Order Code RL33174
CRS Report for Congress
Received through the CRS Web
FEMA’s Community Disaster Loan Program
December 5, 2005
Nonna A. Noto
Specialist in Public Finance
Government and Finance Division
Steven Maguire
Analyst in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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FEMA’s Community Disaster Loan Program
Summary
Areas struck by disasters, both natural and man-made, often experience a
destruction of property and decline in economic activity. Tax collections for affected
local governments may fall substantially as a consequence. At the same time, the
financial and public service obligations of local governments persist and may actually
increase. 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 and/or increased municipal
operating expenses as the result of a presidentially declared major disaster.
The 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. A total of 55 CDLs were made from the initiation
of the program in August 1976 through September 30, 2005, a period of 29 years.
No new loans were made from FY1999 through FY2005. Of the 55 loans made, 36,
or 65.4%, were paid back in part or in full. However, because many of these repaid
loans were for small amounts, they accounted for only 2.3% of the principal amount
advanced. Of the total of $233.5 million in principal advanced, $225.7 million, or
96.6%, 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
the loan amount 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 provides 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 can continue to provide essential services. For purposes of these special loans,
the new law removes the $5 million per loan limit but prohibits their cancellation.
As of November 4, 2005, eight special CDL applications had been approved for local
governments in Louisiana. These loans totaled $182 million. This included $120
million for New Orleans and four other loans for a total of more than $5 million.
FEMA expects more loan applications.
Congress may be called upon to revisit the issues of whether these loans could
be cancelled and whether there should be requirements to report to Congress on the
use of these loans. This report will be updated when legislative events warrant or
when new information about use of the CDL program is available.

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Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Traditional Community Disaster Loans: Section 417 of the Stafford Act . . . . . . . 2
Legislative Activity in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Special Community Disaster Loans Enacted in October 2005 . . . . . . . . . . . 5
Other Bills in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
H.R. 1795 (Maloney) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
H.R. 4012 (Maloney) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
H.R. 4090 (Maloney) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
H.R. 4117 (Melancon) and S. 1872 (Landrieu) . . . . . . . . . . . . . . . . . . . 8
Analysis of the CDL Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Budgetary Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Loan or Grant Program? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Experience with Traditional Loans and Their Cancellation . . . . . . . . . . . . 12
Eliminating the $5 Million Per Loan Cap . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Lowering the Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Experience with the Special CDL Program . . . . . . . . . . . . . . . . . . . . . . . . . 16
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Disaster Relief Act of 1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Alternative Senate Proposal for a Loan Program Not Adopted . . . . . . 17
Disaster Relief Act of 1974: The Robert T. Stafford
Disaster Relief and Emergency Assistance Act . . . . . . . . . . . . . . . . . . 18
Disaster Mitigation Act of 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
List of Tables
Table 1. Community Disaster Loan Program from the
First Loans in August 1976 through September 30, 2005 . . . . . . . . . . . . . . 13
Table 2. Community Disaster Loan Program from the
First Loans in August 1976 through September 30, 2005 . . . . . . . . . . . . . . 14
Table 3. CDLs Greater than $5 Million and Amount Cancelled . . . . . . . . . . . . 15

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FEMA’s Community Disaster Loan Program
Overview
In addition to the heavy loss of lives and the dislocation of hundreds of
thousands of families, Hurricanes Katrina and Rita on August 29 and September 24
of 2005, caused devastating damage to property and seriously disrupted the economic
activity that normally provided the tax and revenue base of the affected areas in
Florida, Alabama, Mississippi, Louisiana, and Texas. There is concern in Congress
and elsewhere, but particularly in the tax-exempt bond community, that the
destruction of the underlying tax base will impair the ability of Gulf Coast
communities to make the payments on their outstanding debt, let alone their ability
to issue new debt.1 These communities also face the loss of revenues needed to
finance normal operating expenses (beyond debt servicing) and possibly additional
operating expenses engendered by the hurricane disasters. This point was brought
home when New Orleans Mayor C. Ray Nagin announced on October 4, 2005, that
he would have to lay off 3,000 municipal employees — 50% of the city’s work force
— due to lack of revenue.2
This report focuses on the Federal Emergency Management Agency’s (FEMA’s)
Community Disaster Loan (CDL) program. This is a program of federal aid available
to local governments specifically to replace revenues lost as the result of a natural or
man-made disaster. These are the revenues needed to pay for normal operating
expenses, such as fire and police services, for public schools, and for debt servicing.
This aid is available in addition to the federal disaster aid provided to replace
damaged public infrastructure and to address special storm-related expenses such as
debris removal.
On October 7, 2005, both the Senate and the House of Representatives
approved, and President Bush signed into law, the Community Disaster Loan Act of
2005, P.L. 109-88. The act provides for up to $750 million of the $50 billion
previously appropriated for disaster assistance following Hurricane Katrina to be
available to support up to $1 billion in special CDLs to local governments affected
by the hurricanes. In addition, it makes two important changes in the conditions
governing these loans compared with traditional CDLs: it removes the $5 million per
1 Leslie Wayne, “Tax Bases Shattered, Gulf Region Faces Debt Crisis,” New York Times,
Sept. 13, 2005, pp. C1, C4. Frank Shafroth, “Meteorological Taxes — Taxing Issues in
Katrina’s Wake,” State Tax Notes by Tax Analysts, Sept. 26, 2005, pp. 955-960. Frank
Shafroth, “The Big Easy — The Taxing Aftermath of Katrina,” State Tax Notes, Oct. 3,
2005, pp. 149-153.
2 Christine Hauser, “Mayor Announces Layoffs of City Workers, New York Times, Oct. 5,
2005, p. A24.

