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Contact: Brandon Lausch
blausch@temple.edu
215-204-4115
Temple University

Contracted prisons cut costs without sacrificing quality, study finds

Temple University's Center for Competitive Government estimates long-run savings of 12 percent to 58 percent when comparing private and public facilities

As states continue to grapple with aging correctional facilities, overcrowding, underfunded retiree obligations and other constraints, new research from Temple University's Center for Competitive Government finds that privately operated prisons can substantially cut costs from 12 percent to 58 percent in long-term savings while performing at equal or better levels than government-run prisons.

Temple economics Professors Simon Hakim and Erwin A. Blackstone analyzed government data from nine states that generally have higher numbers of privately held prisoners (Arizona, California, Florida, Kentucky, Mississippi, Ohio, Oklahoma, Tennessee and Texas), and Maine, which does not contract its corrections services. The professors calculated both short- and long-run savings per state, finding that contracted prisons generate significant savings without sacrificing quality.

"Contracts between private-prison operators and state governments can be very precise in terms of the outcomes the state expects," said Hakim, director of Temple's Center for Competitive Government, which is affiliated with the Fox School of Business. "And contractors have an incentive to overshoot the performance metrics established by the state lest they lose out to a higher-performing company on the next contract bid."

The study uses economic models to determine each state's avoidable costs, which are compared to the contracted per diem rates charged by the private operators. The study also takes into account underfunded pensions and retiree healthcare costs a critical issue, with the Pew Center on the States reporting in 2010 of a $1.38 trillion gap between states' assets and their pension and healthcare retiree obligations.

In California, for example, the researchers estimated that contracted prison facilities save between 32 percent and 58 percent. In Maine, estimated savings in the short run (including operational costs, such as personnel and medical and food services) is 47 percent while long-run savings (which combine short-run costs with capital expenditures, such as facility modernization and financing) is estimated at 49 percent. Researchers said Maine's substantial estimated savings could be attributed to that state's lack of private-public competition and its small prisons that cannot exploit economies of scale.

Short- and long-run savings, state by state:
State | Short-run savings | Long-run savings

Arizona | -1.00% - 8.01% | 14.25% - 22.34%
California | 29.43% - 57.09% | 32.20% - 58.37%
Florida | 7.00% | 17.67%
Kentucky| 9.43% - 20.88% | 12.46% - 23.50%
Maine | 47.40% (estimated) | 49.15% (estimated)
Mississippi | 8.69% | 25.27%
Ohio | 4.14% - 13.44 | 20.28% - 26.81%
Oklahoma | -2.16% - 29.23% | 16.71% - 36.77%
Tennessee | 17.32% | 17.32%
Texas | 37.39% | 44.95%
*Ranges reflect savings that vary from facility to facility for a single state.

"It is important to note that the existence of public prisons also keeps in check price hikes by the private prisons," Hakim and Blackstone wrote. "The knowledge that states could resort to the use of just public prisons encourages private contractors to offer their services at even lower prices than the statutory requirement."

Key findings of the study include:

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The full text of the study, titled Cost Analysis of Public and Contractor Operated Prisons, is available on the Center for Competitive Government's website at http://bit.ly/11S6vUS. The study received funding by members of the private corrections industry.



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