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Tomra Pacific, Inc. et al v. John Chiang

September 22, 2011


(Alameda County Super. Ct. Nos. RG09483580 & RG09490447)

The opinion of the court was delivered by: Sepulveda, J.


At issue is the legality of $519 million in loans between state funds to help balance the state budget during times of fiscal crisis. We conclude that the loans are lawful. The loan provisions, contained in annual budget bills, are germane to the subject of appropriations and thus do not violate the single-subject rule prohibiting legislation having multiple subjects. (Cal. Const., art. IV, § 9.) Nor do the loans interfere with the lending fund's regulatory purpose or object. (Gov. Code, § 16310, subd. (a).) We affirm the trial court order denying petitions for a writ of mandate seeking compelled repayment of the loans.

I. background

The loan transactions are complex and require an understanding of state finances generally, and the specific operation and purpose of the state fund that lent money to other funds.

A. State finances

State government programs are financed, in large part, by expenditures from the General Fund and special funds. (Cal. Dept. of Finance, Finance Glossary of Accounting and Budgeting Terms, at [as of Sept. 22, 2011] (hereafter, Finance Glossary).) "The General Fund consists of money received into the treasury and not required by law to be credited to any other fund." (Gov. Code, § 16300.) The primary sources of revenue for the General Fund are personal income taxes, sales taxes, and corporation taxes. (Finance Glossary.) The major uses of the General Fund are education, health and human service programs, and correctional programs. (Finance Glossary.) Special funds are created by statute or regulation and are "used to budget and account for taxes, licenses, and fees that are restricted by law for particular activities of government." (Finance Glossary.) There are many special funds with billions of dollars in total expenditures. In fiscal year 2010-2011, for example, budget expenditures from the General Fund totaled roughly $92 billion and budget expenditures from special funds were over $30 billion.*fn1 (Cal. Dept. of Finance, Historical Data, Budget Expenditures, [as of Sept. 22, 2011].)

The General Fund and special funds, although separate, are not impermeable. Transfers and loans are statutorily permitted from special funds to the General Fund, and from the General Fund to special funds. (Gov. Code, §§ 16310, 16351.) The statute relevant here provides: "When the General Fund in the Treasury is or will be exhausted, the Controller shall notify the Governor and the Pooled Money Investment Board. The Governor may order the Controller to direct the transfer of all or any part of the moneys not needed in other funds or accounts to the General Fund from those funds or accounts. . . . All moneys so transferred shall be returned to the funds or accounts from which they were transferred as soon as there are sufficient moneys in the General Fund to return them. . . . This section does not authorize any transfer that will interfere with the object for which a special fund was created." (Gov. Code, § 16310, subd. (a).) The statute includes provision for payment of interest under certain circumstances. (Gov. Code, § 16310, subd. (b).)

Like the Governor's power to order a transfer between funds, the Legislature may enact an appropriations bill that transfers "a special fund reserve temporarily from one purpose to another" provided the transfer does not interfere "with the objects for which such fund was created." (Daugherty v. Riley (1934) 1 Cal.2d 298, 309.) This District Court of Appeal has recently confirmed that "money in Special Funds [may] be loaned to shore up the General Fund" subject to the specified statutory conditions of Government Code section 16310: "exhaustion of the General Fund, no interference with the object for which the Special Fund was created, [and] return of the money as soon as possible." (California Medical Assn. v. Brown (2011) 193 Cal.App.4th 1449, 1458 (California Medical Assn.).)

In California Medical Assn., the Legislature acted to close a budget deficit by including an item in the 2008 budget bill providing for a loan of $6 million to the General Fund from a special fund, the Contingent Fund of the Medical Board of California. (California Medical Assn., supra, 193 Cal.App.4th at p. 1452.) That Special Fund receives physician licensing fees and uses the money to oversee and discipline physicians. (Id. at p. 1453.) The California Medical Association (CMA), representing physicians, challenged the legality of the loan with a petition for a writ of mandate directing that the money be returned. (Id. at pp. 1452-1453.) Denial of the petition was affirmed on appeal. (Id. at p. 1452.) The court held that the loan was authorized under Government Code section 16310, and that the statutory conditions were satisfied. (California Medical Assn., at pp. 1455-1465.) The court found no interference with the object for which the special fund was created, the regulation of California physicians, which continued despite reduced funding. (Id. at pp. 1459, 1464-1465.)

The Legislature has made other loans from special funds to the General Fund. At issue here are several loans from a special fund called the Beverage Container Recycling Fund (Recycling Fund). To understand the parties' claims on appeal, a detailed explanation of the operation and financing of California's recycling program is necessary.

