My last post on the Wyatt (responding to a potential state takeover) generated a number of inquiries about this privately-owned prison in Central Falls, RI.  I realize it is time for another installment of information.

What is Wyatt?

From their own website:

“The Donald W. Wyatt Detention Facility, located in Central Falls, RI, is operated by the Central Falls Detention Facility Corporation, which was created by the Rhode Island General Assembly in June 1991 to design, build, and manage the first publicly owned and privately operated detention facility in the Northeast. It is a quasi-public detention facility designed to function as an economic engine for the city of Central Falls and the state of Rhode Island.”

The Wyatt is NOT publicly owned, although the mayor appoints the corporate board.  It is owned by private bondholders whose repayment, by corporate decree, come before anything else (including operating costs).  Anyone who believes the Board of Directors owns a company might want to run that by the investors with stock/bond certificates.  It is, however, publicly funded. All of their revenue comes from tax dollars paying to hold prisoners.

Wyatt is going bankrupt.

This prison, like many privately-owned prisons, was a financial scheme worthy of a credit default swap or any other esoteric Wall Street chicanery.  It has been losing $5 – $10 million per year since the expansion and refinancing.  The building itself is worth under $90 million and depreciating, while the corporation owes $141 million of interest on $101 million in debt.  That’s right, they are paying 140% interest on the loan.  If someone bought a car listed at $10,000, but took out a loan that came out $24,000, they would be considered an idiot, but that’s the difference when one is playing with someone else’s money.

And keep in mind: it is the taxpayers who are paying the interest.  Not a bad loan to own, ay?

According to Receiver Judge Pfeiffer’s report (p.56), the prison has lost money every year since the expansion and is in technical default on its bonds.  Two years ago when the mayor proposed selling Wyatt to private prison mega-corporation CCA, the land and prison were independently assessed at $45 million.

Why the Expansion in 2005?

The expansion and refinancing of the original bonds was an opportunity to make millions for some individuals, while delaying the collapse.  Original bondholders now had the money to “cash in” as the corporation took out a fresh batch of new money.  The expansion allowed middlemen and construction people to cash in, with everyone getting a small bite from over $100 million.  A project coordinator can easily explain 10% of costs going their way, and Anthony Ventetuolo explained that his 2% off the top is totally normal.

The refinancing also creating a “rainy day” fund, to make bond debt payments when the income is not flowing, was a way of concealing the income not flowing.  This fund is done.

Consider that the 1992 bonds were a total of $30 million.  The 2005 bonds were $106 million, including fees, and yet the prison did not even double in size.

Who Manages the Money?

Cornell (Cox) Corrections were dismissed when the new cash flow came in with the expansion/refinancing, and Anthony Ventetuolo took over under the name of AVCORR.  Ventetuolo was a founding partner in the deal to win a bid and build a prison for the Bureau of Prisons to use in Southeastern New England.  He was a highly paid consultant by the Corporation, and made over $1 million just during the expansion, and took over the prison when the new money flowed.

What’s in it for Central Falls?

The original reason Rhode Island authorized these capitalists to make an investment in public human suffering is because it was believed to be a revenue stream for the local municipality.  Sounded good at the time to the Legislature.  This revenue is theoretically coming from discretionary “City Impact Fees.”  The fees have not been paid in several years, and the bondholders threatened to file suit against the Corporation if they pay the City prior to paying their bonds’ principal and interest.

Is a City Impact Fee the same as “revenue”?

It is called a “Fee,” which is something you pay for a service.  In this case, it is absolutely discretionary.  What does Wyatt get?  I call on my public management gurus to help answer that, but there are services like water and sewage that add up to real costs.  The Corporation is tax exempt, as well.  And if the City Impact were merely $1000 per day (A conservative estimate for a place holding over 1,000 prisoners and employees), that adds up to over $6.5 million since the Wyatt was built in 1992.  The Corporation has paid Central Falls $2 million over the past 8 years (I am unsure how much, if any, was paid prior).   Would you call that “revenue?”

Has Anyone Investigated This Corporation?

Yes.  The bondholders themselves realize they are caught holding the bag and somebody is dipping in, which only makes it worse.  In 2008 they called for an independent audit, and hired Michael Fair.  The auditor released a report in 2009, and found serious “financial control deficiencies.”  Considering Arthur Anderson was the original auditor of Wyatt under the Cornell Corrections regime, one can only guess how it used to be.

Naturally, every corporation tries to avoid a scandal and would prefer to deal with things privately.  This one has close ties to Attorney General Patrick Lynch (2002-2010), who never threw the book at anyone involved with the Corporation, and hired his sister as their legal counsel.  The bondholders threw Ventetuolo out in 2009 (I am not aware of any pending charges) and hired Michael Fair to run the operation on an interim basis.  It is worth noting that Patrick Lynch recused himself regarding the investigation of Mayor Moreau in other matters.  Considering the power Moreau wielded in appointing the Board of Wyatt over the years, Lynch basically recused himself from the Wyatt.

How is the Corporation Connected to Central Falls’ Bankruptcy?

The Central Falls smokestack blew, just prior to the 2010 elections.  I’m not sure entirely how the prison and the city are intertwined, except that the mayor has power to appoint all of The Corporation’s local board members.  This mayor, Charles Moreau, is the same man who was using the city tax dollars to pay his friends $10k to board up foreclosed properties.  If that is any indication, there are any number of rocks to look under to “follow the money.”

In a small state like Rhode Island, it is understandable for the mayor, police chief, and state attorney general to be chummy.  It doesn’t mean that corruption is evident; it only calls into question the capacity of anyone to have independent oversight and investigation.  It is not surprising that the Receiver of Central Falls, Judge Pfeiffer, tossed the mayor aside and is now talking about Wyatt.  It is suspicious that he sees the state bailout of Wyatt to be a good thing in any way… except to bailout the bondholders.

The bottom line is that the Wyatt Corporation is going under, and not just because we have more prison cells than prisoners in America from a glut of investment.  It is because one should anticipate graft and mismanagement from any endeavor that lacks a Buyer/Seller balance of power, one that involves taxpayer funds, and is an industry that feasts on social degradation.  Cornell Corrections has since been swallowed up by another prison profiteer, Geo Group, as the entire industry is under strain. Mergers often indicate an excess of capital, which is clearly the case for those who banked on a prison planet.

Anyone wishing to understand Wyatt, particularly who may have decisionmaking power in this process, should first read:

2008 Audit Report

Massachusetts Inspector General Report on Wyatt’s sister-prison

Harvard Design School study of Wyatt

An investment banker’s expose on Wyatt (partner in the firm)

Corporation’s Indenture of Trust Agreement

The Central Falls Detention Facility Corporation named their prison the Donald Wyatt Detention Center, after a federal administrator.  To learn more about what happens inside the prison, there are several enlightening court cases.