[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
SECURITY IN BONDING ACT OF 2011
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, COMMERCIAL
AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
ON
H.R. 3534
__________
MARCH 5, 2012
__________
Serial No. 112-93
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
_____
U.S. GOVERNMENT PRINTING OFFICE
73-211 PDF WASHINGTON : 2012
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COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada
Richard Hertling, Staff Director and Chief Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------
Subcommittee on Courts, Commercial and Administrative Law
HOWARD COBLE, North Carolina, Chairman
TREY GOWDY, South Carolina, Vice-Chairman
ELTON GALLEGLY, California STEVE COHEN, Tennessee
TRENT FRANKS, Arizona HENRY C. ``HANK'' JOHNSON, Jr.,
DENNIS ROSS, Florida Georgia
BEN QUAYLE, Arizona MELVIN L. WATT, North Carolina
JARED POLIS, Colorado
Daniel Flores, Chief Counsel
James Park, Minority Counsel
C O N T E N T S
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MARCH 5, 2012
Page
THE BILL
H.R. 3534, the ``Security in Bonding Act of 2011''............... 3
OPENING STATEMENT
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Chairman, Subcommittee on Courts,
Commercial and Administrative Law.............................. 1
WITNESSES
Mark H. McCallum, CEO, National Association of Surety Bond
Producers
Oral Testimony................................................. 6
Prepared Statement............................................. 8
Jeanette Wellers, President & CFO, JBlanco Enterprises, Inc.
Oral Testimony................................................. 21
Prepared Statement............................................. 23
Robert E. Little, Jr., Of Counsel, Cohen Seglias Pallas Greenhall
& Furman PC
Oral Testimony................................................. 25
Prepared Statement............................................. 26
Karen Pecora-Barbour, President, The Barbour Group, LLC
Oral Testimony................................................. 32
Prepared Statement............................................. 35
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Material submitted by the Honorable Howard Coble, a
Representative in Congress from the State of North Carolina,
and Chairman, Subcommittee on Courts, Commercial and
Administrative Law............................................. 58
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, and
Ranking Member, Committee on the Judiciary..................... 69
Prepared Statement of the Honorable Steve Cohen, a Representative
in Congress from the State of Tennessee, and Ranking Member,
Subcommittee on Courts, Commercial and Administrative Law...... 76
Response to Post-Hearing Questions from Mark H. McCallum, CEO,
National Association of Surety Bond Producers.................. 82
Response to Post-Hearing Questions from Karen Pecora-Barbour,
President, The Barbour Group, LLC.............................. 88
Prepared Statement of the American Subcontractors Association,
Inc............................................................ 92
SECURITY IN BONDING ACT OF 2011
----------
MONDAY, MARCH 5, 2012
House of Representatives,
Subcommittee on Courts,
Commercial and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 4 p.m., in room
2141, Rayburn House Office Building, the Honorable Howard Coble
(Chairman of the Subcommittee) presiding.
Present: Representatives Coble and Gowdy.
Also Present: Representative Hanna.
Staff Present: (Majority) Travis Norton, Counsel; Ashley
Lewis, Clerk; and (Minority) James Park, Subcommittee Chief
Counsel.
Mr. Coble. The witnesses will please take your places, if
you will, and the Subcommittee will come to order. We have
other people who are on their way, I am told, so we will move
along initially. Good to have you all with us, by the way.
I will give my opening statement at this time.
Surety bonds are financial instruments used to provide the
national security for large construction contracts. For
example, prime contractors typically post payment bonds to
assure subcontractors that they will be paid for their work.
Prime contractors may also bid, and post performance bonds to
guarantee the owner that the work will be performed according
to the contract.
The Federal Government regularly contracts with privately
owned businesses to complete construction projects. In doing
so, the government requires contractors to obtain surety bonds,
but the security provided to the government by a surety bond is
only as good as the Capital R assets that stand behind the
bond.
There are currently three ways a contractor can satisfy the
Federal Government's requirement for adequate assurance of
performance and payment. First, the contractor can obtain a
bond from a corporate surety approved by the Treasury
Department. These sureties are vetted by Treasury to ensure
that they have adequate capital to make good on the bond, if
necessary.
Alternatively, the individual contractor can give the
United States the possessory security interest in low-risk
liquid assets such as T-bills, cash, or cash equivalents. If a
contractor does not perform, the government seizes the assets
with ease and finds another contractor to complete the work
without suffering monetary loss.
