You are a responsible property owner, so you make sure to buy insurance to pay for repairs or rebuilding in the event of a disaster.
Unless you’re the state of Texas.
Last summer, the Texas Department of Criminal Justice sustained an estimated $1 million in damage from Hurricane Harvey, most of it at the W.F. Ramsey complex, about 40 miles south of Houston. It is on farmland near the Brazos River, and about 70 percent of the property lies in a flood plain.
Sidewalks, roofing, transformers and building interiors were ruined by flooding, said spokesman Jason Clark. About 4,500 prisoners had to be evacuated from the complex’s three units to escape the rising water.
But the corrections department’s property is uninsured, so the money for the repairs will have to be found somewhere within the agency’s existing budget. That means less will be available to spend on corrections programs and regular maintenance.
“It’s not like we just have $1 million lying around,” Clark said. “We’ll have to prioritize.”
If the prison agency can’t scare up enough cash, it will be forced to ask lawmakers for more taxpayer money to cover the storm-related repairs. It wouldn’t be the first time a state agency has had to go begging to state leaders because it didn’t have property insurance.
Last legislative session, the Texas Parks and Wildlife Department received just under $50 million to repair flood damage to its uninsured facilities. When the Governor’s Mansion burned in 2008, it was uninsured, so legislators had to come up with more than $20 million for repairs and restoration of the historic building (some of the money went for renovations).
After Hurricane Ike, in 2008, more than two dozen agencies petitioned lawmakers for money to cover repairs. Though the University of Texas Medical Branch in Galveston carried an insurance policy, it came up hundreds of millions of dollars short of the money needed to repair and rebuild. Lawmakers wrote a $150 million check to help cover the gap.
The regular dips into the state’s general revenue are necessary because Texas leaders maintain that the state’s property protection plan is “self-insurance.” Many state policymakers hold the “common, but erroneous, assumption that the State self-insures its real and personal property,” the State Office of Risk Management, charged with overseeing the state’s exposure to financial calamity, wrote in a report last year.
But to meet the common definition of self-insurance, the state would have to put aside money to cover future property losses. It doesn’t.
As a result, the report concluded, “a significant portion of the State’s real and personal property is, in practice, uninsured.” According to a 2016 analysis, about $7.4 billion worth of property owned by the state is not covered by insurance.
It might be cheaper to pay for repairs out of pocket in some instances, such as for regular wear and tear and recovery from smaller storms. Overall, however, analysts say the unprotected system adopted by state leaders has probably cost taxpayers millions of dollars, the difference between an insurance premium and regularly siphoning general revenue fund money to cover big fixes.
“Requests for financial assistance over the last few legislative sessions have exceeded a quarter of a billion dollars,” a 2011 risk management office report stated.
State agencies have reported $5.48 billion in costs associated with Hurricane Harvey to the Legislative Budget Board. There is no separate tally yet for how much of that is property damage, however, or how much of the costs will be paid by insurance coverage.
For years, administrators charged with protecting the state against huge financial hits have urged state leaders to mitigate the risk by setting aside money in a self-insurance fund; or, like the vast majority of private property owners, requiring agencies to purchase a policy on the open market to cover large losses.
“It’s an issue the State Office of Risk Management has raised and raised over and over again over the years,” said Claire Bow, who was known as Jonathan Bow when she ran the agency between 2004 to 2014.
Yet lawmakers repeatedly have declined to act. Today, Texas is one of the few states with a high incidence of coastal, wind and hail disasters that does not require its agencies to protect taxpayer-owned property with some sort of insurance coverage.
Until recently, Texas administrators didn’t even know how much property the state owned or what it was worth — the first step toward meaningful risk management. Even now, they concede they can make only an educated guess.
A different sort of rainy day
Property insurance is a statistical bet. Insurance companies base their premiums on actuarial data to guess how likely it is that a catastrophe will strike. Property owners wager that buying a policy to transfer the risk of major damage will grant peace of mind and save them money in the long run.
Though private property owners typically buy insurance coverage — generally required for mortgages — governments often assume some of the risk themselves by at least partially self-insuring. That was supposed to be the plan for Texas.
In 1921, state Senate Concurrent Resolution No. 3 declared that it is “the policy of the state to self-insure its buildings” and recommended establishment of a fund to pay for future losses. Yet none was ever established.
The state does have a so-called rainy day fund. But the account, which stands at about $10 billion, has had little to do with repairing things destroyed because of actual rainy days. It was created primarily to buffer the state budget from ups and downs in the price of oil, which provides a large part of the state’s income. Tapping the fund is also politically cumbersome; two-thirds of state lawmakers must vote to release the money before it can be spent.
Instead, Texas has settled on a patchwork of coverage to protect its estimated 15,000 properties. Most of the state’s university systems — the University of Texas, Texas A&M, Texas Tech, Texas State — create and manage their own insurance plans. Unlike the state’s coverage, they set aside money for property repair and replacement in the event of a disaster. In addition to a constellation of policies to protect it against a catastrophic storm, the UT System keeps about $20 million on hand for such emergencies, said Phil Dendy, chief compliance and risk officer for the system.
