Florida Can’t Get Transportation Project On Track

A revolutionary transportation project has recently been in deliberation in the Sunshine State. Florida has had plans to build a high-speed rail running from Tampa to Orlando, but there is a hurdle in the way. There are several local and national officials who are worried that the state taxpayer’s will be stuck with the responsibility of this project in the end; a great way to evade this issue is to acquire a surety bond for protection.

The debate is on whether or not a plan can be drawn up that eliminates tax payer risk to complete the high-speed rail. Florida Gov. Rick Scott is not convinced that it’s achievable.

Scott told the Capitol News Service, “I remain convinced there is no way they can do a project that the state taxpayer is not going to be on the hook for cost overruns, the operating costs and if it ever gets shut down, the $2.4 billion they would have to pay back”.

“Essentially we are privatizing the high-speed rail project with no risk to Florida taxpayers,” Tampa Mayor Pam Iorio said in a conference regarding proponents presenting their plan to surmount Gov. Scott’s denial of a $2.4 billion federal allocation to construct the Tampa-Orlando rail line.

Problems like the ones being discussed are solved regularly using contract bonds in the world of surety. The anti-rail side of the debate seems to have apprehension stemming from the possibility of unforeseen expenses or failure to finish the job which would end up falling to taxpayer’s; this is exactly what a contract surety bond helps protect against. It’s important that the governor knows if a proper contract and surety bond is in place, the private company that is awarded the bid for the high-speed rail would be accountable for successful completion of the contract including any change orders associated with the contract. Should the contractor not have the resources to manage the job and fall short of their obligations, and then the responsibility would be on the surety company who wrote the bond, not the taxpayer’s. After all, surety bonds are simply a guarantee issued by the surety guaranteeing the successful completion of a construction contract. Eight private sector companies have expressed interest in the construction and operation of the project aspiring that it would eventually run from Tampa to Miami; this would drastically boost job opportunities while creating a transportation system that the State of Florida has never previously seen. Surety bonds are routine in major endeavors such as the rail project, so it would be surprising if this is something they don’t strongly consider.

“Washington is aware of what’s at stake, the jobs and transportation,” said Castor, of Tampa. State officials have said 23,000 jobs could be created during construction of the Tampa-Orlando phase of the project.

Since the surety bond world is a niche market, many people have never heard of them and if they have, they often don’t know what their purpose is. In the end, surety bonds are meant to guarantee something, whether it’s a type of service, project, payment, etc. There are many uses of the surety bond; hopefully officials take a close look at them as a solution for the Florida high-speed rail project.

Unpredictable Job Meets Flexible Bond

Construction jobs tend to be costly and often unpredictable. This is why a surety bond is typically required for construction projects, especially when they are substantial undertakings. It has been quite an unpredictable endeavor when it comes to the project being worked on at Lake Mead in Nevada State.

A company named Vegas Tunnel
Constructors is implementing a new intake which will draw water from deep in Lake Mead, enough to let the flow resume even if the reservoir drops lower than the two existing pipes that provide about 90 percent of the Las Vegas Valley’s drinking water. The projected $487 MM job involves mining a 23-foot tunnel that will channel through three miles of rock and emerge from the bottom of the lake. Unfortunately, the contractor has encountered some unexpected obstacles.

The problems in the tunnel are worse than calculated by the geologic report having experiencing flooding and debris. A $39.5 million “change order” is needed for the intake project because of the roadblocks and the necessary blueprint modifications that are needed to get the job up and running again.

“If the board rejects the change order, the authority will be left with two options, stop the work or keep going and “assume liability” ”, said Water authority General Manager Pat Mulroy.

While this change order option may be a difficult decision for the Nevada Water Authority board to make, it was an obvious choice to obtain a surety bond for this job. If the board approves the change order, the performance bond that is in place will automatically adjust and cover the increased dollar amount avoiding the need for a new bond. The ability to adjust is an advantage of contract bonds and they are flexible in that aspect. Mulroy said this job is so huge and intricate that it took the authority more than a year to find someone willing to insure the work; this would have made it very difficult to find a new bond if the bond contract was not able to adjust for the change order since it took over a year to attain the original bond. Although there hasn’t been a claim put on the bond, the problems experienced with this job show how unpredictable these large tasks can be and why it’s a good idea to have a bond in place just in case things don’t go smoothly.

Surety bonds can be very helpful and flexible. In this case, although the work changed due to unpredicted complications, the bond has the capability to adjust and stay in place for the benefit of both the obligee and public. Hopefully the intake project succeeds at Lake Mead.

