What’s costlier than a government run prison? A private one

By D.M. Levine, contributor
August 18, 2010: 12:17 PM ET

FORTUNE — Early this month, three convicted murderers escaped from a prison in Kingman, a small town along Route 66 in northwest Arizona. According to reports, the inmates had broken free from the facility by using a pair of wire cutters. They’d escaped from a medium-security facility operated by Utah-based Management & Training Corp, a private corrections company.

The incident set off a political furor, not over the fact that the three violent criminals were being held in a medium-security prison, but over the security of the facility itself, and, ultimately, over Arizona’s widespread use of private correctional facilities.

Arizona’s attorney general, Terry Goddard, a Democrat running for governor against incumbent Republican Janice Brewer, took the opportunity to indict the state’s infatuation with privatization.

“I believe a big part of our problem is that the very violent inmates, like the three that escaped, ended up getting reclassified [as a lower risk] quickly and sent to private prisons that were just not up to the job,” Goddard told a local TV news station.

In recent years, the trend toward privatization, both among state governments and at the federal level has been part of an attempt to address serious budget troubles and crisis-level prison overcrowding by outsourcing more and more corrections operations to private companies.

The move has translated into big business for industry leaders like Corrections Corporation of America (CXW), The Geo Group (GEO) and Cornell Companies, Inc. (CRN) (just last week, The Geo Group and Cornell finalized a merger valued at $730 million).

According to research firm IBISWorld USA, private corrections is a $22.7 billion industry with an annual growth rate in the last half-decade of 4.7%. While growth slowed from 2009 to 2010, projections for the industry remain largely optimistic.

“The prison population continues to grow regardless of what the economic conditions are,” says George Van Horn, senior analyst at IBISWorld.

According to the Bureau of Justice Statistics, the number of federal inmates housed in private facilities jumped nearly 14% between 2000 and 2007, and nearly 6% between 2007 and 2008.

Even so, the federal government nor any other state has gone as far as Arizona has in the march toward prison privatization. Last fall, Governor Brewer signed a law calling for the privatization of all the state’s prisons, should a private contractor offer an upfront bid of $100 million. This March, the law was repealed because no private company made a bid.

A prison too far?

But with the recent escapes, officials in Arizona and elsewhere have started to question the use of private correctional facilities. When Arizona’s privatization bill passed, the state’s director of corrections, Charles L. Ryan, took the unusual step of writing a letter to Governor Brewer expressing concern.

“[The bill] seeks to attempt something never experienced in the nation: Privatizing a state’s entire prison system. This is bad public policy,” the letter read.

“This escape has put everything in stark relief,” says Goddard. “A private company has an acceptable level of loss. In the case of violent offenders, I don’t believe the public does or should tolerate any incidence of failure.”

At the heart of the widespread use of private correctional facilities in the U.S. is the industry’s promise of much lower costs to governments than public facilities are able to provide.

“States have had challenging situations where they have to look at operating costs. We provide savings of anywhere between 5 to 15% or more [versus a public correctional facility],” says Damon Hininger, chairman and CEO of Corrections Corporation of America (CCA), the industry’s leader.

Private facilities can offer these savings, in part because they don’t have to contend with the hefty employee pension and wage obligations that government agencies do.

“Private corrections companies can pay a lower wage or pay fewer benefits, particularly no pensions,” says John Roman, senior researcher at The Urban Institute.

Arizona has proven to be a particularly sympathetic ground for private prisons, and a less than friendly place for public employees, as it grapples with significant budget woes.

“Public employees, unfortunately, are pricing themselves out of the market with outrageous benefits,” says John Kavanagh, a Republican state representative in Arizona who favors prison privatization. It was also recently revealed that two of the Arizona governor’s advisers have close lobbying ties to CCA.

Private companies like CCA also generally promise to build prisons in 18 to 24 months roughly half the time it takes to build a public prison, another appealing quality to governments dealing with swelling prison populations.

Private contractors can also cut costs by building facilities for one state’s prisoners in another, less expensive state. CCA operates the Saguaro Correctional Center in Eloy, Ariz., which exclusively houses inmates from Hawaii, because construction and labor costs are much cheaper in Arizona than Hawaii.

Law enforcement locked out of prison?

Arizona Attorney General Goddard says that his state Department of Corrections has nearly zero oversight over the prisons that house out-of-state inmates in his state.

“They don’t have to show proof of financial responsibility, they don’t have to comply with Arizona prison construction standards, they don’t have to report disruptions. . .and both the training and staffing is up to the private operator,” Goddard says. “There were a couple of private prisons that went on lockdown and refused to allow the Department of Corrections to come in.”

