How Do Private Prisons Make Money?

A close look at a set of prison bars.

Private prisons are big business in the USA.

No other country in the world has more people in prison than in the United States. According to the World Prison Population List (11th edition), there were a few more than 10 million people in prisons worldwide in 2015. Even though the United States has just 4 percent of the world’s population, its prisoners made up over 20 percent of that total, nearly 2.3 million American adults in jail.

The US also has more detainees in private prisons than any other country in the world. The vast majority of inmates, about 91 percent in American prisons are in public prisons, but 9 percent of American prisoners, 180,000 people, are in for-profit incarceration facilities for crimes ranging from making threats against public officials and drug possession to grand theft auto and multiple murders.

Private prisons don’t operate in every state. Some states like California ban them altogether (although ICE still puts detainees in privately run facilities in California). Some states like North Dakota ban the importation of prisoners from other states to keep private prisons full. But private prisons in 29 states currently hold about 7 percent of state prisoners and 18 percent of federal inmates plus over half of the immigrant detainees.

Private prisons took in about $80 billion a year before ICE started placing children in immigrant detention at a rate of up to $775 a day. The truth is, we don’t know how much private prisons were earning before 2020, and we may not know how much private prisons are actually earning for some time. But it’s substantially over $80 billion a year, and the biggest profits aren’t even from operating the prisons.

Building prisons on spec brings in big bucks.

A lot of the private prison industry has been organized around the principle of “If you build it, they will come.” Both small cities and large corporations have built private prisons before they had any contracts to house prisoners. Sometimes this “building on spec” approach has been spectacularly profitable. Sometimes it has been a financial disaster. But it does not require an ongoing commitment to operating the prison.

In 1990 city leaders in Hinton, Oklahoma won an election approving a $38 million bond issue for building a private prison and other civic improvements. The city spent $28 million to build its 812-bed Great Plains Correctional Facility. In 1998, at the height of the private prison boom, the city sold the prison for $43 million to Cornell Corrections for a $15 profit.

The city used the money to build an 18-hold golf course with lots for 100 homes at the country club, $700 thousand for a new fire station, $900 thousand to build a new high school football stadium, and $800 thousand to build a two-story terminal at the city airport. When demand for private prison space began to wane in 1999, Cornell Corrections deeded the prison back to the city, in exchange for a promise from the city to help Cornell Corrections bid on housing prisoners from Arizona.

This arrangement was profitable for both the City of Hinton and Cornell Corrections for 10 more years until the prison sat vacant for four years, more recently being used to house prisoners with a different private prison company through 2020.

Building on spec worked out less successfully for the tiny town of Appleton in western Minnesota. In 1990, the farm town of 1,500 people was facing severe economic decline. They tried to woo a casino to build there, then a furniture factory. In desperation, the city officials created the Appleton Economic Development Association to raise $28.5 million from 900 investors. The deal shielded the city from any direct financial risk from the prison, and in two years the 500-bed $28 million Prairie Correctional Facility was operating in a former soybean field.

For four years the prison brought prosperity to the town. Just about anybody could take a two-week training course and get a job that paid $11 an hour. Most prison employees commuted to Appleton because it didn’t have the amenities of larger towns, but there was enough traffic to keep the convenience stores open 24 hours a day and enough tax revenue to keep the potholes filled.

But in the fifth year, there was a shortage of prisoners and the Appleton private prison stood vacant for nine months. The development corporation failed to pay principal and interest to 900 bondholders. In the sixth year, Corrections Corporation of America offered to bail out the development corporation, paying off the principal and giving the investors about a 1 percent return. Corrections Corporation of America added capacity for another 747 prisoners and soon became the town’s largest employer once again. They paid $600,000 a year to the town utility plant and gave to Toys for Tots and the town’s golf course,

The boom under the Corrections Corporation of America didn’t last forever. With the economic downturn in 2008, other states stopped sending prisoners to Appleton. Corrections Corporation of America decided to close the prison. This took away 60 percent of the town’s tax revenues and 75 percent of revenues for trash collection and the sewage system. Pizza parlors, all-night convenience stores, and even an Evangelical Lutheran Church were forced to close, putting Appleton in even worse shape than it was before it built the prison on spec.

Small towns all over the United States that have tried to cash in on prison real estate by building prisons on spec. Not many have succeeded. But $1.9 billion a year Corrections Corporation of America (now Core Civic) has offered a solution for planning mistakes. In 2012, the company made offers to forty-eight cash-strapped states offering to buy their prisons. In return, the company would provide inmate housing and services for 20 years at a contracted rate, as long as the states kept the prisons 90 percent full. Just keep putting people in prison, and we will bail you out of bad deals.

Operating revenues for private prisons vary widely from state to state.

A close look at lock of a prison being opened with a large key.

Most companies that operate private prisons don’t depend on real estate deals to make their money. Their operating model is finding ways to house, feed, guard, and sometimes rehabilitate prisoners at a lower cost than a state or county or the federal government would have to pay.

