BEFORE THE

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON EDUCATION AND

THE WORKFORCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, SEPTEMBER 26, 2000

Printed for the use of the Committee on Education

and the Workforce

OPENING STATEMENT OF CHAIRMAN PETE HOEKSTRA, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

STATEMENT OF RANKING MEMBER TIM ROEMER, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

STATEMENT OF CONGRESSMAN ROBERT SCOTT, 3^RD DISTRICT OF VIRGINIA, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, DC *

STATEMENT OF RANDALL K. McBRIDE, ALPHA OMEGA COMPUTER SOLUTIONS, COTTENDALE, FL *

STATEMENT OF VICTOR ARNOLD-BIK, ACTING DIRECTOR, PROPERTY MANAGEMENT DIVISION, FEDERAL SUPPLY SERVICE, GENERAL SERVICES ADMINISTRATION, ARLINGTON, VA *

STATEMENT OF SHERRY LOW, SUPERVISORY REUTILIZATION SPECIALIST, DEFENSE REUTILIZATION AND MARKETING SERVICE, DEFENSE LOGISTICS AGENCY, BATTLE CREEK, MI *

STATEMENT OF JASPER JONES, EXECUTIVE DIRECTOR, COMPUTERS FOR YOUTH AND FAMILIES, PRAXIS INSTITUTE, ACCOMPANIED BY HORACE ARTHUR TRENT, III, PRESIDENT AND CEO, PRAXIS INSTITUTE, PHILADELPHIA, PA *

STATEMENT OF WILLIAM G. WILSON, PRESIDENT, NATIONAL ASSOCIATION OF STATE AGENCIES FOR SURPLUS PROPERTY *

STATEMENT OF STEPHEN M. RYAN ESQ., MANATT, PHELPS AND PHILLIPS, LLP, REPRESENTING THE COALITION FOR GOVERNMENT PROCUREMENT, WASHINGTON, DC *

STATEMENT OF ANDREW CORBIN, PRESIDENT, TECHNICAL SERVICES LABORATORY, INC., FORT WALTON BEACH, FL *

APPENDIX A - WRITTEN OPENING STATEMENT OF CHAIRMAN PETE HOEKSTRA, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

APPENDIX B - WRITTEN STATEMENT OF RANDALL K. MCBRIDE, ALPHA OMEGA COMPUTER SOLUTIONS, COTTONDALE, FL *

U.S. House of Representatives

Subcommittee on Oversight and Investigations

Committee on Education and the Workforce

Washington, D.C.

The Subcommittee met, pursuant to notice, at 1:00 p.m., in Room 2175, Rayburn House Office Building, Hon. Peter Hoekstra, Chairman of the Subcommittee, presiding.

Present: Representatives Hoekstra, Schaffer, Roemer, and Scott.

Staff present: Bill Montalto, Special Counsel; Whitney Rhoades, Staff Assistant; Patrick Lyden, Professional Staff Member; Mike Reynard, Deputy Press Secretary; Deborah Samantar, Office Manager; Cheryl Johnson, Minority Counsel/Education and Oversight; Peter Rutledge, Minority Senior Legislative Associate/Labor; and Brian Compagnone, Minority Staff Assistant/Labor.

Chairman Hoekstra. A quorum being present, the Subcommittee on Oversight and Investigations of the Committee on Education and the Workforce will come to order.

Good afternoon. The Subcommittee is meeting today to hear testimony in exercise of its capacity to conduct oversight inquiries. Under Rule 12(b) of our Committee rules, oral opening statements are limited to the Chairman and Ranking Minority Member. If other Members have statements, they will be inserted for the record.

With that, I ask unanimous consent for the official hearing record to remain open 14 days to allow Member statements and other documents referenced during the hearing to be submitted in the official hearing record. I would like to make an opening statement and after that, I will ask Mr. Roemer to do the same.

First, I ask for unanimous consent for leaving the record open? Without objection, so ordered. Thank you.

I'm just going to digress a little bit from my prepared opening remarks just to highlight the fact that we are not going to be able to hear all of the testimony that we would like to hear, and that we would like to have presented today. This is because we have received testimony, or we have requested testimony, from the U.S. General Service Administration. They have submitted a letter which I would like to submit, and without objection, will submit for the record. Specifically they have declined our request based on their "criminal investigation regarding FPIs taking and subsequent use of various types of excess property."

From my perspective, it is high time that somebody conducted this type of investigation of Federal Prison Industries. I am disappointed that it has gotten to that point, but I think as you go through and hear some of the testimony that will be given to us today, I think many of you will agree that this investigation is with GSA. I understand it is being conducted in conjunction with the Justice Department.

It is time. Federal Prison Industries in many respects has been out of control for years. I think today you will probably see some of the most blatant examples of a federal agency exceeding its statutory authority and running wild through the marketplace without any Congressional or legislative or legal authority.

We're going to today talk about a new process that FPI has been engaging in. It has been taking tens of thousands of items of excess Federal Government equipment, especially computer equipment, and using them to fuel an entry of unknown scope into the commercial market.

FPIs’ takings expanded dramatically about the same time it dubiously claimed to have authority to sell commercial services. To FPI, selling used computer systems and related hardware and software is not now a product, but a service. FPI gets its product at a great price. They get it for free. As a wholly owned government corporation, the FPI can literally take these excess items, and has done so in a very big way.

During fiscal year 1999, FPI took almost 60,000 excess items from the Department of Defense alone, items that cost DOD almost $481 million when they were purchased. During the first nine months of the current fiscal year, FPI increased its takings to more than 83,000 items with a purchase value of just under $890 million. FPI would likely have topped the $1 billion mark before the end of the fiscal year except for the vigilance of some dedicated career civil servants in the GSA and the Defense Logistics Agency.

Among other government-wide management functions, the GSA is the overall manager of the programs that deal with excess and surplus federal property. The DLA's Defense Reutilization and Marketing Service, located in Michigan, performs the same function for the Department of Defense.

Representatives of both agencies are with us today. They questioned whether FPI could be making direct use of such vast amounts of excess property, as required by law and regulation. They found that FPI's interpretation of use included selling complete used computer systems directly to the public, as well as supporting equipment such as keyboards, screens, printers, and various types of data storage devices. It also included selling components like hard drives and memory recovered from computers that FPI "demanufactured."

Confronted with FPI's creative interpretations of use, a moratorium was placed on FPI's eligibility to continue taking excess computer equipment. A GSA career manager even went so far as to request an inquiry by the GSA's Inspector General, and as I mentioned, that investigation is going on in concert with the Department of Justice, and it is a criminal investigation.

What, you may be asking yourself, could FPI be doing with all of this excess government property, which includes many other items in addition to computer equipment? We don't know, but today we will have a small businessman from Florida who will show us that FPI is selling used computer equipment directly to the public through an outlet store operated at FPIs recovery factory.

FPIs prices are too low to beat. He should know, since he has made purchases himself, and FPI's are better than anything that he can offer his customers as a supplier of computer equipment and services.

But simple selling in direct commercial competition with small business isn't the only thing wrong with FBI's latest foray. As we shall see today, FPI is not always bothering to remove government data from the computers it sells. Given that FPI took more than 69,000 computer-related items from DOD in the first nine months of fiscal year 2000, one wonders what types of data have inadvertently been released, and in what amounts. Hopefully it is not national security data or personal information provided to the government on the basis that it would be kept private.

He raises many concerns about FPIs retail operations that I find deeply troubling. There are other victims of FPIs’ actions who would have been able to put this excess federal equipment to sanctioned use that broadly benefits the public.

As we shall hear this afternoon, various state agencies for surplus property are key players in getting unneeded government equipment to schools, libraries, senior citizen centers, and homeless shelters. Excess federal property helps meet the needs of volunteer fire departments, sheriff's departments, and other elements of local government. All of these governmental and non-profit beneficiaries now come second to FPI when attempting to claim this unneeded federal equipment.

You know, this reminds me, for those of you who have been familiar with this issue over the years, of a few years ago when FPI decided that they were going to get into the business of making American flags. They went to the Veterans Administration and said from now on, we want you to purchase all of your American flags from Federal Prison Industries. As a matter of fact, we are going to mandate it. The end result will be that we honor our veterans who passed on. They will be remembered with a flag not manufactured in the private sector, but one manufactured by Prison Industries without the private sector even being allowed to compete.

And now we find them taking computers and other surplus equipment that could go to the inner city, that could go to low income schools, that could go to other non-profit agencies in America, and saying, no, we get first dibs on this, and now you come in second.

If the only thing that comes out of this hearing today is the same result that we got when they tried to go into the flag business, it would be a huge step forward. That is they would pull back and say this was a mistake, it was a bad strategy, and we are going to allow federal agencies to put this product where it belongs, and that is in the inner city, low income school districts, rural school districts, and non-profit agencies. No longer will Federal Prison Industries come in first, and in this case, at the cost of our children.

We actually have a Computers for Learning Program that was created by President Clinton by Executive Order in 1996. We shall also hear about FPIs taking unneeded federal computer equipment that we actually have a program for.

We will also be hearing from a prominent Washington attorney who will raise a series of questions about the legal underpinnings of FPI's claimed authority. I've got some more, but it is all in my written prepared statement, which I will submit for the record.

