Reforming the Prison Industry Authority · Reforming the Prison Industry Authority SUMMARY Background The Prison Industry Authority (PIA) was established in 1983 to improve enterprises

Policy Brief

Legislative Analyst’s Office April 30, 1996

Reforming thePrison Industry Authority

SUMMARY

BackgroundThe Prison Industry Authority (PIA) was established in 1983 to improve enterprises employing prison

inmates. As of July 1, 1995, the PIA operated 31 types of enterprises at 23 of the state’s 31 prisons. Itemployed about 7,000 of the state’s 131,000 inmates as well as 674 state staff in such varied productand service lines as license plates, dairies, meat cutting, optical goods, and specialty printing. Sales ofPIA products and services, which are generally limited to public agencies, exceeded $152 million during1994-95. The PIA reported a 1994-95 net income of nearly $10 million.

FindingsAfter a number of years of fiscal problems, the PIA has measurably improved its financial position.

However, the improved bottom line—which does not reflect little-noticed subsidies the PIA receives fromthe state—has come in part at the expense of other legislative purposes for the authority. These includethe reduction in the cost of prison operations and the rehabilitation of inmates. While the financialperformance of the PIA itself has improved, the state has received a poor return on its more than$91 million contribution in buildings and equipment for the program. The PIA’s progress has beensignificantly hampered by an ever-shifting and muddled mission, constraints on inmate productivity,governmental constraints such as the civil service system, and a weak internal governance structure.

RecommendationsIn order to improve the PIA’s effectiveness, we recommend that the Legislature:

v Resolve significant conflicts over the agency’s mission by establishing two primary andcomplementary goals of (1) financial self-sufficiency and (2) achievement of areduction in recidivism by improvement in inmate employability.

v Privatize the PIA as an independent, nonprofit, tax-exempt organization, free it ofexisting constraints so that it could become more entrepreneurial and create newforms of private-sector partnerships. The PIA would lose its monopoly on stategovernment business and could make sales to the private sector under specifiedconditions.

v Focus a revamped PIA on providing job-training and other services aimed atpreventing second-strike offenders from coming back to prison with 25-years-to-lifethird-strike sentences.

Page 2

Legislative Analyst’s Office

BACKGROUND

Goals and Structure of the PIA

Before the PIA was established, thestate’s prison work programs wereoverseen by the Correctional IndustriesCommission and directly administeredby the California Department ofCorrections (CDC). The commissionwas created in 1947. By 1981-82, thecorrectional industries programemployed 2,300 inmates and generatedabout $26.7 million in sales.

By 1981, the Legislature concludedthat the program had not achieved itsobjectives. According to thelegislation which created the PIA(Ch 1549/82), state prison programsoperating at the time

. . . failed to provide productive jobsto prisoners, to meaningfully affectthe cost of running the prison system,or to reduce the idleness andunderemployment which arerampant in California’s prisons . . . .The constraints of state governmentseverely impede the ability of theprison industries program tooperate on a self-supporting orprofit-making basis.

Thus, the PIA was created to takeover work programs from theCorrectional Industries Commission,which was subsequently abolished. TheLegislature stated at the time that

. . . a successful prison industriesprogram can best be accomplishedby providing the management . . .with a reasonable degree of

autonomy and by establishing aspecial authority to manage andoperate prison industries and thefunds associated with suchprograms.

Toward that end, the PIA was createdas a semi-autonomous authority withinthe CDC. This autonomy included aseparate fund (Prison IndustriesRevolving Fund) with a continuousbudget appropriation not subject toannual legislative approval. Control ofthe budget was given to an 11-memberPrison Industry Board.

The legislation’s statement of intentand statutory provisions specify a seriesof goals and purposes for the PIA. Thegoals are shown in Figure 1.

The membership of the PrisonIndustry Board consists of the Directorof the CDC (who is also designated asboard chairman), the Director of theDepartment of General Services, theSecretary of the Trade and CommerceAgency, two public membersappointed by the Speaker of the

Figure 1

PIA’s Statutory Goals

✔ Profitability and, ultimately,financial self-sufficiency.

✔ A reduction in inmate idleness,prison violence, and tension.

✔ Development of skills andwork habits to reduce inmaterecidivism.

✔ A reduction in prison systemand taxpayer costs.

Page 3

Policy Brief

Assembly, two public membersappointed by the Senate RulesCommittee, two labor representativesappointed by the Governor, and twoindustry representatives appointedby the Governor.

By law, the PIA General Manageris under contract to the board to serveas the chief administrator of theauthority, but also serves at thepleasure of the board chairman, theCDC Director. The CDC Director isthe appointing authority for all PIAstaff except the General Manager, whois appointed by the board.

Products andServices of the PIA

The PIA operates a series of small- tomid-sized businesses engaged in variedproduct and service lines, as shown inFigure 2.

State law prohibits the direct sale ofPIA products and services to the privatesector in California. (Sales are permittedunder state law to private parties inother countries, but have rarelyoccurred.) Nearly all sales are made tostate and some local governmentalagencies, and state law generallyrequires state agencies to maximize the

Figure 2

PIA Product Lines

✔ Agriculture

• Dairy

• Crops

• Poultry

• Egg production

✔ Services

• Meat cutting

• Bakery

• Coffee roasting

• Resource recovery

• Specialty printing

• Micrographics

• Dental lab

• Laundry

• Optical

• Key data entry

✔ Manufacturing

• Furniture assembly/refinishing

• Wood products

• Metal products

• Metal signs

• License plates

• General fabrication

• Bindery

• Paper products

• Fabric products

• Silk screening

• Fiberglass products

• Shoe factory

• Mattress factory

• Textile mill

• Cleaning products

• Reupholstery

• Concrete precast

Page 4


purchase and use of PIA-made goodsor services at prices set by the PrisonIndustry Board.

The CDC is by far the PIA’s biggestcustomer, representing about 56 percentof sales during 1994-95 primarily forinmate clothing, prison furniture,laundry services, and agriculturalproduce used to feed inmates. TheHealth and Welfare Agency is thesecond largest purchaser of PIA goods(primarily eyeglasses for Medi-Calpatients), followed by the Departmentof Motor Vehicles (which buys licenseplates, signs, and special printing). Localagencies constitute less than a 3 percentshare of PIA sales.

