Receive cannabis program update; provide direction to staff; and re-establish Board Ad Hoc Cannabis Regulation Subcommittee. (No general fund impact) (Lindbo) (Est. Time: 10 minutes)

BACKGROUND
Interim Licensing Ordinance
In response to the Medical Marijuana Regulation and Safety Act (August 2015), and to effect greater local control, the Board of Supervisors adopted the Marijuana Cultivation Ordinance (Licensing Ordinance) in March 2016, which added Chapter 20 to Title 5 of the Yolo County Code. The Licensing Ordinance was originally adopted as an interim measure to address community concerns and limit harmful environmental impacts of illegal cannabis operations while ensuring protection for patient access to medical marijuana. The Licensing Ordinance was ministerial in nature and relatively permissive compared to current local regulatory requirements. 

Public Concerns with the Licensing Ordinance
Because the Licensing Ordinance established a ministerial program and had few requirements related to setbacks, buffers or zoning restrictions for a cultivation site, the County received feedback from concerned citizens who felt the process was overly permissive, allowing for cannabis operations to locate in residential neighborhoods and other areas that they felt were not suitable. Some areas of the County had a higher concentration of cannabis cultivation sites than other areas, resulting in a public concern that some areas of the County were disproportionately impacted. There was also concern that neighbors were not notified in advance of the issuance of the license and there was no public discretionary process for consideration of issuance of the license or requiring conditions of approval.

Cannabis Land Use Ordinance (CLUO) 
To address these and other public concerns about the Licensing Ordinance, in October 2017, the Board of Supervisors directed staff to conduct robust community outreach and obtain feedback on concerns and recommendations for the development of a Cannabis Land Use Ordinance (CLUO). After the public outreach was completed, the Draft CLUO was prepared with specific requirements intended to better balance the needs of the cannabis industry with the concerns of local residents, and ensure that the industry operates in a safe, responsible and sustainable manner. 

After the Draft CLUO was prepared, a new round of public outreach meetings were held in various locations within the County, including at the Planning Commission, to obtain public input on the Draft CLUO from residents, property owners, and cultivators before a final Draft was prepared for review pursuant to the California Environmental Quality Act (CEQA).

The Draft EIR was released for public review in October 2019. It analyzed five alternative variations of the proposed Draft CLUO. The EIR found that the proposed CLUO mitigates most impacts, but that aesthetics (visual character) and odor impacts remain significant and unavoidable, particularly in the over-concentrated areas.

On September 14, 2021, the Board adopted the CLUO, certified the Final EIR, and amended the General Plan and Zoning Regulations to comport to the CLUO. Adoption of the CLUO formally establishes an increased set of regulatory standards (in addition to state regulations), through land use, zoning, and development standards, limiting allowed locations based on zoning and controlling for over-concentration, and also requiring buffers from sensitive land uses. The CLUO also establishes timelines for existing licensees to submit a complete application and reduces the number of cultivators operating in the Capay Valley to mitigate over-concentration. Existing licensees that cannot meet CLUO requirements in their current location may apply to relocate in a suitable location elsewhere in the County. 

CLUO Implementation
Existing licensees have preferential status to apply for a use permit in advance of allowing applications for new cannabis business proposals. Existing licensees that sought non-cultivation license type(s) in addition to cultivation, were required to apply for a use permit by December 16, 2022. Most existing licensees seeking a use permit solely for cultivation have until December 15, 2023, to apply.  New permitees will be able to apply for the remaining cultivation and non-cultivation licenses after processing of existing licensee applications is substantially underway. This date has not yet been determined, but will likely occur mid-late 2024.

To date, the Planning Division has received 15 cannabis use permit applications. Two of the applications include two co-located licensees on one property and the remaining 13 applications include one licensee each. Five applications were received from licensees in the Capay Valley, which equals the total number allowed by the CLUO. Of the 15 use permit applications received, two are located in District 1, one in District 2, two in District 3, and ten are located in District 5. In total, the following license types have been requested:

Table 1 below shows the number of allowed licenses by category and the number requested with a use permit application:

*This number does not include one application for an Early Implementation Development Agreement that has requested two cultivation licenses (co-location) and one Nursery License.

Establishment of Cannabis Tax
In June 2018 Yolo County voters approved Measure K, levying a tax on cannabis businesses in the unincorporated area of the County. The tax rate was authorized to be assessed at a rate between 1 % - 15 % of gross receipts, with an initial rate of 4 % for cultivation and 5 % for all other cannabis businesses.

The ordinance approved by Measure K set the initial tax rates for a period of two fiscal years, from July 1, 2018 to June 30, 2020, at which point the tax rate on cannabis cultivation would automatically increase to 5 % unless the Board of Supervisors approved an action otherwise. The ordinance also allows the Board to increase or decrease the cannabis tax rate or establish differing tax rates for different categories of cannabis business, provided the tax rates are not changed more than once in a 12-month period and are not increased or decreased by more than two percentage points.

In April 2020, the Board took action to maintain the tax at 4% for cultivation and 5% for other cannabis businesses for fiscal year 2020-21 due to the ongoing development of the CLUO and the desire to provide stability to the local cannabis industry. In March 2021 and in May 2022, the Board again took action to maintain the tax rates for 2021-22 and 2022-23 while the CLUO process was finalized and impacts of state cannabis tax reform were observed. 
 

