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Financing for Private Prisons Eliminates Public Accountability

Traditionally, correctional facilities have been financed through tax-exempt general-obligation bonds that are backed by the tax revenues of the issuing governmental body. This debt requires voter approval. Privatization, however, abrogates this power of the people. The corporation builds the institution and the government leases it. The cost of the facility then comes out of the government's budget, avoiding the politically difficult step of raising debt ceilings. Once the lease payments have fulfilled the debt, ownership of the facility shifts to the governmental body, thus completing an end run around the voters.

This arrangement leaves the government entity completely liable for failed performance by the private prison operator. This was the case in 1988, when Dallas-based Detention Services Inc. persuaded Zavala County, Texas, officials to finance a private prison with county bonds to be repaid from prison revenues. The private 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 50 miles to visit a brothel in Mexico. With the prison empty and no revenue coming in, the county was forced to make bond payments out of its operating fund. The county incurred a budget deficit and defaulted on its bonds.22 The taxpayers were left to pay for the entrepreneurs' mistakes.

Texas "big six" private prison scandal.

In 1988, brothers Michael and Patrick Graham incorporated N-Group Securities and, with the lobbying efforts of a former governor and other local power brokers, convinced six counties to float $74 million in tax-exempt bonds to build private prisons. The company sold the county officials on the plan to use county-backed bonds after it paid county attorneys to "review the bond contracts." By October 1989, the bond scheme had made the brothers millionaires. The Grahams tried to influence changes in state policies so their private cells could house Texas inmates, but the jails turned out to be a bust. Investors sued the N-Group for $7 million.

With the bonds about to go into default, N-Group began pressuring the state to buy the jails. Although state corrections officials concluded that the jails were substandard, the state eventually voted to purchase the facilities for $6 million each. According to one member of the Criminal Justice Board, "the purchase of these facilities is nothing but a bailout of the counties seduced by snake oil salesmen."23

REIT Financing

Another trend in private prison financing involves the private firm raising capital by issuing stock, taking advantage of a tax-advantage investment structure called a Real Estate Investment Trust, or REIT. Both CCA and Wackenhut created REITs in 1997, and promptly "sold" the prisons they already owned to the REITs. REITs have been called the next milestone in prison privatization by industry experts. They allow the private firms to get the prison properties off of their books, thereby freeing up venture capital for additional prison privatization projects. However, a jurisdiction's contracting relationship is with the management company and not the REIT. The REIT could, in turn, resell a prison to make a profit. Profit, not the local taxpayers, determine who owns a prison.

Financing prisons through REITs and other private mechanisms allow public officials to get around democratic controls over public capital investment decisions. These democratic controls, such as bond referenda, debt ceilings, and capital budgets ensure that public officials do not make large commitments of public dollars without demonstrating to the public the need for these commitments. These democratic controls are necessary to protect taxpayers.

22 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.

23 Kathy Fair, "Prison Board Votes To Buy Private Jails," Houston Chronicle, April 11, 1992; `Brother Walk Fine Legal, Financial Line," Pecos Enterprise, October 13, 1997.

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