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Private Prison Debt May Ruin Texas County's Bond Rating

Bernard Ammerman, the District Attorney of Willacy County, Texas believes that debt for privately-operated prisons may overwhelm the county's finances. In July 2012, he publicly complained that the county may not be able to repay the debt incurred for the construction and later renovation of a private "tent city" prison run by Management and Training Corporation.

Willacy County Judge John F. Gonzales, Jr. disagrees. He said that Ammerman simply does not understand the nature of the bonds used to finance the prisons. He, Ramon Vela of Velasco and Dan Rios of McAllen, attorneys who advise Willacy County, said that the county and its taxpayers are not responsible for repayment of the debt incurred in relation to the "tent city" prison near Raymondville.

Gonzales points to the fact that the debt incurred by the three public facilities corporations (PFCs) who built a U.S. Marshall's detention center, originally designed to house illegal immigrants, the "tent city" or "dome structures" and the county jail does not revert to the county should the PFCs fail to repay the debt. For instance, the county jail is financed and operated by the State of Texas, according to Gonzales.

Gonzales said that Ammerman also has his figures wrong in quoting $189 million in debt for the MTC-run "tent city." He said that the current "tent city" debt is actually $75 million and that the $189 million figure probably represents all of the principle and interest over the entire life of the debt. Gonzales further maintains that the debt for tent city is secured by the value of the land and buildings there. He said that Ammerman, who specializes in criminal law, does not understand the intricacies of business law which control the structuring of the bonds. Gonzales, by contrast, claims 25 years of experience in corporate finance.

But Ammerman said his reasoning is sound and based upon a June 29, 2012, presentation of the annual county audit by Quentin Anderson of Long, Chilton LLP, a Harlingen, Texas accounting firm.

"(Gonzales) believes we are not liable at all, but in fact, we are," said Ammerman. "Primarily our credit rating will go to junk status even more. We'll never be able to have any type of bond issuance for anything."

Ammerman said that the value of the land and buildings is much less than  the amount of debt and bondholders would therefore seek to sue the county in the event of a default. He also notes that money has been diverted from the PFC for other purposes than building prison facilities.

"Any money we've ever taken out of the [PFC] to the tune of over $6 million, we're going to have to pay back," said Ammerman.

Vela and Rios claim that no PFC money was misused, but that money was taken out to repair the roof of the detention center, to renovate the "tent city for the use of U.S. Marshalls and for non-prison-related public projects.

"You can't just raid the assets of the Local Government Corporation," Ammerman said.

The bonds used by the three PFCs are all at "junk bond status"—rated BBB. This "junk bond" financing involved using investors who specialize in high-risk investments.

"They knew what they were doing; their attorneys and financial adviser looked at all this," said Gonzales.

Gonzales also claims that the prisons brought great economic benefits to the county with profits from the federal prison contract being used to pay for a public storm shelter, a sports complex and a skate park.

"The prisons saved this county (financially),” said Gonzales.

But Ammerman may have a good point. Even if the county is not legally responsible to pay off the bonds for the "tent city," the bond market may well punish the county's bond rating in the event of default. Something similar happened to Moberly, Missouri when a Chinese company sold them on the idea of using bonds to finance the construction of a $39 million dollar artificial sweetener plant.

Most of the authority debt for the sweetener plant was issued under a federal stimulus program that allowed private investors to use tax-free municipal financing. But when the bond came due, the plant was still unfinished and the company said it didn't have the money to pay off the bonds. That left the city of 14,000 on the hook. Then the city council issued a statement that the city's taxpayers shouldn't have to "bail out" the shareholders or investors.

The bond market immediately punished the city by dropping its bond rating nine notches from A to B for debts unrelated to the plant. The plant's bonds were dropped from A- to D. Analysts also warned that the city's failure to pay off the bonds could cause a lowering of bond ratings for other Missouri towns that had nothing to do with the sweetener plant.

The point is that Willacy County's bond rating may tank regardless of whether it is technically liable for the debt or not. This should serve as another warning to other local government units that are considering becoming associated with bonds issued for the construction or renovation of privately-operated prisons and jails.

Source: Harlingen Valley Morning Star

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