Year of Publication

2011

College

Martin School of Public Policy and Administration

Executive Summary

Kentucky has 1500 square miles of surface water and 1500 miles of navigable waterways. Fifty-one of the 120 county seats are located on rivers, and over 25 percent of the state’s population lives along waterways. Not surprisingly, flooding is the most common natural hazard in Kentucky, and many structures have been built over the years in floodplain areas. Although many local ordinances have been enacted across the State in recent years to limit new construction in these areas, existing structures still experience frequent flood damages. These structures are required by the federal government to maintain flood insurance, and the National Flood Insurance Program (NFIP) provides a subsidized insurance program for existing structures in special flood hazard areas. Repetitive repairs are an ongoing expense for property owners, but also for all taxpayers through NFIP subsidies.

Through hazard mitigation funding, the Federal Emergency Management Agency (FEMA) mitigation grant programs work with state and local governments to eliminate repetitive flood losses to residential and commercial structures. Although mitigation funds may be used to elevate, relocate and rebuild these structures in some cases, the best mitigation approach is often shown to be acquiring flood prone property and demolishing the damaged structures for the sole purpose of returning the natural floodplain areas to green space.

At all levels of government, the provision of funds for mitigation projects is a recurring policy issue as budgets are tightened. It is imperative that public funds are used in the most cost effective manner possible and that evidence of a positive return on investment be utilized to maintain mitigation programs. At the federal level, reducing flood claims paid through the NFIP is also a priority. Long term cost effectiveness is a critical consideration in budget preparation and the allocation of scarce resources.

FEMA conducts loss avoidance studies in order to examine the return on investment for acquisition/demolition projects. The study presented here analyzes an acquisition/demolition project implemented in Shepherdsville (Bullitt County), Kentucky utilizing FEMA, state, and local mitigation funds. The buyout was conducted in 1998 following the major floods which inundated the state in 1997. To analyze the long term cost effectiveness of the buyout, this study considers the actual damages incurred in 1997 and estimates damages which would most likely have occurred in subsequent flood events had the project not been executed. These avoided losses are the project’s benefits. Comparing expected damages (benefits) to the initial mitigation funds investment (inflated to 2011 dollars) will yield a ratio utilizing the formula:

Benefits/Costs = Level of Cost Effectiveness (Return on Investment)

The resulting ratio is an indicator of the return on investment and long term cost effectiveness of the mitigation effort. As a percentage, the result indicates return on investment. A 100 percent return means that, for each dollar invested, one dollar in savings is generated for each subsequent flood event.

The analysis of Shepherdsville’s buyout project shows an average return on investment to be 245 percent. This means that an estimated savings of $2.45 in property damages for each dollar invested has been realized since the project’s implementation. These returns indicate that this project has been cost effective over the period of record.

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