STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CCA OF TENNESSEE, LLC,

vs.

Petitioner,

Case No. 13-0880BID

DEPARTMENT OF MANAGEMENT SERVICES,

Respondent.

/

RECOMMENDED ORDER

Pursuant to notice, a final hearing was held in this case on May 1, 2, and 8, 2013, in Tallahassee, Florida, before Suzanne Van Wyk, a duly-designated administrative law judge of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Robert H. Hosay, Esquire

James A. McKee, Esquire Foley and Lardner, LLP

106 East College Avenue Tallahassee, Florida 32301

For Respondent: Clifford A. Taylor, Esquire

Matthew F. Minno, Esquire Department of Management Services 4050 Esplanade Way

Tallahassee, Florida 32399-0950 STATEMENT OF THE ISSUE

Whether Invitation to Negotiate No. 12/13-010, issued by Respondent for the operation and management of Bay Correctional

Facility, Graceville Correctional Facility, and Moore Haven Correctional Facility, is contrary to Respondent's governing statutes, rules, or policies.

PRELIMINARY STATEMENT

On October 10, 2012, Respondent, the Department of Management Services (DMS or the Department), issued Invitation to Negotiate No. 12/13-010 for the Operation and Management of Bay Correctional Facility, Graceville Correctional Facility, and Moore Haven Correctional Facility (the ITN). DMS posted several amendments to the ITN over the next few months. The last substantive amendment, Amendment 11, was posted on the Vendor Bid System (VBS) on January 28, 2013.

On January 30, 2013, CCA of Tennessee, LLC (CCA), filed a notice of intent to protest the specifications of the ITN. CCA filed its Formal Bid Protest Petition on January 31, 2013. The parties pursued resolution of the protest pursuant to

section 120.57(3)(d), but were unable to resolve the protest by mutual agreement. Respondent referred the matter to the Division of Administrative Hearings on March 15, 2013, for assignment of an administrative law judge.

The final hearing was scheduled for May 1, 2, and 8, 2013. CCA subsequently filed a Motion to Compel discovery responses, as well as motions to amend the bid protest petition and continue the final hearing. Following a telephonic hearing on

the motions, the undersigned granted CCA’s motion to amend its bid protest petition and denied the motion to continue final hearing.

During the hearing on the motions, the undersigned gave verbal notice to the Department of Corrections (DOC), pursuant to Florida Administrative Code Rule 28-106.109, regarding its right to be joined as a party. On April 30, 2013, DOC filed its Response declining to join.

The final hearing commenced as scheduled on May 1, 2013, and concluded on May 8, 2013. At hearing, the parties offered the testimony of: Lucibeth Mayberry, CCA Vice President and Deputy Chief Development Officer; Jinanne West, CCA Senior Director of Financial Planning and Analysis; James Upchurch, DOC Assistant Secretary for Institutions and Reentry; Mark Tallent, DOC Director of Budget and Finance; Wayne Green, DOC Assistant Bureau Chief for Security Operations; and Michael Weber, DMS Bureau Chief of Private Prison Monitoring.

The parties introduced six joint exhibits. CCA introduced

51 exhibits, six of which were admitted over objection, and 11 of which were stipulated to by DMS. DMS offered 12 exhibits, six of which were admitted over objection, and the remaining six were admitted as demonstrative only.

The five-volume Transcript was filed on May 21, 2013. The parties timely filed proposed recommended orders, which have been considered in the preparation of this Recommended Order.

FINDINGS OF FACT

Parties/Interested Persons

1. Petitioner, CCA, is a private corporation specializing in the design, construction, expansion, and management of correctional facilities. CCA currently operates 61 facilities for the United States federal government and state governments.

2. Respondent, DMS, is authorized to contract for private correctional services under specified circumstances. As a prerequisite to entering into a contract for private correctional services, DMS must find the contract will result in a 7% cost savings to the State over public operation of a substantially similar facility.

3. DOC, a non-party, currently operates 48 public correctional facilities and contracts with private vendors for operation of seven private correctional facilities. With respect to privatized facilities, DOC has the duty and responsibility to calculate the cost per inmate per day (per diem rate) for public operation of a substantially similar correctional facility. The per diem rate must be based on the costs of operating a correctional facility of a similar size, type, and location as the facility sought to be privatized.

   
   

   Brief Background

   
   

   1. Per Diem Workgroup

      
      

4. The Florida Legislature first authorized private correctional facility operation in 1993, adopting the Correctional Privatization Act, chapter 957, Florida Statutes (the Act). As adopted, the Act included a cost-savings requirement: the State must find that private operation of a correctional facility would result in a savings of at least 7% over public provision of a similar facility.

5. In 2001, the Legislature created the Prison Per-Diem Work Group, composed of the staffs of the Auditor General, Office of Program Policy Analysis and Government Accountability (OPPAGA), and the Appropriations Committee of the Florida Senate and of the House of Representatives (the Work Group). The Legislature directed the Work Group to convene, beginning in 2002 and each year thereafter, for the purpose of developing consensus per diem rates for privately operated facilities.

   See ch. 01-379, § 2, Laws of Fla.

   
   

6. In 2002, the Work Group published a Report of Consensus Per Diem Rates (the Report). The Report included a set of Overall Per Diem Rates for each of the three main population types (adult male, youthful offender, and female), as well as Alternative Per Diem Rates and Program Per Diem Rates. The Overall Per Diem Rates represent an average daily operating cost

   
   

   of all publicly operated facilities. The Alternative Per Diem Rates exclude the costs of operating specialty facilities such as death row and work release, which are not operated by private vendors. The Program Per Diem Rates represent the average cost to provide educational and substance abuse programs to inmates within each of the three population groups.

7. By way of example, the 2002 Work Group developed an Overall Per Diem Rate of $50.53 to operate an adult male correctional facility.

8. The 2002 Work Group explained that the Alternative Per Diem Rates provided examples of adjustments that could be made to the Overall Per Diem Rates to facilitate a more direct comparison between public and private correctional facility costs. The Work Group made a location adjustment to remove the cost associated with a Competitive Area Differential paid to correctional officers in South Florida. Further, the Work Group made a series of size adjustments to reflect the extent to which public facilities of similar size to private facilities are above the location-adjusted average operating per diem.

9. By way of example, the 2002 Work Group calculated an Alternative Per Diem Rate of $44.93 for operation of an adult male correctional facility, a location-adjusted rate of $44.83, and size-adjusted rates of $47.71 on the low end, to $57.60 on the high end.

   
   

10. The 2002 Work Group did not adjust the calculated consensus per diem rates to account for cost differentials in private correctional facility operation such as credits for property tax payments, corporate income and sales tax payments, and payments to a maintenance reserve fund. The Report notes that such adjustments were outside the scope of the Work Group’s responsibility, which was limited to identifying public facility operation costs.

11. In 2005, the Work Group convened again and developed consensus per diem rates utilizing the same methodology as used in 2002. The Work Group developed the following Per Diem Rates for operation of an adult male facility: an Overall Per Diem Rate of $51.90; an Alternative Per Diem Rate of $44.84; and

    Size-Adjusted Per Diem Rates of $51.26 on the low end, to $52.66 on the high end.

12. The 2005 Report on Operating Per Diem Rates does not mention further adjustment of the Adjusted Per Diem Rates to account for cost differentials in private facility operations such as credits for property tax payments, corporate income and sales tax payments, and payments to a maintenance reserve fund. However, the Report does include a note that public correctional facilities realize economies of scale by operating above their design capacity, an advantage that private facilities cannot obtain. Private facilities are limited, by both contract and

    
    

    the standards of the American Correctional Association, to operation at no greater than their design capacity.

13. The 2005 Report notes that the Work Group had not attempted to estimate the impact of economies of scale unavailable to private facilities.

14. In 2006, the Legislature removed the requirement that the Work Group convene on a yearly basis and replaced it with convention upon the call of the Speaker of the House of Representatives and the President of the Senate. See ch. 06-32,

    § 4, Laws of Fla.

    
    

    1. 2010 Procurement

       
       

15. In 2010, DMS rebid the contracts for Moore Haven and Graceville, which were previously operated by GEO Group, as well as the contract for Bay Correctional Facility, which was operated by CCA. CCA was awarded the contract to operate all three facilities.

16. To prepare the 2010 ITN, DOC first selected public correctional facilities similar in size, type, and location to the private facilities which were the subject of the ITN. DOC selected the New River Correctional Institution as similar to Bay and Moore Haven, and Wakulla Correctional Institution as similar to Graceville.

17. DOC separated the programming costs of those facilities from the security and indirect costs, arriving at the

    
    

    base per diem operating costs for the two comparable facilities. Next, DOC added in the costs for educational, health, and other programs based on the level of service required by the contract in the ITN.

