Chapter Two

Findings and Recommendations

As part of the program review committee's examination of the vending machine program operated by the Board of Education and Services for the Blind, the committee reviewed:

• the intent of the program;
• policies and procedures for implementation of the statewide food and beverage vending machine contract;
• oversight and management activities related to contractor and subcontractor performance;
• program participation; and
• the distribution of revenue.

This chapter contains the committee's findings and recommendations for each of those areas.

INTENT OF THE PROGRAM

Finding - The legislative intent of C.G.S. Sec. 10-303, adopted in 1945 to provide employment opportunities for blind individuals, is no longer the primary focus of the BESB vending program.

Background - The federal Randolph-Sheppard Act (20 U.S.C. 107) was enacted in 1936 to give preference to blind persons, whenever feasible, for operating vending stands on federally controlled property. According to the federal legislative history, the act was to provide blind persons with remunerative employment, enlarge their economic opportunities, and encourage their self-support through the operation of vending stands on federal property. In 1954, the federal act was amended to provide for the assignment of vending machine income to blind persons so they could protect their employment preference and prevent the machines from competing with their vendor operations.

Connecticut also has what is referred to as a "mini Randolph-Sheppard law." Enacted in 1945, Connecticut General Statute §10-303 extends a similar priority or preference to blind individuals who operate vending facilities in state and municipally owned or leased property. In 1959, the state law was amended to include vending machines. A review of the state legislative transcripts reveals references to the limited employment opportunities for the blind and an intent to parallel federal changes.

Initially, revenue from the vending machine program was used to pay for fringe benefits for vending facility operators. Over time, the money also came to be used for program operating costs, but no formal basis for this change is evident. This issue was raised by the state auditors in a December 1996 performance audit of BESB. Specifically, the auditors discussed the need for clarity in the law regarding which account money from the vending machine program should be deposited in and how it should be spent.

In 2001, as a result of concerns about the use of the revenue generated by the expanded statewide food and beverage vending machine contract, legislation was adopted to codify actual practice. Public Act 01-9 acknowledged the existence of a nonlapsing account funded by income from vending machines in state and local buildings. It authorized BESB to use the money to pay for fringe benefits and training for blind facility operators, entrepreneurial and independent living training, and equipment for blind or visually impaired children and blind adults. The law also specified BESB can allow agencies where the machines are located to retain vending machine revenue for student or client activity funds.

Issue - As originally conceived, vending services were to be a way to support the employment of blind individuals. As currently structured, revenue from the vending machine program can be used for a wide range of services and a variety of beneficiaries.

Cause - Modifications to C.G.S. Sec. 10-303 expanded the breadth of allowable uses for revenue from the BESB vending machine program without establishing any priorities.

Effect - According to data presented by BESB in spring 2002, the unemployment rate for blind adults in Connecticut is 70 percent. However, only 34 blind individuals operate vending facilities under C.G.S. Sec. 10-303.

A draft multi-year spending plan prepared by BESB in spring 2002, which has since been withdrawn, included funding to set up new businesses for blind individuals. However, one-third of the money was allocated for personnel to support blind enterprises and BESB shared expenses, while one-quarter was for items such as advocacy training for parents and educators, scholarships, and smoking prevention efforts.

Remedy - Statutorily restate the priority use of BESB's revenue from the vending machine program as the creation of jobs for people who are blind.

Recommendation - The program review committee recommends the following.

BESB's share of revenue from its vending machine program shall be used for the direct support of vending facility operators and the development of jobs for blind individuals.

As part of the budget process, BESB shall be required to report annually to the Appropriations Committee on the number and type of new jobs it created for blind individuals during the preceding year.

STATEWIDE CONTRACT PROCESS

Finding - BESB used a publicly advertised process to select the contractor for its statewide food and beverage vending machine contract. However, BESB did not follow all of the procedures normally used by a state agency entering into a personal service agreement (PSA) because BESB believed contracts involving revenue to, rather than an expenditure by, the state did not require oversight by outside parties.

