Law and Legislation Committee Report 915 I Street, 1 st Floor Sacramento, CA

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1 Law and Legislation Committee Report 915 I Street, 1 st Floor Sacramento, CA File ID: Discussion Item 07 Title: Ordinance Establishing an Equity Program for Cannabis Businesses Location: Citywide Recommendation: Review and provide direction on an ordinance establishing the proposed Cannabis Opportunity, Reinvestment and Equity (CORE) Program. Contact: Joe Devlin, Chief of Cannabis Policy and Enforcement, (916) ; Zarah Cruz, Program Specialist, (916) , Office of Cannabis Policy and Enforcement, Department of Finance Presenter: Joe Devlin, Chief of Cannabis Policy and Enforcement, (916) , Department of Finance Attachments: 1-Description/Analysis Matthew Ruyak, Interim City Attorney Mindy Cuppy, City Clerk John Colville, City Treasurer Howard Chan, City Manager Page 1 of 6

2 Description/Analysis Issue Detail: On January 1, 2018, the State will begin issuing licenses for cannabis businesses as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) takes effect. MAUCRSA is the combined regulatory framework for commercial cannabis signed into law by Gov. Brown in 2015 and Proposition 64 or the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA) passed by California voters in November In the wake of these developments in California s cannabis law, the City Council has been taking steps to reasonably regulate cannabis businesses in the city. Early this year, the City Council adopted policies for cultivation, manufacturing and testing and is in the process of considering policies for delivery, distribution and adult use retail. Throughout this process, there has been a series of meetings between the City and stakeholders on the subject matter of equity participation in the cannabis market. By 2020 the legal cannabis business in California is expected to be in the billions of dollars. Large companies and investors are well positioned to control large portions of the legal cannabis market. Communities of color, negatively, and disproportionally effected by the war on drugs are currently not participating in the development of cannabis related business at the same rate of other communities. At the October 24, 2017 Council meeting, the Mayor and City Council requested that staff expand on the work already accomplished with our stakeholders to develop an equity program for consideration that would not only reduce the barriers to entry into the cannabis market but provide the necessary training and support to foster the long-term success of equity participants. The proposed CORE Program includes several components with a common goal of creating multiple pathways for certain communities and individuals to participate in the cannabis industry by removing or reducing typical barriers to entry and facilitating business opportunities for those who otherwise do not have access due to lack of capital, business expertise, or criminal history. The key components of the program are: CORE Program framework Amend the Title 5 manufacturing ordinance creating a tiered manufacturing permit process by type of activity and by gross revenues Amend the Title 17 ordinance removing the Conditional Use Permit (CUP) requirement for small manufacturers (less than $100,000 in gross revenues) Amend the background check ordinance allowing more individuals to participate The CORE Program framework is outlined below. Title 5 and 17 amendments for tiered manufacturing and removing the CUP requirement for small manufacturers were heard by the Page 2 of 6

3 Law and Legislation Committee and forwarded to Council on August 22, Amendments to the background check ordinance were heard by the Committee and forwarded to Council on July 25, CORE PROGRAM FRAMEWORK 1. Establish a small business support center and mentoring program to facilitate the development of cannabis businesses owned by minorities, women, and veterans. The program would provide technical assistance and access to other essential business services to new and growing business, in addition to facilitating an industry mentoring program. The pilot program should be a minimum commitment of three years and administered by a third-party business and technical support organization, with culturally competent staff with a history of successfully operating business development programs. CORE will serve as an incubator program, a small business support center and a hub that will link program participants and cannabis businesses that could include but are not limited to: Intensive cannabis specific business education and technical assistance training that includes individualized coaching, mentorship and apprenticeships. Host supplier diversity and matchmaking events with broader industry, and creating stronger ties among social equity applicants and those outside incubator program. Business plan development Establishing a legal entity City and state application completion Regulatory compliance Legal counsel Criminal record expungement Training on managing back-end business operations 2. Establish a Conditional Use Permit (CUP) and Business Operations Permit (BOP) fee waiver and fee deferral system for qualified participants. After 12 months, fee deferral participants will make installment payments over a period of two years for CUP fees and shall pay the initial BOP fee upon renewal. Dissolved firms will be eligible for forgiveness of application fee debt. Staff may need to return with additional ordinance changes to permit fee waivers and/or deferrals. Staff is currently evaluating best options and will return to Council with a recommendation and ordinance as soon as possible. 3. Establish priority CUP and BOP processing for qualified participants. Page 3 of 6

