California Governor Arnold Schwarzenegger has suggested the state could reduce prison spending by housing undocumented inmates in Mexican jails.
In comments made during a question and answer session, he seemed to suggest the prisons would be specially built.
Mr Schwarzenegger said the costs of building and running the prisons in Mexico would be half of California's.
The state has one of the most overcrowded and underfunded prison systems in the US.
Last year, after a riot broke out in one prison, authorities were ordered to develop a plan to free 40,000 of the 150,000 inmates being held within two years.
"I think we can do so much better in the prison system alone if we can go and take inmates - for instance, the 20,000 inmates that are illegal immigrants that are here - and get them to Mexico," Mr Schwarzenegger said.
"We pay them to build the prisons down in Mexico. And then we have those undocumented migrants down there in prison. It would half the costs to build the prison and run the prison," he said.
"We could save a billion dollars right there that could go into higher education."
He added that he believed allowing the private sector to become involved in running and managing prisons would also help cut costs.
Earlier this month, the California governor declared a fiscal emergency, announcing that severe cuts would be needed to stem a $19.9bn (£12.3bn) deficit.