Legislature(1997 - 1998)
03/12/1997 01:00 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
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HB 53 - LEASE-PURCHASE CORRECTIONAL FACILITY Number 0705 CHAIRMAN GREEN announced the next item on the agenda as HB 53, "An Act relating to the authority of the Department of Corrections to contract for facilities for the confinement and care of prisoners, and annulling a regulation of the Department of Corrections that limits the purposes for which an agreement with a private agency may be entered into; authorizing an agreement by which the Department of Corrections may, for the benefit of the state, enter into one lease of, or similar agreement to use, space within a correctional facility that is operated by a private contractor, and setting conditions on the operation of the correctional facility affected by the lease or use agreement; and giving notice of and approving a lease-purchase agreement or similar use-purchase agreement for the design, construction, and operation of a correctional facility, and setting conditions and limitations on the facility's design, construction, and operation." MARGOT KNUTH, Assistant Attorney General, Central Office, Criminal Division, Department of Law, referred to the committee meeting on March 10, 1997. She said Representative Mulder did a good job of indicating the problem in this state. She made a chart to indicate where the institutions are, how bad off they are, which ones can be expanded and what this ends up costing per bed. She referred to and explained the chart. Spring Creek is the maximum security facility, the only other place with maximum security to any extent is the Lemon Creek facility in Juneau. At Spring Creek, $25 million could buy 250 beds if you are just buying the beds. If you need the infrastructure expansion, then the number of beds you get for you money goes down some. The analysis, by DOT/PF, is that 166 beds could be added if additions to the infrastructure were needed. It is a difference between $100,000 versus $150,000 per bed. MS. KNUTH referred to the Palmer medium correctional center and said for only $13 million, 221 beds could be provided which equals $59,000 a bed. The list equals $155 million without including what the North Slope Borough might come in at. If you were to say $25 million was all the legislature would expend this year, this money would buy the 166 to 250 beds in Spring Creek or you could get 221 beds in Palmer plus 48 beds in Bethel and 64 beds in Mat-Su pretrial and 50 beds at Harborview and the Hiland Mountain float. When we make those type of comparisons, it gets tough. MS. KNUTH said if the legislature were to appropriate $150 million, which is the Governor's six year capital project plan for the DOC. One of the spendier places is the Wildwood correctional center in Kenai because the state is up against the infrastructure wall. When you have to create new infrastructure, the beds end up a costly $195,000 a piece. When you finish with that infrastructure, you have a core which will let you expand beyond that so the next set of beds would be closer to the Palmer price of $59,000 a bed. Ultimately when you look at the ten year picture, you have to be thinking about several sets of expansions. The question is how much to do and where to start. Number 0987 CHAIRMAN GREEN clarified that the estimated costs were done by the Department. MS. KNUTH said the Anchorage figure, $60 million for the 400 replacement beds, is a state estimate. Number 1019 REPRESENTATIVE ROKEBERG clarified this was the plan endorsed by the criminal justice task force. He asked when authorization was made for the North Slope and Harborview facilities. MS. KNUTH said the North Slope item represents conversations on what the cost is and how many beds. There is no construction happening and nothing is authorized. The North Slope was looking at something which was more expensive than what the state is comfortable with paying. The state wanted them to re-evaluate their first estimate which was $42 million for something like 75 beds. The state had listed $15 million for those beds. REPRESENTATIVE ROKEBERG said the operating costs would probably be high and referred to the fact that it is close to $200 a day for community jails in Barrow. He referred to Spring Creek and the estimated operating costs with his calculation being $112 a day based on the fiscal note and the debt service. MS. KNUTH was not able to concur. The staff numbers are accurate on the fiscal note, they have two more people guarding the prisoners at any given moment which is what is being estimated for 250 additional prisoners. It actually takes 44 new positions to have two people there at any time. This component of the fiscal note is straightforward. When nonpersonnel costs are looked at, those are done through an averaging system and those may be high on this note. If the state was able to track down actual numbers, it could bring the note down , but she did not have enough information about that to tell the committee more except that it is high on this note. REPRESENTATIVE ROKEBERG clarified that there are significant operational variables with each geographical location in the state. It was his contention that if the state had a larger facility there would be greater economies of scale and therefore a lower per bed