August 18, 2010

Special Community Disaster Loans Program

Proposed Rule
Summary

Score: 20 / 60

Additional details
Agency
Department of Homeland Security
Regulatory Identification Number
1660-AA44
Agency Name
Department of Homeland Security
Rule Publication Date
04/03/2009

RULE SUMMARY

The Federal Emergency Management Agency (FEMA) proposes to amend its regulations regarding the Special Community Disaster Loans Program to implement loan cancellation provisions for Special Community Disaster Loans provided by FEMA to local governments in the Gulf region following Hurricanes Katrina and Rita. This rule does not propose the automatic cancellation of all Special Community Disaster Loans. This rule proposes procedures and requirements for governments who received Special Community Disaster Loans to apply for cancellation of loan obligations as authorized by the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007. The proposed procedures are intended to provide sufficient information to FEMA to determine when cancellation of a Special Community Disaster Loan, in whole or in part, is warranted. This proposed rule would not apply to any loans made under FEMA’s traditional Community Disaster Loan program which is governed under separate regulations.

METHODOLOGY

There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score

Openness

1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
1660–AA44 can be found on regulations.gov using the RIN and a keyword search, as well as on the Department of Homeland Security's website. It can be found by searching the RIN in the search box, as well as searching the title in the search box.
5/5
2. How verifiable are the data used in the analysis?
FEMA presents figures for loans authorized and loans made, but these are not explicitly sourced. Someone who knows FEMA's budget could probably find the information somewhere. Some wage ata are sourced to BLS.
1/5
3. How verifiable are the models and assumptions used in the analysis?
There is little relevant discussion. One exception: The analysis explains that FEMA proposes to use the same cancellation procedures already familiar to communities who received traditional CDLs because "they have proven accurate and efficient in determining whether local communities meet the requirements for cancellatin of traditional Community Disaster Loans." This assertion could be bolstered with actual proof.
1/5
4. Was the analysis comprehensible to an informed layperson?
The preamble and RIA are relatively understandable, but they are only 9 pages total and there is very little analysis.
4/5

