Audit: PRIDE spinoff is illegal
The state finds the nonprofit, which oversees Florida's prison labor, in violation for creating Industries Training Corp. to run its administrative services.
By JONI JAMES
Published December 21, 2004
TALLAHASSEE - A St. Petersburg nonprofit company that runs Florida's prison industries violated state law when it created a spinoff to run its administrative services, the governor's inspector general has found.
The highly critical audit, released Monday, found PRIDE Inc. had too few internal controls, a flawed business model and conflicts of interests between it and the nonprofit spinoff, Industries Training Corp.
PRIDE's board of directors, appointed by the governor, paid its executives too much, maintained inadequate records of financial meetings and repeatedly made decisions that benefited ITC at PRIDE's expense, the preliminary audit by Chief Inspector General Derry Harper determined.
The report repeatedly recommends PRIDE abandon its relationship with ITC or dramatically increase ITC's accountability.
The Legislature created PRIDE in 1981 to be the sole organizer of the state's prison labor as a way to teach inmates skills they can use in the real world. PRIDE launched ITC in 1999.
PRIDE leaders dismissed the criticism as old news, suggesting they already made administrative and financial changes since a December 2003 legislative audit questioned whether PRIDE's investment in ITC had paid off.
"In my opinion, they are judging whether or not the business decisions we made were good or bad," said PRIDE chairwoman Maria Camilla Leiva of Miami. "Had the ventures we developed proved to be profitable, we would not have been faced with an audit."
Gov. Jeb Bush said he had not yet read the report and won't act on its findings until he hears from the PRIDE board, which has 20 days to respond.
"I think the report shows some areas of real concern," Bush said. "There's not necessarily any specific wrongdoing, per se, but there is concern about government structures, a lack of oversight, high salaries and a flawed business model."
The findings bolster critics who have contended for nearly a year that PRIDE has lost sight of its responsibilities to the state.
The St. Petersburg Times reported in July that PRIDE invested at least $10-million to establish spinoff companies in the past five years, even as revenues dropped more than 30 percent and its number of inmate jobs hit a 15-year low. One of PRIDE's spinoff companies uses Utah prisoners to make $400 parkas.
Later that month, the PRIDE board forced its chief executive officer, Pamela Jo Davis, to resign and ordered separate banking accounts for PRIDE and ITC. Davis, however, remained CEO for ITC, where her annual salary was last reported at $236,000.
James Crosby, who began urging Bush's staff to investigate PRIDE in January after he became Florida corrections secretary, said he was not surprised by anything in the audit.
"I think PRIDE is capable of functioning as it was originally done," said Crosby, whose state job includes an automatic seat on the PRIDE board. "That concept worked for many years and worked well. It really didn't start crashing until the "creativity' came about in '99."
PRIDE gets no annual funding from the state. But it has exclusive access to prison labor and facilities and favored status supplying goods to state agencies. And the state, at the time PRIDE was formed, also transferred some assets to the company. In return, the state is entitled to share profits, a provision that has never been exercised, and is the beneficiary if PRIDE shuts its doors.
Five years ago, operating on the advice of a business consultant, PRIDE turned from being a traditional prison industries company that focused on manufacturing and farming into a complex conglomerate of spinoffs and subsidiaries.
PRIDE's justification at the time was that it needed to be more nimble to compete in a rapidly changing international marketplace. The new spinoffs wouldn't be subject to the same marketing constraints as a prison labor company, plus they could launch other nonprison businesses that might eventually help PRIDE's bottom line.
But the audit found the new business model failed to meet its goal of a net expansion of jobs for Florida prisoners. It also cost PRIDE at least $16-million in assets.
PRIDE also saw declining sales from a high of $93.7-million in 2000 to a low of $60.9-million in 2002. PRIDE has attributed the drop to the loss of a contract providing food to state prison cafeterias, which are now operated by a private company.
Despite the declines, however, the audit found that from 1998 to 2004, PRIDE's and ITC's top executives - who held joint titles with both companies - saw their salaries increase 14 percent annually.
Davis' pay "greatly exceeded" those in other states, the audit found, including California's prison industries chief, who oversees $160-million in annual sales.
Leiva argues the comparison is unfair because California's top executive is a public employee.
Regardless of the financial picture, the audit contends PRIDE, in establishing ITC, violated the law that says only one nonprofit can oversee Florida's prison labor.
PRIDE leaders contend ITC's sole purpose was to aid PRIDE, not compete with it.
But the audit found that PRIDE officials never distinguished adequately between PRIDE and ITC's business or goals.
"In our interviews with board members, at least one indicated PRIDE is subordinate to ITC," the audit states.
The audit argues PRIDE subsidized ITC operations in numerous ways to PRIDE's detriment: a generous service agreement that may have resulted in PRIDE paying too much for things such as payroll and other administrative duties; more than $5-million in loan forgiveness; and millions of dollars in investments to ITC subsidiaries that have hurt, rather than helped, PRIDE's bottom line.
The audit also questions whether PRIDE will ever receive $4.1-million for pension liabilities that it transferred to ITC in December 2003. PRIDE resumed control of the pension plan in June and should also receive that $4.1-million back, the audit said.
"Given ITC's current financial condition, concerns are raised as to how they will pay the obligations when it becomes due," the audit said.