Segment 2 Of 2 Previous Hearing Segment(1)
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COST EFFECTIVENESS OF MITIGATION SPENDING
Thursday, July 20, 2000
House of Representatives, Subcommittee on Oversight, Investigations & Emergency Management, Committee on Transportation and Infrastructure Washington, D.C.
The subcommittee met, pursuant to call, at 2:35 p.m., in Room 1334, Rayburn Building, Hon. Tillie K. Fowler [chairman of the subcommittee] presiding.
Ms. FOWLER. We're going to go ahead and start. Some of our minority members are on their way but said we could go ahead and just start the hearing. We apologize for being late but by the time we were to start we had two votes called but we think we now have an hour or so for this vote hopefully so we thought we better go ahead then and get the hearing started.
Over a year ago the House of Representatives overwhelmingly passed HR707, the Disaster Mitigation and Cost Reduction Act of 1999. This act authorized an increase of over $600 million in mitigation spending over five years. The purpose of HR707 can be summed up by the old saying, a stitch in time saves nine. If we spend a few hundred million dollars preparing for a disaster now, we will save billions of dollars in losses later on. Of course, this is all based on the assumption that the hazard mitigation projects we fund are good ones. But are they?
Current law requires that hazard mitigation projects funded by FEMA be cost-effective. This means FEMA must calculate a benefit-cost ratio or BCR for each project. The BCR is the ratio of the expected benefits of the project divided by the expected cost, thus a BCR of less than one means the cost of the project will likely outweigh the project's benefits, and it should not be funded. This type of analysis not only screens out potentially bad projects, but more importantly, it also allows decision makers to compare projects, thus, even among a group of good projects, authorities can pick the very best ones to fund. The bigger the BCR the better the project.
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Now, I do not necessarily think that a traditional BCR analysis can adequately capture the benefits and the cost of every proposed mitigation project. However, as I stated in the hearing we held last August, the cases where a modified benefit-cost analysis is warranted are probably quite limited. The Hearing that we held last August examined projects that FEMA exempted from benefit-cost analysis. This hearing examines the cost-effectiveness of the hazard mitigation projects that were not exempted.
These are projects where a benefit-cost analysis was performed, and a BCR was calculated. To FEMA's credit, the agency shares our concerns regarding the cost-effectiveness of mitigation projects. Fulfilling a commitment that was made at our hearing last August, the agency has created a database containing information on most of its mitigation projects. As an example of the cooperative relationship that marks this oversight effort, FEMA has made the database available to the Subcommittee and to the General Accounting Office, and I do appreciate that very much.
I'd like to present a chart showing the cost-effectiveness of the projects FEMA has funded since 1993. The data that's recently been compiled by FEMA indicate that over the last several years approximately 28 percent of the total amount of money spent on hazard mitigation projects, that's nearly 500 million dollars, have funded projects which were not cost-effective. That is, the BCR for those projects was less than one.
Also interesting is the fact that over 70 percent of the spending, a billion and a quarter dollars, was spent on mitigation projects that were at best marginally cost-effective. That is, they had a benefit-cost ratio of 1.5 or less. I must say that with all the possible mitigation projects that I know are out there I am surprised that so much money is being spent on marginal and less-than-marginal projects.
At this hearing I hope we can find out what may be going on here and how we can make our mitigation dollars go further than they're already going. Now, I mentioned that old saying, a stitch in time saves nine. Well, nine is an awfully good benefit-cost ratio, and I don't expect to save $9 for every $1 we spend on mitigation, but I do expect to routinely save at least $2 or $3, and that's the figure we normally use. So I look forward to hearing FEMA's expert opinion on how we can get to such a point.
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I'd like to see if Mr. Terry, our vice-chairman, do you have any opening statement that you would like to give?
Mr. TERRY. No.
Ms. FOWLER. Thank you. Then if there are no further statements, then I'd like to call our first and only witness from the Federal Emergency Management Agency, we have Mr. Mike Armstrong joining us. Mr. Armstrong is the associate director responsible for the mitigation directorate and is a good friend of the Subcommittee. He's worked very closely with us over this past year and a half, and welcome back, Mike. I want to thank you for appearing on rather short notice because we had to shift some dates around so we really appreciate your willingness to work with us on that. And as you know it is a practice of the Subcommittee to swear in all witnesses so if you could please stand and raise your right hand. Do you solemnly swear the testimony you're about to give is the truth, the whole truth, and nothing but the truth so help you God?
