Title
Workshop on a Proposed Ordinance Amending the Alameda Municipal Code by Repealing Section 30-5.15 (Medical Dispensaries and Cultivation) in its Entirety; Adding a New Article XVI (Cannabis Businesses); Adding a New Section 30-10 (Cannabis); and Amending Sections 24-11 (Smoking Prohibitions in Places of Employment and Unenclosed Public Places) and 24-12 (Smoking Prohibitions in Housing). (Community Development 209)
Body
To: Honorable Mayor and Members of the City Council
From: Jill Keimach, City Manager
Re: Workshop on a Proposed Ordinance Amending the Alameda Municipal Code by Repealing Section 30-5.15 (Medical Dispensaries and Cultivation) in its Entirety; Adding a New Article XVI (Cannabis Businesses); Adding a New Section 30-10 (Cannabis); and Amending Sections 24-11 (Smoking Prohibitions in Places of Employment and Unenclosed Public Places) and 24-12 (Smoking Prohibitions in Housing)
BACKGROUND
On November 1, 2016, the City Council approved a referral directing staff to study updated regulations for, and potential taxation of, commercial cannabis activities. The referral specifically directed staff to look at conditionally allowing cultivation, manufacture, testing, distribution, transport, and dispensing medicinal cannabis and recreational cannabis. In addition, the referral directed staff to analyze potential fees and taxes related to cannabis business activities.
On July 5, 2017, a second referral related to cannabis business activities was approved by the City Council. The July 5, 2017 referral directed staff to propose regulations to permit convenient and safe cannabis businesses in Alameda including dispensaries, cultivation, manufacturing, purity and potency testing labs and quality control facilities, and other activities associated with the medicinal cannabis activities now legally permitted in California, including temporary licenses for recreational cannabis businesses.
Based on City Council direction contained in the two referrals, staff prepared a draft ordinance that would conditionally permit medicinal and recreational cannabis business activity in the City. The draft Ordinance was presented to the City Council at a September 5, 2017 Council meeting. The September 5 staff report is attached as Exhibit 1. Following a staff presentation, which included an overview of the cannabis industry and the State regulatory framework by SCI Consulting Group (SCI), and public comment, the Council discussed the proposed ordinance and gave staff direction on next steps. Council requested that a special meeting be scheduled to continue the discussion in a workshop format regarding permitting cannabis business activities in the City. In addition, staff was directed to prepare a revised draft ordinance based on feedback received from Councilmembers and provide additional information on a number of issues raised by Councilmembers for review and discussion at the special meeting.
A revised draft ordinance has been prepared and is discussed below. Exhibit 2 is a redline/strike-out version of the revised ordinance. It is recommended that the Council provide staff direction on the revised draft ordinance. If the ordinance captures Council intent regarding the regulation of cannabis business activities in the City, the ordinance can be finalized following the special meeting and introduced at the next regular City Council meeting on November 7, 2017. If the draft ordinance does not fully address the Council’s intent regarding cannabis regulation, it is recommended that the Council direct staff to prepare an ordinance banning all cannabis business activities for its consideration at the November 7 City Council meeting. Adoption of an ordinance banning all cannabis business activities would give the Council sufficient time to ensure a regulatory framework that is appropriate for the community without the risk of a cannabis business securing a license from the State without a local regulatory process in place. It would also enable, if the Council desires, to more closely tie a potential tax on cannabis in June or November 2018 with the potential opening of cannabis businesses.
DISCUSSION
At the September 5 workshop, the Council provided feedback on a range of topics discussed in the staff report and commented upon at the public hearing. This staff report addresses the issues discussed at the September 5 workshop as follows:
Update Smoking Ordinance
The Council as a whole expressed its desire to update the City’s smoking ordinance to include prohibiting smoking cannabis consistent with the existing prohibition on smoking tobacco in public places, including parks, and in multi-family housing. Council also requested that the smoking ordinance be updated to include a prohibition on vaping and using e-cigarettes (and other electronic devices) in public places and in multi-family housing, and specifying that flavored tobacco is included in the definition of tobacco. The draft ordinance updates the City’s smoking ordinance as described above.
Permitted Cannabis Business Activities
The Council acknowledged that the cannabis industry is evolving quickly and that State and local governments have been hard pressed to keep pace with the need for regulations to be in place by January 2, 2018, when commercial recreational cannabis becomes legal. That backdrop led Councilmembers to propose that the City proceed cautiously and look at phasing in its allowable cannabis business activities over time and to consider capping the number of businesses by type. This approach allows the City to gauge impacts and to adjust its regulations accordingly.
