[House Report 113-462]
[From the U.S. Government Publishing Office]


113th Congress                                            Rept. 113-462
                        HOUSE OF REPRESENTATIVES
 2d Session                                                      Part 2

======================================================================



 
                    SECURITY IN BONDING ACT OF 2014

                                _______
                                

  May 21, 2014.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Graves of Missouri, from the Committee on Small Business, submitted 
                             the following

                              R E P O R T

                        [To accompany H.R. 776]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Small Business, to whom was referred the 
bill (H.R. 776) 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, report 
favorably thereon with amendments and recommend that the bill 
as amended do pass.

                                CONTENTS

                                                                   Page
   I. Amendment.......................................................1
  II. Purpose of the Bill and Summary.................................2
 III. Background and the Need for Legislation.........................3
  IV. Hearings........................................................4
   V. Committee Consideration.........................................4
  VI. Committee Votes.................................................4
 VII. Section-by-Section Analysis of H.R. 776.........................5
VIII. Congressional Budget Cost Estimate..............................5
  IX. Unfunded Mandates...............................................6
   X. New Budget Authority, Entitlement Authority, and Tax Expenditure6
  XI. Oversight Findings..............................................6
 XII. Statement of Constitutional Authority...........................6
XIII. Congressional Accountability Act................................6
 XIV. Federal Advisory Committee Statement............................6
  XV. Statement of No Earmarks........................................7
 XVI. Statement of Duplication of Federal Programs....................7
XVII. Disclosure of Directed Rule Makings.............................7
XVIII.Performance Goals and Objectives................................7

 XIX. Changes in Existing Law Made by the Bill, as Reported...........7

                              I. 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 2014''.

SEC. 2. SBA SURETY BOND GUARANTEE.

  Section 411(c)(1) of the Small Business Investment Act of 1958 (15 
U.S.C. 694b(c)(1)) is amended by striking ``70'' and inserting ``90''.

    Amend the title so as to read:
    A bill to amend the Small Business Investment Act of 1958 
to increase the amount of a surety bond guarantee.

                      II. Purpose and Bill Summary

    The purpose of H.R. 776, the ``Security in Bonding Act of 
2013,'' is to improve the ability of small business concerns to 
access surety bonds guaranteed by the Small Business 
Administration (SBA) pursuant to the Small Business Investment 
Act of 1958 (the SBIA).\1\ In private construction contracts, 
the owner of a project collects detailed financial information 
from potential contractors and only issues invitations to bid 
to those that the owner considers responsible. Likewise, if the 
successful contractor fails to pay its subcontractors or 
suppliers, in the private sector those companies can file a 
lien against the project. However, in the federal procurement 
system, all companies are allowed to bid, and subcontractors 
and suppliers cannot file liens against federal buildings. 
Therefore, Congress enacted the Miller Act,\2\ which requires 
that any contractor seeking to perform on a contract for the 
construction, alteration, or repair of federal buildings or 
public works provide the government with a performance bond, to 
secure the performance of the work under contract, and a 
payment bond, to ensure that the subcontractors and suppliers 
will be paid.\3\ Additionally, the government may require all 
offerors to provide a bid bond, which guarantees that if a 
contractor is selected as the successful offeror, that 
contractor will be able to perform.\4\
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    \1\Pub. L. No. 85-699; 72 Stat. 689 (1958). The Act is codified at 
15U.S.C. Sec. Sec. 661-697g.
    \2\Officially, the Miller Act is entitled ``An Act Requiring 
Contracts for the Construction, Alteration, and Repair of Any Public 
Building or Public Work of the United States to be Accompanied by a 
Performance Bond Protecting the United States and an Additional Bond 
for the Protection of Persons Furnishing Material or Labor for the 
Construction, Alteration, or Repair of Said Public Buildings or Public 
Work,'' Pub. L. No. 74-321, 49 Stat. 793 (1935), codified at 40 U.S.C. 
Sec. Sec. 3131-3134.
    \3\40 U.S.C. Sec. 3131(b).
    \4\Id. at Sec. 3131(e),
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    While the Miller Act protects the interests of the 
taxpayer, it can also create a barrier to entry for small 
businesses. Therefore, in 1971 Congress amended the SBIA to 
allow SBA to guarantee a surety provider against loss for a 
portion of the bonds it approves.\5\ Pursuant to the SBIA, SBA 
can use one of two programs to guarantee bonds for contracts up 
to $6.5 million: the Prior Approval Program (PAP) or the 
Preferred Surety Bond Program (PSBP). Under the PAP, sureties 
that obtain approval for specific bonds may receive up to a 90 
percent guarantee, whereas the PSBP only pays a 70 percent bond 
guarantee, but sureties are not required to seek SBA approval 
prior to issuing individual bonds and are audited every three 
years.\6\ Despite the different guarantee amounts and the 
differing levels of review, both the PAP and PSBP have similar 
levels of default. However, over the years, the PSBP program 
has become less effective for small businesses since only four 
sureties currently participate in the program because the 
guarantee rates are no longer competitive enough to encourage 
commercial sureties to participate.\7\ Therefore, since the 
PSBP is the more efficient program and, as discussed later, 
does not expose taxpayers to any risk, this legislation amends 
the SBIA to standardize the guarantee rate at 90 percent.
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    \5\Small Business Investment Act, Sec. Sec. 410-412, 15 U.S.C. 
Sec. Sec. 694a-694c.
    \6\SBIA, Sec. 411(c), 15 U.S.C. Sec. 694b(c).
    \7\E-mail from Frank Lalumiere, Director, SBA Surety Bond Program 
to Committee staff (May 13, 2013) [hereinafter, Lalumiere 2013 E-mail] 
(on file with the Committee).
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                       III. Need for Legislation

