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How Local Governments Got Burned by Private Prison Investments

Counties fell for a pitch on tax-free bonds for prisons and got nailed with millions in IRS fines.

James Parkey spent more than a decade crisscrossing the U.S. selling poor counties on a way to get rich quick. He’d help local governments issue tax-free bonds to build private prisons that would rent beds to the federal government, mainly to hold undocumented immigrants. Parkey’s model for financing lockups, which he promoted with help from a team of bond dealers, consultants, and lawyers, led to a boom in prison construction. While the jails succeeded in many places, almost two dozen defaults followed in cities and counties from Florida to Montana as the prisons struggled to fill beds amid the sudden glut. Then the IRS got involved.

As of July, eight detention center deals were being investigated over their tax-exempt financing, according to an IRS document. Several other counties in Texas and Arizona have settled with the government, paying as much as $1.9 million and refinancing their prisons with taxable debt, including at least three developed by Parkey and his network. In most cases the deals were “basically snake oil,” says Bob Libal, executive director of Grassroots Leadership, a nonprofit in Austin opposed to private prisons.

Parkey, an architect, got into the correctional facilities business in the 1970s, when Texas ordered counties to rebuild their crumbling jails. In the 1990s he founded Corplan Corrections in Irving to focus on prison design and development. “You do one, you do two, you do 10, you do 20, and I guess you’re an expert,” says Parkey, who declined to comment on tax issues. In the wake of the Sept. 11 terrorist attacks, he assembled a team to visit counties eager to kick-start their economies. It included two bond underwriters, a feasibility consultant, a Houston-based builder, and a rotating cast of private prison operators, including Emerald Correctional Management of Shreveport, La.

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They provided local officials with feasibility studies suggesting the facilities would pay for themselves with rental revenue from the U.S. Marshals Service and U.S. Immigration and Customs Enforcement. Counties were urged to build jails with two to three times more capacity than they’d need for local inmates. They also were advised to act fast to nail down that business, lest they “allow other counties or private developers to capture the market,” according to a report given to prospects by Parkey’s team. Local development authorities, some created specifically for the detention deals, owned the projects and issued bonds for them whose interest was exempt from federal taxes.

The bond offering statements included a warning indicating that the IRS might take issue with the setup. They said the tax-exempt status could be “adversely affected” by the decision to house federal inmates at the jails. Since 1986, the federal use of projects built with tax-exempt bonds has been limited to 10 percent, to prevent bondholders from being paid with taxpayer dollars as well as getting the tax-free subsidy. But in 1998 the IRS allowed a single jail project to go ahead with tax-exempt financing because the federal use was intended to be short-term. Since then, developers have argued that their prisons should also qualify for tax exemption. Some have used nonrenewable short-term federal contracts to bolster their claims, according to Mark Scott, the former director of the IRS’s tax-exempt bond division. “They pushed the envelope hard,” he says.

Polk County, one of the poorest in Texas, was eager to ink a deal with Parkey. In 2004 it created the IAH Public Facility Corporation to issue $49 million in tax-exempt bonds to build a jail to house immigrant detainees. Today, hundreds of the 1,054 beds in the detention center are empty. “I trusted the people, or we wouldn’t have gone forward with it,” says Tommy Overstreet, a county commissioner who voted for the facility. “At that particular time everything was go, go, go.”

The Polk facility was initially a boon for the county, generating almost $1 million a year in revenue. Then things changed. The federal government stopped sending as many inmates amid allegations of poor medical care, insufficient food, and excessive use of solitary confinement. The population dropped further after President Obama issued executive orders in 2012 and 2015 suspending detention and deportation for millions of undocumented immigrants. In May 2014 the IRS served notice that it considered the jail’s tax-exempt financing improper. The county development authority, which has settled with creditors over $49 million in outstanding bonds, agreed in September to pay the IRS $980,000 to resolve the case.

Parkey blames the woes in Polk and other counties on circumstances unique to each prison and to dwindling immigration enforcement. “We build them, design them, help communities to get the right operator with the right use, and try to make them successful,” he says. “We’ve had good luck with that, and we’re proud of it.” The IRS declined to comment on the Polk case or any others, saying it’s prohibited by law from discussing specific taxpayers. The underwriters say their decisions were informed by attorneys’ opinions. “With regard to the tax exemption of bond issues, we rely on recognized bond counsel’s opinion that the interest on the bonds will be tax-exempt,” says William Sims, managing principal at Herbert J. Sims & Co., a firm in Fairfield, Conn., that worked with Parkey on the Polk County deal. The law firm that advised Sims, Jenkens & Gilchrist, was dissolved in March 2007 after reaching a nonprosecution agreement with the Department of Justice in which it admitted that it developed and marketed tax shelters worth billions.

In 2005 a Corplan consultant pleaded guilty in federal court to paying bribes to two county commissioners in Willacy County in connection with a prison contract there. The two commissioners also pleaded guilty. Corplan wasn’t charged. The next year, Parkey visited the same county to pitch another jail project. He and his team estimated the county would get $8 million within the first seven months of the contract, according to a federal suit filed against the county, Parkey, and others in 2009 by Juan Angel Guerra, then the county’s district attorney. Parkey was dropped from the suit in 2010, and the case was resolved in favor of the county in 2011. “He’s not a poster child,” Parkey says of Guerra. “It is what it is.”

Parkey is now a consultant for Emerald Correctional Management. In August, a group from Emerald visited Anahuac, Texas, to pitch Chambers County commissioners on a deportation processing center that could be used by federal authorities. The deal was to be paid for with taxable bonds. The commissioners voted no. An Emerald spokesman didn’t return calls.

In September, Parkey traveled to Cleveland, Texas, almost 60 miles northwest of Anahuac, where he met with business leaders at the Lions Club, according to a report in the Cleveland Advocate. “Not one tax dollar of yours goes into this,” he told the group.

The bottom line: The IRS is going after counties that issued tax-free bonds to build jails used by federal agencies.

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