Appropriations Committee

Money is to politicians as honey is to bees. If there is any sitting around, they’ll find a way to appropriate it, no matter who gets stung in the process.

Such is the case in California. This time, the honey pot came in the form of the state’s Beverage Container Recycling Fund (BCRF)—a well-funded kitty that appeared to be just too sweet for lawmakers to ignore.

The situation, according to recyclers in the state, is akin to a subpar parent who steals the kids’ lunch money to cover the family’s electric bill…with a dubious promise to pay it back later.

At question is whether California has the right to use recycling fund money to cover other debt—even if it promises to pay back that money sometime in the future. The California Chamber of Commerce (CalChamber) says no. The CalChamber filed suit Dec. 22, 2009, in the name of Larry Dicke, its executive vice president and chief financial officer, who is acting as a private citizen (not a CalChamber employee) in the lawsuit.

Other recyclers in the state also challenged the state’s move. The legal actions were combined and arguments were heard in Alameda County Superior Court.

The combined actions challenge the state’s decision to transfer $566.7 million from the BCRF to the General Fund and Air Pollution Control Fund, creating a shortfall in the BCRF.

If CalChamber and the recyclers win, any deadline for the return of the money remains an open question.

“We do not stipulate a time frame,” says Erika Frank, general counsel for CalChamber.

Superior Court Judge David Hunter was due to give a tentative decision at the end of February. The Court, however, postponed the hearing date until mid-March on its own motion.

The state says it sees its action as a loan from the well-funded BCRF. Recyclers say they see it as illegal and, in the long run, damaging to both the state’s well-funded recycling program and to their businesses.

This is not the first time the state has been called into court concerning the CRV (California Redemption Value) program. The CalChamber suit follows a suit filed by some California recyclers, including Tomra Pacific, R.B. Recycling and Big Foot Recycling, over the state’s failure to reimburse recyclers for accepting containers.

Simply stated, the purpose of the CalChamber lawsuit is to compel the California director of finance and the state controller to transfer back to the BCRF the unpaid loans and to compel the director of the California Department of Conservation to adjust the processing fees paid by beverage manufacturers to a level commensurate with the revenue status of the BCRF after the loaned funds are returned.

Those bringing the action maintain that state law requires recyclers to be paid for handling fees so that consumers are allowed to redeem their deposits on beverage containers. If the BCRF is not refunded by the state, the program will become insolvent and the state will lose revenue and jobs, Frank says.

The state controller says the suits are without merit.

Rob and Betty Morales own two recycling centers in California, one in Los Molinos and the other in Durham.

“Since the state reduced and then eliminated our funding, we are barely keeping the doors open. We have closed our Recycling Center in Rancho Tehama. We have had to lay off seven people since July 2009. I do not know of any recycling centers that are not struggling right now,” Betty Morales says.

Statewide, more than 150 recycling centers have closed their doors and hundreds of people lost their jobs because of the state raid on the recycling program.

“This has cost companies like ourselves a small fortune,” says Adrian White, president of Tomra Pacific, Corona, Calif.

While he concedes there is a huge state deficit and that resolving that problem is of utmost importance, he says, “Our feeling is that the money should never have been borrowed for general fund use in the first place.”

White adds, “We said to the judge that the Court should force the state to pay back the money they borrowed from the fund and to find that they should not have borrowed money to the detriment of the fund in the first place.”

STATE’S STANCE

The state dismisses those claims. It says the petitioners have not even shown that the closure of Convenience Zone (CZ) centers (recycling centers within a specified area around a supermarket) would reduce recycling rates. The state’s logic, according to its statement: “Customers may well shift to other methods of recycling materials, for instance by taking their empty beverage containers to another Recycling Center or taking advantage of a local curbside pickup program.”

The state, in trying to demonstrate that there would be no hardship either to citizens or recycling operations, challenged the notion that CZ centers would close at all. Indeed, the number of CZs throughout the state has remained constant during the period in question, according to the state’s court brief.

If there is some good news for recyclers to come from Sacramento, it could be that Gov. Arnold Schwarzenegger recognizes the problem. He has said he would repay $54 million to the program right away (a move that does not require legislative action). In addition, he promised to pay back another $99 million under the new budget in July. A huge shortfall—and a bad precedent—remain.