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loan limit and prohibits the cancellation (forgiveness) of these loans. Congress may
be called upon to revisit the issues of whether the option to cancel should apply to
these loans and whether there should be requirements to report to Congress on the
use of these loans.
Traditional Community Disaster Loans:
Section 417 of the Stafford Act
This section describes the law and regulations which governed all community
disaster loans before the enactment of P.L. 109-88 in October 2005. These rules will
continue to govern traditional community disaster loans (CDLs) made outside of the
special provisions of the new law. The rules not amended by the new law will
continue to apply to the special loans made under the new program.
The Robert T. Stafford Disaster Relief and Emergency Assistance Act3 is
popularly known as the Stafford Act. The Stafford Act
...authorizes the President to issue major disaster declarations that authorize
federal agencies to provide assistance to states overwhelmed by disasters.
Through executive orders, the President has delegated to the Federal Emergency
Management Agency (FEMA), within the Department of Homeland Security
(DHS), responsibility for administering the major provisions of the Stafford Act.
Assistance authorized by the statute is available to individuals, families, state and
local governments, and certain nonprofit organizations.4

Of particular relevance to local governments is Section 417 of the Stafford Act.5
Sec. 417 authorizes the President
...to make loans to any local government which may suffer a substantial loss of
tax and other revenues as a result of a major disaster, and has demonstrated a
need for financial assistance in order to perform its governmental functions.
A loan may be approved in either the fiscal year in which the disaster occurs or
the immediately following fiscal year. Only one CDL may be approved for any one
local government as the result of a single disaster.6
The amount of a loan is based on need and is not to exceed 25% of the annual
operating budget of the local government for the (local government’s) fiscal year in
which the major disaster occurs. In addition, as a result of an amendment made in
3 P.L. 93-288, as amended; 42 U.S.C. 5121 et seq..
4 CRS Report RL33053, Federal Stafford Act Disaster Assistance: Presidential
Declarations, Eligible Activities, and Funding, by Keith Bea.
5 42 U.S.C. 5184, Community Disaster Loans.
6 44 C.F.R. 206.361 (d).

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2000, the dollar amount of any loan is limited to $5 million.7 The obligation to repay
the loan is to be cancelled if the locality’s revenues in the three fiscal years following
the disaster are deemed insufficient by FEMA or its outside auditors.
The normal term of a CDL is five years. The loan typically takes the form of
a five-year balloon. That is, the full principal and accumulated interest are due all
together at the end of the five-year term. The Associate Director of FEMA may
consider requests for an extension, based on the local government’s financial
condition. However, the total term of a loan normally may not exceed 10 years,
except under extenuating circumstances.8
The interest rate on CDLs is based on the average rate, on the date of the loan
approval, for U.S. Treasury obligations with maturities of five years. The interest
rate on CDLs is higher than the average rate on municipal (state and local) bonds of
similar maturity. This is because the federal tax exemption of interest on state and
local government bonds enables those governments to sell bonds at lower interest
rates than comparable federal bonds. The relatively higher CDL rate implies that
localities with strong credit ratings would be better off borrowing from the private
credit market, if they were permitted to borrow to cover operating expenses. Only
communities with a weak credit rating — or those hoping for loan cancellation —
would be attracted to traditional CDLs.
A locality that is in arrears on its repayment of a CDL is not eligible to receive
any additional loans under Section 417. Receiving loans under Section 417 does not
reduce or otherwise affect any grants or other assistance available to a locality under
other parts of the Stafford Act.
A local government may use the borrowed funds to carry on existing local
government functions of a municipal operation character or to expand such functions
to meet disaster-related needs.9 The funds are not to be used to finance capital
improvements or the repair or restoration of damaged public facilities. Neither the
loans nor any cancelled portion of the loans may be used as the nonfederal share of
any federal program, including those under the Stafford Act.10
For loan cancellation purposes, unreimbursed expenses of a municipal operating
character are those incurred for general government purposes, such as police and fire
protection, trash collection, revenue collection, maintenance of public facilities, and
other expenses normally budgeted for the general fund.11
7 Section 207(5) of P.L. 106-390, the Disaster Mitigation Act of 2000.
8 44 C.F.R. 206.361(e) and 206.367(c).
9 The Code of Federal Regulations sets forth the policies and procedures concerning the
Community Disaster Loan program in 44 CFR Ch. 1, Subpart K, Secs. 206.361-206.367 (10-
1-04 Edition).
10 44 C.F.R. 206.361 (f).
11 General fund as defined by the Municipal Finance Officers Association. See 44 C.F.R.
206.366 (b) (1).

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Disaster-related expenses that are eligible for reimbursement under project
applications or other federal programs are not eligible for loan cancellation.12 In
addition, expenditures associated with debt service, any major repairs, rebuilding,
replacement, or reconstruction of public facilities or other capital projects,
intragovernmental services, special assessments, and trust and agency fund
operations are not eligible for loan cancellation.
The state must co-sign the promissory note or else the local government must
pledge collateral security to cover the principal amount of the note. In the event of
default, FEMA may request administrative offset against other federal funds due the
borrower and/or referral to the Department of Justice for judicial enforcement and
collection.
CDLs are not available to states or non-profit organizations.
A community must submit an application to FEMA either to receive a CDL or
to have a loan cancelled. Typically, FEMA hires an outside auditing firm to perform
the required analysis of the community’s operating budget. This outside analysis is
combined with data and information that the jurisdiction provides to FEMA in
support of its loan application or cancellation application.
The Code of Federal Regulations (CFR) assigns the primary responsibility for
both making and canceling CDLs to the Associate Director of FEMA for State and
Local Programs and Support. However, according to FEMA’s Office of General
Counsel, these functions are currently performed by the Director of the Recovery
Division. The regulations provide that FEMA shall
...cancel repayment of all or part of a Community Disaster Loan to the extent that
the Associate Director determines that revenues of the local government during
the full three fiscal year period following the disaster are insufficient, as a result
of the disaster, to meet the operating budget for the local government, including
additional unreimbursed disaster-related expenses of a municipal operating
character.13
Accordingly, a community cannot seek to, and FEMA cannot, cancel a loan until at
least three years following a disaster.
Legislative Activity in the 109th Congress
Congress has turned to modifying the CDL program to address the immediate
needs of the local governments affected by the 2005 hurricanes. The Community
Disaster Loan Act of 2005 (CDLA), described below, was recently enacted, and other
legislation has been introduced that would further modify the CDL program.
Generally, the other legislation was introduced before the hurricanes struck and thus
suggests modifications that are not hurricane specific. Or, the legislation was
12 44 C.F.R. 206.366 (b) (2).
13 44 C.F.R. 206.366. See also Sec. 206.361(g).

