Report 96031 Summary - August 1997

Department of Rehabilitation:

Poor Management Practices Limit the Effectiveness of the Business Enterprise Program for the Blind

Results in Brief

The Department of Rehabilitation (department) administers the Business Enterprise Program for the Blind (program) in accordance with the federal Randolph-Sheppard Act and the California Welfare and Institutions Code. The purpose of the program is to provide blind persons with remunerative employment, enlarge the economic opportunities of the blind, and to stimulate the blind to greater efforts in striving to make themselves self-supporting. To accomplish this purpose, the program provides training and vending facilities to enable qualified blind persons to operate their own vending businesses throughout the State.

The program is unique because it consists of numerous individual, government-sponsored businesses competing with private-sector entities for profits. Although the intent of the program is to provide blind persons with meaningful business opportunities that allow them to be independent, we found that the department's administration of the program does not ensure that this objective is always met. Specifically, we noted the following conditions:

· The department is not sufficiently promoting the program to all who might be eligible and interested. In addition, the department does not make a concerted effort to establish new, more profitable locations or improve existing locations, and is slow to explore other business opportunities that would provide alternatives to the types of vending facilities currently available to vendors. Further, it does not provide vendors already in the program with an equal opportunity to apply for facilities because of its process for awarding certain locations.

· The department needs to more effectively fulfill its responsibilities to both the vendors and the Business Enterprise Consultants (BECs) who advise and assist them. For example, the department does not adequately provide training for all vendors to improve current operations or enhance their skills for more complex facilities. Moreover, the department does not always emphasize consulting services, which are designed to identify and resolve issues that negatively affect vendors' profitability. In addition, the department reduces the effectiveness of consulting services provided to vendors because it does not provide sufficient training or guidance to the BECs and it does not enforce the procedures which require BECs to conduct specific reviews of vendor performance. Further, it has not adopted procedures that compel vendors to adhere to the terms of their contracts with the department.

· The department's inadequate administration of program finances impairs the program's growth and continued viability. For example, the department does not ensure that vendors promptly submit required monthly financial reports, fees, or loan repayments. In addition, the department is inappropriately using vendor set-aside fees to provide loans to vendors. Moreover, the department has not demonstrated that it administers set-aside fees in a manner equitable to all vendors. Further, while the department has made some improvement in ensuring it receives all vending machine commissions available to the program, more improvement is needed, and the department must ensure that it uses these commissions for the benefit of all vendors in an equitable manner. Finally, the department needs to improve its controls over equipment. For example, the department has allowed a private food service company to use program equipment at a location developed for program vendors.

· The department has not promptly resolved certain tax-status issues related to the program's retirement plan, thereby putting the vendors and the State at risk. Specifically, the department has administered the retirement plan as a qualified plan for tax purposes, even though as early as 1990, a retirement consulting firm raised concerns that the retirement plan did not meet the requirements of a qualified plan. On a different matter, while the department has stated the vendors are independent businesspersons, it has put the State at risk because its administration of the program raises a question regarding whether its relationship with the vendors is more like an employer/employee relationship. If it is determined that the vendors should in fact be classified as employees, the State is potentially liable for failure to provide employee benefits and withhold taxes.


To ensure that it is maximizing vendor participation, the department should perform the following tasks:

· Consistently promote the program to all department counselors and initiate mailings to blind individuals and community organizations;

· Aggressively identify and establish profitable vending locations on both public and private property, combine locations when beneficial, and document the analysis performed to determine a location's potential;

· Formulate criteria and procedures for supplementing less lucrative locations and apply them consistently;

· Establish procedures to systematically study the successes of private enterprise and analyze potential lucrative business opportunities. In addition, it should consider innovative ways to implement new business opportunities; and

· Establish procedures to circulate all vending locations to eligible vendors.

To fulfill its responsibilities in providing vendor advice and assistance, the department should take the following steps:

· Ensure that the curriculum for its ongoing training program provides opportunities for all vendors to improve their skills in operating vending facilities and consult with vendors to develop ongoing training classes that meet their needs;

· Enforce state regulations and contract requirements which direct vendors to submit profit and loss statements and maintain adequate supporting documentation;

· Establish clear policies and procedures, and provide adequate guidance and training to ensure that BECs are able to perform adequate consulting services, including profit and loss reviews, vendor appraisals, reviews of locations, and counseling of vendors who are not complying with the terms of their contracts;

· Re-evaluate the use of BECs to provide equipment services, with the goal of optimizing the time available for adequate consulting services; and

· Modify vendor contracts to include ranges of acceptable performance, uniformly enforce contract terms, and suspend or terminate the licenses of those vendors who fail to respond to counseling and continue to disregard the contract terms.

To improve its administration of program finances, the department should take the following actions:

· Promptly follow up on missing monthly vendor reports and improve its monitoring of delinquent accounts receivable;

· Ensure that it appropriately administers and collects set-aside fees in an equitable manner and in accordance with federal law and regulations;

· Vigorously attempt to collect all outstanding loans that were inappropriately disbursed using set-aside fees and reimburse the trust fund for moneys used for these loans;

· Improve its collection of vending machine commissions by contracting with vending machine companies and monitoring compliance;

· Appropriately use vending machine commissions to benefit all vendors in an equitable manner;

· Discontinue the practice of allowing a private food service company to use equipment purchased with federal funds and collect the money that is owed it; and

· Promptly reconcile the results of its physical inventories with equipment records.

To minimize the potential financial risk to both the vendors and the State, the department should take the following actions:

· Work to resolve the retirement plan issues as quickly as possible; and

· Perform a thorough review of the status of the vendors as state employees or independent contractors and implement those modifications that will ensure that vendors are treated as intended.

Agency Comments

The department states that, based on principles of sound public policy regarding the appropriate use of limited resources, it disagrees with many of the findings and conclusions in the report. The department acknowledges that there are problems within the program and believes that changes to the program as a result of certain audit findings will prove to strengthen it. On the other hand, the department believes that many of the findings and recommendations, when viewed from an overall public policy perspective, illuminate the problems inherent in a program it considers to be outmoded and out of step with the impending 21st century. Our comments on the department's response immediately follow it.