Private Options

Finding 5: The State does not have an adequate process for determining when to contract for correctional services, or for evaluating or compensating service providers based on performance.

Privatization is not by itself the solution to the State's growing prison-related costs or the ineffectiveness of its correctional policies. Private enterprises, however, do have the capacity to provide some services better and cheaper than public agencies alone.

The California Department of Corrections already makes significant use of private sector expertise. The department's prison construction program, in particular, has relied heavily on both the services available in the marketplace and the benefits of competition to build 21 prisons in 13 years. The department also has contracted with other government agencies and the private sector to build and operate facilities that hold low-security inmates.

Two challenges face policy makers and program managers: The first is to ensure that the existing contracting process is efficient. The second is whether to expand the use of facilities operated by private agencies or other governmental organizations.

National reviews of contracting by public agencies show that the most successful efforts rely upon independent agencies to identify public costs, oversee competitive procedures and evaluate service providers. California, however, does little program evaluation, and as a result policy makers do not know which ones to discontinue or which ones to expand.

The Current Process

In recent years, CDC has made considerable use of the private sector to expand the state prison system. When it became clear in the early 1980s that a large number of prisons would have to be erected in a short amount of time, the Legislature shifted the construction responsibility from the Department of General Services to the Department of Corrections.

Faced with a large challenge and without an established program or experienced workforce, the Department of Corrections' Planning and Construction Division created a process for contracting out nearly all aspects of prison development -- from design through construction. It even contracted out the job of overseeing the contracts. The department's director testified:

Ninety-five percent of a prison project budget is contracted to the private sector. These contracts include architectural and engineer services construction and program management services, construction services and telecommunications services. ⁽¹¹²⁾

The department started by developing a partnership with a private consulting firm that was familiar with large construction projects in which numerous contractors were involved. While department officials maintain decision-making control, they rely on the consultant to research options, provide advice and execute the contracts associated with designing and building a prison.

Over time, the department developed a process in which engineers and architects are selected for a project through interviews to determine which applicant is most qualified, and then by negotiating a price for their services. (This process is only allowed under state law for securing professional services.)

Once designed, a project goes out to bid, and contracts are awarded to the lowest bidders. A typical prison will have 10 bid packages -- some of them are small, such as grading and drainage, and some of them large, such as building the housing units and guard towers. The department breaks down the job into bid packages to encourage competition. The department has maintained that if the entire project were put out for a single bid, only a few companies would have the ability to fulfill the contract, and as a result competition would be limited and the bids inflated. The bid packages, in addition to allowing small- and medium-sized companies to compete, has the additional benefit of giving local firms the opportunity to participate -- building goodwill in the host community.

This process has been reviewed by the Bureau of State Audits, by engineering and architectural experts from the University of California, and the Department of Finance. Each found room for criticism, and each suggested ways that the process might work more efficiently. But the most critical reviews could identify only modest potential savings, and the University experts were amazed by the ability of the process to deliver high quality products for relatively low costs.⁽¹¹³⁾

The most significant potential improvement suggested was to award a contract for an entire prison project. That process, known as design-build, would make the winning bidder responsible for delivering a completed project -- from site-specific design to testing the cell door locks. The potential savings would accrue to the State by reducing the costs of change orders -- essentially exporting the risk of errors and omissions to the contractor.

But the success of the program also would hinge on a sufficient number of capable companies bidding on the project to ensure that competition drove the price down. Even with competition, design-build procedures encourage bidders to build cushion into their prices to absorb the unanticipated expenditures that currently the State only pays for when and if the costs actually are incurred.

As prisons became more full, the State also looked outside the department to other governmental agencies and the private sector to build and operate facilities for low-level offenders.

One such program was created by SB 1591, which resulted in the department contracting with seven public agencies, all of them small cities, to build and operate small prisons.

The Legislature also authorized five private low-security prisons. Both the private and public facilities were intended to hold parole violators, but as the prison population has expanded some new admittees have been sent to those facilities.

The responsibility for the contracts were placed within CDC's Division of Community and Parole Services. That division is responsible for inmates after they are released from prison but remain within the department's jurisdiction for the length of their parole.

