THE MATTRESS COUNCIL HAS ACCUMULATED A LARGE FINANCIAL RESERVE AND CANNOT DEMONSTRATE THAT IT HAS EFFECTIVELY SPENT ITS FUNDING IN KEY AREAS
The Mattress Council has built an unreasonably large financial reserve for the mattress program. Although the recycling act does not place a limit on the amount the Mattress Council can set as a reserve, the act requires the Mattress Council to submit a budget demonstrating that it will operate the mattress program over a multiyear period in a prudent and responsible manner. The Mattress Council has determined that it needs reserve funding equal to 12 months’ worth of expenses, which it estimates is about $42 million. As of the end of December 2017, the Mattress Council had a reserve of roughly $31 million, with an additional $11 million in other net assets above this amount. However, our analysis shows that a much smaller reserve should be sufficient to meet the mattress program’s needs. In addition, as of June 2018, the Mattress Council had not established permanent mattress collection sites in seven of California’s 58 counties, and pockets of the San Francisco Bay Area still did not have convenient access to collection sites. Further, the Mattress Council has not established measures of success for its spending on raising consumer awareness of the mattress program and researching new technology. Without such measures, the Mattress Council cannot readily demonstrate to stakeholders that its spending is effective in these areas.
The Mattress Council Has Amassed an Unreasonable Amount of Unspent Program Funding
Although the Mattress Council has collected millions of dollars in recycling charges from California consumers, it has dedicated a large amount of its revenue to establishing a reserve rather than on ongoing spending to achieve the mattress program’s goals. The Mattress Council collects a recycling charge, which is currently $10.50, for each mattress consumers purchase in California. Outside of a small amount of interest and dividends earned on unspent funding—roughly $230,000 in 2017—the recycling charge is the mattress program’s only source of revenue, and state law requires the Mattress Council to set the charge at an amount sufficient to fund the revenue requirements it identifies in its annual budget. According to the Mattress Council’s audited financial statements, in 2017 it recorded over $44 million in revenue from the recycling charge. State law requires the Mattress Council to recommend—subject to approval by CalRecycle—a funding level sufficient to cover budgeted costs and to operate the program over a multiyear period in a prudent and responsible manner. In total, the mattress program’s net assets at the end of 2017 were about $42.4 million. The recycling act does not prohibit the Mattress Council from accumulating a reserve, nor does it prescribe a limit to the reserve the Mattress Council can accumulate. However, we believe the amount of funding that the Mattress Council has accumulated is excessive.
The Mattress Council believes it needs to have a reserve equal to 12 months of what it expects the mattress program’s expenses will be in 2020, which its most recent audited financial statements indicate will be about $42 million. In other words, the Mattress Council estimated that it needs a total reserve equal to the amount of net assets the mattress program already had at the end of 2017. However, the Mattress Council does not consider this entire amount to be the mattress program’s reserve. Rather, its board has designated only $30.6 million of its net assets as the mattress program’s reserve. The meaning of the distinction between these reserved assets and the mattress program’s other available assets is unclear. The Mattress Council’s chief financial officer stated that it did not have any policies regarding how it can use its reserve that would distinguish the reserve from its other net assets. Therefore, we question the distinction and consider the entire amount of net assets the true amount of reserve funding that the Mattress Council has accumulated. The chief financial officer explained that the reserve funding is intended to stabilize the mattress program’s finances in situations when its existing operating capital is not sufficient, such as cash‑flow shortages or economic downturns. She also expressed that the mattress program needs additional working capital beyond its reserve to fund ongoing operations. However, the Mattress Council’s budget for 2018 shows that it planned to operate at a surplus, indicating that it planned to fund the mattress program from its expected revenue, not from accumulated net assets. When it submitted its proposed 2019 budget to CalRecycle, the Mattress Council indicated for the first time in the program’s existence that it expected the mattress program to operate at a loss that could require it to use its reserve. However, the budget showed that expected spending would only exceed expected revenue by roughly $260,000—an amount that can easily be funded by its net assets.