Impact of the PIAOn the Prison System

The PIA is one of a number of workand education programs to whichinmates may be assigned. It is by nomeans the largest, as can be seen inFigure 3.

By law, most of the 7,000 inmateswho work in PIA enterprises are eligibleto earn credits that reduce the time theymust serve in prison. Many earn asmuch as one day off their sentence foreach day they work for the PIA. Becauseof so-called “Truth in Sentencing”revisions in state law, including the“Three Strikes and You’re Out” lawenacted in 1994, some offendersconvicted of certain violent and seriouscrimes and repeat offenders now mayonly be eligible for credits that wouldreduce their total time in prison by amaximum of 15 percent or 20 percent.

Some offenders, including some withlife terms or with disciplinary problems,are not eligible for work credits.

The work-credit program has twosignificant ramifications for theprison system.

First, by reducing the time someoffenders stay in prison, the work-creditprogram potentially reduces CDCoperational costs, which now average$21,375 per inmate, annually. (Thesesavings are partly offset to the extentthat offenders released earlier on paroleare subsequently reincarcerated for newcrimes or for violation of the terms oftheir parole.)

Second, by reducing the number ofinmates housed in prisons, the work-credit program reduces the number ofadditional prison cells the state wouldotherwise have to build in the future.Because of severe overcrowding inprisons and steady growth in the prisonpopulation, the CDC projects that itwill exhaust all space in the prisonsystem in late 1998 and that severalbillions of dollars are needed forconstruction of additional prisonsbetween now and the year 2005.Without the work-credit program, theCDC would exhaust the available spacesooner and more prisons would have tobe constructed. Current estimates arethat a new prison complex to house4,400 inmates—based on two inmatesper cell—costs about $300 million.

Page 5

Policy Brief

LAO E VALUATIONOF THE PIA

The PIA is one of the most closelystudied agencies in state government.In addition to the recently completedreview of the authority by the Bureau ofState Audits (BSA), the authority’soperations have been scrutinized inrecent years by MGT Consultants, aprivate management consultantretained by the PIA; the Little HooverCommission; and the Senate AdvisoryCommission on Cost Control in StateGovernment. Many of these studieshighlighted strengths and weaknessesin the PIA and other findings whichremain relevant today.

Our office has over the years reviewedthe state’s correctional work andeducation programs, including the PIA,and last year offered the Legislatureseveral preliminary recommendationsin regard to SB 617 (Polanco), still-pending legislation that would havechanged the PIA’s budgetary processand the statutory obligation of stateagencies to purchase PIA goods.

In this report, we have evaluated thePIA’s fiscal performance, its impact onthe prison system, its inmate and non-inmate workforce, the authority’smanagerial performance, and the keyfactors which we believe have hamperedthe authority’s effectiveness. Ourfindings are summarized in Figure 4(next page) and discussed below.

Figure 3

Work and Education Programs in theDepartment of Corrections a

Number of Percentage ofProgram Assigned Inmates Inmate Population

Support Services 38,152 30.1%

Vocational Education 10,849 8.6

Academic Education 10,557 8.3

Prison Industry Authority 6,923 5.5

Conservation Camps 4,158 3.3

Other 789 0.6

Community Work Crews 401 0.3

Joint Venture 154 0.1

Total Assigned 71,983 56.7%

Total Prison Population 126,866

a As of July 1995.

❝ Many . . .

studies [have]

highlighted

strengths and

weaknesses in

the PIA and

other findings

which remain

relevant

today.❞

Page 6


PIA’s FinancialPerformance Has Improved

The PIA is posting record sales andreporting an operating profit, and hasimproved its underlying financialstrength by building up a substantialcash reserve and paying down its debts.This financial turnaround reflectsimproved productivity within the PIA,greater purchases from state agenciesdue to the improved fiscal condition ofstate government, and continuedgrowth in the inmate population housedby the CDC, the PIA’s biggest customer.

Sales, Net Income Have Grown. ThePIA’s financial performance has beenuneven over the years, but reached ahistorical high point in sales and netincome in 1994-95, as shown in Figure 5.Sales of PIA products and servicesexceeded $152 million during that fiscal

year and are currently projected to reacha new high of almost $156 millionduring 1995-96. After the cost of itsgoods and sales and administrativeexpenditures are deducted, the PIAreported a 1994-95 net income of nearly$10 million. In 1995-96, net income isexpected to be about $5 million.

The PIA’s strongest recent financialgains, by product line, have come infabric products, wood products, its shoefactory, and the textile mill (althoughthe mill has persistently run at a netloss, that loss is smaller than in thepast). Enterprises which have recentlybecome less profitable include license-plate manufacturing, meat cutting, thedairy operation, and cleaning productsales. Based on information provided bythe PIA, the unique circumstances in anindustry, rather than any more generaltrend, explain why certain enterprisesare profitable and others are not.

Underlying Financial Strength. Theoverall improvement in the PIA’sbottom line has allowed the authorityto build up a substantial cash reserve.As of June 30, 1995, the PIA had retained$30.3 million in cash, as shown inFigure 6. The cash total is projected toexceed $33 million by June 30, 1996.During the 1980s, the PIA’s reportedyear-end cash balance never exceeded$6.1 million.

The cash buildup might have beeneven higher had not the PIAaggressively been paying down its long-term debts (primarily a 1985 loan fromthe General Fund). As of June 30, 1991,the PIA had $22 million in long-term

Figure 4

LAO Findings

✔ The PIA’s financialperformance has improvedsignificantly.

✔ The state has received littledirect financial return from itsinvestment in the PIA.

✔ The PIA’s good financialperformance has come at theexpense of other state goals,such as lower state costs orrehabilitation of largenumbers of inmates.

✔ The PIA is hampered by civilservice restrictions,constraints on inmateproductivity, and managerialweaknesses.

❝ The overall

improvement

in the PIA’s

bottom line

has allowed

the authority

to build up a

substantial

cash reserve.❞

Page 7

Policy Brief

debt on its books. Four years later, theauthority’s long-term liabilities stoodonly at $3.6 million. The decrease indebt reflects the PIA’s February 1995payment of $4.5 million of itsoutstanding General Fund debt aheadof schedule.

