The Record — For-Profit Private Prisons Do Not Provide Measurable Cost Savings

Two primary factors guide most decisions to privatize correctional facilities: the need to relieve overcrowding and to save taxpayers dollars. Proponents of prison privatization claim that for-profit firms can operate prisons less expensively than government. The companies regularly promise savings in the range of 15 to 20 percent. In reality, the promise of savings turns out to be a big exaggeration. Numerous studies have shown little or no difference in costs associated with public and for-profit correctional facilities. The following describes several of these studies:

• In 1999, researchers at the University of Cincinnati analyzed 33 cost effectiveness evaluations of public and for-profit prisons from 24 independent studies. The results revealed that for-profit prisons were no more cost-effective than public prisons, and that other institutional characteristics such as the facility’s size, age and security level were the strongest predictors of a prison’s per diem cost.¹⁶



• In September 1999, Dennis Cunningham, private prison administrator, Oklahoma Department of Corrections, presented comparative cost data for public and for-profit prisons in Oklahoma at the 4th Annual Privatizing Correctional Facilities Conference. The analysis showed that, in 1999, the average cost of housing an inmate in a publicly run prison in the state ($41.57 per day) was less than the cost of housing an inmate at any of the for-profit prisons in the state.¹⁷



• Congress mandated the Attorney General to study correctional privatization, including an analysis of its cost effectiveness. The 1998 study concluded that available data do not provide strong evidence of any general pattern. Moreover, the conclusions about relative costs of public versus for-profit provision are based on a small and dated sample.¹⁸



• In 1998, the Tennessee Legislature compared the cost of having a for-profit company run one of its facilities with the cost of running two comparable state prisons. The study showed little difference in total costs between the three prisons. It did show, however, that CCA generated a 2 percent profit by paying its employees almost $2 million less in annual salaries and benefits than state employees.¹⁹



• The Florida State Office of Program Policy Analysis and Government Accountability (OPPAGA) conducted a cost comparison of the CCA-operated Bay Correctional Facility with the Lawtey State Prison for the 1996-97 fiscal year. The comparison showed that the per diem cost for Bay was $46.08 while the per diem for Lawtey was $45.98. The CCA-run facility cost the state of Florida 10¢ more per inmate day.²⁰



• The United States General Accounting Office (GAO), the congressional watchdog agency, spent a full year examining operational costs at publicly and privately run prisons. The 1996 GAO report detected “little difference,” “mixed results,” and ultimately could not conclude whether privatization saved money.²¹

Despite this evidence, proponents of for-profit prisons continue to claim they are cheaper than public prisons. These claims tend to be flawed for a number of reasons. First and foremost, they tend to compare “apples to oranges.” One of the major challenges of comparing public and for-profit prison costs is finding facilities that are equivalent so that the key difference is whether the prison is publicly or privately managed. In most studies, the key characteristics are not comparable. In New Mexico, for example, the one women’s prison in the state’s correctional department is operated by a for-profit company. Finding a comparable publicly operated prison in the state is impossible, as women’s prisons are operated quite differently than facilities for men and generally cost more.²² Also, in general, government costs are averages that include maximum and medium security inmates while only 2 percent of the inmate population in for-profit prisons are maximum security inmates.²³

Another flaw is that costs are often projected over a short term, such as a single fiscal year. The long-term costs of operating a for-profit prison may differ from short-term costs, and real costs may not surface for a few years, as each facility goes through the range of experiences. For-profit companies may submit a low estimate to win a contract, and then ask for unexpected fee hikes when they take over the operation of a facility. A good example occurred in Monroe County, Fla. Soon after taking control of county jail operations in February 1990, Wackenhut and Monroe County found themselves at odds over staffing levels at the jail. Wackenhut agreed to increase its staff, but asked the county commissioner for $750,000 more to pay for it. After the request was denied, the sheriff’s office had to take back the jail.²⁴ A similar situation occurred in 1999 when Wackenhut, operating two violence plagued correctional facilities in New Mexico, asked the Legislative Finance Committee to increase the state’s per diem so Wackenhut could improve its facilities.²⁵ In each case, Wackenhut was not able to provide the level of services it promised and generate a profit at the initial contract price.

