BRADENTON, Fla. – A second county jail in Florida has been told by the Internal Revenue Service that its bonds may be taxable because of tax law violations.
The Glades Correctional Development Corp. said that it received a preliminary determination that its tax-exempt bonds violate the private activity use test of the IRS code, according to a notice posted on the Municipal Securities Rulemaking Board's EMMA website Monday.
The GCDC issued $33 million of first mortgage revenue bonds in 2006 to finance the construction of a 440-bed jail in Moore Haven, on behalf of Glades County, according to the offering statement for the bonds.
The south-central Florida facility was intended to house detainees of the U.S. Immigration and Customs Enforcement and ICE staff, as well as inmates of the U.S. Marshals Service and the county.
An IRS analysis, included in the notice on EMMA, found that the bonds were issued with the intent to rent the facility to ICE as the primary user and the USMS as the secondary user.
Historical records and other information uncovered by the IRS determined that from 2007 to 2015, federal inmates represented more than 85% of all inmates in the facility, "clearly meeting the private business use test."
"The issuer's only source of revenue for operational costs of the facility and for payment of the principal and interest on the bonds is over 85% from bed rentals to federal agencies," the IRS notice said. "This indicates that the private payment test…is met."
If more than 10% of bond proceeds are used for private use and 10% of debt service payments can be from or secured by private parties, such bonds are private activity bonds, which are only tax-exempt if they fall into one of several special categories for qualified PABs, none of which includes jails.
GCDC's nonrated, non-insured bonds defaulted on interest payments in 2014 and 2015, and remain in default, according to notices on EMMA.
The corporation entered into a forbearance agreement in November 2015. It expired Oct. 1, 2016.
Robert DeMann, chief deputy for corrections with the Glades County Sheriff's Office, said Tuesday that the IRS first issued a notice stating that a random audit would be done.
"We went through providing them with all the information," DeMann said. "They made the determination that they were not tax-exempt."
DeMann said an exchange of the bonds for taxable debt is pending completion of a court process to notify bondholders by the trustee, UMB Bank NA.
The jail experienced a drastic decline in immigrant incarcerations starting in late 2014, according to the corporation's 2015 financial statement.
Reports filed by the county sheriff showed that the lockup had an average monthly occupancy rate of 37.3% between Nov. 30, 2015 and Sept. 30, 2016.
Occupancy levels rose to an average 54.5% in October-November 2016.
Sheriff David Hardin, who took office in January, told the Glades County Democrat that he was "very excited" about the election of President Donald Trump because that could mean more immigrant detainees and more revenue.
"We actually have seen an increase already and we hope that trend continues," Hardon told the newspaper. "We expect the criminal immigration detainees to rise in the New Year."
On Tuesday, DeMann said occupancy at the jail was over 80%.
In September, the Baker Correctional Development Corp. in northwest Florida posted a notice stating that the IRS had "informally advised" that its $45 million of first mortgage revenue bonds issued in 2008 are taxable.
Bondholders were scheduled to be updated about the status of the debt in a conference call planned for Wednesday, according to a notice on EMMA.