The Irwin County Detention Center (ICDC) in Ocilla, Georgia is an example of everything that is wrong with small-town private-prison development. It's a story of local government officials seeking to make their community profit off the misery of others, only to end up in misery themselves.

ICDC had half its current number of 1,200 beds and a history of defaulting on bonds when, in 2007, Terry O'Brien, a real estate developer and newly-minted private prison entrepreneur talked local government officials into backing $55 million in bonds to double the jail's size. O'Brien founded a property consulting firm in 2002 and expanded into the private jail business when he incorporated Municipal Corrections LLC in Las Vegas in 2004. The sole purpose of Municipal Corrections was to own the IDCD which it purchased from a trustee in 2004.

At first, the jail was a success. Housing overflow prisoners from the Atlanta jail system, there was even pressure to expand. That's what led to issuing the 2007 bonds. But additional prisoners from Atlanta and promised federal and immigration prisoners failed to materialize, leaving the newly-expanded jail half full and unable to pay its bills.

County taxpayers began complaining about the jail's $1.6 million in overdue property taxes. That's equal to four years of the entire county budget. The tax commissioner foreclosed on the jail and was on the cusp of selling it for back taxes when bond investors intervened, forcing Municipal Corrections into bankruptcy and putting the sale on hold.

Irwin County is not alone. Ten other private jails with bonds totaling in excess of $365 million are in trouble. Eight are in default. Most are in small towns, like Ocilla, where slick private prison developers talked local officials into issuing bonds to build private jails, assuring them that the projects would pay for themselves.

"They end up with these huge white elephants," according to Christopher Taylor, an Alexandria, Virginia consultant and former head of the Municipal Securities Rulemaking Board. "You can't convert these things into hotels."

Texas was a hotbed of speculative private jail construction between 2000 and 2008. That's probably why five of the eleven distressed jails are in the Lone Star State. Of the five, two are vacant, one lost a contract worth 75% of its revenue and a fourth has only 14 prisoners where previously it housed hundreds. All five distressed Texas jails and one in Hardin, Montana that was never opened were underwritten by Herbert J. Sims & Co. of Fairfield, Connecticut. Bergen Capital of New Jersey underwrote the ICDC and a distressed jail in MacClenny, Florida.

One abandoned distressed jail in Greensboro, Alabama has had a leaky roof for more than two years. It was designed to hold juveniles. According to retired judge William Ryan, who heads the nonprofit that currently owns the jail, there is not money for repairs and no buyers looking for a youth lockup.

"They don't lock up so many juveniles now," said Ryan.

Why did the bond companies continue to underwrite bonds for private jails even as demand diminished? Fees! Bergen Capital underwrote a $14.8 million bond for the ICDC in 2004 and the $55 million 2007 bond. It made $716,000 on the former and $1.8 million on the latter, according to bond documents. Bergen gets to keep that money regardless of whether the jail is a financial success or not. Bergen doesn't care if demand for prisoner housing is down or if the large private prison companies manage to get all the lucrative contracts.

"We've seen a wave of [private jail bond defaults] over the past 18 months, and it seems to have gotten faster in the last year," according to bond analyst Matt Fabian of Municipal Market Advisors of Concord, Massachusetts. "The rule should be: 'If it has the word jail in it anywhere, leave it for somebody else.'"

That would be good advice to small towns too. When a private jail developer comes around talking about establishing a tax base, bringing in jobs and with no risk to the taxpayers – leave it for somebody else.

Source: www.bloomberg.com