DECISION BY FPI'S BOARD OF DIRECTORS REGARDING THE PRODUCTION OF OFFICE CASE GOODS FEDERAL PRISON INDUSTRIES, INC. (FPI) -- announces the decision by its Board of Directors regarding a proposal to significantly expand production of office case goods. The Board of Directors for Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to significantly expand its production of office case goods. As required by statute, FPI prepared a comprehensive impact study which analyzed the potential impact that FPI's expansion of production may have on private industry and free labor. FPI announced, in the May 8, 1996 edition of the Commerce Business Daily, its plans to present this proposal to the Board of Directors; described the procedures for obtaining a copy of the impact study; and invited public comment on its proposal. Copies of the impact study were sent to various manufacturers, trade associations, labor representatives and private individuals. FPI received written comments on its proposal from two sources, prepared responses to those comments, and submitted all such information to FPI's Board of Directors. Members of the Board reviewed all of the materials and heard in-person comments from individuals representing private industry during a meeting held on October 8, 1996 in Washington, DC. The Board wishes to thank all parties who took the time and made the effort to comment. The industry's written and oral comments were helpful in developing a clearer picture of the industry and its concerns. The Board is now called on by statute to make a determination as to whether expansion in the production of office case goods would result in FPI's assuming no more than a reasonable share of the market and not cause an undue impact on the industry. In reaching our decision, we have relied on the impact study, with the additional insight that the private sector has afforded us. PRODUCTION LEVELS -- After careful review, it is the Board's decision to approve a smaller expansion than proposed by FPI staff. The Board is mindful of the concerns raised by private vendors and does not authorize even a reduced FPI expansion lightly. Rather, we believe our decision well balances the competing goals of maximizing inmate employment while minimizing FPI's impact upon private firms. The Board recognizes its need to soften the impact of any FPI expansion, and is especially mindful of the office furniture industry's complaint that this is FPI's third expansion request within the industry. At the same time, the Board points out that FPI has attempted to minimize its impact by substantially diversifying its production within the office furniture industry, producing a variety of furniture products matched by only a handful of mostly large private sector firms. The Board also notes that FPI is restricted by statute to only selling its products and services to the Federal government. The vast majority of the domestic market for almost every product and service provided by FPI is available solely to private vendors. Indeed, the total domestic market for office case goods is significantly larger than the Federal market. Thus, the Board approves FPI to increase office case goods production to the following levels: FY 1997, $45 million; FY 1998, 55 million; FY 1999, 60 million; FY 2000, 65 million; FY 2001, 70 million. The Board believes this gradual increase in sales to the Federal government, coupled with a projected total domestic market growth rate of 4.2%, will effectively minimize FPI's impact on the private sector. Given the difficulty in achieving an exact level within a given year, FPI may exceed the annual limits by insubstantial amounts, so long as the aggregate over the five year period does not exceed $295 million. THE OFFICE CASE GOODS MARKET -- In reaching this decision, the Board carefully reviewed all the information presented regarding the market for office case goods. Below is a summary of the Board's analysis and findings. Total domestic market: In order to determine the size of the total domestic office case goods market, FPI's impact study relied on data from The Business and Institutional Furniture Manufacturers' Association (BIFMA), the primary trade association for the office furniture industry. BIFMA concluded that approximately 22% of all office furniture sales consist of office case goods, defined in the study to include desks, tables and office storage units, such as credenzas or bookcases. The Board believes that this information was appropriately used to calculate the size of the office case goods market within the office furniture industry. BIFMA's own statistics project the size of the total domestic market for office furniture to increase between 4.2% and 5.5% annually. In particular, the Board recognizes the unprecedented rate of growth evident in the home office furniture market. This segment of the market, from which FPI is excluded, will remain a strong growth area for private vendors. Thus, the levels of FPI production approved by the Board will equate to only 2.6% of the total domestic office case goods market in FY 2001, a slight increase from 2.0% in FY 1996. FPI's increase in sales will more than be offset by growth in the total domestic office case goods market. Despite the approved levels of production in this decision, office case goods sales available to private vendors will nevertheless increase significantly. By measuring the levels of production approved in this decision against BIFMA's statistics and projections for the size of the industry, we see that in FY 1995, office case goods sales available to private vendors totaled slightly less than $2.04 billion. By FY 2001, assuming the growth projected by BIFMA continues at a similar rate, the amount available to private vendors will grow to $2.58 billion. This "expanding pie" allows for FPI to modestly increase its own sales while allowing private vendors to continue to increase their sales. Federal market: Information provided to the Board included conflicting projections regarding the current and future size of the Federal office case goods market. In its proposal, FPI estimated the Federal office case goods market to be $221.3 million in FY 1995. This estimate was attained by taking 22% of FPI's estimate of the entire Federal office furniture market. In testimony before the Board, representatives of private industry claimed FPI's estimate was flawed by overstating the Federal office furniture market. A BIFMA spokesman suggested the Federal office furniture market was roughly $200 million less than FPI's estimate. Under the BIFMA calculation, the segment representing the Federal case goods market would equate to $169.4 million. The Board recognizes the differing market estimates represent a major discrepancy. Since the Board relies heavily upon the Federal market data when rendering a decision for every new product or significant expansion proposal, it is crucial the Board have confidence in the