REPORT TO COUNCIL
SUBJECT
Title
Report on Work Effort Related to New City Cannabis Regulations: Health & Safety Ordinance; Regulatory Fee and Tax Proposal; and Land Use Ordinance
Report
BACKGROUND
The passage of Proposition 64, the Adult Use of Marijuana Act (AUMA), on November 8, 2016, legalized personal recreational use by persons 21 and over, and regulated commercial activities related to cannabis. Subsequently, the State legislature passed Senate Bill 94, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), unifying regulations on medical and non-medical commercial cannabis activities and the personal use of cannabis. As of January 2018, California State (“State”) licensing of commercial activity, depending on license type, will be overseen by the Bureau of Cannabis Control, the Department of Public Health, and the Department of Food and Agriculture. State regulations allow for six general license types for commercial cannabis enterprises: retail (including delivery); cultivation; manufacturing; transportation; distribution; and testing. Prior to the issuance of a State license, the State requires, among other items, a local license if local regulations have been enacted.
In the interest of expanding revenue opportunities for the City, on September 26, 2017, Council directed staff to: 1) prepare cannabis regulations for future Council consideration; and 2) prepare a corresponding fee and tax strategy for commercial cannabis activity. On December 19, 2017, Council approved a contract with SCI Consulting Group (“SCI”) to assist the City with the development of commercial cannabis regulations together with a cost-recovery fee and tax strategy.
On January 19-20, 2018, the City held a City Council Operational and Strategic Priority Setting Session to create a shared understanding and assessment about the state of the organization and the City Council’s policy priorities. At that session the Council discussed the need to increase current revenue sources and/or identifying new revenue sources to stabilize the City’s fiscal condition. Following January 19-20 session, on January 23, 2018, the Council held a study session on commercial cannabis which in turn launched a work plan to create a policy framework to allow certain cannabis activity in Santa Clara and to create a new tax structure for future Council consideration.
In February 2018, SCI engaged in education and community outreach efforts holding two community meetings and two stakeholder meetings. Presentations to the public included information about the history of cannabis; the cannabis industry; State of California cannabis licensing; work effort to create policy framework for potential City of Santa Clara cannabis regulations. In addition to these outreach meetings, staff from several City Departments including Police, Fire, City Attorney’s Office, and City Manager’s Office visited two established cannabis businesses in San Jose. Cannabis activities in these businesses included: retail, indoor cultivation, distribution and delivery. During these site visits, information was exchanged about retail activity; security protocols; surveillance systems; tracking of product and delivery vehicles; hiring and staffing procedures; hours of operation; cash management; compliance with local regulations and nuisance issues (i.e., noise; parking; odor; etc.).
DISCUSSION
Over the past several months, SCI and staff have been working to prepare cannabis regulations for Council discussion and consideration. The City’s proposed commercial cannabis regulatory framework has three main components: 1) health and safety regulations; 2) land use regulations; and 3) regulatory fee and taxing regulations. The framework or regulations would include ordinances which would set the broad policy of the City’s commercial cannabis program and following, corresponding resolutions which would provide for a more detailed level of regulations on implementation and operation of the program.
Health and Safety
Council adoption of health and safety regulations would set policy on matters such as designating allowable categories of cannabis business enterprises that could operate in Santa Clara and specifying certain conditions upon which the business could license and operate. In addition, the health and safety regulations could specify the number of Santa Clara licenses allowed; the process and requirements by which a business may apply and be selected to secure a Santa Clara license; requirements to maintain a license; and the operating requirements of the license holder.
After reviewing the cannabis licensing structures in other cities and viewing the operation of the Santa Clara businesses, the following proposal is reflective of an implementation model that allows for the City, and the multiple departments involved, to adjust to implementing a new regulatory program that requires learning and training on new service areas. Additionally, it is clear that the sustainment of this new regulatory area will require dedicated staff which is a common practice in other municipalities that regulate cannabis. As such, staff’s initial recommendation on several key points include:
• Uses: Provide for the possibility of all six general license types to operate in the City: retail (including delivery); cultivation; manufacturing; transportation; distribution; and testing. Staff recommends that outdoor cultivation and volatile processing be banned and allow only for indoor cultivation and non-volatile processing.
