La Salle County Facility

Name of Prison: La Salle County Facility

Location: Encinal, Texas

Type: Private prison

Owner:

Operator: Emerald Correctional Management

Capacity: 500 beds

Security Level: $21.8 million

Estimated Cost: Taxable revenue bonds issued by the La Salle County Public Facility Detention Corporation.

Source of Capital:

Underwriter: Municipal Capital Markets Group and Herbert J. Sims & Co.

Insurance:

Rating:

Bond Counsel: Akin Gump Strauss Hauer & Feld

Financial Advisor:

Trustee:

Status: Opened in May 2004

SUMMARY: On November 7, 2002 La Salle County sold $21.8 million of high-yield taxable lease revenue bonds to build a 500-bed private prison that would be operated by Emerald Correctional Management near the town of Encinal in South Texas. The bonds were issued by the La Salle County Public Facility Detention Corporation, a newly created non-profit entity. Debt service for the bonds will be paid with rental payments from the county through its contract with the U.S. Marshals Service.

County Judge Joel Rodriguez alleged that the outgoing judge, Jimmy Patterson, and the county commissioners had pushed the project without adequate community input. He characterized the deal as doomed real estate speculation and thought that the county could not afford to issue the prison bonds with debt service payments of over $2 million. Other problems included excessive interest rates (12 percent), high underwriter fees (6 percent) and a flat rate contract with the prison operator, Emerald, that would have to be paid irrespective of the number of prisoners housed in the facility. Two lawsuits delayed the construction of the project, even though the bonds were already sold. One charged the county with violating the Texas Open Meetings Act and the other charged the USMS with failing to conduct an adequate environmental impact assessment. A $3 million infrastructure grant from the USMS was also suspended until the agency completed investigations about procedural appropriateness of the bid. Critics of the project asserted that construction could not be completed without the grant and that any delay would cost the developer and the private prison operator serious financial damage.
In September 2003 Rodriguez replaced former County Judge Jimmy Patterson on the board of the La Salle County Public Facilities Corporation as part of the settlement of the Texas Open Meetings Act violation lawsuit. The settlement also stipulated that all records related to the project and notices of meetings would have to be available to the public.

The county and the prison operator were also told to renegotiate their contract so that Emerald would be paid based on the number of prisoners actually detained in the prison rather than a flat rate irrespective of the actual numbers. Emerald would have to honor a clause to pay the town of Encinal $50,000 and La Salle County $100,000 as part of its bid. In April 2004 the La Salle County Commissioners Court agreed to issue an additional $4.5 million in bonds to pay off contractors. In May 2004 the local water board voted to supply more than 1 million gallons of water per month, clearing the last hurdle to the opening of the controversial facility. The facility received its first 300 USMS detainees the same month.

DETAILS: On November 7, 2002 La Salle County sold $21.8 million of high-yield taxable lease revenue bonds to build a 500-bed private prison that would be operated by Emerald Correctional Management of Shreveport, LA, near the town of Encinal in South Texas. According to the Official Statement for the bonds, the U.S Marshals Service (USMS) had contracted with the county to hold up to 300 prisoners per day at the proposed prison. Debt service for the bonds would be paid with rental payments from the county through its contract with the USMS.

The outgoing county judge, Jimmy Patterson, who had championed the project, claimed that the prison would provide jobs and attract other businesses to the small town of 600.¹ The bonds, which were unrated, would not, according to him, be a risk for taxpayers. The bonds had been issued by the La Salle County Public Facility Detention Corporation, a newly created non-profit entity. The corporation's board consisted of the county commissioners and the county judge. In Texas, the top administrative official of the county has the title of county judge, even though the person may not be a judge in the legal sense.

Patterson and supporters of the project said that the project originated in 2000 with a request for proposals from the U.S Marshals Service for jail space in South Texas. He and Rick Reyes, a former commissioner from a neighboring county, first discussed the idea. Reyes later became a consultant to La Salle County and was reportedly paid $700,000 for his work in that capacity.

But Joel Rodriguez, Patterson's successor as county judge, alleged that Patterson and the county commissioners had pushed the project without adequate community input. Rodriguez claimed that, before taking office, he had been forced to file Freedom of Information Act requests to get basic information about the deal, even though he was chief investment officer of the county at the time. Rodriguez also said that other county officials, including the county attorney, had not had a chance to sign off on the bonds--a possible violation of securities laws. County Attorney Elizabeth Martinez said that she learned of the project just three days before the bonds were issued and was given only 24 hours to sign an opinion on the legality of the issue. She refused to sign the opinion as she considered it beyond her expertise. The Official Statement, Rodriguez alleged, contained a misleading statement involving the county attorney's opinion--also a possible violation of securities laws.

The deal's underwriters and its bond counsel insisted that it was a legal transaction that had been approved by the County Attorney General.

Rodriguez characterized the deal as doomed real estate speculation. He thought that the county could not afford to issue the bonds with debt service payments of over $2 million. If the USMS backed out of the deal, the county would be left with the obligation of repaying the principal, premium and interest on the bonds. Other problems included excessive interest rates (12 percent), high underwriter fees (6 percent) and a flat rate contract with the prison operator Emerald that would have to be paid irrespective of the number of prisoners housed in the facility.

