Report 2010-101 Summary - June 2010

Department of Resources Recycling and Recovery

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Deficiencies in Forecasting and Ineffective Management Have Hindered the Beverage Container Recycling Program

HIGHLIGHTS

Our audit of the Beverage Container Recycling Program (beverage program) at the Department of Resources Recycling and Recovery (department) revealed the following about the department:

RESULTS IN BRIEF

The Beverage Container Recycling Program (beverage program) was created in 1986 by the California Beverage Container Recycling and Litter Reduction Act (act). The intent of the act is to encourage and increase consumer recycling; it has a goal of recycling 80 percent of the aluminum, glass, plastic, and bimetal beverage containers sold in California. The act requires beverage distributors to make a redemption payment to the Beverage Container Recycling Fund (beverage fund) for every qualified beverage container sold or offered for sale. The cost of the redemption payment is passed along to consumers when they purchase beverages and, to encourage recycling, consumers can return used containers to recycling centers and receive a payment representing the initial California refund value (refund value). The Department of Resources Recycling and Recovery (department) is responsible for enforcing the act; its Division of Recycling administers the beverage program and the beverage fund.1

Because of deficiencies in its forecasting process, the department is not always able to reliably project the revenues and expenditures for the beverage fund. We observed that over the past five fiscal years, the department's forecasting model has produced results that differ by between 3 percent and 15 percent from the actual revenues and expenditures. Ineffective supervisory oversight and lack of review of the accuracy of the forecasts have also weakened the value of the forecasting model. For example, the department's errors in forecasting the condition of the beverage fund resulted in a $158.1 million overstatement of the projected fund balance in the 2009-10 Governor's Budget, which was used to make budgeting decisions for the department. In addition, the actual balance in the beverage fund was understated in the governor's budget for three fiscal years—2004-05 through 2006-07—because revenues were not corrected to include prior year adjustments. A projected fund balance deficit in May 2009 prompted the department to reduce payments to program participants, as required by law.

Further, the department can more effectively manage the beverage program. State law requires it to establish an auditing system to ensure that redemption payments that are made comply with the act. However, the department has not followed its plan to audit certain beverage distributors, and when audits are conducted, a significant lag exists between the audit's completion and billing for identified underpayments. For example, at the conclusion of the fieldwork in June 2008 for one audit, the beverage distributor agreed that it had underpaid $941,000 with interest over a three-year period. Because of the large underpayment identified, and because the beverage distributor agreed with the amount, we assumed the department would quickly act to collect the underpayment. However, because of lags in the review process, it did not bill the beverage distributor until December 2008, six months later. The department's lengthy audit process may also increase its risk of failing to collect on underpayments, because it exceeds the two-year statute of limitations. We noted two instances in which the department exceeded the statute of limitations and lost the opportunity to collect a total of $324,000, and a third instance in which it did not complete an audit, potentially losing the opportunity to collect $431,000.

The department also conducts investigations of recyclers that collect used beverage containers from consumers to ensure that they do not commit fraud when claiming reimbursements from the beverage fund. Fraudulent activities include turning in beverage containers from other states or paying the refund value for ineligible materials. However, the department fails to document fraud leads it decides not to investigate. Also, because the department does not have a systematic and documented methodology for analyzing data regarding the volume of recycled containers, it is potentially missing opportunities to detect fraud.

To encourage and support recycling activities, the act authorizes the department to award grants to private entities and local governments, which totaled approximately $67.5 million in fiscal year 2008-09. Although it has a process to monitor grantees to ensure that funds are used properly, the department does not always perform key steps, such as visiting grantees and obtaining status reports on how projects are progressing. Furthermore, when funding market development and expansion (market development) grants, which are intended to encourage new and innovative recycling techniques, the department accepts a level of risk that financial institutions would not accept. As a result, for six completed market development grants we reviewed, the department did not ensure that grantees met their commitments, which ultimately cost the State nearly $2.2 million.

RECOMMENDATIONS

To improve its forecasting of revenues and expenditures for the beverage fund, the department should do the following:

The department should better follow its three-year plan to audit beverage distributors. Steps to accomplish this goal could include performing an analysis of risks that could result in underpayment of redemption payments or implementing policies to terminate audits after the department's initial assessment of a beverage distributor concludes that it is unlikely that an underpayment exists.

To avoid exceeding the statute of limitations for collecting underpayments, and to bill for collection sooner, the department should strive to complete the fieldwork for audits in a more timely fashion. Further, the department should take steps to implement policies to shorten the time needed to review completed audits before billings are made, and should also develop policies to expedite reviews when an audit identifies a significant underpayment.

To improve management of its fraud investigations, the department should take the following actions:

To improve oversight of grants and ensure that the intended value is received from the grant funds it awards, the department should do the following:

AGENCY COMMENTS

In its response, the department agreed with the recommendations and provided additional perspective and information related to our findings.

1 Until January 1, 2010, the Department of Conservation administered the Beverage Container Recycling Program.