AUGUSTA — Will Guerrette has a problem with flood insurance. By his calculation, he’s not buying insurance; he’s paying for the program.

“There is no way I will have the loss I am paying for,” Guerrette said.

Like all those who have mortgages on property within the reach of a 100-year flood, Guerrette, a downtown Augusta property developer, is required to have flood insurance through the National Flood Insurance Program.

Created in the late 1960s to reduce the financial effect of flooding, the NFIP provides affordable insurance to people with flood-prone property and encourages cities and towns to adopt and enforce flood plain management strategies. Even if a single drop of rain from the wildly destructive Hurricane Irma never reaches Maine, ratepayers here are expected to feel its effect in what they pay.

The program, which is administered by the Federal Emergency Management Agency and needs congressional reauthorization this year to continue, is already $25 billion in debt. To cure that deficit, premiums that the federal government has subsidized for many policyholders for decades are on a path to be increased until the debt is erased.

The result, in central Maine and elsewhere, is expected to be rates so high that investment in waterfront properties effectively will be halted, and economic development in historic downtowns in the Kennebec River valley could stall.

And given the claims from Hurricane Harvey and those likely to come from Hurricane Irma, the debt is expected to get a lot bigger before it gets any smaller.

In his office at 227 Water St. in Augusta last week, Guerrette considered the effect of flooding on his block.

Guerrette is part of Smithtown Four LLC, the company that owns 221-239 Water Street. The first floor is retail storefront, the second is offices and the third floor has market-rate apartments with sweeping views of the Kennebec River.

Few if any buildings on that side of Water Street have developed space in the basements and sub-basements that face the river because they’re in the flood plain, the zone that’s likely to be under water in a 100-year flood.

When the March 1987 flood struck, they were in fact under water. It was the largest flood in the state’s history, and the volume of water that flowed down the Kennebec was immense. It’s considered a 1,000-year flood: That’s a measure of the chance that a flood of that magnitude will happen in any given year.

Floodwater covers part of Bond Street in Augusta after Bond Brook and the Kennebec River spilled over their banks in 1987. Staff file photo

Three decades later, his basement is practically empty, and it will stay that way.

“We’ve started to see rates goes up, and we’re facing large ones for the first time,” Guerrette said. “It doesn’t seem very easy to justify.”

When the National Flood Insurance Program was created in 1968, it was in response to the rising costs of flood damage in the United States. Until that point, federal money was spent on building flood-control structures such as dams and levees following the massive floods of the 1920s and 1930s. The only recourse for property owners was federal disaster relief.

For a number of years, the concept of flood insurance was kicked around. By the 1950s it was clear that insurance companies couldn’t underwrite the risk of insuring against flooding. The final push to get the federal program in place was the widespread damage Hurricane Betsy caused in Florida, Louisiana and other Southern states.

In the years that followed, legislative tweaking reshaped the program generally in line with its five-year reauthorization schedule, including:

• making flood insurance mandatory in special flood hazard areas for holders of federally backed mortgages;

• creating a community rating system as an incentive for communities to have requirements more strict than federal requirements for development in the flood plain;

• authorizing buying and tearing down buildings on which repeated claims had been paid; and

• barring structures built in mapped flood zones after 1972 from qualifying for flood insurance.

Generally, what people paid into the program covered the losses. When the losses exceeded available money, the program could borrow from the U.S. Treasury, to be paid back with interest.

Two events in the last two decades have stretched the program: Hurricane Katrina, which devastated New Orleans and part of the Gulf coast in August 2005, and Superstorm Sandy, which rolled over the New York and New Jersey region and flooded swaths of Vermont in October 2012. The combined losses reported from those storms alone totaled about $28 billion.

That was a problem with another legislative fix.

PASSING ON TRUE RISK

When the flood maps were created in 1972, the flood zones included buildings that had been standing for decades and even longer. To give those property owners a break, the program built in subsidies so those ratepayers paid less.

With catastrophic losses looming, federal lawmakers lifted those subsidies in the Biggert-Watters Flood Insurance Reform Act of 2012.

It was clear pretty quickly that those changes would ripple through central Maine.

“The government is saying through its policies and Congress is saying through legislation … that the program won’t be supplemented as it has been in the past,” said Andrew Silsby, president of the Augusta-based Kennebec Savings Bank. In central Maine, people who own property in mapped flood zones, which includes historic downtowns in Gardiner, Hallowell and Augusta, were on the hook for the full risk, and premiums started to rise.

That’s what Guerrette saw. Premiums that had been $4,000 to $5,000 annually were creeping up to $6,000 to $7,000. He said he’s hearing it could reach $25,000 a year.

“Two percent of my value is the basement and 10 percent of the mechanical equipment is there,” he said. That’s the boiler and some mechanical equipment for the elevator.

Will Guerrette talks about flood insurance during a tour Friday of 227 Water St. in Augusta. Guerrette worries that rising costs for flood insurance premiums could stall downtown development in areas such as Augusta along the Kennebec River. Staff photo by Joe Phelan

That’s the only part of his building below the limit of a 100-year flood, and he knows that because he paid an engineer to find that out.

“We are fighting against rate hikes,” he said. “I am happy to insure the stuff we have in the flood plain, but they have no ability to explain what is at risk.”

In fact, the insurance covers everything in the building.

