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[Music] the privatization of prisons and detention centers has been a source of debate for over three decades there has to be some things in our society that we agree are not a business opportunity there's absolutely nothing wrong with profiting off of anything the question is are you providing a service with good quality with humane conditions and so on and moral imperative of government should be to deliver the best outcomes the u.s. privatized parts of its state and federal Corrections and attention facilities in the 1980s two companies in particular core civic NGO group have dominated the industry but the uncertainty of a highly polarized industry stems mainly from the political climate at the end of President Obama's second term then Deputy Attorney General Sally Yates announced that the administration would phase out private prisons core civic and Geo stocks plummeted two months later President Trump was elected and the stocks soared there has been political sensitivity in our stock it's unfortunate but our focus continues to be operations that's what we can control we can't control the political dynamic but lately things have taken a deeper turn Democratic candidates call for a total abolition a number of states have or could be banning the industry and Wall Street is divesting on top of it all prison populations are decreasing that's a huge indictment despite all the noise in the market companies have very good new quiddity how a company is structured on its balance sheet does not save it from a cultural revolution I don't know if it's a breaking point or a time of change but I think it presents it again an opportunity for us to be [Music] more transparent about what we do could this be the beginning of the end for private prisons at the height of the war on drugs and tough on crime era the country began in prison more people than ever seven hundred and fifty thousand people were incarcerated in America by 1997 1.7 million with the growing prison population so were the costs of operating prisons from 1980 to 1994 operating costs of state and federal prisons went from 3 million dollars to nearly 18 million dollars overcrowding was becoming increasingly problematic and the government couldn't keep up Prabhat prisons were established to help maintain the ten billion dollar industry private prison companies could build facilities faster without voter approval they also claimed they could provide a higher quality at a lower price but the accuracy of that claim has been under scrutiny no compelling government study is conclusive one way or another in 1996 the General Accounting Office stated that they were not able to conclude that privatization saved money a Department of Justice study from 2001 claimed that the average savings from privatization was only about 1% and not the projected 20% there are a lot of accounting details that make it difficult to properly compare the cost between public and private and actually there are a lot of factors that make it difficult to compare quality the private prison model was simple build and manage buildings and secure government contracts charge a daily fee for each bed you fill something called per diem or what is commonly referred to as Mandy's in 1987 Corrections Corporation of America sees see a today called core Civic charged 32 dollars and 17 cents per inmate by 1997 it charged the government 33% more however the companies cost only increased by about 8 percent the company's revenue grew 27 times Brian Evans is the CFL of Geo so where do I look at the camera or about two-thirds of Geo group's revenue comes from federal and state corrections and attention contracts ice contracts make up 1/5 our business changed over the years in 2003 with the chairman and CEO the founder of the company George Zoli had a directive at that time to expand the company into other service lines diversify if you will and to own and operate more of the facilities so that process started in about 2003 we were about 500 million in revenue today we're about two and a half billion in revenue some of the that growth has been through acquisitions about half of it through acquisitions and about half of it through organic growth new contracts on new facilities in November 2019 CNBC visited a geo group prison in Florida access to Prisons for journalists is unusual but geo was able to grant us access with state approval within a week we advocated on your behalf to to be here because we want you to be here and we like for people to come here and see what goes on hopefully to change their minds South Bay Correctional Facility is owned by the state of Florida but has been managed by geo since 2009 a contract worth 356 million dollars for 11 years it houses nearly two thousand inmates that are incarcerated for a variety of crimes ranging from low-level charges to felonies geo is paid fifty one dollars and 11 per inmate or mandate South Bay offers a number of educational vocational and substance abuse programs many of which are mandated by the state in 2015 geo launched its continuum of care program it's an expansion of imprison of programs and includes post release support according to the contract the state pays geo around 3 million dollars for COC at Southbank it was all about okay what's our role responsibility and that was to provide the most opportunities in making sure that we did everything we could to provide the rehabilitative services so after they left they wouldn't come back Shawn Killian was convicted of murder when he was 21 years old he's 35 now he's been at South base since 2011 when you're in state-run facilities if you have longer than a five-year sentence basically it's very difficult to get in programs you know they give priority to the guys