Industry Analysis: The Sources of Profit for San Diego's Privatized Prisons

While the rest of America has been mired in economic volatility, the prison-building industry has been holding steady. As of 2011, the U.S.'s correctional system incarcerates one of every 107 adults1 and contains the world's largest prison population.2

With an in-prison population of more than 133,000, California has the nation's third-largest number of people incarcerated. This population size, compounded with a 65.1 percent recidivism rate, has led to huge overcrowding in California prisons. Consequently, courts have ruled that the state failed to deliver adequate mental or physical health care to the prisoners. In an effort to address overcrowding, in 2011 the U.S. Supreme Court upheld a three-judge ruling3 that California should reduce the prison population to 137.5 percent of capacity by this June. In response, the state passed Assembly Bill 109, giving local governments more responsibility for an estimated 30,0004 lower-level felons slated to be transferred into local jails. However, these local facilities are already operating at full capacity.

Renewed legal attention to prison overcrowding has created an opportunity for the for-profit prison industry to unburden local government institutions, as the industry has gained momentum over the last 30 years since the first private prison contract was awarded in 1985.

These numbers are still increasing. From 2000 to 2005, an additional 151 prisons were built nationwide, growing the total number of prisons to 415. As of 2005, private prisons accounted for 23 percent of penal institutions and housed approximately 7 percent of the nation's average daily prisoner population. Most were under contract to the Federal Bureau of Prisons.

In California, the prison inmate population decreased by 27 percent from 2000 to 2005. However, the number of prisons rose 8 percent, and the confinement center - a set of institutions that includes "prisons, prison farms, penitentiaries, correctional centers, work camps, and reformatories" - saw a 74 percent spike from 50 to 87 facilities.5

In particular, Corrections Corporation of America (CCA) has become the market leader for for-profit prisons, owning and operating 65 facilities in 19 states. Capturing 44.3 percent of the market in 2011, CCA earned $1.7 billion in revenue. It had assets exceeding $3 billion and net income of $162.5 million.

In San Diego, approximately 11,896 prisoners account for 7.3 percent of the overall state prison population. For the last decade, CCA has held contracts to operate the San Diego Correctional Facility, located in East San Diego County in rural Otay Mesa. As one of four correctional facilities in the area, CCA's Otay Mesa location, run by Warden Fred Lawrence, operates as an all-male, minimum-to-medium-security prison. The facility has 1,154 beds, which helps to alleviate the overcrowding of low-level offenders from the nearby Richard J. Donovan State Correctional Facility and the George Bailey Detention Facility.

CCA has also sought validation for many of its sites, including the San Diego facility, by obtaining American Correctional Association (ACA) accreditation to promote a national and international image of authority for corrections. While the ACA is a nonprofit government institution, the accreditation process is completely voluntary and does not pose a barrier to entry. But CCA does invest in this accreditation process such that 90 percent of its facilities have received accreditation. Overall, 749 public and private prisons and jails have been accredited through the ACA.

Buyers of Prison Services

CCA attributes its success to an ability to obtain large government contracts. According to CCA's 2011 annual report, the U.S. Marshals Service and Immigration and Customs Enforcement (ICE) together accounted for 32 percent of total revenue. These federal agencies have their own separate $240 million budget for detention and deportation; under the federal State Criminal Alien Assistance Program, $96 million goes to California.

With a steady stream of illegal immigrants, CCA has benefited tremendously from this partnership with ICE. The San Diego Correctional Facility, in operation since 2000, is no exception. ICE pays CCA's San Diego facility a per-diem fee of $89.50 for every person held there.6 In 2008, a Syracuse University report indicated that at least 4,201 detainees were transferred by ICE from the San Diego facility in Otay Mesa, staying for an average of 11 days,7 a single action that translates into $4.1 million in additional revenue for CCA. With $1.7 billion in total revenue and 65 locations, CCA earns $28 million per location annually. Although the facility's current capacity is only 1,150 beds, a newly planned facility would have 2,880 beds, doubling capacity.8

Meanwhile, California currently spends $285 million on contracted facilities.9 However, in June of 2012, California announced that the state will not be renewing its contracts with CCA when they expire in 2015-2016. As a result, CCA had to renegotiate a reduced prison contract for the upcoming 2012-2013 fiscal year. In previous years, the state has had very little buyer power. However, by reducing its annual inmate prison population and meeting the three-judge ruling, the state is now no longer dealing with as many capacity constraints and is regaining control as a buyer.

Barriers to Entry: Zoning

Meanwhile, ICE is CCA's primary contractor for San Diego. Under the provisions of the company's ground lease with the county of San Diego, ownership of the site will revert back to the county on Dec. 31, 2015. Thus, the corporation will need to build a new facility by 2015 if it wants to keep its contract with ICE.

Despite the uncertainty, CCA has decided to move forward with its plans to build a new mega prison in Otay Mesa, investing $44 million to buy real estate, conduct environmental studies, obtain building permits, and complete additional requirements. According to Rob Hixson, chairman for Otay Mesa's Planning Group, the land itself was not zoned for prison use. CCA had to get the land rezoned.

While the cost to re-zone, according to the city of San Diego's planning department website, is only $12,000, re-zoning creates the risk of community outcry and other negative stakeholder reactions.10 However, the location that the private prison corporation selects is crucial, Hixson explains; the property is still far away from residential units but still close enough to plug into public utilities. Thus far, there has been little pushback from any external groups. CCA estimates that the total construction cost of the new mega facility will range from $142 million to $150 million. Without a guarantee that it will be able to renew the existing ICE contract, this is a very risky decision for the company. To the extent that CCA has the capability to accurately assess and mitigate these risks, it carries a significant knowledge advantage over would-be competitors.