In response to the desire to phase in cannabis business activity, the revised draft ordinance during this initial phase:
• Prohibits indoor and outdoor cannabis commercial cultivation;
• Prohibits microbusinesses;
• Prohibits delivery-only cannabis businesses, including dispensaries that are closed to the public;
• Prohibits adult use non-medicinal dispensaries;
• Permits medicinal dispensaries and delivery in connection with those dispensaries;
• Caps the number of medicinal dispensaries to two, one on Park Street and one on Webster Street (as defined in the Zoning Code);
• Permits cannabis manufacturing and distribution in connection with manufacturing; and
• Permits cannabis testing labs.
A summary of cannabis license types is attached as Exhibit 3.
A majority of Councilmembers supported a ban on all types of cultivation. In addition, staff is recommending that microbusinesses be banned at this time consistent with the Council’s desire to phase in permitted cannabis business activities. Some experts believe that microbusinesses are poorly defined under state law and that it is unclear how they will be implemented in regulation. Therefore, it is appropriate to ban this activity until there is a more robust regulatory framework.
A majority of Councilmembers expressed support for medicinal dispensaries, in part based on public testimony received at the September 5 Council meeting. However, there was also a desire to limit the number of dispensaries. The ordinance provides for two medicinal dispensaries, one on Park Street and one on Webster Street. Delivery of cannabis products would be permitted in association with an approved dispensary. Delivery-only cannabis businesses, including dispensaries closed to the public, are not permitted. However, delivery service from retail dispensaries located in other jurisdictions will continue, but are proposed to be regulated under the draft ordinance.
A question was raised as to whether or not a medicinal only dispensary is an economically viable business model in a state that has legalized recreational cannabis. In states that have legalized recreational cannabis, the number of medicinal only dispensaries has rapidly declined. However, there are some factors that may mitigate against this trend in the next three to five years in California. Because of the slow pace of finalizing State regulations, many jurisdictions have banned adult-use cannabis business activities. A recent San Francisco Chronicle article stated that only a handful of cities and counties have permitted recreational cannabis businesses. If the City were to permit up to two medicinal only dispensaries it would be consistent with phasing in cannabis businesses as the City currently bans all cannabis business activities. It would put any future medicinal dispensary in a good position to pursue a State license for dispensing cannabis on an adult-use basis, should the City amend its ordinance in the future to allow recreational cannabis dispensaries, as such a dispensary would be an existing business.
The State exempts medicinal cannabis from sales tax so some consumers may continue to rely on a doctor’s note to obtain medicinal cannabis as it will be more affordable than recreational cannabis. This could be a factor in the future success of medicinal only dispensaries. Some practitioners also believe that the business models currently required for medicinal dispensaries will continue due to their tried and true nature from a legal, risk management and business liability perspective (these businesses have been around for over 10 years). Given these factors, staff believes that permitting a limited number of medicinal only dispensaries is a viable approach to phasing in cannabis business activity in the City.
A Council majority also supported cannabis manufacturing businesses, including distribution, and laboratory testing businesses. The draft ordinance permits both of these business types and does not propose a cap for either type of business. The Council may want to consider a cap, for one or both of the business types, consistent with its desire to phase in permitted cannabis businesses.
Buffer Areas Around Sensitive Uses
State law establishes a 600-foot buffer area around existing sensitive uses. Cannabis business activity cannot be conducted within the buffer area surrounding sensitive uses. The State defines sensitive uses as K-12 schools, licensed day care centers (excluding family day care homes) and youth centers. In the absence of local regulations, these State requirements would prevail. Some local jurisdictions have opined that if the local jurisdiction adopts its own regulations, it can adopt regulations that are more stringent than the State’s requirements.* At the September 5 workshop, a majority of Councilmembers expressed support of a 1,000-foot buffer around sensitive uses. Some Councilmembers were interested in seeing a buffer applied to parks. In addition, on September 26, 2017, the Board of the Alameda Unified School District (AUSD) adopted a resolution “requesting that any cannabis business or dispensary in Alameda be located no closer than 1,000 feet from any Alameda school or AUSD child care center.” The AUSD resolution is attached as Exhibit 4.
Exhibit 5 is a series of maps that shows:
• A 600-foot buffer area around existing sensitive uses;
• A 1,000-foot buffer area around existing sensitive uses;
• The recommended buffer area pursuant to the AUSD resolution; and
• A 1,000-foot buffer around sensitive uses and parks.