B. The Recycling Program

"In 1986, the Legislature adopted the California Beverage Container Recycling and Litter Reduction Act (Pub. Resources Code, § 14500 et seq.) (the Recycling Act) to encourage large-scale recycling of used beverage containers through a program of financial incentives." (Californians Against Waste v. Department of Conservation (2002) 104 Cal.App.4th 317, 319.) The Recycling Act was initially administered by the Department of Conservation, and is now administered by the Division of Recycling in the Department of Resources Recycling and Recovery (CalRecycle).*fn2 (Pub. Resources Code, §§ 14510.5, 14530.)

The central component of the Recycling Act's complicated system of financial incentives is a refundable deposit on beverage containers paid when beverages are purchased and recovered when empty containers are recycled. Beverage distributors make a " '[r]edemption payment' " to CalRecycle on every beverage container sold or offered for sale in California.*fn3 (Pub. Resources Code, §§ 14523, 14560.) Redemption payments are deposited in the Recycling Fund. (Pub. Resources Code, § 14580, subd. (a).) The cost of the redemption payment is passed on to the retailer, then the consumer who purchases a beverage. Consumers may return their empty beverage containers to a recycler, who pays a " 'refund value.' " (Pub. Resources Code, § 14524.)

The record reflects that, "[o]ver the history of the [Recycling Act], the redemption [payment] and the refund value have usually been equal, although this is not always the case." The record also shows that the redemption payment and refund value have ranged from an initial 1 cent per beverage container to a current high of 5 cents for a container of less than 24-ounce capacity, and 10 cents for a container of 24-ounce or greater capacity. (See Pub. Resources Code, § 14560, subd. (a)(3).)

Not all beverage containers are returned for recycling. The redemption rate for beverage containers is not, and never has been, 100 percent. As a result, a portion of the redemption payments borne by consumers remains in the Recycling Fund and are used to pay CalRecycle operating costs and various fees and grants for curbside collection programs, recycling centers, material processors, and other participants in the recycling stream.

The Recycling Act strives to establish convenient return systems to encourage recycling by consumers, including curbside programs and recycling centers. (Pub. Resources Code, § 14501, subd. (a).) Curbside programs accept empty beverage containers from consumers for recycling and retain the refund value to offset the cost of their operations, rather than paying the refund value to consumers. (Pub. Resources Code, § 14509.5, subd. (c).) Curbside recycling accounts for about 17 percent of beverage container recycling in California. Most recycling occurs through recycling centers, which pay consumers the refund value of the containers. (Pub. Resources Code, § 14572, subd. (a).) There are two types of recycling centers: traditional recycling centers and convenience zone recycling centers. Both types must be certified by CalRecycle. (Pub. Resources Code, § 14538, subd. (a).)

Traditional recycling centers are relatively large facilities, usually located in sparsely populated areas, to which consumers bring recyclable bottles and cans and exchange them for a refund--by weight or per container. (Pub. Resources Code, § 14572, subd. (a).) Traditional recycling centers redeem the bulk of beverage containers recycled in California, about 62 percent.

Convenience zone recycling centers are smaller operations, typically located in supermarket parking lots and consisting of several large bins and one employee with a scale. (Pub. Resources Code, §§ 14509.4, 14520, 14526.5, 14526.6.) Convenience zone recycling centers provide consumers with a place to redeem beverage containers contemporaneously with grocery shopping, avoiding the need to travel to a traditional recycling center. Consumers generally do not redeem beverage containers at the retail store where they purchased the beverages. Retailers are required to accept returned containers only if there is no convenience zone recycling center in the area. (Pub. Resources Code, § 14571.6.) There are about 2,000 convenience zone recycling centers in California. CalRecycle reports that convenience zone recycling centers handle about 25 percent of the used beverage containers recycled in the state.

Recyclers (curbside programs and recycling centers) sell the used beverage containers to material processors for the containers' scrap value. (Pub. Resources Code, § 14519.5.) The processors sort the containers and sell the reclaimed materials to manufacturers. (Pub. Resources Code, §§ 14518, 14519.) In addition to paying scrap value to the container recyclers, processors (as an intermediary of CalRecycle) also pay the containers' refund value--which reimburses recycling centers for payments made to consumers and compensates curbside programs for their service.*fn4 (Pub. Resources Code, § 14573.5, subd. (a)(1).)

From the standpoint of a recycler, it costs more to handle glass and plastic containers for recycling than the materials are worth when sold for scrap to a processor. Among the materials used in beverage containers, aluminum alone has a scrap value in excess of its handling costs. In order to promote the recycling of glass and plastic, the cost of recycling these materials is subsidized with " 'processing payments.' " By law, processing payments are the difference between the scrap value of the container and the sum of its average cost to recycle and a "reasonable financial return." (Pub. Resources Code, § 14575, subd. (b)(2).) In early 2009, for example, the processing payment for glass containers was $99.97 per ton--the difference between the per ton scrap value of glass ($5.99) and the sum of the cost of recycling a ton of glass containers with a reasonable financial return for the operation ($105.96). CalRecycle adjusts processing payment amounts periodically based on fluctuating recycling costs and commodity prices. (Pub. Resources Code, § 14575, subd. (c)(1) & (2)(A)-(B).) Both recyclers and processors receive processing payments.*fn5 (Pub. Resources Code, §§ 14518.5, 14573, subd. (a)(3), 14573.5, subd. (a)(3).)

