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Investors in Montana Prison Left Holding the Bag as New Prison Sits Empty

By David M. Reutter

With the expansion of the prison industrialization complex in recent decades, many communities have turned to prisons as a means to generate economic activity.
Considering the success of other small, rural areas in this endeavor, it comes as no surprise that the citizens of Hardin, Montana decided in 2006 to issue $27 million in tax-free bonds to build a 464 bed prison. What has surprised those citizens and the bondholders is that despite the prison being complete, it sits empty.

Hardin is a community with a population of about 3,300. To stimulate its economy, the City formed the Two Rivers Authority. While Hardin has no need for a big jail, it figured to cash in on the Montana Department of Corrections’ (MDOC) need for additional prison beds and treatment facilities. Barring that, the Authority saw the possibility of obtaining prisoners from outside local, state and federal government agencies.

The plan included allowing CiviGenics Texas, Inc. to operate the prison. The feasibility study prepared by GSA Ltd. of Durham, N.C. concluded that with an 80% occupancy level, enough revenue could be generated to cover all operational and debt service costs with a small profit. Of course, in these times of overcrowded prisons, everyone figured on reaching full capacity.

When the combined profitability and an indicated need for prison beds by MDOC, the U.S. Marshals Service and the Bureau of Indian Affairs was examined, it enticed several high-yield fund managers to snap up bonds, which had a 6.25% yield for 2011 maturities and 7.625% for 2027 maturities.

Those obtaining the prison’s bonds include: the Lord Abbet High Yield Municipal Bond Fund with $2.5 million, the BlackRock Long-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.

When the Two Rivers Detention Center was completed in July 2008, the search to fill its beds was on. It quickly hit a standstill, for MDOC’s 2003 or 2004 need for beds had evaporated. Other local areas had no need for the beds either. That prompted city and authority officials to begin seeking contracts to house prisoners from outside Montana.

That search ended in December 2008 when the Montana Attorney General issued an opinion that said state law does not allow local authorities that operate jails and prisons to take in out-of-state prisoners. According to that opinion, which carries the weight of law unless a court overturns it or the legislature modifies the laws involved, only the MDOC has authority to exchange between states for convicted felons.

City and authority officials filed a lawsuit, seeking to overturn that opinion and enjoin the state government from preventing it from contracting with other states and federal agencies. Oral arguments were scheduled for May.

Meanwhile, Hardin has a brand new $20 million prison sitting empty and the bondholders are holding what may turn out to be worthless bonds. So much for the saying that if you build a prison they will come, at least in Hardin. Source: The Bond Buyer.

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