In talking to staff from jurisdictions that currently permit medicinal cannabis businesses, most jurisdictions regulate dispensaries only and allow cultivation, manufacturing and testing businesses to locate in zones where other agricultural, manufacturing and testing uses are permitted by right. This regulatory structure reflects the belief that dispensaries have impacts related to their retail nature that manufacturers and laboratories do not share. Because the manufacturing and testing businesses are not regulated any differently than other manufacturing and laboratory businesses, the buffer areas around sensitive uses are often not required for these types of cannabis businesses, or may be smaller than those required for dispensaries.
In its consideration of whether to support a 1,000-foot buffer around sensitive uses for dispensaries, the Council may want to also consider whether to require the same buffer area for manufacturing and testing businesses as required for dispensaries, and whether or not to expand the definition of sensitive uses to include parks or other facilities. As drafted, the ordinance requires a 1,000-foot buffer around sensitive uses as defined by the State. The ordinance also prohibits cannabis businesses on City-owned property.
Program Administration
As initially drafted, the ordinance proposed a two-pronged regulatory framework that required obtaining an operator’s permit from the Police Department and land use approval from the Community Development Department (CDD). The Council expressed concern with the Police Department administering the operator’s permit process as it might re-enforce the previously illegal nature of the industry. Other Councilmembers believed that it was more appropriate for the Police Department to focus on its core public safety duties. As a result, the revised ordinance provides that the CDD will be responsible for regulating the cannabis business industry in the City in consultation with the Police Department.
As noted in the September 5 staff report, staff recommends that the City Council direct full recovery of all costs incurred by the City associated with permitting and regulating cannabis businesses. These fees are legally limited to recovery of actual expenditures and cannot contribute to the General Fund. Implementation of regulatory fees requires calculation and documentation of actual costs through a nexus, or fee, study. Staff is recommending that SCI be retained to prepare a fee study to determine the appropriate fees for permitting, regulating, monitoring and enforcing requirements related to the cannabis business activities to ensure full cost recovery. The fee study would also highlight any staff resources needed for program administration. Once the fee study is completed and approved, the fees would be included in the Master Fee Schedule.
On-Site Consumption
A majority of Councilmembers expressed a willingness to evaluate on-site consumption as a permitted activity. Several Councilmembers noted that if the smoking ordinance is amended as proposed, residents of multi-unit buildings will not be able to smoke in their homes. In addition, there was a desire to prevent people from smoking cannabis in parks and other open areas. It should be noted that while both Berkeley and Oakland permit on-site consumption, both jurisdictions prohibit smoking cannabis at the permitted premises (neither Berkeley nor Oakland have yet issued permits for on-site consumption). While there may be merit to the idea of providing for on-site consumption, staff believes there are compelling reasons to continue to recommend against permitting on-site consumption at this time. The draft ordinance reflects this recommendation.
Staff believes that the prohibition of on-site consumption is consistent with the Council majority’s desire to phase in permitted cannabis activities over time. There is not currently a test, such as a field sobriety test for alcohol consumption, to determine if someone is under the influence of cannabis and unfit to drive a motor vehicle. The Police Department has raised a concern that if on-site consumption is permitted, it could lead to an increase in the number of drivers operating a motor vehicle under the influence of cannabis with no good way to enforce DUI laws. This could result in more car accidents, injuries and loss of life. As a field test is developed and perfected over time, the issue of on-site consumption can be re-visited in the future.
The links below are to two newspaper articles regarding some of the challenges of traffic enforcement as a result of legalizing recreational cannabis.
<http://www.denverpost.com/2017/08/25/colorado-marijuana-traffic-fatalities/>
<http://www.cbc.ca/beta/news/canada/ottawa/what-denver-can-teach-ottawa-policing-pot-1.4292583>
Exhibit 6 provides additional information about the risks of drugged driving in the current environment of recreational cannabis consumption and no reliable test for determining whether or not someone is under the influence of cannabis and unfit to drive.
Labor Peace/Local Hire/Local Ownership
State regulations require “labor peace” agreements such as card check neutrality for cannabis businesses with 20 or more employees. A majority of Councilmembers supported a local requirement that labor peace agreements be required for businesses with 10 or more employees. The draft ordinance includes this requirement. The ordinance also requires that, as part of an application for an operator’s permit, the cannabis business include a local hire plan. Such a plan would outline how the business intends to recruit and conduct outreach to Alameda residents such as sponsoring local job fairs, working with the College of Alameda One-Stop Employment Center, etc.