that are about to get out but at the same time there's not a lot of programs offered here they have so many programs and everybody's encouraged to take part in them between ice US Marshals Bureau of Prisons and state geo manages about 70 facilities we asked David Ventrella how many of them look like this how many of them look like this well I would say all of the facilities that we own either look like this or better the ones that we manage I would say are pretty similar but the visit to South Bay is one side of the private prison story less than a month prior to the tour and a mate was flown to a hospital after a stabbing geo group like Cora Civic and other private prison companies have been plagued with litigation and claims of human rights abuses there's only two ways for a for-profit entity to create revenue one is to increase your revenue basically by increasing your market share and secondly to cut costs so to lower your expenses and therefore take home more profitability and so if you're cutting cost when it comes to caring for humans that's generally not going to put you in a good place do bad things happen in a well-run system yes they do we don't try to cover it up and we try to learn from that the George Hill Correctional Facility in Delaware County Pennsylvania for example was operated by GL from 2002 to 2008 twelve inmates died at the facility during that time they resumed control of the prison in 2017 when they acquired community education centers for 360 million dollars this is a jail that has significant significant issues we have had instances of wrongful death suicides that have resulted in very large settlements with families we've had issues with under maintenance that's resulted in I wouldn't call dangerous but certainly inhumane conditions continuous understaffing issues private prison companies occupy about seven percent of the total state and federal correctional facilities market that still produces billions of dollars in revenue for detention however about seventy five percent of total detainees are in crowded facilities the funding of detention took off during President Obama's second term coinciding with the increase in migrants from Central America the Senate bill as currently written and has hidden the floor would put in place the toughest border enforcement plan that America has ever seen still in August 2016 then Deputy Attorney General Sally Yates announced her plan to phase out private prisons under the Bureau of Prisons she said that private prison companies compared poorly to public prisons largely based on data from a damning oh I do report that was published the same month I think the Inspector General cherry picked some areas where we didn't match up as good with the Bo P in those specific areas but overall we had less grievances we had better rates for inmate violence and assaults and things like that overall grievances were higher in Bo p prisons however the DOJ selected eight categories of grievances themed particularly relevant to safety and security in that analysis inmates in private prisons about 24% more grievances the stops plummeted the yates announcement would only affect the revenue streams coming from the federal correctional system moody saw enough risk and lowered their ratings we knew that they from a liability and equity perspective they were fine but from a business perspective we didn't know sort of what was what was going to happen after this it was a lot of noise and this was headline risk that we had always incorporating our ratings but this came to fruition it and come to fruition two months later Donald Trump was elected president and within days of coming into office Attorney General Jeff Sessions rescinded the Yates memo stock prices soared private prison companies were those that one the most the following day after the election the first year the Trump administration where things were like gangbusters for the industry Alan z-bo has studied the federal detention and collections funding Trump has obviously been harsher and his treatment of immigrants but it's really a continuation of a trend in family detention started under Obama you look at our record on over the last twenty years both under Republican and Democratic administrations talking at the federal level you know there's been steady growth of you know five to seven percent and that's because of the services that we provide and the quality of the services campaign donations depict the industry favoring Republicans over Democrats core civic and geo group each donated two hundred and fifty thousand dollars to Trump's inaugural committee GL group's contract revenue from ice and US Marshals is up by forty three percent from the last two years of President Obama to the first two years of the Trump administration Attorney General Jeff Sessions announced the zero tolerance policy in April 2018 it was meant to ramp up the criminal prosecution of people entering the United States illegally but images of separated families at the border and the detention of migrants under questionable conditions [Music] [Applause] unleashed a firestorm is the immigration policy under this particular administration really disturbed people the administration lit a fire so we're keeping families together on June 20th 2018 president Trump signed an executive order to halt the separation of families [Music] by then 3,000 children had already been separated from their parents but it continued and to this day the exact number is unclear we have no role in operating the border facilities which is where you saw a lot of pictures of neg overcrowded inhumane conditions those aren't our facilities they don't look anything like that we also don't house unaccompanied minors sparked by an outraged public the families belong together coalition