Private Prisons for Dummies

As noted on the main page, an National institute of Justice study found that private prisons save about 1% over the cost of public ones. This finding may seem odd given the ideology that business is more efficient than government, but my research shows that they also have some much higher overhead costs that government does not. Since the Freedom of Information Act only applies to government [your tax dollars fund it, so you have a right to know what it is doing], documents filed with the Securities and Exchange Commission are a major source of information about how publicly traded companies operate. 

Consider that the CEO got paid $1.4 million at a time when most state Dept of Corrections chiefs would make less than $200,000. There are a number of executives who all make more than their counterparts in the state, plus a Board of Directors who receive up to $50,000 in retainers plus pay for each meeting. There's the cost of financing and restructuring, insurance, legal reserves, customer acquisition, and actually selling stock. Not to mention all the legal fees for Wall Street lawyers to create all the documents that contain the information I've collected on this page. 

Immediately below is a 2008 presentation, Why Private Prisons Don't Save Money. It subsequently became a chapter in Punishment for Sale (co-authored with Donna Selman) [publisher: Rowman and Littlefield ~ Amazon ~ more info from PaulsJusiceBlog].Below that is some additional information, with links to SEC documents and sources that provide background on SEC documents.

 

Why Private Prisons Do Not Save Money: Overhead Costs and Executive Pay by Dr Paul Leighton

 

A pf and pptx version of this are available via my blog post about Why Private Prisons Don't Save Money

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Executive Compensation for Private Prisons (From the Corrections Corporation of America's Securities and Exchange Commission Filing, Form 14A dated April 7, 2006):

Compensation of Chief Executive Officer and President      Our Chief Executive Officer and President, John D. Ferguson, is compensated pursuant to and participates in the same executive compensation plans applicable to our other executive officers, as described above. For 2005, Mr. Ferguson’s total cash compensation (inclusive of salary, bonus, and Company contributions under our Executive Deferred Compensation Plan) was $1,412,854. Mr. Ferguson had a base salary of $683,100. In addition, Mr. Ferguson was granted non-qualified stock options to purchase 45,000 shares of our common stock at an exercise price of $39.16 per share, which was the stock’s market value at the time of the grant, and 17,100 shares of restricted stock with a value of $669,636 based on the grant date market value. (emphasis Paul's)

Summary Compensation Table      The following table summarizes the compensation paid with respect to the three fiscal years ended December 31, 2005, 2004, and 2003 to (i) John D. Ferguson, our Chief Executive Officer and President and Vice-Chairman of the Board of Directors and (ii) our other four most highly compensated executive officers who were serving as of December 31, 2005 (collectively, the “Named Executive Officers”).

Paul's notes: Total compensation can be figured by adding salary + bonus + all other comp. For example, for Ferguson it's $677,769 (salary) + $677,727 (bonus) + $57,358 (all other comp) = $1,412,854 (which is the figure mentioned above). There are, of course some other perks that need to be figured in (see employment agreements), but this is a starting point. 

Tax gross ups (great name) mentioned in notes 4 and 7, are payments companies make to cover the taxes on other payments the companies make to executives. So, in note 7, Mr Seiter received $68,990 in moving expenses plus $26,967 in payments to cover the taxes on the moving expenses. If that seems like a lot, the problem is that the tax gross-ups are themselves taxable, so companies need to throw in additional tax gross-ups to cover the previous gross-ups. According to the tax law blog (written by a law professor): "When a company reimburses executives for their tax payments, that creates new taxable compensation. The company then has to cover taxes on that new amount, which creates yet more taxable pay, and so on. The spiral ends when the ever-decreasing amount of new income reaches zero, or close to it. The bottom line: Grossing up an executive for taxes on $1 million can easily cost an additional $700,000 to $900,000."

According to CCA's 2006 10-K (annual report), exhibit 10.26, Executive salaries for 2006 will be: John D. Ferguson, $ 700,000; Irving E. Lingo, Jr., $353,500; Kenneth A. Bouldin, $ 310,500; Richard P. Seiter, $ 290,000, G. A. Puryear, IV, $ 240,000. 

