State Laws You Should Know
Public Construction Bonds
or
“Cash Bond Cow”
Bill Ward, Executive Vice President, HBAI
State law allows counties and municipalities to require developers to post a cash bond to insure that the public improvements on new developments are completed. If a developer’s plans included the construction of new roads, water, sewers, sidewalks, street lights, (and more) that amounted to $1million, for example, a city could require a developer to deposit $1 million or more with them to guarantee completion of the project improvement. This money would then be used by the unit of local government to finish the project if the developer failed to do so.
Upon completion of the project, a city engineer will inspect the project, deem it complete, and the city would then return those funds to the developer. You can probably guess where this is going; bad things happen when the government has your money and you want it back.
Developers from the HBA of Greater Chicago came to HBAI in 1996 stating that municipalities were holding onto their cash bonds long after their projects were completed. Municipalities would attempt to justify this form of thievery by stating that the development was not deemed complete. In actuality, the projects weren’t deemed complete because the city managers would not order the city engineer to inspect the project. This allowed the city to collect interest on the developer’s bond for months, if not years, after the development was completed.
HBAI addressed the issue with legislation in 1996, 1997, and in 2001. The first bill, sponsored by Republican State Senator Pat O’Malley of Palos Park, enabled a developer to file a current, irrevocable, letter of credit, rather than a cash bond to guarantee completion of the project. The Illinois Municipal League opposed the measure because SB1502 ultimately gave the option of insurance to the developer, not the unit of local government. The bill passed the Senate and was introduced in the House by Republican Bill Black of Danville, where it received a vote of 114-1.
Our efforts in 1997 took more steps toward providing developers with fair treatment by establishing a third option; enabling a developer to file a surety bond “deemed good or sufficient” by the county or municipality. Instead of having to set aside a large amount of money to complete a public project, developers could purchase a surety bond that worked just the same as an insurance policy, which insured completion of a particular development.
HB2161 also gave developers the option of hiring a third-party engineer to determine whether a project was complete, when the situation would arise where municipalities or counties were stalling the inspection. Cities and Counties failing to repay 60 days or more after a project is deemed complete, must pay the developer the bond plus interest set at a rate of 1% per month.
Ultimately, HBAI had to come back to the Illinois General Assembly in 2001 to clarify language that municipalities deemed unclear; or more to the truth, just wanted to ignore. This time, HBAI made it stick with language that explicitly stated that a “builder or developer has the option to utilize a cash bond, irrevocable letter of credit, surety bond or letter of commitment.”
Furthermore, HB2380 expanded and reinforced this flexibility by preempting the entire Counties Code and Municipal Home Rule authority. “This Section supersedes and controls over the provisions of this Code as they apply to and guarantee completion of a project improvement that is required by the County (or Municipality).”
HB2380 was introduced by Republican Rep. Tim Schmitz from Batavia, and was sponsored in the Senate again by Senator O’Malley. The bill passed both Houses and was signed into law on August 23, 2001. You can find the entire statute in the Illinois Compiled Statutes under (30 ILCS 550) Public Construction Bond Act. If you have questions or concerns regarding this issue, feel free to write me at billward@hbai.org.
