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This Week’s Outsourcing Scan 8-22-2016

1) National: In what some see as an historic reversal of prison privatization, the Department of Justice has ordered the Bureau of Prisons to wind down incarceration contracting with Corrections Corporation of America, the GEO Group, and Management and Training and end its use of private prisons. On the news, the share prices of CCA and GEO collapsed, and a day later market analysts and rating agencies were voicing concerns about the quality of their corporate debt. Standard & Poor’s put GEO on credit watch negative, and Moody’s downgraded CCA to “junk” status.

After decades of growth, the future of the private prison industry is in doubt. 

The Bond Buyer
 reported that although the announcement “has a small immediate effect on the municipal bond-financed private lockup sector,” it “could hint at trouble for the private prison industry.” It reported that “the memo does not affect the immigration detainees who fill most of the bond-financed private detention facilities in Texas and other border states, industry officials say,” but goes on to imply that local governments may be affected: “Many of the operators of such DHS and ICE detention centers lease facilities financed by local public facilities corporations, created by city or county governments, that issue revenue bonds backed by lease payments or per diems from the federal government.” [Sub required].

A debt issue of CCA “is now [Friday] trading at $93.75 and was trading at $101.88 last week. Price changes in a company’s debt in credit markets often anticipate parallel changes in its stock price.” [Watchlist News, August 21, 2016].

The DOJ’s move came shortly after a DOJ Inspector General’s report pulled the rug out from under the for-profit prison industry’s central claim that they a provide a much cheaper and safe alternative. The DOJ IG found GEO Group to be the worst of the lot (p. 15). This, combined with the effect of decades of organized opposition to prison privatization by 
human rights and other progressive groups, academics, and individuals, and a commitment this year by both Hillary Clinton and Bernie Sanders to end federal use of for-profit prisons, has dramatically undermined the political backing and “private is better” ideology that the industry has relied on for its existence.

In the Public Interest’s Donald Cohen paid tribute to years of effort by the movement to end private prisons, saying “the DOJ’s decision is a testament to the long and tiring work of some of our closest allies, including Grassroots Leadership, Detention Watch Network, ACLU, AFL-CIO, AFSC, AFSCME, Prison Legal News, Enlace, Justice Strategies, SEIU, Teamsters, CWA, AFGE, PICO, The Sentencing Project, Brave New Films, NAACP, and many more.”

AFSCME President Lee Saunders
 welcomed the Justice Department’s move, saying it “reinforces what we have long asserted: The dedicated women and men working in our nation’s federal, state and local public prisons keep our communities safe, day in and day out, and they do it more cost effectively than at prisons operated for profit by private corporations.”

Although GEO Group and CCA executives hastened to stop the bleeding by holding urgent investor calls, share prices did not fully recover and at least one money manager (Strubel Investment Management) said “we think the extreme drop in the stock price is warranted and that this is just the beginning for these two companies.” However, yesterday morningWells Fargo reaffirmed their neutral rating on CCA shares. CCA executives Damon Hininger and Mark Emkes bought additional shares on Thursday.

It seems likely that big holders of CCA shares took a significant hit from the event. In the first quarter, BlackRock increased its position in CCA by 47.9%. State Street reported owning over $100 million of CCA stock in the first quarter, which means it could have lost $40,000,000 in the 40% drop if its position, which is unknown, was at that level. [Ticker Report, August 21, 2016; sub required].

The big question is whether the U.S. Marshals Service and ICE will now pull their business from CCA and GEO, and whether DOJ’s move will prompt closer scrutiny of CCA’s and GEO’s contracts for prisoner release and monitoring, on which they are staking part of their future should their federal and state prison contracts dry up. Executives from both companies were at pains on their conference calls to stress that the DOJ decision only affected the Bureau of Prisons, and thus left most of their federal and all of their state business intact. 

But regarding USMS, Strubel Investment Management says “there is substantial risk that the DOJ decision on the BOP will also affect USMS. It would be odd to see one part of a federal agency completely phase out the use of private contractors while a different part of the agency continued to use them.” 

Regarding ICE, the DOJ decision is putting increased pressure on the Obama administration to get the profit motive out of the immigration detention system. The ACLU has called on the Obama administration to follow suit with ICE contractsTakePart’s Rebecca McCray reports that “today, 62 percent of beds in the roughly 250 detention centers overseen by DHS are operated by for-profit corporations. These facilities, which house nearly 25,000 immigrants awaiting deportation or whose cases are pending, have repeatedly come under fire from advocates for cultivating unsafe and abusive environments.”

