Article Source: City of San Bruno CA
DATE: June 26,2018
TO: Honorable Mayor and Members of the City Council
Find out what's happening in San Brunofor free with the latest updates from Patch.
FROM: Marc Zafferano, City Attorney
SUBJECT: Provide Direction to Staff Regarding Cannabis-Related Activities in the City
Find out what's happening in San Brunofor free with the latest updates from Patch.
BACKGROUND
Proposition 64 was adopted on the November 8, 2016 ballot (the Adult Use of Marijuana Act or "AUMA"). The Act provides that:
I Recreational marijuana use, possession, transportation, and purchase of specified amounts by adults 21 years or older is legalized, except that certain activities, such as possession or smoking marijuana will still be prohibited in those places otherwise prohibited by state law (such as places of employment) or local ordinance;
- Individuals who are 21 years or older are allowed to grow up to six marijuana plants per residence, indoors or outdoors, for their personal recreational use; and
- Commercial non-medical cultivation, processing, laboratory testing, labeling, storing, wholesale distribution and retail sales of marijuana is now controlled, licensed, and taxed by an agency to be designated as the Bureau of Marijuana Control, located within the state Department of Consumer Affairs.
With the approval of Proposition 64, state licenses for commercial non-medical marijuana activities started to be issued on January 2, 2018. Under the new rules, which now refer to marijuana as cannabis, local jurisdictions may regulate, but cannot ban, personal cultivation of up to six (6) cannabis plants within a single private residence. A local jurisdiction may ban or regulate personal outdoor cultivation. Further, a local jurisdiction may ban or regulate all commercial cannabis activities, except for the lawful transportation of cannabis (or cannabis products) on public roads.
San Bruno Municipal Code Chapter 6.58 currently prohibits all medical marijuana distribution facilities throughout the City. Collective or cooperative cultivation of medical marijuana is also prohibited. This ordinance does not apply to any of the recreational, personal, or commercial non-medical activities that Proposition 64 now allows.
On October 25, 2016, the City Council unanimously adopted an urgency ordinance to impose a moratorium on these activities so that the City can further study the effects of Proposition 64 and determine if the City should continue to prohibit some or all of these activities, or regulate them, and if so, in what manner. On November 22, 2016, the City Council extended the interim ordinance as allowed by state law until October 25, 2017.
On September 12, 2017, the City Council received a comprehensive report about the status of current federal, state, county, and city regulations. After obtaining public input, the City Council directed that staff return with a final extension of the interim ordinance as allowed by state law to October 25, 2018.
Staff is now seeking policy direction from City Council about how to proceed. The options include:
- Continue the interim prohibition on all commercial cannabis activities by enacting a permanent ordinance;
- Allow but regulate some or all commercial cannabis activities; taxing such activities would require a vote of the people.
State Regulatory Framework - Medicinal and Adult Use of Cannabis
The California Uniform Controlled Substances Act makes certain acts involving marijuana a crime, except as authorized by law. Under the Compassionate Use Act of 1996, and the implementing regulations commonly referred to as the Medical Marijuana Program, these authorized exceptions include exemptions for the use of marijuana for personal medical purposes by patients pursuant to physicians' recommendations, and exemptions for acts by those patients and their primary caregivers related to personal medical use. In 2015, the State Legislature, addressing a longstanding need for uniformity and clarity in the Medical Marijuana Program, passed the Medical Cannabis Regulation and Safety Act (MCRSA), which established a licensing and regulatory framework for the cultivation, manufacture, transportation, storage, distribution, and sale of medical cannabis. MCRSA required applicants to obtain a local permit before a state license could be issued to engage in medical cannabis business.
Unlike MCRSA, which required applicants to have a local permit in order to obtain a State license to engage in medical cannabis business, AUMA allows the State to issue a cannabis operations license unless it is expressly prohibited by a local ordinance. Because the City enacted an interim urgency ordinance, the State has not issued any licenses to cannabis businesses that may have proposed to locate in San Bruno. Moreover, the City has not issued any local permits under MCRSA because the City had previously banned medical cannabis businesses, a prohibition that is not affected by AUMA.