Background - The state of Connecticut does not have explicit guidelines for agencies to follow when entering into contractual arrangements involving receipt of revenue rather than an expenditure. However, many state agencies, including DOT and the University of Connecticut, use the same bidding and selection procedures in both situations. Upon request, the Department of Administrative Services (DAS), which handles procurement of many of the products used by the state, is available to provide purchasing assistance to individual agencies.

Guidelines issued by the Office of Policy and Management (OPM), which describe the standards and procedures to be followed when using a personal service agreement, require more scrutiny as the cost and length of a contract increases. Although the guidelines have been revised several times, since at least the early 1990s, a PSA for a term of more than one year (regardless of cost) requires pre-approval by OPM before development of a Request for Proposals (RFP). ¹

As detailed in Appendix B, BESB actually undertook two RFP efforts before executing the current statewide vending machine contract for food and beverages. In both cases, it issued RFPs and evaluated submitted proposals based on a set of criteria. However, as a result of a December 30, 1996, memorandum from the attorney general's office indicating: "Since these contracts do not involve the payment of money by BESB, they need not have formal Attorney General's Office approval.", BESB believed this meant no other approvals were required either. (BESB did receive some guidance in the letter regarding some standard clauses to add to the sample contract submitted for review.)

OPM became aware of BESB's activities in June 1998, before a contract was awarded under the first RFP. OPM asked BESB to suspend the process while efforts were made to clarify state agency compliance with C.G.S. Sec. 10-303.

In January 1999, BESB started the selection process again. Although BESB used a team of state employees from inside and outside of the agency to review and evaluate the proposals from the first RFP, the second time all of the evaluators were BESB employees. BESB and the vendor selected as the winning bidder were the only parties involved in negotiating and signing the contract (PSA 99-541) in June 1999.

Issue - A perception developed outside of BESB that the change from multiple vendors providing food and beverage vending machine services to a system with a single statewide vendor did not comply with state contracting procedures.

Cause - BESB did not involve anyone from outside the agency in the final process used to select the vendor for the current statewide contract. The people within the agency who were most actively involved with the evaluation and negotiation of the contract no longer work for BESB, but it appears few had experience with state contract procurement methods.

Effect - BESB`s records related to the process of selecting a single, statewide contractor are disorganized. No one currently working at the agency can explain exactly how all of the steps in the process were carried out.

Remedy - Prohibit BESB from entering into or extending contracts for current or new products and services dispensed through vending machines without advice and assistance from other state entities with contract management expertise.

Recommendation - The program review committee recommends

all of BESB's future contracting efforts related to vending machines shall be executed through the Department of Administrative Services. BESB shall not ask DAS to seek bids or proposals for any new or renewal products or services dispensed through vending machines until BESB has obtained approval from OPM in accordance with that agency's process for personal service agreements over one year in length.

CONTRACT MANAGEMENT

Finding - BESB has failed to take the steps needed to ensure the statewide vending machine contract for food and beverages is operated uniformly and managed in accordance with all provisions of the contract.

Background - In early 1999, BESB had regional contracts with 70 vendors, who operated 650 food and beverage vending machines in 200 locations. Under this system, BESB did not know how much revenue it was entitled to receive from each vendor. Commission payments were low, and sometimes the same amount (to the penny) for multiple months. In many cases, sales tally information was handwritten rather than electronically recorded.

Since July 1, 1999, BESB has had a single statewide contract with the Coca-Cola Bottling Company of New England, which works with 10 subcontractors to service 1,400 machines in nearly 500 locations. The contract is scheduled to run through June 2009, with the possibility of an additional five-year extension.

BESB hoped the change to a statewide contract would improve accountability and increase revenue. During the first year, commission revenue to BESB increased about 40 percent over what the agency received under the old, multi-vendor system. Since then revenue has doubled, increasing from $700,000 in FY 00 to $1.4 million in FY 02. However, during this period, the number of locations and machines also doubled, and the size of some product offerings expanded with a corresponding increase in price.

Issue - Implementation and oversight of the statewide vending machine contract for food and beverages has been inconsistent and incomplete.

