CSA
Summary
Read the report at California State Auditor ↗
Department of
Rehabilitation:
Its Delay in Correcting Known Weaknesses
Has Limited the Success of the Business
Enterprise Program for the Blind
September 2002
2002-031
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C S A
ALIFORNIA TATE UDITOR
ELAINE M. HOWLE STEVEN M. HENDRICKSON
STATE AUDITOR CHIEF DEPUTY STATE AUDITOR
September 12, 2002 2002-031
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As required by Section 19640.5 of the California Welfare and Institutions Code, the Bureau of State Audits presents
its audit report concerning the Department of Rehabilitation’s (department) Business Enterprise Program for the
Blind (program).
This report concludes that the department’s delays in addressing known problems have hampered its ability to
provide blind persons with meaningful business opportunities that allow them to be independent. In recent years, the
department has achieved only a limited level of success in terms of program participation and operator income. In
fiscal year 2000–01, more than half the blind operators earned less than $2,500 per month, the program’s minimum
for opening a new vending location, and almost a third of the operators earned less than what a person could earn
working full time at California’s 2001 minimum wage. In a step forward, the department recently completed its
first strategic plan for the program, but the plan lacks defined outcomes and important performance measures. In
contrast, after more than seven years of work, the department has yet to update its regulations for administration
of the program, which may lead to disparate service delivery. Lacking guidelines, the department has not ensured
that partnerships between blind operators and private food-service companies are consistent with federal law and
pay their fair share of program costs. Finally, the department has neither adequately addressed significant flaws
in its process for collecting past-due commissions from private vending businesses nor consistently fulfilled its
responsibilities to program participants by providing adequate consulting and monitoring services.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
BUREAU OF STATE AUDITS
555 Capitol Mall, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019 www.bsa.ca.gov/bsa
CONTENTS
Summary 1
Introduction 5
Audit Results
In Recent Years, the Program Has Achieved Only
Limited Success in Meeting Its Goals 9
The Department Only Recently Provided Strategic
Direction to Its Staff and Participants 14
The Department Has Not Updated Its
Guidelines for the Administration of the Program 15
By Allowing Operator Partnerships With Private
Businesses, the Program Has Collected Inequitable
Operator Fees and May Not Have Complied
With Federal Law 19
The Department Has Not Corrected Flaws in Its
Process for Pursuing Past-Due Commissions,
Some of Which May Now Be Uncollectible 25
The Department Has Not Consistently Met All
of Its Responsibilities to Program Participants
as Required by Law and Its Own Regulations 28
Recommendations 33
Appendix A
The Department’s Progress in Implementing
Prior Audit Findings 37
Appendix B
Survey of Blind Operators of
Food-Service Facilities 43
Responses to the Audit
California Health and Human Services Agency
Department of Rehabilitation 45
California State Auditor’s
Comments on the Response
From the Department
of Rehabilitation 61
California State Auditor Report 2002-031 1
SUMMARY
The Department of Rehabilitation (department) administers
the Business Enterprise Program for the Blind (program)
in accordance with the federal Randolph-Sheppard Act
Audit Highlights . . . and the California Welfare and Institutions Code. The goals of
the program are to provide blind persons with remunerative
Our review of the Department
employment, enlarge the economic opportunities of the blind,
of Rehabilitation’s (department)
and to stimulate the blind to greater efforts in striving to make
administration of the Business
Enterprise Program for the themselves self-supporting. To accomplish these goals, the
Blind (program) reveals that: program provides food-service facilities and training to qualified
blind persons throughout the State, enabling them to operate
þ Program participants’
(operators) average net their own food-service businesses, including cafeterias, snack
income has increased, but bars, wet and dry vending stands, and vending machines.
30 percent of them still
However, we found that the department’s delay in correcting
earned less than minimum
known program weaknesses has hampered its ability to provide
wage in fiscal year 2000–01.
blind persons with meaningful business opportunities that allow
þ In May 2002 the them to be independent.
department completed
its first strategic plan for
the program; however, In recent years, the department has achieved only a limited
the plan lacks defined level of success in terms of program participation and income
outcomes and important
for blind operators of food-service facilities (operators).
performance measures.
Specifically, the number of new participants has declined
þ Although the department recently, falling from 16 in federal fiscal year 1997–98 to 7 in
has been working for federal fiscal year 2000–01. Of the 7 participants who completed
more than seven years to
training in federal fiscal year 2000–01, only 3 obtained food-
update its regulations, it
has yet to do so. service facilities. Further, in fiscal year 2000–01, more than
50 percent of operators earned less than $2,500 per month, the
þ The department has not
program’s minimum for opening a new location, and nearly
ensured that partnerships
30 percent earned less than $1,050, about what a person could
between operators and
private food-service earn working full time at California’s 2001 minimum wage.
businesses are consistent Nonetheless, because a small number of operators have been
with federal law and
quite successful, the average net income earned in federal
pay their fair share of
program costs. fiscal year 1999–2000 by California’s operators was slightly higher
than the national average, totaling about $34,300 a year.
þ Since August 1998 the
department has not actively
The problems the program has faced may in part arise from
pursued the collection of
past-due vending machine the department’s delays in correcting weaknesses that previous
commissions from audits identified. These weaknesses included the need for a
private companies.
strategic plan and the need to update the regulatory guidelines
continued on next page that govern the program. The department has only recently
developed its first strategic plan, which represents a significant
step forward. However, the plan lacks defined outcomes and
California State Auditor Report 2002-031 1
þ The program does not important performance measures that would enable the department
adequately monitor to track whether it achieves its objectives. In addition, after more
operators or provide
than seven years of work, the department has yet to update its
them with all required
regulations. Consequently, the program lacks clear guidelines for
consulting services.
basic and critical tasks such as purchasing equipment, which may
lead to a disparate delivery of its services. The department has no
clear time frames or deadlines for completing the regulations,
and the reasons it offers for not having done so lack substance.
One of the key areas in which the department requires immediate
guidance concerns partnerships between program participants
and private food-service businesses. To make its cafeterias
more profitable, the department has pursued these private
partnerships, which ideally would serve as transitional situations
during which the operator would receive training from the
private partner. However, in practice the partnerships have
resulted in operators essentially contracting out some of their
program benefits to private businesses for set monthly fees in
what appears to be an action inconsistent with the content
of the federal law. Moreover, the department has effectively
relinquished the ability to monitor the financial information
for these facilities. As a result, it cannot ensure it collects the
full fees that it would normally collect from the facilities, which
in effect means that other operators are paying an inequitable
share of program costs.
Other weaknesses in the department’s administration of the
program have impeded its success and that of its participants.
Since August 1998 the department has not actively pursued
the collection of past-due commissions owed to the program by
private vending machine businesses. Because of the department’s
delay, some of these funds may now be uncollectible, which
effectively reduces the money available to fund the operators’
retirement plan. Further, the department has not ensured
that the program provides required consulting services and
upward mobility training to its operators, nor has it adequately
monitored the operators so it might intervene and assist in
resolving financial or operational problems.
RECOMMENDATIONS
To improve the effectiveness of the program, the department
should ensure that it dedicates the proper level of attention
and resources to correcting the program’s known weaknesses.
Specifically, the department should take the following actions:
2 California State Auditor Report 2002-031 California State Auditor Report 2002-031 3
• Revise the program’s strategic plan to include expected
outcomes and performance measures so it can evaluate the
program’s success and measure its progress in achieving
strategic goals and improving noted deficiencies.
• Ensure that the program promptly and aggressively pursues the
development of program guidelines, including regulations, so
the department staff equitably provide services to participants
and better enable participants to succeed in the program.
• Establish and follow guidelines for operator partnerships to
ensure that the partnerships are in agreement with federal
and state law, regulations, and guidance. The guidelines
should also require that the program properly administer and
monitor the partnerships to ensure that they enhance, not
drain, program resources.
• Aggressively pursue collection of commissions owed to the
program by private businesses operating vending machines at
federal or state facilities.
• Ensure that the program provides adequate consulting,
monitoring, and upward mobility training services to
the operators.
AGENCY COMMENTS
The department generally agrees with our recommendations
and states that it will continue its efforts to improve the program.
However, it strongly disagrees with some of the statements and
conclusions contained in the report concerning management
and the operation of the program. Our comments on the
department’s response immediately follow it. n
2 California State Auditor Report 2002-031 California State Auditor Report 2002-031 3
Blank page inserted for reproduction purposes only.
4 California State Auditor Report 2002-031 California State Auditor Report 2002-031 5
INTRODUCTION
BACKGROUND
In accordance with the federal Randolph-Sheppard Act
and the California Welfare and Institutions Code, the
Department of Rehabilitation (department) is responsible
for administering the Business Enterprise Program for the
Blind (program). The goals of the program are to provide
blind persons with remunerative employment, enlarge their
economic opportunities, and stimulate them to greater efforts
in striving to make themselves self-supporting. To meet these
goals, the program trains qualified blind persons to operate
their own food-service businesses and provides them with food-
service facilities located in government buildings throughout the
State. Between October 2000 and September 2001, the program
served 168 blind operators of food-service facilities (operators).
A blind person interested in receiving vocational services
can submit an application to the department. By reviewing
the application and conducting an interview, a department
counselor assesses the applicant’s interest and suitability for the
program. The department provides a comprehensive six-month
course in food service for individuals entering the program
and licensing for those who successfully complete the training.
A licensee can then apply to operate one of the department’s
established food-service facilities, which include cafeterias,
snack bars, wet and dry vending stands, and vending machines.
After a program-appointed committee selects the licensee for
assignment to a facility, the department provides continued
support through consulting services and by procuring and
repairing necessary vending equipment. The operators earn
income from the successful operation of their assigned facilities,
and by participating in the program, they receive valuable
health, life, dental, and retirement benefits.
Because program participants receive preference for providing
food services in state and federal buildings in California, any
state or federal department interested in obtaining food services
must submit a request to the program. The program then
evaluates the location’s potential to support an operator, and if
it finds the location suitable, the program determines the type
4 California State Auditor Report 2002-031 California State Auditor Report 2002-031 5
of food-service facility it will provide, organizes selection of the
operator, and acts as the operator’s advocate with the tenant of
the building who requested food service.
To support its activities, the program receives funds from the
federal government, the State’s General Fund, operator fees,
and commissions from private vending machine businesses.
The federal government pays approximately 80 percent of costs
allowed under its guidelines, which include the purchase of new
and replacement equipment, the provision of initial stock and
supplies for facilities, the salaries of the program’s personnel,
and certain other administrative expenditures. Depending on
the nature of the expense, the remaining 20 percent is provided
either by the General Fund or by set-aside fees, which are funds
paid by the operators to the department from the net proceeds
of facility operations. Even when locations are not operated
by a blind operator, the program receives commissions from
private businesses that operate vending machines on state and
federal properties within California. The program disburses
the commissions either to the operators’ retirement plan or to
the program participants who run the sites where the privately
owned vending machines are located.
PROGRAM ADMINISTRATION
The department administers the program through the
supervision of a deputy director and a program manager. For
fiscal year 2000–01, the program had nearly 35 authorized
staff positions. Staff are located in a central office and four
regional, or field, offices. Seventeen of these positions are
business enterprise consultants (consultants) who provide
operators with consultation services and assistance to support
the operation of their facilities. In addition, the program receives
services from several departmental units outside the program,
including accounting services, legal counsel, and the collection
of commissions from private vending machine businesses
operating in state and federal locations.
The operators have a voice in the program’s administration. In
accordance with federal regulations, the department established
the California Vendors Policy Committee (committee) to
represent the operators. The duties of the committee include
actively working with the department to determine major policy
and assist in program decisions, receiving and transmitting
6 California State Auditor Report 2002-031 California State Auditor Report 2002-031 7
operators’ grievances to the department, and developing
operator-training programs. Operators within the program elect
the members of the committee biennially.
PAST AUDITS OF THE PROGRAM
During the past 11 years, the program has been the subject
of fi ve reviews by the Bureau of State Audits (bureau) and
three reviews or evaluations by other entities. These other
reviews include a 1991 study by the University of
California at Davis, a 1993 study by a consultant,
and a 2000 internal review. The program
Bureau of State Audits’ Reviews Reveal
acknowledges that many of these evaluations
Continuing Program Weaknesses
noted the same weaknesses. Appendix A
1995 fi scal audit: The report concluded that summarizes the department’s reported progress
the program was sound fi nancially, but noted
on the recommendations from the bureau’s most
some weaknesses in the department’s internal
control structure and in its compliance with recent programmatic and fi scal reviews.
certain laws and regulations.
1997 programmatic review: The report
concluded that poor management practices
SCOPE AND METHODOLOGY
limited the program’s effectiveness. It found
continuing internal control weaknesses.
The California Welfare and Institutions Code,
1999 fi scal audit: The report concluded
Section 19640.5, requires the bureau to conduct a
that the fund balance in the vending
stand fund, which contains operator fees, fi scal audit of the program every third fi scal year
appeared excessive and that the department until January 2002 and a programmatic review
could increase its commission income
every fi ve years until January 2003. This is the last
by establishing more contracts to collect
commissions from all vending machines of the series of reviews required by the statute.
located on state and federal property.
In 1995, 1999, and 2001, we completed fi scal
2001 fi scal audit: The report concluded that audits of the program. In 1997, we completed a
the fi nancial condition of the program was programmatic review.
sound but that the department could improve
its fi scal management of the program by
developing a comprehensive business plan that To determine the department’s practices for
showed whether its proposed use for its vending
administering the program, we interviewed
fund surplus was appropriate and feasible.
key department and program personnel. To
compare California’s practices to other states, we
interviewed administrators of three other states’
business enterprise programs for the blind. We compared
California’s program results to these states’ performance by
reviewing annual reports to the U.S. Department of Education’s
Rehabilitation Services Administration. In addition, we reviewed
California’s program expenditures for fi scal years 1996–97
through 2000–01 and evaluated the fi nancial success of the
program’s operators by analyzing program records of operator-
reported monthly income. We also reviewed the program’s
recent strategic plan to help us understand the department’s
vision of program success.
6 California State Auditor Report 2002-031 California State Auditor Report 2002-031 7
To better understand the program’s requirements and to
determine whether the program’s guidelines and standards
encourage the effective use of program resources in the
facility development and equipment replacement processes,
we reviewed federal and state laws and regulations. We also
reviewed key program policy and procedures, analyzed data
from the department’s equipment database, and interviewed
department staff.
To evaluate the department’s efforts to improve the program
through the use of vending machine contracts and operator
partnerships with private food-service businesses, we interviewed
key program staff and staff at the Department of General
Services. We reviewed correspondence from the U.S. Department
of Education’s Rehabilitation Services Administration and
interviewed its designated contact person to obtain the federal
perspective. To determine program expenditures and related
business information for the facilities involved in private
partnership agreements, we reviewed expenditure reports and
operators’ monthly operating reports. Finally, we examined
the contracts between the private partners and the operators to
better understand the distribution of duties between partners.