Another fault in most cost comparisons is the omission of the “hidden” costs associated with for-profit prisons. A major hidden cost is the expense of quelling riots and capturing escapees. In July 1999, CCA adopted a new corporate policy of reimbursing “reasonable expenses” incurred by law enforcement agencies searching for CCA escapees.²⁶ (The issue of what is “reasonable,” of course, is subject to interpretation.) CCA adopted the policy after local authorities in Tennessee incurred about $80,000 in expenses for a seven-day search for two Montana convicts who escaped from the CCA-run West Tennessee Detention Center. CCA also had five escapes from its South Central Correctional Center in Tennessee during 1999, compared to none at comparable state run facilities.²⁷

For-profit prisons have existed in Texas since the mid-1980s, but it took the state over a decade to pass a law requiring taxpayers to be reimbursed for the mistakes of the for-profit prison entrepreneurs. Texas, the state with the most for-profit prisons, recently adopted a policy requiring for-profit prison operators to reimburse the state for its assistance in quelling riots and capturing escapees. Other states that have experienced escapes from for-profit prisons have also begun to require reimbursement for these hidden costs. For instance, the State of Ohio now requires for-profit firms to reimburse the state for any assistance it provides in capturing escapees. The high rate of escapes from for-profit prisons has made these reimbursement policies a necessity.

Other costs that need to be taken into account when comparing for-profit prisons with publicly run prisons include costs associated with the procurement process and indirect costs. These costs may include legal work and administrative costs, including contract monitoring, and other overhead costs that will not be reduced by privatization. These costs can be significant. One well-regarded estimate is that they can range between 10 percent and 20 percent of contract costs.²⁸ Privatization can even lead to grafting a new layer of bureaucracy upon an existing structure. In Florida, for example, the Correctional Privatization Commission, was created specifically to oversee the privatization of correctional facilities in the state. As other states begin to regulate their for-profit prisons, the costs of contracting out will continue to mount.

Limits on company costs

Taxpayers incur other hidden costs through the contract incentives given to for-profit firms. These incentives include minimum inmate guarantees and caps on health care costs. The typical contract between a for-profit company and a government guarantees the company a minimum number of inmates. Such guarantees can have costly implications. For example, Wackenhut’s contract with New Mexico required the state to pay for 90 percent occupancy, regardless of actual occupancy at the facility. After a rash of violence at Wackenhut facilities, New Mexico transferred over 100 inmates to a maximum-security prison in Virginia. Wackenhut maintained that the state still had to pay it $45 per inmate day for the empty beds. Thus, New Mexico would be forced to pay two different parties, Wackenhut and Virginia, for housing the same inmates. In addition, New Mexico also had to pay to transport the inmates to Virginia and was charged a high fee — $64 per inmate day — by Virginia because it required emergency housing. New Mexico could wind up paying more than double the original cost to house inmates.²⁹

According to the American Correctional Association, inmate health care costs increased by 10.24 percent in 1998, and 9.87 percent in 1997.³⁰ Ceilings on health care costs for for-profit prison firms exist in a number of states, for example, Tennessee, Florida and Nevada. In Florida, for instance, the for-profit firms pay medical costs up to $7,500; the state picks up any costs above that. These caps shift incarceration costs from the for-profit firms to the state. Longer sentences, the spread of communicable diseases, and the increase in inmates with psychiatric problems are among the factors expected to increase health care costs in the future. Caps on health care costs mean taxpayers will increasingly pick up the tab.

The cost of exporting inmates

The exportation of inmates to for-profit prisons in other states has negative cost implications for the exporting communities. The most obvious costs are the foregone jobs and income taxes. There are also other opportunity costs, such as losses tied to grants and federal subsidies. For instance, the U.S. Census counts prisoners as residents of the jurisdiction where the prison is located. When a state exports inmates to a for-profit prison in another state, it may lose funding for federal and state programs that base their assistance on population.³¹ Other long-term costs are difficult to determine. For instance, there may be costs associated with increased recidivism, as shipping inmates far away from their families and support networks may impede rehabilitation. High transportation costs can also make contact between inmates and their families cost prohibitive. And the cost to taxpayers of transporting inmates to faraway jurisdictions must also be factored into the equation.