The improvement in cash reservesand the lower long-term debt, as shownin Figure 6, (next page) both have apositive impact on the PIA’s annualreports of net income. The buildup incash permits the PIA to avoid incurringnew borrowing expenses that wouldreduce net income. The paydown indebt reduces the existing borrowingexpenses and thus boosts the annualnet income.

Reasons for the Turnaround. ThePIA’s past losses largely stemmed from

start-up costs associated with the rapidand costly expansion of PIA industriesin the mid-1980s, the PIA’s mistakeninvestment in some failed enterprises,inefficiencies in the use of inmate labor,raw materials, and inventorymanagement, and sour customerrelations stemming from poorworkmanship in PIA products.

The recent stronger performance ofthe PIA has been fueled by majorgrowth in the CDC prison population,which tends to drive up purchases ofPIA-made clothing and other goodspurchased for inmates. The state’simproved budgetary situation also maybe stimulating purchases by other stateagencies that were placed on hold orput off during several years of severelimits on governmental expenditures.

Figure 5

PIA Financial Performance UnevenBut Improved

(In Millions)

❝ The recent

stronger

performance

of the PIA has

been fueled by

major growth in

the CDC prison

population . . .❞-6

-3

0

3

6

9

$12

82-83 85-86 90-91 95-96

Net Income

Projected

Page 8


Also, productivity in both the inmateand non-inmate segments of the PIAworkforce has improved.

Little Direct Financial Return tothe State From the PIA

The PIA’s improved net incomestatement overstates its true financialperformance because it does not reflectsignificant state subsidies for capitaloutlay, below-market rents, workers’compensation benefits for inmates,guarding costs, or the premium paidby some other state agencies requiredto purchase PIA goods. Thus, theoriginal legislative goal of PIA self-sufficiency has not yet been fullyachieved and the state does not appearto have received any significant directfinancial return on its majorinvestment in correctional industries.

State Operations Subsidies.Although the PIA paid $4 million to theCDC during 1994-95 to offset utilities,rent, and other costs incurred on itsbehalf by the department, someoperational and capital outlay costs are,in actuality, absorbed by the CDC orwithin the budgets of other stateagencies or budget items. Thus, thePIA’s annual income statement doesnot fully reflect the costs to the state ofoperating the authority’s programs. Forexample, the salaries of correctionalofficers who supervise inmates assignedto PIA enterprises are generally paid bythe CDC without PIA reimbursement.Also, while the PIA picks up the cost ofworkers’ compensation benefits for itscivil service workforce, the CDCprovides workers’ compensation for theinmate workforce.

Figure 6

PIA Cash Reserves GrowingAnd Long-Term Debt Shrinking

(In Millions)

❝ . . . the PIA’s

annual income

statement does

not fully

reflect the

costs to the

state of

operating the

authority’s

programs.❞

$35

5

10

15

20

25

30

82-83 85-86 90-91 94-95

Cash reserves

Long-term debt

Page 9

Policy Brief

Another subsidy is the additionalexpense to state agencies given norecourse by present state law but topurchase PIA-made goods, sometimesof inferior quality, at as much as doublethe price in the private market. A recentaudit by the BSA estimated that stateagencies could save $12 millionannually if they were free to makepurchases from other sources insteadof the PIA.

Capital Outlay Funding Subsidies.Many of the PIA’s enterprises arehoused in facilities constructed andequipped with a portion of the bondfunds appropriated for the constructionof new state prisons. When the PIAtook over the operations of the now-abolished Correctional IndustriesCommission in 1983, the assetstransferred to the PIA were valued onits balance sheet at $17.7 million. As ofJune 30, 1995, the CDC had directlycontributed an additional $91 millionin capital facilities, equipment, and otherassistance to the PIA, not countingadditional payments to retire the debt.

Further state contributions areanticipated. According to the CDC,$5.8 million worth of capital outlayand equipment are being providedfor a PIA optical lab and a PIA laundryat a new women’s prison, and$17 million has been earmarked forPIA enterprises at six new prisonsnow planned by the CDC.

Although the PIA has paid rent forits use of CDC facilities, often assessedat a rate of pennies per square foot, thenominal amounts received do not nearly

offset the millions of dollars in annualborrowing costs of the lease-paymentand general obligation bond funds spentto build and equip PIA facilities. Webelieve these continued capitalsubsidies of PIA operations areinconsistent with the statutory goal ofself-sufficiency established for theauthority in 1983.

Little Direct Financial Return toState. Our review has found that thestate has received little direct financialreturn on its direct outlay for PIAbuildings and equipment, even thoughthe law creating the authority authorizesdirect payments to the state of PIA fundsdeemed to be surplus.

We would note that, on severaloccasions since 1991, the state hasreceived short-term interest-free loansfrom the PIA-controlled PrisonIndustries Revolving Fund in orderto address the state’s overall cashshortages. Last year, such borrowinghad the effect of depriving the PIA of$700,000 in interest earnings it couldotherwise have received from thePooled Money Investment Account,the main fund in which the stateinvests its surplus cash. This amountsto a direct financial benefit paid to thestate by the PIA, because it permittedthe state to avoid costs of borrowingadditional funds.

Aside from these interest-freeborrowings, however, the state hasgotten no other direct financial returnon its $91 million investment to date inthe PIA. Had the law permitted thestate to invest the $91 million in the

❝ . . . the

state has

received

little direct

financial

return on its

direct outlay

for PIA

buildings and

equipment . . .❞

Page 10


Pooled Money Investment Accountinstead of the PIA, it could have earneda significant financial return exceeding$46 million. State law provides for thetransfer of surplus PIA funds to thestate General Fund, but the PIA reportedthat it has never executed such a transferof funds since its creation.

Evaluating the PIA’sImpact on the Prison System

The PIA’s improved financialperformance has come in part at theexpense of other statutory purposesestablished for the authority, such asa reduction in the cost of prisonoperations and the rehabilitation ofas many inmates as possible. This isprimarily because the PIA’s inmateworkforce has remained static evenas the overall prison population hasgrown rapidly.