Other entities have set or advised much lower reserve targets. For example, PaintCare, the operator of California’s paint EPR program, identified a minimum reserve amount equal to two months of its annual expenses, a target reserve amount equal to six months of annual expenses, and a reserve ceiling equal to nine months of annual expenses. We note that—although the Mattress Council is a nonprofit entity—because state law establishes a dedicated revenue stream that the Mattress Council relies on to operate the mattress program, the Mattress Council is similar to government entities that also operate based on revenue generated by statutory requirements. Guidance from the Government Finance Officers Association of the United States and Canada (GFOA) does not identify a specific maximum level of reserves but recommends governments maintain unrestricted funds at a minimum equal to two months of regular operating revenue or regular expenses. Although the Mattress Council could have sound reasons for setting the mattress program’s reserve target somewhat higher than a two‑month minimum, the reserve amount it has targeted is six times the minimum identified by PaintCare and the GFOA guidance. Additionally, its target is about 30 percent higher than the maximum reserve level established by PaintCare.
Further, the Mattress Council’s explanation of its reserve target level does not align with the reason it provided to us for wanting such a reserve. According to its chief financial officer, the Mattress Council determined that it was important to have a reserve balance that was sufficient to carry the mattress program through a 12‑ to 18‑month recession. However, our analysis—which used historic mattress sales data the Mattress Council provided—found that a reserve amount equal to the Mattress Council’s $42.4 million in net assets would be far more than enough for the Mattress Council to run the mattress program through a 12‑ to 18‑month recession. In fact, we found such a reserve would likely cover the mattress program’s expenses for at least six years during a recession similar to the most recent U.S. economic recession, which was the worst economic downturn in about 70 years. Even if the Mattress Council set a reserve equal to six months of the mattress program’s budgeted expenses, this amount would still likely last the Mattress Council for more than three years under those same recessionary conditions. Our calculation of how long the Mattress Council’s net assets would last under recessionary conditions likely underestimates that time. Specifically, to project a scenario in which the mattress program’s reserve was at a higher risk for depletion, our analysis assumed the mattress program’s annual expenses would remain the same as in prerecession years. However, we expect that it is more likely that the mattress program’s expenses would fall, allowing its reserves to last even longer than our projection. This is because Californians would likely not purchase new mattresses as frequently during a recession and therefore would also less frequently dispose of their old mattresses. Such a decline in disposals would reduce the mattress program’s costs to collect, transport, and recycle mattresses.
In its proposed 2019 budget, the Mattress Council indicated that the mattress program needed its reserve to allow it to adjust to unforeseen circumstances that could have a substantial impact on its expenses, such as sudden changes in market dynamics that would affect its costs or a failure of secondary markets for recycled components. To determine how long the mattress program’s projected reserve would last if its costs increased unexpectedly, we calculated how long the reserve would last under the same recessionary conditions described previously if the mattress program’s expenses increased by 10 percent each year at the same time. Under this scenario, we found that the mattress program’s net assets would last for at least three years, while a reserve amount equal to six months of expenses would last at least two years. Under these conditions, the Mattress Council likely would need to pursue an increase to the recycling charge to maintain operations no matter which of the two reserve amounts it maintains. Under the requirements of the recycling act, a six‑month reserve would provide sufficient time for the Mattress Council to pursue such an increase.
The recycling act does not provide CalRecycle effective options to prevent the Mattress Council’s reserve from becoming too large. The recycling act requires the Mattress Council to submit a budget to CalRecycle for approval each year by July 1. CalRecycle then has three months to approve it, disapprove it, or take no action, at which point it is approved by default. However, as we discuss in Chapter 1, the recycling act does not specify a consequence if CalRecycle disapproves of the Mattress Council’s budget. In addition to the change to the recycling act we recommend for addressing that issue, we believe that other changes could create beneficial intermediate steps that CalRecycle could take to address concerns with the mattress program’s reserve funding. For example, the recycling act could define a maximum reserve amount and provide CalRecycle with the ability to direct the spending of any funding that the Mattress Council accumulates over this amount or to adjust the mattress recycling charge. If CalRecycle were granted the authority to direct the Mattress Council to spend excess funding in specific areas, the State would be better positioned to ensure that the recycling charges that consumers pay are used to advance the mattress program and do not accumulate without reason.
