In 1938, Congress established a program under the Wagner-O’Day Act that created employment opportunities for the blind. People employed under the program manufactured and sold certain products, such as brooms and mops, to the federal government. In 1971, Congress expanded the program under the Javits-Wagner-O’Day Act to employ people with other severe disabilities and provide services (in addition to products) to federal customers. Today, the AbilityOne program provides more services than products. As of September 30, 2012, the program’s list of projects (known as the Procurement List) included 4,639 projects— 65 percent of which were services and 35 percent of which were products. Services include janitorial, landscaping, and document destruction services as well as staffing call centers and base commissaries. Products include office and cleaning supplies, military apparel, and bedspreads. Federal agencies that need the specific products and services on the Procurement List are generally required to purchase them through the program. Unlike contracts that are reserved exclusively for small businesses—which generally must be competed among qualified small businesses—contracts for projects on the Procurement List are not competed within the program. Once projects are included on this list, they can remain there indefinitely and continue to be provided by the initially-assigned affiliate. Three types of entities comprise the AbilityOne Program: (1) the AbilityOne Commission, (2) the CNAs, and (3) the affiliates. Figure 1 shows the program’s organizational structure and how each of these entities is funded. The AbilityOne Commission consisted of a 15-member presidentially appointed Commission and 27 full-time staff as of the end of fiscal year 2012. Its responsibilities include (1) establishing rules, regulations, and policies to assure the effective implementation of the program; (2) adding new projects to the Procurement List, after determining whether they can be suitably provided by people who are blind or have severe disabilities; and (3) setting prices for these projects that reflect the market (fair market prices) and appropriately revising them over time. In regard to the CNAs, the Commission has the authority to (1) authorize and de-authorize one or more CNAs to help administer the program, (2) set the maximum fee ceiling the CNAs can charge their affiliates, and (3) provide guidance and technical assistance to the CNAs to ensure the successful implementation of the program. The Commission is funded through congressional appropriations which, in fiscal years 2011 and 2012 were almost $5.4 million each year. The AbilityOne Commission designated two CNAs—NIB and NISH—to help administer the program. The Commission designated NIB in 1938 and in calendar year 2011, NIB had 161 employees and, as of the end of fiscal year 2012, NIB worked with 70 agencies affiliated with the program that employ people who are blind. The Commission designated NISH in 1974 and at the end of calendar year 2011, NISH had 352 employees and, as of the end of fiscal year 2012, NISH worked with 528 agencies affiliated with the program that employ people with severe disabilities. The CNAs are funded almost entirely through fees they charge their affiliates as a percentage of the revenues the affiliates earn from federal customers on AbilityOne contracts. The affiliated agencies that provide AbilityOne projects to federal customers can be private nonprofit agencies or state-run nonprofit agencies. Some affiliates are part of well known nonprofit agencies, such as Goodwill Industries or Easter Seal agencies, and others are lesser known affiliates. Moreover, some affiliates rely exclusively or mostly on AbilityOne sales, whereas others have a substantial amount of sales outside of the AbilityOne Program. Regardless of how much business an affiliate conducts through the AbilityOne Program, the program requires that at least 75 percent of the total direct labor hours it uses to provide all products and services, including those outside of the AbilityOne Program, be carried out by people who are blind (in the case of NIB) or have severe disabilities or blindness (in the case of NISH). The Commission has limited authority to oversee and control the CNAs, which manage much of the program’s day-to-day operations because they are independent nonprofit agencies. Even though the Commission has ultimate responsibility for program management and oversight because of the unique public-private structure of the program it cannot control how CNAs (1) spend their funds, (2) set and manage their performance goals, or (3) set and implement governance policies and other internal controls. The Commission has limited influence over how CNAs spend their funds because the CNAs, as independent nonprofit entities, have their own boards of directors that determine how much the CNAs will spend on each item in their budgets. However, the Commission can influence the CNAs overall budgets by (1) reviewing CNA annual business plans and (2) limiting the maximum amount of revenue the CNAs can collect from their affiliates to fund their operations. Commission reviews of CNA business plans consist of examining the plans to ensure that they are aligned with the Commission’s core goals and asking clarifying questions or requesting changes. The Commission limits CNA revenues by setting the maximum fee amount the CNAs can charge their affiliates based on revenues from their AbilityOne contracts. In fiscal year 2012, NISH spent $78 million and NIB spent $32 million on operations. The major expenses of each are depicted in figure 2 and all expenses are provided in appendix I. Because the CNAs are independent nonprofit agencies, the Commission’s influence over their budgets does not and cannot extend to (1) controlling CNA cost areas, such as employee salaries and benefits or lobbying costs; (2) establishing a policy on the appropriate level of CNA reserves; and (3) ensuring that the CNAs provide sufficient funding to support key program initiatives designed to promote employment opportunities for people with severe disabilities. Compensation and benefits. According to the Commission, it has no direct control over the amount that CNAs pay their executives and other employees, an important driver of CNA expenditures. In November 2004, the Commission proposed to exert more control through proposed regulations that included, among other things, standards regarding the reasonableness of executive and other employee compensation at the CNAs. The Commission eventually withdrew the entire regulatory proposal citing the number and nature of issues raised by commenters. Federal laws limit the amount of federal funds that can be used to pay the salaries of certain federal agency contractors