Parole and Community Services was given responsibility for the contracts because the facilities were expected to hold parole violators. The division already had a number of small contracts with work furlough and other service providers. But contracting is not the division's core expertise, as was developed in the Planning and Construction Division, and operating prisons is not its core expertise, as is CDC's Institutions Division. Contractors, legislative oversight staff, policy analysts and academic criminologists all have identified shortcomings in the contracting procedures used by the division to acquire prisons services.

The chart on the following page displays CDC's organizational structure.

Criticisms of Contracting Procedures

Contractors and policy analysts have identified a number of ways that the CDC's contracting procedures discourage competition and innovation, which if reformed could yield better services at lower costs.

• Inadequate assessment of contracting options. Prior to the contracting with either local governments or private companies to provide housing for low-security inmates, CDC officials said they did not conduct any analysis to determine the complete costs for the department to provide a similar service. As a result, the department did not have a basis for determining whether those acquired services were costing the State more or less than if the department built and operate those facilities itself. CDC officials could not even recount how the decision was made to contract out those facilities.⁽¹¹⁴⁾



• Inadequate evaluation of program effectiveness. The State does not routinely evaluate the performance of contractors whose purpose is explicitly or implicitly to help parolees successfully transition back into society. Many service providers said they have requested the department to conduct outcome oriented evaluations because they believe their services are effective at reducing crime committed by ex-convicts. Others have asked for outcome evaluations because they believed the positive, cost-effective results would justify expanding the programs as a way to reduce crime and reduce the demand for additional prison beds. In both situations, the providers said the department has refused to conduct the analysis. Similarly, the department has not added independent program evaluations, such as those required under federal regulations for federally funded service providers. As a result, policy makers and program managers have no basis for determining whether to continue, expand or discontinue those services.



• Fiscal disincentives to effectiveness. One contract, with Jobs Plus, which provides some schooling inside prisons and parole assistance outside of prisons, is actually based on performance. The nonprofit group is compensated primarily on how many inmates it helps to find and keep jobs. But most of the other contracts are based on a modified version of cost-plus; contractors are essentially given a per diem allowance, with the State routinely analyzing expenditures in an effort to lower the per diem or hold them steady against the creep of inflation. Service providers said this process creates a disincentive for efficiency, because any savings generated by the service provider are not shared between the State and the provider. It also discourages innovation in programming, service providers said, as the State is more interested in how much is spent on toilet paper than how many parole violators acquired a new job skill.
• Flawed competitions for contracts. A number of contractors complained that the request for proposals that precedes new contracts has the effect of discouraging competition. One contractor said that the requests contained technical mistakes. Another said that they favored large companies over small ones.

The vice president of Cornell Corrections, which has seven major prison contracts in three states, testified that the RFP process was "designed to fail" by capping contracts, not giving cost of living allowances and increasing requirements:

While the motivation may be righteous -- to put intensive pressure on contractors to provide low-cost service -- the effect of that process is to discourage competition and to focus all attention on cutting costs rather than increasing outcomes. A cap might be appropriate if it is benchmarked at some known level below what it would cost CDC to provide the same service.⁽¹¹⁵⁾

Unfortunately, that cost has not been derived, and the Cornell official believes that will eventually encourage the most qualified contractors to stop bidding on California prison projects.

Moreover, service providers said the limitations prevented the contracting process from becoming what it really could be -- a cheaper and better way to provide correctional services that lowered the crime rate even after inmates were released. The Cornell official said: "The more appropriate method would be to make sure the competition is vigorous by a simple but rigorous process, and then require performance and reward with incentives."

The department has experienced similar frustrations with its contracts with public agencies. Academic reviewers concluded the contracting process was "apparently flawed":

The contracts were "co-written" based on negotiations done "in good faith" with the jurisdictions involved. An "estimated cost" of operations was arrived at with the understanding that these costs would be audited to determine "actual costs."... They did not use a straight per diem because they needed some way to manage the risk... The State tried to protect itself with the audit mechanism, which would determine actual costs.⁽¹¹⁶⁾

As could expect, the auditors found disallowable costs, but the public agencies were unwilling to pay back revenue for services rendered. Now CDC officials say that the contracts should all be based on a per diem basis. The table on the next page displays the CDC's private contracts.

