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Federal Government Bail-Out Private Prisons

Daaaih Loong writes: "On November 6 the Wall Street Journal (subscription only) posted an article by Joseph Hallinan on the bail-out of failing private prisons by the Federal Government.

Federal Government Saves Private Prisons As State Convict Population Levels Off

CALIFORNIA CITY, Calif. -- Like pioneers from an earlier time,
Corp. of America nearly met its demise here in the Mojave Desert.

The private-prison operator spent $106 million in 1998 to build a giant
prison in the sand, confident it would land a contract to house
prisoners. What CCA officials didn't anticipate, however, was a sudden
in the growth of California's prison population and fierce opposition
unionized state prison guards worried about their jobs. The prison
empty and helped push CCA, then struggling with management problems and
mounting debt, to the brink of financial disaster.

The company's desperation should have presented an opportunity to Uncle
While state prison populations appeared to be leveling off, the head
in federal prisons were growing more rapidly than ever, fueled by
drug and immigration laws. The U.S. Bureau of Prisons needed more beds,
the empty prison here offered immediately available capacity.
the bureau could negotiate a fire-sale price.

Bonanza for CCA

From 1995 to 2000, the three companies (CCA, Wackenhut and Cornell )
made a
total of more than $528,000 in federal campaign contributions -- much
of it
in "soft money" given to the political parties, according to the Center
Responsive Politics, a nonpartisan, nonprofit research group in

As it turned out, the contract signed last year was a bonanza for CCA.
Bureau of Prisons agreed to pay above-market prices and, on top of
that, big
cash bonuses if the company achieved vaguely defined performance

Most important, the Bureau of Prisons guaranteed CCA a 95% occupancy
rate --
an arrangement almost never included in state private-prison contracts,
which typically base payment on the number of beds actually filled.
Here in
California City, the federal government agreed to pay for 95% of the
whether it needs them or not. For now, the prison is full, but the
provides important insurance if demand flags again.

The government didn't stop with CCA, which sparked the creation of the
private-prison market nearly 20 years ago and now commands 52% of it.
Of the
five private prisons now operating under contract with the Bureau of
Prisons, three belong to CCA and two to Wackenhut Corrections Corp.,
industry's No. 2 player, which has had its own financial problems. All
the contracts are generous by conventional industry standards, as they
include occupancy guarantees and long-term renewal options.

What's more, the Bureau of Prisons is expected in coming months to
additional similarly structured private-prison deals, involving a total
6,000 beds and more than $1 billion in potential revenue over time. The
bureau's offer of occupancy guarantees is "the reason why we're so
about the federal side," Steven Logan, chairman and chief executive of
Cornell Cos., the No. 3 publicly traded prison company, told Wall
analysts in June. Federal officials, he added, "cut you that check
month," whether or not the cells are full.

For more than three years, the private-prison business has been
A decade-long prison-building boom among states has slowed markedly,
bad publicity about escapes and violence at certain for-profit lockups
raised questions about the companies' competence.

Now, even as the national economy slogs through a recession and a
disaster-era federal budget tightens, Washington is effectively
throwing the
industry a life preserver.

The Bureau of Prisons says its purpose isn't to rescue CCA and the
companies. Bureau officials at first resisted the push for
during the mid-1990s by the Clinton administration and Congress. And
officials still disagree with the industry contention that outsourcing
prisons saves taxpayers money.

In fact, the federal prison agency's ambivalence over privatization
explain why it has been so generous to the prison companies. Forced by
higher political authorities to do business with the industry, a proud
reluctant U.S. prison bureaucracy has embraced the idea that to
its own high standards, it has to pay the private sector a premium.

Expensive Experiment

If privatization at the federal level turns out to be an expensive
experiment, the chances that Congress or the White House would push for
broad-scale outsourcing of federal prisons would diminish. The public
would survive largely intact, and public employees would keep their

Bureau officials say privatization gives them more flexibility to deal
surges in particular inmate populations, such as illegal immigrants.
don't sit around and strategize how we can make the contractors look
bad or
look more expensive," Michael Janus, the bureau's outsourcing chief,

Asked to explain the above-market contracts and bonuses, he responds
"price is way down on the list" of factors important to his agency. The
federal government, he adds, wants the best prisons, not necessarily