Mr. ARMSTRONG. Yes.
Ms. FOWLER. Thank you.
Mr. ARMSTRONG. Can we be seated?
Ms. FOWLER. And please be seated. And if you would like to introduce who's with you and then proceed with your testimony. I think—can you pull that closer or it's not—I want to see. Does it work?
Mr. ARMSTRONG. Good afternoon. Yes.
TESTIMONY OF MICHAEL ARMSTRONG, ASSOCIATE DIRECTOR FOR MITIGATION, FEDERAL EMERGENCY MANAGEMENT AGENCY
Mr. ARMSTRONG. Good afternoon, Chairwoman Fowler, and members of the Subcommittee.
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Seated next to me is Robert Shea, S-h-e-a. For the record he is the Division Director for Program Support in the Mitigation Directorate, and his jurisdiction is the administration of the hazard mitigation grant program. And I would note for the record he also stood with me and responded to your swearing in.
What I'd like to do, Madam Chairwoman, is highlight some of the written testimony that I've submitted already to the committee and ask that the written testimony be made part of the record.
My name is Michael Armstrong. I'm the associate director for mitigation at the Federal Emergency Management Agency, and I'm very pleased to be appearing before you to discuss FEMA's emphasis on cost-effective spending for projects funded under FEMA's hazard mitigation grant program known as the HMGP, authorized under Section 404 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
From the vision provided by FEMA's director, James Lee Witt, and by this Congress we believe that more than any other FEMA program the HMGP has been the engine that has driven the national movement toward understanding and embracing mitigation as an effective pre and post-disaster tool. This is a movement that will pay national dividends by making our country safer, by helping us live more symbiotically with the environment, and by saving money.
I was here with you just about a year ago to discuss a General Accounting Office report entitled 'Opportunities to Improve Cost-Effectiveness Determination under the Hazard Mitigation Grant Program,' and that report focused on the HMGP cost-effectiveness review processes and on certain categories of projects that are exempted from a formal cost-benefit analysis, such as those involving the purchase of substantially damaged structures, projects funded under the 5 percent initiative for state discretion, tornado-related projects, and hazard mitigation planning for older disasters.
Last year, Mr. Stan Czerwinski of the GAO described the HMGP as the flagship of FEMA's mitigation efforts. While we are justifiably proud of our accomplishments in meeting our statutory charter of reducing the risk of future damage, hardship, loss, or suffering, we believe that the HMGP is the forerunner of a comprehensive family of mitigation approaches promoted by FEMA. Most prominently the HMGP has laid the foundation for an aggressive, far-reaching pre-disaster mitigation initiative, Project Impact: Building Disaster Resistant Communities. With its emphasis on locally-based initiatives, communities across the country are pursuing common sense damage reduction objectives based on risk assessment, private sector participation, and an investment in preventive measures and long-term results. Project Impact has been extremely successful in addressing many of the challenges that we see in implementing HMGP, particularly a lack of planning at local government levels. Project Impact communities value pre-disaster planning not only for providing critical direction in recovering from a disaster but to reduce or eliminate the impact of a disaster. Pre-disaster planning motivates communities to look at alternatives and to undertake measures that enhance the environment and improve their liveability, thereby providing a safer, more sustainable future for their citizens.
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The law requires FEMA to fund only projects, and activities that are as the Chairwoman said, cost-effective. To comply with this stipulation we generally use cost-benefit models created by national experts. To produce the benefit side of this analysis, these models capture most of the easily calculable direct benefits. But again, as the Chairwoman referred, sometimes the traditional cost-benefit analysis does not fully acknowledge other benefits. Unfortunately, as I have said previously before this Subcommittee, there are many more benefits not presently captured by our cost-benefit models that are difficult to quantify.