A Murky Mission. As study afterstudy has documented, the PIA has anever-shifting and muddled mission, dueprimarily to the multiple and oftenconflicting missions set forth in thestatute which created the authority.

For example, the PIA’s focus onlabor-intensive enterprises mayrespond to its stated mission ofemploying as many inmates aspossible to reduce idleness, but it maybe at odds with the goal of being asprofitable as possible. Also, becausethe private sector has increasingly reliedupon labor-saving high technology toprovide products and services, anemphasis on labor-intensive enterprisesmay conflict with yet another stated

mission—that the PIA provide job skillsto inmates that will make them morereadily employable upon their parolefrom prison.

As a result, the mission pursued bythe PIA has varied over time frommanager to manager. In the mid-1980s,the PIA attempted to maximize inmateemployment, while more recently, thePIA has placed greater emphasis onproductivity and improved customersatisfaction.

Impact on CDC Operations. Thischange in mission emphasis has had amajor impact on CDC operations andexpenditures. In the early 1980s, thePIA and the CDC agreed to a mutualgoal by which 42 percent of the inmateassignments at newly built prisonswould be filled by PIA enterprises. Aftera period of rapid growth, however, theCDC and the PIA abandoned the42 percent goal and now have no setquota for PIA assignments in newprisons. At present, the PIA employsonly about 5.5 percent of the overallinmate population, as Figure 7 shows,and steady inmate population growthcould cause the figure to decline furtherin the future.

The CDC has partly filled this inmate-job gap by expanding the number ofacademic education, vocationaleducation, and support servicesassignments. But inmate populationgrowth has outstripped the growth ininmate assignments. After nearing whatit defines to be full assignment of alleligible inmates in the early 1980s, theCDC reports that 15,000 inmates are

❝ . . . the PIA

employs

only about

5.5 percent

of the overall

inmate

population . . .❞

Page 11

Policy Brief

now eligible to participate in work andeducation programs but are left idle forlack of assignments. The number of idleinmates is projected to reach 26,000 byJune 2000, or the equivalent of sixprisons full of inmates.

The lack of inmate assignments hasthe effect of driving CDC operationalbudgets higher. For example, if all ofthe presently idle inmates had work oreducation assignments, the reductionof prison time otherwise served by those15,000 inmates might eventually savethe state as much as $50 million peryear in inmate support costs. The PIA’sslow-growth strategy, by which it haschosen to provide no or only limitedenterprises at new prisons, makes itmore difficult for the state to achievethese potential cost-savings in thebudget for CDC operations.

In addition, the slow-growthstrategy, and the state’s lack of inmateassignments, has ramifications for thestate’s prison construction budget.Because idle inmates are not earningfull work credits that would reduce thetime they stay in prison, a lack ofassignments results in a need foradditional prison space for thousandsof inmates. If all eligible inmates hadwork or education assignments, thestate might be able to reduce the need toconstruct some prisons in the future.

Recidivism Impact Unknown.Academic studies of correctional workprograms operated by the federalgovernment and by other states haveshown that effective inmate workprograms can significantly reduce therate at which inmates who are paroledreturn to prison for new crimes.

Figure 7

Prison Population Outpacing GrowthIn PIA Employment

(In Thousands)

❝ . . . PIA’s

slow-growth

strategy . . .

makes it more

difficult for

the state to

achieve

potential cost-

savings . . .❞

160

20

40

60

80

100

120

140

Inmate Population

PIA Employment

82-83 85-86 90-91 95-96

Inmates

Page 12


It is unclear, however, what impactPIA enterprises are having on the rateof recidivism of the inmates assigned tothe authority. Neither the PIA nor theCDC could provide any data regardingthe recidivism rate of PIA workers (norfor inmates participating in the otherprison work and education programs).Nor has any data been collected to showwhether certain PIA enterprises aremore effective than others in makinginmates more employable, therebypreventing their return to a life of crime.

However, it appears unlikely thatthe PIA has had a significant impact onthe overall recidivism rate of the prisonsystem. That is because only a smallfraction of the 110,000 inmates releasedto parole each year have ever workedfor the PIA.

The enactment of Three Strikesmakes recidivism of certain inmatespotentially much more costly to thestate prison system. Specifically, anysecond-strike offender who is paroledand then commits a new crime wouldbe at significant risk of beingreincarcerated as a third-strikeoffender with a sentence of 25 yearsto life. A typical third-strike offenderwould, over the period of his or herincarceration, result in an operationalcost of at least $428,000 to the stateprison system, plus the $124,000needed on average to build a prisoncell for such a high-security offender.

Several Factors AreHampering the PIA

Our evaluation of PIA operationshas identified several key factors thathave hampered the authority’senterprises. These include existing civilservice restrictions, constraints oninmate productivity, and managerialweaknesses within the PIA.

Civil Service Rules and Other StateRegulations. The legislation whichcreated the PIA expressed the intentthat the authority operate much like aprivate business and contained specificstatutory provisions to free the authorityfrom the existing proceduralrequirements of the civil service system.However, in late 1982, before the PIAcommenced operations, the StatePersonnel Board asserted that the PIAstatute was superseded by civil servicerequirements provided in the CaliforniaConstitution. The PIA thereafter agreedto submit various personnel decisionsto the Department of PersonnelAdministration and to the board, andhas continued to do so today.

As a result, the PIA finds itself todaybound by civil service rules and withsignificant limits upon its ability to actas an entrepreneur. The constraintsimposed by civil service conflict withthe PIA’s efforts to become more like aprivate business, limiting its ability tohire, fire, and reassign staff with theskills it needs in a rapidly changingbusiness environment. It is alsofrustrating efforts to implement a pay-

❝ . . . it appears

unlikely that

the PIA has

had a

significant

impact on

the overall

recidivism

rate of the

prison

system.❞

Page 13

Policy Brief

for-performance salary structure. TheBSA has estimated that some civilservice workers at the PIA earn30 percent more than their private-sector counterparts.

The state’s complex procurementprocess has placed similar constraintson the PIA’s ability to purchase rawmaterials needed for its production linesin a timely and cost-effective fashion. Ingeneral, these state procurementprocesses require that the PIA routepurchase orders through the stateDepartment of General Services, apractice that can take three to ninemonths to accomplish.