Tax consequences

One of the benefits claimed for for-profit prisons is their contribution to the property tax base. Yet there is evidence that for-profit prison firms have sought to avoid paying taxes. For instance, CCA pulled out of its contract to operate the Cleveland (Ohio) Pre-Release Center because it did not want to pay its share of local taxes. Both the city and county had given CCA more than a 50 percent tax abatement from 1995 to 1998, but it was not enough for the corporation.³² In 1997, CCA paid its property taxes for the Leavenworth (Kansas) Detention Center under protest, arguing that 90 percent of the prison should be classified as residential.³³

In 1994, Wackenhut officials promised to pay Glades County officials about $400,000 a year in property taxes, but later sold the land to a specially created non-profit entity. The next year, the Florida Correctional Privatization Commission exempted the 750-bed prison from property taxes.³⁴ Glades isn’t the only Florida county that hasn’t collected property taxes from the for-profit prison industry. Bay, Columbia, Polk and Palm Beach Counties, home to other prison and juvenile facilities managed by Wackenhut, CCA and Correctional Services Corporation, were also not receiving tax revenues from these operations.³⁵ And Florida is not the only state where taxpayers subsidize commercial prison profits. For instance, in 1998 Arizona passed a law which retroactively prohibits taxing income from incarcerating or detaining prisoners in a for-profit operated prison.³⁶

Another attempt to avoid taxation occurred when CCA merged with its REIT to take advantage of a loophole in the federal tax system that allows REITs to avoid taxation at the company level. Although this tax shelter was established for legitimate real estate companies, CCA was hoping to use it to avoid paying corporate income taxes on the revenue it generated from operating for-profit prisons. According to Legg Mason Wood Walker, which is principally engaged in providing securities brokerage and investment banking services to individuals, institutions, corporations and municipalities, REITs also avoid paying tax at the state level.³⁷ CCA planned to make its money managing for-profit prisons and then funnel those profits to its REIT, thereby shielding its income from taxes. As previously mentioned, CCA/Prison Realty was attempting to revert back to its non-REIT structure because its tax-avoidance strategy was adversely affecting the company’s ability to grow.

For-profit prison companies have also avoided paying taxes by becoming partners with local economic development authorities. This relationship has allowed the for-profit prison industry to garner backdoor taxpayer subsidies for financing, through the issuance of tax-exempt bonds. This type of financing can cost taxpayers more than public financing because a development authority might issue securities that pay a higher interest rate than general obligation bonds. It can also shift the project risk from the for-profit company to the taxpayers, leaving the government entity completely liable for failed performance by the for-profit prison operator. This was the case, for instance, in 1988 when Dallas-based Detention Services Inc. persuaded Zavala County, Texas, officials to finance a for-profit prison with county bonds to be repaid from prison revenues. The for-profit operator then signed a contract with the District of Columbia to house prisoners. But in December 1990, the District canceled its contract, citing prisoner escapes, fights by bat-wielding inmates, and an instance in which a guard drove two inmates to a brothel in Mexico. With the for-profit prison empty and no revenue coming in, the county was forced to make bond payments out of its operating fund — sending it into deficit and default on the bonds.³⁸ The taxpayers were left to pay for the entrepreneurs’ mistakes.

Liability costs

A state can contract out its services, but it cannot contract out its liability. This point was emphasized in 1999 by a state judge in Montana who dismissed the state Corrections Department’s arguments that it was not responsible for prison inmates held under contract in a for-profit prison.³⁹ In marketing its services, a for-profit firm may claim that it will fully indemnify a government from liability, but that claim can be difficult to enforce. For example, when the District of Columbia signed an $182 million contract with CCA to house inmates in Youngstown, Ohio, it was told that it was fully indemnified. However, the District of Columbia had to sue CCA to force their compliance with the contract. In its suit, the District of Columbia claimed CCA refused to indemnify District officials and it failed to obtain the required insurance policy naming the District as insured.⁴⁰

There is growing evidence that for-profit companies may not be able to obtain adequate liability insurance. For instance, in its Nov. 18, 1999 SEC filing, Cornell Corrections stated, “we are unable to secure insurance for some unique business risks including riot and civil commotion or the acts of an escaped offender.”⁴¹ In 1990 CCA’s contract with Hamilton County, Tenn., called for the company to have $25 million in insurance to protect the county from liability. The county learned that the company did not have this amount, after the contract had been signed. Then CCA stated that not only did it not have $25 million in insurance, but that it could not get it.⁴²

Employees of for-profit prisons are also subject to being sued. State and local corrections employees are generally protected from being sued for performing their job as long as their conduct does not violate “clearly established rights that a reasonable person should have known.” In June 1997, the U.S. Supreme Court held that employees of private companies are not shielded by the same immunity. As it stands, privatization, which proponents argue will reduce the costs of providing services, may in fact increase costs as indemnification or hold-harmless agreements between jurisdictions and for-profit vendors may not be enforceable, and the ultimate liability for the provision of public services remains with the jurisdiction.

