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Florida’s Prison Bond Scheme Obscures Real Costs of Expansion

The issuance of lease revenue bonds to finance “the costs of prison construction has obscured both the near- and long-term costs of failing to make needed policy changes.” That is the main conclusion drawn in A Billion Dollars and Growing: Why Prison Bonding is Tougher on Florida’s Taxpayers Than on Crime (The Report), a report issued by the Collins Center on Public Policy and Florida Tax Watch.

Since 1980, Florida’s prison population has experienced an 80 percent growth, jumping from 20,000 prisoners to 102,000 in 2010. Over that same period, the cost for Florida’s taxpayers to fund that system annually has gone from $169 million to $2.4 billion.

Prior to 1993, Florida used fixed capital appropriations of general funds, or pay-as-you-go, to build and expand scores of prisons. The legislature created the Correctional Privatization Commission (CPC) in 1995 “for the purpose of entering into contracts for the design, construction, and operation of private prisons in Florida” with operation costs of at least seven percent less than the state. Studies have been unable to prove taxpayers have enjoyed those savings (See PLN, March 2011, p 36).

The CPC quickly became involved in financing the construction of the private prisons. The vendors used Certificates of Participation (COP) to fund the building, and the state would make the lease payments out of general funds. The COPs are a form of lease revenue bonds.

Many states, including Florida, require voter approval to issue general obligation bonds. A California law firm devised lease revenue bonds, which traditionally were used to build projects such as toll roads, bridges, hospitals, parking facilities, recreational projects, telephone systems, and colleges that generate revenue to pay off the obligations.

According to Forbes, “crafty state treasurers” devised to create a way for prisons to generate revenue. An entity or agency is created to build prisons, which it does by issuing bonds. It then leases the prison to the state, who pays the lease payments that service the bond debt.

“Essentially, the state takes money from one pocket (the general fund appropriations to the prison system) and puts it into another pocket (the agency created for the facility), and then the agency distributes the money to bondholders,” Forbes said in describing the scheme to investors.

It is a concept very similar to taking out a mortgage on a house, as for every prison financed with a COP, the state must pay the principal on the loan and the interest on the principal. Forbes reports that, in addition to Florida, California, Texas, New York, Alaska, and Michigan have used this financing technique.

The Florida Supreme Court has held that this technique does not violate the state’s constitutional requirement of voter approval of debt, for the legislature can decide to cancel payments, so the payments are not “real debt,” because there is no definitive legal agreement. Yet, should the state default “on making the lease payments, its credit rating would suffer, and future debt would be incurred at higher rates.”

With six prisons built using COPs by 1996, of which all but one were private, millions of dollars were flowing into the CPC. Corruption ensued due to a lack of oversight and a fragmentation of decisionmakers. The CPC’s head resigned in 2002 “amid a state ethics probe in which he ultimately was fined $10,000. That investigation concluded he was profiting from business relationships with prison contractors outside his role as privatization director.”

The scandals did not end there. As PLN reported, another former CPC head pleaded guilty in 2006 to siphoning $200,000 from a maintenance fund set up for private prisons. He ultimately received a 33-month federal prison sentence (See PLN, May, 2006, pg. 11) The CPC was dissolved and the Bureau of Private Prison Monitoring, housed in the Department of Management Services (DMS), was created in May 2004 to oversee prison contracts.

The CPC created the Florida Correctional Finance Corporation to issue COPs. It was housed under the Division of Bond Finance of the State Board of Administration, who initially had no oversight role, but took over when the CPC was dissolved.

“Between FY 2006-07 and FY 2009-10, the FLorida Legislature appropriated a total of $716,956,421 to the Department of Corrections (DOC) for construction and expansion expenses,” states the report. “This figure includes both ‘pay-as-you-go’ appropriations for prison construction costs and rental costs, but does not include the debt-service (or interest payment) obligations on past construction borrowing.”

If those obligations were included, they would total $1.5 billion. Taxpayers still owe more than $1 billion on the outstanding bonds and corresponding debt service payments. Florida has spent $100 million annually on prison construction or expansion between 2006 and 2010, and the rate of bonding to fund that building has increased by 43 percent.

The decision-making on a prison building is disjointed. “There is a lack of coordination with many separate and distinct players who feel compelled to keep their own,” said former DOC Secretary Jim McDonough. “This is a great system for everyone to point at the other guy when something goes wrong. The Department of Corrections’ role is to take the blame.

Lease revenue bonding also obligates taxpayers to pay for unneeded prison beds. To meet an expected prison population of 111,836 by FY 2011-12, the 2009 General Appropriations Act obligated taxpayers to $340 million in debt to construct 17 prisons. Since then, the estimate for the prison population has declined to 101,833 for FY 2011-12. “However, the bonds to finance this construction have already been issued and sold, obligating taxpayers despite their changing need,” states the report.

Despite the fact that Florida has seen a decrease in both violent and non-violent crimes since 2007, its incarceration rate has not declined. “In fact, Florida arguably leads the nation in incarceration rates and stringency in law and sentencing, making it the most punitive of the 50 states as measured by more than 40 variables, including average prison sentences, life imprisonment, and prison conditions.”

Over the last 40 years, Florida’s rate of incarceration, which is the percentage of people locked up in prison, has quadrupled from .13 percent to .54 percent. Tough-on-crime policy decisions that include the elimination of parole, longer sentences under guidelines and from an 85 percent service requirement, mandatory minimum sentences, state prison incarceration for technical violation of probation, and use of prison instead of community-based alternatives have driven the increase.

The report finds that 18 states have enacted criminal justice reforms designed to reduce costs and increase public safety, highlighting the move made by Texas, Mississippi, and South Carolina. It recommends Florida join these states, urges legislators to review the state’s criminal justice policies and practices, and that a moratorium be placed on prison building.

This is necessary because the current system allows state leaders to avoid hard choices to avoid looking soft-on-crime while adding finance charges on the already enormous cost of building and operating prisons. “Our political leaders are forfeiting our present and future by authorizing the underwriting of these costs as if the public debt was an open-ended credit report,” states the report. “However, the bill to taxpayers will come due when these political leaders have moved on and no longer can be held accountable.” The full report can be viewed on PLN’s website.

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