When setting rights on file systems via Machine Configuration>Windows Settings>Security Settings>File Systems. It will use the system varible like %systemroot%, %program files% etc.

We had an image that someone had built using the D drive for programs and tweaked the system varibles so that the operating system defaulted to D:\Program Files. Looking in the %windir%\security\logs\winlogon.log it would log an error "D:\program files\folder name does not exist." The policy was working correctly. It's just that the system was set to go to D drive.

I was able to force it to C drive by using the quotation marks.
"c:\program files\folder name"