Compliance Economic Review Pursuant to section 120.745(5), Florida Statutes Rule 69K-7.005, Florida Administrative Code Performance Bond - Mausoleums or Below-Ground Crypts Department of Financial Services Board of Funeral, Cemetery, and Consumer Services April 2013 JUSTIFICATION FOR THE RULE Rule 69K-7.005 implements section 497.272(8), Florida Statutes. Section 497.272(8), F.S. provides that a cemetery that is selling interment space in a mausoleum, prior to the mausoleum being built, must provide security to assure that the mausoleum will be built as promised to the consumers purchasing space. Section 497.272(8), F.S. allows the cemetery to provide a surety performance bond to assure construction of the mausoleum. The pre-construction performance bond is required to be approximately equal to the cost of building the mausoleum project. Use of pre-construction performance bonds is unusual. As of Feb. 2013 there is only one preconstruction performance bond in force, in the approximate amount of $1.7 million. This preconstruction performance bond is the only such bond in effect in recent years. The cemetery may sell space in the proposed mausoleum for several years before building the mausoleum. The Division estimates that mausoleums secured by pre-construction performance bonds are typically built within 5 years of issuance of the pre-construction performance bond. Once the mausoleum is built, the cemetery cancels the pre-construction performance bond. After analysis, it is determined that this rule does not meet the standard required for a Compliance Economic Review. 2 STATEMENT OF ESTIMATED REGULATORY COSTS Use of pre-construction performance bonds is unusual. As of Feb. 2013 there is only one mausoleum pre-construction performance bond in force, in the approximate amount of $1.7 million. The preconstruction performance bond is the only such bond in effect in recent years. The cemetery pays an annual premium to the surety company (insurance company) for the preconstruction performance bond. The annual premium varies based on multiple factors, including the surety company's evaluation of the credit worthiness of the cemetery. The annual premium for a preconstruction performance bond typically is in the range of one to two percent of the face amount of the bond. If we estimate the annual premium rate on the above-referenced $1.7 million pre-construction performance bond to be 2% of the amount of the bond, the premium is $34,000 per year, and over 5 years the cost is estimated at $170,000. The Division estimates that it takes approximately 20 hours of staff time of the entity acquiring the preconstruction performance bond to apply for the pre-construction performance bond, providing the surety with required information and documentation. If the value of the staff time is estimated at $40 per hour on average, the transaction cost is $800. The Division estimates that once the pre-construction performance bond is issued, it takes approximately 5 hours of the business' staff time per year to monitor the bond, process the annual premium invoice, get it paid, etc.; at $40 per hour, this would be a cost of $200 per year. If the pre-construction performance bond is in effect for 5 years, the aggregate indirect cost would be $1,600 ($800+ (4 x $200)). Thus total direct and transaction costs are estimated at $171,600 over 5 years. 1. DIRECT OR INDIRECT ECONOMIC IMPACTS Is this rule likely to have an adverse impact on economic growth, private sector job creation or employment, or private sector investment in excess of $1 million in the aggregate within 5 years after the implementation of the rule? The Division answers this question in the negative. Total cost to the private sector is estimated at $171,600 over 5 years. See economic analysis, above. Is the rule likely to have an adverse impact on business competitiveness, including the ability of persons doing business in the state to compete with persons doing business in other states or domestic markets, productivity, or innovation in excess of $1 million in the aggregate within 5 years after the implementation of the rule? 3 The Division answers this question in the negative. Total cost to the private sector is estimated at $171,600 over 5 years. See economic analysis, above. Is the rule likely to increase regulatory costs, including any transactional costs, in excess of $1 million in the aggregate within 5 years after the implementation of the rule. The Division answers this question in the negative. Total cost to the private sector is estimated at $171,600 over 5 years. See economic analysis, above. 2. NUMBER AND TYPES OF INDIVIDUALS AFFECTED Affected persons are typically cemeteries that are part of a large group of deathcare industry businesses under common control. These larger businesses are probably able to obtain more favorable terms on the cost of a pre-construction performance bond, for a variety of reasons (greater net worth, audited financial statements, etc.). Small independent cemeteries do not tend to use pre-construction performance bonds. 3. COST TO THE AGENCY, AND TO ANY OTHER STATE AND LOCAL GOVERNMENT ENTITIES, OF IMPLEMENTING AND ENFORCING THE PROPOSED RULE, AND ANY ANTICIPATED EFFECT ON STATE OR LOCAL REVENUES There will be no additional costs to the Division to enforce the rule. The rule has been in effect for many years and all staff and resources needed to implement the rule are in place. 4. TRANSACTIONAL COSTS The Division estimates that it takes approximately 20 hours of staff time of the entity acquiring the preconstruction performance bond, in applying for the pre-construction performance bond, providing the surety with required documentation. If the value of the staff time is estimated at $40 per hour on average, the transaction cost is $800. The Division estimates that once the pre-construction performance bond is issued, it takes approximately 5 hours of the business' staff time per year to monitor the bond, process the annual premium invoice, get it paid, etc.; at $40 per hour, this would be a cost of $200 per year. If the pre-construction performance bond is in effect for 5 years, the aggregate cost would be $1,600 ($800+ (4 x $200)). 5. ANALYSIS OF THE IMPACT ON SMALL BUSINESSES The Division does not believe that any small businesses have used mausoleum pre-construction performance bonds in recent years. The Division believes the rule has no effect on small businesses. 4 METHODOLOGY USED TO CONDUCT THE ANALYSIS The $40 per hour for staff time of industry personnel is an estimate of the average composite cost of various grades of staff that must spend some time on the task for the licensee. This composite was calculated from knowledge of the industry. The Division has staff that has extensive experience in deathcare industry regulation and, to a significant extent, the economics and empirical characteristics of deathcare industry businesses, particularly deathcare industry licensees. The Division maintains records of pre-construction performance bonds in force. The Division has diligently collated and applied all of said data to produce the good faith estimates of regulatory costs presented herein. 5