Case Study of the Private Prison Industry (2005)
In 2001 Good Jobs First conducted the first study of economic development subsidies provided by local, state and federal governments to the controversial industry of incarceration for profit. In Jail Breaks we found that subsidies such as tax-advantaged financing, property tax reductions, infrastructure assistance and training grants were quite prevalent in the private-prison industry. Nearly three-quarters of the large prisons in the United States that were privately built and operated had received at least one form of economic development subsidy. Specifically, our analysis of all 60 private prisons with a capacity of 500 or more beds (comprising about 66,000 beds or half the U.S. private-prison market) that were constructed by prison companies found that, as of 2001:
- At least 44, or 73 percent, of the 60 facilities had received a development subsidy from local, state and/or federal government sources.
- A total of $628 million in tax-free bonds and other government-issued securities had been issued to finance the private prisons we studied.
- 37 percent of the facilities had received low-cost construction financing through tax-free bonds or other government-issued debt securities.
- 38 percent had received property tax abatements or other tax reductions.
- 23 percent had received infrastructure subsidies, such as water, sewer or utility hook-ups, access roads, and/or other publicly financed improvements.
- Subsidies were found in 17 of the 19 states in which the 60 facilities are located.
- Facilities operated by the two largest private prison companies, Corrections Corporation of America (CCA) and Wackenhut Corrections Corporation (now known as The GEO Group), were frequently subsidized. Among the facilities we studied, 78 percent of CCA's and 69 percent of Wackenhut's prisons were subsidized, suggesting that these companies had been aggressive in seeking development subsidies.
- An unknown number of the facilities also benefited from state corporate income tax subsidies, such as investment tax credits and/or employment tax credits. Because state corporate income tax records are rarely disclosed, we were precluded from determining the extent and value of such subsidies.
- The widespread use of lease-backed securities such as lease-revenue bonds and certificates of participation, which do not require public referenda, deprived taxpayers of their right to approve financing for many of the private prisons that were built.
- Local governments have not systematically assessed whether the subsidies they provided to prison companies have had the desired effect. Not a single local official we interviewed could point to a formal economic impact study that had been done of the private prison built in his or her community.
- Although most of the subsidies came from local and state governments, we also found cases in which the subsidies came from federal sources. About half a dozen of the prisons we studied got infrastructure assistance through grants from the U.S. Department of Commerce, the Department of Housing & Urban Development or the Department of Agriculture. In addition, at least six of the prisons qualified for federal job training grants or tax credits.
The prison industry did not need this extensive assistance from the public sector because of an inability to raise money from private capital markets. Our review of the history of the industry since its origins in the early 1980s showed that private prison companies had been able to raise several billion dollars of investment capital both in the stock market and by borrowing from commercial banks and other lenders.
In the case of industry leader CCA, this display of investor confidence did not prevent the company from nearly going bankrupt in 2000. CCA's aggressive expansion, which included building prisons without a management contract in hand (i.e., on speculation, or on spec), helped create significant overcapacity. By the late 1990s, an industry that was created in large part to address overcrowding in public prisons across the country found itself with a glut of beds.
The problem was exacerbated by a shift in the "market." Demographic changes and declining crime rates, along with the beginning of a move away from harsh sentencing practices, meant that state and local governments had fewer people to lock up. Growth in the federal prison population, on the other hand, remained strong. Still, the weakening of demand for prison beds at the state and local level created a crisis both for the prison companies and for some of the cities and towns that agreed to have for-profit correctional facilities constructed in their community. That crisis has eased in recent years as a result of increased demand for prison space by the federal government.
Prisons as Economic Development
Many of large private prisons that were built during the industry's boom from the late 1980s through the late 1990s were sited in economically depressed areas, including some of the poorest counties in the country. Government officials in these communities, anxious to create jobs for residents and to help local businesses, saw private prisons as a form of economic salvation.
Not only did these communities put aside the obvious drawbacks of prisons--possible dangers posed by escapees, the stigma of being labeled a prison town, etc.--in many cases they took steps to make the projects more attractive to prison companies by offering financial incentives.
Our study, like the work of Good Jobs First generally, made no judgment about development subsidies per se. Instead, our aim was to help governments find ways to ensure that the subsidies they provide have the desired effect. We have found that holding subsidy recipients accountable is best done by enacting disclosure requirements and job quality standards, and by adopting rules that allow governments to recoup subsidies if companies fail to live up to their promises.
In the case of the private prison business, the question of accountability is complicated by the fact that some people believe the industry should not exist at all, whether for philosophical, legal or economic reasons. Our study did not address the legitimacy of incarceration for profit. Yet our findings prompted us to offer a set of policy options for consideration, including:
- Making private prisons ineligible for future subsidies.
State and local governments need to consider whether it makes sense to continue subsidizing an industry that is in such a precarious situation. Given the relatively low wages paid by the industry and its limited ripple effect on the larger economy, subsidizing private prisons may not provide much "bang for the buck."
- Restoring citizen participation in financing decisions.
We found that many large private prisons were financed through government-issued securities known as lease-revenue bonds and certificates of participation, which do not require voter approval. This was done to get around taxpayer resistance to the increasing cost of incarceration. Requiring voter approval would discourage questionable projects by restoring democratic oversight.
- Greater disclosure and transparency.
Among other things, our study demonstrated the difficulty of obtaining information on economic development incentives under current practices. If private prison subsidies continue, the public should be able to find out more about them. Policies that require compilation and disclosure of subsidies before and after a project is approved would go a long way to help communities make informed decisions about future proposals to subsidize the private prison industry.