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introduced soon after the CDLA was enacted to further refine the CDL program.
Some policymakers have argued that the CDLA, which provides that loans cannot
be cancelled, should be modified. Following is an overview of the legislative activity
in the 109th Congress.
Special Community Disaster Loans Enacted in October 2005
The Community Disaster Loan Act of 2005 (CDLA), S. 1858 (Vitter), was
passed by Congress and signed by President Bush as P.L. 109-88, on Friday, October
7, 2005, the eve of the week-long Columbus Day recess.14 The motivation for the
expedited treatment was reportedly to have the money available to affected
communities by Monday, October 10.15
P.L. 109-62, the second emergency supplemental appropriations act adopted
following Hurricane Katrina, provided for $50 billion in “disaster relief.”16 The
Community Disaster Loan Act of 2005 provides for up to $750 million of those funds
to be transferred to FEMA’s Disaster Assistance Direct Loan Program. These funds,
in turn, are to be used to make direct loans to local governments to assist them in
providing “essential services,” as authorized under Section 417 of the Stafford Act.17
The transfer of $750 million may subsidize gross obligations for the principal amount
of direct loans not to exceed $1 billion.18
The CDLA also allows for an additional $1 million of the disaster relief funds
provided by P.L. 109-62 to be transferred to the Disaster Assistance Direct Loan
Program for administrative expenses to carry out the direct loan program.19
14 S. 1858 was introduced by Senator Vitter, passed without amendment by unanimous
consent in the Senate, then agreed to in the House and passed without objection, and signed
by President Bush, all on Oct. 7, 2005.
15 Statement by Representative Baker, Congressional Record, daily edition, vol. 151, no.
130, Oct. 7, 2005, p. H8797.
16 P.L. 109-62 (H.R. 3673) Second Emergency Supplemental Appropriations Act to Meet
Immediate Needs Arising from the Consequences of Hurricane Katrina. Passed by both the
House and Senate and enacted on Sept. 8, 2005. For more information on the two
emergency supplemental laws enacted, see CRS Report RS22239, Emergency Supplemental
Appropriations for Hurricane Katrina Relief, by Keith Bea.
17 The CDLA does not define the term “essential services.” The Stafford Act does include
the term within its definition of “private nonprofit facility.” 42 U.S.C. 5122(9).
18 The $1 billion amount is based on the assumption by the Office of Management and
Budget that the new loan program will have a credit subsidy rate of 75%. This is explained
in greater detail in the section on Budgetary Treatment later in this report.
19 For comparison, FEMA’s budget request for FY2006 was for $567,000 to administer the
entire Disaster Assistance Direct Loan Program which includes “state share” loans in
addition to CDLs. Under the state share program, FEMA may lend to a state or other
eligible applicant the amount it is responsible for under cost-sharing provisions of the
Stafford Act. U.S. Department of Homeland Security, Emergency Preparedness and
Response Directorate, Federal Emergency Management Agency, Fiscal Year 2006
(continued...)

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The new law makes three changes to the CDL program law with respect to the
Special Community Disaster Loans (SCDLs) to be made under this section. First, an
SCDL may exceed the $5 million limit placed on traditional loans made under
Section 417. (The limit of 25% of the locality’s operating budget still applies.)
Second, the cancellation of such loans is prohibited. Third, the law directs that the
loans be used to assist local governments in providing essential services.
The provision eliminating the possibility of loan cancellation was reportedly
insisted upon by the Bush Administration (Office of Management and Budget) and
the Republican leadership in the House as a condition for providing the loan
assistance.20 Several Members made statements on the House and Senate floors
objecting to the requirement that the loans be repaid.21 Representative Obey
requested that a requirement be included to report to Congress about the size and use
of the loans made.22 There were assurances from Representative Baker that this
concern would be addressed after the Columbus Day recess.23
The interim rules implementing the Special Community Disaster Loans Program
were published on October 18, 2005.24 The standard interest rate on SCDLs is, again,
the average rate on Treasury issues with five-year maturities. However, the rules
provide that FEMA will have the discretion to allow localities facing unique
economic hardships to receive discounted interest rates, at levels consistent with the
lowest rate offered by the Small Business Administration’s disaster loan program.25
A formula is provided for determining the discounted interest rate. The subsidized
rate would be the U.S. Treasury’s five-year maturity rate plus one percentum,
adjusted to the nearest 1/8 %, and reduced by one-half. For example, assume that the
yield on five-year Treasury bonds were 4.32%, as it was on October 21, 2005.
Adding one percentum would give 5.32%. Rounding that to the nearest 1/8% would
give 5-3/8%. Reducing that by one-half would give 2-11/16% as the subsidized
interest rate on SCDLs.
19 (...continued)
Congressional Justification, 2005, pp. FEMA 156-157.
20 Statements by Senator Clinton on Relief for the Gulf Coast and by Senator Frist,
Congressional Record, daily edition, vol. 151, no. 130, Oct. 7, 2005, on p. S11280 and p.
S11282, respectively.
21 Statements regarding the Community Disaster Loan Act of 2005, Congressional Record,
daily edition, vol. 151, no. 130, Oct. 7, 2005, pp. S11279-S11285 and H8794-H8796.
22 Congressional Record, daily edition, vol. 151, no. 130, Oct. 7, 2005, pp. H8797-H8798.
23 Congressional Record, daily edition, vol. 151, no. 130, Oct. 7, 2005, p. H8798.
24 Department of Homeland Security, Emergency Preparedness and Response Directorate,
Federal Emergency Management Agency, “Special Community Disaster Loans Program,”
70 Federal Register 60443, Oct. 18, 2005; 44 CFR 206.370-206.377.
25 For businesses not able to obtain credit elsewhere, the law sets a maximum interest rate
of four percent per year on federal physical disaster loans to small businesses. Explained
on the SBA website at [http://www.sba.gov], visited Oct. 18, 2005.