On June 15, 2017, the State Legislature adopted its FY 2017-2018 State Budget package, which included a cannabis trailer bill (AB 94). AS 94 attempts to reconcile differences between AUMA and MCRSA by repealing MCRSA and creating one regulatory system for all commercial cannabis activity, called the "Medicinal and Adult-Use of Cannabis Regulatory and Safety Act" (MAUCRSA). MAUCRSA consolidates licensing provisions from AUMA and MCRSA, and revises references to "marijuana" and "medical cannabis" in existing law to instead refer to "cannabis" and "medicinal cannabis." The bill generally imposes the same requirements on both commercial medicinal and commercial adult-use cannabis activity, although there are some exceptions.
After AB 94, both medical and adult use licenses can be issued by the State without an applicant having first obtained a local license, unless the local jurisdiction notifies the State beforehand that it has prohibited such activity. Local jurisdictions are now required to provide State agencies with a copy of any ordinance or regulation related to commercial cannabis activity (both medicinal and adult use), along with a local point of contact. San Bruno has notified the State that it has adopted a temporary ban on all cannabis businesses.
Under the current rules, the recently renamed Bureau of Cannabis Control or BCC (formerly the Bureau of Medical Cannabis Regulation) is the lead agency for much of the State's licensing and regulatory responsibilities, with the California Department of Food and Agriculture (CFDA) taking the lead on cultivation regulation, and development of the track-and-trace program. The California Department of Public Health (CDPH) is the lead agency for manufacturing regulations.
On December 7, 2017, the State approved emergency regulations for cannabis businesses, which will be in effect until the end of June 2018, when final regulations will be adopted. In general, the State regulations detail which activities are allowed for each type of licensee (retail vs. manufacturing), and create procedures and standards for licensing and operational aspects of the different businesses. These regulations are in addition to those outlined in MAUCRSA itself, including the requirement that no license facility may locate within 600 feet of a school, day care, or youth center.
In summary, State regulations continue to be in flux, and are likely to continue attracting regulatory attention.
Federal Regulatory Framework
Significant uncertainty surrounding California's cannabis legislation continues in light of the fact that cannabis remains classified as a Schedule 1 drug under the federal Controlled Substances Act, and licensed California businesses could be subject to prosecution by the Department of the Treasury and the Department of Justice (DOJ). Under the Obama administration, the DOJ chose not to prosecute most cannabis users and businesses that followed state and local cannabis laws, if those laws were consistent with federal priorities such as preventing cannabis from being taken across state lines into jurisdictions where it is illegal. This policy was set forth in a DOJ memorandum known as "the Cole Memo" authored by Deputy Attorney General James Cole. The current Attorney General rescinded the Cole Memo on January 4, 2018, and stated that further steps with respect to federal cannabis prosecutions are "still under consideration." Attorney General Sessions further explained that federal "statutes reflect Congress' determination that marijuana is a dangerous drug and that marijuana activity is a serious crime" and that prosecutors should follow "well-established principles that govern all federal prosecutions" in determining which crimes to prosecute.
Additionally, in 2014 Congress passed an amendment to the appropriations bill (then the "Rohrabacher-Farr" amendment, now the "Rohrabacher-Blumenauer" amendment) that prohibited the DOJ from spending federal funds to interfere with medicinal cannabis operations that operate in states where they are legal. To maintain effectiveness, this amendment has to be renewed every year. Currently, it has been extended through September 30, 2018. It remains uncertain whether Congress will vote to include this amendment in the next appropriations bill.
Countywide Regulatory Framework
At a study session held on December 6, 2016, the San Mateo County Board of Supervisors directed its staff to explore the possibility of developing a coordinated regional approach to the regulation of adult-use cannabis. County staff hosted a countywide meeting in March 2017 to discuss development of a common regulatory scheme, and formed several cross-jurisdictional working groups (Manufacturing, Cultivation, Sales and Revenue) to focus on key regulatory issues. None of the working groups expressed a strong interest in adopting uniform countywide regulations, having determined that cities' reactions to the legislation are unique to their particular needs.
