Financial Concepts Used to Execute

Financial Concepts Used to Execute the Obligations and Expenditures Related to Hurricane Katrina

Hurricane Katrina, one of the biggest disasters that America has faced till date due to natural causes, also turned out to be one of the costliest ones as well. It also exposed many flaws in the responding capability and readiness that American government agencies displayed both before and in the aftermath of the incidence. This hurricane started out as a depression over the Bahamas on the 23rd of August 2005 and was initially categorized as a Category 1 hurricane moving towards Florida. By August 29th, Hurricane Katrina had developed into a Category 5 hurricane and moved directly towards New Orleans, Louisiana, hitting it at around 6 a.m. On 29th August. The levees along the Mississippi River Gulf Outlet, Industrial Canal, 17th Street Canal and London Avenue Canal were breached flooding approximately eighty percent of this famous American city. Katrina also battered the coastal regions of Mississippi and Alabama. (Palser, 35); (Walker, 42); (Brown, 10)

As per official records, 1833 known fatalities could be attributed to Katrina's wrath. Several indirect fatalities were also reported and a number of people were also reported missing. However, it is not because of the number of fatalities and the environmental impact that Katrina was ranked among the most deadliest of storms since other hurricanes had claimed far more number of lives in the past; it is considered devastating because of the huge economic loss and the financial problems that this posed to the American government and the people in the aftermath of the incident. (Knabb; Rhome; Brown, 11)

It is estimated that the total cost caused by the damage amounted to around $81 billion of which $40.6 alone could be attributed to insured losses. More than a million people were probably evacuated and many of them shifted to other regions of the U.S. And many remained homeless. The entire economy along that region was shattered. The U.S. government thus had to execute a number of financial concepts and schemes in order to execute staggering volume of expenditures and obligations caused by the devastating hurricane. (Knabb; Rhome; Brown, 12)

Creating funds to provide coverage for the industrial losses and to finance rebuilding activities was one such financial concept used by the state and federal governments to cope with the damage caused by Katrina. For instance, the Florida legislature created the "FHCF" of "Florida Hurricane Catastrophe Fund." This was a tax-exempt fund and its limit was around $15 billion which was later increased to $32 billion in 2007. Another financial concept was that of flood insurance. Conventional insurance companies do not provide any sort of flood insurance and therefore the onus falls on the federal-government-backed flood insurance policies in the form of "NFIP" or "National Flood Insurance Program." (Agnew, 29)

NFIP, which is administered by the Mitigation Department operating within "FEMA" or "Federal Emergency Management Agency" which is a part of the "Department of Homeland Security," can be availed by renters, homeowners and owners of businesses which operate in regions affected by Hurricanes like Katrina and Rita." (Agnew, 30) In the aftermath of Hurricane Katrina, the borrowing authority of NFIP was raised three times in a period of six months in order to pay insurance claims which amounted to around $23 billion. Despite the increase, NFIP was unable to pay insurance money to all claimants due to the severe fund crunch. (Agnew, 30)

Prepaid debit cards issued by JPMorgan Chase on behalf of FEMA were yet another financial scheme launched by FEMA. Despite the fact that issuance of cards were stopped within a few days of the launch of this scheme, the "American Red Cross," indiGOCARD in Fort Worth and a few other card marketing companies continued with the task of distributing such prepaid cards to evacuees along the entire Gulf Coast. Approximately 500,000 of these cards were estimated to have been delivered to the evacuees. Every card offered approximately $2,000 which was preloaded on it. Relief payment using prepaid cards provides major benefits in such disaster situations. (Tescher, 1)

Firstly, funds in the form of either government benefits or salaries can be transferred electronically. This was particularly helpful in light of the fact that seven out of ten people in the regions affected did not possess a savings/checking account and nor did they have valid credit cards. Thus it could function as foothold for people who did not have financial stability either before or after the hurricane. Another advantage of such prepaid credit cards lies in its potential as a link between underbanked and unbanked customers since the processing of such cards provides additional functions in the form of credit building, remittances, payments of bills and savings. However, one of the shortcomings of the cards issued by FEMA was that consumers could not reload the cards with money from other multiple sources. (Tescher, 2)

