Eye on disaster recoveryInsights on disaster recovery through insurance and federal grantsIssue #4 | May 2017

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A message from Allen Melton, Partner, Americas Practice Leader, Insurance & Federal Claims ServicesThis issue of Eye on disaster recovery addresses Federal Emergency Management Agency (FEMA) Public Assistance funding for eligible institutions of higher education. Throughout the years, colleges and universities across the United States have experienced signifi cant losses from a wide range of catastrophic disasters such as hurricanes, tornados, fl ooding, wildfi res and earthquakes. The sheer size, location, sprawl and number of facilities have rendered many campuses particularly vulnerable to these types of risks.

In the wake of debilitating events, numerous colleges and universities have sought and successfully realized signifi cant fi nancial support through FEMA. As a result, there is often a mistaken perception among institutions, particularly those that have never dealt with FEMA, that FEMA will automatically help cover their losses following a disaster. This is an incorrect perception and one that can result in costly oversights in terms of required risk mitigation and coverage through insurance.

The featured article entitled “FEMA Public Assistance for institutions of higher education: the 10 greatest myths” dispels some of the commonly held beliefs about the FEMA Public Assistance Program as it pertains to colleges and universities. It also clarifi es many of FEMA’s eligibility guidelines and policies to aid institutions in better evaluating coverage of their risks through insurance and to help prepare for eliciting potential coverage from FEMA. As a result, stakeholders at colleges and universities can more strategically assess the institution’s risk profi le and make more qualifi ed decisions in terms of risk mitigation and retention.

EY’s Insurance & Federal Claims Services professionals have extensive experience in assisting colleges and universities with FEMA Public Assistance grants and insurance, both pre- and post-loss. We are pleased to share our knowledge in this area and welcome your feedback and questions.

Sincerely,

Allen Melton

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FEMA Public Assistance for institutions of higher education: the 10 greatest mythsBy Michael Speer and Michael Herman

The Federal Emergency Management Agency (FEMA) has played a crucial role in the fi nancial recovery of countless colleges and universities following catastrophic disasters. FEMA’s Public Assistance Program, authorized by the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5121-5206), provides assistance to state and local governments, eligible private nonprofi t entities, and Indian Tribal governments following presidentially declared disasters. This assistance includes debris removal, emergency response costs, and repair or replacement of infrastructure and equipment. The program also encourages protection from future damage by providing assistance for “hazard mitigation” measures during the recovery process.

In light of the crucial role that FEMA can play, eligible colleges and universities often include FEMA Public Assistance as a source of potential funding when assessing insurance coverage and developing disaster recovery plans. Yet the FEMA Public Assistance program is widely misunderstood, particularly by institutions that have never dealt with FEMA. Such misunderstandings and misconceptions are hardly surprising given the myriad of statutes, policies and guidelines that underlay the Public Assistance Program. This article addresses some of the major myths surrounding FEMA Public Assistance as it applies to eligible institutions of higher education.

Myth #1: We can count on FEMA to support our institution following a catastrophic event.The truth is, no certainty exists that FEMA Public Assistance funding will be available following a given disaster. The impacted state, which is the grantee (also referred to as “recipient”), or Indian Tribal government if applicable, following such an event, typically requests that FEMA conduct a joint federal, state/tribal “preliminary damage assessment” (PDA), also typically including local government representatives. The PDA team conducts a thorough assessment of the impacted area to determine the extent of the disaster, its impact on individuals and public facilities (including eligible private nonprofi ts), estimates of the amount of damage, and the type and amount of federal assistance that may be needed. This information is included in the governor’s request to FEMA for federal assistance based on the state’s assessment that the impact and severity of the disaster is beyond the capabilities of the state and affected local governments.

Even if the state’s governor requests federal assistance, the president ultimately decides (based on FEMA’s recommendation) whether to issue a declaration of “major disaster,” “emergency” or neither. (A declared “emergency” is limited in the funds it can receive and does not include repairs or replacement of infrastructure or equipment.) In the absence of any such declaration(s), funding from FEMA’s disaster program will not be available.

