LAST MONTH, President George W. Bush signed into law a bill kicking up the National Flood Insurance Program's borrowing authority to $20.775 billion from $18.5 billion. Since September, when the NFIP's line of credit stood at $1.5 billion, the president has signed several such bills in response to the enormous number of flood insurance claims filed in the aftermath of hurricanes Katrina, Rita and Wilma. As the NFIP burns through one pile of money, the government dutifully forwards another. It really has no choice; it can't choose not to honor policies written under its own program. In fact, the next installment already is in works. Last month, the House Financial Services Committee marked up the Flood Insurance Reform and Modernization Act of 2006 (H.R. 4973). Among other things, it would allow the NFIP to raise its IOU to $25 billion–although you'd have to be de-lusional to think these borrowed funds will ever be repaid.

Eventually all the 2005 flood insurance claims will be dealt with, but the big question–Where do we go from here?–will remain. As Congress continues to tweak H.R. 4973 and legislation like it, it could do worse than study a report issued last month by the Republican Policy Committee. The report, "National Flood Insurance: Crisis and Renewal," does not mince words. "The NFIP is now bankrupt," it says. But it also does a good job of explaining how the program got in this fix and how it might get out of it.

At the core of the problem, as others have pointed out, are subsidized rates and low participation. The report notes that in 1973, Congress explicitly subsidized rates for properties in 100-year flood plains. "The Congressional Budget Office estimates that these policyholders pay only 35% to 40% of the risk-based rate, which translates to an annual subsidy of $1.3 billion," the report states. "This means that the program is 40% underfunded on an actuarial basis." Changes to the program in 1981 were meant to ensure the flood-insurance program collected enough premium to cover losses in a "normal" year, the report notes, but did not allow it to charge anything extra to build reserves. "The lack of a reserve of claims-paying capital exposes taxpayers to considerable risk in the event of a catastrophic loss event like Hurricane Katrina," the report points out.