I'd like to illustrate this inherent shortcoming with an example of a typical buy-out of a flood-prone home. In this situation, our cost-benefit models capture the benefits that removing the home will provide in avoided future damage to the structure and in saving temporary housing costs were the home to be flooded again. However, our models do not capture other substantial benefits including future reduced emergency management costs, future savings derived from being able to remove flood-threatened infrastructure such as water, sewer, electrical, and telephone systems, as well as roads and bridges that were required to service the removed residences. It does not also capture such benefits as future debris removal costs, future losses in tax revenue from unemployment and other economic disruption, future environmental benefits resulting from removing homes, businesses, and infrastructure from the floodplain and restoring open space, and the intangible, yet precious benefits of safety, security, and peace of mind.
The list goes on and on but the point here is to demonstrate that FEMA's current cost-benefit models represent only a baseline of benefits. Many other benefits accrue from mitigation projects such as buy-outs. Were these benefits factored into the calculation the resulting cost-benefit ratios would be significantly higher.
Having agreed with the recommendations of the GAO that FEMA establish the basis for exempting substantially-damaged properties from a formal cost-benefit analysis and that we study the cost-effectiveness of other exempt projects after they have been implemented, in November of last year, we issued an action plan that specified our plans to address these suggestions. This action plan indicates that we will complete these studies and report back to the Subcommittee by the fall of this year. We remain committed to this time frame and will provide the results to the Subcommittee and the GAO. I would, however, like to reiterate the findings of a report commissioned by FEMA entitled Economic Evaluation of Substantially Damaged Structures Funded through the Hazard Mitigation Grant Program. I touched on these findings last year when the report was still in draft. It was issued as final in September of last year. This report calculated retrospectively the benefits and costs of approximately 10 percent of acquisition and relocation projects for substantially-damaged structures in the floodplain, approximately 2,000 structures. In aggregate, these projects were found to have a benefit-cost ratio of 2.21 but in fact, projects completed in our Region X office in the Pacific Northwest had an even higher benefit-cost ratio of 6.10. So we are in the process of further evaluating the cost-effectiveness of acquisition and relocation projects for substantially-damaged properties to help us determine whether to continue to waive this analysis for this category.
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Again, it's important to evaluate these projects in aggregate, and I realize that's one of the concerns that the Committee has. For example, if each buy-out action must meet a rigid standard of cost-effectiveness as determined by a benefit-cost ratio of 1.0, there will be instances where only a majority of homes in a neighborhood located in a floodplain meet this standard. If the neighboring homes not meeting the standard cannot be included in the project, the infrastructure cannot be removed, and the environmental benefits of clearing the land are compromised. So, in order to obtain these critical benefits it may be necessary to approve mitigation measures for homes that do not individually meet a strict standard of cost-effectiveness if the aggregate neighborhood project does meet an appropriate measure of cost-effectiveness.
Last year, both FEMA and the Subcommittee were confronted by a lack of data on which we could characterize and analyze the HMGP. I'm happy to report that with a very intensive effort to verify historical data and with continued improvements to our National Emergency Management Information System, known as NEMIS, we are now able to produce analyses with greater confidence. We are also able to create visual displays of program activity. For example, we are now able to geographically represent the locations of the property acquisition, elevation, and relocation projects approved before March 3 of this year as shown on the map to my left.
We have been working with your staff, Chairwoman, Fowler, and keeping them informed of our progress on an ongoing basis, and I want to extend my thanks to you and your staff for that good working relationship.
We would note, however, the databases are not yet 100 percent complete for all projects. We're conducting more accurate evaluations. We're just concluding the studies recommended by the GAO. We may discover practices that need to be amended but we also think there is some good news as well. Using the data on projects approved or closed between June of '93 and May of 2000 that were reviewed with a cost-benefit analysis we learn several things. The aggregate cost-benefit ratio for 658 private real estate property acquisition projects is 2.09, based on completed data for 90 percent of those projects, and projects that retrofited public and private structures to protect against wind resulted in a cost-benefit ratio of 2.82. That's completed data for 96 percent in that category. Given that our standard is 1.0, we think this is good news.
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Finally, there is no doubt that better planning leads to better, more cost-effective hazard mitigation projects. Congress has recognized the importance of planning by including a provision in the proposed Disaster Mitigation Act of 2000 to increase the amount of federal funding provided under the HMGP from 15 percent to 20 percent of federal disaster expenditures when the state has an approved disaster mitigation plan in place at the time of the disaster. We also continue to work and improve and modernize our cost-benefit software. Following the process of software development, we are already hard at work in developing the next generation of cost-benefit software. We will also continue to conduct studies into the benefits of hazard mitigation and to include the results of these studies into future versions of our software and project approval policies and procedures.
