Teaching Case – Contracting for Prisons

The Maxwell School of Citizenship and Public Affairs

State and Local Government Finance
Professor Yinger

Case: Contracting for Prisons in Texas(1)


The Question

It is the spring of 1989 and Texas is at the center of a national debate over whether private companies should be allowed to run prisons for profit. The Texas Department of Corrections is considering the use of four private 500-bed, minimum-security prisons. Although the prisoners would be sentenced by the State of Texas, their guards would wear the uniform of the Corrections Corporation of America, headquartered in Nashville, or of Wackenhut Services, Inc.

Texas would not be the first state to use private prisons. There is already one such prison in operation, near Louisville, Kentucky, and another is being built near Santa Fe to house all the female prisoners in New Mexico. In addition, more than a dozen county jails around the country are owned and operated by companies that receive a daily fee for each prisoner.


Opponents say that private prisons put cost reductions above the responsibility of a government for its prisoners. “The responsibility for the prison system is being given to the people who do not necessarily have the best interest of the prisoners at heart,” said Edward I. Korten of the National Prison Project of the American Civil Liberties Union. The government may not “always have the best interest of prisoners at heart, but at least they’re accountable to the people,” he said, adding, “Who holds these companies accountable?”

But proponents of private prisons say such philosophical objections are a luxury that the overcrowded system can not afford. “I’m an old state bureaucrat,” said Bob Olsen, the internal auditor for the Texas Department of Corrections. “I don’t have any philosophies. If they can do it cheaper than the state can, more power to them.”

There was a time, in colonial America, when all prisons were privately run. But conditions were Draconian and the prisons were put under Government control after the Revolutionary War. In recent years, private groups have won contracts to run half-way houses. Now those companies are building county jails and state prisons at their own expense under contracts that provide for daily fees for each prisoner sent by the state. States are thus spared the trouble and political problems inherent in asking voters for money to build prisons.

Governments are turning to these private groups because they cannot handle the problem themselves. With drug arrests swelling inmate populations, 43 states are under court order to correct overcrowding in their prisons. Lack of prison space has been cited as a contributor to the crime wave in Washington, D.C., which is also considering the use of private prisons. State and local corrections officials have turned to a variety of unusual approaches, including the use of two British-built troop barges to house prisoners in New York City along with a plan to build another floating jail.

The Texas Department of Corrections generally has 6,000 to 10,000 more inmates than it has beds. As a result, Mr. Olsen said, prisoners who have been sentenced to state prison are kept temporarily in county jails and judges are releasing prisoners at the earliest legal date.

Similar problems caused Kentucky to open the country’s first post-Revolution private prison, in the small town of St. Mary’s, three years ago. Nearly 450 prisoners are housed there, and United States Corrections Corporation of Louisville is paid $26.35 a day for each prisoner it houses there.

Contract Requirements

In Kentucky, the company is not required by its contract to prove that its costs are lower than the state’s in order to keep prisoners, said Robert B. McCloud, vice president of United States Corrections. “We’re a little less than they are,” he said. “But even if we’re not lower, they’re still getting a good deal because we own the facility and they’re using it at no cost.”

The company is required to provide all the services mandated in a state-run minimum-security prison, including rehabilitation, vocational and counseling programs, and recreation areas. Moreover, the company cannot hire out the prisoners and keep the money, have them manufacture anything for sale on prison grounds, or put them to work enhancing the prison site or even doing heavy maintenance.

The rules would be similar in Texas, except that the private company would have to prove that its cost is at least 10 percent lower than the state’s. The Department of Corrections estimates its own cost at $38.00 a day for each prisoner. This figure, which is an average over all current prisons in the state, includes wages and benefits for prison workers plus maintenance and operating expenses for prison facilities. Thus Texas would pay no more than $34.20 per prisoner per day to the two companies bidding on prisons, Corrections Corporation of America and Wackenhut Services, Inc. “Any price less than $34 would be a bargain,” said Mr. Olsen.

Sources of Cost Savings

Officials of the private correction companies say most of their savings comes from the fact that they are free of many government rules. “The private sector can do lots of things without going through the procurement process,” Mr. McCloud said. “When we buy something we pay cash for it. You’re going to get a better deal if the vendor doesn’t have to wait six months for payment.”

In addition, Mr. McCloud said his company pays its guards slightly less than the State of Kentucky pays its prison guards, although they are trained at the same state-run school. The state gives the private guards the same police powers as state corrections officers.

Peggy Walker, a spokeswoman for the Corrections Corporation of America, said her company would pay wages comparable to those of the Texas Corrections Department. Because the company would build the prisons itself, she said, they would be less costly to operate than existing prisons, which were not necessarily built with economy in mind. For instance, the new prisons would be designed in a V-shape so guards can see down two main hallways at once, thus requiring fewer guards.

Like many businesses, the companies are counting on volume. The Corrections Corporation of America. which now operates 11 institutions in 4 states, most of them jails and immigration detention centers, saw a profit for the first time in four years for the last quarter of 1988. The company lost $100,000 last year, as against $1.9 million the year before. “We seem to have reached the critical mass of beds to be profitable,” Ms. Walker said. “Our fees now cover what it costs us to run the prisons as well as the principal and interest on our construction loans.”

Critics of contracting out for prisons recognize that some current prisons are inefficient but also point out that many of the so-called advantages of private provision could be incorporated into new public prisons. “We shouldn’t be comparing the cost of public prisons built in the 1940s and 1950s with the cost of private prisons that have all the latest technological wrinkles,” said Mr. Korten.

Prisoners’ Rights

The focus on costs and profits concerns some experts on prisoners’ rights, who have spent years charging state and local governments with prisoner abuse and now find themselves arguing that those governments are best able to regulate prisons.

“You’ll have a private contractor who’ll make a lot of promises to the state about providing constitutional prison conditions,” said Donna Brophy, a San Francisco lawyer whose suit against the Texas Corrections Department led to a court order to reduce overcrowding. “Once the state thinks it’s all taken care of,” she said, “God knows what will happen to the prisoners.”

Other objections are more philosophical, like the one raised by Ira Robbins, author of the book The Legal Dimensions of Private Incarceration, published in October 1988 by the American Bar Association. “What are the core purposes of government?” Mr. Robbins said. “Foreign affairs and domestic defense.” I count corrections and detention as among the latter and I don’t think our government should contract out its core reason for being.”

The Decision

You are the Director of the Texas Office of Management and Budget and have been asked by the Governor to evaluate the proposal to use private prisons.  The Governor is particularly confused about the issue of costs.  He wants you to tell him whether the available estimates of the costs of public and private prisons are comparable.  If they are, he wants to know whether the 10 percent rule makes sense.  If they are not, he wants to know whether it is possible to design bidding rules or contracting provisions that are likely to make private prisons cheaper than comparable public prisons.  Finally, of course, the Governor wants you to make a recommendation concerning the use of private prisons by the State of Texas.  You have been asked to present your analysis and recommendations at a public hearing on the subject.


  1. This case was written by Professor John Yinger for classroom use. It draws heavily on Lisa Belkin, “Rise of Private Prisons: How Much of a Bargain?”, The New York Times, Monday March 27, 1989.