Silsby, as a lender, sees this happen all the time. Kennebec Savings Bank has done a lot of mortgage lending in central Maine, which is also rich with lakes and ponds. And in each case, bank officials are required by their banking regulations to check for the need for flood insurance.

A bank customer on Cochnewagon Lake sought financing for his home and found that the updated flood map put 6 inches of the home in the flood plain; it had not been in the flood plain before.

“If the building is in the flood zone,” Silsby said, “it’s all or nothing. It’s not what’s in the lower level; it’s everything.”

Under the law, any property with a mortgage must have flood insurance. Conversely, any property with a mortgage that’s been paid off no longer has that requirement.

Sue Baker, the state coordinator in Maine for the National Flood Insurance Program, said Maine has 9,000 flood insurance policies.

“When you consider how many buildings are in the flood hazard area, we’re woefully underinsured,” Baker said. “People pay off their houses and they are willing to roll the dice.”

There is no way to know how many buildings are in Maine’s mapped flood hazard area.

STIFLING ECONOMIC GROWTH

In Maine, no flood hazard area disclosure requirement exists.

“People often don’t find out unless there is a purchase and sale agreement and they are in financing and the lender does the determination by law,” she said. “They are generally angry and they are looking at someone to blame.”

That is just one hurdle in a growing field of them that can trip up prospective property owners and those whose job is developing the local economy.

In Gardiner, Patrick Wright has several roles. Two of them are economic development coordinator for the city of Gardiner and executive director of Gardiner Main Street, which involve working to revitalize the city’s historic downtown, among other things.

Part of that revitalization can come through new investment in downtown buildings. But Wright, Silsby and others see the chilling effect of flood insurance rate increases.

“Regardless of where your rates are right now,” Wright said, “they will increase 25 percent year over year until the subsidy is gone and you are paying the full actuarial rate.”

It can be a considerable burden, he said. A $300,000 building might require flood insurance that costs $30,000 a year.

Two years after the Biggert-Watters Act, Congress acted to delay the increases spelled out in the 2012 legislation, but it offers little comfort.

Wright looks at it this way. The requirement to carry flood insurance was the stick and the subsidies were the carrot. With these legislative changes, the stick remains, but the carrot is taken away — slowly.

What all of this means for a community such as Gardiner with a historic downtown is a significant decrease in the pool of prospective building owners willing to invest.

Silsby said he’s seen sales fall through because investors look at the numbers and what’s coming in the form of higher flood insurance costs, and they decide they can’t make it work.

Wright said uncertainty is keeping people who otherwise would be interested in redeveloping a downtown Gardiner building on the sidelines.

When buildings don’t sell, he said, that hurts both resale value and taxable value. And the existing owner still faces higher flood insurance bills.

Silsby said the question becomes whether commercial real estate in the flood zone is worth the same as a comparable property that’s not. Commercial appraisers consider the amount of revenue a business would bring in, and if a business produces less revenue, the value of the storefront won’t be as high.

That has implications for cash-strapped cities and towns; if downtowns, which can be revenue producers, don’t pay their share of property tax, residents foot a bigger share of the bill.

HOPING FOR A FIX

In light of two historic hurricanes making landfall in U.S. territories and in Texas, Louisiana and Florida, Silsby and others say reauthorization before the end of the month is a sure bet.

But it’s unclear whether it will be a full reauthorization or a temporary one to ensure flood claims can be paid this year. A number of proposals are making the rounds in Washington that could be considered.

In Maine, Wright has been looking at options to make the program more workable for towns such as Gardiner.

He and others, such as Baker, real estate agents, bankers and others, converged in Bangor earlier this year for a roundtable discussion in the Bangor office of U.S. Rep. Bruce Poliquin, R-2nd District. Poliquin sits on the House Financial Services Committee, which will take up the reauthorization.

Among the proposals he brought was creating a separate designation for buildings that are listed on or contribute to a National Register historic district and pegging increases to flood insurance rates to the consumer price index.

It’s not clear that idea, or any others floated that day, will gain traction.

Poliquin was unavailable for an interview last week, but his office said in a statement that the National Flood Insurance Program “is critically important for thousands of Mainers who live along our large coastline and by our rivers, lakes and estuaries.”

“There is no question that Congress must reauthorize this program to ensure no lapse in the ability to pay claims and to make improvements and updates,” Poliquin said in the statement. “I believe Congress must extend the program to give lawmakers the opportunity to understand how the recent heartbreaking situation in the Gulf Region will impact the program to allow for needed policy adjustments, before voting on a more comprehensive and long-term solution.”

A view of Water Street in Augusta. Staff photo by Joe Phelan

In the meantime, Baker said building owners in flood-prone areas can take some measures to protect themselves from floods including dry-proofing it, which is harder for older buildings, and opening up the lower floors so that water can flow in and out, unimpeded.

That’s something that Guerrette, in Augusta, might end up doing, but that will require spending money to relocate the boiler and the mechanical equipment.

“I don’t think any of us are worried about flooding,” he said. “Were worried about (our) costs.”

And if the only way to avoid the rising cost of flood insurance is to pay cash, he worries about what that will mean for development efforts.

“Of the 20 business projects I have been involved in, none of them was done without some financing,” he said. “This makes more that the ‘haves’ can do things — and the ‘have nots,’ if you can’t invest in a downtown area without financing, you can’t do anything.”

Jessica Lowell — 621-5632

[email protected]

Twitter: @JLowellKJ