Will Private Prisons Decline as Inmate Population Stabilizes?

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The privately run prison in Walnut Grove, Ms., was besieged for years by violence and legal fights over deplorable conditions. Last month, with local sentencing reforms keeping fewer behind bars, officials shut it down, leaving the state on the hook for $121 million of debt left behind, Bloomberg reports. “The taxpayers are paying for that building and it’s just sitting there,” said Chip Jones, an alderman for the 1,600-person town about 63 miles east of Jackson. The closing is part of a nationwide shift among states and local governments that have sold $30 billion of bonds to build prisons and jails, some of which were leased to for-profit operators. With officials re-evaluating tough-on-crime laws that caused inmate counts to soar and the federal government moving to jettison its use of private prisons, the reduced need for such facilities is rippling through a niche of the $3.8 trillion municipal-securities market.

Last Friday, a Texas prison that serves as a U.S. detention center had its credit rating cut to junk by S&P Global Ratings, joining half a dozen others that were downgraded below investment grade by the company since federal officials in August announced plans to phase out for-profit facilities. About $300 million of tax-exempt debt issued for almost two dozen prisons has already defaulted. “At any point there are only so many prisoners out there to fill the private prison beds,” said Matt Fabian of Municipal Market Analytics Inc. “It creates unequal distribution and you have prisons competing against one another.” It’s not certain that small national declines in the prison population total will continue, said Daniel Hanson, an analyst who follows the municipal-bond market for Height Securities. “The low hanging fruit of criminal-justice reform is already done.”

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