Jail has costly finance plan
By Johnny Brannon
Advertiser Staff Writer
The state is moving rapidly to relieve crowded jails by building a new facility, but the project is expensive and relies on a financing method that is more costly than conventional schemes.
Cory Lum • The Honolulu Advertiser
Designing and building a 1,100-bed jail near the state prison in Halawa Valley is expected to cost as much as $130 million. But that does not include interest on the debt mechanism to finance the plan, called certificates of participation.
The state plans to build a new 1,100-bed jail near the state prison in Halawa Valley that will help alleviate crowding in Hawai'i prisons.
The interest rate for such borrowing is higher than that of general obligation bonds, which are more commonly used to raise cash for government projects, so it will cost taxpayers more to pay off the debt.
Fiscal watchdogs question whether that approach is economically prudent, and criminal justice system critics say the project is unnecessary and would do nothing to ease jail and prison capacity problems.
But officials say the financing plan has strong advantages: the jail would be built quickly and not compete with other projects for approval by the Legislature, which for years has balked at providing money to build new correctional facilities.
"This allows us to start the project right now," state budget director Neil Miyahira said. "The process is started already, but if we went with bonds we would have to wait until the next (legislative) session."
About 3,900 inmates are incarcerated in the state's correctional system, including 1,250 that have been sent to private Mainland prisons to ease crowding here.
Just how much the jail project will cost taxpayers will depend on the actual cost of construction, the investor market for debt instruments and the state's credit rating at the time the certificates are issued, he said.
"Our interest cost is going to be whatever interest is at that point in time," Miyahira said. "But this is a needed facility that we have to do, and we've got to get started."
The financing plan would create a trust entity to own the facility, sell the certificates of participation to investors and pay off the debt with state lease payments over 30 years.
The state has invited developers to present plans for building the jail, and guidelines released this month call for proposals to include optional space for 600 more prisoners, which would bring the total capacity to 1,700.
The project's tentative schedule calls for construction to begin sometime after July 1 and to take no longer than 1,100 days.
Months before those specifications were issued, a development and investment team with a Ho-nolulu office approached officials with an offer to finance and build a $116 million facility. With annual lease payments of $8.4 million for 30 years, the total cost would be $252 million, according to an outline of the plan.
The group is headed by the Hawai'i branch of Durrant, an architectural and construction management firm with offices in 10 states. The company has worked on jail and prison projects in Arizona, Colorado, Pennsylvania, Texas and Wisconsin.
Instead of accepting the company's offer, state officials decided to seek proposals from other developers, as well. Mel Choy, principal of the Durrant's Honolulu office, declined to discuss the company's offer in detail because of its competitive nature.
"It's a substantial project, and I would imagine that any construction company would be extremely interested," he said. "This is high-stakes poker."
Alvin Bronstein, director emeritus of the ACLU's National Prison Project, said building a new jail would waste money and fail to alleviate capacity problems.
"No state and no country have ever built their way out of an overcrowding problem," he said. "Courts, prosecutors and police don't look for less costly alternatives when they've got prison beds. This new building will be a Band-Aid that will be overcrowded the moment it opens."
A better approach would be to invest in serious drug abuse treatment programs, an expanded probation system and community half-way houses and job-training programs, he said.
"The governor, the Legislature and the attorney general have to show some leadership and develop community programs that work," Bronstein said. "That's not always what people want to do in election years, when they worry about being painted as soft on crime."
Department of Public Safety director Ted Sakai, who is in charge of the state correctional system, said the new jail would replace the O'ahu Community Correctional Center in Kalihi, which has a rated capacity for 954 inmates but now holds more than 1,100.
The area was thinly populated when a jail was built there in 1918, but it is now surrounded by homes, businesses and schools. OCCC now serves as a jail, which generally holds prisoners awaiting trial and those serving short sentences, but it has also been used as a prison, holding more serious inmates for longer periods.
"The basic driving factor here is we have a lot of problems at OCCC," Sakai said. "A lot of the beds are not high-security, and the property itself is in the wrong place. We don't have a secure perimeter, so we have to have a lot of staff."
No decision has been made on whether OCCC would be closed, and Cayetano said its future would be up to the next administration. But Sakai said it could be used to hold a smaller number of low-security inmates, or be used as a secure drug-abuse treatment facility.
That could reduce population pressure on the new jail, which could also hold up to 600 more prisoners than OCCC if the state opts to build to the maximum capacity specifications, for 1,700 inmates.
Lowell Kalapa, head of the independent Hawai'i Tax Foundation, questioned why officials had not sought bond financing from lawmakers this year if the project was so vital.
"Is this in the best interest financially for the taxpayer, or are they trying to skirt legislative debate?" he said. "I don't think this is accountable, because the people have not voted on it through their representatives in the Legislature."
Miyahira said that although the project itself would not require legislative approval, the lease payments to retire the debt would be part of future operating budgets that go before lawmakers.
Another reason certificates of deposit are a good financing method is that they do not affect the state's bonding capacity, he said. That means more money can be borrowed for other projects without lowering the state's bond rating and raising interest rates.
"If we were to go with general obligation bonds, it would be in direct competition with other projects we have," he said.
Gov. Ben Cayetano felt certificates of deposit would be a good way to finance the jail because the Legislature has been reluctant to approve bonds for other projects, including schools, his press secretary said.
Cayetano has proposed that the state borrow $321 million through bonds for public school construction and maintenance this year, but lawmakers appear poised to approve only a fraction of that amount.
Some lawmakers, however, say they believe bonds for a jail would have been strongly supported.
"We easily could have done a bond float," said House minority floor leader Charles Djou, R-47th (Kahalu'u, Kane'ohe). "I think there's widespread recognition that we need a new prison."
Certificates of deposit have become a popular vehicle to pay for government projects in jurisdictions where the debt capacity is limited by law or voter approval is needed for bonds, financial experts say. And the approach is especially popular for prison construction.
"Often the public and elected officials simply find it difficult to choose to fund corrections building at the expense of other more popular government objectives," the National Corrections Corporation notes in a report it provides to prospective clients.
The specifications for Hawai'i's project require developers to provide the option of issuing the debt certificates before or after construction is finished.
Arranging the financing upon completion would drive the project's base price up further because that would require the builder to assume construction costs, Miyahira said. But if the interest rate for the certificates is lower at that point, the overall cost after debt service could be less.
"There is a method to our madness," he said.
Cayetano would prefer that a private company run the new facility instead of the state, but that issue has yet to be decided.
The idea strongly appeals to Djou and other fiscal conservatives, who say privatization could lower jail operating costs.
"If you can operate it cheaper and provide equivalent or higher quality, I think we owe it to the public to do that," said Rep. Ed Case, D-23rd (Manoa).
Public worker unions and their supporters have staunchly opposed such ideas, because private facilities staffed by nonunion employees would erode their membership base and ability to expand.
Reach Johnny Brannon at jbrannon@honoluluadvertiser.com or 525-8070.