Part of compensation involves stock options or gifts of stock, which is a complicated topic that's drastically simplified here. They seem 'free' for the company to print off and give away, but dilute the equity of existing shareholders. Say a company is worth $1,000, based on 100 shares at valued at $10 each. The company gives the CEO five options and they give another option of one stock to five more executives. They have created another 10 shares, so the company's value of $1,000 is now divided onto 110 shares - with each share now worth $9.09. Options allow the executive to buy the share at a lower price, say $5, although the effect on shareholder equity (from the increased number of shares) is the same as if it is a gift. 

A recent rule from the Securities and Exchange Commission required companies to report the value of stock options as an expense to the company. But a new rule passed right before Christmas 2006 allows the companies to spread this expense out over several years, rather than report the full value right away. The standardized table reported above will be different in a way that makes it look like there are fewer stock options, but that's just because of the accounting change that allows them to be divided over several years. According to the Washington Post, "The change 'will make it harder for investors to get a transparent picture of the magnitude and value of options being granted to corporate executives,' said Lynn E. Turner, former chief accountant at the SEC and now head of research at Glass, Lewis & Co., an adviser to institutional investors." New SEC Pay Rule To Benefit Executives (Washington Post, Dec 28, 2006, p D1). 

Compensation Agreements: from the Corrections Corporation of America's Securities and Exchange Commission Filing, Form 14A dated April 7, 2006. Emphasis is Paul's; "Change in Control" means a corporate take-over or merger.

Employment Agreements and Change in Control Provisions  

Employment Agreements

John D. Ferguson. We have an employment agreement with John D. Ferguson that expires on December 31, 2006 and is subject to automatic one-year renewals unless the Company or Mr. Ferguson provides notice of non-renewal at least 60 days in advance of expiration of the prior term. The agreement provides for an annual salary, as well as customary benefits, including life and health insurance. Mr. Ferguson’s cash compensation is discussed in more detail above in the Report of the Compensation Committee.

If Mr. Ferguson’s employment is terminated “without cause,” Mr. Ferguson resigns for “good cause,” or the agreement is not renewed by the Company upon the expiration of a renewal term, we generally are required to pay Mr. Ferguson a cash severance payment equal to two times his annual base salary then in effect, payable in monthly installments for a period of two years following the termination of employment, as well certain accrued rights, if any, which include prorated bonus compensation and accrued but unpaid salary. Mr. Ferguson will also continue to be covered under existing life, medical, disability, and health insurance plans for a period of two years. To the extent Mr. Ferguson has become vested in any options to purchase shares of our common stock or other equity securities granted to him prior to the date of termination, Mr. Ferguson will remain entitled to exercise them in accordance with their terms. Any unvested options will be forfeited.

In the event Mr. Ferguson’s employment terminates in connection with a “change in control,” whether by resignation or otherwise, Mr. Ferguson will be entitled to receive a lump sum cash payment equal to three times his base salary then in effect, as well as certain tax reimbursement payments. Mr. Ferguson will also continue to be covered under existing life, medical, disability, and health insurance plans for a period of two years. In addition, all options to purchase shares of our common stock or other company equity securities granted prior to the date of termination, whether vested or unvested, will become immediately vested in accordance with their terms.

Mr. Ferguson is prohibited from competing with the Company during the term of his employment and for a period of one year following termination of employment. Mr. Ferguson is also subject to certain confidentiality and non-disclosure provisions during this period.

Other Executive Officers. We also have employment agreements with each of Mr. Bouldin, Mr. Lingo, Mr. Puryear, and Mr. Seiter. Each of the employment agreements expire on December 31, 2006 and are subject to up to three automatic one-year renewals unless the Company or executive provide notice of non-renewal at least 60 days in advance of the expiration of a prior term. The agreements provide for an annual salary, as well as customary benefits, including life and health insurance, and reimbursement for certain civic and professional memberships that are approved in advance by the Company.