Further, even if a major disaster is declared, it is important to note that FEMA has two disaster assistance programs: the Individual Assistance Program, which provides funding only to individuals;

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and the Public Assistance Program, which can provide funding to colleges, universities, hospitals and other eligible private nonprofi ts. In determining the availability of Public Assistance funds for a specifi c disaster, FEMA analyzes the estimated damages as compared to per-capita state and county guidelines, which sometimes results in a decision not to authorize Public Assistance. The disaster declaration must authorize each program individually, and based on the guidelines, it is not a given that both programs will be authorized for a given disaster.

In light of the many nuances and uncertainties of the FEMA declaration process, it is fair to say that Public Assistance funding by FEMA is diffi cult to predict. For example, if a tornado were to touch down on the campus of a university resulting in damage to a number of buildings but not to any surrounding areas in the applicable county, it is questionable if Public Assistance funding would be available to the institution. This is because there is no assurance, given the limited impact of the event and resultant damages, that a major disaster declaration would be issued. Further, even if a major declaration is issued, based on application of state and county per-capita guidelines as discussed above, FEMA may determine that Public Assistance funds are not available for the specifi c disaster.

Myth #2: Once FEMA authorizes Public Assistance funding for our institution, all damaged buildings on the impacted campus will be covered. FEMA has numerous guidelines regarding the eligibility of facilities, and each facility stands on its own in terms of eligibility for Public Assistance funding. Some of the key guidelines are as follows:

1. Legal responsibility: the eligible institution must be legally responsible for the repair of the damaged facility at the time of the disaster. If the institution leases the facility to another party, the repairs are eligible only if the lease states that the lessor (the college or university) is responsible for repairs to the facility for the type of damage sustained. Similarly, if the eligible college or university is the lessee of the damaged facility, it may be eligible for funding from FEMA only if the lease states that the lessee (the college or university) is responsible for repairs to the facility for the type of damage sustained.

For example: a college leases a building for classrooms and administrative offi ces, and according to the lease, the lessor, a commercial for-profi t realty company, is responsible for all repairs. In this case, the college would not receive funding from FEMA for damages to the building since it does not own the building and is not responsible for repairs or restoration. The commercial realty company would also not be eligible to receive funding from FEMA because it is not a state or local government entity, private nonprofi t or Indian Tribal government.

2. Active use: the facility must be in active use at the time of the disaster. Exceptions to this guideline may occur if the facility was:

• Temporarily inactive for repairs or remodeling

• Unoccupied for only a short time between tenants

• Documented for active use by an approved budget

Or

• Intended to begin use within a reasonable period of time, and such intent could be demonstrated to FEMA

For example, the cost to repair or restore a university’s old laboratory building that was not in use before a disaster, and not planned for active use in the near future, may be declined by FEMA.

3. Alternate use: if a facility is being utilized for purposes other than for which it was originally built, the eligible cost to restore that facility could be limited to either:

• The cost of restoring the facility to its original design

Or

• The cost to restore the facility to its alternate purpose immediately before the disaster, whichever costs less

4. Mixed-use facilities: many campuses have mixed-use facilities, where, for example, the college or university owns the building but leases some of the space to retail or other commercial facilities. FEMA guidelines require that a facility that has mixed uses must be primarily used (more than 50% of the facility’s space or more than 50% of the time) for eligible activities. In the case of a college or university, the eligible activity would likely be educational purposes. At a hospital facility, it would likely be medical purposes, and so on. If the facility is primarily used less than 50% for eligible activities, FEMA may prorate the amount of repair or restoration costs eligible for funding.

The truth is, no certainty exists that FEMA Public Assistance funding will be available following a given disaster.

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Myth #3: FEMA will cover all costs incurred by the college or university irrespective of insurance.FEMA generally expects that insurance be the fi rst avenue of funding for eligible applicants. If an eligible college or university has insurance coverage for cleanup, debris removal, demolition, and/or repairs and restoration, any proceeds received from insurance must be deducted from the eligible costs requested from FEMA. FEMA expects the institution to pursue insurance recovery to the maximum amount allowed and to provide FEMA with copies of all insurance policies, statements of loss, claims fi led and other information.