To evaluate the department’s provision of services to operators,
we reviewed its monitoring of required location reviews. We
also evaluated the review form, interviewed program staff, and
reviewed certain department documents. We also surveyed
35 operators to obtain their perspectives on the program.
To review the department’s progress in addressing our past
recommendations regarding collection of current and past-due
commissions from private vending machine businesses, we
interviewed staff and evaluated the system the department uses
to track reported sales and commissions.
To assess the department’s progress in addressing recommendations
we made in prior reviews, we interviewed key department
and program staff and reviewed various department records.
We summarize the department’s reported progress on
recommendations made in the 1997 programmatic review and
the 2001 fiscal audit in Appendix A. n
8 California State Auditor Report 2002-031 California State Auditor Report 2002-031 9
AUDIT RESULTS
IN RECENT YEARS, THE PROGRAM HAS ACHIEVED ONLY
LIMITED SUCCESS IN MEETING ITS GOALS
The intent of the federal Randolph-Sheppard Act (act) and
of California’s Business Enterprise Program for the Blind
(program) is to provide blind persons with remunerative
employment, enlarge their economic opportunities, and
stimulate them to greater efforts to be self-supporting. However,
the program has achieved only limited success in reaching
these goals. Although California has the largest number of blind
operators of food-service facilities (operators) of any business
enterprise program for the blind in the nation, the number of
new participants in the program has decreased by more than
half over the past four years. Further, in terms of the ratio of new
trainees to current operators, the program ranked only 29th out
of 50 in federal fiscal year 1999–2000. Although some operators
earned fairly lucrative incomes in fiscal year 2000–01, more than
one in four earned less than minimum wage. The average net
income earned by California’s program operators was slightly
higher than the national average, ranking 20th when compared
to other states.
The Number of New Participants in California’s Program
Has Declined
According to the annual reports the Department of
Rehabilitation (department) submitted to the U.S. Department
of Education’s Rehabilitation Services Administration, the
number of new participants in the program has declined over
the past four years. As shown in Figure 1 on the following page,
the number of newly trained participants peaked in federal
fiscal year 1997–98, with 16 individuals completing the training
and 7 being placed. In federal fiscal year 2000–01, only 7 new
participants completed the training, and only 3 were placed
in facilities.
8 California State Auditor Report 2002-031 California State Auditor Report 2002-031 9
FIGURE 1
The Number of New Program Participants Has Decreased
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Source: California Department of Rehabilitation’s annual Report of Vending Facility Program for federal fiscal years 1996–97 through 2000–01.
According to the most recent statistics from the U.S. Department
of Education’s Rehabilitation Services Administration, California
ranked 4th overall in the nation in its number of new trainees
for federal fiscal year 1999–2000. However, for the same
year, California ranked 29th in percentage of new trainees to
total operators. Because California’s program had the largest
number of operators, its efforts to train and place new program
participants had a smaller proportional effect on its program
than the same number of new trainees would have on states
with smaller programs.
The decrease in new participants can probably be attributed to a
number of causes. The program currently offers training only in
Sacramento, which may represent a potential barrier to entering the
program, as discussed later in the report. As shown in Figure 2,
the number of food-service facilities has declined. Recently, the
number of facilities closed has generally exceeded the number
of facilities opened, which might also have contributed to the
decline in program participation. Figures 1 and 2 suggest a
10 California State Auditor Report 2002-031 California State Auditor Report 2002-031 11
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correlation between the number of new food-service facilities
established and the number of participants placed. For example,
federal fiscal year 1998–99, the year that the department
established the highest number of food-service facilities, is also
the year that it placed the highest number of new program
participants. To attract and place new program participants, the
department must continue to establish new facilities for the
participants to operate. Finally, the decrease in participation
may reflect a declining interest in the program.
FIGURE 2
The Number of Food-Service Facilities the Department Has Closed Each Year
Has Generally Exceeded the Number of New Food-Service Facilities It Has Opened
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Source: California Department of Rehabilitation’s annual Report of Vending Facility Program for federal fiscal years 1996–97 through 2000–01.
Although the Average Income of Program Participants Has
Increased, Many Are Not Self-Supporting
Despite the intent of the act, many of California’s program
participants have not earned sufficient income to be self-
supporting. In fiscal year 2000–01, nearly 30 percent of the
operators earned a monthly average net income—income
10 California State Auditor Report 2002-031 California State Auditor Report 2002-031 11
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after program fees—of less than $1,050, or about what a person
could earn working full time at California’s 2001 minimum wage of
In fiscal year 2000–01, $6.25 per hour. As shown in Figure 3, between fiscal years 1996–97
nearly 30 percent of and 2000–01, the percentage of operators with average
the operators earned monthly net incomes of zero or less (that is, those who either
a monthly average net broke even or lost money during the year) more than doubled,
income of less than from 4.1 percent to 8.4 percent. Moreover, in fiscal year 2000–01,
$1,050, or about what 56 percent of the operators earned less than $2,500 a month,
a person could earn the minimum the department must estimate a new site will earn
working full time at before it will establish that site.
minimum wage.
However, 25 of the 35 operators surveyed (71 percent) indicated
that they believe the incomes they receive from the program
allow them to be self-supporting. At the same time, 14 (40 percent)
of the operators surveyed told us that they are actively seeking
to change locations. Six of these 14 specifically said they want
to relocate to increase their incomes. Additionally, 15 operators
(43 percent) believed that their current locations should be closed
or combined with other locations. These answers indicate to us that
the operators might believe they are self-sufficient but still are not
satisfied with their current incomes. The department told us it is
difficult to base success in the program solely on the level of net
income produced. The department believes the fact that some
operators choose to remain in lower income locations indicates
that some operators choose that particular location for other
reasons, including geographic location and ease of operation.
It is important to point out that regardless of their monthly
incomes, operators are eligible for health, dental, and life
insurance benefits, as well as a retirement plan, by participating
in the program. The number of operators electing to participate
in the benefits varies. For some of the benefits, the operator
pays a small portion of the monthly costs. For example, for
a single operator electing to participate in all of the benefits
offered in June 2002, the operator would pay $10 per month,
and the program would pay $232 per month. Also, during
2001, the program contributed approximately $489 per month
to the retirement plan of each eligible operator.
12 California State Auditor Report 2002-031 California State Auditor Report 2002-031 13
FIGURE 3
Although Average Operator Incomes Have Increased,
Many Operators Still Make Less Than $2,500 Per Month
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Source: California Department of Rehabilitation’s Business Enterprise Financial System.
Some improvements have occurred. The average monthly net
income for operators increased from $2,691 in fiscal year 1996–97
to $3,302 in fiscal year 2000–01, and although the percentage of
total operators earning an average monthly net income of zero
or less increased, so did the percentage of operators making an
average monthly net income of $5,000 or more. In fact, nine
12 California State Auditor Report 2002-031 California State Auditor Report 2002-031 13
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operators earned average net incomes of $10,000 or more a
month in fiscal year 2000–01, a 50 percent increase from
According to the fiscal year 1996–97. Moreover, according to the U.S. Department
U.S. Department of of Education’s Rehabilitation Services Administration,
Education, California’s California’s operators earned slightly more than the national
operators earned an average of $34,337 during federal fiscal year 1999–2000, making
average of $35,239 on average $35,239.1
during federal fiscal year
1999–2000, slightly To determine why some operators are able to achieve considerably
more than the national more income than other operators, we reviewed the facility
average of $34,337. types for the nine highest-earning operators in fiscal year 2000–01.
We found that four of these nine operated multiple vending
machine locations, which are generally the most profitable
type of vending facilities. For example, one operator who
ran a vending machine facility at a roadside rest stop, earning
an average of nearly $7,800 per month during the year, was
awarded a second, temporary or interim location for seven
months of the year, which earned on average another $4,700 per
month. Although we support the creation and reorganization
of facilities to enable operators to increase their incomes, we
question the program’s decision to appoint multiple profitable
facilities to certain operators while other operators are either not
assigned locations or not earning enough to be self-sufficient.
In a previous report, issued in August 1997, we reported that
the department’s policy for classifying and circulating locations
was inequitable, because it had not developed a fair process for
assigning interim locations. To date, the department still has not
corrected this weakness.
THE DEPARTMENT ONLY RECENTLY PROVIDED
STRATEGIC DIRECTION TO ITS STAFF AND PARTICIPANTS
In May 2002 the department, in consultation with the
California Vendor’s Policy Committee, issued its first strategic
plan for the program. The department’s previous lack of action
to establish strategic priorities for the program, identify expected
outcomes, or offer methods to measure improvement hampered
the program’s ability to fulfill its mission and to address
deficiencies in its operations that various audits identified as
early as 1991. The current plan states that the program’s mission
is to provide profitable, productive, and independent career
opportunities for blind individuals. It identifies five major goals
1Federal fiscal year 1999–2000 was the most recent year for which national program
data were available at the time of this audit.
14 California State Auditor Report 2002-031 California State Auditor Report 2002-031 15
for the program: quality, uniformity, efficiency, accountability,
and profitability. However, the strategic plan does not reflect
decisions regarding the prioritization of scarce resources, show
which areas the department believes the program needs to
improve the most, or provide any mechanism for the program
to use to determine what level of resources to expend to attain
planned objectives.
Moreover, although the strategic plan lists deadlines for the
completion of its stated objectives, it does not identify expected
outcomes or offer performance measures or benchmarks that
might help the program track its progress. Consequently, the
department might dedicate resources and efforts to an area
but never be able to determine if the program has reached—or
is even moving toward—a stated goal. Further, the program’s
management will not be able to monitor progress and effectively
determine which areas need additional attention and resources.
In some instances, establishing such benchmarks or performance
measures would be fairly simple. For example, the strategic
plan calls for maximizing the profitability of each location.
However, it does not establish an expected outcome for location
profitability, nor does it identify any index, ratio, income level,
or other method to measure the program’s progress toward the goal.
One way the department could evaluate profitability would be to
monitor operator and location income on a monthly or quarterly
basis. However, the department currently does not regularly obtain
this information for use in its management activities.
THE DEPARTMENT HAS NOT UPDATED ITS GUIDELINES
FOR THE ADMINISTRATION OF THE PROGRAM
The department lacks guidance the program needs for sound
administration. The program has neither updated its regulations
The lack of clear guidelines nor provided updated policies for program administration to its
may lead to disparate staff. The lack of clear guidance may lead to disparate service
service delivery and delivery and compromise the program’s success. State law and
compromise the regulations require that every three years the department review
program’s success. and consider updating its regulations for the administration of
the program. However, the department has been working for
at least seven years to update the regulations. Because of this
delay and the program’s reliance on a 1994 policy and procedures
manual that is outdated in some areas and provides insufficient
guidance in others, the program has lacked clear guidelines on
how it should operate. The program has not provided sufficient
guidelines in its purchase of equipment and establishment of
14 California State Auditor Report 2002-031 California State Auditor Report 2002-031 15
private partnerships. As a result, the department cannot ensure
that the purchase of equipment is consistent among locations
and that its private partnerships—which we discuss in greater
detail later in the report—conform to federal law and its own
mission statement.
The department attributes its delay in updating its regulations
on staff vacancies and on the magnitude and importance of the
task. According to the deputy director, the program is complex
and subject to various kinds of complaints and grievances
filed by the operators. The law allows any operator dissatisfied
with an operational or administrative action to appeal that
action. Further, federal and state law require that the operators
be represented by a committee of operators representative of
all licensees. Specifically, the law requires that the committee
be involved in any major administrative decisions and policy
and program development. Therefore, according to the deputy
director, when it embarks on new ways of doing business, the
program needs to develop guidelines and have the guidelines
reviewed and placed in regulation so the department can
ensure consistent statewide implementation of the guidelines
and be able to defend its actions when operators challenge the
program. Although we understand the department’s emphasis
on the importance of regulations, seven years seems an
The department is unreasonably long time for the program to function without
currently developing a updated operating guidelines. Moreover, by seeking to make its
new draft of the proposed regulations overly comprehensive, the department might render
regulations, but it has not the program inflexible.
established timetables or
deadlines to manage The department is currently developing a new draft of the
the process. proposed regulations. However, it has not established timetables or
deadlines for submitting the draft to the Office of Administrative
Law or for holding the public hearings and receiving stakeholders’
comments as required by the regulatory process. The department
intends to revise its policy and procedures manual to coincide with
the new regulations once they are adopted.
The Program Has Not Issued Sufficient Guidelines to Govern
the Purchase of Equipment for Its Facilities
Federal law and state regulations require that the program
determine the need for and provide equipment to facility locations.
Within the four field offices, business enterprise consultants
(consultants), who provide operators with consultation services
and assistance to support the operation of their facilities, are
responsible for making equipment-purchasing decisions, with
16 California State Auditor Report 2002-031 California State Auditor Report 2002-031 17
the approval of supervising consultants. However, the department
has not ensured that the consultants and supervising
consultants have sufficient guidelines to govern their decisions,
Lacking sufficient nor has it provided a core program list of appropriate or
guidelines, the department inappropriate equipment. As a result, the department has no
has no assurance that assurance that staff members are using the same standards
staff members use the or information to decide whether equipment purchases are
same standards or warranted. Although the supervising consultants believe they
information to decide make consistent decisions for the locations in their respective
whether equipment districts, operators in different parts of the State may not be
purchases are warranted. receiving equitable services from the program. For example, one
operator we surveyed stated that he noticed a difference among
the responses to operators’ requests for equipment: His request
for equipment might be denied while another operator obtained
the same equipment.
All four supervising consultants we interviewed indicated that they
make equipment-purchasing decisions on a case-by-case basis. They
indicated that they might ask a consultant or operator to provide
a written business plan or justification for a questionable item.
According to two supervising consultants, some operators will
either appeal negative decisions until they receive the items they
want or contact the department headquarters to attempt to have
the field office’s decisions overruled.
One supervising consultant was able to provide us with a
worksheet that he stated was given to the field offices at one
time to assist the consultants in their assessment of the return
on investment for proposed pieces of equipment. The form was
created to help consultants determine if purchasing specific
equipment made good business sense. However, this worksheet
only required a return on investment based on the amount paid
from the vending stand trust fund; it discounted any federal funds
spent, which are usually about 80 percent of a purchase price. The
central office does not require that the field offices use this or any
other form for assisting in equipment-purchasing decisions.
