Close Security Prison Construction

Re: Advisory Opinion; Close Security Prison Construction; S.L. 1999-237, Section 18.20(a); Article 8, Chapter 143 of the General Statutes; Purchase of Prison Facility by Non-profit Corporation Established by the State Dear Mr. High: : What limits, if any, are there upon the State’s involvement in the creation, organization, or control of the non-profit corporation?

This letter responds to your request for a legal opinion involving an interpretation of N.C.G.S. § 148-37(b1) which reads as follows:

(b1) The Secretary of Correction may enter contracts with

private for-profit or nonprofit firms for the construction of

three close security correctional facilities totaling up to 3,000

cells to be operated by the Department pursuant to a lease

that contains a schedule for purchase of the facilities over a

period of up to 20 years. The Secretary may issue a request

for proposals for the construction of such facilities in

accordance with plans and specifications developed by the

Department and reviewed by the Office of State

Construction. The request for proposals shall provide for the

option of bidding on one or more of the facilities, and shall

require each bidder to provide a separate bid on a single

facility of up to 1,000 cells.

The Secretary of Correction, in consultation with the Chairs

of the Joint Legislative Correction and Crime Control

Oversight Committee and the Chairs of the Senate and

House Appropriations Subcommittees on Justice and Public

Safety, shall make recommendations to the Department of

Administration on the final award decision.

The Department of Administration shall make the final award decision, and the contract shall then be subject to the approval of the Council of State after consultation with the Joint Legislative Commission on Governmental Operations.

Contracts made under the authority of this subsection shall provide that the Department of Correction shall furnish the plans and specifications for these correctional facilities to the Office of State Construction for its review and that the Office of State Construction shall inspect and review each project during construction to ensure that the project is suitable for use as a correctional facility and for future acquisition by the State.

Your letter indicates that the Department of the Treasurer has proposed to the Department of Correction and the Department of Administration a method of implementing the referenced statute by which the State can reduce lease/installments payments through lower interest costs. To implement these provisions for construction with financing at tax-exempt rates, the following process would be followed:

1. The Department of Correction prepares plans for each prison.

    

2. The Office of State Construction reviews and approves plans.

    

3. The Department of Correction prepares RFP’s for construction and construction financing.

    

4. The Secretary of Correction, in consultation with the Chairs of the Joint Legislative Correction and Crime Control Oversight Committee and the Chairs of the Senate and House Appropriations Subcommittees on Justice and Public Safety, make recommendations to the Department of Administration on the final award decision. The Department of Administration makes the final award decision, and the contract is then subject to the approval of the Council of State after consultation with the Joint Legislative Commission on Governmental Operations.

    

5. A State-identified non-profit corporation enters into a commitment to purchase the facility from a contractor upon completion at agreed upon price.

    

6. The State enters a commitment to lease the facility from the non-profit corporation upon completion of construction.

    

7. The State leases land to the contractor.

    

8. The contractor funds construction costs and, as necessary, arranges for its own construction financing.

    

9. Construction begins.

    

10. The Office of State Construction inspects and reviews each project during construction to ensure that the project is suitable for use as a correctional facility and for future acquisition by the State.

     

11. The non-profit corporation purchases the facility from the contractor upon completion of construction.

     

12. The State leases the facility (with an accompanying purchase schedule) from the non-profit corporation.

     

The facility construction costs will be financed by the contractor. The purchase by the non-profit corporation will be financed by its selling its rights to receive lease payments from the State (a Certificate of Participation offering). The State’s lease payments will be used by the non-profit corporation to repay its borrowing. The nonprofit corporation will be a limited purpose, non-profit corporation, created pursuant to Chapter 55A with a volunteer board of directors, solicited by the Director of the Budget, the Secretary of the Department of Correction, and other interested State officials. The corporation will exist solely to facilitate the financing and will have no substantive operations or obligations with respect to the facility.

