DALLAS - Privately operated detention centers face an uncertain future after a series of bond defaults and changes in incarceration policies, but debt for the risky projects is still coming to market.
In Cleveland, Texas, on the outskirts of Houston, the city council will consider a proposal from Emerald Companies to build a 1,000-bed federal detention center on Oct. 6, an offer that was rejected in August by neighboring Chambers County.
Cleveland City Manager Kelly McDonald said she was aware of the difficulties other cities and counties have faced on for-profit jail projects that went into default. While most cities and counties scrupulously avoid a tax pledge, some are forced to find a use for facilities abandoned by their for-profit operators.
"We are going into this with our eyes wide open," McDonald told The Bond Buyer. "We're receptive to any business that wants to create jobs in our city, but we'll do our due diligence."
Moody's Investors Service downgraded Bowie and Polk counties' general obligation ratings in 2014 and 2015 after bonds for private detention centers went into default. The downgrades were attributed to revenue lost to the counties from the private facilities. Moody's restored a stable outlook to Bowie County's Baa1 rating in August.
Burnet County in Central Texas this year acquired a former private lockup for 55 cents on the dollar and made the facility its county jail.
Nine of 21 Texas counties that created conduit issuers for about $1.3 billion in municipal bonds for private detention centers have defaulted on their debt in Texas over the past decade, according to disclosure notices and news reports.
One of the more dramatic closures came Feb. 22 in far south Texas, when an uprising of immigration detainees heavily damaged the 2,200-bed Willacy County Detention Center. After the Federal Bureau of Prisons cancelled its contract with private operator Management Training Corp., the facility defaulted on more than $78 million of debt.
In Livingston, Texas, 28 miles north of Cleveland, a $45 million private detention center is less than half filled and in default. Conduit issuer IAH Public Facilities Corp. recently announced a settlement with the Internal Revenue Service on the tax status of its bonds.
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Emerald moved to Cleveland after striking out in Chambers County in August, when commissioners voted unanimously against building the project in Anahuac.
While Emerald said it expected to hire 300 people with a starting salary of $40,000, Chambers County Sheriff Brian Hawthorne voiced concern about the types of inmates who might end up in the facility and the potential loss of his own officers to the higher-paying operators.
In the town of Encinal near the Mexican border, Emerald abandoned a $23 million detention center that needed repairs 12 years after it opened. That forced LaSalle County to take over the vacant facility, and negotiate a forbearance agreement to finance repairs as bonds issued by a conduit issuer went into default.
Under a recent offer, investors in the LaSalle County Detention Center have until the end of October to accept 40 cents on the dollar for their bonds. In the meantime, county commissioners who serve as the board of the public facility corporation must find a way to staff the 680-bed lockup and seek inmates to support debt service.
In Alvarado, Texas, 25 miles south of Fort Worth, Emerald won the contract to operate a 707-bed federal detention center that broke ground in June. Bonds were issued under the conduit Prairielands Public Facilities Corp., on whose board Emerald CEO Steve Afeman served until 2011, according to board records. The $63.4 million of taxable bonds priced through Aegis Capital and Municipal Capital Markets Group.
Rated BBB by Standard & Poor's with a stable outlook, the bonds pay yields of 3% on 3.5% coupons in 2017 and 6.55% on coupons bearing the same rate at final maturity in 2027.
Mike Harling, executive vice president of Municipal Capital Markets, which has managed numerous private jail bonds, said that earning a credit rating has become increasingly important for private detention center bonds. In the late 1990's and early 2000's, unrated bonds for the jails were common.
"I think the business model is viable for a transaction where there is a client waiting for the facility and willing to pay for it," Harling told The Bond Buyer.
Harling said demand for detention centers has "diminished considerably" since the rush to privatize incarceration in the first decade of the century.
"There have been administrations that aren't terribly supportive of enforcing the laws on the books," Harling said, referring to federal policy on immigration. "And the economy clearly cut into state budgets."
Nonetheless, Harling said bonds coming to market for private detention centers will be "fewer but better."
William Sims, managing principal for underwriter H.J. Sims, said his company quit the private detention center business in 2010 after involvement in a number of deals in Texas since the year 2001.
"Basically, for those 10 years, the bonds had a very good track record," Sims told The Bond Buyer. "Around 2010, the number of prisoners fell dramatically. That began to affect the credit. We made a decision about five years ago that we were not going to keep participating."