18. CCA Deputy Chief Development Officer Lucibeth Mayberry testified that she did not recall whether CCA was aware of the methodology used to calculate the per diem rates for the 2010 ITN. She explained that the per diem rates are the bottom line of any competitive correctional facility procurement, and the 2010 rates allowed CCA to put in a competitive bid.

19. No direct evidence was introduced as to the advertised per diem rates included in the 2010 ITN. However, Ms. Mayberry testified that the current per diem rates by contract for Bay and Moore Haven are around $48.00, while that for Graceville is around $34.00.

    1. Post-2010 Cost Reductions

    
    

20. Since 2010, DOC has significantly reduced its cost to operate Florida’s public correctional facilities. According to an April 2013 report by OPPAGA, in Fiscal Year (FY) 2011-2012, per diem rates for operation of adult male correctional facilities housing inmates similar to the private facilities decreased an average of over 8% from the prior year. The average per diem rate for operation of an adult male public correctional facility for FY 2011-2012 was $42.00.

    
    

21. The DOC operating cost reductions are the result of the closure of several public facilities, including three adult male non-specialty facilities; consolidation of inmates from closed facilities; and workforce eliminations and reductions.

22. OPAGGA concludes that the primary cause of the decrease in per diem rates was the reduction in the amount contributed by the State to employee retirement. OPAGGA estimates that the statewide requirement for employee to contribute 3% to their retirement, together with the State decrease to special risk retirement, resulted in a savings of

    $88 million to DOC.

    
    

23. DOC has also reduced costs at public correctional facilities by changing its operations. The State maintains an 8% vacancy rate in correctional officer positions, allowing wardens flexibility to staff security posts according to highest priority on a daily basis, while leaving lower priority posts vacant. In FY 2011-2012, DOC began working its housing officers on 12-hour shifts, which allowed for further reduction in security costs. By consolidating inmates from closed facilities with those in operational facilities, DOC has realized an economy of scale in some facilities where more inmates are housed without increasing security costs.

24. The 2010 contracts for operation of Bay, Moore Haven, and Graceville correctional facilities expire in 2013.

    
    

25. In January 2013, DMS released the per diem rates for operation of similar facilities to be included in the ITN at issue. The published rates are 17% lower than the rates CCA is paid under the current contract to operate those facilities. Hence, the present controversy.

    The 2012 Per Diem Development Process

    
    

26. Michael Weber, DMS Bureau Chief of Private Prison Monitoring, contacted DOC Deputy Secretary Michael Crews on September 21, 2012, to obtain “key information” from DOC to prepare a document with which to solicit vendors for private correctional facility services at Bay, Moore Haven and Graceville correctional institutions. Key information includes the type of inmate (i.e., male, female, or youth), the custody level (i.e., close, medium, minimum, or community), inmate programs to be offered (e.g., re-entry and education, substance abuse), and the medical profiles of inmates to be housed at each of the three facilities.

27. On October 3, 2012, DOC Director of Institutions James Upchurch responded to DMS with a chart showing inmate type, custody, medical profiles, and programmatic profiles for each of the three facilities operating under the current contracts. DOC later notified DMS of adjustments in both custody and programmatic services for the Bay and Moore Haven facilities during the next contract period. Eventually, DOC decided

    
    

    against changing custody type of inmates housed at those facilities.

28. On October 9, 2012, DOC clarified the need to include within the ITN program services for up to 18% psychological grade three (S3) inmates at Bay and Moore Haven. No changes were made to correctional services provided at the Graceville facility under the current contract.

29. On October 10, 2012, DMS issued the ITN. As issued, responses to the ITN were due November 13, 2012, at 11:00 a.m., Eastern Standard Time.

30. The ITN includes the proposed contract and requires that proposals must be 7% less than the DOC-calculated per diem rate to be considered responsive. However, the ITN as issued did not contain the per diem rate for facilities substantially similar to Moore Haven, Bay, and Graceville.

31. On October 22, 2012, DOC Secretary Kenneth Tucker sent a letter to the Auditor General requesting an audit and certification of an attached set of spreadsheets calculating the per diem rates for public provision of correctional services at facilities comparable to Bay, Moore Haven, and Graceville.

32. The per diem rate for each facility was formulated by DOC in three steps: First, DOC selected a comparable facility; broke out the operating costs by security, administration, and programmatic services; and deducted costs for programmatic

    
    

    services (education, substance abuse, and health services) at the comparable facility. This calculation yielded a per diem rate for the comparable facility based solely on security costs and indirect, or administrative, costs. This rate is referred to as the “above-the-line” number for purposes of interpreting the spreadsheets for each of the three facilities.

33. The above-the-line per diem rate for each facility, as submitted to the Auditor General, was as follows: Bay and Moore Haven -- $41.76; Graceville -- $36.62.

34. Second, DOC multiplied the operations per diem for the comparable facility by the contracted population number for each facility. This calculation yielded operational costs for each of the three contracted facilities. DOC then added to that figure the costs associated with providing the programmatic services requested for the inmate population at each of the three facilities based on the proposed contract. This step yielded the unadjusted operational costs for each facility.

35. Third, DOC adjusted the total cost to account for cost savings realized by DOC through its policy of 12-hour shifts (which private providers cannot match), and deducted costs associated with work camps and work squads at the comparable facilities (private corrections providers do not operate work camps). The total costs to operate were adjusted to provide a per diem rate for operation at a private correctional facility

    
    

    that is comparable to operation at a public correctional facility. This step yielded the total adjusted operational cost for each facility.

36. The total adjusted cost was divided by the contract population for each facility to arrive at the adjusted per diem rate for each of the three facilities, as follows: Bay --

    $43.22; Moore Haven -- $42.38; Graceville -- $40.51.

    
    

37. For each facility, the adjusted per diem rate was slightly higher than the “above-the-line” per diem rate.

38. On October 26, 2012, DMS published on the State VBS a copy of the October 22, 2012, DOC letter to the Auditor General requesting certification of the per diem rates.

39. CCA staff testified they were shocked by the low per diem rates that DOC requested the Auditor General to certify. The published per diem for Bay and Moore Haven was 17% lower than the per diem certified by the Auditor General for the 2010 procurement in which CCA was awarded the current contract.

40. On October 31, 2012, Ms. Mayberry sent a letter to DMS outlining concerns with the proposed per diem rates in the DOC October 22, 2012, letter to the Auditor General. On November 1, 2012, Petitioner’s competitor, GEO Group, sent a letter to DMS raising similar concerns.

41. By letter dated January 24, 2013, the Auditor General’s office notified the Speaker of the House of

    
    

    Representatives and the President of the Senate of its completion of the audit of the DOC per diem rate calculations. In the intervening period, DMS issued 10 Amendments to the ITN, the majority of which extended the deadline for Responses from the original deadline of November 13, 2012.

42. The Auditor General’s letter reads in pertinent part:

    
    

    The Auditor General performed selected procedures to evaluate the 2011-12 fiscal year operating costs provided by the Department for the State-operated Holmes and Okeechobee Correctional Institutions that were identified by the Department as substantially similar to the privately- operated facilities. Operating per diems are primarily a function of costs and inmate population.

    
    

    * * *

    
    

    Based on the procedures performed, we concluded, pursuant to Section 957.07(1), Florida Statutes, that the 2011-12 fiscal year Holmes Correctional Institution operating per diem of $41.76 provided by the Department was reasonably consistent with the State’s accounting and budgeting

    records . . . . The Holmes Correctional Institution operating per diem of $41.76 is an appropriate amount to which necessary adjustment may be made for variations in Bay Correctional Facility and Moore Haven Correctional Facility operations.

    
    

    The letter proceeds with the same findings regarding the FY 2011-2012 operating per diem of $36.62 for Okeechobee Correctional Institution as “reasonably consistent with the State’s accounting and budgeting records” and “an appropriate

    
    

    amount to which necessary adjustment may be made for variations in the Graceville Correctional Facility operations.”

43. As such, the Auditor General’s process evaluated only the “above-the-line” per diem rates in each of the DOC spreadsheets and certified those amounts as the starting point for an adjusted per diem rate for each of the contract facilities.

44. On January 24, 2013, DMS posted the Auditor General’s letter as Amendment 11 to the ITN, as well as a spreadsheet for each of the three contract facilities titled “Public Per Diem with Adjustments.” There are two substantive differences between this publication and the October 22, 2012, spreadsheets provided to the Auditor General by DOC. First, the health care per diem rate was adjusted for both Bay and Moore Haven to account for increased health care costs to house up to 18% S3 inmates at those two facilities. Second, that change increased the adjusted per diem rates for the two facilities. As published on January 24, 2013, adjusted per diem rates for the contract facilities were as follows: Bay -- $43.76; Moore Haven -- $42.91; Graceville -- $41.05.

45. Notably, DMS published at the bottom of the spreadsheet for the Bay Correctional Institution, “Respondents must submit a per diem bid for the Bay Correctional Facility that is no greater than $40.69 to be considered responsive.”

