Name of Prison: Two county jails in Tuttle and Chickasha, Oklahoma

Location:	Tuttle, Oklahoma and Chickasha, Oklahoma
Type:	County jails
Owner:	Grady County
Operator:	Grady County Justice Authority
Capacity:
Security Level:
Estimated Cost:	$17.5 million for building the facility.
Source of Capital:	Bonds issued by the Grady County Industrial Authority.
Underwriter:	Miller & Schroeder Financial Inc.; American Municipal Securities
Insurance:	MBIA (first issue only); Second issue uninsured.
Rating:	Standard & Poor's
Bond Counsel:
Financial Advisor:
Trustee:	BankFirst of Oklahoma City
Status:	County exploring options to avoid default

 

SUMMARY: In 1999 the Grady County Industrial Authority issued two sets of bonds for a total of $17.5 million to build two county jails in Tuttle and in Chickasha, even though voters had not approved the bonds in 1998.

 

The facilities are operated under a complex set of contracts between the Industrial Authority, which issued the bonds, and a shell entity called the Grady County Justice Authority, which contracted with the county sheriff to operate the jails. 

 

The county leases bed space in the jails but has no obligation to pay debt service on the bonds for the facility if revenue falls short of debt service requirements.

 

Revenue generated from leasing beds to state and federal agencies were expected to repay the bonds. But projected revenues from federal detainees turned out to be unrealistic. In July 2003 voters rejected a proposal for a half-cent sales tax increase to cover debt service for the bonds by almost a 75 percent majority. The county is exploring options to avoid default.

 

DETAILS: In 1999 the Grady County Industrial Authority issued two sets of bonds for a total of $17.5 million to build two county jails in Tuttle and in Chickasha. The annual cost of the facilities was $1.37 million for the county.¹

 

Even though voters had not approved the bonds, in 1999 the Industrial Authority issued $12.6 million of revenues bonds that were insured by MBIA Insurance Corp. A second issue for $4.5 million was offered when construction costs exceeded projections. The second issue was sold on equal parity with the first issue. The issue of equal parity for the two sets of bonds was justified by officials as a way of getting the bonds underwritten.²

 

The two facilities are operated under a complex set of contracts between the Industrial Authority, which issued the bonds, and a shell entity called the Grady County Justice Authority, which contracts with the county sheriff to operate the jails The county leased bed space in the jail but had no obligation to pay debt service on the bonds for the facility if revenue fell short of debt service requirements.³

Revenue generated from leasing beds to state and federal agencies were expected to repay the bonds. But according to the sheriff, projected revenues from federal detainees were apparently totally unrealistic. The architect/developer, Lawrence Goldberg of St. Joseph, Mo., who had convinced the county that the projects were viable, said that the numbers would have worked if the economy had not faced a downturn. Local politics had also contributed to the project's problems, he contended. The District Attorney ordered a grand jury to investigate the case.⁴ Though the grand jury did not find any wrongdoing on the part of county officials and the architect, it cited incorrect and overly optimistic revenue projections in assessing the feasibility of the project and said that county commissioners should have ensured the jail's feasibility before asking the industrial authority to issue the bonds. It also recommended that the Grady County Jail Trust Authority be eliminated, calling it an unnecessary bureaucratic layer.⁵

Don Keysser, who worked for Miller & Schroeder Financial Inc., the underwriter for the first issue, said that the developer had grossly underestimated revenues and costs. The second issue was underwritten by American Municipal Securities after Miller and Schroeder went out of business. MBIA had not insured the second issue because the Industrial Authority could not get an adequate rating from Standard & Poor's.⁶

 

In July 2003 voters overwhelmingly rejected a proposal for a half-cent sales tax increase to cover debt service for the bonds. The County made a payment of $827,00 in November 2003 but does not have money for its next round of payments due in May 2004. Taxpayers are not liable for repaying the bonds in case of default.⁷

 

According to MBIA, the bond insurance company, the County was possibly in technical default already. Under state law, contracts to operate the jails must be reviewed every year, but no contract had been in place for the fiscal year that began July 1, 2003. If the technical default situation was not resolved, the trustee, BankFirst of Oklahoma City, could have interceded and taken over operation of the jails.

 

A MBIA spokeswoman said that the company was working with the Industrial Authority to figure out possible options in case of a default. If the county defaults on its payments, the outstanding debt could be paid with ad valorem taxes over three years.

 

Nancy Insco, who formerly headed the Maryland Department of Public Safety and Correctional Services and is a partner at Justice Concepts, commented that the county's lack of due diligence had created the financial mess. The sheriff was working with a committee to try to find a private operator with the right connections in the criminal justice system that could provide a steady stream of prisoners for the facilities.⁸     

The county is exploring a number of possibilities to get out of its financial mess. These included obtaining a federal loan and contracting out management to a private prison operator. The sheriff wanted to use the more than half of the proposed $9 million loan to buy a private facility and seek contracts with other agencies for prisoners, declaring that the proposal carried a moderate risk and had a good chance of working.⁹

NOTES

1.  Mac Bentley, "Grady County voters to decide sales tax for jail," The Oklahoman, July 7, 2003.

 

4. Richard Williamson, "Overcrowded Jail Market Puts Counties at Risk, Experts Say," The Bond Buyer, July 29, 2003.

5. Richard Williamson, "Faulty Figures, But No Crimes Found in Oklahoma Jail Deal," The Bond Buyer,  September 3, 2003.