Cause - BESB has no written policies or guidelines for the operation and oversight of the statewide food and beverage vending machine contract. A limited amount of BESB staff resources are available to support contract implementation, including outreach to new locations and compliance monitoring. Communication among direct and indirect contract participants has been limited in scope and contradictory in content.

Effect - Despite a reduction in the number of vendors it must deal with, BESB is unable to provide comprehensive information about the vending machine program, including compliance with contract provisions.

To date, BESB's efforts to verify all requirements contained in the statewide vending machine contract are being met have been uneven. In September 2002, BESB increased the staff resources assigned to the vending program by transferring contract oversight duties to the agency's director of finance. Although some steps were taken to enforce ongoing contract provisions, such as the requirement an independent certified public accountant annually audit the financial statement and schedules, only an audit for calendar year 2001 has been submitted and other opportunities for oversight have not been pursued. Appendix E contains a table summarizing the status of BESB's enforcement of existing contract provisions.

Quantitative information that would be helpful for evaluating the results of the program is difficult to obtain. BESB receives limited data about sales and revenue for the machines it allows state and local schools to keep. Data for the machines from which BESB receives revenue have not been available in a user-friendly format. The statewide contractor recently started providing required monthly sales and commission data electronically in an ACCESS 2000 format. Until then, BESB relied on printed reports, or it inputted data into its Interact system, which few employees know how to use and which is not structured to produce routine tracking reports.

There is considerable misunderstanding about BESB's jurisdiction over vending machines and the extent to which BESB intends to exert its authority over the placement of machines in government buildings throughout Connecticut. Municipalities in particular are confused about the effect of C.G.S. Sec. 10-303 on the operation of food and beverage vending machines in their town buildings and schools.

Although BESB sent several letters to towns over the years describing its statutory right of first refusal to operate vending machines, almost one-third of the 105 respondents to a program review committee survey of towns indicated they were unaware of BESB's authority prior to receiving the survey. (See Appendix F for a copy of the full survey.)

Complicating the issue, the letters BESB sent indicated towns should wait for further contact from BESB regarding the transfer of town machines to the BESB contract. However, in many cases, BESB still has not made contact with the towns. Indeed, more than half of the 63 respondents to the committee's survey who indicated "some" or "none" of their vending machines were operated by BESB said it was because BESB had not requested control.

Policy implementation related to the statewide vending program has been random and inconsistent. For example:

• When the statewide contract began in 1999, in at least one case, BESB agreed to split commission revenue from machines in a school with that school. Subsequently, BESB stopped taking any commission revenue from local schools, but the agency's intention to maintain this practice permanently has never been put in writing.
• Once BESB stopped taking any commissions from schools, it stopped receiving sales data for those locations, and BESB does not know which schools are covered by its contract.
• Despite letters to former vendors threatening to impose fees for removal and storage if they did not remove their machines by a specific date, BESB had no plan for when such penalties would be imposed.
• BESB has no time table or priority list for the order in which it will contact locations not currently covered by the statewide contract.
• Since the start of the statewide contract, BESB has said it would not seek to operate vending machines located within school cafeterias because those facilities are exempt from BESB control due to a lack of blind operators available to run the facilities. However, a December 2, 2002, letter from BESB to the program review committee indicated BESB will seek to bring such machines under the BESB contract when individual school cafeteria contracts come up for renewal.

Many of these examples mirror concerns previously expressed about BESB's management capabilities in other program areas. The state auditors' reports covering fiscal years 1996 and 1997 as well as 1998 and 1999 noted recurring problems regarding the lateness of inventory reports, accuracy of information in Generally Accepted Accounting Principles (GAAP) reports, and duplicate grant payments. The most recent audit completed this summer found BESB still had not pursued outstanding balances owed the state by several vendors replaced when the statewide food and beverage contract began in fiscal year 2000.

The program review committee itself, in its December 2000 report Educational Services For Children Who Are Blind Or Visually Impaired, identified similar management deficiencies in a program separate from the vending area. The committee found written goals and strategies for vision education were lacking, BESB had difficulty integrating and summarizing client service and expenditure information for planning and monitoring purposes, and personnel and expense data requested by the committee could not be compiled.

