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State Auditor Blasts Texas Correctional Industries

by Matthew T. Clarke

The Texas State Auditor has issued a report on Management Controls at Texas Correctional Industries (TCI) concluding that its management controls are so poor TCI cannot fulfill its statutory mandates of training prisoners for post-incarceration jobs and reducing the costs of incarceration.

In Fiscal Year 1996-7, the Texas Department of Criminal Justice (TDCJ) incarcerated over 140,000 prisoners in approximately 150 prisons. Almost all medically fit TDCJ prisoners were required to work. TCI operated 44 factories and three warehouses, providing jobs for 8,000 prisoners, manufacturing uniforms, mattresses, shoes and other items for TDCJ and furniture, license plates, and jail steel for other governmental agencies. Total sales was nearly $96,000,000.

The current monthly financial information on TCI factories is inaccurate because they are produced using an accounting system that does not adequately allocate costs to products. Outdated costs of materials are used in reports. The calculation of overhead costs is severely flawed. Thus, TCI cannot tell if its calculated costs reflect actual costs. Furthermore, prices are often set at 10% below competitors' prices, regardless of production costs. Therefore, TCI cannot tell if any of its factories make a profit.

TCI's financial statements are inaccurate. In addition to the inacurate cost calculations, the statements disguise TDCJ subsidies to other agencies. Thus, despite the fact that they are distributed to TDCJ, legislative entities, and external users for that specific purpose, TCI financial statements are not accurate indicators of divisional or factory success.

TCI's funding is not tied to production. TCI receives lump-sum funding based on TCI's estimates of the costs of producing goods for the prison system, revenue from external sales, and separate appropriations for goods sold to state jails. The separate funding sources are reflected in a piecemeal budgeting system that results in three separate budgets for each factory. The separate budgets are not consolidated, thus it is difficult to monitor factory budgets using TCI budget status reports.

TCI allocates appropriations to the factories based on historical budget amounts, not current operations, or even whether a factory over-or underspent its previous year's budget. Expected expenditures are often grossly overstated in the budget. Thus appropriations often do not reflect budgetary needs of the individual factories.

TCI is unable to accurately price its goods and services because much of the information it prepares or collects is not accurate and TCI's cost accounting system does not effectively track costs. TCI does not use standard reports or mechanisms containing free world benchmark ratios for tracking financial performance of manufacturing concerns. Thus, it is not possible to track the financial performance of TCI factories.

TCI is required by state statute, Tex. Gov. Code § 497.022, to provide vocational training for prisoners so they can get post-release civilian jobs and to recover some of the costs of incarceration. However, "TCI has not managed its operations in a way that ensures all of its statutory objectives are accomplished." Part of the problem is TCI's view of itself as a work program rather than a vocational training program, part lies with the nature of the contradictory goals of vocational training and cost recovery. A large part of the problem is TCI's failure to develop long-term strategies to fulfill the full scope of its mandated purpose. Instead, TCI has concentrated on short term returns.

Several factors combine to make TCI's operations difficult. Prisoners are assigned to TCI factories by prison security with no input from TCI. Skilled factory workers may be arbitrarily reassigned by prison security to non-factory jobs. When prisons are locked down for security reasons, production stops. Because it does not pay prisoners, TCI can thus offer little incentive. TCI must rely on the General Services Commission or the prison system's purchasing department for purchases of raw materials, making logistics difficult and leading to temporary production stoppages.

TCI operational reviews are inadequate to detect significant problems and no mechanism exists to ensure that problems detected are corrected. TCI's quality assurance program is not designed to review the actual quality of the products produced at the factories. TCI does not use customer input to improve business practices nor does it adequately track and effectively respond to customer complaints. Thus, poor business and production practices may continue unchecked for years.

TCI makes poorly informed decisions to build new factories without analyzing whether it would be less expensive to purchase a product instead of manufacturing it or whether the new factory will train prisoners in skills which are useful after release. When calculations are made to support the construction of new factories, flawed methods, arithmetic errors, and faulty figures yield unreliable conclusions. No system wide criteria for implementation of new businesses exists. Furthermore, the role of the Texas Board of Criminal Justice (TBCJ) in overseeing TCI's implementation of new businesses is unclear. This results in micromanage-ment by TBCJ on some relatively minor expansions of existing facilities while some large scale expenditures escape oversight.

Many of TCI's problems are caused by inadequate communication of production and financial information between the factories and TCI headquarters. To help alleviate this problem, TCI had begun implementation of a computerized system for financial and operational management. However, the $2,400,000 Industrial Operations Information System (IOIS) is far behind schedule and over budget. Because of delays, the scope of IOIS has been scaled back from the original proposal so that it no longer meets TCI's information needs.

