BILL ANALYSIS S.B. 381 By: West State Affairs 3-3-95 Committee Report (Unamended) BACKGROUND According to the Minority Development Agency of the U.S. Department of Commmerce, more than 154,000 historically underutilized businesses operate in Texas. These businesses employ over 78,000 Texans and have annual sales in excess of $7 billion. Texas purchases over $70 million in goods and services from these businesses, yet that amount is only 2.1 percent of the state's annual purchases. PURPOSE As proposed, S.B. 381 authorizes the issuance of bonds to assist historically underutilized businesses and sets forth provisions for guarantees and indemnification of surety bonds. RULEMAKING AUTHORITY It is the committee's opinion that rulemaking authority is granted to the policy board to the Texas Department of Commerce under SECTION 5 (Sec. 481.1203, Government Code). SECTION BY SECTION ANALYSIS SECTION 1. Amends the heading of Chapter 481G, Government Code, as follows: SUBCHAPTER G. ASSISTANCE FOR HISTORICALLY UNDERUTILIZED BUSINESSES AND SMALL BUSINESSES SECTION 2. Amends Section 481.101, Government Code, as follows: Sec. 481.101. DEFINITIONS. Defines "bid bond," "historically underutilized business," "obligee," "office," "payment bond," "performance bond," "prime contractor," "principal," "small business," "subcontractor," "surety," "surety bond fund." SECTION 3. Amends Chapter 481G, Government Code, by adding Section 481.1011, as follows: Sec. 481.1011. EXCLUSION AS HISTORICALLY UNDERUTILIZED BUSINESS. Provides that a business is not a historically underutilized business if an owner of the business has a personal net worth of more than $750,000, unless the Office of Small Business Assistance (office) determines that the person has demonstrated that the person is a socially disadvantaged individual described by Section 481.101(2)(A). Defines "personal net worth." SECTION 4. Amends Section 481.103(b), Government Code, to make conforming changes. SECTION 5. Amends Chapter 481G, Government Code, by adding Sections 481.118, 481.119, 481.120, 481.1201, 481.1202, 481.1203, 481.1204, as follows: Sec. 481.118. TEXAS HISTORICALLY UNDERUTILIZED BUSINESS SURETY BOND FUND. (a) Provides that the Texas historically underutilized business surety bond fund is a revolving fund in the state treasury and consists of money appropriated to the department, general obligation bonds proceeds, bonding fees, other amounts received by the state from the guarantee program, and federal grants money and other sources to be deposited in the surety bond fund in certain accounts. Provides that money in the surety bond fund is available for use by the office for the surety bond program. (b) Authorizes money in the program account, minus the costs of issuance of general obligation bonds to provide surety bonds and necessary costs of administering the surety bond fund, to be used only to provide guarantees and indemnification under Sections 481.119 through 481.1203. Sec. 481.119. GUARANTEE OF SURETY. (a) Authorizes the office to guarantee a surety against loss resulting from breach of the terms of a bid, payment, or performance bond by a historically underutilized business that is the principal on a contract if the amount of the contract is $1,250,000 or less. Authorizes the terms of a guarantee or commitment to vary from surety to surety based on the office's experience with a particular surety. Authorizes the office to authorize a surety without further approval to issue, monitor, and service a bond subject to a guarantee. (b) Prohibits a guarantee from being issued except under certain conditions. (c) Prohibits a payment made under a guarantee from exceeding 90 percent of the loss involved. Sec. 481.120. INDEMNIFICATION. (a) Authorizes the office to agree to indemnify a surety against a loss the surety incurs in avoiding or attempting to avoid a breach of the terms of the bond. Requires the office to authorize the specific expenditure to be indemnified before the expenditure is made and after the office determines that the breach is imminent and the amount of the proposed expenditure is reasonable. (b) Prohibits the amount of the indemnification from exceeding 90 percent of the amount of the expenditure indemnified. Sec. 481.1201. EXCEPTIONS TO PAYMENT. Provides that the office is not required to pay any amount under Section 481.119 or 481.120 under certain conditions. Sec. 481.1202. REPORTS; AUDIT. (a) Requires a participating surety to make reports to the office at the times and in the form the office requires. (b) Authorizes the office to audit any material in the hands of a surety relevant to a guarantee under Section 481.120 at the surety's offices. Sec. 481.1203. RULES. Requires the policy board to the Texas Department of Commerce (policy board) to adopt necessary rules to carry out the guarantee program created by this subchapter. Authorizes the rules to prescribe reasonable fees to be paid by a principal or surety participating in the program. Sec. 481.1204. SURETY BOND FUND: GENERAL OBLIGATION BONDS. (a) Authorizes the policy board to issue up to $50 million of general obligation bonds and to use the proceeds to provide surety bonds. Requires the policy board to deposit the bond proceeds in the surety bond fund and apply them in accordance with the resolutions authorizing those bonds. Requires the surety bond fund and any accounts established in the fund to be held in trust by the state treasurer and the owners of the general obligation bonds and to be used only as provided by this section. Sets forth required procedures for depositing payments for the provision of a surety bond. Requires the comptroller to transfer to the fund a sufficient amount of the first money coming into the state treasury not otherwise appropriated by the constitution to pay the obligations in the event that the policy board determines funds are insufficient to pay either the principal of or interest on the general obligation bonds or both during the following fiscal year. (b) Authorizes the general obligation bonds to be issued in one or more series or issues, in bearer, registered, or any other form, including book-entry obligations. Requires the registration of ownership and transfer of the bonds to be provided for by the policy board under a system of books and records maintained by the office or by an agent appointed by the policy board in a resolution providing for the issuance of its general obligation bonds. Authorizes general obligation bonds to mature serially or otherwise not more than 40 years from their date. Provides that general obligation bonds may or may not bear interest at any rates, fixed, variable, floating, or otherwise, as determined by the policy board. Provides that interest on the general obligation bonds are payable at any time and interest rates are adjustable as determined by the policy board. Authorizes the policy board to exercise the powers granted to the governing body of an issue as it relates to the issuance of obligations under Article 717q, V.T.C.S. Authorizes the general obligation bonds to be issued and executed determined by the policy board. Provides that the signature of an officer on the general obligation bond remains valid and sufficient even if the officer leaves office. (c) Subjects all general obligation bonds issued by the policy board to review and approval by the attorney general consistent with Article 717q, V.T.C.S. (d) Provides that general obligation bonds are a legal and authorized investment for certain private and public entities and individuals. Authorizes the general obligation bonds to secure deposits of public funds of certain entities. Authorizes the policy board to issue bonds to refund all or part of its outstanding general obligation bonds. Provides that general obligation bonds and relating sale profits are exempt from taxation by certain government entities. SECTION 6. Amends Section 481.160(b), Government Code, to make conforming changes. SECTION 7. Prohibits the policy board of the Texas Department of Commerce from issuing more than $25 million of bonds under Section 481.1204, Government Code, as added by this Act, during the state fiscal biennium beginning September 1, 1995. SECTION 8. Provides that this Act takes effect on the date on which the corresponding proposed constitutional amendment takes effect. Provides that this Act has no effect if the proposed amendment is not approved by the voters. SECTION 9. Emergency clause.