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Legislative Memo

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BILL:

S.5671-A (DeFrancisco) / A.8641-A (Gantt)

  Support

SUBJECT:

Letters of Credit

 

S.5671-A (DeFrancisco) / A.8641-A (Gantt)

DATE:

May 1, 2012

 

The Business Council of New York State supports S.5671-A (DeFrancisco)/A.8641-A (Gantt) that would limit the amount of any letter of credit required by state entities to no more than 3% of the total contract for vendors contracting with the state.

The state finance law allows individual contracting state entities discretion over the amount and type of performance guarantee required from vendors. Letters of credit, performance bonds, and insurance are some examples of different types of performance guarantees a contracting entity may require; they have the ability to use one or use multiple forms to satisfy their requirements. 

Letters of credit are often the most detrimental type of guarantee, of all the other options, because they require businesses to set aside a certain amount of money as their guarantee. This takes away from available resources that might be needed to operate a business or fulfill a contract, and unlike bonds or other types of guarantees, letters of credit can seriously affect the ability of a business to obtain a loan. This has an especially negative impact on small and medium sized companies because it hampers their ability to operate, invest and grow their business and it also prevents them from being able to successfully compete for large state contracts. Placing a cap on letters of credit would help the procurement process by opening competition, encouraging small business and M/WBE participation in state contracting and helping the state realize more cost saving opportunities by limiting the expenses and burdens placed on bidders. 

Since it is up to the individual contracting entity to determine the type and amount of guarantee they would require, there is no uniformity and plenty of uncertainty surrounding contracting opportunities. This has also led to many situations where the required guarantees have been excessive and arbitrary to the contracts perceived risk. This legislation does not seek to eliminate contracting state entities’ authority over performance guarantees or the amount they require, it would only cap the amount of letters of credit to 3% of the total contract. If the state agency determines it needs a greater guarantee, they would still have the ability to require additional forms, such as bonds, that are less harmful to businesses. 

This legislation takes one step in the right direction to create a more open and competitive procurement process by capping one form of performance guarantee. 

For these reasons, The Business Council supports this legislation.