SPEED READ:

Two dozen states hold more than $75 million in stock in private prison companies, according to the American Federation of Teachers.

The labor union is calling on pension funds to divest from private prisons. “Our high incarceration rate disproportionately affects people of color, and our schools and our members see the negative effects of that disproportion every day," says AFT President Randi Weingarten.

Divestment, though, is controversial. Critics say it’s too often politically motivated and not based on sound investment strategy.

Some of the nation’s largest public pensions top a list of two dozen funds invested in private prison operators, a new report from the American Federation of Teachers (AFT) has found.

The California Public Employees' Retirement System, the New York State Teachers' Retirement System and the Ohio Public Employees Retirement System lead the list of pensions holding shares in the two largest private prison companies, CoreCivic and GEO Group. In total, AFT President Randi Weingarten says 24 funds across 20 states hold more than $75 million in stock in the two prison companies.

These companies, AFT alleges, profit by paying workers less and providing lower quality services than public institutions. “The more incarceration you have, the more money these companies make,” Weingarten says. “Our high incarceration rate disproportionately affects people of color, and our schools and our members see the negative effects of that disproportion every day.”

Therefore, AFT argues, investing in private prisons poses not only moral risks, but also public relation and political risks that make their viability as a long-term investment questionable. AFT points to the hundreds of lawsuits filed against private prison operators over the years, including more than 140 alone against Correct Care Solutions. Another company, Corizon Health, has paid out millions of dollars in settlements, including a record $8.3 million settlement in 2015 for a detainee who died after not receiving a required intake assessment.

It’s a familiar argument: Environmental activists use it to urge divestment in coal, and anti-gun activists use it to urge divestment from gun manufacturers. Divestment, though, is controversial. Critics say it’s too often politically motivated and not based on sound investment strategy.

Responding to AFT’s report, the Institute for Pension Fund Integrity notes that all companies are vulnerable to lawsuits, the impact of new and changing state and federal laws, and the political environment in which they operate. “How the companies react to and perform against these challenges,” it said in a statement to Governing, “will be reflected in their market performance, which should be a primary consideration when evaluating investment options."

The federation has so far been successful at urging a few public pensions, including the New Jersey Pension Fund, the Chicago Teachers fund and the California State Teachers’ Retirement System, to dump their direct holdings in private prisons.

In response, private prison companies have called divestment efforts a “deliberate mischaracterization” of their role as a service provider. They “ignore the fact that our company plays absolutely no role in passing, setting or advocating for or against criminal justice or immigration laws and policies,” GEO Group spokesman Pablo E. Paez recently said. (A 2011 Justice Policy Institute report, however, found prison corporations do use lobbyists, campaign contributions and relationships with policymakers to further their own business agenda.)

The report, released Tuesday, is part of AFT’s “Ranking Asset Managers” series which singles out money managers that AFT believes act in the counter interests to public pensions.

Short of divestment, AFT urges pension funds to engage with CoreCivic and the GEO Group to demand that they adopt policies to ensure just and humane treatment of detainees and proper oversight. The federation also encourages funds invested in private equity companies that own for-profit prisons ask what steps those companies are taking to address any investment risks associated with the prisons.

In other public finance news this week:

Pre-K Investment (Slowly) Growing

States collectively put $256 million more into pre-Kindergarten programs last year, a 3.4 percent increase over the 2017 fiscal year, the Education Commission of the States reported this week. Still, that’s the smallest one-year increase since 2012, the year the commission began producing its pre-K report.

While there’s a growing body of research supporting the idea that pre-K schooling gives kids an educational head start, most programs are funded through appropriation. That, the commission warns, “means pre-K programs are often subject to discretionary budget decisions and economic cycles.” Meanwhile, four states -- Idaho, New Hampshire, South Dakota and Wyoming -- still don’t provide any state funding for pre-K.

Puerto Rico Making Progress in Bankruptcy

Puerto Rico won a judge’s approval to restructure $17 billion in sales tax-backed debt this week, a major step toward financial solvency more than three years after it began defaulting on its debt payments. It also marks the second such deal reached between the government and its creditors. In November, it won approval on about $4 billion in debt related to its Government Development Bank.

The U.S. territory first defaulted in August 2015, but it took nearly two years to win federal protection to restructure its debt. The island has about $120 billion in debt, including its retiree liabilities. This week’s deal on its sales tax-backed bonds will cut out $17.5 billion in debt payments over nearly 40 years, saving the island an average of $456 million annually.

To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.