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| OPINION: Paying for Private Prisons, Part Four |
| Kevin Pranis | 7/11/12 |
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| Back to the News Summaries |
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Read Part One
The current wave of prison expansion is financially unsound. Public enthusiasm for incarceration has waned and it is plausible that long-term demand for beds could fall below the current supply. The federal appetite for new prison and detention beds continues unabated, but lawmakers have not yet shown a willingness to fund them at a level that would take up the slack in the much larger state prison market.
 These developments may not be of great concern to investment bankers and bond counsel, who make money on both good and bad deals. They should be of great concern to bond investors, who risk losing their shirts if supply greatly exceeds demand. Yet investors seem blissfully ignorant of the dangers. Their failure to appreciate the risks of long-term investments in prison expansion may be rooted in the differences between prisons and other bond-financed projects.
The bulk of municipal bonds are issued to fund projects such as sewer and water systems, highways and schools that meet public needs in a direct and obvious way. Most people flush toilets, drive to work and send their kids to school on a daily basis. Consumers of these services may argue over what the quality should be and how much they should pay for them. But it’s safe to assume that they will keep paying as long as there is money in the bank.
It is more difficult to determine how many prison beds the public needs and is willing to pay for. Researchers have found little correlation between incarceration and measures of public safety such as crime rates, and to the degree that a relationship exists, it doesn’t necessarily go in the right direction. Opinion research has shown that the public is deeply ambivalent about the wisdom of current high incarceration rates and reluctant to throw more money into a system that delivers such poor results.
But bond investors are getting all of their information from bond issuers who have a financial stake in making prison bonds look as safe as possible. Prison bond documents are full of information about the remarkable pace of prison population growth over the past quarter-century. They contain little or no information about sentencing and correctional policy reforms, shifts in public opinion or other trends that would weaken the case for new prisons.
If investors knew that modest sentencing and correctional policy reforms could pull the floor out from under prison population growth in Arizona, they might think twice about buying private prison bonds issued by the Pinal County Industrial Development Authority. If financial analysts understood the extent of speculative detention growth in Texas, they might have been less sanguine about the prospects for a major bed expansion at Reeves.
The risks back-door prison finance poses to both investors and governments are very real. A review by staff at Good Jobs First, a nonprofit economic development think-tank, found that prisons financed with certificates of participation accounted for a third of all lease-backed bond defaults in the 1990s. A decade ago, a $74 million speculative scheme to build 500-bed prisons in six Texas counties collapsed when five of the six were unable to house the necessary numbers of prisoners. The fiasco gave rise to one of the largest-ever bond fraud and conspiracy cases and resulted in a partial bailout by the state which acquired sub-standard jails at 50 cents on the dollar.
More recently, the bond ratings of three Texas counties – Hayes, Hood and Kerr – were downgraded after local officials decided to walk away from lease-purchase agreements. Hayes County built a juvenile detention center twice the size it needed with the intention of renting the remaining beds to other counties. But Texson Management Group, which set up the deal, went bankrupt and left the county holding the bag. In 2003, Standard & Poor’s downgraded Hayes County’s bond rating from A-plus to BBB-minus based on the county’s failure to meet its “moral obligation” to repay the debt. Crystal City has already been denied a loan to buy trucks and police cars because of concerns the city’s detention deal raised for a local bank.
The belief that prison expansion is inevitable could become a self-fulfilling prophecy, at least in part. Once prisons, jails and detention centers are built, the political pressure to fill them is enormous. Back-door financing only heightens these pressures by aligning bond investors, insurers and rating agencies with the communities that see prisons as a source of jobs and economic development.
This is not to say that new prisons will be a sure bet for investors or local governments that engage in back-door finance schemes. The lack of rational planning processes virtually guarantees that there will be slippage between the supply and demand for prison and detention beds.
The best financed, informed and connected market players will be able to survive the slippage and even thrive on it – picking up valuable prison real estate at rock-bottom prices. Meanwhile less well-positioned counties and investors will fall through the cracks when they make bad market bets or simply get squeezed out by more powerful competitors. Worst of all, long after their bonds have gone into default, with damaging consequences to local economies, the prisons will still be there demanding to be filled – with immigrants, kids, the mentally ill, or another population du jour.
The bigger question for the financial markets is not why they turn a blind eye to risky prison financing deals but why they don’t pay more attention to the broader implications of growth in the use of incarceration. Prisons are a drop in the public finance bucket, but the cost of operating prisons and jails makes up a significant and growing share of state and local spending.
According to the most recent available figures, for every dollar spent on state prison construction, $16 was spent on operations.4 The hundreds of millions of dollars that are being borrowed for back-door state prison expansion will draw down billions of dollars in operating costs, draining states of the resources needed for services that strengthen their long-term economic outlook. Seen in this light, high and rising incarceration rates should be understood by bond markets as a threat to the long-term fiscal health of state and local governments.
Fortunately, activists and advocates across the country understand what the financial markets are missing. They have begun to develop strategies to challenge back-door financing of prisons, jails and detention centers by putting the public back in public finance.
When Oregon proposed building new prisons with revenue bonds, the Western Prison Project held a public series of meetings to discuss a possible taxpayer lawsuit and flooded the State Treasurer with phone calls – ultimately drawing attention to and postponing the bond sale. Colorado’s Criminal Justice Reform Coalition filed suit against a sale of certificates of participation for a supermax prison under that state’s tough constitutional protections for taxpayers. And North Carolina anti-prison activists tried to persuade legislators that a scheme to privately finance construction of three new prisons was overpriced, fiscally unsound and undemocratic.
None of these efforts ultimately succeeded in blocking the financing of new prisons but they helped raise a public debate over what was previously an invisible issue. Local campaigns to oppose the construction of new jails and detention centers from Memphis, Tennessee, to Laredo, Texas, have also highlighted financing concerns. In 2004, advocates and activists concerned with prison finance gained a new tool to break down prison finance deals. – a website that contains a wealth of information on revenue bonds and their use in prison expansion.
Ultimately, increased attention to the issue may persuade both policymakers and Wall Street that back-door prison finance is not in anyone’s long-term interest. If not, we will all pay the price for many years to come.
The author would like to acknowledge Judy Greene, May Va Lor, Mafruza Kahn and Phillip Mattera for their contributions to the growing body of prison finance knowledge. This article originally appeared in Prison Profiteers: Who Makes Money from Mass Imprisonment (New Press, 2008).
Endnotes
1. A bond is a security that guarantees its owner payment of interest and principal – the “face” amount of the bond – on a fixed schedule. Bonds can be bought and sold in the marketplace like stocks, but are generally considered a safer investment because the bondholder’s eventual return is largely predetermined.
2. Cooperative endeavor agreements are legal structures that allow the state of Louisiana to engage in partnerships with private parties to fund activities which are supposed to benefit state residents.
3. According to PublicBonds.org, in 1996 capital expenditures accounted for $1.3 billion of $22 billion in total corrections spending.
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