As Table 3 shows, in the first two years of the mattress program’s operation, its revenue outpaced its expenses, causing its net assets to increase. According to the Mattress Council’s 2018 budget, most of the mattress program’s expense categories were below budget in 2016, largely because the Mattress Council’s contractors received fewer actual mattresses than it had anticipated and because not all municipal and solid waste facilities contracted with the Mattress Council. The mattress program’s net assets increased by roughly 80 percent in 2017, from about $23 million in January to more than $42 million by December. The mattress program’s budget for 2018 shows that it expects this amount to continue growing by more than $6 million.
|Recycling charge revenue||$42,263||100%||$44,506||99%||$39,723||99%||$43,983||99%|
|Interest and dividend income||45||0||370||1||250||1||296||1|
|Transportation and processing||$10,484||60%||$17,475||69%||$21,595||65%||$30,455||68%|
|Administration and legal*||3,733||22||3,046||12||3,633||11||4,544||10|
|Research and advisory||22||0||55||0||278||1||950||2|
|Revenues Minus Expenses||$24,937||$19,579||$6,894||($262)|
|Prior Year Net Assets†||(2,154)||22,783||42,362||49,256|
Source: Mattress Council’s financial reports and budgets.
* We included the amount of CalRecycle’s oversight expense that it charges the Mattress Council as part of the administration and legal expense category.
† The prior‑year balance for 2016 includes about $2.1 million in prior‑year expenses to start the program. The recycling act did not require the recycling charge to be collected before December 30, 2015. According to the Mattress Council’s managing director, the International Sleep Products Association funded all preprogram expenses through a combination of loans from the association and a line of credit against the association’s assets.
As we mentioned previously, the recycling act does not prescribe a limit to how much funding the Mattress Council can accumulate in a reserve. However, the legislative intent of the recycling act is for the Mattress Council to develop, finance, and implement a convenient and cost‑effective program to collect and recycle used mattresses generated in the State. When the Mattress Council instead accumulates large amounts of unspent funding rather than spending it on the program, it raises concerns about the degree to which its decisions support the legislative intent of the recycling act.
The Mattress Council Has Opportunities to Increase the Convenience of the Mattress Program
The Mattress Council is responsible for operating the mattress program in compliance with the recycling act. To this end, the Mattress Council collects used mattresses through multiple channels: free consumer drop‑off at permanent collection sites (which the Mattress Council’s 2016 annual report stated were mostly solid waste facilities and also include recycling facilities), retailer used mattress take‑back, large‑quantity institutional collectors, and consumer drop‑off at collection events. However, it collects far more mattresses from some channels than from others. According to the EPR supervisor, the mattress program is different from the carpet EPR program in that it includes a retailer used mattress take‑back requirement, and CalRecycle expected this option to yield the most mattresses for recycling. However, as Figure 2 shows, the Mattress Council collects most mattresses through permanent drop‑off sites throughout the State.
The Mattress Program Received Most Mattresses Through Permanent Drop-Off Sites in 2017
Source: The Mattress Council’s 2017 annual report.
* Large-quantity institutional collectors are hotels, educational facilities, and other institutional purchasers of mattresses
that, with limited exceptions, may drop off their discarded units at any Mattress Council‑contracted recycling facility.
† State law requires retailers to offer consumers the option to have their used mattresses picked up for free if the retailers are delivering their new mattresses.
