A good investor loves a great deal. In traditional finance, we want to minimize risk and maximize return. We love a dependable counterpart with a great credit rating. And finally, we try to maximize the tax efficiency of any investment transaction.
Last week, London-based financial services company Barclays went out to market with a deal it thought fit all these criteria. It had coordinated with the state of Alabama and the Public Finance Authority (PFA) of Wisconsin to launch a muni bond, typically considered to be a highly tax efficient structure. The bond has an A- credit rating, and was structured with a prepayment mechanism to reassure investors. The bond would provide a government service deemed high priority by the state. Investors should be salivating over such a deal.
Barclays took this offering to the market last week—the Alabama Political Reporter noted, “the deal originally sought $633 million in taxable private activity bonds, which are open to a limited number of institutional investors, and another $215 million in private placement bonds, open to individual investors and banks.” But as Jason Appleson of PT Asset Management commented, “they weren’t having much success,”— reflective of an overall trend of asset owners consciously moving away from supporting the infrastructure behind mass incarceration.
While every investor has their own evaluation process, it seems that the part of the equation that Barclays may have misjudged before going to market was the diversity of risk factors this bond represents: political, social, and reputational, for being connected to an industry rife with documented human rights abuses.
While traditional finance has often failed to look under the hood at what actual investment products are investing in — especially with vehicles like bond and index funds — the past decade has brought a radical shift of investors paying more attention to the environmental and social implications of where their money spends the night. Today, 1 in every 3 dollars under institutional management is under some sort of social screen, leading investment managers to ask deeper questions beyond just the financial return of products like munis.
This story exemplifies the importance of addressing the fuller social consequences of muni bonds—and the hot water financial players can get into otherwise.
Barclays breach: going back on its commitment to end private prison financing
Barclays’ role in this attempted financing deal felt particularly ironic, given that just two years earlier, in the summer of 2019, the bank publicly announced it would stop financing private prisons. This commitment came in the wake of mass grassroots activism and public pressure, including organizations like my own, urging big banks to end their role in financing the prisons participating in family separation. JPMorgan Chase
Barclays’ connection to the Alabama deal made it the first known bank to attempt to go back on its word. Yet, in a statement to Bloomberg, Barclays explained that they believed the commitment they made in 2019 not to finance private prison companies “remains in place,” rationalizing that they would not be directly financing CoreCivic, but rather that they would be the lead underwriters of the debt issued by PFA, on behalf of Government Real Estate Solutions of Alabama Holdings LLC… which just so happens to be 100%-owned by private prison company CoreCivic. Naturally, others quickly refuted this financial engineering.
“Barclays’ commitments to the public need to mean something, and its attempt to quietly finance a mega private prison project in Alabama was indefensible, and a betrayal of the public’s trust. At this point, Barclays should finally understand that the private prison industry is toxic to governments, financial institutions, and the public at large,” said Matt Nelson, Executive Director of Presente.org. “Side-by-side with our partners and with the leadership of grassroots organizations in Alabama, we made sure Barclays and Wisconsin’s Public Finance Authority pulled out of this deal. We’ll remain vigilant so deals like this never happen again and hold every single bank who committed to stop financing private prisons accountable,” continued Nelson.
How investors and activists responded to the deal
Investor opposition was wide and swift. On April 12th, 43 business leaders, investors (including my firm), and activists and joined forces in a letter urging “banks and investors to refuse to purchase securities that will be offered on April 15th whose purpose is to perpetuate mass incarceration.” Signers included AllianceBernstein, a manager with $700 billion in assets under management, from which a representative told Yahoo Finance that they would not participate in the offering as it contravened the company’s “modern slavery policy.”
Then, for the first time in its over thirty year history, the American Sustainable Business Council and its partner Social Venture Circle, which together represent over 250,000 businesses, refunded Barclay’s membership dues and sponsorship dollars in protest to the deal. “We abhor the hypocrisy represented here and renounce the continued investment in the broken, unjust system of incarceration of this country,” says MaryAnne Howland, the American Sustainable Business Council’s board chair.