Processing payments are funded primarily from the unredeemed deposits paid by consumers who purchase beverages in containers that are not all returned for recycling. Beverage manufacturers that package their products in plastic and glass also pay "processing fees" into the Recycling Fund, which partially funds the processing payments to recyclers. A processing fee is imposed upon manufacturers who use container materials with recycle costs that exceed their scrap value under "the 'polluter-pays' principle," which encourages manufacturers to switch to materials that have a lower cost of recycling and increases the market for recycled products (thus increasing the scrap value of the material over time). Originally, manufacturers paid the entire amount of the processing payment. A manufacturer's contribution is now statutorily capped at 65 percent of the cost of the processing payment. (Pub. Resources Code, § 14575, subd. (e)(1)(A)-(I) & (2).)

CalRecycle may reduce the manufacturer processing fee, subject to the availability of funds, to encourage the use of containers with better recycling rates. (Pub. Resources Code, § 14575, subd. (e)(1)(A)-(I) & (2).) For example, the manufacturer processing fee may be set at only 10 percent of the processing payment for a container type with a recycling rate equal to, or greater than, 75 percent, but the fee may be set at 65 percent of the processing payment for a container type with a recycling rate of less than 30 percent. (Pub. Resources Code, § 14575, subd. (e)(1)(A) & (I).) The vast majority of beverage containers are made of aluminum, glass, and two types of plastic, all of which had a recycling rate in excess of 70 percent in 2009. Manufacturers have therefore paid far less than 65 percent of the processing payment in recent years, when funds were available. Manufacturers have often paid around 20 percent of the processing payment, with the remainder covered by CalRecycle's " ' "processing fee offset" ' " funded by the surplus of redemption payments over redemption refunds.

Convenience zone recyclers located near supermarkets receive an additional financial incentive, beyond the containers' scrap value, processing payments, and administrative payments. They receive "handling fees." (Pub. Resources Code, §§ 14526.6, 14585.) Handling fees are per container fees paid to convenience zone recyclers as a subsidy, to cover the additional cost of operating recycling collection sites at supermarket locations. (Pub. Resources Code, §§ 14513.4, 14585, subd. (f).) Handling fees are meant to encourage establishment of convenient recycling locations.

In summary, funding for the Recycling Act's beverage container recycling program flows through the Recycling Fund, which CalRecycle administers. Beverage manufacturers pay processing fees to the Recycling Fund on beverage containers that have a recycling cost greater than their scrap value, and distributors make redemption payments to the Recycling Fund on beverage containers, the cost of which is ultimately passed through to consumers. In turn, the Recycling Fund makes several types of payments to consumers, recyclers, and processors to encourage recycling.

The program has been a great success. In 2008, Californians recycled over 16 billion beverage containers and leads the nation in total quantity of bottles and cans recycled. The Recycling Act established a beverage container recycling goal of 80 percent. (Pub. Resources Code, § 14501, subd. (c).) The recycling rate was 52 percent in 1988, shortly after the program began. The recycling rate reached 82 percent in 2009, despite program alterations over the years that added new container types with historically low recycling rates. Since inception of the recycling program in 1987, more than 200 billion beverage containers have been recycled.

C. The Recycling Fund and loans to the General Fund and Air Pollution Control Fund

The Recycling Fund was designed to be self-financing with the redemption payments funding consumer refunds, processing payments, and other costs. The Recycling Fund maintained an equilibrium in its first years but expenditures exceeded revenue in the early 1990s when the refund value was set higher than the redemption payment on beverage containers. The Recycling Fund borrowed about $43 million to maintain its solvency during the early 1990s. In 1992, the redemption payment and refund value were reconciled to the same amount so the program was not paying out more money than it was receiving on each beverage container. For many years thereafter, the Recycling Fund enjoyed a surplus balance because the recycling program generated revenue in excess of expenditures. As noted earlier, the Recycling Act established a beverage container recycling goal of 80 percent. (Pub. Resources Code, § 14501, subd. (c).) Recycling rates were often lower than 80 percent, especially after the program was expanded in 1999 to include additional types of containers. The excess of redemption payments over refund claims created a fund surplus. At the end of fiscal year 2001, the Recycling Fund balance was over $155 million and growing.

