Tuesday, February 1, 2011

For-Profit Jail Bond Financing Shows Hurry-Up Decisions

Of Revenue Bonds issued in the state at the time, those for the CEC Jail were of the highest yield – nearly 2 points higher than the rest

By The Legendary Jim Parks
Reporting by R.S. Gates

Waco – A runaway board, a sweetheart contract with a single bidder, and a hurry-up decision on revenue bond financing mar the record of the supposedly for-profit Jack Harwell Detention Center built for CEC (Civigenics), Inc., in 2009 and not opened until last summer – way behind schedule.

Hurry up and sign up turned into hurry up and wait with a jail only half full of prisoners gleaned from the County's downtown lockup, also maintained and operated by CEC.

As it turns out, they were in a big hurry to rob Peter to pay Paul – at 6.625%.

Now they are having trouble meeting their interest payments. The job sends them scrambling for cash all over the lot and making budget amendments to the annual budget County Judge Jim Lewis calls a “living document.”

Even the most cursory examination of the financial records of the Public Finance Corporation, the entity formed to handle the nuts and bolts operations guiding the financial transactions for the public project of the McLennan County Commissioners' Court, shows a stacked deal in which but one contractor, Hale-Mills Construction, Houston, was given a fair chance to make an intelligent bid.

Commissioner Joe Mashek leveled allegations of poor ethics against County Judge Joe Lewis at the time. He said he would be seeking the advice of a lawyer on his own initiative to see if the way the bidding was handled was legal and above board.

Mr. Mashek alleged that County Judge Jim Lewis hand fed Hale-Mills the floor plans and design specifications that would be on the request for proposal a year in advance. Other contractors were given but one month to prepare their bids for the 816-bed facility after submitting their response to a request for qualifications.

Our readers might like to review news video made at the time of the County Commissioners' Court meeting in which they dealt with finalizing the deal with the construction company. Mr. Mashek went on record with his complaints while Judge Jim Lewis said he would “help him sign the letter.”

He said the allegations are substantially true – on camera.

Interviewed by a newsman after the meeting in a courthouse corridor about the possibility that there may have been an ethics violation, he said, “That's the most ignorant statement I've ever heard in my life.”

Mr. Mashek is not the only public figure with whom Judge Lewis has clashed over his methods of building for-profit jail facilities and financing their construction. His opponent in the November general election, local attorney Ralph Cooper, called him a liar in print and on a talk radio show when the Judge had told voters that CEC would pay off the revenue bond issue.

The bond financing agreement shows that McLennan County is the ultimate underwriter of record – meaning taxpayers are obligated for the debt and its debt service, which is many millions of dollars above the nearly $50 million cost of construction.

If the county should default on the bond issue, it would ruin its credit rating with bond underwriters such as U.S. Bank, which is the entity that loaned the money and pays the investors their tax free interest on coupons clipped periodically.

What's more, reading the minutes of the Bond Pricing Committee appointed to set the interest rate of the bond issue shows a rush to accept a coupon rate of 6.625% on the $49,015,000 project - just under the ceiling of 6.98% adopted when the committee was formed.

This compares with a bond coupon rate of 2.389% set in Hidalgo County on a similar bond issue; 2.816% set in a Hewitt bond issue; 3.207% on a Brenham issue; 3.273% on a Huntsville issue; 4.249% in New Braunfels; 4.441% in Lufkin, and two issues in Pflugerville of 5.101% and 5.252%.

Only two members of the committee, Commissioner Ray Meadows and County Treasurer Bill Helton, raised question about the cost of doing business.

You might call it buyer's remorse, though only one of them voted against it. That was the Democratic Treasurer, Bill Helton. He was defeated by a Repubican, retired State Trooper Danny Volcik, on the 60/40% bias most other Democratic office holders experience last November 2.

They both expressed concern with costs. Mr. Meadows made an issue of the costs of construction, holding an official of the construction company to a closer examination of costs; Mr. Helton asked to hold off on setting the rate for 60 days to see if a more favorable interest rate could be obtained.

It was one of his principal duties, seeking out the most favorable interest rates the County can get for its investment capital on a day to day basis.

“Mr. Mike Harling of Municipal Capital Markets stated that they have been monitoring the markets,” the minutes say. “He explained that there have been a lot of redemptions in the nutual funds, so the area tha they and most issuers are relying on now, is the retail investor market as opposed to the institutional investor market. Mr. Harling stated that upon approval of the Committee they have the Bonds sold at a coupon rate of 6.625%...with a closing date of January 29, 2009.”

Treasurer Helton wasn't having it. He hung tough, according to the minutes.

(Mr.) “Helton stated he would like to give it another sixty (60) days.”

Earlier, the record shows, “Mr. Herb Bristow with Haley & Olson P.C. (the law firm handling the bond issue) explained that we are here as a sub-committee of the Board of Directors of the Public Facility Corporation for the purpose of establishing the proposed rate on bond issuance.”

Looks they got 'er done, y'all.

“After further discussion, President Lewis made a motion that since we are at 6.625% and our ceiling was 6.98%, we accept the recommendation of ht eFinancial Advias and Legal Advisor, and it was seconded by Vice President Meadows. Treasurer Bill Helton questioned if this is a majority vote or one hundred percent (100%) vote. President Lewis replied majority. After further discussion, a vote being called for, voting in favor of said motion was President Lewis and Vice President Meadows with Treasurer Bill Helton opposing.”

The meeting took place on January 12, so they were just under the wire to keep their appointment to hit the law office conference room and sign the paperwork.

Our readers may be interested in the spread sheet prepared by the Texas Bond Review Board at Austin that compares the rates set by similar committees of Public Finance Corporations that issued revenue bonds for public projects during the same period of time.

Click the image to enlarge it for easy reading.

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