Municipal Surety Bonds - A Study In Corruption

It's not a topic that sounds too sexy, I'll grant you that. But there was an interesting article in the paper last week about the relationship between our politicians and the Surety bonding industry:

http://www.chron.com/disp/story.mpl/headline/metro/6587327.html

Titled "Metro light rail tactic raises funding concerns", it details the criticism Houston Metro President Frank Wilson endured because he had not obtained performance or payment bonds for the expansion of the Houston light rail system, as if doing so might put taxpayers in peril.

"And why", you ask OffHisMeds, "does this matter to me?"

Because across the country, Surety Bonds cost 1 to 3% of construction costs on virtually every road improvement, mass transit, building, bridge or airport project in the country, that's why. Yearly. In perpetuity. As if Houston Metro's multi-billion dollar spending orgy sending buses and trains all over town without passengers to nowhere wasn't bad enough, we now discover that one significant slice of the multi-generational gouging of taxpayers is a cozy arrangement whereby politicians and Surety providers raid an ever-expanding pool of billions by doing: nothing.

More about that later. On with the story:

In refusing to bond the Rail expansion, Wilson explained that the risk of default was small, the contractors were reputable, and that they had all guaranteed their work with the assets from their own companies. That all sounds reasonable, right? Well, not to his critics, including Mayoral candidate Peter Brown and representatives from the Bond industry, one of whom called Wilson's plans "foolhardy". You might think it a sign of how bad the corruption has gotten that "representatives of the Bond industry" feel they are even entitled to a frigging opinion as they are poised at the trough; OffHisMeds sure does.

That said, it strikes me that it is hardly "foolhardy" to question the status quo, particularly when it is revealed in the article that: "Texas statute requires public agencies to obtain performance bonds on construction contracts larger than $100,000 and payment bonds on contracts larger than $25,000". This is where it gets interesting.

Texas statute sprung from a federal law known as The Miller Act, passed in 1935. Like today, that law also mandated performance and payment bonds on projects of $100,000 or more: but that was back in 1935. If you compare cost-of-living in 1935 with 2009, $100,000 was worth about 20 times what it is today, equivalent to around $2 Million. However, if you estimate inflation based strictly on the comparative cost of public works projects, the inflation factor is at least 100 to one.

One of the peculiarities of comparing inflation rates today and in the first half of the 20th century is that prior to modern times, America could crank out huge projects for next-to-nothing. For some perspective, the Hoover Dam was built in 1935 for $50 million. By comparison, Jerry Jones just took the gift wrapping off a new Cowboy's football stadium that is not a pimple on the butt of the Hoover Dam: for $1.15 Billion.

For another perspective, here in Houston $50 million these days gets you about 3/4's of a mile of MetroRail. You do the math: On the one hand, the Hoover Dam was built in 1935 to provide most of the electricity for the state of Nevada, including all the glittering lights in Las Vegas. It is the engine that drives an entire state's economy, and wildly profitable to boot. On the other hand, Metro can build only 4000 feet of trolley in 2009 that goes from nowhere to nowhere and operates at a permanent deficit, sucking up millions in taxpayer dollars every year. But hey, we're already in agreement that MetroRail is useless, so let's stick with the cash grab by the greedy Money Changers.

Some interesting questions pop up:

1) Why haven't surety bonds been inflation-adjusted since 1935? Had they done so over the past 74 years, there would be only a tiny handful of present-day improvement or construction projects that cost more than $10 million. By not adjusting for inflation, that means that for the vast majority of projects, surety bonds are now the rule rather than the exception. That's a sweet deal if you're in the Surety bond business, not so sweet for the taxpayers who have to pay for them.

2) The Miller Act mandates that the winning Contractor pays for the bonds. Why does Texas law mandate that a municipality (meaning taxpayers) subsidize them? Take Payment Bonds, for example. Why must the city buy a policy to protect itself from liability when a Contractor for the City doesn't pay it's sub-contractors? Why should Taxpayers be on the hook for transactions between two private parties?

3) Considering all that has changed in the past 74 years, are surety bonds even necessary? With improvements in financial reporting laws and the instantaneous nature of communications, computers and the internet, you'd expect to see less of this kind of thing, not one hundred times more. If Metro bureaucrats do their homework and get a serious peek under their contractors' kimonos, it seems like they ought to have a level of "surety" that would obviate the necessity of going out and paying a third party to do the job for them.

The premise seems to be that mandatory surety bonds relieve politicians of their responsibility to do their jobs, award honest contracts, and keep contractors at arm's length. Is it really necessary for taxpayers to take out a policy to ensure that their elected representatives are not incompetent or corrupt? The real scandal here, though, is Point Number One: the "Inflation Creep" that has forced bonding on even the smallest of projects instead of the very large projects that the 1935 law intended. Pretty it up anyway that you want to, but State-mandated surety bonding in this day and age strikes me as nothing more than a legalized protection racket.

And as I mentioned earlier, all the politicians, contractors and surety bond companies have had to do to grow the gravy train by orders of magnitude since 1935 was: nothing. Just let inflation work its magic, and the money torrent grows bigger and bigger. Stop me when this sounds like the "bracket creep" of graduated income tax rates that Democrats inflicted on us in the 20's. Makes you wonder how these people live with themselves.

A superficial take-away from this whole story appears to be that Metro President Frank Wilson - by not bonding this project - has broken with a corrupt tradition and taken a small and tentative step in the direction of the Public Interest. That may be. OffHisMeds will frankly admit that - as a neophyte in Municipal politics - he is not well enough informed to discern any other motive. That said, Wilson presides over the organization that routinely does to taxpayers what Willie Sutton did to bank vaults.

I'll take what I can get, though. And if Wilson continues down the good and righteous path by breaking with the bond merchants, who knows what else might happen? He might start asking his contractors why they're charging $75 million per mile for something that ought to cost less than a third that amount, and once again the Public Interest will be served.