It doesn't hurt relations between the companies and the federal
that CCA and Wackenhut have hired numerous former Bureau of Prisons
officials, including those who now serve as wardens of all five of the
federal prisons that have been privatized so far. A Bureau of Prisons
spokesman says the hiring of former officials has no bearing on

For their part, CCA officials say that at California City they are
an almost-new facility and top-notch services that merit premium pay.
with the recent addition of five private prisons to the federal
100 publicly owned and operated facilities, the federally run lockups
have more inmates overall than their stated capacity. "We think [the
of Prisons] could probably use us more," says CCA's chief executive,

Since CCA opened its pioneering private prison in Tennessee in 1984,
government use of such facilities has been controversial. Critics argue
only officials accountable to the public should be trusted with the
of inmates.

But prisons cost a fortune -- $50 million and up, as a rule of thumb --
private industry long had argued that it could house and manage
less expensively than government. By 1997, CCA, based in Nashville,
had 47 prisons, healthy profits and a soaring stock price.

Encouraged by a national trend toward locking up more drug felons for
periods of time, CCA built prisons based on speculation that states
rent space in them. In 1998, it acted "on spec" when it put up the one
in California City.

But then trouble struck. After California's prison population jumped by
from 1993 to 1996, the growth rate began to slow -- to 3.9% in 1998 and
to only 0.7% in 1999. That made the state a less-eager potential
Resistance from the politically potent prison-guard union, which feared
privatization of public-sector jobs, ended any hope that state inmates
fill the California City facility.

And CCA was having difficulties elsewhere. A rash of inmate escapes and
guard-brutality cases led to harsh media attention and contributed to
jitters on Wall Street about prison companies' stock. In one of the
most-notorious examples, two inmates were killed by other inmates and
escaped from a medium-security CCA prison in Ohio during separate
in 1998.

Privatization opponents pointed to such events as evidence that the
was incompetent or negligent. CCA and its rivals countered that the
incidents illustrated only isolated problems and that, on the whole,
prisons are on a par with public.

Meanwhile, CCA's financial management was faltering. Long-term debt
taken on
to finance its building boom climbed to $1.09 billion in 1999, from
million only two years earlier. The company began losing money -- $730
million in 2000. Its stock dropped to $4.50 a share in 1999, from
nearly $45
in 1997. In 2000, it fell as low as 19 cents.

As states around the country began to ease the Draconian sentencing
that helped the industry get established in the first place, the future
looked bleak for CCA. The one ray of hope came from Washington.

Founded in 1930, the Bureau of Prisons remains in the shadow of its
agency, the U.S. Justice Department. But the BOP, as it's known in
Washington, prides itself on being the class operation in its field.

The BOP had resisted suggestions from the Clinton administration that
federal government privatize prisons. "The BOP was adamantly opposed to
says a former career Justice Department official involved in internal
discussions about privatization. "Although they would never say it,"
official adds, "I think they were afraid of the camel's nose," meaning
even a small move toward privatization could lead to the eventual
outsourcing of most federal prison work.

In a July 1999 "Message to All Bureau of Prisons Employees Regarding
Privatization," the agency's director, Kathleen Hawk Sawyer, tried to
reassure subordinates that they weren't going to lose their jobs to
privatization. For one thing, she wrote, the prison companies hadn't
"established an acceptable track record" for "the incarceration of
or high-security inmates."

Nevertheless Clinton administration officials intent on "reinventing"
government did see privatization as a means of holding down the growth
the BOP's work force, which had nearly doubled during the 1980s, to
employees. In 1995, as part of his budget proposal to Congress for the
fiscal year, President Clinton said his administration planned to
the management and operations "of most future federal [prison]
under construction."

This proposal was enthusiastically received in Congress, where CCA,
Wackenhut and Cornell were lobbying for broader privatization. From
1995 to
2000, the three companies made a total of more than $528,000 in federal
campaign contributions -- much of it in "soft money" given to the
parties, according to the Center for Responsive Politics, a
nonprofit research group in Washington, D.C.

The Justice Department, acting on behalf of the BOP, continued to raise
safety concerns about privatization, but the momentum was too strong. A
Republican-controlled Senate appropriations subcommittee put language
in a
spending bill in 1996, directing the BOP to launch its first privately
operated prison, in Taft, Calif. A spokesman for Sen. Judd Gregg of New
Hampshire, the subcommittee chairman at the time, declines to comment.