and nonprofit agency executives receiving federal grants to the level II federal senior executive service (SES) salary, which in fiscal year 2012 was the maximum SES CNA executive salaries, however, are not limited in pay of $179,700. this way because although the fees the affiliates pay the CNAs originate with federal customers, once they are remitted to the affiliates they are no longer federal funds. SES pay ranged from $119,554 to $179,700 in fiscal year 2012. Our review of the financial information submitted by NISH and NIB of their 25 highest-paid executives for this year shows that 11 executives had a salary above this range, 12 were within this range, and 2 were below this range. NISH and NIB employees, including the highest- paid executives, also received bonuses and benefits, such as pensions, and health, dental, disability, and life insurance. The highest-paid NISH executives as well as staff were entitled to first-class or business air travel in certain circumstances and reimbursement for eligible wellness program expenses up to a maximum of $250 annually. Also, the NISH Chief Executive Officer received a stipend for a car. Within the last 5 years, each CNA has had different consultants conduct compensation assessments to determine whether their compensation was comparable to other organizations. The organizations used for comparison had similar missions and levels of revenue for the assessments conducted for NISH, and similar locations for the assessments conducted for NIB. These assessments took into consideration some factors similar to those in the Commission’s proposed regulations, such as comparing the salary of job positions at the CNAs with positions at other organizations deemed similar. However, none of the assessments compared CNA compensation to federal sector compensation. One consultant who conducted one of the studies explained that this was because CNA job titles and functions were more comparable to the for-profit and nonprofit sectors than the federal sector. These assessments also varied in scope and methodology. For example, while some NISH assessments included a review of the value of all salary, cash incentives and benefits, the NIB assessments did not include a review of benefits. The 2011 study for NISH found that with the exception of salaries for three executives, the salaries of all NISH executives were comparable to the market median. The 2009 study for NIB found, in part, that the salaries for NIB’s leadership team needed to be increased to be competitive with the market, and NIB subsequently raised their salaries. 18 U.S.C. § 1913. and NISH reported spending $700,000 on lobbying. In the same period, NIB reported lobby activities related to the AbilityOne Program, the Rehabilitation Act, Social Security and federal procurement, and NISH reported lobbying related to 10 different bills or laws.years, from 2008 to 2012, NIB reporting spending about $976,729 and NISH reported spending $3.5 million on lobbying. According to the Commission, to decrease reserves the Commission reduced CNA fee limits in fiscal year 2007. each CNA is inappropriate.reserves for NISH and NIB separately over time. Specifically, the annual reserves for NISH for fiscal years 2008 to 2012 as well as its reserve projection for fiscal year 2013 continued to grow, while NIB’s reserves declined slightly in 2011and 2013 (see fig. 3). The Commission relies on CNA recommendations when determining which projects are added to the AbilityOne Procurement List and when assigning affiliates to provide them. However, some affiliates have expressed concerns that CNA assignment decisions may not be sufficiently transparent or equitable. In response to these concerns, the AbilityOne Commission issued a policy on how CNAs should assign projects. While a step in the right direction, this policy may be ineffective in several ways. Federal law gives the AbilityOne Commission the authority to add projects to the AbilityOne Program Procurement List and federal regulations give the Commission the authority to approve which agencies affiliated with the program can provide the projects. In so doing, the Commission relies heavily on recommendations from the CNAs. Specifically, it takes five steps to add a project to the Procurement List (see fig. 4). Under the first step of the Procurement List addition process, the CNAs assign one of their affiliated agencies to develop a business opportunity that potentially may become an AbilityOne project, in accordance with their own procedures. The Commission does not provide input into which affiliate is assigned at this stage. In step 2, the CNAs recommend that the Commission add the potential project to the Procurement List using a standard project addition package. The affiliate that the CNA assigns to develop the potential project is typically the affiliate that the CNA recommends to the Commission to provide the project in this package. In step 3, Commission staff review CNA addition packages to determine whether the project is suitable for the AbilityOne Program, using the criteria in the sidebar. According to Commission staff, they do not determine: a) whether another affiliate would be better positioned to provide the project or b) if the CNAs followed appropriate processes in selecting the affiliate. In step 4, Commission members vote on whether to add staff-recommended projects to the Procurement List, using the same four criteria that staff used to evaluate the project. They also vote on whether the CNA-recommended affiliate should be designated to provide the project. According to Commission staff, members vote to add the vast majority of projects staff put forward for addition to the Procurement List. GAO has identified key elements that public procurement systems should have to ensure that they are efficient and accountable. Two of these, which the Commission has also acknowledged in policy as being important in the AbilityOne Program, are: transparency, which includes having written procedures that are easily understandable by all; and equity, which includes maintaining impartiality, avoiding conflict of interest and preferential treatment, and dealing fairly and in good faith with all parties. The processes the CNAs use to make assignment decisions allow them to exercise discretion when determining which affiliate to assign to a project and such discretion can limit transparency and equity. A Commission official told us that such discretion is essential to balancing the core mission of this program—providing employment opportunities for people who are blind or have severe disabilities—with providing quality projects to federal agencies in a timely and economical manner. AbilityOne officials also told us that their involvement in determining which affiliate should