On October 12, California Governor Arnold Schwarzenegger vetoed legislation that would have expanded recycling while providing medium-term relief to a shortfall in ancillary program expenditures. The funding shortfall was caused in large-part by the administration’s approval of more than $250 million in transfers from the Bottle Bill to the General Fund and other unrelated government programs.

As a result of an 85% funding cut by the Department of Conservation in July and the Governor Schwarzenegger’s veto of SB 402, several severe program changes will begin to occur immediately, including:

• The likely closure of up to 1100 supermarket-based recycling centers;
• Elimination of up to 5,000 recycling related jobs;
• Elimination of more than $85 million in funding for local government, non-profit, and private sector recycling and litter clean up activities;
• An increase of roughly $100 million in consumer costs for beverages.

Below, in its entirety, is Governor Schwarzenegger’s SB 402 veto message (in red Italics) and our responses:

I am returning Senate Bill 402 without my signature.

This bill makes changes to California’s Beverage Container Recycling Program by adding new containers to the fee program, increasing the California Refund Value (CRV) fee on some existing containers, and maintaining, suspending, or increasing funding for ancillary programs that benefit from excess funds in the CRV fund.

The Beverage Container Recycling Fund (Fund) is facing a severe deficit at the end of the 2009-2010 Fiscal Year because Californians are recycling more and because this fund has made loans to the General Fund of several hundred million dollars over the past several years. To combat this deficit, the Department of Conservation has had to implement an across the board cut of 85 percent to the funding programs paid by the Fund. My Administration has offered solutions for long-term repair of the Fund, but unfortunately, SB 402 does not contain those solutions.

Neither the Schwarzenegger administration nor the Department of Conservation has proposed any ‘long-term repair of the fund’. On July 29, Governor Schwarzenegger signed the state budget bill which relied on a number of loans and gimmicks, including a $132 million loan from the Bottle Bill program.  The administration’s solution to then address the problem (temporarily) was another gimmick: shorten the time period beverage distributors have to pay the CRV to the state by 30 days, effectively adding a 13^th monthly payment to the fiscal year. The administration and Department has never proposed a long-term fix, only a short-term (one year) patch that relied on temporary cuts and a one-time expenditure increase. The Department’s own financial analysis of that proposal revealed that it would not fix the problem much beyond end July 2010, thereby requiring another, as yet unspecified, urgency (2/3rds vote) solution next year.

Only the proposal in SB 402 would provide a balanced packaging of solutions through 2010.

Compounding the problem and increasing the severity of the July 1st reductions, was the Department of Conservation’s failure to bring the problem to the attention of policy makers during February budget hearings. The administration’s initial budget proposal and Department of Conservation budget hearing testimony denied the existence of the deficit until the Governor’s May budget revise.

SB 402 expands the Beverage Container Recycling Program to include fruit and vegetable juices and soy based drinks. This expansion is inappropriate given that these products are often dietary necessities for families;

Fruit and vegetable juices are already covered by the existing program, and have been since 2000. SB 402 simply closed a loophole that exempted a small fraction of these beverages based on container size and/or type.

…while wine and distilled spirits, which are more like the products currently subject to the CRV and are typically paid for from consumer’s disposable income, remain exempt from the program.

We agree! Local governments, recyclers and environmental groups have long advocated expansion of the program to include wine and liquor containers, and that legislation has been previously introduced.  Despite a DOC staff recommendation to add wine and liquor containers, the administration has never acted on that recommendation.

Earlier this year, the Department of Conservation specifically asked the Schwarzenegger administration for permission to sponsor legislation to expand the program to include wine and liquor containers. That request was denied.

While consumers will have the opportunity to recover their costs when they recycle their containers, they will face a direct impact at the time of purchase, which will be troubling for many in this economy.

Public opinion surveys have consistently demonstrated public support for 5 cent and 10 cent refund values on beverage containers regardless of beverage or container type. SB 402 would add a refundable 10 Cent CRV to juices and other beverages sold in 46 ounce and larger bottles and 64 ounce cartons. The price of these juice products ranges from $2.50 to $4 or more. In the 35 plus year history of Bottle Bills in California and other state’s there is zero evidence that the imposition of a refundable deposit has ever depressed sales.

Today some milk and juice producers voluntarily add a $1 deposit to their refillable glass bottles.

Furthermore, while the bill proposes to capture more beverage containers for the recycling market rather than the waste stream, there are, at present, no known California end users for the material types SB 402 adds to the Program. This bill proposes that CRV be applied to products that will likely end up in a landfill.

This is statement is simply not supported by the facts. SB 402 would for the first-time add paperboard beverage cartons and boxes to the program. But these containers are already being collected for recycling in curbside recycling programs throughout California. The world’s largest provider of curbside recycling has recently committed to accepting these containers for recycling nationwide. And while virtually all of the 5 billion plastic bottles collected for recycling in California last year were shipped overseas for recycling, there are today papermills in Arizona and the Pacific Northwest that accept cartons for recycling into tissue and other paper products. Additionally, the 40,000 tons of recycled paper fiber that would have been recycled annually if SB 402 was signed, may have provided the much needed fiber supply for the re-start of a proposed ‘green’ tissue paper mill in Humboldt County. Proponents of that project were hoping to directly employ more than 450 people.