Private Correctional Facilities in California
Facility	Company	Location	Contracting Agency	Size	Security level
Mesa Verde Community Correctional Facility	Alternative Programs, Inc.	Bakersfield	Department of Corrections	340	Minimum
Leo Chesney Community Correctional Facility	Cornell Corrections	Live Oak	Department of Corrections	270	Minimum
Baker Community Correctional Facility	Cornell Corrections	Baker	Department of Corrections	288	Minimum
Montebello City Jail	Correctional Systems, Inc	Montebello	City of Montabello	24	Pre-arraign.
Baldwin Park City Jail	Correctional Systems, Inc	Baldwin Park	City of Baldwin Park	20	Pre-arraign.
Eagle Mountain Community Correctional Facility	Management and Training Corp.	Desert Center	Department of Corrections	424	Minimum
Victor Valley Community Correctional Facility	Maranatha Production Company	Adelanto	Department of Corrections	500	Minimum/ Medium
McFarland Community Correctional Facility	Wackenhut Corrections Corporation	McFarland	Department of Corrections	224	Minimum
Seal Beach Detention Facility	Correctional Systems Inc.	Seal Beach	City of Seal Beach	38	Pre-arraign.
San Diego City Jail	Wackenhut Corrections Corporation	San Diego	City of San Diego	200	Minimum
Desert View Community Correctional Facility	Wackenhut Corrections Corporation	Adelanto	Department of Corrections	550	Minimum (March 98)
Central Valley Community Correctional Facility	Wackenhut Corrections Corporation	McFarland	Department of Corrections	550	Minimum (March 98)
Golden State Community Correctional Facility	Wackenhut Corrections Corporation	McFarland	Department of Corrections	550	Minimum (March 98)

Lessons Learned Elsewhere

Government's collective experience in contracting out is growing, and with it the benefit of experience that can guide policy makers and program managers regardless of the service being sought. These reviews show that there are two important issues that can make or break the cost effectiveness of contracting: How the contracting is done and whether the process is competitive.

How Matters

As in most areas of public administration, policy analysts have concluded that one of the not-so-secret elements of success is effective management. One analyst has concluded:

"Without effective public management the promises of privatization can never be fulfilled."⁽¹¹⁷⁾

The U.S. General Accounting Office surveyed six successful contracting programs throughout the nation and determined that they had a number of elements in common. Among them, each had an organizational structure that provided the expertise and independence to gather cost figures, conduct competitive procurement procedures and execute contracts. The independence of that agency was particularly important in places where government agencies are invited to participate in the competition to provide services. The box to the right lists the major lessons learned.⁽¹¹⁸⁾

Similarly, another expert said a chief lesson learned so far from privatization is that how the policy is implemented -- rather than some inherent efficiency with private suppliers -- will determine whether the public gets a better deal by turning to the marketplace for meet public needs. In order to contract effectively, government needs to know what it wants to buy and government needs to know what they have bought: "The two ends of the contracting-out chain -- defining the service and measuring the results -- are the critical links."⁽¹¹⁹⁾

To determine what government wants to buy, it needs to know what public agencies are providing and the true costs of those services. A number of analysts indicate that a full and complete auditing of public costs is an essential ingredient that is often overlooked by agencies. Part of the problem is that it is difficult to determine the complete costs, as most public programs rely on the assistance of a number of departments to procure supplies and personnel services, to acquire and maintain facilities and equipment.

Determining what government has bought requires detailed evaluations to ensure that service providers did everything they were required to by the contract, as well as specified in the contract. The evaluations have to be prompt so immediate action can be taken to correct deficiencies.