provide a project is limited. The reasons they gave for relying so heavily on CNA recommendations include (1) historically, project assignment has always been a CNA responsibility, and (2) it is the CNAs that have the necessary expertise to assess which affiliates are best suited to providing specific projects. Although both NISH and NIB have written procedures for assigning affiliates to projects, some affiliates told us that they do not always find the CNAs’ assignment processes transparent. Both CNAs have basic eligibility criteria that all affiliates must meet or they will be disqualified from pursuing a potential project. NISH has 16 additional criteria that it uses when making assignment decisions among qualifying affiliates and NIB has 7 (see sidebar). Both NISH and NIB also provide feedback to affiliates that were not awarded a project, upon request. NISH officials explained that not all of its criteria are relevant when determining which affiliate should be assigned a project and that each project notification lists those criteria that will be used. NIB officials explained that due to the general nature of their criteria, most are applicable to assignment decisions. Nevertheless, some NISH and NIB affiliates told us that they do not always understand how the CNAs apply the assignment criteria on a project-by-project basis and, as a result, do not understand how their proposals are being judged. One affiliate explained, for example, that sometimes his CNA views geographic proximity to a project’s worksite as more important than prior experience in a relevant line of business when evaluating affiliate proposals and sometimes they do the opposite. However, because the CNA does not tell the affiliates up front which criteria will be weighted as more important, affiliates do not know what elements to emphasize in their proposals and can be confused as to why one affiliate was assigned a project over another affiliate. Moreover, some affiliates have questioned the overall integrity of the CNAs’ assignment processes. Several affiliates we spoke with stated that they feel the system is biased in that assignment decisions tend to favor larger affiliates, affiliates that are or were on one of the CNAs’ boards of directors, or are a member of a particular affiliate sub-group. In addition, NISH assignment decisions are made by a regional executive director in each of its six regions and some affiliates questioned whether these individuals apply NISH assignment criteria consistently. Affiliates have also said that when NIB identifies a potential project for development, NIB does not routinely notify all affiliates. Instead, NIB usually notifies only those that they think may be interested in, and capable of, developing it. During our focus groups with affiliates, several mentioned that this practice can make it difficult for them to be considered for a different or new line of business. NISH, on the other hand, routinely notifies all affiliates of potential projects through its website and such notification is a requirement in NISH assignment procedures. The Commission’s May 2012 policy, according to Commission officials, sought to articulate a minimum set of broad principles that CNA assignment policies and procedures should incorporate—some of which relate to the elements of transparency and equity discussed above. This was the first time that the Commission had issued a written policy to guide CNA project assignment decisions, although the CNAs have had their own written procedures for years. Commission officials told us that they issued this written policy for two reasons. First, in the event that an affiliate filed suit in court over an assignment decision, as occurred in 2010, the Commission wanted to be able to point to a written policy that described how they expect CNAs to make assignment decisions. Second, they felt that having a written policy was important, given complaints levied by some affiliates that CNA assignment decisions sometimes lacked transparency and appeared biased. A Commission official acknowledged that the principles articulated in its assignment policy generally aligned with the CNAs’ written procedures. As a result, the Commission did not expect that the CNAs would need to make substantial changes in their assignment processes. Our review of the Commission’s policy shows that although it describes some desired outcomes regarding CNA assignment decisions, it does little to indicate how these outcomes can be achieved. For example: The policy states that CNAs should develop processes to assure that projects are distributed among affiliates that result in fair, equitable, and transparent distribution, taking into account the unique mission and objectives of the program. It does not explore how such distribution should be achieved, or define what is meant by fair, equitable, and transparent. To maintain CNA discretion in determining certain criteria to use when making decisions, the policy allows decisions to be at least partially based on special considerations in certain circumstances. The policy gives examples of special considerations, such as providing jobs to wounded warriors or using environmentally friendly supplies, but it does not limit the CNAs to them. The policy also does not define or provide any examples of the circumstances in which the special considerations may be applied, which limits transparency. The policy also lacks transparency because it does not require that the CNAs routinely disclose to affiliates applying for projects how and why special considerations were used in making assignment decisions. Instead, it says that upon the Commission’s request, CNAs must certify that an assignment complies with all applicable policies and procedures and include documentation about any special circumstances in the project addition package submitted to the Commission. The policy also contains three types of enforcement mechanisms, another key internal control intended to ensure that program directives are followed, but they are not well—formulated. Specifically: The policy requires that the Commission review CNA assignment processes at least once every 3 years to determine whether these processes are aligned with the principles outlined in its policy. However, because some of the principles contained in this policy are vague, the Commission may have difficulty determining the extent to which CNA procedures are aligned with them. Although the policy states that these reviews would begin in 2012, as of February 2013 the Commission had not developed review procedures or conducted any reviews. The policy requires that CNAs document any special considerations that figure into an assignment decision and provide such documentation to the Commission upon request. It does not, however, specify