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Reports on Privatizing Ohio Prisons Indicate Savings are Illusory

by David M. Reutter

Was Ohio’s attempt to sell off and privatize five of its state prisons in 2011 a race to the bottom? That’s the question raised and analyzed in a report titled Cells for Sale: Understanding Prison Costs & Savings, released by Policy Matters Ohio in April 2011.

Ohio is ten years into its prison privatization experiment, which state officials laud as having saved taxpayers more than $45 million over that time period. However, an in-depth examination of the calculations used for those seemingly robust savings found them “not only riddled with errors, oversights and omissions of significant data, but also potentially tainted by controversial accounting assumptions that many experts consider deeply flawed,” according to Policy Matters Ohio.

The calculations used to determine savings from prison privatization came under scrutiny after Governor John Kasich proposed in March 2011 to sell five of the state’s prisons to private companies for $200 million. The idea gained momentum with the need to close the state’s $8 billion budget gap.

At the time Ohio already had two privately-operated state prisons, the Lake Erie Correctional Institution (LECI) and the North Coast Correctional Treatment Facility, both run by Management and Training Corporation (MTC). State officials have admitted that previous efforts to calculate savings were inconsistent and imprecise, and said they were creating a new model for such calculations. Under state law, private prisons must achieve a minimum five percent cost savings.

The debate over prison privatization is heated and decisive, and opinions on the issue tend to be more emotional than analytical. “A lot of the arguments are very hypothetical and more based on theory than on fact, more on ideology than anything,” said Dr. Gerry Gaes, a former director of research for the Bureau of Prisons and a visiting scientist with the National Institute of Justice from 2002-2007. “Direct comparisons of cost and quality neither favor the public nor the private sector.”

To determine cost savings, Ohio used a hypothetical prison identical to the privately-operated facility, then determined what it would cost the state to operate that imaginary prison. “You fabricate a cost savings that way,” noted Dr. Travis Pratt, an Arizona State University criminologist who studies privatization issues.

Spreadsheets obtained by Policy Matters Ohio through a public records request revealed that the purported cost savings were largely illusory and also created potential security issues. The model for the calculations required an imaginary prison identical to LECI, and estimated what it would cost to staff the prison with state employees; to stock, supply and equip the facility to provide an appropriate array of services; and to provide the prison with heat, electricity, water and sewer services.

Of those three components, utilities are the least costly expense and are consistent whether a prison is privately or publicly operated. Calculating costs for equipment, supplies and contract services is more complex, as it requires comparing costs with a facility that has the same characteristics.

In calculating savings for LECI, state officials used comparable state prisons that are more expensive to operate because they have mental health residential components, prescribe more medication, have higher staffing levels, and house older and less healthy prisoners. Additionally, costs for prisoner pay and hospitalization expenses above $20,000 were not calculated in the expenditures for the hypothetical model. Finally, the model did not take into account state prison “central office” overhead costs.

“The problem of overhead costing is so pervasive and difficult,” wrote Dr. Gaes, “that ... this calculation alone can tip the balance (often erroneously) in favor of one sector over another.”

Private prison operators achieve the majority of their savings through staffing. The cost differentials between private and public-sector workers come from disparate training requirements, differences in pay and benefits, and different staffing levels. Staffing costs account for 70% of public prison expenditures. Research on issues related to staffing at private and public prisons has been minimal, leaving many questions unresolved.

“What is the impact of lower labor costs on staff turnover or staff performance?” Dr. Gaes asked in a 2010 research review. “How do private companies develop training for workers with fewer skills? Do private companies, in fact, hire lower skilled workers? Have private companies re-engineered the prison employee’s job?” Gaes cited a possible “McDonaldization” of prison labor.

The dangers of staffing issues in private prisons, including in the areas of training and supervision, were exemplified when three prisoners escaped from an MTC-operated facility in Arizona in July 2010. The escapees are accused of killing a man and his wife while on the run. [See: PLN, March 2011, p.24]. Security concerns aside, the real motivation behind privatization – achieving cost savings – is the driving force behind contracting out government services.

The Policy Matters Ohio report found that with proper accounting – with all costs considered and proper comparisons – LECI achieved fewer savings than required by state law, and that privatizing the facility may have actually resulted in a “loss for taxpayers between $380,000 and $700,000” for the 2006-2007 biennium.

Even if privatization can achieve cost savings, it may be unwise to place what is an essential government service into private hands. “There are going to be occasions where you are going to save money. You can begin to squeeze money out of the system. Maybe you can squeeze half a percent out, who knows,” said Dr. Gaes. “But it’s not as if these systems are overfunded to begin with. And at some point, you start to lose quality. And because quality is very difficult to measure in prisons, I’m just worried you’re getting into a race to the bottom.”

Reviews of privatization in other states indicate that once a state goes private, it becomes so reliant on the service provider that it is very difficult to resume control over the operation again, creating an endless cycle of privatization. The only winners are the private companies that profit and the lawmakers who receive campaign donations from those companies. [See: PLN, Aug. 2007, p.13].

In September 2011, Ohio sold one of the five state prisons it had offered for sale.
Corrections Corporation of America (CCA) paid $72.7 million for LECI, and will operate the facility under a 20-year contract with the state for annual payments of $32.8 million.
The company assumed management of the prison on January 1, 2012. CCA’s lobbyist in Ohio, Don Thibaut, was Kasich’s chief of staff when Kasich served in Congress. Ohio’s prison director, Gary C. Mohr, previously worked as a managing director for CCA.

In addition to selling LECI, the North Coast prison was returned to state control while MTC won contracts to operate the North Central Correctional Institution and the previously-vacant Marion Juvenile Correctional Facility. These developments are estimated to save $13 million annually, according to state officials – but given the questionable methodology the state has used to calculate prison privatization savings in the past, it is unknown whether such cost reductions will actually occur.

In another report released on December 15, 2011, Policy Matters Ohio claimed the sale of LECI “could easily wind up costing taxpayers millions of dollars,” while estimated savings from privatizing the North Central and Marion facilities were “based on what appear to be highly dubious accounting assumptions that one expert calls ‘bogus’ and that seem to bear little relation to reality.”

The report concludes by stating, “This deal looks like it could turn into a loser for Ohio taxpayers. Only time will tell if it will.”

The Policy Matters Ohio reports are available on PLN’s website. The ACLU of Ohio released another report on prison privatization in April 2011, which also concluded that privately-operated prisons achieve few cost savings and may be more expensive than state facilities. [See: PLN, Dec. 2011, p.22].

Sources: Associated Press;; “Cells for Sale: Understanding Prison Costs & Savings,” Policy Matters Ohio (April 2011)

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