Statement by: Kenton H. Pattie, President, National Center for Fair Competition, on behalf of Small Business Legislative Council, National Emergency Equipment Dealers Association, National Association of Police Equipment Distributors

Mr. Chairman:

I appear today on behalf of the Small Business Legislative Council, the National Center for Fair Competition, the National Emergency Equipment Dealers Association and the National Association of Police Equipment Distributors.

The Small Business Legislative Council (SBLC) is a permanent, independent coalition of nearly one hundred trade and professional associations that share a common commitment to the future of small business. Our members represent the interests of small businesses in such diverse economic sectors as manufacturing, retailing, distribution, professional and technical services, construction, transportation, and agriculture. Our policies are developed through a consensus among our membership. Individual associations may express their own views. I've had the privilege of having been elected to several offices in SBLC.

The National Center for Fair Competition was established last year as a central information and advocacy coalition for all small businesses faced with competition from not-for-profits, local, state and federal agencies. We have assisted with lawsuits and publicity to bring attention to the plight of small businesses afflicted by competitors who receive tax exemptions and other government-given advantages.

The National Emergency Equipment Dealers Association (NEEDA) is an alliance of small businesses that sell, build, equip, repair, and service fire and emergency vehicles for the nation's volunteer and paid emergency services. I am Executive Director of this organization and a member of the Board of the Fire Service Institute.

The National Association of Police Equipment Distributors (NAPED) includes dealers who serve police and law enforcement departments in every state, city, county and town in the Union. I am Washington representative for this organization.

White House Delegates: Prohibit Government Commercial Sales

When the delegates to the White House Conference on Small Business (June 1995) made unfair competition by governments and non-profits one of their top issues they had in mind the dramatic way in which the U.S. Federal Prison Industries competes unfairly with small businesses.

Of 434 issues, the following recommendation by 1,800 elected and appointed delegates was one of their top fifteen:

• Government and Nonprofit Competition
• Support fair competition:

  Congress should enact legislation that would prohibit agencies, tax-exempt and antitrust-exempt organizations from engaging in commercial activities in direct competition with small businesses. (NCRA #144: page 26 "Final 60 Recommendations" Foundation for a New Century: A Report to the President and Congress, by the White House Conference on Small Business, September 1995.)

  This recommendation originated at the state level where delegates complained that the Federal government, including its prison factories, is a major competitor which enjoys unfair competitive advantages.

  Today, those delegates are disappointed and disillusioned by the time and complexity involved in getting results.

  Small businesses are sick of finding the government is a competitor or is giving preference to a competitor in their markets. Delegates to each of the three White House Conferences on Small Business have pleaded with Congress and the Administration on this issue. But to no avail, except that you and the cosponsors of your bill Mr. Chairman are trying to get a solution.

  We support the Freedom From Government Competition Act (HR 314) introduced by Rep. John J. Duncan of Tennessee which would require Federal agencies to do only what is the core and inherently governmental mission of the agency and to leave commercial services and products to the private sector. This bill and amendments are pending in the House Government Reform and Oversight Committee, Subcommittee on Management, Information and Technology.

  We also support your bill (Prison Industries Competition in Contracting Act, H.R. 2758) Chairman Hoekstra to remove the monopoly power enjoyed by the Federal prison industries over all Federal buyers.

• Priorities: Criminals vs. Competition

  If current prison law reflects the priorities of our government, priorities are as follows:

  First: Criminals

  Last: Law-abiding Americans

  When it comes to jobs, the current law gives more job priority to criminals than to law-abiding Americans who find themselves unemployed. Current law sends an ominous message to our youth: good jobs available in prison, steady employment, take-home pay.

  While Congress has often endorsed the policy of full and open competition, the mandatory source status Congress has given Federal Prison Industries is against competition. Nothing could be further from full and open competition.

  There is something remarkable about the Department of Justice administering this law which is neither just nor fair.

  While Congress has recognized the potential for the adverse impact of Federal laws and regulations on all businesses including small businesses, none of this applies when prison industries are involved. As Federal Prison Industries continues to grow rapidly, little deters it from taking over more and more jobs and business opportunities from the private sector.

  For example, a small business objecting to unfairness by the Federal Prison Industries would appeal to the FPI Ombudsman, an FPI senior executive. Or to the FPI Board which sets the very policies the small business would be complaining about.

  In fact, because FPI has government-given monopoly powers granted by Congress, the only reasonable appeal by small businesses is to Congress. That is why we are here today to support HR 2758 and S. 339.

