The Dangerous Finances of Private Prisons

Private prisons companies have expanded quickly and recklessly in the U.S. since 2000, earning millions in profits from lucrative government contracts. But at what cost?

The last five years have been good to our country's two biggest private prison operators - Corrections Corporation of America and The Geo Group. They have seen their respective stocks climb 13% and a whopping 113% during that period - beating the benchmark S&P 500, which fell 18%.

American taxpayers may be unknowing funders for the business of incarceration as we send more of our prisoners and detained immigrants to these facilities, but private investors have also fueled the growth of these two prison-for-profit companies.

Geo, CCA and others in the prison business benefit more than anything else from growing demand for their services. Since Dec. 31, 2000, the number of federal inmates held in private facilities has increased 102%, while the number of state inmates held in private facilities has increased 32%. Twenty-one states had at least 5% of their prison population held in private facilities at Dec. 31, 2007. Cash-strapped state and federal agencies, faced with the problem of ever-increasing prison populations and shrinking incarceration budgets, save money by outsourcing their inmates to the likes of CCA and Geo.

And when CCA and Geo get their customers/inmates, they make sure to make a pretty penny off of them. The companies' net profit margins, or how much of each dollar earned by the company is translated into profits, were 9.5% for CCA and 5.5% for Geo, putting them both above Starbucks and in the ballpark of Burger King, at 7.7%, and Exxon Mobil, at 9.5%.

As a result, for 2008, these companies posted impressive revenue and profit figures. CCA earned $150.9 million on revenue of $1.6 billion, up from $133.4 million on revenue of $1.5 billion in 2007. Geo's net income was $58.9 million on revenue of $1.04 billion, up from $41.8 million on revenue of $976.3 million.

But the growth of these two companies, with CCA now the nation’s largest owner and operator of privatized correctional and detention facilities, has not come without a price: high debt. Investors take note of debt to make sure companies don't become too big, too fast.

CCA, as of Dec. 31, had $1.19 billion worth of debt on its books. The company, in a federal filing, admits that it could have to dedicate some of its cash on hand to pay down what it has borrowed, making it harder to fund necessary capital expenditures. This would be more tolerable if the company was not in the business of handling, and supposedly rehabilitating, prisoners. But high debt levels ultimately impede on a company's ability to do business and, as we've seen recently with capable Americans trying to get mortgages, borrow money.

For 2008, CCA paid out $59.4 million in interest expenses, up $53.8 million in 2007. That means CCA is spending more than half of what it earned in 2008 just on interest - probably not a successful long-term formula.

Geo's situation is not much better. The company had $378.5 million of debt for 2008, up from $305.7 million in 2007. It spent $30.2 million on interest expenses in 2008, down from $36.1 million. Still, with a net income of $58.9 million, that means over half of Geo's earnings are sacraficed to pay down debt.

The take away from this is that while these companies are growing, it comes at a cost to investors, state and federal governments and prisoners themselves. High debt levels threaten the stability of these two companies, and their struggles to cut costs could lead to the decline of conditions under which they house hundreds of thousands of prisoners. Our government enables these companies to make high profits from incarceration, and we should watch them to make sure they don't take advantage of the opportunity.