A third option, a contractor may secure a bond from an
individual surety. Under the Federal Acquisition Regulation,
however, an individual with surety needs only to pledge assets
to the government. It does not need to allow the government to
hold the assets. In addition, an individual surety may pledge
more volatile assets such as stocks and bonds traded on an
exchange or rights in real property.
In recent years, there have been a number of instances in
which individual surety bonds have not provided the security
that they purport to offer. In some cases this was because the
value of the pledged assets had decreased significantly, like
when the stock market suddenly dropped or real estate values
plummeted.
H.R. 3534, by Congressman Hanna of New York, is intended to
give the Federal Government and subcontractors true security
when they contract to perform construction work on a Federal
project. The bill allows Federal contracting officials to
require a bond from a Treasury-regulated surety. It does not
foreclose individual sureties from the bonding market, but it
does require them to pledge in the same manner the same kind of
low-risk assets that an individual contractor would be required
to pledge in lieu of a surety bond.
It should also be noted that H.R. 3534 is supported by the
American Subcontractors Association and the National
Association of Minority Contractors. I hope to work with
Ranking Member Cohen and Congressman Hanna to ensure that the
Federal Government does not suffer monetary loss on
construction projects at a time when it can least afford to do
so.
I look forward to hearing the testimony from our witnesses
subsequently.
[The bill, H.R. 3534, follows:]
__________
Mr. Coble. Mr. Richard Hanna of New York is recognized. Mr.
Hanna, glad to have you sit on the podium. You won't be able to
speak, however, since you are not a Member of the select
Committee, if you will. It is good to have you with us,
nonetheless.
Mr. Hanna. Thank you, sir.
Mr. Coble. And I am still a little reluctant to start. Let
me introduce the witnesses, and by then we should be in a
position to move forward.
Where is my witnesses list here, Steve? Mr. Mark McCallum
is the Chief Executive Officer of the National Association of
Surety Bond Producers. NASBP is an international association of
companies employing professional surety bond producers and
brokers. Prior to his service there, Mr. McCallum held a seated
position at the Association of General Contractors of America,
and before that at the American Institute of Architects. Mr.
McCallum earned his law degree from Tulane School of Law in New
Orleans and his Bachelor's Degree from Vanderbilt University in
Nashville--one of May favorite towns, by the way, Mr. McCallum.
I am a country music enthusiast. So when I think country music,
I synonymously think Nashville, knowing that there is more to
Nashville than that.
Mr. McCallum. It is a great town.
Mr. Coble. It is a great town.
Jean Blanco Wellers is the Executive Officer of JBlanco
Enterprises, Inc., a construction and real estate management
firm in Sheridan, Colorado. Ms. Wellers emigrated to the United
States as a child to escape the civil war in El Salvador.
Through hard work and education, she became corporate safety
director for the largest residential roofing contractor in the
Southwest before forming JBlanco Enterprises in 2004.
JBlanco Enterprises participates in the Small Business
Administration's 8(a) development program. In 2008, Ms.
Wellers' firm was recognized by the SBA as 8(a) contractor of
the year and was featured in 2010 as the second fastest growing
minority-owned business in Colorado.
Mr. Robert Little, Jr. is an attorney with more than 37
years in public service and private practice. Currently he is
of counsel in the law firm of Cohen Seglias Pallas Greenhall &
Furman, PC. Prior to that he served as a senior associate
counsel to the headquarters of the Naval Facilities Engineering
Command for service, supply, and construction contracts
worldwide. In that capacity, he had a substantial experience
with reviewing surety bond applications. Mr. Little holds a law
degree from the College of William & Mary, and a Bachelor's
Degree in philosophy from the Virginia Polytechnic Institute.
Finally, Miss Karen Barbour is the owner and founder of the
Barbour Group, a Maryland-based independent insurance agency
with a focus on construction bonding and commercial insurance.
Prior to starting the Barbour Group, Ms. Barbour was a partner
of Barbour Construction Corp for 10 years. The Governor of
Maryland has appointed Ms. Barbour to his Commission on Small
Business. She also serves as vice chair on the advisory board
for the Small Business Development Center for the State of
Maryland. Ms. Barbour attended Loyola University in Maryland
where she earned her Bachelor's Degree in political science and
history. She earned her business degree from the University of
Baltimore.
