Ineligible Recyclers Got $12 Million, Auditors Charge

SACRAMENTO —  The agency that administers the California beverage container recycling program has improperly paid out more than $12 million to ineligible commercial recyclers, state Controller Gray Davis charges in a draft audit report.

Additionally, the unreleased draft, a copy of which was obtained by The Times in advance of its scheduled release next week, asserts that the state Department of Conservation withheld information from auditors of the controller.

In unusually blunt language, the controller’s auditors charged that the redeemable container recycling program “has suffered from improper administration of fiscal controls and from the effects of poorly thought-out administrative decisions” that resulted in “improper payments” to recyclers not certified for payment.

The report drew heavy criticism Thursday from state Conservation Director Randall M. Ward, whose department administers the nearly 2-year-old program, in which Californians are paid a penny for each glass, aluminum or plastic soft drink or beer container they submit for recycling. Under a new law intended as an incentive, the redemption rate will increase to five cents for each two containers returned for recycling effective Jan. 1.

Ward, saying he wanted to avoid a public fight with the politically powerful Davis, instead assailed the controller’s auditors, accusing them of “overzealousness” and failing to understand the complex law that created the recycling program.

Ward noted that unlike other audit reports that usually detail and substantiate an auditor’s conclusion, the controller’s draft provided virtually no such evidence. He asserted the draft contained “innuendo and vague inferences” but lacked specific documentation.

“The controller’s office has broken a lot of eggs on the way to market on this one,” Ward said.

In their draft findings, the auditors said that “improper administrative decisions allowed more than $12 million to be paid to uncertified entities,” mostly “commercial recyclers.”

“We have no idea what his substantiation is for the $12 million and can only suspect that it is an extrapolation based on a sample that provides no evidence that we have seen,” Ward said.

Beverage distributors contribute a penny for each soft drink and beer container to a special fund. When the redeemable container is submitted for recycling, the consumer is paid a penny from the fund.

The recyclers then sell the containers to processors, who render the glass, plastic and aluminum into a reusable form. Processors and recyclers must be certified by the state to participate in the program and must maintain records to prove that they are not mingling redeemable containers on which the penny has been paid with non-redeemable materials.

Virtually from the start of the program, however, the department has been plagued by cheating by some recyclers who seek payment from the estimated $120-million redemption fund for containers smuggled in from Mexico or other states.

In an attempt to get better access to cheaters, the Legislature last year approved legislation that, in effect, gave auditors of the Department of Conservation the authority to examine the books of recyclers.

Ward said so far the department has collected $1.2 million from cheaters and has decertified 25 of them. He said his auditors, in cooperation with the state Department of Justice, are now investigating recyclers suspected of fraudulently claiming $9 million.

Audits by the Department of Conservation are performed after payment is made, Ward said, in much the same way as income taxpayers may be audited by the state or federal governments after submitting their tax returns.

Davis’ auditors accused the department of failing to cooperate in the investigation and of withholding unspecified information. Ward said he met with representatives of Davis in July and told them if there was any difficulty obtaining information to “notify me.”

“No one has called,” Ward said.

The controller’s audit also asserted that the department’s own auditors are not sufficiently independent from department administrators and suggested that they be dispersed elsewhere in state government, an idea rejected by Ward.