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A month after California created a Department of Cannabis, reforms and challenges take shape

Over the summer, California made its biggest change to how cannabis is regulated since voters approved legalization half a decade ago, with Gov. Gavin Newsom merging three agencies that had been overseeing segments of the industry into one new Department of Cannabis.

A month later, new strategies and challenges for the industry are taking shape.

It’s taking longer for cannabis businesses to get licensed since the consolidation took place, according to multiple people who work in or advocate for the cannabis industry.

“I think folks are hoping that’s just them getting their house in order,” said Lindsay Robinson, executive director of the California Cannabis Industry Association, a trade group representing more than 400 industry businesses. She said most business owners are willing to give the state’s new regulators “a little breathing room” because they believe the streamlined oversight will be best for the industry in the long run.

The work to merge three complex sets of regulations and licensing processes into one is really just beginning, acknowledged Nicole Elliott, director of the state’s new cannabis department.

Regulators also must grapple with finding new ways to tackle California’s massive illicit market and other issues that have plagued the licensed industry from its start. And they have to deal with emerging challenges, such as how the declining price of wholesale cannabis might impact the industry.

Elliott said they’re laying the foundation for some reforms now, with a clear set of goals in mind:

“We want to make it easier for people to become licensed and stay licensed in our state market, and we want to support a diverse industry.”

New department formed

While most states that have legalized cannabis have created one department to oversee the industry, California spread responsibility among three agencies after voters created the largest legal market in the world in November 2016. The agriculture department has licensed and regulated cultivators, the health department has overseen manufacturers, and the consumer affairs department’s Bureau of Cannabis Control has had charge of retailers, distributors, testing and events.

Since that idea was first proposed, Robinson said the CCIA has advocated for merging oversight into one new department.

“We had been hearing over the years that it was just a real struggle to navigate the different agencies,” she said.

Distinct regulations, approval processes and wait times have posed particular problems for business owners who are vertically integrated, noted Brian Dewey, director of business development for Nabis, a cannabis distributor that works throughout California.

“There were three different points of contact that were all trying to play their role inside of cannabis,” Dewey said. “There was no parent governing body that oversaw it all.”

The group most dissatisfied with the old system were farmers, who complained of lengthy waits to get licensed by the Department of Food and Agriculture, according to Dale Gieringer, director of the California chapter of the nonprofit cannabis rights group NORML.

“They had a big backlog of applications,” Gieringer said. “It wasn’t adequately staffed, and they have bigger crops to attend to.”

Shortly after Newsom took office and named Elliott his senior cannabis policy adviser in February 2019, she said they started meeting with stakeholders and talking about ways to strengthen the industry. Consolidating oversight became a top priority, and it was supposed to take place in 2020. Then a global pandemic happened.

Elliott said they spent the extra time – 18 months total – working behind the scenes to transition hundreds of thousands of files among the various agencies, to hammer out interagency agreements and to set up key leadership roles so they’d be ready when the time came.

That day came July 12, when Newsom created the cannabis department with the passage of Assembly Bill 141, a trailer bill for the 2021-22 budget. It was the most significant consolidation and reorganization of California state agencies since the California Tax and Fee Administration and Office of Tax Appeals were created in 2017.

Changes underway

The Department of Cannabis is overseeing a $194.4 million budget this fiscal year. (For context, licensed cannabis businesses paid $817 million in taxes during the 2020-21 fiscal year – a 55% jump from the prior year, though still short of the $1 billion in revenue projected once the market is fully established.)

The cannabis department this year also will manage a special $100 million grant fund that will be awarded to 17 counties and cities. It’s one strategy Elliott identified to try to help curb the illicit market.

For many business owners, the biggest hurdles to getting licensed are bans, strict regulations and lengthy delays at the local level. So if the state can use grants to make it easier for local governments to regulate cannabis in their boundaries, and to help businesses transition from temporary to permanent licenses, then Elliott hopes they can encourage more jurisdictions to welcome the industry while attracting and retaining more licensed businesses.

Cities and counties could also use those local grant funds to help small cannabis farmers stay afloat as wholesale marijuana prices start to fall, Elliott said.

The dropping prices are a predictable result of the legal market growing and stabilizing, Gieringer noted.

“As you scale up, it just gets more economical to produce,” he said. “It’s been inevitable all along, but it’s really squeezing the small growers.”

The cannabis department aims to award local grant funds by the end of the year.

They also plan to staff up, which Elliott says should help with wait times.

The Department of Cannabis is approved to have up to 624 employees this fiscal year. A spokesperson said they’re at 394. That gap, combined with a jump in cultivation applications, is why Elliott said some business owners might be noting a slowdown in the processing of applications. As the department continues to hire staffers in the weeks and months to come, she said she hopes they’ll be able to process applications more swiftly.

That issue aside, industry folks, by and large, have good things to say about Elliott, who was director of San Francisco’s cannabis office before going to work for Newsom. Communication has been solid, according to Robinson. And Dewey noted that Elliott’s learning curve is small, since she’s already experienced in working with the industry.

Some other organization decisions and top hires in the cannabis department also have drawn praise from people in the industry. Robinson, for example, applauded the creation of a new Equity & Inclusion division – one of 10 divisions in the new department, with others devoted to issues such as enforcement, technology and testing. And Robinson said she was happy to see the equity division’s deputy director post go to Eugene Hillsman, who did his Princeton dissertation on marijuana policy before also joining San Francisco’s cannabis office.

The department this fall will grapple with issuing new emergency regulations that will attempt to combine hundreds of pages of rules from the three previous oversight agencies into one rulebook, Elliott said. There are some key conflicts between the regulations that need to be resolved, she said, such as different definitions from the agencies about what constitutes “ownership” and “financial interest” in a company.

The department also is just beginning to have conversations around how to create a unified licensing system, Elliott said, with no estimate yet for when that change might be implemented.

While Newsom’s potential recall is causing some concerns in the industry, with both CCIA and NORML California opposing the move, Elliott said her department’s work shouldn’t be impacted by what happens Sept. 14.

“We’re just focused on getting this done and getting this done right.”


Source: Orange County Register

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