The cost of Alabama's prison P3 soars

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The public-private partnership Alabama is using to build three prisons for men has undergone major increases in cost and scope.

The Alabama Department of Corrections has begun nonpublic discussions on financial terms with two developer teams that will purchase land and design, build, finance, and maintain three turnkey correctional facilities. ADOC will lease and staff the facilities.

Gov. Kay Ivey said time is of the essence to rebuild Alabama’s correctional system to improve safety for prison staff and inmates.

The biggest change in the long-planned effort to replace three crumbling state prisons is the cost.

In the state's June 2019 request for qualifications from developers, the estimated capital cost to build three prisons was $900 million.

The final request for proposals released April 6 of this year says the state's "affordability limit" or cap on the annual amount it plans to spend leasing the prisons is a combined $88 million, for a total of $2.64 billion over the 30-year lease period. Lease payments are subject to annual appropriation by the Alabama Legislature.

"The procurement process will now enter into a confidential negotiation period to ensure and secure the best possible value for the state," Governor Kay Ivey and ADOC said in a joint release Sept. 3, announcing the developer teams. "The ADOC expects financial close for the facilities to occur in late 2020, at which time the final financial terms will become publicly available."

In addition to purchasing property, building and financing the prisons on 210-acre sites in Bibb, Elmore and Escambia counties, the developers will provide infrastructure maintenance and facility life-cycle replacement over the term of the leases.

The state selected a consortium of CoreCivic, Caddell Construction, DLR Group engineering, and R&N Systems Design to negotiate the terms of building prisons in Elmore and Escambia counties. One prison will have 3,954 beds and the other will have 3,104 beds.

The cap on CoreCivic group's payment is $32.6 million annually for the larger prison and $27.7 million for the smaller one, according to the RFP.

The Alabama Prison Transformation Partners — a consortium of Star America, BL Harbert International, Butler-Cohen, Arrington Watkins Architects, and Johnson Controls Inc. — will negotiate to build a 3,104-bed prison in Bibb County. The capped lease amount is $27.7 million a year.

The ADOC anticipates construction will begin in early 2021.

Not only has the cost of the project changed, but the scope has changed too. The RFP says "no milestone payments will be made during design and construction," but the RFQ said the state planned to lease three facilities using an availability payment structure.

The RFQ said the state’s goal was to build new correctional facilities with a 50-year design life. The state said that 30-year leases would be negotiated in the RFP.

Neither ADOC nor Ivey responded to questions submitted by The Bond Buyer about the P3 project, including why the state plans 30-year leases for facilities with 50-year lifecycles.

Alabama is undertaking the P3 process because state lawmakers failed over several years to agree on a bond-financing plan.

Prisons are the type of facilities that lend themselves to the involvement of the private sector, said Joseph Krist, municipal bond analyst and author of Muni Credit News.

“The winning bidder will have to do a lot and that will influence cost,” he said. “It is, however, a good way around opposition to bonding.”

After reviewing Alabama’s RFP, Krist said the proposal is similar to a number of prison deals that he’s seen over the years where the actual construction is done privately with the state beginning payments and taking over operations upon acceptance.

“It likely sells better with voters/residents versus plans to do a P3 for roads paid for by tolls,” he said. “This one can probably be shown to be more cost effective.”

Krist said he believes P3 projects should be viewed and evaluated as one of an array of possible options for many "governmental" projects.

“If they offer the most effective option then states and cities should look at them,” he said. “If they don't offer the best alternative then don't do a P3.”

Documents released by the state don't say if Alabama will help the developers by creating a financing entity, but the request for proposals says ADOC encouraged the teams to consider taxable and tax-exempt financing structures and that the state "will make good faith efforts” to facilitate each proposer’s reasonable financing approach.

Alabama's general obligation bonds are rated AA-plus by Fitch Ratings, Aa1 by Moody's Investors Service, and AA by S&P Global Ratings. All three say the outlook on the state's debt is stable.

The state had $722.8 million of outstanding general obligation bonds as of Sept. 30, 2019.

Ivey said time is of the essence to rebuild Alabama’s correctional system from the ground up to improve safety for prison staff and inmates.

“Given the failing state of the ADOC’s existing infrastructure and that the department already is faced with more than $1 billion in deferred maintenance costs alone, pursuing new construction without raising taxes or incurring debt is the fiscally sound and responsible decision," she said Sept. 3.

Ivey also said she's pleased with the integrity of the procurement process and looks forward to working with the Legislature "as we comprehensively address this intricate and important issue that affects us all.”

Alabama Attorney General Steve Marshall praised Ivey for moving forward with a plan to build the new prisons.

“Governor Ivey deserves our gratitude and praise for tackling head-on the toughest issue facing our state, replacing Alabama’s aging prisons with modern facilities," Marshall said in a statement. "Years of delays in agreeing on a plan for their replacement, coupled with ever more costly maintenance, have created the need for action on the part of the state."

Some state lawmakers have questioned the lack of public details about the project, including who will own the prison buildings after the 30-year lease runs out.

Sen. Greg Albritton, R-Atmore, told the online news site that he has questions about finances that haven't been answered.

“What happens when or if the owner fails to make payments, goes bankrupt, has other financial issues, and then the bank tries to repossess?” he asked. “Where is the state in that regard?"

One reason Ivey says time is of the essence is that the state has been sued several times.

In 2014, the Southern Poverty Law Center and the Alabama Disabilities Advocacy Program filed a class-action lawsuit against the state contending that the poor level of mental health care provided to prisoners violated the Eighth Amendment, which prohibits cruel and unusual punishment.

In February 2019, U.S. District Judge Myron H. Thompson ruled that ADOC had violated the Eighth Amendment and that it was “deliberately indifferent” because of its failure to adequately monitor the mental health of incarcerated people in solitary confinement.

In April 2019, the Department of Justice notified the governor that its attorneys had reason to believe that Alabama’s prisons routinely violated the rights of prisoners “by failing to protect them from prisoner-on-prisoner violence and prisoner-on-prisoner sexual abuse, and by failing to provide safe conditions.”

The DOJ said the suspected violations were exacerbated by “serious deficiencies in staffing and supervision and overcrowding.”

In July of this year, the DOJ released a report that concluded there is reasonable cause to believe that the conditions at Alabama’s prisons violate the Eighth Amendment of the Constitution because male prisoners are subjected to excessive force by prison staff.

The DOJ provided ADOC with written notice of its allegations and the minimum remedial measures necessary to address them.

“The results of the investigation into excessive force issues within Alabama’s prisons is distressing and continues to require real and immediate attention,” said Louis Franklin, the U.S. Attorney for the Middle District of Alabama.

Richard Moore, the U.S. Attorney for the Southern District of Alabama, said while there are challenges with correcting systemic constitutional deficiencies, the problems in Alabama prisons have existed for decades.

The DOJ said it planned to contact the state “to find mutually agreeable settlement terms.”

Marshall, Alabama's attorney general, responded to the report saying the DOJ had “ambushed” the state because it had been working diligently toward an agreement.

“To be clear, the state of Alabama has never denied the challenges that the Alabama Department of Corrections is facing,” Marshall said. “As evidence of the seriousness with which we have taken the DOJ’s allegations, the state is undertaking efforts to construct three new men’s facilities that we believe, and the DOJ has conceded, will have a significant positive impact on many of the areas of concern that the DOJ has identified.”

Marshall also said that the state will not, under any circumstances, enter into a consent decree with the federal government to avoid a lawsuit.

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Public-private partnership Infrastructure Lawsuits Kay Ivey DoJ State of Alabama Alabama