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Marketplace Morning Report

For-profit prison companies adjust to new era

Dan Weissmann May 6, 2015
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The factors that drove double-digit growth for prison companies are largely in the past — like the ever-harsher sentencing laws that bloomed in the 1980s and 1990s. 

The prison population has actually declined slightly since 2009, according to data compiled by The Sentencing Project.

“With the recession, it became quite clear to governors of both political parties that prisons had become very expensive items in state budgets,” the project’s director, Marc Mauer, says.

The Corrections Corporation of America has adjusted. Kevin McVeigh, managing director with Macquarie Research, watches the company.  “While it’s still a very healthy industry,” he says, “the rate of growth isn’t what it had been historically. And as a result of that, they started to generate meaningful amounts of free cash flow.”

Meaning, the company made money operating existing prisons, but it didn’t have new projects to invest that money into.

So, in 2013, it re-organized into a different kind of entity: A Real Estate Investment Trust— or REIT for short.    

Carl Takei, an attorney with the ACLU’s National Prison Project, sums up the reasons: “It comes with a lot of tax advantages.” 

A REIT pays out most of its earnings in dividends, which can result in a better tax deal for both investors and the company.

Typically, REITs own rental properties — the income comes from occupants. In CCA’s case, it’s essentially still collecting rent— just not from the occupants themselves.

Takei thinks the arrangement may not last.  “Because mass incarceration and sentencing reform are major topics of discussion, the private prison industry’s future is uncertain,” he says. Criminal justice reform has become a rallying cry among Republicans as well as Democrats.

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