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Pandemic economics pushing So Cal cities to consider cannabis

From Hawthorne to Laguna Woods to Montclair, cities throughout Southern California are considering the idea of licensing cannabis businesses as a way to offset revenue losses triggered by the coronavirus pandemic.

Other cities, such as Costa Mesa, already allow some marijuana operations but are considering permits for more segments of the industry as a way to grow their tax base, bring more jobs to town and expand cannabis access for residents.

“We are seeing a significant uptick in the number of cash-strapped jurisdictions in Southern California begin to investigate regulating cannabis,” said Jackie McGowan, founder of Green Street Consulting, which tracks the industry statewide.

“Massive budget deficits have forced many to consider exploring every possible avenue available to them to collect revenue,” McGowan added.

But the deadline for cities and counties to get measures on the Nov. 3 ballot — either to ask for residents’ direction or to get required voter approval for a new tax — is Aug. 7. And some cities that were considering ballot measures have slowed those efforts because of community opposition or concerns that the health crisis could complicate the process of creating new regulations for such a complex industry.

That means advocates’ dreams of a huge wave of cities welcoming cannabis operations in the upcoming election might shrink to a mere ripple.

Still, nearly four years after voters legalized recreational cannabis — and gave cities the authority to regulate or ban the industry from their borders — cannabis activists say they’re still happy to see any progress. To date, only a quarter of all California municipalities allow any kind of marijuana business.

Now, the pandemic — which helped shrink the national economy by a third in the past quarter — is likely to change the mindset in a few cash-strapped communities.

“I am surprised that more cities haven’t jumped on the bandwagon,” said Bradley Hertz of the Sutton Law Firm, which specializes in election and public policy law.

“But more cities are starting to put their toes in the water,” Hertz added. “I’m seeing more of a positive reception by city councils and counties to say, ‘Let’s at least consider this as a good revenue opportunity and good public policy.’”

Today, Santa Ana is the only city in Orange County that allows cannabis retail along with cultivation, manufacturing and other segments of the industry. And the cannabis sector is helping the city’s finances.

The city is facing a nearly $19 million deficit amid the pandemic, which it will cover with general fund reserves. But without the marijuana industry, Santa Ana would be further in the hole, since it’s expecting to take in nearly $11 million from cannabis taxes in the 2020-21 fiscal year.

Costa Mesa is poised to potentially become the second city in the county to welcome marijuana shops. The city, which already permits other types of cannabis businesses, will ask voters on the Nov. 3 ballot if they want to permit and tax retail stores.

Keiko Beatie, a board member for The Cannabis Chamber of Commerce, said there’s so much confidence that Costa Mesa’s measure will pass that she knows people who are already putting money down on property for retail shops.

While cities have to get approval from their voters for new taxes, they don’t have to ask for voters’ OK to welcome the marijuana industry. But some still choose to put the question to voters — as Laguna Woods will on Nov. 3, when voters will consider a measure to allow cannabis retail in the city’s commercial zones.

In Stanton, voters approved cannabis taxes in 2019. Now, the city is working through applications for operators from various sectors of the industry.

Stanton Mayor David Shawver said the city isn’t hurting for money during the pandemic, in part because it doesn’t host industry that is dependent on tourism or foot traffic in the way that, say, Anaheim depends on Disneyland. But Shawver said he expects the bulk of any added cannabis tax revenues will go to support public safety, helping to pay Stanton’s contracts with the county for sheriff’s and fire services.

In Los Angeles County, many of the more populous cities, including Los Angeles and Long Beach, already permit a range of marijuana businesses.

So far, Hawthorne is the only city in L.A. County with a marijuana measure on the Nov. 3 ballot. The city’s measure asks whether voters want to approve a 5% tax on cannabis businesses if, at some point in the future, the city council decides to permit the industry.

That type of open-ended tax question is what James Ottem, executive director of the advocacy group Smart Leaders for Smart Regulations, would like to see more cities get on the ballot in the next week.

By going the pre-approval route, Ottem noted that cities don’t have to work out the complicated details of regulating the industry  — or even decide if they want to allow it at all — to ask voters to approve a tax. That way, if they want or need to pursue marijuana tax revenue down the road, they won’t have to wait until the next consolidated election.

Ottem, who’s worked in state and local government for 20 years, said one given, even in uncertain times like these, is that cities always get the short end of the fiscal stick. Even as sales tax revenue has cratered, he noted that smaller cities aren’t getting much in the way of aide from federal relief packages aimed at buffering impacts from the coronavirus. A local cannabis tax, he said, can provide a city-controlled revenue stream.

The need for revenue is also prompting some cities that have already passed cannabis tax measures to step up efforts to get businesses licensed and open, according to Ellen Komp, deputy director of the California chapter of the advocacy group NORML.

Cannabis revenues aren’t a panacea for a city’s budget woes, though. In Santa Ana, for example, which has 25 cannabis shops plus other industry sectors and is the only licensed shops in a county of 3 million people, marijuana revenues account for just 3% of the city’s budget.

But jobs are another factor. With the pandemic causing a spike in unemployment in much of the economy, David Belsky, CEO of the cannabis industry staffing firm FlowerHire in Los Angeles, said the cannabis industry has seen a hiring uptick since March. That’s because California declared cannabis an “essential” industry, letting operations continue even during state shutdowns. Business surged as that decision was made. And Belsky said operators have continued to hire more people as they create rotating shifts of workers to allow for distancing and as they continue to open new facilities.

“All of a sudden, cannabis is more stable than other industries,” Belsky said. “So cannabis is front and center now in a broader conversation about revenues.”

Officials in some cities, such as West Hollywood, are still negotiating which of two competing proposals should appear on the Nov. 3 ballot.

A law that took effect last year allows citizens or city officials to pull back measures, even if the measure has qualified for the ballot. As a result, Hertz said, some activist groups are qualifying generous cannabis measures, knowing it will force cities to get their own, more restrictive, measures on the ballot. That lets advocates and city officials negotiate a middle-ground measure, each side avoiding the cost of a campaign and the risk of losing at the ballot box.

While pro cannabis groups like Smart Leaders for Smart Regulations and OC NORML have been reaching out to cities and encouraging them to at least get cannabis tax measures on the ballot by the Aug. 7 deadline, some cities that once seemed ready to move forward have since pulled back.

That includes Yucaipa, a right-leaning city in southeast San Bernardino County.

In May, some city council members in Yucaipa asked staff to look at cannabis taxes as a way to help offset a 15% drop in sales tax revenue due to the pandemic. But City Manager Ray Casey said, for now, the council has opted not to move forward with the idea.

Likewise, Fullerton recently has backed away from putting a cannabis tax on the ballot, after hearing backlash in particular from the local Latino community. Instead, the city is only choosing to ask voters if they want a 1.25 cent sales tax increase to help offset a $7.9 million deficit. The city is still considering permitting marijuana businesses, but would use development agreements with each operator to raise money through fees.

Hertz, the public policy attorney, noted that such fees are intended to cover only a city’s cost for its cannabis-related regulations, not to generate new revenue. Otherwise the fees can be seen as an end-run around on a legally required public vote on any new tax.

Still, McGowan encouraged cities who may miss the Aug. 7 deadline for getting a tax measure on the ballot to consider development agreements to help them get by.

“Cannabis is and will remain a contentious and polarizing subject at the local level,” McGowan said. “But I do believe that financial insecurity will lead to a substantial increase in municipalities that will be rolling out regulations in 2021.”

Source: Orange County Register

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