The Department’s Reasons for Not Being Able to Establish
Guidelines Are Unfounded
According to the department, it has been unable to update
the program’s regulations for the past seven years because of
staff vacancies and the complexity of making the regulations
sufficiently comprehensive. However, we found the department’s
reasoning regarding both these issues to be flawed. The
department believes it is necessary to put program policies into
16 California State Auditor Report 2002-031 California State Auditor Report 2002-031 17
regulations because the program is subject to various complaints
and grievances filed by the operators and to litigation filed by
federal and state agencies. The department maintains that once
policies are in regulation, it is in a better position to defend its
actions if challenged. Moreover, the department believes that
using the regulatory process to establish policies might reduce
grievances. The department explained that the task of creating the
new regulations has become more time-consuming as it identified
additional issues to consider and as the new regulations become
more comprehensive.
Although we understand the department’s emphasis on the
importance of regulations, we believe that its practice of
requiring the program’s governing policies to be in regulations
could render the program inflexible and unable to promptly
react to changing conditions. Policies that are susceptible
to frequent or regular change might be better specified in
departmental or program policies. This would enable the
department to respond to changing conditions when necessary
without going through the lengthy regulatory process.
In addition to its desire to ensure that its regulations are
comprehensive, the department claims that staff vacancies have
The department claims limited its ability to establish program guidelines. However, it
that staff vacancies has been working to establish these guidelines in regulation
and its desire to ensure for seven years, during which it had the staff and the time it
its regulations are said it needed. The department attributes its inability to move
comprehensive have the process to the next step to vacancies in the program’s
limited its ability to assistant manager and legal counsel positions. However, these
establish program vacancies are recent. Although the previous legal counsel left
guidelines; however, the department in November 2001, the position has been
during the seven years it established for over two and a half years and is paid for by
has been working on the the program. The position of assistant program manager has
regulations, it had the time also been vacant since November 2001, but this position
and staff it said it needed. was established many years ago and has been consistently
filled since May 1994 except for a brief four-month period in
2000. Vacancies in key positions can certainly cause delays,
but seven years is an unreasonably long period to have not
completed the task. We believe that the department’s decision to
operate the program without updated guidelines for an extended
period puts the program at risk for criticism and legal action.
18 California State Auditor Report 2002-031 California State Auditor Report 2002-031 19
BY ALLOWING OPERATOR PARTNERSHIPS WITH
PRIVATE BUSINESSES, THE PROGRAM HAS COLLECTED
INEQUITABLE OPERATOR FEES AND MAY NOT HAVE
COMPLIED WITH FEDERAL LAW
By encouraging private partnerships between blind operators
and private food-service businesses, the department recently
has allowed the private businesses to obtain program benefits
that federal law intended for blind operators.2 In a private
partnership agreement, a program participant licensed to
operate a food-service facility contracts with a private food-
service business to allow that business to prepare and sell food
at a program facility. The program generally maintains the
location’s equipment, provides consulting services, and supplies
a preferential location in a state or federal building. As with
Under a private other new program locations, the department may pay for
partnership agreement, the cost of the initial stock of goods to be sold. In return, the
a contract between a private food-service business typically agrees to pay the program
program participant participant either a set monthly amount or a portion of gross
and a private food- sales ranging from 6 percent to 15 percent.
service business, the
private business pays The program manager explained that he has pursued these
the program participant agreements because he felt that several of the program’s
a monthly amount and cafeterias had a history of not making enough profit and that
in exchange is allowed the agreements would provide a transitional period for the
to prepare and sell food participants to make them profitable. Currently, cafeterias are
at a program site in a the second-least profitable type of program facility, earning
state or federal building an average of about $1,900 per month in program participant
and to receive other net income in fiscal year 2001–02. To date, the department
program benefits, such as has six partnership locations in place or being developed and
consulting services and plans to spend approximately $807,000 in developing these
equipment maintenance. locations. It had spent or encumbered $84,000 of program funds
as of June 30, 2002, to assist in operating these locations since
they became partnerships and plans to spend approximately
$723,000 more by March 2003. Locations range from a
dining facility on an air force base to a café and coffee cart in
Southern California to a proposed sports restaurant and grill in
Sacramento. The department’s investment per site varies from
approximately $9,000 to a proposed $723,000.
However, we found numerous problems with the program’s
administration of its private partnership agreements. Specifically,
it has not adequately ensured that its actions conform to
2In private partnerships, operators generally assign the daily operational duties to their
partners; therefore, in this section, we refer to the blind operators as program participants.
18 California State Auditor Report 2002-031 California State Auditor Report 2002-031 19
the intent of the act, under which the program was created.
Moreover, because it has not developed guidelines on when or
how to implement the partnerships, it cannot be sure that the
partnerships are allowable, prudent, or consistent or that they
protect the interests of the State or the program participants.
Because of the terms of the partnerships, the department has
lost its ability to monitor the investment of program funds in
these locations in the same way that it can monitor the use
of program funds at other locations, and it has not obtained
enough information from the partnerships to determine if they
are successful business ventures. Further, although the program
generally provides the same services to private partnerships
that it would to other program participants, it allows some
partnerships to pay disproportionately lower fees than other
program participants pay.
The Private Partnerships Seem Inconsistent With the Spirit of
the Federal Randolph-Sheppard Act
Although the department has the responsibility to ensure
that the private partnership agreements it honors conform to
federal and state laws, it has not established any guidelines
Federal officials told us to this effect. Recently, the department has allowed program
that the goal should participants to enter partnerships with private food-service
be to have program businesses through which the program participants essentially
participants take over the have exchanged some of their program benefits under the act
operations of the facilities; to the private businesses for a guaranteed monthly amount
however, the partnership or a percentage of sales. These partnership agreements do not
agreements do not always always specify that program participants operate the facilities
specify that program or that, once they are trained, program participants assume
participants operate the operational control over the facility. The act does not specifically
facilities, obtain training, prohibit private partnerships; however, both the act and state
or take over the operation law that authorizes the expansion of the act’s preference to state
of the facilities. buildings assert that blind persons licensed under the provisions
of these laws shall be authorized to operate vending facilities on
federal and state property. Moreover, the act clearly states that
its intent is to provide blind persons with meaningful business
opportunities that encourage them to be self-sufficient.
Private partnerships should be limited to specific purposes.
According to the Commissioner of the U.S. Department of
Education’s Rehabilitation Services Administration and follow-
up conversations with the commissioner’s specified contact
person, generally program participants should manage and
operate the facilities. Program participants may use partners, for
20 California State Auditor Report 2002-031 California State Auditor Report 2002-031 21
example, in military cafeterias to provide them with training, but
the goal should be that the program participants eventually take
over the operation of the facilities. The department should establish
training requirements, objectives, goals, and time frames in
conjunction with the program participants and the private business
partners to enable the program participants to independently
manage the food-service facilities as soon as possible.
Although six private partnerships exist or are being developed,
of the four operating as of June 2002, only three have
contracts between the program participant and the partner.
The three existing partnership agreements we reviewed did
not consistently require program participants to operate the
sites, obtain training, or assume operation of the sites. In two
partnership contracts, responsibility for operating the site
was assigned to the private partner rather than the program
participant. In the third agreement, the program participant
was the onsite manager and reported to the private partner’s
representative. That agreement required the program participant
to comply with the private partner’s written recommendations
concerning the operation of the site. Although two of the
agreements we reviewed listed training as a contract requirement,
they did not contain specific goals, subjects, or timetables. One
Two of the three contracts contract specifically precluded the program participant from
we reviewed showed that operating the site without the private partner.
although the private
partners were responsible
The Department’s Lack of Guidelines Governing Private
for maintaining monthly
Partnerships Has Resulted in Inconsistent Contract and
profit and loss statements,
Program Requirements
this information was not
typically shared with the Because the department has not established guidelines on how
department. The third to administer its private partnerships, contract and program
contract did not even requirements are inconsistent in critical areas, such as reporting
require the preparation and payment of fees, the degree of involvement required of
of such a statement. the program participant, and the signing of the contract. These
inconsistencies have resulted in significant variations in how
partnerships comply with the spirit of the act and in how they
assist program participants in learning how to operate food-
service facilities. If the department does not treat all partnerships
consistently and establish guidelines that require partnerships
and other locations to be treated equally, the department may
expose itself to future complaints and liability.
One of the areas in which the contracts have not been consistent
involves the preparation of financial documents and the payment
of set-aside fees, which are funds paid by the operators to the
20 California State Auditor Report 2002-031 California State Auditor Report 2002-031 21
department from the net proceeds of facility operations.
Because the existing state regulations regarding set-aside fees and
financial reporting are standard for all locations, we would expect
partnered locations to be subject to the same requirements.
However, two of three contracts we reviewed showed that
although the private partners were responsible for maintaining
monthly profit-and-loss statements, this information was not
typically shared with the department, as required of program
participants’ locations that do not involve private partners. The
third contract did not require the preparation of such a statement,
requiring instead that financial information be kept confidential.
Program participants in all three partnerships we reviewed
have submitted their required monthly operating reports that
were based on the income received from the private partners
rather than based on the operations of the facilities. Finally, the
contracts did not specify a standard amount of set-aside fees to be
paid back to the program, as required of program locations not
involving private partners.
In addition, little consensus appears to exist within the program
regarding issues such as who must sign the contract and the
degree to which program participants must take part in the
management of facilities. The four supervising consultants who
oversee the field offices disagree on the required involvement
of program participants in the management of the partnership
facility. One supervising consultant stated that the program
does not require any program participant to be onsite. Another
stated that the program participant is required to be onsite or
use a designated manager, which could include the partner.
Similar confusion seems to exist around the issue of signing the
contract. Although two of the three contracts we reviewed were
signed only by the private partner and the program participant,
the third was also signed by the department’s program manager,
who in this instance also signed a separate contract between the
program and the private partner.
The Department Has Not Adequately Protected the Interests
of the State or Program Participants
The department has not By allowing these private partnership agreements, the department
consistently confirmed has inadequately protected the interests of the State and
that program participants program participants. It has not consistently confirmed that
and partners have program participants and partners have written contracts before
written contracts before beginning operations, has not analyzed the investment and
beginning operations. return on investment of the partnerships to the program and
the program participant, and has not adequately reviewed the
22 California State Auditor Report 2002-031 California State Auditor Report 2002-031 23
partnership agreements. The department stated that it does not
always perform these activities because the program participants
are independent businesspeople authorized to contract for goods
and services. However, we believe this stance is inappropriate
because in most cases, program participants are essentially
assigning some of their program benefits to private food-service
partners and thereby are committing program resources for
business expenses such as equipment and equipment repairs.
Moreover, the partnership agreements allow private businesses
the advantage of location preference in state and federal buildings
that do not charge rent or utility fees.
In some instances, the department has either failed to ensure
that contracts were in place or has agreed to contract terms
that may prove problematic. For example, a partnership that
had been operating since November 1, 2001, still did not have
a contract in place as of June 2002. Under another partnership,
the program committed $191,000 to design a sports restaurant
and grill and requested redirection of another $532,000 from a
previously approved project to pay for the facility’s construction
costs, even though as of July 2002, the partner and program
participant had not signed a contract and the department had
not performed an analysis of its return on investment. Further,
in the one contract that the department signed, it agreed that
if the program participant ever terminated the agreement, the
State would guarantee that any future program participant
would be required to accept the same terms as the original
contract. In this case, the program guaranteed a private
company the exclusive right to a location regardless of the
program participant’s wishes. In contrast, the two other
partnerships that have contracts allow the program participant
to dismiss the partner either with 90 days’ notice or for causes
specified in the contract.
The department has also inadequately analyzed its partnership
The department is spending investments. The department could not provide us with an
a significant proportion analysis of the investment required from both parties and the
of the program’s funds return on investment for any partnership. However, it has
on partnerships without spent or plans to spend at least $807,000 by March 2003 on its
knowing if the partnerships partnership agreements, an amount equal to 12 percent of the
are a worthwhile program’s reported annual expenditures for federal fiscal year
investment for the operator 2000–01. The department is spending a significant proportion
or the program. of program funds without knowing if these partnerships will
result in sufficient fees to the program and funds to the program
participants to make the investment worthwhile.
22 California State Auditor Report 2002-031 California State Auditor Report 2002-031 23
Finally, the department’s review of private partner contracts has
not ensured that these contracts are adequate. The department’s
deputy director told us that the program has not approved the
contracts for three of the six partnerships because the program’s
field offices, not the central office, put them into place, and the
central office did not become aware of the program participants’
agreements with their private business partners until after
the fact. The department’s chief legal counsel told us that
partnerships are something new for the program and the role
of the legal unit in relation to partnership agreements is still
being worked out with the department. Currently, the legal
unit told us it reviews these partnership arrangements to ensure
the department’s interests are protected. However, the legal
unit does not evaluate the partnership agreements to ensure
the program participant’s interests are protected; instead,
it has recommended that program participants considering
partnerships obtain their own legal counsel. In addition,
according to the department’s chief legal counsel, the legal unit
does not evaluate the amount of fees to be paid to program
participants or to the program.
The Department Is Unable to Effectively Monitor Its Private
Partnerships and Collect Appropriate Program Participant Fees
The department’s inconsistent enforcement of its requirements
for reporting on operations and collecting set-aside fees has
rendered it unable to effectively monitor partnership agreements.
The department does Current state regulations require all locations to submit monthly
not require the private operating reports, which show the business activities of the
partnerships to submit location including sales, expenses, and other information.
monthly operating However, the monthly reports submitted by private partnerships
reports that show the generally do not include the information the department needs
business activities of to determine the degree of the location’s success and the return
the location, including on the program’s investments. The deputy director in charge of
sales, expenses, and the program stated that the department is currently considering
other information the developing guidelines and a new monthly operating report for
department needs to partnerships, but as of June 2002 it had not established a specific
evaluate the location’s timeline to complete this task.
success and the return on
the program’s investment. None of the four locations whose monthly operating reports
we reviewed included critical information such as gross sales
and cost of goods sold. In each case, the program participant
only reported the amount of money the private partner paid
the program participant each month for the right to manage
and operate the site. For example, in one instance, the private
partner paid the program participant $7,500 a month. The
24 California State Auditor Report 2002-031 California State Auditor Report 2002-031 25
program participant thus reported his income, $7,500 per
month, as net proceeds, and usually did not report any sales or
expense information from the operation of the business.
Because the department has allowed partnerships to submit
less information on monthly operating reports than other
locations, the department has not ensured that it charges an
equitable amount of fees to program participants involved
in partnerships. The department charges all other locations
set-aside fees from a fee schedule based on net profits. The
maximum amount of set-aside fees a program participant pays
is the lesser of 6 percent of gross sales or the amount specified
on the fee schedule. However, as the previous example shows,
the department has allowed program participants who have
entered partnership agreements to report their guaranteed
In computing set-aside fees, payments from the private partners as the net profits from the
the department’s treatment location. These partnership participants then pay a set-aside fee
of partnership participants of 6 percent of the guaranteed payment figure rather than the
is inconsistent and potentially much higher fee amount the program charges other
inequitable to the program program participants based on net profits or gross sales. For
participants of other instance, the program participant who received $7,500 a month
locations, who must in turn in payment from the private partner should, according to the fee
pay a disproportionate schedule, have paid the lesser of $3,675 per month or 6 percent
share of program costs. of the facility’s gross sales, which are unknown. However, the
program charged the program participant $450 per month in
fees—6 percent of his guaranteed payment. This treatment
of partnership participants is inconsistent and inequitable to
program participants of other locations, who must in turn pay a
disproportionate share of program costs.