It is good to have each of you with us, and I am still in a
reluctant hold right now. I hate to start before a member of
the Democrat Party shows up, but we may do that because I don't
want to penalize you all for having been here in a timely way.
James, I have your assurance that I won't be keel-hauled.
But for the moment, folks, if you all would just hang loose, I
need to get another Member here if we can. And if not, we will
go ahead and proceed. So be at ease for the time being, and
pardon my gravelly voice, folks. I am trying to come down with
my annual early March cold, but sounds irritable, I know.
[Brief recess.]
Mr. Coble. I appreciate the presence of the witnesses here,
and hopefully we will get some action momentarily. Let's roll.
Folks, we are going to go ahead and proceed according to plan.
Again, thank you for your patience, and I apologize for the
delay.
Mr. McCallum, we will start with you, and folks, we try to
comply with the 5-minute rule. There is a timer on your desk,
and when the green light turns amber, that is your wake-up call
that you have a minute at that point, and then when the red
light appears, that is the 5-minute termination. You will not
be physically punished if you violate that, but if you can wrap
it up as soon as possible. Mr. McCallum, we will start with
you. You are recognized for 5 minutes. Get your mike on,
please, Mr. McCallum.
TESTIMONY OF MARK H. McCALLUM, CEO, NATIONAL ASSOCIATION OF
SURETY BOND PRODUCERS
Mr. McCallum. Mr. Chairman, thank you for the opportunity
to speak to you this afternoon.
NASBP members are companies employing licensed bond
producers who assist businesses of all sizes to obtain surety
credit and to grow as competitive businesses. Bond producers
often are asked by construction firms to help them assess the
strength and reputation of a surety furnishing a bond to which
the firm is a beneficiary. A surety that is not sound
financially cannot add to the credit standing of the firm to
which it is bonded. Moreover, such a surety will not supply the
protection promised by the bond. As a result, bond producers
advocate for well-regulated and stable surety markets.
The Security and Bonding Act of 2011, House Resolution
3534, is a critical and commonsense measure that will assure
the integrity of surety bonds on Federal construction contracts
when issued by individuals using a pledge of assets. Bonds
furnished by unlicensed individual sureties have an unfortunate
track record of problems on Federal construction projects.
In fact, financial loss to subcontractors and to
contracting agencies from individual surety bond fraud was the
catalyst for changes in the Federal Acquisition Regulation in
1990. Recent events involving individual sureties, however,
have made clear that these changes have not proven sufficient
to ameliorate the problem. It is time to do so, and NASBP,
along with 10 other national construction and surety
organizations view the proposed statutory changes in H.R. 3534
as the solution.
Mr. Chairman, as you mentioned earlier today, construction
firms may use one of three methods to furnish security on a
Federal construction project. They may secure a bond written by
a corporate surety listed on Treasury Circular 570; they may
use their own assets to purchase and pledge an eligible
obligation in lieu of a surety bond or they may obtain a bond
from an individual if the bond is secured by an acceptable
asset, which includes stock, bonds, and real property.
Corporate sureties writing on Federal projects must possess
a certificate of authority from the Department of the Treasury,
which conducts a financial review of the surety and sets a
single bond size limit for the surety. Corporate sureties are
licensed in the States in which they conduct surety business
and they must obtain certificates of authority from State
insurance departments. They are regularly audited and file
financial reports with State regulators. They must file the
rates they intend to charge for their bonds and are subject to
market conduct investigations. They are also rated by private
rating organizations, such as A.M. Best, which publicize their
financial strength and size.
Individual sureties are not subject to the same level of
scrutiny and oversight as corporate sureties and are vetted
solely by Federal contracting officers who often are
overburdened and under resourced for the complex tasked
required of them. Federal regulations do not require individual
sureties to possess a certificate of authority as an insurer in
any State.
They are not required to furnish character information such
as information about criminal convictions, State or Federal tax
liens, prior bankruptcies, or State cease and desist orders. No
third-party rating information is available on individual
sureties. If a contracting officer fails to performed
adequately, the necessary investigation of the individual
surety and the assets backing the individual surety bond proves
insufficient or nonexistent, unpaid subs and suppliers are
denied their statutory payment remedy and contracting agencies
are denied their guarantee of contract performance.
