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New Report Mischaracterizes Private Prison Contract Occupancy Rate Provisions

Understanding whys and hows of occupancy rate provisions critical to assessing their merits

Leonard Gilroy
September 25, 2013

A recent report by the advocacy group In the Public Interest discusses the use of prison bed occupancy guarantee clauses in some private prison contracts and argues that such provisions impose a hidden “low-crime tax” on governments and undermine the prospects for criminal justice reforms. Unfortunately, the paper seems more aimed at sensationalizing the topic than providing substantive analysis of correctional procurement policy, as it mischaracterizes the subject and fails to provide important context on an inherently nuanced issue.

While it is true that some private prison contracts include occupancy rate guarantees—though, as the report points out, this is far from ubiquitous in correctional contracting—it is important to understand why states and their private partners may opt to include them in contracts and how they are used in practice.

First, let’s turn to why occupancy rate guarantee provision might be used. States and private prison operators both want to have some assurance that a prison facility will be staffed at the appropriate level, as well as cover the full costs of utilities, food, healthcare, and other key cost drivers of the operation. Thus, setting an occupancy rate level at, say, 80 percent or higher ensures that the facility will be fully staffed and able to provide a proper level of service, taking into account the utilities, healthcare, and complete range of other elements of a fully-functioning prison.

Additionally, when the facility in question is a brand-new facility for which the private sector must finance the construction costs, occupancy rate guarantees serve as a risk mitigation tool that gives more assurance to the capital markets that the contract will generate sufficient revenues to allow the debt to be repaid on time and in full. Further, such occupancy rate guarantees can reduce the cost of capital overall, allowing the private sector to offer better pricing to their government clients than in the absence of such provisions. (Likewise, some of the privately operated facilities with occupancy guarantees were actually financed through state-issued bonds and are owned by states, who will similarly seek occupancy guarantees to raise capital at the lowest interest rates for taxpayers.)

And a government entity—not a private prison management firm—may seek the inclusion of an occupancy rate guarantee to prevent the private manager from contracting out some beds in a given facility to another government entity. While many privately owned and operated prisons house inmates from one particular state or federal agency, a few of them house inmates from multiple clients. But if a state or federal agency may want to ensure the dedicated use of a privately owned prison for its own inmates, then the occupancy rate provision is an option it can seek in the contract.

Second, a critical nuance lost in the report is that it implicitly assumes that an 80 percent, 90 percent, or 100 percent “occupancy rate” is referring to the design capacity of the prison facility—the true number of beds a prison is designed to hold from an engineering standpoint—when that is often not the case. Prison administrators and operators tend to want some flexibility to address unforeseen scenarios in which they may need to move inmates around a facility and the like, so a prison contract may specify a “100 percent” level as being 1,000 beds—let’s call this the contracted capacity—even though the design capacity for the facility may be actually be something higher, say 1,200 beds. Hence, a 100 percent occupancy rate does not imply that 100 percent of the possible beds a prison can hold will be filled; it all depends on how many beds within that facility the government client is seeking to secure, which is typically significantly less than 100 percent of design capacity.

Thus, the percentage specified for the occupancy rate has everything to do with the total amount of beds a government seeks in a contract and little to do with the actual number of beds a prison may be designed to hold. Again, this distinction between contracted capacity and design capacity relates to the need to have some future flexibility to move inmates around within a given prison facility in the event of future construction or repair projects or other currently unforeseen situations. Because the report failed to discuss this key factor, nor include data on contracted capacity and design capacity for individual contracts in its report (see pages 15 and 16), readers have no way to judge what a given occupancy rate is truly referring to in terms of contract vs. capacity—only that a contractual provision exists.

Third, while it’s theoretically possible that a government client may opt to send a lower number of inmates to a facility than expected and come in under its occupancy rate guarantee, in practice it is rare that they would want to see a private prison facility operated at a level below the agreed-upon occupancy rate. In typical contracts that include occupancy rate provisions, the private companies offer one per diem rate up to the occupancy level—say 80 or 90 percent—but then they can offer a much-reduced per diem rate for every inmate over the occupancy threshold because beyond that point the marginal costs of each new inmate (once the facility is fully staffed and is covering utility, healthcare, food and other costs) is substantially lower, sometimes on the order of over 50 percent on a per-diem basis. Because those costs are typically so much lower than the costs of housing an inmate in a government-run prison, it makes financial sense for the public agency to take advantage of the lower pricing in the private facility.

The last point to make revolves around the report’s assertion that “[occupancy rate] guarantee clauses can also tie the hands of lawmakers” when it comes to pursuing sensible criminal justice reforms. While I agree with the sentiment that reforming the criminal justice system and reducing the size of the nation’s prison population is a worthy pursuit, I disagree that occupancy rate provisions in private prison contracts put policymakers and correctional agencies in a bind. First, the private sector houses less than 10 percent of the state and federal prison population today, so the vast majority of the system is under the direct operation and control of government agencies and is thus amenable to handling changes resulting from future reforms that policymakers enact. Second, government agencies are entirely responsible for determining inmate classification levels and facility assignments, so they have full discretion over what inmates get sent where. Third, while some private prison contracts have occupancy rate provisions, they all give the government partner the ability to cancel the contract via termination provisions or to adjust the contractual arrangement in the event of budget shortfalls or a failure of legislatures to fully fund existing contracts in the appropriations process.

While In the Public Interest ultimately argues that occupancy rate provisions should be banned outright and never used by government agencies, I take a different view. Occupancy rate guarantees may or may not be appropriate or valuable depending on the context, so an outright ban seems heavy handed. But I also don’t think that government agencies should just accept them as a default feature of contracts either. Rather, during the procurement process, I believe that it would be sensible for correctional agencies to ask the private sector to give them options—e.g., what a given contract and related pricing would look like without occupancy rate provisions as well as with different levels of occupancy rate guarantees (e.g., 80 percent, 90 percent, etc.). Then they could evaluate all of the options side by side and make appropriate decisions based on a range of scenarios.

In the end, occupancy rate provisions in private prison contracts are not inherently good or bad—they’re a technical tool that may have value in certain situations. The attempt to demonize them without explaining the rationale behind them does a disservice to the agencies that have used them sensibly and to the ongoing public discourse on the role of the private sector in corrections.

Leonard Gilroy is director of government reform at Reason Foundation.


Leonard Gilroy is Director of Government Reform


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