operating cost. MS. KNUTH said this would be the case to the extent that you could do that. Alaska has a lot of pretrial felons who need to be in their community for access to court as well as housing short term misdemeanants where it doesn't pay to ship them to Arizona or somewhere else in the state. There is a break down of how many inmates are sentenced felons, versus the pretrial felons, versus misdemeanants. All Wildwood inmates are essentially pretrial, except for an occasional in and out prisoner depending on what is happening spacewise elsewhere. To a certain extent, a lot of the numbers, especially in the jail area, are not flexible. Whereas prison numbers do tend to be more flexible. When you have someone with a year or more to serve, then you can move them to where you can house this economy of scale. Number 1305 CHAIRMAN GREEN clarified that the location and the type of facility creates as large a variation in cost as the size of the facility. REPRESENTATIVE ROKEBERG referred to the Yukon-Kuskokwim facility where it cost $149 a day per bed and asked if there was a number of misdemeanants who could be in soft beds in that community. MS. KNUTH said there are three components of a general corrections plan: try to reduce the number of people who are going into the system, within that number to try to maximize the number who could go into halfway houses which are soft beds; for those prisoners who have to be in hard beds, make sure that those beds are available; and the third part is to try to get people out of those hard beds in a manner which is consistent with public safety. The greatest complaint about corrections is that there should be more use of halfway houses, more soft beds. She said the DOC is doing the best that they can. All the available beds have been filled. There will always be a need for more soft beds and the state will always be utilizing them, but the state also needs hard beds. The state gets prisoners who could not be put into soft beds because it would not fulfill the mandate of protecting the public. Number 1460 CHAIRMAN GREEN asked what the reluctance was to use other forms of surveillance, such as electronic surveillance for non-violent felons and misdemeanants so that a bed would not have to be taken. MS. KNUTH said this is an area that is being entered into. One of the elements of reluctance is that when the state gives the court system additional tools, they don't think of them as alternatives. The court sees it as one more thing to do. If you were to add electronic monitoring as another option, you must prevent the court from stacking all the conditions on top of each other instead of taking away the jail time. As electronic monitoring is being looked at, there needs to be a way in which the court system uses this as an alternative compared to jail time, not just one more part of it. Under the existing statutory framework, the state does not have the administrative ability to say that a person's sentence was ten days in jail which will be enforced through electronic monitoring. A statutory fix would be needed before that could happen. CHAIRMAN GREEN said perhaps this should be considered if it is statutorily fixable. MS. KNUTH said this is a ripe area to look at. Number 1595 REPRESENTATIVE CROFT asked for an explanation on the chart and why the Palmer facility was so cheap. MS. KNUTH explained the chart. She said Spring Creek would be between $100,000 and $150,000 per bed depending on whether you are getting as many as 250 beds or as few as 166 beds. The $150,000 figure assumes that not only do you need to build a bed, but you also need to build some infrastructure for that bed. There is some component of a kitchen, a dining room, an additional administrative building. The price is $59,000 per bed in Palmer because it is the one facility where the core infrastructure is being underutilized. It has an ability to have more people without having to do more than building the beds and expand the fence. Number 1733 REPRESENTATIVE JAMES expressed concerns; whether to have private prisons or to continue current operations. One of the benefits is the smaller cost per day in a private prison because of the economies of scale. She asked for information on why you needed to put all these facilities in different communities. She thought some of those people could be transferred out of those communities and could be moved to a statewide facility. She also raised the issue of soft beds. It was her understanding that soft beds could be provided by the private sector. She asked if the government had deterred or created interest in that issue. Number 1857 MS. KNUTH answered that all but six or eight of the soft beds are private, this is the private part of corrections in Alaska at this point. Those six or eight are contract beds in Barrow. The state just bought another 13 soft beds this week and are buying them as fast as they can, with whatever money is available to them. They might have overspent, there may be as many as 75 soft beds available but the DOC doesn't have money in their budget for those. There is a growing need for soft beds, but they are not a substitute for hard beds for some of the prisoners. There is a classification matrix which corrections applies to determine the proper placement. She wasn't as qualified to speak on classification, but offered