October 12, 2009 -- Talking Points Memo (US)
Behind Montana Jail Fiasco: How Private Prison Developers Prey On Desperate Towns
By Justin Elliott
With the unraveling of the deal for the shadowy American Private Police Force to take over and populate an empty jail in Hardin, Montana, it's pretty clear that the small city got played by an ex-con and his (supposed) private security firm.
But an investigation by TPMmuckraker into how Hardin ended up with the 92,000 square foot facility in the first place suggests that, long before "low-level card shark" Michael Hilton ever came to town, Hardin officials had already been taken for a ride by a far more powerful set of players: a well-organized consortium of private companies headquartered around the country, which specializes in pitching speculative and risky prison projects to local governments desperate for jobs.
The projects have generated multi-million dollar profits for the companies involved, but often haven't created the anticipated payoff for the communities, and have left a string of failed or failing prisons in their wake.
"They look for an impoverished town that's desperate," says Frank Smith of the Private Corrections Institute, a Florida-based group that opposes prison privatization. "They come in looking very impressive, saying, 'We'll make money rain from the skies.' In fact, they don't care whether it works or not."
In June 2004, James Parkey, a Texas-based prison developer and architect, met at the Las Vegas airport with Judy Martz, who at the time was the Republican governor of Montana. Described by the Texas Observer as a "polished salesman" for the booming private prison industry, Parkey presents himself on his Web site as a beneficent savior for local communities hit hard by the decline of the manufacturing sector.
Parkey, who runs a company called Corplan Corrections, was seeking to sell Martz on a prison project for her state. His method is to promise a full-service team to handle the entire project from soup to nuts -- what one source described as a "turn-key system."
That team includes a construction firm to build the prison, a prison operator to work with local officials to find prisoners, then run the facility, underwriters to sell the bonds, and even a consultant to do an economic feasibility study. "They walk into a municipality and say, you don't have to do a thing, we'll take care of everything," Christopher "Kit" Taylor, a municipal bond expert who has followed Parkey's operation, told TPMmuckraker.
State officials eventually referred Parkey to the city of Billlings. From there, he was directed 50 miles east, to rural Hardin -- where he found a receptive audience. Parkey promised the town's brass that his team would take care of everything. The project would generate 150 solid jobs. The prison operator in Parkey's team pledged to pay the town a business license fee and at least $100,000 in annual per-prisoner fees.
To officials in a county whose poverty rate is double the national average, that seemed like too good an opportunity to turn down.
Big Pay Day
For Parkey and his crew, the deal soon paid off. The prison's designer and builder, Hale-Mills Construction of Houston, was guaranteed a maximum price of $19.88 million, according to the official bond statement obtained by TPMmuckraker. The exact amount the firm ultimately received isn't known.
And Hardin's $27 million municipal bond sale, conducted in 2006, netted the underwriters -- a pair of companies called Herbert J. Sims, of Connecticut, and Municipal Capital Markets Group (MCM), of Dallas -- a total of $1.62 million. Other players recruited by Parkey -- lawyers, surveyors, and the North Carolina-based consultant who conducted the feasibility study -- reaped $169,750. It's not known how big a cut Parkey took, and he didn't respond to calls for comment.
Hardin itself didn't make out nearly so well. Not a single inmate has ever slept in the jail, and the town hasn't seen a cent of revenue from the project.
The bonds, which were to be paid back through the anticipated -- but non-existent -- revenue, have gone into default. The prison "was built on spec," says Taylor, the muni bond expert, who has looked at the Hardin deal. "[The consortium's] whole premise was hell, we don't care what happens to the bonds."
That's left Hardin with an empty jail that it so desperately wanted to fill that it begged first for sex offenders from the state, then for Gitmo inmates from the Feds, and, finally, for some kind of salvation from the American Private Police Force.
A Compromised Consultant?
Central to Hardin official's expectations for the deal was the feasibility study that Parkey's team conducted, which concluded that the project was all but certain to pay off. But that study appears to have been not only deeply flawed, but essentially rigged from the start.
A Montana state auditor found in a 2007 memo that the study -- carried out by Howard Geisler, a North Carolina feasibility consultant specializing in prisons -- was racked with problems. It provides "little methodology" regarding its estimates of potential prisoners for the jail. It lacks "historical data to support anticipated prisoner counts." And it makes "a number of assumptions made related to financial viability that appear to be unfounded," including "potential improvements to local aviation facilities."
In addition, Geisler's study failed to mention that bringing in out-of-state prisoners is potentially illegal under Montana law -- even though that idea was held up as a key method for recruiting prisoners. The state's attorney general challenged Hardin over the provision, and though a judge ultimately sided with the town, it was only after a year of legal wrangling.
Perhaps those flaws aren't surprising. The study was paid for by one of the underwriters, MCM, which had worked frequently with Geisler in the past. A truly independent feasibility study, says Taylor, the muni bond expert, would involve multiple firms making bids to do the job for the city.
Geisler was clearly aware while writing the study of the conflict of interest inherent in the set-up. On one page, he notes in bolded text that, "to assure independence," his fee "is not contingent upon the sale of the Bonds." But Taylor calls that "a smokescreen." "[The passage] is trying to give a sense of legitimacy to the deal, when that's not the case at all," he told TPMmuckraker.
Indeed, the study was in fact the third such report produced on the subject -- and the second by Geisler -- over a two-year period, according to a Montana source close to the process. The first two studies -- the other of which was done internally by Hardin -- came to ambiguous conclusions as to whether the project would succeed. After the first two reports, says the source, "the MCM people had [Geisler] come back and do another. That's when they decided it made sense to go forward."
To this day, some local officials defend the study, arguing that it's easy to criticize with the benefit of hindsight. Dan Kern, Hardin's economic development director in late 2005 and early 2006, told TPMmuckraker he's not sure why support for the project evaporated after the jail was built. "Everybody told me that this was a great project and there was a need for it," he said.
But Taylor says if the official bond statement, which includes the feasibility study, was false or misleading, the bond players have legal liability.
It looks like Hardin isn't the only place where the the lavish promises of Parkey's consortium failed to pan out.
The Montana state auditor's memo notes that, in three separate jail deals with Texas counties, pushed through by Parkey's team, "current revenues are insufficient to cover operating and debt expenses."
And in 2005, three Texas county commissioners were convicted on bribery charges in connection to one of those Parkey-led projects. As in Hardin, MCM acted as the underwriter, and Hale-Mills handled construction.
All of the companies in the consortium either declined to comment for this story or did not return calls and e-mails.