Thursday, May 06, 2010

Waco taxpayers likely on the hook for debt on jail they were promised would pay for itself

Whenever private prison companies and their governmental champions try to convince the public it's possible to build a jail at no cost to the taxpayers by making it bigger and leasing out space, taxpayers need only point to the McLennan County Jail in Waco as a cautionary tale. Today the Waco Tribune Herald published a story titled "Jail bonds could cost taxpayers if county forced to repay $49 million," which opens:

The county’s treasurer is concerned taxpayers could be forced to repay construction bonds on the new jail if the company hired to run it cannot.

While the company that evaluates the credit risks of proposed bonds agrees with this view, confusion remains among county officials over whether the county will have to pay for a facility that was to be built at no cost to taxpayers.

This of course, was both predictable and predicted on this blog back in 2008 when they made the deal. The attorney for the county is claiming the taxpayers are not liable if the public corporation which formally issued the bonds can't pay them, that the bonds could just default and local taxpayers would have no obligation to pay them. But:

James Breeding, director of Standard & Poors Rating Services in Dallas, said the bond documents imply that the county would cover bond payments if housing revenues fell short.

“The way the documents were structured and the way we rated it was that the county would step in with other funds, if necessary,” he said. ...

The rating attached to new bonds signals how risky the investment would be to potential bond purchasers. Standard & Poors Rating Services gave the McLennan County Public Facility Corp. a AA- rating for the jail project.

The company cited McLennan County’s tax base, previous financial performance, and low debt load as evidence of the project’s “general trustworthiness” and “rating stability.”

Gilbreath said the county’s rating was used to show investors that the bonds were secure investments.

“If I’m going to buy one of those bonds, I’m not just going to look at the entity that’s issuing it,” Gilbreath said. “I’m going to look at the deep pockets behind it, and thereby make a more informed decision about the credit worthiness of the bonds I’m buying.”

Breeding said if the project goes into default, the county’s bond rating in future projects would be affected.

As predictable as the sunrise, yet everyone involved in the deal swore it wouldn't happen, even though it was evident back in August 2008 that the deal's finances were suspect. I wrote on Grits at the time:

I was interested and curious to see that the vendor chosen, private prison operator CEC Corp., promised to house inmates at an astonishingly low rate of about $25 per day, about $15-20 below what it cost most counties and other contractors to operate a jail. Likely they're hoping to make up the difference by housing high-dollar federal immigration detainees, but that's a speculative bet on the future, not a sure thing. I have to wonder if the $25 per day figure is a real, sustainable number or if it will increase once the jail is built and the charges become a fait accompli.

Of course, a low-balled price means nothing if they can't find any inmates to fill the jail, at any price.

For me over the last couple of years, watching this McLennan County private jail project has been like observing a train wreck in slow motion, the outcome was so obvious but the engineer just kept plowing forward. The local deputies' union opposed the deal, as did the statewide labor group CLEAT, and this blog openly predicted this worst-case outcome and suggested alternative approaches to reduce overcrowding without risky new jail building. All the while, though, private prison boosters in and out of government forged ahead with a scheme that's going bust before it ever even gets off the ground, with the private prison company immune from liability and taxpayers on the hook for debt service on the empty jail.

It's been said there is no such thing as a free lunch. Similarly, there's certainly no such thing as a free jail, no matter what kind of hype the salesmen and politicians put forth on the front end These projects socialize risks for local government's corporate partners while privatizing profits when such ventures succeed. Too many counties are already stuck with such arrangements, at least for a while, but given current market conditions and iconic failures like the new McLennan jail, it'd be foolhardy for others to replicate their mistakes.

RELATED: From Texas Prison Bidness, "CEC's Jack Harwell detention center in Waco sits empty."


Anonymous said...

From the tone of the response it looks like the rating agency (in this case S&P) made a big mistake and now wants to get off the hook. This isn't the first time that the national rating agencies have blamed their problems on others. Do a Google search.

i don't live in Waco but i think the bigger story here isn't the failed jail (even if it was predictable). It's the huge power the rating agencies play. One has to wonder if the project would have ever even got off the ground if S&P had told the truth.

Gritsforbreakfast said...

@3:44 - The bond prospectus said “the county presently intends to appropriate other available money of the county, if necessary,” to make the bond payments. If that's what S&P relied on to issue the rating, it's not unreasonable for them to assume the county would be liable for the bonds if the debtor entity couldn't pay.

Anonymous said...

Another bad government investment, just like the federal government.

Oh what the heck anyway, the country has lost its way, and we are headed for self destruction.

Once politicians get into office, they are surrounded by lobbyists and special interests that want more, not less, from government.

That's what happened to the folks of McClennan County too!

Anonymous said...

Debra Medina yesterday.....

"So many folks are railing about what's going on in Washington," she said by phone from Wharton. "We've got local officials whose spending habits are just as egregious. But we tend to ignore what's happening right under our nose."

Medina had her flaws as a candidate, mostly because of inexperience.

But she's right on this: We spend way too much time watching cable TV news and not enough time watching local government.

"Some of our local governments have taken on too much debt, and the growth in spending far outpaces inflation and the growth of per capita income," she said, sounding again like the policy-geek Ron Paul supporter who debated toe-to-toe with Gov. Rick Perry and U.S. Sen. Kay Bailey Hutchison.

Read more:

Anonymous said...


I don't know how one gets from the phrase "presently intends" to a government guarantee. I think any person who thinks those terms are synonymous is manifestly unreasonable.

Gritsforbreakfast said...

@10:01 - Telling someone at the time they purchase the bonds that the county "presently intends" to back the bonds in the event of non-payment then failing to do so after the fact IMO would amount to a misleading statement and potentially a fraudulent business practice - of course, only a court could say for sure.

Certainly the ratings agency understood that language to mean these were county backed bonds.

Anonymous said...

The way they will fill it is with arresting people for bogus charges. I HAVE SEEN THIS FIRST HAND. I will not go into details, but it happens.