Prisons are Safe Havens -- For Investors

For those of you who are concerned about the growth of the prison-industrial complex, a recent article in Forbes titled “Hiding Out in Prison Bonds” points to the private prison industry as a growth sector. One way to benefit is to invest in the stock of prison firms like Corrections Corporation of America and GEO Group (Wackenhut). But another investment option is through public bonds. Since the early 1980s most of the new prisons in the United States have been designed, built, and operated by private firms. It’s a highly profitable business. But where do they get most of their money to build new prisons? Not from their own stockholders, but from bonds issued by states and counties. Not general obligation bonds that are approved by voters, but rather from revenue bonds that are issued often with little public notice or input. Prison bonds issued by states and counties return higher interest rates to investors than bonds approved by community and state taxpayers. That’s because the revenue to pay investors comes not from taxpayers but from the per diem payments provided by governments. Hence, the name “revenue bonds.” These bonds are not backed up by county or state general funds but rather count on the revenue stream of the bond-financed project – in this case, a private prison. But Forbes says that prison bonds are a good place for investors to find safe haven in troubled times. Its Oct. 10 article argues:

“Prison systems incarcerate offenders. Any state that would stop making lease payments on its correctional facility bonds and set incarcerated offenders out on the streets would have some explaining to do. The stakes are too high for society to permit such default. We think the risk is minimal for prison bonds.”

In some cases, states use revenue bonds to finance prisons that it builds and operates itself. California, for example, is funding a 55,000 bed expansion of its prison system through revenue bonds. Investors are attracted because the bonds earn interest at 1-2% higher than other public bonds, and they are also tax-free.

It works like this: the state issues bonds for which taxpayers are not liable that are bought by private investors attracted by high interest rates and tax exemptions derived from the public character of the financed project. State or county annual appropriations provide the revenue to pay investors, and private prison companies often run these “facilities.”

Since the mid-1990s the ever-mounting trend to criminalize immigrants has proved a boon to the prison bond business.

Throughout the country – but particularly in the South and Southwest – private prison firms have enticed county and state governments to build speculative prisons financed by revenue bonds.

The county – through a newly created trust or public facility corporation – issues prison bonds in collaboration with private prison firms that design, build, and operate the resulting prison for immigrants. Betting that the immigrant crackdown will continue for two decades (bonds of 15-22 years), investors scarf up high-interest, tax-free bonds.

The revenue to pay the bonds – and the private prison firm – comes from per-diem payments made for each immigrant detained or imprisoned.

At a time when immigration restrictionists like the Federation for American Immigration Reform (FAIR) are stoking an anti-immigration backlash movement that charges that immigrants aren’t paying their fair share of taxes, bond investors and private prison firms are enjoying the tax-free benefits of imprisoning these immigrants for profit.