In addition to local cannabis tax, cannabis is taxed at the State level with a 15% excise tax. Prior to July 1, 2022, the state also taxed cannabis cultivation, however that was eliminated to provide relief to the industry which is struggling statewide.
 

Cannabis Tax Expenditure Plan
Revenue from the County's cannabis tax is general revenue that may be spent on unrestricted general government purposes at the Board's discretion. The tax measure passed in 2018 stated this, but also included examples of potential uses such as criminal enforcement of illegal cultivation, early childhood intervention and prevention, youth development, substance abuse education and treatment, rural infrastructure and programs, and cannabis research. The ordinance also created a citizen's oversight committee to review expenditures of tax revenues. 

Since going into effect in July 2018, the cannabis tax has provided a stream of revenue that has allowed the County to make substantial investments in a variety of areas including illegal cannabis enforcement, child and youth programs, and rural community programs and infrastructure. However, cannabis tax receipts have fallen sharply in the past two fiscal years. Through the first two quarters of 2022-23, cannabis tax receipts have totaled just $257,000 compared to $536,000 in the prior year, a decline of more than 50%. Third quarter and fourth quarter receipts are not yet known as the due dates are on April 30, 2023 and July 31, 2023. Based on projections from the Department of Financial Services, current year receipts are projected to total only $400,000.

 

STATE OF THE CANNABIS PROGRAM TODAY
The number of cannabis licenses in Yolo County has been trending downward since the program's inception, reflecting a volatile, highly regulated and competitive market. The downward trend is not unexpected, considering the challenges discussed in this staff report, however staff feels the market could stabilize in the near future. 

Number of Cannabis Licenses in Yolo County
In 2016 the County issued approximately 41 licenses to cannabis cultivators. That number rose in 2017 to 66 issued licenses. The next few years would see a downward trend - which continues to this day. See Table 3, Cannabis Licenses by Year. 

 

                                 Table 3: Cannabis Licenses by Year

* Yolo County issued annual cannabis licenses effective from January 1 to December 31 for the 2017, 2018 and 2019 years. Yolo County modified the licensing calendar in 2020 from the calendar year to April 1 to March 31 which remains in effect today.

Yolo County Local Enforcement Program
Yolo County performs monthly routine inspections to ensure cannabis operators are following local ordinances, including assuring compliance with the inventory tracking to prevent diversion of cannabis to the illegal market. Monthly inspections prevents diversion to the illegal market by confirming Track and Trace data entry is compliant, and the plant and product inventory is kept up to date. Cannabis can be grown from seed to harvest in as little as 2.5 months making it imperative that these inspections occur on a monthly basis.  Jurisdictions performing quarterly inspection (every 3 months) or less can miss a complete harvest that is grown within the 2.5 months timeframe. Yolo County is not alone in performing monthly inspections. The City of Sacramento and the City of Needles also perform routine monthly inspections. Jurisdictions that have different tax schemes such as based on square footage of the cultivation site may not need to perform frequent inspections because diversion is not as concerning from a tax revenue standpoint. 
 

Yolo County's enforcement program also responds to complaints. Complaint responses are performed within 24 hours of receiving the complaint. Additionally, the enforcement program has recently developed an illegal cannabis enforcement task force to combat illegal cultivation in Yolo County. 

Yolo County's cannabis enforcement program has been recognized as being an industry leader with a well-developed program. Yolo County's cannabis enforcement program received a 2021 Merit Award by the California State Association of Counties.  

The Cannabis program is fully fee-funded. Table 4 includes the Yolo County annual license fee and also the State Department of Cannabis Control annual license fee. 

 

 

Note: The California State Department of Cannabis Control measures cannabis cultivation or grow sites differently than Yolo County. The State determines a small grow site as 5,000 to 10,000 sq. ft. while Yolo County defines a small grow site as up to 1/4 acre. The State determines a medium grow site as 10,000 sq. ft. to 1 acre while Yolo County defines a medium grow site as 1/4 acre to 1 acre.

Challenges Facing the Cannabis Industry
Downward trends observed in Yolo County are being seen statewide. Over the past several months staff have heard from industry participants and other sources regarding challenges facing the cannabis industry in California. Some primary concerns are provided below:   

Table 5 shows the price trend of legal cannabis in California according to the State records. Current market trends indicate stabilization in prices, which could indicate oversupply has leveled off. This could be because the amount of legally grown cannabis in California has declined as many jurisdictions statewide are seeing cannabis sites going out of business. However, as more and more local jurisdictions in California and other states legalize cannabis cultivation, the supply will remain high, which will likely result in continued downward pressure on cannabis prices.  

Table 5: Statewide Cannabis Pricing Trend (per pound) from 2021 to 2023

*Average Indoor price as benchmark

Role of the Cannabis Regulation Ad-Hoc Committee

Considering the challenges facing the industry currently, staff recommends the Cannabis Regulation Ad Hoc Committee be re-established and work to gain a deeper understanding of the issues and explore possible remedies (See Attachment 1, Cannabis Regulation Ad Hoc Committee Scope).

Department of Financial Service