New Mexico: A Model to be used for Success

In the midst of NASBP’s 2012 Annual Meeting, we were notified that the New Mexico General Services Division had formed a Procurement Reform Task Force to review and consider cost saving measures throughout state government. The Task Force created the Construction Bond Subcommittee, chaired by Dee Dennis, Superintendent of Regulation and Licensing, and a former electrical contractor, to consider alternatives to bonding, such as using default insurance, eliminating subcontractor bonding, or eliminating statutory bond requirements all together. Fortunately for the surety industry, Tom Padilla, NASBP Second Vice-President, knowing the political landscape in New Mexico quite well, quickly identified several local trade associations and formed a coalition to ensure that members of the Subcommittee were well informed and educated about the benefits of surety bonding, including what the impact would be on the state and the construction industry if bonding requirements were removed or weakened. Among those who came to provide a great deal of guidance to the Subcommittee were a number of New Mexico producers including Tom Padilla, Bob Brooks, Dick Minick, Chris Downey, Dean Vigil. Others voicing support for bonding requirements were representatives from SFAA and the coalition of local industry supporters, such as the American Subcontractors Association, the Associated General Contractors, the Associated Builders & Contractors, the Independent Agents, and the Mechanical Contractors Association. Because of the gravity of the situation, NASBP also hired a former Superintendent of Insurance in New Mexico to protect our interests and to press our cause further.

Throughout the course of the Spring and into early Summer, Superintendent Dennis held a series of meetings where opponents to bonding, most notably representatives from the Public School Finance Authority (PSFA), were on record stating that bonds were costing the state millions of dollars while offering little or no value. PSFA presented data to the Subcommittee, which they had circulated a number of years ago, that appeared outdated and was refuted by the surety industry. SFAA, at the Superintendent’s request, collected data which listed specific claims and payouts by three sureties to New Mexico agencies. For example, payments were made to the University of New Mexico book store for over $55,000 and to the New Mexico Hispanic Cultural Center for $1.6 million. Such empirical data made a compelling case that the surety industry responds to claims and protects contracting authorities and state taxpayers.

The surety coalition provided clear evidence that statutory bonding requirements work as intended. Further, the coalition saw an opportunity to point out that such benefits are not available when statutory bonding requirements are not enforced. Presently, New Mexico law requires subcontractors to furnish bonds for projects above $125,000. However, the law is not always enforced nor is the penalty severe enough to incentivize compliance by all construction firms. Moreover, other interests often try to eliminate or increase the threshold of the New Mexico subcontract bonding statute. Two years ago, for example, legislation was introduced to increase the subcontractor bond threshold from $125,000 to $250,000. NASBP members worked to ensure that an enforcement provision was included to guarantee that the statutory bonding requirement would be enforced to require that prior to the last payment, the general contractor and the subcontractor shall provide a notarized statement certifying that the required bonds were in place. NASBP and the local construction trade associations supported the enforcement provision. However, PSFA raised concerns and did not endorse the legislation. Once again, the industry recognized a potential problem, that statutory requirements were not being followed, and responded by supporting legislation to rectify this issue.

Based on the support of the coalition and the statistical information provided by SFAA, Superintendent Dennis formally recommended in a letter (click here to access the letter) to the Procurement Reform Task Force that “the State is receiving the value of construction bonds and there is a higher risk of loss if bonds were to be eliminated.” Superintendent Dennis also opened the door to additional discussions about the need for mechanisms to enforce statutory bond requirements by stating in his findings that “it is the recommendation of the Subcommittee that prior to the first payment to the general contractor, for the scope of work contracted for, on a public project that proof of bonding of every first tier subcontractor above the statutory threshold be submitted to the State.”

This was an important fight—and an interim victory—for the industry, and our process should be used as a template when other state agencies or legislatures begin to contemplate eliminating or lessening statutory bonding requirements. As an industry we must rely on our industry friends to organize a strong opposition to supplant such claims that bonds are too costly and offer no protection. A viable coalition which does not wavier, coupled with empirical industry data and local producer activism, is the perfect recipe for showcasing the importance of the surety bond product and for averting the removal or weakening of statutory bonding requirements.