THE DEPARTMENT HAS NOT CORRECTED FLAWS IN ITS
PROCESS FOR PURSUING PAST-DUE COMMISSIONS,
SOME OF WHICH MAY NOW BE UNCOLLECTIBLE
Since August 1998 the department has not actively collected
past-due commissions owed to the program by private vending
machine businesses (private businesses) operating on federal
and state properties. Its delay may have rendered a significant
portion of these commissions uncollectible, causing program
participants to lose commission revenues earmarked to fund
their retirement. Moreover, although it recently established a
system to monitor the collection of commissions, the system has
proved inadequate. This problem has been compounded because
the department has not maintained all its contracts, conducted
planned audits, and appropriately trained its collection staff.
24 California State Auditor Report 2002-031 California State Auditor Report 2002-031 25
The Department’s Lack of Pursuit of Past-Due Commissions
May Have Rendered These Commissions Uncollectible
When a vending machine facility located within a federal
or state building is operated by a private business instead of
a blind operator, the private business must pay a portion of
its net income, called a commission, to the department. The
department either provides the commission to a blind operator
who runs a facility that competes with the private business
or uses the commission to fund the retirement plan for all
operators. The private business submits a monthly or quarterly
sales report to the department, which calculates the commission
due based on the report and the contractual commission rate.
Although state law requires the department to actively pursue all
commissions from private businesses, we found that it has not
adequately pursued its past-due commissions. Because it has not
promptly followed up on commissions that private businesses
failed to remit since August 1998, it may not be able to collect
these amounts. We were unable to accurately estimate the
amount of these past-due commissions because of the quality of
the data and because the program’s current system for tracking
contracts is not able to accurately identify the amount of past-
due commissions. The department is also unable to estimate
the amount of past-due commissions because it needs to use a
manual process to do so.
The department’s ability to collect these commissions has
decreased as time has passed, particularly because it believes
that the only power it has to demand collections is its ability
to cancel ongoing contracts with delinquent private businesses.
Since vending machine contracts generally expire after three
years, the department’s nearly four-year delay in ensuring that
staff actively pursue past-due commissions has reduced its
ability to collect the amounts. Staff told us that the department
had not followed up on these past-due amounts because it had
insufficient staff and an inadequate record-keeping system in
the past. The department recently developed a new contract and
commission-tracking system, but as of June 2002, it was still not
pursuing the collection of overdue commissions.
The Department’s Collection Process Is Inadequate, and Its
New Database Cannot Track Past-Due Commissions
According to the department, in fiscal year 1997–98, it used a
database system to track the commissions it received. However,
in part because of the questionable accuracy of the information
from that system, the department did not follow up on missing
26 California State Auditor Report 2002-031 California State Auditor Report 2002-031 27
commissions. In June 2001, the department contracted
with a consultant to develop a new database system to track
Because the department commissions from private businesses and to provide reports
tracks commissions by of amounts owed. However, the program’s new commission-
the month they were tracking system does not adequately serve this purpose. By using
paid rather than the the system to track commissions by the month they were paid
month for which they rather than the month for which they were owed, the department
were owed, it is unable to is unable to determine quickly which private businesses owe
determine quickly which additional commissions. For example, if a private business sent
private businesses owe a payment in June for the amounts it owed for May and June,
additional commissions. the system would only show a commission received for June. To
determine which private businesses actually owed commission
payments, the department staff would need to investigate each
instance of nonpayment or potential underpayment.
An adequate accounts receivable system should contain a
detailed history of payments by each private business and
accurate and current information identifying amounts still
owed. The challenge that the department faces is that it is
unable to calculate the commissions owed until the private
businesses report their monthly or quarterly sales. Other
agencies such as the State Board of Equalization, which collects
sales taxes from private businesses and relies on the reported
sales amounts, have adopted methods of addressing similar
problems. The department should consider incorporating
attributes of the State Board of Equalization’s model into its own
procedures. In particular, it should track who should be paying
and at what commission rate and then promptly follow up if
private businesses do not report sales for the month or quarter.
In addition, the program does not always have current and
accurate contract information. The department’s contracts with
private businesses identify the commission rate for vending
machine sales at specified locations. However, when we asked
to review the contracts, the department did not have copies of
contracts for 30 locations operated by private businesses. For
25 locations, the department did not have contract numbers,
either because no contracts existed for the location or the
agency where the vending services were provided executed their
own contracts and the department did not acquire a copy of the
contracts. Without contracts, the department cannot verify that
it is owed commissions or determine the rate it should use to
calculate the commissions.
26 California State Auditor Report 2002-031 California State Auditor Report 2002-031 27
Further compounding the situation, the department has not
audited private businesses’ reported sales and commission
The department cannot payments since 1999. According to the department, it can only
ensure that reported determine whether the commissions that private businesses pay are
commissions are correct by checking to ensure that private businesses appropriately
accurate because it has multiply the commission rate by the sales they report each month
not audited private or quarter. Without auditing the private businesses, the department
businesses’ reported cannot ensure that the sales information is accurate. Although
sales and commission it has planned to audit private businesses every year since fiscal
payments since 1999. year 1996–97, the department has not conducted any of these
planned audits since 1999 due to lack of staff resources and other
assignments deemed higher priority.
Finally, the department staff currently assigned to track
commissions from private businesses appear to lack a working
knowledge of state collection procedures and effective accounts
receivable management. When we discussed the long delays in
collection of past-due commissions with the responsible staff
person, she told us that she had drafted procedures and
collection letters but before collecting past-due commissions,
she needed to study the State’s collection procedures and
receive the approval of her supervisor. Since this person has
been assigned since 1997 to the task of developing a collection
system and procedures for collecting past-due commissions, we
are concerned that the department has not ensured she receive
training in receivables management and the State’s collection
procedures. It is also unclear why the department has not
transferred these responsibilities to its accounting section, which
is knowledgeable regarding collection procedures and already
has an established accounts receivable system it uses to track
and collect outstanding operator fees owed to the program.
THE DEPARTMENT HAS NOT CONSISTENTLY MET ALL
OF ITS RESPONSIBILITIES TO PROGRAM PARTICIPANTS
AS REQUIRED BY LAW AND ITS OWN REGULATIONS
By not fulfilling all its responsibilities to program participants
in terms of training, feedback, and financial monitoring, the
department may have hindered the ability of participants
to succeed and engage in improved work opportunities.
Specifically, the department has not complied with state law
that requires it to provide the program’s initial training in two
locations, nor has it consistently provided upward mobility
training as required by federal law. Further, the department
28 California State Auditor Report 2002-031 California State Auditor Report 2002-031 29
has not always offered operators documented feedback that
might enable them to increase the success of their facilities
even though its own policies require that it give such feedback
every three months. Finally, the department has not ensured
that operators submit financial reports and fees as required
by regulations; consequently, the department cannot readily
identify operators who may be having operating and financial
difficulties and need the program’s assistance.
The Program Has Not Complied With Certain State and
Federal Requirements for Operator Training
The program has neither provided initial program participant
training in two California locations as required by state law
nor supplied training to allow current operators to become
upwardly mobile as required by federal law. State law requires
that the program offer training in two locations in the State, but
since 1997, the program has offered training to new program
participants only in the Sacramento area. More than five years
ago, the program offered training in a second location, San Diego.
According to the department, it limited training to one location
because of declining enrollment and limited program resources.
By limiting operator training to Northern California, the
program may create a barrier for visually impaired persons
interested in participating in the program. Blind vocational
clients wishing to participate in the training must relocate to
the Sacramento area for several months, and they may have
to relocate again to operate their first assigned food-service
facilities. Moreover, although it may be more economical for
the program to offer the training only in Sacramento, the costs
of relocating multiple participants are still the State’s financial
responsibility, paid through the department’s vocational
rehabilitation program.
As we reported in our 1997 review, the program still offers only
limited opportunities for upward mobility training. Federal law
During the last three years, requires ongoing upward mobility training that includes further
the department reported education and additional training or retraining for improved
that it provided no upward work opportunities for all licensed operators. According to the
mobility training for department’s annual reports to the U.S. Department of Education’s
program operators. Rehabilitation Services Administration, the department provided
no upward mobility training during federal fiscal years 1998–99
through 2000–01. Further, except for mandatory sanitation
certification training, during the same three years, it provided
in-service classes to only 39 operators. The department’s in-service
28 California State Auditor Report 2002-031 California State Auditor Report 2002-031 29
training is designed to provide operators with instruction and
guidance to maintain their skill levels and improve current
operations. The program’s trainer also indicated that operators
are able to receive retraining by sitting in on classes offered to the
new participants when space is available and that operators might
receive individual training in the field, when the consultants feel
it is warranted. Although in-service training may be valuable for
maintaining operator skill levels, it may not be sufficient to meet
the federal requirements to provide training to prepare operators
for more complex work assignments. More than 25 percent
of operators we surveyed thought there were inadequate
opportunities for upward mobility. Furthermore, 53 percent of the
operators surveyed believed that barriers to upward mobility exist.
The department addressed training concerns in its recent
strategic plan. It stated that it intends to provide continuing
training to operators and to customize training to individuals’
needs. It also indicated that its goal is to make training available
in more locations. The department anticipates implementing
these improvements to the program’s training efforts by
December 2002. However, as of June 2002, the department
was still reviewing its training program and had not yet
implemented any improvements or developed a tangible plan
for doing so.
The Department Has Not Offered Operators Documented
Feedback in a Timely Manner
The department recognizes the importance of periodic formal
monitoring, and operators confirmed its importance and value.
Both the deputy director and the program manager stated that
location reviews are very important for monitoring a location’s
operating condition. Although the operators we surveyed
reported that they received periodic feedback and it was helpful,
we found that the department was not providing documented
Ten of the 16 locations feedback as required by its own policies. These reviews
we sampled had not document aspects of a location’s condition that otherwise might
received a quarterly not be noted.
review as required and
6 had not received a When we obtained the most recent reviews for 16 locations—4 from
quarterly review within each of the program’s 4 districts—we found 10 locations, or
the last 12 months. more than 60 percent, that had not received quarterly reviews
as required. In fact, 6 locations, or nearly 40 percent, had not
received quarterly reviews within the last 12 months, and the
most recent reviews for 2 locations dated as far back as 1998.
The program’s administrative office currently monitors when it
30 California State Auditor Report 2002-031 California State Auditor Report 2002-031 31
receives a copy of these reviews, but it does not notify program
consultants if reviews are past due. Therefore, operators may
not receive timely feedback that would enable them to improve
their locations. Although operators may receive informal
feedback through conversations with their consultants, informal
discussions do not necessarily address each area covered by
reviews nor result in the proper documentation of locations’
recurring problems. Lacking such documentation, the department
may not be able to readily identify operators who need further
assistance and resources to ensure that their locations operate at
optimum levels.
Because the Department Has Not Promptly Followed Up on
Missing Reports From Operators, It Has Not Been Able to
Monitor These Operators’ Financial Problems Properly
State regulations require each operator to submit a monthly
operating report (which the program previously called a profit-
and-loss statement) by the 25th day of the following month
for each location he or she operates. The monthly operating
report includes a summary of the facility’s operations that the
department uses as the basis for calculating certain fees owed to
the program by the operator, including set-aside fees, workers’
compensation insurance for employees, and liability insurance
for the facility. Operators are required to remit the fees to the
program each month with their monthly operating reports. The
program also uses the information from the reports to assist
operators in making decisions in improving their locations and as
a source for required federal reports and the establishment of fees.
Although the department has enhanced its existing database to
track missing monthly operating reports, it has not required staff
Although the department to aggressively follow up on either missing reports or missing
has enhanced its existing fees. This has allowed some operators to become delinquent in
database to track missing remitting their reports and fees. Our analysis indicated that 43 of
monthly operating the 166 operators who submitted monthly operating reports in
reports, it has not required fiscal year 2000–01 had at least one missing monthly operating
staff to aggressively follow report and related fees. Fifteen of the operators had three or
up on either missing more monthly operating reports missing. State regulations
reports or missing fees. require the program to estimate fees and penalties for missing
monthly operating reports after they are delinquent more than
a month. The department estimated that missing fees for active
operators as of June 30, 2002, totaled at least $28,982. However,
a memo circulated in 2000 by the program’s management
requested that consultants not follow up on missing monthly
operating reports until they were at least 60 days delinquent.
30 California State Auditor Report 2002-031 California State Auditor Report 2002-031 31
The program’s manager stated that the department extended
the period because some operators were needlessly contacted
by their consultants for reports they had already submitted.
According to the manager, monthly operating reports received
late by the accounting section were often erroneously included
as 30 days delinquent.
To verify that the program is contacting operators regarding
delinquent monthly operating reports and estimating fees and
penalties owed, we reviewed the correspondence between the
consultants and the four operators with the greatest number
of missing reports between January 2000 and January 2002.
We found that none of the consultants for these four operators
had sent notices for these missing monthly operating reports
with estimates of owed fees and penalties in a timely manner.
While the consultants may have sent reminders or had phone
discussions about the missing reports, they did not send out
initial notices with estimates until the reports were delinquent
between 83 and 292 days.
The extensive delays hindered the program’s ability to properly
monitor and promptly intervene to help operators resolve
financial problems they were experiencing. Because the program
has decided to wait until a report is 60 days late before notifying
the operator and providing estimates of amounts owed, nearly
three months pass since the month the report covers. One of
the four operators with the greatest number of missing reports
between January 2000 and January 2002 resigned from her
site because the State Board of Equalization revoked her seller’s
permit for delinquent sales taxes. According to the department,
another operator recently filed for bankruptcy but is still
operating the facility. The other two operators are both still
operating their facilities. Each of the four operators owed the
program between $4,000 and $18,900 in actual and estimated
fees. If the department had ensured that program staff promptly
addressed the missing monthly operating reports, perhaps it
could have assisted the operators in correcting their business
problems. Assistance could have been in the form of providing
timely consulting services to help the operators become more
profitable or even shutting down locations before the operators
owed such debts.
32 California State Auditor Report 2002-031 California State Auditor Report 2002-031 33
RECOMMENDATIONS
To ensure that its application and selection process for locations
is equitable, the department should establish procedures to
circulate all permanent and interim food-service locations to
eligible operators.
The department, in consultation with the California Vendors Policy
Committee, should revise the program’s strategic plan to include
expected outcomes and performance measures so the department
can evaluate the program’s success and measure its progress in
achieving strategic goals and improving noted deficiencies.
