How Local Governments Got Burned by Private Prison Investments

James Parkey spent more than a decade crisscrossing the U.S. selling poor counties on a way to get rich quick. He’d help local governments issue tax-free bonds to build private prisons that would rent beds to the federal government, mainly to hold undocumented immigrants. Parkey’s model for financing lockups, which he promoted with help from a team of bond dealers, consultants, and lawyers, led to a boom in prison construction. While the jails succeeded in many places, almost two dozen defaults followed in cities and counties from Florida to Montana as the prisons struggled to fill beds amid the sudden glut. Then the IRS got involved.

As of July, eight detention center deals were being investigated over their tax-exempt financing, according to an IRS document. Several other counties in Texas and Arizona have settled with the government, paying as much as $1.9 million and refinancing their prisons with taxable debt, including at least three developed by Parkey and his network. In most cases the deals were “basically snake oil,” says Bob Libal, executive director of Grassroots Leadership, a nonprofit in Austin opposed to private prisons.