I'm glad that over the last two years, Mr. Roemer has been the Ranking Member on this Subcommittee. This is something that we have been able to approach in a bipartisan way. I will now yield to Mr. Roemer.

Mr. Roemer. I thank the Chairman and appreciate his kind words, and ask the unanimous consent to revise and extend.

Chairman Hoekstra. Without objection, so ordered.

Mr. Roemer. Thank you, Mr. Chairman.

Mr. Chairman, first of all, I want to salute and commend you for your hard work on this particular topic. It is a topic that you and I have worked on for a long time and is directly related to the allegations that we are going to be hearing specifically about today. And that topic is, trying to make sure that the Federal Prison Industries does not compete directly with hard-working Americans, and take jobs away from them.

We not only have most of this Committee, Republicans and Democrats, supporting Mr. Hoekstra’s and my bipartisan legislation on that front, but also we have the Chamber of Commerce, the National Association of Manufacturers, labor unions, and the AFL-CIO supporting this legislation. So we have wide bipartisan support to address this over-reaching issue that we find to be very important.

We also have another issue today that I think there is wide bipartisan support for. I'm very concerned about these allegations. There is no question that Federal Prison Industries may claim excess federal property for the purpose of using that equipment within a prison/work facility. However, what we are faced with are allegations that Federal Prison Industries is claiming excess equipment at no cost, not for its own use, but for sale, and not for sale to the government, but for sale to the public.

These are very serious allegations that raise very troubling issues. Neither American employers nor American workers should be subject to unfair competition from prison labor, yet if these allegations are accurate, that's exactly what is happening. It would appear that FPI is operating without regard for the limits that Congress has placed on the corporation.

What disturbs me even more than the unfair competition is that these computers could be diverted from other uses, such as ensuring that our schools are equipped with computer technology. In fact, if this is true, this practice hurts programs such as the Computers for Learning Program that uses excess federal computers and related information technology equipment to help bridge the digital divide for inner city and rural youth who would otherwise not have access to computer equipment. The success of this program relies upon a steady stream of excess information technology equipment.

I'm also disturbed by the assertion that FPI may not be clearing government data and material off these computers before selling them in the commercial market. It concerns me, if true, that this data may contain some sensitive or classified information that should not be released due to privacy and security concerns.

Let's ensure that that is not the case. Again, I look forward to hearing from the witnesses. This is clearly a matter that merits the attention of this Subcommittee, and I salute the Chairman for calling this hearing.

I hope that we can continue to work in a bipartisan manner to get to the bottom of these allegations to ensure that our schools, businesses, workforce and security are not being put at risk by this program, and I yield back the balance of my time, or I would be happy to yield my remaining time to the distinguished gentleman from Virginia.

Mr. Scott. Thank you. I would thank the Ranking Member for yielding. I just want to point out that we have made serious allegations about the FPI. The FPI representatives are here and available for questioning. They were not invited to testify or to respond to questions.

I think the idea that this ought to be a criminal investigation is way overboard. The activities in selling computers are not done out of the back door or in secret. It is done, as I understand it, with the advice of counsel. If there is a discussion or a dispute over the policy, that ought not to be subject to criminal investigation, it ought to be handled through the normal ways that we discuss policy in Washington.

And with that, I yield back the balance of my time.

Chairman Hoekstra. I thank Mr. Scott and Mr. Roemer for your comments. As we have so consistently done when we have been asked to refrain from being involved in an investigation, we have held back. Whether it was the Teamsters or anything else, we have held back. We are not classifying or characterizing it as a criminal investigation. All I am saying is that is the information that we have gotten from GSA in the letter that they have sent to us.

Mr. Scott. Mr. Chairman?

Chairman Hoekstra. Yes.

Mr. Scott. If you will yield, my criticism was aimed to whom it may concern.

Chairman Hoekstra. All right, and they are not testifying today, either.

[Laughter.]

Let me introduce the witnesses that we have today. Our first witness will be Randy McBride. He is from Alpha Omega Computer Solutions of Cottondale, Florida. We have asked Randy to go first to give us a better perspective of what he found going on in his community with Federal Prison Industries, and how it impacted his business.

We have Victor Arnold-Bik, who is the acting director of the Property Management Division of the Federal Supply Service, General Service Administration, and Sherry Low, who is the chief with the Reutilization, Transfer, and Donation Business Unit, Defense Reutilization and Marketing Service, Defense Logistics Agency, and you are here from Battle Creek? Welcome.

And they are going to kind of give us an idea as to the scope or the magnitude of what the problem may be, based on what Mr. McBride has told us.

Our fourth witness will be Jasper Jones, who is the executive director of Computers for Youth and Families, with the PRAXIS Institute from Philadelphia. Welcome, and thank you for being here.

Our fifth witness is Bill Wilson, who is president of the National Association of State Agencies for Surplus Property. He's with the Wisconsin Federal Property Program. Welcome, thank you for being here.

We have Steve Ryan, who is an attorney representing the Coalition for Government Procurement. Steve, welcome to you. And then we have Andrew Corbin, who is the president of the Technical Services Laboratory, Incorporated from Fort Walton Beach.

So thank you all for being here. The expectation was that we were going to have a vote between 1:00 and ten after 1:00, but as usual, we are running on Congressional time, and we will take our witnesses one at a time, and we will see where we end up.

Mr. McBride, we will begin with you. Thank you for being here.

Mr. McBride. Mr. Chairman, and Members of the Subcommittee, my name is Randall McBride.

Chairman Hoekstra. Mr. McBride, you have to have the mike close to you. We have new technology. It has great sound, but you have got to be really close to it.

Mr. McBride. Mr. Chairman, and members of the Subcommittee, my name is Randall McBride. My wife, Sherri, and I own and operate Alpha Omega Computer Solutions. Our small business provides new and used computer systems, components and peripheral sales and support in Jackson and surrounding counties in Florida and Alabama, and has done so since June 1994.

We are grateful for the opportunity to be here today and to be able to share with you our experiences with the Federal Prison Industries ``Recovery Factory`` located in Marianna, Florida.

A series of events led to my first visit to the Federal Prison Industries recovery factory. Having noticed recurring similarities in the licensed software situation of many of the potential customers seeking our business services, I often questioned them as to the location or business from which they had purchased their computer. When questioned, typically the response was that they had purchased the computer system from the prison. Some of these systems had property tags and stickers indicating prior ownership by Federal Government agencies. Some of these systems still had the typical software loaded on them that I have encountered while working for a Department of Defense contractor.

Seeing the software loaded on the systems, with no evidence of software licensing certificates or computer programs being provided by the selling entity, troubled me. My wife and I work diligently in complying with the provisions of software copyrights.

Some time around February 2000, one of my customers provided the directions to the Federal Prison Industries factory outlet. Upon arrival at the facility, I was astonished at the quantity of the computers and the parts for sale. In one area of the facility, approximately five to ten inmates were sitting at a long workbench disassembling a variety of computer types. Parts from the disassembly process were sorted into boxes based on computer types.

In another area, Keyboards, mice, and cables were being sorted. Other areas provided sorting and testing of monitors and printers. Still yet another area provided an assembly and testing area for complete computer systems. The display area contained completed, assembled, and tested used personal computer systems. Often these were in the powered-on state with executing screen savor software applications.

Items and prices were indicated on display boards found in the appropriate areas of the factory outlet. Shoppers would browse through the items and the inmates would offer assistance in finding and testing items for the shoppers.

Chairman Hoekstra. You have photos of the facility, isn't that correct?

Mr. McBride. Yes, sir, I do.

Chairman Hoekstra. Including signage indicating it is open to the public?

Mr. McBride. Yes, sir, the sign on the left that actually is displayed on the door of the facility, in addition to having a MasterCard and Visa decal.

Chairman Hoekstra. I feel comfortable now knowing that we are giving MasterCard and Visa numbers to the clerks at the prison store.

Mr. McBride. Yes, sir. Once the items were selected, inmates normally would write up an invoice. The guards then processed all monetary transactions.

Being awed by the extremely low prices and knowing the value of many of the items for sale, I began to purchase select items to replenish my business' depleted used inventory stock. I was not able to find such low prices as those of the factory outlet using normal business channels.

Chairman Hoekstra. Again, Mr. McBride, you have got a table here of some of the prices, right?

Mr. McBride. Yes, sir, yes, sir, I do.

Chairman Hoekstra. I think it might be worthwhile to kind of point out the other table.

Mr. McBride. Yes.

Chairman Hoekstra. I don't know about you, Mr. Roemer, but I can't read those numbers.

Mr. Roemer. I've got my binoculars on.

Chairman Hoekstra. I think the prices here are anywhere from what? You could buy it at the prison store for $5, $10, $15, and your cost, or you and your competitors, the market price might be somewhere in the neighborhood of $100.

Mr. McBride. Yes sir, my cost on this item in a five pack from the wholesaler is a little less than $500.

Chairman Hoekstra. Explain to us what this is.

Mr. McBride. This is actually a software license, an OEM version of Microsoft Windows. It is an older version. Still, I can purchase that from the wholesaler. When I purchase it from the wholesaler, a five pack is a little bit less than $500. I bought this at UNICOR for $10.

Chairman Hoekstra. And when you buy that, or you resell that, you have to have some kind of a licensing agreement from Microsoft, correct?