The department should aggressively and promptly pursue
development of program regulations. If the current draft is too
complex or lengthy, the program should consider breaking the
draft regulations into segments, first identifying and addressing
the highest priorities. The department should ensure that the
guidelines include measures that will improve consistency in
equipment purchase decisions, including a list of allowed and
disallowed equipment and supplies, and statewide criteria for
equipment purchase and replacement.
To improve its administration of private partnerships, the
department should take the following steps:
• Establish and follow guidelines for partnerships, ensuring that
they are in agreement with federal and state law, regulations,
and guidance.
• Require program staff to further study the cost and benefit
of each partnership to ensure that future agreements do not
inequitably drain program resources.
• Establish a review process for proposed private partnerships
that will allow the department to adequately protect the inter-
ests of the State and program participants.
• Monitor partnerships to enable the department to compare
the costs and benefits of partnerships and determine if they
achieve program objectives.
• Ensure that program staff are able to monitor the success of all
locations, including private partnerships.
32 California State Auditor Report 2002-031 California State Auditor Report 2002-031 33
To make sure that that it promptly addresses known problems,
the department should consider moving the commission-
collecting function to its accounting section, which already
collects operator fees for the program and possesses the necessary
collection knowledge and accounts receivable tracking system.
To ensure that the program provides adequate consulting,
upward mobility training, and monitoring services to operators,
the department should take the following steps:
• Offer program participants a second training location. This
will ensure that the program complies with existing state law
intended to remove potential barriers to individuals entering
the program.
• Ensure that the program identifies and offers upward mobility
training classes for operators as stated in its strategic plan.
• Track location reviews to identify past-due reviews and to
ensure that business enterprise consultants complete the
required reviews at least quarterly.
• Discontinue its practice of waiting 60 days before identifying
delinquent monthly operating reports. Also, the department
should require the accounting section to enter the data into the
database more promptly. These steps would provide program
consultants with important financial information sooner.
• Ensure that consultants contact operators regarding missing
monthly operating reports when the reports are a month or
more delinquent, as required by current regulations.
• Make sure that the program monitors operators adequately to
prevent the accumulation of significant past-due fees and lengthy
delinquencies in reporting. When operators refuse to submit
financial reports as required by regulations, the department
should demonstrate it is willing to suspend and terminate opera-
tors’ licenses to ensure compliance with program requirements.
34 California State Auditor Report 2002-031 California State Auditor Report 2002-031 35
We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: September 12, 2002
Staff: Reed M. McDermott, CPA, Project Manager
Wendy A. Stanek, CIA
Vern L. Hines
Cameron Swinko, CMA
34 California State Auditor Report 2002-031 California State Auditor Report 2002-031 35
Blank page inserted for reproduction purposes only.
36 California State Auditor Report 2002-031 California State Auditor Report 2002-031 37
APPENDIX A
The Department’s Progress in
Implementing Prior Audit Findings
TABLE A.1
The Department’s Reported Progress in Implementing Recommendations
From the Bureau of State Audits’ June 2001 Fiscal Audit
Recommendations Department Actions
To improve its financial management of the program, the
Department of Rehabilitation (department) should take the
following steps:
Complete its strategic plan, including a component that The department recently completed its strategic plan for the
outlines future uses of the vending stand fund and that will program. The plan includes a three-year spending budget that
help the department determine whether its surplus can outlines proposed uses of program funds.
support its approved projects.
Finish its survey of state and federal properties to identify The department completed its survey and in March 2002
vending machine opportunities that could generate submitted a report to the Legislature and the governor’s office
commissions for the program. identifying five new locations feasible for program development.
Identify and pursue vending machine commissions from Since August 1998 the department has not actively pursued
agencies and vending machine operators that refuse or fail collection of past-due commissions. See Audit Results for
to remit commissions. further discussion of past-due commissions.
Verify the exempt status of incorporated, nonprofit The department currently is not actively pursuing the
employee organizations, and then collect the vending collection of commissions from potentially exempt
machine commissions from those that are not exempt. organizations. The department states that college and
university organizations are not likely to cooperate and pay
vending commissions. Consequently, the department has
decided not to pursue collecting commissions from them.
The department should evaluate its need for resources to identify
and collect income from operators of vending machines, and it
should consider taking one or all of the following steps:
Use the results of its strategic plan to determine whether it The department has recently completed its strategic plan and
can allocate staff from other units of the department. states that, because of budget reductions and the current hiring
freeze, there are no additional staff resources to devote to the
vending machine unit. The department believes it should be able
to maintain its new commission database with current staff and the
assistance of a consultant. See Audit Results for further discussion of
uncollected commissions and weaknesses of the new database.
Evaluate the feasibility of the blind operators’ proposal for The department is still reviewing the feasibility of the proposal and
contracting for professional services to identify and collect has missed its initial deadline to reach a decision by August 2002.
vending machine commissions.
Consider seeking legislation to amend state law to allow the The department disagrees with this recommendation. It
department to use some of the vending machine income for believes that such a change in state law would conflict with
hiring staff to perform the program’s administrative functions. federal law governing the program.
36 California State Auditor Report 2002-031 California State Auditor Report 2002-031 37
TABLE A.2
The Department’s Reported Progress in Implementing Recommendations From the
Bureau of State Audits’ August 1997 Programmatic Review
Recommendations Department Actions
To ensure that it is adequately promoting the program, the
department should take the following actions:
Consistently inform all rehabilitation counselors for the blind The department states that it discusses the program at new
and counselors about the program to ensure that all blind employee orientations, during district visits, and at numerous
clients of the department are made aware of it. meetings of blind organizations and counselor groups. The
department also states that it annually mails promotional
Initiate mailings to blind individuals and community organizations
material to various blind organizations, community groups,
to ensure that blind individuals who are not currently clients of the
and department counselors.
department are made aware of the program.
To ensure that all applicants meet criteria for the program, the
department should take the following actions:
Comply with existing state regulations, or if appropriate, The department plans to propose revisions to state regulations
propose revisions to state regulations to remove the to remove requirements that medical and vocational evaluations
requirements that medical and vocational evaluations document an applicant’s physical and emotional qualifications
document an applicant’s physical and emotional to operate a vending facility.
qualifications to operate a vending facility.
Require medical evaluations that provide evidence of the The department now requires prospective trainees to provide
applicant’s TB status. evidence of their TB status.
To fulfill its mission to provide blind persons with enlarged
economic opportunities and assist the efforts of the blind to be
self-supporting, the department should do the following:
Aggressively identify and establish profitable vending The department believes it fulfills its mission to establish
locations on both public and private property, combine profitable vending locations. State and federal agencies are
locations when beneficial, and document the analysis required by law to notify the department when facilities with
performed to determine a location’s potential. food service become available. Additionally, the department
has received from the Department of General Services a list
of all state agency locations. Program staff have evaluated the
potential of these locations to house new program vending
facilities. The department maintains documents to support its
analysis of new locations.
Formulate criteria and procedures for supplementing less The department plans to promulgate regulations to provide
lucrative locations and apply them consistently. a process to allow operators to compete for a location that
can be combined with his or her existing location. See Audit
Results for further discussion of the department’s efforts to
update regulations governing the program.
Establish a process to identify and pursue priority for blind The department states that it has sent letters to appropriate
operators when a state or federal facility has a vending state and federal agencies reiterating the program’s priority
facility that is not operated by a licensed blind operator. for operating vending facilities located on state and federal
property. The department requested that these agencies report
to it any vending facilities operated by parties other than
program operators. Also, department staff prepare an annual
report of vending facilities operated by private businesses from
its database of private businesses that pay commissions on sales
of vending machines operated on state and federal property.
Staff can then group and analyze these locations for potential
development into a program vending machine location.
To ensure that it is taking adequate steps to expand business The department addresses innovative ways to implement
opportunities, the department should establish procedures to new business opportunities in its recently completed strategic
systematically study the successes of private enterprise and plan for the program. See Audit Results for discussion of the
analyze potential lucrative business opportunities. In addition, weaknesses of the program’s strategic plan.
it should consider innovative ways to implement new business
opportunities in the program.
38 California State Auditor Report 2002-031 California State Auditor Report 2002-031 39
Recommendations Department Actions
To ensure that its policy for classifying and circulating The department has not corrected the inequities inherent in
locations to operators is equitable, the department should its selection process for assigning interim locations. It plans to
establish procedures to circulate all vending locations to establish regulations to provide for a competitive process that
eligible operators. will permit the department to circulate notices for all locations.
Currently, the supervising business enterprise consultant for
the region where the interim facility is located assigns interim
locations at his or her discretion. This assignment is made from
a list of operators who have expressed an interest in operating
interim locations. See Audit Results for further discussion of the
department’s assignment of interim locations.
To improve its ongoing training program, the department
should take the following actions:
Ensure that the curriculum provides opportunities for all The department has provided limited upward mobility training
operators to improve current operations or improve existing opportunities for its operators. Its recent strategic plan includes
skill level to advance to more complex vending facilities. plans to provide continuing education for operators with a
projected implementation date of December 2002. See Audit
Results for further discussion of training.
Consult with operators to develop ongoing training classes The department mailed a needs assessment questionnaire to
that meet their needs. operators to receive their feedback on desired training classes.
To ensure that the program meets its responsibilities to
promote and encourage operator success, the department
should do the following:
Enforce state regulations that require operators to submit The department is testing an enhancement to its business
monthly operating reports (which the program previously enterprise financial system that will identify and report on
called profit-and-loss statements) and maintain adequate missing monthly operating reports. See Audit Results for
records to assist business enterprise consultants in further discussion of monthly operating reports.
performing operating report reviews.
Develop procedures to ensure that the business enterprise The department, with the approval of operators’ policy
consultants consistently and accurately complete operator committee, has eliminated the program requirement to have
appraisals and location reviews. business enterprise consultants perform annual operator
appraisals due to the perceived subjectivity of the evaluations.
The department still requires that its business enterprise
consultants conduct operator location reviews at least once
every three months. However, the department has not
ensured that the business enterprise consultants complete the
reviews as frequently as required. See Audit Results for further
discussion of location reviews.
Re-evaluate the use of business enterprise consultants to The department has not revised the responsibilities of the
provide equipment services, with the goal of optimizing the business enterprise consultants to reduce the amount of time
time available for consulting services. they spend on equipment duties. However, it reported that it
has consolidated equipment-purchasing duties and assigned
them to a staff person at the central office.
Provide guidance to the business enterprise consultants The department’s recently completed strategic plan for the
by developing a formal training program and scheduling program calls for improved quality and availability of training
routine meetings to discuss policies and procedures that will for program staff and has a projected implementation date of
ensure consistency in the services provided to operators. December 2002.
Establish clear policies for the business enterprise consultants The department believes that existing statutes, regulations,
to follow when counseling operators who are not complying and procedures for the program provide sufficient guidance
with the terms of their contracts. to its business enterprise consultants and has instructed the
consultants to take action consistent with these statutes,
regulations, and procedures.
Modify operator contracts to include ranges of acceptable The department disagrees with this recommendation and has
performance, and uniformly enforce the terms of the contracts. not included performance ranges in its operator contracts.
Suspend or terminate the licenses of those operators who fail The department has sent letters to all operators, putting them
to respond to the business enterprise consultants’ counseling on notice of its intent to take action against operators in
and continue to disregard contract terms. violation of their contract terms.
continued on next page
38 California State Auditor Report 2002-031 California State Auditor Report 2002-031 39
Recommendations Department Actions
To improve its management of monthly operating reports, the
department should take the following actions:
Improve the accuracy of its database and add missing records. The department has completed an enhancement to its business
enterprise financial system, which will allow better monitoring
Implement procedures to improve the accuracy of the
of monthly operating reports. The system generally does not
summaries of missing monthly operating reports it
include records before September 1995. The department
distributes to business enterprise consultants.
believes that the time and resources required to reconstruct
Reconstruct records prior to September 1995 and follow up monthly operating reports before September 1995 is better
on missing monthly operation reports from that period. spent pursuing and maintaining records on a prospective
basis. The new system enhancements will allow prompt
Intervene when an operator falls behind in submitting identification of missing monthly operating reports and allow
monthly operating reports and assist the operator if help is staff to intervene when the operator falls behind in submitting
needed in preparing them. reports. However, current department practice allows reports
to be 60 days delinquent before they are identified as being
late. See Audit Results for further discussion of monthly
operating reports.
Take action against chronically delinquent operators in As stated on page 39, the department has sent letters to
accordance with laws, regulations, and department policy. all operators notifying them of its intent to take action
against operators in violation of their contract terms, which
includes not submitting required monthly operating reports.
Additionally, the department has established payment
schedules for many previously delinquent operators.
Ensure that monthly operating report information is provided See system enhancement previously described.
in a timely manner to business enterprise consultants so they
can promptly follow up with the operators.
Estimate fees and penalties owed from operators for missing The department generally estimates the fees and penalties
monthly operating reports and record the estimated associated with missing monthly operating reports and
amounts as receivables. includes these amounts as part of its reported contingent
receivables on its year-end financial statements for the
program.
To improve its monitoring of accounts receivable, the department The department is currently testing an enhancement to
should identify when a operator is falling behind in his or her its accounts receivable system that it hopes will enable
payment of fees and establish a reasonable corrective action consultants and management to better monitor operators
plan, and remove the operator from the location or take action that fall behind in payments to the department. See Audit
against the operator’s license if he or she fails to comply with Results for further discussion of the department’s monitoring
the corrective action plan and pay all fees. of operators’ financial problems.
40 California State Auditor Report 2002-031 California State Auditor Report 2002-031 41
Recommendations Department Actions
To ensure that it appropriately administers set-aside fees, the
department needs to take the following actions:
Ensure that it uses set-aside funds only as allowed by Consistent with the purposes identified in federal law for set-
federal law and propose changes to state law to ensure it is aside fees, the department no longer makes initial stock loans
consistent with federal law. to operators as was allowed by state law and the department’s
procedures manual.
Vigorously attempt to collect all outstanding initial stock loans. The department has contracted with a collection agency for
collection of overdue stock loan accounts.
Reimburse the trust fund for moneys that were used as initial The department disagrees with this recommendation and has not
stock loans. reimbursed the trust fund for money used as initial stock loans.
Propose legislation to eliminate the $1,000 income minimum The department disagrees with this recommendation and has
and require all operators to pay fees. not proposed the suggested legislation.
Modify the existing fee schedule to ensure that all operators The department disagrees with this recommendation and
pay a fair amount of fees. believes that not all operators should be required to pay fees.
However, the department has currently assigned work groups
to review the fee schedule to ensure that all operators pay a
fair amount of fees.
Ensure that the set-aside fee schedule is appropriately updated. The department generally updates the fee schedule’s
minimum amount required for paying fees annually but has
not yet updated the amounts of fees to be paid by operators.
