Reeves County Detention Center III

Name of Prison: Reeves County Detention Center III

Location: Pecos, Texas

Type: Publicly owned; privately operated

Owner: Reeves County Detention Center Trust

Operator: Geo Group Inc. (formerly Wackenhut Corrections Corporation)

Capacity: 960 beds (addition to the Reeves County Detention Center

Security Level: Low

Estimated Cost: $49.5 million

Source of Capital:

Taxable Certificates of Participation issued by the Reeves County Detention Center Trust

Underwriter: Friedman Luzaatto

Insurance: Ambac, ACA Financial Guaranty Corp.

Rating: Fulbright & Jaworski (special counsel to the county); Norton & Johnson (underwriter's counsel)

Bond Counsel:

Financial Advisor:

Trustee:

Status: Open

SUMMARY: In March 2004 Reeves County entered into an annually renewable contract with the Arizona Department of Corrections to house Arizona prisoners in the 960-bed, $40 million Reeves County Detention Center (RCDC) III. Under the contract, the facility could hold up to 864 prisoners from the state. The month before county officials announced that federal prisoners would be housed in the third wing of RCDC. The two other wings of the complex already held more than 2,000 federal prisoners. The expansion had been financed by the Reeves County Detention Center Trust, a county agency, which issued $49.5 million in Certificates of Participation in 2001. The Detention Center Trust had a lease agreement with the county. The contract with the state of Arizona and the three-year intergovernmental contract with the federal Bureau of Prisons resulted in an upgrade of the facility's credit rating by Fitch Ratings in June 2004, which, along with Standard & Poor's had lowered RCDC's rating at the end of 2003, when it was unable to secure contracts. The B rating by Fitch indicated that the bonds were still highly speculative with significant credit risks. The county made its first lease payment to the Trust in the fall of 2003, even though the newly built facility was empty at the time. In an effort to market unused bed space in the county, the board of the Detention Center Trust contracted with Wackenhut Corp. (now Geo Group) in November 2003. This was expected to cover debt service payments in the short run. But rating companies warned that the new arrangement would carry significantly more market risk than the deal as it was originally conceived because it would be competing in the open market.

DETAILS: The Reeves County Detention Center (RCDC) was built in 1998. Construction of the facility had been financed using proceeds from issuing Certificates of Participation, as was its initial expansion in 2001. The Reeves County Detention Center Trust, a county agency that had a lease agreement with the county for the facility, had issued the COPs.

The Reeves County COPs were secured by county lease appropriations derived from the per diem paid by federal agencies, principally the Bureau of Prisons, for housing federal prisoners at the low-security prison complex.¹ But federal contracts with county facilities do not stipulate how many prisoners are to be housed at a facility, and the 1000 beds in the latest addition to RCDC remained empty between March 2003 and February 2004.²

In the summer of 2003, when default seemed imminent, county Judge Jimmy Galindo wrote a letter to President Bush asking him to intervene and save the local economy by providing BOP prisoners for the facility. The prison was the largest employer in the county. Galindo said that Reeves County had the lowest per diem in the country and that he did not understand why the federal government would choose other facilities over the county detention center. But a BOP spokesperson said that location and not costs were the decisive factor in this case and that the Bureau had been clear from the outset that it was not making any promises.³

The county made its first payment in the fall of 2003, even though the new facility was empty at the time. In September and November of 2003, Fitch and Standard and Poor lowered their ratings of the Certificates of Participation, saying that it was not financially viable to house 2,100 prisoners in a 3,000-bed facility.⁴ In addition to filling up the empty new wing with federal prisoners, the county also needed the BOP to increase the prevailing $47.33 per diem for its existing population to sufficiently cover operational expenses and debt service requirements.⁵

In September 2003 Fitch lowered its ratings of the $89 million COPs issued over four years from BBB- to BB, citing less than anticipated revenue from the facility. The agency also placed the bonds on a "Rating Watch Negative, " which meant that it could be downgraded further.⁶ A BOP spokesman said that the Bureau did not expect to begin housing more prisoners in Reeves County anytime soon, as there was no immediate need for more beds in the south-central region.⁷ At the time of the September downgrade, the county had to defer its payment to the city of Pecos for a water project that would supply water to the prison so that it could make its bond repayment.⁸. The county also tried to get contracts with the U.S. Marshals Service, the Department of Homeland Security and the state of Arizona.⁹

In November 2004 Standard & Poor's lowered its rating on the $49.5 million of taxable COPs from BB to BBB-plus, the higher end of the speculative grade scale. The debt affected included the Series 2001A, which was insured by MBIA Insurance Corp., and the Series 2001B, which was insured by ACA Financial Guaranty Corp. S&P placed the debt on CreditWatch pending contract negotiations between the county and the BOP.¹⁰