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The term of the SCDLs is to remain, as for traditional CDLs, at five years, with
the option of the Associate Director of FEMA extending the term to up to 10 years.
Only under extenuating circumstances may the repayment period exceed 10 years.
Also, as with traditional CDLs, the state must co-sign the promissory note or else the
local government must pledge collateral security to cover the principal amount of the
note. In the event of default, FEMA may request administrative offset against other
federal funds due the borrower and/or referral to the Department of Justice for
judicial enforcement and collection.
Other Bills in the 109th Congress
Three other bills that would amend Section 417 of the Stafford Act have been
introduced in the 109th Congress by Representative Maloney of New York City. All
three of the Maloney bills would make CDLs available to state as well as local
governments.
H.R. 1795 (Maloney). The Whatever It Takes To Rebuild Act of 2005.
Introduced April 21, 2005; referred to the Committee on Transportation and
Infrastructure. H.R. 1795 was introduced with the intention of increasing federal aid
to the governments of New York City and the state of New York to help compensate
them for the losses of tax and other revenues related to the terrorist attacks of
September 11, 2001. H.R. 1795 would amend the Stafford Act to make community
disaster loans available to states as well as local governments. It would retain the
restriction that the loan not exceed 25% of the annual operating budget of the (state
or local) governmental entity. But it would remove the limit of $5 million on the size
of the loan that could be made to an individual government.
The bill would effectively turn loans made as a result of a major disaster caused
by terrorist attacks occurring on or after October 30, 2000, into grants. The bill
provides that
The President shall not require the payment of any interest or principal on a loan
made under this section to a State or local government which may suffer a
substantial loss of tax and other revenues as a result of a major disaster caused
by a terrorist attack.26
Finally, Section 4 of H.R. 1795 would specifically authorize the President to
make loans to New York City and the state of New York for losses of tax and other
revenues as a result of the terrorist attacks of September 11, 2001. The total amount
of the loans would be set at $8.8 billion, or a greater amount if determined by the
President to be necessary to cover the losses, subject to the availability of
appropriations. The President would not require the payment of any interest or
principal on these loans.
Representative Maloney introduced identical legislation in the 108th Congress
(H.R. 1542) and nearly identical legislation in the 107th Congress (H.R. 5523)
(without Section 4, the explicit funding for New York City and New York State).
26 Section 3(c) of H.R. 1795 in the 109th Congress.

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H.R. 4012 (Maloney). Community Disaster Loan Equity Act of 2005.
Introduced October 7, 2005; referred to the Committee on Transportation and
Infrastructure. H.R. 4012 would amend Section 417 of the Stafford Act to make aid
available to states as well as local governments. It would remove the limit of $5
million per loan. In addition, two special conditions are provided for a loan made to
a state or local government which has suffered a substantial loss of tax and other
revenues as a result of a major disaster that the President determines to be an
“incident of national significance.” First, the loan is not subject to the limit of 25%
of the government’s operating budget. Second, the President shall not require the
payment of any interest or principal on the loan. (This would effectively make the
loan a grant from the outset.) The amendments would apply to any major disaster
occurring after August 24, 2005. The findings section nonetheless refers to revenue
losses experienced by the city and state of New York following the terrorist attack
of September 11, 2001, as well as the effects of Hurricane Katrina (which occurred
on August 29, 2005).
H.R. 4090 (Maloney). Whatever It Takes to Rebuild Act of 2005, Part II.
Introduced on October 20, 2005, H.R. 4090 would repeal the recently passed
Community Disaster Loan Act of 2005, P.L. 109-88, and make available loan
eligibility to state or local governments. In addition, the President shall not require
payment of any interest or principal on the loan.
H.R. 4117 (Melancon) and S. 1872 (Landrieu). H.R. 4117 and S. 1872,
introduced on October 20, 2005, and October 17, 2005, respectively, would repeal
the provision in the CDLA of 2005 that disallows cancellation.
Analysis of the CDL Program
The federal role in aiding particular local governments in budgetary distress has
typically been to subsidize borrowing costs. This has taken the form of providing
a federal guarantee of loans made to the local government — as in the case of the
loan guarantee enacted for New York City in 1978 in the midst of its fiscal crisis. It
has also taken the form of permitting a locality to issue federally tax-exempt bonds
for private activities in order to augment its tax base over the long run — as in the
case of Liberty Zone bonds issued by New York City after the terrorist attack of
September 11, 2001.
The Community Disaster Loan program is unique in permitting local
governments struck by disasters to borrow directly from the federal government. It
has also been unique in giving the federal administrators of the loan program the
authority to cancel the borrower’s obligation to repay the loan under specified
budgetary conditions.
State and local governments are generally prohibited by state constitutions or
laws from issuing municipal debt to finance deficits in their operating budgets.
Indeed, the regulations governing traditional CDLs prohibit loan cancellation to