to provide information about it. MS. KNUTH said the state has had a lot more success in getting soft beds then they have had in expanding the hard bed numbers. The hard beds require capital expenditures which tend to be quite large, whereas they are able to buy some soft beds here and there. There are some communities who do not like to have the Community Residential Center (CRC) in their area and there has been some resistance. There are places where the state would like to have more soft beds, but haven't yet found a good place to put them. MS. KNUTH referred to the economies of scale and cost per day. To take the Fairbanks correctional center, the people who are there are short term misdemeanants and pretrial felons. Any of the felons who have a lengthy sentence to serve are being sent somewhere else. They are going to Spring Creek, Arizona, Wildwood or Palmer depending on their classification. Those prisoners go back to Fairbanks the last six months or 90 days of the sentence. She said this was the same thing in Bethel and Ketchikan because they don't have the space to keep the prisoners there for a long term sentence. Number 2177 REPRESENTATIVE JAMES suggested that the state move some of the people who are qualifying for soft beds into soft beds instead of keeping them in hard beds. MS. KNUTH said it is a matter of percentages, there are some people in hard beds who could go into soft beds, but the state does not have enough soft beds. Each year the prison population is growing by 260 people. Of that number, only 60 of them meet classification standards for the soft beds. Two hundred of those prisoners are dangerous, they need to be isolated and they need hard beds. There are some hard beds that aren't being utilized in the best way possible. This pales in comparison with how short we are on hard beds for the people who belong in them. REPRESENTATIVE JAMES asked if it was possible for the hard bed prisoners to be in one facility somewhere in the state. Number 2300 MS. KNUTH answered that, for prisoners who are in maximum or medium custody who have sentences of over a year, you can send them virtually anywhere. There is also an increase in the number of people who are getting short sentences and there is a big increase in the number of people who are pretrial. For some reason this increase is not going up proportionately. Judges are giving them sentences of time served in a pretrial status. Those people can't be sent anywhere. She could try to get more precise numbers, but out of the yearly increase of 200 hard beds each year something like 30 to 50 of them have to stay local because they are the short term prisoners who can't be transported, with a 100 of the prisoners being able to transfer. TAPE 97-38, SIDE A Number 0000 REPRESENTATIVE BERKOWITZ suspected that the increase in pre- indictment prisoners has to do with the change in the Anchorage district attorney's office about negotiating cases at the pre- indictment phase and pushing back the process further. He asked if she could track from the time of arrest to the time of post conviction and classification when someone becomes hard bed, soft eligible. MS. KNUTH said she couldn't but Mr. Sauser could provide an answer. Number 0114 CHAIRMAN GREEN said, "it's been said that judges are having a tendency to, well they're not supposed to be involved, but there has been plea bargaining down from a certain classification which might be, without question a hard bed to a lesser offense that might be more amenable to a soft bed type situation. Is that, to your knowledge, is that going on? I know they're not doing it on a bed basis, but they're doing it on what their charge is, but." MS. KNUTH did not feel that the judiciary would be involved. REPRESENTATIVE PORTER said the question presumes that the only basis for classification is the current charge and there is a much bigger criteria. CHAIRMAN GREEN clarified that what he was saying was there is plea bargaining occurring and as a result of that, what might have been a felony for a hard bed, now becomes a misdemeanor and this bargaining exacerbates the problem of having more misdemeanants. He said we have enough hard beds, but not enough if we are going to fill those hard beds with misdemeanants. MS. KNUTH said most of the beds are being filled by felons who have fairly lengthy sentences. There are areas where there is a lot of turnover in a misdemeanant population. REPRESENTATIVE PORTER asked if there were misdemeanants who would not be suitable for a soft bed. MS. KNUTH said there are and Mr. Sauser could explain the classification. For example if a prisoner has a recent history of escapes, they are removed from consideration for soft bed eligibility. If there is a violence problem they are not sent to a halfway house. Number 0384 FORREST BROWNE, Debt Manager, Treasury Division, Department of Revenue, said the DOR is only interested in the most effective type of financing. There are two concerns about HB 53; one is the tax exempt versus taxable and the other is, essentially, turning over the arranging of debt for the state to a third party. The DOR has provided recommendations which satisfy those concerns. Regarding the first problem; there is no requirement in the bill, as written, that it would use tax exempt financing. There is an advantage in doing this type of financing