Permanent drop‑off sites offer stable and predictable places for individuals to dispose of used mattresses, so providing consumers convenient access to these sites is critical to the Mattress Council’s ensuring that it collects the maximum number of used mattresses for recycling. The Mattress Council’s recycling plan states that within the first year of the mattress program’s operation, it intended to identify at least one free drop‑off site in each county in California or hold at least one collection event annually in counties not served by drop‑off sites. However, the Mattress Council did not fulfill its intent: it neither established a permanent mattress drop‑off site nor held a collection event in every county in California by the end of 2016. According to the Mattress Council’s 2016 annual report, 122 collection sites and 11 recycling facilities were a part of the mattress program in 2016. The same report indicated that 15 of 58 counties did not have permanent drop‑off sites as of December 2016, although the Mattress Council held at least one collection event in 2016 in six of these counties, with the number of events per county ranging from one to three. However, collection events are less convenient than permanent drop‑off sites because they exclude anyone who wishes to dispose of mattresses but is unable to attend during that time. Further, there were nine counties in 2016 that did not have either a permanent drop‑off site or a collection event. According to the Mattress Council’s records, the mattress program had 168 collection sites and 10 recycling sites in its program as of June 2018. However, seven of 58 counties still did not have permanent drop‑off sites. These seven counties are populated by more than 1.5 million people, or about 4 percent of California residents. Although the Mattress Council has held at least one collection event in most of these counties and some residents in these counties may have access to a free disposal site by driving to a neighboring county, having at least one permanent disposal site in each county would help to ensure that its residents have convenient access for disposing of a mattress.
Further, because of the large size and population dispersion of some California counties, a per‑county measurement is not enough to fully assess the convenience of the mattress program. For example, as of the end of 2016, the Mattress Council had three free drop‑off sites in Alameda County—one each in Hayward, Oakland, and San Leandro. When the Mattress Council publishes its annual report, CalRecycle allows the public and interested program stakeholders to comment on the report. The city manager of Newark, a city in Alameda County, stated in a comment on the 2016 annual report that the terms the Mattress Council offered to solid waste facilities had not been effective at establishing a collection site anywhere in east Alameda County, which he stated has two transfer stations, two landfills, and a permanent household hazardous waste facility. Further, he stated that the mattress program had no collection sites in the east, south, or north areas of Alameda County and that many heavily populated areas were far from the available collection sites. The city manager of Pleasanton made similar comments on the same annual report.
To assess whether Californians have convenient access to dispose of used mattresses at one of the program’s drop‑off sites, we defined convenience as a 30‑minute drive to one of those drop‑off sites. We then reviewed three major metropolitan areas—the San Francisco Bay Area, Los Angeles, and San Diego—to determine how many residents live conveniently nearby a permanent drop‑off site within the program. Although we found the majority of residents in the Los Angeles and San Diego areas lived within a 30‑minute drive of a permanent drop‑off site, we identified significant groups of residents living beyond the 30‑minute drive time in the eastern part of the Bay Area and in Marin County. Figure 3 shows the results of our analysis and the key areas in which individuals do not have convenient access to permanent drop‑off sites in the Bay Area.
According to its managing director, the Mattress Council has faced challenges in establishing drop‑off sites in some areas. For example, he explained that Marin County has a single solid waste service provider and that this entity has been indifferent to the Mattress Council’s efforts to educate it about the mattress program’s purpose. Additionally, he noted that limited real estate options have made finding an alternative location for mattress drop‑off in that county difficult. As a result, as shown in Figure 3, most residents in Marin County are currently without a convenient free drop‑off site to dispose of their mattresses within the program.
As we recommend in Chapter 1, we believe the Legislature should require CalRecycle to develop a goal that would measure the consumer convenience of the mattress program. According to its managing director, the Mattress Council does not currently measure consumer convenience because the recycling act does not require a convenience standard and the Mattress Council believes convenience is subjective and difficult to measure in the short term. He explained that the recycling act established multiple channels for used mattress collection to ensure that Californians have reasonable access to recycle their used mattresses. Nevertheless, our review of EPR program literature identified the importance of establishing performance measurements to monitor program goals, such as ensuring consumer convenience. The program’s convenience could be measured in ways beyond those we describe in this section. For example, Washington state law, in requiring reasonably convenient collection for the state’s electronic waste program, specifies offering collection services in every county and at least one collection site or alternative collection service in every city or town with a population of more than 10,000. Further, as we describe earlier in this chapter, the Mattress Council currently has unspent funding it could use to establish more collection sites to allow consumers more convenient access to drop off used mattresses. As the Mattress Council continues to expand its program, a defined standard for convenience will be an important guide for its future spending.
The Mattress Council Could Improve the Convenience of the Mattress Program for Residents in the San Francisco Bay Area
Source: Analysis of permanent drop‑off site locations as of June 2018, provided by the Mattress Council.
