Scarcity of Inmates Spurs Bondholders Of For-Profit Jails To Feel Out Texas

DALLAS - Bondholders of six for-profit jails have asked Texas to consider buying the 500-bed facilities, even though none of the bond-financed projects have defaulted.

"The bondholders made overtures about purchasing the facilities," said Selden Hale, chairman of the Texas Department of Criminal Justice. "We are not going to do that unless we get it at a fire sale. There are not going to be any state inmates in those units unless they sold them to us at a cut-rate deal."

Spokesmen for the investors, who have hired Goldman, Sachs & Co. and Dallas bond counsel McCall, Parkhurst & Horton to advise them on the projects, declined to comment.

The bondholders would not take possession of the facilities - one of which is operating - unless the lease revenue bonds go into default. That is not likely before Aug. 1, 1992, when the projects must be self-supporting from operations.

The next payment, due in February 1992, is expected to exhaust the remaining capitalized interest and reserve accounts set up when now-bankrupt Drexel Burnham Lambert Inc. underwrote $74 million of tax-exempt bonds in 1989.

"The bondholders know that after next February, it will be hard to unload any of that paper," said a bond lawyer not involved in the deals. "It makes sense that they are starting to look at their options right now."

During an interview, Mr. Hale said the state could use some of the facilities, if they were purchased cheaply enough and if modifications could be made. The facilities were built to jail standards, but he believes they would not likely meet court mandates for prison space.

Mr. Hale declined to speculate on what price the state might be interested in paying for the jails, but said he would not expect much competition. "I'm the only bidder," said Mr. Hale, an Amarillo lawyer.

Meanwhile, officials in the five counties where jail beds remain empty continue to hope for fee-generating inmates to fill the cells in their $12 million lockups.

Pat Graham, president of Houston-based N-Group, developer of the projects, believes Texas lawmakers last weekend solved the empty cell problem for his former clients when they included two obscure provisions in Senate Bill 5, the omnibus prison bill.

He said one provision would allow certain parole violators to be housed in surplus jail space around the state, while another would authorize the Texas Commission on Jail Standards to shift inmates from county jails whose crowding is found to violate the U.S. Constitution's ban on cruel and unusual punishment.

"Isn't it great news?" asked Mr. Graham, who hired a lobbyist to work for the provisions. "There is no doubt the prisoners are there. What we've been doing is fighting for two years to show the bureaucrats there is the authorization to use the facilities."

While he predicts that inmates could be available this fall, others are not as certain. They note that Harris County is the only jail system in Texas under court order to relieve crowding. And that county has already contracted with the Angelina County Detention Center - the only one of the six projects in use - to house about 400 inmates.

"That [the provisions] only applies to one county," said Mr. Hale, who has been critical of the N-Group projects.

Jack Crump, executive director of the jail standards commission, also expressed doubts that the measures would solve the inmate shortage at for-profit jails.

"I don't think so," he said when asked if the measure would help. "Harris County is the only jail with a problem, and they are about to complete 4,000 beds of their own."

Ed Toles of Johnson & Gibbs in Dallas, a lawyer for four counties, declined to say what impact the new law could have on the future of the projects, but he added, "I think that's good legislation and that's encouraging."

His clients - Falls, LaSalle, San Saba, and Swisher counties - have been actively involved in trying to locate prisoners to put into the jails. They hired Galt Graydon, a lawyer in the Austin office of Johnson & Gibbs, to lobby the Legislature about the facilities.

Their message to lawmakers and others apparently includes the information that N-Group is no longer associated with the projects. This summer, the counties canceled contract monitor agreements with the firm, which was paid an upfront, 3% development fee on the projects, about $2.2 million.

"The counties I work with have made it clear that their relationship with N-Group has ended," Mr. Toles said.

Mr. Graham, whose firm is proposing similar projects in New Hampshire and Oregon, said his relationship to the Texas jails has indeed been severed.

"I built them. They are built, and now I don't have any involvement," he said. "I have a moral obligation to show that the business plan will work because I just didn't build them and run off."

The fifth county, Pecos County in West Texas, also has severed ties with the developer and is moving to break a jail management contract with Pricor Inc. of Murfreesboro, Tenn.

Pecos County Judge Fredie Capers said the county wants Pricor to furnish the prison and staff it to improve the chances of contracting to house inmates. "You can't bring inmates in until you've got furnishings and staff, but Pricor said they wouldn't until they have a guarantee of inmates."

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