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Corrections PPPs Delivering Cost Savings in Florida

Leonard Gilroy
February 4, 2011, 1:05pm

In this post, I'd like to address a question recently posed by a reader regarding Reason Foundation's January policy brief proposing a continuum of care in corrections through public-private partnerships (PPPs). We used Florida as a case study in the paper, estimating that shifting to a continuum of care PPP model in two Florida Department of Corrections (FDOC) regions could potentially save the state between 7-10% in operating costs. However, because most state correctional systems do not typically break down their own fully allocated costs at the individual facility level, we relied on average per diems (by facility type) reported by FDOC to estimate the total facility operating costs in each region, multiplying the number of beds in each facility by the average per diem for that type of facility (e.g., prison, work camp, private prison, etc.) across the whole district.

The reader noted that the per diem we used for "correctional institutions" (e.g., prisons)—$42.31 per inmate per day-was lower than the per diem we used for "private prisons" ($45.53), prompting the question, "doesn't that show that private prisons cost more than public prisons?"

The answer is no, for two reasons. First, the average per diems reported by FDOC are indeed that—averages. They were useful for preparing a broad estimate of costs by facility at a regionwide scale in the absence of internal state accounting that breaks down facility-level costs in that manner, but as averages, they inherently smooth out a significant degree of variation in costs at the facility level. Hence, they're not meant to (or designed to) provide an apples-to-apples comparison of like-versus-like facilities in the public and private sector. That's the sort of question that demands a more rigorous full-cost accounting analysis at the individual facility level, which was not the purpose of the FDOC average per diems. Simplifying, the former attempts an apples-to-apples analysis, while the FDOC averages were essentially averaged bundles of apples and oranges mixed. In fact, when averaged out, the higher per diem figure for privately-operated institutions makes some intuitive sense, as private prison population in Florida includes a higher proportion of higher cost female beds—FDOC estimates average per diems of over $60 per inmate per day in female institutions, for example—and private institutions are often required to offer more intensive education and substance abuse programming than found in state-run facilities.

Second, the average per diems for state-operated facilities do not account for indirect administrative costs, which the Florida DOC estimates to be $3.54 daily per inmate. On the other hand, state-operated facilities include specialty institutions that house chronically-ill offenders and death row inmates. All these differences—which play out at the facility level—have to be accounted for when comparing privately-operated prison per diem costs with state-operated prison per diem costs. Average per diem costs are useful in approximating broad costs among many facilities, but they're neither designed nor intended to serve as a basis for evaluating the comparative costs between public and private facilities.

For that, what's needed are facility-level cost comparisons prepared on an apples-to-apples basis, and a large-scale correctional PPP procurement in Florida in 2010 offers a powerful example of the cost savings achievable through PPPs. For context, under Florida law the privatization of prison operations cannot be approved without a minimum cost savings threshold of 7%, which has been consistently met by private prison operators since the 1990s and has been validated and verified by the state in advance of the private corrections contracts in place in Florida today.

In 2010, the Florida Department of Management Services (FDMS) entered into an "invitation to negotiate" process to award contracts for the private management and operation of four state prisons—the 985-bed Bay Correctional Facility, the 1,520-bed Gadsden Correctional Facility, the 1884-bed Graceville Correctional Facility, and the 985-bed Moore Haven Correctional Facility. During the procurement process, FDMS assembled a team of in-house and corrections department experts to conduct a cost comparison that established a benchmark per diem for each facility based on what it would cost the state to operate them.

For private bids to be considered compliant, they had to beat the benchmark state per diems at each facility by at least 7%. As shown in the table below, the winning bids at each facility came in at cost savings levels ranging between 14-27%. Taken together, these private facilities will therefore be operated at an annual cost savings of $19.8 million, or more than $59.5 million over the three-year term of the contracts.

2010 Florida Correctional Procurement Cost-Comparison Summary

Facility

# of Beds

Comparable State Per Diem Cost

Private Operator Per Diem Cost

% Cost Savings

Annual Cost Savings

3-Year Cost Savings

Bay Correctional Facility

985

$57.52

$48.05

16%

$3,404,702

$10,214,105

Gadsden Correctional Facility

1,520

$54.85

$45.97

16%

$4,926,624

$14,779,872

Graceville Correctional Facility

1,884

$47.02

$34.37

27%

$8,698,899

$26,096,697

Moore Haven Correctional Facility

985

$56.19

$48.36

14%

$2,815,081

$8,445,242

TOTAL

$19,845,306

$59,535,917

Source: Florida Department of Management Services, Memorandum by Negotiation Team (ITN# 09/10-017) to DMS Secretary Linda South ("Recommendation of Award"), April 13, 2010, available here.

Real-world evidence like this supports our suggestion that the private sector could deliver the cost savings estimated in our paper for Florida. Our estimated annual cost savings range of 7% to 10% is based on Florida and other states' past experiences with prison privatization and may be a conservative assumption, given the notably higher cost savings in the real world comparison discussed above. Results like that in the recent past help make a compelling case for the expanded use of correctional PPPs in Florida, given the magnitude of the state's ongoing fiscal challenges.

For more details on Florida's 2010 procurement and cost comparison analysis, see here. And for more on Reason's work on privatization and corrections, see here.


Leonard Gilroy is Director of Government Reform


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