Corrections Corp of America on Buying Spree - State Prisons For Sale?

[Lucinda F. Boyd]

Corrections Corporation of America (CCA) reported better than expected earnings yesterday. CCA president and CEO, Damon Hininger, said in a conference call with analysts that earnings per share increased 10.8% for 2011, making, “11 consecutive years of EPS growth for CCA with the worst economic environment of our lifetime.” While I would not argue that these have been challenging economic times, I would argue that prison growth has been harmed by any economic downturn. It’s like saying “Foreclosure” sign manufacturers had record sales despite the worst economic environment of our lifetime.

What was more interesting in the call was when Hininger spoke about the recent purchase (January 2012) of a state prison in Ohio….”the first of its kind transaction,” he said. CCA purchased the Lake Erie Correctional Institution for $72.7 million as part of Governor John Kashich’s (Republican) prison privatization program. That’s a nice hit of cash for a state struggling to balance its budget (like every other state). According to a press release from the state, tax payers will realize an estimated $3 million in annual savings. So my question was, “Why not sell CCA all the prisons in the state?” So it made little sense when I read that the same state press release said that other prisons were also up for sale but, “state officials decided it was not in the taxpayers’ best interest to sell additional prisons now.” Maybe the cost savings that are projected need to align with reality, and that will take some years to prove.

CCA is not stopping at Ohio though. Chris Kirkham over at the Huffington Post, did a bit of research on CCA’s purchase of the Ohio prison and found that CCA’s Chief Corrections Officer Harvey Lappin, former Director of the Bureau of Prisons who joined CCA less than a year ago, is making similar offers to buy prisons in other states. CCA offers to buy the state’s prison with cash up front in exchange for a 20-year management contract plus an assurance that the prison will remain 90% full over that period. In Ohio’s case, that meant that for the big chunk of cash up front, it would guarantee payments to CCA for 20 years for inmate per diem, occupancy fee ($3 million/year) and a guarantee that the minimum inmate population would be no less than 90% of capacity.

Other states have questioned the savings. Louisiana recently voted down a measure to sell 3 state prisons that would have put $86 million in the state’s coffers. Once the bill was defeated, the Louisiana Department of Corrections was ordered by governor Bobby Jindal (Republican), a supporter of privatization, to start preparing layoff plans for prison workers because of pending budget cuts. They play tough in Louisiana and I suspect that the issue will come up again.

Selling the facility has its downfalls. Once a state has sold its facility, it leaves little opportunity to contract with another prison management company in the event of a dispute or to save money. CCA, in the case of buying a prison, could be in the driver’s seat to dictate prison policy to the state. And what happens when an inmate escapes? Well the state will be the one going on the hunt for the escapee, not the private prison. So the taxpayer is still on the hook.
Florida is also a state looking for taxpayer savings through prison privatization, though they have no plans to sell any of their facilities to private companies like CCA, but instead will let them just manage them. Florida legislators are battling on whether to privatize thirty (30) Florida state prisons. The disagreement is over how much money, if any, prison privatization saves. If Florida decides to go private, CCA stands to benefit. CCA already runs a four prisons in Florida.

Workers at the state prisons are worried that they will be replaced with lower paid employees brought in by private companies running the prison, so their voices tout that there is no real cost savings to the state. Companies like CCA say that the savings has already been documented. Hininger is the last analyst call said, “…critics of the company [CCA] and the industry will continue to discount the cost savings with irrational and incorrect claims.” Confident, but it sounds a little like a scene from the Wizard of Oz. I would think some caution is warranted based on the old adage that if something sounds too good to be true, it probably is. There could be savings, but there are studies out there that provide projections that support their own position (pro or con).

I know one way to reduce prison costs; reduce the number of people incarcerated….but that’s way too easy of a solution and something I do not see happening for a while. If you have the stomach for it, perhaps CCA is the stock for you…it looks like a growth industry.
http://www.forbes.com/sites/walterpavlo/2012/02/14/corrections-corp...