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Construction Costs and State Budgets Dominate 2008 Legislative Agenda
Increasing construction costs and declining revenues drove the agenda for contractors and their sureties in the state legislatures this year. While many state budgets were in good shape at the end of 2007, by mid-summer 2008, most states reported tax collections in all categories were falling short of projected revenues and new budget deficits were on the horizon for fiscal year 2009.
Faced with declining revenues and increasing construction costs, state and local contracting entities looked to cut expenses this year. Some state legislatures sought to increase their bond threshold to $100,000 to conform to the federal Miller Act as a method of cutting costs in state and local budgets. However, none of these proposals recognized that the federal Miller Act continues to require payment protection such as a payment bond for contracts of $25,000 and above.
The rationale for this legislation was that few claims exist on bonds under $100,000, and the bond unnecessarily increases construction costs for local taxpayers. This argument ignores the entire purpose of the underwriting process, which helps prevent defaults and the many payment bond claims paid without notice to the public owner.
In Maine, the primary proponent of a threshold increase was a quasi-public municipal corporation, which used some contractors in its construction projects that could not obtain bonding. Maine H.B. 1478 increased the state bond threshold from $100,000 to $125,000, which is far lower than the $250,000 sought in the original legislation. The legislature rejected the original bill because it would have given Maine one of the highest bond thresholds in the nation. Without the protection of a performance bond, public entities would bear the increased completion costs upon default, which few budgets can afford at this time.
California’s A.B. 3024 increased its payment bond threshold this year from $5,000 to $25,000. The original bill would have increased the payment bond threshold to $100,000 to conform to the current California requirement for performance bonds. The California legislature was persuaded to amend its law to mirror the federal Miller Act, under which the threshold for a performance bond is $100,000, but payment security is required at $25,000. Under federal regulations, a surety bond is the preferred form of security in contracts between $25,000 and $100,000. The bill was amended to set the payment bond threshold at $25,000 rather than $100,000, and the bill was enacted.
Similar efforts to increase bond thresholds to $100,000 were defeated in Kentucky and Illinois, but such legislation likely will be back in these states in 2009.
Only in New Hampshire and Rhode Island were problems with bonding for small and emerging contractors cited as the basis for increasing the state bond threshold. Small and emerging contractors usually cannot participate in public construction projects because they cannot get bonded. By raising the state bond threshold, these contractors could perform larger jobs for the state without bonding and grow their businesses.
The problems, however, were identified in only one city in New Hampshire. The bonding problems were not widespread or statewide. S.B. 481, which would have raised the threshold from $25,000 to $100,000, was defeated. The legislature concluded that raising the bond thresholds statewide doesn’t guarantee small and emerging contractors would get any or all of the state projects under the higher threshold.
Rhode Island’s S.B. 2243 would have increased the state bond threshold from $50,000 to $200,000, and H.B. 8368 would have increased the threshold at which bid bonds are required for state construction contracts from $50,000 to $150,000. Contracts between $50,000 and $150,000 would have required final bonds, but no bid bonds.
Both bills were put aside for review by The Surety & Fidelity Association of America’s (SFAA) Model Contractor Development Program (MCDP). SFAA and the American Insurance Association have met since with the bill sponsor and legislative leadership, who are interested in implementing the SFAA MCDP in Rhode Island by the end of this year.
With fiscal conditions on the downturn, state spending on construction and other budget items likely will remain level at best in 2009. The pressure to cut construction expenses will remain, and higher state bond thresholds will be introduced.
More small contractors may leave the problematic residential construction market and seek work in the public sector, where they will have to be bonded.
Contractors and their sureties must remind their legislators about the harmful effects of threshold legislation. Laborers, subcontractors and suppliers on public projects must rely on the general contractor’s payment bond for protection because they cannot assert liens against public property. If no bond is required, these parties are left with no way to collect for their services and supplies if the contractor is unable or unwilling to pay them. Small and emerging contractors are more likely to start as subcontractors, so when state bond thresholds are raised, the most vulnerable companies are deprived of payment protection.
Increasing the bond threshold may mean all contractors can bid on bigger projects without providing performance and payment bond protection, and these projects may include financially unstable contractors from other states that cannot get bonded. Threshold legislation can really hurt the contractors and taxpayers it intends to help.
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Wednesday, February 8, 2012