Under each of these agreements, if we terminate the employment of the executive “without cause” we generally are required to pay a cash severance amount equal to the executive’s annual base salary then in effect, payable in installments in accordance with the terms of the agreements. In the event of termination in connection with a “change in control,” whether by resignation or otherwise, the executive will be entitled to receive a lump sum cash payment equal to 2.99 times his base salary then in effect, as well as certain tax reimbursement payments, and the employee will continue to be covered under existing life, medical, disability, and health insurance plans for a period of one year.

Each of the executives is prohibited from competing with the Company during the term of his employment and for a period of one year following termination of employment. Each employee is also subject to certain confidentiality and non-disclosure provisions during this period.

On July 1, 2006, CCA hired William Rusak as Executive Vice President and Chief Human Resources Officer. According to the 8-K they filed on July 8:   

Compensation. The agreement provides for an annual salary of $250,000, as well as customary benefits, including a bonus pursuant to the Company’s cash compensation incentive plan, stock options or restricted stock awards pursuant to the Company’s equity incentive plan, life and health insurance, and reimbursement for membership fees in connection with Mr. Rusak’s membership in professional and civic organizations which are approved in advance by the Company. Pursuant to the terms of the agreement, the Company will also reimburse Mr. Rusak for all reasonable travel and other business expenses incurred by Mr. Rusak in performance of his duties. Mr. Rusak’s compensation payable under the agreement is subject to annual review by the Board of Directors, or a committee or subcommittee thereof to which compensation matters have been delegated, and may be increased based on his personal performance and the performance of the Company. The Agreement also provides for a one-time grant to Mr. Rusak’s on his first day of employment of (i) an option to purchase 14,265 shares of common stock of the Company and (ii) an award of 5,196 shares of restricted stock. Each of these awards is subject to the terms of the Company’s Amended & Restated 2000 Stock Incentive Plan and a separate award agreement.           

Termination of Agreement. Under the agreement, if the Company terminates the employment of Mr. Rusak “with cause,” it is only required to pay Mr. Rusak his salary through the date of such termination. If the Company terminates the employment of Mr. Rusak “without cause,” including non-renewal by the Company or Mr. Rusak, the Company generally is required to pay a cash severance payment equal to one-half (1/2) of his annual base salary then in effect, payable in accordance with a predetermined schedule based on the date of termination. In the event of termination in connection with a “change in control,” whether by resignation or otherwise, Mr. Rusak will be entitled to receive (i) a lump sum cash payment equal to 2.99 times his base salary then in effect, (ii) certain tax reimbursement payments, and (iii) coverage under existing life, medical, disability, and health insurance plans for a period of one year. (See summary or full 11 page employment contract)

Rusak replaced Anthony M. DaDante, who had the title of Executive Vice President and Chief People Officer and whose severance agreement called for a $245,000 payment. He agrees to remain available to the company for consulting, and 

"For a period of one (1) year following the Separation Date, Executive agrees to make reasonable efforts to cooperate with and assist the Company on an as-needed basis with respect to the human resources-related programs initiated by Executive during his employment with the Company... Should the Company request services by Executive pursuant to [this section], the parties agree to negotiate in good faith to reach a reasonable, mutually-agreed hourly rate for such services and further that Executive will be reimbursed for any bona fide, reasonable expenses incurred in performing such services. (summary or actual agreement)

 

Pay for the Board: Director and Executive Officers of CCA (From CCA's 2006 10-K (annual report), exhibit 10.26)

EX-10.26  DIRECTOR AND OFFICER COMPENSATION

                                                                   
               CORRECTIONS CORPORATION OF AMERICA (THE "COMPANY")

             SUMMARY OF DIRECTOR AND EXECUTIVE OFFICER COMPENSATION

I. DIRECTOR COMPENSATION. Directors who are employees of the Company do not
receive additional compensation for serving as directors of the Company. The
following table sets forth current rates of cash compensation for the Company's
non-employee directors.