The bureau had little choice but to comply. It hired Wackenhut for the
Congress intervened again in 1997, ordering the BOP to take
for certain inmates in Washington, D.C.'s corrections system.

The BOP didn't warm quickly to privatization. "We did not pursue this
in the Bureau's approach to private contracting," Dr. Sawyer, a BOP
who holds a doctorate in counseling and rehabilitation, wrote in her

She noted that "private prison companies often seek business by
promising to
federal and state legislators that they can provide comparable services
at a
reduced cost." These industry claims "have not been proven," she
stated. But
"we cannot ignore them. Some legislators and other policymakers are
convinced the cost savings are real."

The BOP opposed broad privatization but recognized that many in
viewed outsourcing as a thrifty strategy. Meanwhile, the federal-prison
population was expanding rapidly.

By the end of the 1990s, declining rates of violent and property crime,
combined with some easing of state sentencing laws, contributed to an
apparent leveling off in state prison head counts. But the opposite was
happening in the smaller federal system. Harsher federal
laws enacted in the 1980s kept tens of thousands of inmates in federal
prisons for longer terms. And tough immigration legislation in 1996 led
sharp increases in the arrest and incarceration of so-called criminal

Last year, the federal inmate population expanded at a brisk 7.5% rate,
to a
total of 145,416. BOP officials say they had no choice but to go along
additional outsourcing to handle some of the growth.

But, Dr. Sawyer wrote in her 1999 memo, "we must be cost-competitive
the private-sector companies in order to argue against further
mandates for privatization." One way she has done that is cutting the
own costs.

Another factor that has helped keep the BOP cost-competitive with the
private sector is the relatively high cost of the bureau's

The BOP's approach to determining how much to pay prison contractors
indicated a remarkable solicitousness toward the industry's financial
concerns. The bureau's Mr. Janus says that the agency held two rounds
"interchange" meetings with industry representatives, the first in 1995
the second about two years ago. The bureau organized the meetings,
were private and held with one company at a time, because it was
for ideas of mutual benefit to both the government and contracting
community," he says.

Marvin H. Wiebe, senior vice president for government affairs with
says the meeting he attended in late 1998 or early 1999 at the BOP's
Washington office, was "outstanding, phenomenal." He recalls that as
many as
10 bureau officials listened as he outlined the contracting terms his
company would like to see in federal-prison contracts. "We were asking
100% occupancy" guaranteed, he says. "And they came back with what I
was a very fair and creative plan, which is that they guaranteed 95%

Louise Green, a spokeswoman for CCA, says employees currently with the
company "didn't have any conversations" of this sort with the BOP,
ex-employees may have. Wackenhut employees attended meetings with
officials, says Margaret Pearson, a company spokeswoman. But the
declines to make those employees available or comment further.

BOP officials decline to discuss in detail why they went along with the
industry's suggestion of occupancy guarantees, sometimes known as
take-or-pay provisions. In a written statement responding to questions
the topic, the bureau says: "In formulating our approach, we solicited
from the corrections industry and other independent correctional
Based on our own data and feedback from the private-corrections
industry, we
determined that payment for 95% of designated capacity was

Mr. Janus adds that paying for the exclusive use of an entire prison
the federal government more leverage in determining how a facility is
managed. That reasoning is roughly akin to that of a company that rents
entire hotel for a conference, instead of just the rooms its employees
occupy -- an analogy that Mr. Janus accepts.

As an additional plum, the BOP promised companies substantial bonuses
"optimum performance" in three areas: overall work quality,
and management of "quality-control" programs.

The idea of awarding performance bonuses and agreeing to take-or-pay
guarantees startles some state-prison officials, who otherwise
express respect for their federal counterparts. Montana, for example,
neither take-or-pay nor bonuses to CCA, which operates a 500-bed
medium-security prison in the town of Shelby. "We expect them to do a
job," says Pat Smith, contracting chief for the Montana Department of
Corrections. "If they don't, we fire them."

Asked whether any CCA customers, other than the federal government,
bonus payments, company spokesman Steven M. Owen says, "I'm not aware
of any
that come to mind." None of Wackenhut's state contracts has bonus
provisions, either, says Ms. Pearson.

