DALLAS - A privately operated jail near Houston will remain open under a forbearance agreement with the trustee representing owners of $49 million of revenue bonds, according to a disclosure announcement.
Jail operator Community Education Centers had planned to cease operating the facility in Livingston, Texas, on Feb. 1, 2015.
"If the Project is without an operator for any period of time the project may be shut down, which would negatively affect the value of the collateral securing the bonds and would cut off project revenues -- the primary source of payment on the bonds," according to the announcement from U.S. Bank National Association, which acts as trustee.
Under a forbearance agreement with U.S. Bank, CEC agreed to continue operating the facility for another year. The forbearance agreement was posted on the Texas Municipal Advisory Council website and the Municipal Securities Rulemaking Board's EMMA website, but the trustee declined to clarify some of the language in the notice.
"We cannot comment beyond the bondholder notices," U.S. Bank spokesperson Pat Swanson said.
"The company has agreed to a contract extension at the IAH Secure Adult Detention Facility and looks forward to continuing to provide a high level of service that is a source of pride for all our partners," said Chris Greeder, spokesman for CEC.
Conduit issuer IAH Public Facilities Corp. is in negotiations with the IRS over whether the unrated bonds issued in 2004 and 2006 qualify as tax-exempt debt. A number of rulings in the past year have gone against privately operated jails in Texas.
The IRS has disallowed tax exemptions when the bonds are used to finance facilities holding federal prisoners rather than state or local inmates. The IAH Detention Center has been holding detainees for the U.S. Immigration and Customs Enforcement office.
The initial $24.2 million of lease revenue bonds, underwritten by Herbert J. Sims & Co. and Municipal Capital Markets Group, Inc. in 2004, are unrated and carry no tax pledge. In 2006 IAH issued another $24.8 million through the same underwriters.
The IAH Secure Adult Detention Facility opened January 2006 and was designed to hold 533 inmates. In July 2007, the facility expanded to add 528 beds.
The IAH Detention Center was designed to create jobs in Polk County, about 70 miles northeast of Houston.
Although Polk County created the conduit issuer, it does not provide a moral or tax pledge for the detention center. Nevertheless, the detention center is a factor in the county's credit rating.
"We consider the county's budgetary performance weak with the total governmental funds having declined during the past two years, primarily because of a decline in the number of per-diem inmates held at the county on the state's behalf," Standard & Poor's analyst Sarah L Smaardyk wrote in an Aug. 7 report. "General funds declined by 4.4% and total governmental funds by 7.7% at fiscal year-end 2013."
The disclosure about the IAH facility comes on the heels of another event notice about a similar lockup in LaSalle County whose bonds were underwritten by the same finance team. U.S. Bank National Association recently posted a notice that the LaSalle County facility will close for an indefinite period of time, interrupting project revenues.
