Friday, March 09, 2012

Texas, other states should decline Corrections Corporation of America's offer to buy prisons

According to the Houston Chronicle's Patti Hart and other reports, the letter Corrections Corporation of America (CXW on the stock exchange) sent to 48 states last month offering to buy their old facilities included a perverse and unconscionable set of proposed conditions: CXW would only buy the prisons "if the selling state would guarantee to keep it filled [to] 90 percent capacity for 20 years."

With incarceration declining nationwide, I understand why CXW is seeking long-term stability. It's the same reason states should turn them down. It appears the incarceration bubble is bursting, with immigration detention the only near-term growth sector in private prisons' portfolio. Texas state prisons are full but incarceration rates are declining, with crime falling at an even steeper rate. Last year for the first time ever, Texas closed a prison unit instead of building or leasing more. In the past four years, the state has reduced the juvenile prison population by more than 2/3, including closing several facilities including a private one in Coke County.

At the county level, despite pockets of overcrowding (caused mostly by local elected officials' aberrant decision making), county jails statewide are terribly overbuilt, operating collectively at 68.4% capacity as of February 1, with 93,535 jail beds statewide and only 63,985 inmates to fill them. Imagine what a fix counties would be in if 5 years ago they'd sold their facilities to a private company and guaranteed them 90% capacity!

CXW and (even more so) its chief competitor the GEO Group are already overladen to the gills with debt, so the offer only makes sense if states agree to guarantee them a 90% occupancy rate two decades into the future, and any state pol who fell for that would be buying a pig in a poke. Conversely, if the company were to buy old prisons without such a guarantee, they'd be the suckers. State Senate Criminal Justice Committee Chairman John Whitmire has been quoted in press reports saying he disfavors the idea, and Grits hopes Texas officials as well as leaders in other states universally follow his lead.


R Shackelford said...

Scott, Correction Corporations of America stock (CXW) has risen 25% since January 1st. Someone is definitely listening to them.

Gritsforbreakfast said...

Yeah, but their strategy is to gin up short-term revenues with long-term debt when they're already overleveraged. (That's the only way they could purchase these new facilities.) That may make them the flavor of the month on Wall Street, but the fundamental trends driving the industry (mainly incarceration rates declining instead of rising) IMO aren't nearly as "favorable" for CXW long-term as one might have projected five years ago.

Also, part of the recent rally had to do with changes in Obama Administration immigration policies that had nothing to do with the fundamentals discussed here.

Anonymous said...

I'm still pulling my jaw off the floor after imagining that any state official in their right mind would agree to this.

If a state owns a prison and plans to keep it 90% full for the next 20 years, why in God's Name would would they sell it to a private prison company and lease it from them? If you own your house, would you sell it to somebody then rent it for 20 years?

How stupid would you have to be to think this is a good offer? Oops! I forgot who is governor. Bet Texas takes them up on it. :)

Anonymous said...

I am sure tricky Ricky will have a substantial amount of stock in this company if that happens. Oh and he won't let that sway his decision on the matter either.

Don said...

Agree with Anon 7:57. Why would anybody go for it? Who wouldn't buy a business if somebody guaranteed them a profit for 20 years? It's hard to figure out. Gotta be something more than is meeting the ol' eyeball here.