That's the future. Now back to the present I'd like to thank the Committee for its continued interest and support. I appreciate the time and attention and would welcome the opportunity to respond to any of your questions.
Ms. FOWLER. Thank you, Mr. Armstrong. I appreciate your testimony and all the work that you have been putting into trying to get this database accurate and up to speed, and I just want to ask you expressed somewhere in there in your statement that you were becoming much more confident that the BCRs that are presented in your database are more accurate. Now, is that correct?
Mr. ARMSTRONG. Yes. That's correct, and of course, when that happens, we're also—as we get more accurate we're also going to be better at finding our mistakes, too.
Ms. FOWLER. Okay. Because that's—I guess my concern is what's been going on over the past couple of days. Two days ago you all notified the Subcommittee that there was an error in the database which misidentified about $200 million in mitigation spending, and then this morning we got another notification that for an additional $38 million and 58 projects there were discrepancies. And then a couple of hours before the hearing, then there was another notification that the data was not quite correct. So this still must be a work in progress, and I guess that's my concern on the data that we've received to date, how accurate can we assume that it is, and what are you doing specifically to try to maintain and improve this accuracy because we were concerned this kept changing over the last 24 hours.
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Mr. ARMSTRONG. Well, I think, Congresswoman, you've pointed out the benefit of having the GAO and the benefit of having these hearings. I think it's good to hold us accountable, to put us under some pressure, under some deadlines to do some more self-searching in terms of how we've come to these conclusions, and I think the staff was very committed to having the best data possible by the time we got to this hearing.
We are in the midst now of continuing to update our database. We think that we have the right people evaluating this. We're doing quality control in three critical data fields in four categories, general data, financial data, benefit-cost data, and environmental data. This effort to improve our data has included providing regional offices with lists of missing, questionable, or obviously erroneous data values. We have also put our efforts into populating the property site inventory, which provides specific data on acquired, relocated, elevated, or retrofited properties. Thirdly, we've improved the reporting capabilities of the database by adding several fixed reports. This is the historical database. Fourth, we've conducted a comprehensive review of financial information and reconciled that data against our automated disaster assistance management system, which was the older information management system. So we created a crosswalk between the old system and the new. And finally, we've developed data maintenance procedures for regional personnel to make sure that they keep the data updated.
Additionally, based on the methodology for reviewing the database described above, FEMA headquarters will be conducting annual audit queries to identify missing or inconsistent data and to insure that regional offices are continuing to enter, maintain, and update the data. So we think we've invoked some quality control measures. We made sure that our field personnel are trained. We're reconciling older data with the newer data, and we're spotting the errors. But because this is an ongoing process and a number of our regions are still working on things like Hurricane Floyd and other recent activities or are in the midst of new disasters, it sometimes takes awhile to get that communication back and forth with the field.
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But I think our staff went to an extra effort to make some calls and double check some work so that's why you're seeing some last minute revisions.
Ms. FOWLER. Well, and that's good. I mean, that does show the process is working so I think we're all on the same team here. I'm a big supporter as you know of these grants but we want to make sure that they are cost-effective because that's—those who don't support them, that's the best way they show that we shouldn't increase them. And I think we've got to make sure that the taxpayer dollars are being spent wisely and so we're all on this together, and I think we're trying to make sure they work.
So my assumption would be then we've got this chart over here that shows that over the past several years the BCRs of these funding projects have not been getting higher but if say a year from now we have that chart up there, then I would assume that then the next chart on there, line on there would show these BCRs getting much better, much higher as we—as these systems get implemented.