what the documentation should entail. For example, it does not require the CNA to document why or how a particular consideration was used in an assignment decision. Such information would be critical to assessing whether the assignment decision was impartial and free from bias. The policy requires that CNAs have written appeal processes in place and both CNAs had such written procedures before to the Commission issued its policy. The policy also requires that the AbilityOne Commission develop its own separate written appeals policy and procedures, which would allow for a second level of appeal. At the time of our review the Commission did not have a timeline for developing this policy. The AbilityOne Commission has not determined how the assignment of projects among affiliates has affected the creation of employment opportunities for people who are blind or have severe disabilities and, according to Commission officials, has not done so at least in part because of limited resources. Such an assessment is important to conduct for two reasons. First, identifying risks that may affect the capacity of an agency to meet its mission—in this case the creation of jobs for people who are blind or have severe disabilities—is an important Because the Commission has not determined if or how internal control.the current assignment of projects affects its mission, it does not know whether the way projects are currently distributed among affiliates poses a risk to achieving the program’s mission and, if so, the extent of this risk. Second, according to an AbilityOne official, the relationship between the distribution of projects and job creation for people who are blind or have severe disabilities has been an ongoing debate among affiliates, CNAs, and the Commission for years. AbilityOne and CNA officials told us that there is no clear research to indicate whether the current distribution of projects among affiliates affects the amount of employment opportunities created for people who are blind or have severe disabilities. On the one hand, AbilityOne and CNA officials said that the program could benefit from spreading projects widely among its affiliates. Under this scenario, the program would not be as reliant on the capabilities of a few affiliates to hire people who are blind or have severe disabilities. Such a broad bench of affiliates may reduce the possibility of the program losing a federal customer if a producing affiliate becomes unable to provide a project because the project could be transferred to another affiliate within the program that had similar or potentially similar capabilities and capacity. On the other hand, Commission and CNA officials also said there could be benefits from a completely different distribution that assigned relatively more projects to some of the largest affiliates. Larger affiliates typically have more experience and their size creates economies of scale necessary to provide large projects, such as computer destruction or contract closeout services for an entire federal agency or program within an agency. We analyzed fiscal year 2012 program data and found that while the largest affiliates represent a minority of the AbilityOne affiliates, they hold the majority of projects. Figure 5 shows that the largest 114 affiliates (20 percent) that provided projects as of the end of fiscal year 2012 had 56 percent of the projects and 79 percent of the sales dollars. We also analyzed the distribution of projects among NIB and NISH affiliates separately. The largest 13 NIB affiliates (20 percent) held 46 percent of AbilityOne projects and 53 percent of AbilityOne sales. The largest 100 NISH affiliates (20 percent) held 50 percent of AbilityOne projects and 80 percent of AbilityOne sales. Program officials from all levels, as well as some of the affiliates themselves, told us that small and mid-size affiliates may struggle to compete for AbilityOne projects for a variety of reasons. For example, they told us that small affiliates cannot devote as many resources to business development or may only have the capacity to compete for projects in their local area. Affiliates also said that CNAs may not select them because of a perceived lack of work experience in a new line of business. Indeed, one affiliate told us it provides janitorial services and, despite efforts to expand into other businesses, it could not persuade its CNA to consider it for anything other than janitorial contracts. AbilityOne and CNA officials told us that while they try to give opportunities to smaller, less experienced firms, opportunities for smaller affiliates may be reduced when other factors are taken into account, such as a federal customer’s preference for a larger, more experienced contractor. While the AbilityOne Commission is ultimately responsible for determining the fair market price of projects in the program, it permits the CNAs, affiliates, and federal customers to negotiate pricing and recommend a fair market price for each project. Commission guidance defines a fair market price as the price agreed upon by a buyer and seller, with neither under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.that providing jobs to people who are blind or have severe disabilities may necessitate employing a less than fully productive workforce, which could raise an affiliate’s costs. As a result, according to Commission staff, a project’s price under the AbilityOne Program is not necessarily the lowest possible price, but it also isn’t the highest possible price. Commission guidance holds that the fair market price should include the CNA fee. In addition, the Commission recognizes The process for determining the price of a project begins when an affiliate and federal customer are developing a potential project for the program and ends when that project is added to the Procurement List (see fig. 6). Commission staff review the CNA pricing package in step 3 of the process. This review is a key control intended to ensure a fair market price. Between January 1, 2012 and December 10, 2012, the Commission received 336 new packages for price review. As shown in figure 7, staff recommended 78 to Commission members for final approval (23 percent). Staff rejected the pricing proposed in the other 258 pricing packages (77 percent), primarily because of insufficient documentation, but in some instances because they found the price too high. The CNAs and affiliates have the option of revising and resubmitting the rejected packages. After working with the CNAs, affiliates, and customers, as necessary, to produce better documentation or a revised price, staff recommended that Commission members approve the revised packages of 116 proposals. For the last several years, the Commission has approved all pricing packages the staff have