Apart from financial considerations, the BOP didn't see the highly
publicized incidents of violence or escapes at some private prisons as
obstacle to hiring the industry. The bureau's Mr. Janus says those
kinds of
events happen periodically in all prison systems, including the BOP.

Still, the bureau shares the view of many private-prison skeptics that
industry lacks sufficient competence to handle medium- and
inmates. That is why the BOP limited its private contracts to only the
least-risky inmates, those classified as low- or minimum-security, Mr.
says. Most inmates in the bureau's growing population of criminal
fall into those categories.

In the fall of 1999, the BOP sought industry proposals for housing
criminal-alien prisoners in the Southwest. CCA put in the winning

In June 2000, with CCA losing money and its California City facility
empty, the BOP awarded the company the biggest contract in
history. Covering both California City and a second CCA facility in
County, N.M., the deal promised the company a minimum of $68.7 million
year in revenue, the equivalent of 22% of CCA's total 2000 revenue. The
deal, which spanned three years, with seven one-year options to renew,
be worth $760 million over the 10-year period. The day it was
CCA's stock rose 56%.

Almost all of the roughly 2,300 criminal aliens held at the California
prison have been convicted of one of three offenses: illegal entry into
country, illegal re-entry, or possession or trafficking of drugs. As
and minimum-security inmates, they are less expensive to guard than
more-dangerous prisoners, who require greater security.

Yet the BOP agreed to pay an annual average of $21,880 per inmate at
California City, or slightly more than the $21,601 the agency spends,
average, throughout the entire federal system, including medium- and
high-security inmates.

As a result of its occupancy guarantees, the BOP sometimes pays more
the $21,880 average. California City is fully occupied now. But as of
11, at its sister CCA prison in Cibola County, N.M., 877 of 961 beds
contract -- 91% -- were occupied. The cost of paying for the extra 4%,
fulfill its take-or-pay guarantee, has hiked the BOP's annualized
per-prisoner cost at Cibola to $23,777 -- 10% higher than the average
at BOP-run prisons overall.

The BOP has included the 95% guarantee in all five of its existing
prisons, three of which are operating below capacity. Future
contracts are also expected to include such guarantees.

The good news for CCA doesn't end there. In May, the company learned it
would receive a $520,000 bonus for its successful operation of the
prison at
California City and a third facility it operates for the BOP, at Eloy,
For a company that had a loss of $5.3 million for the first quarter
year, that's a significant amount.

As set out in the written BOP contract, the objective of the bonus "is
afford the contractor an opportunity to earn [an] increased fee
with the achievement of the optimum performance." Unofficially, says
Janus, "it avoids the haggling that sometimes takes place in a
negotiation." Since privatization of federal prisons began in 1997, the
says it has paid a total of $2.3 million in bonuses to CCA and

A look at what states pay private prisons makes CCA's federal contract
even richer. Here in California City, the company receives $57.48 per
a day at full occupancy. In Mississippi, by contrast, CCA gets just
$28.29 a
head a day. In Idaho, it gets $37.60; in Montana, $51.59.

"Do we pay a little bit more?" asks the BOP's Mr. Janus. "Probably. But
think we get a better service."

By service, Mr. Janus says, he means a range of things, from the
recreational programs a prison offers inmates to how accommodating it
is in
meeting BOP requests. For instance, he says, the occupancy guarantees
bonuses ensure that when the BOP doubles to 80 from 40 the number of
prisoners it delivers to California City during a particular week, CCA
grumble. The government values another kind of flexibility, as well, he
adds. Rather than financing construction of new prisons for criminal
the BOP has committed itself to only three years of service at
City. After that, if illegal immigration eases or there is a move to
legalize some of those who have entered the country unlawfully, the BOP
walk away from the private prison.

At the California City facility, 120 miles northeast of Los Angeles,
Percy Pitzer says that high on the list of services that warrant
pay is inmate rehabilitation. In the hobby-craft room, for instance,
spend their days at plywood tables making elaborate jewelry boxes from
toothpicks and Popsicle sticks. In an indication of how rarely violence
is a
problem here, the inmates are allowed to use razor-blade-equipped box
cutters in their craft work.

Privatization of federal prisons will continue to expand, the BOP
CCA's Mr. Ferguson says he very much looks forward to more federal
contracts. "We treasure the Bureau," he says."