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finance a budget deficit that was anticipated before the disaster.27 In contrast, the
CDL program is intended specifically to permit a community to borrow to pay for
operating expenses when its revenue base has been damaged by a disaster.
Budgetary Treatment
Financing for the activities authorized by the Stafford Act is provided through
funds appropriated to the Disaster Relief Fund (DRF), which is administered by the
Department of Homeland Security (DHS) through the Federal Emergency
Management Agency (FEMA). Funds appropriated to the DRF remain available
until expended (termed a “no-year” account). Typically there is supplemental
appropriations legislation every fiscal year to meet the needs of especially
catastrophic disasters, as has occurred with Hurricane Katrina.28
The CDL program is a direct loan program of the federal government (in
contrast to a loan guarantee program). The CDL program is classified as a
discretionary program (in contrast to a mandatory program) under the Budget
Enforcement Act of 1990.
The CDL program is subject to the Federal Credit Reform Act of 1990
(FCRA).29 The FCRA changed the accounting method for measuring the cost of
federal direct loans and loan guarantees from cash flow to accrual accounting,
starting in FY1992. Under FCRA, discretionary programs providing new direct loan
obligations or new loan guarantee commitments require appropriations of budget
authority equal to their estimated subsidy costs. Furthermore, the appropriations bill
must include an estimate of the dollar amount of the new direct loan obligations that
are supportable by the subsidy budget authority appropriated to the agency for its
credit program.30 These requirements of the FCRA explain the language used in the
CDLA of 2005.
The Office of Management and Budget (OMB) estimated the credit subsidy rate
of the traditional CDL program at 93% for FY2005 and FY2006.31 Roughly
27 44 CFR 206.366 (a)(5).
28 For more information on the FY2005 emergency legislation, see CRS Report RS22239,
Emergency Supplemental Appropriations for Hurricane Katrina Relief, by Keith Bea.
29 The Omnibus Budget Reconciliation Act of 1990, P.L. 101-508, added Title V to the
Congressional Budget Act. Title V is also known as the Federal Credit Reform Act of 1990.
30 For further explanation, see CRS Report RL30346, Federal Credit Reform:
Implementation of the Changed Budgetary Treatment of Direct Loans and Loan Guarantees,
by James M. Bickley, especially Appendix B, Budgetary Treatment of a Hypothetical Direct
Loan.
31 For FY2005, the traditional CDL program had an estimated credit subsidy rate of 93.43%.
This subsidy rate was attributed 3.72 to the interest rate and 89.72 to all other. The interest
rate subsidy accounts for the borrower’s interest rate being below the federal government’s
cost of borrowed funds. “All other” reflects cancellations of interest and principal
payments. (No part of the subsidy was attributed to defaults net of recoveries or to fees.)
(continued...)

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CRS-10
speaking, this means that for every $100 million of loans made and interest due, $93
million in principal or interest was cancelled or forgiven.32 This was by far the
highest subsidy rate among all of the federal government’s direct loan and loan
guarantee programs. In contrast, a subsidy rate of 75% was used in the calculations
for the CDLA of 2005. This lower rate was based on the assumption that the special
CDLs could not be cancelled. The 75% subsidy rate was used to determine that $750
million in budget authority could support total loans of $1 billion, as provided in the
language of P.L. 109-88. This language conforms to the requirements of the FCRA.
The prohibition of loan cancellation was placed in the law to reduce the
budgetary cost of this disaster aid program. This provision lowered the estimated
subsidy rate from 93% to 75%. However, a subsidy rate of 75% suggests that a high
default rate is expected on the special CDLs. In addition, the interest rate subsidy
component will be higher because all of the Gulf-area jurisdictions will get the
discounted interest rate.33 The actual subsidy outcome will not be known for five or
10 years, depending upon the maturity period set for the special CDLs.
Historically, CDLs have been made on an “as-needed” basis, without a pre-
specified aggregate limit. Furthermore, from 1974 until 2000 there was no dollar
limit on the size of a loan that could be made to an individual local government
through the traditional CDL program. The 2000 amendment limited the loan to any
individual local government to $5 million and provided that no additional loan would
be made to a community that is in arrears on payments under a previous loan.34
Congress made these changes to help control program costs.
The 2005 CDLA takes another approach to controlling the cost of the special
CDL program that it created. While it lifts the $5 million cap on an individual loan,
31 (...continued)
The average borrower’s interest rate assumed for the purpose of calculating the subsidy rate
for the CDL program during FY2005 was 4.30%. This was lower than the borrower interest
rates that applied to most of the other federal direct loan and loan guarantee programs. In
early 2005, the subsidy rate of the traditional CDL program for FY2006 was estimated just
slightly lower at 93.30%, assuming a borrower interest rate of 4.66%, and attributing 3.75
of the subsidy to the interest rate, and 89.55 to all other. U.S. Executive Office of the
President, Office of Management and Budget, Budget of the United States Government,
Fiscal Year 2006, Federal Credit Supplement (Washington: GPO, 2005), pp. 2, 10, 16.
32 More precisely, the credit subsidy rate is equal to 1.00 minus the ratio of the present value
of expected cash inflows to the government, relative to the present value of cash outflows.
In essence, it reflects the extent of nonpayment by the borrowers. The estimate is based on
both actual and projected repayments by borrowers. U.S. General Accounting Office (now
named the Government Accountability Office), Letter to The Honorable Christopher S.
Bond, Chairman, Subcommittee on VA, HUD and Independent Agencies, Committee on
Appropriations, U.S. Senate, June 5, 1996, GAO/RCED-96-148R Community Disaster
Loans, p. 5.
33 Credit analysts at OMB indicate that roughly five percentage points of the total estimated
credit subsidy is attributable to the interest rate subsidy and 70 percentage points to the
expected default on principal and interest payments.
34 Disaster Mitigation Act of 2000, P.L. 106-390, 114 Stat. 1571.

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CRS-11
the new law prohibits the cancellation of any loan made under its auspices. It also
sets an aggregate limit of $1 billion on the principal amount of loans that can be
made, based upon a set-aside of $750 million from funds already appropriated for
disaster relief.

