Candidate: McLennan County on the hook for bonds on privatized jail

I received an interesting press release this weekend from a county judge candidate in Waco regarding alleged misreportage by the local paper, the Tribune-Herald (now paid only, no story available), regarding the financing arrangement for McLennan County's new, mostly empty, privatized jail, repeating many of the critiques of the project's ill-conceived fiscal arrangement voiced frequently on Grits, albeit in shrill campaign rhetoric:

FOR IMMEDIATE RELEASE

Ralph Cooper, Candidate for County Judge, Challenges Trib Story about Dallas County Inmates, Alleges Continued Falsification of Facts about the Jail Contract

Ralph Cooper, Candidate for County Judge of McLennan County, issued a blog post and email blitz this morning in response to the lead article in today’s Waco Tribune-Herald. The text of the email and blog post follows:

The Lies Continue:

The following was posted on my blog and the same content was email to four people at the Trib, two reporters and two members of the editorial board: The article in today's Waco Trib continues a falsehood about the jail and the bond obligation. It says that CEC, the jail operation contractor, is obligated to pay the bond debt on the new jail County Judge Jim Lewis pushed through the Commissioners’ Court in 2008.

The bonds were issued by the Public Facility Corporation (PFC), a subsidiary of the COUNTY. The bonds specifically are guaranteed by the COUNTY or they would not be tax-exempt ("muni") bonds.

The PFC was created to avoid an election to approve the bond obligation. Thus the County bonding capacity could be used to build the new jail without the delay of an election and the risk the voters would disapprove. It also enabled proceeding while Mr. Crunk was still on the Commissioners' Court; it was highly unlikely that his replacement would have joined Mr. Lewis and Mr. Meadows in taking the County into this risky venture.

CEC HAS NO OBLIGATION TO PAY THE BONDS!

There is a trustee under the contract and the bond indenture, a legal contract of sorts between the bondholders and the COUNTY, through the PFC. Money received from McLennan County for our prisoners there ($45.50 per day per prisoner) and money from other counties and the federal and state agencies that may have prisoners there – all of that money goes to the trustee who then sets aside and pays the $3.997 million annual bond debt service.

AFTER the debt service is paid, other expenses of the facility get paid, including the expenses and fee of the trustee, the $2 per prisoner per day to the County, and CEC's $36.00 per prisoner per day for operation of the jail.

CEC HAS NO OBLIGATION TO PAY THE BONDS!

Since the revenue from the current population there is too small, CEC is not receiving its full payment, and a backlog of what they are not receiving is building up.

They are therefore operating at a loss.

If there were insufficient money to pay the debt service, the COUNTY is obligated to pay, OR the bondholders have the right to foreclose on the jail, take it over, sell it, etc.

The COUNTY bond rating would be reduced, complicating all future financing by the County. Bondholders may choose to sue the County for failing to pay a debt guaranteed by the County.

Please forgive the emphases in the above, but this is a continuing and repeated misrepresentation that has been foisted on the public (electorate) by Mr. Lewis with the assistance of the local media, and it needs to stop.

It also needs to be corrected by the media. NOW.

Ralph Cooper
Candidate for County Judge of McLennan County

I asked him to forward me some of the offending coverage, not wanting to judge the Trib's reportage without seeing it. From the Oct 29th Tribune, here's the most recent offending passage:

Since the Jack Harwell center opened in June, the 816-bed jail has remained less than half- full.

Revenue from housing inmates from other areas is needed to repay the $49 million in bonds that financed the jail’s construction. The bonds were issued by the McLennan County Public Facility Corp., a governing body the county formed to issue bonds without creating a debt liability to the county.

Community Education Centers, the New Jersey detention company that operates the jail, is legally on the hook to pay the bond debt. But the county’s bond rating will suffer if the payments go into default.

I don't know a thing about Mr Cooper except that he's running for McLennan County Judge, but he's correct that the line "without creating a debt liability to the county" is full-on false, as is in my non-lawyerly opinion the statement that the contractor is "legally on the hook" instead of the county. Cooper's description of the financial arrangement jibes exactly with my understanding of the contract from contemporary media accounts and statements from the ratings agency. I'd already written earlier this year that the outcome Mr. Cooper describes - McLennan County being on the hook for these bonds with no liability for the contractor "was both predictable and predicted on this blog back in 2008 when they made the deal ... 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." 

McLennan County isn't the only one that got caught flat-footed when the marginal increase in incarceration rates began to fall with the economic slump, as the empty jail in Johnson County attests. But by the time McLennan commissioners undertook the venture, IMO they should have known better.

Indeed, the folks at the Trib know, or should know, that it's the county ultimately on the hook for this. In another article Cooper forwarded, on May 6 the same reporter, Regina Dennis, wrote that:

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.

Admittedly, that same May 6 story said "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," but the county treasurer agreed with S&P's view, while the "confusion" in the story came belatedly from commissioners who'd been crowing to voters that the jail would be free, would pay for itself, etc.. Their confusion seemed a little self serving, like buyer's remorse, and the truth is it's not credible to say that wasn't the deal at the time. I don't know how the Trib gets from Mr. Breeding's comments to "without creating a debt liability to the county," but it's a misbegotten road. (Note to reporters at the Trib and elsewhere: Read the damn bond prospectus, people!)

The error seems more sloppy than intentional, and perhaps the reporter was influenced by the wishful thinking of county commissioners who dearly hope they won't have to pay for the jail, but secretly know that, of course, they have agreed to if contracts for outside prisoners don't generate enough revenue. What's more, they were warned ahead of time, by among others the county treasurer.

An email accompanying the press release included additional allegations about the bonds themselves that were new to me, declaring:

There is a lot that stinks about the new jail in McLennan County (Waco),  including some funny business about the bond sale (all to one group, some of  whom may be players in setting the whole thing up, at a fairly high interest  rate, then sold in days to other parties at an effective lower rate).  Also a rushed bidding process, a recessed meeting and then adoption without a separate public announcement when the recess ended a day later, and other shenanigans.

(Whenever I hear someone calling "shenanigans" I always think of the show South Park.)

Lots of stuff gets said in the final days of campaigns and I have no way of knowing who bought the bonds or what they did with them. But the press release itself describes the financial arrangements as I understood them, and I must say I'm surprised to see local media misreporting the jail's financial arrangements at this late date.