View Full Version : Prison operator makes corrections to expand

08-24-2003, 09:26 AM
Prison operator makes corrections to expand

By Stephen Pounds, Palm Beach Post Staff Writer
Sunday, August 24, 2003

BOCA RATON -- Don't ask Mississippi Gov. Ronnie Musgrove about Wackenhut Corrections Corp.

You might get a growl.

In the past two years, Musgrove has locked horns with private prison operators, Wackenhut and rival Corrections Corp. of America over the financing of "ghost inmates" at Mississippi's private prisons. Both times he lost.

In the first go-around in 2001 when the state was in a budget crisis, he vetoed Mississippi's corrections budget to give more money to schools. The following day, the legislature trumped his veto -- but not before two key senators, Bunky Huggins and Jack Gordon, were wined and dined by Wackenhut President Wayne Calabrese and folksy, silver-haired lobbyist Al Sage.

Last year, Musgrove vetoed $54 million for the two prison companies because a legal provision locked in money for private prisons "whether (or not) there are sufficient inmates" to fill them. Again he got spanked.

"They have some effective lobbyists," one sardonic governor's staffer said.

Financial fisticuffs with politicians like Musgrove are just one of the hazards of running private prisons. Even worse are prison riots and misconduct charges against correctional officers.

Wackenhut Corrections has weathered them all. And after separating last month from its parent company, The Wackenhut Corp., and mopping up a spate of missteps two years ago, its stock has risen from $9 a share in April to more than $19 a share in July. In the private prison business, Wackenhut Corrections is one the nation's three major players. It manages 49 prisons in 13 states, including Moore Haven and South Bay in South Florida. Overseas, it runs prisons in Australia, South Africa, New Zealand, and Canada.

"Five years ago, the company was a shadow of what it is today," analyst Jim Macdonald of First Analysis Securities in Chicago said.

Corrections started as a subsidiary of security-guard giant Wackenhut Corp. in 1984. Ten years later, it began trading stock separately although it remained part of the parent company, Wackenhut. But Corrections' biggest move came last month when it bought back 57 percent of its stock from Group 4 Falck, the Danish security giant and owner of the Wackenhut corporation.

Until July, Chairman and Chief Executive George Zoley ran Corrections as part of Wackenhut. It was 19 years ago that he floated the idea for Wackenhut to manage prisons with company founder George Wackenhut. Zoley closed the company's first deal to build a detention center in 1986 for the U.S. Immigration and Naturalization Service. The founder, Wackenhut, allowed a $17 million initial offering of Corrections stock in 1994 to feed expansion of the prison management business. But he retained majority ownership of the stock.

Corrections benefitted from a trend in the early-to mid-1990s toward privatizing prisons. The company's strategy has been to guarantee a lower cost operation than state or federal prisons. It then contributes to political campaigns and dangles jobs and tax money in front of local politicians to get behind a prison project.

Fla. candidates got $65,200

A study by the National Institute on Money in State Politics found that Wackenhut Corrections gave $237,750 to candidates in six Southern states in 2000, including $65,200 in Florida.

"As if to put an exclamation point on its effort to influence the legislature, Wackenhut Corrections wrote 25 checks of $500 each totaling $12,500 on Nov. 1 and 2, just hours before the midnight Nov. 2 contribution deadline," according to the study.

In these states, when legislation came up on private prisons, the votes often went Wackenhut's way. In Mississippi, Musgrove found out with the override of his veto. In North Carolina, legislators approved an expensive expansion of private prisons. In Georgia and Florida, measures to limit private prisons or industry influence died in committee.

In Florida, Wackenhut even bought a temporary-staffing company from state House Majority Leader Jim King in 1997 for $11.5 million in stock and cash.

"They contributed early in a campaign, giving to incumbents before there was a campaign, or at the end when there was a sure winner," said Ed Bender, who led the study on political contributions. "And they hire top-flight lobbyists."

That's a problem when for-profit prisons can sway legislators to boost spending for more prison beds over spending on drug treatment and other programs for inmates. It is especially acute when a budget crunch forces a state to decide between dollars for education or human services and money for private prisons, said Judy Greene, a fellow at the Open Society Institute in N.Y. who studies prison privatization.

Ken Kopczynski, a lobbyist for the Florida Police Benevolent Association which has opposed private prisons, remembers when Florida began to privatize prisons. The state Department of Corrections was given the go-ahead in the late 1980s to look into privatization as a option to relieve crowding. But after foot-dragging by the department, the legislature created a separate commission in 1993 to oversee private prisons under the Department of Management Services.

"Florida is the only state in the union with two departments of correction," Kopczynski said. "It didn't hurt that the lobbyist for the DMS was the wife of the lobbyist for Wackenhut."

As a state consultant, University of Florida Professor Charles Thomas wrote the law creating the privatization commission and often championed private prisons. As director of the Private Corrections Project at the university, he was considered an expert.

In 1997 and '98, ethics complaints were filed against Thomas over his close ties to the private corrections industry. Zoley even complained to the commission about his "shock" at learning of Thomas' board seat on a rival's real estate investment trust. But Thomas' project was financed by several prison companies, including Wackenhut. He was fined $20,000 and forced to resign.