We were encouraged by the recommendation of the National Performance Review's recommendation:

• Reinventing Support Services SUPO3 Improve Distribution Systems to Reduce Costly Inventories
• Permit customer choice in sources of supply. Take away the Federal Prison Industries' status as a mandatory source of federal supplies and require it to compete commercially for federal agencies' business.
• 'Creating A Government That Works Better & Costs Less' Report of the National Performance Review Vice President Al Gore September 7, 1993

  However, since 1993, the Clinton-Gore Administration has not actively pressed for its position. Nor has the Administration attempted to get the Justice Department and the Bureau of Prisons to change their tune. Instead, the Administration has encouraged agencies to be 'entrepreneurial,' to earn income from selling products and services wherever possible. The theme is 'make-a- buck.' In this framework, FPI is just one more US agency earning commercial income at the expense of the private sector.

• Congress: The Court of Last Resort for Small Businesses

  The only way Federal Prison Industries can be stopped is through an act or acts of Congress. You are our court of last resort.

  As Rep. Carolyn B. Maloney of New York said 'Any policy which cuts into the paychecks of good honest working Americans is not worth the paper it's printed on. Unfortunately, some of the loyal workers at the Glamour Glove Company in my district nearly became victims of a work program expansion at a Federal Prison. America's glove industry has already suffered at the hands of foreign competition. It shouldn't also be fingered by Federal Prison Industries.' Washington DC, October 30, 1997

  As you said Chairman Hoekstra: 'Plain and simple, FPI gives employment to murderers, rapists and drug kingpins -- people who have thumbed their noses at laws of our nation and take those job opportunities away from thousands of honest, hard-working Americans. Whether those people are office furniture workers in West Michigan, glove makers in Illinois or New York, or textile workers in Southern states, FPI's unfair advantages in the federal market must end.'

  Washington DC, October 30, 1997.

  As Jere W. Glover Chief Counsel for Advocacy, Small Business Administration, said in a letter to then-Chairwoman Rep. Jan Meyers of Kansas: 'The Office of Advocacy enthusiastically supports legislative restrictions that would curtail government entities from competing unfairly with small firms. . . This provision would help many small firms by leveling the playing field so they could compete fairly for federal contracts in industries where FPI is currently the mandatory source. . . The Office of Advocacy has recently heard from many small firms, especially in the furniture and signage industries, who are troubled by and very concerned with FPI's unfair intrusion within their markets.' April 11, 1996.

• McCollum Bill: Brash Invasion of Commercial Markets

  At a time when the American public is asking for less government intrusion, Rep. Bill McCollum of Florida has proposed the Free Market Prison Industries Reform Act of 1998 HR 4100.

  This bill is anything but a 'free market' bill. Instead this bill takes the huge power of the FPI and makes it bigger.

  HR 4100 proposes to expand the market for prison-made goods to state and local governments and to private sector buyers. This is quite a surprise to the many states which have invested in their own prison industries, but would now have to (a) compete with the Federal government or (b) step aside while Federal Prison Industries takes over.

  Rep. McCollum is proposing that states dissolve their own state preferences. At a time when the House leadership and the Republican Governors' Conference have agreed to re-commit to Federalism -- separation of Federal and state governments -- comes Rep. McCollum advocating new Federal power over the states. The McCollum bill would empower FPI to be a predator in taking away monopolies of the state prisons in their own states. A brash move and questionable policy for the 105th Congress.

  Already, without any legislative authority the Director of FPI said his goal for the year 2000 is to expand sales to $600 million and the number of inmates making commercial products and services to 25,000. (Committee on Government Procurement Conference, Crystal City, June 22-3 1998.)

  The question is: Would the Federal market absorb this dramatic explosion of commercial products by FPI? As unpopular, overpriced, and poorly delivered as FPI products have been throughout the 1990s, the answer is probably 'No.' Yet, the McCollum bill, if enacted, would endorse and encourage this astonishingly brash expansion. In either case, the risk for the expansion of FPI is born by the US taxpayer. If the risk fails, and the huge new production capacity finds no equivalent huge new market, it will be the taxpayer who picks up the pieces.

  Rep. McCollum speaks of 'reducing the taxpayer's burden' as if the main purpose of prison industries is to make a buck rather than protect the American public. But, does his bill reduce the 'taxpayer's burden' if there is no proof that anyone will buy the new prison-made goods?

