SACRAMENTO -- State agencies are forced to buy office furniture and supplies at prices sharply higher than retail under a program that officials say is certain to face intense scrutiny as Gov. Arnold Schwarzenegger looks for ways to trim spending.

The Prison Industry Authority generates $150 million in revenue by paying prison inmates 40 cents an hour to manufacture 1,800 items, including notebooks and desks. It also may buy items and mark up the prices before making deliveries to state agencies.

A comparison of the authority's Internet catalog and Web sites of various office-products retailers shows the state pays up to 135 percent of retail for some items -- such as $2.35 for an inch-thick notebook binder available at Staples for 99 cents -- and more than 60 percent for others, including a $770 desk available from BuyOnlineNow.com for $462.

"The (governor's) California Performance Review, I believe, will make this an issue for review as part of the administration's analysis and recommendation on how to do things differently," said Fred Aguiar, the governor's secretary for state and consumer services, who oversees procurement. The California Performance Review is the governor's plan to conduct a cost-benefit analysis of all state expenditures.

Prison officials defend the prison program, saying the money that state agencies spend for products also lowers prison violence and reduces recidivism by providing inmates with job skills they can use when they are paroled.

But critics say this practice obscures what state taxpayers actually spend on prisons and might not be a cost-efficient way to accomplish the job-training goals. Administration sources say this could be a perfect example of Schwarzenegger's comments during the recall campaign when he said no one really knows how much money state government is spending -- and on what.

The Department of Corrections has endured a barrage of attacks in recent years due, in part, to huge cost overruns that have become typical even though the annual budget has grown in the face of a declining inmate population. The department has been criticized for a large pay raise that the powerful California Correctional Peace Officers Association, the prison guards union, secured in the midst of the state's massive deficits.

This week, state Senate hearings revealed code-of-silence allegations against prison guards, and last year hearings focused on corruption among investigators who function as the Department of Corrections' version of internal affairs officers.

California law requires all state agencies to purchase office furniture and supplies from the Prison Industry Authority, which manufactures products and provides services for resale to all government agencies, including offices run by legislators and the governor.

Critics are dubious of the authority's cost-effectiveness in part because more than 50 percent of its revenues fund expenses related to guards -- for supervision, administration and transportation of inmate workers -- and because the law permits the authority to purchase wholesale and resell products and services when prison factories or inmate personnel cannot meet demand. These resales account for 3 percent of the authority's annual earnings.

"What you have here is another government bureaucracy that operates as inefficiently as government bureaucracies tend to operate," said state Sen. Tom McClintock, R-Thousand Oaks, a longtime critic of government waste.

Without the Prison Industry Authority, officials argue, the Department of Corrections would have to allocate about $14 million annually to fund an alternate program that addresses recidivism and prison violence -- or at least keeps inmates occupied -- and to replace other benefits. They said the benefits include victim-restitution payments that inmates are required to pay out of prison earnings and incarceration costs now saved by giving the employed inmates time off their sentence for every day worked.

Up to 30 percent of an inmate's earnings is deducted for court-ordered restitution and fines, and the money is deposited into a restitution fund. In fiscal year 2002-03, inmates employed by the program paid more than $430,000 into the fund, adding to a total topping $4.6 million since 1992-93, according to the authority.

"There are a number of security issues that add to the cost of doing business," Prison Industry Authority spokesman Frank Losco said.

Criticism of the Prison Industry Authority surfaces about every four years, officials say. In 1998, the Bureau of State Audits revealed that the authority up until then had purchased finished goods 656 times and lost $208,000 on their resale. The loss was blamed on poor inventory planning and procurement methods.

The authority was established under the Department of Corrections in 1983 and employs 6,000 inmates in about 60 agricultural, manufacturing and service industries at 22 prisons. In addition to office furniture and supplies, the authority manufactures clothing, food products, shoes, signs, eyewear, gloves and license plates.

Lawmakers face a deficit of $14 billion in 2004-05 and an as-yet undetermined shortfall in 2005-06. Schwarzenegger has vowed to scour government programs for waste and inefficiency, and he might focus on the Prison Industry Authority because it provides many goods and services that could be contracted out to private-sector firms for a cost savings to taxpayers.

'It's just another example of why the governor's goals and policies and mission to review and reorganize the way state government procures goods and services and contracts for goods and services is extremely important," Aguiar said.

McClintock is preparing legislation that, if passed by the Democrat-controlled Legislature and signed by the governor, would allow the state to contract out more goods and services with private-sector firms. McClintock believes the state prison system generally has priced itself out of the market and costs taxpayers far more than it should.

While that might be true of corrections generally, Prison Industry Authority officials argue that the agency gives taxpayers their money's worth.

"The question comes up, and I understand the question. That's why typically I invite people out to see how we operate," Losco said.