Mr. ARMSTRONG. Well, Congresswoman, what I would like to suggest to you is that, in fact, there is always going to be a constant in terms of a certain amount that are not going to make that 1.1 ratio. And I think that there are good public policy reasons for that. Again, if one of the missions of this program, for example, in flood hazard areas is to move properties out of the 100 year floodplain, we don't want to cherry pick. We don't want to create a checkerboard situation. We don't want to create new burdens for local government. If we have certain other situations where we're doing a long-term infrastructure project and there's a feasibility piece and an implementation piece, sometimes the feasibility part is going to be under 1.1 but the implementation will be over 1.1. And when you break that down by year, you don't always see that aggregate. And there are going to be some other situations where it's just the right thing to do. We have—and I have a photograph here of lights that fell in a classroom at 4:00 a.m. when the Northridge Earthquake hit. Now, I don't think that the members of Congress from this part of California would have withstood public scrutiny if they would have said we don't want to fund installing better lights that won't fall on school children. That's not a 1.1 cost-benefit.
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But I think there will be continued efforts to refine our process. We will do our levelheaded best to make this program cost-effective but as I think I told the Committee last year cost-benefit is a sub-component of cost-effective and that there are other means to show that the activity is cost-effective.
Ms. FOWLER. Exactly. But we just have to get better oversight so that these people out in the regions who are making sometimes subjective decisions are really...
Mr. ARMSTRONG. Yes.
Ms. FOWLER. ...making more objective decisions with them. If you were to set a goal for the proportion of funding that would—that's going to projects with BCRs of less than 1, what would that goal be? If you look at all the projects, what percentage of projects should be roughly going to projects that have a less than 1?
Mr. ARMSTRONG. Well, in a perfect world, of course, our goal would be to have 100 percent of our projects have a BCR greater than 1 but I am reluctant to set an actual goal quite frankly in deference to the Congress because of the individual and unique situations that happen in every disaster. We have some locations that have never been hit before and are totally taken by surprise such as in a tornado activity where actually we're seeing more deaths now than we are in floods or other...
Ms. FOWLER. Right.
Mr. ARMSTRONG. ...disasters. We are seeing the impacts of urbanization of the floodplain of weather pattern changes where things are happening with more frequency or get in new areas where you have new growth and new population where the population hasn't been confronted with these issues. Planning and the lack thereof, the adoption and enforcement of codes, understanding and assessing risks. Those factors and the absence of those factors are going to from time to time have to be acknowledged in how many of these projects may not meet that 1.1 ratio for the greater goal of also enhancing state and local capabilities. So while I would like to shoot for 100 percent it seems to me, in looking at our data, that if we can keep it below 20% in terms of those that aren't meeting 1.1, that's a good start. And of course, I'd like to reduce that down if I could.
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Ms. FOWLER. Now, I think the current level right now according to the figures we have, and those—it's about 28 percent don't meet that goal of 1.1 and about 71 percent don't meet the goal of 1.5. So I know you're trying to—if you could get it down to like you say the 20 percent and to something definitely lower than 71 percent, I think that was more concern where we had jumped from a 28 percent when you just went from 1.1 to 1.5, percentage jumped from 28 percent to 71 percent. That's a pretty big percentage of projects that are being funded that aren't meeting just a basic BCR of 1.5. So I think at that—and all the things you're implementing and putting in, again, I think...
Mr. ARMSTRONG. Uh-huh.
Ms. FOWLER. ...next year you should begin to see the results of some of that.
Mr. ARMSTRONG. Well, let me, if I could, Congresswoman, respond to two other issues. One is this issue of how many are under 1.5. When we do a cost-benefit analysis process because there is a concern about expediency, getting money out the door, we don't do a fully-exhaustive cost-benefit analysis. Once we hit that 1.0 we pretty much stop doing our work so it's a bit of a misnomer to say that a lot of the projects are in the 1.0 to 1.5 category. If we took the extra time to do a full-blown cost-benefit analysis, we would see a lot of those projects coming in at higher than 1.5 or higher than 2 but it's a balancing act. Do we want to spend the extra time doing cost-benefit, or do you want to keep moving to get these projects out the door and create disaster-resistant communities? So I wouldn't rely too much on the lack of projects that are not above the 1.5 category because we simply usually don't go beyond that when we do cost-benefit analysis.
The other point I would make is that you're going to see spikes in this process from time to time. For example, when you have a Hurricane Floyd activity that in particular North Carolina hit so many people who were in low-income categories and in such a large area of the state, this aggregate approach to cost-benefit analysis is going to spike the numbers that are going to be below the 1.0. And you can almost see in the history of the program a spike coming after the Northridge Earthquake, a spike coming after the Grand Forks Floods, and another spike coming after Hurricane Floyd.
