State retirement fund invests in private prisons that hold large contracts

The Arizona State Retirement System has invested in the country’s largest private prison operators, which also hold state contracts.

The state pension fund owns 49,800 shares of CoreCivic, formerly Corrections Corp. of America, the largest private prison company, according to the most recent ASRS filing with the U.S. Securities and Exchange Commission. That document, filed on Aug. 2, also shows the fund holds 52,450 shares of The GEO Group, the second largest giant in the private prison industry. ASRS has held shares in both companies since at least 2012.

CoreCivic operates the state’s Red Rock Correctional Facility in Eloy, and GEO operates four state facilities, the Arizona State Prison Florence West, Kingman and Phoenix West and the Central Arizona Correctional Facility.

ASRS spokesman David Cannella said the shares were valued at $2.6 million based on their closing price per share Tuesday.

Cannella said the investments were made in passive index portfolios, meaning the ASRS investment staff does not make specific stock selections.

“You would be hardpressed to name a company that we’re not invested in,” he said. “In terms of that, it’s not as if somebody was sitting around here and saying, ‘That’s a good company for us to invest in because they’re local or anything like that.’ It would have come up through some sort of index or an outside manager picking indexes on their side.”

The state pension fund could dump the CoreCivic and GEO shares, Cannella said, but investing in an index like the S&P 500 would not allow ASRS to explicitly exclude one company or another.

Because of the nature of the indexes, he said investing in a company the state also contracts with is “probably” normal.

“I don’t know how granular you want to get,” he said. “Say the state has a contract with Coca-Cola to fill their vending machines. We’re (invested) in Coca-Cola.”

But the investments in private prisons – among others – raised a red flag for American Friends Service Committee Director Caroline Isaacs.

Isaacs said ASRS investing in the private prison industry was “problematic on so many levels,” namely because doing so puts the success of CoreCivic and GEO in the state’s interest.

From a legal standpoint, she could not say whether the investments created a conflict of interest. But she argued members of the pension, like state professors, are now tied to the same companies that “syphon” funds from state agencies, like the universities.

In a blog post published Monday, Isaacs cited a Grand Canyon Institute report that said Arizona spends 60 percent more on prisons than on state colleges and universities.

“All of those professors are getting invested in the company that ate their lunch?” she said. “It’s bizarre.”

Rep. Mark Cardenas, D-Phoenix, said he would call on Gov. Doug Ducey and ASRS Board Chairman Kevin McCarthy to divest in both companies.

Though the investments were nothing new, they were news to Cardenas. More concerning was that ASRS had recently increased its shares in CoreCivic, purchasing an additional 900 shares in the second quarter.

“There are companies in this world that many people morally disapprove of, morally disagree with,” Cardenas said. “And this is certainly one of those companies.”

Cannella said ASRS’ goal is simply to get investors the best return for an appropriate risk, and the fund does not engage in “social investing.”

In contrast, he said the California Public Employees’ Retirement System is socially conscious, opting not to invest in companies that, for example, use coal.

“There’s nothing wrong with that,” Cannella said. “It’s just not what we’re set up to do.”

However, he did note that the Legislature could pass a bill to exclude certain investments.

A 2016 law along those lines prohibits state investments in or contracts with companies that boycott Israel.

Arizona Public Safety Personnel Retirement System spokesman Christian Palmer said PSPRS does not hold shares of either CoreCivic or GEO, but the question has been raised before.

“There is the remote possibility that one of those companies could be included. And when I say remote, I mean remote, remote, remote possibility,” he said. “One of those companies could be included in something like a private equity or even a hedge fund. But we are not immediately aware of any direct or indirect investments in either of those companies.”

Like ASRS, he said the fund is diverse, investing in everything from cranberry farms to bioscience, but social and political considerations are not a factor in how those stocks are selected.

CORRECTION: A previous version of this story said Isaacs cited a report by Grand Canyon University. The report was actually published by the Grand Canyon Institute.