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Audit: California Private Prison Contracting Tainted by Conflicts of Interest

The California State Auditor reported in September 2005 that the California Department of Corrections and Rehabilitation (CDCR), when contracting with private prison contractors for two minimum security Community Correctional Facilities (CCF), issued no-bid awards to companies who had hired recently retired senior CDCR and Finance employees with economic interests in the awards.

Specifically, the Auditor found that (1) actions taken by two of CDCRs former employees may have violated conflict-of-interest laws, (2) CDCR does not ensure that retired annuitants [former employees on retirement pay who are rehired on a second salary] file statements of economic interest, (3) state funds were committed and spent before approval was obtained for a no-bid contract and (4) justification for the no-bid contracts was based on a misleading claim of cost comparisons that did not include all comparable costs. The Auditor further criticized CDCRs future prison population projections [and hence the need for such private facilities] because no documentation of the projection process existed, denying the Auditor ability to establish the validity of the projections.

In addition to 34 state prisons, CDCR operates 12 minimum security CCFs, six of which are operated by private contractors and the other six by local governments. All CCF contracts are to be competitively bid. Statewide, 4,733 CDCR prisoners are housed in CCFs.

Due to lack of funds in fiscal 2003-04, three private CCFs were closed: McFarland, Mesa Verde and Eagle Mountain. It was estimated that these beds would not be needed due to anticipated alternatives-to-incarceration programs. Moreover, CDCRs projections through 2009 showed a stable population. But when the new programs were canceled due to guards union (CCPOA) pressure [private prisons do not employ CCPOA guards] CDCR was beset with an unexpected sudden need for prison beds, and reversed course to reopen McFarland and Mesa Verde. CDCR began by using one-year no-bid contracts, with a planned competitive bidding process for the long term.

Auditing these two contracts at the California Legislatures request, the Auditor found that for the $6.8 million Mesa Verde contract, the contractor (Civigenics) failed to disclose that two of its senior staff had worked for CDCR in the twelve months prior to the award and were currently retired annuitants for CDCR while yet participating in Civigenics operations at Mesa Verde. One was former Chief Deputy Director David Tristan, who retired from CDCR on May 27, 2004 but was still on its payroll as a retired annuitant. Deputy Director as of July 2005, while pre-award contract funds were being expended at Mesa Verde. The other triple-dipping employee was Michael Pickett, a former Deputy Director, who retired on January 31, 2003 but was rehired as a retired annuitant two days later (and remained on that pay status as of July 2005). (See: PLN, Jan. 2006 Private Prison Firms Stumble; Hire Former California Officials To Lobby For Beds.) After reviewing relevant conflict-of-interest laws, CDCR disqualified Civigenics June 2005 bid on July 14, 2005 (thus effectively voiding the contract), citing the participation of a current CDCR employee in violation of California Contract Code §§ 10410, 10411. Significantly, the two no-bid contracts had been justified on the basis of an unexpected CDCR population explosion, but when Civigenics conflict of interest was exposed, the population projection suspiciously imploded, obviating the need for those beds.

The contract for McFarland was awarded to GEO Group, Inc. (GEO) before it was approved by the Department of General Services. A challenge was raised of influence by Californias former Director of Finance Donna Arduin, who left office in October 2004 to become a trustee of the real estate trust (Correctional Properties Trust) that owns the McFarland asset, which is leased to GEO. It was nonetheless determined that distancing herself by association with the Trust rather than GEO sufficed to insulate Arduin from a conflict of interest.

Looking deeper, the Auditor found that some CDCR policies lacked proper controls, and recommended new ones. For example, CDCR claimed that because the CCFs average daily costs ($45 at McFarland and $54 at Mesa Verde) were lower than the $59 maximum daily county jail rate, CCFs were cost effective. The auditor disagreed, noting that CDCR was hiding the ball of ancillary remaining overhead support from CDCR to the CCFs, including health care, transportation, disciplinary housing, counselors and administrative appeals. Thus, CCF contract comparison justifications failed in general, although the auditor found the non-competitive contract bids in line with other CCF contracts (after excluding a $1 million startup cost to reequip the older Mesa Verde facility for the contractor).

The auditor recommended correcting all of the above indiscretions. See: California State Auditor, CDCR: It Needs To Better Ensure Against Conflicts Of Interest And To Improve Its Inmate Population Projections, Report No. 2005-105 (Sept. 2005). Free single copies are available from Bureau of State Audits, 555 Capitol Mall, Suite 300, Sacramento, CA 95814; also at and

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