Much of the strategy around drawing attention to this deal was led by Alabama activists like Communities Not Prisons and Alabama Students Against Prisons, who teamed up with national organizers like Presente.org, Worth Rises, Fight Toxic Prisons, Justice Capital and Candide Group (where I serve as Founding Partner, and have worked alongside my colleague Jasmine Rashid to better understand the private prison industry: as social investors we’ve been deeply engaged in the question of industries that profit from harm).
“This invasion of CoreCivic into our state has been facilitated unilaterally by the Governor and ADOC commissioner,” says Morgan Duckett, co-founder of Alabama Students Against Prisons. “They intentionally circumvented the legislature, and by proxy, the will of all Alabamians by removing our only mechanism to decide how our tax dollars are spent on a wildly unpopular plan. Now, we are suing to expose the fact that this gross overreach is in violation of State code 14-1-1.2. We believe the plan is illegal.”
The conclusion of this drama storm? As summed up eloquently by Bloomberg: “Barclays… probably should have seen this coming.”
The deal falls through
The offering was delayed, and the public portion of the sale was downsized by about $200 million, from an over $630 million taxable municipal bond offering to $436.2 million. Then came the announcement. “We have advised our client that we are no longer participating in the transaction,” Barclays announced on Monday, April 19th. “While our objective was to enable the State to improve its facilities, we recognize that this is a complex and important issue. In light of the feedback that we have heard, we will continue to review our policies.”
KeyBanc Capital Markets Inc., who had signed up as co-manager alongside Stifel, also announced the end of their participation, followed by the same news from the PFA. “During the Request for Proposal (RFP) process, Barclays as lead underwriter for this project approached PFA to serve as a conduit issuer on the project. Since then, business dynamics have changed and the lead underwriter that brought PFA into this project has chosen to leave this deal. As a result, PFA is no longer part of this transaction,” wrote Andy Phillips, von Briesen & Roper, s.c., General Counsel to the Public Finance Authority, via email on April 19th. Stifel has yet to state its position.
Despite this setback, the state of Alabama plans on moving forward with this project: but they’ll need to find some new partners to fill the gap that Barclays, KeyBanc, and the PFA have left.
“Prisons are not the answer, period.”
In light of a DOJ lawsuit underscoring Alabama’s harrowing incarceration problem, the state claimed that they turned to private prisons as a solution. In February, Governor Kay Ivey of Alabama stated that “leasing and operating new, modern correctional facilities without raising taxes or incurring debt is without question the most fiscally responsible decision for our state… We are improving public safety, providing better living and working conditions, and accommodating inmate rehabilitation all while protecting the immediate and long-term interests of the taxpayers.” By that same argument, CoreCivic responded strongly to Barclay’s announcement: “The reckless and irresponsible activists who claim to represent the interests of incarcerated people are in effect advocating for outdated facilities, less rehabilitation space and potentially dangerous conditions for correctional staff and inmates alike,” reads a statement from CoreCivic.
There are two fundamental fallacies with this thinking.
First, the safety records and cost efficiency of facilities run by private prisons have often found to be worse, not better, than public prisons. According to a recent study out of Pennsylvania, the Delaware County Jail Oversight Board determined that the county could actually save up to $7 million annually by de-privatizing. And President Biden’s executive order banning the DOJ’s use of private prisons explicitly noted, “privately operated criminal detention facilities consistently underperform Federal facilities with respect to correctional services, programs, and resources.”
Second, there is little to support the notion that high rates of incarceration actually keep communities safe. In the wake of yet another round of national protests critical of our criminal justice and policing system this month, citizens express consistent frustration that the profit motivations behind mass incarceration disproportionately target communities of color, and that funding more prisons takes dollars away from education, mental health services and drug treatment centers that could reduce the need for such prisons in the first place.
