The Federal government’s stimulus package will no doubt impact the surety industry. Will it mean business as usual for contract bond agents or a boom like we have never seen before?
The sheer size of the bill is absolutely daunting to put it lightly. The bill includes roughly 130 billion in funds towards construction related projects. It is the largest infrastructure investment seen in this country for the last 50 years. Unfortunately, it is impossible to come up with an exact number for construction spending, as the bill allows some departments freedom to use the funds for non-construction related expenses (see: Revovery Bill).
Stimulus Package Details
The website www.recovery.gov is dedicated by the government to keep Americans in the loop on where funds are being spent; it is currently vague at best with a bar graph including some categories of where funds are to be spent. A link below the graph titled “learn more” shows us the same figues in a bubble chart. I doubt showing the same information in a different chart format will appease many.
In all fairness, the bill was just passed yesterday so it might be a bit early to expect detailed information on the www.recovery.gov site. However, I am sure people will begin to demand more details to be provided since this is suppose to be an attempt at transparency through the use of the web.
The Engineering News Record posted an article on 2/13/09 entitled, The Stimulus Bill Compromise, Sector by Sector. They did a better job at breaking out the spending, specifically what applies to the surety industry. According to ENR, the major categories are appropriated as follows:
Transportation – $49.3 Billion
- Highways: $27.5 billion
- Transit: $8.4 billion
- New discretionary grant program: $1.5 billion for highways, transit, rail, seaports, other projects. U.S. Dept. of Transportation would choose which projects would be funded
- Airport Improvement Program construction grants: $1.1 billion
- Rail: $9.3 billion, including allocations for Amtrak and high-speed rail
- Port, transit, rail security: $300 million
- DHS/Transportation Security Administration, procure, install airport explosives-detection, baggage-scanning equipment, $1 billion
- Coast Guard, bridge alterations $142 million
- Coast Guard, acquisition, construction, improvements $98 million
ENERGY – $30.62 Billion
- Electricity grid, including “Smart Grid” activities: $11 billion
- Home weatherization assistance: $5 billion
- Energy efficiency and conservation grants: $6.3 billion
- Renewable-energy loan guarantees: $6 billion
- Carbon capture and sequestration demonstration projects, $1.52 billion
- Clean Coal Power Initiative, round III $800 million
WATER AND ENVIRONMENT – $20.1 Billion
- DOE environmental cleanup: $6 billion
- EPA Clean Water and Drinking Water funds: $6 billion
- EPA cleanup, including Superfund: $1.2 billion
- Agriculture Dept., rural water and waste disposal facilities: $1.28 billion appropriations, to support $3.8 billion in loans and grants
- Corps of Engineers civil works: $4.6 billion
- Bureau of Reclamation: $1 billion
BUILDINGS – $13.365 Billion
- GSA federal buildings, energy-efficiency upgrades: $4.5 billion
- Border stations, ports of entry: $300 million
- Facilities on federal and tribal lands:$3.1 billion
- Fire stations (federal grants): $210 million
- GSA new Dept. of Homeland Security headquarters, $450 million
- GSA U.S. Courthouses, other federal buildings, $300 million
- Agriculture Dept. bldgs/facilities $ 200 million
- Agriculture Dept. rural facilities $130 million (supports $1.234 billion in loans)
- NIST construction $360 million
- NOAA procurement, acquisition and construction $430 million
- NASA construction (hurricane damage repairs) $50 million
- National Science Foundation academic facilities modernization $200 million
- NSF major research equipment and facilities construction $400 million
- DHS consolidation $200 million
- DHS ports of entry $420 million
- Smithsonian facilities, $25 million
- National Institutes of Health, grants for construction, renovation of non-NIH research facilities, $1 billion
- NIH buildings and facilities (construction, renovation) $500 million
- Social Security Administration, National Computer Center replacement, $500 million
- State Dept. Capital Investment Fund, $90 million
SCHOOLS – Unknown
Roughly $39.5 billion out of the $53.6 billion total for the State Fiscal Stabilization Fund is set aside for local school districts. These funds allow for school modernization, but a precise amount for construction purposes is undecided at this time.
