The county’s treasurer is concerned taxpayers could be forced to repay construction bonds on the new jail if the company hired to run it cannot.

While the company that evaluates the credit risks of proposed bonds agrees with this view, confusion remains among county officials over whether the county will have to pay for a facility that was to be built at no cost to taxpayers.

The Jack Harwell Detention Center was built using $49 million in project revenue bonds issued by the McLennan County Public Facility Corp., a seven-member board that includes the county commissioners court.

Community Education Centers of New Jersey, the private detention company contracted to manage the jail, agreed to repay the bonds using revenue from housing state and federal inmates.

CEC has not lined up any housing agreements, and the jail remains empty.

Bill Helton, county treasurer and member of the public facility corporation, said the situation raises the question of whether the county is responsible for the debt if housing revenue cannot cover the bond payments.

The jail belongs to the county and is operated by CEC.

“If you borrow money, you’re expected to pay it back,” Helton said. “The PFC has indeed borrowed money here by selling the bonds, and I anticipate that the bondholders are going to want to be repaid.”

A matter of obligation

The responsibility of repaying the bonds hinges on what party is legally obligated to pay the debt.

The bond document was prepared by investment banking firm Municipal Capital Markets and outlines the construction project, projected revenues from the jail and bond repayment schedule for potential investors.

Helton said some language in the bond documents implies that the county has promised to assist with the debt.

In the “risk factors” section of the bond documents, it states that “the county presently intends to appropriate other available money of the county, if necessary,” to make the bond payments.

County attorney Herbert Bristow said the county is not legally obligated to repay the bonds. He points to language in the bond documents that states the county is not required “to appropriate any money for payment of its obligations under the lease.”

The county only has to budget funds each year to pay for any county inmates that are housed at the new jail, Bristow said. He added that the commissioners court could choose yearly to budget money to help repay the bonds.

“It is so crystal clear to me, and it is crystal clear to the bondholders, that the obligation to appropriate (county) funds is a discretionary call for the commissioners to make, period,” Bristow said.

But James Breeding, director of Standard & Poors Rating Services in Dallas, said the bond documents imply that the county would cover bond payments if housing revenues fell short.

“The way the documents were structured and the way we rated it was that the county would step in with other funds, if necessary,” he said.

Public finance cushion

By design, the PFC was created to add some level of protection to the county from the debt.

Governmental entities may form public facility corporations to issue debt for a project without having to gain voters’ approval in a bond election, according to Kent Gilbreath, Baylor University economics professor.

The arrangement also helps shield the county from officially carrying the debt on its books.

“It is not an indebtedness of the county, and thus the amount of indebtedness of the county is not increased,” said Gilbreath, a former board member of the Federal Reserve Bank of Dallas. “The higher the indebtedness of the county or the city, generally the lower their bond ratings would be.”

Risk ratings

The rating attached to new bonds signals how risky the investment would be to potential bond purchasers. Standard & Poors Rating Services gave the McLennan County Public Facility Corp. a AA- rating for the jail project.

The company cited McLennan County’s tax base, previous financial performance, and low debt load as evidence of the project’s “general trustworthiness” and “rating stability.”

Gilbreath said the county’s rating was used to show investors that the bonds were secure investments.

“If I’m going to buy one of those bonds, I’m not just going to look at the entity that’s issuing it,” Gilbreath said. “I’m going to look at the deep pockets behind it, and thereby make a more informed decision about the credit worthiness of the bonds I’m buying.”

Breeding said if the project goes into default, the county’s bond rating in future projects would be affected.

CEC is still working to find inmates to fill the beds. The company is negotiating a contract to house Harris County prisoners. CEC also intends to apply for a housing contract with the Federal Bureau of Prisons that will be awarded later this summer.

CEC Senior Vice President Peter Argeropulos wrote in a letter Monday to the county that it needs at least 525 inmates in the jail to produce enough revenue for operating and debt costs.

Argeropulos told commissioners previously that CEC would not open the jail until it was guaranteed enough inmates to cover its expenses.

While CEC has money on hand to make its debt payment in June, revenue is needed for the next $1.9 million payment due in December.

U.S. Bank National Association is trustee of the bonds. The bank collects interest payments made from the public facility corporation and distributes them to bondholders.

The bank will also be responsible for pursuing payment if the bonds go into default.

Bristow said the bonds would only go into default in a “doomsday scenario” in which no prisoners are ever placed in the jail. The reserve fund provides at least one year of cushion for CEC to secure housing agreements, Bristow said.

County Judge Jim Lewis said if payments were not covered by housing revenues, the bondholders would simply have lost their investment.

“It’s like if you were to buy stock in General Motors for $10, and then the price of the stock drops to $1, then that’s your loss,” Lewis said. “Once it’s gone, it’s gone. Bonds work similar to that.”

Helton said while he hopes the county will not have to pay the bonds, it is difficult to believe that all the parties can walk away from the debt if revenues aren’t generated.

“If somebody walks up to you and says ‘Here, you can borrow this money, but if things don’t work out you don’t have to pay it back,’ it just doesn’t sound right,” Helton said.

“I believe our legal counsel is a skilled attorney, and I hear what he’s saying, and I look on the other side, and I understand it, too, but the two — I can’t reconcile that in my own mind.”

Court opinion split

Members of the commissioners court have different views on how much protection the county has from the debt.

Commissioner Kelly Snell, who was not on the court at the time that the jail project was approved, said Bristow repeatedly assured him the county would not be responsible for the debt.

“He is the attorney that represents the county. You gotta kind of go with your legal representation,” Snell said. “If they tell you ‘this is what it is’ then that should be it.”

However, Commissioner Joe Mashek said despite Bristow’s assertions, he has wondered how the county would be able to evade liability for the debt if CEC defaulted on repayment.

“If we do not do it, we lose the jail, we lose the property, and our bond rating goes down so bad that we won’t be able to get any loans anymore,” Mashek said. “I feel, and I think Bill (Helton) does, too, that even though we may not to be responsible for these bonds, it would probably be in the best interest of the county to go ahead and pay the debt.”

rdennis@wacotrib.com

757-5755

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