recommended because they agreed with their staffs’ recommendations. Commission staff told us that they consider various factors when reviewing recommended prices, such as whether negotiations between the federal customer and affiliate are sufficiently documented. Staff also told us that they conduct research to determine whether the recommended price in a project addition package conforms with the pricing for similar goods and services available from public sources, and if not, whether the project addition package contains a sufficient explanation for these differences. Commission staff also told us that they conduct these reviews in accordance with written policies and procedures, but acknowledged that these instructions are not sufficiently explicit and transparent. Such limitations can make it difficult for the CNAs and affiliates to understand how and why decisions are made. CNA managers and some affiliates told us, for example, that they sometimes do not understand the Commission’s price reviewing procedures and by extension, its reasons for rejecting prices. This lack of understanding about Commission reviews of recommended prices may partially explain the relatively high rejection rate of initial packages (see fig. 7). More explicit and transparent written policies and procedures on pricing reviews might include, for example, a checklist of what Commission staff should look for when assessing prices and a list of red flags that could indicate when recommended prices might be too high. Clearly-communicated price review procedures, including a discussion about the protocols the Commission uses to review pricing packages, could result in better- prepared pricing packages and therefore fewer rejections and less rework. According to AbilityOne policy, all projects that extend beyond a single contract period must include a mechanism for adjusting the price. All parties involved—the affiliate, the federal customer, the CNAs, and the Commission—must agree on the mechanism. According to CNA officials, periodic negotiations between the affiliate and the customer are the most common price revision mechanism. If a price revision conforms to the originally approved mechanism, the affiliate and customer implement the revision without seeking Commission approval or submitting documentation of the revision to the Commission. However, if the change in price does not conform to the originally approved mechanism, Commission policy directs affiliates to prepare a price revision request package, which the CNA submits to the Commission for staff approval. Between January 1, 2012, and December 10, 2012, Commission staff reviewed 569 packages for non-conforming price revisions (see fig. 8). Commission staff initially approved 216 of these packages (38 percent) and, after a subsequent review, approved an additional 157. Commission staff rejected 196 of the price revision packages, none of which had been resubmitted at the time of our review. Commission staff told us that they might reject a price revision for a variety of reasons. Staff might see an anomaly in the request, such as a price that is increasing much faster than either (1) the original terms of the contract specified for future year price changes or (2) research indicates that it should be changing. Affiliates and their federal customers have the option to resubmit their requests with additional information or clarifications. Commission staff and CNA officials reported that they do not have procedures in place to ensure that affiliates comply with the policy that affiliates report to the Commission, through their CNA, any price revisions that do not conform with approved contract pricing mechanisms. If the Commission becomes aware of unreported price revisions, staff told us that they contact the affiliate and federal customer to attempt to resolve the situation, typically by asking for an immediate price revision package. Commission staff told us that unreported price revisions are a recurring problem, and provided us with three examples of price increases that should have been reported between 2 months and 19 years ago. Although they were not able to estimate the number of times such unreported increases occurred, they said that its recurring nature causes them concern. CNAs collect information on current prices, but the Commission does not require them to submit this information to the Commission. If the Commission had this information, it could electronically compare the current prices to the data it maintains on the approved prices and thus have assurances that controls were met. Failure to submit price revision requests to the Commission before raising prices (1) negates the Commission’s internal controls that ensure that affiliates are charging fair market prices and (2) means that the Commission does not have accurate data regarding the prices that are actually being used within the program. The AbilityOne Program is one of many federal programs designed to help people with disabilities find employment. It is the single largest source of employment for the blind and others with severe disabilities. This program’s unique public-private structure was set up more than seven decades ago when federal purchasing was simpler and much smaller in scale. Today, billions of federal procurement dollars flow through the program every year and tens of thousands of people who are blind or have severe disabilities are employed through it. The Commission’s oversight of the CNAs is hampered by limitations in its monitoring procedures and in its authority over their operations. Developing a written agreement between the Commission and each CNA that specifies key expectations for the CNAs and oversight mechanisms could improve program accountability. It would be important to work to achieve an agreement within a reasonable period of time, such as 18 months. In the event that an agreement cannot be reached, it is important to identify in advance appropriate next steps for program changes by the Commission to establish adequate oversight and accountability for the AbilityOne program. In addition, there are specific areas where the Commission needs to establish adequate oversight procedures to better help ensure program integrity, transparency, and effectiveness. These include: obtaining reports from CNAs on alleged misconduct and internal control violations to ensure that any appropriate corrective actions are taken, overseeing CNA procedures for assigning projects to affiliates to help ensure transparency and equity, developing more explicit and transparent written protocols for pricing reviews, and reviewing pricing packages to ensure fair market value. Finally, the AbilityOne program does not have an independent IG. Without an independent IG, this major procurement program