"He knows Charley is a (disciple) for the industry but Zoley only questions his ethics when he joins a competitor," Kopczynski said.

During the state's last legislative session, the Corrections Department requested 4,100 new beds for Florida's public prisons. Instead, the legislature cut back the total in favor of a 1,086-bed expansion at private prisons. The state hasn't said which companies will get those beds but Privatization Commission Director Alan Duffee has recommended Wackenhut's South Bay prison in Palm Beach County for part of the expansion.

Zoley, who is involved in local politics as chairman of Florida Atlantic University's Board of Trustees, says Wackenhut's political dealings are part of a business in which government is the sole client.

Even without political contributions and powerful lobbyists, private prisons can make a strong sell. They bring jobs to an area. They pay property taxes and public prisons don't. They spend money in the community. And they push state-run prisons to spend less.

Communities want the jobs

"We don't want to be somewhere where we're not wanted," Zoley said. "But in these hard times, there are communities that want the employment opportunities."

Take Pueblo, Colo., population of 98,300.

This year, the company approached the city about building a pre-release center on the west side of town where convicts could be socialized to reenter the community.

To smooth the way, Zoley and Calabrese flew in for a cake-and-punch, meet-and-greet with townspeople in May. Wackenhut Corrections would employ 160 people and would spend $60 million to build the center, much of it going to local construction firms. The company also would pay $700,000 in sales taxes for materials to build the center.

After residents from an adjacent neighborhood balked, the city council rejected the site.

"There was a tremendous knee-jerk reaction when you said the word 'prison,' " Pueblo City Manager Lee Evett said.

Wackenhut countered with a second site, this one in an industrial park on the east side of Pueblo. In negotiations, the firm agreed to pay almost $80,000 an acre more than the appraised value, and $40,000 a year for city services and road maintenance.

It also flew Pueblo officials to Florida to tour the South Bay prison "and probably played a little golf," Evett said. When the second site came to a vote in July, the city council approved it.

Being a good neighbor

"They were pretty upfront," Evett said of Wackenhut "It's going to have towers and barbed wires.... But they were also saying, 'We're going to be a good neighbor.' "

Five years ago, the company learned the hard way how public opinion can turn against it.

In December 1998, the first of three inmate slayings occurred at its prison in Hobbs, N.M. In August the following year, a guard was killed at the Santa Rosa, N.M. prison, and two days of rioting followed.

Around the same time, the company made headlines in Texas in a sex scandal at a state prison in Austin involving its guards and female inmates. Twelve Wackenhut Corrections employees were indicted on charges ranging from rape to sexual harassment.

Then in March of 2000, a Louisiana judge toured the Jena juvenile prison after reports alleging physical abuse and mismanagement. Afterwards, the judge removed seven youths for their own protection.

Texas later took over management of its prison; Louisiana closed its prison.

Zoley, who was paid $2 million last year, blames the problems on growing too fast. In response, he has opened three regional headquarters for closer control of Wackenhut Corrections' prisons. Now the federal government is looking at the Jena location for a detention center and Wackenhut has managed to retain one-third of the private prison beds in Texas.

"Operationally, we've cleaned up our act," Zoley said.

Over the past year, Zoley has focused his attention on buying out Group 4, which bought The Wackenhut Corp. in May 2002 for its guard service not its corrections unit. It immediately said it would sell Corrections and put the price tag at $170 million.

In the deal completed in July, Zoley spent only $132 million to buy back Group 4's 12 million shares of Corrections. By killing those shares, Corrections added 70 cents a share to its bottom line. It also sold its 50 percent stake in a prison venture in the United Kingdom, bringing in $52 million after taxes.

The good news is that Corrections has $100 million in cash. The bad news is it's $250 million in debt.

"They plan to acquire something," Macdonald said. "We know they want to go back to the UK."

Macdonald projects $1.14 a share in 2003 on $602 million in revenue. But that doesn't account for the drop in outstanding shares and the sale of its UK unit, which will boost earnings by about $2 a share, the company said.

"They could earn as much as the $1.70-range if they put their money to work," Macdonald said.

Prisons crowded again

Macdonald said the private corrections industry faces a market where states aren't building many new prisons. Some are expanding the prison capacity they have, paving the way for some growth. But some are releasing prisoners.

"Prisons are becoming slightly overcrowded again," Macdonald said.

More encouraging, at least for private-prison companies, the federal government is adding 7,000 detention-center beds, giving the industry its widest avenue to growth -- at least until states start a new prison-building boom.

"Because of homeland security, all the agencies are expanding," Zoley said.

As part of the Group 4 deal, Zoley will have to come up with a new name other than Wackenhut within a year. Still, losing the Wackenhut name shouldn't hurt Zoley; he has a reputation as a disciplined manager and early innovator in the private prison industry. But with independence, Zoley cuts a tether that has helped Corrections around the world. In April, the company moved away from the parent company's home office in Palm Beach Gardens to Boca Raton.