Thursday, November 20, 2008

High interest rates delay McLennan jail construction

In Waco, McLennan County Commissioners are temporarily postponing jail construction because of high interest rates resulting from Wall Street's credit crunch, the Waco Tribune Herald reports ("Rough financial markets delaying construction of McLennan County jail," Nov. 19):

McLennan County commissioners Tuesday postponed for the third straight week issuing project revenue bonds to finance the new jail because of high bond interest rates. Community Education Centers, the New Jersey-based company that is to oversee the new jail’s construction and operation, would be responsible for paying the interest on bonds the county sells to third-party financial houses.

County Judge Jim Lewis said officials had hoped to break ground for the new jail this month. However, the county is waiting to see whether the financial markets stabilize, allowing for reasonable bond interest rates. In the meantime, Lewis said, the project cannot go forward. He did not know how long the county would hold out on issuing the bonds.

“We could sell these bonds today if we wanted to, but we’d be selling them for 10 percent interest or more,” Lewis said, citing the stock market’s large fluctuations in the last week. “If we tell (CEC) that we’re selling for that high of interest, they’d say there is no way they can make this work. So it would be a prudent business decision to wait and see how the market does.”

I'd predicted precisely this outcome soon after the credit markets crashed, declaring:
it's worth mentioning the most immediate criminal justice dilemma created by the crisis - rising cost of commercial paper (debt) used to finance government construction. Some jurisdictions are already canceling debt issues approved by voters. In Houston, "the City Council [decided to] draw $100 million out of cash reserves to fund construction projects, rather than use commercial paper on which interest rates had spiked." According to a Harris County source, "the commercial paper rate was 1.74 percent a week on Sept. 11 and jumped to 5.25 percent a week later. The county also uses commerical paper."

This news makes new jail construction projects ... a lot more expensive than voters were previously told
So a month ago Harris County was balking at 5.25% interest rates, and today, McLennan County would have to pay up to 10% interest to build a jail. Every jail project in the state faces the same dilemma, which tells me to expect a serious slowdown in the rate of new jail construction as long as the credit crunch continues. With luck, that dynamic may spur county officials to more diligently seek solutions via alternatives to incarceration and jail diversion instead of just building more lockups.


cheese said...

Why do we keep hearing that the 'Fed' is lowering rates and that they are the lowest in decades etc.?

Gritsforbreakfast said...

Cheese, it's because the rates are so high in the marketplace (i.e., for actual borrowers) so the Fed is lowering the rate at which they loan to banks hoping it will influence the rate at which banks loan to the rest of us. So far, it has not.

Some people predict in January the Fed will lower the rate it lends to banks all the way to ZERO. I don't even understand what that would mean - they'd basically be printing money and giving it away, using inflationary pressure to reduce interest rates where expanded liquidity failed.