H.R. 3534 solves this problem. It requires individual
sureties to pledge solely those assets defined as eligible
obligations by the Secretary of the Treasury. Eligible
obligations are public debt obligations of the U.S. Government
and obligations whose principal and interest is unconditionally
guaranteed by the U.S. Government.
These assets then are given to the Federal contracting
authority, which in turn deposits them in a Federal depository,
such as the Federal Reserve Bank, St. Louis, ensuring that
pledged assets are real, sufficient, convertible to cash, and
in the physical custody and control of the Federal Government.
This is nothing more than what now is statutorily required of
construction firms that wish to pledge assets as security on a
Federal contract in lieu of a surety bond.
Firms working on Federal construction projects, either as
subs or suppliers, have no control over the prime contractor's
choice of security provided to the Federal Government, but they
suffer the most harm financially if the provided security
proves illusory. H.R. 3534 will give them the confidence that
on all Federal projects adequate and reliable security is in
place to guarantee that they will be paid.
Thank you for your time and attention today. I am happy to
answer questions that you may have.
[The prepared statement of Mr. McCallum follows:]
__________
Mr. Coble. Thank you, Mr. McCallum, and you beat the red
light. It illuminated. You get a gold star for that.
Ms. Wellers, I am not trying to put pressure on you, but
you are recognized as well.
TESTIMONY OF JEANETTE WELLERS, PRESIDENT & CFO, JBLANCO
ENTERPRISES, INC.
Ms. Wellers. Thank you for having me here. My name is
Jeanette Wellers, and I own a roofing, waterproofing, and
photovoltaic company located in Sheridan, Colorado. I
incorporated my company in 2004 with an SBA loan. I will make
this really short, because I only have 5 minutes and I can talk
about the subject for hours.
In 2006, we were located in Bloomfield, Colorado, which is
now Mr. Jared Polis' district. In 2006, 2 years after I started
my business, my company entered into a contract with a general
contractor who had contracted to the Federal Government. This
was our first Federal job ever. I heard through the grapevine
that this general contractor had some financial problems, but
after consulting with my staff, we decided that there was
minimal risks, and this was a Federal contract and bonding was
in place.
After the general contractor failed to pay our progress
payment and after we found out that we had no privity with the
Federal Government, we consulted an attorney, who after various
requests for production of documents found out that the general
contractor had obtained and the Federal Government had accepted
a fraudulent bond from an individual surety.
We expended thousands of dollars only to learn that the
individual surety did nothing to secure the bond principal
other than its ability to pay premiums. More detrimental to us
was the fact that the assets pledged to back the bond did not
exist. So there were no securities pledged and when we went
back to talk to the bonding company, they didn't have a claim
department. They had pledged all of the assets to different
projects, private and Federal.
The fact is that the individual surety could not pay any
money due to us, and we ended up getting a second mortgage from
our house in $240,000 worth of credit that we owed to credit
cards. At this time we owe our attorney a lot of money, and we
talked to an attorney, and he ended up telling us that it is
okay not to pay what we owed to them. I ended up going to the
bank and getting a loan to pay my credit cards, and that is how
we ended up getting back on track.
So I am here to support Bill 3534, and I am requesting that
you guys hold individual surety and government entities to the
same due diligence as contractors are held, and dispel all of
us the stresses this has caused to my employees, my family, and
my company.
That is it.
[The prepared statement of Ms. Wellers follows:]
Prepared Statement of Jeanette Wellers
__________
Mr. Coble. Thank you, Ms. Wellers. By the way, folks, for
your information, your entire statements will be made part of
the record. Thank you, Ms. Wellers. You too beat the
illuminated red light.
Mr. Little, the pressure is on you now. Good to have you,
Mr. Little.
TESTIMONY OF ROBERT E. LITTLE, JR., OF COUNSEL,
COHEN SEGLIAS PALLAS GREENHALL & FURMAN PC
Mr. Little. Thank you for the opportunity to testify today
on H.R. 3534, Security Bonding Act of 2011. These views are my
own and do not necessarily represent the views of Cohen Seglias
or the Naval Facilities Engineering Command, my former
employer, and my remarks will be brief.
The bill will provide much needed certainty to a very
contentious area of Federal construction contracts,
acceptability of bid, performance and payment bonds issued by
individual sureties. A little bit of background. To address
rampant fraud problems encountered with individual sureties in
the late 1980's, the regulations, that is the Federal
Acquisition Regulation, was modified in 1990 to require
individual sureties to pledge certain highly liquid assets. The
intent was to make the wealth or solvency of the surety largely
irrelevant.
