Trend in the Region

Wanted: Inmates and Investors Texas Lockups Go on the Block

Tuesday, July 19, 2011

By Richard Williamson, Bondbuyer

DALLAS — As Texas and other states seek to lower prison expenses, local governments that invested in private lockups are bearing the costs of lower incarceration rates.

In the West Texas town of Littlefield, a vacant and privately operated but publicly financed prison built to hold 383 inmates will go on the auction block next week, with bids starting at $5 million.

In nearby Dickens County, the transfer of federal inmates to a facility in Lubbock has left all 489 beds empty and cost 120 jobs in a community of 2,700 people.

McClennan County had to shift inmates from an older jail to produce revenue from a newly completed private facility that remained vacant for four months.

The trend affects not just privately run detention centers but those that are publicly operated, as well. Under HB 1 enacted last month by the state Legislature, the Texas Department of Criminal Justice will close the Central Unit in Sugar Land, saving $25 million per year and eliminating 290 jobs at the 1,060-bed prison.

The TDCJ’s total appropriations for the 2012-13 biennium beginning Oct. 1 are about $6.1 billion. That’s roughly $162 million or 3% below the agency’s funding request — but it could have been a lot worse.

“In January 2011, when HB 1 was first introduced, the proposed budget for TDCJ would have eliminated more than 2,000 positions,” executive director Brad Livingston told employees in a memo after passage of the measure. “However, a series of legislative decisions during the last five months has substantially restored funding for the agency.”

In a state where prison overcrowding was once an issue, today more than half of all privately operated county jail beds are empty, according to the Texas Commission on Jail Standards.

Between June 2008 and June 2009, the total inmate population in local jails across the United States fell by 2.3% as the number of inmate beds grew by 2.9%, according to the Bureau of Justice Statistics, a unit of the U.S. Justice Department. That was the first decline in incarceration since the survey began in 1982.

“When you start talking about closing prisons in Texas, the situation’s not real good,” said Richard Kiekbusch, associate professor of criminology at the University of Texas Permian Basin. “It’s not a matter of the Legislature finding Jesus. They have just found that they cannot afford to lock people up anymore.”

When the newer private jails, prisons and detention centers were in the planning stage, Texas was seeing a surfeit of inmates and federal detainees, as were other states.

The Bill Clayton Detention Center that will be auctioned July 28 in Littlefield, Tex., held inmates from Idaho before that state in January 2009 cancelled its contract with operator Geo Group, which, in turn, canceled its contract with the city of Littlefield. The jail has been vacant for 18 months, according to realtor Jef Conn, a specialist in detention facilities with Coldwell Banker. “We had some tire-kickers, but no serious offers,” he said.

If a buyer wins the bidding with a minimal $5 million, the city will be left with more than $4 million in debt. In addition to the debt, the prison cost the city its investment-grade rating of triple-B plus in 2006. Prospects for servicing that debt resulted in a negative outlook from Fitch Ratings in May on the BB-plus credit.

“A failed auction would maintain financial pressure on the city, forcing it to continue with the current practice of cobbling together debt-service payment amounts from various sources,” wrote Fitch analyst Steve Murray. “Utility system cash levels could decline and additional reserve fund draws could occur.”

The private prison debt of $9.97 million represents 77% of Littlefield’s $13 million overall debt. Around $1.1 million of certificates of obligation issued for the facility in 1999 mature in 2019, and a 2001 refunding issue of $8.9 million matures in 2031. Annual prison debt service for the town of 6,500 comes to $235,000 per year, or half of total debt service.

With no facility revenues to service the debt, the city combined payments from various sources, primarily available revenues of the water and wastewater utility system. Littlefield was current on its payments until August 2010, when legal questions surrounding its ability to use sales tax revenue from its economic development corporation delayed use of those funds, according to Fitch.

The city used nearly $269,000 from the debt service reserves associated with the Series 2000 and 2001 certificate of obligations issued for the detention center to make the August 2010 payment. Since then, the legal question regarding use of economic development corporation sales tax revenues has been resolved favorably for the city and the debt service reserves were fully replenished.

Like many of the speculative detention centers built in sparsely populated counties, the Clayton facility was meant to be an economic stimulus instead of an economic drain. But Littlefield took the somewhat unusual step of pledging its full faith and credit to the bonds.

Other counties and municipalities that have agreed to issue bonds on behalf of prison operators have typically sought assurances that taxpayers would not be on the hook for bond payments if the operator canceled its contract or failed to meet quotas.

However, in Waco, McClennan County commissioners appear to have provided a pledge to service $46 million of debt for a jail there in the event that the county failed to negotiate deals to house sufficient prisoners to provide the needed revenue.

“Although the county reasonably anticipates that county project revenues will be sufficient and no appropriation will be necessary, the county presently intends to appropriate other available money of the county, if necessary, for the payment of rental payments and rental payment deposits due under the lease in the event that county project revenues are insufficient,” the 2008 preliminary official statement reads.

How that statement squares with the POS cover announcement that no tax revenues are pledged and that the bonds are obligations only of the conduit public facilities corporation has been a source of debate for county officials.

But in rating the 2008 bonds AA-minus with a stable outlook, Standard & Poor’s left no doubt that the county was backing debt service on the project.

“To pay the required rental payments, the county has covenanted to appropriate all revenues from the operation of the facility,” analyst James Breeding wrote. “Standard & Poor’s views this obligation as a general appropriation pledge of county revenues.”

Despite the threat of budget cutbacks, Moody’s Investors Service in April issued a special report with a stable outlook for the private detention industry. The outlook for two of the largest private operators, Geo Group and Corrections Corporation of America, remained positive.

“Our major concern for credit quality in the industry generally is that contracts with government entities could potentially be cancelled or have their per-diem usage reduced,” said Moody’s analyst Jane Cotroneo. “So far, contract cancellations have not been significant as governments vary in their budget and policy decisions and facilities remain overcrowded.”

Moody’s cited limited re-use possibilities for lockups, the limited number of government clients, the short-term nature of most contracts, and the industry’s vulnerability to shifts in public opinion as major credit concerns.

Despite those issues, Coldwell Banker’s Conn feels confident that Littlefield will receive an adequate bid when it auctions the empty prison.

Buying a turnkey facility like Littlefield’s — which remains stocked with orange coveralls for potential inmates along with a fully operational computer system and office equipment — eliminates the need for architects, bond issues, construction costs and other unknowns, he said.

“It might be two years before you were able to open a facility like this,” Conn said. “I feel pretty confident that on the 28th, we’ll receive an acceptable bid.”