Constraints on Inmate Productivity.The PIA does not fully control itsselection of inmate workers, butgenerally must accept the selectionsmade by internal CDC committees andsecurity personnel at each prison.Although the PIA does establishacademic and work experiencerequirements for many of its positions,the CDC can and often does overridethese requirements for security and forother reasons. Neither the PIA nor theCDC has established criteria whichformally link the length of stay of aninmate to their eligibility for a PIAassignment. The high turnover rate inthe PIA workforce (145 percent per year)suggests that many inmates with littletime left to serve in prison are beingassigned to the PIA, then paroling soonafter the PIA invests in their trainingand before they have put theirnewfound skills to work for PIA

enterprises. Because the PIA may haveto accept unskilled or inadequatelyeducated workers, and quickly losesskilled workers, these arrangementsreduce PIA productivity.

There are other problems. Theassigned PIA workforce often lacksnecessary education and training, goodwork habits, and motivation. Also,lockdowns resulting from prisonviolence significantly interfere with PIAproduction deadlines. During 1994-95,the PIA lost out on 1.3 million hours ininmate labor due to lockdowns andother causes, or about 14 percent of itstotal production schedule. That equatesto about $18.4 million per year in lostsales production, and constitutes amajor setback to the PIA goal ofprofitability.

Managerial Weaknesses. Since itscreation, PIA management has madesome progress toward becoming morebusiness-like and customer-oriented.The PIA management has implementedresults-oriented Total QualityManagement (TQM) programs,installed computerized systems to bettertrack product costs, established aprogram to shorten delivery times forsome products, and bolstered itsmarketing and market research teams.

But the PIA has been hampered by astatutorily mandated structure thatdivides the lines of authority, therebyundermining accountability. In addition,despite the presence of the PrisonIndustry Board, internal governance

❝ . . . the PIA

finds itself

today bound

by civil service

rules and with

significant

limits upon its

ability to

act as an

entrepreneur.❞

Page 14


has been weak and lacks the necessarychecks and balances for a $152 millionper year enterprise. Finally, there hasbeen relatively little ongoing legislativereview of the PIA given its continuousappropriation of funding supportthat exempts the authority from theannual state budget process.

u Divided Line of Authority. Bylaw, the PIA General Managerserves under contract to thePrison Industry Board.However, the same statute saysthe General Manager alsoserves at the pleasure of theDirector of the CDC,theoretically giving theDirector veto power over thedecisions of all other boardmembers when it comes toadministrative control of thePIA. Existing law likewiseprovides that the CDC Director,not the board or the GeneralManager, is the appointingauthority for the PIA staff,again raising the question as towho is in charge at the PIA.

uWeak Internal Governance.The board is made up of part-time unsalaried appointeeswho meet infrequently (by law,at least four times yearly) toconduct PIA business. Boardmembers lack the resources toconduct in-depth analyses andevaluation of PIA budgets andoperations, and many contractsand other business decisionsrelating to the daily operation

of the PIA are never presentedto the board for approval.

u Limited Legislative Review.Because of the PIA’scontinuous appropriation offunding support, agencyrevenues and expenditureshave rarely been reviewed bythe Legislature.

The weak organizational structureof the PIA has led to poor internalmanagement of its enterprises. As theBSA recently documented, the PIAhas found itself burdened with farmore products than it can successfullyhandle, excessive levels of inventoryand warehouse space, an inadequatesystem to control product costs, and asignificant number of money-losingenterprises.

The PIA is now a larger operationthan many other state agencies subjectto much tighter legislative scrutiny anddirect legislative control. We areconcerned that the PIA lacks properchecks and balances to ensure that itsresources are well-spent and that theagency is held accountable to itsstatutory mandate.

LAO R ECOMMENDATIONS

A Changing Environment

The prison, governmental, andeconomic environment in which thePIA must operate has changedsignificantly since its inception. The sizeof the prison system has more thanquadrupled since 1983 primarily as aresult of tougher sentencing laws. State

❝ The weak

organizational

structure of the

PIA has led to

poor internal

management of

its enterprises.❞

Page 15

Policy Brief

government has moved from an era ofdouble-digit annual revenue increasesto a period of significant fiscalconstraints. Meanwhile, the Californiaeconomy has evolved away frommanufacturing toward a more diverseservices-based economy. Although thePIA has made some administrativeshifts in its mode of operation over timein response to these changes, the basicstatutory framework for the authorityhas not changed significantly since itwas established. We believe somechanges in that framework are nowwarranted that will address some of theauthority’s problems and improve itseffectiveness.

We concur with many of the findingsand recommendations recently offeredto the Legislature by the BSA for reformof the PIA, and in particular itssuggestions for improving internalmanagement and accounting of PIAenterprises. However, we have asomewhat different approach to offerin our set of recommendations,particularly in regard to the missionand organizational structure for the PIA.

THE LAO PROPOSAL

The Florida Model. The LAOproposal for the reform of the PIA ispatterned after PRIDE (which standsfor Prison Rehabilitative Industries andDiversified Enterprises, Inc.) of Florida,a nonprofit, self-funded corporationcreated in 1981 by the State of Florida tooperate its prison work programs. Inour view, PRIDE serves as a model forachievement of the dual missions we

recommend be established for the PIA—greater financial self-sufficiency and areduction in recidivism by makinginmates more employable.

Our review of the Florida modelindicates that PRIDE is relatively self-sufficient and does not receive themajor subsidies which have accruedto the PIA.

For example, while the PIA hasreceived $91 million in capital facilitiesand equipment from the state, PRIDEhas funded its own facilities andequipment for new enterprises. Also,where the PIA has regularly beenreceiving operational subsidies from thestate, PRIDE of Florida regularlycontributes 1.5 percent of its sales backto the state, including a $1.2 millionpayment in 1994-95 to help offset thecost of inmate incarceration. In 1994-95,PRIDE recorded $85 million in sales anda net income of $5.5 million.

Under Florida law, as in California,PRIDE can sell its products and servicesonly to governmental agencies and notto the private sector. However, unlikeCalifornia, state agencies in Florida arenot required to purchase any goodsfrom PRIDE. PRIDE competes for statecontracts like any other bidder. Thus,state agencies are not subsidizing PRIDEenterprises by overpaying for products,as is sometimes the case with the PIA.

