Sureties Tell Congress They Need Stability in SBA Bond Guarantee Program

As Congress debates reauthorization legislation for the U.S. Small Business Administration, the surety industry wants to make sure the SBA's Bond Guarantee Program gives sureties some certainty about the program's future stability.  
 
In testimony before the House Small Business Committee the week of Sept. 3, Bill Peterson, a vice president of CNA Surety Corp., told House members that the program is important for the country's infrastructure, but that surety companies are wary of unexpected fee increases and other problems they see with the program.  
 
"The economy is such that there is a significant need for the program," Peterson said, according to a transcript of his testimony. "Some internal problems with the program have discouraged many companies from participating and caused many that do still participate to limit their participation. The program no longer makes financial sense to many sureties."  
 
The SBA bond program provides backing for smaller contractors to get the surety bonds they need to secure construction contracts. Surety bonds make sure that workers and suppliers get paid in the event of a contract default.  
 
"Small and emerging contractors can play an extremely important role in the necessary construction and repairs, but the SBA program itself is in need of revitalization at a time when it is needed the most," Peterson said.  
 
In 2005, the SBA increased the fee paid by surety companies from 20% to 32% of the premium on bonds they issue and guarantee under the program -- a move that threatened to make the program "economically unattractive for most sureties and will affect the continued viability of the program," Peterson said. The fee increase stemmed from an Office of Management and Budget actuarial study that found that the SBA had to increase its fees to cover its losses. But Congress never intended the program to be self-sufficient, Peterson told the committee.  
 
Because of the potential for sureties to flee the program, SBA lowered the fee increase to 26%, down from the initial 32%, but the SBA also increased the fees charged to small businesses who get a bond through the program. The effect was to increase fees overall, but split the burden sureties and contractors.  
"While we appreciate the proposal to reduce the increase, any fee increase on sureties hurts the small and emerging contractors that the SBA is supposed to assist to the extent that it causes sureties to rethink their participation in the program," Peterson said.  
 
Peterson was also representing the Surety & Fidelity Association of America and the American Insurance Association before the committee. SFAA and AIA represent more than 500 surety insurance companies that the two groups say collectively write most of the surety and fidelity bonds in the United States.  
SBA Administrator Steve Preston also testified, telling the committee that the agency welcomes the suggestions for improving the surety bond program.  
 
Participation in the program has declined in recent years, Preston said, and "there is a limit to our ability to effect change without statutory authority. I am glad that our recent regulatory effort is working, but we acknowledge the need for legislative changes." He said he supports a S.1960, a bill by Sen. Olympia Snowe, R-Maine, that would increase the surety bond level to $3 million from $2 million.  
 
"This statutory limit has not been increased since the program's inception and is a concern that has been raised to the (Bush) administration several times," Preston told the committee.