What Other Cities in San Mateo County are Doing
Cities in San Mateo County have had a broad range of reactions when considering whether to allow cannabis businesses to operate within their jurisdictions. Burlingame, East Palo Alto, Half Moon Bay, and Woodside have adopted interim bans on all commercial activity, with the intention to further research the issue. Several cities, including Belmont, Colma, and San Mateo, have passed ordinances prohibiting all commercial cannabis businesses. Other cities have adopted ordinances allowing some aspect of commercial cannabis businesses within their jurisdictions. San Carlos allows commercial cultivation, manufacturing, and testing subject to regulation and zoning, but does not allow retail storefront. Pacifica is adopting regulations to allow cannabis businesses, and placed a measure on the November 2017 ballot, which was approved by voters, to impose a local tax on marijuana operations. Redwood City has decided to ban cannabis businesses generally at this time, but is allowing deliveries, and is taking a phased approach to consider allowing storefront retail in 2019. San Mateo County allows limited commercial cultivation. With respect to personal cannabis activities, only Belmont, Brisbane, and Pacifica allow outdoor cultivation; all other cities (and the county) require that all cultivation occur indoors.
Attachment 1, prepared by the City's finance consultant Muni Services, summarizes this information. Note that if a city such as San Bruno adopted an interim urgency ordinance prohibiting cannabis, that city was assigned the classification "X = Not Expressly Authorized or Prohibited." Cities that adopted a permanent ordinance allowing and regulating the specified cannabis were assigned "A = Authorized," and cities that adopted a permanent ordinance prohibiting specified cannabis activities were assigned "P = Prohibited."
CEQA
The level of environmental impact analysis required for adoption of cannabis regulations presents another source of uncertainty for local jurisdictions. San Mateo County was recently sued on CEQA grounds after it adopted a local ordinance allowing commercial cannabis cultivation in greenhouses in unincorporated parts of the County. In passing the ordinance, the County adopted a negative declaration, concluding it would not create significant environmental impacts. A local citizens group has challenged that finding, alleging that the County should have prepared an Environmental Impact Report because there was evidence in the record demonstrating that commercial cultivation in greenhouses could cause negative environmental impacts. The court will hear that matter in the next 6 months or so, and depending on the outcome, it may be appealed, so it will take some time before the law in this area is settled. Other jurisdictions which have prohibited all commercial cannabis activity have found that action exempt from CEQA review, and to date, they have not been challenged.
San Bruno
As noted earlier, the City has adopted an interim ban on the manufacture, processing, laboratory testing, labeling, storing, and wholesale and retail (including delivery) distribution of non-medicinal cannabis. Outdoor personal cultivation is also prohibited. This interim ordinance will expire on October 25, 2018. In addition, the City prohibits medicinal cannabis cultivation, dispensaries, and distribution facilities in all zoning districts.
DISCUSSION
The City has several options for regulating cannabis cultivation and cannabis-related business activity, each of which could have varying impacts on City staff and resources. These options are further described below.
A. Local Regulatory Options
1) Personal Cannabis Cultivation: Regulate Indoor and/or Ban or
Regulate Outdoor
ALMA permits adults 21 years or older to plant up to six (6) plants within a single private residence (i.e. a home, apartment, mobile home or similar dwelling). Property owners, including landlords, can prohibit cultivation on their property. Furthermore, the City can reasonably regulate, but cannot ban, personal indoor cultivation, and can ban or regulate personal outdoor cultivation. (The current moratorium bans outdoor cultivation.) If the City bans personal outdoor cultivation, it is ineligible to receive state grant monies funded through the state excise tax specifically targeted for law enforcement, fire protection, or other local government programs addressing the public health and safety impacts of cannabis.
Accordingly, staff requests that City Council consider whether it wishes to (a) regulate personal indoor cultivation and/or (b) regulate or ban outdoor personal outdoor cultivation.
Personal indoor cultivation is allowed as a matter of right under State law. Most jurisdictions have not attempted to regulate it on a local level, other than to note any cultivation activity (i.e., watering, lighting, temperature controls) must be done in compliance with standard building code requirements. Drafting and enforcing additional local regulations would be challenging because it would involve activities inside people's homes. Currently, there are no model regulations available. Local regulations in at least one jurisdiction (Fontana) were struck down by a local court as too burdensome.