lacks an office to independently audit and investigate waste, fraud, and abuse and to make recommendations for enhancing program integrity and operations. To enhance program effectiveness, efficiency, and integrity in the AbilityOne Program, Congress may wish to consider establishing an independent inspector general for the program with the authority to audit and investigate the Commission and the CNAs. To promote greater accountability for program effectiveness, efficiency, and integrity, the Chairperson of the U.S. AbilityOne Commission should direct the AbilityOne Commission to enter into a written agreement with each CNA within reasonable established time frames, such as within 18 months. The agreements should establish key expectations for each CNA and mechanisms for the Commission to oversee their implementation and could cover, among other things: expenditures of funds, performance goals and targets, governance standards and other internal controls to prevent fraud, waste, and abuse, access to data and records, consequences for not meeting expectations, and provisions for updating the agreement. If the Commission is unable to enter into such a written agreement with either CNA, the Commission should take steps to designate a CNA that is willing to enter into such an agreement or seek legislation that would require such an agreement as a prerequisite to designation as a CNA. To further improve oversight and transparency in the AbilityOne Program, the Chairperson of the U.S. AbilityOne Commission should: Routinely obtain from the CNAs any audits and reports of alleged misconduct or other internal controls violations, and information on corrective actions taken by the CNAs. Take additional action to better ensure that the CNAs’ processes of assigning projects to affiliated agencies result in a transparent and equitable distribution. Such action could include one or more of the following: further developing its policy to specify procedures CNAs should follow to ensure equity and transparency in project assignment decisions, developing protocols for how the Commission will review CNA project assignment procedures to ensure their alignment with the Commission’s policy, or performing a study to determine if and how the distribution of projects among affiliates affects the number of jobs for people who are blind or have severe disabilities. Develop more explicit and transparent written procedures for how Commission staff review pricing packages and clearly communicate these procedures to affiliates and the CNAs. Such communication might also highlight the most common reasons that pricing packages are rejected by Commission staff. Require the CNAs to provide current pricing information to enable the Commission to better identify instances when current prices differ from approved prices. We provided a draft of this report to the AbilityOne Commission, NIB, and NISH for review and comment. The Commission’s comments are reproduced in appendix II, NIB’s comments are reproduced in appendix III, and NISH’s comments are reproduced in appendix IV. Technical comments from all three agencies were incorporated as appropriate. In their written comments, the Commission and the two CNAs agreed with our matter for Congressional consideration and recommendations for executive action. They also provided additional information and disagreed with several findings. We subsequently modified the report in a few places to provide further clarification. With regard to our matter for Congressional consideration about establishing an independent Inspector General (IG) for the program, the Commission concurred that there are benefits to having an independent entity conduct audits where needed. The Commission added that in its view, the creation of an IG would have to be budget neutral given the already scarce program funding for the Commission. The Commission concurred with our recommendation to enter into a written agreement with each CNA and added that it will pursue these agreements once it has updated and enhanced its regulations to describe its authority and oversight with respect to the CNAs. The Commission added that it anticipates completing the written agreements in 18 to 24 months. The Commission concurred with our recommendation to routinely obtain from the CNAs any audits and reports of alleged misconduct or other internal control violations, and information on corrective actions taken by the CNAs. The Commission added that it will establish or enhance and disseminate policies and procedures regarding CNA oversight and internal controls and anticipates that this will be completed in fiscal year 2014. While NIB agreed with our recommendations to the Commission, NIB disagreed with our finding that the Commission has limited control over CNA spending. NIB highlighted several tools which it believes show that the Commission’s controls are sufficient, such as the Commission’s ability to set fee limits for the CNAs and provide guidance for, and review of, CNA budgets and performance. The report discusses these tools and presents evidence as to why we believe they are not sufficient for the Commission to oversee CNA spending. Both CNAs cited other controls that contribute to the oversight of their budgets. We cited examples of these other controls in the report, including IRS reporting requirements for nonprofit agencies and such CNA internal controls as undergoing annual independent financial audits. However, IRS and CNA internal controls cannot replace Commission oversight because the Commission is the entity that is most knowledgeable about the program’s regulations and is ultimately responsible for ensuring compliance with these regulations and for the stewardship of the program. The Commission and the two CNAs commented on CNA reserve levels. The Commission provided some additional clarification on its written guidance for reserves and actions taken, which we incorporated into the report. NISH disagreed with the statement that the CNAs have been accumulating reserve funds. However, our analysis of certified financial statements for NISH and NIB shows that (1) the annual reserves for NISH for fiscal years 2008 to 2012, as well as its reserve projection for fiscal year 2013, continued to grow and (2) NIB’s reserves declined slightly in 2011and 2013 (see fig. 3). NISH also disagreed with the statement that the CNAs have not provided the Commission with financial analyses that support their levels of reserves and reserve policies. However, the statement in the report to which NISH refers actually focuses on actions of the Commission and we have clarified this in the report. This statement indicates that the Commission has not developed guidance about what the CNAs should consider when setting reserve policies nor determined what