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Christopher Petrella
NationofChange / Op-Ed
Published: Saturday 31 December 2011
“AB900 allows the California Department of Corrections and Rehabilitation (CDCR) to authorize $7.8 billion in lease-revenue bonds to fund the addition of 53,000 new prison and jail beds while bypassing the electorate.”

Leasing Through the Back Door: The Private Financing of “Public” Prisons

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Nearly 130,000 bodies are currently caged in for-profit or privately managed “correctional” facilities in the United States, a figure that accounts for 16.4% of federal and 6.8% of state populations.

Since 2000, moreover, the number of extant for-profit and privately contracted penal institutions has skyrocketed by approximately 120% during a time in which the population of “public” federal and state facilities has grown four times as slowly. And although federal and state expenditures on prisons have mushroomed by72% over the last decade and now cost taxpayers $74 billion per annum, the two largest private prison companies, Corrections Corporation of America and GEO Group (formerly Wackenhut Corrections Corporation), have together “earned” over $2.9 billion in profits since 2000.

While in recent years much public attention has rightly been devoted to illuminating the “industrial” operations associated with the proliferation of private prison facilities—from the tumesced pocketbooks of private prison operators to the profits generated by telecommunications companies by way of no-bid phone contracts—surprisingly scant attention has been paid to the private financiers of “public” prison projects who earn a profit each time a prison is built. And unlike those who collect revenue on prison operations, firms that purchase bonds for prison construction needn’t have a personal stake in the eventual utility or solvency of any given facility. Their coffers will grow whether or not prison beds are occupied.

But a two-decade long declension in public support for prison expansion has thwarted traditional options for financing new prison construction and has resulted (as it usually does) in new opportunities for cadres of investment bankers, building contractors, and consultants to realize indulgent returns-on-investment with abidingly anti-democratic financing schemes. I call it “leasing through the back-door.”

Even a cursory review of prison, jail, and detention expansion initiatives demonstrates that federal, state, and municipal governments are using “back door” financing instruments that allow them to borrow billions of dollars to build facilities that the public does not want nor can afford. The State of California provides a superlative case study for the examination of “back door” prison financing.

Simply stated, California voters have overwhelmingly rejected the issuance of prison construction bonds the last two times the issue went to referendum. And according to a 2011 poll jointly commissioned by the University of Southern California and Los Angeles Times, nearly three-out-of-four California voters currently oppose tax increases for the purpose of building new prisons. Perhaps the recent voter disinclination for prison construction is a result of the passage of California’s AB900 in 2007. AB900 allows the California Department of Corrections and Rehabilitation (CDCR) to authorize $7.8 billion in lease-revenue bonds to fund the addition of 53,000 new prison and jail beds while bypassing the electorate. To date, the CDCR has packaged and sold $2.1 billion in lease-revenue bonds.  Approximately $900 million of that debt was sold in 2011 alone.

Many anti-prison activists have cogently argued that AB900 was drafted to circumvent the “will of the people” who previously defeated two propositions placed on the ballot by the state legislature to appropriate money from general obligation bonds to pay for more prisons. When voters began rejecting general obligation bonds for prison construction, state treasurers, corporate lawyers, and investment bankers began underwriting lease-revenue bonds for the purpose of avoiding constitutional and statutory restrictions on such debt guarded by voter approved bonds.

Of course, prison finance policy is far from immutable and often reflects political-economic trends, exigencies, and anxieties. In fact, prior to the mid-1980s, prisons were generally financed in one of two ways. State officials either adopted a “pay-as-you-go” approach by funding new construction out of general revenues or they borrowed  money through the sale of general obligation bonds. A general obligation bond is simply a repayment pledge that is guaranteed by the “full faith and credit” – including the taxing power – of the issuer, in this case, the state. Failure to pay debt service on a general obligation is exceedingly rare among large government entities and typically only occurs under conditions of bankruptcy. Most crucially, the issuance of general obligation bonds requires approval by taxpayers in the form of a bond referendum.

As correctional populations and costs mounted in the 1980s and 1990s, however, California and other states found it increasingly difficult 1) to fund prison expansion vis-à-vis annual operating budgets and 2) to secure public approval for new debt. Through the collusion of the public and private sectors (scarcely distinguishable these days…) state officials responded by issuing another type of debt to finance prison construction: lease revenue bonds. Elected officials can circumvent citizen lead socio-political obstacles by issuing lease-revenue bonds, a type of debt that allows agencies created by the government to finance a prison facility by issuing tax-exempt bonds and then leasing the right to use the facility back to the state. The state, which generally gains ownership of the project at the end of the lease period, uses funds appropriated by the legislature (and the governor, typically) to make lease payments. Lease-revenue bonds do not require voter approval.

