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Published: March 8, 2010
Interesting data from your federal
government:
The average wage of the 15.2 million employees in California,
according to the U.S. Bureau of Labor Statistics, is $48,090.
That's about $23.12 an hour.
Very low on the scale: Private security guards, at $25,950. Also
bailiffs, who earn just under $49,000.
Yet relatively high on the scale is state prison guards, who
can, with overtime, easily earn more than $100,000 a year. By
contrast, a kindergarten teacher in the Golden State can expect
to pull down an average $56,540.
If that makes you crazy, try this statistic on for size: Fully
9.5% of the California state budget is allocated toward prisons.
Only 5.7%, by comparison, goes to universities.
Twenty-five years ago, prisons were 4% of the budget. Higher
education represented 11% of the state budget.
The prison guards union has historically been one of the most
powerful in the state. No one pays guards more. And these jobs
are very secure: If Sacramento is facing the squeeze and has to
furlough state workers, prison guards are one of the few groups
that are exempt and must stay on the job.
Wages are only the tip of the compensation iceberg: Guards also
receive generous health care and retirement benefits. You won't
get 90% of your salary in retirement. A prison guard in
California, however, absolutely will.
The Governator is not happy with this.
His administration has been plagued by budget crises. The
current budget proposal creates a $20 billion
deficit, which half of Californians -- according to a poll
released today -- say should come not from more taxes but from
spending cuts.
(The half that doesn't think that way were among those who sued
the governor for exercising his line-item veto last year. The
courts ruled on Tuesday that he had the authority to reduce or
eliminate state programs.)
Mr. Schwarzenegger is sponsoring a ballot initiative that would
automatically give more money to higher education than to
prisons. He has also said he wants to build jails in Mexico to
house the 20,000 or so illegal immigrants in California prisons.
That suggestion, however, raises constitutional questions and is
unlikely to gain traction as a serious solution.
What's left?
Well, the governor could let people out of jail. The politics of
this are dicey, as anyone who remembers
Willie Horton can attest.
There are other practical considerations as well. In some cases,
release isn't even an option. California has a "three strikes"
law. Since 1994, three felony convictions have put offenders in
jail for the rest of their lives, with scant chances for parole.
The law, upheld by the Supreme Court, is wildly popular. After
15 years,
one study suggested it has saved the state $54 billion and
prevented 10,000 murders.
I'll give you three guesses which lobby
pushed that bill through the statehouse.
If you said "the California Correctional Peace Officers
Association," you're right.
Mr. Schwarzenegger's only serious alternative is to find a
cheaper solution than putting these inmates in prisons with
platinum-paid guards. The governor can outsource the problem to
companies with lower costs. Private prison operators pay
security guard wages rather than correctional officer wages,
which gives them a significant pricing advantage. (Wages
represent 70% of a prison's budget.)
What's more, private business is far more adroit at building
prisons than the slow ship of state can, especially during a
financial crisis. And while there is some question as to whether
it's kosher to ship inmates to Mexico, it's perfectly all right
to ship them to another state.
All that is why 25 U.S. states have deals to outsource
prisoners.
The leading vendor is Correctional Corporation of America
(NYSE: CXW), a $2.4 billion company that operates 65 private
prison facilities with 87,000 beds in 19 states and the District
of Columbia.
Corrections revenue, not surprisingly, has not decreased since
2005. And the future looks bright for the company, not just
because of the problems of Mr. Schwarzenegger, but because of
the long-term trend toward harsher incarceration in this
country. In 1980, 319,598 people were in prison. At the end of
2008, the latest year for which the Department of Justice has
data, the total U.S. prison population stood at 1.5 million, a
gain of +375%, exceeding the growth in the general population --
+32.4% -- more than tenfold.
The bottom line is that Corrections can't build prisons fast
enough, and it will never run out of supply. Even given its
status as the No. 1 operator of private prisons, its bed count
is equal to a mere 5.7% of the total inmate population.
Given this immense growth potential, CXW is exceedingly cheap.
Shares trade for a mere 15.5 times earnings, a significant
discount to its historical average earnings multiple of 18.5 and
a -13.9% discount to the broader market.
Low costs, strong margins and an endless supply of "customers"
is as good as business models get. As governments, like Mr.
Schwarzenegger's, seek to find ways to reduce spending, CXW's
services will look very appealing. If his ballot initiative wins
passage, the state will have no choice but to outsource massive
amounts of prisoners.
These government actions are very good news for the company's
shareholders -- and very good reasons to become one today.
Government actions mean big money.
If you're looking for a steady stream of government-driven
profit opportunities like CXW, I invite you to
test-drive my premium investing ideas.
-- Andy Obermueller
Chief Investment Strategist
Government-Driven Investing |
