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Corrections Corporation shows crime pays with private jails.
from Bloomberg Business Week
(originally published May 11, 2010)By Daniel Taub
May 11 (Bloomberg) -- Erik Townsend says he prefers the Arizona prison where he’s serving 15 years for robbery to the California facility where he was until August. For one thing, he was getting just two hot meals a day at the other prison.
“We get three hots here,” Townsend, 40, said while taking a short break from sweeping the yard at La Palma Correctional Center in Eloy, Arizona, a desert town halfway between Phoenix and Tucson. “It’s all right. It’s decent.”
La Palma, which houses about 2,900 convicts from California, is one of 65 facilities operated by Corrections Corp. of America. As is the case at the company’s other facilities, all the workers at La Palma, from the guards and office staff to the warden, are employed not by a government agency but by Nashville, Tennessee-based Corrections Corp.
The company has grown to become the largest private-prison operator in the U.S. as states from California to Florida, along with the federal government, turn to corporate America to punish felons and hold detainees. Tightened budgets likely will lead to more contracts, company executives said.
“The fiscal situation on the state side is very dire,” said Damon Hininger, who began his career as a prison guard and has been chief executive officer of Corrections Corp. since October. States have fewer dollars for prison construction, meaning more incarceration has to be outsourced, he said.
“We think that is very favorable for the company and for the industry,” Hininger said.
Inherent Conflict
Conflicts are inherent in shifting one of the government’s gravest responsibilities -- punishing and rehabilitating criminals -- to private companies, which seek to both expand their business and reduce costs, said Mark A.R. Kleiman, a University of California, Los Angeles, professor and author of “When Brute Force Fails: How to Have Less Crime and Less Punishment” (Princeton University Press, 2009).
Corrections Corp. has been accused in lawsuits of allowing violence at its facilities and providing inadequate health care to prisoners, resulting at times in preventable deaths.
“It’s a question of how you delegate the really ferocious powers of the state to a private enterprise,” Kleiman said. “Lobbyists for CCA want to make sure they keep their prisons full.”
Hininger said Corrections Corp. wins contracts by running its prisons well and treating prisoners fairly. Analysts are mostly upbeat on the company’s future. Seven of nine analysts recommend investors buy the shares, and two have hold or neutral ratings, according to data compiled by Bloomberg.
The shares have climbed 11 percent annually in the past five years, more than the 1.8 percent rise in the Standard & Poor’s 500 Index. The stock rose 32 cents to $20.36 at 4 p.m. in New York Stock Exchange composite trading.
Budget Deficits
Moody’s Investors Service says the credit-rating outlook for Corrections Corp. and other private-prison companies is positive, though it cites risks. While state and federal government agencies “may need to turn more heavily to private bed space” as they halt construction of prisons, some contracts may be canceled as they “look at all options for mending budget deficits,” New York-based Moody’s said in a February report.
U.S. states are forecasting budget deficits of $136.1 billion through 2012, according to figures released in February by the National Association of State Budget Officers and the National Governors Association.
“It cuts both ways,” said Jane Cotroneo, a Moody’s analyst who follows prison operators and real estate investment trusts. Decisions by some states to eliminate mandatory minimum sentencing and release some prisoners early may hurt Corrections Corp., she said. “Even if they didn’t continue to grow, or leveled off for a while, they would do fine where they are.”
Recidivism Touted
In investor presentations, Corrections Corp. touts as benefits to the company demographic trends that in other contexts would be considered societal ills.
“At current incarceration rates, jail and prison populations would grow by about 121,000 between 2010 and 2015, or more than 24,000 per year on average,” Corrections Corp. said in a February presentation. Both “high recidivism” among felons and “inmate population growth following prior recessions” are highlighted as positives for the company in the 48-page report.
With about 2.3 million people in prisons and jails, the U.S. has the most convicts of any country, according to the International Centre for Prison Studies at King’s College London. The U.S. prison population rate of 756 per 100,000 people ranks higher than Russia’s (629 per 100,000) and Rwanda’s (604 per 100,000), and is also the highest in the world.
