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Legalization of Pot Means Trouble for Private Prisons

The Times Are Changing...

Written by Brian Hicks
Posted January 9, 2014

Marijuana is now legal in Colorado, and Washington is coming up next.marijuana money

Did you know that approximately 750,000 people were arrested last year for marijuana offenses? While not all of these people ended up in jail, there are about 40,000 inmates who are in state and federal prisons with a marijuana conviction.

Half of these people are in for marijuana charges, and most for distribution. There's about one percent that are in just for possession.

That's what makes it so strange that you can now walk into a shop in Colorado, buy the drug from a distributor and walk out waving it in the air without fearing you'll be arrested.

To address this disparity, the government is trying to change the mandatory sentencing that comes along with many nonviolent drug offenses. Senators Dick Durbin (Dem-Ill) and Mike Lee (Rep-Utah) have introduced a bill called the Smarter Sentencing Act which would ease mandatory sentencing. 

Those that support this initiative say mandatory sentences are simply no longer valid. They also tie judges' hands when it comes to deciding how an offender really should be punished.

By removing the mandatory sentences, the United States can start to save some money. The Justice Department spends as much as $6.4 billion on prisons every year. Over the past 30 years, the cost of prisons has increased significantly. It costs up to $33,000 to take care of federal inmates. The more people who are in prisons, the more money they have to spend housing them.

The drop for mandatory sentencing is likely to happen because the Senate and House are both pushing for it. It's only a matter of time before there will be a decrease in the number of people going to prison for drug related crimes.

Is this a good thing? Well, you be the judge.

Corrections Corporation of America (NYSE: CXW)

One company can't happy about it – Corrections Corporation of America. This is arguably the most famous company that runs private prisons.

Their business model involves offloading prisoners from overcrowded state and federal facilities, and collecting revenue for it. The more prisoners they have, the more money they make.

A reduction or total elimination of mandatory minimum sentences will likely have an effect on them since they have tended to favor less violent inmates because they are easier to care for, and are less of a liability for a private prison.

Meanwhile, there are claims that private prisons run by CCA are understaffed, overcrowded, and run poorly. Just recently, Idaho Correctional Center decided to end its $29 million-a-year contract with CCA. Instead of finding another contractor, the state Board of Correction is expected to take over.

Prison privatization is unquestionably a controversial topic. They are not seen as places to rehabilitate inmates, but rather just as a place to store them until their sentence ends.

In one situation, prison staff ignored a woman's pleas for medical care, and she ended up giving birth in the cell's toilet. The baby died four days later. The inmate ended up suing, and the prison was shut down.

One prison was named "Gladiator School" by prisoners because of the shocking level of violence there. Last year, CCA was caught using prison gangs to take care of the violence. They were also caught falsifying hours on staff records to receive more money.

In Mississippi, CCA lost a contract because of riots, food and sanitation problems, guard mistreatment, and lacking medical care. That state is hiring another private prison company (MTC) but they have a high assault rate. GEO Group used to run the prison, but when they were found leading a juvenile facility into a pit of "unconstitutional and inhuman acts" they cut that contract too.

There is no shortage of controversy surrounding CCA.

Private Prison Investments

At one time, private prison investments were great. They were making tons of money because it was this grand idea on how it was going to be so much better than the state led prisons. However, it now looks like one of the worst investments you can make.

With the potential abolition of mandatory sentencing for drug crimes, and many prisons cutting ties with CCA, MTC, and GEO Group (NYSE: GEO) because of their poor management abilities, it's just going to get worse.

If these company prisons end up having to bring in riskier offenders to already understaffed facilities, more problems are sure to arise. When the problems increase, they become a less attractive option. Essentially, the value these companies see in prison inmates is choked.

So what this means for you is don't hold on to private prison investments, and don't even think about getting into them. They are going down, and they won't come back. Check the portfolios of your mutual funds as well. Some of the biggest investors in the private prison space happen to be popular mutual funds. 

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