Updated: Jun 9
MOUND CITY – On Monday, May 23, the Linn County Commissioners learned that because the bonds for the Justice Center are tax exempt bonds that they may be limited on the amount of federal prisoners they can house in the county jail there.
Joey McLiney of Mission, Kan.-based McLiney and Co., a securities and commodities intermediation and brokerage company, and Kevin Cowan from Gilmore and Bell in Wichita, the county’s bond attorney, talked at length with the commissioners about an issue that was brought to their attention.
Apparently another bond broker intended to come talk with commissioners about refinancing the Justice Center based on changes in federal policy, and McLiney and Cowan wanted to discuss the issue with the commission before a decision was made.
McLiney told the commissioners that recently the Biden administration had changed the laws for housing federal prisoners. According to McLiney, prisons that have tax-exempt bonds for funding are limited to the number of long-term federal prisoners that can be housed there. No more than 10 percent of the jail population can be long-term federal prisoners.
The jail, as it is set up now with a dormitory area for part of the prisoners, can house 96 inmates. If cells are added to that area, it will only be able to house 92 inmates, according to County Counselor Gary Thompson.
McLiney, who helped the county with locating and purchasing the bonds to finance the justice center, was there to work with the commissioners on what steps to take.
“I did check the legal on this. If the sheriff has a good relationship with the feds, he can call up everyday and say how many prisoners do you want me to take and not change your bond at all, so there would be no reason to do anything,” said McLiney.
It would only be the long-term contracts for prisoners that would have to be under 10 percent.
County Clerk David Lamb pointed out that about 15 percent of the project was paid for out of the county’s cash, not the bonds. So that would make about 25 percent of the prisoner spaces able to be on a federal long-term contract.
McLiney explained that when the county decided to build the new jail, officials thought that not only would the county have enough prisoners, but it would get enough prisoners from neighboring counties that the jail will be full and have enough income from that to take care of the expenses. So it made sense.
At the time when the county started this project, the existing jail was way over capacity, and there was some liability because of the age of the jail. So the new jail was built, and the bonds were issued at a remarkably low interest rate. The only time it would have been lower is if it had been done it during COVID, said McLiney.
The Biden administration in the past year has said that jails cannot take long-term federal prisoners if the bonds used to build them are tax exempt. So if the county wants to get more long-term federal prisoners, it will need to refinance the low-interest-rate bonds and buy taxable bonds. It will take the interest from just under 2 percent to about 5.5 percent, said McLiney.
So if the county refinances 25 percent of the bonds, your additional interest cost will be $1.9 million dollars, or in present time about $1 million over 30 years, he said.
McLiney added that if interest rates do go up, the county's current bonds are worth more having that super low interest rate. Then again, maybe a long-term contract would be worth it. With the cost it may make sense to see how much demand there is for those federal prisoners first.
What brought up this meeting is that the person who cannot be here today is interested in being the underwriter who buys the bonds, said McLiney.
McLiney said that both he and Cowan were neutral parties in the bond discussion, and that they were there to help the county carefully consider whether to refinance the bonds.
McLiney said that he can do the numbers and look at what is called an advance refund. The question is how many cells do you want to give up to federal use and if your sheriff is willing to make the call every day for $2 million.
County Counselor Gary Thompson said this was not the case when the county sold bonds in first place.
County Commissioner Rick James said that at the beginning, the sheriff’s office at the time had 40 to 55 prisoners and farming them out cost the county $300,000 year.
McLiney said that the county was not misled, it is hard to predict what the federal government will do.
Cowan explained that contracts with federal government agencies were considered private contracts. Contracts with other counties and cities were not.
After hearing part of the presentation, Commission Chair Jim Johnson said he was confused about who had started this whole presentation.
Linn County Sheriff Kevin Friend said that he had.
Johnson said he did not understand how they could get to talking to bond attorneys without even talking to him (Friend) first.
Friend said that he talked with James. Johnson said there were three commissioners there and he did not understand this and he was confused.
Friend said that while he was working with the federal application for contract that asked him questions and he reached out to Thompson to make sure that he was not in violation of any laws.
Johnson asked Thompson who was in charge of the bonds and who is in charge of making this decision.
Thompson said that, as the governing body, the commissioners were the ones who were in charge of issuing the bonds.
Cowan said that he was not here to have them make a decision. He was just here to give the commissioners the framework they could use in making decisions.
Johnson asked Cowan who the other guy was who was coming there.
Cowan said that he is an investment bond underwriter who has sort of been in the role of if you need an issue of financing.
Thompson and Cowan said that the underwriter had probably learned of the issue through the team at Osage County working on the jail there.
Johnson said there seemed to be a lot of communication going on and the commissioners did not know about it.
James said he did not know until he saw it on the agenda.
Cowan told the commissioners that they had to compare the economic loss of more interest on a taxable bond to what they would gain from going into a long-term contract with the federal government or a private user.
At present the additional cost in interest of selling 25 percent of the bonds and taking them on at a higher rate would cost the county about $72,000 per year for the next 30 years, said Cowan.
Lamb pointed out that even if the county did nothing with the bonds it had and had a long-term contract with the federal government for 21 percent of the spaces at $100 per day, the county could make about $730,000 per year for those spaces.
Thompson summarized the exchange saying that Cowan would go back to his firm to verify what percent was actually eligible for long-term contracts if nothing was sold or if 25 percent was sold. County Sheriff Kevin Friend would work with federal agencies to firm up what their actual per-diem was and how many spaces they would require, and McLiney would look at what needed to be done if they decided to sell off 25 percent of the tax exempt bonds and purchase taxable bonds in their place.