Lease-revenue bonds are often extraordinarily costly because they carry high interest rates resulting from the lease agreement that guarantees the loan. Even by the CDCR’s own admission, “from a standpoint of costs alone, general obligation bonds are preferable to lease-revenue bonds.”

Wait, what?

They continue, “General obligation bonds typically carry an interest rate 0.2 to 0.5 percentage points below the interest rate on lease-revenue bonds. [General obligation bonds issued by the state of California carry an average interest rate of 5.5% and a service life of 25 years.] In addition, lease-revenue bonds have slightly higher issuance costs (due to the need to purchase commercial insurance) than do general obligation bonds and require a higher value of bonds to be issued to produce the same net proceeds generated by general obligation bonds.”

The higher risk and cost associated with lease-revenue bonds doesn’t seem to concern Bank of America, Goldman Sachs, and Morgan Stanley – three of the largest six U.S. financial institutions—that have underwritten and purchased over $2 billion in lease-revenue bonds for prison construction in California from 1991-2007. The public must be made to know that although financial institutions like Bank of America, Goldman Sachs, and Morgan Stanley do not profit directly by exploiting prison labor or by operating private penal facilities, they nonetheless realize exorbitant annual revenues by propping up a “prison industrial complex” by way of “leasing through the back door.” And to paraphrase 16th century Dutch polymath Balthazar Gerbier, too many back doors make thieves.

California residents interested in eradicating the “prison industrial complex” and restoring socially responsible, sustainable, and humane budget priorities are encouraged to join CURB (Californians United for a Responsible Budget). More information is available at

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ABOUT Christopher Petrella

Christopher Petrella is a NationofChange contributing author and a doctoral candidate in African American Studies at the University of California, Berkeley. He writes on the contradictions of modernity and teaches at San Quentin State Prison. His work has appeared in such publications as Monthly Review, Truthout, Axis of Logic, NationofChange, and The Real Cost of Prisons. Christopher also holds degrees from Bates College and Harvard University.

Thank you republican

Thank you republican governors .... especially Pete Wilson.

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--->the domination of society

--->the domination of society by a specific group which stays in power by partially taking care of and partially repressing the claims of other groups.

Forcibly sideline the surplus is the control freaks mind set. When you are in the business of playing < god > fear is an ancient tool along with the superior mystique and other mum-bo jumbo. Strip their masks off! You empower this "them" when you want what they have. Continue to grant the enemy NO quarter.

By the way:
Does anyone now if the jail / prison money show up as part of the national product numbers? I am certain that it enters the employment statistics. When certain classifications of employment are used, "private" "contract" "part time", employment factors such as "over time" "retirement" "health insurance" can be averted.
Finally, Ron Paul and the message he brings makes the great serpent his in anguish

It's useless to be rich

It's useless to be rich without peons to pee on. The word itself shows the result. Ri-ch. It means king like. We shouldn't have kings or tzars in our country. I'm serious, wealth should be outlawed through anti hording laws already on the books. If this money were still in the communities, we might not have so many criminals.
Pot heads in prison is a slap to Gods face. Prisons are a slap, Jesus had no respect for them either. Right wingers invested in prisons are big time loser hypocrites.
I would imagine Him being quite put off by having His name smeared into American politics. Private prisons are one direct result. It's part of the Armageddon mentality. Legion are they're strategies, minions, and bucks.
Weepy eyed begging, smiley eyes of triumph at the trials where entire families are destroyed through toxic laws and discount lawyers. And now furthering the schemes of profitability.
Be careful, they're might be a prison app for that.

More crime, more prisons,

More crime, more prisons, more judges, more prosecutors, more defense attorneys more Homeland Security funds, more illicit drugs, more addicts, less justice. Have you noticed that we are much safer now and how much we lowered taxes and reduced public debt? The big losers are the taxpayers.

Thank you republican

Thank you republican governors .... especially Pete Wilson.

Finally someone is reporting

Finally someone is reporting this crap. But there is another specter perhaps even greater. My friend and I have been in a near state of froth since California (our home state) began running 'private' prisons. I put the scare quotes around the 'private' because these are not private revenue generating business. they're 100% welfare driven, by tax dollars. The cover is that the owners (like Dick Cheney) dupe the population into thinking that private business can run prisons more cheaply and thus save tax payers money. Two problems with this: (1) They don't run them more cheaply costing tax payers more in reality and (2) They pay employees 30% less (considering benefits and hourly wages), taking even more tax related revenue out of the system and into the pockets of the owners/investors. Please do an investigative piece on this--please!

Slavery was always high

Slavery was always high profit.

On the contradictions of

On the contradictions of extremist capitalism or Ayn Randism:

When prisons are run for profit, more crime -- i.e., more criminals to be incarcerated and thereby greater profits -- is desirable.

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