Further, the department plans to promulgate regulations to
establish the process for updating the entire fee schedule. See
Audit Results for further discussion of the department’s efforts
to update its program regulations.
To improve its collection of vending machine commissions, the
department should do the following:
Continue its efforts to enter into contracts with vending The department has continued its efforts to enter contracts
machine companies. with private vending machine businesses. However, it does
not always get copies of contracts that other agencies entered
with private vending machine businesses. This hampers the
department’s ability to effectively monitor the commissions
these businesses pay to the department. See Audit Results for
further discussion of past-due commissions.
Consider dedicating additional staff to assist in The department has not added any additional staffing
establishing contracts. resources to establish contracts.
Perform an analysis to determine the costs and benefits of The department maintains that trust funds should not be used
using moneys in the trust fund to address staffing needs. for additional staffing.
Establish procedures to monitor contract compliance. The department performs a desk audit of reported commissions
by multiplying reported sales by the contract commission rate.
However, the department is unable to verify the accuracy of the
reported sales amounts and, as previously discussed, does not
always have the contract to identify the contracted commission
rate. See Audit Results for further discussion of this issue. In the
past, the department’s internal audit unit performed site reviews
of a few of these private vending machine businesses; however,
due to other priorities and limited resources, no such audits
have been performed since 1999.
continued on next page
40 California State Auditor Report 2002-031 California State Auditor Report 2002-031 41
Recommendations Department Actions
To ensure that vending machine commissions are The department currently uses unassigned vending machine
appropriately used, the department, with the approval of commissions to fund the retirement of all operators assigned a
the operators, should establish a plan that would use the vending location.
unassigned vending commissions to benefit all operators.
To improve its controls over program assets, the department
should take the following actions:
Discontinue the practice of allowing a private food-service For the case in question, the department corrected the
company to use equipment purchased with federal funds. situation by selling the equipment that previously was
being used by a private food-service company. However,
the department is currently allowing private food-
service businesses to use program equipment through its
encouragement of private partnerships. See Audit Results for
further discussion of partnerships.
Collect the money that is owed to it by the Legislature. The Legislature was billed for, and has paid, the amount it
owed the program.
Ensure that all contracts entered into with other entities are The department maintains that all contracts are forwarded
for authorized purposes and are approved by staff with the to its budget and contract section to be reviewed and signed
appropriate authority. by the appropriate department representatives. However, we
have concerns with the contracts for private partnerships. See
Audit Results for discussion of private partnerships.
Promptly reconcile the results of its physical inventories with Currently, the department’s business services unit does not
the equipment records. reconcile the physical inventories of the operators’ facilities with
property records. The business services unit recently stopped
performing physical inventories due to department-imposed
travel restrictions as a result of the current budget crisis.
To minimize the potential financial risk to both operators and
the State, the department should take the following actions:
Work to resolve the retirement plan issues as quickly as possible. With the establishment of its new retirement system and
the system’s favorable tax status approval acquired from the
Internal Revenue Service, the department maintains that its
retirement issues have been resolved.
Perform a thorough review of the status of the operators as The department believes that no additional legal analysis
state employees or independent contractors. is needed.
Implement those modifications that will ensure that workers The department maintains that program operators are not
are treated as intended. state employees but independent contractors who own their
own business consistent with the statutes and regulations
that govern the program. However, the department added a
clarifying paragraph to its standard operator agreements to
reinforce this.
42 California State Auditor Report 2002-031 California State Auditor Report 2002-031 43
APPENDIX B
Survey of Blind Operators of Food-
Service Facilities
To obtain input from blind operators of food-service facilities
(operators) regarding the administration of the Business
Enterprise Program for the Blind (program), we surveyed
35 active operators by telephone. Below are summarized results
of the key questions on the operator survey.
Yes No Unsure
Does the income you receive from participating in the program
allow you to be self-supporting? 71.4% 28.6% —
Gone Up Remained
Increased Decreased and Down the Same
Since you have been in the program, has your income from
participating in the program . . . 45.7% 17.1% 34.3% 2.9%
4 or More
0 times 1 Time 2 Times 3 Times Times
How many times did your business enterprise consultant
(consultant) visit your facility in the last 12 months? 0.0% 2.9% 14.3% 17.1% 65.7%
Provide
Location Training or
Review Guidance Equipment Other*
What was the focus of the consultant’s visits to your facility?† 65.7% 11.4% 34.3% 65.7%
Yes No Unsure
Did you receive any feedback from your consultant, such as a
location review report, as a result of a facility visit? 91.4% 8.6% 0.0%
Was the feedback you received appropriate and helpful? 80.0 2.9 17.1
Are equipment repairs and replacements done in a timely manner? 71.4 17.1 11.4
When you applied for your current location, did the program
accurately estimate the location’s expenses and income? 60.0 34.3 5.7
Are you actively seeking to change locations? 40.0 60.0 0.0
Should your location be closed or combined with another location? 42.9 54.3 2.8
Are you satisfied with the program’s development of new locations? 42.9 51.4 5.7
Do you believe the program offers adequate opportunities for
upward mobility? 74.3 25.7 0.0
Do you believe there are barriers to upward mobility? 52.9 47.0 0.0
Do you believe there are barriers to entering the training program? 17.7 58.8 23.5
Are you interested in working with a private partner—in general,
not necessarily at your current location? 45.7 34.3 20.0
* Other included such categories as reviewing inventory; remodeling; speaking with the health department or building management; and checking sales, sharing
ideas, or touching base.
† Survey participants could choose more than one response, thus the total percentage of responses is greater than 100 percent.
42 California State Auditor Report 2002-031 California State Auditor Report 2002-031 43
Blank page inserted for reproduction purposes only.
44 California State Auditor Report 2002-031 California State Auditor Report 2002-031 45
Agency’s comments provided as text only.
California Health and Human Services Agency
1600 Ninth Street, Room 460
Sacramento, CA 95814
August 28, 2002
Elaine M. Howle*
State Auditor
Bureau of State Audits
555 Capitol Mall — Suite 300
Sacramento, CA 95814
Dear Ms. Howle:
Attached you will find the response of the Department of Rehabilitation to your recent draft audit
report of the Business Enterprise Program for the Blind. I have also enclosed a diskette containing
the department’s response.
Sincerely,
(Signed by: Grantland Johnson)
GRANTLAND JOHNSON
Attachments
* California State Auditor’s comments begin on page 61.
44 California State Auditor Report 2002-031 California State Auditor Report 2002-031 45
Department of Rehabilitation
2000 Evergreen Street, 2nd Floor
Sacramento, CA 95815
August 28, 2002
Elaine E. Howle
State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, CA 95814
Re: Report #2002-031
Dear Ms. Howle:
Enclosed is the response to your report entitled “Department of Rehabilitation: Its Delay in
Correcting Known Weaknesses Has Limited the Success of the Business Enterprise
Program for the Blind” performed in accordance with Section 19640.5 of the California Welfare
and Institutions Code. Thank you for the additional time to respond to the report.
If you have any questions about the response, please contact Juney Lee, Assistant Director,
Operations and Accountability Section at (916) 263-8826.
Sincerely,
(Signed by: Catherine Campisi)
CATHERINE CAMPISI, Ph.D
Director
Enclosure
46 California State Auditor Report 2002-031 California State Auditor Report 2002-031 47
DEPARTMENT OF REHABILITATION
Response to the Bureau of State Audits Report Entitled
“Its Delay in Correcting Known Weaknesses Has Limited the
Success of the Business Enterprise Program for the Blind”
INTRODUCTION
Since January 2000 when the current executive level management team assumed
responsibility of the Department of Rehabilitation (department), the department has
been strongly committed to make the Business Enterprise Program (BEP) program a
success and recognizes that improvements are needed to achieve that goal. Despite
the many real barriers that the department has encountered during the past 2 years,
the department has accomplished the following:
1. The development of a strategic plan and implementation of a financial planning
process, which enables the program to project revenues and make sound deci-
sions for program growth and improvement.
2. Completion of a master purchase agreement, which streamlines the purchasing
process for vending machines.
3. Competed for and won the contract to provide food service at Edwards Air Force
Base where the blind vendor recently won the Hennessey Award, the top honor
awarded for food service by the Air Force.
4. Opened vending facilities in 7 prisons and 1 roadside rest, the top income produc-
ing types of BEP locations.
5. Automated the annual reporting process required by Rehabilitation Services
Administration (RSA), reducing required staff time by 75% and improving accuracy.
In addition, beginning fiscal year 2002-03, the department plans to establish approxi-
mately 30 highly profitable vending machine locations over the next three years.
The department is pleased that the survey of program participants conducted by BSA
(Appendix B) indicates strong satisfaction with the program. A large majority of the
vendors surveyed felt that the income they earned allowed them to be self-supporting,
the oversight and feedback provided by the program was helpful, the equipment repairs
were provided in a timely manner, and that there was adequate upward mobility. Cali-
fornia compares favorably with other BEP programs and, in fact, the average income
California vendors receive is above the national average.
The department faces many challenges brought on by reductions made in the depart-
ment’s budget for Fiscal Year (FY) 2001-02 and further reductions being considered
for budget year 2003-04. In addition, the department faces elimination of an unknown
number of vacant positions, many of which may support the BEP. However, despite
these challenges as well as other real barriers facing all departments responsible for
program implementation, the department is committed to improving the overall perfor-
mance of the BEP.
46 California State Auditor Report 2002-031 California State Auditor Report 2002-031 47
The department provided the BSA valid examples of external occurrences that have
had a significant impact on the program, such as changes in the department’s admin-
istration and program management, department reorganization, changes in the mem-
bership of the advisory committee representing the vendors and key staff vacancies.
These occurrences, although heavily discounted in the report, are very real and have
significantly impacted the department’s ability to manage this program.
The department understands the nature and reason of a programmatic review and wel-
comes feedback for the betterment of a program. However, the department believes
1
that this report lacks perspective and does not present a balanced and objective review
of the program. The department strongly disagrees with some of the statements,
conclusions and mischaracterizations of information concerning the management and
operation of the BEP. However, the department will consider the suggestions and rec-
ommendations made in the report and continue to do its best to make a very success-
ful program even better. The department offers the following in an attempt to provide
clarity and perspective to some of the statements and conclusions made in the report.
IN RECENT YEARS, THE PROGRAM HAS ACHIEVED ONLY
LIMITED SUCCESS IN MEETING ITS GOALS
Participation in the program has remained steady during the last five years with the
exception of a peak of 16 in FY 1997-1998. The department conducts continuous
outreach efforts seeking new vendors to enter into the program. Several factors may
impact consumers’ decision to choose the program as their vocational outcome. Con-
sumers know that to be successful in the program they might be required to relocate
several times. Also, other opportunities are available to consumers who are visually
impaired through the department’s vocational rehabilitation program. These other
employment opportunities may be available in their own communities. Ultimately, it’s
up to each consumer to make the choice to enter the BEP or not.
According to the survey included in BSA’s report, 71.4% of vendors surveyed indicated
that the income they receive from the program allowed them to be self-supporting.
This high percentage could be attributed in part to the generous benefits package pro-
vided by the program. For example, in FY 1999, 2000, and 2001, vendors received an
annual contribution to their retirement fund of $6428, $6595, and $5868 respectively.
Vendors also receive monthly benefits of health insurance premiums at $225, dental at
$34, and life insurance on a sliding scale at $.58 per $1000 of coverage the cost of pro-
viding their own individual health benefits if the program did not provide them would be
much higher. Therefore, in the year 2000, for example, for the 30% of vendors receiv-
ing an average net income of less than $1050 per month, their actual average monthly
income including benefits would have been $1909. Additionally, many vendors employ
spouses and adult children whose wages are reflected as expenditures on the Monthly
Operating Report (MOR) but in fact, contribute to the family income.
48 California State Auditor Report 2002-031 California State Auditor Report 2002-031 49
The department established a standard of $2500 per month as a measure to deter-
mine whether to open a new facility and not as a measure to determine self-sufficiency.
To the extent vendors continue to operate facilities earning less than $2500 per month,
despite opportunities to move into more lucrative locations, they do so for a variety of
reasons: they have sufficient income, they do not wish to relocate, and/or they do not
choose to work in a more demanding location. The department intends to continue
adding more profitable locations to the program; however, the program does not set
minimum standards for ongoing operations. Vendors have had, and will continue to
have, regular opportunities to move into more profitable locations.
2
The department has written procedures for finding vendors for interim locations. The
field office supervisors send a letter-of-interest to all vendors in their regions approxi-
mately every two years to generate a list of potential interim vendors. Names of other
interested vendors may be added to the list upon written request to the supervisor on
an ongoing basis. The selection of an interim vendor is based on availability, qualifica-
tions, and proximity to the vendor’s primary location.
The department does not circulate announcements for interim locations because,
based on experience, it is not productive or practical. In emergency cases such as
sudden abandonment through the death of the vendor, the staff must find an interim
vendor as quickly as possible, which precludes following a more lengthy procedure.
Following the selection of an interim vendor, however, staff circulates the location to all
vendors, following the procedure for selection of a permanent vendor.
THE DEPARTMENT ONLY RECENTLY PROVIDED STRATEGIC
DIRECTION TO ITS STAFF AND PARTICIPANTS
While the BSA accurately identifies a lag in time for the department to issue its first
strategic plan, the department followed through with a previous BSA recommendation
3
to develop and issue a strategic plan. The report discounts the significant factors that
impeded the department’s ability to complete the strategic planning process in a time-
lier manner. However, in year 2000, a change in administration occurred, resulting in
a period of time before the department appointed its upper management team. It also
took time for the department to complete a structural reorganization to better serve
individuals who are blind and visually impaired, among others. Moreover, since year
2001, the department has faced significant vacant positions and resource constraints,
which further slowed the planning process.
The BEP strategic plan identifies specific objectives, specific tasks and staff assign-
ments. The department agrees that benchmarks and identified outcomes would be
helpful and will consider such performance measures in future updates to its strategic
plan.
48 California State Auditor Report 2002-031 California State Auditor Report 2002-031 49
THE DEPARTMENT HAS FAILED TO UPDATE ITS GUIDELINES
FOR THE ADMINISTRATION OF THE PROGRAM
The existing state and federal regulations guiding the administration of the BEP are
extensive and complete. The department acknowledges that some of the regulations
4
may be outdated and can either be modified or eliminated. However, the department
is not aware of any specific regulation that has impeded its ability to efficiently and
effectively manage the BEP. In addition, the Welfare and Institution Code requires the
department to only consider revisions to its regulations on a regular basis, which the
department has done repeatedly over the years. So, while the BSA is correct in its
statement that the department did not make changes to its regulations, the department
is not required to change any regulation within a specified period and in fact, is not
required to make any changes to the regulations at all. It is a matter of management
discretion to assess the need for regulatory changes and the relative priority for such
5
changes compared to other program needs. Furthermore, the department does not
agree with the BSA’s conclusion that a lack of revisions to the regulations equates to
an absence of guidance. The existing regulations provide extensive guidance regard-
ing the administration of the program.
