Pagosa Springs News:
|OPINION: Paying for Private Prisons, Part Two|
|Kevin Pranis | 6/14/12|
|Back to the News Summaries|
|Read Part One|
As correctional populations and costs mounted in the 1980s and 1990s, states had greater difficulty funding expansion out of their operating budgets or winning public approval for new debt. State officials responded to these developments by issuing another type of debt – revenue bonds – to finance new prison construction.
Easy access to investment capital permits policymakers to commit to thousands of new prison beds that will cost billions of dollars to operate over the coming decades while putting, as they say in the car commercials, “nothing down.” The lucrative nature of back-door prison finance deals also brings together set of powerful financial interests which have a large stake in pushing the deals through.
North Carolina has financed construction of five prisons since 2001 by engaging a private consortium to float bonds, build facilities, and sell them to a state bonding authority. The North Carolina Infrastructure Finance Corporation then issued its own bonds to finance the purchase of the prisons for the state. The deals generated millions of dollars in fees for developer Carolina Corrections and the investment bankers at Lehman Brothers who sold both sets of bonds.
A few years ago, Arizona found itself caught between a rapidly growing prison population and record budget deficits. Lawmakers responded by turning the bulk of new prison finance over to the private sector. Private prison companies have arranged financing for 2,400 new beds that operate under long-term contracts with the state over the past half-decade, while the state has built 1,000 new public beds using proceeds from the sale of lease-revenue bonds.
Back-door financing arrangements drive up the long-term costs of prison expansion. Complex deals require more work from investment bankers and attorneys than straightforward state bond sales. Outsourcing also increases the risk to investors who demand higher rates of return and/or costly bond insurance.
But such schemes provide short-term benefits to elected officials. Back-door financing keep prison debt “off the books,” avoiding constitutional caps, and concealing major long-term obligations from normal budget scrutiny. Decisions about prison expansion remain beyond the reach of the voters who will bear the costs of operating them. Finally, back-door financing generate large transaction fees for investment bankers and others with deep pockets and close ties to state officials.
Back-door prison financing encourages overbuilding and has a corrosive effect on criminal justice policymaking. In both Arizona and North Carolina, bipartisan groups of legislators were considering sentencing reform proposals that could have reduced or eliminated the need for prison expansion. Given the intense budget pressures each state faced and the lack of public support for further prison spending, reform seemed to be the obvious choice. But once big-ticket expansion plans gathered momentum, advocates of sentencing reform had difficulty getting a serious hearing for their ideas.
A perverse loophole in the law has pushed officials in one Texas county to overbuild a jail in order to secure financing. In 2004, Willacy County was being pressured by the Texas Commission on Jail Standards to fix persistent problems with plumbing and overcrowding of female detainees in its 45-bed jail. The county was in a quandary. A budget crisis had forced local officials to borrow $1.5 million for operations, pushing the county’s debt load and tax rates to the maximum allowed by law – 80 cents per $100 of assessed property valuation. Unable to issue county obligation bonds to finance a new jail, officials faced the unappetizing prospect of being shut down by TCJS and spending millions of dollars to transport detainees and house them elsewhere.
They chose another option that might at first seem counterintuitive – borrow two or three times as much money, at a higher interest rate, to build a jail twice the size needed. The larger jail could then be marketed to the federal government and, as the county’s investment banker put it, be “paid for by the inmate population at no cost to the taxpayer”.
County Judge Simon Salinas considered the scheme’s chances of success to be slim. With no other means to bring the jail up to state standards, however, local officials decided to take the gamble. The new jail was built, but the detainees did not come. In May of 2006, the county was forced to pay bondholders $137,000 out of its general funds and commissioners reported that the county risked losing control of the facility.
Cost #2- Back-Door Finance Locks In Excess Prison Capacity
State policymakers know only too well that pressure from local communities and other interested parties makes prisons easier to open than to close. Reginald Wilkinson, who until recently ran Ohio’s Department of Rehabilitation and Corrections, had to go all the way to the Ohio Supreme Court to vindicate the department’s right to close prisons over the opposition of the prison guards’ union.
But closing a prison, jail, or detention center can be doubly difficult if the facility was financed “off the books.” Louisiana lawmakers discovered this unfortunate fact when they tried to shut down the nation’s most notorious juvenile detention center.
In 1995, the Louisiana Department of Corrections entered into a “cooperative endeavor agreement” 2 with the City of Tallulah and Trans-American Development Associates (TADA), a group of businessmen with close ties to then-Governor Edwin Edwards, for the construction, financing and operation of a secure juvenile facility.3 Swanson Correctional Center for Youth - Madison Parish Unit, better known as the “Tallulah” facility, was financed and then refinanced with bonds backed by the state’s operating contract with TADA.
Tallulah became notorious for abusive conditions, and the problems did not end when the state took over operating the facility. But state legislators who wished to withdraw funding for the facility – including $3.2 million in annual payments to the owners for debt service – were hamstrung in their efforts. State officials received letters from rating agency Standard & Poor’s and bond insurer Ambac warning that a decision to break the juvenile prison lease could damage the state’s bond rating.
The state could simply have shut down the Tallulah facility while continuing to make lease payments. But such a move would have put lawmakers in the politically unpalatable position of appropriating millions of tax dollars each year for an empty prison (a step that lawmakers were eventually forced to take anyway). Youth confined at Tallulah were left to suffer for another year while the bond controversy delayed closure of the facility. When lawmakers did act, the bill to close Tallulah came attached with a rider requiring the state to reopen it as an adult prison.
If the construction of Tallulah’s youth prison had been financed out of the state’s capital budget, it would have been a simple matter to convert the site into a learning center, a demand made by local residents, or abandon it entirely. The state would still have been obligated to repay the debt incurred to build the facility, but the payments would be smaller – courtesy of cheaper public financing – and buried in the tens of millions of dollars spent each year to service state debt. Lawmakers instead found themselves trapped in a costly lease that could not be terminated without damaging consequences to the state’s credit rating, for a prison that must be kept filled in order to justify the lease payments to voters.
Arizona officials have entered into similar arrangements, signing off on the sale of $132 million in private prison bonds backed entirely by state lease payments since 2000. Even if bond rating agencies and insurers were willing to let Arizona out of the leases, fear of a damaging default could prevent the state from canceling contracts with private prison operators. Most of Arizona’s state-contracted private prisons have been financed or refinanced with bonds issued by county industrial development authorities. The bonds are not legally county obligations, but a default could still scare away investors and raise the cost of borrowing for both public and private groups in the region.
Read Part Three...
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