financial information the CNAs should provide to it to fully support their reserve levels. NISH and NIB cited the criteria they took to establish their reserve policies and levels in their comments. NISH disagreed with the Commission’s position that the Commission lacks the authority to require and enforce program improvements. During the course of our work, Commission officials noted that the Commission has very little explicit authority to regulate the CNAs and, as a result of this lack of authority, said they have not taken additional action to expand the Commission’s oversight in ways that may be beneficial to the program. They said that, without additional oversight tools, they have few ways to enforce regulations. For example, although they could remove a CNA as an administrator of the program for noncompliance or significantly reduce its fees, such approaches could be highly disruptive to the program and the people it serves. Thus, depending on the infraction in question, they could be reluctant to use them. Because an agency’s interpretation of its regulatory authority under the laws it is charged with administering is generally to be afforded deference, we did not make any changes to our report. However, we note that it may be beneficial for the Commission to engage with NISH on this issue as it takes steps to implement our recommendations, particularly the one focusing on entering into written agreements. NIB disagreed with our finding that the Commission has limited oversight and control over areas such as CNA performance, governance, and internal controls. NIB’s comments on this topic generally provided additional information about NIB’s governance structure and controls and did not directly address the Commission’s level of authority and control. However, in response to NIB’s comments, along with additional clarification from a NIB official, we revised the report to make clear that NIB does not allow board members who are executives or employees of a NIB affiliate to serve as a Board officer, but those individuals can serve on the Board. The Commission agreed with our recommendation that it take additional action to ensure that CNAs’ processes of assigning projects to affiliated agencies result in a transparent and equitable distribution. The Commission noted that it has already initiated a review of CNA assignment policies as part of a larger review of procedures across the entire AbilityOne Program and that it will build our recommendations into the deliberative process. The Commission added that the target completion date for this review and development of procedures is no later than June 2014. Both CNAs disagreed that their processes for assigning projects to affiliates were not transparent. NIB stated that the primary factor it uses when making assignment decisions is the potential to positively impact employment for people who are blind and NISH stated that it ensures transparency through several actions, including posting all notices of project opportunities on its website. However, we continue to believe that greater transparency is needed for the reasons stated in the report, including to address the concerns of some affiliates that: (1) they do not understand how the CNAs prioritize the criteria used to evaluate their proposals; (2) NISH applies its criteria inconsistently across its regions, and (3) NIB does not notify all of its affiliates about potential project opportunities it is considering for the program. NISH also stated that it disagreed with what it believed to be our assessment that CNA assignment processes are biased. We did not, however, state that these processes are biased; rather, we stated that some affiliates view them as biased. Greater transparency can help organizations address concerns of bias. NISH also provided additional information about its assignment processes that we incorporated in the report as appropriate. The Commission and NISH provided comments about the distribution of projects among affiliates. The Commission noted that it will increase its emphasis and attention to mentoring the smaller affiliates so that they can more fully participate in the program. The Commission also suggested that we note that factors other than an affiliate’s size can influence the number of projects affiliates are assigned in the program. We agree, but did not make any revisions to the report in this regard because we had already discussed such factors in the draft. NISH noted that it assigned more projects to its smaller affiliates in fiscal year 2012 than in prior years. However, because it is not clear how the distribution of projects among affiliates affects the creation of employment opportunities for people who are blind or have severe disabilities, it is not currently known whether assigning more projects to smaller affiliates is the most effective path for the program to pursue. The Commission suggested that we modify the wording of our finding on the extent of the Commission’s knowledge about how project assignment affects employment opportunities for its target population. The Commission noted that, while it is presented with information on the number of employment opportunities a proposed project will generate, it does not track the number of overall employment opportunities realized. In response, we revised the wording to clarify that the Commission does not track how the program’s distribution of projects affects job creation for its target population. NIB reiterated several aspects about the process of adding projects to the Procurement List. In response to these comments we now more explicitly note that the Commission relies on CNA recommendations when adding projects to the Procurement List and votes on whether to approve CNA-recommended affiliates as project providers at the Procurement List addition stage. The Commission agreed with our two recommendations for Commission actions to improve pricing reviews. However, the Commission took exception with our statement that Commission staff do not have written policies and procedures for reviewing pricing packages. The Commission stated that staff do have such written instructions and we confirmed this statement and revised the report to incorporate this information. Nonetheless, the Commission agreed with our assessment that its pricing review procedures are not sufficiently explicit or transparent and that this can make it difficult for the CNAs and affiliates to prepare acceptable pricing packages. The Commission noted, however, that the extent to which Commission reviews of pricing packages can be transparent is limited by the fact that such reviews are often based upon sensitive information that is not releasable to the CNAs or affiliates. We agree, but continue to believe that the Commission can increase