The USMS was also evaluating if the county was the actual proprietor of the prison, because a valid Intergovernmental Agreement like the one cited in the Official Statement could only be made directly between the agency and a government, not through a non-profit corporation.

Other problems pointed out by Rodriguez included the fact that the county sheriff, who was also the brother of the former judge, Jimmy Patterson, had been the point person in the county's dealings with the USMS. Rodriguez felt that a county government official should have been designated as a county representative for the prison. He was also concerned about potential competition from other facilities.² The USMS was soliciting proposals for a 2800-bed prison in Laredo that could be a potential contender. Under the existing arrangement, the USMS could back out of the deal by just writing a letter stating its intentions.

Two lawsuits eventually delayed the construction of the project, even though the bonds were already sold. One charged the county with violating the Texas Open Meetings Act and the other charged the USMS for failing to conduct an adequate environmental impact assessment. A $3 million infrastructure grant from the USMS was also suspended until the agency completed investigations about the procedural appropriateness of the bid, including the county's failure to disclose that several of the county commissioners had been barred by the U.S Department of Housing and Urban Development for misusing funds in a housing deal involving a similar financing arrangement.³

That deal also involved a non-profit bond issuer, the La Salle County Housing Finance Authority, which was created shortly before the creation of the Public Facilities Detention Corporation. The Authority had to foreclose on eight of the 10 houses it bought with its federal grants and needed to be bailed out by the U.S. Department of Housing and Urban Development, which took on the losses. HUD barred Patterson and two of the county commissioners, who were officers of the housing authority, for one year from participating in federal housing programs.⁴ In September 2003 Rodriguez replaced former County Judge Jimmy Patterson on the board of the La Salle County Public Facilities Corporation as part of the settlement of the Texas Open Meetings Act violation lawsuit. The suit was settled one day before it was set for trial. The county acknowledged that it had violated the law. Residents who had filed the lawsuit said that they had agreed to settle even though they still had serious issues with the project. The settlement also stipulated that all records related to the project would have to be made available at the County Clerk's office in Cotulla. Notices of meetings would have to be posted in Encinal, where the prison was located.
The settlement called for the county and the prison operator to renegotiate their contract so that Emerald would be paid based on the number of prisoners actually detained in the prison rather than at a flat rate irrespective of the actual numbers. In addition, it also told Emerald to honor a clause that the company offered in order to win the bid Under the clause, the company would pay the town of Encinal $50,000 and La Salle County $100,000. Emerald was not formally a party to the agreement and the clause was not included in the actual contract.⁵

In October 2003 Rodriguez asked the county attorney to file misdemeanor complaints against the commissioners for withholding public information about past county projects in light of its dire financial conditions. Rodriguez's biggest concern was a contract the county signed in 2002 with Emerald to operate two other facilities. One was a 48-bed county jail for holding federal prisoners and the other was a 576-bed detention center. He said that the county was losing thousands of dollars each month because it had to house its own prisoners elsewhere and predicted that the problems would get worse when the La Salle facility opened. He wanted the commissioners to hire a lawyer to review and renegotiate the contracts, if necessary. Emerald officials said that they would not consider any revisions of the contract, as it was a "market-type" deal.⁶ The underwriter, Municipal Capital was one of the three plaintiffs in a lawsuit filed against Rodriguez for his opposition to the project. The lawsuit was filed against him as an individual and not in his public capacity.⁷ The outgoing judge Patterson has also filed a lawsuit against Rodriguez for defamation.⁸ In April 2004 the La Salle County Commissioners Court agreed to issue an additional $4.5 million in bonds to pay off contractors.⁹ In May 2004 the local water board voted to supply more than 1 million gallons of water per month, clearing the last hurdle to the opening of the controversial facility.¹⁰ The facility received its first 300 USMS detainees the same month.
NOTES

1. The following account is drawn from Richard Williamson, "Texas Jails Raises Hackles: Some Worry About Securities Violations," The Bond Buyer, November 26, 2002.

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

3. Richard Williamson, "Lawsuit Over Texas Jail Gives Leading Opponent a Lead Role," The Bond Buyer, September 29, 2003.

4. Richard Williamson, "Texas Jails Raises Hackles: Some Worry About Securities Violations," The Bond Buyer, November 26, 2002.

5. Richard Williamson, "Lawsuit Over Texas Jail Gives Leading Opponent a Lead Role," The Bond Buyer, September 29, 2003.

6. John MacCormack, "La Salle judge battles panel, " San Antonio Express-News, May 10, 2003.

7. Richard Williamson, "With Lawsuit Dismissed, A Texas County Jail Deal Closes, The Bond Buyer, August 11, 2003.

8. Richard Williamson, "Lawsuit Over Texas Jail Gives Leading Opponent a Lead Role," The Bond Buyer, September 29, 2003.

9. Jesse Bogan, "La Salle OKs $4.5 million in bonds for jail; The controversial facility has been built but can't be opened until contractors are paid." San-Antonio Express-News, April 13, 2004.

10. Jesse Bogan, "New jail in La Salle gets Ok for water," San Antonio Express-News, May 14, 2004.