Analysis

5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
1/5
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
The analysis mentions that cancellation would benefit recovering communities. The proposed rule elaborates by saying that FEMA believes the "sustained financial long- term recovery of the communities affected by Hurricanes Katrina and Rita may continue to be at risk." Without the financial strength to repay these loans on a timely basis, they could default, "which would further impede their ability to recovery affecting, among ohter things, a municipality's ability to issue bonds." The analysis fails to address the affect of loan cancellation on the economy: chiefly, who has to foot the bill instead and what productive activities this transfer of payments is preventing.
2/5
Does the analysis identify how these outcomes are to be measured?
According to the analysis, the benefit to recovering communities is the dollar amount they save from having to repay their loans. There is perhaps an implicaiton that loan forgiveness makes it easier for communities to provide services, but this is not explicit.
1/5
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
The analysis explains that the cancellation provisions apply to SCDLS issued under the 2005 and 2006 acts for "those communities whose revenues during the full three-fiscal-year period following the major disaster are insufficient to meet the operating budget of the local government." This could be interpreted as a claim that the regulation focuses forgiveness where it will do the most good. The preamble says cities have claimed that if they have to default on the loans, it will be harder for them to recover credit ratings that will allow them to issue bonds; this is the closest it comes to articulating a link between the regulation and any kind of results.
1/5
Does the analysis present credible empirical support for the theory?
This section could be bolstered if it cited empirical support for why revenues and operating budgets are the best barometers for loan cancellation and, by extension, if they benefit recovering communities.
0/5
Does the analysis adequately assess uncertainty about the outcomes?
No relevant discussion.
0/5
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
2/5
Does the analysis identify a market failure or other systemic problem?
The background section of the proposed rule explains that Hurricanes Katrina and Rita devastated communities in Louisiana,Texas, Mississippi and Alabama (the most states for any single disaster in FEMA history). So there is evidence that the original problem that led to the loans was big. The problem the regulation seeks to solve is that some communities cannot afford to pay back these loans, and they might be in an even deeper financial hole of the loans are not forgiven.
2/5
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
The sole reference to how debt cancellation solves any systemic problem is the claim that some localities will find it harder to get their bond ratings back if they default. Why this is a problem for some communities but not others is not explained.
1/5
Does the analysis present credible empirical support for the theory?
The analysis does a good job outlining the catastophic nature of natural disasters with statistics from the affected communities. However, this part of the analysis could be bolstered by empirical support citing other instances where federal intervention into loan provision and cancelation at this level was beneficial to the economy (i.e. that the long term benefits to recovering communities outweigh the cost to taxpayers of footing the bill of cancelled loans).
2/5
Does the analysis adequately assess uncertainty about the existence or size of the problem?
The preamble acknowledges that it is not clear how many communities will actually ask for debt cancellation. FEMA actually "solicits public input on this issue."
2/5
7. How well does the analysis assess the effectiveness of alternative approaches?
2/5
Does the analysis enumerate other alternatives to address the problem?
FEMA considered automatically canceling all Special Community Disaster loans but concludes it did not have authority to do so. It also considered altering documents/info localities have to submit when they apply for cancellation, but claims that existing procedures work well and communities are familiar with them.
3/5
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
These are quite narrow alternatives.
2/5
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
The RIA asserts, but presents no calculations or figures, that the alternatives would not alter costs to the government and would not simplify procedures. "FEMA opted to retain the requirements used for the traditional CDL program that have proven accurate and efficient." Furthermore, the analysis notes that the alternatives considered "did not have a measurable effect on Federal costs and did not simplify program administration or consolidate or clarify existing definitions, procedures, or processes." Finally, the analysis says that the "creation of additional or revised regulatory requirements would not be in concert with the intention of providing forgiveness consistent with previous disasters."
1/5
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
It asserts some communities will have problems if their debt is not canceled, but offers no real analysis. The analysis just mentions that "any funds cancelled will have a positive effect on the State and local economy by reducing on-going operating expenses related to the loan, as well as the debt for the loan." Establishing a baseline and including some quantitative analysis of the state of these affected economies in the absence of loan cancellation provisions would bolster FEMA's argument.
1/5
8. How well does the analysis assess costs and benefits?
1/5
Does the analysis identify and quantify incremental costs of all alternatives considered?
The analysis calculates the cost to communities of applying for cancellation and maximum possible cost to the federal government if all outstanding loans were canceled. If all 152 loan recipients applied, and were found eligible, the analysis notes that "for full cancellation under these proposed procedures, up to $1,270,501,241, plus any applicable interest and costs, could be cancelled, although as of March 16, 2009 only $831 million of that amount had been drawn down." There is no calculation of costs of alternatives.
2/5
Does the analysis identify all expenditures likely to arise as a result of the regulation?
It identifies federal loans that would be canceled, which would act much like a federal grant.
3/5
Does the analysis identify how the regulation would likely affect the prices of goods and services?
No relevant discussion.
0/5
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
Little relevant discussion. It mentions that the loans are not intended to cover pre-existing deficits. Surely cancellation of debt creates some incentive effects? There seems to be a huge moral-hazard problem involved with loan forgiveness. Specifically, a community receiving a Special CDL would want (or ensure that) its "revenue during the full three-fiscal-year period following the major disaster are insufficient to meet the operating budget of the local government" so that they qualify for Special LDC cancellation.
1/5
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
The analysis notes that it is not clear how many communities will apply for cancellation, so it calculates the maximum amount of debt that could be canceled. The analysis only presents $120,501,241 as the upper bound cost of cancellation if all 152 loan recipients applied for and were found eligible for full cancellation. However, it also notes that "not all of the loan funds obligated have been distributed." As of March 16, 2009, only $831 million (approximately 65 percent of the total amount awarded) has been drawn down by applicants. So while "FEMA expects that all communities with Special CDLs will apply for cancellation," the agency recognizes that it cannot predict with accuracy how many of those communities will be eligible for cancellation. This aspect of the analysis would be improved if FEMA provided a range of cost estimates, not just the upper bound.
3/5
Does the analysis identify the alternative that maximizes net benefits?
Since benefits were not really measured or estimated, net benefits could not be calculated
0/5
Does the analysis identify the cost-effectiveness of each alternative considered?
Since benefits are not really measured or calculated, cost-effectiveness could not be calculated.
0/5
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
The analysis recognizes that localities will bear a cost of applying for cancellation, and cancellation functions much like a grant from the federal government to the locality. It breaks down the loans by Act 2005 and 2006 and by each state affected.
1/5
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
It gives only a general assessment of benefits to affected communities who apply and are accepted to the cancellation program is given.
1/5

Use

9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
The tiny amount of analysis seems to have had no impact on decisions.
1/5
10. Did the agency maximize net benefits or explain why it chose another alternative?
Since benefits are barely even articluated and not measured, net benefits are unclear and played no role in the decision. One option was rejected due to lack of legislative authority; another rejected due to the assertion that it would have no effect on costs.
1/5
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
Since benefits are barely even articluated and not measured, it is not clear from the RIA how one would go about measuring or setting goals for outcomes.
0/5
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
FEMA could at least track costs by tracking debt forgiveness.
1/5
 
Total 20 / 60