First-Quarter Earnings
Corrections Corp. on May 5 said first-quarter net income rose less than 1 percent to $34.9 million, or 30 cents a share, on higher revenue from a new contract with the Federal Bureau of Prisons and population increases at facilities managed for the U.S. Marshals. Results beat the 29-cent average estimate of eight analysts in a Bloomberg survey.
Net income at Corrections Corp. has risen in each of the past four years. For 2010, the company is forecasting per-share earnings of $1.16 to $1.26, down from $1.32 last year. Earnings are forecast to rise 7 percent in 2011, according to the Bloomberg survey of analysts.
This year’s earnings are being hurt by state budget cuts, resulting in the early release of some inmates to control prison populations, said Karin Demler, senior director of investor relations for Corrections Corp. Profit likely will grow again as state budgets recover, she said.
‘Exciting’ Opportunities
“Overcrowded prisons and projected inmate growth combined with constraints on new public-prison development create exciting growth opportunities for the private-prison industry,” Corrections Corp. said in its February presentation.
The prison operator’s growth potential may explain why William Ackman’s hedge fund has been buying Corrections Corp. shares. New York-based Pershing Square Capital Management LP, Corrections Corp.’s largest shareholder, added 3.58 million shares in the fourth quarter of last year, bringing its stake to 9.6 percent, according to filings with the U.S. Securities and Exchange Commission.
Ackman declined to comment on his investment.
Corrections Corp. is not the only private-prison operator in the U.S., and others are benefiting from government outsourcing. Earnings at Geo Group Inc., based in Boca Raton, Florida, gained 12 percent to $66 million last year. At Cornell Cos., based in Houston, net income rose 11 percent to $24.6 million.
Geo Group in April agreed to buy Cornell for $385 million in cash and stock, and to assume $300 million in Cornell debt.
‘Dominant Player’
Cotroneo of Moody’s calls Corrections Corp. the prison industry’s “dominant player.” The company, whose net income rose 2.7 percent to $155 million last year, controls about 45 percent of the private prison and jail beds in the U.S., and is the country’s fifth-largest correctional system, public or private.
While private prisons have gained acceptance by states across the U.S., opposition remains. The American Civil Liberties Union is one of the most vocal critics of both private prisons overall and Corrections Corp. in particular.
ACLU attorneys in 2007 filed a complaint that says immigrant detainees at the company’s San Diego Correctional Facility, managed for the federal government, were provided inadequate medical and mental health care resulting at times in avoidable death. That case is being mediated. In March, ACLU attorneys, working on behalf of six prisoners at the Idaho Correctional Center, said in an amended complaint that the San Diego prison has become so violent that it’s known as “Gladiator School.”
“We think there are certain structural problems that exist with private prisons,” said David Fathi, director of the ACLU National Prison Project in Washington.
‘No Consumer Choice’
The customers of private prisons are state and federal agencies, not convicts themselves. As a result, Fathi said, injuries or deaths at private prisons may not result in an immediate impact on the companies that run them.
“There’s no consumer choice,” Fathi said. “If they don’t like a particular prison, they can’t go down the road.”
Hininger, Corrections Corp.’s CEO, said that while prison operators are different from other companies, that doesn’t mean his firm can get away with treating those it imprisons poorly.
Corrections Corp. has to comply with accreditation standards put in place by the American Correctional Association, an Alexandria, Virginia-based trade group, and is always at risk of losing its contracts, Hininger said. Prisons and jails operated by government agencies face no similar risk.
“We are held to a higher standard,” Hininger said. Corrections Corp. says it has a three-year average escape rate of 0.41 per 10,000 inmates, compared with 5.51 for the public sector, and a mortality rate, for all types of deaths, of 0.73 per 1,000 inmates, compared with 2.51 for the public sector.
Contract Renewals
Corrections Corp., if it’s mistreating prisoners, not only won’t get its existing contracts renewed but won’t be able to attract business from additional states, Hininger said.
“We know they’re going to call the existing customers,” the CEO said. “That motivates and incentivizes us to operate at a high level.”
