[A-List] Prison Legal News on Prison Financing

Paul Wright pwright at prisonlegalnews.org
Thu Nov 13 14:52:32 MST 2008


Readers may be interested in this article on prison financing in the latest
issue of PLN. It is a lengthy article so I am including the link and the
first part of the article. For those who wonder how mass imprisonment
impacts financing here it is:

 

http://www.prisonlegalnews.org/20629_displayArticle.aspx

 

 

Doing Borrowed Time: The High Cost of Back-Door Prison Finance

by Kevin Pranis

Much public attention has been devoted in recent years to the "industrial"
side of the prison boom, from the fortunes of private prison operators to
the profits generated by telecommunications companies from lucrative phone
contracts. Less attention has been paid to the sector of the prison industry
that gets paid each time a prison is financed or built. Unlike those who
make their money from operations, firms that get paid on the front end may
have little stake in the ultimate use or financial viability of a new prison
or detention project. They profit whether the beds are empty or full.

Declining public enthusiasm for costly prison expansion plans has closed off
traditional options for financing new prison construction. But this trend
has created new opportunities for a cottage industry of investment bankers,
architects, building contractors, and consultants to reap large rewards with
"back-door" financing schemes. A review of recent prison, jail, and
detention expansion initiatives shows that federal, state, and local
governments are using back-door financing mechanisms to borrow hundreds of
millions of dollars to build facilities that the public does not want and
cannot afford. 

Paying For Prisons-?Corrections Takes The "Public" ?Out of Public Finance

Until the mid-1980s, prisons were generally built in one of two ways. State
officials either took the "pay-as-you-go" approach by funding new
construction out of general revenues; or they borrowed money through the
sale of general obligation (GO) bonds.1 A general obligation bond is an
unlimited repayment pledge that is backed by the "full faith and credit" -
including the taxing power - of the issuer. Failure to pay debt service on a
general obligation is rare among large government entities and is tantamount
to bankruptcy. The issuance of new general obligation bonds often requires
approval by taxpayers in the form of a bond referendum.

As correctional populations and costs mounted in the 1980s and 1990s, states
had greater difficulty funding expansion out of their operating budgets or
winning public approval for new debt. State officials responded to these
developments by issuing another type of debt - revenue bonds - to finance
new prison construction.

Revenue bonds are limited obligations that are backed only by assets and
income streams specified in the issuing documents. Revenue bonds were
originally designed to provide a source of financing for projects that could
generate sufficient revenues to pay for themselves over time. The classic
example is a bridge that generates enough income from tolls to cover the
cost of operations, upkeep and debt service on the bonds issued to finance
its construction. Revenue bonds can be issued without public approval
because they are not backed by the full faith and credit of the government.

Prisons, jails and detention centers would seem to be poor candidates for
revenue bond financing since they are largely or entirely funded with tax
dollars. Yet in 1980, Gov. Mario Cuomo responded to voters' rejection of a
$500 million prison bond referendum by turning to the state's Urban
Development Corporation (UDC). 

The UDC is a nonprofit corporation established after the assassination of
Martin Luther King, Jr. to expand access to affordable housing. The Governor
used the UDC to issue revenue bonds to build upstate prisons - a very
different kind of low-income housing. The "revenues" backing the bonds came
from leases between the UDC and the state's Department of Correctional
Services.

Under such lease-revenue arrangements, the state has no legal obligation to
repay the debt incurred by its bonding authority, and the legislature can
terminate the lease at any time by choosing not to appropriate the necessary
funds. Revenue bond financing allows officials to dispense with restrictions
on general obligation debt such as constitutional debt limits and public
referenda requirements.

Behind the legal fiction, however, is a "moral obligation" to investors who
purchased the bonds. The consequences of failing to meet such a "moral
obligation" can be as serious as the consequences of failing to meet a legal
obligation. They range from a costly "downgrade" of a state's bond rating to
reluctance of investors to make further investments in the region. 

Revenue bonds and other back-door financing schemes became more popular
during the 1990s when state officials found themselves squeezed by mounting
corrections costs and a growing anti-tax chorus. The website PublicBonds.org
reports that, by 1996, more than half of new prison debt was being issued in
the form of certificates of participation, a type of lease-revenue bond. 

Some local governments continue to issue general obligation debt to finance
jail expansion. But no state has built a new prison with general obligation
bonds since the turn of the century and few have put the question to voters.
It's not hard to figure out why. A 2002 proposal to build a $25 million new
prison in Maine was defeated by a two-to-one margin, while California Gov.
Arnold Schwarzenegger was recently forced to pull a $2.6 billion prison
proposal from a bond package after failing to find support for the measure
within his own party.

Instead, states pursuing a prison expansion agenda have done so through
increasingly complex, and costly, back-door finance schemes. State officials
are not alone: back-door financing is playing an increasingly important role
in prison and jail expansion at the federal and local level, as well as in
the private sector. 

Officials in Shelby County, which includes the city of Memphis, Tennessee,
were recently courted by the nation's leading private prison companies with
offers to build a massive new jail. A plan advanced by The Geo Group
(formerly Wackenhut Corrections) would have established a nonprofit bonding
authority to issue revenue bonds, while Corrections Corporation of America
offered to build the facility using its own credit line in exchange for a
50-year lease agreement. In 2005, CCA made a similar proposal to the leaders
of Richmond, Virginia. 

 

Paul Wright, Editor

Prison Legal News

P.O. Box 2420

West Brattleboro, VT 05303

802-257-1342

 

Seattle Office:

2400 NW 80th St. # 148

Seattle, WA 98117

206-246-1022

 

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