FEMA also requires that National Flood Insurance Program (NFIP) fl ood insurance be carried on facilities located in fl oodplains (“special fl ood hazard areas”). The failure to carry such insurance for eligible facilities when required can result in FEMA reducing the eligible project costs by the lesser of:

• The maximum amount of insurance proceeds that could have been covered by a standard NFIP fl ood insurance policy

Or

• The value of the facility at the time of the disaster

After such deduction, FEMA funding would be available for:

• A reasonable deductible (limited to the minimum available under NFIP), but only for the fi rst disaster and not for subsequent disasters

• Items not covered by NFIP

• Damage in excess of limits of a standard NFIP policy

Another crucial FEMA requirement regarding insurance is that as a condition to receiving Public Assistance funding for permanent work, the institution must obtain and maintain insurance to cover the facility for the same hazard that caused the damage for any future event. This is sometimes referred to as “one bite at the apple” as FEMA intends to pay for the damage only the fi rst time. This does not apply to facilities in a special fl ood hazard area that have a pre-disaster insurance requirement. At a minimum, the coverage amount must be equal to the estimated damages to that structure prior to any reduction. The institution can request a waiver of this requirement from its respective state commissioner of insurance, and such waiver may be granted if the commissioner determines the insurance is not “reasonably available.” Generally, this waiver is not available for fl ood insurance, as FEMA makes insurance available under the National Flood Insurance Program.

Myth #4: All of our costs related to the repair and restoration of eligible facilities, debris removal and emergency protective measures will be covered by FEMA.FEMA has many guidelines regarding the eligibility of costs, and as such, an incurred cost does not automatically mean it will be an eligible cost. As a general rule, in order to be eligible, all costs must be related to the specifi c disaster, be reasonable and necessary, and be incurred for completion of eligible work for debris removal, emergency protective measures, or permanent repairs and restoration.

Further, all costs must be carefully tracked and documented by specifi c project and reported on FEMA grant documents referred to as “Project Worksheets.” FEMA has defi ned and publishes an extensive list of the types of records that satisfy documentation requirements, and relevant records and documentation must be maintained not only throughout the restoration process but throughout the entire grant life cycle, including grant close-out and subsequent audits. While FEMA will provide examples of the types of documentation that will meet its requirements, there are often other types of documentation it will accept. The following are some of the categories of costs for which specifi c guidelines exist that need to be well understood and complied with:

• Debris removal: in order to be eligible, these costs must be what FEMA refers to as “in the public interest,” which FEMA defi nes as those activities that are necessary to:

• Eliminate immediate threats to lives, public health and safety

• Eliminate immediate threats of signifi cant damage to improved public or private property when the measures are cost-effective

• Ensure economic recovery of the affected community to the benefi t of the community at large

Or

• Mitigate the risk to life and property by removing substantially damaged structures

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As a general rule, in order to be eligible, all costs must be related to the specifi c disaster, be reasonable and necessary, and be incurred for completion of eligible work for debris removal, emergency protective measures, or permanent repairs and restoration.

• Emergency protective measures: costs in this category relate to activities taken before, during and following a disaster that are necessary to:

• Eliminate or reduce an immediate threat to life, public health or safety

Or

• Eliminate or reduce an immediate threat of signifi cant damage to improved public or private property through cost-effective measures

FEMA has a lengthy list of the types of activities and related costs that are considered eligible in this category. This is an area where institutions often encounter issues with eligibility, procurement and documentation.

• Permanent work: these are costs related to repair or restoration of a damaged facility. Generally speaking, FEMA will fund only those costs required to return a facility to its pre-disaster design, function and capacity in accordance with applicable codes or standards in effect at the time of the disaster.

• Force account labor: these are costs relating to the institution’s use of its own employees rather than outside contractors. There are specifi c guidelines regarding the use of various classes of employees, the charging of overtime versus straight-time, eligibility of supervision and more.

• Force account equipment: these are costs incurred for an institution’s use of its own equipment. There are numerous guidelines addressing the rates charged for force account equipment and the types of equipment that are eligible. It is important that an institution not only track its force account equipment (and labor) but also be able to show which employees used which equipment and when.

• Administrative costs: FEMA has numerous guidelines addressing which costs are eligible, including the requirement that direct administrative costs be attributable to specifi c projects.

Failure to comply with FEMA guidelines in any of the above categories may result in the applicable costs being deemed ineligible.