For personal outdoor cultivation, security, aesthetics, and odor may be of concern if the cultivation is visible from or near to other properties, especially the public right of way. Also, under the new MAUCRSA legislation (which is still subject to interpretation), it appears that outdoor grows may only be permitted in enclosed areas that are capable of being locked and not visible to the public. The City Council could consider making the current ban on outdoor grows permanent, or direct City staff to research and propose regulations for outdoor personal cultivation.
2) Ban or Regulate Cannabis Business
AUMA establishes 19 different business license types pertaining to cultivation, manufacturing, testing, retail and distribution. One of the business license types is for a 'microbusiness," meaning the licensee is vertically integrated and has the State's permission to cultivate and to act as a manufacturer, distributor, and/or retailer. Local jurisdictions may ban any or all of these license types. Local jurisdictions may also adopt business and/or land use regulations pertaining to any or all of these license types. If a local jurisdiction bans commercial cultivation or retail sale of cannabis, it is ineligible to receive state grant monies funded through the state excise tax specifically targeted for law enforcement, fire protection, or other local government programs addressing the public health and safety impacts of cannabis.
Accordingly, City staff requests that City Council consider whether it wishes to ban or adopt business or land use regulations pertaining to cultivation, manufacturing, testing, retail sales and distribution.
- Cultivation
- Manufacturing and Testing
AUMA establishes 14 license types pertaining to cultivation. The license types are based on the size of the cultivation area (ranging from less than 5,000 square feet to greater than 22,000 square feet) and whether the cultivation is indoor or outdoor. The potential impacts associated with commercial cultivation depend on whether the cultivation is indoor or outdoor.
For indoor commercial cultivation, the primary concern is whether the building that houses the cultivation meets certain fire prevention and health and safety requirements in light of the increased electricity needed for the required lighting and temperature controls. In addition, proper ventilation is important to control odor and to reduce the risk of mold infecting the plants.
For outdoor commercial cultivation, security is of great concern if the cultivation is visible from other properties, especially the public right of way; odors associated with outdoor cultivation have also been reported.
Impacts associated with both indoor and outdoor commercial cultivation include pesticide use and the impact on water quality. Fertilizers or pesticides stored or applied improperly can be mobilized by runoff from watering or rain and discharge into surface waters. On a commercial cultivation scale, this could potentially result in contamination of those waters, necessitating inspection of water runoff from cultivation sites to prevent contamination
AUMA establishes three license types pertaining to manufacturing. Manufacturing of cannabis products can involve either the extraction of cannabinoids from the raw flower or the production of consumable goods made with cannabis extracts. For extraction, there are two subcategories: one using volatile solvents and one using non-volatile solvents. The use of volatile solvents can result in an increased risk of lab explosions.
AUMA establishes one license type pertaining to testing. An entity with a testing license would perform tests of cannabis or cannabis products. The State will inspect manufacturing facilities and develop laboratory standards for testing the concentration of active ingredients and contamination in the products. The State will also develop compliance requirements, labeling and packaging standards, and products standards for all consumables. Initial products entering the market must be labelled "untested." Manufacturers will have a 6 month grace period to set up and obtain testing for their products.
c) Distribution and Retail
AUMA establishes two business license types pertaining to distribution and two business license types pertaining to retail. Distributors are engaged in the procurement, sale, and transport of cannabis and cannabis products between entities licensed to engage in adult-use cannabis business. Retailers are engaged in retail sale and delivery of cannabis and cannabis products to customers.
AUMA authorizes a local jurisdiction to ban or regulate distribution and retail locations and/or deliveries within their borders. However, a local jurisdiction cannot prevent a licensed entity from using public roads to simply pass through its jurisdiction to a delivery location outside of its boundaries.
Impacts from distribution facilities and retail stores may include security issues, loitering, nuisance, driving under the influence, and odor from smoking. In addition, retail stores may generate impacts on traffic and parking.
