A bill is wending its way through the Connecticut Legislature that would encourage greater participation by minority contractors on public works projects. The bill, Senate Bill 830, would require that by October 2015 the Department of Administrative Services create a new surety bond guarantee program for emerging contractors. “Emerging contractors” is politispeak for minority-owned and women-owned contractors that aren’t prequalified by DAS, and who can’t get the necessary bonding to work on state and municipal public works projects. With public works contractors complaining that minority participation goals can’t be satisfied with qualified contractors, this bill aims to improve participation by removing what could be a significant obstacle. Both the bill and guarantee fund operate on the notion that these contractors are unable to qualify for public work because they don’t have access to conventional bonding. So, for contracts and subcontracts over $500,000, the bill eliminates the Little Miller Act bonding requirements on public works projects for “emerging contractors” in the new bond guarantee program.
The goals of the bill are surely laudable, although it’s not clear how such a fund would be set up, or how it could be ready by October. DAS presumably will look to similar programs for guidance. The U.S. Small Business Association operates a bond guarantee program. So does Connecticut’s DECD, whose small contractor bond guarantee program actually already provides for a set-aside of 25% of the guarantee fund for minority contractors. This begs the question of whether SB 830 could accomplish the same end through an expansion of the DECD program, rather than requiring another agency to create a second bond guarantee program.
Given the financial impact of SB 830, as indicated in its fiscal note, it’s difficult to understand how the fund could be viable. The bill appropriates only $100,000 in FY 16 to DAS to establish the program, and it would take triple that just to cover the estimated up-front costs of setting up underwriting for the program. The yearly costs to manage the program are estimated at over $420,000. And then there’s the reserve fund for the actual guarantee, which is estimated to be at least $10 million. While the guarantee percentage (the portion of the sureties’ bond losses that DAS would reimburse) isn’t specified, as a point of comparison the SBA guarantees from 80% to 90% under its program.
The Office of Fiscal Analysis reported in the fiscal note that the annual value of state construction contracts that would qualify for this program is $780 million. OFA figured that if 1% of this work were given to “emerging contractors” under this program, $7.8 million of bonds would be written each year. That amount would need to be multiplied by a substantial factor because SB 830 would open the guarantee program to contractors on municipal projects too. Also consider that “emerging contractors” are, by definition, businesses that the conventional sureties consider too risky to bond. Depending on the default rates on guaranteed bonds under the program, a $10 million reserve may not be enough for DAS, and it certainly hasn’t been appropriated for a rollout in October.