Stung by the collapse of two bonding companies this year, Prince William County has decided to ban companies that appear financially shaky.
Starting July 1, bonding companies that fall below the A15 grade on Best's Key Rating Guide or that fail to appear in the U.S. Treasury's list of companies approved to do business with the federal government no longer can back builders in Prince William County.
The decision comes as the county is handling a record number of defaulted subdivisions -- 25 in 1984 compared with 15 the previous year. That has left the county with a potential liability of about $1.2 million for incomplete roads and other public improvements not covered by bonds, assuming no other developer completes the work.
The collapse last winter of Manassas Battlefield Builders is primarily to blame for the dramatic rise in defaults, said Martin E. Crahan, director of the county's Department of Development Administration. Battlefield has left nine residential subdivisions in disarray in Prince William. It also helped drag into bankruptcy Ideal Mutual Insurance Co. of New York. Ideal Mutual has backed two Battlefield projects: Fernbrook Section 4 in the Woodbridge area and Montyville Estates Section 2 near Manassas. Ideal was rated A13, according to Assistant County Attorney James E. Barnett.
But there is no guarantee that the new policy could insulate Prince William County in the future. The second bonding company that declared bankruptcy this year, Eastern Indemnity of Maryland, probably would have qualified under the new standards. As for Ideal Mutual, it tumbled so rapidly to a C rating that Best's did not have time to update its report before Ideal went under, Crahan added.
Since the turn of the century, Best's Key Rating Guide has evaluated property and casualty companies for their financial security and offered them a rating of which the top is A+15; that is 15 points above Prince William's minimum. The Department of Treasury quarterly publishes in the Federal Register a list of companies it considers reliable and gives them financial limits.
While bonding agents consider Prince William's new guidelines prudent, they also warned that the policy could penalize the small builder.
Local builders with limited equity already have a tough time finding bonding companies willing to work under the strict regulations in Northern Virginia. Tightening the strings further could be another step toward pushing these builders out of the local market altogether, said Earnest E. DeConti, vice president of Smith-Fields CBA.
"You're squeezing out the little guys, and the result is stamped-out development from the big companies," DeConti said. Already, national companies such as Ryan Homes build 75 percent of the homes in Northern Virginia, up from about 60 percent a decade or so ago, he said.
Ted Britton, president of Britton Bonding and Insurance Ltd., blames politicians for the shrinking number of bonding companies willing to operate in Northern Virginia. County boards hold up the release of bonds too long, making companies reluctant to back builders, he said.
"A supervisor who has a campaign contributor complaining of a leaky roof will hold up a bond release indefinitely. Until municipalities really and truly implement bond releases, it's going to be a nightmare," Britton said.
Crahan said his staff is reviewing which companies doing business in Prince William County today fall below the A15 rating or are not listed in the Federal Register. He doubts any current bonding company will be affected, but if one does turn up, the builder will be given a grace period to seek another surety company, Crahan said.
Fairfax County staff also is considering recommending to its board that the county accept only bonding companies approved for federal work. Stafford County is even stricter: for new developments, it requires letters of credit from a bank, which are easier for the county to collect than a bond if the development goes into default.