Increase Revenues of Texas Correctional Industries

The revenues of Texas Correctional Industries should be increased by expanding existing markets and develop-ing new markets.


Background
Texas Correctional Industries (TCI), housed within the Institutional Division of the Texas Department of Criminal Justice (TDCJ), consists of 35 factories or plants located at 24 different institutions. Six additional new factories are currently under cons truction and nine are in the planning stages, to be completed by 1995. These factories produce an array of products and services for use by the Institutional Division (referred to as Departmental Sales ). TCI also sells products to the other two divisions of TDCJ; Pardons and Parole and the Community Justice Assistance Divisions (referred to as Outside Sales ). 1 However, TCI only attempts to break even on sales within TDCJ.

Outside sales are also made to tax-supported agencies and political subdivisions such as counties and cities. The distribution of TCI outside sales for fiscal 1992 is provided in Table 1. By far the largest source for TCI s outside sales is state agencies, which represent approximately 65 percent of outside sales in fiscal 1992. The Texas Department of Transportation is TCI s largest single customer, purchasing a variety of products, such as license plates, metal road signs, furniture, dump truck beds and data entry services. 2

Table 1 - Texas Correctional Industries
Outside Sales by Percent, Fiscal 1992

Department of Transportation 45.8%
Mental Health and Mental Retardation 3.5
Other State Agencies 15.5
New Construction (TDCJ facilities) 17.9
Counties 4.7
Cities 1.3
Schools 7.1
Colleges 2.5
Miscellaneous 1.7

Total 100.0%

Source: Texas Department of Criminal Justice-Institutional Division, Texas Correctional Industries Division.

In addition to operating its factories, TCI is responsible for transporting goods and supplies to the various prison units, repairing vehicles and equipment and operat ing three large warehouses. Agricultural production and sales are under a separate division. 3

TCI factories are largely manufacturing-oriented, producing primarily those items needed by TDCJ, such as inmat e clothing, janitorial products, stainless steel products, mattresses, soap and furniture. TCI also produces goods in response to requests made by state agencies and political subdivisions, such as license plates, metal and plastic signs, office furniture, eyeglasses products which TCI can generally p roduce less expensively than other providers. However, in recent years TCI has begun to expand into more service-oriented markets such as data entry, records conversion and even telemarketing, again primarily because a specific state agency or political su bdivision has requested that TCI provide such services. 4

In fiscal 1992, the combined departmental and outside sales figure for TCI was $64.1 million, of which approximately $44 million (70 percent) was in Outside Sales. 5 The total operating cost for TCI during fiscal 1992 was approximately $58.2 million. TCI netted a profit of $6.3 million for fiscal 1992. 6

TCI can generate additional revenues by reducing production costs, expanding existing markets and by expanding into new market areas.

Reducing Production Costs
According to TCI staff, some vendors offer an early payment discount equal to a certain percent of value of the contract for production goods, if payment is made within a designated time period (usually ten days) from receipt of invoice. Th e discount can range from 0.5 to 2.0 percent of the face value of the contract, and in high-dollar contracts could result in significant savings for TCI. However, TCI is rarely able to take advantage of early payment discount clauses in contracts due to a usual 30- to 60-day payment turnaround. 7 An expedited payment process should result in cost savings for TCI.

To assess the potential impact of this issue, a sample of 62 of TCI s contracts for production materials was selected and reviewed for the prese nce of an early payment discount clause. The total value for all 62 of the sample contracts was $23.1 million. Twenty-two contracts (35 percent) offered an early discount and, with timely payment, costs could have been reduced by $18,415. It should be note d that ten contracts accounted for roughly 90 percent or $20.8 million of the expenditures made under these 62 contracts, of which three were for purchases of materials from a single vendor offering an early payment discount. Expedited payments to this ve ndor alone would have resulted in savings of $13,564.

In light of the fact that 35 percent of the sampled contracts offered an early payment discount, it is reasonable to assume that an early payment discount would be available for at least part of the remaining fiscal 1992 contracts. TCI staff estimate that roughly $44.7 million was expended in fiscal 1992 on production materials. 8 Although only 35 percent of the contracts sampled provided for an early payment discount, TCI staff were certain that additio nal vendors would offer such a discount if they were assured that TCI could pay a billing invoice within ten days. The establishment of a clearly articulated policy outlining an expedited early payment process for TCI s purchases, especially high dollar value production materials purchases, is warranted.

Expanding Existing Markets
TCI can generate additional revenue by increasing sales to its existing market base which is comprised primarily of state agencies and, to a lesser degree, political subdivisions such as counties, cities, and school districts. TCI is limited somewhat in its marketing scope in that, unlike private industry, it may only sell products to state agencies and political subdivisions. 9 Just as TCI is limited in its customer base, state agencies also face limitations in that they are required to purchase products from TDCJ if that product is available through the General Services Commission (GSC). 10 Although the law is intended to increase state agency purchases from TCI as opposed to some private sector vendor (thus increasing state revenues), there are numerous ways for state agencies to avoid purchasing products from TCI. 11

To assess the extent to which state agencies purchase products produced by TCI (such as office furniture) from non-TCI vendors, a limited review of state agency purchases of office furnishings and equipment was conducted. This analysis indicated that, in many instances, the impact of these state-use laws, which again are designed to increase state agency purchases of goods produced by TCI, may be minimal. For example, ten of the reviewed agencies purchased only $1,793 worth of products (including office furniture) from TCI, but collectively purchased $307,780 worth of office furniture from private office furniture companies. 12 In essence, these ten agencies lost potential revenue for Texas of about $300,000.