    
    

    The spreadsheets for Moore Haven and Graceville contain the same language specifically incorporating the adjusted per diem rate as a term of the ITN and require bids be 7% below the adjusted per diem rate to be considered responsive.

46. On Monday, January 28, 2013, at approximately

    
    

    5:30 p.m., DMS again posted Amendment 11 and noted as follows:

    
    

    On January 24, 2013, the Department posted on the VBS two changes regarding the above- mentioned competitive solicitation.

    However, Amendment 11 was not completely posted. As such, the Department hereby posts Amendment 11 in its entirety.[1/]

    
    

47. Petitioner filed a notice of intent to protest the specifications of the ITN on January 30, 2013, and filed its Formal Bid Protest Petition on January 31, 2013.

    Petition and Issues

    
    

48. CCA challenges the ITN on both procedural and substantive grounds. Procedurally, CCA alleges DMS is authorized to procure contracts for the operation of private correctional facilities only by Request for Proposal (RFP) pursuant to section 957.07, Florida Statutes.

    1. Procedural Challenge/Waiver

       
       

49. DMS maintains CCA is precluded from challenging DMS’ choice to procure the private correctional institutional contracts by ITN rather than RFP. The ITN was issued on October 10, 2012, and no intent to protest was filed within

    
    

    72 hours. DMS argues that the issue of method of procurement has been waived.

50. DMS is correct, as more fully explained in the Conclusions of Law. In order to challenge DMS’ choice to procure private correctional facility operation through ITN rather than RFP, CCA should have filed a notice of intent to protest within 72 hours of DMS posting the ITN on October 10, 2012. Since CCA did not file a notice of intent to protest until January 28, 2013, that issue has been waived.

51. DMS also alleges that CCA waived many of the issues contained in its Petition because CCA did not file notice of intent to protest particular specifications of the ITN within

    72 hours of DMS posting the amendments which incorporated those specifications.

52. DMS maintains that CCA is limited in its challenge to whether the per diem rate published on January 28, 2013, accurately accounts for the cost of housing S3 inmates at Bay and Moore Haven. DMS reasons that the only change between the per diem amount published on October 26, 2012, and that published on January 28, 2013, is the small adjustment made to account for S3 inmates and, therefore, it is the only issue timely raised by CCA.

53. DMS’ position on this issue is not supported by the facts. The DOC letter to the Auditor General was not posted as

    
    

    an Amendment to the ITN; did not contain a notice of rights, pursuant to chapter 120.57(3), Florida Statutes; and was not incorporated into the ITN as a term thereof. Neither the above- the-line nor the below-the-line per diem rates had been reviewed or certified by the Auditor General on October 26, 2013, and the certification process was not complete. In fact, the certification process was not completed until January 24, 2013, some 90 days later.

54. DMS represents that CCA’s corporate representative admitted at hearing that CCA could have filed a bid specification protest on October 26, 2012, in response to DMS posting the letter to the Auditor General. However, the testimony of Ms. Mayberry does not bear that out:

    Q: Was that a discussion that was had internally with regard to different options and vendor relationships about how that might change with filing a protest as opposed to sending a letter?

    
    

    A: At that time, I don’t believe we had -– we knew a protest was possible in Florida and we had filed an intent to protest before which we had withdrawn. But at that time –- we didn’t have a certified per diem. We thought this was going to be fixed. We thought that when we raised concerns, that would be addressed.

    
    

    So I am giving you information because I don’t honestly remember exactly –- I don’t think a protest –- a protest seemed premature to us at that point because we didn’t have certified per diems, as that wasn’t –- we didn’t have the real per diem

    
    

    at that point. We just had the letter from DOC, which we felt certain was going to be adjusted.[2/]

    
    

    Ms. Mayberry did not admit that CCA had a point of entry to challenge the per diem rates in the October 22, 2012, letter; instead she insisted that the rates were not final and a challenge would have been premature.

55. Even if Ms. Mayberry had admitted that CCA could have challenged the posting on October 26, 2012, her opinion would not have been binding on the undersigned because it would have been a legal conclusion.

    1. Substantive Challenge

    
    

56. Next, CCA challenges the per diem rates included in the ITN through Amendment 11 on the following bases:

    1. The per diem rates are not based on the costs associated with comparable publicly operated correctional facilities. CCA maintains DOC acted arbitrarily in selecting the comparable facilities.

    2. DOC erred in adjusting the base per diem rate to account for costs associated with programmatic services to be provided under the contract in the ITN. CCA maintains that some adjustments were too high, while others were too low.

    3. DOC erred by not including adjustments to the base per diem rate to account for savings realized by operational

       
       

       changes at public institutions which cannot be made by a private vendor.

    4. Finally, CCA argues that the overall accounting methodology utilized by DOC is flawed.

57. In summary, CCA argues that the per diem rates for all three facilities are too low because DOC did not correctly choose substantially similar facilities as the bases for public per diem rates, and DOC did not accurately adjust the base per diem rates to fairly account for differences in public and private correctional facility operations.

    1. The Contract Facilities

       
       

58. CCA challenges DOC’s selection of the Holmes Correctional Institution for comparison to Bay and Moore Haven because Holmes is not “substantially similar” as required by the governing statute. Likewise, CCA challenges the selection of Okeechobee Correctional Institution for comparison to Graceville because it is not “substantially similar.”

59. Under the governing statute, DOC is charged with selecting a public correctional institution which is similar in “size, type, and location” to the facilities sought to be managed by a private correctional institution.

60. Size equates with inmate population of a correctional facility. Both Bay and Moore Haven have a design capacity of 985 inmates. Graceville is a larger facility designed to house

    
    

    1513 inmates. All three facilities are under contract to operate at design capacity.

61. There are three types of general correctional facilities: adult male, youthful offender, and female. There are also a number of specialty type institutions in the correctional system, such as reception and medical centers, maximum security, death row, and mental health.

62. Adult male facilities may house inmates at different custody levels (close, medium, minimum, and community) and with different health profiles (medical grades 1, 2, and 3; psychological grades 1, 2, and 3; wheelchair; and special needs). Inmates from different custody levels and health profiles may be housed together without changing the primary mission of the facility to a specialty institution.

63. Bay, Moore Haven, and Graceville are all adult male facilities, contracted for similar custody levels. Under the ITN, Bay and Moore Haven may accept inmates of medium, minimum, and community custody levels. Both are currently serving 100% medium custody inmates. Graceville is designated to accept close, medium, minimum, and community custody inmates and currently serves 40% close custody inmates.

64. The three facilities are also designated to accept inmates with similar health profiles. Under the ITN, Bay and Moore Haven will accept 84% medical grades 1 and 2, 16% medical

    
    

    grade 3, 82% psychological grades 1 and 2, 18% psychological

    
    

    grade 3, 2% wheelchair, and 6% special needs inmates. Graceville is designated to accept the same percentages of psychological grade inmates and wheelchair inmates, but may accept up to 5% special needs inmates and a small percentage of medical grade 4 inmates.

65. Location refers to the geographic location of a facility. DOC divides correctional facilities regionally. Both Bay (Bay County) and Graceville (Jackson County) are in

    Region 1. Moore Haven (Glades County) is located in Region 3.

    
    

66. For purposes of comparing correctional facility costs, location is significant when a facility is located in South Florida, where employees are paid a competitive area differential. Location is also a factor when an institution is remote from population centers, which may affect staffing and turnover rates.

    1. Substantially similar facilities

       
       

67. James Upchurch, DOC Assistant Secretary for Institutions and Reentry, selected the public correctional facilities “substantially similar” to the three contract facilities for purposes of calculating the base per diem.

    Mr. Upchurch came to Florida as Chief of Security Operations for DOC in 1996 following 26 years in operation of public correctional facilities in Mississippi and Arizona. He served

    
    

    as a warden in three different Arizona correctional facilities, including a super max facility, and was a regional director for the State of Arizona as well.

68. Mr. Upchurch was DOC Chief of Security Operations from 1996 until 2011, when, after a brief stint as warden at Franklin County Correctional Institution, he became DOC Director of Operations. In March 2012, Mr. Upchurch was promoted to Assistant Secretary of Institutions and Reentry and now supervises region directors, the deputy assistant secretary for institutions, and the deputy assistant secretary for reentry. Altogether, Mr. Upchurch has 17 years of experience in Florida’s correctional facility operations.

69. After excluding the DOC specialty institutions, Mr. Upchurch identified two institutions similar to Bay and Moore Haven and two institutions similar to Graceville for further review. He asked Vicki Newsome, DOC Assistant Bureau

    Chief for Population Management and Classifications Services, to pull the facility profiles for comparison.

    1. Bay and Moore Haven

       
       

70. In his initial analysis, Mr. Upchurch chose Holmes Correctional Facility and Lawtey Correctional Facility as comparable to Bay and Moore Haven and reviewed their facility profiles. Holmes, Bay, and Moore Haven are all located in Region 1 and house adult male inmates.