Supplier Power: Unions

At the same time, a key supplier to the U.S. correctional system has been the California Correctional Peace Officer Association (CCPOA). The union represents 30,000 correctional peace officers working inside California's prisons and in years past has been regarded as one of the strongest and most influential labor groups. California has the second-highest mean salary for correctional officers in the nation. There are a total of 42,410 correctional officers in California. According to the Bureau of Labor Statistics, California correctional officers have a mean hourly wage of $31.99 and an annual mean salary of $66,540.11

This means with 33 state prisons, the California Department of Corrections and Rehabilitation (CDCR) spends approximately $2.8 billion on correctional officers alone.12 Nevertheless, CCA does not have the same pay rate as the CDCR, although it claims that it does not cut corners regarding treatment of its guards. As of 2011, CCA has approximately 16,750 employees. With $770 million of its operating expenses going toward salary and benefits to correctional officers (64 percent of its operating expenses)13 and adjusting for the 5 percent belonging to labor unions, the average compensation for a CCA employee in 2011 was approximately $45,000, which is comparable to the annual national mean salary of $43,76014 at local, state, and government-owned prisons outside of California.

CCA's salaries are in the 10th percentile for California, and the company employs very few unionized workers, suggesting the company carries an advantage over a key supplier despite the presence of unions.

Rivalry

Meanwhile, rival firms face similar industry trends. CCA's main rival is GEO Group. The GEO Group also operates a facility in San Diego; the Western Regional Detention Facility has a capacity of 770 beds and contracts with the U.S. Marshals Service. Yet, the CDCR canceled its contracts with the GEO Group in 2011, and the state will not renew its contract with CCA after 2015. Both face diminished power to operate in California since the federal government will be the only customer.

Conclusion

The for-profit prison industry has faced significant challenges over the past decade. However, as long as it is able to service the federal government through contracts with the Bureau of Federal Prisons, ICE, and the U.S. Marshals Service, the sources of profit for the private prison industry are stable. In September 2010, CCA was able to negotiate a 15-year contract at the California City Correctional Center (guaranteed 95 percent occupancy). Considering the high fixed costs involved in building prisons, the for-profit model still offers a promising way for government agencies to address immediate prison population issues. While there are still opposing forces, the most significant of which are government budget cuts, there are still a number of political drivers that are in play in favor of the for-profit prison industry. The recent upholding of the death penalty via Proposition 34 and the passage of harsher sentencing to human traffickers via Proposition 35 reveal the continued political appeal of legislation that is tough on crime. The private prison industry can remain profitable as long as it can continue to capitalize on the government as its main source of income. In the case of California and specifically CCA's mega prison in Otay Mesa, once the mega prison is operational, securing another government contract will be essential for the firm's continued presence in San Diego.

Elizabeth Liner (Full-Time Class of 2013) is a marketing professional with experience in the biotechnology sector. She focuses on marketing strategy, marketing communications, and community outreach.


Endnotes
  1. Glaze, Lauren E and Erika Parks. 2012. "Correctional Populations in the United States, 2011." Bureau of Justice Statistics. http://bjs.ojp.usdoj.gov/index.cfm?ty=pbdetail&iid=4537.
  2. Roy Walmsley. 2011. "World Prison Population List." International Centre for Prison Studies. http://www.idcr.org.uk/wp-content/uploads/2010/09/WPPL-9-22.pdf.
  3. Coleman v. Schwarzenegger, et al. No. Civ S-90-0520 LKK JFM P; Plata v. Schwarzenegger, et al., No. C01-1351 TEH, http://www.cdcr.ca.gov/News/Press_Release_Archive/2009_Press_Releases/docs/tentative_ruling.pdf.
  4. Magnus Lofstrom and Katherine Kramer. "Capacity Challenges in California's Jails." Public Policy Institute of California. http://www.ppic.org/main/publication_quick.asp?i=1034.
  5. Census of State and Federal Corrections Facilities. 2005. http://bjs.ojp.usdoj.gov/content/pub/pdf/csfcf05.pdf.
  6. Leslie Berestein. 2008. "Detention Dollars: Tougher Immigration Laws Turn the Ailing Private Prison Sector Into a Revenue Maker." The San Diego Union-Tribune, May 4. http://www.utsandiego.com/uniontrib/20080504/news_lz1b4dollars.html. (Berestein 2008)
  7. Syracuse University TRAC (forthcoming)
  8. North County Times http://www.nctimes.com/news/local/sdcounty/article_19eb296c-469f-52dc-8103-50621a30c43a.html
  9. California E-Budget. 2012. "Corrections and Rehabilitation Budget 2013-2014." http://www.ebudget.ca.gov/StateAgencyBudgets/5210/5225/department.html. (California E-Budget 2012)
  10. San Diego Government Site. 2012. "City of San Diego Fee Deposit Schedule for Development & Policy Approvals Permits." http://www.sandiego.gov/development-services/pdf/industry/infobulletin/ib503.pdf.
  11. Bureau of Labor and Statistics. 2011. "Occupational Employment and Wages, May 2011: Correctional Officers and Jailers." http://www.bls.gov/oes/current/oes333012.htm.
  12. California E-Budget. 2012. "Corrections and Rehabilitation Budget 2013-2014." http://www.ebudget.ca.gov/StateAgencyBudgets/5210/5225/department.html. (California E-Budget 2012)
  13. Corrections Corporation of America. 2011. "CCA Annual Financial Statement 2011." http://ir.correctionscorp.com/phoenix.zhtml?c=117983&p=irol-reportsannual.
  14. Bureau of Labor Statistics. 2012. "Occupational Employment Statistics." http://www.bls.gov/oes/oes_dl.htm.
Winter 2013

Table of Contents


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