Parametric Block Grants Could Fix Some of FEMA’s Worst Problems

Dominik Lett

Federal intervention into America’s state-led disaster management system has produced a long list of ills, including slow response times, inadequate mitigation, ballooning costs, and wasteful spending. The administration and Congress are separately considering reforms to the Federal Emergency Management Agency (FEMA), which administers federal disaster assistance. One idea being floated, block grants with parametric triggers, would ameliorate a few of FEMA’s many issues, but policymakers should be wary of any reform effort that falls short of meaningfully limiting federal spending and involvement in disaster assistance.

FEMA’s Cost-Sharing Structure Encourages Waste

FEMA provides disaster assistance through two primary channels. Public Assistance (PA) programs provide grants to states and localities for emergency response and recovery work. Individual Assistance (IA) programs provide direct support to individuals who sustain losses due to disasters. The resulting costs are supposed to be shared between the federal government and the states on a 75/25 federal-to-state basis. However, presidents routinely raise the federal share—sometimes to 100 percent of costs—leaving federal taxpayers holding the bag.

Over the last decade, federal disaster spending has grown from $19 billion in 2016 to $33 billion in 2025, adjusted for inflation (2026 dollars). When subnational governments and the private sector expect the federal government to bear the bulk of disaster costs, their incentives to invest in mitigation, avoid building in risky locations, and insure against disaster risks weaken.

Requiring states, localities, and private actors to shoulder a greater share of the financial burden of disasters would reduce federal costs and better align incentives with actual risk, resulting in a more just, effective disaster system.

Parametric Block Grants Address Some of the Core Problems with FEMA

Any serious effort to control disaster spending must address FEMA’s PA programs. PA is the primary cost driver of FEMA’s Disaster Relief Fund, and where the agency’s failures are most visible. Nearly half of FEMA’s PA projects aren’t even obligated—a legally binding commitment to spend—within a year of the initial aid request. Historically, around 20 percent of FEMA’s Disaster Relief Fund spending is consumed by administrative overhead. Overly burdensome documentation requirements and state officials’ confusion over federal red tape have hobbled federal disaster assistance programs since before FEMA existed.

The administration is considering overhauling and simplifying this PA process by adopting block grants with parametric triggers. Under this model, the federal government pays states and localities a fixed amount when predefined thresholds are met, such as wind speeds exceeding 100 mph. The base 75/25 federal-to-state cost share would also be revised downward to 50/50, better reflecting the American tradition of disaster response as a state, local, and private sector responsibility.

The parametric approach (also known as index insurance) has several advantages over traditional insurance:

• Less administrative waste, delay, and uncertainty. Parametric insurance avoids the time-consuming adjustment process associated with traditional indemnity insurance by relying on predefined objective triggers, thereby reducing uncertainty and speeding aid delivery. Because FEMA would not need to evaluate individual claims as closely, it could dramatically reduce administrative overhead, resulting in cost savings and a more efficient use of taxpayer resources.
• Stronger mitigation incentives. Traditional disaster aid pays based on estimated losses, which weakens incentives to invest in resilience. Consider Municipality A, which spends money hardening its infrastructure. It incurs up-front mitigation costs, suffers smaller losses when disaster strikes, and therefore receives less federal aid. Municipality B does not invest, faces no upfront costs, suffers larger losses, and receives more aid. Under the current system of subsidies, Municipality B’s risk-taking may be financially optimal even though it is socially harmful. Parametric triggers can help neutralize this risk-taking behavior. Municipality A and B both receive the same payout, but A reaps the financial reward because mitigation reduces actual losses while leaving the trigger unchanged.
• Less political bias and corruption. Disaster aid is a perennial example of political favoritism. During election years, presidential approval rates of disaster declarations and generous cost-sharing arrangements spike. It also cuts in the other direction. The current administration has rejected disaster aid requests from Democratic states at a higher rate than those from Republican states. A parametric approach, which relies on objective triggers, leaves much less room for partisan discretion and corruption.

Of course, there are limitations to this approach. The most obvious is basis risk, which is the gap between what the trigger pays and what a state, locality, or private actor loses. A disaster survivor might get particularly unlucky during a storm and face financial losses despite sub-trigger conditions. This basis risk problem can be mitigated by allowing insurance markets to price risk, including by reforming the National Flood Insurance Program and state regulatory regimes that suppress accurate pricing.

Similarly, parametric triggers are best suited for fire, wind, water, and seismic events, which constitute the vast majority of what FEMA typically handles. More unusual catastrophes, like a solar flare or asteroid, would likely fall outside this parametric model. The private sector can fill this gap.

Another limitation is that cost savings depend entirely on how the triggers are calibrated. One can imagine a parametric approach that results in equal or greater federal disaster spending than is currently projected, because triggers can be set in overly generous or politically convenient ways. Such is the peril of relying on government bureaucrats to replicate a market product. For parametric triggers to succeed, they must be set in an actuarially sound manner and statutorily protected from manipulation.

Designing a Better Disaster System

Optimally, the federal government should do away with FEMA as it exists today and reimagine the entire federal disaster process. The current system is a tangled mess of overlapping agencies and duplicative programs. The federal role in disaster policy, if there is any, should be constrained to genuine catastrophic national disasters that exceed the capacity of states and the private sector.

Short of agency elimination, FEMA’s core mission should be limited to managing large-scale disasters that cross state lines and overwhelm state and private sector resources. The administration and Congress can accomplish this by raising the bar for disaster declarations, adopting a 50/50 state-to-federal cost share in the near term, and gradually reducing the federal cost share to zero as states and private actors build capacity.

States, localities, and the private sector can take a more proactive role in managing disaster risks by assuming a majority share of disaster costs, fully financing rainy-day funds, and investing in coordination, mitigation, and resilience.

On the continuum of policy reform, block grants with parametric triggers would be a step in the right direction. Designed correctly, they could shrink the administrative state and better align state and private sector incentives to mitigate disaster risks. But designed poorly, especially if layered on top of existing federal programs, they will simply become another instance of technocratic reform gone wrong.

Source: https://www.cato.org/blog/parametric-block-grants-could-fix-some-femas-worst-problems