Despite claims from companies like CCA, the jury seems to be out on whether private prisons end up saving governments money. An audit by the accounting firm MAXIMUS conducted for Arizona compared the cost of public and private corrections facilities in 2007 and found that, on average, private facilities ended up saving the state $5.49 per inmate per day.

But more recently, an internal Arizona Department of Corrections report released in February 2010, found that, in 2009, those savings narrowed to around $2.75 per inmate per day, and in certain instances, private facilities were found to cost even more per day than public ones.

“There’s nothing definitive saying publics are better or privates are better. There’s a lot of propaganda,” says Michel Jacobson, director of the Vera Institute of Justice, a non-partisan research organization.

The Urban Institute’s John Roman argues that at times private prisons also lack the incentive to help prepare inmates to return to society, leading to a higher rate of recidivism (inmates returning to prison) and a higher overall cost to the prison system.

Whether the prison provides rehabilitation services depends on the company’s government contract, which is largely dictated by politics.

“We will offer whatever the public customer wants us to offer,” says Hyman of Cornell Companies Inc., the third largest private corrections company in the country, which on Thursday finalized a merger with the second largest, the GEO Group.

But even Hininger, CCA’s CEO, admits that many states are asking for a reduction in prisoner rehabilitation services. “That does have a negative impact on potential recidivism,” says Hininger.

The private corrections industry has managed to weather the economic storm better than many other industries, and it’s gearing up for what it sees as a lucrative future. The unavoidable reality is that the U.S. prison population continues to grow, leading more governments to look at creative ways to solve both its economic and prison system’s challenges.

While most states may not have gone as far as Arizona, governments are starting to look more favorably at outsourcing their prisons. And CEOs like Hyman sound a little like hoteliers during the economic boom: “I cannot think of an industry that has such strong medium-to-long term growth potential behind it, driven by a need for beds.

Useful Tips Section

Guv’s task force recommends overhauling pensions, prison programs

To save money, Governor Herbert wants to eliminate your pension and privatize the prisons. This article from the Salt Lake Tribune came out just shortly after the endorsement from UPEA. After reading the article – be sure to comment on why would UPEA endorse a governor who wants to cut benefits, get rid of pensions and eliminate jobs?
By robert gehrke
The Salt Lake Tribune
Updated Aug 19, 2010 11:52PM

The commission was led by former Gov. Norm Bangerter. Former Salt Lake Olympics chief executive officer Fraser Bullock, former House Speaker Nolan Karras, and Charlie Johnson, the former chief of staff to Gov. Mike Leavitt, were vice-chairmen.

Bangerter said state government is already lean, but the commission was able to dig into weeds and find some areas of potential savings.

“I think we need to recognize that [the state has] done a good job and there has been in the last two or three years of this budget process a great deal of money cut out of the budget,” he said.

The commission called for “appropriate” privatization in the state prison system and a better use of county jails, as well as more treatment for inmates aimed at reducing recidivism.

“Certainly it’s something we ought to continually be looking at ,” said Tom Patterson, director of the Department of Corrections. “Juggling that with public safety issues. We have been looking at that and we will continue to look at that as one of the viable alternatives for our state.”

Investing in early-childhood education would yield long-term savings, the commission said, and making sure students can get college credit for Advanced Placement and concurrent enrollment courses could reduce waste. Expanded use of online courses and textbooks could reduce the need for new buildings, buses and administration buildings.

“We think this is a big change in education that will happen in the next couple of years,” said the commission’s Johnson.

Herbert said that one of his favorite recommendations was the proposal to balance state employee salaries and benefits to reflect private sector realities.

Currently, state employees are paid 17 percent less than their private-sector counterparts, but their benefits are 20 percent greater. Shifting that balance toward competitive salaries and away from benefits would enable the state to hire and retain top employees, the commission said.

Sen. Dan Liljenquist, R-Bountiful, who was on the commission, sponsored legislation that would move state employees away from a defined-benefit pension system to a defined-contribution system, like a 401(k).

The commission said millions could be saved each year if the balance between supervisors and staff were changed. Currently, each supervisor manages just under 7 employees; raising the ratio to one manager for 10 employees would mean $35 million in savings and expanding it through public and higher education could save as much as $80 million.

Several of the suggestions involved additional use of technology for handling child support applications, and various computer systems.

Other recommendations included studying the privatization of state parks, closing some seasonal roads during the winter, finding alternatives to mail to notify residents that their car registration needs to be renewed, consolidating public safety dispatch offices and limiting sale prices at state liquor stores.

For most of the recommendations, the commission acknowledges more study would be needed to determine the feasibility and how to implement the change.

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