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Fitch gives Littlefield bonds a "Negative Outlook" after GEO pulls out

We've often cautioned against cities and counties financing speculative prisons and detention centers.  Here is another example why it's a bad idea ("Fitch Affirms Littlefield, Texas' COs at 'BB'; Outlook Negative," April 14), 

The speculative grade rating and Negative Outlook reflect the uncertainty as to when and if the city can secure an operator or buyer for the detention center as well as the city's limited financial resources to repay the detention center debt. To the surprise of city officials, the state of Idaho announced their plans to leave the Littlefield facility in January 2009, citing the need to consolidate all of its out-of-state prisoners into a larger facility in Oklahoma.

In addition, the detention center's private operator, the Geo Group, unexpectedly announced termination of their agreement to manage the facility effective January 2009. The move to leave Littlefield by the Geo Group is significant, given that the established private operator had made sizable equity investments in the detention center reportedly totaling approximately $2 million. In the past, the ability of the Geo Group to quickly replace prisoners with little disruption in operations, as well as their investment in the Littlefield detention center were cited as credit strengths.

While it's true that GEO pulled out of the Bill Clayton Detention Center, it may be a bit of a stretch to say it was unexpected.  As we reported, GEO had lost its contract with Idaho to house prisoners.  Idaho pulled out after the suicide of Idaho prisoner Randall McCullough, who killed himself after the GEO Group held him in solitary confinement for more than as a disciplinary measure.  McCullough's death followed the tragic death of Idaho prisoner's Scot Noble Payne a year prior at another Texas GEO facility - the Dickens County Correctional Center

Now it appears that Southwestern Correctional has a non-exclusive aggrement with the Littlefield in its attempt to find prisoners and avoid further bond devaluation.  However, the search for prisoners isn't going well.

The agreement with Southwestern Correctional is not exclusive and the city continues to seek discussions with other operators. Exacerbating city efforts is the current national recession, cuts in governmental spending, and a reduced jail population.

Officials have indicated, rather than drawing upon the debt service reserve fund, that the city is considering levying an interest and sinking fund tax to pay a portion of the detention center debt service, with the balance of detention center debt service requirements coming from expenditure reductions and available surplus funds. The city would have to almost double the property tax rate to pay for the entire detention center debt, which is not feasible.

It may seem dumbfounding that the city is going to reduce spending in other areas to pay a debt service on an empty jail that previously generated a profit for a private prison corporation.  But that's the situation in Littlefield, Texas, and should be a warning to other counties in a similar situation. 

 

Fitch downgrades Littlefield's bond rating after Idaho removes prisoners from GEO lock-up

In a fascinating and disturbing example of what can go wrong when a locality finances a speculative prison, the Fitch ratings agency has downgraded the City of Littlefield's bond rating after the city's GEO-operated Bill Clayton Detention Center lost its contract to hold Idaho prisoners, and has subsequently been dumped by the private prison corporation. 

According the Ad Hoc News article ("Littlefield, - Fitch Downgrades Littlefield, TX' COs to 'BB'; Outlook Negative," August 24th)

Fitch Ratings has downgraded to 'BB' from 'BBB-' the rating on Littlefield, TX's (the city) outstanding $1.3 million combination tax and revenue certificates of obligation (COs), series 1997, and removed the ratings from Rating Watch Negative. The CO's constitute a general obligation of the city, payable from ad valorem taxes limited to $2.50 per $100 taxable assessed valuation (TAV). Additionally, the COs are secured by a pledge of surplus water and sewer revenues. The Rating Outlook is Negative.

The downgrade reflects events related to the operation of the city's detention center facility, which accounts for the majority of outstanding debt (which was not rated by Fitch but is on parity with the series 1997 bonds). To the surprise of city officials, Idaho announced their plans to leave the Littlefield facility in January 2009, citing the need to consolidate all of its out-of-state prisoners into a larger facility in Oklahoma. In addition, the detention center's private operator, the Geo Group, unexpectedly announced termination of their agreement to manage the facility effective January 2009. The move to leave Littlefield by the Geo Group is significant, given that the established private operator had made sizable equity investments in the detention center reportedly totaling approximately $2 million. In the past, the ability of the Geo Group to quickly replace prisoners with little disruption in operations, as well as their investment in the Littlefield detention center were cited as credit strengths.

The article isn't quite accurate in saying Idaho's decision to remove prisoners from the facility was a surprise.  The decision followed the suicide of Idaho prisoner Randall McCullough, who killed himself after the GEO Group held him in solitary confinement for more than as a disciplinary measure.  McCullough's death followed the tragic death of Idaho prisoner's Scot Noble Payne a year prior at GEO's Dickens County Correctional Center. After Noble Payne's suicide, a subsequent investigation revealed squalid conditions and the Idaho Department of Corrections Health Director called the GEO prison the worst facility he'd ever seen.

Still, the outlook for Littlefield isn't good.  According to the Ad Hoc News article,

On Dec. 9, 2008, Fitch placed the series 1997 bonds on Rating Watch Negative, reflecting the city's active pursuit of various alternatives to remedy the situation and possibly resolve it within the next several months. Funds to repay debt service on detention center COs through August 2010 had been identified through available city funds as well as a debt service reserve fund. The city indicated to Fitch in May 2009 that it was in negotiations with another established jail operator (the operator) to assume management of the Littlefield facility and that the operator was attempting to secure an agreement with a federal agency to house prisoners. Resolution or near resolution of this agreement was expected by August 2009. However, the operator has yet to secure a prisoner agreement and the timing for resolution remains uncertain.

Littlefield's story should be a cautionary tale for other cities and counties considering floating debt to finance a private prison corporation.  We'll keep you posted on how this story develops.  In the meantime, see our previous coverage of the Bill Clayton Detention Center:

Removal of Idaho Prisoners from GEO Jail Threatens County's Finances, Jan. 15, 2009

Idaho Cancels Contract with GEO's Bill Clayton Prison, Nov. 6, 2008

Idaho Removes Some Prisoners from Texas Private Prisons, Oct. 15, 2008

AP on Idaho Inmates in Texas Private Prisons, Sept. 24, 2008

Idaho Inmate Died After More Than a Year in GEO's Solitary Confinement, Sept. 22, 2008

Another Idaho Inmate Commits Suicide in a GEO Group Texas Prison, Aug. 21, 2008

Idaho Prisoners Also Being Transferred to GEO’s Bill Clayton Unit, July 23, 2007

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