                             RETAINERS AND FEES                                2006
                             ------------------                                ----
    Board retainer.......................................................    $ 50,000
    Board meeting fee....................................................    $  3,000
    Audit chair retainer.................................................    $ 10,000
    Audit member retainer................................................    $  2,000
    Compensation, Nominating and Governance chair retainer...............    $  5,000
    Committee chair meeting fee (excluding Executive)....................    $  2,500
    Non-chair committee meeting fee......................................    $  2,000

         In addition to the cash compensation set forth above, each non-employee
director receives a nondiscretionary annual grant of a non-qualified option for
the purchase of 4,000 shares of the Company's common stock. The option has an
exercise price equal to the fair market value of the stock on the grant date and
is fully vested as of the grant date.

Misc Operational Expenses of Private prisons

"numerous recapitalization and refinancing transactions over the past several years" CORRECTIONS CORPORATION OF AMERICA 10-K (for Fiscal Year ending 12/31/2005), p 15. Page 32 items this expense as $32.3 million for 2005.

While the following is listed under "risk factors" ( a section I'd recommend reading), it gives some sense of the hours that lawyers and bankers need to spend working out these arrangements: 

Risks Related to Our Leveraged Capital Structure Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our debt securities.

We have a significant amount of indebtedness. As of December 31, 2005, we had total indebtedness of $975.6 million. Our substantial indebtedness could have important consequences to you. For example, it could: make it more difficult for us to satisfy our obligations with respect to our indebtedness; increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; and limit our ability to borrow additional funds or refinance existing indebtedness on favorable terms. 

Our new revolving credit facility and other debt instruments have restrictive covenants that could affect our financial condition. The indenture related to our aggregate principal amount of $450.0 million 7.5% senior notes due 2011, the indenture related to our aggregate principal amount of $375.0 million 6.25% senior notes due 2013, and the indenture related to our aggregate principal amount of $150.0 million 6.75% senior notes due 2014 issued subsequent to year-end, collectively referred to herein as our senior notes, and our new revolving credit facility contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our ability to borrow under our new revolving credit facility is subject to compliance with certain financial covenants, including leverage and interest coverage ratios. Our new revolving credit facility includes other restrictions that, among other things, limit our ability to incur indebtedness; grant liens; engage in mergers, consolidations and liquidations; make asset dispositions, restricted payments and investments; enter into transactions with affiliates; and amend, modify or prepay certain indebtedness. The indentures related to our senior notes contain limitations on our ability to effect mergers and change of control events, as well as other limitations, including: limitations on incurring additional indebtedness; limitations on the sale of assets; limitations on the declaration and payment of dividends or other restricted payments; limitations on transactions with affiliates; and limitations on liens. 

Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debts. We do not have sufficient working capital to satisfy our debt obligations in the event of an acceleration of all or a significant portion of our outstanding indebtedness. CORRECTIONS CORPORATION OF AMERICA 10-K (for Fiscal Year ending 12/31/2005), p 28-9. Page 32 lists interests expenses as $63.9 million for 2005. 

General and Administrative Expenses: $57 million for 2005. CORRECTIONS CORPORATION OF AMERICA 10-K (for Fiscal Year ending 12/31/2005), p 32. "For the years ended December 31, 2004 and 2003, general and administrative expenses totaled $48.2 million and $40.5 million, respectively. General and administrative expenses increased from 2003 primarily due to an increase in salaries and benefits, combined with an increase in professional services during 2004 compared with 2003." (p 55)

Audit Fees & Tax Fees: $1.2 million for 2005, down from $1.8 million in 2004  CORRECTIONS CORPORATION OF AMERICA - FORM DEF 14A April 7, 2006, p 17

Under the section Critical Accounting Policies:

Income Taxes ... During 2003, the Internal Revenue Service (“the IRS”) completed its field audit of our 2001 federal income tax return. During the fourth quarter of 2004, the 2001 audit results underwent a review by the Joint Committee on Taxation. Based on that review, the IRS adjusted the carryback claims we filed on our 2001 and 2002 federal income tax returns, requiring us to repay approximately $16.3 million of refunds we received during 2002 and 2003 as a result of tax law changes provided by the “Job Creation and Worker Assistance Act of 2002.” A portion of our tax loss was deemed not to be available for carryback to 1997 and 1996 due to our restructuring that occurred between 1997 and 2001. 