was formed 250 organizations came together to protest collect signatures and raise awareness and money to help families for unite but a few wanted more Jen Armstrong co-authored a report that looked at who was profiting off of the detention of migrants and private prisons were part of it something that is really key is understanding about private prisons is that they're actually structured as something called real estate investment trusts for reefs REI tes the interesting thing about this structure is that it actually allows two companies to largely avoid paying income taxes the flipside of that however is that they are actually required to pass on about 90% of their taxable income to investors in the form of dividends and so they don't actually get to keep much cash on hand which requires them to really wholly rely on a bunch of short-term borrowing to for their operations for any expansions that they want to do that's where Wall Street came in by mid-2016 geo had 1.9 billion dollars in debt and core civic then CCA 1.5 billion dollars and six banks largely financed it we know that private prisons make money when we're detaining more people during this immigration crisis but what people don't see are the large syndicate of banks that are providing all the financing for all the operations for these companies who are then also profiting through interests and fees and various income that they get from their financing relationship activists took matters into their own hands the coalition mass organized to urge the banks to divest by March 2019 the group got their first win when JP Morgan announced they were no longer bank with the industry seven banks have follow suit it's actually eighty seven point four percent of all of the known financing for lines of credit and term loans for these two companies in June 2019 Elizabeth Warren published a statement that if elected she will shut down the use of federal private detention facilities many other candidates have espoused similar intentions Nevada and California signed into law bans that would eventually phase out private prisons Colorado in Minnesota could soon the largest pension fund in the country the California Public Employees Retirement System is divesting so have a number of city pensions in a response the stocks of geo and core civic have fallen by 30 percent since June 2019 that's exactly what happens when you mass organize and so when you have every Democratic presidential candidate saying if I win private prisons are abolished that's not just about the candidates themselves it's now a party stance and in a two-party system that business should be very concerned we redid ours our credit facility which is about 1.8 billion dollar credit facility we renewed that in June of this year and most of the other banks participated in that process and renewed with us through 2024 so some of them since then have made public statements that they don't intend to renew in the future but I think we'll just have to see how that plays out we continue to dialogue with many of those banks we dialogue with other institutions but we'll be able to access calendar [Music] Fitch downgraded kora Civic and changed its outlook to negative they do not reach your group Moody's has not changed their ratings since 2016 there's a lot of headline risk obviously and despite all the noise in the market companies have very good new quiddity for example poor Civic as one bond coming due next year but they have enough they have over 600 million in liquid e right now geo they don't have anything due to 2023 either both of them are you know their their renewal read their retention rates so far both of them are in the high 90s they both reported earnings growth and what they call Noi growth which is net operating income per the different contracts they both have added it's funny to say this way but they've all all have added people to their beds or they call it heads in the beds so from our perspective we're very comfortable where our ratings are right now hood on Seagram is an assistant professor of Finance at NYU and has studied geo group and core civics balance sheets over a five-year period the business is largely dependent on who's funding and who's in power rather than the fundamentals itself therefore as long as this administration is willing to fund them they're going to be doing reasonably well only issue with these companies they don't have enough debt financing for growth so if they don't have that and if the major banks pull out of it like Bank of America JP m and Wells Fargo they can be in a steady state but they cannot grow as much as they want those concerns maybe slowly vanishing after failing to raise a two hundred and fifty million dollar term loan back in June debt wire reported on December 13th 2019 that Cora Civic was working with a Japanese investment bank to raise the money something activists have long feared could be happened divestment is as much about the financial conversation and the fine Angell impact as it is about shifting culture shifting the narrative and getting policy to reflect the values of the people so regardless of how strong core civics and geo groups financials are the culture can still eliminate them a lot can happen between now and with the financing terms mature for core civic and geo group while significantly more expensive more foreign banks like Nomura can step in and fill the gap an election can swing things dramatically and the companies could continue to diversify their portfolios to protect themselves all the while the American public is more engaged than ever you can say is at the beginning of the end and as the end look like 2020 maybe not but whether the end is 2020 or the end is 2024 it's inevitable it's coming the toss of a coin pretty much [Music]