S&P's downgrade followed a similar move by Fitch Ratings, which lowered its rating from BB to CCC a week earlier. BB is considered "below investment grade" or junk status.¹¹ The CCC rating had a stable outlook, which meant that the rating agency did not expect the rating to change in the near future. A CCC rating, however, indicated a high risk of default.¹²

The two older wings of the complex had been used as collateral for building the third wing. If the county missed on payments it could lose control of the prison.¹³ The key factors in determining if the rating would stabilize included occupancy at projected levels, the source of prisoners, the negotiated per diem rates under federal guidelines, other associated expense adjustments and a sustained and timely payment of per diem rates at or close to originally projected levels.¹⁴

Analysts for Fitch commented that the continuing delay in contract negotiations between the RCDC and BOP had made the rating agency skeptical about the relationship between the two agencies and that a positive relationship between them had been a key rating criterion.¹⁵ The rating agency was also concerned about the restructuring of federal homeland security functions and associated uncertainties related to BOP and other RCDC federal customers.

If the empty beds stayed unfilled for a protracted period of time, debt service could potentially increase to over 20 percent. This would significantly reduce the county's ability to make lease payments. In case of a serious cash shortage, several million dollars in certificate reserve funds and the county's general fund reserves could serve as back-up. There was also a trustee leasehold interest in the project. But the rating agency said it was hard to predict if subleasing the facility to any other entity other than the county would improve performance in the event of a default.¹⁶

In an effort to market unused bed space in the county, the Detention Center Trust board contracted with Wackenhut Corp. in November 2003. The company was expected to cover debt service payments for the facility. Rating agenciess warned that the new arrangement was much riskier because the facility would be competing in the open market.¹⁷ The company said that it did not expect to earn a profit from its contract until there was a contract to fill the empty beds.¹⁸
The facility would continue to be staffed by county employees and led by a small management team from the company. The contract called for a 21 percent reduction in the workforce employed at the facility from 435 to 344.¹⁹
In early 2004 Reeves County received contracts for RCDC III from both the Bureau of Prisons and the Arizona Department of Corrections (for up to 864 prisoners).

The contract with the state of Arizona and the three-year intergovernmental contract with the federal Bureau of Prisons resulted in an upgrade of the facility's credit rating by Fitch Ratings in June 2004, which, along with Standard & Poor's had lowered RCDC's rating at the end of 2003, when it was unable to secure contracts. The B rating by Fitch in June indicates that the bonds are still highly speculative with significant credit risks.

NOTES
1. Elizabeth Albanese, "Deal in Focus: Texas County COP Sale to Finance a Prison, Maybe Prosperity, The Bond Buyer, May 15, 2001.

2. Elizabeth Albanese, "Fitch Drops Reeves County, Tex., Prison COPs to CCC," The Bond Buyer, November 12, 2003.

3. Chris Roberts, "Reeves County needs inmates to make payments on prison," Associated Press, August 30, 2003.

4. Elizabeth Albanese, "Fitch Lower $89 Million of Texas County's Detention Center Debt," The Bond Buyer, September 5, 2003.

5. Elizabeth Albanese, "Reeves County, Tex., Lowered Twice in One Week," The Bond Buyer, November 17, 2003.

6. "Ratings group downgrades Reeves County prison bonds," Associated Press, September 4, 2003.

7. Elizabeth Albanese, "Fitch Lower $89 Million of Texas County's Detention Center Debt," The Bond Buyer, September 5, 2003.

8. "Ratings group downgrades Reeves County prison bonds," Associated Press, September 4, 2003.

9. Elizabeth Albanese, "Fitch Lower $89 Million of Texas County's Detention Center Debt," The Bond Buyer, September 5, 2003.

10. Elizabeth Albanese, "Reeves County, Tex., Lowered Twice in One Week," The Bond Buyer, November 17, 2003.

11. "Ratings group downgrades Reeves County prison bonds again," Associated Press, November 10, 2003.

12. Elizabeth Albanese, "Fitch Drops Reeves County, Tex., Prison COPs to CCC," The Bond Buyer, November 12, 2003.

13. "Reeves County makes payment on prison," Associated Press, September 3, 2003.

14. "Fitch Dwngrs $89MM Reeves County, TX COPS to BB; Watch Neg," Business Wire, September 3, 2003.

15. "Fitch Dwngrs $89MM Reeves County, TX COPS to CCC," Business Wire, November 10, 2003.

16. Fitch Dwngrs $89MM Reeves County, TX COPS to BB; Watch Neg," Business Wire, September 3, 2003.

17. Elizabeth Albanese, "Fitch Drops Reeves County, Tex., Prison COPs to CCC," The Bond Buyer, November 12, 2003.

18. "Wackenhut wins Texas contract," Corrections Professional, January 16, 2004.

19. "Company to run prison, lay off workers," Associated Press, November 6, 2003.