The result was that for about 12 years individual sureties
all but disappeared. Their disappearance, by the way, had no
apparent ill effects on the small or small disadvantaged
business community. When they reappeared, they were convincing
to a few people because the people that saw individual sureties
initially had never seen them before. As it turns out, most
individual surety bonds were rejected.
As I began to look at them in 2004, I noticed that as they
were rejected they seemed to be modified to account for each
prior rejection. It was as if there were some central
clearinghouse that was learning based on the rejections, then
issuing the learned information to the individual surety
community. And the one thing that they all had and, in my
experience at least still have in common, was that all of the
assets were unacceptable. All of them.
One of my favorite assets was shares of penny stock based
on already mined gold abiding in the tailings of a placer mine
valued by a CPA at around a billion dollars that was in a
trust, held in another trust, that lived in an escrow account
at a Wells Fargo Bank.
When I called the escrow official at the bank to see what
was actually in the account, the surety threatened to sue me
for violation of an obscure banking privacy act that did not
remotely apply.
While that example may seem laughable, it is indicative and
very, very serious. H.R. 3534 would end that kind of bullying
behavior and those kinds of assets from being proffered.
It could be that individual sureties do have extensive
commodities at their disposal, valued in billions of dollars.
The fact that I have seen no evidence of it is hardly
determinative. But it does make me wary, and I only hope it
makes others wary as well.
One final point. If H.R. 3534 becomes law, there will be
absolutely no incentive for contracting officers to preclude
individual surety bonds. They will literally become the gold
standard. Why would any contracting officer prefer arguing with
a corporate surety when he or she can execute against what is
essentially a cash asset? Indeed, one might expect agencies to
find ways to get individual sureties preferential treatment.
Thank you.
[The prepared statement of Mr. Little follows:]
__________
Mr. Coble. I don't know that I can recall any hearing when
all of the first three witnesses, all three, beat the red
light. I am not trying to impose pressure on you, Ms. Barbour,
but good to have you with us.
KAREN PECORA-BARBOUR, PRESIDENT,
THE BARBOUR GROUP, LLC
Ms. Barbour. Thank you. Thank you, Chairman Coble, and
thanks for listening to me on my views of suretyship and the
benefits of individual sureties.
I, too, think H.R. 3534's intent is noble. I think
individual sureties will or should have to prove that their
assets are real and tangible, but I think that this bill has
unintentional flaws, I am sure, that would eviscerate
individual sureties.
According to General Zafros, who is past Director of
Contract Policy Division, Chief Acquisition Officer, General
Services Administration, this bill essentially is a jobs
creation killer. He says if this bill is passed, a change to
the FAR would need to be proposed, and it would effectively
kill individual sureties on FAR contracts. Right now, the
current language in the Code prohibits a contracting officer
from requiring the bond issued by a corporate surety. The
proposed change would give the contracting officers the
authority to require the use of a corporate surety. So it would
be easier for them just to simply look up on a T list and say
okay, fine, that is the corporate surety rather than to try to
vet the assets.
So what happens when a minority or small business owner
tries to get corporate surety credit and is declined because of
their stringent guidelines? They are not going to have anyplace
to go.
Individual surety bonds have helped many. There are over
7,000 success stories, and while I can't readily dispute what
Mr. Little is saying, I can say that the assets supporting
those bonds were just fine and accepted by legal counsel in
review. They weren't with NAVFAC, however.
The contractor right now can seek advise from U.S. Treasury
and even their own legal counsel, and as Mark McCallum has
pointed out in that letter from U.S. Treasury in his testimony,
they are required to do so. So they are not overburdened by any
stretch.
In fact, one veteran recently I provided an individual
surety bond for, he was a graduate--he is a graduate from the
Naval Academy and he came back home and he had financial
problems. His house was foreclosed on, and the Army gave him a
$1 million bond, and he was denied corporate surety credit. So
we provided an individual surety bond. He is doing fabulously
well. He is going to heal himself with this one job, and he is
doing so well they want to award him another $1 million job.
Where would he be without this product?
So there are many interpretations of the FAR. It varies
with contracting officer and/or agency, and it is very
difficult to predict predictability and assurance to
contractors that the individual surety bonds will be accepted,
so I agree with H.R. 3534. I think that sureties should be
preapproved, either by FAR counsel or by U.S. Treasury, and
those that pass the FAR requirement should be enrolled on a
list of acceptable individual sureties, and that these sureties
are able to provide their data and have their attorneys present
to address any legal issues with regard to FAR compliance.
