Surety and construction stakeholders have worked hand in hand this year in Congress and at the state level on legislation impacting industry members on several fronts.
Some States Increase Infrastructure Spending
All states were in session in 2015, and for most states this was the first of a two-year session, which means there was a heavy volume of legislation. Most states worked on their fiscal year 2016 budget, which began July 1, 2016. Many states struggled to find more money for infrastructure.
A handful of states (including Georgia, Idaho, Iowa, Nebraska, South Dakota, Utah and Washington) increased their state gas tax rates in 2015 to provide infrastructure funding. Kentucky and North Carolina repealed gas tax cuts that were about to take effect. Maryland, Rhode Island and Vermont had incremental increases in the tax rates this year from legislation in past sessions. In addition, Connecticut, Delaware, Georgia, South Dakota and Washington enacted major infrastructure bills, with the largest $16.1 billion transportation revenue bill passing in Washington.
Public-Private Partnerships (P3S) Are The Key Procurement Issue
Nearly 30 states considered P3 legislation this year. Only Georgia enacted new P3 authority for state and local public works projects. A pending bill in New Jersey would permit the state, as well as local governments, school districts and state colleges, to enter into P3 agreements for public building, structure, road, facility and infrastructure projects. Arkansas revised an existing law that authorizes the Department of Transportation (DOT) to adopt regulations for design-build contracts to permit the DOT to establish regulations to enter into design-build-finance contracts and concession agreements with private partners. California enacted a law authorizing a P3 for a civic center in Long Beach.
Such legislation will be back next year almost by necessity as the states look to complete needed public works projects. P3s are public works contracts just like projects delivered under more traditional methods, and bonding must be required on any construction in a P3. It might seem like this is an issue only for large contractors; yet, states are starting to bundle large numbers of small contracts into a single P3, which will affect contractors of all sizes.
Uptick In Bond Threshold And Bond Waiver Legislation
States looking to balance budgets considered eliminating the protections that surety bonds provide to taxpayers, subcontractors and suppliers with legislation to increase state bond thresholds or waive bonds. In Nevada, a $1 million state bond threshold was rejected, as small contractors working as subcontractors would be working on much larger projects without payment protection. In New York, legislation was introduced to raise the state bond threshold from $100,000 to $500,000. The increase was reduced to $200,000 and sent to Gov. Andrew Cuomo, who is considering the impact of doubling the bond threshold.
A bill passed in Arizona that permits the waiver of the performance bond for job order construction services contracts if the amount of construction under the contract does not exceed $500,000 (including change orders). The new law does not permit waiver of the payment bond. The application of the bond waiver is limited to the largest counties and has a 2020 sunset date.
Retainage For Private Construction Contracts Was On The Front Burner
The vast majority of the retainage bills introduced this year dealt with private construction projects. Legislation limiting the amount of retainage on private work was considered in Illinois, Iowa, Maine, Mississippi and Nevada, but most bills were not enacted this year. The governor of Maine vetoed a bill that capped the retainage at 5 percent for private work, and Nevada’s new law reduces the retainage on private contracts from up to 10 percent to not more than 5 percent. Legislation pending in Massachusetts provides that provisions in private contracts requiring more than 5 percent retainage would be void and unenforceable for the amount that exceeds 5 percent.
One significant bill on public works projects that is on Gov. Cuomo’s desk would prohibit withholding retainage on payments due to suppliers for materials that have been delivered and accepted on public works projects. Sureties are supporting the local contractor groups in seeking a veto.
Congress May Address Contracting Policies By Year’s End
The U.S. House Rules Committee released the final conference report on the National Defense Authorization Act (NDAA), which is the annual defense policy legislation. Two surety provisions from the federal Construction Coalition’s procurement reform legislation were included in the final NDAA legislation in the conference report.
One provision would increase the Small Business Administration’s guarantee to sureties in its Preferred Surety bond guarantee program from 70 percent to 90 percent. The second provision would require individual sureties to play by the same rules as any other person or entity that provides collateral to the federal government. Individual sureties would be required to pledge known and reliable assets to back their bonds, and to relinquish control of those pledged assets to the federal contracting officer, who would deposit them in the Federal Reserve system.
These are all simple reforms with no cost to the federal government that will increase small business participation in federal public works projects, and in the case of individual surety bonds, assure that real assets exist to back the payment and performance bonds so subcontractors and suppliers will get paid if the general contractor does not pay them, and taxpayers are not required to pay twice for the work.
The looming question remains whether the president will veto the NDAA as he has threatened because it contains an additional $38 billion in funding over the current caps on defense spending and a prohibition on the transfer of detainees at Guantanamo Bay, which prevents the president from closing the facility.
An extension to the MAP-21 highway act expired Oct. 30, and Congress is considering another six-year extension. The problem remains finding funding for that length of time. All new spending must be offset with increased revenues or cuts in government spending elsewhere. The Senate is looking for $51 billion to fund its bill, and the House may be looking at an even higher amount.