DALLAS - The Texas Public Finance Authority plans to launch the state's record $1.1 billion prison bond program next month with a $61 million competitive deal.

About $672.1 million of the issuance program should be sold by August 1993, officials said yesterday. The timetable for the rest depends on the Texas Legislature, which will make the appropriations next spring.

The Texas Department of Criminal Justice intends to use more than half of next month's $61 million deal to buy six for-profit jails financed in 1989 with junk municipal debt, according to Glen Hartman, executive director of the authority.

The remainder will be used for initial engineering and upfront costs in building 25,300 beds for the state's planned expansion of its corrections system.

A senior corrections official said the agency is planning four bond sales by Aug. 31, 1993, close of the current two-year budget cycle.

The $61 million deal will be the smallest, said David McNutt, assistant budget director for the Texas Department of Criminal Justice. "But we plan more sales," he added.

By December the agency expects to have asked the public finance authority to sell up to $100 million of GO debt. It hopes to sell another $300 million of debt next April, and the final $210 million in August 1993. The size and timing of the issues are subject to change.

Mr. McNutt confirmed that $39 million of the first bond sale will be set aside for the purchase of the six 500-bed jails. Earlier this year, the board governing the state correction system voted to take control of the local projects through the legal condemnation process.

Under that process, the state would ask a local judge to condemn the project and determine its fair value. The board voted to buy the projects if the cost did not exceed $6 million for each facility, which is about half the original construction cost for the projects.

The 3,000 beds are expected to be used for drug treatment centers.

Barney Knight, a lawyer with Bickerstaff, Heath & Smiley in Austin, which represents one of the rural Texas counties involved, said that proceedings had not begun with his client, Pecos County.

Institutional bondholders, which purchased the $74 million of high-risk, unrated bonds from Drexel Burnham Lambert Inc. in late 1989, are not expected to fight the condemnation. However, they are opposing the former developer, underwriters, legal counsel, contractors, and others in a federal lawsuit alleging securities fraud.

According to the lawsuit, the investors are some of Wall Street's best-known institutional clients. They are Apex Municipal Fund Inc., Merrill Lynch High Income Municipal Bond Fund Inc., Franklin High Yield Tax-Free Income Fund Inc., T. Rowe Price Tax-Free High Yield Fund Inc., Stein Roe Municipal Trust, Allstate Municipal Income Opportunities Trust I-III, Municipal High Income Fund Inc., and the sole individual investor, Roy G. Andersen.

Rick Porter, a bond lawyer at McCall, Parkhurst & Horton of Dallas, which represents investors said yesterday that his clients last month notified the trustee, First City Bank in Houston, that five of the issues were in technical default.

The sixth deal, involving a project in Angelina County, Tex., has not been declared in default and continues to house an average of more than 300 prisons a day.

While sources speculated that Angelina would make its Aug. 1 debt service payment, they said the other five projects would not. The trustee could not be reached by telephone.

"To simplify the process, the bondholders went ahead and notified the trustee of the default," said Mr. Porter.

Mr. Knight added, "We've entered into an agreement with the trustee so that they have now swept the accounts and the money that was there has been paid to the bondholders."

Mr. Porter said that "several hundred thousand dollars" were paid in June to bondholders. The investors sought the default declaration on several grounds, including the fact that some of the empty facilities had never been certified for operations.

State corrections officials expect to have money to purchase the for-profit jails by late August. However, the $61 million prison bond offering must first be approved by the Texas Bond Review Board at its July 23 meeting.

The board's staff discussed the deal yesterday at a routine working meeting.

Mr. Hartman said that in addition to the new-money slate, the Public Finance Authority will also discuss refundings of nearly $500 million of debt at its July 28 meeting. The largest part of that would be a refunding of $416 million of state GO bonds used for corrections and mental health projects.

He said the state usually targets savings of 5% on its refundings, but noted, "We definitely will be shooting at something less than 5%."

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