Sims said that more lenient sentencing guidelines and federal detention policies were key factors in the company's decision.
"The change in policy had a direct impact," Sims said. "There were either too many facilities or not enough prisoners."
According to research by the nonprofit Sentencing Project, private detainees in the United States grew by 259% between 2002 and 2010, due primarily to increased efforts to find, incarcerate, and deport people who violate immigration laws.
In Alvarado, City Manager Clint Davis said the city has been studying the Prairielands Detention Center for five years and is confident that no local tax dollars will be at risk.
"We have talked with our city attorneys and reviewed and reviewed any liabilities associated with it, any recourse associated with it," Davis told The Bond Buyer. "We've talked with the ratings agencies to be as comfortable as possible with it. Moody's did suggest that there might be a moral obligation but not a legal obligation. We were very cautious from that perspective."
Construction of the Prairielands Detention Center coincides with Johnson County's plan to build a $22 million jail to replace the existing privately operated facility in Cleburne. Alvarado is in Johnson County. The privately operated county jail was previously the designated detention center for Immigration and Custom Enforcement.
Alvarado's contract with ICE has a term of five years, but any contractor, including ICE, can cancel with 90 days' notice. That type of cancelation sent the Willacy County Detention Center's rating to junk bond status from investment grade.
As a backup, the Alvarado detention center will be certified to house county jail prisoners, as well as federal inmates, Davis said.
"If something didn't work out with Homeland Security, they [city council] wanted to be sure that it met Texas jail standards," Davis said.
Brandon Wood, executive director of the Texas Commission on Jail Standards, said his agency does not have jurisdiction over facilities that hold federal inmates exclusively.
The financing of county jails usually follows a more routine path, with lease-revenue debt implicitly backed by the county, Wood said. Winning public referendum support for a jail is almost unheard of, though Houston and Harris County, did accomplish the feat in 2013 when voters approved $70 million of bonds.
Wood said that while the Texas population has grown, the number of inmates in state and county jails has held relatively steady. Since the 2008 recession, "we've thrown away the idea that when the economy is down, the inmate population goes up," he said.
Like other states, Texas has developed new sentencing guidelines to keep more people out of jail, Wood said.
"There's been a shift in trends from 'Let's lock everybody up,' to 'Let's use our money smarter,'" he said.
With fewer state and local inmates, federal immigration detainees have become the target of private operators.
"There were 495,000 illegal detainees last year," Emerald's Afeman told Johnson County commissioners in March, according to the Alvarado Star. "Even if 50% commit crimes and are considered a different category prisoner [to be incarcerated at a different type facility], there would still be more than 200,000 detainees."
With ICE budgeting for 900 inmates per night in the Southwest, providing a minimum of 525 per night in Alvarado should be no problem, Afeman concluded.
Jennifer Elzea, spokesperson for ICE, would not comment on prospects for increased detainment of undocumented immigrants, but noted that "if operational needs no longer support such agreements or if ICE determines a facility to be unacceptable, they may be cancelled."
The agency also periodically reopens a contract as a "recompete" bid, she added. In Houston, for example, ICE is "recompeting" a contract for a new detention facility, with requests for proposals coming this year.
"This contract would replace the contract currently in place, which expires next year," she said.
While the Alvarado facility is expected to hold low-risk inmates, uprisings are a source of risk for bondholders, as the riots in Raymondville demonstrated.
Another facility, the Reeves County Detention Center in Pecos in far West Texas, has seen multiple riots. A report from the Justice Department's Inspector General in April found that Geo Group facility was understaffed and failed to address persistent security problems.
The 2,400-bed federal prison, about 175 miles east of El Paso, houses mainly immigrants who have committed low-level crimes, including drug possession and entering the United States illegally more than once.
The federal Bureau of Prisons operates 121 prisons and was responsible for 210,227 inmates as of last February, according to the Inspector General. The bureau began contracting with private operators to hold immigrants in 1999 and in February housed 26,801 inmates in 14 of the privately operated facilities. Two more centers are under solicitation.
"ICE takes very seriously the health, safety and welfare of those in our care," Elzea said. "The agency is committed to ensuring that individuals housed in our detention facilities have the care and resources they require."
