Private Prisons Still Make Money From Federal Inmates Despite Biden’s Executive Order

Private-prison operators are replacing revenues from some lapsed federal contracts by clinching deals at the city or county level to house federal inmates

Prison operators are striking deals with municipalities to replace expiring federal contracts, cushioning the financial blow from the Biden administration’s efforts to disentangle the U.S. government from privately run detention facilities.

Days after President Joe Biden was inaugurated, he ordered the Justice Department not to renew any expiring contracts with privately operated jails and prisons, while honoring existing agreements. Investors sold off the stocks and bonds of contractors including CoreCivic Inc. and GEO Group Inc. in response, concerned about a pullback in federal support for private prisons.

CoreCivic and GEO Group, the prison industry’s two major publicly traded companies, are plugging some of the revenue gaps created by the expiration of federal contracts by signing new deals known as intergovernmental agreements involving cities and counties.

These three-way agreements allow the federal government to hand off custody of prisoners serving time for federal crimes or awaiting sentencing from a federal judge to localities. City and county law enforcement then transfer those inmates to private detention facilities they have contracted with.

“From the private prisons’ perspective, there’s not much difference between a direct contract with the federal government and intergovernmental service contracts, except that it allows the White House to say they are not directly contracted with the private prisons,” said Joe Gomes, a senior research analyst at investment bank Noble Capital Markets.

Municipalities will first agree to take custody of federal prisoners, such as detainees of the U.S. Marshals Service awaiting federal trial or inmates incarcerated by the Bureau of Prisons, with the federal agency paying the localities a per-diem rate for each prisoner. Local officials separately contract with a private prison to house those federal inmates. In exchange, prisons typically pay the localities a service fee, designed to make the transaction still economically enticing for the jurisdictions, which are transferring a large share of the federal funding to the private prisons.

The multiparty contracts allow the federal government to avoid a direct relationship with the private prisons, as required by January’s executive order, according to financial analysts and researchers covering the industry. But federal dollars continue to flow to prison operators, albeit indirectly.

Some intergovernmental agreements predate the Biden administration, and not all expired federal prison contracts have been replaced by intergovernmental agreements since the executive order was issued.

But their use might increase, according to Lauren-Brooke Eisen, director of the Brennan Center for Justice, a think tank focused on criminal justice reform, as the federal government still needs beds for its inmates, and state-owned facilities struggle to house them.

“While the federal government can house some detainees in local jails, they still crucially depend on the capacity that for-profit firms provide,” Ms. Eisen said. “And the executive order has opened a loophole that makes it possible for some privately owned detention centers to continue to operate.”

An alternative to intergovernmental agreements is unlikely to emerge if the federal government doesn’t commit to increasing state-run prison capacity or reducing its overall inmate population, according to some researchers. Although imprisonment rates in the U.S. have been falling since around 2010, private facilities still housed roughly 16% of all federal prisoners as of 2019, according to the Justice Department.

Justice Department contracts accounted for roughly a quarter of revenues for CoreCivic and Geo Group in the first half of this year. In 2020, CoreCivic recorded revenue of $999 million from all federal agencies, representing 55% of its total revenue. For GEO Group, last year’s revenue from the federal government totaled $1.3 billion, accounting for 56% of the total.

Junk-rated CoreCivic and GEO Group had total debts of roughly $1.5 billion and $2.9 billion, respectively, as of June 30, according to public filings.

In May, Mahoning County in Ohio signed a three-year intergovernmental agreement with the federal government and CoreCivic to house federal prisoners at a correctional center the company owns and operates in Youngstown, after a U.S. Marshals Service contract with CoreCivic expired at the end of May and wasn’t renewed.

The Mahoning County sheriff’s office will charge the federal government a fee for housing detainees and then pay CoreCivic for keeping those prisoners at the CoreCivic-owned Youngstown facility, Mahoning County Sheriff Jerry Greene said at a public meeting in May.

“The biggest benefit was that it was basically saving jobs in the city of Youngstown,” Mr. Greene said at the meeting. The county had looked into taking over operating the CoreCivic facility but decided on the intergovernmental agreement instead, he said.

“One of the most important ways we serve our government partners is through the flexibility we provide, and we’ll continue working with them in the ways they desire and need,” a CoreCivic spokesman said.

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Alexander Saeedy