As a result of a March 2002 management audit of BESB conducted by OPM staff, the secretary of policy and management wrote to BESB expressing concern BESB staff were still not consistently following established procedures for the selection of vendors. The letter specifically asked BESB to seek OPM approval before entering into any contracts or personal service agreements, regardless of their value or length. However, it appears this summer BESB was exploring opportunities to increase the number of rest area locations offering phone cards without having discussed the expansion with OPM.

Remedy - Give BESB a finite deadline to take specific actions that demonstrate its ability to successfully manage the vending machine program. If BESB fails to perform, provide it with the management and oversight assistance it needs to achieve its program goals by changing its status from being within the Department of Social Services "for administrative purposes only" to being a subdivision of DSS under the active control of the commissioner.

Recommendation - The program review committee recommends:

By March 1, 2003, BESB shall take the steps needed to:

• establish a comprehensive automated accounting system for all vending machine revenue (including from DOT, PSA 99-541, other contracts, and federal buildings) capable of producing timely reports on sales and revenue by source that can be matched against the numbers contained in the comptroller's periodic revenue reports;
• create a formal mechanism to obtain feedback from a rotating sample of machine locations regarding vendor compliance with contract provisions (e.g., machines being well-stocked and clean, prices correct, etc.);
• conduct periodic, random, unannounced visits to locations with machines to verify vendor compliance with contract provisions (e.g., stickers re BESB program on machines);
• prepare written evaluations of the contractor's overall performance at least annually and document any specific performance issues that require action on the part of the vendor or any subcontractor;
• meet with the contractor on a regular basis to discuss performance;
• prepare guidelines for BESB staff describing the steps to follow when contacting state agencies or local governments not covered by a specific vending machine contract (e.g., who to contact, how, and when); and
• formalize record keeping regarding the locations covered by all vending machine contracts, and at a minimum:

_ obtain written permits (i.e., signed letters of understanding) from the head of any state or local agency where a BESB vending machine is located;

_ issue written waivers for any location BESB chooses not to place machines within, unless the state statutes specifically exempt the location;

_ maintain an up-to-date inventory of vending machines by location and type of governmental agency (i.e., federal, state, town, or local school); and

_ maintain an up-to-date list of towns and state agencies not yet visited regarding their inclusion under the statewide contract.

If BESB fails to provide the program review committee with documented evidence by March 1, 2003, that BESB has taken the steps needed to implement all of the actions specified above, then BESB's "administrative purposes only" status within the Department of Social Services shall be converted to that of a subdivision under the active control of the commissioner.

Figure II-1 displays a graphic depiction of the recommendations.

CONTRACT PARTICIPATION AND REVENUE ALLOCATION

Finding - The parties benefiting from the statewide BESB vending machine contract for food and beverages vary, depending on whether a vending facility exists on-site, BESB has made contact with the administrator for the locale, and/or BESB has voluntarily waived revenue.

Background - Since 1959, BESB has had statutory authority to operate vending machines in state and municipal buildings. In 1996, only 17 towns and 35 state agencies were covered by BESB vending machine contracts. In 1997, BESB sent letters reminding towns about the provisions of C.G.S. Sec. 10-303, but BESB never followed-up with non-complying entities.

In June 1998, OPM surveyed state agencies to determine compliance with the law and found at least 10 agencies were out of compliance at one or more locations. In many cases, the money being retained by the agencies was used to provide additional products or services for agency clients. Recently, BESB has been working with the Department of Mental Retardation and the Department of Mental Health and Addiction Services to develop Memorandums of Understanding (MOUs) regarding a sharing of vending machine commissions with those agencies.

In 1999, after signing the statewide vending machine contract, BESB began asserting its right to take over municipal locations. After sending an initial notice to towns indicating their existing machines would be replaced with ones operated by BESB, conversion activity has slowed. BESB plans to visit towns not currently under the program prior to the placement of BESB machines on site, but only about three dozen towns have been visited so far. In November 2002, BESB staff indicated it could take up to two years to visit all of the remaining towns it currently has authority to include under the vending machine contract for food and beverages.