Contractor Skates Off Job, Bond Saves A Park

Many skaters in San Marcos, Texas were not pleased when a contractor that was supposed to construct a skate park in the city fled the skeleton of a potential park. Fortunately for the city and skaters a like a surety bond was in place incase something like this occurred.

A large crater in the ground with exposed grids of metal rebar was supposed to be a skate park including large bowl and pool-like concrete structures, but development on the park halted last year because the contractor “basically was not able to complete the job”, city Officials said. City attorney Michael Cosentino said San Marcos has made a claim on the performance bond while obtaining a replacement contractor to finish the job. Kristy Stark who is the public information specialist for the Capital Improvements Program, said the contractor never gave notice that the company wouldn’t be able to finish the job. Luckily, DAVCAR Engineering Services, the design engineer for the project, suggested that the city file a claim “due to the contractor’s unsatisfactory progress.” The claim was filed against the performance bond which was written by Western Surety Company.

When this contractor abandoned the skate park job, it demonstrated how important a surety bond can be regarding construction projects. If a performance bond wasn’t obtained for the job, the city would be stuck with the responsibility of funding the rest of the skate park or just be forced to forget the project altogether. Since a performance bond was in place guaranteeing the work, the surety who wrote the bond will finance the rest of the incomplete job; in turn the surety will put a claim out on the contractor who deserted the job. When a city gets stuck with the bill for an incomplete job because it wasn’t protected with a surety bond, so does the public within the Commonwealth being the city will most likely dip in to tax dollars to fund the rest of the job. The performance bond is protection not only for the obligee, which in this case is the city of San Marcos, but also the public within the city.

“The additional cost to complete the work is being borne by the bonding company, not the city. The bonding company is taking up the difference,” Cosentino said.

There are many questionable contractors and companies lurking around; it’s hard to know who will perform faithful work. A surety bond can help ease any worries when it comes to ensuring all sorts of services, including construction projects. The City of San Marcos played it safe; when in doubt, secure a bond simply because it will guarantee the services agreed upon.

Unfair Or Necessary Changes for Debt Management Companies

The surety companies who write the surety bonds for many to operate a legal business always have to meet some sort of state or federal requirements. These requirements are for the benefit of the obligee requiring the bond and the principal obtaining the bond; the requirements are meant to avoid financially questionable sureties writing bonds that can end up costing thousands of dollars.

A new Senate bill is proposing that all Texas debt management service providers are obliged to attain a $50,000 surety bond from a surety company who has an “A” rating with a nationally recognized rating service. The title of the bill is Bill 141 and would put in to action the Uniform Debt-Management Services Act of the National Conference of Commissioners on Uniform State Law (NCCUSL) which would activate this “A” rating requirement.

The Surety & Fidelity Association of America does not think this is a good solution.

“We support the intent of such proposals to assure that a financially sound surety company issues the bond guaranteeing the debt management services provider’s obligations. SFAA believes, however, that there are better ways to accomplish this than requiring the surety to be “A” rated by Best’s and that such eligibility requirements for a surety may unnecessarily limit the available market for the required bond”, said the SFAA.

The SFAA continued, “To issue a bond in any state, the surety must be licensed in the state and be subject to the regulation of the state insurance department, which includes minimum capital and surplus requirements, financial reporting and market conduct and financial exams, among many other types of regulation. The primary criteria for the surety company issuing a required state bond should be that it is licensed and in good standing with the state insurance department, which is the state agency that is charged by state law with regulatory oversight of the surety industry.”

One of the larger arguments against this bill is that it would prevent financially strong surety companies from writing bonds who may have a “B+” rating just because it doesn’t meet the proposed requirement. While the rating from a nationally recognized rating service such as A.M. Best should be taken into consideration, it shouldn’t be a deal breaker when it comes to the ability of writing surety bonds. As stated above, the surety must be licensed with the state and the state insurance department who helps in analyzing sureties’ financial strengths and weaknesses; they have regulations in place to determine who is financially sound. Being licensed with the state is the major requirement that must be met when a surety is writing any type of surety bond; and this requirement seems to be more fool proof.

“The state insurance department would be in the best position to know the financial standing of the surety, and it would be the most readily accessible source for any other state agency for questions about the surety’s licensing status and financial condition or complaints that the insurance department has received about the surety’s business practices in the state”, the SFAA commented.

