COASTAL BUILDING CODES AND HURRICANE DAMAGE Carolyn A. Dehring* University of Georgia and Martin Halek University of Wisconsin - Madison May 11, 2012 * Terry College of Business, Department of Insurance, Legal Studies, and Real Estate, University of Georgia, 206 Brooks Hall, Athens, GA 30602, phone (706) 542-3809, FAX 706- 542-4295, [email protected] The authors are grateful to the Honorable Kenneth M. Wilkinson, CFA, Lee County Property Appraiser, Lee County, Florida, for data, and especially to Jim Sherron. We thank Chris Jones for his coastal engineering insights. We also thank Peter Colwell, Ed Coulson, Chris Dehring, Jim Kau, Olivia Mitchell, Harold Mulherin, Henry Munneke, and Tony Yezer for helpful comments. We acknowledge financial support provided by the Terry-Sanford Research Award and the National Science Foundation DEB-0823293 and DEB-0218001 as part of the ongoing research at Coweeta LTER. JEL Classification: H59, H76, Q54 Abstract We explore whether federal and state level changes to coastal building standards are effective in mitigating losses to coastal property following Hurricane Charley. We find properties built seaward of and after the reestablishment of the Coastal Construction Control Line, and those built under the National Flood Insurance Program and located in an A-Zone, had more damage relative to similarly located structures built before these regulatory changes. We show the NFIP regulations allowed for weaker foundation requirements and lower elevations relative to the earlier county code. This likely led to greater flood damage, as supported by analysis of individual structural components. 2 1. INTRODICTION In the United States, government limits the bundle of rights associated with real property ownership through building codes, also referred to as construction codes. These codes set standards for various aspects of construction, including fire prevention, structural integrity, and general health and safety. Unlike in Canada, where a national building code is used, local building codes in the U.S. may be based on a model code or a state code. Building codes are enforced by local governments as an exercise of police power. Building construction in areas prone to flood hazard is often regulated at the federal or state level. In the State of Florida, coastal setback lines, known as coastal construction control lines (CCCLs), designate areas having the potential for extreme fluctuation in the event of one- hundred year storm. Special siting and design criteria apply to construction seaward of this line. In addition, most Florida communities participate in the National Flood Insurance Program (NFIP), where residents are eligible for subsidized federal flood insurance.1 As a condition of participation in this program, building codes must incorporate minimum building standards set forth by the Federal Emergency Management Agency (FEMA).2 In Special Flood Hazard Areas (SFHAs), these building standards involve minimum building elevations and foundation requirements. There are two competing hypotheses regarding the effects of building codes on safety and property risk. Building code proponents argue that home buyers are unlikely to possess the technical expertise needed to accurately assess the structural integrity of a housing unit, and that such codes are necessary to prevent market participants from developing land in a manner that 1 NFIP insurance on over 20% of the policies presently in force is priced at 35 to 40% of the actuarially fair rate. A recent study by the Property Casualty Insurers Association of America estimates that on average full-risk premium properties would be charged rates 23.3% higher if coverage were provided through the private market. 2 Local building ordinances may be stricter than FEMA standards. 3 endangers adjacent property (see Oster and Quigley 1977, Seidel 1980, Chivers and Flores 2002). Kunreuther (1974) suggests land use restrictions and building codes as efficient ex-ante disaster loss reduction mechanisms. In support of this view, Fronstin and Holtmann (1994) attribute their finding that newer properties in Florida’s Miami-Dade county sustained greater damage than older properties in Hurricane Andrew to a general erosion of the South Florida Building Code, although they do not explicitly control for building code changes in their empirical analysis. The alternative hypothesis suggests an adverse effect of building codes on safety. Lindsey (1976) assumes a less omniscient government agent where government regulation focuses purely on visible factors, possibly at the sacrifice of overall quality. For example, a focus on elevation with regard to flood peril may compromise the effectiveness of other building technologies designed to minimize the effects of concomitant perils. Further, building codes associated with the provision of subsidized insurance may create moral hazard by inducing risk taking. Both Shavell (1979) and Stiglitz (1983) have rationalized that the acquisition of insurance against some contingency is associated with a decreased incentive to avoid or prevent the insured loss, because the insured does not bear the full consequences of their actions.3 Finally, independent of any insurance provision, moral hazard can also result from a false perception of safety.4 In this paper, we investigate the effectiveness of coastal construction code changes associated with Florida’s Coastal Construction Control Line and the National Flood Insurance Program in reducing property risk from hurricane exposure. Using a sample of residential 3 For example, compulsory insurance regulations coupled with no-fault laws similarly create moral hazard costs which result in increased traffic fatalities (see Cohen and Dehejia 2004). 4 Peltzman’s (1975) results suggest that drivers exhibit greater risk taking in their driving in response to increased auto safety regulation. 4 properties from the Florida county in which Hurricane Charley made landfall in 2004, we investigate if the likelihood of property damage is related to the construction code regime in place at the time of construction, while controlling for other physical and locational attributes thought to influence hurricane risk exposure. Then, conditional on some damage being sustained, we determine whether the extent of damage is related to the codes in place at the time of construction. We find post-NFIP construction located in certain Special Flood Hazard Areas had a higher incidence of damage and, conditional on damage, sustained greater damage relative to similarly located property from Hurricane Charley. We also find properties built both seaward of and after the reestablishment of the 1991 CCCL sustained greater damage relative to similarly located property. In the case of the CCCL, a “permit run” prior to the reestablishment of the line suggests an adverse market perception associated with these regulations. We attribute our NFIP results to lower required elevations and less stringent foundation requirements relative to what was in place before the NFIP. Our findings raise questions about the optimal scale of code design. The remainder of this paper is organized as follows. In Section 2, we provide some background into the coastal construction code changes in Lee County, Florida, that are the subject of our study. In Section 3 we present our basic econometric models. In Section 4, we discuss our data and the sampling issues associated with hurricane damage reporting. Our empirical results are reported and discussed in Section 5. In Section 6 we extend this analysis by incorporating data from individual building components and pre-NFIP building codes. The paper concludes with a discussion of the policy implications from our findings. 2. BACKGROUND 5 The state of Florida experienced significant population gains during the 20th century. Since 1920, the state’s population growth rate per decade was consistently in the top 7 among states. Between 1900 and 1980, average growth rates per decade exceeded 50% for some regions in the state.5 It was important for both the state and local communities to manage the development that accompanied this population growth. This was especially true in communities having environmentally sensitive coastal areas subject to coastal flooding and beach erosion. 1970s to 1984 Southwest Florida’s Lee County first adopted coastal construction codes in the mid- 1970s. These coastal building codes established two or three zones on each of the county’s multiple barrier islands. Zones were delineated by distance from the shoreline. Building requirements were strictest in the most seaward zone, which included those properties that front the Gulf of Mexico. In this zone, buildings had to be elevated above the National Geodetic Vertical Datum (NGVD) of 1929, which is often referred to as the mean sea level, and anchored to pile foundations. A pile is a column, typically made of wood, steel, or concrete, that is driven deep into the ground to provide support for a structure. The size of the piles, as well as their spacing, depth of embedment, and force bearing capacity were specified in the code. The code also specified horizontal wave and uplift pressures. Finally, buildings were required to be elevated between 12 and 13.5 feet above the mean sea level, measured from the first finished floor, or from the underside of the building in the most seaward zone(s). In the largest and most landward zone, which included properties on the eastern sides of the islands, columns on footings (pier foundations)