Locking up criminals is a dirty business, and some people abhor the very notion of profiting from it. Because of that, Corrections Corporation of America always has been one of Nashville’s most controversial companies.
During the last three years, it also has become one of the city’s most unsuccessful. Consider that the company’s stock reached an all-time low of 18 cents last December, near the end of a year in which it recorded a loss of an astonishing $731 million. This after the company’s stock traded as high as $44 in 1998. And this only four years after the Legislature seriously considered relinquishing Tennessee’s prison system to a for-profit prison company such as CCA.
Last year, with the company’s future in doubt, CCA’s board of directors recruited John Ferguson, the former Tennessee finance commissioner who waged Gov. Don Sundquist’s unsuccessful effort last year to persuade the state Legislature to adopt an income tax.
So far, Ferguson’s tenure as CCA’s chief executive officer has been better than anyone expected. The company’s stock rebounded from that 18-cent value to a current equivalent share price of about $1.30. It has met its financial goals for two consecutive quarters. Meanwhile, credit rating agencies have upgraded the valuation of CCA’s short- and long-term debt.
Nevertheless, CCA still is reeling from a series of management blunders that turned it from a Wall Street darling to a tax write-off. Among them:
♦ In 1997, CCA completed a 2,000-bed prison in Youngstown, Ohio, and signed a contract with the government of the District of Columbia to house medium-security inmates there. However, CCA brought the prison online too quickly, a problem exacerbated by the fact that D.C. began sending more prisonersand more dangerous prisonersthan the original contract called for. During its first few months of operation, 17 inmates were stabbed, two were murdered, and six escaped, causing uproar in the Ohio Legislature. Eventually, the federal government seized the District of Columbia’s prison business. The facility is now phasing out operations, and CCA is looking to sell or lease it.
♦ The same year, CCA tried to persuade the Tennessee Legislature to pass a bill authorizing Sundquist to privatize some or all of the state’s prison system. News of that initiative helped boost CCA’s stock on Wall Street. However, the effort failed miserably, despite the fact that the bill’s sponsors included Lt. Gov. John Wilder and that CCA chief executive Doctor Crants spent weeks at the Legislature lobbying for the legislation. In the end, the effort didn’t reap CCA a single prison bed.
♦ At about that time, CCA built a 2,300-bed prison in California City, Calif., in hopes that it would help the company draw a major part of that state’s correctional business. However, CCA’s lobbying effort in Sacramento failed. When the prison was completed, it sat empty at first, adding a tremendous drag to the company’s balance sheet.
♦ CCA also built two speculative 1,500-bed prisons in Georgia. Efforts to fill those facilities with Georgia inmates failed, and they currently sit empty.
♦ CCA’s biggest snafu was on the administrative side. In late 1997, the company reorganized itself into a real estate investment trust (REIT) called Prison Realty and an operational company called CCA. Wall Street seemed to like that move. The next year, the business reorganized again, with the operational company going private and becoming a part of publicly held Prison Realty. This move confused some shareholders and angered others. “Doc [Crants] understood the organization, but no one else did,” one analyst says. “He forgot that private prisons are a controversial business, and it’s best to keep it simple.”
After the second reorganization, Prison Realty’s stock fell. Then, because of regulations that require REITs to make high dividend payments to investors, the combined companies began to lose capital fast. Last year, the group of financial institutions that loan money to Prison Realty and CCA ordered that they be recast in their original form. (They have since been converted back into a public company called CCA.) The institutions also ordered that Crants be fired as CEO of Prison Realty.
When the search committee recommended Ferguson as Crants’ replacement, some investors weren’t so thrilled. CCA was founded in the mid-1980s by three prominent Republicans who attended West Point together: Crants, former Tennessee Republican Party chairman Tom Beasley, and Stokes Bartholomew Evans & Petree law partner Sam Bartholomew. Many were hoping that Crants would be replaced with someone other than a prominent Nashville Republican. Ferguson, who lived in Memphis before his appointment to the Sundquist administration, says he has nevertheless overcome the problem. “I’m not a member of the Nashville mafia,” he says.