Mr. McBride. Yes, sir, wife Sherry typically handles that end of it. You have to have an OEM agreement with Microsoft, to assemble computers and put the software on them. This version, if I look at the certificate, it is actually an OEM version, so that would indicate to me that there needs to be some sort of licensing agreement with Microsoft. Whether the Bureau of Prisons has that, or UNICOR, I don't have an idea.

Chairman Hoekstra. Okay, thank you.

Mr. McBride. As to other items, we were really amazed at the mark-ups. I mean, some of the items $200 and up. I can't remember the exact figures, but it was extreme.

Chairman Hoekstra. It was the mark-ups that you have to pay, right? I mean, they are selling it at a pretty good discount.

Mr. McBride. Oh, yes, oh, yes, it was phenomenal what we were able to purchase it for from them. It is just totally amazing.

Chairman Hoekstra. Since they now have a sign ‘open to the public’ on the door, they are competition to you.

Mr. McBride. Oh, yes, sir. If I acquire things through normal business channels, I can't sell any of this stuff because the market is so diluted in the country where I live from this type of pricing. How can I buy it from a normal re-seller? You have to go to them to even compete in the local marketplace.

Over a period of time, I began to tell other friends that have computer businesses and backgrounds about the factory outlet and they began to purchase items. Perceiving this to be a potentially lucrative business venture, we acquired select used items, tested them, and placed them out for bid on a nationally known auction site.

We were amazed at the high rates of return on most of the items that we had selected to put out for national bid. As we pursued the goal of testing the market for the acquired used products, our frequent visits to the facility increased, as did our encounters with situational oddities.

Given the irregularities that we began to experience when visiting the recovery factory, our last visit to the facility was the middle of the month of August 2000.

Among the irregularities were potential security issues. Such as, federally convicted felons being responsible for the final disposition of data found on computer magnetic media. We have brought examples. We have no idea what's on them, but should federally convicted felons be the ones responsible for taking care of data, removal thereof, or is it a good thing to actually release such tapes, still on the drive, to the general public?

And I have two examples. We also have a chart that shows one of the drives and the tape back up which go with a SUN workstation. That is not something you typically do work processing on.

Many of the items that we have actually cleared had DOE labels on them, and we had machines from Aberdeen Proving Grounds, DoD, and CDC. So, does or does not the tape have data on it, or even should the tape be in the drive?

I have made multiple recoveries of tapes, magnetic media from tape back-up drives, hard drives that still contain data on them, and once again, the SUN workstations. I have had to format the hard drives of SUN workstations. I have had to format hard drives that came out of servers that still had the directory trees on the servers, and I have come across multiples of those.

There are potentially illegal business practice issues. The factory outlet had prices there that would go up and down based upon the mood of the individual on the day. There is a lack of competitive bid process. You can see based upon the previous chart we had, what a nationally competitive bid process will do for the government surplus.

It amazes me, really amazes me. Observing a customer being told by security personnel to write two checks. Why would one of the security guards have to tell the customer to write two checks when purchasing a computer system?

Certain parts of the facility are cordoned off by signs indicating that the area is accessible to vendors only. What requirement is there for a vendor to be eligible to get into that particular area? Who is a vendor? Which business licenses are on-hand to actually show that the individual is a commercial entity?

When asked about access to the vendor only area, the reply was that the pre-requisite for access was to buy a lot. Well, what constitutes a lot?

When questioning one of the site personnel about the reason for withholding certain items for sale, and the position of the individual responsible, I was told by that individual to be careful what I step into.

There are also potential accountability issues. I have actually seen them unloading the trucks with government access, without hand receipts. I’ve seen them unload items off the truck, seen particular individuals who purchase from the facility walk into the back of the truck before it has even been cleared, put tape on that or those items, and say that they were purchasing them. No clearance, no hard drive checks, no tape drive checks. They walk into the truck, mark it, and it's bought.

There are potential software licensing issues, such as the qualifications and authority of Federal Prison Industries to sell OEM versions of operating system products such as Microsoft Windows.

Computer systems are being sold with software loaded, and no transfer of original media or software license. And one of the most frequent comments that I have heard from people, even after talking about the mark-ups, whatever else it may be, has been why aren't they giving these to the kids?

I think there may be a couple of more charts that we can actually talk about for just a moment, if you don't mind.

Chairman Hoekstra. I think we are going to get to those perhaps during the questioning time.

Mr. McBride. Okay.

Chairman Hoekstra. All right. We are going to try to do one more witness, and we are going to go to Mr. Arnold-Bik. Thank you. If you can try and stay at five minutes, that would be helpful. All right? Thank you.

Mr. Arnold-Bik. The issues raised by recent transfers of excess personal property to the Federal Prison Industries are of great concern to the General Services Administration, and we are working hard to address these concerns and to ensure that the goals of the Federal Property and Administrative Services Act of 1949, as amended, are fulfilled.

As you requested in your letter dated September the 21st, 2000, I would like to first explain GSA's role in the federal excess and surplus personal property program, and then I will address our concerns involving the recent transfers of excess personal property to FPI.

Section 202 of the Property Act mandates that executive agencies, to the maximum extent practicable, use excess personal property as the first source of supply in meeting their requirements. Excess personal property is any personal property that an agency has determined that it no longer needs.

Each year, hundreds of millions of taxpayer dollars are saved by managers who acquire the excess property of other agencies instead of purchasing new property. Transfers between agencies are generally made without charge for the property.

After agencies determine that property is excess, they are normally required to report it to the GSA regional property management office responsible for the geographic area in which the property is physically located.

GSA makes the information on the reported excess property available to other agencies during the excess screening period, and the agencies review the information to determine whether they need any of the items that have been reported as excess. If an agency needs the property, it submits a request for a transfer of excess personal property.

I would like to talk just briefly about the donation program because I know that Mr. Wilson is here and I won't steal his thunder.

If no federal entity requests the excess personal property, it is declared surplus under the Property Act. Surplus is defined as property to mean that there is no federal need for that property.

Pursuant to Section 203 of the Property Act, GSA transfers federal surplus personal property to the states for donation to eligible non-federal organizations. We also sell surplus property. When surplus property survives the screening period, in this case, none of the state agencies for surplus property request the property, GSA regulations issued under the Property Act specify that the properties available for sale to the public.

Each agency that originally reported the property as excess is responsible for determining how to sell the property once it becomes surplus. Either GSA can sell the surplus property, or the agency can make its own arrangements for selling the property.

Unless they have their own authority independent of the Property Act, agencies are required to follow the requirements in Section 203 of the Property Act for public sale. Although there are some exceptions, sale proceeds from sales conducted under Property Act rules are generally required to be returned to the U.S. Treasury.

In addition to the information you have requested, you have asked about the authority for FPI to receive this property. FPI is a wholly owned government corporation and is authorized to participate in GSA's excess personal property program because it is included in the definition of executive agency that applies to the Property Act.

We have been informed by FPI that they have their own authority to sell the personal property through 18 USC 4044. With regard to GSA's recent decision to limit transfers of excess personal property to the FPI's Elkton, Ohio facility, this decision was prompted by allegations of potential wrongdoing with the excess personal property previously transferred to this facility.

As the Chairman and the committee know, I have attached some charts detailing the trends in the amounts of excess personal property that have been transferred. GSA approves the transfers of excess personal property to FPI on the basis that FPI was planning to reutilize the property. As stated in the GSA regulations implementing the Property Act, agencies must not acquire excess personal property with the intent to sell or trade for other assets.

As we became aware of the large volume of excess property being transferred to FPI, we began to seek more information as to how this property was being used. We have suspended transfers of excess personal property to the FPI facility at Elkton, Ohio, and plan to question and scrutinize approvals to all other FPI facilities.

We have been asking FPI how will they use excess personal property before we authorize transfers. We will continue to ask for this information, and to approve transfers only where they comport with applicable regulations.

We will be working with FPI and all of our customer agencies to monitor transfers of excess personal property to ensure that we are promoting the maximum reutilization of this property as required by the Property Act.

As you know, we have sought GSA/OIG guidance and counsel. They are preparing a report. When we receive the GSA/OIG report, it will be invaluable to GSA property management. As we set forth a comprehensive process to determine excess transfers in relation to FPI facilities.

Chairman Hoekstra. Hallelujah. FPI is now in the business of seeking waivers. For years federal agencies have been in the business of trying to get waivers to buy stuff from the private sector. At least because of what GSA is doing now, it appears that for some of this federal surplus product to make its way to FPI, they need to give a waiver, and I hope that you are as tough on FPI getting waivers as what FPI is on the private sector in giving waivers in that area.

I think with that, we will recess and we have four votes, so we will be back around 2:00 o'clock, so we will recess until around 2:00. I'm not sure, Mr. Roemer, if you will be able to back then.

Mr. Roemer. I'm going to try.

Chairman Hoekstra. Okay.

Mr. Roemer. I have an intelligence hearing to attend as well.

Chairman Hoekstra. Right. We will see you in about 15, 20 minutes. Thank you.

[Recess.]

Chairman Hoekstra. Let's get back to the business of Federal Prison Industries. Thank you for your patience. It took twice as long as what I thought it would, and we might have gotten it done quickly. Our next witness will be Sherry Low. Welcome.