Many of these lessons are immediately transferable to the procurement of correctional services. One academic expert on the subject testified:

It seems self-evident that the key to becoming a smart buyer in the field of corrections or elsewhere is in the formulation of sophisticated requests for proposals and equally sophisticated methods for evaluating submissions by competing firms. ... The hard reality is that there is no language one can inject into contracts or techniques one can incorporate into contract monitoring strategies that can compensate for poorly crafted procurement documents or weak evaluations of submissions. ⁽¹²⁰⁾

Competition is the Goal

Experience also shows that it is less important who performs the service -- private for-profit, private nonprofit or governmental agency. It is more important that contracts are awarded through competitive procedures, because it is competition that drives efficiency and innovation. As one analyst put it: "Public versus private matters, but competitive versus noncompetitive usually matters more."⁽¹²¹⁾

Most important, concludes yet another analyst, "privatization does not so much reduce government as transform it -- it leads to a sharing instead of a division of responsibilities."⁽¹²²⁾

Competition also has been known to encourage efficiencies among public programs -- even if they are not directly subjected to competitive pressures. One expert testified:

Bits and pieces of evidence in the research literature strongly suggest that the long-term and most significant cost savings associated with privatization may come more from the improved performance of public agencies in those jurisdictions which have privatized than from the efforts of private corrections management firms. My judgment is that the volume and quality of evidence of this type is likely to grow rather swiftly. This is as I believe it should be... The injection via privatization of a bit of competition between alternative providers of similar services might well produce a healthy modicum of encouragement for public employees to become more efficient and more effective. ⁽¹²³⁾

The Private Prison Experience

Privatization of public services is almost always controversial -- because of the potential to displace civil servants (or in California, limit the growth of civil servants), because private companies often provide savings to government through lower wages and benefits, because of suspicions over the fairness of contracting provisions and concerns that private companies will try to cheat the government.

Private correctional efforts have the added burdens of convincing policy makers that it is ethically appropriate for private companies to operate prisons and that private companies are equipped to quell prison riots and prevent escapes.

In some cases, the debates are louder than the issues are relevant. Clearly, the mistreatment of inmates at the hands of guards is unacceptable whether that person is on a public payroll or a private one. And just because inmates in a private jail have been abused does not mean the State should not rule out private prisons, any more than abuses of inmates in public prisons have ruled out incarceration overall. Despite these hurdles the private prison industry is growing rapidly through the western world and particularly in the United States. As the chart above shows, California is one of several states venturing into the marketplace.

In little more than a decade, private prisons have evolved from a topic of theoretical debate to an industry with estimated annual revenues of $500 million. In 1987, private firms had 3,122 inmates in their charge. In 1996, private prisons in America held nearly 78,000 inmates. More than half of the states have some kind of private facility under contract.⁽¹²⁴⁾

The growth was spurred by several factors -- rapidly increasing prison populations, tight public budgets and a growing willingness on the part of policy makers to contract with private firms to perform work traditionally delegated only to civil servants. While private prisons have emerged quickly, they still house only 2.6 percent of the nation's inmate population.

California also has a hurdle that some other states do not have -- a constitutional requirement that work performed by civil servants must continue to be performed by civil servants. While recent court decisions have affirmed the State's inability to replace civil servants by contracting out for services, a legal review of the law and recent court decisions has advised the Legislature that the provision would not block an expansion of the prison system using private companies. Indeed, as discussed, the State in recent years has done just that.⁽¹²⁵⁾

Particular to Corrections

As in most policy debates, the public debate over privatized prisons is muddled by dueling studies: Studies that document savings. Studies that document no savings. Studies that review the studies and tally the score. The study duel over private prisons reached a high point in 1996 when the U.S. General Accounting Office released a study that concluded the studies had not proven one way or the other that privatized prisons were cheaper than public prisons. The GAO study was chastised by some and hailed by others.⁽¹²⁶⁾

For policy makers, however, the threshold is not whether privatized prisons are always cheaper, usually cheaper or seldom cheaper. At this point, it is clear that privatized prisons can save government money. Thequestion is whether privatized prisons, implemented in a way that incorporates the lessons learned elsewhere, will be cheaper in California. The question can only be answered with confidence by an independent agency assigned to calculate public costs and conduct requests for proposals.