Myth #5: The college or university can follow its typical procurement guidelines.FEMA may deem costs as ineligible if the college or university’s procurement procedures with regard to those costs are not in compliance with the “Government-Wide Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” also known as the OMB Super Circular, codifi ed at 2 CFR, Part 200. These requirements apply to disasters declared on or after December 26, 2014. Some of the requirements include:

• Following the guidelines regarding the use of fi ve different methods of procurement

• Maintaining oversight to ensure contractors are performing in accordance with awarded contracts

• Engaging full and open competition for contracts

• Maintaining written standards of conduct covering confl icts of interest

• Maintaining records regarding the history of procurements

• Taking all necessary steps to assure that women’s business enterprises, minority businesses and labor surplus area fi rms are used when possible

• Performing a cost or price analysis in connection with procurements

• Negotiating profi t as a separate element of the price for contracts in which there is no price competition

• Utilizing time and materials-type contracts only if no other contract is suitable and if the contract includes a ceiling price

• Avoiding the use of cost-plus contracts, such as cost plus a percentage of cost, and cost plus a percentage of construction cost

Myth #6: FEMA Public Assistance will help the institution fund lost revenues related to the disaster.The FEMA Public Assistance Program does not cover the loss of revenues or loss of earnings. This coverage, if obtained, must be entirely from insurance (i.e., business interruption coverage).

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Myth #7: FEMA Public Assistance will help fund the institution’s increased operating costs following a disaster.The increased costs of operating a facility following a disaster, with few exceptions, are not considered by FEMA to be eligible costs. Some examples of ineligible costs (per FEMA) are as follows:

• Increased costs of administrative operations

• Increased costs of telecommunications (e.g., additional cell phones and fees)

• Increased cost of obtaining electrical power from an alternate source

• Increased cost of obtaining water from an alternate source

• Finance charges, such as interest on loans and bond costs to fi nance rebuilding

However, “reasonable short-term additional costs” that are directly related to accomplishing specifi c emergency health and safety tasks as part of eligible emergency protective measures may be considered eligible costs. Examples of such costs (per FEMA) include the following:

• Increased water-testing and water-treatment supplies in the immediate aftermath of a disaster to counter a specifi c threat

• Increased fuel for increased use of a pumping station

• Increased facility costs (e.g., electricity) for emergency operating centers of eligible applicants

Given the limited eligibility of FEMA Public Assistance for these types of costs, colleges and universities are well advised to consider the possibility of covering such costs in the same way they would cover their risk of lost revenues — through insurance.

Myth #8: FEMA will rely upon the same information submitted by the institution to its insurance carrier(s).FEMA requires that all costs related to emergency protective measures, debris removal and permanent restoration be fully reported and documented on FEMA Project Worksheets, irrespective of the specifi c detail or documentation of those costs reported to insurance. The compilation and reporting of costs to FEMA can be onerous, often requiring some duplication of the work done for purposes of insurance. Generally, FEMA writes projects as if there is no insurance and then backs the insurance proceeds out of the grant.

Myth #9: The college or university will expend minimal time and resources since FEMA will manage the entire recovery, documentation and reporting process. At the outset of the disaster recovery process, FEMA will typically assign a Public Assistance Coordination Crew Leader in coordination with the state, who will work with the institution to help ensure that various projects are processed in an expeditious manner. FEMA and/or the state may also assign project specialists and technical specialists to assist with the development of projects and estimates.

That said, it is still the responsibility of the college or university to ensure that eligible costs are being reported in a comprehensive and well-documented manner. It is in the institution’s best interest to move this process along as quickly as possible, and it is not uncommon for FEMA to challenge the eligibility of facilities, work and costs, creating additional effort on the part of the institution. Colleges and universities can in fact expect to devote substantial time and resources to the FEMA Public Assistance grant process, particularly following a major widespread disaster where FEMA and state resources may be spread thin. Further, the recovery and grant process can continue for months and even years after a disaster.

In light of the signifi cant level of required knowledge of FEMA guidelines and the potential commitment of time and resources, institutions are well advised to obtain outside assistance with the Public Assistance grant process. The costs for such assistance, which may include help with surveying and assessing damages, reviewing project worksheets, preparing “small projects,” assisting with the documentation of project worksheets, evaluating Section 406 hazard mitigation measures, and other services may be eligible for reimbursement from FEMA as direct administrative costs, provided the institution tracks, accounts for and charges such costs directly to specifi c eligible projects.