In addition to the lengthy process needed to analyze, develop and obtain appropriate
approvals for amendments to regulations, the department is required to consult with
the California Vendors’ Policy Committee (CVPC) that represents the operators con-
cerning policy development, including regulations. A change in the committee mem-
bership occurred while the department was in the process of reviewing possible regula-
tory changes. Consultation with the committee, before and again after the change in
membership, extended the required period for development of regulation changes.
In the report, the BSA faults the department for making its draft regulations “overly
comprehensive” and in its judgment such level of detail “may” render the program
6
“inflexible.” However, the BSA provided no support for its judgment that the level of
detail being considered in the revised regulations is inappropriate. In the department’s
experience, in many cases, greater detail has facilitated a superior administration of
the program. The department acknowledges that it is difficult to satisfy the statutory
requirement that certain types of rules be issued as regulations while at the same time
preserving maximum flexibility in its ability to operate the program. The difficult chal-
lenge of drafting appropriate regulations requires that the department proceed delib-
erately. In addition, the department will initiate a review of the regulatory changes by
the Office of Administrative Law only after the final version of the proposed regulatory
changes have been reviewed by the department’s legal staff.
The department does not believe that issuing policy in lieu of regulations is a sound
management practice, as this would expose the department to legal action to have
such policies considered as underground regulations hence unenforceable. The
department is required to place certain types of rules into regulation, after appropriate
notice and opportunity for public comment. The department is not free to issue poli-
cies, if the subject matter of the policy is regulatory in nature.
50 California State Auditor Report 2002-031 California State Auditor Report 2002-031 51
In the report, the BSA states the department has not provided guidelines to staff in
making decisions regarding equipment purchases, including a list of appropriate and
inappropriate equipment. As a result, the report concludes that operators “may not be
receiving equitable services.”
Department staff is guided by existing regulations regarding equipment, including
the requirement that the program consult with the vendor concerning equipment pur-
chases. The department believes that allowing program staff to evaluate and decide a
vendor’s equipment on a case-by-case basis is appropriate. Each location has unique
needs, based upon factors such as customer preferences, potential food sales pro-
duced by the equipment, other equipment already in use at the location, space, local
competition and operator needs. Overall consistency is also assured by approval of
7
purchases by supervisors after consultation with the program manager. In its report,
the BSA does not cite any instances in which a program operator was treated inequi-
tably, instead apparently relying upon the speculation of one operator who stated that
his request for equipment might be denied while another operator received the same
equipment. Regulations allow program operators the right to appeal decisions if they
disagree with a decision regarding equipment. As the program has received very few
grievances from operators based on this issue, the department believes that the cur-
rent flexible and collaborative approach to equipment purchases is working well.
BY ALLOWING OPERATOR PARTNERSHIPS WITH PRIVATE
COMPANIES, THE PROGRAM HAS COLLECTED INEQUITABLE
OPERATOR FEES AND MAY NOT HAVE COMPLIED WITH FEDERAL LAW
The department does not allow vendors to trade program benefits to private companies
and the department has not provided program resources to such companies.
As noted in the report, the Randolph-Sheppard Act, under which the program is oper-
ated, does not prohibit contractual arrangements between operators and private com-
panies. Such agreements are in use in other states. The department acknowledges
that legitimate issues for discussion exist with respect to contractual arrangements
8
between operators of vending facilities and private businesses. However, the BSA
is incorrect in characterizing these agreements as “partnership agreements” and the
department as a party to the agreements. Nonetheless, the department agrees with
the BSA that such contractual relationships should not and will not relieve operators of
their responsibility to operate or manage their facilities.
These agreements are limited in number and scope and are between the operator of
the facility and a private business. Over the past few years, the program has explored
the use of these innovative contractual arrangements between the operator and pri-
vate companies in a few unique situations where the program believed that such an
arrangement would permit a facility to be operated (and provide an opportunity for a
blind individual) that otherwise could not be operated. The program has attempted
to assure that the proposed arrangements are consistent with state and federal law.
9
No program funds or other benefits are made available to the private entities and the
50 California State Auditor Report 2002-031 California State Auditor Report 2002-031 51
private entities pay fees similar to other program participants. In each case in which
the department has approved contractual arrangements with a private company, the
department has done so within the framework of existing regulations that specifically
provide that the vendor is responsible for managing and operating the facility.
Further, it should be noted that while existing regulations provide that the operators
are responsible for managing and operating the facility, the operators are permitted to
purchase services, including the services of on-site manager, food suppliers, account-
ing services, etc. Within the parameters of the regulations and the operating agree-
ment for their facility, the operators have the same freedom as any other small busi-
ness operator to decide how the facility is operated and with whom they contract for
services.
The contractual relationships with private entities have only been used for specific pur-
0
poses and have only occurred to date in two limited circumstances: in connection with
food service at federal military bases, and in connection with cafeteria operations on
state property.
One of the six facilities referenced in BSA’s report is a military base. A contractual
agreement between the operator and an experienced food service company permitted
the operator to obtain a facility that he otherwise could not have obtained and oper-
ated. The contract between the operator and private company required the operator to
function as the manager of the operation, with management assistance, training and
a line of credit provided by the private company. The federal government awarded the
underlying food service contract for a limited period, and the parties contemplated that
the services of the private company would likely be required throughout the term of the
underlying contract given the size and complexity of the operation. Accordingly, the
contract between the operator and vendor did not include a timetable for the private
company to cease providing assistance at a particular point.
As noted in BSA’s report, the program has also explored the use of contractual
arrangements between vendors and private companies in the context of cafeteria
operations in an effort to address the historically low profitability of such facilities.
Cafeterias produce the second least net income of any type of facility in the program,
are more difficult to operate, and are fraught with personnel, liability and quality issues.
Many cafeteria locations have been unable to attract an operator for years with some
even returning to the private sector. The program has to either implement new and
innovative methods to make cafeteria operations more successful or cease cafeteria
operations all together. Use of contractual agreements with private companies appears
to be a potential option to assist vendors in operating this type of facility successfully.
Currently, certain vendors who are operating cafeterias have entered into arrange-
ments with private companies. One such facility is a cafeteria in a state building oper-
ated by an interim vendor. Although the cafeteria is large and attractive and 2500
people work in the building, there are dozens of restaurants in the area that compete
with the facility. A local restaurateur expressed interest in working with a blind vendor
52 California State Auditor Report 2002-031 California State Auditor Report 2002-031 53
to develop the business. An interim vendor was identified, and a proposed contract
between the vendor and the private entity established a specific training program for
q
her. As she is an interim vendor, and has her main location in another building, she is
not at the cafeteria all the time (nor is she required to be by state regulation). She is,
however, responsible for the operation of the facility and is learning the many facets
of running a cafeteria. Since the cafeteria was built and equipped by Department of
General Services (DGS), no funds were invested by the program in this arrangement.
The program has been able to open and operate the facility while providing training
and experience to a vendor.
A second cafeteria in which the vendor is working with a private company involves a
state leased building. The existing cafeteria is poorly designed, it is extremely large
and requires a minimum of thirteen employees to operate. The building population is
relatively low. The previous occupant of the building subsidized the cafeteria opera-
tion. Only a very experienced operator could be expected to make the location profit-
able without such a subsidy. Because of its high visibility, several local restaurateurs
approached the state agency when it first occupied the building to express interest
in operating the cafeteria. After analyzing its potential, however, these companies all
declined. The program believed that with the assistance of an experienced private
entity, a vendor might be able to succeed. The original owner of the building had pro-
vided all of the equipment and furnishings, so very little expense was required to open
the facility. The blind vendor selected to operate the facility is on-site every day, partici-
pating in the operation of the facility and acquiring training from the private company.
No program benefits were exchanged with the private company by either the blind
vendor or the program.
The department’s expenditure of $800,000 noted in the report was mostly attributable
to the establishment of one particular facility located in the newly built East End proj-
9
ect and, contrary to BSA’s statement, did not benefit private entities. The East End is
being constructed through a joint powers project involving not only DGS and the state
departments that will be occupying the space, but also the City of Sacramento and the
Capital Area Development Authority (CADA). DGS notified the program over two years
ago that it did not want a typical “sterile state cafeteria.” Instead, DGS wanted a high-
end restaurant in this facility to satisfy the concerns of the city in particular that this
facility be open evenings and weekends to avoid a “black hole” effect in the heart of the
city after working hours.
The department viewed this particular location as an excellent opportunity to be inno-
vative and demonstrate that the BEP can provide top of the line customer service. The
program recognized that this facility would be more expensive to establish than a typi-
cal cafeteria; however, due to the size of the complex, the potential exists for the loca-
tion to produce significant revenue, provide above-average income to the operator and
generate significant fees to the program. The program analyzed the selected vendor’s
concept for the location, as well as the level of investment needed and potential income
w
for the vendor. A thorough analysis was made of the potential return from the restau-
rant at the East End project both for the vendor and for the program.
52 California State Auditor Report 2002-031 California State Auditor Report 2002-031 53
The funds allocated for the East End project are for the development of the restaurant
for the program and its selected vendor, not for a private entity. At this time, although
the vendor contemplates a contractual arrangement with a private company in con-
nection with this facility, no such arrangement is required nor has any agreement been
reached.
e
In all instances when vendors enter into an agreement with private vendors, the depart-
ment takes the necessary steps to reasonably ensure that the interests of the State
and of program participants are protected.
The department acknowledges that it has not yet developed specific guidelines with
respect to the contractual arrangements between vendors and private companies. The
department is currently evaluating the merits of these arrangements and considering
how best to provide criteria and guidance for their use. The department will develop
procedures to ensure compliance with current guidelines. However, program manage-
ment has been mindful of the legal and regulatory framework applicable to the program
in its exploration of the use of innovative contractual arrangements in a limited number
of cases.
The department acknowledges that in two instances program field staff allowed
arrangements to proceed without contacting program management to assure that any
such arrangements were consistent with existing regulations and statutes. However,
these arrangements were never approved. When program management learned of
these proposed arrangements, field staff was advised that these arrangements were
not approved and notified all field offices that these types of arrangements must be
reviewed and approved by program management.
The department acknowledges that the preparation of the MORs and calculation of the
set-aside payment can be complicated in situations in which the vendor and private
party have a contractual agreement. The department continues to review this issue.
Based upon the limited number and scope of these types of arrangements, however,
r
the department believes that the BSA overstates the magnitude of this issue.
In one instance identified in the BSA report, a vendor was operating a facility with the
assistance of a private entity without a contractual agreement in place. The program is
working to correct this situation.
With respect to another contractual arrangement, the BSA criticizes the department for
agreeing, “that any future program participant would be required to accept the same
terms as the original contract” regardless of the program participant’s wishes. While
this is a true statement, such an agreement was necessary in order to secure the
services of the private company to assist in the operation of the facility on the military
base. The program agreed that the private company could continue to participate in
the operation of the facility for the term of the underlying military contract, in the event
that the operator left the facility. This request was reasonable under the circumstances,
because of the limited term of the underlying contract and the need for the company
54 California State Auditor Report 2002-031 California State Auditor Report 2002-031 55
to be assured a reasonable opportunity to recoup its cost of initial outlay. This agree-
ment did not prevent any operator from managing this site alone, because no vendors
had the requisite experience or credit line necessary to undertake performance of the
underlying food service contract without assistance.
t
The obligation to report income generated from the facility rests with the operator.
There is no evidence that the department has not enforced such reporting by the
participants who have entered into arrangements with private entities. BSA’s point is
well taken, as noted above, that calculating the set-aside to be paid can become more
complicated when the vendor’s agreement with the private entity involves payment for
services based upon a percentage of the facility’s income. In determining the amount
of set-aside, the department is considering how best to address this issue through the
regulatory process. While the method used to determine the set-aside may be faulted
y
in particular cases, these isolated instances do not support the conclusion that some
operators who contract with private companies pay disproportionately lower fees than
other operators. An operator’s fees are based on the income of their own facility. They
u
do not pay a “share” of program costs. The fees paid by a participant do not in any way
affect the fees paid by others.
t
It is inaccurate to conclude that in all cases the department has “allowed the partner-
ships to submit less information on monthly operating reports than other locations.”
y
The department agrees that, in isolated cases, there is an issue with respect to the
information being reported. The department is reviewing these cases and will address
them.
THE DEPARTMENT HAS FAILED TO ADEQUATELY ADDRESS
SIGNIFICANT FLAWS IN ITS PROCESS FOR PURSUING PAST-DUE
COMMISSIONS, SOME OF WHICH MAY NOW BE UNCOLLECTIBLE
The department has collected $6,135,517 of vending machine commissions from
July 1997 - May 2002. Out of this amount, $629,000 was paid directly to vendors and
$5,162,868 was deposited into the retirement fund.
The department concurs that it has not aggressively pursued or collected past due
commissions for most of the contracts not remitting commissions since 1998. How-
ever, the department began a process of pursuing past due commissions in late July
2002. The department will pursue past due commissions based on available staff
resources starting with the most recent past due commissions. The department has
notified delinquent vendors in situations where the vendor has submitted a bid for
a contract at another location, or when special circumstances arose that made the
department aware of the past due commissions.
The department has not been able to pursue past due commissions primarily because
the information needed to determine past due commissions was lost and/or corrupted
in late 1998 when the database storing the data crashed. Consequently, the department
54 California State Auditor Report 2002-031 California State Auditor Report 2002-031 55
began designing and building a new system in 1999, as several attempts to restore the
database failed. A consultant was contracted to complete the database in 2001, and
the department is continuing to refine the database system.
Although the new database system is not yet fully operational, the department is cur-
rently pursuing past due commission by improving the attributes in the database. These
efforts will broaden its usefulness by allowing the database system to collect program
and contract data and serve as an accounts receivable system. The department will
evaluate the Board of Equalization’s (BOE) process cited by the BSA. However, unlike
BOE, the department has no statutory or regulatory authority to demand payment and
establish an account receivable based on historical information.
The department concurs with the BSA’s comment that it does not always have current
and accurate contract information and cannot always verify commission payments.
The department routinely requests a copy of the contract when the state or federal
agency receiving the vending services implements its own contract. However, when
the department is not a party to a contract, it has no authority to require a copy of a
contract from private businesses or public agencies. The private business and state or
federal agency are complying with the statute by submitting income derived from vend-
ing services. The department has no authority to require the vending company to enter
into a contract.
The BSA stated in the report that staff responsible for collection are under trained, and
suggested that the collection process should be transferred to the Accounting Section.
The vending machine contracts and commissions collection system is more complex
than a typical accounts receivable function. The commission collection is only one part
of the contract and commission functions and information necessary for the depart-
ment to administer the BEP and the retirement fund. The department will evaluate the
resources available and the proper placement of the collection function. The results of
that evaluation will determine whether additional training and/or movement of the func-
tion are warranted, and the department will take the appropriate action based on the
evaluation and available resources.
