INSIDE JOBS

MR. SCHWALB IS PUTTING HIS INMATES TO WORK. FOR THE PRIVATE SECTOR

As Prison Population Surges, Service Economy Offers Rich Source of Chores

Labor, Business Are Livid

FORT WORTH, Texas -If it weren't for the drab green and gray uniforms worn
by the clerks, this office would look much like many in Corporate America.

A hundred women, some listening to Walkmans, clack away on computer
keyboards, entering used-vehicle sales data for CCC Information Services
Group Inc., a Chicago insurance-claims processing company. Beyond the
uniforms, however, there's a less obvious difference: no telephones. The
convicted felons at work here aren't allowed to have them.

The data-entry operation at this 90-acre prison enclave called Carswell is
a controversial experiment by Federal Prison Industries, a self-supporting
arm of the Justice Department. FPI, which employs about 20,000 prisoners,
makes clothing, furniture and other goods for the federal government. But
it believes its future lies in selling services - and not just, to the
government.

FPI is counting on the robust service economy to remedy, its biggest
headache: The nation's prison population is growing faster than wardens can
find work for it. If FPI can't meet its goal of employing at least 20% of
the eligible federal inmates, there will be more idle prisoners and more
potential for turmoil behind bars. To cope with the influx, FPI hopes to
tap the commercial market for such services as coupon sorting, packaging
and data processing.

Its new strategy and the growth of FPI's traditional businesses infuriates
an eclectic mix of politicians, unions and business leaders. They say FPI
is stealing jobs from the private sector and is able to compete only
because it pays much less, than the minimum wage. Their anger is fueling a
campaign to strip FPI of its most valuable asset - its right of first
refusal on federal contracts for hundreds of goods, ranging from swim
trunks to-iron security doors.

At the center of the storm is Steve Schwalb, 48 years old, FPI's chief
operating officer. "What we have here is one damn complex political
issue,"' says Mr. Schwalb, a 26-year veteran of prison management. "It
shouldn't be personal," he, adds, "If I've done something wrong, shame on me."

Like his private-sector counterparts, Mr. Schwalb, who is based in
Washington, huddles with his chief financial officer and frets about
inventories; he also is managing an overhaul of his corporation's computer,
systems. But though be is responsible for keeping FPI financially solvent,
his mandate doesn't allow him to focus solely on the bottom line.

Because FPI is required to employ as many-prisoners as possible, it
deliberately, tackles labor-intensive jobs in the most, labor-intensive ways.

At its Marianna., Fla., furniture factory, for example, tasks that could be
done by machine, such as sanding and planing, are done by hand. Since many
of its, employees have few skills and have never held a regular job, there
is a quality-control manager for every eight inmates, a ratio far greater
than in private industry.

Indeed, FPI's inmate Workers are only about a fourth as productive as their
private sector peers, and at least 25 of its 100 factories are
unprofitable. Mr. Schwalb says he tries to stick with businesses that are
moneymakers and pull the plug on the money losers, as he did with mattress
recycling. However, his hands are often tied because he can't control the
size of his work force.

"I'm not really enamored with more inmates, but these are the cards I'm
dealt," says Mr. Schwalb, who expects the number of inmates under his
supervision to increase 50% to 30,000 by 2006.

The case of 39- Cynthia Tamlin shows why. Stricter parole and sentencing
guide-lines and, mandatory prison terms enacted as part of a federal
crackdown on crime in the late 1980s meant a 30-year sentence for Ms.
Tamlin, a Fort Worth resident who was convicted in 1993 of helping a
boyfriend deal cocaine at a nightclub she co-owned. Under the old parole
rules, she might have gotten out as early as 2003. Instead, even with
perfect behavior, she won't be freed until 2017.

Meanwhile, for $1.25 an hour, she orders supplies and tracks other inmates'
work hours at the Carswell data-processing office. The job, Ms. Tamlin
says, "makes me feel like I'm part of the outside."

But business and labor groups see another side to the equation. "FPI is
like a social cost, a tax, on individual industries that never asked for
it," says Rick Cippele, president of closely held American Apparel Inc. of
Selma, Ala., who says he has lost jobs making uniforms to FPI. The apparel
industry alone estimates it has lost more than 8,000 jobs to federal
prisoners.

Other industries may soon be facing a similar plight. That's because most
federal agencies that are FPI customers are shrinking, not growing. "We're
running out of new things to make that the government wants to buy," says
Mr. Schwalb.

He says he considers the data-entry operation at Carswell a win-win
proposition. Since the work his inmates are doing for CCC Information
Services was previously done in the Philippines, the shift didn't
jeopardize any American jobs. The company, which approached FPI about the
job, says it expects to get more-accurate data more quickly and at a
slightly lower cost. "It's a no-brainer," says Mr. Schwalb, chewing hard on
a stick of gum.

