DALLAS -- Texas officials say that developers are again proposing construction of for-profit jails to localities that are eager to generate jobs, including one rural county that defaulted last summer on just such a project.
Wayne Gondeck, deputy director of the Texas Commission on Jail Standards, said that as many as 15 counties have contacted the oversight agency about developer proposals. The firms urged setting up corporations that could sell tax-exempt debt for projects to relieve the state's crowded prison system.
"There are several companies out there right now promoting these projects," Gondeck said. "Some of them are reputable and have done other projects, and some of them are fledgling."
Because an earlier wave of for-profit jail projects cost bondholders millions of dollars, Texas officials say they are advising localities to proceed cautiously and to make sure they have long-term contracts to assure that their facilities will be used and that revenues will be generated to pay off debt.
"We are advising them that today there is a need for jail space," Gondeck said, adding that future demand for such facilities cannot be predicted.
In fact, Texas Assistant Attorney General Jim Thomassen, chief of the state's public finance section, said that local officials should know that without such a long-term revenue stream, his office will not approve bond issues to build more of the privately run jails.
"I think it would be unlikely we'd approve any kind of deal without there being a firm contract in place," said Thomassen. "We would look at it very closely."
His office decided to require long-term contracts after its approval in 1989 of $74 million in unrated bonds sold for six for-profit jails. The six deals, averaging $125 million each, had been arranged by Houston-based developer N-Group Securities Inc. and underwritten by Drexel Burnham Lambert Inc.
Despite concerns about the projects, Thomassen concluded that the purchasers, all institutional investors, were sophisticated enough to make their own judgments.
Last summer the country-created jail financing corporations that issued the bonds defaulted after capitalized interest and reserves ran out. The projects have since been purchased for $6 million each by the Texas Department of Criminal Justice, which is about half their original cost.
One of the six counties involved. San Saba County, Tex., is among those approached by developers proposing almost identical 500-bed projects that could involve bond financing of up to $20 million, local officials said.
"To say the least, we are proceeding very carefully," said San Saba County Judge Harlen Barker, who admits he was reluctant to even consider the proposal. "I thought, ~Hey, if I bring this up are they going to hang me out here in one of these trees on the courthouse lawn?'"
He confirmed that the country is considering two proposals. One would be a speculative prison like the defaulted project now owned by the state. The other could involve a long-term contract with a state agency to use the space to house some of the thousands of felons from crowded county jails such as the one in Houston.
Some believe the latest round of for-profit prison proposals was triggered when the state issued a request for proposals asking local officials to build an estimated 2,000 beds the state would lease to handle some of the 18,700 felons it currently cannot house.
Under the proposal, the state would contract to house inmates in locally built and financed facilities at a per diem rate of $20 to $30 per inmate. While investment bankers say a state contract will be essential to any future projects, some questioned whether the low rates the state is paying would even cover debt service.
For instance, the N-Group projects were built on the assumption of rates of up to $40 a day, with as much as $30 of that going to pay debt service alone. Besides, one banker with experience in jail financing said there is talk the state has no plans for new facilities and instead is considering 500=bed additions to the four local projects it first contracted with in 1989.
Some bond experts who were asked about the new wave of proposals expressed concern that development-hungry local officials might be convinced there will always be demand for such for-profit jails.
"It's like before, there's a need for space, but there has to be an ability to pay to use that space," said a bond lawyer.
Few know that better than San Saba County officials. The local project was built on the assumption that the state's booming prison population would create a long-term demand for the space. But when the six N-Group projects opened last spring, no one used them. The state has now filled the facility only after buying it for half its original cost.
There is no shortage of inmates. Gondeck said stone officials are projecting that there will be more felons to fill such temporary jail space even after Texas completes its own $2 billion bond-financed construction of new prisons by the end of the decade.
However, he tells local officials, the Legislature is not appropriating the money needed to lock up all the criminals that lawmakers want locked up.
In the two-year fiscal period that began Sept. 1, 1991, the agency was allotted $113 million to pay counties to house felons. And with eight months until the end of the fiscal year, the state is already $34 million over that budget.
"It is estimated that we will go $80 million over that budget this year," Gondeck said. "We cannot guarantee there will be funds in the future ."