When BESB exercises an option to operate a vending "facility," the revenue from the stand as well as any vending machines within the same location accrues to the blind operator of the facility. Revenue from vending machines operated by or for BESB in other public buildings is deposited into state Account 361, except schools are being allowed to retain the proceeds from the machines in their buildings. Revenue from vending operations at state and local sites not covered by the BESB contract are distributed in accord with whatever arrangements the governing authority for the site makes with the vendor.

BESB does not operate cafeteria facilities in any local schools. In a number of cases, those locations also include coin operated vending machines. In the past, BESB considered such machines to be part of the cafeteria operation and exempted them from the statewide BESB contract. As a result, individual school systems continued making their own arrangements with vendors regarding the benefits the school would receive from the operation of those machines.

That decision created confusion in the towns. Though BESB did not seek to control machines in cafeterias, in some locations the statewide vendor has contacted towns directly about the possibility of servicing these machines. At least some towns thought these efforts were connected with expansion of the BESB contact. The situation could become even more complicated since BESB has now announced it plans to pursue operation of those vending machines when the cafeteria contracts come up for renewal.

A review of other states that grant preferences to blind vending facility operators indicates most states limit the scope of those Business Enterprise Programs to state buildings. In addition, several states also create exemptions related to type, size, or occupancy level of the facilities. The most common types of exemptions include higher education, state hospitals, residential institutions, state parks, or legislative buildings. A number of states also carve out vending machine funding for highway funds.

Issue - The policy regarding whether BESB or another entity will operate and/or receive revenue from vending machines in state and local government buildings is not clear.

Cause - State agency compliance with C.G.S. Sec. 10-303 has been mixed, and few towns have voluntarily complied with the requirement they give BESB right of first refusal to operate vending machines. While the preference for the blind to benefit from vending machines in state and local buildings was granted in 1950s, for many years BESB failed to systematically pursue its statutory jurisdiction. Questions have been raised about the fairness of singling out a single beneficiary for all revenue from vending machines in government buildings.

Effect - Towns and schools have mixed feelings regarding BESB's authority over vending machines in their facilities. Those with control over buildings not under the BESB statewide contract for food and beverages assumed they had jurisdiction over the offerings and benefits provided by the vending machines in their locations. A few small towns benefit from the statewide contract because they receive service they could not obtain as an independent customer. Others believe they can manage better on their own by dealing directly with vendors. Many also do not believe local facilities should be required to be part of a state contract.

Remedy - Limit the mandatory component of the BESB vending machine program to non-educational state facilities. However, MOUs currently in effect between BESB and other state agencies regarding commission allocations would be honored.

The legal question of whether locations already covered by the existing statewide contract must remain there through 2009 and the extent to which BESB would be required to continue adding locations will have to be examined further.

Recommendation - The program review committee recommends the following.

Participation in the BESB vending machine program by town governments and local schools shall be voluntary, except to the extent that such voluntary participation is limited by the existing BESB vending contract.

Revenue from towns and schools that voluntarily participate in any BESB vending machine contract shall accrue to the BESB 361 Account.

In state and municipal buildings with a vending facility operated by a blind person, revenue from all vending machines shall continue to accrue to that person for as long as he/she operates the facility, and to any subsequent operator who is blind.

The Department of Transportation shall continue to make payments to BESB under the terms of its memorandum of understanding in order to compensate BESB for not operating on-site vending facilities at highway rest areas.

State higher education institutions and state regional vocational-technical schools shall be allowed to continue making independent vending machine arrangements for the benefit of their students.

In all other state locations, revenue from vending machines shall be deposited in BEBS's 361 Account for the support of vending facility operators and other employment-related programs for blind adults.

Figure II-2 displays a graphic depiction of the recommendations.

REVENUE CAP

Finding - BESB has been unable to document a clear spending plan for the revenue it receives from vending machine operations.