For instance, the State of Alabama spends an average of $14,780 a year per incarcerated person to keep its 31,563 prisoners in custody. If a private corporation offers to take over the prison for less than $14,780 per year per prisoner, the state has an incentive to privatize.

The State of California spends an average of $64,642 per prisoner to maintain its 132,992 incarcerated. If a private corporation offers to take over prison for less than $64,642 per prisoner, the State of California could come out ahead on its budget.

As you might imagine, Alabama has a much smaller percentage of prisoners in private prisons, less than 1 percent, than California, which until recently had about 5 percent of its prisoners in private facilities. In some states, there just aren’t many costs to cut. But private prisons are usually paid between $21,000 and $25,000 for prisoners they incarcerate, often from hundreds or even thousands of miles away.

There are currently no private prisons in Arkansas, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New York, North Dakota, Oregon, Utah, Vermont, West Virginia, Washington, or Wisconsin. A few states, such as Montana and New Mexico, have a majority of their prisoners in private prisons. Texas only has about 8 percent of its prisoners in private prisons, but that’s almost 13,000 prisoners,

The Federal Bureau of Prisons maintains the nation’s greatest number of people managed by private prison contractors, over 27,000, including prisoners in half-way houses and under monitoring at home. In 2014, the latest year for which we have statistics, the federal government paid an average of $22,159 per prisoner per year.

Some private incarceration facilities are paid much, more than the average to house prisoners. The fiscal year 2018 for  Immigration and Customs Enforcement (ICE) called for expenditures of $133.99 a day (equivalent to $48,439 per year) to house each adult prisoner. Housing “family units,” typically mothers and children, costs $319 per day, or $116,515 per year. And a bed in the “tent cities” for unaccompanied minor children costs $750 per night or $273,978 per year. Immigrant detention is where private prisons currently make their big bucks. But there are other ways for private prisons to make money.

Private prisons make money from prison labor.

A close look at a prisoner breaking down rocks at the quarry.

Chance are you have heard about prisoners making license plates. For over a century, state prisons have used prison labor to make license plates and road signs. The states of Louisiana and Texas have famously, or infamously, also used prison labor to run sugar plantations. The most popular brand of sugar in those states was once made from sugar cane grown with prison labor.

But modern private prisons have many more options for earning extra revenue from the work of the prisoners they house. In the federal prison system, prisoners can get jobs as groundskeepers, kitchen workers, orderlies, plumbers, painters, and warehouse workers for the prison itself. Many county jails also have “trustees” allowed to go to day jobs on the local economy, provided they return to lockup every night. But the greatest number of prisoners in private correctional facilities work on large contracts between the private prison and outside companies.

Prisoners are less expensive than workers in offshore call centers. There have even been credit card companies that contracted call center work to private prisons. Cisco, NetApp, Hitachi, and SAP have used prisoners to make cold calls to sell multi-million dollar software systems. Haystack Mountain Goat Dairy has used prisoners to run its goat farms and dairies to make fine chevre (goat cheese) that is sold at Whole Foods. And many cities and counties contract with private prisons to find the labor to mow roadsides, maintain streets, and take care of trash collection,

Prisoners are not covered by the Fair Labor Standards Act, so there is no minimum wage for prison labor. Prisoners in state prisons receive an average of 20 cents per hour and prisoners in federal prisons receive an average of 31 cents an hour, although some prisoners in favored states, such as Colorado, earn as much as $4 a day. (The prisoners who sold computer systems made by Cisco, NetApp, Hitachi, and SAP had a bonus system that allowed them to save up to $8,000 to have ready when they were released.)

Prisoners can spend their earnings at the prison commissary for candy, cigarettes, noodles, shaving equipment, toothpaste, deodorant, shower shoes, thermal underwear, cosmetics, denture adhesive and countless other items for personal use, none of them at a discount from prices on the outside. Efforts to limit the cost of phone calls from prisoners have been thwarted by lawsuits for phone companies and private prisons themselves.

Frequently Asked Questions About Private Prisons:

Q. Are there private prisons outside the United States?

A. There are private prisons in Canada, France, Israel, New Zealand, and the United Kingdom. There are private prisons planned in Brazil, Chile, Greece, Jamaica, Mexico, Peru, South Africa, and Thailand.

Q. Who owns private prisons?

A. Most private prisons are owned by towns and cities, economic development associations set up by towns and cities, and by private corporations. Just two companies, Core Civic (formerly known as Corrections Corporation of America or CCA) and The GEO Group, control about 88 percent of private prisons in the United States.

Q. Are there any benefits to private prisons?

A. Private prisons have helped states balance their budgets during financial crises. But this help comes at the cost of lower levels of services that keep prisoners safe and healthy and prevent their recidivism, their return to jail.

Q. Are there any drawbacks to private prisons?

A. Every private prison focuses on its bottom line. Private prisons have incentives to keep prisoners in jail (making sure they don’t get parole) and keeping expenses to rehabilitate prisoners to a minimum.

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