the transparency of its pricing review processes. As agreed with your offices, we will send copies to the appropriate congressional committees, the Chairperson of the U.S. AbilityOne Commission, the President and CEO of NISH, the President and CEO of NIB, and other interested parties. In addition, this report will be available at no charge on the GAO web-site at http://www.gao.gov. If you or your staff members have any questions regarding this report, please contact me at (202) 512-7215 or sherrilla@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Appendix I: CNA Operating Expenses for Fiscal Year 2012 (in millions) The CNA fiscal year begins on October 1and ends on September 30. Employee benefits include health, dental, life, and disability insurance. In response to NISH’s clarification of its operational costs, we removed $31.57 million for subcontracting costs that are associated with federal contracts in which NISH was the prime contractor. According to NISH officials, these costs are not required to be reported on the IRS Form 990 as operational costs and NIB did not do so. The CNA fiscal year begins on October 1 and ends on September 30. Employee benefits include health, dental, life, and disability insurance. NIB’s service bureau costs are for its outsourced data entry and call center. In addition to the contact named above, Assistant Director Bill Keller, Nancy Cosentino, Julie DeVault, Sara Pelton, and Paul Wright made significant contributions to this report. Assistance, expertise, and guidance were provided by Kurt Burgeson, David Chrisinger, Michele Grgich, Alex Galuten, Kristine Hassinger, Steve Lord, Mimi Nguyen, Jerry Sandau, William Shear, Walter Vance, Monique Williams, and William Woods.

Summary: In 1938, Congress created a program providing employment opportunities for people who are blind and expanded it in 1971 to include people with severe disabilities. Now known as AbilityOne, the programs public-private structure consists of the federal, independent U.S. AbilityOne Commission (15 part-time presidentially-appointed members supported by 27 staff) to oversee the program; two central nonprofit agencies (CNAs) to administer much of the program; and hundreds of affiliated nonprofit companies employing people who are blind or severely disabled to provide products and services to federal agencies. Federal agencies are generally required to purchase such products and services through the program. GAO examined how the AbilityOne Commission: (1) directs and oversees the CNAs; (2) adds products and services (hereafter called projects) to the program and assigns affiliates to provide them; and (3) prices program projects. GAO reviewed policies, procedures, relevant federal laws and regulations, and other documents; interviewed CNA and AbilityOne officials; held five focus groups with affiliates; and analyzed data on program products, services, and pricing reviews. Federal agencies need to exercise strong oversight to promote effectiveness and efficiency and prevent waste, fraud, and abuse--especially in a federal procurement program such as this, which is exempt from full and open competition requirements. However, although the AbilityOne Commission is ultimately responsible for overseeing the program, the Commission cannot control how CNAs (1) spend their funds, (2) set and manage their performance goals, or (3) set and implement governance policies and other internal controls. The Commission's authority to direct CNA budget priorities--including how much they compensate their executives and the level and growth of their reserves--is limited. As independent entities, the CNAs are responsible for determining their spending. Most of their money comes from fees they charge their affiliates as a percent of revenue earned from AbilityOne contracts. Moreover, the Commission does not have sufficient authority to set CNA performance and governance standards, so it depends on the CNAs to set and enforce such standards. Although the CNAs have instituted their own internal controls, the Commission does not have procedures to monitor alleged CNA control violations, nor is there an inspector general to provide independent audit and investigative capabilities for the program, including at the CNAs. The AbilityOne Commission is responsible for determining which products and services can be suitably provided by the program. It delegates to the CNAs most of the responsibility for deciding which affiliates should develop and provide these projects. According to CNA and affiliate officials, the CNAs often do not fully disclose how they make these decisions. This limited transparency could increase the risk of biased decisions because CNA officials have wide latitude in determining which affiliate should be awarded a project. Although AbilityOne Commission officials have acknowledged the importance of transparency and equity in assigning projects, they have done little to indicate how these outcomes can be achieved. The Commission has statutory responsibility for determining the fair market price of projects in the program, but: (1) its written pricing review policies and procedures are limited and (2) it does not have sufficient internal controls to ensure that prices are appropriately revised over time. The Commission sets procedures that encourage affiliates and federal customers to negotiate prices that reflect the market. Although Commission staff review these prices in accordance with written policies and procedures, they acknowledged that these instructions are not sufficiently explicit or transparent. Such limitations can make it difficult for the CNAs and affiliates to understand the Commission's pricing review procedures and, by extension, its reasons for rejecting prices. This lack of understanding may partially explain the 77 percent rejection rate for initial pricing packages. Commission policy also states that CNAs submit for Commission review any request for adjusting the price of a project beyond a single contract period that does not conform with the prior Commission-approved mechanism. Occasionally customers and affiliates implement non-conforming price revisions without requesting Commission approval. This negates the Commission's internal controls for ensuring fair market prices and results in the Commission not knowing the actual price being charged. Neither the AbilityOne Commission nor the CNAs have procedures in place to systematically identify such instances. We are presenting a matter for Congressional consideration to establish an inspector general and several recommendations to the Commission to enhance program oversight. The Commission and CNAs agreed with our recommendations, but disagreed with several findings or provided additional information, which we incorporated as appropriate.