* The 30-minute service area is based on street lengths and speeds without adjustments for traffic.
Because the Mattress Council Has Not Established Measures of Success for Key Program Activities, It Cannot Demonstrate the Sufficiency of Its Spending in These Areas
The Mattress Council has not established measures of success to determine the effectiveness of its implementation of key program activities. The recycling act required the Mattress Council to describe in the recycling plan its intended activities in the areas of research and outreach to consumers, manufacturers, and retailers. However, it did not require the Mattress Council to establish metrics to measure the success of its spending on these activities. As a result, the Mattress Council does not have measurable goals for the mattress program related to consumer awareness and research on new technology. Because the recycling act requires the Mattress Council to report on its recycling activity on an annual basis, the State can determine if the Mattress Council achieves year‑over‑year increases in the number of mattresses collected and the amount of mattress material recycled. However, these aggregated results do not speak to the effectiveness of the Mattress Council’s spending on activities in specific areas of the mattress program. Without measurable goals in those areas, the Mattress Council cannot demonstrate that its spending and activities are sufficient or successful.
The Mattress Council has only recently begun measuring whether its spending and activities concerning consumer awareness are effective. According to its managing director, during the first two years of the mattress program, the Mattress Council did not perform any studies or surveys to determine the level of consumer awareness of the mattress program. In the first half of 2018, the Mattress Council performed a survey of residents to evaluate consumer awareness that a mattress could be recycled, that mattress recycling was free under state law, and of how to dispose of a mattress so that it would be recycled. During our audit, the Mattress Council provided us with the survey’s results and the Mattress Council disclosed a portion of the survey results in its 2017 annual report. However, its president asserted that the full results of that survey were confidential business proprietary information that could not be publicly disclosed. As a result, we do not include any information from that survey in this report. Nevertheless, the Mattress Council cannot demonstrate the sufficiency of its spending on advertising without goals to define how it would measure success.
The Mattress Council spent less on communication activities—which include consumer awareness activities such as advertising and market outreach—in the mattress program’s first year than the State’s paint EPR program spent in its first year. The Mattress Council’s managing director stated that it developed the mattress program’s budgets based on the metrics of other EPR programs in the State, such as the paint EPR program. We compared the expenses for the paint and mattress programs in their first year of operation and found that each spent a similar proportion of its total expenses on administration. However, the Mattress Council spent a much lower percentage on communications than the paint program did. In 2016 the Mattress Council spent about $1.5 million on communication activities, which was 9 percent of its total expenses. In contrast, in its first year of operation, the paint program spent about $2.4 million on communications, which was 25 percent of its total expenses. The managing director of the Mattress Council explained that although the Mattress Council modeled some of its cost targets on similar programs such as the paint program, educating consumers about paint recycling opportunities is different from educating them about mattresses because of the lifespans of the products. The Mattress Council also expressed that the expenses for communication after the first year of the paint EPR program were lower than the 25 percent it spent in its first year; maintaining an average of about 13 percent of its costs per year. We acknowledge that the Mattress Council’s spending a lower percentage of its costs on communications than the paint program does not prove that its spending on advertising and outreach was inadequate. However, the Mattress Council is more than two years into implementing the mattress program, and it has not yet determined whether its level of spending is sufficient, which we find a cause for concern. Without a focus on smaller and more immediately measurable goals, the Mattress Council will continue to spend millions of dollars on communications activities without knowing for certain that it is increasing awareness of the program, which in turn would contribute to an increase in mattress recycling.
Further, the Mattress Council could not demonstrate that it adequately funded research on new technology related to improving used mattress collecting, dismantling, and recycling operations. In 2016 the Mattress Council budgeted $50,000 towards research and advisory studies. However, it spent only $22,000—less than half of the planned amount. In 2017 the Mattress Council increased the budget to $200,000, but it spent only about $55,000. The Mattress Council’s 2016 annual report states that the Mattress Council supports applied research and development efforts to improve the sustainability of mattress recycling through efforts focused on advancing the efficient collection, transportation, and recycling of discarded mattresses and on identifying new and better uses for extracted mattress components. However, according to the Mattress Council’s managing director, research was not a priority in the initial years of launching the mattress program. Rather, he stated that the Mattress Council focused its efforts on tasks such as hiring staff; creating an outreach campaign for retailers, consumers, and other stakeholders; developing a mechanism for retailers to remit payment; and establishing the network for mattress collection. He further asserted that funding research to help establish secondary markets for recycled mattress materials would have been premature if the Mattress Council had not first ensured that the mattress program would collect a substantial number of mattresses.