Self-funded insurance reserves. As of December 31, 2005 and 2004, we had $33.6 million and $34.4 million, respectively, in accrued liabilities for employee health, workers’ compensation, and automobile insurance claims. We are significantly self-insured for employee health, workers’ compensation, and automobile liability insurance claims. As such, our insurance expense is largely dependent on claims experience and our ability to control our claims. We have consistently accrued the estimated liability for employee health insurance claims based on our history of claims experience and the time lag between the incident date and the date the cost is paid by us. We have accrued the estimated liability for workers’ compensation and automobile insurance claims based on a third-party actuarial valuation of the outstanding liabilities. These estimates could change in the future. It is possible that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.

Legal reserves. As of December 31, 2005 and 2004, we had $13.2 million and $16.6 million, respectively, in accrued liabilities related to certain legal proceedings in which we are involved. We have accrued our estimate of the probable costs for the resolution of these claims based on a range of potential outcomes. In addition, we are subject to current and potential future legal proceedings for which little or no accrual has been reflected because our current assessment of the potential exposure is nominal. These estimates have been developed in consultation with our General Counsel’s office and, as appropriate, outside counsel handling these matters, and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.  CORRECTIONS CORPORATION OF AMERICA 10-K (for Fiscal Year ending 12/31/2005), p 36-7.

Under facility Operations:  

We have recently been successful at settling certain legal proceedings in which we are involved on terms we believe are favorable. During 2005, we settled a number of outstanding legal matters for amounts less than reserves previously established for such matters, which resulted in a reduction to operating expenses of approximately $2.7 million during 2005 compared with 2004. Expenses associated with legal proceedings may fluctuate from quarter to quarter based on changes in our assumptions, new developments, or by the effectiveness of our litigation and settlement strategies. Our recent success in settling outstanding claims at amounts less than previously reserved is not likely to be sustained for the long-term and it is possible that future cash flows and results of operations could be adversely affected by increases in expenses associated with legal matters in which we become involved. 

The operation of the facilities we own carries a higher degree of risk associated with a management contract than the operation of the facilities we manage but do not own because we incur significant capital expenditures to construct or acquire facilities we own. Additionally, correctional and detention facilities have a limited or no alternative use. Therefore, if a management contract is terminated at a facility we own, we continue to incur certain operating expenses, such as real estate taxes, utilities, and insurance, that we would not incur if a management contract was terminated for a managed-only facility. As a result, revenue per compensated man-day is typically higher for facilities we own and manage than for managed-only facilities. Because we incur higher expenses, such as repairs and maintenance, real estate taxes, and insurance, on the facilities we own and manage, our cost structure for facilities we own and manage is also higher than the cost structure for the managed-only facilities. CORRECTIONS CORPORATION OF AMERICA 10-K (for Fiscal Year ending 12/31/2005), p 40.

Customer Acquisition Costs: $873,000 + customer list $765,000 CORRECTIONS CORPORATION OF AMERICA 10-K (for Fiscal Year ending 12/31/2005), p F19

From time to time, the company sells additional stock and notes. From the January 17, 2006 CORRECTIONS CORPORATION OF AMERICA - FORM S-3ASR:

Paul's final comment: With all these extra costs, how does the private prison manage to be cheaper than a public prison? You use non-union labor, pay them less than the state would and give them fewer benefits. That creates more inequality as we lock up more poor people. 

For more background understanding these filings, see "Getting Started with Financial Statements" and "How to Read an Income Statement" from the Finance Professor at TheStreet.com, which also has an article on How to Read an Income Statement

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