“This prison project was an outrageous misuse of funds,” observes Andrea James, Executive Director of the National Council for Incarcerated and Formerly Incarcerated Women and Girls. “The billions of dollars that Governor Ivey tried to channel to CoreCivic should be spent to support local communities, including investment in jobs, education, and healthcare. Elected officials on all levels need to understand people want resources for reimagining communities disrupted by decades of investment in prisons.”
“We welcome discussions with Barclays and other institutions on how they can align their investments with Decarceration to become a part of the solution — $630M would go a long way in Black, Brown, Indigenous and systems impacted communities most in need to build a healthy, thriving infrastructure that unlocks shared economic prosperity,” added Christina Hollenback, Founding Partner, Justice Capital and one of the investor organizers.
In the Alabama prison system alone, the organization Alabama Appleseed has identified “89 people who have died violent, preventable deaths from homicide, suicide, or drug overdose over the last six years while in the custody of the Alabama Department of Corrections.” And as referenced earlier, the Alabama’s Department of Corrections, who would lease the two prisons, is currently being sued by the U.S. Department of Justice for alleged violations of prisoners’ constitutional right not to suffer cruel and unusual punishment. For countless experts and advocates on the US criminal justice system, this is not a conversation about whether we should be building private or public prisons — but the need for a comprehensive thinking of community safety and resilience.
While activists celebrate the pause of this deal, the state of Alabama is expected to proceed in seeking to move the prison project forward, with Governor Ivey making a statement that she is still “fully committed.” That means another offering could reach the market, providing another opportunity for investors to determine which side of history they will be on.
People currently incarcerated in Alabama—the supposed “beneficiaries” of “better” prisons—have been watching this story closely, too. Bennu Hannibal Ra-Sun, a currently incarcerated activist in Alabama, emailed the following observations:
“When this process of exposing the conditions inside ADOC and the laws that were being used to perpetuate the system started for us in 2013, Alabama prisons were spiraling into a humanitarian crisis that hardly anyone knew about and even fewer cared about. Today, that landscape has changed. Organizers, activists and ordinary people around the State and across the country now know the true nature of imprisonment in Alabama. We are grateful to those who have joined this fight with us and we stand united with organizers, activists and others on the moral high ground who recognize that the changes needed to fix Alabama’s prison problem aren’t new prisons. We on the inside want to be very clear, we denounce plans by Governor Kay Ivey and the pariah company CoreCivic to build new human warehouses for profit in Alabama. As we all know from serving time in Alabama prisons, it is the lack of care and compassion for human life, and the motive for profit and human exploitation at the expense of, and in the name of taxpayers that is the cause for the human suffering. While today’s news is welcome, we must continue to organize for change in Alabama laws like the death penalty and HFOA, new leadership over the prisons, and fundamental change in conditions inside ADOC that affect human life.”
Beyond the details of this particular deal, it’s important to ask ourselves more broadly: how are investors complicit in funding companies who have a profit incentive to keep America’s dubious distinction as the country that incarcerates more people than any other on the planet? As Bianca Tylek, Executive Director of Worth Rises notes, “Unfortunately, the prison industry is much more than just private prisons. It includes food service operators like Aramark
So the next time you’re buying a muni bond fund or mutual fund…pay close attention to what’s in it.
Thanks to Jasmine Rashid for her contributions to this piece. Full disclosures related to my work available here. This post does not constitute investment, tax, or legal advice, and the author is not responsible for any actions taken based on the information provided herein. Certain information referenced in this article is provided via third-party sources and while such information is believed to be reliable, the author and Candide Group assume no responsibility for such information.
CoreCivic filed a lawsuit in March of 2020 against author Morgan Simon and her firm Candide Group, claiming that certain of her prior statements on Forbes.com regarding their involvement in family detention and lobbying activities are “defamatory.” While we won dismissal of the case in November of 2020, CoreCivic has appealed such that the lawsuit is still active.