. ‘INDEPENDENCE ISSUE PAPER Independence Institute * 14142 Denver West Parkway #101 * Golden, CO 80401 « (303) 279-6536 No,—15-88 July 29, 1988 THE MONOPOLY ECONOMICS OF JUVENILE CUSTODY Could Private Competition Keep Costs Down? By Rex Reed and David W. Holm Colorado's legislature and gov- ernor disagree about a one-year experiment to contract out a twelfth of the juvenile custody caseload to a private conpany in Brush. The plan, which would cut almost 7% off a bed/day cost that has risen at nearly 138 a year since 198, is up for veto override in early Au- gust. Policy analysts Reed and Holm provide background for the controversy by asking whether the 76% cumulative jump in ju- venile custody costs (four times the inflation rate during this period) doesn't indicate monopolistic behavior by state government. Would a dose of competition be the antidote taxpayers are looking for? As Colorado faces rising prison costs, one of the areas of potential privatization currently under debate is the whole range of correctional, deten- tion, and institutional services now directly administered by government agencies. But opponents of privatization often warn that a private conpany, if given a contract to provide such services, would be in a position to estab- lish a monopoly in a given area, allowing it to raise prices almost at will, gouging the taxpayer. This line of reasoning assumes that such monopo- listic cost increments do not occur in services ~ provided by government. The present study de- velops data which may refute that assumption. The Colorado Division of Youth Services (DYS) is charged with custodial care of juveniles in Colo- rado. It is funded by the legislature with appropriations out of the state's general fund. Over the last six years, the Division of Youth Services budget on a per-bed basis has increased a total of 76.5% while during the same approximate period the Consumer Price Index (CPI) has increased a total of only 17.9%. Why would Colorado's unit cost of keeping a teenager in custody have jumped four times as fast as the average cost of all other goods and services during the mid= 7980s? Could it have anything to do with the fact that during this period the Division of Youth Services has had no competition? Pages 4-9 provide a breakdown of the DYS budget and the average daily attendance for the period 1982-1988. The figures are derived from the final Colorado budget appropriations for each year and from the year-end report of the Division. Cap- ital construction costs to the division have been amortized for their life expec- tancy and applied to each actual budget and have been held constant so that new construction begun during the five-year period under consideration will not artificially distort the data, Had they been included, the disparity between the CPI and the DYS cost increases would have been even more dramatic. The graphs on page 10 show that the single greatest area of increase on a per-day per-bed basis is the operating funds, which include the majority of employee Salaries. Budget sources within the Division told us they believed that the Note: The Independence Issue Papers are published for educational purposes only, and the authors ‘speak for themselves. Nothing written here is to be construed as necessarily representing the views of the independence Institute or as an attempt to influence any election or legislative action.single largest cause for increases in the Division budget over the past six years was the salary increases mandated by the state's salary survey. The CPI data were calculated by using the United States Bureau of Labor Statistics All Urban, All Items Index for 1982 through 1987. The indexes and percentage increases obtained from them are presented in the following table: a bd c d e Li Actual Hypothetical Fiscal Calendar Government % Increase cPl Private Year Year Cost/Day /Bed Over Prior Increase Cost/Day/Bed 1982-83 1982 $77.73 -- -- $ 77.73 1983-84 1983 $ 91.97 18.3 3.2 $ 80.22 1984-85 1984 $104.97 14,1 4.3 $ 83.67 1985-86 1985 $113.65 8.3 3.6 $ 86.68 1986-87 1986 $132.01 16.1 1.9 $ 88.33 1987-88 1987 $137.11 9 3.7 $ 91.60 Cumulative Increase $ 59.38 76.5% 17.9% $ 13.87 (Note: Colum f, the hypothetical path of private cost increases, is calculated by applying the CPI figures to actual DYS costs in the base year. There is not a direct correlation between the Colunn c and Column f figures for a given year because the state fiscal year is July to June and the CPI is provided on a calen- dar year basis. But over the five-year span of the conparison, those differences become at most, only as significant as six months’ worth of data. With the gross differences in cost increases, any anomalies resulting from the offset time periods are minimal. Footings on Colunns d and e are expressed as percentages above base year, not as the sum of year-to-year increases.) The figures presented are raw data, with no direct causality support. In order to directly demonstrate the monopolistic affect on DYS per bed costs we would have to compare the costs with the costs of privatized youth services during the same period, since other legitimate factors might conceivably have been responsible for driving up all operators’ unit costs ~~ whether publicly or privately run -- faster than the inflation rate. Unfortunately, there has been no privatization of youth services custodial care in Colorado, and if there had been during this period, there would be no monopoly by the state. In order to validate the cause of the comparative differences, the DYS budget will have to be analyzed in contrast with other analogous private sector costs, such as the costs of provision of community correctional services, and private adult custodial care. Such a comparison is beyond the scope of thepresent study. But at the surface, there does appear to be a significantly higher rate of increase of service provision costs in this monopolistic govern- mental service than what was experienced in the rest of the economy. This pattern bears investigation, since it may be evidence of a chink in the assumed insulation of government service providers fron monopolistic practices. If that insulation were found to be imperfect or nonexistent, there would be one Jess obstacle to a public policy experiment with contracting out some of Colorado's correctional functions to private firms. ENDNOTE: When Gov. Roy Romer signed the Long Bill on June 23, he used his item veto to delete an appropriation for $1,056,000 that would have enabled DYS to lease 25 juvenile custody beds for the coming year at no more than $115.72 per day. This is 6.9% below the comparable 1987-88 figure, government-operated, of $124.23 -- calculated by netting off the daily administrative share of $12.88 (see page 10: divide total administrative budget by 302 caseload and 365 days) from the year's gross cost of $137.11. Romer, with 1 exception, OKs budget By Jey A. Roberts tion beds at a private prison near Meanwhile, the 25 juvenile of Poeerin coun eee Brush tenders wha Wau have bean ben A'GA4bilion sate spending plan "Instead, Romer wants lawmak- tp Brush wil be ‘abeorbed” it tor i0a60 eared Gov Roy Ro” era'to spond the LOL milion to te slate systems by doubling bern Bada iasy cp or lp ‘com fo ae in. wih ober youl ral Tet ilion em Tee Hoy dees meved “shea tnat al : Gmina aay pou neem vane emored need ha mln fe as ble, Romer signed the budget bill Front Range. The money, he sald, Said. “That was a clear call, and pied iy ivmakerat'mon Stal beta fo conta fried sine oy tom Pm veo Nelool an sppropaatin im the space wit one Division of Yeh Services that (estate g THE DENVER POST would have leased juvenile deten- June 24, 1988