CA Prison Budget Cuts Hurt Jail Plans
State government has promised to chip in $26 million for a new jail in Calaveras County and $80 million for a jail expansion in San Joaquin County. So what could go wrong?
Well, for one thing, state budget cuts to the prison system.
The state plans to come up with money for projects authorized under AB900, a law passed in 2008, by selling lease revenue bonds. Unlike traditional lease revenue bonds where the property financed is a money maker, the “lease” in this case involves a rent payment of tax dollars from one state agency to another.
The State Department of Corrections and Rehabilitation is supposed to pay rent to the State Public Works Board for use of the jail facilities. If it doesn’t, the Public Works Board is obligated to find someone else to pay the rent. In the event of a state default on particular bonds, the county that built the jail would be given the first opportunity to pay the rent. If the county government couldn’t or wouldn’t pay it, then it would face the prospect of having a building in the middle of its law enforcement complex leased to some other entity, possibly a private company in the prison business.
The lease-revenue arrangement, and its potential pitfalls, have come as news to some county officials.
“I thought these were general obligation bonds of the state,” Calaveras County Supervisor Tom Tryon said during a July 27 meeting of the Board of Supervisors. “If they come to foreclose on the jail, what happens to our $32 million?” Tryon asked, referring to the money from a local bond measure county voters approved in 2007.
The local money in Calaveras is going to an 80-bed jail dormitory and to a Sheriff’s Department administrative building next to the planned main 160-bed jail building. A specially carved parcel that includes only the main 160-bed jail serves as security for the lease-revenue bonds. So the county would keep the administration building and the dormitory even in the event of a default.
Calaveras County Counsel Jim Jones said county officials were concerned enough about the possibility of a state default jeopardizing the main jail that county officials tried to negotiate changes in the language of the jail funding contract with the state.
He said state officials were unwilling to make the changes because they believe the lease-revenue arrangement is necessary to attract investors willing to buy the bonds.
There are significant differences between general obligation bonds and lease-revenue bonds. General obligation bonds in California must get a two-thirds approval from voters. They cost the least in interest because they are backed by the full faith of the state government.
Lease-revenue bonds were traditionally used to finance things such as electric utility plants, water treatment plants or toll bridges that would generate the money needed to pay the debt. By using lease-revenue financing, state officials avoid the need to ask voter approval but will have to pay higher interest rates, and therefore more tax dollars, for the state’s $7.4 billion in borrowing for AB900. That program is building both prison and jail capacity around the state.
Another danger to the jail financing is that California’s battered credit rating and budget deadlock could make it difficult to sell AB900 bonds.
Yet state officials remain confident that they will be able to both sell the bonds and pay them off.
“You can’t say with any certainty there is no risk,” said Robert Takeshita, deputy director of the California Corrections Standards Authority. “But then you have to look at the history. There has never been a default in the state of California.”
And county officials are for the most part resigned to the fact that they need the state funding if they are to build a bigger jail.
“We do have concerns, and we hope it doesn’t happen,” San Joaquin County Director of Facilities Management Gabe Karam said of the risk the state could default on the bonds. “But there is too much at stake here. It is $80 million from the state to build the jail here. How can you say no to that?”
Al Segalla, president of the Calaveras County Taxpayers Association, said that if the general public hasn’t objected so far to the funding mechanism, its high costs, and its risks, that’s because few people understand it.
“This multilayered leasing is really confusing to the public and to me. It is almost like a fraud or a scheme to avoid public accountability,” Segalla said.
Calaveras County has finished its design for the jail and is scheduled to begin construction late this year, finishing the job by December 2012.
San Joaquin County is going slower, Karam said, and doesn’t anticipate starting construction on its expansion until mid-2012. By then, he said, local officials may know more about whether investors are willing to buy AB900 bonds and whether California’s elected leaders can stabilize state finances.
“We have two years to know more about the state of the economy in California,” Karam said.
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