Loan or Grant Program?
There is considerable controversy in Congress over whether the CDL monies
to be advanced to the local governments affected by Hurricanes Katrina and Rita
should be treated as loans that must be repaid or as loans that may be cancelled.
Cancellation of loan repayment obligation in effect results in a grant to the
community.
The community disaster program for local governments began in 1970 as a
program of community disaster grants. In 1974, Congress replaced the grant program
with a program of community disaster loans.35 However, the loan program was
accompanied by a provision requiring mandatory cancellation of the obligation to
repay all or part of the loan under specified local budget conditions. In contrast, the
funds advanced under the 2005 CDLA would be treated strictly as repayable loans.
A 1995 report by FEMA’s Office of Inspector General recommended
considering the conversion of the community disaster loan program into a grant
program because so few of the loans were expected to be repaid and because it
requires much less time, effort, and expense to administer a grant program than a
loan program.36 In 1996, FEMA’s Director of the Office of Policy and Regional
Operations noted that the subsidy rate for the CDL program was close to 90% for
FY1996 and close to 100% for FY1997. He said that FEMA’s goal was to terminate
the loan program or, if not terminated, to administer it as a grant program.37
In 1997 congressional testimony, then FEMA director James Lee Witt asked
rhetorically

... then let it be a grant program if they can’t pay the money back. Why spend all
the money we are having to spend administratively to support these loans and to
have accounting firms go in and do audits of the cities or governments that are
getting the loans if they are not being repaid?38
35 The evolution of the CDL program is explained in more detail at the end of this report, in
the Legislative History section.
36 Federal Emergency Management Agency (FEMA), Office of Inspector General, Audit of
FEMA’s Disaster Relief Fund, H-16-95 (July 27, 1995). Cited in U.S. General Accounting
Office (now named the Government Accountability Office), Letter to The Honorable
Christopher S. Bond, Chairman, Subcommittee on VA, HUD and Independent Agencies,
Committee on Appropriations, U.S. Senate, June 5, 1996, GAO/RCED-96-148R Community
Disaster Loans, p. 5.
37 Op. cit.
38 U.S. Congress, House Committee on Appropriations, Subcommittee on VA, HUD, and
Independent Agencies, hearings, part 4, 105th Cong., 1st sess., 1997 (Washington: GPO,
(continued...)

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CRS-12
With a grant program, immediate revenue relief could be provided to local
jurisdictions in a disaster area without saddling them with additional debt. With no
possibility of interest or principal repayments, a grant program would cost more per
dollar of aid delivered than a loan program. In addition, a grant program would likely
be used by more jurisdictions than a loan program and could thus be considerably
more expensive for federal taxpayers. A larger program would redistribute more
resources from non-affected areas to areas affected by disaster.
However, even though administrative accounting costs may be lower with grants
than loans, grants may require more federal control and oversight of the use of funds.
Monitoring compliance could increase the cost of administering a grant program.
Experience with Traditional Loans and Their Cancellation
The traditional CDL program has been used infrequently relative to the number
of declared disasters. From the first loans made in August 1976 through September
30, 2005, a period of 29 years, FEMA received 64 loan applications related to 21
separate disasters. Of those 64 applications, four were withdrawn by the community
and five were suspended because another federal aid program was then available to
school districts through the Department of Education. FEMA approved the
remaining 55 loan requests and disbursed funds. In contrast, over the same time
period there were 1,104 declared major disasters, many of which affected more than
one local jurisdiction. No community disaster loans were made from FY1999
through FY2005.
The FEMA data summarized in Table 1 (in millions of dollars) and Table 2 (as
a percentage of total for loans disbursed) suggest that the traditional CDL program
is more accurately described as a grant program with a small loan component. This
is because the CDL program has experienced a high rate of loan cancellation,
measured in dollar terms. Of the $233.5 million in total loan principal disbursed,
$168.7 million, or 72.2%, went to 16 loans that were fully cancelled. Another $57.0
million, or 24.4%, was the amount of principal cancelled for the 6 loans that were
partially cancelled. Adding these two categories together indicates that $225.7
million, or 96.6%, of the total loan principal disbursed was cancelled.
The repayment experience looks better when measured simply by the number
of loans. Thirty-six, or two-thirds, of the 55 individual loans made have been paid
back in part or in full. However, many of these loans were for amounts as small as
$500 or $1,000. Altogether, these loans repaid only $5.5 million, or 2.3%, of the total
principal amount loaned by the CDL program.
When the loan principal was cancelled, generally so was the interest due. In
addition to the $225.7 million in loan principal that was cancelled, so was $95.3
million in interest owed. In contrast, loans that were paid back in part or in full paid
only $10.1 million in interest.
38 (...continued)
1997), pp. 64-65.

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CRS-13
Table 1. Community Disaster Loan Program from the First
Loans in August 1976 through September 30, 2005
(in $ millions)
Amounts in $ millions
Number
Principal
of Loans
Principal
Interest
and
Interest
Loans applied for
64
—
—
—
Applications withdrawn or suspended
- 9
—
—
—
Loans approved
55
$279.7
—
—
Loans disbursed
55
233.5
$106.8
$340.3
Loans cancelled in full
16
168.7
74.4
243.1
Loans cancelled in part
6a
57.0
20.9
77.9
Loans paid back in part
6a
2.2
8.3
10.5
Loans paid back in full
30
3.3
1.8
5.1
Loans outstanding
4a
2.3
1.4
3.7
a. Five loans were counted as both cancelled in part and paid back in part. One outstanding loan has
also been partially cancelled. Another outstanding loan has been partially repaid. The dollar amounts
are assigned to their respective categories.
Source: Tabulated by CRS from data on individual loans, as of Sept. 30, 2005, provided by Gerry
Miederhoff, FEMA program specialist.

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CRS-14
Table 2. Community Disaster Loan Program from the First
Loans in August 1976 through September 30, 2005
(as a percentage of total for loans disbursed)
Principal
Number
Principal
Interest
and
of Loans
Interest
Loans disbursed
100.0%
100.0%
100.0%
100.0%
Loans cancelled in full
29.1
72.2
69.9
71.4
Loans cancelled in part
10.9
24.4
19.6
22.9
Loans paid back in part
10.9
0.9
7.8
3.0
Loans paid back in full
54.5
1.4
1.7
1.5
Loans outstanding
7.3
1.0
1.3
1.1
Note: Percentages may not sum to 100.0 due to rounding and, for number of loans, some double
counting. See note a to Table 1.
Source: Tabulated by CRS from data on individual loans, as of Sept, 39, 2005, provided by Gerry
Miederhoff, FEMA program specialist.
Eliminating the $5 Million Per Loan Cap
Many large local governments in the Gulf region, including New Orleans, could
not benefit significantly from the traditional CDL program because of the loan limit
of $5 million per jurisdiction, per disaster. Removing the $5 million limit is likely to
deliver more federal aid to large jurisdictions than would be allowed under traditional
program rules.
The primary argument against eliminating the $5 million cap is the greater
potential cost to the federal government. A total of five of the 55 CDLs approved
through September 2005 under the traditional CDL program exceeded the $5 million
cap. Together they accounted for 90% of the cancelled principal and 93% of the
cancelled principal and interest (see Table 3). This suggests that removal of the $5
million cap is likely to increase the federal cost of the program if there are defaults
on large loans. Some argue that the other cap — 25% of the borrowing government’s
operating budget in the fiscal year of the disaster event — achieves the objective of
capping the federal exposure, albeit at a higher level.