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Ms. FOWLER. Thank you. Mr. Terry.
Mr. TERRY. I'll follow up on some of the questions and comments from the Chair. I'm actually, Mr. Armstrong, more concerned about the projects now than I was 20 minutes ago.
Mr. ARMSTRONG. Okay.
Mr. TERRY. Because it seems to me that the standards that are being followed by FEMA are ones that FEMA has developed and not following the statute. Maybe my comment you disagree with, but when I hear comments like it's the goal to remove all structures from the hundred year, that seems to be a different standard than what was set out in the Act.
Mr. ARMSTRONG. Uh-huh.
Mr. TERRY. The Act said we will use taxpayer dollars to remove structures or primarily this is to remove structures from various areas where there's a hazard of continuous disasters in the area. Correct?
Mr. ARMSTRONG. Yes. And I would hasten to add, Congressman, that we look at the HMGP as one of the tools in our toolbox. It may be the biggest tool but it's not the only tool, and when I refer to clearing out the one hundred-year floodplain, it's not just the hazard mitigation grant program that helps fulfill what our mission is at our agency. It's also the Flood Mitigation Assistance Program, which is a pre-disaster grant out of the Flood Insurance Program. It's also the Project Impact Initiative, which is pre-disaster dollars, and it also is in some cases flood control projects that other federal agencies impose.
So in aggregate all of those programs can contribute toward this national mission but I also don't believe that the Stafford Act language or the specific language around HMGP is in conflict with that greater goal of clearly the floodplain. We know that the HMGP won't get us all the way there but in terms of what is cost-effective and what is good public policy we have suggested to our states that through mitigation planning and identifying before a disaster, where to place these post-disaster grants, that it would be well for them to look at things like repetitive loss properties...
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Mr. TERRY. Okay.
Mr. ARMSTRONG. ...like properties that would most damage your infrastructure, like properties that would put senior citizens and children and other vulnerable populations in harm's way, like properties that would cost the most for first responders to react to. So we do think that the...
Mr. TERRY. Well...
Mr. ARMSTRONG. ...HMGP is consistent...
Mr. TERRY. ...Mr. Armstrong...
Mr. ARMSTRONG. ...with...
Mr. TERRY. ...but that also starts begging the question and the purpose of this hearing. This Act stated that to be watchdog of taxpayers money that we wanted a ratio of 1 to 1. That was—that's the language. That's what Congress acted upon, and what you're saying is that there's so many other intangibles out there that should be part of a cost-benefit analysis so part of the problem I guess in why there's this difference of opinion on the merits of the use of this project and the 1 to 1 ratio is perhaps the basis that's being used, how you calculate the cost-benefit analysis. Because a lot of the issues that you're injecting is a lot like art, you know. It's really hard to define in what's nice for one person is ugly to the next. And so somehow I think you need to figure out how to make it more concrete and tangible. You listed out several criteria that you—I would interpret as you saying are in the intangible area that I think are calculable.
Mr. ARMSTRONG. Uh-huh.
Mr. TERRY. That are not part of this. I don't understand why they're not. The other part, the majority of these fall under a waiver. I assume that if it's above a 1 to 1 ratio you had mentioned that there's a waiver. I'm not totally familiar with the process. Is there a waiver process then that's concrete, that there's some criteria that you would adopt or look towards to exceed the 1 to 1 ratio?
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Mr. ARMSTRONG. Congressman, actually you've posited several questions here so let me see if I can do my best to answer them all. The waiver that I was referencing is we have waived a certain sub-group of projects that are in the category of what we call substantially damaged. That is if a local building inspector concludes that a property is substantially damaged, that is, more than 50 percent damaged, then we have made the policy decision that it is de facto, on its face cost-effective to offer a buy-out and elevation or relocation to that property owner without doing the formula cost-benefit analysis. Because of that policy decision we were asked by this Committee and the GAO a year ago to go back and review that—those—that subset of properties to see whether if a cost-benefit analysis had been run that we could justify that policy waiver. And to date we are seeing that the vast majority of those projects, some—over 80 percent of those projects if we did—had done a cost-benefit analysis, they would have passed muster.
