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

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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.