SUMMARY: In April 2001 Provident Foundation Inc., a non-profit group based in Baton Rouge, LA, formed a subsidiary called Carolina Corrections LLC, which then received a contract to build three 1,000-bed prisons to be operated by the North Carolina Department of Corrections. Under its agreement with the state, a special-purpose state corporation, the North Carolina Infrastructure Finance Corporation, would buy the prisons from Carolina Corrections for $226 million after construction was completed in 2004. The Corporation would then lease the facilities to the North Carolina corrections department for 20 years.        

 

The Finance Corporation, which was created in 2001, issued $226 million of lease-purchase revenue bonds in July 2003. The bonds will be payable from lease rental payments made by the state. The General Assembly will make annual payments to the Corporation for the lease through annual appropriations. The deal, however, will be recorded as a lease and not as a debt by the state. This was the first time the state was backing debt with appropriations. The deal was criticized by some lawmakers and former Treasury officials who said that it involved off-the-books financing and bypassed voter approval.

 

North Carolina's nonpartisan fiscal research division estimated that rather than saving money, the 20-year lease would, in the long run, cost the state an additional $146 million. Technically, the state could break the lease anytime. But an analyst for Fitch, the credit rating agency, said that breaking the lease would ruin the state's credit rating.

 

DETAILS: In April 2001 Provident Foundation Inc., a non-profit group based in Baton Rouge, LA, formed a subsidiary called Carolina Corrections LLC, which received a contract to build three 1,000-bed prisons for North Carolina.¹ The state leased state-owned land to Carolina Corrections to build the facilities.² Provident is run by a group of lawyers, investment bankers and financial consultants.

 

Under its agreement with the state, a special-purpose state corporation, the North Carolina Infrastructure Finance Corporation, will buy the prisons from Carolina Corrections for $226 million after construction is completed. The Corporation will then lease the facilities to the North Carolina corrections department for 20 years.³  According to state analysts, the lease payments over 20 years would total $370 million or approximately $18.6 million annually. The state would own the prisons when the lease ends after 20 years.

 

The Finance Corporation, which was created in 2001, issued $226 million of lease-purchase revenue bonds for the first time in July 2003. Proceeds from selling the bonds will be used to buy the three prisons after construction was completed. Carolina Corrections would assign the ground leases to the Corporation when it purchased them.⁴ The bonds would be paid off by the state's, i.e., the department of corrections'  future lease payments.

 

The General Assembly will make annual payments to the Corporation for the lease through annual appropriations. As long as the state leased the prisons, they wouldn't be classified as capital spending or debt in the budget. This was the first time the state was backing debt with appropriations. The deal was criticized by some lawmakers and former Treasury officials who said that it involved off-the-books financing and sidestepped voter approval. A bond analyst for Standard & Poor's said that though the debt was off the state's balance sheet legally, it would still be a factor in evaluations of the state's fiscal strength by rating agencies.

 

The state justified the arrangement saying it would avoid borrowing money during a period of increasing budget deficits since a private entity would build the facilities. But North Carolina's nonpartisan fiscal research division estimated that the 20-year lease would, in the long run, cost the state an additional $146 million. The state's deputy treasurer also said that North Carolina could have saved money in the long run if it had financed the deal itself.⁵

 

Technically, the state could break the lease anytime. But an analyst for Fitch, the credit rating agency, said that breaking the lease would ruin the state's credit rating.

 

According to a spokesperson for the state's Treasurer, the departure from traditional financing methods did not mean that the state was lacking in cash; rather, appropriation debt financing was considered to be a more efficient way of paying for costly projects under existing fiscal circumstances.⁶

 

This was the first time the state had used a non-profit entity to issue debt. The Infrastructure Corporation was legally separate from the state government. Its three directors had been appointed by state Treasurer Richard Moore who contributed to Moore's campaign for Treasurer. A Raleigh bond attorney said that the Infrastructure Corporation "served as a conduit through which the state can borrow money without falling under the state's constitution's restrictions on borrowing."

 

Former state Treasurer Harlan Boyles, the person credited with earning North Carolina's outstanding credit rating, said that the General Assembly had approved the more expensive financing arrangement with higher interest rates to circumvent voter approval. Boyles endorsed the concept of lease-purchase financing in 1993 while holding office as State Treasurer, but he warned lawmakers not to borrow excessively without voter approval after the prison bonds were issued. Former Deputy State Treasurer, Charles Heatherly said that the prison deal was approved without adequate scrutiny by legislators.⁷

 

Until 2003 all of the state's debt commitments were general obligation debts. The prison bonds under this arrangement were by contrast secured by lease rental payments that would be made by the state directly to the trustee, First Citizens Bank & Trust Co. and would not be insured. "If the prisons under construction are not completed and cannot be acquired by the designated date, the bonds are subject to extraordinary optional redemption at par in part on any date on or before Dec. 15, 2004."

 

The bonds would be sold through a negotiated deal and had maturity dates from 2004 to 2023. The bonds will be rated AA by Fitch, Aa2 by Moody's Investor Service, AA-plus by Standard and Poor's. The state is rated triple-A by Fitch and Standard and Poor's and Aa1 by Moody's.⁸

Name of Prison: Maury Correctional Institution and another not yet named

 

Location:                   Bertie and Greene Counties, North Carolina

Type:                          To be owned by state after lease ends in 2024

Owner:                       North Carolina Infrastructure Corporation

Operator:                   North Carolina Department of Corrections                

Capacity:               1,000 beds each

                                       

Security Level:          Maximum/high  

Estimated Cost:       $159.6 million

Source of Capital:    Certificates of Participation issued by the NC Infrastructure Corporation

 

Underwriters:            Banc of America Securities; BB&T Capital Markets; Citigroup Global Markets, Inc.

 

Insurance:                    Not expected to be insured.

 

Rating:                         Fitch: AA; Moody's: a Aa2; S&P: a AA-plus

 

Bond Counsel:             Womble Carlyle Sandridge & Rice

 

Financial Advisor:            Davenport & Co.

           

Trustee                                   

 

Status:                                     Bonds issued in January 2004

 

 

SUMMARY: The financing arrangement seems to structurally identical to the Anson, Alexander and Scotland county facilities, except that Carolina Corrections is not involved. The North Carolina Infrastructure Corporation issued the $159.6 million of certificates of participation in January 2004. The state will lease the facilities from the Corporation and make annual lease payments. The General Assembly will make annual appropriations for the payments. The proceeds from the Series 2004A bonds will be used to finance initial costs of construction; additional bonds will be issued to fund the remaining expenses associated with building the facilities. The lease expires in 2024. The state has the option to take ownership in 2014 by prepaying the bonds.  

 

Analysts said that the bonds have a lower rating than those assigned to the state's General Obligation bonds because of the risks associated with the legislature's inability to make appropriations to pay for the lease payments.

Greene County's Maury Correctional Institution broke ground in April 2004 in spite of controversies surrounding the deal. The controversies included reports in the News & Observer that state employees, including a corrections department official, had business ties with the landowners who sold 131 acres of land for the prison to the state.¹⁰ These articles prompted investigations by the State Bureau of Investigation and the FBI.¹¹

Activist groups involved:

 

Not With Our Money: http://www.notwithourmoney.org/

 

Prison Reform Advocacy Center http://www.prisonreform.com/index.shtml
 

Families Against Mandatory Minimums: http://www.famm.org/si_sbs_northcarolina.htm

NOTES

 

1. Joseph T. Hallinan, "Charity Lends a Hand to Prisons With Murky Off-the-Books Deals," Wall Street Journal, May 1, 2002.