DALLAS -- Pesos County, Tex., officials yesterday said they are $7,243.57 short of making an Aug. 1 interest payment on municipal junk bonds that financed a for-profit jail that remains empty.
But a lawyer for the county said he has verbally requested that interest from $150,000 that has been held in trust to furnish the private jail -- but not yet spent -- be used to ensure that the $597,187.50 payment is made next month.
Barney Knight, a lawyer at Bickerstaff, Health & Smiley in Austin, said the return of those unused funds would solve the immediate problem. Asked if the bonds were in danger of default, he responded, "I certainly hope not."
Officials at First City, Texas, Bank in Houston, the trustee for Pecos County and five other counties that created nonprofit, conduit-financing corporations in 1989 that sold $74 million of tax-exempt bonds, did not return calls yesterday.
Officials, however, speculated that none of the other five counties were facing immediate shortfalls -- although all but one still face uncertainty over who will pay to use their 500-bed jails.
Even if Pecos County makes its entire debt service payment on Aug. 1, the shortfall has raised alarms because capitalized interest and reserve funds for the $12 million projects was supposed to cover all payments through February 1992.
In fact, county officials said they had been told the projects should be self-supporting by this May in order to make their first stand-alone payments to bondholders next August.
"We're kind of in a quandary about what to do next," said Pecos County Judge Fredie Capers, who took office after the project began. "I don't know why there is a shortage."
While the West Texas county has its lawyers studying options, Mr. Capers said other commissioners agree that no county funds will be used now or in the future to pay interest on the high-yield bonds.
"The commissioners have said that we're not going to have a budget amendment and we are not going to allocate anything in 1992," Mr. Capers said. "The commissioners are going under the contract that says we can [make up any shortfalls], but we don't have to."
Officials in all six counties said they backed the projects after being assured by the underwriter, bond counsel, and developer that the counties and their taxpayers would bear no liability if their project defaulted.
Responsibility for the debt service lies with county-created non-profit jail financing corporations that sold the bonds through now-defunct Drexel Burnham Lambert Inc. in October 1989.
But in Pecos County, the jail corporation has been mostly dormant since the bonds were sold and has followed the lead of the county since being notified last week by First City, Tex., about the anticipated shortfall.
"We're really pretty powerless to do anything about our situation," said Frank Baker, president of the jail corporation. "This corporation is really a legal technicality."
At the direction of the county, Mr. Knight has verbally requested that Pricor Inc., the Murfreesboro, Tenn.-based operator of the prison, return a $150,000 payment that has not yet been used to furnish the prison.
"I don't anticipate any problems" with the money and interest being returned, he said. "Pricor has been holding the money in trust anyway. They haven't bought any furnishings, and there's no need to buy until they have prisoners."
Pricor spokesman Laws McCullough said he was unaware that a request for the funds had been made, adding, "I look forward to a written request."
Pecos County was the last of the six facilities to be constructed and certified for use. So far, only Angelina County, Tex., is operational.
Mr. McCullough said yesterday that the facility is operating with 449 inmates who were transferred from the crowded Harris County, Tex., jail between June 3 and June 28.
Even though Swisher and Falls counties have contracts with Harris County to house prisoners, neither has received any inmates or is likely to soon. Three other counties, including Pecos, have no contracts.
"At this point, there are no inmates to fill any of the other facilities," Mr. McCullough said.
Officials from five of the counties met yesterday at the Austin law offices of Johnson & Gibbs, a Texas bond counsel, to discuss marketing their facilities and possibly lobby the legislature to use the facilities, according to sources familiar with the meeting.
Also, some of the counties have canceled contract monitor agreements with N-Group Securities Inc., the Houston-based developer of the projects, because of frustration over the lack of success in securing revenue-paying customers for the jails.
"Everybody was consistent in their belief that N-Group wasn't helping," Mr. Capers said. "It's becoming a nightmare. What started out to be a beneficial project is turning into havoc."
N-Group President Pat Graham said his firm was not fired as contract monitor, but agreed that by saving the firm's 50-cent-per-inmate fee under the agreement, the counties might be able to negotiate more competitive per diem fees with prospective clients.
"We basically are at a point where price is critical to enticing [users]," Mr. Graham said. "We agreed to terminate our contracts."
However, Mr. Graham confirmed that his company has been paid the full 3% for the projects. He said contracts called for the second half of the fee to be paid once construction was completed and the jails were certified for use -- as all have been.
County officials have previously said they believed the second half of the money was only to be paid once the jails were substantially occupied.
Even though the jails remain unused, Mr. Graham says he has not decided that for-profit projects should only be built if they have contracts for prisoners in advance.
"I don't think I want to sell any more on a speculative basis," said Mr. Graham, whose company is pushing a similar proposal in New Hampshire. "If these were to, a year from now, go into default and sit as white elephants, then maybe I'd be willing to say [speculation] doesn't work."
So far, market watchers say they are skeptical but undecided about the future of the projects. But since late 1990, none of the bonds have traded. In fact, one source said bonds for the San Saba County, Tex., project were offered for bid last week, but there were no takers.
Added another, "If any bonds have traded, it would be a surprise to me."