- New Report Previous Reports: July 28, 2006

Abstract: Areas struck by disaster often experience a destruction of property and decline in economic activity. Tax collections for affected local governments may fall substantially as a consequence. The unexpected loss of revenue coupled with the increased financial needs for responding to a natural disaster or terrorist act may lead local governments to seek assistance from the federal government. This report examines the federal Community Disaster Loan (CDL) program, authorized by Section 417 of the Stafford Act and administered by the Federal Emergency Management Agency (FEMA). The CDL program is intended to assist local governments that experience revenue losses as the result of a presidentially declared major disaster. The traditional CDL program provides for loan forgiveness (cancellation) when it is determined for three fiscal years following a disaster that the affected government will not be able to repay the loan. From the initiation of the program in August 1976 through September 30, 2005, of the total of $233.5 million in principal advanced, $225.7 million, or 97%, was for loan amounts that were cancelled. Five loans in excess of $5 million accounted for 90% of cancelled principal. In 2000, a $5 million limit was placed on a loan that any one jurisdiction can receive through the traditional CDL program for a single disaster. On October 7, 2005, both houses of Congress approved and President Bush signed the Community Disaster Loan Act of 2005 (CDLA), P.L. 109-88. Previously, P.L. 109-62, the second emergency supplemental bill enacted following Hurricane Katrina, had appropriated $50 billion in disaster assistance. CDLA provided for up to $750 million of those funds to be used to support “special” community disaster loans, up to a total of $1 billion in principal amount, to local governments so that they could continue to provide essential services. For these special loans, the new law removed the $5 million per loan limit but prohibited their cancellation. As of September 12, 2006, FEMA had approved 89 special CDL applications for local governments in Louisiana and 53 for Mississippi, for a total of 142 loans. These loans summed to $739 million for Louisiana communities, including $120 million for New Orleans, and $261 million for Mississippi communities. All of the loans received a subsidized interest rate in the range of 2.66% to 2.90%. The Emergency Supplemental Appropriations Act of 2006 (P.L. 109-234), enacted on June 15, 2006, included an appropriation of $279.8 million to support an additional $371.733 million in direct loans. These loans are available only to communities that lost 25% or more of their tax revenues as the result of Hurricane Katrina or Rita. Cancellation of these loans is prohibited. The law removed the $5 million per loan limit and raised the other size limit from 25% to 50% of a community’s operating budget. As of September 12, 2006, Louisiana communities had received their full allocation of $261 million in loans, including another $120 million for New Orleans. Mississippi communities had received $8 million of the $112 million allocated for them. This report will be updated when legislative events warrant or when new information about use of the CDL program becomes available.

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Topics: Federal Agencies, Government, Risk & Reform