Last week, the U.S. Justice Department delivered what undoubtedly was a blow to the three private-sector companies that operate prisons — two of which are REITs — when it announced that it would phase out or significantly limit its use of these correctional facilities. Specifically, Deputy Attorney General Sally Q. Yates announced that she:
sent a memo to the Acting Director of the Bureau of Prisons directing that, as each private prison contract reaches the end of its term, the bureau should either decline to renew that contract or substantially reduce its scope in a manner consistent with law and the overall decline of the bureau’s inmate population. This is the first step in the process of reducing — and ultimately ending — our use of privately operated prisons.
Officials made the decision, following an inspector general report that concluded these facilities had more safety and security incidents than the prisons operated by the federal Bureau of Prisons.
The report also found that in two of the three facilities the inspectors visited, new inmates were being housed in segregation or other cells normally used for disciplinary measures even though the inmates hadn’t violated any rules. The prisons have corrected this issue, according to the report.
Disappointment and Disagreement
What Your Peers Are Reading
The three companies, the publicly operated Corrections Corp. of America and the GEO Group, and the private company, Management and Training Corp., not surprisingly voiced disappointment in the decision and challenged some of the stats from the IG report.
Their chief argument was that the prisons that the private sector is running for the U.S. government have very different inmate populations from the federally run prisons, making it an apples-to-oranges comparison. They also took issue with the conclusion that their prisons are less safe.
As MTC said on its website, the inspector general’s report included many favorable findings about the contract prisons that are easy to overlook when just skimming the report, namely that there is 29% lower rate of disruptive behavior incidents in contract prisons and and that contract prisons had fewer allegations of sexual misconduct by staff against inmates.
Congress Takes Aim at Prison REITs
Still, it appears that the Justice Department is moving ahead on this path despite the counter arguments. And even if it wasn’t, privately run prisons — at least the two companies that are structured as REITs — are also under legislative scrutiny as well, although not for the same reasons cited by the Justice Department memo. Last month, Senate Finance Committee Ranking Member Ron Wyden, D-Ore., introduced legislation that would limit the ability of private companies that operate prisons to take advantage of special tax rules for REITs.
The measure, the Ending Tax Breaks for Private Prisons Act of 2016, takes aim at the compensation these REITs receive for providing both space and services at a prison. These services, which include security, food service for the inmates, rudimentary medical and dental services and mental health services, are all provided by a taxable REIT subsidiary within the prison REIT.
A Bigger, More Diverse Market
Leaving aside Congress’ move to limit the prison REITs’ tax exemption, a look at these companies’ larger market share suggest that they are only losing a part of a larger, and in some cases more diverse, market.