    During the 112th and 113th Congresses, the Committee has 
sought to reform the SBA surety bond programs in order to 
increase opportunities for small businesses to compete for 
federal construction projects. While construction and architect 
and engineering (A&E) contracting accounts for about eight 
percent of federal prime contract dollars, this segment 
accounts for over 17 percent of the awards to small 
businesses.\8\ Therefore, issues affecting construction and A&E 
contracts have a disproportionate effect on small business 
opportunities. Therefore, in the National Defense Authorization 
Act for Fiscal Year 2013 (FY13 NDAA), the Committee worked to 
pass reforms increasing the size of surety bonds guaranteed by 
SBA.\9\ Additionally, the FY13 NDAA allowed SBA to allow 
partial payments on bonds in cases where sureties failed to 
adhere to SBA's regulations, such as notification requirements, 
since the failure did not prejudice the government.\10\ 
However, SBA and industry both informed the Committee that the 
disparate guarantee rates between the PBSP and PAP was 
incenting behavior that ultimately made the programs less 
efficient.
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    \8\Analysis based upon the Federal Procurement Data System (FPDS), 
available at https://www.fpds.gov (last accessed March 6, 2012). Copies 
of reports are on file with the Committee.
    \9\Pub. L. No. 112-239 Sec. 1695, 126 Stat. 1632, 2089 (2012).
    \10\Id.
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    Specifically, as of early 2014, there were 22 surety 
companies participating in the two SBA surety bond programs--18 
in the PAP, and only four sureties participating in the 
PBSP.\11\ Given that four and a half times more companies 
participate in the PAP, it is unsurprising that, as of May 
2013, 86 percent of the 7,494, active bonds were guaranteed 
through the PAP.\12\ This shows a marked decline in the use of 
the PBSP program, as in 1994, 50 percent of bonds were 
guaranteed through the PBSP, and at that time there were 12 
sureties participating in the PBSP.\13\
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    \11\E-mail from Frank Lalumiere, Director, SBA Surety Bond Program 
to Committee staff (May 21, 2014) [hereinafter Lalumiere 2014 E-mail]. 
(on file with the Committee).
    \12\Building America: Hearing Before the Subcomm. on Contracting 
and Workforce of the House Comm. on the Small Business, H. Rpt. 113-019 
at 19 (2013) [hereinafter, Building America]. These bonds had a value 
of approximately $2.9 billion.
    \13\Lalumiere 2014 E-mail.
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    This decline in the use of the PBSP harms small businesses, 
sureties, and SBA. The PAP is a more time consuming and costly 
process than the PSBP, as it requires that SBA review each bond 
individually before issuing a guarantee.\14\ If the PAP 
produced better results than the PSBP, the additional time and 
expense of reviewing each bond might better protect the 
taxpayers than simply having SBA review the processes, 
procedures, and portfolios of the PSBP participants every three 
years.\15\ However, the default rate for both programs remains 
at about three percent, far less than the commercial rate of 
default.\16\ As the program is funded entirely through fees 
collected from participating sureties and small businesses, the 
higher guarantee does not expose the government or taxpayers to 
any risk.\17\
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    \14\SBIA, Sec. 411(c),15 U.S.C. Sec. 694b(c).
    \15\Id. at Sec. 411(a), 15 U.S.C. Sec. 694b(a).
    \16\Building America at 20.
    \17\Lalumiere 2013 E-mail. To fund both programs, SBA charges the 
small business receiving the bond 0.729 percent of the contract price 
for the bond guarantee, and the surety company 26 percent of the fee 
the surety charges the small business. As of May 2013, there are 
approximately 7,494 active bonds with an actual bond liability of $2.9 
billion. Each program is operating at a zero subsidy from taxpayers.
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    Furthermore, the bureaucracy involved with PAP program 
discourages some sureties from participating in either of the 
SBA programs.\18\ This in turn means that fewer bonds are 
available to capable small construction companies. 
Consequently, these companies are excluded from participating 
in federal competitions as prime contractors. As a result, 
there is less competition for public works projects. Basic 
economic principles of supply and demand dictate that when 
fewer companies are permitted to compete, taxpayers will pay 
higher prices for public works projects. Raising the guarantee 
rate for the PBSP should attract more sureties to the program, 
reduce the cost to SBA of running both programs, and allow more 
small businesses to compete for contracts, thereby driving down 
taxpayer costs.
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    \18\Building America. at 5.
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                              IV. Hearings