Another shortcoming of these cards was the misuse and abuse of the government funds by federal employees/agencies for luxurious and extravagant items and services which were far removed from the relief operations that they were initially intended for. These included iPods, beer brewing kits, time spent at luxurious resorts during training sessions and even a 63-inch plasma TV purchase by FEMA. (McNamara, Bill It to Uncle Sam)

A huge number of people who evacuated to other regions as well as the significant number of people who took shelter in the Astrodome and other shelters during the Hurricane were rendered homeless. Reconstruction of homes and rebuilding the lives of such people was amongst the top obligations of the federal and state governments. Issuing "emergency Section 8 Housing Choice Vouchers" was one of the ways in which part of the reconstruction work was financed by the government. (Greenstein, 2)

In the past, these vouchers were not meant to be used for long-term or permanent construction but were intended for providing temporary houses in the form of trailers, repair damaged roofs or facilitating the payment of mortgages by families. However, in case of Hurricane Katrina, such emergency housing vouchers were meant for making a federal payment to land-owners to include the expenses towards a house or decent apartment in the privately-run market. These vouchers could also be utilized to make available extra housing funds to local housing authorities who supply pre-authorized but unfunded vouchers to families affected by Hurricane Katrina. (Greenstein, 2)

The Department of Housing and Urban Development -- HUD also announced a tax-credit meant for developers of residential homes immediately after the Hurricane passed by. Another financial initiative launched by the Department of Homeland Security and Secretaries of HUD for the displaced families was the creation of KDHAP -- Katrina Disaster Housing Assistance Program. This was managed by HUD but funded by the Department of Homeland Security via FEMA. Locally, the KDHAP is managed by semi-governmental PHAs -- Public Housing Authorities. (McCarty, 4-5)

Such PHAs are paid $1,000 for every family that they assist through KDHAP vouchers. They are also given administrative fees which amounts to fifteen percent of the benefits. This program launched in September 2005 supplied a new type of voucher -- the KDHAP voucher -- to the displaced families receiving aid from HUD. Families eligible for such vouchers included the homeless ones as well as those whose houses were rendered uninhabitable by the hurricane. The KDHAP assistance was for a total period of eighteen months and comprised of 'utility deposit assistance', 'security deposit assistance', and a subsidy for the monthly rent which would be equal to hundred percent of the FMR or lesser than the actual rent. (McCarty, 5-6)

Other similar housing development financial concepts included the diversion of the unused $600 million from "Road Home funds" for repair/construction of low-income house-owners by the state of Louisiana. Louisiana also raised housing allocation funds from the existing 77% to 86%. (Steps, 3)

One more financial scheme that was launched by the government in order to provide financial assistance to victims of Hurricane Katrina was the tax relief measures as outlined in the Katrina Emergency Tax Relief Act of 2005. This bill was passed into legislation by President Bush on 23rd September 2005 and offered $6.11 billion in the form of tax relief for short-term not only to the hurricane victims but also for the taxpayers who had been willing to offer aid to them. As per the 'Internal Revenue Service -- IRS' taxpayer guidance, some of the provisions included in this new legislation involved a blanket extension from January 3rd 2006 to February 28, 2006 for paying taxes, filing returns, filing claims for tax refunds or a credit. This applied to income taxes as well as to federal taxes like excise and employment taxes which had an original/extended deadline on 29th August 2005 or after it. (Kess, Hurricane Katrina tax relief); (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma); (Hurricane Katrina Recovery Assistance Programs)

