The Real Cost of Prisons Weblog

Coming after years of opposition from California's prison guards' union, a breakthrough contract this fall to house up to 1,000 inmates by next spring reflects a shift in fortunes for Nashville-based CCA. Two years ago, the company's problem was finding clients to fill 8,000 empty beds. Now, the challenge is staying ahead of the curve to meet the growing need for prison beds.

"All the stars have kind of aligned at this point in terms of demand for beds is high and supply is low," said Jim Macdonald, a stock analyst at First Analysis Securities in Chicago.

CCA plans to complete work that will add 3,931 beds next year in its biggest expansion since overbuilding of prisons and problems with a real estate investment trust left the company on the brink of collapse in 1999.

It also plans to begin construction of an additional 4,000 to 6,000 beds to meet future demand as more states shun building their own prisons, turning instead to private operators to keep corrections department costs under control.

"It's just politically not palatable to spend money on prisons when it could be spent on schools," said analyst Anton Hie at Jefferies & Co. in Nashville.

The California opportunity has materialized as overcrowding and other problems have worsened for that state's prison system.

Gov. Arnold Schwarzenegger issued an emergency declaration last month, allowing the immediate transfer of inmates out of state without competitive bidding. Initially, CCA and two other private prison operators are expected to receive 2,260 inmates while California officials grapple with what else they might do to ease prison overcrowding. The state's prisons hold about double the number of inmates for which they were built.

The decision to use out-of-state jailers faces a legal challenge by the prison guards' union, which has filed suit suggesting that the transfers violate state civil services rules. This week, a California judge denied the union's request for an immediate injunction but said the group had a good chance of winning at trial starting in February because the governor may have exceeded his emergency powers and violated the state's constitution.

State officials don't see it that way.

"We're confident that these contracts meet our constitutional requirements," said Bill Sessa, press secretary for California's Department of Corrections and Rehabilitation.

John D. Ferguson, chief executive officer with CCA, said the company knew the "logjam" in California's prison system would eventually break, and asked its customer relationship manager to renew contacts with the state about three years ago.

"We thought the opportunity for CCA was pretty good even before California made its decision," Ferguson said, pointing to the company's 19 other state clients and assorted federal agencies it serves.

Roughly 60 percent of CCA's business is with state and local government agencies. Federal agencies, including Immigration and Custom Enforcement, account for the other 40 percent. California will pay CCA $63 a day per inmate, much lower than the roughly $90 it currently costs the state to house prisoners.

Most of CCA's roughly 4,100 empty beds are under contract with existing customers. Construction by the company includes the 1,896-bed Saguaro Correctional Center in Eloy, Ariz. CCA, meanwhile, has submitted or plans to submit bids on deals such as Arizona's request for proposals for roughly 5,000 beds and the U.S. Marshals Service's request for 1,500 beds at Laredo, Texas.

"It's a seller's market right now for private prisons and they (private prison operators) are able to get better pricing out of existing customers," said Hie, the Jefferies & Co. analyst. "And to the extent that customers may not be willing to accept the price increases, you could see customers getting fired."

Hie cited a recent instance in which CCA's rival Cornell Cos. Inc. of Houston told Oklahoma that it wouldn't renew a contract under which it houses inmates in Hinton, Okla., after that state wasn't willing to give "cost-of-living" increases sought by the prison operator.

Most of the 4,000 to 6,000 additional beds CCA plans to start work on for 2008 and beyond will be brand new buildings, not expansions of existing prisons that account for most of the immediate growth, Ferguson said. The company expects to fund projects with cash on hand and can borrow without piling on too much debt relative to earnings, he added.

"This management team is disciplined enough and will measure it so it doesn't harm the company in any way," Ferguson said.

This isn't Corrections Corporation of America's first try to do big business with California.

In the late '90s, CCA was so optimistic about prospects there that it reassigned then company President David Myers to the newly created role of president of the West Coast region and based him in California.

CCA built two prisons in California with a combined 3,300 beds. It built the beds without contracts to fill them. In retrospect, Myers said, the company underestimated the influence of the powerful California Correctional Peace Officers Association, which fought using private operators in a bid to protect their job security.

"I made a decision after being out there a year or so that we were not going to get state business," said Myers, who today remains a resident of California but is no longer involved with CCA or prisons. "The atmosphere at the time wasn't right."

Now, Macdonald, the Wall Street analyst, said the company faces a balancing act as it plays catch up with soaring demand.

"You don't want to have too many beds," he said, "because if something softens, you don't want to be left with a bunch of beds again."
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