Should California Insure Against Spending too Much on Fighting Wildfires?

One bill would establish a state catastrophe fund to provide extra liability insurance for utilities. It would provide the utilities financial stability to keep the lights on in California.

by George Skelton, Los Angeles Times / February 28, 2019
Sunrise above fire-stricken Lake Elsinore, Calif., on Saturday, Aug. 11, 2018. TNS

(TNS) - This would be a first for California: state government buying insurance to protect itself against overspending its budget.

But before you start pelting the politicians and screaming fiscal irresponsibility, know that the budget-busting would be for fighting wildfires.

That puts it in an entirely different category from, say, controversial spending to help immigrants who are here illegally, or trying to register voters at the notoriously jammed DMV.

No sane person is going to gripe about overspending tax dollars to douse a deadly wildfire.

But it does amount to a sucker punch for state budgeters, who might be forced to grab money from other state programs to pay for the firefighting. Fortunately in recent years the robust California economy has been producing state revenue surpluses. So, little problem.

Another recession is a certainty, however. And so seemingly is something else: devastating wildfires worsened by climate change.

Gov. Gavin Newsom’s recent budget document contained this passage:

“Conditions in the state’s wildlands are changing rapidly…. Despite additional precipitation …vegetation remains critically dry. Weather events are more extreme, winds blow with more intensity for larger durations and humidity levels are lower for longer periods of time. Conditions historically observed in Southern California vegetation are moving north … and higher in elevation.”

The budget document also notes that 2018 “brought the largest, deadliest and most damaging fires in the state’s history…. Wildfires in California killed over 100 people, destroyed more than 22,700 structures and burned over 1.8 million acres…. Emergencies of this magnitude are becoming a more regular occurrence.”

Here’s why some leading Democrats are proposing that the state insure itself against budget-busting wildfire calamities: For the current fiscal year, the Legislature and former Gov. Jerry Brown budgeted $443 million for firefighting, and the total tab so far is $936 million. For the previous fiscal year, $427 million was budgeted and costs were $948 million.

So three elected officials — state Sen. Bill Dodd (D-Napa), state Treasurer Fiona Ma and Insurance Commissioner Ricardo Lara — have proposed legislation that would authorize the state to buy private disaster insurance to protect it against overspending on wildfires.

Depending on the policy, if the state overspent its budget by $500 million, it might be reimbursed $400 million.

“We would use insurance to hedge against a big, bad fire season,” says Dodd, whose wine country district was devastated by wildfires in 2017. “California has never done this.”

But Oregon has. For four decades, the state has bought wildfire insurance costing $61 million and received $102 million for claims, according to backers of the California legislation.

So if the Oregon insurers lose money, why would they keep selling the policies? That answer will have to wait for another day.

The Federal Emergency Management Agency also buys policies to protect its emergency flood funds from drying up during a calamity.

“Most of us have house insurance, auto insurance, maybe earthquake and flood insurance,” says Ma, whose husband is a career firefighter and has battled several major wildfires. “Why doesn’t the state have disaster insurance to reduce its [financial] exposure?”

That’s a serious question legislators and the governor will need to answer.

Here are some reasons why maybe not:

Those premiums are very expensive — as high, I’m told, as 30% of the payout value. With taxes rolling into Sacramento, why not just budget more for firefighting and use the would-be premium money for extra fire prevention?

Moreover, the state already is reimbursed by the feds for its firefighting in national forests. So its budget-busting is not as severe as advertised. During the current fiscal year, $202 million is expected from Washington.

But buying insurance to protect against fiscal surprises does raise some intriguing possibilities. Maybe the state could insure itself against breaking the bank on public works — like a $77-billion bullet train that is so far projected to cost more than double the original sticker price. How about a policy to hedge against a revenue-killing recession?

Maybe citizens could even buy insurance to protect themselves against a hefty tax increase. Naw. No insurer would be foolish enough to sell that in California.

There’s also other wildfire insurance legislation percolating in Sacramento.

One bill would establish a state catastrophe fund to provide extra liability insurance for utilities. Pacific Gas & Electric Co. declared bankruptcy, fearing it could be liable for up to $30 billion for fire losses. The fund would help utilities stay afloat when they’re drowning in claims. Utilities and the state would pay into the fund.

“This would provide the utilities financial stability to keep the lights on in California,” says the author, Assemblyman Chad Mayes (R-Yucca Valley).

Another wildfire insurance bill would help burned-out victims who are underinsured or uninsured. A fund modeled after one in Florida to help hurricane victims would be created, and the state and utilities would finance it. Victims could turn to it for claims that private insurance didn’t cover.

“Communities need to be rebuilt — not just homes but small businesses,” says the author, Assemblywoman Autumn Burke (D-Marina del Rey), who recently visited the virtually incinerated Sierra foothills town of Paradise. “All you see is burned-out homes and chimneys.”

As for the state buying insurance to protect itself against breaking the budget, the politicians need to remember one thing: Both the state and the insurer can’t be winners. One will get burned.

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