One study stands out as showing through a rigorous methodology that there is enough evidence supporting the efficiencies of private prisons to warrant California moving to the next step of actually counting public costs and requesting proposals. The case study came out of Louisiana, where lawmakers authorized three identical prisons to be built at the same time -- one public and two private. The study, discussed in the box on the previuos page, showed that private prisons were a serious option for meeting correctional needs, and at the vary least in providing competition for the existing public provider.⁽¹²⁷⁾

Two states have had significant experience with private prisons, and their approaches are potential models for California:

• Texas. The Texas Legislature started by authorizing four 500-bed private facilities -- requiring that they be of equal or better quality than public facilities and that they save the state at least 10 percent off what it would cost the state to operate comparable prisons. The Texas Sunset Advisory Commission concluded the private prisons had exceeded the 10 percent goal, had paid $400,000 in taxes and had been accredited by the American Correctional Association. The analysis concluded the private prisons, however, needed to improve their educational programs. By 1996, 39 private facilities were operating in Texas under contracts with local, state and federal agencies.



• Florida. The Florida Legislature in the 1980s gave the Florida Department of Corrections authority to contract prison management with private firms. After lawmakers became convinced that the department would not contract out its core mission, the Legislature created the Florida Correctional Privatization Commission. The new agency -- five part-time and uncompensated appointees with a small staff -- was charged with assessing proposals and awarding contracts to private companies to design, build and operate prisons. The Legislature originally authorized the Commission to contract for two prisons, provided the facilities could be operated at least 7 percent below the costs of a comparable state-run prison. The Legislature assigned the state's auditor general the task of making the comparison, given the complexity of uncovering the out-of-sight support costs associated with any large governmental project. The auditor general estimated the savings from the projects to be nearly 10 percent. Florida now has more than 10,000 prisoners in 10 privately operated prisons.

Both states relied upon agencies independent of the state prison system to calculate costs. This is important because both proponents and opponents of private prisons argue that hidden costs can tilt the economics in their favor.

Public prisons have costs hidden in the budgets of other departments that provide a myriad of internal services, from contract negotiations to procurement. But private contractors often do not provide all of the services that public prisons do, such as medical care. One pair of analysts point out that private prisons incur the costs of "dual administrations," the private company managers and the government monitors. The experience is that these numbers can be counted, but the task needs to be left to accountants independent of the prison system.

Once costs are accounted for, the State needs to ensure that it purchases a quality product. The president of Wackenhut Corrections, the nation's second largest private prison company, said California should rely on seven factors to help ensure a quality private prison program: The terms of the contract, a facility based monitor, annual government audits, in-house corporate auditing, accreditation systems, competition among private operators and media scrutiny. The president said some states tie performance to payment based on pre-established outcome indicators.

Similarly, a competitive process for providing prison services for California could link compensation with performance. Until now, the economic debate over private prisons has been whether the daily or annual operational costs could be reduced by 5 percent or 10 percent. With California's growing correctional budget, marginal savings can quickly add up to millions of dollars. But if the innovation and efficiency provided through competitive procedures could be used to improve the quality of programs in prisons and reduce the crimes committed by inmates when they are released, then the potential economic benefits are even greater.

Summary

Over the last decade, California has gradually and haphazardly expanded its use of contracts with private and public agencies to procure needed prison beds. Existing service providers and outside reviewers believe that contracting process could be significantly improved to use competition rather than oversight to hold down prices and to provide incentives to contractors to improve their services. Moreover, if the State is to truly capture the benefits of competitively derived correctional services, the State will need to develop the independent expertise to evaluate costs, request proposals and award and monitor contracts.

Recommendation 5: The Governor and the Legislature should enact legislation establishing a vehicle within the Youth and Adult Correctional Agency for soliciting proposals, negotiating contracts and evaluating the performance of contractors.

• The Board of Corrections should be the procurement agent. The entity should review and renegotiate existing contracts to require evaluations, establish minimum standards and link compensation to performance. Outcome measures should include as equal priorities the safety of the institution and the ability of released inmates to successfully reintegrate into society. The evaluations and outcome measures should be shared with the master planning entity and the Legislature to help inform policy debates about how to best increase public safety.