Ms. Low. Mr. Chairman, Members of the Subcommittee, I am Sherry Low, supervisory property disposal specialist, and chief of the reutilization transfer and donation program, which is referred to as RTD.

I work for the Defense Reutilization and Marketing Service. I have worked in the RTD program for 21 years. DRMS is a primary level field activity of the Defense Logistics Agency. I am pleased to have the opportunity to provide information about the Federal Prison Industries, also referred to as UNICOR, participation in our RTD program.

The DRMS is responsible for disposal of excess property received from the military services. The inventory changes daily and includes thousands of items, from air-conditioners to automobiles, clothing to computers, and much more.

Department of Defense, DoD, policy for the reutilization of excess property is to first offer the property for reutilization within the Department of Defense or transfer it to other federal agencies, and finally, it is donated to state and local governments and other qualified organizations.

In fiscal year 1999, property with an original acquisition cost of $4.3 billion was reutilized, transferred or donated. DRMS supports a variety of RTD programs, to include the Department of Defense humanitarian assistance program, foreign military sales program, and the law enforcement support program.

Most excess property is physically transferred to collection points called defense reutilization and marketing offices, DRMOs. There are DRMOs located in the continental United States and overseas. DoD excess personal property is made available for reutilization and transfer screening before donation, sale, or other disposal actions. Reutilization, DoD activities and transfer, and federal civilian agency screening is accomplished electronically, manually, and by visual inspection of the property on-site at our DRMOs.

Property is available for screening upon receipt on the DRMO's inventory records, and until completion of a 42-day formal screening period. The first 21 days, DoD and federal civilian agencies have priority in screening. The next 21 days, the property is available for donation to state agencies. During the 42-day screening cycle, eligible customers, federal and state agencies as described previously, can screen and tag property on a first-come, first-serve basis.

However, during the first 21 days, DoD and federal civilian agencies have priority. Issues of DoD excess personal property are transferred at no cost to federal civil agencies. They do, however, have to pay for the transportation.

As a federal agency, UNICOR is eligible to obtain DoD excess personal property through the transfer program managed by the General Services Administration, GSA. The transfer process works this way. UNICOR identifies to GSA the items they want. They submit a standard Form 122, which is a transfer order to the GSA region office.

GSA either approves or disapproves this transfer order. If approved, GSA officials sign the SF-122, and return it to UNICOR for forwarding to the DRMO. The DRMO releases the excess property to UNICOR upon receipt of the completed SF-122.

UNICOR is currently DRMS's largest transfer customer. In fiscal year 1997, UNICOR received three percent of all items transferred. In fiscal year 1998, they were issued 16 percent of total transfers. This percentage increased to 43 percent in fiscal year 1999, and is currently running at 56 percent, which equates to $889 million in acquisition value.

Chairman Hoekstra. We have a chart on that, don't we?

Ms. Low. Yes, we do.

Chairman Hoekstra. I think it's the first chart leaning against the easel.

Ms. Low. That one, yes.

Chairman Hoekstra. Yes. It is dramatic growth in the amount of items and the dollar value that has been transferred to FPI, correct?

Ms. Low. Of the total DoD excess property transferred in fiscal year 00 through the month of August. The statistical summary of UNICOR's participation in the transfer program is shown on that chart, as well as your attachment I believe that you have.

Past UNICOR business with DRMS focused primarily on the transfer of excess Department of Defense computers and related equipment. More recently, their focus has expanded to include other commodities, to include primarily electronics. The chart at Attachment 2 shows transfers which is just I believe the bottom portion of the poster, it shows the amount of computers and related equipment to UNICOR over the past four years.

Since the beginning of this fiscal year, we have received several complaints from our reutilization transfer donation customers regarding the unusual large quantities of excess property being transferred to UNICOR. The UNICOR property transfer increases over the last two years now amounts to over 50 percent of all transfers, and has significantly reduced the amount of property available to other reutilization transfer donation customers, and to surplus property buyers.

UNICOR is eligible to receive excess property requiring de-militarization for its own use, however, concerns raised about UNICOR selling re-cycled demilitarized property to the public prompted us to elevate our concerns to our higher headquarters.

Since GSA approved the Federal Prison Industries as an eligible transfer recipient for excess DoD property, DRMS has transferred property to UNICOR upon receipt of a GSA-approved transfer order. UNICOR's participation in our program during the past four years has grown dramatically, making them our largest customer, receiving more than half of all property transferred to federal civilian agencies.

Thank you, Mr. Chairman, for this opportunity to provide you an overview of UNICOR's participation in the DRMS excess personal property transfer program. I will be happy to answer any questions you may have.

Chairman Hoekstra. Thank you. Mr. Jones?

Mr. Jones. Thank you, Mr. Chairman, and Members of the Subcommittee. I'm Jasper Jones, the executive director of Computers for Youth and Families Program of the PRAXIS Institute. With me is Horace Arthur Trent, President of the PRAXIS Institute.

I will deviate from my remarks here. What we are is a model program that has been utilizing the surplus material. I will now return to the script. The PRAXIS Institute is a 501(c)(3) non-profit corporation located within the North Central and West Philadelphia empowerment zone communities of Philadelphia, Pennsylvania.

A national enterprise community based collaborative partnership, the PRAXIS Institute provides services to over 6,000 individuals and families in three divisions which are, college-bound and career preparations, school relations and community development, and African rites of passage systems.

Currently the PRAXIS Institute directly serves 1,289 school age youth, 220 plus college-age young adults, and 4,780 other clients and their families who are young adults, older adults, issue-by-issue participants and/or active alumni of PRAXIS Institute projects, programs, activities and service.

Of these, 58 percent are male, and 42 percent are female. Most participants are residents of the federally designated empowerment zones, and all are from under-served, under-represented low income and at risk minority and ethnic populations, including African-Americans, Hispanic/Latino Americans, Native Americans, and multi-ethnic Americans.

PRAXIS Institute is the primary non-profit organization establishing the Alkebulan traditional omni-community, ATO, charter school, campus of distance learners, and the People Empowerment Credit Union, a proposed Internet-based credit unit.

The PRAXIS Institute has collaborative partnership relationships with Penn State University, Philadelphia Resource Center, the American Academy of Distance Education and Training, ADT, NewDeal, Inc., Data Spectrum, Inc., the Commonwealth of Pennsylvania, Department of General Services, Bureau of Supplies and Surplus, Operations, Instructional Management Support Systems, the Sequential Skills Development Series Publishers, and the Learning and Information Network for Community ViaTelecomputing, the LINCT Coalition program.

The LINCT Coalition program is a national network program through which PRAXIS is working with groups in Los Angeles, California, Chicago, Illinois, and etc., to implement our computer-based human development programs.

The PRAXIS Institute's human family development programs center around rites-of-passage for children, youth and their parents. In our computer age society, a boy cannot go into manhood and a girl cannot go into womanhood and become prosperous adults without becoming computer literate.

Accordingly, in our rites-of-passage program, we feature computer literacy training. Our computer literacy program is the computers for youth and families, earn a computer program, earn a modern, operational, 486 computer, keyboard, monitor, mouse, loaded with software, including Windows type graphical user interface software, New Deal with School Suite through an authentic computer literacy program.

The program features computer literacy training, nutrition, stress management training, language skills evaluation workshops, membership in the People Empowerment Credit Union, a financial literacy learning by doing program, access to the ATO charter school distance learning program, and the people get a modern 486 computer with New Deal technology on it.

The mass employment/mass production economic infrastructure system no longer exists. Because of this, America must institute new ways and means of advanced access to the acquisition of basic and technology skills, and credit-financial institutions for its needy citizens that are currently supported by public welfare assistance programs; America's poor and displaced workers.

A new means of access to education and credit is a solution to the welfare restructuring emergency which exacerbates the need for access to the acquisition of basic and technology skills, plus financial credit resources in order to address the need to create small business employment, and home ownership opportunities for our needy citizens.

In this situation, there is a need for government-funded programs and private sector-sponsored programs to take the lead in the implementation of basic training with technological and financial literacy training, distance learning, and e-commerce credit access expansion programs.

A distance learning and e-commerce credit access expansion program are designed to give needy citizens supported by welfare assistance or low income disadvantaged circumstances, a free start on life through a new system of individual/independent human development financial support and education service deliveries.

In order to provide distance learning and e-commerce support services to needy citizens, an affordable technology vehicle has to be created to make distance learning and e-commerce access economically feasible for the target low income populations.

Our identified affordable technological vehicle is the revolutionary New Deal Green-PC Internet computer communications graphical user interface software that provides the functional equivalent to Microsoft Windows 95 through 2000.

Yet the graphical user interface operates from a 286 personal computer through Pentium PC's. Our organizations' ability to utilize New Green PC's, used computers, has allowed us to change the price point to make this technology available for distance learning and e-commerce services to needy citizens who otherwise would not have such access.

The economic and social justice impacts for needy citizens of our learning –by-doing distance learning and e-commerce training program are the primary program goals of our organization.

Our New Deal Green PC education and economic reform is needed to address the economic dilemma that our community faces in the empowerment zone and is driven by Executive Order 12999. Because we are operating in the empowerment zone areas which have so many problems, we have creatively worked with the people to get this technology out to the people in our community.

I'm going to skip a lot of the things I wrote down here in the interest of time, so I can have Mr. Trent to come up and tell you stories about the positive impacts that our program has had on people in our community. Mr. Trent?