In 2002, an economic downturn and stock market drop led to a budget shortfall in California's General Fund. (Legis. Analyst, Cal. Spending Plan 2002-2003, ch. 1 [as of Sept. 22, 2011].)*fn6 The shortfall was addressed, in part, by interfund loans. (Id. at ch. 3.) The Legislature approved $2.6 billion of loans and transfers from special funds to the General Fund in the 2002 budget bill. (Ibid.) Among those was a loan from the Recycling Fund to the General Fund. The 2002 budget bill authorized the Director of Finance to order the Controller to transfer $188 million from the Recycling Fund to the General Fund to be repaid, with interest, by June 30, 2009.*fn7 The bill stated: "It is the intent of the Legislature that the repayment is made so as to ensure that the programs supported by this fund are not adversely affected by the loan." A loan of $98.3 million from the Recycling Fund to the General Fund was made in 2003 on similar terms, and an additional $66 million was borrowed from Recycling Fund subaccounts that year. as of Sept. 22, 2011) In other words, if consumers recycled 80 percent of purchased beverage containers, all redemption payments on the containers would be paid out in redemption refunds, processing fee offsets, handling fees, administrative fees, operational costs, and other program costs (such as grants and public education). (Ibid.) The recycling rate had been 61 percent or less from 2000 to 2005. As a result, a significant amount of money accumulated in the Recycling Fund. (Ibid.) The Legislative Analyst's Office noted that the Legislature may "want to consider extending the repayment period for the monies loaned to the General Fund from the [Recycling Fund] in 2002-03 and 2003-04" given the state's fiscal condition and the large balance in the Recycling Fund. (Ibid.) But it was also noted that a loan extension would "not assist the program in meeting its recycling target" and suggested directing CalRecycle to evaluate options, such as increased expenditures, to raise the recycling rate toward the statutory goal and lower the fund balance "to more reasonable levels." (Ibid..)

The Legislature adopted a number of measures relating to the recycling program in 2006. (Stats. 2006, ch. 907, p. 5408 (Assem. Bill No. 3056).) The Legislature extended repayment of the 2002 and 2003 loans from the Recycling Fund to the General Fund until June 30, 2013, and also amended various provisions of the Recycling Act to increase CalRecycle expenditures. (Id. at p. 5423.) Among other things, the Legislature increased processing payments, handling fees, incentive payments, and grants. The Legislature also directed CalRecycle to submit a report addressing the Legislative Analyst Office's concerns with the below-target recycling rate and high fund balance. CalRecycle submitted a report in February 2007. CalRecycle estimated that revenues and expenditures would be nearly balanced in the short term at about $1 billion each but that program changes would increase expenditures and the recycling rate over time, leading to a reduced Recycling Fund balance.

The Recycling Fund continued to have a positive fund balance at the end of fiscal year 2007-2008. The fund balance at that time was over $306 million, and an additional loan from the Recycling Fund was made. The September 2008 budget bill authorized a $32 million loan from the Recycling Fund to the Air Pollution Control Fund (a fund administered by the California Air Resources Board) to assist in the implementation of programs to reduce greenhouse gas emissions, with full repayment due by June 30, 2013. The Recycling Fund's balance was $160 million at the end of fiscal year 2008-2009, after making the loan to the Air Pollution Control Fund.

In November 2008, CalRecycle prepared forecast figures for the 2009-2010 budget being prepared by the Governor. CalRecycle projected a surplus fund balance of $81 million for fiscal year 2009-2010. The February 2009 budget bill approved a loan of $99.4 million from the Recycling Fund to the General Fund, with repayment "made so as to ensure that the programs supported by the [Recycling Fund] are not adversely affected by the loan, but no later than June 30, 2013." The interfund transfer was directed to be made by the Controller, upon order of the Director of Finance. The budget bill also authorized an immediate $35 million loan from the Recycling Fund to the Air Pollution Control Fund, to be "repaid by the earliest feasible date" but no later than June 30, 2014.

D. CalRecycle projects a fund deficit in May 2009 CalRecycle's projection of a fund surplus for fiscal year 2009-2010 was wrong. A later audit revealed that CalRecycle's forecast model was flawed, which led the department to understate expenditures and thus overstate its projected fund balance. CalRecycle stated that market changes also led to an overstatement of the projected fund balance, including reduced sales of beverages resulting in lower revenue and higher recycling rates that increased expenditures.

The recycling rate rose from 61 percent in 2005 to 82 percent in 2009, surpassing the Recycling Act's goal of an 80 percent recycling rate. (Pub. Resources Code, ยง 14501, subd. (c).) At these recycling rates, expenditures outpaced revenue and the Recycling Fund experienced an operating deficit. An audit report shows that in fiscal year 2008-2009, CalRecycle collected about $1.2 billion in redemption payments and paid almost all of that amount--about $1 billion--in refund claims. The ...

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