    In the 113th Congress, the Subcommittee on Contracting and 
Workforce held a hearing on May 23, 2013, that examined the 
current surety bond program and other challenges for small 
business contractors. During that hearing, which was titled 
``Building America: Challenges for Small Construction 
Contractors,'' witnesses from the SBA, Army Corps of Engineers, 
Associated General Contractors, National Association of Surety 
Bond Producers, and the American Institute of Architects 
offered support for H.R. 776.
    Furthermore, during the 112th Congress, the Subcommittee on 
Contracting and Workforce addressed surety bond issues during a 
February 9, 2012 hearing entitled ``Construction Contracting: 
Barriers to Small Business Participation.'' Witnesses at that 
hearing also supported reform of the surety bond program.

                       V. Committee Consideration

    The Committee on Small Business met in open session, with a 
quorum being present, on March 5, 2014 and ordered H.R. 776 
reported to the House by a voice vote at 4:07 p.m. During the 
markup, one amendment was offered and adopted.
    Amendment Number One filed by Ms. Graves (R-MO) was an 
amendment in the nature of a substitute and was adopted as base 
text by unanimous consent.

                          VI. Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the recorded 
votes on the motion to report the legislation and amendments 
thereto. There were no recorded votes on H.R. 776.

              VII. Section-by-Section Analysis of H.R. 776


Section 1. Short title

    This Section designates the bill as the ``Security in 
Bonding Act of 2013.''

Section 2. SBA Surety Bond Guarantee

    Section 411(c)(1) of the SBIA currently permits SBA to 
guarantee 70 percent of the value of surety bonds issued by 
PBSP providers. This section amends section 411(c)(1) by 
increasing the guarantee to 90 percent. This change should 
incent more companies to participate in the PBSP, thereby 
improving the efficiency of the SBA's surety bond program and 
allowing more small construction firms to compete for federal 
prime contracts.

                VIII. Congressional Budget Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, April 15, 2014.
Hon. Sam Graves,
Chairman, Committee on Small Business,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 776, the Security 
in Bonding Act of 2014.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                          Peter A. Fontaine
                              (For Douglas W. Elmendorf, Director).
    Enclosure.