  Rep. McCollum's vision is for Federal prisons to have a giant work-pool for hire by anyone. Already, FPI is expanding the inmate work force from 15% to 25% of all inmates despite the fact that the recent FPI share of prisoners has dropped. Since the number of prisoners has expanded rapidly recently, the 25% will be of a much larger prison population.

  Is it no wonder that small businesses are alarmed? As long as the prison population keeps going up, FPI raises its sales and work force goals, and Rep. McCollum threatens with his legislation, small businesses are at risk.

What will be the result of all this?

FPI Goal Is to Hit More Industries

Steve Schwalb, Assistant Director of Federal Prison Industries, stated his plan in June: with or without new legislation FPI will expand the number of industries FPI will penetrate. In effect, he has declared war on dozens of industries which previously were not affected by prison-made goods. Every member of SBLC, NEEDA, NAPED and hundreds of other associations should be concerned. These moves will result in rising opposition by the small businesses of this land. Congress will hear more and more about this issue.

When I asked Director Schwalb if he is having trouble attracting companies to use the prison work force he said 'No.'

Why?

Because he offers a way to get around the Federal Minimum Wage set here in Congress.

• Whereas all employers must pay Federal Minimum Wage, companies need pay FPI inmates only an average of $.92 per hour (from FY 1995 report).

  This is a huge competitive advantage equaled only in China and other less- developed nations.

• He offers them exclusive access to a firm, stable Federal agency market -- a market which can't say 'No' without a huge commitment to bureaucratic red tape in the form of protest or waiver procedures.
• He offers them the ability to have poor quality and poor delivery schedules without penalty or loss of sale.
• He offers them the ability to over-price their goods, without penalty or loss of sale. The GAO warned Congress in October 11, 1991 that FPI overpriced 89% of its goods an average of 15%. Based on GAO data, agencies should have received refunds totaling $50.8 million. The problem has persisted throughout the 90s. The taxpayer has paid all these overcharges. How long does it take, how many GAO reports does it take, for Congress to get the message. The annual Federal budget is being savaged by FPI through high prices.

The General Accounting Office documents the failings of FPI. Congress opened the 90's with a GAO report on FPI overpricing and, thanks to your persistence Mr. Chairman, Congress is ending this decade on the same note. No American company would tolerate such failures. But, FPI is a government monopoly with little incentive to fix its price, quality or delivery problems. There have been a lot of promises, but little performance.

The McCollum bill would thrust this ill-prepared tax-exempt commercial enterprise into a new risky era, with the taxpayer underwriting the risk.

The McCollum bill thrusts FPI into the open marketplace but says nothing about paying Federal, state and local taxes on profits. Nor does it insist on FPI meeting the many requirements imposed on private firms.

Altogether, these represent giant competitive advantages which many companies would find attractive.

Now comes Rep. McCollum saying this system should be expanded so these lucky companies -- armed with all these special, insider-advantages can use prisoners to make products and provide services for any customer: government and non-government.

Mr. Chairman, the impact on small business of the McCollum bill would be huge. Already Steve Schwalb announced recently his goal to boost FPI sales to $600 million by 2000. The McCollum bill could drive sales even higher.

Q. What does this $600 million represent?

A. Jobs and small businesses: opportunities taken away from the law-abiding.

Impact of growth from 15,000 to 25,000 inmate commercial workers

FPI Product or Service	Inmate Jobs	Millions of Sales
Textiles	4,836	$111.4
Electronics	3,270	$107.0
Furniture	4,194	$202.5
Metals	1,385	$30.8
Graphics and Services	2.009	$43.7
Totals FY 96 stats	15,694	$495.4
Growth of 62%	+9,730	+$307.1
Goal After 62% Achieved	25,424	$802.5

As this chart shows, a 10,000 inmate commercial worker growth would take 9,730 additional jobs and $307.1 additional sales from the private sector.

While the Department of Justice and the Bureau of Prisons may not feel these figures are significant, they boil down to the employment -- or lack of employment -- of thousands of law-abiding Americans and the taxable income of thousands of small businesses.

This is no new issue. It has arisen again and again. For example:

In 1896, however, the protests of organized labor and of businesses in competition with prison industries finally prevailed and New York passed a law abolishing the contract system and limiting prison labor to the production of items for use by the state.

