How Private Prison Companies Could Get Around a Federal Ban

Via The American Prospect | Bryce Covert

Sue Ogrocki/AP Photo

The Great Plains Correctional Facility in Hinton, Oklahoma, is owned and operated by the GEO Group.

Last week, Senator Elizabeth Warren gave the movement against private prison companies a big boost. In another of her flurry of policy proposals as part of her run for the White House in 2020, she put forward a plan that would ban the use of private detention facilities at the federal level. She would also push state and local governments to follow her lead, by conditioning federal public-safety funding on the use of public, not private, facilities. Warren is not the only candidate running for president to get behind the idea. Senator Bernie Sanders introduced legislation to ban private prisons in 2015, and Senator Kamala HarrisJoe Biden, and Beto O’Rourke have also called for an end to private prisons.

Given that it’s a campaign proposal, Warren’s plan doesn’t contain a ton of specifics. But the details of any ban could end up mattering a great deal as to whether private prison companies are actually cut off from federal-government funding for good. Major private prison companies have adopted a model that could still allow them to have a hand in the public system, even in the face of bans.

If not explicitly ruled out, the companies could win contracts to build and maintain prisons, while letting the government actually run the operations inside. The bans may kneecap them financially, but they could still grant access to a potentially lucrative way to keep working with the government.

The two main private prison companies, GEO Group and CoreCivic (formerly known as Corrections Corporation of America), converted themselves into real estate investment trusts, or REITs, in 2013. REITs are portfolio companies that own, operate, or finance real estate, allowing investors to put their money into a variety of properties. The REIT builds or leases spaces, collects rent, and then distributes income to its shareholders.

The original impetus for CoreCivic and GEO Group converting to REITs was “largely tax avoidance,” says Shahrzad Habibi, research and policy director at In the Public Interest, an organization that documents privatization efforts. In 2017 alone, GEO Group reported getting $44 million in tax benefits due to its new REIT status. However, the transformation could also keep private prison companies in business, in addition to the tax advantages.

To qualify as a REIT, most of CoreCivic’s and GEO Group’s assets must be in real estate. So both have been working on setting up contracts with governments to build prison facilities that can be part of their portfolios. The proposition to governments is that these companies will design, finance, build, and maintain physical prisons.

Some contracts are both to own and operate facilities. But for others, such as CoreCivic’s facility in Lansing, Kansas, they simply create the building and let the government run operations inside. It “opens up so many more potential customers for them and real estate development opportunities for them,” notes Habibi. Even state and local governments that may be wary of the public reaction to having a private company running its prisons might be open to having one build the prison itself. And it could allow banks, which have been pressured into halting financing for private prison companies, back into the game. The Kansas facility was built using an unusual “private placement bond” underwritten by JPMorgan Chase, which announced in March that it would stop financing private prison companies. The arrangement enabled CoreCivic to keep its financial partners and investors secret for months.

Building facilities could allow private prison companies to enter new jurisdictions that were previously off-limits. As CoreCivic CEO Damon Hininger put it during a 2017 investor call, “This could potentially be a great solution for states where we don’t have a footprint today but we are ready to go in and develop a new project to replace an old antiquated facility … So we think that the real estate owned solution really opens the playing field for more opportunities with other jurisdictions.” This is something, he later told a conference, that is “the newest part of our business and our focus over the next few years.”

Similarly, GEO Group CEO Dave Donahue told investors in 2017, “As jurisdictions are evaluating their age capacity, they’re also looking for more efficient physical plans to support that. And that’s where we see the opportunities in the future.”

The private prison companies could conceivably build and lease facilities to governments that have banned them from operating prisons directly. Whether or not such an approach would still be permissible comes down to the details. “Language is everything in these things,” Habibi says. A ban “could potentially still allow for them to actually own these facilities … and act as the landlord.”

She adds: “That still has a lot of bad implications.”

The issue has cropped up in California. There, a bill to ban the state Department of Corrections and Rehabilitation from entering into or renewing contracts with private prison companies has passed the assembly and will be heard by a senate committee in early July. But while the assembly bill text was short, a bullet point was added in May stating, “As used in this section, ‘private, for-profit prison facility’ does not include a facility that is privately owned, but is leased and operated by the department.” That would allow private prison companies to still lease land, build facilities, and rent them to the government—they just wouldn’t be able to directly operate them afterward within the state.

These arrangements are attractive to private prison companies because it means they get paid back everything they spend to build a facility plus a profit margin, and over a long time period. “These are big infrastructure contracts,” Habibi points out. “You have to put that cost over a decent amount of time so the governmental entity can actually make those contractually required payments.” CoreCivic’s Lansing contract, for example, is for 20 years. 

They’re also more lucrative. CoreCivic makes six times more profit per prisoner in facilities it owns and operates than in ones owned by a government where it only operates. And in places that haven’t banned these companies from operating prisons, there’s nothing to stop a state or local government from amending a contract down the road to also hand that responsibility over to CoreCivic or GEO Group.

It’s still a victory, advocates say, to have governments run prison facilities rather than private companies with track records of human-rights abuses. It would also restrict the companies’ profit models. “Even if they are able to sidestep one aspect of the [California] legislation and take advantage of the REIT status for that purpose, it’s still going to severely impact their revenue flow and put a dent in one of their largest contracting partners,” says Emily Claire Goldman, founder and director of Educators for Migrant Justice (an ESG Transparency Initiative campaign). “It is still something that would cripple both companies and addresses a very significant part of the issue, even if it doesn’t address it in its entirety.”

Still, there are other drawbacks to having private companies build prisons, beyond the potential to skirt bans. In the Lansing case, a state audit found that having the local government finance the construction itself by issuing bonds would have been cheaper. The Department of Corrections decided to award the 20-year contract to CoreCivic in November 2017 anyway; the company will receive $14.9 million after the first year, and payments will increase nearly 2 percent annually after that. It is often true, Habibi notes, that governments can finance these projects more cheaply than private companies.

And because contracts to build and maintain facilities extend for such long periods of time, it leaves little room to change or reduce capacity in light of criminal justice and immigration policy changes. The private company owns the facility at least until the end of the contract term, giving the government no ability to alter how it’s used or dispose of it completely. “If we were to really get serious about … criminal justice reforms that really reduced populations, there really is very little flexibility,” Habibi points out, “unlike if the government owned the facility.” Both the private company and the government will be invested in keeping beds filled, since they’ll be paying for them anyway.

For example, Habibi says, what if the Trump administration decided to contract with CoreCivic or GEO Group to build new Immigration and Customs Enforcement facilities? “Those are long-term contracts,” she points out. “Do we as a country foresee our immigration detention practices and policies changing in the future? I hope so.” But the contract will long outlive the administration and even subsequent ones.

It “embeds [GEO Group and CoreCivic] in the criminal justice system,” she adds. “While they may not be operating, they are very much pulling the strings.”

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