• Number of locations: Initially allow a maximum of three commercial cannabis locations within certain zoning designations in the City, with multiple license types allowed at each location until a full cannabis program is established. After the City has a better understanding of operational issues such as the staffing and resource requirements associated with a City cannabis licensing program, the City Council may consider increasing the number of allowable locations.
• Operation: As observed in facilities located in San Jose, each approved location could request and secure multiple license types depending on the nature of the business operation. The City’s cannabis regulations will include areas such as security requirements; minimum hours of operation; background investigation and, requirements of staff employed.
Staff anticipates that a health and safety ordinance, together with necessary resolutions would be scheduled for Council review and consideration in June 2018. At that time the Council could decide whether to allow these uses if the cannabis tax measure does not pass.
Zoning
While in general health and safety regulations speak to the manner in which commercial cannabis may operate (who, when, how), zoning regulations would set policy on where commercial cannabis activity is allowed. State law restricts cannabis business from locating within a 600 foot radius of an existing school or youth center and requires any commercial cannabis business to operate in compliance with the City’s zoning ordinance.
Council consideration and adoption of an ordinance amending Title 18 Zoning Code could designate particular zones in which a cannabis use might be allowable. Several maps have been prepared for discussion on zones to consider allowing commercial cannabis activity and will be presented to the Council and community for feedback.
In preparation for Council consideration of an amendment to the Zoning Code, SCI and Placeworks are also preparing the associated environmental analysis required under the California Environmental Quality Act (CEQA). It is anticipated that zoning regulations and corresponding environmental analysis would be scheduled for Planning Commission and Council review and consideration in August 2018 and September 2018, respectively. At that time the Council could decide whether to allow these uses if the cannabis tax measure does not pass.
Fee and Taxing Regulations
The third major work effort is the development of policies associated with regulatory fees and the establishment of new taxing regulations. Regulatory fees may be charged to businesses seeking a license to operate in the City. The calculation of the cannabis license fee would include full cost recovery of all City staffing costs associated with the licensing activity such as, but not limited to processing, background check, review, monitoring, inspection, etc. The calculation of the fee cannot include costs associated with general deterrence or enforcement activity for activities not directly associated with the license.
Many municipalities in California have been or are in the process of pursuing an overall cannabis policy and taxing structure in order to generate taxes to enhance revenue. Santa Clara, Redwood City, Mountain View, Santa Jose, and Oakland all have already or are in the process of formulating cannabis policies to allow for taxation. Taxation methodology on cannabis may be approached in several ways including: gross receipts; square footage; and/or inventory weight. SCI’s presentation will provide more information on these different types of cannabis tax structures for Council feedback and consideration. A final report on the regulatory fee structure with a companion cash management policy will be brought forward for Council consideration in September.
A general tax measure, such as one Santa Clara may be interested in pursuing, must be considered at a general election and requires a 50%+1 majority vote to pass. Funds generated by a general tax on cannabis activity would be unrestricted and flow directly to the City’s General Fund to offset general deterrence or enforcement activity costs. As discussed in the earlier revenue opportunities presentations, Council discussion of potential revenue enhancement opportunities will be scheduled in June with consideration of potential tax measure(s) to be forwarded to the Registrar of Voters in July for placement on the November ballot.
It should be noted that while California’s cannabis program is still new, the amount of revenue generated for the State has been less than projected. As a general rule of thumb, municipalities may expect to generate $10 to $20 per capita on an annual basis. Applying this factor to Santa Clara, a local cannabis tax measure may generate $1.2 to $2.4 million annually.
Following the Council meeting a community outreach meeting will be held on Wednesday, May 30 at 7:00 pm at the Northside Library with a second meeting to be held on June 14 at 6:00 pm in the City Council Chambers. Feedback from these meetings will be reported back to City Council at its meeting on July 5.
FISCAL IMPACT
There is no fiscal impact to the City with this report; however, there could be an increase in revenue if the Council decides to put a tax measure on the ballot and the voters approve the tax.
COORDINATION
This report has been coordinated with the Finance Department and the City Attorney’s Office.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(5) in that it is a governmental organizational or administrative activity that will not result in direct or indirect changes in the environment.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any report to council may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov> or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
Review and provide feedback on the framework for the establishment of a commercial cannabis policy and a corresponding fee and tax structure.
Staff
Reviewed by: Ruth Shikada, Assistant City Manager
Approved by: Deanna J. Santana, City Manager