Chairman Hoekstra. Okay, your time is up. Are you just going to have a couple of minutes?

Mr. Trent. Yes, this will only take one minute.

Chairman Hoekstra. All right.

Mr. Trent. Once again, for the record, my name is Horace Arthur Trent, III, president and CEO of the PRAXIS Institute. Mr. Chairman and Members of the Subcommittee, and members of the public and the media, we thank you for this opportunity to testify before you on behalf of our successes, obstacles, collaborations, and goals towards addressing the educational and technological development of youth and adults in Philadelphia, Pennsylvania, and eventually throughout the nation.

A few brief examples of our projects and accomplishments include the following: Over 2,100 computers being distributed to youth and their families, all of whom were from economically impoverished communities primarily in the apartment zone at Enterprise Communities.

Student attendance rates in schools are increasing directly with their enrollment and training periods of PRAXIS Institute projects where the students take command by not only participating in our program, but eventually co-teaching and becoming peer mentors in computer-based literacy training.

There is increased parental involvement with both the children and their children's schools, as the parents are also required to enroll in the training as well, and to assist in developing a college preparation environment in their homes where we eventually hope that the children will go to high school, and graduate, and go to college.

One parent, for example, was paying $3,000 for a six-month course in computer literacy training. And after enrolling his two children in our program, even he learned more in three days than he had learned in three months in the program that he paid for.

Another mother and father trained and used the equipment they received from us to train their son in how to operate, administrate, and eventually take over the family tax accounting business.

Regular and learning disabled students use our computer-training program to create websites, and also to track the path and velocities of model rockets as a part of their graduation and promotion project requirements, which is now mandated throughout the State of Pennsylvania. They now have access to computer lessons in their schools since we have opened nine computer labs throughout the empowerment zone.

There is now a backlog of 10,000 plus families, and thousands more people who want the digital divide narrowing services of the PRAXIS Institute and all of our collaborative partners.

So all that to close by saying, we hope that you will join us as a collaborative partner in the future and destiny of America which is the destiny of our youth and our families. We need your help and support, and being able to receive the excess surplus equipment to further this process, for if not you, we ask who, and if not now, we ask when.

Thank you very much.

Chairman Hoekstra. Thank you very much for that testimony. I can guarantee you that we will be better partners with you than Federal Prison Industries. We are going to do everything we can to stop that practice, and get this excess surplus equipment going back to the intent of the executive order, and I think the intent of Congress.

And thank you for the fabulous work that it appears that you are doing in your community. Thank you.

Mr. Trent. Thank you very much.

Chairman Hoekstra. Mr. Wilson?

Mr. Wilson. Good afternoon, Mr. Chairman, Members of the Committee. My name is Bill Wilson. I am president of the National Association of State Agencies for Surplus Property, and the director of the Wisconsin Division of Federal Property.

The National Association of State Agencies represents all 50 states, five U.S. territories, and the District of Columbia. We were founded in 1947, and established in federal law by the Federal Property and Administrative Act of 1949.

We serve public and private schools, K-12, colleges and universities, historic black colleges. We serve emergency services such as fire and police in our states, public and private health care, and state, county and local government organizations. We also serve public radio, T.V., and museums.

In all, we are serving over 60,000 donee organizations nationwide. In addition to the donation program, we are working in the framework of federal legislation and executive orders, including Executive Order 1299, which allows computer equipment to be donated from federal agencies direct to the K-12 public and private education.

Today we are here to speak to the Federal Prison Industries' activities in acquiring and disposing of computers from federal agencies. We understand that the Federal Prison Industries is authorized to educate and train inmates, but we question some of the training value being received by the inmates acquiring these computers, or supposedly acquiring the computers, where the computers have really been going to, and how are they being disposed of.

You know, how much training is really going into, and what is really happening to the computers. We don't know. Federal Prison Industries was established to procure commodities for sale, for consumption within the penal institutions, and for sale to federal departments and agencies, not to or in competition with private industry.

How many computers are really being refurbished, and how many federal agencies are really taking refurbished computers? I don't know of any.

We understand that a large percentage of these computers are being disposed of through recycling practices, supposedly. We don't know exactly what these recycling practices mean, but having seen what I saw today, we see stores selling property. Is that recycling?

If Federal Prison Industries continues to operate in this mode with computers, we are concerned about what's next. We are concerned about the computers, yes, but we are also concerned about does this mean that they also want to do generators and fork lifts. Do they want to refurbish and sell? Where is this going?

The USDA in Landover, Maryland, when they receive computers, they are shrink-wrapping them, they are holding them for Federal Prison Industries. Also the DMRO at Norfolk is doing the same thing, and then they are direct shipping them to Federal Prison Industries.

They are not being screened by other organizations. Upon receipt, they are being placed on a pallet, shrunk-wrapped, and held for shipment.

Our program, again, is located in all 50 states, five territories, and the District of Columbia. This year, to-date, we have done about $300 million of transfers from DRMS. Federal Prison Industries in the meantime has done almost $900 million. We serve over 60,000 donee organizations across this country, and we are getting around $300 million compared to how big is Federal Prison Industries? I don't know, but it seems to be way out of line.

In working with the historical black colleges up in Landover, Maryland, one of our state agencies, the Pennsylvania state agency, went in to get some chairs for Lincoln University in Philadelphia. There were hundreds of chairs sitting there, and they were told that they could not have any, they were being held for Federal Prison Industries to come in and take a look at first.

Federal Prison Industries did come in and they took hundreds of the chairs, leaving the scrap chairs for the historic black college to get if they chose to acquire them through our program.

Really, where is this program going? Who is it really serving? Is it serving the intent of Congress as it established Federal Prison Industries? We don't believe as we read the establishing charter for Federal Prison Industries that this is happening.

In our states, we do bring computers in through executive order, and through our donation program. We bring them in, and many times our states place them in our correctional facilities for refurbishing, but then those computers come out of our facilities and are placed in our schools, in the low income areas, in the needy areas, in the rural areas under the executive order. They are being refurbished, but we are getting them back to place in our schools.

We would like to offer that if Federal Prison Industries really chooses to continue to work with computers, that our state agencies working with them may be able to take those computers that they have refurbished, that the inmates have gotten their training on, and put them back into schools where they can be used, not sold out to private industry or to private individuals, but put back into the schools where they are needed, which as Executive Order 1299 says, is the intent of our administration, to get our schools on-line and into the current technology age.

I thank you on behalf of our association and our 60,000 donee organizations, and if you have any questions, I will more than willing to answer them.

Chairman Hoekstra. Just one quick question. I mean, your program, you said that you did about $300 million in transfers?

Mr. Wilson. In the first three quarters of this year, yes.

Chairman Hoekstra. And FPI, we saw, I think from Ms. Low, about how dramatically FPI has increased. And they are approaching $900 million this fiscal year. Has a big chunk of that come out of your organization a few years? Would you have been at 500, $600 million?

Mr. Wilson. Right, yes. Normally, we normally run between 500 to $600 million a year. This year we will be lucky to see 400.

Chairman Hoekstra. So I mean, this is directly out of your hide.

Mr. Wilson. It seems to imply that.

Chairman Hoekstra. Crassly speaking.

Mr. Wilson. Yes. It does seem to imply that.

Chairman Hoekstra. I would think so, yes. All right, thank you. Mr. Ryan. I understand you have got 22 pages of testimony.

Mr. Ryan. And I will submit it for the record, Mr. Chairman.

Chairman Hoekstra. Without objection? Without objection, so ordered.

Mr. Ryan. If Mr. Scott is bad, we will ask him to read it at some point.

Mr. Ryan. Let me just say that I'd like to give you a slightly different perspective on this, and I will summarize my testimony very quickly.

I represent 340 companies in a variety of industries through the Coalition for Government Procurement. What we have seen over the last few years is that the whirlwind that the Committee is seeing today is actually merely one example of a series of what I would call lawlessness by the Department of Justice, where the department self-aggrandizes. It gives itself additional authorities that the Congress of the United States did not grant it to enter businesses.

In 1934, when FPI was established, it was well understood, and has been understood until 1998, by the Department of Justice, that they were not to sell items or sell services to the commercial sector.

In 1998, an opinion was written within the Department of Justice, and not from the office of legal counsel, which at least has a theoretical authority to issue such opinions, that in essence, gave FPI an alleged green light to enter the service area. The opinion purports to carve out, and to say that services are somehow different, and that Congress did not prohibit FPI from selling those services.

And the direct result of that self-serving opinion which would not withstand either academic or independent scrutiny is the source of today's hearing. It is the source of today's abuse.

FPI introduced a rule making that was intended to substantiate some of these additional authorities. It was opposed by the Department of Defense. The General Services Administration opposed it, and it was withdrawn.

Notwithstanding that, quite frankly, I think that the Congress of the United States is being bearded by FPI in a series of ways. They are saying we will take the law into our own hands, we will enhance our authority as we see fit because we do not believe that the Congress which is polarized on the issue of FPI's policy, will address us and stop us from doing it.

I really think it is quite important that the Committee ask the Congressional Research Service, or some other independent third-party to review that 1998 opinion, and see if they believe that those authorities as cited there are correct.

