DALLAS – The federal government's decision to phase out the use of private prisons has a small immediate effect on the municipal bond-financed private lockup sector.
But Thursday's announcement could hint at trouble for the private prison industry.
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The new policy affects only 13 facilities holding less than 15% of the 195,000 inmates in the charge of the BOP.
And it will take effect slowly – according to Yates' memo, it will allow the Bureau of Prisons to stop using "three or more" private prisons over the next year, with as many as 14,200 inmates remaining in such private lockups in May 2017.
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Corrections Corporation of America runs four of the prisons, and the Management and Training Corp. owns two.
The memo does not affect the immigration detainees who fill most of the bond-financed private detention facilities in Texas and other border states, industry officials say.
Those inmates are housed under contract with the Department of Homeland Security and the Immigration and Customs Enforcement agency.
Many of the operators of such DHS and ICE detention centers lease facilities financed by local public facilities corporations, created by city or county governments, that issue revenue bonds backed by lease payments or per diems from the federal government.
Homeland Security detains about 400,000 immigrants per year – twice as many inmates as are held by the BOP – in 250 facilities across the U.S., according to a study by the Center for American Progress.
The immigration detention system has grown from fewer than 7,500 beds in 1995 to the 34,000 beds mandated by federal law today.
Corrections Corporation of America, the largest operator of private prisons, does not use the bond financing that typically supports private immigration detention centers. CCA, which is classified as a real estate investment trust, actually owns the facilities it operates.
CCA said in a statement that Bureau of Prisons correctional facilities the Yates memo impacts account for only 7% of its business.
Shares of CCA and Geo Group fell sharply after Yates's memo was released Thursday.
The Bureau had already announced that it would not renew its contract with CCA to operate one of its 13 private facilities, the 1,200-bed Cibola County Correctional Center in Milan, N.M., which will close Oct. 1, costing 300 jobs.
In 2015, the Bureau of Prisons cancelled its contract with the Willacy County Correctional Center in south Texas after inmates set fires and damaged property beyond the contractor's ability to continue services required by the federal monitor. Bonds used to build that facility went into default after the cancellation.
The Emerald Corp. that operates immigration detention centers and inmate facilities for state and local governments is not affected by Yates's memo, according to chief executive Steve Afeman.
"It only affects Bureau of Prison inmates," Afeman said. "Facilities that contract with the U.S. Marshal's Service, ICE and counties aren't affected."
Emerald is the operator of one of the nation's newest immigration detention facilities in Alvarado, Texas, south of Fort Worth.
"It's not even open yet, but it's 99% complete," said Alvarado City Manager Clint Davis.
The 700-bed facility, which has a five-year contract with Homeland Security, was built with $63.4 million of taxable bonds priced through Aegis Capital and Municipal Capital Markets Group.
"Our taxpayers have no obligation," said Davis, who added that even if the facility lost its federal contract, it could be converted to a state jail.
"We tried to end up with a facility as versatile as it could be," Davis said. "If Homeland Security did not renew, we would be looking at other options."
In LaSalle County, Texas, on the Mexican border, County Judge Joel Rodriguez said he was studying Yates's memo to see what it means for a former private prison now operated by the county. The county is in negotiation with bondholders on a price for the facility in Encinal whose bonds went into default last year.
"In looking at the AG's memo, I think we're in some type of purgatory," Rodriguez said. "Emerald pulled out and left it in pretty bad shape."
While the county is running the detention center, it still houses only federal immigration detainees, Rodriguez said. Under that set-up, the county has managed to keep the facility operating in the black, he added.
If Homeland Security followed the BOP lead and halted use of private detention centers, counties like LaSalle that took over abandoned facilities might benefit because they are now government-operated, Rodriguez said.
"We may be ahead of the curve," he said.
Rodriguez, who as county treasurer opposed the financing plan for the Encinal Detention Center, said, "I still have heartburn over it. It's been a lot of work. We still have to address repairs. The amount of work has been tremendous."
The bonds used to build the lockup in Encinal are among those that lost their tax-exempt status in a series of rulings by the Internal Revenue Service.
S&P Global Ratings is already reviewing eight federal detention credits with negative implications in Arizona, Oklahoma and Texas. S&P cited misapplication of rating criteria on the eight credits, which ranged from CCC-plus to BBB.
The previous criteria "do not adequately capture the risk of change in federal policy or event risk, such as riots, facility damage, or health hazards, that can arise at federal prison facilities and how those risks correlate to the willingness of the federal government to appropriate for the bonds and/or the prison facility operator to continue to perform under its contract," analysts wrote.
Rodriguez said he wonders if the private prison issue will become a factor in the presidential race and whether the Republican-controlled Congress will oppose Yates's memo. Former Democratic contender Bernie Sanders made opposition to private prisons one of his top campaign issues, and Hillary Clinton has picked up the baton.
After reports in The Intercept that the Clinton campaign had received campaign donations from private prison lobbyists, private prison opponents confronted Clinton, leading her to announce that she would no longer accept the money and later stating that "we should end private prisons and private detention centers."
CCA chief executive Damon Hinninger said that whoever wins the presidency, his company will survive.
President Bill Clinton's signing of the controversial "three strikes" law in 1994 – mandating life sentences for criminals convicted of a violent felony after two prior convictions – led to a massive increase in incarceration.
Between 1980 and 2013, the federal prison population increased by almost 800%, exceeding the BOP's ability to keep up. The bureau began contracting with privately operated correctional institutions to confine some federal inmates.
But that tide has begun to turn.
By 2013, as both the federal prison population and the proportion of federal prisoners in private facilities reached their peak, the Bureau was housing approximately 15% of its population, or nearly 30,000 inmates, in privately operated prisons.
"Since then, for the first time in decades, the federal prison population has begun to decline, from nearly 220,000 inmates in 2013 to fewer than 195,000 inmates today," Yates said in her memo.
"Private prisons served an important role during a difficult period, but time has shown that they compare poorly to our own Bureau facilities," Yates wrote. "They simply do not provide the same level of correctional services, programs, and resources; they do not save substantially on costs; and as noted in a recent report by the Department's Office of Inspector General, they do not maintain the same level of safety and security."
All of the private prison operators disputed Yates's statement that their facilities were inferior to the federally operated prisons.