In light of the General Assembly’s enactment of N.C.G.S. § 148-37(b1), you raise two questions. Those questions and our responses are as follows:

We understand your first question to be whether the public bidding requirements of Article 8, Chapter 143 of the General Statutes, would be applicable to the construction of the three close security correctional facilities authorized by N.C.G.S. § 148-37(b1). Both this statute and the factual scenario set forth above clearly contemplate that such facilities will be constructed by the private sector using private funds. Article 8, Chapter 143 of the General Statutes, is applicable only to public construction or repair projects involving an expenditure of "public money." See

N.C.G.S. § 143-129(a).

QUESTION 2

ANSWER: We find nothing in N.C.G.S. § 148-37(b1) which either expressly or by implication authorizes the State to establish a non-profit corporation to finance by selling tax-exempt Certificates of Participation a purchase of the prison facilities immediately upon completion of construction by a private firm.

N.C.G.S. § 148-37(b1) does not address the issue of how the State will fund the purchase of any facilities constructed pursuant to the statute. The statute, in pertinent part, provides that the Secretary of Correction may enter into "contracts with private forprofit or nonprofit firms for the construction of three close security correctional facilities … to be operated by the Department pursuant to a lease that contains a schedule for purchase of the facilities over a period of up to 20 years." The last paragraph in the statute further provides that the Office of State Construction will be responsible for reviewing the plans and specifications for the correctional facilities and shall inspect and review each project during construction to ensure that the project is suitable for use as a correctional facility "and for future acquisition by the State."

We interpret this language to mean that it would be the responsibility of a firm in the private sector to finance, construct and lease the prison facilities in question to the State. It is our understanding that this interpretation is consistent with interpretations of this provision by both the Office of State Budget and the legislative fiscal research staff responsible for drafting this provision.

Prior to your request for this opinion, a meeting was held between you and representatives from the Office of State Budget, Department of Correction, State Property Office, and this office. During this meeting, a question was raised as to whether N.C.G.S. § 148-37(b1) authorizes the establishment of a non-profit corporation as outlined above for the purpose of financing the purchase of the constructed prison facilities through the issuances of tax-exempt Certificates of Participation. It was decided during that meeting that the Office of State Budget would consult with the legislative staff personnel responsible for drafting this statute regarding the intent of this provision. It is our understanding the Office of State Budget was advised that it was the intent of this provision to provide for "turn key" projects in which a firm or firms in the private sector would be responsible not only for financing and constructing the facilities but also leasing same to the State with a provision allowing a purchase of the facilities over a period of up to 20 years. It is also our understanding that the Department of Correction and the State Property Office are currently drafting a request for proposal (RFP) form which is consistent with this interpretation. The statute does not authorize the State either directly or indirectly to finance an acquisition of the facilities as outlined above.

It has been suggested that the authority to finance an acquisition of the correctional facilities as outlined above may be implied from the authority to contract with "nonprofit" firms in the first sentence of the statute. By its express terms, the first sentence merely authorizes the Secretary of Correction to contract with private firms "for the construction" of correctional facilities. As stated above, the statute does not address the issue of funding with respect to the acquisition of the facilities. We note that N.C.G.S. § 148-37(g) authorizes the Secretary of Correction to contract with private for-profit or "nonprofit" firms for the provision and operation of certain confinement facilities. The authority of the Secretary of Correction to enter contracts under this subsection is specifically made subject to the appropriation of funds for this purpose by the General Assembly. See N.C.G.S. § 146-37(g).

In conclusion, the provisions of Article 8, Chapter 143 of the General Statutes, are not applicable to the construction of the correctional facilities authorized by

N.C.G.S. § 148-37(b1). Furthermore, we find no authority in the present statute for the Department of Correction, or the State, to establish a non-profit corporate entity to finance the purchase of the completed prison facilities through the issuance of taxexempt Certificates of Participation and then lease the facilities to the State pledging the lease payments as security to repay funds borrowed by the corporate entity. Financing the acquisition of prison facilities by this means would require further legislative authorization.

Signed by:

Reginald L. Watkins Senior Deputy Attorney General

Roy A. Giles, Jr. Special Deputy Attorney General