Gov. Charlie Crist and the Cabinet voted Wednesday to pay Warren Buffett’s Berkshire Hathaway conglomerate $224 million in exchange for a pledge to provide $4 billion in cash if Florida has a devastating hurricane season this year.
But the deal favored by Crist was roundly criticized by the two other trustees on the State Board of Administration, Attorney General Bill McCollum and Chief Financial Officer Alex Sink, who called it a steal for the billionaire Nebraska investor.
“This is not a good deal,” said McCollum, who questioned why the state needed to buy the extra hurricane protection when the chance of a serious enough storm hitting Florida this year was about 3 percent.
“Berkshire Hathaway will wind up pocketing the money,” he said.
Sink, a Democrat, chided the GOP-led Legislature for passing on her plan last spring to reduce the size of the Cat Fund, along with her fellow trustees for not taking any longer-term steps to reduce Florida’s hurricane exposure.
“The truth of it is we’re kind of sitting here paying part of the price for the Legislature’s inaction,” she said. “I am not going to sit here next July 1 and be held hostage by just one provider.”
Because of the 2007 reforms meant to lower premiums to homeowners, the state’s hurricane catastrophe fund could have to pay out as much a $29 billion to reimburse insurers for claims this year, if a Katrina-sized hurricane struck the most densely populated regions of the state.
Because the Cat Fund only has about $8 billion in cash at its disposal, the state would have to sell bonds after a storm to raise the rest, and there’s no certainty that battered financial markets would be able to buy as much as $20 billion.
Enter Buffett.
For the $224 million taken from Cat Fund reserves (which would be repaid by consumers eventually), his investment conglomerate would pledge to buy $4 billion in bonds after a serious enough hurricane strike – at roughly 6.5 percent interest (which would also be paid be ratepayers).
So Berkshire Hathaway pockets the $224 million and would draw 6.5 percent interest on the bonds in the unlikely event that it has to buy them.
“No wonder Warren Buffett wants it. Who wouldn’t want a 6.5 percent tax-free investment?” Sink said afterward.
The Cabinet members also differed on whether the $224 million being spent would have to be passed immediately along to consumers. SBA acting director Bob Milligan said since it was an expense, insurers that buy backup coverage from the state are allowed by law to factor it into their premiums.
“There are no free lunches,” he said after the meeting.
But Crist disagreed, and cast the lone vote against a measure allowing the agency to start that process.
“We’ve already got the money in the bank. We’ll spend it. The taxpayers have already given that money,” Crist said after the vote.
However, it wasn’t clear after the morning meeting who won the vote. The Attorney General’s office thought the motion would require a unanimous vote of all three trustees – in which case, it would have failed – while Sink’s office said it only took two votes, in which the pass-through of the cost to policyholders would have passed.