There should also be an appeal process if the individual surety
believes that they were not treated fairly. And this will
alleviate concerns for general contractors and for agents like
me. I don't see that in this bill.
But if such a system is adopted, how long would that
process take and would time be of the essence? I would hope so.
We are hearing all of these things about individual sureties.
Well, let's talk about First Sealord Surety, a corporate surety
that went defunct 3 weeks ago. They were T listed. They were
A.M. Best A-minus one day, and literally the next day, they
were rated C-plus. The next day they declared bankruptcy. And
then the regulators found out they walked away with $8 million
of contractors' collateral. They were a small corporate surety
themselves, so to hedge their losses they took collateral from
contractors. Where is the collateral? Now the contractors are
in breach of their contracts. They have to go and secure a new
bond, pay for that premium, and they can't get paid on their
contracts because they don't have a valid bond. So that surety
alone has caused more damage than any individual sureties I
know.
So I think we should support legislation for Federal
contracting officers to disclose what type of security was
provided by the general contractor. Moreover, I have done
consulting for the Corps, and I can tell you that sub-guard was
taken in lieu of a bond on a mega project. This job could not
get a surety bond, a corporate surety bond, so Zurich puts out
this product called sub-guard. The Army accepted sub-guard
because it affords subcontractor failure on the job. Now, those
subcontractors, I am sure, don't realize that there is not a
surety bond in place. They don't have any Miller Act claims on
a bond, I don't believe, on that job, because the GCs don't
have a bond. I have also seen it where on the mega projects,
too, that are over a billion dollars where the contractors have
put up a corporate guarantee. That is not afforded small
business, but it has afforded big business.
So individual surety is a great tool to bring contractors,
and the Miller Act hasn't been updated since 1934. Well,
$100,000 it was back then. That was a huge sum of money. It is
$150,000 now. That is not a big jump. That probably wouldn't
even build a McDonald's. So here you are having $150,000 Miller
Act requirement that has its tentacles all through small
business and preventing them from getting bonding. And then you
want to--well, and also States, by the way, there is like 30
pieces of legislation out there where States want to up the
Miller Act requirements in their States to a million.
But I just wanted to end this and say in terms of the Tip
Top case, that there is a--his name is, excuse me, Professor
Nash, the Grand Poohbah of government contracts law, who
started the George Washington University Law School's program
on government contract law, in his article says: ``One of the
best aspects of government contracting is that sometimes it
gives us a good laugh.'' And this is regarding the Tip Top
case.
The humor is found in the FAR--am I done? There is no red
light.
Mr. Coble. Go ahead and finish.
Ms. Barbour. Okay. I didn't see any red light, I
apologize--oh, I am sorry.
The humor is found in the FAR, not the decision. Under the
FAR stocks traded on specific exchanges in real property are
good, acceptable assets, while under FAR 28-203 personal
property such as jewelry, furs, antiques are bad, unacceptable
assets. Since the mined coal was personal property, it arguably
fell within the FAR definition of bad assets. On the other
hand, General Motors' stock could have been pledged last year
and would have been counted as security at 90 percent of its
value. Similarly, the surety's house could have been pledged
and counted at 100 percent of its tax assessment value, which
are all upside down in this market. But the value of coal can't
be predicted, so it doesn't count.
So this gentleman says, well, I would take the coal. All
that Tip Top proves is that FAR was written before we got our
recent lesson in modern economics. And those good assets turned
out to be bad assets--I have just one sentence left--and that
coal still has quite a large amount of value without regards to
FAR, and maybe someone should try to pledge a retirement
account. So this is an esteemed professor who disagreed with
the Tip Top case.
[The prepared statement of Ms. Barbour follows:]
__________
Mr. Coble. Thank you, Ms. Barbour. Thanks to each of you
for your terse statements. I appreciate that.
Without objection, I want to introduce into the record the
letter from the National Association of Surety Bond Producers
and the Security & Fidelity Association of America. It features
10 corporations that endorsed the bill, and the Surety &
Fidelity Association of America, their statement as well.
Without objection, they will be made part of the record.
