[House Report 112-460]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 112-460
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SECURITY IN BONDING ACT OF 2012
_______
April 27, 2012.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Smith of Texas, from the Committee on the Judiciary, submitted the
following
R E P O R T
[To accompany H.R. 3534]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the
bill (H.R. 3534) to amend title 31, United States Code, to
revise requirements related to assets pledged by a surety, and
for other purposes, having considered the same, reports
favorably thereon with an amendment and recommends that the
bill as amended do pass.
CONTENTS
Page
The Amendment.................................................... 1
Purpose and Summary.............................................. 2
Background and Need for the Legislation.......................... 2
Hearings......................................................... 4
Committee Consideration.......................................... 4
Committee Votes.................................................. 4
Committee Oversight Findings..................................... 5
New Budget Authority and Tax Expenditures........................ 5
Congressional Budget Office Cost Estimate........................ 5
Performance Goals and Objectives................................. 6
Advisory on Earmarks............................................. 6
Section-by-Section Analysis...................................... 6
Changes in Existing Law Made by the Bill, as Reported............ 7
The Amendment
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Security in Bonding Act of 2012''.
SEC. 2. SURETY BOND REQUIREMENTS.
Chapter 93 of subtitle VI of title 31, United States Code, is
amended--
(1) by adding at the end the following:
``Sec. 9310. Individual sureties
``If another applicable law or regulation permits the acceptance of a
bond from a surety that is not subject to sections 9305 and 9306 and is
based on a pledge of assets by the surety, the assets pledged by such
surety shall--
``(1) consist of eligible obligations described under section
9303(a); and
``(2) be submitted to the official of the Government required
to approve or accept the bond, who shall deposit the assets
with a depository described under section 9303(b).''; and
(2) in the table of contents for such chapter, by adding at
the end the following:
``9310. Individual sureties.''.
SEC. 3. GAO STUDY.
(a) Study.--The Comptroller General of the United States shall carry
out a study on the following:
(1) All instances during the 10-year period prior to the date
of the enactment of this Act in which a surety bond proposed or
issued by a surety in connection with a Federal project was--
(A) rejected by a Federal contracting officer; or
(B) accepted by a Federal contracting officer, but
was later found to have been backed by insufficient
collateral or to be otherwise deficient or with respect
to which the surety did not perform.
(2) The consequences to the Federal Government,
subcontractors, and suppliers of the instances described under
paragraph (1).
(3) The percentages of all Federal contracts that were
awarded to small disadvantaged businesses (as defined under
section 124.1002(b) of title 13, Code of Federal Regulations)
and disadvantaged business enterprises (as defined under
section 26.5 of title 49, Code of Federal Regulations) as prime
contractors in the 2-year period prior to and the 2-year period
following the date of enactment of this Act, and an assessment
of the impact of this Act and the amendments made by this Act
upon such percentages.
(b) Report.--Not later than the end of the 3-year period beginning on
the date of the enactment of this Act, the Comptroller General shall
issue a report to the Committee on the Judiciary of the House of
Representatives and the Committee on Homeland Security and Government
Affairs of the Senate containing all findings and determinations made
in carrying out the study required under subsection (a).
Purpose and Summary
H.R. 3534, the Security in Bonding Act of 2011, amends the
requirements that an entity must satisfy in order to bid on or
perform work for the United States government under a Federal
contract. Specifically, the bill requires that, to secure a
contractor's obligation to complete a project, an individual
surety must post collateral in a manner and of a nature that is
consistent with what would be required of a contractor electing
to bypass the requirement that it secure a surety bond from an
entity approved by the U.S. Department of Treasury. Such
heightened collateral requirements will ensure that taxpayers,
subcontractors, and suppliers will be better protected.
Background and Need for the Legislation
A surety bond refers generically to any one of the bonds
that provides security to another party in a contracting
relationship. When the Federal Government needs construction
services, it solicits bids from contractors. Each bidding
contractor posts a bid bond to assure the government that the
contractor is willing to accept the bid if it is the winning
bidder. Without skin in the game, a bidder may be inclined to
lowball several government contracts, get one or two, and walk
away from the others, leaving the government to re-budget or
look again for another contractor to perform the job. Once a
bid is won, the contractor posts a payment bond to guarantee
payment to downstream subcontractors, and a performance bond to
assure the United States that it will perform the contract
according to its terms. Without a performance bond, the
contractor could, for example, perform half the project and
then take up another more lucrative project, leaving the
government in the lurch.
The Miller Act, 40 U.S.C. Sec. Sec. 3131-34, requires
contractors on Federal projects to give security to
subcontractors and to the Federal Government in connection with
a Federal contract. Under the Federal Acquisition Regulation,
there are three methods by which security can be furnished. A
contractor may supply a bond by a reliable corporate surety.\1\
Corporate sureties are vetted by the Treasury Department to
ensure they are sufficiently capitalized and are listed on
Treasury Circular 570.\2\ Alternatively, a contractor may
individually provide to the government a possessory security
interest in low-risk assets, such as U.S. bonds or notes, or
furnish to the government a letter of credit or other right to
draw on cash or cash equivalents upon default.\3\ Finally, a
contractor may secure a bond from an individual surety.\4\
Individual sureties are not listed on Circular 570 and are not
vetted by the Treasury Department.
