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Editorial: Why Bond Assets Need Scrutiny

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Do federal contracting officers have the time and wherewithal to check the validity and worth of assets pledged by an individual surety to back a contractor? The National Association of Surety Bond Producers doesn't think so, and it has in the last year succeeded in winning passage in the U.S. House of Representatives of a bill that tightens up requirements so that individual sureties must back their guarantees with

a Treasury bill or some other easily liquidated asset. Winning passage in the Senate will require more hard work and could make it harder for small and minority-owned firms who may never otherwise qualify for surety guarantees to work on federal projects. So now is a good time to assess what H.R. 3534 means, why its passage in the Senate is important and who wins and loses.

You don't have to look far to realize that while corporate sureties are hardly all models of financial probity and from time to time default, individual sureties are by their nature more flexible and entrepreneurial. They also are prone to smoke-and-mirror financial practices and some of them aren't shy about it.

Coal Waste as a Surety Asset

Take the 2009 lawsuit known as Tip Top Construction Inc. vs. U.S., which involved a Federal Housing Authority project to construct a traffic circle in the U.S. Virgin Islands. In that instance the contractor fought the rejection by the federal contracting officer of a bid bond that was backed with coal mining waste. The individual surety involved has been outspoken in fighting NASBP, describing it as an instrument of big corporate sureties that would like nothing better than to put individual sureties out of business.

Individual sureties have played a role in the construction economy by providing surety credit, but it isn't clear to us whether the number of contractors helped is major or microscopic. And individual sureties can't wrap themselves in the flag of small business champions because they have hurt those same small contractors when their guarantees turned out to be of dubious value.

Such fast-and-loose financial games are part of the reason why the NASBP shepherded H.R. 3534 through the House and into the Senate. Before final passage, it would be nice to see how much federal contracting is backed by individual surety and what the patterns of default and recovery reveal.So far NASBP's chief executive, Mark McCallum, says he has turned over a folder full of instances of individual surety mayhem to the relevant Congressional committees, but his case would be even stronger if he had more definitive numbers on individual surety use.

In the meantime, we agree with McCallum and NASBP that assets such as real estate and coal aren't appropriate and that federal contracting officers are in no position to verify the authenticity of pledged assets.

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