Minnesota prison labor program undercharged in contracts with private firms, audit finds

A Minnesota prison labor program allowed private companies to profit from low-cost prison labor, subsidizing corporate contracts and reducing revenue that could have been used for prison services, according to a new state review.

The Office of the Legislative Auditor (OLA) in June said Minncor Industries — a self-supporting enterprise within the state Department of Corrections that contracts with private businesses for incarcerated labor — did not account for all of its own costs when calculating the rates it charged private companies.

Although Minncor operates without direct taxpayer funding, some of the costs it offsets, such as laundry and recreation, would otherwise be paid for by the state.

The costs would normally be covered through wage deductions from workers, known as costs of confinement. But the review found Minncor did not cover those deductions in its contracts with two private companies, thus charging millions less than it should have.

That gap, OLA officials say, amounted to an indirect taxpayer-funded subsidy.

“They basically passed on the value of that deduction to the private business, as opposed to keeping it in-house to use for the benefit of incarcerated persons,” said Katherine Theisen, director of the legislative auditor’s special reviews division.

Minncor has since changed its procedures for calculating prison labor contracts with private companies, the report said.

The OLA said it reviewed two contracts — with balloon manufacturer Anagram International Inc. and plastic parts manufacturer Plastech Corp. — after a legislator raised concerns in 2024. The DOC separately contacted the OLA about the issue, the report said.

Neither Anagram nor Plastech, both Minnesota companies, responded to requests for comment.

Minncor used $2.4 million in the worker deductions to offset Anagram contract costs, bringing down the effective hourly rate for labor by 30%. For Plastech, the report found that Minncor excluded administrative expenses and confinement costs altogether, resulting in a $6.70 loss per labor hour in 2024.

Minncor operates like a business with its own chief executive and reported $49 million in operating revenue in 2024.

It participates in the Prison Industry Enhancement Certification Program (PIECP), which allows prison-made goods to cross state lines but requires market-rate wages and safeguards to avoid displacing private-sector jobs.

Although technically compliant, OLA found Minncor paid some workers below PIECP wages by labeling tasks as non-essential to production, a distinction that let it skirt wage requirements.

The Department of Corrections told OLA that Minncor will no longer use confinement deductions to offset costs and will include general and administrative expenses when setting standard rates for contracts, OLA said in the report.

These changes were applied in a new contract with Anagram, finalized in December 2024. Plastech ended its partnership with Minncor after the revised, higher rate was proposed, according to the report.

In a written response to the findings included in the review, DOC Commissioner Paul Schnell said the department agreed with the review’s conclusions.

“As the report recognizes, there is a need to be mindful of the reality that pronounced increases in the costs charged to Minncor customers could impact existing business relationships, thereby impacting available work assignments for the people we serve,” Schnell said in a letter.

OLA urged lawmakers to codify Minncor’s rate-setting process to ensure consistency. A 2009 OLA audit raised similar concerns, prompting some reforms, but the new report warned against relying on institutional memory.

OLA’s findings come amid growing national scrutiny of prison labor systems, with critics increasingly questioning whether incarcerated workers are being exploited to bolster corporate profits.

Moving forward, the DOC will place Minncor’s finances and contracts under the oversight of the department’s chief financial officer. A fiscal control specialist from the inspector general’s office will also review Minncor’s contracts with private companies, and all new proposals must undergo multi-level review for compliance with the federal wage rules and DOC policies.

“We are fully committed to ensuring that all program expenses are properly allocated and that any partnerships with private companies serve our broader mission of rehabilitation and reentry readiness,” Aaron Swanum, a spokesman for the DOC, said Friday.