[The information referred to follows:]
__________
Mr. Coble. And we try to comply with the 5-minute rule
also. So we will try to do that. We have been joined by the
distinguished gentleman from Atlanta, the land of the palmetto,
Mr. Trey Gowdy. Trey, good to have you with us.
Mr. McCallum, can you describe in more detail how the
government suffers a pecuniary harm when a bid or performance
bond proves to be worthless?
Mr. McCallum. Yes, Mr. Chairman. Two different items here.
The bid bond is to secure that you have a good-faith bidder who
intends to enter into the final contract and supply the final
bonds. The bid bond acts to provide the difference between the
bid, the lowest bid that was accepted, and the next lowest
bidder. And it will pay that amount to the government to help
for its reprocurement costs.
The performance bond is guaranteeing the obligation of the
awarded prime contractor. If, for whatever reason, that party
defaults in their performance, the surety will step in, and
they have a variety of actions that they can take, but
essentially to guarantee up to the penal sum of the bond any
amounts that it needs to pay out to complete that contract
obligation.
Typically, there are delays, reprocurement costs, and other
costs that the contracting agency and, hence, taxpayers may
suffer in the absence of a valid performance guarantee. So that
bond is there to secure those debts.
Mr. Coble. Thank you, sir. Ms. Wellers, opponents of H.R.
3534 have suggested that the bill will harm minority
contractors' ability to secure surety bonds. Yet the National
Association of Minority Contractors supports the bill. Can you
cover that, what appears to be an inconsistency?
Ms. Wellers. Well, in my opinion, if a contractor doesn't
have a good balance sheet, or P&L, they shouldn't get a bond.
It is a detriment, I think, to the contractor itself. Because
if I go, you know, my business, for example, we know that we
can do from $1 million to $10 million projects, and I know I
couldn't do a $50 million project. So I wouldn't be looking for
a bond that size. Plus, you know, when I got into the struggle
with the surety bonds, with the individual surety bond that
didn't have any assets, we went back to the SBA, and they have
a bond program which I was able to get in. And then I spoke to
a regular surety, and 2 years later I was back on my feet.
So, you know, unfortunately, not everybody can be bonded
and, you know, if you don't, you know, running a business is
tough and you need to know a little bit about money and
finances.
Mr. Coble. I thank you, Ms. Wellers.
Mr. Little, as a former acquisition counselor for the
Federal Government, what were some of the assets that you saw
individual sureties trying to pledge to support their bonds,
and why did you find them unacceptable?
Mr. Little. The assets, many of them we couldn't find. The
way they were presented was not unlike the way I described in
my statement. That is, it would be an asset hiding in a trust,
lurking behind another document or another legal instrument,
and as you tried to unravel it and unravel it, you would
eventually either give up or you would just reject the bond and
say we can't figure out what this asset is. We can't figure out
not only what the asset is, we can't figure out how we would
ever liquidate it if we could ever figure out what it was and
if we could ever get our hands on it.
Mr. Coble. Yeah.
Mr. Little. That is the biggest problem. Now, we did see
some obvious things wrong, like one of my earlier ones was
Wachovia Bank stock. Now, when you get Wachovia stock, there is
nobody to call to ask what Wachovia stock is valid. What you
have to do is you have to start with Wachovia. If you ever did
that, you would find that it is very hard to find somebody in
Wachovia who knows anything about issuances of Wachovia stock
and what it might be worth, and whether the CUSIP numbers that
were on those stocks were valid. Couple that way the fact, that
very--when somebody comes and tells you that they have got an
escrow account full of Wachovia stock--I am preaching to the
choir, I am sure--but you probably have never seen a stock
certificate from Wachovia stock because they don't print them
anymore. So one of the problems is, and there is a fair number
of anachronisms involved in the process. But when you get
something like a stock certificate, you have no idea--you don't
have the stock certificate, by the way. The stock certificate
was placed in escrow, so you have to call the escrow office to
see whether or not that Wachovia's stock is in there, and so
forth.
Mr. Coble. Yeah.
Mr. Little. So it is difficult. We see instruments that you
have never heard of in your life before, and you see them on
all sorts of fancy paper. You see debentures. You see gold
certificates. You see all sorts of amazing documents that
ostensibly, if you were to suspend disbelief and pretend like
this was a play, you would be very entertained. But if you
actually start trying to pull on the threads of these things,
it very soon comes unraveled and there is literally no there,
there.