    
    

71. Lawtey does not house S3 inmates and Holmes only houses one S3 inmate. Both Bay and Moore Haven will house up to 18% S3 inmates under the ITN. According to the data reviewed by Mr. Upchurch, Holmes houses 37% close custody inmates, while Lawtey houses no close custody inmates. Neither Bay nor Moore Haven is contracted to house close custody inmates.

72. Holmes is not a stand-alone facility, but rather includes a work camp which is physically separated from the perimeter of the main facility. Lawtey is a stand-alone facility, as are Bay and Moore Haven.

73. Bay and Moore Haven have similar layouts –- four large dorms housing between 250 and 400 inmates each, and one much smaller dorm housing a small number of segregated inmates. By comparison, Lawtey’s inmate population is spread among 10 dorms, one housing 200 inmates and the remainder housing roughly 80 inmates each. Much like Bay and Moore Haven, Holmes houses its population in a series of larger dorms, one housing 250 inmates, seven housing just under 150 inmates each, and one much smaller dorm housing around 60 segregated inmates.

74. Lawtey is a faith- and character-based institution.

    
    

    Bay, Moore Haven, and Holmes are not faith- or character-based.

    
    

75. For the 2010 procurement, DOC had chosen the New River facility as comparable, but that facility has since closed. Holmes and New River are 2 of 15 state correctional institutions

    
    

    built on a prototypical layout –- administration and support at the front of the compound, recreation wellness yard in the back, housing units in the middle, and a separate work camp on the grounds but physically separated from the perimeter of the main compound.

76. In the final analysis, Mr. Upchurch selected Holmes as the facility most comparable to Bay and Moore Haven. He based this selection, in large part, on the fact that Holmes was so similar to the New River facility selected for the prior procurement.

77. Mr. Upchurch ruled out Lawtey in his final analysis because it is a faith- and character-based institution, which he testified increases security costs. Further, the layout and dorm capacities of Lawtey are not as efficient as the larger dorms at Bay and Moore Haven. Mr. Upchurch did not verify that Lawtey actually had higher security per diems because it was faith-based. In fact, he explained that the only way to verify that mathematically would be to remove the faith- and character- based mission and compare the resultant costs with the prior costs.

78. Identifying a public correctional institution substantially similar to Bay and Moore Haven is indeed a difficult task. At a contracted inmate population of 985 each, Bay and Moore Haven are significantly smaller than the average

    
    

    adult male public correctional facility. This was true in 2005 when the Per Diem Workgroup was convened to formulate a consensus per diem rate. This disparity in size has only increased in recent years as many public institutions have been closed and their populations consolidated.

79. In FY 2011-2012, only 7 of the 30 public adult male facilities had an average daily population of fewer than 1,500 inmates. Both Lawtey and Holmes are among the seven.

80. The populations of Lawtey and Holmes differ significantly, however. Holmes averaged 1,466 inmates per day in FY 2011-2012, while Lawtey averaged 805. The difference in population between Bay and Moore Haven and that of Lawtey is

185. The difference in population between Bay and Moore Haven and that of Holmes is 481.

1. The evidence was uncontroverted that facility size is one of the most important variables in determining correctional facility costs. The larger the inmate population, the more security is needed. More security means more salaries and benefits.

2. Mr. Upchurch selected Holmes as comparable to Bay and Moore Haven based on its similarity to New River, one of the same prototypes as Holmes, and the similar inmate housing patterns, which were known to him to require similar staffing patterns. Although Holmes has a work camp, which Bay and Moore

   
   

   Haven do not, Mr. Upchurch expected the security costs associated with the work camp (separate perimeter patrol and additional security staffing) would be removed from the per diem rate. Furthermore, Mr. Upchurch considered the security staffing requirements of Lawtey based on his experience not just in Florida, but in his entire 43-year career in public correctional facility operation.

3. Mr. Upchurch’s decision to select Holmes as substantially similar to Bay and Moore Haven was not made without thought or reason or in an illogical manner.

   1. Graceville

   
   

4. For Graceville, Mr. Upchurch narrowed the decision down to Everglades and Okeechobee correctional institutions, both adult male facilities in Region 4.

5. Everglades and Graceville are similar in population size and inmate profiles. Both facilities house over 1500 inmates. Both house large percentages of close custody inmates (Everglades –- 54%; Graceville –- 42%), and both house S3 inmates, although at different percentages.

6. Mr. Upchurch eliminated Everglades for two reasons.

   
   

   First, based on its location, the facility has experienced high staffing turnover, which has increased hiring and training costs. Second, Everglades has a higher percentage of S3 inmates (24%) than contracted for at Graceville (18%).3/

   
   

7. The evidence was uncontroverted that S3 inmates increase per diem rates because of the cost of psychotropic drugs administered to those inmates.

8. Mr. Upchurch also testified that the presence of S3 inmates can increase security costs. S3 inmates have more disciplinary problems, are more spontaneous, and are more difficult to manage. Mr. Upchurch testified that when a large number of S3 inmates are housed together, they “feed off one another” and create more disturbance. When asked specifically what percentage of S3 inmates would create an increased security cost, Mr. Upchurch estimated around one-third of the population. The number of S3 inmates housed at Everglades does not rise to that level.

9. Mr. Upchurch selected Okeechobee as the facility most substantially similar to Graceville for comparison. The facilities have similar inmate populations –- both house over 1500 inmates with high percentages of medical grades 1 and 2 inmates, similar numbers of special needs inmates, and no wheelchair inmates. However, as emphasized by CCA, Okeechobee serves no S3 inmates.

10. Mr. Upchurch focused on the design efficiencies of the two facilities. Both Okeechobee and Graceville house a large number of inmates in a small number of dorms. The six “T building” dorms at Okeechobee house up to 230 inmates each. The

    
    

    four main dorms at Graceville house approximately 400 inmates each. This design is intentional and creates efficiencies in the officer-to-inmate ratio. Many of the other DOC facilities have multiple smaller “open bay” dorms with less efficient operation.4/ More inmates in fewer dorms equates with lower security costs.

11. Mr. Upchurch also noted that both Okeechobee and Graceville are stand-alone facilities, meaning only one correctional facility is contained within the perimeter.5/ Upchurch testified that, where possible, it is preferable to compare the per diem rates of stand-alone facilities.

12. Mr. Upchurch disagreed with DOC’s selection of the Wakulla Correctional Facility as comparable to Graceville for the 2010 procurement process. The Wakulla facility is actually three different institutions within one: Wakulla Correctional, Wakulla Annex, and Wakulla Work Camp.6/ The facility operates three separate perimeter security details, three separate control rooms, and three sets of security supervisors.

    Mr. Upchurch testified that he objected to the selection of Wakulla because no adjustment was made to the Wakulla security per diem rate in 2010 to account for the higher security per diem at Wakulla. Thus, he disagreed that Wakulla was comparable.

    
    

13. CCA assigns error to Mr. Upchurch’s choice of Okeechobee over Everglades as comparable to Graceville. CCA highlights that Okeechobee houses no S3 inmates, and, therefore, does not incur costs associated with psychotropic drugs for those inmates. Further, CCA notes that between the two comparable facilities, Mr. Upchurch chose the one with the lower total per diem rate -- $33.23 at Okeechobee versus $45.82 at Everglades.

14. The higher per diem rate at Everglades is a factor in both a higher security per diem and a higher health per diem than at Okeechobee. Everglades’ security per diem is $28.00 while Okeechobee’s is $23.99. Higher recruiting and training costs due to turnover likely account for that difference. The health per diem at Everglades is also higher -- $17.14 compared with $8.64 at Okeechobee. The treatment of 24% S3 inmates likely accounts for this higher rate.

15. Mr. Upchurch was aware that the contract with Graceville required the facility to house up to 18% S3 inmates. He did not ignore that requirement in selecting Okeechobee over Everglades. Mr. Upchurch was aware of the process of adjusting the per diem rate of the selected comparable facility to account for the specific programs under the contract. The cost of housing S3 inmates at Graceville was accounted for in the adjustment process.

    
    

16. Mr. Upchurch selected Okeechobee as substantially similar to Graceville based upon his significant knowledge regarding the operations of all the DOC facilities. The choice was informed by the size, type, and location of the facilities, as well as the physical layout, size of dorms, efficiencies of staffing, and similarity of inmate profiles.

17. For FY 2011-2012, DOC operated 30 adult male facilities. Of those, 18 had an average daily inmate population of 1500 or higher, as does Graceville. Both Graceville and Okeechobee are stand-alone facilities housing large numbers of inmates in few dorms, which increases staffing efficiencies. Overall, the undersigned does not find that Mr. Upchurch’s choice of Okeechobee was arbitrary, capricious, or erroneous.

