal Emergency Management Agency Oversight

 

Bud Larson, Associate Director

New York City Office of Management and Budget

September 24, 2003

 

 

Good Morning Chairman Voinovich, Senator Carper, our own New York Senator, Senator Clinton, and distinguished Members of the Subcommittee.  My name is Bud Larson, and I am the Associate Director of the New York City Office of Management and Budget.  My responsibilities include, among others, coordinating and processing all of the FEMA claims by the City of New York, and I am thankful for the opportunity to share the City’s experiences in this process over the last two years.  In particular, I would like to provide you with some insight on how the City and FEMA responded to certain limitations in the Stafford Act.

 

Immediately following the attacks of September 11th, 2001, the President and Congress committed over $20 billion of much needed aid to the City of New York.  This aid included a $5 billion Liberty Zone Tax Incentive Package, over $3 billion in Community Development Block Grants for economic development, almost $2 billion to the US Department of Transportation for downtown transit upgrades, and over $8 billion to FEMA for transit improvements, individual and family assistance grants and the public assistance program.  Of these, the City of New York is eligible to make direct claims for reimbursements of disaster-related costs only through FEMA’s Public Assistance program.   The City’s claims have totaled approximately $3.5 billion. 

 

Overall, FEMA has been remarkably efficient and flexible in reimbursing the City, given the constraints of the Stafford Act.  Since the 9/11 terrorist attack was the largest disaster ever in the United Sates, the associated costs borne by the local government was the largest FEMA has ever had to deal with.  FEMA recognized very early on in the process that they had entered into new, un-chartered territory, as this disaster was unlike any they had ever responded to, and FEMA officials were willing to work as hard as possible in order to provide the necessary reimbursements to the City of New York. 

 

The City has already received almost 100% of all claims filed and currently eligible to be reimbursed, excluding the $1 billion insurance fund.  A large portion of the balance of Public Assistance funds have been earmarked for transportation improvements for a new transit hub in Lower Manhattan, and will be provided to the appropriate entity when the expenses occur.  This success is attributable to the staff at FEMA, the State of New York, all of our City agencies and the assistance of our Congressional Delegation, including Senator Clinton.

 

While we greatly appreciate the work done by the staff at FEMA in providing the City with appropriate reimbursement, there are a number of limitations in the Stafford Act that did not make this an easy process.  If not for Congressional action, the City would still not have received the reimbursement necessary to cover the unique expenses a local government incurs when responding to a terrorist attack.  In fact, there are some instances where the City will never receive the appropriate reimbursement due to these limitations.

 

First and foremost, due to the extent of the damages and the destruction of the financial center of the nation, the City and State lost a substantial amount of tax revenue as a direct result of this terrorist attack.  The City estimated substantial losses in tax revenue of almost $3 billion in the 2002 and 2003 City fiscal years directly attributable to the attack and independent of the economic slowdown.  These losses were due to decreases in City personal income taxes, business taxes and reduced sales taxes.  In addition, the actual destruction of property, the closure of Lower Manhattan and the significant effect on travel and tourism to New York in particular, also had devastating affects on our tax revenues.  While some have argued that it is impossible to link the loss of these revenues to the terrorist attack, the General Accounting Office issued a report on July 26, 2002 reviewing these estimates and noted that the tax revenue loss estimates for 2002 “appear to reasonably approximate the impact of the terrorist attacks on tax revenues”.      I also want to make it clear that the City did not receive any federal funds based on the City’s experiencing a budget shortfall as a result of these lost tax revenues.

 

 

Currently the Stafford Act does not allow FEMA to provide any reimbursement for lost tax revenue to local governments.  While a Community Disaster Loan Program currently exists, the loan amount is capped at only $5 million – not even a fraction of the costs associated to such a large terrorist attack in a major metropolitan city.  Since the Stafford Act does not accommodate this very real need for disaster-stricken local governments, the people of the City and State of New York have been forced to shoulder these additional financial burdens caused by an act of war.

 

Another limitation of the Stafford Act is its lack of provisions for local governments to receive reimbursement for unique expenses associated with a terrorist attack.  New York City was a direct target as was as the Pentagon and the District of Columbia; and as a direct target, the City needed to take action immediately by heightening security in all parts of the City.  Prudence demanded that the entire City needed to be shut down, bridges and tunnels into Manhattan needed to be closed, subway lines and railroads needed to be suspended and security at the United Nations and other key locations was immediately heightened.  These costs were incurred directly as a result of the City being a terrorist target.   However, the Stafford Act does not recognize these expenses as eligible reimbursements since these additional expenses did not occur at the actual site of the “disaster”.  While FEMA worked to interpret the act has broadly as possible, under the narrow confines of the Stafford act, FEMA could not grant reimbursement.  It took a special act of Congress to allow FEMA to provide reimbursement to the City of New York for these costs, which would clearly not have been incurred but for the terrorist attacks.  After receiving Congressional authorization, FEMA responded diligently and effectively in processing these new claims.  But the fact remains that in any future terrorist attack there will be significant related costs incurred by local government that will be ineligible for reimbursement under the Stafford Act.

 

Finally, one of the most complex obstacles to full reimbursement under the Stafford Act encountered by the City involved environmental liability as it relates to debris removal.  Immediately after the attacks on September 11th, the City responded by deploying police officers, firefighters, EMS workers and other employees to the site for search and rescue.  At the same time, the City contacted four construction companies to begin the process of debris removal.  These companies acted with a sense of patriotism, and worked without contracts, insurance or indemnity. This response by the municipality and its contractors were immediate and necessary, and both parties took substantial risks.  In order to protect against liability for the City and its contractors, the City sought to obtain insurance on the private market, but was able to obtain only $79 million of general liability coverage; and even that coverage came with significant exclusions.  The City and its contractors accordingly sought legislation providing for federal indemnification of these claims, but without success.  Finally, as a result of Congressional action, FEMA set aside approximately $1 billion for an insurance fund to protect the City and its contractors from claims relating to the debris removal process.  While the City and contractors will benefit from this substantial coverage, the amount of coverage is only a fraction of the $12 billion of damages already claimed against the City. 

 

The creation of this insurance fund was difficult and complex, and this was aggravated because the Stafford Act provided no facility for its funding.  In fact, even after two years since the attack and seven months after additional Congressional action, this insurance fund has yet to be created and negotiations between FEMA, the City and its contractors are still ongoing.  This is clearly an unfortunate circumstance, and one no local government or contractor should have to deal with.  In fact, this experience may cause governments and others to think twice before responding to a terrorist attack.  The federal government must address this issue, by either enacting federal indemnification or an insurance plan to protect municipalities and their contractors.

 

While the City’s experiences with FEMA have not been without some difficulties - as I just explained- I want to be very clear that this was in no way due to the staff or mission of the agency.  I have the utmost respect for the professionalism and diligence of the people at FEMA. It was the constraints in Federal statute that proved to be difficult.  I urge you to examine these issues and determine the best course of action, so local governments and taxpayers are protected from the additional financial burdens of a terrorist attack. 

 

I thank you for your patience and would be glad to take any questions.