Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Department of Conservation (3480)

The Department of Conservation (DOC) is charged with the development and management of the state’s land, energy, and mineral resources. The department manages programs in the areas of: geology, seismology, and mineral resources; oil, gas, and geothermal resources; agricultural and open-space land; and beverage container recycling.

The department proposes expenditures totaling $885.2 million in 2006-07, which represents a decrease of $1.7 million, or less than 1 percent, below estimated current-year expenditures. About 94 percent of the department’s proposed expenditures ($827.3 million) represent costs associated with the Beverage Container Recycling Program.

Addressing the Swelling Recycling Fund Balance

California consumers recycle less than three-quarters of the redeemable beverage containers they purchase each year, with the result that the balance in the Beverage Container Recycling Fund continues to swell. This is because California Redemption Value payments into the fund exceed payments out of the fund at current rates of recycling. We recommend that the department report on options to reduce the fund balance, both by reducing monies that flow into the fund and by increasing monies that flow out of the fund to support activities intended to improve recycling program effectiveness.

Operation of the Beverage Container Recycling Program. The DOC’s Division of Recycling (DOR) administers the Beverage Container Recycling Program, commonly referred to as the Bottle Bill program. This program was created 20 years ago by Chapter 1290, Statutes of 1986 (AB 2020, Margolin). The program encourages the voluntary recycling of most beverage containers by guaranteeing a minimum payment (California Redemption Value [CRV]) for each container returned to certified recyclers. Beverages are subject to the CRV (and the flow of payments under the program, discussed below) based on the content of the container, not the container material.

Funding for the program flows through the Beverage Container Recycling Fund (BCRF), which DOR administers. As shown in Figure 1, the program involves the flow of beverage containers and payments between several sets of parties, and generally operates as follows:

• Distributors and Retailers. For each beverage container subject to the CRV that they sell to retailers, distributors make redemption payments that are deposited into the recycling fund. The cost to distributors of the redemption payments is typically passed on to retailers.

• Retailers and Consumers. Beverage retailers sell beverages directly to consumers, collecting the CRV from consumers for each applicable beverage container sold.

• Consumers and Recyclers. Consumers redeem empty recyclable beverage containers with recyclers, from whom they recoup the cost of the CRV they paid at the time of purchase.

• Recyclers/Processors and Manufacturers. Recyclers sell the recyclable materials to processors in exchange for the scrap value of the material and for the CRV. Processors, who are reimbursed from the recycling fund for these CRV pass-throughs, then collect, sort, clean, and consolidate the recyclable materials and sell them to container manufacturers or other end users who make new bottles, cans, and other products from these materials.

In enacting the Bottle Bill, the Legislature sought to make redemption and recycling convenient, thereby encouraging litter abatement and beverage container recycling. The Legislature set a statutory recycling goal of 80 percent. When the recycling rate reaches around 80 percent, the BCRF essentially “clears” itself. That is, when consumers recycle 80 percent of purchased beverage containers subject to the CRV, all money paid into the fund by beverage container distributors is paid out either in reimbursements to beverage container recycling processors or to cover administrative and programmatic costs (including grants and public education). In other words, up to around an 80 percent recycling rate, the Beverage Container Recycling Program is totally self-financing. However, over the 20-year history of the program, the recycling rate has rarely reached 80 percent. For example, in 2004-the last year for which actual data are available-the recycling rate was 59 percent. As a result, a significant portion of the monies paid into the BCRF has remained in the fund. Given the available balances, the Legislature approved loans from the BCRF to the General Fund totaling $286.3 million to help cover a General Fund budget shortfall in 2002-03 and 2003-04. The amount of these loans plus interest-an estimated $320 million-is to be repaid to the BCRF in 2008-09. Were these loans not made, the actual fund balance would be even higher than it is today.

Below-Target Recycling Rates, Increasing CRV, and a Swelling Fund Balance. Since the inception of the Bottle Bill program, the volume of beverage containers recycled in the state has grown. However, as new beverages-such as noncarbonated water primarily sold in plastic bottles-have become subject to the CRV, the rate of recycling has, in many years, declined and remained consistently below statutory targets. And, as shown in Figure 2, as recycling rates have declined or remained below 80 percent, the balance remaining in the fund generally has grown. Recent legislation-Chapter 753, Statutes of 2003 (AB 28, Jackson)-sought to improve the rate of recycling by increasing the CRV from 2.5 cents to 4 cents for containers less than 24 ounces, and from 5 cents to 8 cents for containers 24 ounces or larger. Since the increased CRV took effect on January 1, 2004, recycling rates have remained well below 80 percent, resulting in a BCRF fund balance that continues to grow.