Background - Money generated by BESB's statewide vending machine contract for food and beverages, as well as other BESB operated vending machines for other products, is deposited in state Account 361, a nonlapsing fund. FY 02 revenue totaled $2 million.

In recent years, BESB has been making limited annual disbursements from the account in order to build up money to undertake projects for the renovation of existing vending facilities and the furnishing of new facilities. Despite repeated requests from the program review committee, BESB was unable to provide a detailed description of what the money was used for during the past five years. The balance in the account at the end of FY 02 was $2.7 million.

BESB presented a spending plan to the legislature's Education Committee in March 2002, but subsequently indicated it would be revising the plan. It hopes to have a new plan ready for the 2003 legislative session.

C.G.S. Sec. 10-304, which also involves potential revenue to BESB, specifies any money in excess of $300,000 remaining in the account at the end of the fiscal year reverts to the General Fund. Similar provisions exist for funds used by other state agencies.

Issue - BESB annually spends only a portion of the money it earns from its vending machine operations.

Cause - BESB has no long-range plan for the use of the revenue from its vending machine programs. BESB says it needs money to complete major renovations of existing vending facilities, but it does not have a detailed budget or time table for these activities. The agency's future plans are vague, with a limited focus on employment.

Effect - BESB's statewide vending machine program currently generates nearly $2 million in annual revenue (from all sources). Program spending in FY 02 totaled $1.4 million. Between the end of FY 00 and FY 02, the year-end balance in Account 361 rose 78 percent.

Remedy - Cap the amount of money BESB can carry forward in Account 361 at a level that will allow the agency the flexibility to undertake vending facility repairs, renovations, or start-ups at the beginning of the fiscal year.

Recommendation - The program review committee recommends:

BESB shall not be allowed to carry forward more than $750,000 at the end of any given fiscal year. Any amount in excess of that level shall be deposited in the state's General Fund to be disbursed within the normal appropriation process.

PROGRAM REGULATIONS

Finding - Existing regulations used to guide operation of the statewide vending machine contract are out-of-date and not applicable to the existing situation.

Background - The regulations governing operation of BESB's vending program were originally adopted in 1987. The most recent modification was in 1996.

These regulations were developed for purposes of operating a vending facilities program with on-site blind employees. References to vending machines are included within the context of that program. The regulations have not changed since BESB decided to sign a single, statewide vending machine contract for food and beverages.

Issue - BESB has no regulations to specifically deal with issues that arise from a vending machine program potentially covering all government locations in the state and serviced by an independent contractor.

Cause - The scope of the vending machine program has grown dramatically since the late 1990s. No clear policies or procedures were established in anticipation of this expansion.

Effect - Issues related to the statewide vending machine contract for food and beverages are resolved on a case by case basis, and few written policies exist.

Remedy - Require BESB to establish regulations for the operation of all of its vending machine contracts.

Recommendation - The program review committee recommends:

BESB shall update its vending facilities regulations and adopt additional provisions specific to the operation and management of independent vending machine contracts.

PRODUCT SALES IN STATE BUILDINGS

Finding - The state has no written guidelines regarding the types of products and services appropriate to offer for sale within state-owned or leased space.

Background - BESB has been examining options for expansion of the products it offers in vending machines (e.g., ATMs, phone cards, etc.). While state law limits where some products can be sold and by whom (e.g., liquor), the state does not appear to provide any written guidance to state agencies about what items are appropriate to sell in government buildings.

Issue - There are no clear rules regarding the products and services that can and cannot be sold in state buildings.

Cause - Few state agencies have sought to sell nontraditional products or services within their buildings.

Effect - Individual state agencies may set different standards regarding the products or services sold in their buildings.

Remedy - Require the Department of Public Works, the agency with primary responsibility for state property management, to develop advisory guidelines regarding the products and services appropriate to sell in state buildings.

Recommendation - The program review committee recommends

the Department of Public Works should establish guidelines regarding the types of products and services that can be offered for sale within state-owned and leased space and who is authorized to make such sales.

¹ See Appendix D for the relevant excerpt from the OPM guidelines.