'Teaching Prisoners a Lesson' by James S. Kunen The New Yorker, July 10, 1995

New York had the same debate a century ago. Twenty five years ago, Congress recognized the role of education in prisoner rehabilitation. Under the 1972 law allowing prisoners to pursue higher education, there were 237 higher education programs in prisons:

'. . . and by 1982 three hundred fifty. By 1994, one could earn a bachelor's degree while doing time in the federal prison system or in any of thirty-one state systems. And interestingly enough, recent studies seem to confirm what Elmira's reformers discovered a century ago: inmates who complete education courses are less likely to return to prison than those who don't. These findings challenge the conventional wisdom. . .male inmates who completed one or more years of higher education in prison had a recidivism rate four years after their release, more than twenty percent lower than the average for all male inmates.' Ibid.

However, today FPI has replaced education with day labor. They use the same argument about recidivism except they've shifted from 'education' to 'labor' as the way to reduce re-incarceration. The McCollum bill is silent on education.

What is the alternative to the FPI/McCollum Plan?

1. Eliminate the requirement that every Federal agency must use FPI if at all possible. It is time for the super preference of FPI to be abolished. At a minimum, take FPI out of the face of American small businesses.
2. Limit the amount of any market FPI can penetrate. Twenty percent of government business may be OK in some industries, But, for others whose entire market is government it is far too high.
3. Give prisoners technical skill training, not full-time jobs. Prepare them to perform public service such as responding to national emergencies: floods, wildfires, hurricanes, tornadoes, earthquakes, etc. Prepare them to apply skills to any job but don't direct them to a single labor-intensive trade.
4. Make education a requirement for exiting from prison. According to a joint legislative research committee of the Virginia General Assembly, 80% of prisoners are dependent on drugs and alcohol, have low literacy, and were truant, expelled or dropouts from school. This statistic clearly points to the solutions.

It was astonishing to read the assertion by Steve Schwalb that 'the net impact on civilian jobs of eliminating FPI from the equation would be negative.'

Would the American public be hurt by returning these jobs to the private sector? Would the economy be hurt or helped by letting law-abiding citizens do these jobs? Would prisoners actually experience more 'correction' and 'rehabilitation' from education and skill training rather than from a mere laborer's job? Isn't giving a job to a prisoner who is illiterate, without providing him or her with literacy, putting the cart before the horse? March 22, 1996 'Effect of FPI on the Private Sector' TO: Members of the Growth Strategies Committee FROM: Steve Schwalb, Assistant Director, Industries, Education and Vocational Training

While Steve Schwalb thinks converting $.96 per hour jobs to the minimum wage will have a negative 'net impact on civilian jobs' few would agree with him.

'If I said to you 'I am going to use captive labor to skirt the labor laws and compete with the work force,' you would object. But, that's what is happening here,' declares Segundo Mercado-Ilorens, who until recently was chief Washington lobbyist for the United Food and Commercial Workers. 'One practically has to commit crime these days to have guaranteed employment.' 'Hard Time for Prison Inmates' Legal Times, November 27, 1995

Instead, leaving full-time jobs to the private sector, providing literacy, education, drug and alcohol counseling, and skills training for inmates would likely have more positive long term impact on inmates' lives.

FPI: Keeping Them Busy & Out of Trouble

While the whole inmate employment program is touted as 'teaching the work ethic' it is, according to penal experts, mainly a way to keep prisoners busy and out of trouble. 'We're really keeping 400 people busy, so that they're not thinking about ways to harass us,' Petersburg Va Federal Prison Warden Joe Ludgate told Government Executive ('Competing With Convicts,' June 1997). The fact that it makes money, pays the salaries of many prison workers, is a bonus that helps sell the idea to legislators. In today's public climate, it is easy to succumb to the myth that the way to rehabilitate a criminal is to give him a laborer's job.

In addition to Federal prisons, many state and local prison systems take jobs and job opportunities from small businesses. In many cases it is very unlikely the prison workers will ever find the same job when they leave prison. For example, in Fairfax County Va. Lorton Prison does laundry for Federal and District of Columbia agencies in the Washington Metropolitan area. It provides milk for DC General Hospital, DC Village, St. Elizabeth's Hospital, and Youth Services. But, because it is the only dairy farm in the area, as long as the prison serves DC residents it is highly unlikely any inmate will end up working in dairies.

Similarly, it is rare for a former Federal inmate to snag a job doing the same thing he or she did in prison.

William Wilson, 31 a Lorton prisoner said he didn't need the Lorton dairy job to get future employment.