HOUSING/HUD $9.6 Billion
- HUD Public Housing Capital Fund: $4 billion
- HUD redevelopment of abandoned and foreclosed homes: $2 billion
- HUD energy retrofits, “green” projects in HUD-assisted housing projects: $250 million
- HUD Community Development Block Grants (housing, services, infrastructure): $1 billion
- HOME investment partnerships program $2,250
- Lead paint abatement $100
Defense & Veterans – $7.78 Billion
- VA: $1.25 billion for hospital and other medical facility construction and upgrades
- DOD: $4.240 billion for “facilities sustainment, restoration and modernization,” includes energy-efficiency improvements, plus repair and modernization of DOD buildings, including medical facilities.
- DOD: $2.33 billion for facilities projects, including housing, hospitals, child-care centers, other military “quality of life” projects.
OTHER – $100 Million
- Security, border fencing, infrastructure, technology $100 million
Below you will find a chart that breaks out the details of spending towards construction. The size of the chart speaks to the size of the bill, as we could not fit the graphic properly on the blog. Please click here for a full sized version of the chart.
Bull Or Bear Surety Market?
All of this government spending must lead to a large surge in surety premium, right? Of course, but will it offset the slump seen due to the current economic conditions? John Welch, President of CNA stated the following during CNA’s 2008 4th qtr. earnings call on 2/6/09:
“The infrastructure part of the stimulus package from best I could tell looks to be anywhere $70 to $80, $90 billion, which is good and it’s great and we need it, but it still is relatively a small part of the overall construction spending in a full year.”
Does this mean that an expert such as Mr. Welch is bearish on a surety premium boom? Think again…In the same CNA meeting Mr. Welch stated:
“Our production was supported by the continued spending on public construction offset to some degree by the drop off in the private market. While there are strains on public construction spending, talk of a government stimulus package including public infrastructure spending give us some encouragement going forward.”
In other words, we are going to need to wait to see how this all plays out.
SBA Changes
The SBA announced today that they will receive $730 million from the bill. What does this mean for the surety industry? How about a raise on the maximum allowable contract amount for the SBA Surety Bond Program from $2 million to $5 million, a 250% increase. In special circumstances, the SBA can now even consider contracts up to $10 million, or a 500% increase! The additional funds will also be used to expand the program further.
Conclusion
The economy has seen better days. Every day on the news we all hear about more layoffs from industry to inudstry. Hopefully the stimulus bill is the begining of our road to recovery.
As one might guess, there is no clear answer on how the surety industry will weather this recession. Even the experts cannot predict what is going to happen, as this is uncharted territory for our industry and the country as a whole.
Personally, I am an optimist and see the surety industry getting through this crisis better than most other industries. This is something we will all have to watch as it unfolds.
Are you bullish or bearish on the surety industry? Leave a comment below!
A bid bond is in place to keep irresponsible bidders out of the bidding process by guaranteeing that the lowest bidder will enter into a contract and supply the required performance and payment bonds. If the lowest bidder fails to follow through with these commitments, the owner is protected, up to the amount of the bid bond, typically for the difference between the low bid and the next higher responsive bid. 
In the majority of cases, contract bonds are required by law for public construction projects. Many bonds are required by a township, borough, or municipality. Since these laws have been in existence for many years, few contractors give much thought as to why such laws are even in place. Some contractors who are unable to obtain the required bonds argue that the laws are unfair because they are denied when applying for types of contract bonds. Let’s take a look at what gave rise to these laws that require contractors to obtain bid or performance/payment bonds in order to perform public construction projects. 
government attempted to use individuals to serve as sureties. However, most of the individual sureties failed to follow through with their commitments, many times because they did not have the financial resources to cover their obligations. So, in 1894, Congress passed the “Heard Act� to allow the use of corporate surety bonds to protect privately performed federal construction contracts. In 1935, the Heard Act was replaced by the “Miller Act�, which is the current law that requires performance and payment bonds on federal construction projects.