18. CCA further assigns error to DOC’s selection of substantially similar facilities because DOC did not undertake a formal process or analytical exercise to select those facilities. It is true that Mr. Upchurch did not review documentation on all 48 DOC correctional facilities, or otherwise consult DOC records, prior to narrowing the choices to two facilities similar to Bay and Moore Haven and two facilities similar to Graceville.

19. Mr. Upchurch relied upon his 17 years of experience in state correctional facility operations, including his knowledge of the facilities’ design, layout, staffing and programming.

    
    

    Once he narrowed the choices, he requested and reviewed the inmate profiles for comparable facilities to the private facilities. As such, his selections were not arbitrary or capricious.

    1. Errors Calculating Program Costs

       
       

20. Having identified Holmes as substantially similar to Bay and Moore Haven, and Okeechobee as substantially similar to Graceville, DOC began with each facility’s base security per diem plus administrative costs, and multiplied that figure by the contracted population for each of the contracted facilities.

21. To that base operational cost figure, DOC added costs for health services, educational, substance abuse, and behavioral/transition services based on the draft contract in the ITN. DOC program staff specializing in each area calculated the cost to provide the contracted services.

22. Errors were made in those calculations which were admitted to at the final hearing.

23. The health services per diem of $7.82 added to the Bay security per diem was in error. The correct rate is $8.28. As such, the per diem rate published in Amendment 11 for Bay was incorrect.

24. The health services per diem for Graceville was calculated incorrectly as $12.46 rather than $12.56. As such,

    
    

    the per diem rate published in Amendment 11 for Graceville was incorrect.

25. Next, DOC calculated the mental health programmatic costs associated with housing S3 inmates at Bay and Moore Haven as required by the ITN. CCA alleges DOC made an error in calculating that amount because it relied upon FY 2011-2012 pharmacy expenditure data to determine the amount spent on psychotropic drugs, rather than relying on the data from the state accounting system known as FLAIR.

26. Mark Tallent, DOC Director of Budget and Finance, testified that the pharmacy data is a more accurate accounting of the actual amount DOC spent on psychotropic drugs than the FLAIR data. The state accounting system appropriated approximately $11 million for psychotropic drugs and the FLAIR data shows DOC spent over $6 million out of that category. However, Mr. Tallent testified that DOC paid bills for other types of drugs, such as infectious disease drugs, out of that category, so the number is inflated and unreliable as it relates to psychotropic drugs exclusively. He testified that the pharmacy system is more accurate because it correlates each individual prescription with an inmate at a particular facility, allowing for an accurate accounting of the institutional costs for each specific type of drug.

    
    

27. Mr. Tallent’s testimony is accepted as credible and reliable. DOC did not err when it calculated the per diem cost of psychotropic drugs based on the figure of $5,045,018 from

    FY 2011-2012 pharmacy data.

    
    

    1. Errors in Additional Adjustments

       
       

28. The governing statute requires DOC to “calculate all the cost components that determine the inmate per diem in correctional facilities of a substantially similar size, type, and location that are operated by the Department of Corrections, including administrative costs associated with central administration.” § 957.07(1), Fla. Stat.

29. The statute also directs DOC to make some adjustments to account for the public nature of the operation. DOC must include in the per diem an equivalent cost of services that are provided to DOC by other governmental agencies at no direct cost to the agency. Id. Also, the statute requires DOC to include as a cost savings in the calculation of the per diem rate “reasonable projections of payments of any kind to the state or any political subdivision thereof for which the private entity would be liable because of its status as a private rather than public entity,” including corporate income and sales tax payments. § 957.07(2), Fla. Stat.

30. DOC made a number of additional adjustments to account for operations unique to public correctional facilities

    
    

    to arrive at a per diem rate more comparable to that of a private facility. While all these adjustments are not required by statute, they are examined for their accuracy.

    1. 12-hour shifts

       
       

31. DOC adjusted the per diem to account for the cost savings realized at Holmes and Okeechobee by operating housing security personnel on 12-hour shifts.

32. In calculating the 12-hour shift adjustment, DOC failed to add back in the cost of providing security staff at the private facilities associated with covering the 4 hours essentially unmanned when the cost of the 12-hour shifts were removed. In other words, DOC deducted too much cost when making this adjustment. As such, the per diems published in Amendment

    11 for Bay, Moore Haven, and Graceville were incorrect.

    
    

    1. Work Squads

       
       

33. DOC also adjusted the per diem by backing out the costs associated with the work squads at Holmes. A correctional facility work squad may perform services such as landscaping, maintenance, or other jobs both on the facility grounds and “outside the fence.” DOC removed the costs associated with work squads under the mistaken impression that none of the private facilities operate work squads.

34. However, Bay and Moore Haven operate work squads in the community, which require supervisory security personnel. As

    
    

    such, the per diem amount published in Amendment 11 for Bay and Moore Haven was incorrect.

    1. Work Camps

    
    

35. Holmes operates a work camp on its grounds, although it is physically separate from the main unit. The work camp requires both separate perimeter security and supervisory security. DOC adjusted the per diem rate for Bay and Moore Haven to exclude the security costs attributable to the work camp at Holmes. CCA argues that DOC erred by deducting only the security costs attributable to the Holmes work camp, but not other costs associated with the inmate population at the work camp, since private correctional facilities do not operate work camps.

36. Mr. Tallent testified there is no way to back out the costs associated with the work camp at Holmes, other than the salaries and benefits of the security officers, because it is the same budget entity as Holmes Correctional Institution and the costs cannot be separated. No evidence was presented regarding the specific costs CCA expected to be removed, or the amount of those costs.

37. Given the accounting structure of the DOC system, and the uncontested fact that security costs are the driving factor in calculation of correctional facility per diem rates, the

    
    

    undersigned does not find that DOC erred in removal of only the security costs at Holmes.

    1. Additional Alleged Errors

       
       

38. CCA assigns error to DOC for failure to make additional adjustments to the per diem rates in the ITN.

    1. Utility service charge

    
    

39. Moore Haven pays a monthly utility service charge of

    
    

    $25,000, which is extraordinarily high. This service charge was not disclosed to CCA by the predecessor operator, GEO Group, and CCA did not take it into account in preparing its response to the 2010 ITN.

40. No evidence was presented to establish that this utility surcharge is paid by the operator of Moore Haven because of its status as a private rather than public entity. If it were, DOC would be required by law to include it as a cost savings when calculating the per diem rate. Without that evidence, the undersigned cannot find that DOC erred by not adjusting the per diem to account for it.

41. DOC has offered to make an adjustment in the per diem to account for this service charge. However, DOC’s offer to make an adjustment during negotiations does not prove an error on its part.

    
    

    2. Lapse Factor/Vacancy Rate

    
    

42. Next, CCA argues DOC erred by not adjusting the per diem rate to account for the DOC “lapse factor.”

43. Contradictory evidence was introduced as to the meaning of “lapse factor” and the related term “vacancy rate.” Based on the preponderance of the evidence, the lapse factor is the percentage of DOC security positions which are temporarily vacant due to normal turnover, during which time recruitment and training of new officers occurs. Mr. Upchurch testified that DOC generally runs a 3% lapse factor.

44. A vacancy rate, on the other hand, is the percentage of positions which remain intentionally unfilled due to a hiring freeze or other cost-saving measure. DOC operates with roughly an 8% vacancy rate as part of its budget cutbacks.

45. For the purpose of the contract sought via the ITN, a vacant position is defined to occur “when the employee assigned to that position has resigned, been terminated, or is reassigned to another position.”7/ The terms of the draft contract do not allow the private correctional facility operator to run a blanket vacancy rate. In fact, the operator will incur a vacancy deduction for positions not filled with permanent employees or contracted staff within 30 days after a position becomes vacant, unless a waiver has been granted.8/

    
    

46. Petitioner argues that DMS erred in not adjusting the per diem rate to account for operation of the public correctional facilities with across-the-board vacancies. DMS testified, and has apparently agreed, that such an adjustment would be fair to account for vacancy rates above the normal 3% lapse factor.

47. Moreover, Petitioner argues that the adjustment should be high enough to account for vacancies in actual posts at comparable institutions. Each warden at each public correctional facility has the flexibility to leave positions, or posts, unfilled on a given day based on the security priority of the post. DOC classifies posts into level 1, 2, and 3 priority positions. Level 1 posts are critical to daily operation of a shift. Level 2 posts are essential to the daily normal operation of a facility and allow all activities and programs to be marginally staffed. Level 3 posts are necessary for long term normal operations.

48. In order to fill a level 1 post, a warden may move to a level 1 post an officer assigned to a level 2 or 3 post for that day; limit non-critical activities, such as recreation or work squads; or pay overtime to fill the level 1 post. Level 3 posts are generally utilized prior to level 2 posts to fill level 1 vacancies.

