Corrections Corp. Wins as Brown Buys California Prison Fix

Corrections Corp. of America, the largest U.S. prison company, and Geo Group Inc. (GEO) stand to gain in California Governor Jerry Brown’s plan to rent thousands of their cells as part of a $1 billion effort to meet a federal court deadline to reduce prison overcrowding.

Brown seeks to spend $315 million in the year that ends June 30 and an estimated $415 million annually for two more years to remove 12,500 inmates from state penitentiaries. The plan calls for leasing a Corrections Corp. (CXW) prison in the Mojave Desert, shipping more inmates to private lockups out of state, and renting beds at public and private jails in California.

The proposal is an about-face by Brown, who sent Corrections Corp. shares tumbling 8.9 percent in one day in April 2012 when he said he planned to reclaim almost 10,000 inmates held by the company in Arizona, Mississippi and Oklahoma. California is Corrections Corp.’s biggest state customer and accounted for 12 percent of revenue, or $214.8 million, in 2012, according to corporate filings.

The state’s business “was a negative for the stock because people were discounting whether they can count on the revenue and earnings from that particular customer,” said Tobey Sommer, an analyst for SunTrust Robinson Humphrey in Nashville, Tennessee, who has a buy recommendation on both companies. “So when you have a reversal of something being a risk to a potential positive, that can really help.”

Shares Down

Corrections Corp., based in Nashville, rose 1 percent to $32.65 at the close in New York, the biggest gain since Aug. 23. The stock is up 7.3 percent in the past year. Geo, based in Boca Raton, Florida, climbed 1.6 percent to $31.61, the highest since Aug. 29. The shares have gained 30.7 percent in the past 12 months.

California faces a Dec. 31 deadline to get its inmate population down to 137.5 percent of designed capacity. The system, which operated at 200 percent for more than a decade, was at 143.8 percent as of Sept. 4, with 123,777 inmates, according to a Corrections and Rehabilitation Department report.

Brown met with Senate and Assembly leaders today and agreed to ask the court for more time to meet the order, the Los Angeles Times reported. The agreement calls for expanding mental-health and drug-rehabilitation programs to reduce the number of former inmates returning to prison, while preparing to move prisoners into private prisons and other facilities if the court refuses, the Times said.

Federal judges seized control of the prison health system in 2006, saying inmate care was so bad it amounted to cruel and unusual punishment and violated the U.S. Constitution. That led to the order to reduce inmate numbers.

Court Order

Brown fought the order to the point that the judges threatened to hold the 75-year-old Democrat in contempt. The state has lowered the count by 43,000 since 2006 and spent $1 billion on improving care and conditions, he has said. The only way to reduce the number further is to release dangerous felons, the governor said.

Last month, the U.S. Supreme Court rejected his plea to postpone the Dec. 31 deadline, prompting Brown to seek funding from the legislature to temporarily lease prison spaces.

Under Brown’s plan, California would put 1,000 inmates, with state guards, in Corrections Corp.’s 2,300-bed prison in the Mojave Desert. The company currently rents some of the space to the U.S. Marshals Service and U.S. Immigration and Customs Enforcement.

California would shelve plans to bring back about 4,000 of the almost 9,000 inmates held in out-of-state Corrections Corp. prisons and instead ship out potentially 5,800 more.

The state currently pays Corrections Corp. about $64.50 a day per inmate. The governor and lawmakers had budgeted just $120 million in the current year for out-of-state prisoners because Brown had planned to reclaim almost half. A bill pending in the legislature would double the appropriation.

‘Additional Capacity’

“We have additional capacity that could meet their needs,” Steve Owen, a Correction Corp. spokesman, said by e-mail. “It is our understanding that they are looking at some of our facilities as well as some not owned by CCA.”

Corrections Corp. owns and runs 49 prisons, manages another 18 and leases two, as of June 30. The federal government provided almost 43 percent of the company’s $1.76 billion of revenue in 2012, according to its annual report.

Geo, the second-largest U.S. prison company, has a contract with California to confine parole violators at a 625-bed dormitory-style lockup in McFarland, 135 miles (217 kilometers) north of Los Angeles.

In January 2012, the state said it would terminate the contract. It rescinded that plan three months later, and Brown later extended the contract through fiscal 2016. Under the governor’s plan, the state would lease as many as 1,225 beds in two of Geo’s facilities in California that were shuttered when the state canceled earlier contracts.

Pablo Paez, a spokesman for Geo, didn’t respond to a telephone message asking for comment on Brown’s plans.

Share Potential

Sommer, the analyst, said the additional California spending may add as much as 20 cents a share to each company’s funds from operations, a measure of cash flow for real-estate investment trusts. He forecasts $2.52 a share in funds from operations for Corrections Corp and $2.50 for Geo.

“So 20 cents is material,” he said.

California’s nonpartisan Legislative Analyst’s Office, which evaluates fiscal issues for lawmakers, said the cost of Brown’s plan could be higher than he estimates. Running the Mojave Desert lockup with the state’s own prison guards would cost taxpayers twice as much per bed as a typical contract.

The analyst’s office said the state should negotiate to pay only for beds that are occupied, not for a fixed number that might not all be occupied.

Not Certain

While Democrats control the legislature, Brown’s plan isn’t certain to pass. It is opposed by Democrats in the Senate who put forward an alternative to spend $200 million in grants for counties to expand rehabilitation, drug and mental-health treatment programs that they said would reduce recidivism. Their plan also calls for an advisory commission to look at sentencing changes.

Lawmakers recess Sept. 13 for the rest of the year, though legislative leaders could bring them back. Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, hinted that a compromise is possible.

“We do not reject capacity out of hand, especially the need for some in-state capacity, as part of a package of changing the underlying dynamic in this criminal justice system,” Steinberg said at a hearing last week.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.