The recent insolvency of California’s Bottle Bill program has revealed a systemic flaw in the state’s recycling strategy.

“We need to reexamine the program from top to bottom,” said Department of Conservation spokesman Mark Oldfield.

On November 1st the state abruptly cut all processing payments to its more than 2,400 recycling centers including 20 in San Francisco. This was after an initial July cut of 85 percent. According to a report put out by Californians Against Waste, the move is projected to cost consumers $100 million in increased fees for beverages, lead to the closure of 1,100 recycling centers, and put 5,000 people employed in the recycling industry out of work – many of whom are at-risk youth, the Los Angeles Times reported.

“If funding is not available to support infrastructure then small programs are going to close at a critical time when we need to recycle more,” said Christine Flowers of Keep California Beautiful.

So far, 90 recycling centers have shut their doors statewide, according to Ed Dunn, Executive Director of the Haight Ashbury Recycling Center.

California’s bottle bill program, in place since 1986, charges consumers a small deposit for beverage containers, which is reimbursed to them when they recycle. Each year, around $1.2 billion in deposits pass through the Beverage Container Fund.  The fund was designed to cycle deposits from manufacturers to consumers to recyclers, theoretically leaving it with a zero balance.

However, because the recycling rate has hovered around 50 percent for decades, the fund has typically run a surplus of millions of dollars in unclaimed deposits.

In other states, such as Oregon, unredeemed deposits are given back to manufacturers. However in California, excess monies were used to pay for the program’s administration costs, as well as processing and handling fees paid to recycling businesses.

Those fees subsidized recycling companies, and led to exponential growth within the industry.

An additional $85 million in excess deposits were granted each year to public and private sector programs at the local level and non-profits, all working to expand the state’s recycling program.

This, the logic went, would boost the recycling rate.

And it did. More than 85 percent of beverage containers were recycled in the first six months of 2009.  But that meant less money—only 15 percent of the fund — to subsidize local recyclers and pay for the program’s $48 million in annual administrative costs, according to the Department of Conservation.

In addition, the state legislature borrowed more than $415 million from the container fund between 2003 and 2009, for other purposes. Those loans have yet to be repaid.

“Because it ran surplus it was seen as free money,” said Brian Early of Californians Against Waste, “If you borrow from the fund to the point that the program is not working, then that’s illegal.”

In a recent press release, The Department of Conservation also said it was also looking into allegations of fraud, but refused to comment on the matter.

The states largest recycling companies, Tomra Pacific and Nexcycle, who combined own 12 of the centers in San Francisco, recently filed a $416 million joint lawsuit against Sacramento, saying the cuts will put them out of business.

With the state legislature deadlocked over how to solve the problem, many more fear they may be next.

“I’ve seen my income cut in half since the announcement,” said Jimmy Stuart, owner of J&S Recycling in Bay View. Like other small recyclers, Stuart relied on handling fees to subsidize the recyclables his company processes.

In the meantime, the centers able to remain open will now have to rely on what they can bring in selling scrap to larger processors – a difficult way to make a living since the price of recyclables dropped by as much as 80 percent earlier this year.

“It’s going to be survival of the fittest when it comes to who keeps their doors open,” said Dunn, “If centers continue to shut down, the recycling rate will most likely drop back to where it was ten years ago. It’s really a huge loss to the community”

Last month Governor Arnold Schwarzenegger vetoed Senate Bill 402, which was widely supported by the recycling community, and would have increased the program’s revenue base by expanding it to include additional containers, such as those containing vegetable and soy drinks.

“This was a good bill with a historic level of support,” said Early, “The governor’s veto was incomprehensible.”

In a letter accompanying his veto, the governor questioned the likelihood that Californians would recycle additional beverage containers, “this bill proposes that CRV (deposits) be applied to products that will likely end up in a landfill.”