More broadly, both pro-business and social justice voices are pointing to the DOJ decision as a sign that the decades-long drive to privatize of government services has hit a wall. Cary Leahy, the chief U.S. economist of Decision Economics, told the BBC that “maybe this is a sign that the government thinks that privatization of certain services has gone too far.” Aman Banerji of Roosevelt Forward writes that the DOJ decision “offers an opportunity to contest the privatization of state services beyond the prison system.”

The fate of federal prison privatization is closely tied up with the outcome of this year’s presidential election. Hillary Clinton has supported an end to it, but Donald Trump, who could reverse last week’s DOJ decision with the stroke of a pen, is supportive of private prisons and a tough immigration detention policy.

2) NationalThe Washington Post runs a major investigative piece, backed by documents obtained by National Immigrant Justice Center, on what it calls “the administration’s $1 billion deal to detain Central American asylum seekers.” The deal included lockup quotas for CCA, which has massively profited from the arrangement at the expense of taxpayers. The Post reports that “as Central Americans surged across the U.S. border two years ago, the Obama administration skipped the standard public bidding process and agreed to a deal that offered generous terms to Corrections Corporation of America, the nation’s largest prison company, to build a massive detention facility for women and children seeking asylum. The four-year, $1 billion contract — details of which have not been previously disclosed — has been a boon for CCA, which, in an unusual arrangement, gets the money regardless of how many people are detained at the facility. Critics say the government’s policy has been expensive but ineffective. Arrivals of Central American families at the border have continued unabated while court rulings have forced the administration to step back from its original approach to the border surge.”

3) National: Donald Cohen of In the Public Interest discusses the private prison industry on “State of the Union,” produced by District Council 37, AFSCME, AFL-CIO—New York City’s largest public employee union. Listen here.

4) NationalCorrections Corporation of America is involved in another scandal, this time for the Leavenworth Detention Center, which it operates for the Federal Bureau of Prisons, U.S. Immigration and Customs Enforcement, and the U.S. Marshals Service. “A prison drug-smuggling scheme in which seven people are charged may involve more than 90 inmates, perhaps five dozen outsiders and a ‘significant number’ of the lockup’s employees, according to a federal prosecutor in Kansas.” The smuggling case is also “at the center of a separate legal storm over prison recordings of lawyer conversations with clients at the lockup. A public defender has called that an unprecedented privacy violation, and [U.S. District Judge Julie] Robinson this week said she plans to appoint an independent investigator to help her manage that complex matter.”

5) National: In another blow to an industry profiting off the criminal justice system, the Justice Department said in a court filing that holding defendants in jail because they can’t afford to make bail is unconstitutional. “Barry J. Pollack, president of the National Association of Criminal Defense lawyers, said Friday said he applauded the Justice Department for making ‘critically important arguments.’ A spokesman for the defense lawyers group said it believes ‘pretrial liberty must be the norm and detention prior to trial the carefully limited exception.’” The Sacramento Bee, reviewing the debate on the bail bond industry, has called this issue “the next frontier of criminal justice reform.”

6) National: Cintas, one of the largest government contractors for facilities management and uniforms, swallows up its smaller rival, G&K Services, in a $2.2 billion deal. The transaction requires G & K shareholder and regulator approval.

7) National: Global Tel*Link (GTL), the leading provider of phone services to U.S. prison inmates, is opposing a rate cape on calls imposed by the Federal Communications Commission. As In the Public Interest’s Buying Access report disclosed, using Prison Policy Initiative data, “a 15-minute call through GTL in Georgia would cost a prisoner $17.44.” [FCC Order on Reconsideration, issued August 9].

8) National: Hillary Clinton and Donald Trump will be addressing the annual convention of the American Legion this weekend in Cincinnati, and are expected to address the issue of privatizing or not privatizing veterans’ services. Clinton promises to block VA privatization, whereas Trump’s plan includes some elements of privatization.

9) CaliforniaThe Los Angeles Unified School District may move to shut down El Camino Real Charter High School. Issues cited by the school system in a letter to the school last week include possible inappropriate spending, poor accounting and oversight, and violations of public-meeting rules. L.A. Unified has accused the school of demonstrating “an inability to determine how public funds are being used and identify specific instances of their use for personal expenses,” adding that “fatal flaws in judgment … call into serious question the organization’s ability to successfully implement the charter in accordance with applicable law and district requirements.”

10) California: On September 1, the California Public Utilities Commission will be holding a public workshop to discuss the “Application of California-American Water Company for Approval of the Monterey Peninsula Water Supply Project and Authorization to Recover All Present and Future Costs in Rates.” In Sacramento, 9 am to 1 pm.