If the City Council is interested in allowing delivery of products to customers within the City, it could require that all delivery businesses obtain a business license. However, identifying and enforcing this requirement may be difficult.
- Ban or Regulate Medicinal Cannabis Business
- Impose Fees to Recover Cost of City Regulatory Activities; Enact Local Taxes by a Vote of the People
MAUCRSA authorizes local jurisdictions to ban or regulate all medicinal cannabis business within their borders, except that lawful transportation of cannabis through jurisdictions cannot be prevented. Presently, San Bruno has an ordinance prohibiting medicinal cannabis cultivation, dispensaries, and delivery businesses in all zoning districts. The City Council now has an opportunity to consider whether it wishes to instead allow and regulate, through business or land use regulations, cultivation, manufacturing, testing, retail sales and distribution, including delivery or medicinal cannabis. The impacts of these types of medicinal cannabis businesses are the same as the impacts of adult use cannabis businesses discussed above.
a) Fees
Cities are authorized to impose fees to defray the cost of implementing and enforcing regulatory programs. Such fees do not require a vote of the people so long as they do not exceed the costs of providing the services. If the City Council decides to allow and regulate cannabis-related activities, staff would then need to evaluate the range of regulatory options and the proposed fees associated with those options.
An additional issue relating to regulation is the availability of insurance for cannabis businesses. All City-issued permits obligate permit holders to defend, indemnify, and hold the City harmless from any liability associated with the activity, and further require an insurance policy naming the City as an additional insured. Until recently, no insurance products were available for cannabis businesses, and therefore they could not meet this requirement. The State Insurance Commissioner, Dave Jones, has just announced that the American Association of Insurance Services will now begin issuing policies that provide general liability and property coverage; auto and worker's compensation coverage is still not available. There are likely to be further developments in this area.
b) Taxes
Effective January 1, 2018, AUMA imposes a State excise tax at the rate of 15% of gross retail sales receipts of cannabis. Also effective January 1, 2018, AUMA imposes a separate cultivation tax on all harvested cannabis as follows: $9.25 per dry-weight ounce on all cannabis flowers and $2.75 per dry-weight ounce on all cannabis leaves. After reimbursing State agencies for the costs of regulation and implementation, $25 million of the tax revenues generated from the State taxes are allocated to earmarked sources, and the remaining tax revenue is distributed to youth programs, substance abuse education, prevention and treatment. As noted above, if cultivation and retail sales are not banned by a local jurisdiction, it is eligible, but not guaranteed, to receive state grant monies for law enforcement, fire protection, or other local programs addressing the public health and safety impacts of cannabis, funded through the State excise tax.
Local jurisdictions may impose their own taxes on the privilege of cultivating, manufacturing, selling or distributing cannabis, except that AUMA prohibits imposition of local sales taxes on medical cannabis and AUMA exempts cannabis cultivated for personal use from taxation.
The City's existing business license tax ordinance, which would apply to any cannabis business, is based on a graduated schedule of gross receipts. The City would also receive its share of any sales tax already collected.
There are several key issues associated with local taxation in excess of the business license tax, including the appropriate tax rate for each type of allowed business. Experts have cautioned that because the effective state taxation rate (AUMA excise tax plus state sales tax) is 22%, imposing too high a local rate may create an incentive to operate the business illegally. Estimates of the amount of tax that will actually be collected from any given business are subject to substantial uncertainty. Therefore, experts are recommending that if a tax measure is placed on the ballot, it should state a maximum rate, and allow the City Council discretion to establish a lower rate if warranted. Most cities that have adopted taxes have stated a maximum rate of 10%. A
general tax must be approved by over 50% of the voters, and a two-thirds vote is required for a special tax.
c) Banking and Revenue Collection
Because the production, distribution, sale, and possession of cannabis is illegal under federal law, cannabis businesses have been unable to access the State's banking system, which is required to comply with federal law. According to State Treasurer John Chiang's report dated November 7, 2017 titled Banking Access Strategies for Cannabis-Related Businesses, this "forces cannabis businesses to deal in large amounts of cash, which makes them targets for assaults and puts the general public in danger. Security and procedural concerns about handling massive amounts of cash also create a nightmare for state and local government revenue-collecting agencies." The report, which was developed by a diverse statewide Working Group of 50 experts after six public hearings across the state, recommended a series of steps to 1) implement safer money handling practices, 2) develop a data portal for compliance and regulatory purposes, 3) conduct a feasibility study of a public bank or other state-backed financial institution, and 4) establish a multi-state consortium of state government representatives to pursue changes to federal law.
