A subsidy that aims to support recycling efforts on Oahu is being examined by the City Council amid criticism that the decades-old assistance measure amounts to "corporate welfare," costing the city more than $2 million a year.
Schnitzer Steel Hawaii Corp., the company at the center of the debate and the one that receives the most from the subsidy, says the amount is commensurate with the tonnage of material it recycles.
Bill 47-10, being heard by the Council’s Public Works Committee today, would end the practice of giving private companies an 80 percent discount on "tipping fees" charged by the city when they deliver recycling residue to the Waimanalo Gulch landfill. The subsidy would continue for charitable organizations such as Goodwill Industries and the Salvation Army, which are exempt from paying the fees.
Although the ordinance is applied equally to companies that qualify, the overwhelming majority of it goes to Schnitzer Steel, which does the most recycling in Honolulu more than 100,00 tons of metal a year from automobiles, appliances and other bulky metal items.
Schnitzer’s discount for calendar year 2010 was $1.9 million, according to the city Department of Environmental Services. Goodwill received the second highest in discounts, $147,000, followed by Island Recycling at $70,000.
Councilman Stanley Chang, chairman of the Public Works Committee, said he and colleagues are supportive of the law’s intent to encourage recycling efforts.
"At the same time, we want to establish a fair policy for all the different recyclers in the City and County of Honolulu," he said.
Chang would not say what amendments he might offer, but said the city wants to emphasize fiscal responsibility and "ensure that all the companies are being treated fairly in a general program of support to recycling."
Critics of Schnitzer Steel contend the ordinance was first adopted at a time when the price for scrap metal was depressed and there were few recyclers in the islands. Since then, demand for scrap metal has grown in countries such as China, and Schnitzer’s profitability should make the subsidy unnecessary during a time when city departments are facing tight budgets.
Parent Schnitzer Steel Industries Inc., a publicly traded company based in Portland, Ore., posted profits of $126 million on revenues of $2.3 billion in fiscal year 2010, according to a company earnings report. Critics charge that Schnitzer Steel Hawaii has kept profits hidden as a means to continue receiving the subsidy.
Schnitzer Steel Hawaii executives have declined to provide financial information, saying it would put the company at a competitive disadvantage in the long term, even though doing so might benefit it before the Council. Officials say Hawaii accounts for less than 2 percent of the company’s metal recycling business.
Former City Council candidate Bob McDermott is among those who say the discount is no longer needed.
"Originally, Schnitzer Steel pleaded financial hardship and was awarded this discount via legislation," McDermott said in an email. "This hardship clearly no longer exists, and the hemorrhaging of more than $2 million of taxpayer’s money per year to this profitable company ought to come to an immediate end."
McDermott is an unpaid consultant to Hanni Hartmann, president of Paragon Metals International, a Schnitzer competitor and one of the main backers of the legislation. Paragon competes for scrap metal with Schnitzer but does not recycle the materials in Hawaii, instead arranging to ship the material abroad.
At a February hearing, Schnitzer and opponents of Bill 47 argued the money helps support much-needed recycling programs such as Aloha Aina Earth Days recycling events and the Marine Debris to Energy program, which collects derelict nets, fishing line and rope for recycling by Schnitzer.
Schnitzer officials had said those programs might be at risk if the subsidy was cut, but have since backtracked, saying they intend to fully support the recycling programs regardless of what action is taken on the bill.
"Community service is a tenet that we take very seriously at Schnitzer Steel, and we try to be involved in all the communities where we do business," said Jennifer Hudson, governmental and public affairs manager for Schnitzer’s metal recycling business. "The increased cost will be borne somewhere in our business, and we’d have to consider all of our options going forward if there’s a change in the discount."
Schnitzer’s position has been backed by other recycling companies as well as a handful of state lawmakers.
A primary supporter of the legislation is Paragon Metals, which sued Schnitzer in 2008, alleging it dumped residue in the landfill containing recyclable material. The U.S. District Court lawsuit was dismissed in 2009, but Hartmann said the ruling simply indicated the matter should be brought up at the county level.
He argued Bill 47, introduced last year by former Councilman Todd Apo, was partly a result of that ruling.
Hartmann and other supporters of the bill say the measure will make competition for scrap metal more equitable.
"The elimination of the unneeded discounts for for-profit organizations we have no trouble to keep the discount for nonprofits will simply allow my company to operate at a level playing field," Hartmann said in an email, adding that the discount and savings allow Schnitzer to "brutally" outbid him and others in securing scrap metal in Hawaii.
Along with McDermott, Hartmann has retained another former Council candidate, Matthew LoPresti, as a lobbyist, while former city information technology deputy Keith Rollman serves as another unpaid consultant. Hartmann said he brought all three on recently after seeing their work on environmental issues.
"It’s not just Paragon that is interested, it’s anyone who sees that corporate welfare at this time from the city makes no sense," LoPresti said in an email.
Schnitzer noted that shortly after Paragon’s lawsuit was filed in 2008, the company was approached by Paragon to discuss a settlement in which Hartmann would be paid $4.5 million pursuant to a consulting agreement in exchange for Hartmann to stop competing.
"Schnitzer representatives refused to consider the offer because it was improper and would have violated federal antitrust laws," Hudson said.
Hartmann confirmed that about three years ago a meeting "to buy/sell our company" took place between Schnitzer and Paragon.
"However, this is a very common practice in the industry," he said. "Schnitzer has been buying companies all the time. … Same is happening in general at a breathtaking pace throughout the country and the world."