Again, we're trying to balance this issue of getting people out of harm's way before the next disaster hits and the concerns of the Congress regarding effective stewardship of the taxpayer dollar. But I would also interject that the language in the Stafford Act, it does not say do a cost-benefit analysis and come up with a 1.1 ratio. The language is much broader. It says, the projects must be cost-effective. We don't think that the word—the phrase cost-effective is synonymous with the phrase, cost-benefit. We think cost-benefit is a tool to show cost-effectiveness, the best tool, the most frequently used tool. And as you just suggested we can start to add some of these other benefits, and I do concur with you, not all of them are intangible, as we get better at modeling this and doing analysis, I would like to add more of those things that we aren't using for benefits into the formula so we can get to this goal of 100 percent.
But I think that the cost-benefit approach, while it's valuable and easily understood, isn't the only road to get to the statutory requirement of cost-effectiveness.
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Mr. TERRY. Well, then is there at least some written procedure that you have to list and describe what these other benefits and intangible benefits are so we can study them and see if common sense dictates because once you start talking about intangibles...
Mr. ARMSTRONG. Yes.
Mr. TERRY. ...that it does leave it open to at least accusations of fraud or maneuvering to projects to certain politically-sensitive areas, and we want to have a formula that people can trust are being used for what the intended purposes are. So what—are there written procedures getting back to my...
Mr. ARMSTRONG. Sure.
Mr. TERRY. ...basis of my question where those are listed out for people to observe...
Mr. ARMSTRONG. Yes.
Mr. TERRY. ...for us to observe?
Mr. ARMSTRONG. And let me just define the universe for you. Of the projects that we have done since '93 87 percent of those projects we apply cost-benefit analysis to. So we're only talking about 13 percent of the entire pool that we don't apply the mathematical formula. Of that 13 percent that 13 percent is divided into three subcategories. One category are properties that are substantially damaged. That's the largest slice of that piece of pie.
The other two are for tornado-related projects. We create a special exemption because in the tornado hazard sheltering and warning are the best means of mitigation. And we felt that we needed to be flexible to allow for things like NOAA weather radio and other warning systems, which many members of Congress have asked us to look at as part of that. But we are now closing the window on that exemption. We have a proposed regulation on structural projects that's making its way through our General Counsel's office that will prohibit in the future the HMGP being used for that amount.
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Then there's a third category. 5 percent of the total HMGP pot in any disaster can be set aside for what we call other state projects. These are projects that state emergency management officials have identified that don't neatly fit within the definition of the Hazard Mitigation Grant Program but we believe augment the HMGP because they are a preparedness activity or they are a recovery activity that make the mitigation stronger. Again, things like warning systems, emergency operation center activities, and other enhancements of state and local capability.
So again, we're only talking about 13 percent of the total and of that total we do believe we have defined approaches to each of these but we would be glad to submit for the record that guidance that we've issued to the states on those exempt categories.
Ms. FOWLER. That would be helpful if you could submit it. Thank you.
Mr. TERRY. Thank you, Tillie.
Ms. FOWLER. Do you have any—don't—Mr. Terry, I was just...
Mr. TERRY. Not right now.
Ms. FOWLER. Do you have any other questions? Well, I just have one or two others right now. Earlier I was mentioning about the regional directors and if a regional director is faced with a project they deem worthy of approval but the project doesn't meet cost-effectiveness standards, then is there a particular process that a regional director has to comply with in order to get the project approved?
Mr. ARMSTRONG. Well, the...
Ms. FOWLER. Are there published lists of factors or guidelines or whatever that they have to follow?
Mr. ARMSTRONG. Yes, there is. I don't want the Committee to have the impression that we encourage our staff to look for projects that don't meet the cost-benefit analysis. There are, again, in the rare instance where, and I'll use again the photograph that I've passed for you all to look at the instance where there is a good public policy behind retrofiting a school so that lights won't fall on school children. We do have some written guidance and some approaches, and again, we can submit that for the record as well.
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Ms. FOWLER. But that would just—I thought of that after we had mentioned earlier about regional directors because it's a big country.
Mr. ARMSTRONG. That's right.