Mr. Coble. Thank you, Mr. Little.
Ms. Barbour, do you believe that individual sureties ought
to be able to leverage the same asset several times over to
secure multiple surety bonds, and what happens when that asset
needs to be liquidated to support more than one bond?
Ms. Barbour. Well, the FAR says that the asset cannot be
multiple pledged, that it can only be pledged for that
transaction. I don't know. First Sealord Surety when they
closed their doors, the Pennsylvania regulators closed it when
they had $5 million in assets and $200 million in outstanding
bond liability. I don't know why they didn't close them any
sooner. I don't know how they could exist with $5 million in
net worth or surplus to carry on, you know, to support $200
million in bonds.
I think that is a better question for the regulators, and
how they regulate corporate sureties, because individual
sureties back dollar for dollar for the bond, and it cannot be
multiple pledged.
Mr. Coble. I thank you, Ms. Barbour.
The distinguished gentleman from South Carolina is
recognized for 5 minutes.
Mr. Gowdy. Thank you, Mr. Chairman. I also want to thank
the gentleman from New York, Mr. Hanna, and the gentleman from
South Carolina, Mr. Mulvaney, for their work on this issue.
Mr. McCallum, I believe that Maryland has recently passed a
law that changed how individual sureties are accepted for State
construction projects. Are you familiar with that, and do you
have any initial----
Mr. McCallum. Yes, I am familiar with that.
Mr. Gowdy. What is your assessment on how well it is
working and why?
Mr. McCallum. That law, the Maryland law was passed in
2006, under the intent to benefit or provide an additional
market for small businesses wanting to perform public works
contracts in the State of Maryland. There is a requirement that
the contracting agencies of the State report every 2 years to
the General Assembly on the use of that law in getting
individual surety bonds on public works projects.
The next report is due out this month. I don't know what it
says, but the first two reports basically have indicated that
no small business has benefited from the 2006 law, and you can
presume certain things. It is not exactly analogous to the
Federal requirements. So the State of Maryland decided that
they wanted more information about a potential individual
surety, and they created an additional affidavit that the
surety would actually have to sign a sworn statement where they
would have to provide information about criminal convictions
and other matters. And that is a requirement that currently we
do not have at the Federal level.
Mr. Gowdy. Thank you.
Ms. Wellers, during the course of your litigation with the
individual surety on the Federal project you described in your
testimony, what other facts did you learn about the owner of
the Federal surety company and his assets, if any?
Ms. Wellers. Oh, I can tell you a lot about him. He--
everything they had pledged, he had a balance sheet, I think he
was worth $127 million, but you know, really, he had a house in
Texas and his own house. I don't think it was worth more than
half a million dollars. He had millions of contracts out there
where he pledged the same, you know, the same real estate. We
ended up, we were doing a job in Florida, and this company was
from Alabama, so we ended up just driving by his house, and his
office was just, you know, like a double wide, and stuff--not
to say that that is bad, but it was not a real company. He
would not return our calls. He didn't have--it was him and his
wife, so he didn't have a place where you can make a claim. He
was just somebody that claimed to have a surety company, and
the GSA accepted it.
Mr. Gowdy. Yes, ma'am.
Mr. Little, some individuals complain, I suppose, that this
bill would effectively remove them from the surety market. What
do you say to those critics?
Mr. Little. I would say that every representation that I
have ever seen by an individual surety indicates that they have
assets in the hundreds and hundreds of millions, even billions
of dollars. I can't imagine anything happening to those firms
that have hundreds and hundreds of millions and billions of
dollars.
Mr. Gowdy. Thank you, Mr. Chairman. Again, I thank the
gentleman from New York, and the gentleman, Mr. Mulvaney, from
South Carolina for their work on this issue, and I yield back.
Mr. Coble. I thank the gentleman from South Carolina, and I
want to reiterate what you said regarding--Mr. Hanna, I
appreciate your leadership on this bill.
Folks, again, I want to thank you all for your testimony,
for your attendance today. I apologize for any delay that may
result unfavorably. Blame me for it, don't hold me harmless, in
other words.
Without objection, all Members will have 5 legislative days
to submit to the Chair additional written questions for the
witnesses, which we will forward and ask the witnesses to
respond as promptly as they can, so that their answers may be
made a part of record.
With that, again, I want to thank you all for being here,
and this hearing stands adjourned.
[Whereupon, at 4:50 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record