data's accuracy. It is for precisely this reason that the Board has decided to grant FPI less than its full expansion request. (Irrespective of the disagreement over the size of the Federal office case goods market, the Board saw no evidence disputing that FPI represents only a fraction of the much larger total domestic office case goods market. This evidence alone is compelling enough to warrant the approved production levels outlined above.) With the dispute over the size of the Federal market in mind, the Board has directed FPI to convene a panel of experts to review the methodology used by FPI to calculate the Federal market for its new product and significant expansion impact statements. This Federal review panel will include representatives of the Small Business Administration, Department of Commerce, Office of Federal Procurement Policy and the General Services Administration's Federal Procurement Data Center. Additionally, and with regard to concern over inadvertent expansion in the past, the Board has also directed FPI to have an independent auditor examine FPI's sales and market share levels since FY 1990 to assess the Corporation's historic compliance with the current expansion guidelines. The auditor is also requested to review FPI's implementation of the current guidelines, how the process is being managed, and assess the viability of the current rules, recommending any changes it believes are necessary. This review is already underway and is being conducted by the accounting firm of Urbach Kahn & Werlin. The outcome for both of these efforts are anticipated in the Spring of 1997. In its office case goods proposal, FPI projects the Federal office case goods market to grow from $221.3 million in FY 1995 to $264.3 million in FY 2001. Representatives of private industry argued that the Federal market will experience little growth, due primarily to downsizing of the Federal workforce, and that an increase of this magnitude is contrary to FPI's responsibility to avoid unduly burdening any single industry. The evidence before the Board supports a projection of continued growth. In forecasting 3% annual growth for the Federal office case goods market, FPI's impact study cites three main factors. The first is that recent Federal procurement history displays a clear trend of increased purchases of office case goods. Sales of office case goods to the Federal Government have grown from $185.2 million in FY 1991 to $221.3 million in FY 1995. The second factor is that the recent trend of increasing Federal office case goods procurements has continued despite a reduction in the size of the Federal workforce. As stated in the study, "This suggests that even though the Administration and the Congress have made reducing the Federal workforce a priority, it does not necessarily translate into a decrease in the Federal market for office case goods." The Board noted in our earlier decision regarding FPI's proposal to significantly expand production of office seating that Federal demand for such products "is not directly related to Federal employment levels." The third major factor is the current Administration's emphasis on improving Federal productivity and efficiency. Aspointed out in the study, an important part of such effort is providing workers with a better, more efficient office environment, which often translates to "newer and better types of office furniture." The Board concurs with these arguments outlined above, and finds it reasonable that the Federal office case goods market will experience 3% annual growth. The approved production levels will allow the corporation to sell $70 million of office case goods in FY 2001. Although this figure represents an increase in FPI's sales, private sector manufacturers will be able to increase their sales from current levels due to growth in the size of the Federal market for office case goods. In light of the discrepancy over the size of the Federal market for office furniture, the Board will intentionally not equate the approved levels of production with a specific market share. To illustrate, in FY 1997, using FPI's projections, approximately $190 million in Federal office case goods sales will be available toprivate sector vendors. Under FPI's proposal, this amount will increase to $194 million by FY 2001. Therefore, despite growth in FPI's market share, the data presented to the Board indicates that there is room for private sector vendors as well. VOLUNTARY WAIVER OF THE MANDATORY SOURCE -- The Board has heard from office furniture industry officials at several meetings that FPI should cease to operate as a mandatory source of supply for the Federal government. This same issue was raised by the dormitory and quarters furniture manufacturers. In that decision, the Board encouraged the parties to initiate discussions in an effort to arrive at an agreement, to be presented to the Board, under which FPI would pilot the voluntary waiver of its mandatory source. In that decision, the Board also balanced our intrigue with such a pilot against a concern that placing too much emphasis on profit and business efficiency may detract from FPI's equally paramount obligation to employ inmates and teach them work skills and habits, and to employ sufficient inmates so as to reduce idleness in the Federal Prison System. With the same caveats, we encourage such discussions between FPI and the office furniture manufacturers. In order for the pilot project to be manageable, the Board thinks it prudent that such a pilot apply to only one segment of the office furniture industry, rather than to the entire array of office furniture produced by FPI. With this in mind, the Board suggests either office seating or office case goods be used as the potential product to pilot, whereby FPI works with the office furniture industry to develop a joint proposal under which FPI would administratively waive its mandatory source. ADDITIONAL BOARD REVIEW -- In addition to its current and semi-annual publication of sales data in the Commerce Business Daily, FPI will compile its sales in office case goods at the end of each fiscal year, and provide a copy of this information to all interested parties. Should any party believethat circumstances such as (but not limited to) overall industry growth or Federal procurements have changed sufficiently that FPI's authorized production is having a substantially greater impact than anticipated in this decision, that party may provide such written information to the Board. The Board will then review the information and, if warranted, reexamine FPI's authorized production levels. Additionally, the Board will give consideration to modifying the approved levels of production depending on the outcome of the two outside reviews outlined earlier, as well as FPI's discussions with the industry relating to the pilot project for waiving FPI's mandatory source.

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