Ms. FOWLER. We've got regions all around it and different circumstances, and you can't ever have—one size does not fit all, and that's one of the things we're about but some basic guidelines that they have to meet or follow. I'd be interested in that. The other thing you had mentioned in your testimony I believe, was that when you're looking at acquisitions, that's when you seem to have more of a problem with the cost ratio, that when you do an acquisition project then that's where sometimes you, if you're paying the fair market value for the home and the benefit received is going to be the same, you know, regardless of any damage to existing structure, then how is it that when you acquire the contiguous properties, you mentioned that that lowers the benefit-cost ratio. Would you explain how that works?
Mr. ARMSTRONG. Well, I've used the phrase aggregate...
Ms. FOWLER. Uh-huh.
Mr. ARMSTRONG. ...and what we mean by aggregate is we try to take a defined geographic area and look at the full benefit to the area. And usually that's either an entire political sub-division such as a city or it more often than not it's a neighborhood, a defined neighborhood. The goal here is to avoid leaving the one house at the end of the cul-de-sac so that we can't remove—they still have to maintain sewage, telephone, trash removal, and then they've got to maintain the other properties around that house for weed control. And you've got to send out the city crews to do all of those other activities. If in the aggregate of that neighborhood it makes sense to scoop up the two or three properties in that 200 or 400 property area for the greater good, again, of not maintaining a burden to the local government or creating a future hazard where the flood waters are really going to do something to that homeowner, then we think it's good public policy to include the property. But it's that aggregate approach that we're taking. And we would be glad to explore that issue further with you...
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Ms. FOWLER. Okay.
Mr. ARMSTRONG. ...and your staff.
Ms. FOWLER. Thank you. Mr. Terry, do you have any other questions? Well, I don't think we've got—I want to thank you. I don't think there are any other questions, and I want to thank you for your testimony.
You've really been working hard on this and trying to put this together, and I appreciate it, and it's going to get processed together. You know, we were talking about it earlier because today, you know, Americans are trying to live healthier lives. I'm not sure how many members of Congress do but we're trying to alter our lifestyles as far as eating better, exercising, et cetera, and we do see the risk of disease and other health problems. But just as we're trying to change our own personal habits to improve our health the federal government's got to change its habits as to how we are—have been approaching natural disasters. So if we're going to spend more resources preparing for disasters before they occur, then we can better prepare and serve our citizens which is what you're all about and what we are trying to ensure, too. But we all know our funding is limited. We'd like to have more than we have, and we're trying to get that but if we can—we can greatly diminish the damage disasters cause only if we use these resources that we have wisely.
And that, as I stated earlier, is what we're trying to do because we owe it to everybody who lives near a fault Line or on a floodplain or in a tornado alley or in a hurricane-prone area to make these grants as effective as possible. So I am greatly encouraged by the cooperative effort that FEMA and GAO and the Subcommittee have been taking to insure that these mitigation dollars are spent on the best projects and that we are getting the best value for our money.
And with all three of us pulling in the same direction, and that's what I think we've all been doing, we're making progress. And we're bound to be making even more. So I look forward to working with you to help make FEMA's mitigation program, which is already an excellent program, even better.
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And we're also looking forward to, at least my staff is looking forward to examining this detailed mitigation project information that we have requested from FEMA awhile back, and I understand we just got it this morning. So they're going to be reviewing it, and I'm sure that when they've had the opportunity to review it, then we would be interested in speaking with FEMA again about some of the information contained in that.
But, again, I want to thank you because I know how hard you've been working. I think you've made a tremendous amount of progress in that we are getting to where we want to be with making a good program even better and helping even more people out there. And the good news is HR707 as we know is out of the Senate...
Mr. ARMSTRONG. That's right.
Ms. FOWLER. ...and we're going to keep moving it to Conference because my goal is to have that signed into law before we go out this year because that will help you the most of all.
Mr. ARMSTRONG. Yes, it will.
Ms. FOWLER. But again, what we have in that bill needs to be used wisely, and so I think you're setting up a great program that when we get those resources and provisions in that, we'll be ready to do even better with it. So thank you again.
Mr. Terry, did you have any closing statement or anything?
Mr. TERRY. Thank you.
Ms. FOWLER. Thank you for being here, too, and thank you, and if there are no other things. This hearing is adjourned. Thank you.
Mr. ARMSTRONG. Thank you.
[Whereupon, at 3:20 p.m., the Subcommittee was adjourned.]
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