Saturday, April 24, 2010

'Doomsday Deal': Prison-for-profit scheme in Waco going bust for lack of inmates

In Waco, reported the Herald-Tribune ("A new jail in McLennan County, but no inmates to fill it," April 23), "The new jail on State Highway 6 has an impressively low detention population: zero." Now a private prison scheme that two years ago was touted as a multi-million dollar moneymaker for the county appears to be headed into a financial death spiral:
Community Education Centers, the New Jersey-based detention company under contract to manage and operate the jail, has been unable to secure agreements with state and federal agencies to house inmates.

Meanwhile, CEC must begin repaying the $49 million in project revenue bonds that financed the construction of the jail. The $313,000 monthly debt service is to be paid using revenue from housing inmates, placing the company under a crunch to fill beds.

While funds already have been set aside for the first payment of $1.9 million due in June, CEC must begin making revenue soon or risk defaulting on the bonds. Doing so would mean the county loses the new jail.

CEC wants some relief from the county to cover the financial obligation, but some commissioners say getting involved could end up costing taxpayers.

Naturally, CEC wants the county to bail them out. This is becoming a too-familiar tale, and for good measure, in this particular case let me throw in an "I told you so." This outcome was as predictable as it was unnecessary and ill-advised. The same thing happened with CEC in Johnson County, the Trib noted:

CEC exercised an escape clause last month to pull out of managing Johnson County jails with one more year to go on a three-year contract.

Argeropulos said Johnson County’s jail population had dropped by 25 percent, causing CEC to lose money.

A separate entity was created to issue the bonds, so county taxpayers aren't formally on the hook, though I suspect it would affect the county's bond rating in the event of default.

Herbert Bristow, attorney for the county, said if CEC defaulted on repaying the bonds, the county would not be liable to make payments.

The McLennan County Public Facility Corp., a seven-member board including the commissioners court, issued the bonds in 2009.

“It was done by design to insulate the county,” Bristow said. “But the end result is if it’s a doomsday deal, and we can’t find any prisoners to put in it . . . the bondholders have the right to take the property back and get whatever value there is in it.”

This is happening all over the state: This month Littlefield, TX had its bond rating lowered and now, according to Texas Prison Bidness, must "reduce spending in other areas to pay a debt service on an empty jail." Down in Webb County, which is presently considering a similar deal, commissioners should take these as cautionary tales - harbingers of the dangers of speculative, entrepreneurial jail building.

Private prisons enjoyed a market "bubble" over the last several years that appears to be bursting. I suspect this won't be the last time we see one of these speculative jail building deals fall through after construction is complete. These companies have figured out how to make their risk public and the profits private. That's a smart business model for them, one supposes, but Waco's example shows why it's not such a great idea for taxpayers.


Anonymous said...

Well at least it's better news than what they did in PA, where the private prison paid off the judges to incarcerate the juveniles in their prison. The judges are now being prosecuted (or have they been convicted?).

Early Light said...

"These companies have figured out how to make their risk public and the profits private."

I suspect this is one of the underlying, profound insights that go far, far beyond privatized prisons in this country today.

Anonymous said...

Speculating on the misfortunes of other is bad Karma for those who do. Look at Freddie and Fannie. I happy to see those who think they can make money from our politicians desire over the last 2 decade to move Texas towards a police state get burned.

The Local Crank said...

Who could possibly have foreseen that attempting to run an essential government operation at a profit might not succeed? *cough*postal service*cough*

Anonymous said...

The story on McLennan county and CEC is weirdly wrong. CEC is not on the hook for debt repayment. The industrial development authority that the Corplan bunch created is in fact responsible.

This is similar to the bond defaults in Pioche Nevada and Hardin Montana, both engineered by Corplan's James Parkey and Municipal Capital Markets' Michael Harling. The Pioche pen was empty for 11 years when it was finally sold for 7 cents on the original dollar. The Hardin one will be vacant three years at the end of June. Its bond default will have its third birthday on May 1st.

These P.T. Barnums are trying to sell Weslaco on building a family "detention facility" in response to an apparently nonexistent RFP.

Herb Bristow is a regular player on their "team." Hale-Mills is often found doing the sole-source construction.

They've also floated similar and varying proposals in Quartzite, Benson and Globe Arizona of late, as well as Las Cruces New Mexico.

The judges in Pennsylvania arranged to plead guilty, but the federal judge hearing the case thought it was too easy on them, even though they were going to do some serious time, and I don't know when the trial is scheduled.

The writing was on the wall over two years ago when the economy was starting to crash and the insurers of many of these municipal bonding schemes, AIG, MBIA, AMBAC, etc., started swirling down the toilet. I don't believe the Hardin public facility corporation bonds were ever rated, not even the bogus ones from Moodys, Fitch or S&P.

All of the larger for-profit prison corporations are in trouble with thousands of empty beds. CCA has closed Appleton Minnesota, Walsenburg Colorado and will shut down Watonga Oklahoma next week. It is not releasing empty bed figures in other prisons from Arizona to Mississippi, but it had lost many contracts. It is due to lose its California City contract by September and Whiteville Tennessee is also going away.

GEO Group, not content with having a long-empty prison in Baldwin Michigan has likely not filled its expansion in Aurora Colorado. Still it is buying Cornell which has 400 empty beds in Hudson Colorado.

CEC is stuck with many hundreds of other empty beds in Texas not mentioned in the article, as well as having similar problems in northeastern states.

CCA nearly bankrupted itself in 2000 with its overbuilding fever and its competitors were also feeling the heat, but were rescued by Osama bin Laden. That's an unlikely scenario this time.

We may see a reprise of the N-Group schemes of the Graham brothers which left investors holding the bag and Texas again picking up the pieces for 50 cents on the buck. The state won't buy prisons it doesn't need, though.

Texas Heart said...

Don't worry, soon those empty beds will be filled with teens who had consentual sex with another teen. Texas has perfected the art of filling prisons with harmless young men and labeling them for life as a SEX OFFENDER. You can thank your local DA for filling those beds just to improve his yearly statistics.

Anonymous said...

Joe. Wake up people it was not about filling the beds, it was about building them for 50 millions dollars. That was the reason. construction is loaded with kick backs for inspectors, elected officials, attorneys, engineers, architects, subcontractors, bankers,and cutting corners. Everyone has their hands open. Its all under the table. Everyone including the commissioner's court knew this but a lot of money was made.

Anonymous said...

Private companies have no honorable business in public correction facilities. Crime and profit for communities is a bad metallic taste in the mouth of criminal rehab experts. Let's put it in the form of a simple analogy. If you ran a private, for profit facility based on lowering company costs and by maintaining high daily rent for high profit, would a company present a healthy meal of nutrituous gruel or would they elect to serve green molded hot dogs and three day old beans with dry hard bread for their daily gruel? In the 60's and 70's communities fought tooth and nail to not have penal facilities in "their" towns and now communities fight just as hard for approval and award of attaining a faciltiy. This provides a bad way to economically boast their counties with minimum wage jobs and political pull.