PRIDE has also succeeded insignificantly reducing the recidivismrate of inmates assigned to its prisonenterprises. Florida officials point todata indicating that only 15 percent ofPRIDE’s inmate workers returned to

❝Our review

of the Florida

model indicates

that [it] is

relatively

self-sufficient

and does not

receive the

major subsidies

which have

accrued to the

PIA.❞

Page 16


prison over four years. The reductionin recidivism is the basis of Floridaofficials’ claim that hundreds of millionsof dollars in prison costs have beenavoided because of PRIDE. Overall,51 percent of Florida inmates eventuallyreturn to state prison. The lowrecidivism rate of PRIDE workersstrongly suggests the job-training,counseling, and job-placement servicesprovided by the privatized agency arechanging post-release behavior. Ourspecific recommendations forimproving the PIA are shown inFigure 8 and discussed below.

Our Concept of Reform. We recom-mend that the Legislature rewrite thestatute (Penal Code Section 2800, et. seq.)which created the PIA to resolve

significant conflicts over the agency’smission. Specifically, the Legislatureshould enact legislation whichwould establish two primary andcomplementary goals for the PIA:(1) financial self-sufficiency and (2) theachievement of a reduction inrecidivism by improvement in inmateemployability.

The new organization would be anindependent, nonprofit entityempowered to be more entrepreneurial.As such it could enter into new forms ofpartnerships with the private sector inan unprotected market that couldexpand, under specified circumstances,to include at least some sectors ofprivate-sector sales. The state wouldget a share of sales revenue.

Figure 8

The LAO Concept of Reforming the PIA

Privatize the PIA as an independent nonprofitorganization with a mission of achieving self-sufficiency and a reduction of inmate recidivism.The program would be targeted at reducing the entryof “third strikers” into the prison system.

w Restructure the PIA management.

w Improve the PIA fiscal accountability.

w Require the PIA to become more self-sufficient.

w Improve the state’s financial return from PIA.

w Stabilize and improve the inmate workforce.

w Establish pay for performance.

w Eliminate protected markets.

w Open the door to private partnerships.

w Establish clear rules for fair competition.

w Measure mission performance.

❝ The new

organization

would be an

independent,

nonprofit

entity

empowered

to be more

entrepreneurial.❞

Page 17

Policy Brief

A revamped PIA would be directedto provide, as its finances permitted,vocational education, job assignments,pre-release job counseling, and post-release job placement services aimedespecially at second-strike offenderswho are at the most risk of comingback to prison with 25-years-to-lifethird-strike sentences under the ThreeStrikes law.

The Case for Reform

Time Is Right to Privatize the PIA.In The 1996-97 Budget: Perspectives andIssues, (starting on page 173), we discussthe concept of privatization. We outlinean approach that policymakers coulduse to ensure that good decisions aremade regarding whether a program isan appropriate candidate forprivatization and, if so, what type andform of privatization is best. In ourview, the objective of privatizationshould be improving the effectivenessand efficiency with which publicservices are provided.

We believe our proposal for the PIAmeets the tests we set forth forprivatization. Among our criteria, forexample, is having the “right”conditions for privatization, such as theexistence of strong competitive forcesthat would ensure a governmentmonopoly does not merely become aprivate monopoly. In this case, webelieve that a privatized PIA wouldface sufficient private-sectorcompetition in the sale of goods andservices to avoid a monopoly situation.

Privatization of the PIA, in our view,is a logical progression from its presentstatus as a semi-autonomous stateagency. Privatization would allowfulfillment of the originally statedlegislative intent that the PIA becomemore business-like and operate withoutstate subsidy.

It is also the organizational form mostlikely to achieve the mission for theauthority that we have proposed, andthe only one that would substantivelyaddress all three of the major factorsthat we have identified that hamper itspresent operations—governmentalconstraints, constraints on inmateproductivity, and managerialweaknesses. For example, a privatizedPIA is likely to have greater successcreating a more profit-oriented andentrepreneurial culture within its non-inmate workforce. As a practical matter,a privatized PIA would likely be moresuccessful in hiring badly needed cost-accounting expertise that has provenhard to get through the existing civilservice hiring process.

The administration has proposed,as part of a package of changes in thestate procurement process containedin AB 3307 (Brewer), that the PIA loseits long-protected market of stateagency procurement. If that occurs,the authority will have to becomemore competitive with the privatesector to survive. Privatization willmake the PIA more competitive. Inour view, a traditional governmentalstructure for the PIA is unlikely toachieve that purpose.

❝ Privatization

would allow

fulfillment of

the originally

stated

legislative

intent that the

PIA become

more business-

like and operate

without state

subsidy.❞

Page 18


Fiscal, Policy Advantages Seen. Webelieve the LAO concept for reform ofthe PIA offers several fiscal and policyadvantages.

Our approach would require thePIA to become more truly financiallyself-sufficient, thus saving state funds.For example, under our approach, thePIA would hereafter have to bear thefull costs of new capital facilities andequipment, eliminating a major ongoingstate subsidy. Also, the PIA would nolonger have a monopoly on the businessof state agencies; in effect, the PIA wouldlose a subsidy received from other stateagencies forced to pay whatever thePIA decided to charge them for itsproducts and services.

We believe our approach wouldalso help to mitigate the fiscalpressure facing the state fromunskilled and hard-to-employ“second strikers” who wouldotherwise likely return to a life ofcrime. Judging from the results ofcorrectional work programsoperated in other states, particularlyFlorida, a well designed PIA trainingand work program has the potentialto substantially reduce recidivismrates of members of this critical targetgroup. The framework we haveproposed, which deemphasizes thecurrent goal that the PIA employ asmany inmates as possible, opens thedoor for wider use by the PIA of cost-effective modern technology in itsdelivery of products and services inplace of low technology, labor-intensive production methods.

Inmates trained in modernproduction techniques are likely tobe more employable and thus lesslikely to return to a life of crime aftertheir release on parole.

While a privatized PIA may beeffective in achieving the goals outlinedabove, we believe other legitimategoals, such as maximizing inmateemployment, would best be addressedprimarily through other CDC programs.It would be more cost-effective, forexample, to achieve the goal of reducinginmate idleness through expansion ofless capital-intensive programs, suchas support services assignments orcommunity work crews.

