HI-5 program faces heat

Three months after the state Department of Health raised the beverage container recycling fee, the state auditor released two long-delayed audits that concluded the program continued to be plagued by serious flaws, some of which exposed the multimillion-dollar fund to fraud and excessive administrative costs.

Because of prior accountability problems identified in a 2006 audit, legislators in the House this year adopted a resolution urging the department to hold off on raising the fee until the more current evaluations were completed and consumers were assured the prior problems were corrected.

But the agency increased the fee anyway, saying the financial viability of the 7-year-old program was at stake.

The nonrefundable handling fee on Sept. 1 was raised to 1.5 cents from 1 cent, bringing the total that the consumer pays on each recyclable container to 6.5 cents. A nickel is refunded when the container is redeemed.

The two audits, performed by Accuity LLP, an accounting firm hired by the auditor’s office, were released Nov. 30 and took the department to task for lax oversight of the so-called HI-5 recycling program. The latest audit, which covered the fiscal year that ended June 30, 2010, determined that several deficiencies exposed the program to fraud and likely resulted in more deposits and handling fees paid by the state than were justified.

The audits present a litany of chronic procedural and financial failures that all err to the benefit of redemption centers and to the detriment of the state and consumers who fund the program, said consultant Kevin Dietly, who was hired by the American Beverage Association to analyze the two reports.

The flaws included the department’s over-reliance on self-reporting by distributors and redemption centers and a lack of adequate internal controls to monitor the accuracy and completeness of the information submitted by them, according to the report, one of the last overseen by Marion Higa, the retired state auditor whose final day in office was Friday.

The lack of sufficient oversight meant the state risked collecting too little in fees from distributors — which have an inherent incentive to underreport the number of containers sold — and paying too much to redemption centers, the auditors warned. They said they found deposits and fee collections from distributors and payments to redemption centers that were unsupported by documen­tation. One recycling company refused to provide records to the auditors for nearly $350,000 in deposit reimbursements for four of its facilities.

According to the report, the auditors also found:

» A lack of controls by the department to prevent or detect unauthorized beverage containers from being redeemed.

» A failure to perform compliance inspections on distributors with regular frequency, hobbling efforts to effectively use the enforcement tools available to the agency.

» A failure to implement planned changes to address apparent overpayments to redemption centers since at least 2007. The apparent overpayments stemmed from significant differences between the number of containers claimed to be recycled and actually shipped for recycling.

» Two uncertified redemption centers that appeared to be operating in violation of the law, and at least one large redemption center operator that increased weights reported to the state to correct errors made by its workers.

Because of the deficiencies, "the program is exposed to fraud that may affect the published redemption rate and result in higher program costs, placing a greater burden on consumers through unwarranted container fee increases," the 2010 report concluded.

Fixing the problems is necessary to alleviate public concern over program costs, the auditors wrote.

Department officials did not respond to Star-Advertiser requests for comment late last week.

But in a Nov. 19 written response to Higa, Health Director Loretta Fuddy noted that the 2010 report correctly points out that most of the program’s shortcomings resulted from a lack of resources, including staff vacancies. She said the department concurred with many of the findings but took issue with the report’s format, which she noted highlighted criticisms in bold letters without providing underlying reasons for the problems.

Fuddy acknowledged that the HI-5 program will continue to have "a minimal presence to perform inspection and enforcement responsibilities over distributors and redemption centers while the inability to recruit and retain qualified personnel persists."

She said the department is considering a reorganization to provide manpower and resources to implement the audit recommendations, some of which already are being addressed.

Rep. Sharon Har, (D, Royal Kunia-Makakilo-Kapolei) and a co-sponsor of the House resolution, said it was "absolutely outrageous" that the department went ahead with the September fee increase — adding to beverage costs for consumers — given the chronic problems that have plagued the program since 2005.

"A lot of people are going to be outraged," she said.

Hawaii’s beverage industry, which opposed the fee hike, raised questions about the delayed release of the two audits.

"Given that the audit findings cast significant doubt on the department’s conclusion that a container fee increase (was) justified, the audits were not released until well after that decision was made," consultant Dietly wrote in a Dec. 20 memorandum.

Deputy Auditor Jan Yamane, who takes over as acting auditor with Higa’s retirement, said the delays had nothing to do with the fee increase and were not caused by the health department. She said an internal issue delayed the 2006 audit, triggering a domino effect that resulted in delays to the 2008 and 2010 reports.

By law, the recycling program must be audited every even-numbered year.

For the 2010 audit, Accuity redeemed containers at 13 redemption centers and attempted to trace the transactions and test for accuracy. Auditors found various errors in the amounts refunded to consumers based on the weights of the containers redeemed, according to their report.

At four RRR Recycling Services centers, the auditors could not substantiate the amount of container deposits refunded to consumers because the company refused to provide supporting documentation, raising the question of whether the program overpaid RRR Recycling for about $343,255 in reimbursements in the months analyzed, the report said.

RRR Recycling did not respond to a request for comment Friday.

The auditors also found problems in the distributor network, including underpayments and overpayments by distributors and transactions for which supporting documentation could not be found.

Two of the largest distributors in Hawaii, Coca-Cola Bottling Co. and Pepsi Bottling Group, failed to provide supporting documents for September and August 2009, respectively, preventing auditors from checking about $1.4 million in deposits and $270,000 in container fees reported and paid by the companies, according to the report.

Coca-Cola did not respond to a request for comment Friday, while a Pepsi official said he didn’t have information immediately available to address the issue but would pursue the matter.

Several distributors told auditors that their systems could not readily generate reports containing the information requested, raising questions about how such companies originally determined the amounts reported and paid to the state, the audit said.

The state has touted the success of the program by noting that Hawaii’s recycling rate has topped 70 percent in each of the past several years. But the auditors raised questions even about the accuracy of the recycling rates.

The extra half-cent handling fee is expected to generate an additional $4 million-plus annually, about equal to the shortfall the program experienced in recent years.