Long-standing problems with the state’s beverage container recycling program continue to result in overpayments of millions of taxpayer dollars, exposing the operation to abuse and possible fraud and undermining its financial viability, according to a new state audit.
The report released Tuesday by acting Auditor Jan K. Yamane was highly critical of the way the Department of Health program is run and noted that systemic flaws, including ineffective inspection and enforcement functions, continue to plague it despite being identified in previous state audits.
From fiscal 2010 through 2012, for instance, the program paid $6.2 million in deposit refunds for nearly 7.5 million pounds of materials that cannot be accounted for, the report noted.
The state pays 5 cents per container to redemption centers based on what the centers claim to have received from consumers, not what is actually shipped to recyclers, and the claimed amounts are not validated, which can result in overpayments and loss of taxpayer dollars, the audit said.
"Management has known about its flawed payment system for years but has done little to address the defect," the report said.
Gary Gill, the department’s deputy director who oversees the so-called HI-5 program, didn’t dispute the general findings of the audit, said improvements have been made and noted that more must be achieved.
But Gill said the audit didn’t reflect the phenomenal success HI-5 has had — despite staffing and funding challenges — in preventing billions of soda cans and other containers from ending up in landfills and helping promote responsible consumerism in Hawaii.
He also questioned the way the auditors characterized some of the overall findings, even though he said they did a good job of presenting the details. "I dispute the sensationalism they use," Gill said in an interview with the Honolulu Star-Advertiser.
The program has been a boon to Hawaii’s environment and has contributed to a high recycling rate — usually in the 70 percent-plus range — since the mid-2000s. In fiscal year 2013, consumers recycled nearly 75 percent of the 911.8 million containers sold statewide.
Consumers pay retailers a 5-cent refundable deposit and a 1.5-cent handling fee for each eligible beverage container purchased. The 5-cent deposit is refunded to consumers when the container is taken to a redemption center, which in turn gets paid for handling the containers. Distributors, who sell the beverages to retailers, pay the state 6.5 cents per container.
While the program has helped put a dent in Hawaii’s litter problem, it has been hampered by operational and fiscal problems for years.
Gill said the program has only recently recovered from the years in which the Legislature raided the recycling fund of about $3 million annually to help deal with the state’s budget problems. "Now that we have the fiscal plan stabilized, we can focus more on these" audit issues, Gill added.
The HI-5 program’s "front-end" payment system is the root of many of the financial and accounting flaws, according to the auditor. If the agency switched to a "back-end" one, basing payments on shipped totals of recyclable containers rather than claimed amounts received from consumers, that would significantly reduce the opportunities for fraud and abuse and help ensure the sustainability of the program, the audit concluded.
As far back as 2006, the department has proposed switching to a "back-end" system, which the auditors called a priority. As of June that option was still being considered, the report said.
Gill said such a system remains a goal, but the department needs to deal with issues that could undermine the industry’s stability if a change is made, including whether redemption centers are willing to front the nickle refunds for weeks longer than they do now.
Gill was not aware of how other states with back-end systems handle that issue.
Mirroring findings from the auditor’s three previous audits, the latest report concluded that the department relies on self-reported data from distributors who may fraudulently or erroneously underreport beverage containers sold and from redemption centers that likewise may fraudulently or erroneously overreport their totals.
Yet the department lacks adequate management to provide effective oversight, exacerbating its inability to prevent fraud and abuse, according to the audit.
The report cited an example in which a single redemption center, RRR Recycling, was possibly overpaid about $2.2 million in deposit fees, and the department acknowledged that the company couldn’t account for a discrepancy involving more than 2 million pounds of claimed material, according to the auditors.
RRR Recycling didn’t respond to a Star-Advertiser request for comment.
The audit also noted that only one staff accountant for HI-5 understands how the payment process to redemption centers works and single-handedly approves more than $54 million in payments to centers statewide. In addition, the department has not audited redemption center and distributor reports since 2008, Yamane’s office said.