I will cite the Committee to the words of President Roosevelt's Executive Order. He said in his Executive Order, that ``industrial operations of Federal Prison Industries were to be restricted from selling to the private sector.'' What FPI has done is carved out services and said that services are somehow not within the words industrial operations, or the words used in its statute.

Frankly, that is not the only abuse of FPI. I thought that Congressman Scott's remarks at the beginning that perhaps this shouldn't be a criminal inquiry are important because there's a series of things, and I'm not sure, sir, who should inquire, but let me give you a list of the authorities that FPI has recently granted to itself.

One authority is to sell goods directly to federal agencies that are made without prison labor using their mandatory source authority. That is, goods being made by free labor in Canada, and in the United States, are being sold to federal agencies using the mandatory source authority.

Second, the Federal Prison Industries has now granted to private sales persons who are on a contractual commission basis, the power to grant or deny the waiver authority to the Department of Defense. I believe the granting of authority to commissioned sales people who have every interest in seeing that their commissions are high, is an inherent conflict of interest. It is one prohibited by the Federal Acquisition Regulation, and I believe it is also prohibited from delegation as an inherently governmental authority by the Office of Federal Procurement Policy.

Another authority in the last decade that FPI has given itself is the power to retroactively approve failures to follow its statutes. That is, they build factories, and then they retroactively approve that when we bring a lawsuit against that activity.

Finally, I will just bring to the committee's attention that there appears to be a potentiality that FPI has inappropriately sought to have its private sector partners lobby Congress, using government instrumentalities to bring it to their attention.

Attached to my testimony, you will find a fax that shows that it originated in the office of Federal Prison Industries containing an amendment that Senator Levin had introduced in the Senate. Six days later, the Correctional Vendors Association which is the vendors who have every right, by the way, to lobby for programs that benefit their company, took a position against that legislation, so one could ask whether it is appropriate for government instrumentalities to be used in that way. I don't think FPI should be contributing in any way to that.

These are all issues, I think, these are not evil people there. They are trying to fulfill their mission, but they need to stop taking their statute and acting as if that statute is elastic, and that they can do anything that they want.

I would welcome the opportunity to have you examine each of these issues, to ask FPI to explain their conduct, and to lay before you as the board of truth, whether you would want to defend these policies to your constituents.

Chairman Hoekstra. Thank you, and thanks for that litany. I have been involved in a number of those issues and have had the opportunity to talk to FPI, their directors, on the most troubling ones. Although none of them are a very pretty picture, they were going in where they have retroactively approved decisions that they had made earlier, and I think if I'm not mistaken, the clearest example of that might have been the whole glove, the manufacturing of gloves.

I won't say anything about evil people. I am very upset with the way that they have treated Congress, and unilaterally continue a pattern of disregard for what I think is the proper interpretation of the law, and it has to stop.

Our final witness, Mr. Corbin. The pressure is on now. We have waited almost two hours for this testimony.

Mr. Corbin. The audience is going to sleep, too. Mr. Chairman and Members of the Subcommittee, my name is Andy Corbin and I'm the president of Technical Services Laboratory, or TSL, in Fort Walton Beach, Florida.

We are a small electronics design and manufacturing firm that has been in business about 30 years. We have had as many as 25 employees, and currently employ 15 people. Considering the breadth of projects that we undertake in both high-tech and non-high-tech design and manufacturing, I have to feel that companies such as ours fill a niche that cannot easily be duplicated in larger, less nimble firms.

We are not daredevils, but we do have the flexibility and freedom to pursue cutting edge work that has an element of risk that might be avoided by a publicly traded company.

One of the products that we have designed and produced in large quantities is an electrical panel used extensively by all of the armed services. Under a 10 million dollar fixed price contract awarded by the Air Force in 1987, we designed and manufactured nearly 10,000 of these power distribution panels, or PDPs, for the Air Force, Navy, and Army.

We were quite proud of completing such a huge order with a relatively small labor force, never exceeding 25 people. Our bid for the job was about $1.5 million less than the next bidder.

During the two-year duration of the project, the price of many of the materials we used skyrocketed, but we performed at the fixed price. We did not ask for contract adjustments, cost overruns, or the like. The contract resulted in a monitory loss for my company, but a performance success.

We finished production of the panels in August 1990, just in time for Desert Shield/Desert Storm. We have received only positive reports about their performance in the field.

In December 1996, we were preparing a bid for a new procurement of PDP's when the Air Force notified us that their requirements would be met by ``mandatory inter-governmental purchase procedures in accordance with Federal Acquisition Regulation, Part 8.6.''

As you know, this section of the FAR sets forth FPI's mandatory source status. This status allows them to require a federal agency to buy any product that they make, unless they grant the agency a waiver to buy competitively from the private sector. Otherwise, the federal agency must live with FPI's product, delivery schedule and price.

FPI decides whether its product and delivery schedules meets the mission need of the buying agency, and whether the price is competitive.

Among small government contractors, fierce competition is the rule, not the exception. We compete on past performance. We compete on technical capability, and we compete on price.

FPI does not compete. It simply takes the business opportunities that it wants, and throws back those that it doesn't. This isn't good for small business. It isn't good for the government, and it isn't good for the taxpayers who foot the bill.

Understanding that FPI can legally control the procurement process, I decided to make some waves, something I'm told they understand. In January 1997, I wrote to all of the firms on our bidders list, all small business, and all competitors of TSL, to inform them that their opportunity to compete for this government business was in the process of being taken away by FPI.

The FPI representative I spoke with informed me that I was wasting my time; the law was clearly on their side. It seems to me that a law that forecloses competition, prohibits small business participation, and deprives the government of the ability to get the best value for the tax dollars being expended is a law in serious need of fundamental change.

I'll reiterate that TSL's involvement in the PDP business saved the U.S. taxpayers $1.5 million on a $10 million contract. From my point of view, that's the kind of competition the government should encourage, not quash in the name of rehabilitation.

Ultimately we did prevail in this matter. I sent a letter explaining our plight to Senator Bob Graham of Florida, and he forwarded it to the Department of Justice. Mr. Steve Schwalb of the Federal Bureau of Prisons responded that FPI had decided to waive this contract, ``even though it has successfully produced thousands of similar PDPs over the last ten years.''

I would suspect that the decision to waive this contract had more to do with the political pressure created than to anything else. Nevertheless, it is disheartening to me, and I suspect to many other small businesses, to have to recognize that FPI has the legal authority to unilaterally take any business opportunity.

In my case, if FPI had chosen to ignore the political heat, TSL would have lost 30 percent of our sales in 1997. The ``thousands of similar PDP's'' that they have produced represent thousands of work hours taken away from non-inmate workers like mine.

Unlike my fellow Floridian from Alpha Omega Computer Solutions, TSL is not directly affected by the FPI's newly found authority to sell services in the commercial marketplace. But as a fellow small business owner, I can understand his shock when confronting FPI. His situation is almost worse than mine. FPI is obtaining its used computers for free from other government agencies.

No business, large or small, could stand up to such a competitor in the commercial market. However, I was asked to relate my limited experience with FPI from the standpoint of a manufacturer.

I have read testimony from other small businesses that have lost business to FPI or have been threatened by the expansion of FPI's activities. I know of at least one defense manufacturer that is out of business because of FPI's encroachment into his field.

While we may have been lucky enough or smart enough to win this skirmish with the FPI, we still see FPI take millions of dollars in government business that would otherwise be competed among lean, hungry companies such as TSL.

The main reason for my appearance today is to warn you that hardworking, law-abiding citizens have lost work opportunities, if not jobs, to inmates. I don't know of a clearer way to put it. Don't be fooled into thinking it doesn't happen. Any task performed by FPI is business removed from the private sector, no matter how menial.

I understand that the prison population is expanding and that inmates are best kept busy, but why should the hardship be born by the small companies like mine that Congress of often trumpets as the backbone of the American economy.

I want to express my support for the legislation that you have sponsored, Mr. Chairman, H.R. 2551, the Federal Prison Industries Competition in Contracting Act. It would make the kind of changes that are needed to provide a level playing field for small government contractors like TSL.

It would also untie the hands of government contracting officers, enabling them to get the best value through competition and stop FPI from victimizing them and, indirectly, taxpayers like the people who work at my firm.

I would also like to express my opposition to H.R. 2558, which appears to be mislabeled as the Prison Industries Reform Act. In reality, it would give FPI and state prison industry programs broad access to the commercial market for both services and products, without really assuring any change to the lock on the government exercised by FPI.

It is very disappointing that this legislation, which is opposed by the business community and labor unions, is being so vigorously defended by its sponsor, Representative Bill McCollum of Florida. To me, his position simply does not make sense.

Thank you. I would be pleased to take any questions.

Chairman Hoekstra. Thank you all for being here. Somebody mentioned that Congress was polarized on this issue, at least the House. Actually, I mean, when you have got the business community, the labor unions, and the kind of coalition that we've got together, I would hardly call that polarized.

What we have is some individuals who are strategically placed that can bottle up this legislation, and the one thing that does happen each time FPI goes out and expands its product offering a little bit more, we pick up another five, ten, 15 co-sponsors to our legislation, because what they are actually doing is they are hurting more businesses in the small businesses, medium-sized businesses, and in this case, they are actually going after our kids.

