State Strategies to Manage Budget Shortfalls

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Case Study: Privatization in Tennessee and Texas

In 1991, Tennessee enacted legislation allowing for the private operation of one of the state's medium security prisons. One objective of the legislation was to generate data that could be used to compare public and private operations of similar kinds of facilities. Renewal of the private contract could occur only if the contractor provided the same quality of services as the state at a lower cost or if the contractor provided services superior to those provided by the state at essentially the same cost. The law also required that an evaluation be conducted to assess the operations.

The evaluation, conducted by the Fiscal Review Committee, was released in 1995 and compared the cost and quality in similar correctional institutions (two run publicly and one run privately). The evaluation found that quality measures on key factors like health care, prisoner treatment and security were slightly higher in the privately run facility. However, the average daily operating costs in the private facility also were slightly higher--$33.78 per inmate per day in private facilities versus $33.18 per inmate per day in public facilities. This translated to an average annual cost of $12,330 per inmate in the private facility versus $12,111 in the public facilities, a difference of approximately 1.02 percent. Based on the evaluation, the state extended the contract for the private facility until February 1997. At that time, the state will consider issuing a new contract.

Because of the rapid growth in its prison population and the rising costs of incarceration, in 1987 Texas authorized the Texas Department of Corrections (now the Department of Criminal Justice) to contract with private vendors to finance, construct, operate, maintain or manage correctional facilities. Privatization was seen as a potential means of increasing the capacity to house prisoners at a level of quality equal to that provided by the state but at a lower cost.

The legislation authorizing private prisons contained several guidelines including limiting the number of prisoners in the facilities, restricting the contracts to minimum or medium security facilities and retaining accreditation from the American Correctional Association. To ensure that the state would save money on the private contracts, the law also required that private vendors provide their service at a cost savings of at least 10 percent under the state's cost. The Legislative Budget Board was directed to determine the cost figures to be used by the four prisons that were authorized to operate under private management.

The law also required that the Texas Sunset Advisory Commission analyze the cost and quality of private prison services compared with the cost and quality of any similar state service. This proved to be a difficult task because the Department of Criminal Justice did not (and still does not) operate correctional facilities comparable to those being operated privately. Nevertheless, the Sunset Advisory Commission released its analysis in March 1991 and found:

Through the end of FY 1990, the cost of operating the private prisons was more than 10 percent less than the cost if the state were to operate similar facilities;
The four private prisons contributed to state and local economies by each paying an estimated $400,000 in state and local sales taxes, franchise taxes and payments in lieu of property taxes;
The private facilities were in general compliance in many categories of operation but had problems in education and training programs; and
All four facilities received accreditation from the American Correctional Association.

Because of the overall successful experience of the first four privately run correctional facilities, Texas has increased its number of privately operated correctional facilities.

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Written December 1996, posted January 2003, reviewed December 2003
Email statebudget-info@ncsl.org for more information.
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