Even though the “A” rating from a company like A.M. Best can be a good indication of a surety’s condition, it’s not bulletproof. A former surety company by the name of Amwest Insurance Company had an “A” rating with A.M. Best and looked to be in good shape; but in 2001 an order of liquidation was put on the company based on the Nebraska Director of Insurance findings that the company was insolvent; this all happened in roughly two months, an insufficient amount of time for a surety’s rating to be downgraded. As a result, approximately 40,000 bonds were terminated. While Amwest Insurance Company had an “A” rating it did not help foresee or prevent the company from crashing.

This article is not meant to convey that national rating services are meaningless. The ratings help give you an idea of the financial wellbeing of a surety company. Although, to enact this new bill seems like a waste of time and energy being that the rating is not always a sufficient method of determining a company’s condition. The letter rating requirements don’t guarantee any company, it is important to dig deeper than that.

Surety Bonds Going Green

The uses of a surety bond can be quite versatile. The general public usually associate surety bonds with the construction of buildings and various structures; but there are more purposes outside of construction jobs for surety bonds. The state of Texas actually did the opposite, utilizing surety bonds for deconstruction in favor of the environment.

In Texas, new environmentally friendly legislation has been passed regarding offshore oil rigs. The law is named AB 2503 and it authorizes the partial removal of offshore oil structures in the Gulf of Mexico. Since the BP oil spill last year, there are much stricter regulations being but in place for oil rigs. The bill requires operators of idled oil rigs to remove the rigs while providing financial assurance such as a surety bond. The surety bond guarantees that the operator will supply adequate funds for the removal of the rigs to the Ocean Protection Council, the Department of Fish and Game, the State Coastal Conservancy and the State Lands Commission; procedural steps include an environmental evaluation, a determination of the project’s net environmental benefit, establishing the project’s costs savings, preparation and application of a management plan and any other costs for satisfying the law’s requirements.

“After we saw events of the Macondo well begin to unfold, many of us began to realize we were going to live in a more regulated environment in the U.S. Gulf,” Superior Energy CEO David Dunlap told a Pritchard Capital conference last month.

Oil companies have commonly been unenthusiastic when it comes to plugging and removing of stagnant wells. Owners of oil rigs said the idle wells could potentially be used to assist other neighboring active wells. In the previous 5 years, about 100-150 platforms were deconstructed yearly in the U.S. Gulf, said James West at Barclays Capital; that number may double to around 200-350 platforms in 2011. As soon as the wells are taken apart, old platforms can offer useful artificial reefs which in turn would help preserve the marine ecosystem.

With the surety bond requirement in place, it will help guarantee the completion of the idle oil rigs removal. It is a safeguard in case the job does not get done. Instead of having a failed job, the surety company who is backing the bond will come in and finance the rest of the job; a claim will go out on the owner of the rig (principal) who would then have to reimburse the surety. The idle rigs pose a threat to all ocean life; even more so with an incomplete removal of a rig. The surety bond will help prevent a botched job from occurring.

This new legislation shows the array of uses for surety bonds. They can be used to aid many different types of companies and endeavors from opening up a car dealer ship to building a school. In this case, surety bonds come to the rescue for marine life and the environment as a whole.

Mexican Government In Hot Water Over Broken Bonds

Many custom surety bonds have written on “pointless paper” relating to the Bureau of Customs (BOC) and their imports/exports. Allegedly, the Mexican government lost billions of pesos in the past several years due to having unstable surety companies guarantee the required bonds. The committee on ways and means in the House of Representatives has chosen to initiate an investigation on the surety bonds from BOC.

“There will be a “motu proprio” investigation considering the gravity of the situation as confirmed by the BOC Deputy Commissioner and an Insurance Commissioner,” stated Batangas Rep. Hermilando Mandanas, who chairs the House Committee on Ways and Means.

The Insurance Commissioner John Apatan confirmed that the BOC was unable to collect surety bond claims valued in the millions because many of the surety companies who were backing the bonds shut down. According to Hermilando Mandanas’s testimony, the BOC authorized the release of goods when importers submitted surety bonds in lieu of payment of duties and taxes. Since several sureties closed up, the surety bonds used were uncollectible which caused the government to lose hundreds of millions of pesos in uncollected revenues.

This predicament that the BOC and Mexican government is in could have been avoided by making more educated decisions when selecting surety companies by weighing out their financial strength and credibility; after all, they are the ones backing the surety bonds. The questionable surety companies chosen to write the bonds is what led to this dilemma.

Mandanas also said that this investigation is vital because the government is in urgent need of funds to maintain its numerous programs.

Both the BOC and government must deal with the consequences of the irresponsible choices in surety companies. This huge government deficit is a great example of how vital it is to research and fully understand the strength of the surety companies guaranteeing your surety bonds.