This bill would also change the CRV threshold to beverage containers carrying 20 fluid ounces or less to $0.05 per container, and beverage containers carrying 20 fluid ounces or more to $0.10 per container, effective January 1, 2010. This change in law, combined with the additional containers and beverage types, would cost consumers about $300 million annually.

Governor Schwarzenegger’s veto of SB 402 will cost result in higher net costs to consumers—roughly $100 million annually in higher processing fees, with no mechanism to for consumers to redeem these funds.

The total CRV increase resulting from SB 402, represents a relatively modest 20% growth in program revenue. By comparison, in 2006, Governor Schwarzenegger signed legislation (AB 3056) doubling the consumer refund values on all containers--totaling more than $400 million. Since 2006, roughly 78% of that CRV increase has been returned to consumers. The facts show that with an increase in redemption value, consumers are inclined to get back a greater share of their refund. As a result of AB 3056, the net cost of the program to consumers has actually decreased. Governor Schwarzenegger has squandered an opportunity to do that again.

Additionally, these changes are merely a patch that provides relief for only one fiscal year. The Fund cannot support the expenditures continued by SB 402 beyond the first half of Fiscal Year 2010-2011.

SB 402 was presented to the Governor as a ‘medium-term’ solution. No other proposal has been put forward that maintains fund solvency for a longer period of time. And again, the funding crisis in the Bottle Bill is the direct result of the administration’s support of using recycling funds to ‘patch’ the General Fund budget gap.

Finally, in addition to several other fatal flaws, this bill unjustifiably uses the Fund to increase grant amounts for some programs, guarantee payments into the future for others, and decrease or eliminate grant funding for still others, including public education used to inform consumers of the program expansion and fee increase.

It’s not clear what ‘fatal flaws’ there were in SB 402. Most of the provisions have been thoroughly analyzed and debated over at least the last two years. Specific program reductions and increases were consistent, if not specifically, at least in magnitude, with department proposals. SB 402 implemented thoughtful reforms, cutting those programs that have proven less effective, while providing modest increases to two programs that by every analysis have been found to be successful: 1) An additional $2.5 million to hire at risk youth for litter clean up and recycling activities; and $3 million to provide support for California manufacturers and processor who utilize recycled plastic (rather than shipping this material overseas). Both of these program increases will directly result in increased ‘green jobs’ in California.

SB 402 fails to make the hard choices that need to be made with regard to providing a lasting solution for the Fund. While I recognize that without this bill there is an immediate hardship placed upon consumers and businesses because of the across the board funding reduction, the lasting effects of this bill are far worse.

SB 402 proposed a thoughtful and complete package of expenditure reductions and proven recycling program expansions. The administration has failed to offer any equally thoughtful alternative. Again, the only ‘solution’ offered by the administration is a one-time revenue gimmick and postponement of the ‘hard choices’ to next year.

Consistent with a provision already included in SB 402 and in an effort to mitigate this hardship, I am ordering the Department of Conservation to adopt emergency regulations to accelerate the deposit paid into the Fund by adjusting the payment schedule for distributors from every three months to every two months.

The Governor’s proposal is either misinformed or disingenuous. Neither the Governor nor the Department of Conservation have any legal authority to administratively changes the payment time period for beverage distributors. Distributor payments are currently made on a monthly basis, not ‘every three months’ as described. The department lacks the legal authority to require beverage distributors to make CRV payments earlier than 90 days after the month a container is sold. Only SB 402 would have provided that authority. Regardless, simply accelerating distributor payments is just one-more short-term gimmick that fails to address the issues facing the program and fund. The Department’s analysis of this one-time proposal indicates that it would only work thru July 2010, and still require substantial across the board program reductions.

I recognize this action will not solve the problems faced by the Fund, but, with the cooperation of those who pay into and receive grants from the Fund, it should smooth out the challenges in the current fiscal year as we work on additional, long term solutions.

This statement would appear to affirm that the administration’s proposal does not provide the needed long-term funding solution, and in fact represents a substantially smaller and shorter-term fix than SB 402. Most disturbing, less than one-week after the Governor’s promise to ‘smooth out the challenges’, the Department of Conservation has announced that “further reductions – beyond those announced a few months ago at the 85% reduction level – will be necessary to ensure the solvency of the Recycling Fund”.

Additionally, subsequent legislation on this issue should contain provisions that prohibit any additional loans to the General Fund in the future and require the General Fund to repay past loans from this program.

“Save me from myself”! In the last 15 months, Governor Schwarzenegger has approved the transfer of more than $164 million from the Bottle Bill to close gaps in the State General fund and other unrelated programs. Now he wants legislation to keep his administration from doing what they’ve done!? Of course any piece of legislation can be superseded by the Legislature and Governor. This is a meaningless and disingenuous statement. If the Governor is really serious about preventing himself and future Governors from borrowing from this special fund, then he will join with local governments and other program stakeholders in supporting a Constitutional Amendment for the June 2010 ballot that specifically prohibits the borrowing from this special fund, and specifies any immediate repayment schedule.

For these reasons, I am unable to sign this bill.

Sincerely,

Arnold Schwarzenegger