Abandoning Prison Privatization Will Cost Michigan Taxpayers

(The following is an edited version of the April 26, 2005 testimony provided by Jack McHugh, a legislative analyst for the Mackinac Center for Public Policy, to the Subcommittee on Corrections for the Michigan House Appropriations Committee. The subcommittee was holding an informational hearing in response to efforts by the administration of Gov. Jennifer Granholm to close Michigan’s only privatized prison.)

Good morning, Mr. Chairman and members of the committee. I am here not to express an opinion on the future of the Michigan Youth Correctional Facility, because we have not studied the details or circumstances surrounding the facility and any related budget moves. I am here to argue that, in general terms, by failing to adopt prison privatization, Michigan is walking away from huge potential savings and doing a real disservice to taxpayers.

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Michigan’s Department of Corrections will spend more than $1.7 billion from the state’s general fund this year, consuming more than 20 percent of the state’s general fund revenues — far more even in real terms than what the department spent barely a decade ago. The state’s prison population, now around 49,000 inmates, has risen by more than 40 percent since the early 1990s. The MDOC requires nearly 19,000 employees, and according to the state Senate Fiscal Agency, it costs approximately $28,000 each year to imprison an inmate in Michigan.

Two-thirds of the states, including Michigan, have privatized some part of their prison system, but we have barely stuck our toe in the water. Our state has never had more than 1 percent of its prisoners under private management, and that could drop to virtually zero if the Michigan Youth Correctional Facility in Baldwin closes. That’s too bad, because several decades of experience elsewhere demonstrates that states can save money by privatizing prisons, while experiencing no decline in quality.

An analysis of 28 studies of prison privatization by the Los Angeles-based Reason Public Policy Institute found that virtually all of the studies concluded that private prisons save money — typically between 5 and 15 percent — compared to government prisons.[1] A May 2002 article published by the Harvard Law Review referenced several recent studies documenting such savings:[2]

Researchers at Louisiana State University compared three Louisiana prisons, one public and two private. The researchers concluded that the prisons were "as comparable as reasonably possible in terms of history, capacity, design, types of inmates, number, gender and ethnicity of inmates." Privatization produced estimated cost savings of 12-14 percent. The quality comparison was a wash, with the private facilities faring better in some areas and worse in others.

An Arizona study performed in 2000 by the state Department of Corrections compared three private prisons with fifteen public ones. The study found average savings of 13.6% at the private prisons in 1998. The quality comparison gave the edge to neither group. …

Finally, a 2000 study of Florida prisons compared the private South Bay Correctional Facility, operated by Wackenhut Corrections Corporation, with the most comparable public facility, Okeechobee Correctional Institution. After adjusting for various differences, including capacity, the study found that the private prison’s costs were 3.5% lower than the state’s costs for fiscal year 1997–98 and 10.5% lower for 1998–99 meeting the 7% cost reduction mandate established by law. Additionally, construction costs were 24% lower for the private prison. As for quality, the study found that South Bay had fully operational programs within six months of opening (as opposed to three years for Okeechobee), had fewer health service deficiencies than Okeechobee, was able to house more inmates three months after opening than Okeechobee could house after seventeen months, and implemented an innovative approach to housing certain "close management inmates."

There is another important factor that these studies do not capture, and this is very relevant to the issue before the committee today. While there is ample evidence that individual private prisons have lower costs in "apples-to-apples" comparisons, their very existence in a state lowers costs throughout the entire system, as public and private facilities "sharpen their pencils" under the pressure of competition.

A 2003 study by the New Mexico-based Rio Grande Foundation compared states on the basis of how much of their prison population is in private facilities, and it found that as the number goes up, costs throughout the system fall. "The credible threat of contract termination … induce(s) both public and private prisons to carefully mind costs."[3]

The study carefully controlled for other factors and confirmed that privatization generates savings of around 14 percent per prisoner, or about $4,000, when 5 percent of the prison population is in private prisons. For Michigan, this would mean savings of some $192 million. When 20 percent of the inmates are in private prisons, the savings increase to around $8,000 per prisoner, or 27 percent. As the privatized population increases even further, the savings continues to rise, but the "marginal return" falls off, and the rate of cost decline decreases.

With almost 45 percent of its prisoners in private facilities, New Mexico spent $9,600 less per prisoner in 2001 than states with no prison privatization — a 32 percent savings over the median per-prisoner spending nationwide. Projected on a prison population the size of Michigan’s, this would mean savings of some $439 million in our $1.7 billion corrections budget.

One note of caution regarding these figures: The New Mexico study found that savings are higher in "right-to-work" states, where workers can be employed at a unionized company without joining the union or paying union dues. As the study explains, "In states with right to work laws, employers … enjoy greater freedom in staffing … (and) are likely to be less burdened by the cost of labor monopoly." Therefore the potential cost savings figures cited for Michigan would likely be reduced. This is yet another reason that Michigan should adopt its own right-to-work law, in addition to the huge shot in the arm such a move would give our failing economy.

Nevertheless, by closing its only private prison, Michigan is moving in exactly the wrong direction. Indeed, there is evidence that not only will we forgo the immediate savings that private prisons generate, but that we can also expect prison costs to rise faster than they would have otherwise because we have removed the incentive to improve. A study published by Vanderbilt University researchers in August 2003 showed that states using privately owned or privately run prisons saw their daily cost of housing prisoners grow almost 9 percent slower than states not using the privatization option — another "sharpened pencils" effect.[4]

One unexpected benefit to having privately owned and operated prisons is that they generate property taxes! For example, the Michigan Youth Correctional Facility reportedly pays more than $1 million in total property taxes each year to state and local government.

