If a state were to liberalize its drug laws where will it come up with needed inmates?

State and local government finances have been sorely tested by the worst recession since the Great Depression.  The recession’s effect on tax revenue and expenses amplified longer-term structural problems, leading to mushrooming debt loads in many jurisdictions.

Tension and concern over the possibility of municipal bond defaults were at a peak about a year ago.  But over the past year, municipal bonds actually proved to be one of the best-performing asset classes in financial markets, as recession fears abated and as municipality taxing power and other resources gained greater respect.

State government financial reporting has its critics, with their concerns including rosy assumptions for future investment returns in accounting for unfunded future pension liabilities, and the use of ‘modified cash basis’ accounting methods that lead to understatements in the current expensing of growing retirement obligations.

What is good for the goose is good for the gander, and there are ways in which states and local governments have resources that aren’t reflected in their current accounting statements as well.  Here in Chicago, for example, cash-strapped City Hall recently announced a plan to install new traffic cameras rigidly enforcing speed limits near schools, a move anticipated to lead to significant new revenue.  This plan has been criticized, however, in part for having been sold as a way to improve the safety of children when its real motivations lie elsewhere.

This is just one example of the way the authoritative power of the state may be under-priced in the accounting methods used to report state and local government financial conditions.  More fundamentally, states have significant long-lived real estate assets carried at old historical costs. And many states are now considering asset sales as an option for raising cash in a difficult period.

One method currently under consideration certainly raises some eyebrows.   Last night, the evening Boiling Frogs news summary included a story by Noel Brinkerhoff and David Wallechinsky from AllGov.com about one of the largest private prison operating companies in the U.S., a firm called Corrections Corporation of America, and how it has been offering to purchase the prisons currently owned by state governments.  Their offers have reportedly been structured as part of long-term contracts, with provisions calling for the states to guarantee 90% prison occupancy. 

Fixing your budget can come with a cost, it appears.  If a state were to liberalize its drug laws, for example, where will it come up with needed inmates?  And if it doesn’t come up with enough inmates, does it pay a bigger price when facing penalties owed to Corrections Corporation of America for not living up to its contract? 

Bill Bergman has 10 years of experience as a stock market analyst sandwiched around 13 years as an economist and financial markets policy analyst at the Federal Reserve Bank of Chicago. He earned an M.B.A. as well as an M.A. in Public Policy from the University of Chicago in 1990. Mr. Bergman is currently working with Social Movement Sciences LLC, a new enterprise developing evaluation and funding services for not-for-profit organizations.