CHICAGO - The trustee for holders of $28.4 million of defaulted Appleton, Minn., prison bonds has agreed not to take immediate legal action to give the prison time to develop its operations.

In a letter to bondholders dated July 30, First Trust National Association in St. Paul said it would not pursue "legal remedies" in connection with the default until Jan. 1, 1995.

The nonprofit Appleton Prison Corp., which the city of Appleton created to issue the bonds and supervise the Prairie Correctional Facility, has defaulted on its February and August debt service payments.

The First Trust letter says that "at present, no funds are available to make any debt service payments." The trustee explained that if reserve funds were used to make those payments instead of for operating costs, the facility would be forced to close.

If the prison closed, "no revenues could be earned by the corporation for any future bond payments and the value of the bond collateral would greatly decrease," the letter says.

Robert Thompson, the city's coordinator, said the city is "satisfied" with the agreement. "It allows us to become operational," he said.

Thompson referred all questions regarding debt service to First Trust.

Appleton, located in rural southwestern Minnesota, issued $26.9 million of unrated tax-exempt revenue bonds and $1.5 million of unrated taxable bonds in 1990 to build the prison. City officials hoped to capitalize on nationwide prison overcrowding to help revitalize Appleton's sagging economy.

Construction of the Prairie Correctional Facility began in February 1991 and ended in May 1992. The prison was built on speculation, meaning that the city did not have any contracts to house inmates before it was built. It is owned by the city and supervised by the prison corporation, a seven-member panel appointed by the city.

In February, the prison corporation defaulted on a $1.5 million payment because of a lack of inmates. The facility was completed in November 1992, but had difficulty in securing contracts until earlier this year when the Commonwealth of Puerto Rico agreed to send 516 prisoners to the facility by September.

First Trust reported that a majority of bondholders in May approved the transfer of $1.1 million from the bond reserve fund to help finance $1.5 million of the prison's startup costs. The remaining startup funds will come from an operating loan from Appleton banks. The trustee, with bondholder approval, has agreed to pledge reserve funds as collateral for the loan, the letter says.

Since it was completed in May 1992, the prison has been tapping bond reserve funds to pay for its operational costs.

While the agreement will help the prison get on its feet, the trustee said that "at this time it is not possible to determine whether bond debt service in arrears can be repaid or whether bond debt service due in the future can be paid in full."

As part of the agreement, the prison corporation is obligated to resume debt service payments due prior to and after Nov. 1, the letter says. A First Trust official said yesterday that preliminary projections indicate the prison will have sufficient funds on hand on that date to remedy the default.

In March, the prison corporation signed an agreement with the Commonwealth of Puerto Rico to fill the prison to capacity with 516 inmates, pending completion of an additional building in September. So far, about 250 inmates have been transferred to the facility.

There are 57 privately managed prisons in operation across the country, according to Charles Thomas, a professor of criminology at the University of Florida. The Prairie Correctional Facility is one of 24 that are privately operated and publicly owned.

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