Revising the PIA Charter

Consistent with the conceptdescribed above, reform of the PIAshould include a number of specificprogrammatic changes, some of whichcould be written into the new statutorycharter for the authority.

Restructure PIA Management.Administrative control and authorityfor appointment of PIA staff of the newlyprivatized authority would be vestedwith the General Manager, who wouldserve under contract and at the pleasureof the governing board of the newnonprofit organization. The newlycreated PIA governing board (whichwould replace the present PrisonIndustry Board) would, as at present,include representatives of organizedlabor, industry, the CDC, theDepartment of General Services, and

❝ . . . reform of

the PIA should

include a

number of

specific

programmatic

changes, some

of which could

be written into

the new

statutory

charter for the

authority.❞

Page 19

Policy Brief

the Trade and Commerce Agency.Additionally, it would includerepresentatives of the public withexpertise in marketing, accounting,human resources, and agriculture. TheDirector of the CDC would no longerautomatically serve as the chair of thePIA governing board. Instead, the chairwould be elected by a board majority.

We believe these changes wouldremedy the confused lines of authoritywithin the PIA.

Improve PIA Fiscal Accountability.All PIA contracts and expenditureswould be subject to approval of thegoverning board, which would beobligated to meet at least 12 timesannually. Board members would servepart-time, and would receive a part-time salary for four-year terms, inrecognition of the expandedresponsibilities and more frequentmeeting schedule. The board would beprovided sufficient resources to reviewbudgets and proposals for newenterprises presented by the PIAGeneral Manager. The PIA wouldcontinue to provide an annual report tothe Legislature, but it would contain amore detailed accounting of past andprospective business activities,expenditures, and inmate and non-inmate staffing levels. A summary ofthe PIA’s projected net incomestatement and capital outlay would beprovided within the budget documentprepared by the Department of Financefor display purposes, but the PIA budgetitself would not be subject to the annuallegislative appropriation process. The

PIA would continue to be subject tovarious audit agencies.

We believe these changes wouldprovide the checks and balancesrequired to ensure fiscal accountabilityfor an organization of the PIA’s sizeand complexity.

Ensure Greater Self-Sufficiency.The PIA would be authorized toborrow money from the GeneralFund and other public sources (aswell as private sources) to finance itscapital outlay needs and expand itsenterprises as its internal resourcespermit, but would be obligated topay off any loan in full at the sameinterest rate as that paid by the PooledMoney Investment Account. The PIAcould also continue the currentpractice by which the CDC buildsand equips facilities using generalobligation or lease payment bondsand then makes the facilities availableto the PIA. In this event, however,the PIA would be obligated to payrent under a lease either to the CDCor to the General Fund (dependingon the budget from which the debtwas to be repaid) at a rate sufficientto fully retire the debt on anyborrowed funds used on behalf ofthe authority.

We believe these changes wouldreduce the PIA’s dependence uponstate funding for capital outlayand equipment.

Improve the State’s FinancialReturn. The Legislature should directthe PIA, through the Budget Act, to

❝ . . . the PIA

would be

obligated to

pay rent [to

the state] at a

rate sufficient

to fully retire

the debt on

any borrowed

funds used on

behalf of the

authority.❞

Page 20


make a one-time transfer of PIA cashto the CDC for support of programs.(We believe that, upon privatization,as much as $20 million of the$33 million in projected cash reserveswould be surplus to the PIA’s needs.)The funds would be redirected throughthe Budget Act for the expansion ofother education and work programsat the CDC in order to significantlyincrease employment of all eligibleinmates. As a consequence, theremaining $2.4 million balance on thePIA’s loan from the General Fundwould be deemed paid. Thereafter, inlieu of any compensation for securitycoverage, inmate workers’ compensation,and any other potential subsidies by theCDC, the state General Fund wouldreceive a payment of 1 percent of PIA’sannual gross sales in any year that theauthority’s business enterprises did notrecord a net loss of income.

We believe these changes wouldprovide the state with a significantreturn on its investment in the PIA.

Stabilize and Improve the PIAInmate Workforce. As its budgetpermits, the PIA could assumeresponsibility for funding and staffingof vocational education programs thatcorresponded to its prison enterprises;inmates who successfully completedthe programs would then be shifted bythe PIA into work assignments. Thisapproach to vocational trainingprograms would financially benefit thestate. However, the PIA would alsobenefit from being able to train inmatesto the needs and standards of its

enterprises. The PIA would be directedto seek available federal and state job-training funds to finance these activities,which are already permissible undercurrent law.

The CDC and the PIA also wouldbe directed by statute to prioritize anynew enterprises or new employmentto inmates who have two- to six-yearsentences left to serve in state prison,particularly those serving a second-strike prison sentence. The PIA wouldkeep these inmate workers until theirparole date if they were performingsatisfactory work. Inmates withsentences shorter than two years, orlonger than six years, would generallybe assigned to other work or educationprograms. Exceptions to these ruleswould be permitted to minimizedisruption of existing enterprises andmeet the security needs of the CDC.

We believe these changes wouldprovide the PIA with a more stable andproductive inmate workforce.

Establish Pay for Performance. ThePIA salaries for non-inmate workersshould be adjusted to be morecomparable to the private sector. Whereappropriate—as in sales representativepositions and key managerialpositions—compensation of the PIAstaff should be partially tied toappropriate measures of jobperformance. A more general profit-sharing plan with employees could alsobe authorized. We recognize that anumber of labor-related issues wouldneed to be addressed during theconversion to privatized status, including

❝ [PIA would

prioritize] . . .

new employ-

ment to inmates

who have two-

to six-year

sentences left to

serve in state

prison . . .❞

Page 21

Policy Brief

any labor agreements in force at the timeand the provision of retirement benefitsat the privatized authority. TheLegislature should state its intent thatthe PIA avoid any unnecessarydisruption of its existing non-inmateworkforce during the transition.

We believe these changes wouldmake the PIA’s non-inmate workforcemore productive.