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\1\Federal Acquisition Regulation (hereinafter F.A.R.) 28.201.
\2\United States Department of Treasury, Circular 570 (updated Feb.
17, 2012), available at http://www.fms.treas.gov/c570/index.html.
\3\F.A.R. 204-204.4.
\4\F.A.R. 203.
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Whereas the government and subcontractors have substantial
security when they have recourse to a corporate surety bond or
to low-risk collateral posted by a contractor individually, the
classes of qualifying collateral permitted under the F.A.R. for
individual sureties provide relatively little security. First,
an individual surety need not provide a possessory security
interest in collateral. Under Uniform Commercial Code Articles
8 and 9, a nonpossessory security interested in investment and
other intangible property may be trumped by a possessory
security interest or by sale to a bona fide purchaser. The
government therefore stands to get primed if these assets are
pledged subsequent to their use to support an individual surety
bond. Moreover, F.A.R. 28.203-2 permits an individual surety to
post any exchange-traded security as collateral; F.A.R. 28.203-
3 even allows for the pledge of real property. These classes of
collateral are far less secure than low risk cash equivalents
like T-bills required to be furnished by individual
contractors.
The lack of Treasury Department oversight over individual
sureties and the relatively relaxed collateral requirements for
individual surety bonds has led to some notable instances in
which the United States and/or subcontractors on Federal
projects have been left without recourse. For example, in March
2010, Federal agents arrested a man in Fort Worth, Texas, in
connection with the sale of worthless surety bonds through his
company, Infinity Surety. ``According to allegations in the
complaint, these bonds were used to insure various multi-
million dollar construction project [sic] and were purportedly
backed up by a single family residence in Tarrant County with a
2008 tax appraisal value of $130,700.''\5\ In other cases, the
Federal Government has had the foresight to reject bonds backed
by insufficient security.\6\
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\5\Press Release, United States Department of Justice, Forth Worth
Man Arrested and Charged in Alleged $25 Million Nationwide Scheme to
Sell Fraudulent Securities, Mar. 26, 2010.
\6\See, e.g., Tip Top Constr. v. U.S., 563 F.3d 1338 (D.C. Cir.
2009) (approving Federal Government's rejection of individual surety
bond backed by an ``allocated portion of $191,350,000.00 of previously
mined, extracted, stockpiled and marketable coal, located on the
property of E.C. Scarborough'' because asset was not readily marketable
as required by the F.A.R.).
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One legislative solution to improve the security of the
United States and subcontractors on Federal jobs would be to
eliminate the individual surety market altogether. With a
lighter touch, the Security in Bonding Act of 2011 simply
requires individual sureties to post collateral of equal
security to the collateral that an individual contractor would
have to pledge if he or she chose to secure payment or
performance individually.
Some small contractors, and particularly disadvantaged
business enterprises\7\ (DBE's) and others seeking to enter the
Federal contracting industry, may raise some concern about H.R.
3534. While DBE's who serve as subcontractors can benefit from
the enhanced collateral requirements for individual sureties
contemplated by H.R. 3534, those seeking to be prime
contractors may be wary to the extent that the bill makes
obtaining bonds more difficult, as the enhanced collateral
requirements for individual sureties may drive some individual
sureties out of the bonding industry. Emerging contractors
already face difficulty in obtaining the necessary surety bonds
to bid for and perform Federal contracts because of their lack
of sufficient assets, causing a cycle where a lack of assets
leads to an inability to obtain bonding, which, in turn,
prevents them from obtaining work that allows them to build up
their assets. Some emerging contractors are concerned that H.R.
3534 may have the unintentional effect of making their already
difficult bonding situation worse by reducing the number of
individual sureties available.
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\7\``Disadvantaged business entities'' are for-profit small
business concerns where socially and economically disadvantaged
individuals own at least a 51% interest and also control management and
daily business operations. 49 C.F.R. Sec. 26.5African Americans,
Hispanics, Native Americans, Asian-Pacific and Subcontinent Asian
Americans, and women are presumed to be socially and economically
disadvantaged. United States Dep't of Transp., Office of Small and
Disadvantaged Utilization, Definition of a DBE, available at http://
osdbu.dot.gov/DBEProgram/definitions.cfm.
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Hearings
On March 5, 2012, the Subcommittee on Courts, Commercial
and Administrative Law held a legislative hearing on H.R. 3534
and heard testimony from: Mark McCallum, the CEO of the
National Association of Surety Bond Producers; Jeanette
Wellers, the President and CFO of JBlanco Enterprises, Inc.;
Robert Little, Jr., a former government contracting officer;
and Karen Barbour, President of The Barbour Group, LLC.
