SAN FRANCISCO - The citizens of Hardin, Mont., thought that a privately run jail facility would generate economic activity and jobs for their community of about 3,300 people. The investors who purchased the revenue bonds that financed the jail got yields of up to 7.625% tax-free.
The way things are going, none of them may get what they bargained for.
The 464-bed Two Rivers Detention Center was completed eight months ago. But it has no inmates.
State political and policy decisions, combined with an adverse legal opinion, have left the debt-issuing authority without any inmates for its jail. Without inmates, there is no need to hire guards. And no revenue is coming in to pay debt service on the $27 million in tax-exempt revenue bonds the Two Rivers Authority Inc. issued in 2006 to finance construction of the detention center.
The Two Rivers Authority, a port authority formed by the city to promote economic development, developed the jail as an economic development opportunity. Small-town Hardin has no need for such a large jail. But the plan calls for outside state, local, and federal governmental agencies to pay to send their detainees to the Hardin jail, which is to be operated by a private contractor.
The unrated bonds that financed the $20 million facility were underwritten by Municipal Capital Markets Group Inc. and Herbert J. Sims & Co.
Hardin is about 45 miles east of Billings, on the border of the Crow Reservation, and about 15 miles northwest of the Little Bighorn battlefield.
City and authority officials anticipated that their detention facility would house prisoners from the state Department of Corrections and from jails in other Montana counties.
But when the detention center was ready to open last summer, Two Rivers didn't have any takers for its jail beds. Corrections Department officials said they didn't need them.
The authority sought contracts to house inmates from outside Montana, but that hope was dashed by an adverse legal opinion from the state attorney general.
In the December opinion, Attorney General Mike McGrath said that Montana law does not permit the local authorities that operate detention centers such as the Two Rivers facility to take in out-of-state or federal felons.
Only the state Department of Corrections - not a local detention center - has authority over the exchange between states of convicted felons, according to McGrath's opinion.
"In summary, there is nothing granting independent authority to a detention center to freely contract with out-of-state or federal authorities for long-term confinement of inmates convicted in other jurisdictions," the opinion says.
In Montana, opinions of the attorney general carry the weight of law unless a court overturns them or the Legislature modifies the laws involved.
Hardin and the Two Rivers Authority filed suit in state court against the state government and the Corrections Department in December, after McGrath's opinion was released.
They asked the court to overturn the attorney general's opinion and to enjoin the state government from preventing the detention center from contracting with federal agencies and other states.
Oral arguments are scheduled for May, according to a spokeswoman for McGrath.
In a news release announcing the lawsuit, city and authority officials say they went ahead with construction of the facility after hearing the Corrections Department express a need for additional inmate beds and treatment facilities.
At a February meeting of the department's advisory council, Bill Slaughter, director of corrections until 2006, said he had met with Hardin officials in 2003 or 2004 at a time when the state was struggling with jail and overcrowding issues. However, he said he made no promises nor signed any contracts to use a Hardin facility, according to the official summary of the meeting.
The developers paid for a feasibility study of the project by GSA Ltd of Durham, N.C., which was attached to the official statement for the bonds. The facility was to be operated by CiviGenics Texas Inc.
The consultant concluded that recent history indicates that the Montana Department of Corrections, the U.S. Marshals Service, and the Bureau of Indian Affairs all will have a "continued near-term demand for secure beds in Montana," which would be the prime market for the facility.
"The proposed center would generate sufficient revenue to cover all operational and debt service costs and return a profit with an occupancy level of approximately 80%. The projections indicate that occupancy in excess of that level is possible in the year of opening," the report said. "These facts combine to indicate a need for the proposed center and a high probability of financial success."
The Montana Legislative Audit Division, in a November report, found the feasibility analysis to be lacking in rigor.
"There are a number of assumptions made related to financial viability that appear to be unfounded, to include future incarceration rates, potential improvements to local aviation facilities, and local willingness to incur proposed prisoner per-diem rates," the audit division wrote. "One of the critical concerns in this analysis is the lack of historical data to support anticipated prisoner counts or any defined methodology for determining potential housing levels."
The report also noted that three privately operated corrections projects, financed with bonds underwritten by Municipal Capital Markets and Herbert J. Sims, resulted in problems for local authorities in Texas.
"There are a number of cases where initial assumptions have been questioned and current revenues are insufficient to cover operating and debt expenses," the report said.
At least three high-yield fund managers found the bond offering attractive. As of their most recent annual reports, all dated in 2007, holders included the Lord AbbettHigh Yield Municipal Bond Fund with $2.5 million, the BlackRockLong-Term Municipal Advantage Trust with $4.1 million, and Pioneer Investments with $1 million in its Municipal High Income Advantage Trust and $1.6 million in its Municipal High Income Trust.
The bonds were priced in April 2006 to yield between 6.25% for 2011 maturities and 7.625% for 2027 maturities. The 2027 bond priced more than 325 basis points above the Municipal Market Data's triple-A curve at the time. The bonds traded this month at prices ranging from 61.435 to 85, according to data provided by the Municipal Securities Rulemaking Board.
Officials with the Two Rivers Authority and Municipal Capital Markets Group said they would respond to questions from The Bond Buyer but did not by press time. A Herbert J. Sims official did not return a phone call.