The U.S. government halted a decade-long experiment to hire private companies to help manage the soaring prison population, sending shares of facility operators Corrections Corp. of America and GEO Group Inc. plunging.
Corrections Corp. fell 37 percent to $17.06 at 2:05 p.m. in New York, after earlier dropping as much as 52 percent, the real estate investment trust's biggest intraday decline in almost 16 years. GEO Group plummeted 38 percent to $20.14, after earlier falling 50 percent, its largest drop since the stock began trading in 1994.
The Federal Bureau of Prisons will phase out the use of privately operated prisons with the goal of ultimately ending contracts with them, according to an order today from Deputy Attorney General Sally Yates. Private prisons "simply do not provide the same level of correctional services, programs and resources" and "do not save substantially on costs," and there's less need for such facilities as the federal prison population declines, she said.
"I am directing that, as each contract reaches the end of its term, the bureau should either decline to renew that contract or substantially reduce its scope in a manner consistent with law," Yates said in her memo. The Federal Bureau of Prisons accounts for 25 percent of the U.S. Justice Department's budget annually, Yates wrote.
The U.S. government began contracting with private operators about 10 years ago after incarceration grew beyond what it could handle. The federal prison population increased by almost 800 percent between 1980 and 2013, often at a far faster rate than the Bureau of Prisons could handle at its own facilities, according to the Yates memo.
But cracks in the plan emerged, with incidents of assault and other problems in private facilities piling up. By 2013, with both the federal prison population and proportion of federal prisoners in private facilities reaching their peak, the bureau was housing about 15 percent of prisoners, or almost 30,000 inmates, in privately operated prisons. That same year, the Justice Department began to identify reforms, leading to actions including a decision three weeks ago to end a private-prison contract for about 1,200 beds and today's call to phase out contracts with private operators in future.
"These steps will reduce the private prison population by more than half from its peak in 2013," Yates said.
Corrections Corp., the largest U.S. owner of private prisons, owned or controlled 49 facilities and 25 halfway houses, and managed an additional 11 sites owned by its government partners as of June 30, according to its second-quarter regulatory filing. At GEO Group, U.S. government agencies accounted for 45 percent of revenue in 2015, according to the company's annual report. GEO Group has been trying to win new clients and also operates facilities in Australia, South Africa and the U.K.
Corrections Corp. and GEO didn't immediately respond to calls and e-mails seeking comment.
"We are dependent on government appropriations," both companies said in their annual reports for 2015. Corrections Corp.'s contracts with government entities typically run for as many as five years, with renewal options. The company said in its annual report that 24 facility contracts are scheduled to expire on or before Dec. 31 of this year with renewal options, and 10 others are set to end without potential for renewal. Revenue from the 34 contracts last year was $594 million, or 33 percent of total revenue.
Seven years of stock options granted to Corrections Corp. Chief Executive Officer Damon Hininger plunged underwater with today's stock decline. Hininger had 474,367 stock options at the end of 2015, according to a company filing. Those would have been worth $3.22 million if exercised at $27.22, Corrections Corp.'s closing price yesterday. Hininger's options have strike prices between $17.38 and $24.
Stock options were eliminated from Corrections Corp.'s compensation plan in 2012 and were replaced with restricted stock and performance shares. Payout of the performance awards is based on funds from operations per share.
The federal action won't affect contracting by individual U.S. states, and larger state-level contracts are "arguably more important" for the private prison operators, Daniel Hanson, an analyst at Height Securities, wrote in a report today. Furthermore, Corrections Corp. and GEO Group facilities "are vital to the smooth functioning of the federal prison system and they will remain integral over coming years," he said.
"While the Obama administration may desire a reduction in the use of private prisons at the federal level, we believe that this goal is more aspirational than attainable," Hanson wrote.