[Congressional Record Volume 152, Number 106 (Thursday, August 3, 2006)]
[Senate]
[Page S8805]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. SNOWE:
  S. 3785. A bill to amend the Small Business Investment Act of 1958 to 
improve surety bond guarantees, and for other purposes; to the 
Committee on Small Business and Entrepreneurship.
  Ms. SNOWE. Mr. President, I rise today to introduce the Surety Bond 
Improvement Act, a bill designed to reinvigorate the Small Business 
Administration's Surety Bond Guarantee Program. This bill's primary 
purpose is to ensure that small businesses are able to secure the 
surety bonds they need to compete for contracts, grow, and hire more 
employees.
  Surety bonds are critical to small companies' survival and 
competitiveness. Without bonding, small firms cannot secure the 
contracts they need to grow. Unfortunately, many new, small businesses 
lack the stable credit histories and assets they need to secure surety 
bonding. Many sureties also refuse to bond small companies because of 
the greater risk that comes with insuring unproven firms. For many 
small businesses, difficulties obtaining surety bonds act as a barrier 
to entry and prevent them from competing in defense contracting, 
construction, services, and other markets.
  Insuring against loss, surety bonds are most often used on large 
contracts where the sequential work of many subcontractors is necessary 
to finish a project on time. The principal contractor will require that 
each subcontractor obtain a surety bond. A subcontractor's surety bond 
will guarantee that they will meet their contract's time and quality 
requirements whether it be for framing a building or installing 
specific computer equipment. The majority of small and large businesses 
fulfill their contractual obligations, and claims against surety bonds 
are infrequent. If a claim occurs, the surety firm is responsible for 
any monetary damages that occur because the bonded company did not 
fulfill its contractual obligations.
  Many new small contractors are only able to obtain surety bonds 
through the SBA's Surety Bond Guarantee Program. In order to reduce the 
risk to- surety firms, the SBA promises to cover between 70 and 90 
percent of any possible claims on bonds underwritten through the Surety 
Bond Guarantee Program. The Surety Bond Guarantee Program then helps 
small businesses establish a bonding history so that with time they can 
outgrow the program and obtain bonds in the competitive marketplace.
  It is critical to understand that the number of participating 
sureties in the Surety Bond Guarantee Program directly affects the 
number of small companies that can receive surety bonds. Over the last 
several years, a number of SBA actions have greatly reduced the 
profitability of surety companies participating in this SBA program. 
Declining profitability has forced sureties to leave the program, 
causing a severe downturn in the total number of small businesses 
obtaining surety bonds.
  In 2003, the Surety Bond Guarantee Program issued 8,974 bonds to 
small businesses. In 2004, the number declined to 7,803 bonds, and in 
2005, the number declined again to 5,678 bonds. This year, even though 
the need for surety bonds has not decreased, as of March 2006, only 
1,760 surety bonds have been issued. The sureties argue that SBA's 
outdated fee structure and other actions, such as unwinding bond 
guarantees and recent fee increases, make it impossible for them to 
earn a profit and continue participating in the program.
  One of the greatest obstacles to profitability is the Preferred 
Surety Bond Program's outdated fee structure. Currently, sureties in 
the preferred program are forced to use insurance rates set on August 
1, 1987, almost 20 years ago. Many sureties have left the program 
because the SBA's outdated rates prevent them from making a profit on 
the small business bonds they issue.
  To address this problem, my bill would grant participating sureties 
greater rate setting flexibility by allowing them to charge rates that 
are approved by the insurance commissioner of the State in which the 
contract will be performed. It will also raise the current limit on the 
maximum amount of a contract that a company can bond through the 
program from $2 million to $3 million, an adjustment that inflation 
makes necessary.
  My bill prohibits the SBA from unwinding a surety bond guarantee 
after the agency has already underwritten and approved the bond. 
Currently, the SBA will often find technical reasons, which should have 
been discovered during the underwriting process, to avoid paying on a 
claim against an SBA guaranteed bond. When this occurs, the surety 
companies must honor the SBA's financial obligations and cover any 
losses caused by the breach of contract. Most sureties can only afford 
to have the SBA unwind a bond once or twice before they are forced to 
leave the Surety Bond Program.
  My bill also addresses recent SBA fee increases. In August of 2005, 
the SBA moved to increase surety bonding companies' premium fees by 60 
percent and then directed that none of the fee increase could be passed 
along to small companies seeking surety bonds. I was concerned that 
this fee increase would provide an additional reason for surety 
companies to stop underwriting small companies and further decrease the 
ability of small firms to receive surety bonds.
  The SBA's fee increase made it necessary for me to evaluate the 
underlying terms of the surety program. After working with the SBA, 
eventually the agency agreed to allow the surety companies to split the 
fee increase with small firms, a much more palatable solution than 
forcing the bonding companies--or the small businesses--to absorb all 
of the increase.
  The bill requires the SBA to be transparent in its fee structure and 
any calculations the agency uses to justify future fee increases. The 
bill also clarifies that Congress does not require the Surety Bond 
Guarantee Program to be entirely self funding or self sufficient.
  I am working with the SBA to reverse the decline in participating 
sureties and increase the number of small businesses receiving surety 
bonding. To achieve this goal, the Surety Bond Guarantee Program is 
working to reduce approval times by increasing companies' ability to 
submit underwriting applications and claim requests online. The program 
also plans to restructure its field offices and conduct outreach to new 
sureties and small businesses needing surety bonding. These changes, 
along with the necessary legislative changes I have proposed today, 
will help the program attract new sureties and increase the overall 
number of small companies able to secure sureties underwriting through 
the program.
  Mr. President, I would like to encourage my colleagues to support the 
Surety Bond Improvement Act. This bill was written after consulting 
with small business owners and surety bonding companies on how best to 
revitalize this critical program. Without these changes, the number of 
sureties participating in the program will continue to decline--as will 
the ability of small businesses to secure surety bonds. Without these 
bonds many small businesses will be unable to compete for contracts and 
government work. For new companies, obtaining a surety bond will become 
a barrier to entry and competition they are unable to overcome.
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