which relates to approximately 200 basis points, varying a bit from month to month and depending on the term of finance. In this proposed term, approximately 18 years, the DOR sees a penalty of approximately 2 percent per year on the $90 million financing by using taxable rather than tax exempt financing. MR. BROWN said because HB 53 does not require the use of tax exempt, the DOR has prepared their fiscal note under the assumption that taxable financing would be used. There would be a way to require the state and the third party contractor to abide by a certain U.S. Department of Treasury, IRS regulation having to do with private company management contracts. Those contracts are fairly narrow, they restrict somewhat the profit making ability of the private contractor which could be a negative in the eyes of the private contractor. The trade-off is an estimated a $25 million of potential savings on the financing costs. The suggestion is that, if the legislature wishes to require the use of tax exempt financing, it should be specified in HB 53, by references made to these IRS management contract guidelines. He had a copy of those guidelines. MR. BROWNE said the DOR reading of HB 53 and how this would work, according to their council's opinion, is that absent a requirement it probably wouldn't happen. A contract would happen which would not fit into the IRS guidelines and therefore taxable financing would be required. MR. BROWNE suggested separating the financing, the arranging of the debt, from the contract to construct the facility and the contract to operate the facility. If the state retains that financing flexibility, then the procedure would be as follows: the bill would essentially say that the state bond committee would arrange this debt as any other debt is arranged, approved by the legislature; the state would then solicit bids from private, third party contractors to construct and manage the facility under the assumption that they would be paid in full, in cash at the completion of the facility or you could arrange some progress payments during the construction; the facility would be constructed and operated pursuant to those agreements as provided in HB 53. MR. BROWNE explained the reason for this suggestion is that DOR thought it would be poor public policy to delegate the responsibility to someone other than the state. He questioned having someone, not as familiar with the state and its financing, going to Wall Street, talking to the bond rating services, the underwriters, essentially arranging the credit, using the credit of the state and arranging bonds for a long period of time. He said they might not be familiar with the Prudhoe Bay curve as well as other positive things that are occurring in the state of Alaska. If there was ever a default in that agreement over the 18 year period, it would reflect back on the state. He said DOR jealously guards this state credit situation because it has been very hard to get the double A rating which the state currently has. MR. BROWNE said the second point is that there is no one who could get lower cost financing for the state than the state itself. The state is in the market, has access on a daily basis. They feel that the effective cost to the state in terms of financing, which in a sense are going to be paying over the term, is that the state should be the one that would arrange it. MR. BROWNE said the third point, in terms of future flexibility, is that the DOR has seen over the years, in these long term debt instruments, opportunities to refinance them from time to time. The outstanding general obligation bonds were refinanced at a considerable savings. The latest refinancing of the international airport resulted in about $7 million of savings. This has been done from time to time because, in the past, the state has directly controlled the issuance and management of this debt. They did not feel it would be well advised to leave these potential refinancing profits on the table. These should accrue to the state and the DOR would like the ability to claim those into the future, instead of letting them go. MR. BROWNE said the fourth point is that the proposed facility, would need to be expanded or renovated. If the state has direct access to the financial markets, they could do that at any time in the future when the legislature approves it. If the financing was controlled by a third party, then the state would have to go "hat in hand" to the holder of the financing. There would be little or no competition in that regard and the state would pay whatever the expansion cost would be. If the state had control and direct access to the markets, the additional monies could be raised for the renovation or expansion with a minimized cost and maximum flexibility. MR. BROWNE said there is no provision in HB 53 for the state, at the end of the period, to own the land underlying the facility. The DOR would suggest an amendment, since the state is paying this over the 18 year period. The state would end up not only owning the facility, but the land as well. Number 0925 REPRESENTATIVE CROFT asked for clarification on unbundling and how this might affect the state's credit rating. He asked what is currently bundled in this and how it is different from how it is normally done. MR, BROWNE said, as is proposed in the bill, the third party contractor