Another benefit is truth-in-spending. Most of the costs associated with the Michigan Youth Correctional Facility are part of a private-sector business contract and are therefore easily identifiable. For instance, money spent on legal expenses — attorney’s salaries, for instance — are factored into its overall cost structure, which can be examined easily, at any time. By contrast, the cost of salaries earned by lawyers at the Attorney General’s office doing work on cases involving the Michigan Department of Corrections are not charged to the department, thus making the true cost of providing state correctional services appear less than it actually is.

Likewise, the cost of the facility itself is "baked into" the private contractor’s per-prisoner cost. In contrast, under the per-prisoner cost accounting of the Department of Corrections, one would think our prisons fell from the sky like manna from heaven, because there is no recognition of the cost of prison construction.

One final note: Some opponents of private prisons contend that savings are due to private contractors cutting corners and delivering a lower quality of service. This does not appear to be the case. A review of 18 studies of prison quality in the Reason Public Policy Institute report found that 16 of them showed private prisons performing at least as well as government-run ones.[5] While only 10 percent of the country’s 48,000 government prison facilities are accredited by the American Corrections Association, 44 percent of privately run facilities are accredited.[6]

Governments around the globe have been hiring private companies to manage prison populations for decades now. Both companies and governments have acquired the expertise necessary to negotiate, write and supervise contracts for management. It is ironic that the state with the worst economy, the worst business tax, one of worst business climates and perhaps the worst "structural deficit" is moving in the opposite direction. Actually it’s more than ironic; it is tragic and perhaps emblematic of what is behind all those other "worst in the nation" statistics.



(After McHugh’s testimony, state Rep. Alma Wheeler Smith, D-Ypsilanti, asked whether the prison privatization studies I cited controlled for wage levels. In other words, she wondered, Aren’t the savings provided by privatized prisons due to their paying lower wages to employees than government-run prisons?)

Jack McHugh
Legislative Analyst
Mackinac Center for Public Policy

April 26, 2005

Rep. Alma Wheeler Smith
House Office Building
Lansing, MI

Dear Rep. Smith:

Following my prepared testimony in the House Appropriations Corrections Subcommittee today, you asked whether the prison privatization cost saving studies I cited controlled for the wage levels of employees in government-run and privately managed prisons.

Employee compensation in any particular geographic area is a function of the productivity of the workers (human capital) and the strength of the general economy in the area. The strength of the local economy is largely determined by the willingness of investors and entrepreneurs to do business in the area, meaning they believe it is possible to earn a worthwhile return on their money and effort. The level of taxation in an area is one of the "terms" in the equation on which that belief is based. The taxation level is in turn determined to a large extent by the compensation paid by government to its employees.

Government can only pay large numbers of government employees above-market wages by taking more in taxes from other workers, investors and entrepreneurs. This is ultimately self-defeating, since those workers, investors and entrepreneurs will eventually conclude that they cannot make a worthwhile return on their capital and/or efforts and labor.

Prisons and a criminal justice system are certainly one of the core functions that our founders would agree properly belongs to government. I think we can all agree that taxpayers are best served when the Department of Corrections performs this function as efficiently and at the lowest cost possible. As I explained in my testimony, a great deal of empirical evidence indicates that the competition resulting from the existence of private prisons in a state brings down costs throughout the system. In other words, unless Michigan has some privatized prisons, it is likely that taxpayers are being overcharged. This is both wrong and unsustainable.

Thank you for your courtesy during my testimony. Here are the citations and URLs for the studies I referred to in my testimony.[7]


Jack McHugh


Portions of McHugh’s testimony were taken or adapted from the following Mackinac Center articles:

Lawrence W. Reed, Michigan’s Prison Costs And What To Do About Them (Midland, Mich.: Mackinac Center for Public Policy, Jan. 9, 2003, http://www.mackinac.org/4959). This piece was originally published by MIRS.

Michael D. LaFaive, Prison Privatization: A Growing National Trend (Midland, Mich.: Mackinac Center for Public Policy, April 2004, http://www.mackinac.org/6504).


Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

[1] Geoffrey Segal and Adrian T. Moore, Weighing the Watchmen: Evaluating the Costs and Benefits of Outsourcing Correctional Services (Los Angeles: Reason Public Policy Institute, Policy Study No. 289, January 2002, http://www.rppi.org/prisoncost.html).

[2] Alexander Volokh, "A Tale of Two Systems: Cost, Quality, and Accountability in Private Prisons," Harvard Law Review 115:7 (2002).

[3] Matthew Mitchell, The Pros of Privately-Housed Cons: New Evidence on the Cost Savings of Private Prisons (Tijeras, NM: Rio Grande Foundation, March 2003, http://www.riograndefoundation.org/papers/prison_study_march18.pdf).

[4] James F. Blumstein and Mark A. Cohen, The Interrelationship between Public and Private Prisons: Does the Existence of Prisoners under Private Management Affect the Rate of Growth in Expenditures on Prisoners under Public Management? (San Francisco: Association of Private Correctional & Treatment Organizations, April 2003, http://www.apcto.org/logos/Study.pdf).

[5] Ibid., Segal and Moore.

[6] Ibid.

[7] Omitted from the Internet text, since they are provided in the endnotes above.