4 4. Provide Non-Operational BOP to participants who have completed a business plan and the background check requirement. This type of permit will allow participants to attract capital and potential investors. 5. Engage local community-based business organizations in diverse neighborhoods (based on qualifying zip codes) to host free informational workshops or seminars to share information on licensing opportunities and assist with cannabis license application completion and compliance requirements. ELIGIBILITY Individuals to participating in the CORE program must meet one of the following qualifications: Type 1: Residing in a zip code of a priority neighborhood for at least 7 years, between 1994 and the date of application, or from the most negatively impacted zip code subject to disproportionate marijuana arrest rates (use or sales). Type 2: Economically disadvantaged status, as marked by income below 200% Federal Poverty Level and net worth below $250,000 Type 3: A women or veteran-owned business For businesses participating in the program: Type 4: Commitment to employ 51% transitional workers 1. Type 5: Business with equity incubator. A business that hosts an equity business, Type 1,2, or 3. Business host shall offer equity business free or greatly reduced rent, technical assistance, and general business guidance with prescribed goal of successfully transitioning equity business out of the incubator. Council may want to consider requiring equity applicants, solely or cumulatively with other equity applicants, to have at least 51% ownership in proposed business (this can include a cooperative structure). For medical marijuana non-profits, social equity applicants should compose the majority of the board of directors, cooperative leadership structure or executive leadership. 1 Transitional worker: having a prior arrest and conviction for a misdemeanor or felony; homeless; a custodial single parent; receiving public assistance; lacking a GED or high school diploma; suffering from chronic unemployment; having been emancipated from the foster care system; a veteran of the U.S. Military Page 4 of 6

5 PROGRAM BENEFITS BY APPLICANT TYPE Type 1: Eligible for services offered by the business support center including the expungement of criminal records, priority CUP and BOP processing and fee waiver. Type 2 & 3: Eligible for services offered by business support center, priority CUP and BOP processing and fee deferral. Type 4 & 5: Eligible for priority CUP and BOP processing. Policy Considerations: The proposed CORE Program is a three-year pilot program with the specific goal of increasing access to the legal cannabis industry by removing barriers and support small business development. The City s permit fees are calculated based on the administrative and enforcement efforts that will be required in regulating the City s permitted cannabis industry, as well as the illegal grows in Sacramento s residential neighborhoods. Together, the administrative and enforcement costs can be costly. Coupled with the cost of a CUP application, these fees become a deterrent for small manufacturers to seek a permit and legalize their operation. The CORE program will be supplemented by amendments to existing ordinances related to small manufacturers, testing facilities and background checks to be considered by Council on November 28 th in order to achieve a fair, accessible and equitable cannabis program. If approved by the Committee and subsequently the City Council on November 28th, staff will take the next steps required to implement the program. Economic Impacts: Development and implementation of the CORE Program will increase opportunities for certain communities and individuals to participate in the cannabis industry by removing or reducing typical barriers to entry and facilitating business opportunities for those who otherwise do not have access due to lack of capital, business expertise, or criminal history. It is difficult to estimate the economic impact of these businesses at this time. Staff will return to Council if/when the program is implemented to provide estimates based on program participation. Environmental Considerations: This action is not a project that is subject to CEQA because it does not have the potential for causing a significant effect on the environment. (CEQA Guidelines 15061(b)(3).) Sustainability: Not applicable. Commission/Committee Action: Not applicable. Rationale for Recommendation: The cannabis industry is projected to be a multi-billion-dollar market in California. New business opportunities are emerging in anticipation of January 1, 2018 when commercial cannabis becomes legal in the State. Creating pathways for small Page 5 of 6

6 business to enter the legal framework supports the City s goal of supporting small business development particularly among minority, women and veteran-owned businesses. The proposed equity program is a conscious effort to provide the training and support necessary to ensure that the emerging cannabis market is accessible to all, regardless of economic status, gender, racial and cultural background and criminal history. Financial Considerations: All cannabis businesses are required to pay a four percent Business Operations Tax (BOT). With the addition of adult use retail, delivery and distribution, subject to City Council approval, the annual revenue from cannabis-related BOP and BOT is anticipated to increase substantially which will help the City in meeting its cannabis-related enforcement obligations and provide a resource to implement a cannabis equity program within the City. Local Business Enterprise (LBE): Not applicable. Page 6 of 6