Ariz. Prison Sell-Off
(02/25/2010)

PHOENIX — Arizona completed $735 million in sale and lease-back deals for public buildings and state properties, including several prison facilities, as lawmakers attempt to close the state’s multibillion-dollar budget deficit.

The state sold $735 million of certificates of participation on the municipal bond market to help close Arizona’s $3.2 billion shortfall, according to the Department of Administration.

Six buildings at the state prison complex in Florence and the state police headquarters were among some of the notable properties included in the offering, which also includes the tower that houses the governor’s office.

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The sale and lease-back financing initiative essentially means the government is using public buildings and properties as collateral to back the borrowing. Under the scheme, the state will continue to occupy the 14 buildings, leasing them back from investors, with ownership returning to the state after a fixed period of repayments.

As part of a separate legislative budget-balancing initiative, state authorities are considering generating revenue through the outright sale of prisons and privatizing the prison system, officials say.

Under the privatization scheme, prison operators would be required to assume control of an entire facility — to avoid the possibility that bidders would cherry-pick the most attractive housing units and easiest inmates — and would pay the state an estimated $100 million up front. The DOC would pay operators a per diem for each inmate, handing over control of all daily operations except for executions.

If approved, the plan would mark the first complete privatization of a state prison system.

Lawmakers are considering authorizing an additional sale and lease-back of buildings that could generate a projected $200 million to $300 million to cover the remaining revenue shortfall. Officials identified one or more prisons and the state psychiatric hospital as potential candidates for future sale and lease-back offerings.

The certificates carry maturity dates ranging from three to 20 years and offer an interest rate return of more than 4.5 percent. Trustees operating for investors would assume ownership of the leased buildings in the event of the state defaulting on the payment schedule, experts say.

The state will pay an estimated $400 million in interest over the life the certificates, with repayments to the certificate holders coming from semi-annual lease payments made from the state’s general fund, officials say.

Arizona’s budget deficit is one of the largest in the United States, with state revenues decreasing by 30 percent since fiscal year 2007-08.

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