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Private Prisons Are a Risky Business for Local Governments

Local governments in Texas and across the nation are bearing high costs for building private prisons that are now unwanted due to a sharp decline in incarceration rates. This has led some local governments to adopt radical strategies such as closing, or even selling, the publicly-financed, privately-operated prisons that were built when incarceration rates were soaring. Some local governments' bond ratings have been lowered due to the financial strain caused by the costs of financing the boondoggle prisons.

The West Texas town of Littlefield has taken the most radical solution, putting its 383-bed prison up for auction after having been abandoned by the private prison company that contracted to fill and operate the prison. The town is hoping to make $5 million from the sale of the empty prison which is costing $65,000 a month in bond interest payments alone.

Nearby Dickens County suffered financially after the federal government transferred inmates from a 489-bed prison to a facility in Lubbock. The costs of the empty private prison included a loss of 120 jobs in a community of 2,700.

McClennan County finally was able to get prisoners from an older jail in Lubbock to its newly-completed private prison in Waco after vainly trying for four months to find occupants for the new facility.

In the past, Texas private jail and prison operators could depend on the federal government, other states, and especially the Texas Department of Criminal Justioe (TDCJ) to send them prisoners from their overcrowded prison systems. Now there are no guaranteed prisoners. Even TDCJ is cutting back after the state legislature approved the closing of the 1,060-bed Central Unit, seeking to save $25 million and help close the state's large budget gap.

According to the Texas Commission on Jail Standards, over half of all privately-operated jail beds are empty. This is explained by the decline in jail populations which the federal Department of Justices's Bureau of Justice Statistics pegged at 2.3% between June 2008 and June 2009. That was the first decline in jail populations since 1982 and began a reversal of the decades-old trend of prison and jail population expansion.

"When you start talking about closing prisons in Texas, the situation's not real good," said University of Texas-Permian Basin criminology professor Richard Kiekbush. "It's not a matter of the Legislature finding Jesus. They have just found that they cannot afford to lock people up anymore."

Unfortunately for local governments, the reduction in state prisoners has resulted in a glut of private prison beds, reducing what they can charge for incarcerating prisoners and ruining their calculations for paying off bonds issued to pay for prison construction. Fitch Ratings has already downgraded Littlefield's bond rating from BBB to of and has issued a negative outlook for another downgrade due to the empty private prison. The prison represents 77% ($10 million) of Littlefield's $13 million debt. It costs the town of 6,500 $235,000 per year to service the prison debt. To keep from defaulting, Littlefield has had to use sales tax, wastewater and utility revenues to service its debt, causing it to neglect other government functions.

Like Littlefield, many local governments foolishly pledged their full faith and credit to cover the prison construction bond debt. For instance, McClennan County pledged to service the $46 million debt for construotion of a privately-operated jail in Waco, Texas. That commitment earned the bonds an AA- rating by Standard and Poor's, but left the county on the hook for the entire debt should the prisoners needed to generate revenue fail to materialize. Thus, private prison deals that seemed like free money in the past may wreck many local governments' finances.


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