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Cash-Strapped States Turning to Private Prisons

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Investors hoping to lock down gains with privately run correctional institutions.

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Crime doesn't pay, but it may not be a bad investment.

As state governments (California, anyone?) find their fiscal situations looking increasingly grim, they -- along with the federal government -- are turning to privately run correctional institutions, operated by companies like Corrections Corporation of America (CXW), Cornell Companies (CRN), and GEO Group (GEO).

"We think that is very favorable for the company and for the industry," Corrections Corp. CEO Damon Hininger told Bloomberg.

According to a recently released white paper from the Reason Foundation titled Public-Private Partnerships for Corrections in California: Bridging the Gap Between Crisis and Reform, "Nearly 130,000 inmates are now housed in private facilities. 14 states (Arizona, Colorado, Hawaii, Idaho, Kentucky, Mississippi, Montana, New Jersey, New Mexico, Oklahoma, Tennessee, Texas, Vermont, and Wyoming) had relocated at least 10 percent of their state prison populations to private-run facilities."

At current incarceration rates, that number "will grow more than 24,000 per year on average," a Corrections Corp. report points out.

"The cost savings [to the taxpayer] are huge," Leonard Gilroy, director of Government Reform at the Reason Foundation and lead author of the Reason study, tells Minyanville. "The state of Texas has been collecting data on the costs of public versus private incarceration for the past 20 years and has found that, on average, it costs 14% less per year to operate a private prison."

Gilroy says that institutional investors are becoming more and more interested in private corrections as they look to complement their investment baskets beyond roads, bridges, and other infrastructure projects.

"In California, for example, you've got aging facilities run by the state that need to be replaced," Gilroy says. "Even if they went full-out, releasing all their non-violent offenders, they'll still need prisons. In fact, because of such severe overcrowding, California was instructed by the federal government to reduce its prison population by 40,000. The state has so far transferred 10,000 inmates to out-of-state prisons, including La Palma Correctional Center in southern Arizona, home to about 3,000 of them. Even if California was to fully comply and reduce the number of inmates by 40,000, it would still leave the state at 137% of capacity. But California didn't go into debt building La Palma, floating bonds to finance the facility that took those prisoners. CCA built it. And they're housing those inmates for 72 bucks a day, which includes their initial capital costs, labor costs, legal costs, and so forth, compared with the $133 a day it costs California to do the same thing."

It also takes California an average of seven years to build a new prison "through traditional public-sector procurement methods laden with onerous rules and cost mandates," the Reason report states. "By contrast, private corrections companies can deliver an equivalent facility in approximately one year."

Additionally, "privately operated correctional facilities employ state-of-the-art technology and design techniques -- such as sight lines and technology to allow inmates to be monitored with fewer correctional personnel -- as they compete to stay a step ahead of their competitors. Any given firm may be constructing multiple facilities each year, allowing for continuous improvement in facility design that tends to be unmatched in the public sector, whereas an individual agency may only be responsible for delivering one or two new correctional facilities each decade."

A common refrain among opponents of prison privatization is that privately run institutions are less safe than those that are publicly run, although statistics show that the rate of violence behind taxpayer-funded bars is quite a bit higher than the rate of violence behind privately owned ones.

The most recent data from the Bureau of Justice Statistics shows that privately operated facilities have a much lower rate of violent incidents (both alleged and substantiated) than state facilities. And Corrections Corporation's data show 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 of 0.73 per 1,000 inmates, compared with 2.51 for the public sector. Private correctional companies know they will not be awarded contracts if they can't prove they can maintain control of an institution, existing contracts also will not be renewed if a safe environment is not adhered to.

"This means…keeping [inmates] well-fed and occupied with work, education, or recreation," Gilroy writes. In fact, inmates at CCA facilities are given the opportunity to earn high school equivalency diplomas, are offered vocational training, and can become certified in Microsoft Office while incarcerated.

Still, violence inevitably occurs.

"The reality is that bad things happen in good prisons, both public and private," Gilroy says. "These are not utopias -- these are prisons. If all sorts of horrible things were going on though, these companies know that investors would steer clear. Which is another incentive for privately run prisons to stay as safe as possible."

"That said," Gilroy continues, "you don't just turn over a prison to a private company and walk away." At La Palma, two full-time employees from the California Department of Corrections and Rehabilitation, which ultimately is responsible for La Palma's inmates, work on-site, overseeing operations.

Conversely, in publicly run prisons, there's actually less accountability.

"We all know what happens when the public sector polices itself," Gilroy says. "Look at how well that worked out for Fannie Mae (FNM) and Freddie Mac (FRE)."

While California tries its hardest not to become the next Greece, Gilroy writes that "transferring an additional 25,000 low- to medium-security inmates to such facilities -- 5,000 per year for five years -- would result in an estimated savings of between $111 million and $120 million for the first year of the prisoner transfer plan, and between $1.7 billion and $1.8 billion in savings by the end of year five."

Once California -- and other states -- realize just how many of their precious dollars are being flushed away, private correctional companies stand to benefit.

"[California's] labor costs and the lack of incentives to reduce costs have created a prison system that is helping wreck the state budget," Gilroy says. "Our partial privatization plan isn't going to solve all of the problems, but it can put a big dent in them."

How big a dent?

One in 10 California correctional officers earn in excess of $100,000 a year.

And one in seven California state employees is a correctional officer.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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