However, his critics fear that not every case will be so clear-cut. They
worry that FPI will inevitably tread on domestic industries. "Whenever FPI
gets authority to do anything, they treat it like a blank check," says Rep.
Peter Hoekstra, a Michigan Republican who is one of FPI's most vocal critics.

FPI is governed by rules that date back 65 years to the Great Depression.
At the time, the young federal Bureau of Prisons was beset by a rash of
inmate disturbances, which it attributed to a lack of meaningful work
programs. One idea was to establish prison factories to produce goods for
the federal government, but the American Federation of Labor immediately
protested against the plan. At a meeting in the Oval Office in 1934,
President Franklin D. Roosevelt persuaded the AFL to withdraw its
opposition, in part by promising labor a seat on FPI's board; that seat is
now held by the AFL-CIO, which opposes FPI's expansion plans.

In its early years, FPI manufactured such products as clothing, mattresses,
bricks and brooms. It made parachutes and munitions during World War 11 and
dipped into keypunch operations for the government after the war, while
scaling back its foundry operations and needlework. By 1980, it had a labor
force of 6,300 inmates and $117 million in sales.

Amid the prison-population boom that started in the 1980s, FPI expanded
into modular furniture, which now represents 20% of its $530 million in
annual revenue, as well as thermoplastics and printed circuits. Mr.
Schwalb, who took the helm in 1993, continued to search for new ideas. Some
proved too politically sensitive. For example, he vetoed a plan for his
prisoners to make burial flags for presentation to the widows of servicemen.

Then, during a 1997 meeting with state prison representatives, he learned
that prisons in states such as Florida, South Carolina and Kentucky were
experimenting with providing services to the private sector. Intrigued, he
had his counsel check with the Justice Department to determine whether
FPI's charter, which bars its products from the private sector, would allow
FPI to enter the commercial market for services. In the meantime, FP1 moved
aggressively to offer services to the government. It now employs about
2,500 workers in service jobs that range from doing laundry for Eglin Air
Force Base in Florida to repairing mail satchels for the U.S. Postal
Service in Atlanta.

This past October, with the Justice Department's blessing, FPI announced it
would begin selling services to the private sector, focusing its efforts on
winning back jobs that had gone overseas in pursuit of cheap labor.
"Repatriation" became Mr. Schwalb's favorite buzzword.

But Mr. Schwalb was caught off-guard by the white-hot reaction from
industry and labor. "I think it-stinks," says Gary Engebretson of the
Contract Services Association of America, a Washington-based trade group.
"They don't have to comply with all sorts of labor-practice requirements-
members do," such as minimum wages and job-safety rules.

Unions and business groups began to join forces to oppose FPI's expansion
efforts. As its services strategy took shape this past spring, Andrew
Fortin, the U.S. Chamber of Commerce's manager for privatization policy,
invited several labor and business representatives to the chamber's
Washington, D.C., headquarters.

There, for the first time, he met lobbyist Tom Trotter of the machinist's
union. "I was impressed that he felt this was an issue important enough to
him that he'd come into enemy territory," Mr. Fortin says. "We were in
complete agreement on this issue."

Now, the combined labor-business axis is pressuring Congress to rein in
FPI. In May, Sen. Carl Levin' a Michigan Democrat, inserted a propose into
an appropriations bill to make it easier for the Department of Defense to
use private companies instead of FPI for smaller purchases; the proposal
came two votes short of passage. On Monday, Rep. Hoekstra introduced a bill
with 53 House co-sponsors that would force FPI to compete with the private
sector for all federal contracts, except those specifically designated by
the attorney general as exempt.

"Clearly the momentum is going our way," says Steve Lamar, head of the
American Apparel Manufacturers Association, which is based in Arlington, Va.

Under pressure, Mr. Schwalb has told critics in recent months that he is
willing to relinquish FPI's first dibs on federal contracts. But in
exchange, he is pressing for legislation such as that introduced Tuesday by
Rep. Bill McCollum, (R., Fla.), authorizing FPI to go full bore into
commercial markets. For example, he sees FPI expanding into making products
such as toys and sneakers, almost all of which now are made abroad.

These days, from his office, which features a prison-made desk with a
mahogany finish, Mr. Schwalb frets as he minds the clock. He already is
authorized to open a total of 13 new factories in 2001 and 2002. So, he is
watching the Carswell experiment closely. If it works, the two-year
contract should add between $650,000 and $750,000 a year to FPI's revenue,

At Carswell, a world away from the political battleground, Maria Vidro's
33-year-old former gang leader imprisoned for life for racketeering and
aiding and abetting a drug conspiracy, types away intently. She is trying
to boost her production to 700 records a day.

"I'm really enjoying this job," says Ms. Vidro, who is working overtime
while the operation ramps up. "This is my little world."