Many of the problems with IOIS are due to the method of contracting for its implementation. The contract manager, who is not a TCI employee, was the author of the original feasibility study and was contracted at additional costs despite the availability of qualified salaried departmental data management personnel for the job. Because there is no internal contract manager, TCI employees lack detailed knowledge of the system. Furthermore, few factory employees were familiar with the system's capabilities, even in its currently-implemented diminished capacity.

Statistics relating to vocational training of prisoners or whether prisoners are assigned to TCI for any length of time are not kept. Post-release employment is not tracked. There is no accurate measure kept of the costs of incarceration. Therefore, TCI cannot determine its performance in the statutorily-mandated areas of vocational training of prisoners and recovery of costs.

Inventory controls in the TCI factories are inconsistent and determined locally. They are inadequate to protect and track inventory. Neither TC1 nor the individual factories have accurate information on the inventory quantities that should be on hand. Furthermore, when a difference is found between actual and book inventories, the book inventory is adjusted to reflect the actual inventory without any investigation into the cause of the discrepancy. This makes it difficult to prevent or detect theft or waste of materials.

The inventory control problems are still present at the factories that have implemented the IOIS computerized inventory control. At one factory using IOIS, 22 of 24 items checked had inaccurate inventory quantities. Thus, full implementation of IOIS may not alleviate the problem.

Most factories have not or have only recently established raw materials stocking level controls such as reorder points and minimum and maximum order points. Some factories have staff "eye" inventory levels to determine when inventory is low and needs reordering. Thus, many factories have inadequate methods for determining when to order additional raw materials. This leads to production delays and additional costs due to obsolete overstocked inventories. Many factories had large quantities of obsolete inventory on their books which must eventually be written off or sold through auction or bid, potentially resulting in a large financial loss.

TCI fails to properly track whether the customers it grants credit to have outstanding overdue balances. Thus, some customers with large outstanding balances for long periods were still being shipped goods on credit. This continued despite a previous internal audit which identified and addressed the collection problem.

TCI allows employees to purchase goods for personal use for the costs of raw materials plus overhead. However, the prices charged employees were often not justified, proper authorization for the sale was missing, unauthorized persons (non-employees) were making the purchases, and the goods purchased appeared to be for business, rather than personal use.

Generally, the State Auditor's Report blasted the poor, unprofessional operation of the factories. It also noted that TCI seemed unconcerned with the fulfillment of its legislatively-man- dated objectives--prisoner vocational training for civilian jobs and partial reimbursement of incarceration costs. TCI lacked vision and long-term planning to implement those goals. Indeed, TCI seems a monument to bureaucratic failure.

The report contained an appendix summarizing similar state auditors' reports in CA, DE, FL, MD, MO, NJ, NY, OR, PA, RI, and VA. Of those states, only MO and PA had self-sufficient programs; no state used effective strategic planning; only DE assisted released prisoners to find jobs; only FL trained prisoners with skills marketable in the free-world; and only MO and NJ reduced the costs of incarceration.

Allan B. Polunsky, chairman of TBCJ, attributed the problems at TCI to the prison system's "plantation mentality" and threatened to "find other people who were willing to do the job" if the present TCI staff did not makes changes quickly. Polunsky questioned the training of prisoners in jobs such as soap production and textiles, jobs for which there is no market in Texas. TBCJ tentatively agreed to put a new $2,600,000 sheet and pillow case factory on hold as a result of the State Auditor's Report.

"How many textile mills do you think there are in the state of Texas?" Polunsky asked John Benestante, the head of TCI. "How many are in the Fifth Ward of Houston? How many facilities in South Oak Cliff in Dallas manufacture shoes or soap?" Lambasting the "plantation mentality" of the prison system, Polunsky stated that TCI needed to be aggressive in identifying job opportunities that are "relevant in the 1990s and beyond" so prisoners will be able to find civilian jobs that pay enough to reduce the temptation to commit crime.

Benestante replied that private companies complain of unfair competition when TCI attempts to establish factories requiring highly skilled workers. However, Polunsky countered that Benestante overstated the problem and noted that, although there were economic issues to consider, he did not believe TCI to be in competition with the private sector.

Testifying before a commission which determines whether state agencies should be continued, Wayne Scott, executive director of the prison system noted that he had changed leadership of TCI and was implementing the recommendations of the audit report.

"We have the capability to make things better," said Scott.

"You know, several other directors have sat here, just like you, and promised the same thing." replied State Senator J. E. "Buster" Brown.

Sources: An Audit Report on Management Controls at Texas Correctional Industries-Office of the State Auditor of Texas (free download copies available at, Houston Chronicle, Tyler Morning Telegraph.

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