H.R. 3534: Security in Bonding Act of 2011

H.R. 3534

Security in Bonding Act of 2011

Sponsor
Sen. Bernard Sanders

Date
May 14, 2012 (112th Congress, 2nd Session)

Staff Contact
Sarah Makin

Floor Situation

On Tuesday, May 15, 2012, the House is scheduled to consider H.R. 3534, the Security in Bonding Act of 2011, under a suspension of the rules requiring a two-thirds majority for approval.  The bill was originally introduced on December 1, 2011, by Rep. Richard Hanna (R-NY) and was referred to the Committee on the Judiciary.

Bill Summary

H.R. 3534 would revise requirements related to assets pledged by a surety. 

The bill would declare that if another applicable law or regulation permits the acceptance of a bond from a surety that is not subject to specified federal law, and is based on a pledge of assets by the surety, the assets pledged by such surety must:

(1)   Consist of eligible obligations given as security instead of surety bonds; and

(2)   Be submitted to the government official required to approve or accept the bond, who shall deposit the assets with a depository.

H.R. 3534 would require the Comptroller General of the United States to 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.

(3)   The percentages of all Federal contracts that were awarded to small disadvantaged businesses and disadvantaged business enterprises as prime contractors in the two-year period prior to and the two-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.

Background

According to the sponsor’s office, H.R. 3534 aims to strengthen the surety bonding process and ease the worry of subcontractors and suppliers about whether they will be paid for their services on federal projects.  The lack of oversight on individual sureties has resulted in a number of documented cases where assets pledged to back the bond have been illusory or insufficient, leaving small businesses and taxpayers without sufficient payment remedies.

At present, construction firms may furnish a security on a federal construction project in one of three ways:

  1. By securing a bond written by a corporate surety that must be vetted and approved by the U.S. Department of Treasury.
  2. By posting an “eligible obligation,” i.e. a U.S.-backed security such as a T-note, in lieu of a surety bond. The security is pledged by the construction firm directly and deposited with the federal government until the contract is complete.
  3. By securing a bond from an unlicensed individual, if the bond is secured by an “acceptable asset,” which includes stocks, bonds, and real property, but may also include assets which are difficult to value. Individual sureties are not deposited with the federal government.

Individual sureties, as allowed in Item #3, neither are subject to the same vetting and scrutiny as corporate sureties or eligible obligations, nor are they required to relinquish the custody and control of the assets that they pledge to secure their bonds. 

The “Security in Bonding Act” will remedy this problem by requiring individual sureties to pledge solely those assets described as “eligible obligations” and to deposit such in the custody and control of the federal government. 

H.R. 3534 would ensure that if an individual surety bond is furnished for a federal construction contract, the small businesses and subcontractors which provide goods and services on that contract will not need to worry about the integrity of their payment remedy.  This bill would provide the security that small businesses, subcontractors and citizens seek from the federal government.

Cost

According to the Congressional Budget Office (CBO), 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.