I think, Mr. Wilson, you have spoken about how the process works. You would have gotten that stuff. That stuff would have ended up in our schools, places where our kids are doing it, places where Mr. Jones is going in and making a difference. FPI has said no, sorry, that's not good enough anymore, we are going to claim it, and we're going to send that stuff somewhere else.

I can't tell you, I have worked on this issue for five or six years. We are getting closer, and we are going to get it done, and the biggest reason we're going to get it done is because of the arrogance of Federal Prison Industries and their total unwillingness to have a dialogue, to have any kind of meaningful reform in this whole area. Where they continue to flaunt their charter, to misinterpret it, and it is kind of like just keep going down that road because one of these days, the support is going to be so overwhelming because of their arrogance, and their actual disservice to their client population, which are the inmates, it is going to swing over.

The fear will be that it will swing over too far, but it's the way we are heading because of the attitude that they have taken. I have said they have had some great examples. The gloves are a great example, where they retroactively approved what they had done.

The American flag manufacturing issue is another one where they just kind of went so far and were so brazen, and now this one where their facilities now broadly saying we are selling to the public, and we are selling in some cases at 1/20th, 1/25th of the price of what somebody can do in the private sector.

I think they have crossed the line. It is going to be very interesting to see whether they've got the types of agreements, those that they have to have to sell Microsoft products through their stores. How they are going to explain the materials that you've got in front of you there that have who knows what kind of information on them. And I'm assuming that those are the kinds of things that we can't really get into all that much because I would expect that those may be part of what GSA and the Justice Department are looking at as criminal investigations.

Like I said when we started, I am disappointed that we have gotten to that point with Federal Prison Industries. But it is high time that somebody took a serious look at it because in Congress, really this Committee has been the only one that has given a serious look at Federal Prison Industries in an oversight capacity, and the Committee that has primary jurisdiction on it, has not.

Chairman Hoekstra. Mr. Arnold-Bik, in your statement, you mentioned that the general rule is that the proceeds of the sale of surplus property go directly to the Treasury. As to the proceeds of Federal Prison Industries, are you aware of whether that money is going directly to the Treasury, or is it saying within Federal Prison Industries, or the Justice Department? Where is that money going?

Mr. Arnold-Bik. Mr. Chairman, I'm not quite sure where that money is going. I know that as you have so stated, if GSA were to be selling the property, it would be going into the miscellaneous receipts, but because the FPI has taken the position that they have these provisos, I'm assuming that they are following whatever guidance their counsel may have given them.

Chairman Hoekstra. What their counsel is giving them? It may or may not make its way directly back to the federal Treasury, is that correct? You don't know?

Mr. Arnold-Bik. I don't know, sir.

Chairman Hoekstra. Also, Mr. Arnold-Bik, you also talked about federal agencies taking excess federal property for their mission use are subject to minimum holding requirements. Does that also apply to Federal Prison Industries?

Chairman Hoekstra. First, what does it mean, and then does it apply to them?

Mr. Arnold-Bik. In general, excess property is the property, as Ms. Low has talked about, it's within the 21-day period. It's in play, and a federal agency would indicate an interest.

In this case, the Federal Prison Industries is indicating an interest in computers, and under the excess program, that would mean that they would use that property for a period of time. It could be a year or more.

In Mr. Wilson's case, typically they would be using their computers for at least 12 months under the state situation. Because of what you've described and because of what we've heard, and because we know, because the Office of Inspector General has told us, they are doing direct shipments, they are not holding the property, they are doing direct shipments to commercial re-manufacturers.

And so in effect, they are deviating from the system excess properties to be used within the excess community. So you would think the computers would be used in the prison or somewhere within the Department of Justice community.

Chairman Hoekstra. Thank you. Mr. Wilson, we focused on computer equipment, computers for learning programs and those types of things. Can you describe what other components, other than computers, may be part of this movement, and whether they, and what types of organizations are being deprived of the products?

Mr. Wilson. Well, there is also the computer-related equipment such as the printers, the modems, that type of thing, but also we are looking at, as I started to say earlier, forklifts, generators, construction equipment. These are types of items that we are concerned could find their way into Prison Industries, and into training programs for Prison Industries, and then be made available for sale outside as is being done with the computers.

So we don't have any specifics right now, but of the approximately $900 million they took, only $540 million of that was computer equipment which leaves a substantial amount, still $300-some million worth of product, other than computers.

Chairman Hoekstra. Thank you. Bob, can you take the chair for a minute, and I am going to yield to Mr. Scott. Do you have any questions or comments?

Mr. Scott. A couple of questions.

Chairman Hoekstra. Go ahead. Mr. Scott.

Mr. Scott. Thank you. Thank you, Mr. Chairman. Mrs. Low, in your testimony, you indicated that the Norfolk DMRO is holding excess computer equipment for the FPI.

Mr. Wilson. No, I'm sorry, that was my testimony. As it is being received, it's being put on the pallet and shrunk-wrapped and held for them, yes.

Mr. Scott. Now, would GSA have to approve that transfer before the shipment could be made?

Mr. Wilson. Yes, GSA still has to approve it, but the items are not being screened by others, they are being held for them, just like in Landover, Maryland where the chairs were being held for them, and also computers. They are doing the same thing there.

Mr. Scott. But no transfer could take place without the approval.

Mr. Wilson. That's correct, but no one else is allowed to screen them.

Mr. Scott. I don't know who this would be aimed at, but let me just ask the panel if anybody wants to answer it.

Mr. Arnold-Bik. Mr. Scott, may I make a comment, sir?

Mr. Scott. Sure.

Mr. Arnold-Bik. There are direct transfers, for federal agencies to transfer property directly, and they would notify us after the fact.

Mr. Scott. They would notify you after the fact.

Mr. Arnold-Bik. They could do that.

Mr. Scott. And what would happen if you didn't think the transfer should have taken place?

Mr. Arnold-Bik. We would raise that as an issue, but because it is a direct transfer, it is from a federal agency to a federal agency, so for example, HHS could have some equipment, and they could directly transfer it to DoD, or vice versa.

Mr. Scott. And if you found that these transfers are being made inappropriately, what would you do?

Mr. Arnold-Bik. We would, of course, raise it with our office of inspector general, or with their staff, and then to the appropriate authorities within their community.

Mr. Scott. Let me ask the panel, what portion of the overall used computer sales are generated by the FPI? My guess is it would be very much a negligible portion of the used computer sales overall. Does anybody have a response?

Mr. Ryan. Mr. Scott, I would agree with you. I represent a number of information technology companies. As a sales matter, it's going to be a small percentage of the re-sell of used computers.

On the other hand, I think there is a basic lawfulness issue at the premise of whether FPI has the legal authority to be selling them at all.

Mr. Scott. Let's hold that question because that is our next question to you, but overall, we are talking about a negligible portion of the used computer sales. Mr. Ryan, let me ask that second question. You indicated that there is an attorney's opinion that this is lawful, and you disagree with that opinion. Is that what I understand?

Mr. Ryan. That's correct, Mr. Chairman - Mr. Scott.

Mr. Scott. Not this year.

[Laughter.]

Mr. Ryan. I understood, sir, and I can provide that for the record for the Committee, but I would say that this is an opinion, frankly, from a relatively low-ranking and inferior office within the Department of Justice.

Mr. Scott. But it is an opinion. You have a different opinion. Have you reduced your opinion to some sort of brief or legal analysis?

Mr. Ryan. I have conveyed industry's opinion to FPI in meetings.

Mr. Scott. Has that been reduced to a legal analysis that someone could compare your analysis to?

Mr. Ryan. I would be glad to do that. I think, frankly, what might be more cogent would be to have CRS do it, because you know, I am an advocate, and I believe, frankly, that they don't have that right, and I would be glad to reduce our opinion so that you could lay it alongside theirs.

Mr. Scott. And whoever else is going to do the TRS, whoever might have the benefit of your analysis, too.

Mr. Ryan. I would be glad to.

Mr. Scott. I have no further questions, Mr. Chairman.

Mr. Schaffer. Mr. Wilson, I have a question for you. Your statement mentioned direct shipments of excess federal equipment taken by FPI. Could you elaborate?

Mr. Wilson. Right. I understand that in some of these locations, items are being shrunk-wrapped and held on pallets for them to come and pick up. I know that from conversations I have had with some officials across the country, equipment is being picked up really literally across the country. Out in California, trucking firms are picking up computers for transfer to FPI back to the East Coast.

What really astounds us in the surplus program that is transferring property all the time, how they can afford to do something like that. I couldn't afford to do it from Chicago, Illinois to Madison, Wisconsin. I don't know how they can afford to bring it from California to the East Coast.

It is also, I guess, rumored, and I have no facts so maybe I shouldn't go any further on that, but the potential is the items aren't even going to FPI, but are actually going to private contractors.

Mr. Schaffer. As a follow-on, Mr. Arnold-Bid and Ms. Low, any comments for those making the access federal property available to the FPI?

Mr. Arnold-Bik. Mr. Chairman, we know that there are direct shipments leaving from Elkton going directly to commercial recyclers. There is no question on that point, sir, and I have a document that I am looking at from the Office of Inspector General telling me that.

Mr. Schaffer. Ms. Low, do you have anything else to add on that question?