Colleges and universities can in fact expect to devote substantial time and resources to the FEMA Public Assistance grant process, particularly following a major widespread disaster where FEMA and state resources may be spread thin. Further, the recovery and grant process can continue for months and even years after a disaster.

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Myth #10: Once FEMA has provided the funding to an institution, the grant is complete and the funding secured.This could be one of the most misunderstood aspects of the FEMA Public Assistance Program. FEMA and/or the state will typically conduct an audit of a Public Assistance grant at the time of grant close-out, which can be years after the funds were reimbursed to the institution, and the institution is nonetheless expected to have retained all relevant documents. FEMA can at the time of such audit choose to deobligate or disallow funds and require their repayment.

Further, as discussed in our last issue of Eye on disaster recovery, the Department of Homeland Security Offi ce of Inspector General (OIG) is responsible for independent oversight of disaster programs, including disaster grants. Each year, the OIG conducts a number of audits and reviews of disaster grants, including FEMA Public Assistance grants, and can question costs and recommend their deobligation. From FY 2011 through FY 2014, the OIG conducted audits of approximately$7.2 billion of Public Assistance funds and recommended that FEMA disallow or deobligate approximately $2 billion (28% of the funds audited).

What is most important is not how much funding is initially written into your grant or how much you receive but how much you ultimately get to keep.

ConclusionFEMA Public Assistance merits serious consideration as a crucial source of potential funding when assessing insurance coverage and developing disaster recovery plans. This is particularly important when considering FEMA insurance requirements that could impact an institution’s ability to recover costs from FEMA following a disaster. However, there is no guarantee that Public Assistance funding will in fact be available following a disaster or that all costs will in fact be eligible.

Every college and university is well advised to understand the requirements and guidelines of the FEMA Public Assistance program, beginning with a determination of the institution’s eligibility, and to factor those requirements into its disaster preparedness planning. In so doing, the institution can better assess its requirements for insurance and through proper training and implementation, increase the likelihood of having costs deemed eligible by FEMA following a disaster and retaining that eligibility following future audits. Further, the institution will be able to better manage the expectations of its stakeholders.

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About EY’s Insurance & Federal ClaimsServices practiceThe EY Insurance & Federal Claims Services practice assists clients with fi nancial recovery from catastrophic disasters through insurance and federal grants. We help clients measure, document and prepare complex property damage and business interruption insurance claims. We also assist state, local and tribal governments, as well as qualifi ed nonprofi ts to develop and manage disaster grants from federal agencies such as FEMA and HUD. The end result is expedited recovery via strategic management and planning of the process from start to fi nish.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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Insurance & Federal Claims Services practice contacts

Allen Melton, Americas Practice Leader

+1 817 706 7108 allen.melton@ey.com

Bradley (BJ) Nichols +1 617 680 1574 bradley.nichols@ey.com

Robert Reeves +1 212 773 1332 robert.reeves@ey.com

Nigel Henley +1 214 969 8627 nigel.henley@ey.com

Matt Jadacki +1 202 327 6807 matt.jadacki@ey.com

Joseph Alonso +1 713 750 4940 joseph.alonso@ey.com

Michael Herman +1 240 938 8397 michael.herman@ey.com

Steven Kral +1 202 327 6036 steven.kral@ey.com

Ken Mallette +1 443 641 7171 ken.mallette@ey.com

Brad McCloskey +1 214 969 9563 brad.mccloskey@ey.com

Reena Panchal +1 312 879 5491 reena.panchal@ey.com

Jill Powell +1 312 879 4683 jill.powell@ey.com

Allen Shank +1 214 478 9222 allen.shank@ey.com

Christopher Siminski +1 214 969 0836 christopher.siminski@ey.com

Michael Speer +1 312 879 3782 michael.speer@ey.com

Marisa Wiethe +1 212 773 4533 marisa.wiethe@ey.com

Please direct your comments and questions to Michael Speer, editor of Eye on disaster recovery, at +1 312 879 3782 or by email at michael.speer@ey.com