Other state agencies may arrange property insurance through the state’s risk management office. But they are not required to, and many do not. “A lot of agencies really just go bare,” Bow said. After a disaster, “they just say: ‘It fell down. We need to put it back up.’ They assume if something catches on fire, someone will find the money.”
That differs from other states vulnerable to the same natural threats as Texas. In a 2013 study, the Texas risk management agency surveyed Alabama, Florida, Louisiana, and North and South Carolina and found that, unlike Texas, all required state-owned property to have some kind of coverage as a hedge against a catastrophic disaster or loss.
In Florida, agencies pay into a trust fund for smaller damage repair and purchase outside coverage for large natural disasters — an approach that state leaders have concluded is cost-effective, said Marc Stemle, head of the state’s Bureau of State Liability and Property Claims. Florida’s program began in 1917.
“Texas is late to the game in addressing this,” conceded Stephen Vollbrecht, executive director of the State Office of Risk Management. “It presents us with significant opportunities for rapid improvement.”
‘We know what we don’t know’
As part of their property protection programs, each of those comparison coastal states also requires agencies to regularly report in detail how much their properties and contents are worth for the purpose of calculating proper insurance coverage. In Florida and North Carolina, agencies report the updated information annually. Alabama sends inspectors out to inventory its property every three to four years; other states hire private appraisers.
Texas, by comparison, has no such requirement. In fact, it wasn’t until 2015 that lawmakers even ordered a survey of the state’s holdings.
“No agency or legislator knows how much property the state owns or what that property is worth,” a summary of House Bill 3750 said. “This has raised concerns about the state’s ability to assess, effectively use, or insure its assets.”
The study, released in December 2016, found that the state owned 13,633 buildings (Austin, at 812, had the most, though Houston’s were worth more) and 1,376 pieces of land. The total cost of replacing them in the event of a disaster was pegged at just under $81 billion.
Yet the authors conceded that the information was incomplete, inconsistent and, in places, simply wrong. Vollbrecht said the number of state properties could actually be as high as double his office’s estimate.
Half of the state-owned land and buildings identified also had no appraisal information attached. Of the 7,000 properties that did have a valuation, only 45 had performed appraisals within the past three years.
Valuations for more than 400 of the properties were a decade or more out of date, leaving risk management officials to guess at their worth. The result: after a year of study, “we basically know what we don’t know,” Vollbrecht said.
‘The tyranny of the urgent’
With more structures than any other single state agency, the Texas Parks and Wildlife Department is at risk for property loss no matter where a hurricane, tornado, drought, hailstorm or fire happens. “We have such a broad footprint that if there’s a weather event anywhere in the state, the odds are that one of our sites is in the impact zone,” said Jessica Davisson, the agency’s director of infrastructure.
However, fewer than 3 percent of the department’s facilities are insured, she said. So in late 2016, after a series of devastating natural disasters, including a half-dozen floods, damaged 52 parks, agency administrators had to beg lawmakers for help.
The legislature ultimately agreed to give the department an extra $49 million to make fixes. Only three months later, however, Hurricane Harvey damaged another $21 million worth of Parks and Wildlife Department property.
The agency has been forced to divert about a quarter of the money it received for the 2015 flooding to address Harvey damage, Davisson said. That means older projects will have to be put on hold even longer as the money is used to get facilities severely damaged by Harvey up and running. Goose and Mustang state parks, a regional office in Rockport and a coastal fisheries facility in Dickinson remain closed because of hurricane damage.
“It’s the tyranny of the urgent,” Davisson said.
Agency officials concede that the perpetual triage is frustrating because while the specifics of where and when natural disasters will hit cannot be known, it is certain that they will occur and that there will be no insurance money to cover the damage. “I can look back at the 11 years I’ve been here and see that we will need about $9 million every year,” Davisson said. “There’s a predictability. Yet there is no contingency or rainy day fund.”
“Texas says it’s self-insured, but that’s a misnomer,” said Michael Jensen, the Parks and Wildlife Department’s financial resources director. “So you’re left scratching, taking money away from other opportunities.”
TEXAS TAKES RISKS
Unlike other states that face comparable natural disasters, Texas does not require its agencies to maintain property insurance. Nor does it have a dedicated fund to cover losses. Those agencies that choose to obtain coverage must purchase it through the State Office of Risk Management. Most of the state’s higher educational systems oversee their own risk management.
But according to a 2016 analysis, about $7.4 billion worth of property owned by the state of Texas is not covered by insurance.
This story by Eric Dexheimer of the Statesman’s investigative team reflects the paper’s consistent focus on how government decisions affect Central Texans through such factors as tax burdens, housing affordability and quality of education.