    
    

49. Jinanne West, CCA Senior Director of Financial Planning and Analysis, analyzed the security post charts and daily rosters for the Holmes and Okeechobee facilities. She found that for FY 2011-2012, Holmes had an average security post non-fill rate of 17%, with level 3 posts vacant 73% of the time and level 2 posts vacant 39% of the time. During the same time period, Okeechobee ran an average non-fill rate of 26% with level 3 posts vacant 94% of the time and level 2 posts vacant 72% of the time.

50. CCA’s argument, however, assumes private facilities are required to staff their facilities exactly as public facilities do. The draft contract included as part of the ITN does not bear out that assumption.

51. With respect to security staffing, the contract provides, in pertinent part, as follows:

    1. Security Staff Utilization: CONTRACTOR shall develop and implement Security staff utilization in accordance with DC policy and procedure that includes, but is not limited to the following:

       
       

       1. A table of organization for the security staff for the maximum inmate population for the Facility and the position qualifications, job descriptions, pay levels, number of persons per post, distribution by shift, and security staff to inmate ratio in each housing unit by shift.

    
    

    5.28.6.2 A detailed Security Post Chart outlining how key functions/duties will be staffed.

    
    

    6.3 PERSONNEL.

    
    

    * * *

    
    

    1. CONTRACTOR will provide the Department with a finalized staffing pattern prior to the Service Commencement Date. Positions will be staffed with qualified employees in accordance with the staffing pattern attached hereto as in

       [Exhibit , to be provided by

       the CONTRACTOR]. CONTRACTOR’S

       staffing pattern must be submitted and approved by the Contract Manager prior to the Service Commencement Date. Any modifications to the position requirements or the staffing pattern must be approved in writing by the Contract Manager.

       
       

       * * *

       
       

    2. Sufficient certified security staff shall be employed at all times to assure that all positions identified as critical complement on the approved staffing pattern, are manned, at all times, for each shift, unless a departure from the staffing pattern has been approved in writing by the Contract Manager.

    . . . CONTRACTOR shall be required to fill critical complement positions by using overtime or other qualified staff members to ensure that staffing levels do not decrease below the established critical complement. (emphasis added)

    
    

52. The private contractor is charged with developing the security staffing pattern for its facility, including the job descriptions, pay levels, number of persons per post, distribution by shift, and security staff to inmate ratio per housing unit. While the contract may penalize the private operator for vacant positions left unfilled after 30 days, no evidence was introduced from which the undersigned can infer that private operation lends itself to any higher than normal lapse rate. It is illogical to count as a cost to the private operator the savings realized by public sector cutbacks. The Legislature intends to ensure more efficient private operation by including the 7% cost-saving requirements.

53. CCA also argued that DOC has an advantage because it maintains high vacancies in individual posts at the level 2 and

    3 positions, which private operators cannot do without incurring a vacancy deduction penalty. Again, the contract does not bear that out. The vacancy deduction is tied to vacancies of positions due to resignation, termination, or reassignment. There is no evidence from which to conclude that private operators are separately penalized by running vacancies in individual posts at an institution. In fact, the contract specifically provides for flexible staffing of the private correctional facility similar to that of the public facility –- filling critical complement posts at all times, authorizing the

    
    

    movement of employees from other posts and the use of overtime if necessary.9/

    3. Reception and Medical Center Cost

    
    

54. Next, CCA argues that the per diem rates published in Amendment 11 are artificially low and should be further adjusted to account for health care administered to inmates at public reception and medical centers (RMCs). RMCs are public correctional facilities which conduct initial health screening of inmates at intake and may provide medical care to existing inmates as well. Inmates at public institutions may receive health care at RMCs, but the state pays for that health care out of a budget separate from the institution’s budget. In other words, public correctional facilities may send an inmate to an RMC for care and not pay for that care out of the facility’s budget. CCA argues that since it will be charged with the cost to treat inmates at an RMC, the per diem rate should account for that difference as a savings to the public correctional facility.

55. What CCA fails to include in the discussion is the fact that a private correctional facility operator is authorized to use the RMC as a cost-saving measure. Private correctional facilities are required to provide health care, including emergency care, to its inmates offsite only when the onsite Chief Health Officer determines an inmate cannot be treated

    
    

    properly in the facility itself. Only then is the private facility authorized to seek offsite hospitalization or other offsite treatment. The vendor is solely responsible for the costs of the offsite treatment, including the security costs of treating or hospitalizing an inmate offsite. The transfer agreement authorizes the private correctional facility to use the RMC, when space is available, as an alternative to minimize security costs for offsite treatment of the private correctional facility’s inmates.

56. Under these facts, the undersigned cannot find that DMS erred by not including an adjustment to the per diem rate to account for treatment costs of private correctional facility inmates at RMCs.

    4. PILOT Fees

    
    

57. Next, CCA argued that the published per diem rates are in error because they were not adjusted to account for the fees paid by the private correctional facility to the local government as Payments in Lieu of Taxes (PILOTs). A PILOT is made to compensate local governments for the tax revenue lost by virtue of the public correctional facility property being used for a governmental function.

58. DOC does not pay property taxes or PILOT fees related to Holmes, and no such fees are included in the Holmes per diem rates. However, the Bay and Moore Haven facilities are subject

    
    

    to PILOT fees required to be paid to local governments. Such fees are deducted from payments due to private correctional facility operators pursuant to the ITN, and are paid directly to the local governments assessing such fees.

59. Pursuant to section 957.07(2), Florida Statutes,

    
    

    [r]easonable projections of payments of any kind to the state or any political subdivision thereof for which the private entity would be liable because of its status as private rather than a public entity, including, but not limited to, corporate income and sales tax payments, shall be included as cost savings in all such determinations.

    
    

60. PILOT fee payments for Bay and Moore Haven are clearly included within the definition of section 957.07(2), Florida Statutes. Accordingly, PILOT fee payments for Bay and Moore Haven should have been included as an adjustment in the Amendment 11 per diem rate spreadsheets. Because PILOT fees were not included in the per diem rates published in

    Amendment 11 for Bay and Moore Haven, the rates were incorrect.

    
    

    5. Major Maintenance and Repair Fund

    
    

61. The ITN requires payments to be made by private correctional facility operators to the Major Maintenance and Repair Fund (MMRF). MMRF monies are used by the private facilities for maintenance, repairs, and renovations. Payments to the MMRF are deducted by DMS from payments due to private

    
    

    correctional facility operators, thereby reducing the per diem rate paid to private contractors.

62. CCA argues that the per diem rates published in Amendment 11 are erroneous since those rates were not adjusted for MMRF payments. However, if the entire MMRF amount were credited to the private correctional facility, the per diem would not include any costs associated with regular repairs, maintenance, or other facility improvements. The amount paid into the MMRF is returned to the private correctional facility when repairs and maintenance are needed and conducted. There may be better ways to account for the maintenance costs of the private correctional facilities, but the undersigned finds no error in the per diem rate calculation on that basis.

    6. Fleet Payments

    
    

63. CCA contends the per diem rates should be adjusted to account for the requirement that the private correctional facility acquire a vehicle fleet for each of the three facilities, and that DMS erred in excluding the vehicle fleet costs for Holmes and Okeechobee when calculating the per diem rates.

64. In calculating per diem rates, DMS excluded the one- time fleet cost of $573,986 associated with the purchase of the State vehicle fleet to operate the comparable public correctional facilities. The uncontroverted testimony of

    
    

    Mr. Tallent was that those costs were excluded because the fleets were acquired at the time the Holmes and Okeechobee facilities were first constructed. For example, the Holmes fleet was acquired 24 years ago. Because vehicle costs have changed dramatically during the intervening years, any adjustment to account for fleet cost would be insignificant. Additionally, Mr. Tallent testified that adjusting the per diem rate to account for the fleet charge would provide a windfall to a company, such as CCA, which was currently operating one of the facilities if it was awarded the contract again.

65. At one point, CCA expressed that they were not actually concerned with whether the fleet acquisition cost had been incorporated into the per diem, but rather whether ongoing maintenance costs were included.10/ Mr. Tallent’s testimony was uncontroverted that the operating per diem of the public facilities includes all vehicle maintenance and fuel costs.11/ As such, the undersigned finds that DMS did not exclude vehicle fleet maintenance and fuel costs. The ITN requires private correctional facility operators to provide a fleet of vehicles for use at the Bay, Graceville, and Moore Haven facilities.12/ Given the greater weight of the evidence, the undersigned finds that excluding the fleet costs from the per diem rates incorporated as Amendment 11 was not erroneous.

    
    

    7. Economies of Scale

    
    

66. Last, CCA argues that the per diem rates should be adjusted to account for the economies of scale realized at Holmes and Okeechobee because these facilities are operated above design capacity. CCA maintains this adjustment is necessary since Bay, Moore Haven, and Graceville may not exceed design capacity under the contract.

67. Mr. Upchurch agreed that an economies of scale adjustment would be appropriate if a reasonable way to calculate that adjustment could be determined.

68. The 2005 Per Diem Workgroup was convened to establish per diem operating rates for private correctional facilities which would be comparable to operation of public facilities.