would design, construct the facility and then manage it for at least a five year period. This contractor would also raise, based on the state's credit, up to $90 million. The DOR thinks the same thing could be accomplished, if the intent of the legislature is to have privatization, by writing the contract that the state would pay cash for the facility when it was completed. Then the state could go out and do its own direct financing with the national financing markets. In either case it will impact on the state's debt and the state's debt capacity, the state's bond rating. The DOR would suggest that it would be more advantageous, and we are talking about tens of millions of dollars which could be saved, if this process was used. The implied goal of HB 53 could be accomplished and yet some flexibility could be retained on the financing. Essentially having state control, because it is state debt. You can call it a lease with a third party, but the third party is not providing the credit. It is the state of Alaska and the agreement that the state has made to make the principle payments. Number 1066 REPRESENTATIVE CROFT asked if we have ever let a private entity have this much possible impact on the state's credit rating. MR. BROWNE did not know of any situation. Sometimes on small scale leases such as xerox equipment, the automotive fleet or construction maintenance fleet there may have be instances where the state signs a lease or just goes out and bids. The vendor effectively ends up doing the financing along with providing the equipment. He provided an example of where the DOR recently refinanced $5 million of equipment for the DOT/PF that previously had been bid as a package. The DOR separated the financing and having closed the transaction had 12 competitive bids which looks like there might be $400,000 of savings in interest costs over the next five years on a $5 million package. He would suggest that on a $90 million project, potentially millions of dollars could be saved. REPRESENTATIVE ROKEBERG said that projects such as the Red Dog Mine and Four Dam Pool have been underwritten by AIDEA, so there have been larger projects where there has been correlation with the state's credit. KATHRYN THOMAS, Chair, Alaska State Chamber of Commerce, said her organization represents approximately 700 member businesses statewide which provide jobs to nearly 70,000 employees. The mission of her organization is to create a climate which is conducive to a strong private sector economy. She spoke in favor of HB 53 because it represents a reasonable and logical action by state government which will save money to the state and enhance business opportunities in the private sector. The top priority of the state chamber of commerce is to help the state find ways to close the fiscal gap. Therefore, the chamber encourages the state to find those government services which could be affordable and efficiently provided by the private sector. She said HB 53 provides a way to do those things. MS. THOMAS stated that it has been demonstrated, through the experience of housing a portion of Alaska's prisoners in the Arizona private system, that the private sector can provide for the confinement and care for prisoners as satisfactorily and at a lower cost than the Alaska state system. The missing element, within a government operation, is competition. The private sector must do things more efficiently and at less cost in order to be the successful bidder. If the private sector does not provide the service in a manner consistent with the state's specifications, then the private sector knows that there are other service providers ready and able to take their place. MS. THOMAS said the practice of government contracting with the private sector for correctional system services is not a new concept in which Alaska would be breaking ground. This is being done, successfully, in many other states. This bill provides that the contractor must provide custody, care and discipline to the standards established by the state and by the courts. The service will be as good as any that the state of Alaska could provide, but at a lesser cost. MS. THOMAS explained that in addition to the initial cost savings there is the added benefit of the corporate taxes that the private service provider will be paying to the state. Ancillary and support services would also be utilized by the state. The state would also seek contractors who would provide their own prison facilities which meet the state specifications. Savings would be realized by the state in not having to furnish the land, construction and maintenance for another state owned facility. Her organization can see no downside to this legislation, it makes good business sense. Number 1403 REPRESENTATIVE BERKOWITZ referred to privatization and asked if the chamber felt there were any core governmental services which ought to be privatized. MS. THOMAS felt all services ought to be looked at. There are some services that government is best at administering. Many areas such as prisons and areas of DOT/PF could be privatized, but we have to decide to what to degree, where, as well as structuring state procedures so that this can be done. CHAIRMAN GREEN said this issue would be revisited on Friday with committee deliberation and amendments.
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