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Expert Brief

Are Private Prisons in Trouble?

Caught in a unique political moment, state governments and banks are moving away from private detention facilities, raising questions about the industry’s future.

Published: November 18, 2019

Every candidate in the Democratic presidential primary has spoken out against private prisons. This is despite the fact that only 8 percent of those behind bars — about 120,000 people — are held in private state and federal facilities.

Why is this happening right now at this political moment?

The backlash against private prisons

As of November 2, more than 47,000 people were in Immigration and Customs Enforcement (ICE) custody. More than 70 percent of ICE detainees are held in privately operated facilities, shining attention on the private prison firms. Last year, nearly 400,000 people spent time in an immigration detention facility.

The industry is facing pressure on other fronts as well.

Amid public outcry, eight banks — JPMorgan Chase, Wells Fargo, Bank of America, SunTrust, BNP Paribas, Fifth Third Bancorp, Barclays, and PNC — have said they would no longer finance the private prison industry. Three states — California, Illinois, and Nevada — passed legislation attempting to curb the operations of private firms that manage prisons and detention centers.

In July, Edelman, the world’s largest public relations firm, ended its relationship with Geo Group, one of the country’s largest private prisons firm. And last month, a federal judge in Washington State ruled that the state’s attorney general can move forward with a lawsuit against Geo Group for failing to pay immigration detainees in their facility minimum wage.

We’ve seen this before

This is not the first time the industry has faced significant challenges.

Private prisons proliferated in the 1990s. In acknowledgement of the profit opportunity that the next decade would bring, the 1994 annual report to shareholders for CoreCivic (then called Corrections Corporation of America) stated, “There are powerful market forces driving our industry, and its potential has barely been touched.”

Yet, as I note in my book, Inside Private Prisons: An American Dilemma in the Age of Mass Incarceration, by the decade’s end, private firms that built prisons across the country found themselves sitting on thousands of empty prison beds. As states faced budget cuts, they were reluctant to sign new contracts with these companies. And bad press around high-profile escapes and riots at private prisons from Arizona to Texas diminished the industry’s credibility.

CoreCivic’s stock peaked in 1998 at $40 a share, losing 93 percent of its value by 2000. And GEO Group’s shares nosedived by more than two-thirds. A 2000 Bloomberg Businessweek article called “Private Prisons Don’t Work” declared, “The industry is in a rut, and its prospects have been severely trimmed.”

But the gloom and doom atmosphere was short-lived. As state corrections commissioners became increasingly cautious about for-profit prisons, the industry looked to the federal government. A new market emerged in the privatization of federal prisons and immigration detention centers.

In the wake of the 1995 Oklahoma City bombing, President Bill Clinton signed the Antiterrorism and Effective Death Penalty Act in April 1996. Among other things, it expanded the grounds for detaining and deporting immigrants, including long-term legal U.S. residents. Within a few years, these changes were fully implemented, and the federal government experienced a surge in demand for immigration detention facilities.

Private operators swooped in.

At the same time, the federal prison population was growing significantly, creating a need for additional prison facilities that the private sector could provide. In the ensuing years, the Department of Homeland Security, created after 9/11, began outsourcing the detention of immigrants to private firms.

Second downturn

The industry experienced another downturn more recently.

In August 2016, the Justice Department’s internal watchdog found that privately run federal prisons are more dangerous than those managed by the Bureau of Prisons. The inspector general’s office that said private prisons needed more oversight. A week after the report’s release, then Deputy Attorney General Sally Yates sent a memo to the bureau directing it to decline to renew contracts with private prison corporations as they came up for contract renewal.

The private firms fought back, pointing out that the Justice Department’s conclusion stood in conflict with the fact that when compared with the non-contract federal prisons, private prisons had lower rates of drug use, grievances, suicides, disruptive behavior, uses of force, and allegations of staff sexual misconduct against incarcerated people.

Yet shares of the private prison giants tanked. CoreCivic and GEO Group stock each dropped by nearly half, an indication that the nation’s largest for-profit prison corporations’ profitability might be on the wane.

Meanwhile, on the campaign trail, Donald Trump was promising to deport millions of immigrants and pledged to push Congress to increase the mandatory minimum sentence for illegal reentry into the country to five years. After Trump was elected, CoreCivic and GEO Group’s stocks soared. One business analyst called Trump’s victory “nothing short of a game changer for the beleaguered private prison contractor industry.”

The administration’s push to privatize parts of the federal government looks to be another boon for the industry. But on the state level, challenges are mounting.

On October 11, California Governor Gavin Newsom signed a bill that purports to essentially ban all new contracts and contract renewals with private firms that manage prisons and immigrant detention centers. But a close read of the legislation makes clear it is full of significant loopholes, including an exemption for facilities that provide “educational, vocational, medical or other ancillary services” to incarcerated individuals. The bill would also allow the state’s prisons department to renew or extend contracts to comply with court-ordered population caps. For proponents of reducing private-prison firms’ footprint, these likely read as a major concession.

Other states are moving away from private detention centers. Illinois banned private correctional facilities in 1990, and this year it went one step further by enacting a law prohibiting state and local agencies from entering into agreements with private firms to detain individuals. Nevada also quietly passed a law that eliminates the use of private prisons for core services, such as housing and custody.

It’s also not just firms that manage prisons and detention centers that are facing political scrutiny. Earlier this month, Sen. Elizabeth Warren (D-MA) and Rep. Alexandria Ocasio-Cortez (D-NY) asked five private equity companies to provide information about their investments in correctional services, including healthcare companies that operate in prisons. 

Will the private prison industry survive the increased obstacles?

The biggest question may revolve around who will finance the two largest private prison firms. Geo Group and CoreCivic operate as Real Estate Investment Trusts (REITs), which means most of their assets and income are connected to real estate investments. REITs are required to distribute at least 90 percent of taxable income as dividends for favorable tax benefits. This leaves them with little cash on hand to cover day-to-day operations, such as overhead costs at prisons and staff salaries. Therefore, they must rely on revolving credit from large banks to run their operations and pay their investors per the REIT requirements.

Some speculate that non-bank lenders, such as private equity investors or hedge funds, will fill the void. However, these financiers are likely to charge higher rates given the riskiness of the loans. Alternatively, prison firms may seek capital from smaller banks that haven’t historically partnered with the industry.

Also, some of the contracts with the big Wall Street banks, which have pledged to move away from the industry, don’t expire until 2024, allowing the firms some breathing room. These private prison firms also continue to maintain contracts with ICE, the Bureau of Prisons, and many states. As of July, ICE had $475 million worth of contracts with Geo Group and $280 million with CoreCivic.

The industry has seen dark days before but has managed to pull through. But this year could be a turning point that reshapes how America outsources the management of its correctional and immigration facilities.