Ms. Low. Yes. If you would like, for the record, I could provide you a break-down of the excess computer and related equipment that we dispose of through the reutilization, transfer, and donation program, as well as how much we scrape in sale to the general public, if that information would be of use to the Committee.

Mr. Schaffer. I think we would find it very useful.

Ms. Low. And for clarification on when a DRMO would, such as the example the DRMO Norfolk where they set the computer equipment aside for FPI, there is a standing practice at many of our DRMO's where a customer or an agency can come in with a standing want list, whereby as we receive that type of property, it is not set aside so much for them, but it is offered to them based off their existing want list, and all issues from a DRMO is with, we don't do transfer to a federal agency without GSA's approval for the DoD excess.

Mr. Schaffer. FPI's taking of excess property has expanded pretty dramatically in the last three years. Could FPI be making direct use of so much material? Clearly, they have a different concept of their obligation to use the excess property. Do you have any comment on that?

Ms. Low. I would have to defer that to FPI. I have no concept of their operations and how much material they need.

Mr. Schaffer. Mr. Arnold-Bid, do you have any thoughts on that matter?

Mr. Arnold-Bik. I, too, would have to defer to FPI, but the volumes are significant. If I am not mistaken, the data shows that we are closing in on $800 million in total reutilization transfers to FPI. GSA does typically around $1.2, $1.4 billion, adding that number is like almost doubling the program, so it is also like doubling a program for one entity.

I believe the numbers are in fiscal year '90, just for Department of Justice alone, and I have to check the record, it is around $2 million, and now we are at $800 million in three quarters.

Mr. Schaffer. Mr. McBride, you brought copies of sales receipts for purchases that you made at the outlet store, at the recovery factory in Marianna, Florida. These are for purchases of laptops and CPUs.

Mr. McBride. Yes, sir.

Mr. Schaffer. Could you review those purchases for us?

Mr. McBride. Certainly.

Those two computers that we are looking at, there are two 486s that are actually listed on this invoice. One of them I use personally, to be honest with you. It's a Compaq. The thought process that came to mind, I mean, it may be salvage, but with a little bit of software, it actually becomes the key to the future for a child.

The other, I actually have a friend who has been in the computer business, been in the business for a number of years, and he is personally using that device. He uses it every day.

Mr. Schaffer. These are 486 computers.

Mr. McBride. Oh, yes, sir, they are 486s, actually laptops.

Mr. Schaffer. I bet, Mr. Jones, you would love to have these, wouldn't you?

Mr. Jones. Yes. What we have been doing is taking those computers and giving them out to needy students who otherwise wouldn't have them, and with the software that we put on it which functionally operates like Windows, they have, in effect, the industry-training vehicle that they otherwise wouldn't have.

That's what I think is the issue here, whether or not, this is the most appropriate use for this material in terms of the needs of our society.

Mr. Schaffer. I think the President spoke in his executive order, it clearly indicates that he didn't think it was the most appropriate use, but yes. So what were the prices on those? There was a 486 for what? $150? Or was it, was that $50?

Mr. McBride. I believe one of those was $50, and the other was $75. On the other side of that, I believe, there are also two machines listed there, those two machines are actually 64-byte machines, which are kind of fast. They are actually digital alpha stations. I actually put those out for bid, and those items sold anywhere between $450 and $800 for the same machine.

Mr. Schaffer. Now, the other interesting thing is this stuff was also available on the web for a while, right?

Mr. McBride. Yes.

Mr. Schaffer. Federal Prison Industries not only had a facility in your hometown or your backyard, but they also put this on the web, is that correct?

Mr. McBride. Yes, sir, they had an order form on the web. The printout that I had was actually dated 5-12-2000, and they had a fill-in-the-blank form where the price is, you actually tell them what you wanted to pay for it, the quantity you wanted, complete systems, and they actually listed a complete PC system for $350 I believe on this form.

Like I say, fill in the blank, e-mail it and I guess, hopefully, they will fill your order, I'm not sure.

Mr. Schaffer. So this is not only a small mom and pop business in your backyard, they also tried to get on the web, and again, I'm sure, I don't think it said on there only for government employees, or only for government sale, did it?

Mr. McBride. No, sir, it did not. It said I think for private individuals and everybody under the sun, just about.

Mr. Schaffer. I don't have any more questions. I will be happy to relinquish the chair back to the Chairman.

Chairman Hoekstra. Yes, I just have one other question. Mr. Arnold-Bik, GSA imposed a moratorium on the FPI recovery factory in Ohio, correct? Hasn't that been your testimony?

Mr. Arnold-Bic. That is correct, sir.

Chairman Hoekstra. Having heard about the activities of the ``recovery factory'' in Marianna, Florida today, what process do we need to go through to get GSA to consider imposing a full moratorium again on all FPI takings of computer equipment?

Mr. Arnold-Bik. Certainly this hearing will go a long way in strengthening our hand in working with the FPI folks.

Chairman Hoekstra. I hope so. I mean, this is an outrage, okay? I have been fed up with this organization for a long time, and I applaud what you have done, but for them to take what they are selling in the private sector, they are selling on the web, they are going in direct violation of what the President outlined in his executive order, which is a key priority for Republicans and Democrats in bridging the digital divide.

We don't know if the money is going to the Treasury, and it is all based on a flimsy interpretation, a self-serving interpretation that really ought to be challenged, and so I hope this hearing helps, and that you really do go and consider a full moratorium on computer equipment, and perhaps some of the other stuff as well.

Mr. Arnold-Bik. Yes, sir.

Chairman Hoekstra. I mean, do you need a letter from us?

Mr. Arnold-Bik. One of the things that we're doing, sir, you are always, of course, welcome to send us a letter, and you can be sure that we will definitely be taking your comments to heart. We are looking forward to the Office of Inspector General report. They are looking at that. They are going to be helping us, giving us counsel administratively to work out a thorough process to make sure that when the FPI folks come to us and indicate that they need excess property, it will be used for its intent.

In the event a document comes to us and says that it will be used for computers for schools, Executive Order 12999, you will be sure, sir, that it will be used for computers for school, or we will not approve it.

We have situations of that where there is a suggestion it is going to be used for a particular program, and we found it not to be true, and we stop those, sir.

Mr. Ryan. Sir, could I add something?

Chairman Hoekstra. Yes.

Mr. Ryan. I have no faith in Inspector General's offices because they are not going to ask the right question. The question that Congress asks is "is this a wise policy"? Congress asks "is this good for the American people"? That's not the charge of the Inspector General. They will only be able to tell you whether there is an arguable, lawful nature to it.

GSA in effect is required in large measure to give this stuff to FPI. They had a preference over the digital divide programs in the private sector that are waiting for it, so frankly the Congress I think is going to have to deal with this agency, not the Inspector Generals. You can't have any faith, not that they are going to white-wash it, but they are just not going to be able to ask the question that you people ask of yourselves. Is it wise policy to permit this?

Chairman Hoekstra. All right. Mr. Scott, do you have any additional questions?

Mr. Scott. No, thank you, Mr. Chairman.

Chairman Hoekstra. Mr. Schaffer?

Mr. Schaffer. No.

Chairman Hoekstra. I want to thank all of you for being here today. The testimony has been very interesting, it has been disturbing, but I encourage you for being here. Mr. Jones, I thank you for being here.

Mr. Jones. Thank you, sir.

Chairman Hoekstra. I apologize that Congress has not acted in this case, we are going to continue to do everything we can so that programs like yours can get the priority that I believe the President and the Congress would like them to have, and I apologize for our inability to rein in Federal Prison Industries.

You are not the only victim, but you are the latest victim.

Mr. Jones. It seems the Federal Prison Industries is missing the whole concept of what they were initiated to do, and that's to train people to work so that when they go back to society, they don't have a predilection to come back.

That's what our program is actually doing. We actually have a bid into the Governor's office of Pennsylvania to put a charter school inside of their correctional facilities that would train people and give them certification in computer skills.

Chairman Hoekstra. I mean, you are doing everything to train young people and give them the tools so that we will never have to deal with them through a federal prison institute.

Mr. Jones. Yes.

Chairman Hoekstra. They are making sure that you know, actually what they are doing is they are trying to improve their job security.

Mr. Jones. Basically, yes.

Chairman Hoekstra. But they are not giving these young people the tools and the equipment that they need. For them, it may be a penny-wise, but for the American people, it's a pound of foolish business strategy.

Mr. Jones. That is correct, sir.

Chairman Hoekstra. It really is an embarrassment for us to even be having this discussion, and be going down this road, but with this agency, we have been there before, and we will probably be there again.

I want to thank GSA, the Defense agency, for the work that you have done in trying to bring this to our attention, and for trying to rein it in. I think you are doing the right thing.

Mr. Wilson, thank you for sharing with us again the direct impact that it has on a larger, on a national basis as well as building off of what happens here on a local basis, on a personal level with small businesses.

Mr. Ryan, thank you for again your expert testimony. I ask unanimous consent to keep the record open for additional statements until October 9, 2000. Yes?

Mr. Scott. Mr. Chairman, I would ask for unanimous consent that a program summary on the computer-recycling program by the Defense Logistics Agency be submitted for the record.

Chairman Hoekstra. Without objection, so ordered.

There being no further business before the Subcommittee, the Subcommittee will adjourn. Thank you very much.

Whereupon, at 3:25 p.m., the Subcommittee was adjourned.