Although establishing a network for mattress collection is an essential part of the mattress program’s success, the Mattress Council missed a strategic opportunity to invest in the long‑term viability of the mattress program. In its proposed 2019 budget, the Mattress Council indicated that one of the reasons that it needed to maintain a reserve was to respond to unforeseen circumstances, such as a failure in the market for recycled materials wherein recyclers could not readily sell materials extracted from used mattresses. In its 2017 annual report, the Mattress Council indicated that if the recycled materials from mattresses declined in value, it would need to compensate its contracted recyclers more, thereby increasing the overall cost of the program. Research to identify additional uses for recycled materials could help reduce the likelihood that recyclers will have no market for the material they reclaim from mattresses. However, the Mattress Council spent only a fraction of a percentage of its overall expenses on research activities in the first two years of the mattress program while it accumulated a large amount of reserve funding.
The Mattress Council increased its budget for research and development costs in 2018 and 2019 to $278,000 and $950,000, respectively. Therefore, the Mattress Council would benefit from developing goals in the area of research—such as a target for how effective it would like to make the technology that recyclers use to recycle mattresses so that more mattress material is recovered for recycling—because it cannot determine whether its spending is adequate without goals and metrics to measure its success.
Moreover, the Mattress Council has created measurable goals for other EPR programs it administers, demonstrating that it has the ability to do so when required. For example, the Mattress Council established measurable goals for Rhode Island’s mattress recycling program, such as ensuring that 80 percent of that state’s solid waste facilities participate and contacting all retailers to explain their obligation to register and remit payments to the Mattress Council by the end of the second year of the program’s operation. According to the Mattress Council’s managing director, the law that established Rhode Island’s mattress recycling program was specific about the Mattress Council developing metrics and measurable goals. Our review of Rhode Island law found that it required the Mattress Council to establish performance goals for the first two years of the program and to submit these goals for approval by the Rhode Island Resource Recovery Corporation (Rhode Island Corporation), a public corporation created by statute. Rhode Island law then required the Mattress Council to submit updated goals for the Rhode Island Corporation’s approval based on its experiences during the first two years of the program’s operation.
In contrast to Rhode Island’s law, the recycling act does not explicitly require the Mattress Council to include goals for the mattress program in its recycling plan. Based on our reviews of successful U.S. and European EPR recycling programs, we believe that setting clear targets that are acceptable to all stakeholders is a best practice and that state environmental agencies must ensure accountability when assessing progress towards performance goals. Further, without intermediate goals to measure the success of its spending in key program areas, neither the Mattress Council nor its stakeholders will be able to know whether its spending in these areas is adequate and effective.
The Legislature should amend the recycling act to require the Mattress Council to maintain a reserve equal to no more than six months of the mattress program’s budgeted expenses. Further, the Legislature should amend the recycling act to provide CalRecycle the ability through its budget approval process to direct the spending of any amount of funding that the Mattress Council accumulates in excess of this amount or to adjust the mattress recycling charge.
The Legislature should amend the recycling act to require the Mattress Council to include in its recycling plan measurable goals in the areas of consumer awareness and research on new technology. Further, the Legislature should require that the Mattress Council’s annual report include information about the mattress program’s progress toward meeting those goals.
We conducted this audit under the authority vested in the California State Auditor by Government Code 8543 et seq. and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
ELAINE M. HOWLE, CPA
California State Auditor
August 30, 2018
Bob Harris, MPP, Audit Principal
Brian D. Boone, CIA, CFE
Terra Bennett Brown, MPP, CIA
J. Christopher Dawson, Sr. Staff Counsel
For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255.
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