The sequence of events that got CCA into financial trouble is complicated. What Ferguson has to do to reclaim a healthy company balance sheet is not. Because of overbuilding and contract losses, CCA owns or leases about 9,000 empty prison beds. (It owns or leases about 53,000 that are filled.) While chief operating officer J. Michael Quinlan focuses on CCA’s existing business, Ferguson’s job is to fill beds by selling prisons or signing new contracts with governments that need them.
But the prison business isn’t what it used to be. In recent years, crime rates in most of the country have declined. Many states also have taken the opportunity posed by the healthy tax revenues of the mid-1990s to build new prisonsbad news for a company that’s having a yard sale on prison beds.
However, CCA has had some success removing debt from its balance sheet. While Crants was still CEO, CCA leased its California City, Calif., prison to the Federal Bureau of Prisons. That facility now houses about 1,900 federal inmates, and so far the government is happy with its operation. Recently, CCA sold a North Carolina prison for $25 million and generated another $66 million by selling its interest in a prison in England.
Today, Ferguson says for-profit prisons are still a profitable business. Many states such as Texas, Oklahoma, and Florida continue to have good experiences with private prisons. Except for the Ohio debacle, CCA has managed to retain virtually all of its existing contracts amid the corporate upheavals of the last three years. The federal government also is becoming more comfortable with the idea of private prisons, having recently signed several contracts with CCA and industry rival Wackenhut Corrections Corp.
Meanwhile, there are still states with overcrowded prison systems. The most notable example is Alabama, now under a federal court order to find a new home for at least 2,000 inmates. Since CCA has an empty prison in Mississippi and two in Georgia, Ferguson says he is closely following that situation. “We are definitely interested in Alabama,” he says. “The problem is that Alabama is used to paying a much lower per diem than other southeastern states.”
Ferguson and the CCA board also believe there will be a for-profit prison business as long as governments are trying to find ways to save money. “Privatization is always better,” says board chairman Bill Andrews. “When a private company doesn’t perform, you can fire it. But when the state doesn’t perform, you can’t get rid of it. The taxpayers know this.”
Still, CCA and other private prison companies will always face resistance. Chief among the enemy groups are state employee organizations, whose members fight CCA because they believe private prisons one day will cost them their jobs. A much larger group of critics are ordinary citizens who simply don’t believe government should farm out its prison business.
Because it is so controversial, CCA constantly has to eradicate political brush fires. Currently, the Georgia Legislature is considering a bill that would ban the incarceration of out-of-state inmates there. “There is nothing in Georgia law to address this,” says Rep. Chuck Sims (D-Douglas), who is sponsoring the bill. “After all, who pays the cost of health care for an inmate from out of state? Who pays to catch them if they escape?” CCA has hired one of Georgia’s top lobbying firms to kill the legislation. In its current form, the bill would allow out-of-state inmates in CCA’s two prisons but prohibit the future development of prisons for out-of-state inmates.
Even within the for-profit prison industry, there are doubts about whether a prison company should be sold on the public market. Richard Crane, a prison industry consultant and CCA’s former general counsel, believes for-profit prison companies work better when they are privately owned because private owners can deal better with what he describes as an inherent “conflict-of-interest” between the owners of the company and the governments that contract with it. “When a for-profit prison company is publicly held, the analysts are always pressuring the company to fill up beds as fast as possible,” he says. “CCA and other for-profit companies are aware of this pressure, and they often give into it.
“The problem is that sometimes it is not in the best interest of cities and counties with CCA prisons for them to be filled up that fast. Look what happened in Youngstown. When CCA filled that prison quickly, the shareholders loved it. But it turned out to be a disaster.”
CCA officials have answers for their critics. They have said, and will continue to say, that private prisons can be safer, have lower escape rates, and lower recidivism rates than public prisons (something state employee groups will argue vehemently). They also say that private prisons save money (something state employee groups will also deny).
Ferguson maintains that prisons are a good business, both for a private company and a public one. “This company made two big mistakes,” he says. “One was overbuilding, and the other was taking on an organization that no one understood. But this is a good business model. And I’m not going to let this company take on a transaction and fill beds in a way that might do harm to its reputation. If we had Youngstown to do all over, we certainly wouldn’t do it again.”
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