The report concludes: "In the end, it became apparent that a definitive solution to the cannabis banking quandary will remain elusive until the federal government removes cannabis from its official list of dangerous drugs or Congress approves safe harbor legislation protecting financial institutions that serve cannabis businesses from federal penalties."
So long as cannabis businesses are operated on a cash basis, City staff are likely to experience difficulty ensuring compliance with any taxes imposed. Professionals such as auditors and accountants may not want to risk potential criminal liability by becoming involved in verifying compliance.
B. Resource Impacts of Developing and Implementing New Regulations and Fee/Tax Policies
Depending on the approach taken, significant staff time and outside expert assistance will be required to develop land use policies and other policies to regulate, inspect, and enforce locally-established regulations, including conducting the appropriate level of environmental review. Existing code enforcement, fire prevention, building, finance, community development, and law enforcement resources are already fully tasked, and demand for many of these services already exceeds staff capacity.
Once policies and regulation mechanisms are in place, ongoing costs associated with these activities potentially could be recovered through fees, but the initial effort required to develop regulations and inspection and enforcement protocols would require prioritizing this initiative over other City priorities for staff time.
As previously reported in the September 12, 2017 staff report, the San Mateo County Sheriffs Office has evaluated the impact of legalized marijuana, and identified several issues of concern. The Sheriffs Office has reported that in Colorado, marijuana-related crimes increased 42%, DUIs were up 41%, marijuana ingestion by children went up 138% and there was a 400% increase in toddlers ingesting edibles, marijuana hospitalizations increased 82%, and students referred to law enforcement for marijuana-related incidents increased 45%. Colorado, with a population of 5 million, in contrast to 38 million in California, has dispensaries that outnumber Starbucks and 7-11 locations combined. The Sheriffs Office recommends that cities carefully evaluate the impacts of allowing marijuana businesses and plan ahead so that the necessary resources and infrastructure is in place before the business operations begin.
C. Summary of Direction Requested from City Council
Because the City's interim ban will expire on October 25, 2018, staff requests City Council direction regarding whether to bring forward a permanent ordinance for introduction that reflects the prohibition on all commercial cannabis activities.
Otherwise, if the City Council wants to explore allowing and regulating some or all cannabis activities, staff requests input on the following topics:
(1) Regulation of Personal Cultivation:
- Should personal indoor cultivation, which is allowed by AUMA, be regulated? Staff could explore possible regulations, although there are no existing models.
- Should outdoor personal cultivation be allowed and regulated?
(2) Regulation of Cannabis Business: Should some or all aspects of cannabis businesses be allowed and regulated?
(3) Regulation of Medicinal Cannabis Businesses: Should some or all medicinal cannabis businesses be allowed and regulated?
(4) Taxation: If there is any interest in allowing and regulating cannabis business, is the City Council interested in considering proposing a local taxation measure for voter consideration, and if so, for which types of businesses?
RECOMMENDATION
Provide Direction to Staff Regarding Cannabis-Related Activities in the City
FISCAL IMPACT
There is no fiscal impact associated with this report. The fiscal impact of any regulation will depend on City Council's policy direction.
ALTERNATIVES
1. Request additional information from staff and/or expert consultants before providing direction.
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FULL Council Agenda Packet WITH Staff Reports can be viewed and downloaded from:
https://sanbruno.ca.gov/gov/elected_officials/city_council_minutes_n_agendas.htm
This document should be available late Friday before the Tuesday Council Meeting
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Robert Riechel
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E=Mail: SanBrunoPatch.Robert@Yahoo.com
Photo Credit: San Bruno CA Patch Archives
Source Credit: San Bruno CA City Council
Web Site: https://sanbruno.ca.gov