The state admits that the number of recycling centers has been reduced. However, it says, “payments have only been reduced by 35 percent.” The state maintains, “standing alone, these cuts are unlikely to have a significant impact on their operations.”

The state continues, “While the reduction in fees paid to CZ Centers will undoubtedly reduce their profitability, absent a showing that such reduction will result in appreciably lower rates of recycling, the loans made from the Recycling Fund to the General Fund will not interfere with the purpose of the Recycling Fund.” The state contends, therefore, that complaints from the CalChamber and recyclers like Tomra Pacific and Rob’s Recycling should be dismissed.

HURTING RECYCLERS

In a press statement, CalChamber notes that, since 2002, the state has “borrowed” (its quotes) a total of $566.7 million from the BCRF to make up for budget shortfalls in the General Fund.

“The funding cuts do not just affect recycling centers, they affect everyone that buys CRV beverage material and the retailers that sell them,” Morales replies.

To pour salt into the wound, the state has proposed to change its definition of CZ, eliminating many rural-area CZs.

According to some of the affected parties, the state’s rationale appears to be that leaving rural customers without recycling will be OK since they live far from city centers and don’t recycle that much by volume, anyway.

If a recycling opportunity does not exist within a CZ, then retailers selling beverage containers in that zone must take-back containers in-store. By law, if the CZ is not served, the supermarkets are supposed to either pay the state $100 per day (only one store is doing so) or redeem the containers themselves, but most do not.

Under the Bottle Bill, recycling centers that operate in a CZ receive a premium payment, called a handling fee, to offset the additional costs these sites incur. This was true up until October 2009, when the handling fee expenditures were discontinued.

Under today’s law, a grocery store that grosses $2 million per year must have a recycling operation. Under proposed regulations, that gross triples to $6 million—meaning many stores no longer will qualify.

“If a recycling center closes, the consumer has to travel farther to recycle and may just decide it is not worth the effort and throw the material away,” Morales says. That means more material in the landfill, plus the consumer cannot get back the deposit on the container.

The state gets to keep the unredeemed CRV money, which originally was used to cover the cost of the handling fees paid to the recycling centers that sustain the state’s program.

“Instead the state is using the unredeemed CRV money to help balance the budget and is devastating the recycling program in the process,” Morales says. “What is essentially happening is the beverage container deposit is being turned into a hidden tax. No recycling centers, no return on deposit.”

Before eliminating funding, the state would pay recycling centers a processing fee, an administration fee and a handling fee. These fees were designed to help the recycling centers cover the expenses of handling the material, hauling the material and doing all the paperwork for the state. “Without these fees, the recycling center gets back what it paid for the material, plus a scrap value on the material, if there is one. That's it. You can’t keep your doors open long if you pay a nickel and only make a nickel,” Morales states.

THROUGH THE COURTS

White said the team at Tomra filed its legal action against California in November 2009. CalChamber filed its suit the following month. To expedite matters, the court decided in January to merge the two suits because they raised similar complaints.

“We didn’t want the court to do anything that would delay our case,” White explains, noting that Tomra has lost enough money and does not want to incur more legal fees. However, the court set a Feb. 25 hearing date, which was later pushed back.

CalChamber’s Frank says state law requires that recyclers be paid handling fees so that consumers are allowed to redeem their deposits on beverage containers. If the BCRF is not refunded by the state, the program will become insolvent and the state will lose revenue and jobs.

At least $482.7 million of the BCRF “loans” (again, their quotes) have not been repaid by the state, forcing some of California’s major recycling centers to either close or make severe staff and budget cuts, Frank notes.

The state legislature’s Budget Conference Committee reported that by June 30, 2010, the BCRF would have a negative balance of $161 million. This in the face of a move in 2009 by the Department of Conservation to increase processing fees for glass and high-density polyethylene containers (HDPE) by more than 600 percent, and the fees for polyethylene terephthalate (PET) by more than 800 percent.

The Superior Court gave no indication that its decision would it go against the state. However, it is unlikely that the state would be able to quickly come up with the millions of dollars required to bring the BCRF back to full funding.