Prison Privatization: A Growing National Trend

Prison systems and their management represent the virtual “undiscovered country” of privatization in Michigan. The state has less than 1 percent of its prisoners under private management. Yet two studies released in 2003 show that states can save money by privatizing prisons and thereby slow the rate of growth in prison costs. State officials should take advantage of the savings available through outsourcing prisons, and save taxpayers money and improve services in the bargain.

From Tennessee to New Mexico, states have been contracting with private, for-profit businesses to manage their prison populations. No state has privatized the management of its entire correctional system, but New Mexico comes closest, with as much as 45 percent of its prisoners housed under private management.

A 2003 study by the New Mexico-based Rio Grande Foundation showed that New Mexico spent $9,600 less per prisoner in 2001 than did states with no prison privatization. The state saved more than $50 million in 2001 over the previous year, by contracting out for management of less than half its prison system.

In 1998, Tennessee almost signed a deal to outsource its entire prison system, and officials there estimate the move could have saved as much as 22 percent of that state’s entire correctional system budget. If the state of Michigan saved just 20 percent of its entire General Fund/General Purpose (GF/GP) budget contribution to prisons, this would come to savings of $326 million annually.

In addition, a study published by Vanderbilt University researchers in August, 2003 showed that states using privately owned and/or run prisons saw their daily cost of housing prisoners grow almost 9 percent slower than states not using the privatization option. This point cannot be overstated. By slowing the rate of spending growth through prison privatization state officials change the fundamental structure of government spending in future years. One of the reasons Michigan’s budget has been so hard to balance is that a lot of its spending is mandated by law. So, regardless of how well the economy is doing, or how much money is flowing into the treasury, the state must meet certain spending obligations. When officials can slow the rate at which those spending obligations expand, it will be easier to balance the state budget — without increasing taxes.

This is particularly compelling when one considers the degree to which prison costs in Michigan have expanded. According to House Fiscal Agency analyst Marilyn Peterson, in the last two decades the portion of total GF/GP spending dedicated to “prison population, inflation-adjusted corrections General Fund spending, and Corrections” has more than tripled. Prisons are expected to absorb an increasing share of the state’s revenues unless changes are made.

Russ Marlan, spokesman for the Michigan Department of Corrections, reports that by the end of 2008, Michigan will need about 4,500 more prison beds than it has now. Barring any changes in state sentencing guidelines that would reduce the inflow or increase the outflow of prisoners, the state may have no other viable choice but to privatize.

Michigan does have experience with prison privatization. In 1999, it contracted with the Wackenhut Corporation (now Geo Group, Inc.) to build, own and operate a youth correctional facility in Baldwin, which is located in Lake County. According to Frank Elo, warden of the Michigan Youth Correctional Facility, a conservative estimate of the savings resulting from the contract with Geo Group comes to 20 to 22 percent a year compared to what it would cost the state to run the prison.

The privatized facility has been a boon to local and state units of government for several reasons. First, the state didn’t have to finance construction of the facility, which probably saved millions. Michigan Privatization Report attempted to ascertain precisely what it would have saved, but state corrections spokesman Leo Lallonde was unable to provide an estimate. Second, the annual cost of running the prison is less than that of state-run facilities. Frank Elo says the facility pays more than $1 million in taxes every year to state and local government.

There is another benefit to having privately owned and operated prisons: truth in spending. Most of the costs associated with the Michigan Youth Correctional Facility are part of a private-sector business contract and, therefore, easily identifiable. For instance, the Geo Group must spend money on legal expenses (attorney’s salaries, for instance) that are factored into its overall cost structure, which can be examined easily, and at any time. By contrast, the cost of salaries earned by lawyers at the Attorney General’s office doing work on cases involving the Michigan Department of Corrections are not charged to Corrections, thus making the true cost of providing state correctional services appear less than it actually is.

Some goods and services that governments provide — such as national defense and the judicial system — should remain the exclusive preserve of government. They are much closer to the economist’s definition of true “public goods.” There is little if anything inherent in the operation of prisons, however, that should mandate they remain government-run facilities.

Governments around the globe have been hiring private companies to manage prison populations for decades now. Both companies and governments have acquired the expertise necessary to negotiate, write and manage contracts for management. It is time for the state of Michigan to more aggressively pursue this option in order to save taxpayer dollars and improve prison services.

Michael LaFaive is director of fiscal policy for the Mackinac Center for Public Policy.