¹⁶ Travis C. Pratt and Jeff Maahs, “Are Private Prisons More Cost-Effective than Public Prisons? A Meta-Analysis of Evaluation Research Studies,” Crime & Delinquency, September 1, 1999, pgs. 358-371.

¹⁷ Dennis Cunningham, “Projected FY 2000 Cost of DOC Operated Medium Security Beds Compared to Private Prison Contracts,” presented at 4th Annual Privatizing Correctional Facilities, sponsored by World Research Group, Las Vegas, Nevada, September 24, 1999.

¹⁸ Abt Associates Inc. “Private Prisons in the United States: An Assessment of Current Practice,” July 16, 1998, pg. 46.

¹⁹ Sheila Wissner, “Study Casts Doubt on CCA Savings,” The Tennessean, March 2, 1998, pg. A1.

²⁰ Florida Office of Program Policy Analysis and Government Accountability, “Review of Bay Correctional Facility and Moore Haven Correctional Facility,” April 1998.

²¹ U.S. General Accounting Office, “Private and Public Prison: Studies Comparing Operational Costs and/or Quality of Service,” GAO/GGD-96-158, August 1996, pgs. 3, 7, 9, 23.

²² Abt Associates Inc. “Private Prisons in the United States: An Assessment of Current Practice,” July 16, 1998, pg. 34.

²³ Ibid., pg. 25.

²⁴ Charles Mahtesian, “Dungeons for Dollars,” Florida Trend, October 1, 1996, pg. 80.

²⁵ Lou Fecteau, “Upgrades at 2 Prisons Proposed,” Albuquerque Journal, October 22, 1999, pg. A1.

²⁶ Richard Locker, “Prison Officials Defend Procedures at Mason,” The Commercial Appeal, July 9, 1999, pg. A1.

²⁷ Paul Wade, “CCA OK’d to Run Prison 2 More Years,” The Commercial Appeal, December 10, 1999, pg. B1.

²⁸ Lawrence L. Martin, “A Proposed Methodology for Comparing the Costs of Government Versus Contract Service Delivery,” The Municipal Year Book, International City/County Management Association, 1992.

²⁹ Mark Oswald, “Wackenhut Billing N.M. for Empty Beds,” The New Mexican, September 9, 1999.

³⁰ American Correctional Association, Corrections Compendium, October 1999, pg. 8.

³¹ Tracey L. Huling, “Prisons As a Growth Industry in Rural America: An Exploratory Discussion of the Effects on Young African-America Men in the Inner-Cities,” prepared for U.S. Commission on Civil Rights, Washington, D.C., April 15-16, 1999, pg. 14.

³² Cindy Horswell, “Private Prison Firm Pulling Out After Dispute With School District,” Houston Chronicle, September 3, 1998, pg. 32.

³³ Mark Wiebe, “Detention Center Meets Opposition in Push to Change Classification,” The Kansas City Star, March 12, 1998, pg. 1.

³⁴ “Divided Wiggins Votes Today on Private-Prison Plan,” Denver Post, July 8, 1997, pg. B04.

³⁵ Margaret Talev, “Officials Locked in Prison Tax Fight,” The Tampa Tribune, June 29, 1997, pg. 1.

³⁶ National Conference of State Legislatures, State Crime Legislation: 1998, November 1998, Vol. 23, No. 19, pg. 13.

³⁷ John R. Honovich, “Corrections Industry Financing Options,” presentation at 4th Annual Privatizing Correctional Facilities, sponsored by World Research Group, Las Vegas, Nevada, September 23, 1999.

³⁸ Todd Mason, “Its A Bust: Many For-Profit Jails Hold No Profits — Nor Even Any Inmates; Still Promoters Keep Pushing Privately Run Prisons to Job-Hungry Towns; Texas Rent-A-Cell-Breakout,” The Wall Street Journal, June 18, 1991.

³⁹ “State Liable in Suits by Cons in Private Prisons,” Associated Press, October 13, 1999.

⁴⁰ Cheryl W. Thompson, “D.C. Sues Private Prison Firm in Contract Dispute; CCA Failed to Protect and Defend the City in Two Lawsuits, Complaint Contends,” The Washington Post, December, 19, 1998, pg. B07.

⁴¹ Cornell Corrections, Inc., Form S-3, Securities and Exchange Commission, Washington, D.C., November 18, 1999.

⁴² “Tennessee County Finds Pitfalls in Private Prison,” The Phoenix Gazette, April 7, 1990, pg. A15.