'Work habits I already have,' he says. 'What I need is money.' Wilson, who hopes to be paroled in three months after serving a three-year sentence for drugs and destruction of property, makes about $300 a month for his 56 hour weeks. 'It's a little slow making money,' he admits. . .But even a small nest egg will come in handy when he's released.

Lorton's Farm Team' by Christopher Solomon The Washington Post, October 19, 1995

But, the exploitation of prison laborers is about the explode as 19 new Federal prisons are on stream, according to Steve Schwalb speaking at a June 1998 meeting in Crystal City, Va.

This is a blow about to be dealt to dozens of unsuspecting industries. They have never had to deal with prison industries as competitors before.

But, Steve Schwalb says he will be diversifying to make and sell the products of many more industries in the next few years.

He is not as concerned about the outrage of the affected industries as he is in accommodating all the new prisoners arriving at over 100 prison sites around the country.

More Affected Industries: Expect Shrill Scream

The coalition expressing concern about prison industries is large. Tomorrow, the coalition will grow as more and more industries are affected. As FPI moves through its $600 million goal, the crescendo of opposition will rise to a shrill scream.

With FPI sales at $117 in 1980 projected to rise to $600 million by 2000, small businesses are increasingly alarmed and shocked at this run-away Federal commercial enterprise which takes jobs and contracts away from the private sector. Inmate employees have risen from 10,000 to 16,780 and are projected to be 25,000 by 2000 on a base of 125,000 Federal prisoners. Another million prisoners are held in non-Federal prisons. Many will be put to work in day labor jobs as the government-made sector explodes to the detriment of small business markets.

FPI is opening new facilities where commercial production of goods and services by inmates is expected to take place.

For those handful of companies in the police equipment distribution business the problem is here today. It is hard to believe -- you may laugh -- but Federal prisons make body armor. This is a product many criminals wish they had when they are committing their crimes. It is a critical factor in the safety of immigration, customs, drug interdiction, Coast Guard, and other Federal law enforcement officers.

Inmates who make body armor when they are inside are unlikely to work in this small but highly sensitive industry when they are outside. A criminal record is a poor recommendation for someone working on the safety of those who enforce laws and are the first to respond to crime and violence.

Federal prisons which make body armor today are taking away key Federal law enforcement markets from body armor companies. Like the glove business Mrs. Maloney fights for, the body armor industry is so small, one or two contracts lost to FPI can ruin a business. FPI is unconcerned. So, today we turn to the Congress for help.

There will be a larger voice of angry businesses as more and more industries are savaged by FPI.

Conclusion: Education Not Exploitation

Congress can wait, leaving Federal Prison Industries on its current run-away course. Or Congress can pass the Hoekstra-Frank-Collins-Maloney 'Federal Prison Industries Competition in Contracting Act.' Congress can consider extremist measures like the McCollum bill. Or Congress can call for a complete reform of the prison inmate program to refocus on the real problem of inmates: drugs, alcohol, illiteracy, lack of education, lack of resiliency, lack of employable skills, inability to get along successfully with others, lack of respect for or hate of authority. Congress can retain the same old solutions that were rejected in the 19th Century, or Congress can ask for a new plan.

Congress must break away from the concept that when prisons earn money it is as good for the inmates as it is for the Federal budget. Denying an inmate an education, which is the true platform for job success outside, leaves him or her little choice but to be a laborer for the rest of their lives.

1. Eliminate the requirement that every Federal agency must use FPI if at all possible. At a minimum, take FPI out of the face of American small businesses.
2. Limit the amount of any market FPI can penetrate. Twenty percent of government business may be OK in some industries, in many others it is far too high. For example, the entire market for body armor is 'government.' So taking one fifth of the market is unfair and unacceptable.
3. Give prisoners technical skill training, not full-time jobs. Prepare them to perform public service such as responding to national emergencies. Prepare them to apply skills to any job but don't direct them to a single labor- intensive trade.
4. Require education as a requirement for exiting from prison. On this point, according to a joint legislative research committee of the Virginia General Assembly, 80% of prisoners are dependent on drugs and alcohol, have low literacy, and were truant, expelled or dropouts from school. Most of them when they enter prison are barely past the age for high school but have had an unsuccessful school experience. For some, public schools have failed them, for others they simply failed public school. Whoever is at fault, the solution is not to give them a free job, but to help them gain the education and skills training that will return them to be productive responsible citizens.

Mr. Chairman, we thank you for your many years of exceptional and determined leadership on this issue. We thank the Subcommittee for holding this important hearing. We look forward to working with you.