Historically, large expanses of California's low-lying Central Valley flooded nearly every winter. Over the past 150 years, individuals, communities, and state and national agencies have increasingly altered the landscape with levees, reservoirs, and bypasses to support agriculture and urban centers. The Central Valley's flood protection infrastructure and the institutions that manage flood risks have coevolved as risks and local needs have changed. The current state of flood management is in transition, as the recognition of a precarious disconnect between land-use decisions, flood liability, and flood infrastructure expenses unfolds. Substantial risks to public safety, the state's purse, and water supply are likely to be exacerbated by population growth and climate change. The paper identifies the strengths and weaknesses of the current flood management system, and explores several market and policy measures that might address the weaknesses of the system, especially the disconnection between flood management costs and benefits in California's Central Valley.