Are fewer inmates good news? Not if you invest in private prisons

By David B. Le

The decline in prison populations is good news unless you happen to be an investor who’s put money into prison bonds. 

The 3.8 trillion municipal-securities niche market has investors demanding higher payouts for their risk as prison bonds have been downgraded due to the prison population reduction and private prisons closure, Bloomberg News reported.

Responding to investors’ demands, the Reeves County detention center in Pecos, Texas has raised its bond payout as high as 6.4 percent from 4.6 percent, according to Bloomberg.

Mississippi closed its privately run Walnut Grove prison due to budget constraints and an annual population drop of 10.5 percent from 2011 to 2016.

The facility run by the GEO Group had a history of staff misconduct and poor living conditions for its inmates, which a federal judge described as “a picture of such horror as should be unrealized anywhere in the civilized world,” Bloomberg reported.

Despite the closure, Mississippi still owes $121 million of debt obligation to bond holders.

In August, the Department of Justice announced that it will cancel or limit its contracts with private prisons. In addition, the Department of Homeland Security said it would consider doing the same, Bloomberg reported.

If Homeland Security chooses to close its privately run detention center in Florence, Ariz., 31,000 residents could take a serious employment hit, the town spokesman said. Other small towns could be similarly affected by such closures.

However, some analysts are not sure the prison decline will continue. “The low-hanging fruit of criminal-justice reform is already done,” said Daniel Hanson, an analyst for Height Securities, which tracks the municipal-bonds market.

Hanson thinks that prison populations may not continue to decrease once nonviolent offenders are weeded out because both the state and federal prisons’ populations are still over capacity.

Based on the U.S. Bureau of Justice Statistics, state and federal prison populations peaked at 1.62 million in 2009 and by 2014 that number had been reduced by 54,000, or three percent.

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