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California Prison 'Realignment' Attracts Investors: Reuters Analysis

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CALIFORNIA PRISON REALIGNMENT INVESTORS
California Department of Corrections officer looks on as inmates at Chino State Prison exercise in the yard December 10, 2010 in Chino, California. The U.S. Supreme Court is preparing to hear arguments to appeal a federal court's ruling last year that the California state prison system would have to release 40,000 prisoners to cope with overcrowding so severe that it violated their human rights. The cash-strapped state will need help from investors to finance the realignment. | Getty
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SAN FRANCISCO (Reuters) - The Golden State may be ushering in a golden era for investing in jails.

California's prisons ``realignment'' begins this month with counties taking charge of low-level felons to help unclog state prisons, which are under court order to ease overcrowding.

Thinning the most populous U.S. state's prison population involves setting free 30,000 inmates. That will require county sheriffs and probation officers to manage many who run afoul of the law, along with nonviolent offenders.

But California's cash-strapped government has not cemented funds for its realignment program for the long haul. It has state money only through this fiscal year, raising the prospect of an unfunded mandate that worsens crowding in local jails.

``We're estimating about 1,200 individuals will be released to San Diego County in the first year,'' said Don Steuer, chief financial officer for San Diego County. ``By the end of the second-year implementation, we're looking at between 2,000 and 4,000.''

But as for permanent funds, ``We don't see it right now,'' Steuer said. ``It just adds to the uncertainty.''

Money for adding space for more felons locally will be critical for public safety, said Assemblyman Anthony Portantino: ``It's going to lead to the early release of inmates without any infrastructure to deal with it.''

LEASING JAILS TO COUNTIES

Counties do have some funds available for adding correctional facilities, but not much, said Nick Warner of the Sacramento, California advocacy firm Warner & Pank Llc.

``There is $650 million in unused bond authority that will be available to counties,'' said Warner, who represents the California sheriffs' association. ``But it's probably only going to cover a sliver of the statewide need.''

That opens the door to counties selling additional bonds on their own, said Michael Harling of Dallas-based investment bank Municipal Capital Markets Group Inc, which has done about 60 financing deals over the last decade for correctional projects.

Selling bonds to build out jails and treatment centers may, however, be easier said than done because local voters may balk at taking on debt to boost spending on felons.

``Financing for schools or parks is more emotionally appealing,'' said Steven Frates of the Davenport Institute at Pepperdine University's School of Public Policy.

Buddy Johns of CGL Capital Solutions Llc aims to put into play a third option: Bypass the bond market and let investors build jails that counties can lease and eventually take over.

``We're trying to simplify it for speed purposes,'' said Johns, president of the Scottsdale, Arizona-based sister company to corrections facilities planner Carter Goble Lee.

AVOIDING FIGHT WITH GUARDS

Johns's idea may raise eyebrows in California, where so-called public-private partnerships allowing investors to build public infrastructure have not gained much traction.

However, local governments' financial woes may prompt a new look at the tie-ups, which Johns aims to promote with a team of architecture, engineering, construction, law and consulting firms.

Their effort will not include proposals for private management of correctional facilities, which would guarantee a bitter political fight with unionized guards.

``We're not suggesting that the private sector take over any management services,'' Johns said. ``I want to stay out of politics. All I want to do is a good financing model for what they need.''

Johns has lined up investors, who expect returns on leases slightly higher than returns on county general obligation debt. The group also aims to impress counties with offers to maintain facilities it builds and to take on their project risks.

``If we think it's going to be an $80 million jail and it turns out to be a $95 million project, that's our problem,'' Johns said.

Sacramento County Sheriff Scott Jones said Johns' idea is ''intriguing'' in light of how jail costs could swamp counties. ''I don't think anything should be a nonstarter,'' Jones said. (Editing by Dan Grebler)

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