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CRS-15
Table 3. CDLs Greater than $5 Million and Amount Cancelled
(in $ millions)
Principal
Principal
Date of
Amount
Disaster Event
Amount
and Interest
Event
Disbursed
Cancelled
Cancelled
Hurricane Hugo, U.S.V.I.
9/20/89
$50.1
$48.2
$65.7
Hurricane Val, American Samoa
12/13/91
$10.2
$8.6
$12.0
Hurricane Andrew, Homestead, FL
8/24/92
$10.3
$10.3
$13.5
Hurricane Iniki, Kauai, HI
9/12/92
$15.0
$15.0
$19.1
Hurricane Marilyn, U.S.V.I.
9/16/95
$127.2
$127.2
$189.0
Total for CDLs over $5 million
__
$212.8
$209.3
$299.3
(5 loan approvals)
Total for all CDLs
__
$233.5
$233.5
$321.0
(55 loan approvals)
Source: Data as of Sept. 30, 2005, from Gerry Miederhoff, FEMA program specialist.
Lowering the Interest Rate
A consolation offered to those concerned about the non-cancellation provision
for the special CDLs was that the administrators of the loan program would have
considerable latitude in setting the terms of repayment for the loans which include
both the interest rate and the time period of the loan.39 However, according to the
interim regulations accompanying CDLA of 2005, the time period for repayment is
the same for the special program as it is for the traditional program — typically five
years, and not to exceed 10 years except in cases of exceptional financial hardship.40
The new CDL program does, however, offer FEMA administrators the option
of offering a lower interest rate to communities judged to be in more serious financial
distress. According to FEMA, all Gulf jurisdictions will be eligible for the
subsidized interest rate. Lowering the interest rate is intended to reduce the burden
of repaying the loan. This is counter to the usual practice in credit markets, where
borrowers judged more financially risky typically face a higher interest rate than
those judged more likely to repay. However, it does parallel the treatment of physical
39 Statement of Representative Baker, Congressional Record, daily edition, vol. 151, no.
130, October 7, 2005, p. H8796.
40 Department of Homeland Security, Emergency Preparedness and Response Directorate,
Federal Emergency Management Agency, “Special Community Disaster Loans Program,”
70 Federal Register 60443, Oct. 18, 2005.

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CRS-16
disaster business loans offered by the Small Business Administration (SBA) to
businesses that have not been able to obtain credit elsewhere.41

A lower interest rate would, by design, increase the attractiveness of the CDL
program to more governments. The likely increased demand for the loans would
increase the federal cost of the program. The larger interest subsidy alone would add
to the cost of the program even if the loans were repaid. But attracting less
creditworthy borrowers is likely to raise the risk of default on the loans, further
increasing the cost of the program.
In contrast, a policy of linking the CDL interest rate to the underlying credit
rating of the borrowing government could reduce the adverse selection that may exist
under both the traditional and special CDL programs.42 For example, setting the
interest rate at a fixed amount (number of basis points) or percentage below the local
government’s current five-year bond rate is a method that could be easily
implemented by FEMA yet would still reduce the burden on the borrowing
government.
Experience with the Special CDL Program

With the authority to make up to $1 billion in loans, the special CDL program
has the potential to be nearly four times as large as the traditional CDL program to
date ($233.5 billion loaned). As of November 9, 2005, FEMA had approved eight
special CDL applications for local governments in Louisiana. These loans totaled
$182 million. This included $120 million for New Orleans, four other loans for over
$5 million, and three loans for under $5 million. FEMA expects to receive more loan
applications from other Gulf Coast communities.43
Legislative History
Over its history, the community disaster program has taken the form of both a
grant program and a loan program. Several approaches have been used to limit the
cost of the program. In addition, changes were made in the definitions of revenues
to be replaced and expenses to be supported by the program.
41 The SBA sets a maximum interest rate of 4% per year and a maximum maturity of 30
years on loans to borrowers judged unable to obtain credit elsewhere. For businesses that
SBA determines can obtain credit elsewhere, the interest rate charged by SBA cannot
exceed what is being charged in the private market at the time of the disaster, or 8%,
whichever is less, and the maturity period cannot exceed three years. [http://www.sba.gov]
visited Oct. 18, 2005.
42 The term “adverse selection” refers to the concept in insurance markets whereby only
those who will likely need insurance are most likely to purchase policies. In the context of
CDLs, it suggests that jurisdictions with serious budget troubles will be more likely to use
the federal loan program.
43 Information from Gerry Miederhoff, FEMA program specialist. See also Eric Lipton,
“FEMA Calls 60,000 Houses In Storm Area Beyond Repair,” New York Times, Nov. 5,
2005, p. A10.