THE DEPARTMENT HAS NOT CONSISTENTLY FULFILLED ITS
RESPONSIBILITIES TO PROGRAM PARTICIPANTS AS
REQUIRED BY LAW AND ITS OWN REGULATIONS
The department had provided training in Sacramento and San Diego until late 1996.
Declining participation in the San Diego class made it impractical to continue the train-
ing in this location (only one of three applicants successfully completed the 1996 San
Diego class). Additionally, the program found that it did not have the facilities and other
resources in the San Diego area to support the on-the-job training needs, and other
requirements, of the training class. Plans were formulated to move the class to Los
Angeles, but a suitable classroom site could not be secured, and during this interval
the Southern California trainer left the position. Since then, the training class has been
conducted in Sacramento where all the training needs can be met. However, the train-
56 California State Auditor Report 2002-031 California State Auditor Report 2002-031 57
ing workgroup established for the strategic plan has been studying all issues regarding
training, including training locations, and will be submitting its recommendations by
December 31, 2002.
The department trains vendors to operate and manage all types of facilities offered in
the BEP. Consequently, the department believes that BSA’s criticism for not providing
i
upward mobility training is unwarranted. Training a vendor to operate only a specific
type of facility would make it necessary to provide upward mobility training to allow the
vendor to advance to a more complex facility. However, the training that the depart-
ment provides to all participants certifies and licenses them to operate all types of
facilities, hence they do not need to obtain additional certification to advance to more
complex facilities. In addition, the department offers training to all interested vendors in
the areas of sanitation, vending machine operation, and selection committee presenta-
tion on an on-going basis. All certified BEP vendors are welcome to attend part or all
of the training offered by the program as a refresher.
The department agrees it can do a better job in providing and tracking the quarterly
location reviews. However, the department provides feedback in a number of other
ways not referred to in the report. For example, the MORs are reviewed on a monthly
basis by the field staff for discrepancies or problems, which are discussed with the
vendor by telephone, written correspondence, and site visits. The field staff visits their
locations on a regular basis. The lack of a location review is not an indication that the
operator did not receive feedback. In fact, BSA’s own survey of the operators indicates
the vendors receive feedback on a regular basis that they find appropriate and helpful
(See Appendix B).
o
Department staff does follow up on missing reports from operators. In fact, the pro-
gram has taken action to terminate the licenses of several vendors based on delin-
quencies. The department is not aware of and the BSA did not link the failure of
any individual vendor to a lack of timely review on the part of the department of the
vendor’s MOR. Further, the review of the MOR is unrelated to the issue of whether the
vendor experiencing financial difficulties received other forms of assistance or inter-
vention from the program. Moreover, vendors can experience business problems for a
variety of reasons, not all of which can be resolved by the program.
56 California State Auditor Report 2002-031 California State Auditor Report 2002-031 57
RECOMMENDATIONS
To ensure that its application and selection process for locations is equitable,
the department should establish procedures to circulate all permanent and
interim vending locations to eligible operators.
Response
2
The department already has an established procedure for circulating all permanent
vending locations to eligible operators. The department also has a procedure for
selecting interim operators that the department believes is equitable and appropriate
The department, in consultation with the Vendors’ Policy Committee, should
revise the program’s strategic plan to include expected outcomes and perfor-
mance measures so that the department can evaluate the program’s success
and measure its progress toward achieving strategic goals and improving noted
deficiencies.
Response
Although the department believes its current plan is sufficient, it will review the plan
and consider BSA’s recommendation.
The department should aggressively and promptly pursue development of pro-
gram regulations. If the current draft is too complex or lengthy, the program
should consider breaking the draft regulations into segments, first identifying
and addressing the highest priorities. The department should ensure that the
guideline include measures that will improve consistency in equipment purchase
decisions, including a list of allowed and disallowed equipment and supplies,
and statewide criteria for equipment purchase and replacement.
Response
The department will pursue appropriate regulatory changes consistent with the depart-
ment’s overall needs, priorities and resources. The department will consider the sug-
gestion regarding addressing particular regulatory issues in separate regulation pack-
ages. The department believes its current system for equipment purchases is consis-
tent, and does not unreasonably consider individual location needs. Statewide criteria
for equipment replacement currently exist in state regulation.
58 California State Auditor Report 2002-031 California State Auditor Report 2002-031 59
To improve its administration of private partnerships, the department should
take the following steps:
• Establish and follow guidelines for partnerships, ensuring that they are in
agreement with federal and state law, regulations, and guidance.
• Ensure that program staff further study the cost and benefit of each part-
nership to determine that future agreements do not inequitably drain pro-
gram resources.
• Establish a review process for proposed partnerships that will allow the
department to adequately protect state and program participant interests.
• Monitor partnerships to enable the department to compare the costs and
benefits of partnerships and determine if they achieve the program’s objec-
tives.
• Ensure that program staff are able to monitor the success of all locations,
including private partnerships.
Response
The department is evaluating the use of contractual agreements between operators
and private entities and considering regulations to address this issue. The department
currently studies all potential locations for costs and benefits. No location would be
approved for development if it drained program resources. The department will con-
tinue to monitor the success of all locations.
To ensure that it promptly addresses known problems, the department should
consider moving the commissions’ collections function to its accounting sec-
tion, which already collects operator fees for the program and possesses the
necessary collection knowledge and accounts receivable tracking system.
Response
The department will evaluate the recommendation and determine the proper place-
ment for the vending machine commissions’ collection function.
To ensure that the program provides adequate consulting and monitoring ser-
vices to operators, the department should take the following actions:
• Offer program participants a second training location. This will ensure that
the program complies with existing state law intended to remove potential
barriers to individuals entering the program.
• Ensure that the program identifies and holds upward mobility training
classes for operators as stated in its strategic plan.
58 California State Auditor Report 2002-031 California State Auditor Report 2002-031 59
Response
The department is in the process of evaluating the entire training program to
ensure it meets the needs of the program participants, including offering program
participants a second training location and the need for upward mobility training.
• Track location reviews to identify past-due reviews and to ensure that busi-
ness enterprise consultants complete the required reviews at least quar-
terly.
Response
The department will strengthen its tracking system for the quarterly location
reviews.
• Discontinue its practice of waiting 60 days before identifying monthly oper-
ating reports delinquent. Also, the department should require the account-
ing section to enter the data into the database more promptly. These steps
would provide program consultants with important financial information
sooner.
Response
The department will take this recommendation under consideration.
• Ensure that program consultants contact operators regarding missing
monthly operating reports when the reports are a month or more delin-
quent as required per current guidelines.
Response
The department agrees with this recommendation. The department will develop
procedures to ensure compliance with current guidelines.
• Ensure that the program better monitors operators to prevent the accumu-
lation of significant past-due fees and lengthy delinquencies in reporting.
When operators refuse to submit financial reports as required by regula-
tions, the department should demonstrate it is willing to suspend and
terminate operators’ licenses to ensure compliance with program require-
ments.
Response
The department is pursuing delinquent vendors and will work to better monitor
program operators. The department will continue to refer the suggestion to sus-
pend or terminate operators’ licenses to our legal department and, based on their
counsel, consider the appropriate place and circumstances for such actions.
60 California State Auditor Report 2002-031 California State Auditor Report 2002-031 61
COMMENTS
California State Auditor’s Comments
on the Response From the Health
and Human Services Agency
To provide clarity and perspective, we are commenting on
the Department of Rehabilitation’s (department) response
to our audit report. The numbers below correspond to the
numbers we placed in the margins of the department’s response.
1
We disagree with the department that the report lacks perspective
and does not present a balanced and objective review of the
Business Enterprise Program for the Blind (program). Throughout
the audit report we provide the department’s perspective on the
issues presented and impartially present the facts regarding the
program as they exist.
2
The department is avoiding the issue presented and that issue is
the adequacy of its written procedures. As we state on page 14,
in 1997 we reported that the department’s policy for classifying
and circulating locations was inequitable because it had not
developed a fair process for assigning interim locations. The
written procedures to which the department refers predate our
August 1997 report. Thus, as we state in our report at page 14,
the department has not corrected this weakness.
3
The department has been responsible for administering the
program since the 1960s. Recent challenges the department
faced are not unique and should not have prevented it from
providing its staff and program participants timely strategic
direction. On the contrary, the circumstances the department
describes are typical of the environment in which it works.
4
The department contradicts earlier statements it made to us in
which it indicated that the lack of updated regulations hinders
its ability to address recommendations made in prior audit
reports. Additionally, the department explained to us that it
had been working to update its regulations for many years. As
early as its October 1997 response to our 1997 programmatic
review, it reported that certain portions of its regulations were
inappropriate, and that it intended to propose revisions to update
them by December 1998. For example, it wanted to revise its
regulation requiring medical and vocational evaluations. Again,
60 California State Auditor Report 2002-031 California State Auditor Report 2002-031 61
in its first meeting with us on March 13, 2002, the department
stated that the lack of updated regulations was a barrier to it
addressing certain recommendations from our past audits and
that it was currently working to update its regulations.
5
We disagree with the department’s statement. It was the
department that concluded it needed to update its regulations
to provide proper guidance to its staff and participants, as we
discuss in note 4. However, as we state on page 15, in certain
areas outdated regulations for administering the program have
contributed to the lack of clear guidance in these areas.
6
The department misrepresents our statements. On pages 17 and
18 of our report, we do not fault the department for making
its regulations overly comprehensive. However, we caution the
department that doing so could render the program inflexible.
We clarify our meaning by stating that program guidelines
that are susceptible to frequent or regular change might be
better specified in policies so that the department can respond
to changing conditions without going through a lengthy
regulatory process.
7
The department wrongly assumes that our conclusion is based on
the speculation of one operator. Our conclusion is based on many
hours of audit work—interviewing consultants and reviewing
program records. The instance we cite in the report was intended
to provide the reader with a practical example. It was not
intended to be misconstrued as the sole basis for our finding.
8
We believe that the term “partnership” correctly characterizes
these agreements. In fact, in documents we obtained from the
department, including an actual contractual agreement between
a program participant and a private business, an internal
memorandum, and a location announcement that the program
sent to program participants; the department, private businesses,
and program participants refer to the private businesses as
“partners” or “teaming partners” and the agreement as a
“partnership contract.”
9
Contrary to the department’s assertion, it has in fact allowed the
private partners to benefit from the program in a variety of ways.
As we state on page 19 of the report, the program allows the
private partner access to program locations, program equipment,
and equipment maintenance. In addition, the department
has spent or encumbered $84,000 and plans to spend another
$723,000 to develop locations that program participants and
62 California State Auditor Report 2002-031 California State Auditor Report 2002-031 63
their private business partners will occupy and operate. Further,
as we state on pages 24 to 25 of the report, none of the four
operating partnerships pay fees similar to the other program
participants. Program participants in these partnerships pay fees
equal to 6 percent of the participant’s reported net proceeds,
rather than the lesser of the amount specified on the fee schedule
or 6 percent of the location’s gross sales.
0
The department is incorrect. As we state on page 21 of the report,
three partnership agreements exist.
q
The signed copy of the contract between the program participant
and the partner states that the “partner shall provide basic
food-services training to further enhance the operator’s overall
knowledge of all elements of food services.” It provides no
specific training program for the program participant. Further,
it specifically states that the program participant grants to
the partner, “the right to establish, manage and operate a
food service program in the facility.” Thus, contrary to the
department’s claims, the program participant is not responsible
for the operation of the facility.
w
Unfortunately, the department was unable to provide us
such an analysis during our audit. In fact, the department’s
November 2001 announcement for this particular location
stated that the department’s earnings estimate only included
vending machines and coffee carts and not a restaurant. Also, the
department’s deputy director confirmed for us in July 2002 that
an analysis had not been completed, when she informed us that
the department had only just begun to calculate the return
on investment for this location. However, the department
had already committed $191,000 for its design and requested
redirection of another $532,000 from a previously approved
project to pay for construction costs. Additionally, the department
acknowledges on page 54 of its response that the East End project
does not yet have a contractual agreement between the program
participant and the partner. Thus, as we state on page 23, the
department is spending a significant proportion of program funds
without knowing if these partnerships will result in sufficient fees
to the program and funds to the program participants to make
the investment worthwhile.
e
The department contradicts itself. As it acknowledges just
two paragraphs later, two of the three partnership agreements
we discuss in the report were in place before it had seen or
62 California State Auditor Report 2002-031 California State Auditor Report 2002-031 63
approved them. Thus, we cannot agree that the department
takes all necessary steps to ensure that the State’s and program
participants’ interests are protected when participants enter into
agreements with private businesses.
r
We disagree that we are overstating the magnitude of this
issue. As we state on page 23, by March 2003, the department
plans to spend the equivalent of 12 percent of its reported
annual expenditures for federal fiscal year 2000–01 on these
partnerships. Further, we believe this issue may be increasing in
importance. As we state in Appendix B, on page 43 of the report,
nearly 46 percent of operators we surveyed were interested in
working with a private partner.
t
The department misrepresents the facts. The department requires
monthly reports from program participants who use a private
business partner. However, the information contained in these
reports is not the same as that required of other program
participants and is insufficient to determine the degree of the
location’s success and the return on the program’s investments
in the location. As stated on page 24, the department did
not require program participants to submit sales and expense
information from the operation of their partnership locations
as is required on the monthly operating reports of program
participants not using a private partner. Instead, the department
only required those program participants to report the payments
they receive from their private partners.
y
These are not isolated examples. As we state on page 24, we
reviewed monthly operating reports from all four operating
private partnerships. None of the program participants involved
in these partnerships included critical information such as gross
sales and cost of goods sold in their monthly operating reports.
u
The department is mistaken. As we report on page 6 of the
report, the department funds a portion of the program’s
activities with the operators’ set-aside fees. Consequently, to the
extent that some operators pay less than their fair share of fees
or the program pays disproportionately more for their locations,
they are being subsidized by the other operators.
i
Our criticism is warranted. Although initial training may expose
the operator to all types of facilities offered by the program,
it may not sufficiently prepare them for more complex work
assignments. Further, the department itself acknowledged in
64 California State Auditor Report 2002-031 California State Auditor Report 2002-031 65
its reports to the U.S. Department of Education that it had not
provided upward mobility training during federal fiscal years
1998–99 through 2000–01.
o
Although department staff may follow up on missing reports
from operators, as we state on pages 31 and 32, it does not do so
promptly. The department’s current processing system does not
identify a monthly operating report as late until three months
after the reporting month, hindering the program’s ability to
properly monitor and promptly intervene to help operators that
may be experiencing problems.
64 California State Auditor Report 2002-031 California State Auditor Report 2002-031 65
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
66 California State Auditor Report 2002-031