Expanding Into New Markets
TCI contracted with an independent consultant to recommend new factories for TDCJ s future prison facilities. The consultant conducted a review of TCI s existing factories, current customers and potential competitors in new market areas. They surveyed various segments of TCI s target market in order to make projections regarding future purchasing in those segments. The consultant compl eted the report in February 1992, and presented TCI with the following list of ten finalist industries for future prison facilities. 13

Potential Expansion Industries in Prisons

1. Bookbinding
2. Box Manufacturing
3. Microfilming Services
4. Furniture Repair and Refinishing
5. Folding Tables and Chairs Manufacturing
6. Modular Furniture Manufacturing
7. Work Clothes and Hospital Garments
8. Bus Repair and Refurbishing
9. Tire Retreading
10. Solid Waste Recycling

Source: B.R. Blackmarr & Associates

Using the information provided in the consultant s report as a starting point, the Texas Performance Review conducted a limited assessment of potential future expansion industries for TCI. During the course of this assessment, discussions were held with purchasing specialists at both the GSC and the Comptroller s office, as well as with TCI and TDCJ staff.

Based on this assessment two promising new industry expansion opportunities were identified: geographical information systems (GIS) and solid waste recycling.

The Department of Information Resources (DIR) asked TCI to consider performing GIS services for it, primarily because DIR felt that TCI could provide these services more cost effectively. GIS requires a labor intensive data entry service wh ich involves the digitizing of maps into computer records. 14


Recommendations
A. The Legislature should direct Texas Department of Criminal Justice (TDCJ) to work with the Comptroller s office to develop and implement an Early Payment Discount policy which would govern the conditions under which Texas Correctional Industries (TCI) would aggressively seek early payment discounts offered for the expedited payments of invoices.

This policy would be in accordance with recommendations made in the procureme nt reengineering project mentioned elsewhere in this report. The policy should clearly define the minimum dollar value of the contracts under which an expedited purchasing plan would be implemented.

B. The Legislature should carefully review and tighten the provisions of Section 601b of the Texas Civil Statutes, ( state-use laws ) to ensure the highest possible level of purchases for TCI-produced products.

C. The TDCJ-Institutional Division management should direct TCI to expand into service-oriented in dustries, such as geographical information services and solid waste recycling, both of which have documented widespread sales and employment opportunities.

TCI should aggressively pursue new markets, especially political subdivisions, for these two services.

Implications
TCI has developed sales and profits projections for GIS for a three-year period. Based on the experiences of the California and Florida departments of corrections and from information provided by the DIR, TCI anticipates an overall net profit of $940,000 a fter one year of operation. 15

GIS not only provides the State of Texas with a new source of revenue, but also provides training and improved future employment opportunities for participants. Moreover, the demand for such services expands beyond state agencies to counties and cities.

Solid waste recycling, although not as profitable as GIS, is, according to a recent consultant study, a very timely and important new industry for TCI. 16 Private-sector firms often have a difficult time making a sustainable profit in the recycling business, thus there is generally a shortage of recycling providers. Despite the fact that it is difficult to predict the profit level of this industry, it is cl ear that the employment potential of such a facility is very good. The consultant s analysis of the recycling market indicated that if the recycling plant were located in a rural area, then a proposed facility would not be profitable. However, the report states: Although the profit performance looks poor [for a rural-based plant], a suburban or urban site would likely be very profitable. The potential profit level of such a facility could not be readily determined. However, the employment potential as well as the environmental benefits to the state more than justify TCI s expansion to this industry.


Fiscal Impact
The increased revenues would, like all TCI revenues, be deposited in the State Industrial Revolving Account. No attempt has been made to determine the amount of increase due to the implementation of these recommendations. The impact, if any, upon the Gener al Revenue Fund would be due to any savings to the agencies that purchase TCI products at lower prices when compared to the private vendors. It was not possible to calculate that amount.



Endnotes
1 Interview with John Bradley, Business Manager, Texas Correctional Industries, Huntsville, Texas, November 19, 1992.
2 Texas Department of Criminal Justice, Texas Correctional Industries, Texas Correctional Industries 1992 Outside Sales by Percent (Huntsville, Texas, December 1992).
3 Texas Department of Criminal Justice, 1990 Annual Report (Austin, Texas), pp. 30-35.
4 Interview with John Nelson, Industry Director, Texas Correctional Industries, Huntsville, Texas, November 17, 1992.
5 Texas Department of Criminal Justice, Texas Correctional Industries, Sales Report For FY 92 (Huntsville, Texas, December 1992).
6 Interview with Kevin Keck, Texas Correctional Industries staff, Huntsville, Texas, December 18, 1992.
7 Interview with Jim Watson, Director of Purchasing, Institutional Division, Texas Department of Criminal Justice, Huntsville, Texas, November 18, 1992.
8 Interview with John Bradley, Business Manager, Texas Correctional Industries, Huntsville, Texas, December 16, 1992.
9 Interview with Pat Martin, General Services Commission, Austin, Texas, December 2, 1992.
10 Ibid.
11 Ibid.
12 Comptroller of Public Accounts, Claims Division, Report on Expenditures of Furnishing and Equipment Paid During FY 1992 (Austin, Texas, December 1992).
13 B.R. Blackmarr and Associates, Texas Correctional Industries Market Analysis and New Industries Recommendations (Dallas, Texas, February, 1992).
14 Interview with John Nelson, Industry Director, Texas Correctional Industries, November 17, 1992.
15 Texas Department of Cirminal Justice, Texas Correctional Industries, Business Plan for Geographical Information Systems (Huntsville, Texas, August, 1992).
16 B.R. Blackmarr and Associates, Texas Correctional Industries Market Analysis and New Industries Recommendations (February, 1992).