The Republic | azcentral.com Sun Dec 29, 2013 12:39 AM

The Red Rock Correctional Center, Arizona’s newest private prison, will begin housing inmates next month, with taxpayers guaranteeing its owner a profit to help alleviate overcrowding in the state penitentiary system.

State Corrections Director Charles Ryan hopes to house up to 1,000 inmates there by the end of next year — twice the number originally planned in the first year. The facility along East Arica Road and Arizona 87 just outside Eloy has the capacity for 1,596 inmates.

The complex about 65 miles south of Phoenix was built in 2006 by Corrections Corporation of America to house inmates for the state of California. After CCA won an open-bid contract last year to house Arizona inmates, it moved its California prisoners to other CCA sites around the country.

According to Ryan, state-owned facilities have roughly 5,000 inmates sleeping in temporary beds because of overcrowding. Arizona, as of Friday, housed 41,157 inmates, about one-sixth of them in private facilities.

“The department was in need of beds,” Ryan said. “The solution was a private-prison operator.”

Corrections officials forecast the state prison population will surpass 43,000 in fiscal 2016, despite four recent years of relatively little growth or declines in the population.

The Corrections Department is wary of building its own new prisons to accommodate the growth, citing costs that could exceed $100 million. Instead, it is expanding its use of private prisons.

If the contract lasts 20 years as expected, the long-term cost of the CCA contract is likely to exceed $400 million.

CCA wins contract

The Corrections Corporation of America beat four other private-prison companies in August 2012 to win the contract.

CCA is guaranteed a 90 percent occupancy rate at Red Rock, meaning the state will transfer inmates out of state-operated facilities and into the private prison until the minimum occupancy is met.

The guarantee requires a minimum of 450 inmates by the end of the first year, and 900 by the end of the second, but Ryan wants to accelerate the transfer of up to 1,000 inmates in 2014. There also is room to expand to the facility’s capacity.

Arizona will pay CCA $65.43 a day per inmate. Once the contract is fully implemented, the 90 percent occupancy guarantee will result in the company being paid at least $58,887 a day for 900 inmates — nearly $21.5 million a year. The contract is for an initial term of 10 years, with two five-year renewal options upon mutual agreement. Should the contract run 20 years, CCA could make at least $430 million. Ownership of the facility would transfer to the state after 20 years.

The Arizona Republic reviewed Corrections documents and CCA financial records and calculated the company’s operating margin on the Red Rock contract. The operating margin measures how much of each dollar of revenue from the state Red Rock will keep after ordinary expenses.

The Nashville-based company, which is publicly held, said in a U.S. Securities and Exchange Commission filing that its average total daily expenses per inmate at facilities it owns and manages was $45.89 during the first nine months of 2013. Based on that figure, Arizona’s daily payment will provide $19.54 in daily operating income per inmate, as compared with $22.23 in daily income per inmate the company typically makes in other facilities it owns and operates.

That equates to an operating margin of about 30 percent on the Red Rock contract. The company, which operates 69 facilities in 20 states and the District of Columbia, averages just more than a 29 percent operating margin at all facilities it manages or owns, according to a recent company filing.

The state is requiring CCA to make numerous improvements, such as building a new softball field, enhancing dining facilities and adding parking at Red Rock. The company, in an SEC filing, said it expects to incur approximately $20.5 million in capital-improvement expenses — less than what it will make in an entire year with Arizona’s occupancy guarantee.

“We are being compensated for a service we provide,” said Steven Owen, a CCA spokesman. “It’s a very specialized service.... We are providing cost savings at the end of the day to taxpayers and relieving unsafe overcrowding.”

Corrections Corporation of America trades on the New York Stock Exchange. For the first nine months of this year, it recorded $1.26 billion in revenue and posted $253.3 million in profit — more than double the earnings recorded for the same time in 2012.

High occupancy

Critics say promising such a high inmate-occupancy rate at Red Rock guarantees CCA a healthy bottom line at taxpayer expense. The occupancy guarantee at Red Rock, however, is the lowest among the state’s three private-prison operators, with other sites having occupancy guarantees of 95 to 100 percent, according to Corrections Department records. The other private operators are the GEO Group Inc. and Management & Training Corp.

Ryan said occupancy-rate guarantees are a way for the state to secure a fixed cost to house inmates, and it keeps contractors from raising rates because of demand. The guarantees also are needed, he said, to attract private-prison operators who must recover their costs to build facilities. The state saves money upfront by not having to build new prisons despite a growing inmate population, he said. The state also assumes ownership of the facilities at the end of the contract.

“We are not closing state prison beds to ensure a private-bed operator a guaranteed occupancy rate,” Ryan said.

But Shar Habibi, research and policy director for a Washington, D.C.-based watchdog group called In the Public Interest, said Arizona taxpayers are on the hook if the CCA beds and other private facilities go unused.

“If you don’t fill those beds, you are still paying for them,” said Habibi, whose group monitors private-prison contracts around the country.

CCA spokesman Owen called In the Public Interest’s claims against private-prison companies “sensationalized.” He said occupancy guarantees are commonly used by state governments to control costs.

“We look at what we can do to provide the most cost-effective solutions,” Owen said.

But Justin Jones, former Oklahoma Department of Corrections director who has worked with Habibi and is an opponent of private prisons, said correctional facilities should be used to reduce recidivism — not become a “profit machine” for private businesses.

Lower costs

Arizona began looking at private prisons in the late 1980s, Ryan said, when a group of lawmakers and Corrections officials visited Louisiana and compared the operational cost between state-run and private facilities.

Ryan, at the time an upper manager at DOC, was asked to go on the trip and assess staffing levels and operations. He said he concluded that the private prison had lower operating costs because it did not have a correctional officer at all of the security posts.

He said his opinion was not solicited at the time about whether Arizona should have private prisons. He sidesteps the question today.

“Private prisons are part of the public policy of the state of Arizona as determined by the Legislature and the executive branch,” Ryan said. “I am here to support the public policy, and that public policy has served the Department of Corrections and the state of Arizona particularly well during difficult budgetary times.... To me, it’s not a philosophical issue. It’s a business decision.”

Arizona’s first contract prison opened in Marana in October 1994, 10 months after a “truth in sentencing” law went into effect that dramatically increased prison sentences and the state’s inmate population, which at the time was just less than 19,000 inmates. Arizona’s prison population is now more than double that.

And since fiscal 1995, the number of in-state private-prison inmates has grown from 273 to 6,489. Arizona also contracted to house inmates with out-of-state private prisons from fiscal 2004 to 2010.

Whether CCA or other private-prison operators save the state money is debatable.

A Corrections Department study found it was less expensive in 2008, 2009 and 2010 to house inmates in state-run medium-security facilities compared with similar in-state private facilities.

That still may be the case, but it is difficult to determine because the state no longer factors inmate costs the same way.

In fiscal 2013, which ended June 30, the non-adjusted average daily cost per inmate at a medium-security prison was $64.52, compared with the private-prison cost of $58.82.

However the state’s number includes inmates who have significant medical or mental-health issues. The private prisons house only healthy inmates.

When an adjustment is made for the medical costs, the balance tips significantly in the state’s favor.

The adjusted 2010 daily cost of housing a medium-security inmate in a state-run facility was $48.42, compared with the private-prison cost of $53.02.

Ryan acknowledged that private-prison inmates are “a healthier, less-expensive population” to house.

The Legislature in 2012 repealed the law that required the Corrections Department to conduct a state and private cost comparison, which had occurred since fiscal 1995.