Chapter 753 anticipates the potential persistence of less-than-desirable recycling rates. The statute provides that if the recycling rate is below 75 percent during the 2006 calendar year or any calendar year thereafter, then the CRV will increase from 4 cents and 8 cents to 5 cents and 10 cents, respectively. The legislative intent behind this adjustment is that the higher CRV will spur consumers to recycle more beverage containers. The department is reluctant to project recycling rates. However, to the extent recycling rates remain below 80 percent, the BCRF balances will grow even larger should the higher CRV take effect.

The Governor’s Budget Proposal. The budget proposes spending approximately $827 million on the Bottle Bill program in 2006-07. Of that amount, a projected $600 million (73 percent) is for CRV payments to processors and $36 million (4 percent) is for program administration. The balance of the program’s expenditures is for various activities intended to support and promote recycling in California, including:

• Payments to qualified recycling center operators in designated Convenience Zones-areas generally located within one-half mile of a supermarket ($27 million).

• Grants to local conservation corps and community organizations and nonprofits that encourage litter abatement and recycling ($16 million).

• Supplemental payments to curbside recyclers ($15 million).

• Grants to cities and counties for litter abatement and recycling activities ($11 million).

• Infrastructure loan guarantees ($10 million).

• Grants to encourage new and expanded end-uses for aluminum, glass, and plastic beverage containers ($10 million).

• Consumer education and outreach ($6.5 million).

• Incentive payments to suppliers of clean, quality glass for recycling ($3 million).

Options to Address Swelling Fund Balance. The persistent balance in the BCRF presents the Legislature with challenges and opportunities. As it appears optimistic to expect recycling rates to reach or remain at the statutory goal of 80 percent in the near term, it is likely that BCRF balances will remain at high levels for several years to come, absent corrective action. While the Legislature can reduce the recycling fund balance overtime simply by decreasing the money coming in to the fund or by increasing the money flowing out of it, we think that it should, in general, be guided by actions that encourage consumers to recycle more than they do today. In Figure 3, we list a number of actions that could be taken with the goal of increasing the rate of recycling, which would serve to bring down the fund balance to more reasonable levels.

In addition to the actions listed in Figure 3, which are mostly on the expenditure side of the ledger, the Legislature could take actions to gradually draw down the BCRF balance by reducing the flow of revenues into the fund. One such action would be to suspend, either partially or in full, payments made by beverage container distributors into the fund, until fund balances reach a more desirable level. Given the state’s long-term fiscal condition, as discussed in “Part I” of our companion volume (The 2006-07 Budget: Perspectives and Issues) and the size of the BCRF balance, the Legislature may also want to consider extending the repayment period for the monies loaned to the General Fund from the BCRF in 2002-03 and 2003-04. (The current statutory repayment date is 2008-09.) These actions, however, would not assist the program in meeting its recycling target.

Recommend Department Report on Options to Address Fund Balance Issue. Many of the options available to potentially address very large BCRF balances involve policy choices that should be evaluated by the Legislature prior to implementation. To assist the Legislature in such an evaluation, we recommend that the Legislature adopt the following supplemental report language requiring the department to report on options available to address the BCRF fund balance:

Item 3480-001-0133. Beverage Container Recycling Program. The Department of Conservation shall submit a report to the Legislature by January 10, 2007, that includes the following information:

1. A history of revenues, expenditures, and balances of the Beverage Container Recycling Fund (BCRF) since its inception, and an estimate/projection of such information for 2006-07 and the subsequent two fiscal years.

2. A history of beverage container recycling rates, and an estimate/projection of such rates for 2006 and the subsequent two years.

3. Identification and assessment of the costs and effectiveness of options to decrease the residual balance in the BCRF. Options to be evaluated should include those intended to increase the rate of recycling through targeted program augmentations as well as options impacting the flow of revenues into the fund.