    The report provides, “[t]he workgroup has not attempted to estimate the impact of economies of scale that are not available to private facilities. The workgroup, however, was provided with two estimates ranging from $6.66 per day from the Auditor General’s office to $7.10 per day from Geo Group.”13/ Although the Workgroup report refers to the Auditor General's estimate as an attachment thereto, the estimate was not attached to the report introduced into evidence. Further, no testimony was presented relating to whether the estimates from either the Auditor General or GEO Group were reasonable or otherwise reliable.

    
    

69. Given the lack of evidence on whether, and by what methodology, an economies of scale adjustment could be calculated, the undersigned does not find that DMS erred by excluding an adjustment for economies of scale.

    1. Accounting Error

    
    

70. Jinanne West is CCA’s Senior Director for Financial Planning and Analysis. Ms. West has a master’s degree in accounting and is a certified public accountant. Prior to joining CCA, Ms. West worked for Arthur Andersen for three years, and then taught college accounting.

71. Ms. West evaluated the spreadsheets used to calculate the public comparable per diem rates for Bay, Moore Haven, and Graceville and found fundamental accounting errors.

72. To determine DOC’s per diem cost to operate the Bay and Moore Haven facilities, the Amendment 11 per diem rate spreadsheets divided Holmes’ operating costs by its average inmate population of 1,466 to arrive at a per diem rate, but then multiplied the per diem rate by the Bay and Moore Haven inmate populations of 985 to determine the daily costs associated with programming at those facilities. As a result, all operating costs attributable to Holmes were reduced by 33% (1,466 minus 985 divided by 1,466) to arrive at DOC’s projected operating costs to operate a 985-bed facility similar to Holmes.

    
    

73. DOC then deducted from the remaining 67% of the Holmes operating costs 100% of the Holmes costs related to Holmes work squads and Holmes work camp staff, and additionally deducted 100% of the savings expected at Holmes due to the transition to 12-hour shifts. However, costs attributable to Holmes work squads and Holmes work camp staff and savings attributable to the 12-hour shift adjustment had already been reduced by 33% in the Amendment 11 per diem rate spreadsheets, given the difference in population between Holmes and the Bay and Moore Haven facilities. By deducting 100% of these costs and expected savings from the remaining 67% of the Holmes operating costs, DOC in effect incorrectly deducted 133% of Holmes’ costs and anticipated savings from the per diem rates.

74. A similar error was found in the spreadsheet for Graceville. The inmate population at Okeechobee is slightly smaller than that at Graceville, leading to erroneous adjustments to the per diem for program costs and adjustments made to account for operational differences at Okeechobee.

75. Due to this error in accounting methodology, the per diem rates published in Amendment 11 for Bay, Moore Haven, and Graceville were incorrect.

    
    

    CONCLUSIONS OF LAW

    
    

76. The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of this proceeding. See §§ 120.569 and 120.57(3), Fla. Stat. (2012). Waiver

77. Subsection 120.57(3)(b) provides in part:

    
    

    With respect to a protest of the terms, conditions, and specifications contained in a solicitation, including any provisions governing the methods for ranking bids, proposals, or replies, awarding contracts, reserving rights of further negotiation, or modifying or amending any contract, the notice of protest shall be filed in writing within 72 hours after the posting of the solicitation. The formal written protest shall be filed within 10 days after the date the notice of protest is filed. Failure to file a notice of protest or failure to file a formal written protest shall constitute a waiver of proceedings under this chapter.

    
    

78. The policy expressed by subsection 120.57(3)(b) is that vendors must complain early if they are unhappy with the procurement method the agency chooses, or their right to complain will be waived. See Tex. Aquatic Harvesting, Inc. v.

    Dep’t Envtl. Prot., Case No. 06-4217BID (Fla. DOAH Feb. 27, 2007), mod. in part, Case No. 06-2223 (Fla. DEP March 29, 2007)(concluding that bidder who did not challenge the RFP within 72 hours of issuance waived the right to challenge agency’s use of the ITN without written findings that an RFP was not practicable).

    
    

79. As explained by Administrative Law Judge Cave in Correctional Services Corporation v. Department of Juvenile

    Justice, Case Nos. 02-2966BID and 02-2967BID (Fla. DOAH October 29, 2002):

    The policy underlying this requirement and the waiver provision is obvious: If a would- be offeror takes issue with the State's proposed method of procurement, it should challenge that method at the inception, so that any legal or other element of the state's request can be remedied in a timely fashion, rather than at the end of the process.

    
    

80. In the case at hand, the agency issued the ITN on October 10, 2012, and issued 11 separate amendments thereto over the next three months. However, Petitioner did not challenge the agency’s use of the ITN until January 30, 2013. As such, Petitioner has waived the right to challenge the agency’s method of procurement.14/

81. The Department next alleges that CCA has waived the right to challenge any basis on which DMS or DOC formulated the per diem rate other than the mental health services per diem. The Department’s argument is based on the fact that the mental health services per diem is the only part of the published per diem worksheet which changed between the posting of the letter to the Auditor General on October 26, 2012, and the publication of Amendment 11 on January 22, 2013. In essence, the Department argues that Petitioner was required to have challenged DOC’s

    
    

    letter to the Auditor General posted on the VBS in order to have timely challenged any basis on which the per diem amount was calculated.

82. The Department’s argument is not persuasive. The letter to the Auditor General was not posted as an Amendment to the ITN, was not accompanied by a Notice of Rights pursuant to chapter 120, and was not incorporated as a term of the ITN.

83. It is a fundamental tenet of administrative law that when an agency determines a party's substantial interests, the agency must grant the affected party a clear point of entry into formal or informal proceedings under chapter 120. The point of entry cannot be "so remote from the agency action as to be ineffectual as a vehicle for affording [the affected party] a prompt opportunity to challenge" the decision. See, e.g., Gen. Dev. Util., Inc. v. Dep't of Envtl. Reg., 417 So. 2d 1068, 1070 (Fla. 1st DCA 1982). The Department’s action of posting a letter from DOC to the Auditor General requesting an audit of an attached per diem spreadsheet is far removed from the Department’s final decision to incorporate the DOC per diem rates, as certified by the Auditor General and as further adjusted by DOC, as a term of the ITN.

84. Unless and until a clear point of entry is offered, "there can be no agency action affecting the substantial interests of a person." Fla. League of Cities, Inc. v. State of

    
    

    Fla., Admin. Comm'n, 586 So. 2d 397, 413 (Fla. 1st DCA 1991). Indeed, absent a clear point of entry, "the agency is without power to act." Id. at 415. The Department’s position is contrary to basic administrative principles. It is disingenuous for the Department to argue that Petitioner’s only opportunity to challenge the per diem rates was when the letter was posted on October 22, 2012, although the final decision on per diem rates was not made until three months later. Petitioner’s substantial interests were affected, and the commensurate point of entry was afforded, when Amendment 11 was posted incorporating the final adjusted per diem rates as a term of the ITN. Petitioner timely challenged the per diem rates and all bases on which they were formulated, including the choice of substantially similar facilities.

85. Section 120.57(3)(f) provides that:

    
    

    the burden of proof shall rest with the party protesting the proposed agency action. In a competitive-procurement protest, other than a rejection of all bids, proposals, or replies, the administrative law judge shall conduct a de novo proceeding to determine whether the agency’s proposed action is contrary to the agency’s governing statutes, the agency’s rules or policies, or the solicitation specifications. The standard of proof for such proceedings shall be whether the proposed agency action was clearly erroneous, contrary to competition, arbitrary, or capricious.

    
    

86. The nature of the de novo review in a bid protest proceeding has been established as follows:

    [T]he phrase 'de novo hearing' is used to describe a form of intra-agency review. The judge may receive evidence, as with any formal hearing under section 120.57(1), but the object of the proceeding is to evaluate the action taken by the agency. See Intercontinental Properties, Inc. v. State Department of Health and Rehabilitative Services, 606 So. 2d 380 (Fla. 3d DCA 1992).

    
    

    State Contracting and Eng’g Corp. v. Dep’t of Transp., 709 So. 2d, 607, 609 (Fla. 1st DCA 1998).

87. The standard of review of the agency’s proposed action in a bid protest proceeding has been generally described as follows:

    a ‘public body has wide discretion’ in the bidding process and ‘its decision, when based on an honest exercise’ of the discretion, should not be overturned ‘even if it may appear erroneous and even if reasonable persons may disagree.’ Department of Transportation v. Groves- Watkins Constructors, 530 So. 2d 912, 913 (Fla. 1988) (quoting Liberty County v.

    Baxter's Asphalt & Concrete, Inc., 421 So. 2d 505 (Fla. 1982)) (emphasis in original). ‘The hearing officer's sole responsibility is to ascertain whether the agency acted fraudulently, arbitrarily, illegally, or dishonestly.’ Groves-Watkins, 530 So. 2d at 914.