Committee Consideration
On March 20, 2012, the Committee met in open session and
ordered the bill H.R. 3534, as amended, favorably reported by
voice vote, a quorum being present.
Committee Votes
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee advises that there
were no recorded votes during the Committee's consideration of
H.R. 3534. Mr. Cohen offered an amendment striking a provision
that would have given contracting officers discretion to
require the use of a corporate surety and adding a GAO study
requirement. The Committee adopted the amendment by voice vote.
Committee Oversight Findings
In compliance with clause 3(c)(1) of rule XIII of the Rules
of the House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
New Budget Authority and Tax Expenditures
Clause 3(c)(2) of rule XIII of the Rules of the House of
Representatives is inapplicable because this legislation does
not provide new budgetary authority or increased tax
expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, the Committee sets forth, with
respect to the bill, H.R. 3534, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act of
1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 16, 2012.
Hon. Lamar Smith, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3534, the
``Security in Bonding Act of 2011.''
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Matthew
Pickford, who can be reached at 226-2860.
Sincerely,
Douglas W. Elmendorf,
Director.
Enclosure
cc:
Honorable John Conyers, Jr.
Ranking Member
H.R. 3534--Security in Bonding Act of 2011.
As ordered reported by the House Committee on the Judiciary on
March 20, 2012.
H.R. 3534 would amend Federal law regarding the use of
certain surety bonds by the private sector for work on Federal
construction projects. Specifically, the legislation would
strengthen the collateral requirements for individual sureties.
H.R. 3534 also would require a report by the Government
Accountability Office (GAO) on the use of surety bonds by
Federal contractors over the past 10 years.
CBO estimates that implementing H.R. 3534 would cost less
than $500,000 a year, subject to the availability of
appropriated funds for GAO to produce the required report.
Enacting the bill would not affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply.
Under current law and regulation, contractors on Federal
projects are required to insure their performance to
subcontractors and the Federal Government in connection with
Federal construction projects using surety bonds. Surety bonds
provide financial guarantees that contracts will be completed
according to mutual terms; if a contract is not completed, the
bonds are available to cover the losses. Based on information
from the General Services Administration, private contractors,
and bond providers, CBO expects that agencies would continue to
receive contracts at the lowest price available and the
proposed changes to some collateral requirements under H.R.
3534 would not affect the cost of procuring construction
services.
H.R. 3534 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of State, local, or tribal
governments.
The CBO staff contact for this estimate is Matthew
Pickford. This estimate was approved by Peter H. Fontaine,
Assistant Director for Budget Analysis.
Performance Goals and Objectives
The Committee states that pursuant to clause 3(c)(4) of
rule XIII of the Rules of the House of Representatives, H.R.
3534 amends title 31, United States Code, to improve the
financial security of the United States when it contracts on
Federal projects.
Advisory on Earmarks
In accordance with clause 9 of rule XXI of the Rules of the
House of Representatives, H.R. 3534 does not contain any
congressional earmarks, limited tax benefits, or limited tariff
benefits as defined in clause 9(e), 9(f), or 9(g) of Rule XXI.
Section-by-Section Analysis
Section 1. Short Title.
Provides the bill may be referred to as the Security in
Bonding Act of 2011.
Section 2. Surety Bond Requirements.
Adds new 31 U.S.C. Sec. 9310, requiring that, when Federal
law permits acceptance of a surety bond from a producer not
subject to Federal oversight, the producer give a possessory
security interest in low-risk assets to the Federal Government
to provide such security.
Section 3. GAO Study.
Requires GAO to study the instances in which an individual
surety has been rejected by the U.S. government or accepted and
later found to be deficient; the impact of the bill on the
Federal Government, subcontractors, and suppliers; and the
percentage of Federal contracts awarded to small disadvantaged
businesses and disadvantaged business enterprises.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules
of the House of Representatives, changes in existing law made
by the bill, as reported, are shown as follows (new matter is
printed in italics and existing law in which no change is
proposed is shown in roman):
TITLE 31, UNITED STATES CODE
* * * * * * *
SUBTITLE VI--MISCELLANEOUS
* * * * * * *
CHAPTER 93--SURETIES AND SURETY BONDS
Sec.
9301. Definitions.
* * * * * * *
9310. Individual sureties.
* * * * * * *
Sec. 9310. Individual sureties
If another applicable law or regulation permits the
acceptance of a bond from a surety that is not subject to
sections 9305 and 9306 and is based on a pledge of assets by
the surety, the assets pledged by such surety shall--
(1) consist of eligible obligations described under
section 9303(a); and
(2) be submitted to the official of the Government
required to approve or accept the bond, who shall
deposit the assets with a depository described under
section 9303(b).
* * * * * * *