Anchorage Daily News

WASILLA -- A plan to build the largest prison in Alaska might be seriously short of funding thanks to the Wall Street meltdown and national recession.

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State officials fear the prison project at Point MacKenzie could stall if the Legislature doesn't cover a new funding gap estimated at $20 million.

That sum is part of the proposed state budget that Gov. Sarah Palin unveiled this week.

State investment officer Deven Mitchell said the shortage is due to high interest rates demanded by lenders as national credit markets tighten, brand-name businesses head for bankruptcy court and whole industries are pleading with Congress for help. High interest rates mean less money for construction and other costs.

The Mat-Su Borough is hoping to sell bonds to obtain most of the funds for the $250 million project. The state then would lease the prison for 25 years, covering the borough's bond payments. Earlier this month the borough aborted a bond sale when it became clear not enough buyers were interested.

Most of the $20 million shortfall -- $11 million -- is designated for a road and for extending electrical, phone and natural gas lines to the prison site.

About $9 million would pay for computers and office furniture, prisoner beds and other furnishings, the state said.

"It's kind of hard to run a facility without gas and electric and roads," said Dwayne Peeples, state deputy commissioner of the Corrections Department.

Longtime dream

The plan to build a large statewide prison got its genesis in 1995 as a plan to bring back to Alaska hundreds of prisoners housed at a private prison in Arizona. But the project has repeatedly hung up on details: where to build it, whether it should be private or public, and how much it can cost.

Mat-Su Borough manager John Duffy lobbied state Sen. Lyda Green, a Republican from Wasilla, for several years to build a large prison in the Valley as an economic development tool. In 2004, Green pushed through the Legislature a bill that calls for a prison of 1,200 to 2,251 beds, with a local municipality building it and leasing it to the state.

Scaling back

Lawmakers allowed the construction costs to rise with inflation, but they put a strict ceiling on the size of lease payments.

Mat-Su originally was looking to build a 2,251-bed prison in a single building, but as costs have climbed they have scaled it back to 1,536 beds in a few smaller buildings.

Peeples said the state trimmed the project again this year. The prison compound was made smaller, inmate room sizes shrunk, program space was cut and a planned vocational education center will be built only as a shell to be filled in later, he said.

"We've cut thousands of square feet," Peeples said.

Mitchell said that effort erased $9 million from the cost.

Bumping against ceiling

If the borough bonds were sold a year ago, everything would have worked out because interest rates had fallen, Mitchell said. At that time the state and borough were expecting to end up with a $17.8 million yearly lease payment, an amount that fell within the Legislature's ceiling.

But with today's higher interest rates, the fixed lease amount no longer would cover the borough's borrowing costs. Just as monthly mortgage payments are greater when the interest rate is higher, Mitchell said, interest rates in today's chaotic bond markets now threaten to blow the project budget.

The request for extra money from the Legislature would get around the combined problem of higher-than-expected costs and high interest rates. Karen Rehfeld, director of the state Office of Management and Budget, said if the market improves and interest rates drop, the $20 million hole will shrink.

Mat-Su Borough finance director Tammy Clayton said the borough is monitoring the bond market and plans to try and sell $230 million to $235 million in bonds early next year.

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