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CRS-17
Disaster Relief Act of 1970
The CDL program originated as a grant program. Sec. 261 of the Disaster
Relief Act of 1970 (P.L. 91-606) provided for community disaster grants. The grant
provisions originated in a House amendment to S. 3619. The President was
authorized to make grants to any local government which, as the result of a major
disaster, had suffered a substantial loss of property tax revenue (both real and
personal). A grant could be made for the year of the disaster and the following two
tax years.
The grants were intended to replace lost property tax revenue. The locality was
expected to maintain its tax rate and assessed value factors at their pre-disaster levels.
Specifically, the grant for any tax year could not exceed the difference between the
annual average of property tax revenues received by the local government during the
three tax years preceding the disaster and the actual property tax revenue received by
the local government for the tax year of the disaster, and similarly for the next two
tax years. However, if the government had reduced its tax rates or tax assessment
valuation factors subsequent to the disaster, an adjustment would be made to remove
the effect when measuring the shortfall in revenues.
Alternative Senate Proposal for a Loan Program Not Adopted. The
conference committee on S. 3619 did not adopt the provisions of the bill passed by
the Senate which proposed a loan program instead of the grant program. The Senate-
passed bill would have authorized $100 million to establish a Community Disaster
Loan Fund in the Treasury. The Fund would have provided loans to local
governments for three purposes: (1) meeting interest and principal payments on
outstanding bonded indebtedness; (2) paying the local share of federal grant-in-aid
programs necessary to restore the disaster area; and (3) providing and maintaining
essential public services, such as fire and police protection.
To qualify for a loan, a local government would have to have suffered a loss of
more than 25% of its tax base or such a substantial amount that it could not otherwise
meet payments on its debt obligations, its matching shares, or its essential public
services. The size of the loan was linked to the loss of property tax revenues, in the
same way as the grant program that was adopted. The loans would be interest-free
for the first two years. The term of the loan could not exceed 20 years. The interest
rate on the loans would be determined by the Secretary of the Treasury, based on the
current average market yield on 10- to 12-year U.S. Treasury obligations less an
adjustment not to exceed 2% per year. The President would be authorized to defer
the initial payments on the loans for five years or half the term of the loan, whichever
was less. Such sums as the President might determine necessary could be transferred
to the Fund from disaster relief appropriations. In turn, the President could transfer
excess monies in the Fund to the general fund of the Treasury or to disaster relief
appropriations.44
44 Legislative History of P.L. 91-606, Disaster Relief Act of 1970, United States Code,
Congressional and Administrative News, 91st Cong., 2nd Sess., 1970, vol. 3 (St. Paul, Minn.:
West Publishing Co., 1971), pp. 5513-5514.

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CRS-18
Disaster Relief Act of 1974: The Robert T. Stafford Disaster
Relief and Emergency Assistance Act45
The Disaster Relief Act of 1974 (P.L. 93-288, 42 U.S.C. 5121 et seq.) replaced
the program of community disaster grants with a program of community disaster
loans. However, the loan program was given a mandatory cancellation provision.
This eliminated the locality’s obligation to repay the loan, under specified budgetary
conditions (Sec. 414(a)). The 1974 amendments broadened the consideration of
revenues to be replaced from property taxes to “tax and other revenues.” The amount
of, and limit on, the loan was linked, not to lost revenues, but to the size of the
operating budget. The budget could include additional disaster-related expenses if
they were of a municipal operation nature.
Specifically, the 1974 Act authorized the President to make loans to any local
government which suffers a substantial loss of tax and other revenues (which the
conferees intended to include utility revenues) as a result of a major disaster, and has
demonstrated a need for financial assistance in order to perform its governmental
functions. (The legislative history of the act gives as examples of municipal services
the protection of public health and safety and the operation of the public school
system.) The amount of the loan is to be based on need but may not exceed 25% of
the annual operating budget of the local government for the fiscal year in which the
major disaster occurs.
Repayment of all or any part of the loan is to be cancelled to the extent that
revenues of the local government during the three full fiscal years following the
major disaster are insufficient to meet the operating budget of the local government.
This budget may include additional disaster-related expenses of a municipal
operation character. The 1974 Act also provided that any loans made under this
section would not reduce or otherwise affect any grants or other assistance under the
Stafford Act.
The enacted provisions regarding CDLs originated in S. 3062, the Disaster
Relief Act Amendments of 1974, as approved by the Senate. There was no
counterpart in the House amendment to S. 3062. The conference substitute
amendment made the cancellation of community disaster loans mandatory under the
specified conditions. The Senate-passed bill had authorized the President to cancel
all or part of the CDLs under the specified conditions.46 The Senate Report to
accompany S. 3062 stated that the loan or any cancelled portion could not be used as
the non-federal share of any federal program, including those programs under the
act.47
45 The 1974 Act was renamed the Stafford Act by the Disaster Relief and Emergency
Assistance Amendments of 1988, P.L. 100-707, Sec. 102.
46 Legislative History of P.L. 93-288, Disaster Relief Act of 1974, United States Code,
Congressional and Administrative News, 93rd Cong., 2nd Sess., 1974, vol. 2 (St. Paul, Minn.:
West Publishing Co., 1975), pp. 3077, 3086, and 3110.
47 Op. cit., p. 3077. Senate Report (Public Works Committee) No. 93-778, Apr. 9, 1974, 12.
(continued...)

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CRS-19
Disaster Mitigation Act of 2000
Before 2000, there was no dollar limit on the amount of the loan that could be
made to a local government under Sec. 417 of the Stafford Act. Sec. 207(5) of the
Disaster Mitigation Act of 2000 (P.L. 106-390) placed a limit of $5 million on the
size of the loan that could be made to a local government. (This dollar limit was in
addition to the limit of 25% of the operating budget.) The 2000 amendments also
provided that a local government cannot receive additional assistance under Sec. 417
if it is in arrears on payments for a previous loan.48
In placing these limits, Congress was reportedly reacting to two very large loans
that had been made to the Virgin Islands in the aftermath of Hurricane Hugo in 1989
and Hurricane Marilyn in 1995, for which repayment was cancelled. See Table 3
earlier in this report.
Section 204(a) of H.R. 707 as passed by the House would have repealed Sec.
417 of the Stafford Act and thereby eliminated the disaster loan program. It was Sec.
207 of H.R. 707 as passed by the Senate which contained the amendments to Sec.
417 that were adopted in the enacted bill
47 (...continued)
Community Disaster Grants (Sec. 414).
48 CRS Report RS20736, Disaster Mitigation Act of 2000 (P.L. 106-390): Summary of New
and Amended Provisions of the Stafford Disaster Relief Act, by Keith Bea..

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