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Do Private Prison Contracts Fuel Mass Incarceration?

A new report from In the Public Interest confirms that government contracts with private prisons not only fleece the taxpayer, but often create perverse financial incentives for states to lock up more people.

  • Julia Bowling
September 20, 2013

Private pris­ons have weathered a wave of criti­cism recently, as revel­a­tions about their poor secur­ity and lack of over­sight have gone public. Now, a new report from In the Public Interest confirms that govern­ment contracts with private pris­ons not only fleece the taxpayer, but often create perverse finan­cial incent­ives for states to lock up more people.

The study examined 62 private pris­ons contracts in 21 states. It found that the major­ity of these contracts guar­an­tee that the state will supply enough pris­on­ers to keep between 80 and 100 percent of the private pris­ons’ beds filled. If the state fails to fulfill this ‘bed guar­an­tee’, it must pay a fine to the company running the pris­ons – in effect, paying for each prison bed regard­less of whether it holds a pris­oner. This incentiv­izes states to send pris­on­ers to private pris­ons rather than state-run pris­ons in order to meet the bed guar­an­tee, regard­less of the pris­ons’ distance from famil­ies, their secur­ity level, or health condi­tions.

In effect, this ‘bed guar­an­tee’ payment struc­ture penal­izes taxpay­ers for low incar­cer­a­tion rates. This is a system that hurts both taxpayer and pris­oner. Bed guar­an­tees funnel taxpayer money into private prison profits at a time when states should see over­all cost savings from success­ful attempts at curb­ing crime. Instead, when states reduce incar­cer­a­tion rates below lockup quotas, they compensate compan­ies’ lost revenue at the per day rate, adding up to millions of dollars in fines.

Under basic economic prin­ciples, firms that compete for and rely on govern­ment contracts want to decrease their costs while maxim­iz­ing their revenue. Private prison compan­ies are no excep­tion – they reduce costs by cutting reentry and educa­tional programs that would help reduce recidiv­ism, and raise revenue by keep­ing govern­ment fund­ing consist­ent through lockup quotas. Unsur­pris­ingly, many private prison compan­ies actu­ally lobby for harsh crim­inal justice policies – like mandat­ory minim­ums and truth-in-senten­cing laws – and against efforts to reduce mass incar­cer­a­tion. 

The report recom­mends that poli­cy­makers ban these lockup quotas.  Another reform could further reduce perverse incent­ives: imple­ment­ing “results-oriented fund­ing” in private prison contracts. Results-oriented fund­ing brings company interests in line with those of the taxpayer by connect­ing payment to real public-safety prior­it­ies. For example, last year New York City created a program in which Gold­man Sachs inves­ted in a Rikers’ Island reentry program. The amount the City pays Gold­man depends on whether the program meets certain goals for redu­cing recidiv­ism. If contracts similar to these were insti­tuted for private pris­ons, states could encour­age private pris­ons to reduce recidiv­ism and, in turn, reduce mass incar­cer­a­tion. It would also incentiv­ize prison compan­ies to provide better reentry services and health condi­tions, which are proven to reduce recidiv­ism.

Perverse finan­cial incent­ives are not unique to the state-corpor­a­tion rela­tion­ship. These prob­lems persist across the crim­inal justice system, even for public agen­cies. For example, many law enforce­ment agen­cies oper­ate on a numbers-based poli­cing model, in which they are finan­cially rewar­ded for hitting high arrest quotas. This incentiv­izes law enforce­ment to make high volumes of low-level arrests, instead of focus resources on invest­ig­at­ing and solv­ing viol­ent crimes. To both reduce mass incar­cer­a­tion and get the most out of taxpayer money, poli­cy­makers should restruc­ture these finan­cial incent­ives and tie fund­ing more directly to results proven to improve public safety.

(Photo: Correc­tions Project)