H.R. 776--Security in Bonding Act of 2014

    H.R. 776 would increase the portion of a bid, performance, 
or contract bond that could be guaranteed by the Small Business 
Administration (SBA) under the Surety Bond Guarantee program. 
Under current law, SBA guarantees 70 percent of the value of 
bonds written by surety companies that participate in the SBA's 
Preferred Surety Bond Guarantee (PSBG) program. H.R. 776 would 
raise the guaranteed portion to 90 percent of the bond value. 
Under the PSBG program, participating surety companies are 
authorized to issue, monitor, and service bonds without prior 
approval from the SBA.
    Expenses for this program are recorded in the budget on a 
cash basis and SBA collects fees sufficient to offset those 
costs. In fiscal year 2012, SBA recorded $10.5 million in fees 
and recoveries of defaulted amounts. Based on information from 
SBA, CBO estimates that implementing H.R. 776 would not have a 
significant effect on discretionary spending because we expect 
the agency would raise fees to cover any additional costs 
arising from the higher guarantee percentage. Enacting the bill 
would not affect direct spending or revenues; therefore, pay-
as-you-go procedures do not apply.
    H.R. 776 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would impose no costs on state, local, or tribal governments.
    The CBO staff contact for this estimate is Susan Willie. 
The estimate was approved by Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                         IX. Unfunded Mandates

    H.R. 776 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act, Pub. 
L. No. 104-4, and would impose no costs on state, local or 
tribal governments.

  X. New Budget Authority, Entitlement Authority and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House, the Committee provides the following opinion and 
estimate with respect to new budget authority, entitlement 
authority and tax expenditures. The Committee adopts as its own 
the cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to Sec. 402 of the Congressional Budget 
Act of 1974, which found that H.R. 776 does not affect direct 
spending or revenues.

                         XI. Oversight Findings

    In accordance with clause 2(b)(1) of rule X of the Rules of 
the House, the oversight findings and recommendations of the 
Committee on Small Business with respect to the subject matter 
contained in H.R. 776 are incorporated into the descriptive 
portions of this report.

               XII. Statement of Constitutional Authority

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
authority for this legislation in Art. I, Sec. 8, cl. 3 of the 
Constitution of the United States.

                 XIII. Congressional Accountability Act

    H.R. 776 does not relate to the terms and conditions of 
employment or access to public services or accommodations 
within the meaning of Sec. 102(b)(3) of Pub. L. No. 104-1.

             XIV. Federal Advisory Committee Act Statement

    H.R. 776 does not establish or authorize the establishment 
of any new advisory committees as that term is defined in the 
Federal Advisory Committee Act, 5 U.S.C. App. 2.

                      XV. Statement of No Earmarks

    Pursuant to clause 9 of rule XXI, H.R. 776 does not contain 
any Congressional earmarks, limited tax benefits or limited 
tariff benefits as defined in subsections (d), (e) or (f) of 
clause 9 of rule XXI of the Rules of the House.

           XVI. Statement of Duplication of Federal Programs

    Pursuant to clause 3(c) of rule XIII of the Rules of the 
House, no provision of H.R. 776 establishes or reauthorizes a 
program of the federal government known to be duplicative of 
another Federal program, a program that was included in any 
report from the GAO pursuant to Section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

               XVII. Disclosure of Directed Rule Makings

    Pursuant to clause 3(c) of rule XIII of the Rules of the 
House, H.R. 776 does not direct any rulemaking.

                XVIII. Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House, the Committee establishes the following performance-
related goals and objectives for this legislation:
    H.R. 776 increases the guarantee rate for the PBSP, which 
will increase the number of participants in the PBSP, the 
number bonds SBA guarantees, and the percentage of public work 
projects awarded to small businesses.

       XIX. 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 (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

SMALL BUSINESS INVESTMENT ACT OF 1958

           *       *       *       *       *       *       *



TITLE IV--GUARANTEES

           *       *       *       *       *       *       *



Part B--Surety Bond Guarantees

           *       *       *       *       *       *       *



                    authority of the administration

  Sec. 411. (a) * * *

           *       *       *       *       *       *       *

  (c) Any guarantee or agreement to indemnify under this 
section shall obligate the Administration to pay to the surety 
a sum--
          (1) not to exceed [70] 90 per centum of the loss 
        incurred and paid by a surety authorized to issue bonds 
        subject to the Administration's guarantee under 
        subsection (a)(3);

           *       *       *       *       *       *       *


                                  
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