Bloomberg News

Sequestration Seen Bullish for Prison Companies Amid Cuts

March 27, 2013

The IAH Secure Adult Detention Facility in Livingston, Texas

The facility had typically filled least 900 of its 1,054 beds, contributing more than $1 million a year to the county’s estimated $25 million budget, however in the past year the inmate population has dipped to about 400 as the U.S. government prepared for automatic budget cuts that began March 1, according to Polk County Judge John P. Thompson. Source: Polk County via Bloomberg

Polk County, 1,100 square miles of eastern Texas prairie with 45,000 residents, made a bet seven years ago that a detention center for undocumented immigrants would create jobs and keep taxes low.

For a time, it paid off, said John P. Thompson, the county’s judge and highest-ranking elected official. The Polk IAH Adult Detention Facility in Livingston, Texas, often filled most of its beds, paying for 5 percent of the county’s budget.

Federal budget cuts have helped drive the prison’s population down to less than half its capacity, Thompson said, and now that income is threatened by further government spending reductions.

“You hate to think about incarceration or detention being economic development, but it is economic development here,” Thompson said.

Economic losses for rural communities that rely on prison revenue may turn out to be a gain for companies such as Corrections Corp. of America and Geo Group Inc (GEO)., which are positioned to help federal officials drive down incarceration costs, said Tobey Sommer, an Atlanta-based analyst with SunTrust Robinson Humphrey Inc.

“If there was a scenario that could impact them, I think it might be helping the government to get cheaper rates by privatizing facilities,” Sommer said. He has “buy” recommendations on Nashville-based Corrections Corp. and Boca Raton, Florida’s Geo Group, which have outperformed their mid- sized peers over the past 12 months.

Lower Margins

Smaller vendors, which tend to manage facilities owned by other parties, are “probably more vulnerable” because the government can always shift to a new operator, Sommer said. “In managed facilities, there are five, ten, fifteen different competitors -- and more competitors usually means lower margins.” Privately held Community Education Centers Inc., based in West Caldwell, New Jersey, runs the Polk County prison.

Detention centers for undocumented immigrants such as the Polk facility were among the first to face the consequences of automatic U.S. budget cuts under a process known as sequestration. Immigration and Customs Enforcement released 2,228 detainees from Feb. 9 through March 1 “for solely budgetary reasons,” John Morton, the agency’s director, told Congress this month. The agency must cut $295 million through September, according to a White House document posted online.

Chris Greeder, a spokesman for the company that runs the Polk County detention center, declined to comment on the releases or the company’s future plans.

Investor Support

Investors appear to agree that Corrections Corp. (CXW) and GEO Group -- which together have captured $7.1 billion in U.S. contracts since 2000 -- may be better positioned to meet the demands of a more competitive landscape.

Shares of GEO Group, which manages or owns 100 facilities worldwide, jumped 121 percent and Corrections Corp. increased 46 percent over the past 12 months. The Standard & Poor’s index of 400 mid-sized businesses rose 14 percent in the same period.

Steve Owen, a Corrections Corp. spokesman, declined to comment on how sequestration may affect the company, which owned 49 facilities as of Dec. 31. Pablo Paez, a Geo Group spokesman, also declined to comment about the federal budget cuts, which may total $1.2 trillion over nine years.

Corrections Corp. and Geo Group typically run prisons for higher-security inmates and may not bear the financial brunt in the release of undocumented immigrants, said Kevin McVeigh, an analyst with Macquarie Capital USA Inc. in New York.

Contract Guarantees

Both companies set minimum occupancy guarantees in most of their federal contracts, which helps shield revenue, he said. Operating costs are as much as 50 percent less than state and federal expenses because Corrections Corp. and Geo Group don’t fund defined-benefit pension plans covering government workers, he said.

“The cost of personnel for private operators is much, much more economically attractive relative to the public sector,” McVeigh said in a phone interview.

Ernestine Fobbs, a spokeswoman for Immigration and Customs Enforcement, said in an e-mail that the daily cost to house an inmate is “generally higher” at government-owned facilities.

Bob Wasserman, an analyst with Dawson James Securities Inc. in Boca Raton, Florida, said while any cuts to trim prison populations probably will affect all contractors, the bigger vendors may see it as an opportunity to snap up rivals.

Ankle Bracelets

He cited Geo Group’s 2011 purchase of BI Inc., which specializes in ankle bracelets and other electronic monitoring technology. Almost 200 of the detainees released are being tracked via electronic monitoring, which costs about $1,709 a day for all participants, according to the immigration agency officials. GEO’s BI unit is the sole vendor providing the monitoring equipment and case management services.

“They’re letting people go, but not forgetting about them,” Wasserman said. “It’s cheaper, it’s more humane, that’s where the whole industry is going.”

Smaller operators that may bear the brunt of sequestration cuts may also become acquisition targets of the largest contractors, Wasserman said.

GEO Group bought Sarasota, Florida-based Correctional Services Corp. in 2005 and Houston-based Cornell Cos (CRN). in 2010.

It costs an average of $119 dollars a day to house an inmate in a detention center, compared to $17.69 a day or less for electronic monitoring systems, according to Fobbs, from the U.S. immigration agency.

‘Human Tragedy’

Some immigrant advocates said that taxpayer dollars should be directed to supporting monitoring methods, such as ankle bracelets, instead of funding profit-making detention centers.

“It’s a real tragedy, both a human tragedy and a fiscal tragedy, that the private prison industry has been profiting off a broken immigration system,” said Ali Noorani, the executive director of National Immigration Forum, a Washington-based immigrant advocacy group.

The U.S. released more undocumented immigrants in Texas than any other state, including 240 in the Houston area, Morton told the House Judiciary Committee on March 19.

Some of those were Polk County, about 60 miles northeast of Houston. Thompson said he received a call three weeks ago from Community Education Centers, the prison operator, notifying him that inmates would be released and jobs cut.

The 1,054-bed adult detention facility in Livingston had often filled at least 900 of its beds, with the per-inmate fees covering 5 percent of the county’s $26.5 million annual budget.

Polk County used revenue from the prison to buy police cars, add sheriff deputies and hold down tax rates, Thompson said.

“This was an opportunity to put people to work with a decent salary, good benefits and retirement,” he said.

County leaders assumed steady revenue and jobs from the facility, Thompson said.

“Unlike other economic development areas, like the high tech industry or agriculture where you have ups and downs, government or government-type jobs are usually more consistent,” Thompson said. “In this case, it’s not turning out as we thought.”

To contact the reporter on this story: Kathleen Miller in Washington at Kmiller01@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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