Are counties on the hook for debt issued by 'nonprofits' they create to oversee jail bonds?

Having yesterday mentioned Montgomery County's entrepreneurial jail scheme gone awry, I should mention another instance where a county in South Texas (Willacy County - Raymondville is the county seat, such as it is - just north of Cameron) must finagle a way out from under a growing pile of debt related to financing the Willacy Detention Center, which has failed to achieve the projected number of additional inmates after an expensive, recent expansion. A July 9 story from the Valley Morning Star on the controversy opened:

Willacy County’s debt for privately operated prisons has swelled to the point where the county may never be able to pay it back, District Attorney Bernard Ammerman says.

Comparing the debt to the ill-fated ocean liner Titanic, Ammerman says a private prison deal is on a collision course with an iceberg of debt that will sink the county financially.

But County Judge John F. Gonzales Jr. and others say the district attorney is wrong, countering that Ammerman does not understand the types of bonds used to refinance the prisons.

Attorneys who advise the Willacy County Local Government Corp. say the county and its taxpayers are not responsible for the debt connected to the so-called “tent city” detention center near Raymondville.

The debt has grown as a result of construction and renovation costs at the “tent city,” Ammerman said.

The detention center, originally built to house illegal immigrants, was refinanced last year and converted to house low-risk federal inmates from the U.S. Bureau of Prisons in the last year of their sentences, Gonzales said.

A new agreement with the federal government assures the county there will be a steady stream of income from the contract to house prisoners, the county judge said.

The Bureau of Prisons has contracted for 90 percent of the beds in the “tent city” or “dome structures,” and must pay whether they are used or not, he said.

The facility is operated by Management and Training Corp., which also ran the illegal immigrant detention center, he said.

The DA also accused county commissioners of improperly raiding the WCLGC for other projects.

Like in Montgomery County, where commissioners may sell a local prison set up under a nonprofit financing structure to avoid debt liability, Willacy County created a nonprofit, this one with two commissioners among five board members, which ostensibly carries the debt. According to the bond prospectus (large pdf, p. 19), "The Issuer [of the debt] is a nonprofit corporation formed on behalf of the County pursuant to the Act and Resolution Authorizing the Creation of the Willacy County Local Government Corporation of the Commissioners Court of the County (the 'Commissioners Court') adopted on June 19, 2006. The Issuer was formed for the purpose of financing the Facility for and on behalf of the County. ... In addition, the Commissioners Court has the right at any time to dismiss any director, for cause, or at will, and to appoint a successor to take his or her place."

It is true that the bond prospectus specifically states that, "The Series 2007 Bonds do not constitute an obligation, either special, general or moral of the County, the State, or any other political subdivision thereof." But given the level of control exercised by the commisioners court over this nonprofit - including authority to dismiss directors at will - it's wishful thinking for the County Judge to pretend that means the county won't take a severe hit on its credit rating. They'll be in the position of Germany, forced to bail out Greece in order to save the Euro.

The DA's main argument wasn't that the county was directly, legally liable, but that “Primarily our credit rating will go to junk status even more. We’ll never be able to have any type of bond issuance for anything.” He's absolutely right about that: Bond ratings agencies would consider a default by the Willacy County Local Government Corporation a major black mark and downgrade current and future Willacy County debt, raising costs to deliver government services across the board. Their just-a-little-too-smart-for-their-own-good Chinese wall may formally protect them from liability on paper, but it won't protect them from the harsh judgments of bond ratings agencies nor those who might lend the county money in the future. That old mumpsimus ignores reality.

The 2007 bond prospectus actually foresaw (p. 7) that the nonprofit's ability to pay the bonds is predicated on continued high occupancy:

The continuing demand for the beds in the Facility is predicated on the assumption that demand for detention space, in the aggregate, will continue to exceed the supply of available space. However, due to economic, social, and political factors, it is impossible to predict whether this assumption will hold true. In general, the closer the supply of bed space comes to meeting or exceeding the demand therefor, the more difficult it will be for the Issuer to house inmates at an occupancy level and at per diem rates which will generate Facility Revenues sufficient to pay principal and interest on the Bonds and to pay Operation and Maintenance Costs.

But that was written before the incarceration bubble began to burst. Today, the market has changed and there are many facilities competing for fewer contract inmates, leading some market analysts to argue against private prisons' long-term viability as investments. If the Willacy Detention Center can keep its inmate numbers up, they shouldn't have a problem. If they can't, commissioners would be foolish to suppose the county won't pay a price in the bond market for creating its own pet nonprofit, issuing a bunch of debt through it, then walking away.