WASHINGTON - The Justice Department is exploring whether to create a state revolving fund program, seeded with federal money and leveraged with tax-exempt bonds, to help finance the construction of about $6 billion a year of court and prison facilities.

A private study commissioned by the department's National Institute of Justice has concluded that a program modeled on the Environmental Protection Agency's 50-state revolving fund system could go a long way toward addressing a lengthy list of facilities mandated by court orders against prison overcrowding and other problems.

The department's program, unlike the EPA's, would start from scratch since there are no existing federal grant or loan programs for criminal justice facilities that could be converted into a revolving fund program, said John Gillespie, managing director of Bear Stearns & Co., which conducted the study for the justice institute.

While it would be difficult to start a new federal construction program at a time when Congress and the administration are intent on reducing the deficit, Gillespie expressed optimism that President-elect Bill Clinton will show interest in the idea. It could be a component of his $20 billion-a-year infrastructure investment initiative, he said.

But he acknowledged that Clinton has primarily focused on transportation and environmental infrastructure as well as deficit reduction.

Nolan Jones, an official at the National Governors' Association who said he has discussed the rEvolving fund proposal with Clinton transition, officials, said it is "not as high a priority as health care or deficit reduction."

Nevertheless, Charles B. DeWitt, the justice institute's director, said at a discussion session on the revolving fund proposal Thursday that he intends to present the study's findings to the incoming administration. He said a compelling need has developed for such financial assistance.

"I see this as a way to take a relatively small amount of federal money and augment it three or four times" through the issuance of state and local bonds sponsored by the revolving funds, Gillespie said.

Bear Stearns looked at alternatives to revolving funds in its study. including direct grants and an expansion of industrial development bond authority for justice facilities. But those ideas were seen as either too expensive or unrealistic, he said.

Other discussion participants agreed that a new federal financing mechanism is badly needed to help address the growing backlog of construction needs caused by escalating crime, longer prison sentences, and increased litigation in most states.

Gillespie estimated the cost of new court, prison, and police facilities needed each year at about $6 billion, adding to a backlog already totaling in the "tens of billions."

He pointed out that 44 states are under court orders to upgrade their prison facilities to correct overcrowding and other poor conditions. Another one-fifth of local governments are also under court mandates to do so, he said. "For county governments, jails are often the biggest capital need," he said.

The court orders hanging over the heads of the states are not unlike other unfunded federal mandates enacted and passed on by Congress, he said. DeWitt said the court orders are a major reason the Justice Department is looking into the revolving fund proposal.

Gillespie said that increased funding to build courts and jails, just like increased funding for highways, would create a lot of construction jobs. And addressing the growing gap in criminal justice funding would produce other economic benefits, such as lowering the crime rate and improving the quality of life, he said.

Participants at the discussion session Thursday generally endorsed the revolving fund idea, but they warned that it must be structured to avoid some pitfalls encountered by the EPA program.

"The idea has a track record" of success and "may be an attractive thing to do in a low-growth era," said John E. Peterson, president of Government Finance Group Inc., a division of Legg Mason Co.

But he noted that the EPA program has been "too limited" because of a 20-year limit instead of the usual 30 years place by Congress on the maturities of bonds issued by the revolving funds.

Other problems experienced by the EPA program were "a very complicated implementation phase" and difficulties in attracting large local issuers to participate in pooled offerings when they already have ready access to the market.

Sarah Eubanks, executive director of the Michigan Municipal Bond Authority, which operates that state's environmental revolving fund, agreed that any criminal justice revolving fund program should allow longer maturities that are "related to the useful life" of the facilities being built.

But she said the states have succeeded in attracting strong credits, as well as sponsoring many weak credits through the funds. She noted the Michigan fund offers a substantial enticement to all borrowers with a subsidized, 2% rate on its loans.

One problem a justice facilities fund may have, Eubanks and Peterson said, is a lack of steady income from user fees to support the financings. While jails and other facilities sometimes produce income through work programs and fees, these are not very reliable, participants said.

Gillespie said that because of the lack of revenues, bonds issued by the criminal justice revolving funds would be sold "more off the general obligation credits of the state and local governments" than the EPA-backed bonds.

But the most immediate obstacle the revolving fund proposal will face is the scarcity of funds at the federal level, officials said.

"It seems to the me the problem is to get seed money for the SRF," said Milton Wells, executive director of the National Association of State Treasurers, adding that with a $5 trillion national debt, "that's the most you could hope to get."

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