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The Pitfalls of Backdoor Financing
Wednesday, September 02, 2009

A previous blog post provided information on Municipal-Lease Purchase Financing for local and state governments needing to secure funds to tend to outdated, overcrowded correctional facilities. While moving away from General Obligation Bonds (GOBs) and taking on alternative forms of financing seem to solve legislatures' problems, there are serious pitfalls that need attention before signing on the dotted line.

Today's investors are more cautious

A recent Market Watch, advising investors, addresses the lesson of a bear market: stick with what you know. Municipal bonds have historically been viewed as a safe haven. However, the recent downgrades of bond insurers, the failing of the rating agencies and the rapidly worsening municipal budget deficits underscore the importance of the above lesson. General Obligation Bonds (GOBs) are very safe because they are backed by the full faith and credit of the issuing jurisdiction and are senior to all other obligations of the municipality. 

Functionality of the facility is limited 

In 1995 the Louisiana Department of Corrections entered into a "cooperative endeavor agreement" with the City of Tallulah and Trans-American Development Associates (TADA) for the construction, financing and operation of a secure juvenile facility. The facility was refinanced with bonds by the state's operating contract with TADA. After several years of reported abusive conditions, the state, upon taking control of the facility, wanted to shut the facility down. Before doing this, however, lawmakers were warned by rating agencies that a decision to break the juvenile prison lease could damage the state's bond rating. The bond controversy delayed the closure of the facility by a year. Instead of the state turning the facility into a much needed learning center for the area, it was forced to reopen it as an adult prison in order to justify the lease payments to voters.

Easy money may result in wasteful or risky spending

Lack of rational planning will result in the slippage between supply and demand of prison beds. Unable to issue tax obligation bonds, Willacy County, Texas borrowed nearly three times more money to build a jail twice the size needed hoping to market the excess to federal government. The expected detainees never came. The county was forced to pay bondholders out of its general funds and commissioners reported that the county risked losing control of the facility. 

Read More...

Prison Legal News offers several more examples of the faults of backdoor prison financing. Click here to access the article.

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About This Blog

This blog is a collaborative effort of the Justice group at Performa Inc. It is a platform for dialogue and the exploration of issues impacting correctional facilities, detention centers, homeland security facilities and more. The group is led by David Robillard, President of the Performa Justice Team.