Do Away With Protected Markets.As part of its proposal for reform ofstate procurement practices, theadministration has proposed that,after a waiting period of several years,the requirement that state agenciespurchase PIA-made goods andservices be phased out, doing awaywith its protected market. We agreewith the proposal—with theproviso that private-sector marketopportunities for the PIA beexpanded simultaneously, permittingthe authority to sell goods andservices to the private sector, underspecified circumstances, as discussedin more detail below. The statutes in28 other states permit such private-sector sales.

We believe these changes wouldprompt the PIA to become morebusiness-like and cost-competitive.

Establish Clear Rules for FairCompetition. In our view, the PIAshould not be restricted fromestablishing enterprises involvinggoods and services produced for sale tostate and local governmental agencieson the basis that such an enterprise

might have a negative impact on anexisting private business or industry.In such cases, we believe the potentialbenefit to the taxpayers should be givenmore weight than industry concerns.However, we believe clear statutorystandards should be established toprevent unfair competition fromoccurring whenever the PIA establishesenterprises involving goods andservices produced primarily for sale tothe private sector. If an enterprise isproducing goods for sale to the private-sector market, the PIA should berequired to pay its inmate workforce atleast wages comparable to those paidto non-inmate employees for similarwork. Such an enterprise would also beprohibited if the PIA governing boarddetermined, following a public hearing,that it would divert a specifiedpercentage of existing private-sectorjobs or a specified percentage of theexisting market share to the PIA. Theappropriate percentages would be fixedin statute.

We believe these changes, coupledwith the elimination of capital subsidies,would reduce the ongoing controversyabout whether particular PIA enterprisesconstitute unfair competition withprivate labor and industry.

Open the Door to New PrivatePartnerships. Proposition 139, whichwas approved by California voters inNovember 1990, repealed a stateconstitutional ban on the contractualuse of inmate labor by any privateparty. The measure also establishedthe Joint Venture program, by which

❝. . . the

administration

has proposed

that . . . the

requirement

that state

agencies

purchase

PIA-made

goods and

services

be phased

out . . . . We

agree with the

proposal.❞

Page 22


private companies may establishfactories on the grounds of stateprisons which employ inmate labor.The Joint Venture program operatesseparately from the PIA.

In addition to the Joint Ventureprogram, Proposition 139 specificallyauthorized the creation of other, similarprograms by which inmate labor wouldbe contracted out to private parties.

Our proposal would authorize thePIA to contract to provide products andservices under contract to private-sectorpartners, and further authorize the PIAto contract with private partners toprovide management of PIA enterprisesor marketing or distribution of its goods.Similar partnerships with privateparties have been established withcorrectional enterprises in other states.For example, PRIDE has been licensedby a private company in Florida torecycle used tires into Rebound, acombination of rubber particles andcompost that is used to renovatesporting fields.

In the case of private partners willingto pay inmates wages comparable tothose paid to non-inmate workers forsimilar work, the PIA would bepermitted, when security concernswould not be compromised, to bus itsassigned inmates to private factories orfarms or trash-recycling centers. In suchcases, a fixed share of inmate earningswould be diverted to compensate thestate for the cost of their room andboard, provide victim restitution,support inmate families, and to createan inmate trust fund accessible only

after parole. Upon their parole, PIAinmate employees would be exemptedfrom requirements that they return totheir county of commitment if the PIAitself or a PIA partner wished to hirethem for a non-inmate staff position(as the law already allows for inmatesassigned to Joint Venture enterprises).Another form of private partnershipwould also be encouraged: as anonprofit tax-exempt organization,corporate and private donations to thePIA would be tax deductible.

We believe these changes wouldopen the door at the PIA to private-sector capital, managerial skills, andmarket opportunities.

Measure Mission Performance. Justas they should be held accountable forthe financial performance of theauthority, the PIA governing board andGeneral Manager should be heldaccountable for PIA’s success inreducing the recidivism rate of inmatesparticipating in the PIA workforce. TheCDC and the EmploymentDevelopment Department should bedirected to cooperate with the PIA inroutinely assessing the effect of PIAprograms on post-release employmentand recidivism. The results would bemade a part of the annual reportprovided to the Legislature on the PIA’sperformance, and would provide thePIA with additional incentives toprovide vocational training, jobplacement, and other services intendedto reduce inmate recidivism.

We believe these changes wouldpromote achievement of both proposed

❝. . . the PIA

governing board

and General

Manager should

be held

accountable for

PIA’s success in

reducing the

recidivism rate

of inmates . . .❞

Page 23

Policy Brief

PIA missions—greater self-sufficiencyand less recidivism through improvedinmate employability.

CONCLUSION

Just the Beginning. In our view,reform of prison inmate programsshould not stop at the PIA. Given thatthe PIA now employs only about5.5 percent of the total inmatepopulation, we believe that otheracademic education, vocationaleducation, and work programs whichnow provide a much larger number ofinmate assignments warrant furtherreview and reform by the Legislature.

We believe that the time is ripe toredefine the mission and restructure ofthe PIA. Thirteen years have passedsince the Legislature and the Governorenacted the present program, whichhas improved its financial performance

but failed to achieve its major purposes.In our view, basic reform of the PIA islong overdue. We would also note thattwo years have passed since theLegislature and the Governor enactedthe Three Strikes law. More than 16,000second strikers are already housed instate prison, and about 800 more arearriving each month. We believe it iscritical that the state take steps now toreduce the number of second strikersnow in prison from returning to statecustody with long-term and costly third-strike prison sentences. The CDCcurrently has no specific program orstrategy aimed at addressing the fiscalpressure posed by second-strikerrecidivism. We believe a privatized PIA,focused on reducing recidivism by thistarget group, would provide significantlong-term dividends by holding downthe growing costs of the prison system.

This Policy Brief was prepared by Daniel C. Carson, under the supervision ofCraig Cornett. This report and others are available on the LAO’s World WideWeb page at http://www.lao.ca.gov. The Legislative Analyst’s Office is locatedat 925 L Street, Suite 1000, Sacramento, California, 95814. To requestpublications call (916) 445-2375.

Documents

Reforming the Prison Industry Authority · Reforming the Prison Industry Authority SUMMARY Background The Prison Industry Authority (PIA) was established in 1983 to improve enterprises