11) ConnecticutGov. Malloy (D) releases a plan to privatize dozens of group homes. The plan calls for cutting 605 related staff positions, 113 of which have already been eliminated. “Jennifer Schneider, spokeswoman for SEIU 1199, New England, the union representing the affected state employees, said ‘The governor’s proposal would decimate our state’s ability to provide services for the disabled.’ She urged Malloy to find the money to keep the disabled ‘in the only home many of them have ever known.’”

12) Montana/National: Public access to the state’s wildlife is dominating the governor’s race. “On one side, incumbent Democratic Gov. Steve Bullock is fighting private efforts to close off hunting and fishing grounds that Montanans have enjoyed for generations. On the other, Republican Greg Gianforte is seeking to empower big landowners (like himself) to limit such access. In 2009, he sued the state to remove a public easement that gave anglers, walkers and others access to the East Gallatin River via his property. He accused the Montana Department of Fish, Wildlife and Parks of using ‘extortion’ to keep that river path open.” Writing in the Columbus Dispatch, Froma Harrop says “today, the biggest threat to wildlife is loss of habitat, a concern for all environmentalists. Another issue, the movement to privatize public lands, should also link hunters and vegan hikers in common cause.”

13) New JerseyAmerican Water continues gobbling up local water companies in New Jersey. It just announced its purchase of the Shorelands Water Company, a privately owned water utility that provides water services to more than 11,000 customer accounts in Monmouth County.

14) PennsylvaniaSchool bus privatization worsens the Penn Hills school district’s critical financial woes. “Plans to save money by privatizing transportation in 2011 backfired, with busing costs instead spiking and further straining the cash-strapped budget. Prior to privatizing in 2010, the district enrolled 4,600 children and had 78 school buses; by 2014, enrollment dropped to 3,800 but the district had 111 buses across five companies.”

15) Pennsylvania: The Scranton City Council is concerned about the fate of stormwater treatment after the city’s sewer system is privatized to Pennsylvania American Water. “The water company is buying only the first two portions—sewer and combined sewer overflows—and not the stormwater lines. As a result, the city is considering creating a new authority to manage and maintain the stormwater system. The city recently applied for a $35,000 state grant for a stormwater management plan feasibility analysis.”

16) New YorkMassena council members urge the town to come up with an alternative to privatizing its hospital. “By privatizing, they were conceding defeat, according to [Councilman Steven D. O’Shaughnessy]. ‘If we privatize, we just give up. We give up any right to fight the fight and keep Massena Memorial Hospital,’ he said.”

17) PennsylvaniaCharter schools outspend traditional schools on chief administrator salaries by $87 a pupil, a report by the Pennsylvania School Boards Association finds. Its report states that “charter schools allocated a substantially greater proportion of their budgets to chief school administrators, principals and other administrative services than school districts.”

18) Tennessee: T.C. Weber, who blogs in Nashville as “Dad Gone Wild,” interviews Amy Frogge, a public school parent, lawyer, and school board member who just won re-election despite being outspent by proponents of privatization.

19) Virginia: Writing in The Washington Post, Bacon’s Rebellion’s Peter Galuszka reports that for the third time in four years the University of Virginia “is embroiled in an extraordinary controversy,” this time over finance. “The real problem here that no one wants to discuss is creeping privatization. It started a decade or so ago, when the cheapskate General Assembly agreed to grant U-Va. less in state funding in exchange for more school autonomy. Doing so put pressure on the university to get more creative with its financial investments and seek more out-of-state students, who pay higher tuition. Another factor is that conservative politicians and alumni dislike the idea of providing free tuition. They are less focused on having the school produce good teachers, nurses and other middle-class workers. Hedge-fund managers, who can donate big money as alumni, might be more like it for them.”

20) International: British Labour leadership candidate Jeremy Corbyn proposes a “citizens’ right to challenge” the privatization or outsourcing of local public services through referenda.

21) Think Tanks: Diane Ravitch of the Network for Public Education shares a clever poem on school testing and profiteering based on Kipling’s “White Man’s Burden.”

Legislative Issues

1) Utah: Privatization of Medicaid dental services three years ago is looking like a serious mistake as the California-based company that it’s contracted out to, Premier Access, has imposed a “capitation” model in which dentists are reimbursed based on a per child limit rather than by procedures performed. This is forcing dentists to drop Medicaid patients. The Deseret News says “it’s time for Utah lawmakers to revisit their decision to privatize this service. Too many of the state’s low-income residents already are suffering from lawmakers’ inability to agree on a way to expand overall Medicaid coverage to reach people left without benefits under the rules of Obamacare. It’s time to stop giving poor people, and especially their children, short shrift.”

 

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