    
    

    Scientific Games, Inc. v. Dittler Bros., 586 So. 2d 1128, 1131 (Fla. 1st DCA 1991).

    
    

88. CCA, as the Petitioner, has the burden to establish that the per diem rates included in the ITN through Amendment 11 were clearly erroneous, contrary to competition, arbitrary, or capricious. § 120.57(3)(f); Dep’t of Transp. v. J. W. C. Co., 396 So. 2d 778, 787 (Fla. 1st DCA 1981).

89. Agency action will be found to be "clearly erroneous" if it is without rational support and, consequently, the administrative law judge has a "definite and firm conviction that a mistake has been committed." U.S. v. U.S. Gypsum Co.,

    333 U.S. 364, 395 (1948); see also Pershing Indus., Inc. v.

    
    

    Dep’t of Banking & Fin., 591 So. 2d 991, 993 (Fla. 1st DCA 1991). Agency action may also be found to be "clearly erroneous" if the agency's interpretation of the applicable law conflicts with its plain meaning and intent. Colbert v. Dep't of Health, 890 So. 2d 1165, 1166 (Fla. 1st DCA 2004). In such a case, "judicial deference need not be given" to the agency's interpretation. Id.

90. As discussed in the above Findings of Fact, DOC erred in calculating the health care program costs and in adjusting the per diem to account for public savings associated with 12- hour security officer shifts. Further, PILOT payments were erroneously excluded from the per diem calculation contrary to the statutory terms. Finally, DMS made a fundamental accounting error in calculating the per diem costs based on two different

    
    

    inmate populations. As such, the per diem rates were clearly erroneous.

91. An act is "contrary to competition" if it runs contrary to the objectives of competitive bidding, which have been long held as follows:

    to protect the public against collusive contracts; to secure fair competition upon equal terms to all bidders; to remove not only collusion but temptation for collusion and opportunity for gain at public expense; to close all avenues to favoritism and fraud in various forms; to secure the best values for the [public] at the lowest possible expense . . . .

    
    

    Wester v. Belote, 138 So. 2d 721, 723-24 (Fla. 1931); see also Harry Pepper & Assoc., Inc. v. City of Cape Coral, 352 So. 2d 1190, 1192 (Fla. 2d DCA 1977). CCA emphasized the fact that DOC is a competitor to the private sector correctional facility operators, implying that DMS and DOC intentionally calculated lower per diem rates than in past procurements to give the State an advantage contrary to competition. The undersigned was not persuaded by the implications. The evidence showed that public correctional facility costs have decreased significantly, that facilities used in past procurements have subsequently closed, and that the gap between large and small correctional facilities has increased. The undersigned concludes that DOC made a fair evaluation of the factors it is statutorily obligated to

    
    

    consider in calculating the per diem rate for the ITN, and did not act contrary to competition.

92. An agency action is capricious if the agency takes the action without thought or reason, or irrationally. An agency action is arbitrary if it is not supported by facts or logic. See Agrico Chem. Co. v. Dep’t of Envtl. Prot., 365 So. 2d 759, 763 (Fla. 1st DCA 1979).

93. To determine whether an agency acted in an arbitrary or capricious manner, it must be determined “whether the agency:

    (1) has considered all relevant factors; (2) has given actual good faith consideration to those factors; and (3) has used reason rather than whim to progress from consideration of these factors to its final decision.” Adam Smith Enter. v. Dep’t of Envtl. Reg., 553 So. 2d 1260, 1273 (Fla. 1st DCA 1989).

94. However, if agency action is justifiable under any analysis that a reasonable person would use to reach a decision of similar importance, the decision is neither arbitrary nor capricious. Dravo Basic Materials Co., Inc. v. Dep’t of Transp., 602 So. 2d 632, 634 n.3 (Fla. 2d DCA 1992).

95. CCA failed to meet its burden of proof. The evidence presented at the final hearing did not establish that DOC’s selection of comparable public facilities was arbitrary or capricious, or that the calculations of program costs and other adjustments to the per diem were made arbitrarily.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED:

That Respondent, Department of Management Services, enter a final order adopting the Findings of Fact and Conclusions of Law set forth herein, and withdraw ITN 12/13-010 for the Operation and Management of Bay Correctional Facility, Graceville Correctional Facility, and Moore Haven Correctional Facility.

DONE AND ENTERED this 12th day of July, 2013, in Tallahassee, Leon County, Florida.

S

SUZANNE VAN WYK

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675

Fax Filing (850) 921-6847 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 12th day of July, 2013.

ENDNOTES

1/ J.Ex. 2; P.Ex. 67.

2/ T.96:15-97:7.

3/ The undersigned calculated the percentage of S3 inmates at Everglades from the raw data introduced into evidence and upon

which Mr. Upchurch relied. Mr. Upchurch did not specify a percentage in his testimony.

4/ Okeechobee has only two open bay dorms.

5/ DOC has developed a work camp at Okeechobee which is not yet open. Thus, security costs associated with the work camp are not included in the facility per diem rate.

6/ For FY 2011-2012, Wakulla maintained an average daily population of almost 3,000 inmates.

7/ See J.Ex. 1 (Operations and Management Service Contract,

§ 6.4.4.1).

8/ J.Ex. 1 (Operations and Management Service Contract,

§ 6.4.4.2).

9/ J.Ex. 1 (Operations and Management Services Contract,

§ 6.3.3).

10/ T.73:2-10.

11/ T.363:8-10.

12/ T.451.

13/ “Report on Operating Per Diem Rates prepared by the Prison Per Diem Workgroup on June 15, 2005, pursuant to

section 957.07(5), Florida Statutes” at 4.

14/ Petitioner argues that the Department does not have authority to procure private correctional services by ITN because the governing statute specifically refers to a Request for Proposals. Assuming, arguendo, this issue has not been waived, Petitioner’s argument may be other grounds for invalidating the ITN.

The statute provides that the Auditor General shall “certify [per diem amounts] to the Department of Management Services to be included in the request for proposals.” § 957.07(4), Fla.

Stat. (emphasis supplied). Further, the statute prohibits contact between bidders and the commission “regarding a request for proposal, a proposal, or the evaluation or selection process from the time a request for proposals for a private correctional facility is issued until the time of notification of intent to award is announced.” § 957.12, Fla. Stat.

However, the statute also states that a contract for operation of private correctional facilities shall “[b]e negotiated with the firm found most qualified.” § 957.04(1)(a), Fla. Stat. The agency argues that the reference to negotiation of the contract with the most qualified firm plainly contemplates procurement through an ITN. However, as Petitioner points out, the foregoing language predates the creation of the ITN as a formal procurement method within chapter 287, Florida Statutes. See ch. 02-207, § 15, Laws of Fla. The year following enactment of the ITN process, the Florida Legislature amended other state procurement provisions to conform to that enactment. See ch. 03-91, § 1, Laws of Fla. (authorizing the state to procure employee health insurance by ITN as well as RFP); ch. 03-138, § 2, Laws of Fla. (requiring DMS to issue an ITN for review of state agency service contracts); and ch. 03- 182, § 4, Laws of Fla. (authorizing the Wireless 911 Board to secure the services of an independent accounting firm via ITB, RFP, ITN or existing professional services contracts). However, the Legislature has not amended chapter 957 to authorize procurement of private correctional services by any method other than RFP. The Legislature’s inaction cannot be interpreted as a mere oversight, as a legislative body is presumed to pass statutes with full knowledge of prior existing statutes.

See Knowles v. Beverly Enters.-Fla., Inc., 898 So. 2d 1, 9 (Fla. 2004); Ag. for Health Care Admin v. Estate of Johnson, 743

So. 2d 83, 86-87 (Fla. 3d DCA 1999).

In the case at hand, the Legislature has not amended the Correctional Privatization Act to authorize DMS to procure private correctional services by any method other than RFP. It is possible the Legislature specifically authorized DMS to procure operation and management of the subject facilities by ITN in a state budget specific appropriation, but the undersigned did not locate such an appropriation after limited research. An exhaustive review of Legislative appropriations was impractical given the number of other critical issues which are squarely presented for determination in this case.

COPIES FURNISHED:

Robert H. Hosay, Esquire James A. McKee, Esquire Foley and Lardner, LLP Suite 900

106 East College Avenue Tallahassee, Florida 32311

Clifford A. Taylor, Esquire Matthew Fraher Minno, Esquire Department of Management Services 4050 Esplanade Way, Suite 160D Tallahassee, Florida 32399-0950

Craig Nichols, Secretary Department of Management Services 4050 Esplanade Way

Tallahassee, Florida 32399-0950

Josefina M. Tamayo, General Counsel Department of Management Services 4050 Esplanade Way, Suite 160

Tallahassee, Florida 32399-0950

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit exceptions within 10 days from the date of the Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 13-000880BID

Orders for Case No: 13-000880BID