Empty Texas Jail Defaults and Gets Downgraded; Another on the Block

DALLAS — Standard & Poor’s on Tuesday lowered $35.8 million of outstanding Texas Midwest Public Facility Corp.’s 2009 revenue bonds to D from CC after the issuer defaulted on debt service for its vacant private jail in Jones County.

“The trustee notified bondholders that the corporation defaulted on the bonds on Oct. 1, 2011, when it did not make its required $2.23 million interest and principal payment,” said S&P analyst Sarah Smaardyk. “We understand that the jail facility remains vacant and that no revenues from the substance-abuse felony punishment facilities and intermediate sanction facilities were received prior to the payment due date.”

The trustee was able to pay half the interest payment due on the bonds on Oct. 1 by using $774,813 from the reserve fund under the indenture for the bonds, Standard & Poor’s said. After paying 50% of the interest payment, the trustee will hold $1.3 million in the reserve fund, which will be used to make interest payments to provide a source of funds for default remedies.

The jail, completed in May 2010 at a cost of $35 million, has never been occupied.

Jones County, north of Abilene, built the jail with the understanding that the Texas Department of Corrections would provide inmates. The original contract was for two years, with three one-year renewal options, with funds already appropriated through fiscal 2011. However, the state notified Jones County officials that the department would not be sending inmates to the facility, though the contract has not been officially terminated.

County officials hope they can obtain inmates from California under a plan to sharply reduce that state’s inmate population. In May, the U.S. Supreme Court found that California’s overcrowded prisons constituted cruel and unusual punishment.

The Jones County jail is one of several private lockups in the state and nation facing pressure from falling incarceration rates. Texas has reduced imprisonment under revenue constraints, and one public prison has closed.

In the West Texas town of Littlefield, the $11 million Bill Clayton Detention Center was to return to the auction block Tuesday after a previous winning bid for the vacant private jail in July fell through. The 383-bed facility held inmates from Idaho before that state in January 2009 canceled its contract with private operator Geo Group, which, in turn, canceled its contract with Littlefield.

Unlike the bonds backing the Jones County prison, those in Littlefield are backed by city utility revenues. In July, the city thought it would be able to reduce its outstanding debt to $3 million when a bid of $6 million was accepted. However, the unidentified bidder through the auction company Williams & Williams decided not to follow through, officials said.

In the Tuesday auction, as in the July sale, the highest bid over $5 million will buy the prison. Results of the auction were not available Tuesday afternoon. Standing on 30 acres, the Clayton Center was built in 2000 and updated in 2005. It has five one-story, air-conditioned, concrete-block buildings and a capacity of 383 inmates.

With only 5,700 residents, Littlefield has struggled to service the bonds, which represent 77% of the town’s debt. The prison cost the city its investment-grade rating of BBB-plus from Fitch Ratings  in 2006. Prospects for servicing debt in May brought a negative outlook from Fitch on the now-BB-plus rating.

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