Since Hurricane Katrina was a "presidentially-declared disaster," a number of tax advantages were offered to those distressed taxpayers who had suffered a loss of personal residence. As per IRC Sec. 1033(h), the tax rules for the replacement of those properties destroyed or converted in such cases are eased and the overall replacement period extended as well. "Some rules were also revised like the 'Rev. Rule 95-22' which considers the funds received for the primary residence as well as scheduled property such as jewelry, pieces of art, coins, etc. which had been insured, as funds for a single item of property." (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma) These funds were to be considered as a "common pool" of proceeds from which the gains realized by the taxpayer could be to the extent of the amount exceeding the expenses after meeting a suitable replacement property. This revised rule also clarifies that the replacement property could refer to the residence being replaced or any scheduled private property "in any proportion." (Kess, Hurricane Katrina tax relief); (Hurricane Katrina Recovery Assistance Programs)

For those suffering casualty losses due to presidentially declared disasters like Hurricane Katrina a federal income tax deduction is provided which means that victims from affected regions who have a deductible loss can opt to deduct that amount from their tax return of the year before, i.e. 2004. For victims who had already filed their tax returns for the previous year the deductible loss amount for the previous year could be claimed through filing a revised return -- Form 1040X for individuals and Form 1120X for corporations. (Kess, Hurricane Katrina tax relief); (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma); (Hurricane Katrina Recovery Assistance Programs)

Several retirement funds were also made available in the aftermath of Hurricane Katrina. Victims, who suffered economic loss of their primary residence located in the hurricane-affected region on 28th August 2005, could take loans up to $100,000, an increase of $50,000 from the earlier limit, from qualified retirement plans. These loans had to be availed before 1st January, 2007. In addition, the repayment period was extended from five years to six years. Recipients of such suitable retirement distributions were exempted from paying the supplementary 10% tax on early distributions. According to the revised law, the compulsory twenty-percent withholding for qualified distributions was also not required. (Kess, Hurricane Katrina tax relief); (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma); (Hurricane Katrina Recovery Assistance Programs)

Another financial concept used in the interests of Katrina-affected people was re-contributions to retirement plans. Eligible individuals in the affected regions, who had availed a "qualified first-time homebuyer distribution" or a "hardship distribution" from a 403(b) or 401(k) annuity from the IRA with the intention of building or buying a house in the affected area between February 25, 2005 to August 29, 2005 but could neither build nor purchase were provided with the option of re-contributing the money in a suitable retirement plan provided that the re-contribution was made between 25th August, 2005 and 28th February, 2006. "This amount would be considered as a payment in a direct rollover." (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma)

Many of the provisions offered in "Katrina Emergency Tax Relief Act of 2005" were expanded in the subsequently declared Gulf Opportunity Zone Act of 2005. (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma) This offered educational aid by extending the "Hope and Lifetime Learning" credits meant for students who were studying in the Gulf Opportunity Zone with affected counties in Alabama, Louisiana and Mississippi in the tax years 2005/2006. The educational assistance limit was increased to 100% of the initial $2,000 and 50% of the subsequent $2,000 up to a total $3,000 per student. The "Lifetime Learning Credit" was also increased to 40% from the initial 20%. Non-business debts taken by people residing in the Katrina affected regions were also cancelled only in cases where the debt was not secured by property outside the affected regions. (Kess, Hurricane Katrina tax relief); (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma); (Hurricane Katrina Recovery Assistance Programs)

Provisions were also made in the new law for suspension of charitable limits in case of specific charitable contributions. Deduction for qualified charitable contributions by individuals was permitted up to the total amount by which the individual's contribution surpassed the deduction for other charities. Any amounts contributed beyond this limit are usually carried forward to subsequent taxable periods. Corporations were also permitted to make qualified contributions only towards the relief operations of Katrina and the hurricanes which followed it such as Rita or Wilma. Here, qualified contributions refers to cash contributions provided in the period between 28th August 2005 and 31st December 2005 to charitable institutions as listed in Section 170(b)(1)(A). Contributions other than cash, i.e. securities, etc. are not counted as qualified contributions. (Kess, Hurricane Katrina tax relief); (IRS, Tax Law Changes Related to Hurricanes Katrina, Rita and Wilma); (Hurricane Katrina Recovery Assistance Programs)