One way Corrections Corp. attracts customers is by developing and operating prisons for less money than government agencies do. The company says it can build facilities for $55,000 to $65,000 a bed, compared with $80,000 to $250,000 for government-owned facilities. Corrections Corp. is able to build a prison in one to three years, compared with three to seven years for a state or federal agency.
Lower Costs
The cost savings come from a variety of areas, Hininger said. National contracts allow the company to buy food and other supplies for less money; only 7 percent to 8 percent of the company’s workforce is unionized; and the company often gets tax breaks from cities seeking prisons and the jobs they bring.
Cities such as Eloy, Arizona, have embraced private prisons. Eloy has about 10,000 residents, and almost as many prisoners -- about 7,400 -- all housed at La Palma and Corrections Corp.’s other three prisons about five miles from downtown.
Corrections Corp., the largest private employer in Eloy’s county, Pinal, is an active member of the community, donating to food and toy drives and holding quarterly luncheons for city officials and community leaders, said Belinda Akes, executive director of Eloy’s chamber of commerce and a recently elected member of the city council.
“They want to be good citizens,” she said. More important, the prisons bring jobs to an area otherwise dominated by pecan and cotton farms. “It has been great for employment.”
Nurses, Teachers, Guards
Corrections Corp. employs about 2,700 people at the four Eloy prisons and the two other facilities the company operates in Pinal County, according to Brad Regens, the company’s vice president of state customer relations. Those employees include accountants, maintenance workers, nurses and teachers along with prison guards, the facilities’ largest job category.
“It’s not just people who want to go into public safety,” Regens said. “There are job opportunities across the board.”
The economic impact from Corrections Corp.’s six Arizona prisons, including $130 million in direct wages from jobs at the facilities, is more than $435 million annually, according to a January report prepared for the company by Elliott D. Pollack & Co., a Scottsdale, Arizona-based economic-consulting firm.
La Palma, open almost two years, is split into three medium-security sections, including one special-needs yard where prisoners are in protective custody -- gang ties may make them prey for other prisoners -- or they have medical problems. While La Palma’s 570 workers are employed by Corrections Corp., two full-time employees from the California Department of Corrections and Rehabilitation, which ultimately is responsible for La Palma’s inmates, work on site.
Plumbing, Microsoft Office
Prisoners are offered General Educational Development, or GED, classes, which give them the equivalent of a high-school diploma, as well as training in horticulture, carpentry, plumbing and computer use, including Microsoft Office certification. Aside from giving prisoners skills they can use once released, the classes keep them out of trouble, Warden James Schomig said.
“We can’t have idle time,” said Schomig, who worked for state correctional systems in Illinois, Nevada and Kentucky for 32 years before joining Corrections Corp. two years ago. “It keeps violence down by keeping inmates busy.”
White walls, linoleum floors, acoustic ceiling tiles and disinfectant-gel dispensers make La Palma’s front office appear part of a hospital. The electrified fences and razor wire -- three coils at the top of fences and three at the bottom -- that surround La Palma make it clear that the facility is a prison.
Utensils as Weapons
La Palma’s kitchen also looks like one found at a hospital or university cafeteria, if not for the fact that all spatulas, rolling pins and other utensils have to be individually accounted for before any of the kitchen workers -- some of whom are prisoners -- are allowed to leave. The implements could be used as weapons, said Joel V. Young, the prison’s assistant warden.
Under rules set by California, prisoners working in the kitchen or doing other jobs around the facility earn 15 cents to 37 cents an hour -- money that can be used to buy radios or televisions for their cells, or pay restitution to their victims.
Clad in a blue uniform, Townsend, the prisoner serving 15 years for robbery, is earning his pay by sweeping the sidewalks between the kitchen and La Palma’s other buildings. Convicted in 2004 -- he’ll say only that he “took someone’s money” -- Townsend is on the waiting list to take La Palma’s electrician courses. He said he hopes to make himself employable once out of prison -- and avoid the recidivism that has helped make Corrections Corp. profitable.
“I’m going to take that to add to my profile,” Townsend said. “You can get a job anywhere being an electrician.”
--Editors: Rob Urban, Larry Edelman
To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net.
To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net
