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The Irwin County Detention Center sprawls down Cotton Drive in Ocilla, Georgia (STOGA1). The lockup has 1,200 beds and enough prisoners to fill only half of them. It’s the latest private jail to fail in a small, Southern town.
County (13924MF) officials issued $55 million of debt in 2007 on behalf of a real-estate developer turned corrections entrepreneur in hopes of luring inmates, jobs and prosperity at no risk to taxpayers. This month, bondholders forced a Chapter 11 bankruptcy days before the county was to sell the jail for $1.6 million in back property taxes.
Ten similar projects, with bonds totaling more than $365 million, are in trouble, according to the Municipal Market Advisors research firm. Eight are in default. Most are in places such as Ocilla, a town of 3,400 surrounded by peanut and cotton fields in a county criss-crossed by red-dirt roads.
“They’d end up with these huge white elephants,” said Christopher Taylor, a consultant in Alexandria, Virginia, who is former head of the Municipal Securities Rulemaking Board. “You can’t convert these things to hotels.”
Communities often provided infrastructure for jails that sit empty and deteriorating, Taylor said in a telephone interview. The projects were financed with bonds tied to revenue earned by housing inmates for other agencies, including the U.S. Marshals Service, U.S. Immigration and Customs Enforcement and state corrections departments.
Irwin County issued bonds in 2007 to help developers double the size of an existing detention center. The county of about 9,500 that’s 89 miles (143 kilometers) north of the Florida line, hoped to expand its tax base, County Attorney Warren Mixon said in an interview there. The jail is Irwin’s biggest private employer, said Joey Whitley, chairman of its commission.
As jails faced increased competition for prisoners, revenue didn’t materialize and neither did debt payments.
“We’ve seen a small wave of these over the past 18 months, and it seems to have gotten faster in the last year,” said Matt Fabian, an analyst for Municipal Markets Advisors, which in Concord, Massachusetts.
Individual investors, he said, should beware: “The rule should be: ‘If it has the word jail in it anywhere, leave it for somebody else.’”
Five of the 11 distressed projects on the company’s list are in Texas, which saw a spurt of speculative corrections building between 2000 and 2008, according to Bob Libal, an organizer with Grassroots Leadership. The group, based in Charlotte, North Carolina, says the private prison industry preys on development-starved towns.
Two Texas jails are vacant and have yet to make money, a third had its head count drop from several hundred to 14, and a fourth lost a contract worth 75 percent of its revenue last year, bond documents say.
In Greensboro, Alabama, the roof of an abandoned youth prison began leaking two years ago, and there’s no money for repairs, said William Ryan, a retired judge who formed the nonprofit that owns it. He has tried in vain to find a buyer.
The center succumbed to a change in judicial philosophy, Ryan said in a phone interview: “They don’t lock up so many juveniles now.”
The five distressed Texas jails and one in Hardin, Montana, that never opened were underwritten by Herbert J. Sims & Co., based in Fairfield, Connecticut.
Bergen Capital of New Jersey was the underwriter for a Macclenny, Florida, project that counted on more immigration detainees than it got, and the Irwin County jail.
Its path to bankruptcy began in 2007.
That year, the county approved $55 million in new bonds for the private prison that had been in and out of financial trouble since 1991. The owner by then was a limited partnership formed by Terry O’Brien, a real-estate broker and property consultant.
O’Brien had formed a property consulting firm in 2002 and got into the jail business in 2004, when he incorporated Municipal Corrections LLC in Las Vegas. The firm’s purpose was to own the Irwin County lockup, according to bond documents.
The jail had defaulted on 1990 and 1994 bonds and spent years abandoned, its title held by a trustee, until a group that included O’Brien bought it in 2004.
It was overflow housing for prisoners from suburban Atlanta when the owner and operator began pushing to expand it in 2007. The idea was to market beds to federal justice and immigration officials.
A bond disclosure that year described O’Brien as a man of “limited operating history and limited assets.”
Still, the county did as it had before. It extended its tax-exempt status to bonds for Municipal Corrections, agreeing to lease the jail back from the company.
“It brings jobs and it brings a business with a tax base, which is just as important if not more so, and at no cost to taxpayers,” Mixon said.
The deal obligated the county to pay only what it received from other governments for housing inmates. Municipal Corrections was to get between $5,000 and $8,000 a month for its ownership, according to documents. Another company, Michael Croft Enterprises, was to operate it for $21,000 per month.
A second O’Brien company, Correctional Center Consultants, was also hired to provide advice, bond documents said.
Bergen Capital underwrote both $14.8 million in bonds that paid to reopen the closed jail in 2004 and the $55 million in bonds for expanding it three years later. It earned $716,800 in fees on the first, and $1.8 million on the second, bond documents show.
The company, a division of Scott & Stringfellow LLC, was renamed BB&T Capital Markets in January. O’Brien and BB&T Capital did not return telephone and e-mail messages requesting comment.
The expanded jail opened for business in January 2009. Dun- colored, with metal sides, it resembles a complex of industrial warehouses, with man-sized fenced outdoor runs along its sides. It can hold 1,200 prisoners.
The difficulty was finding them.
Larger operators secured contracts more easily, Whitley said. Corrections Corporation of America and GEO both have federal detention centers in Georgia: Between 2006 and 2009, CCA added enough beds to house 2,254 illegal immigrants, said Steve Owen, a company spokesman.
The Ocilla jail also failed to get about 200 immigrants relocated from an Alabama center after that state’s congressional delegation intervened, a bond document said.
Six months after opening, Municipal Corrections replaced the jail’s operator with Detention Management LLC, whose website lists O’Brien as a leader. The new operator touted connections with government officials and promised to fill the jail in 90 days: “You throw the attorney general’s name around, that’s impressive to us country folk,” Mixon said.
The time came and went, and cells remained empty. The jail dipped into reserves.
Last November, with the lockup 58 percent full, the bond trustee sent a consultant to Ocilla who reported impediments including bureaucratic delays at ICE, murky authority over marketing and public budget constraints.
By 2011, tax-paying farmers were complaining about the jail’s $1.6 million in back taxes in a county with an annual budget of just over $400,000, Whitley said. The tax commissioner foreclosed and was poised to sell the building for what was owed on March 6 of this year.
Bondholders Hamlin Capital Management LLC of New York, Oppenheimer Rochester National Municipal Funds of New York, and UMB N.A. of Minneapolis and Kansas City forced the company into bankruptcy in Nevada on Feb. 29, stopping the sale.
On a sunny day last week, a handful of inmates in stripes lounged in the jailyard and county officials pondered how to make their punishment pay.
“We’ve retained counsel in Las Vegas,” Mixon said. “Whoever would have thought we’d be doing that?”
The case is In re Municipal Corrections LLC, 12-12253, U.S. Bankruptcy Court, District of Nevada (Las Vegas).
To contact the reporter on this story: Margaret Newkirk in Ocilla at firstname.lastname@example.org
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