Otter Creek Correctional Center in Wheelwright will be shutting its doors at the end of June.
Officials say with capacity being added at other facilities in Kentucky, the state did not feel the need to continue using Otter Creek and did not renew its contract with the Corrections Corporation of America (CCA).
"The department did not have a need for the continuation of that contract beyond its current term," said CCA spokesperson Steve Owen.
More than 170 people from the Wheelwright area work there, but after June 30 they will no longer have jobs.
"A lot of them live within the city and a lot of them live in the community, you know. We're a tight knit community around here," said Wheelwright Mayor Andy Akers.
"We are preparing our employees for the fact that at the end of June we will not have a population in that facility, and so we want to work very closely to take care of them," said Owen.
He said if those employees are willing CCA will try to help them relocate to other facilities in the state and across the country.
Mayor Akers says the prison's closing could be devastating to the local businesses, and Wheelwright's economy could suffer.
"If you don't have jobs you can't spend money at them. Money keeps rolling over and over when you spend it," said Akers.
Otter Creek houses more than 650 inmates. All those inmates will be sent to other correctional facilities in Kentucky.
"I hate to see it closing, but if there's any way we can help we're trying," said Akers.
The mayor says the city is trying to come up with a plan of action, but right now all they can do is wait.
CCA says they are trying to market the facility to other potential government users.