Local ownership of cannabis businesses has also been a topic of interest to the community and the Council. Local ownership typically comes into play when a jurisdiction caps the number of permitted dispensaries and undertakes a selection process to award permits to a limited number of operators. Consistent with many other cities, staff recommends that the dispensary permits be awarded through a selection process that would be established by resolution of the City Council. Selection criteria and guidelines would be prepared by staff and approved by City Council and could include preference points for local ownership and/or for operators who demonstrate a commitment to the community through, for example, support of local non-profit and other social service organizations.
Equity Program
Oakland was the first city to raise the issue of the disparate impact that the war on drugs had on poor communities and on people of color, primarily African-Americans and Latinos, and express a desire not to perpetuate that disparity as it began to regulate the emerging industry of recreational cannabis. Oakland made a series of findings regarding the impact of the war on drugs on certain neighborhoods in Oakland and the disproportionate number of marijuana-related arrests of African-Americans and Latinos as part of its equity program to ensure that these individuals and communities can benefit for the legal cannabis industry. Similar equity programs are being researched and developed in San Francisco, Los Angeles and other jurisdictions.
It was requested that staff review marijuana-related arrests in the City of Alameda over the past 20 years to determine if similar findings could be made about disparate impacts and/or if such arrests would support findings for an equity program in Alameda. The Police Department analyzed 20 years of data (from 1998-2017) regarding the three most common marijuana-related violations, one violation is a misdemeanor and two are felonies. A fourth common marijuana-related violation was decriminalized from a misdemeanor to an infraction about half way through the study period so those arrests were not reported on.
There were 923 arrests over the past 20 years, or an average of 50 arrests a year (just over four per month), for all marijuana-related violations. Thirty-five percent of those arrested were white, 32% were African-American, 15% were Latino, and 9% were Asian-American. Generally, over the last 20 years, Alameda’s demographic make-up is as follows: 54% white, 28% Asian-American, 10% Latino and 6.4% African-American. It is difficult to draw meaningful conclusions from these raw numbers and percentages. For example, it should be noted that, for all arrests in any given year, 50% of arrestees reported their home address outside of the City. Therefore, it is difficult to correlate those arrested with City demographics due to the high number of arrests of non-residents.
In addition to researching 20 years of data on marijuana-related arrests by race and ethnicity, staff looked at arrests by geography. Arrests by Police sector (Exhibit 7) were as follows:
• 36% Willow to Eastshore
• 36% Alameda Point to 8th Street
• 20% 8th to Willow
• 4% Bay Farm Island
• 4% Alameda Point
The foregoing arrest data does not support a disparate impact of marijuana-related arrests on any specific neighborhood.
The small number of marijuana-related arrests over the past 20 years (an average of just over four per month), along with fact that approximately 50% of all arrests generally are of non-residents, leads staff to conclude that available arrest data would not support an equity program as part of regulating recreational cannabis activity in Alameda.
Impacts due to the Cash-based Nature of the Cannabis Industry
Several Councilmembers raised concerns about the risks associated with the cannabis industry being largely cash-based. Concerns ranged from whether or not workers are paid appropriately, with payment into Social Security, etc., to public safety concerns with large amounts of cash being handled, both at the place of business and at City Hall.
Staff spoke with several business representatives about how the cash-based nature of the business effects their operations and with staff from several cities about how they handle cash payments. Like many other issues in this rapidly evolving industry, the cash-based nature is changing. Different businesses have developed different banking relations, but in general, businesses seem to have some type of banking relations. One business’ banking relationship was limited to depositing funds that were used exclusively to pay Federal taxes. Another business had a more expansive banking relationship but paid its Federal and state taxes in cash.
A common practice is to hire a payroll service, which prepares the payroll for all employees. The payroll service handles all of the withholdings and premium payments for health insurance coverage. Therefore, paychecks that are issued to employees are net of all required tax and other benefit withholdings. While payroll services are used to provide employee paychecks, many services are paid for with cash, including utility bills, fees and taxes, rent and other services such as legal and marketing services.
It appears that cities handle cash payments for fees and taxes in a generally consistent manner. Cannabis businesses are required to make an appointment ahead of time so that the City knows that the business will be coming and can arrange for a room to count the money and pack it into bank bags, and arrange for an armored car to be available to transport the cash to the bank. The cash counting process involves several staff people who count the cash by hand and by machine. Businesses may come in more frequently than annually to pay the required fees and taxes to reduce the amount of cash that is handled at any one time.
Cannabis businesses pay Federal and state taxes and fees and taxes to local jurisdictions. While there may be risk to a city to accept money for fees and taxes from cannabis businesses, staff was unable to document a case where those monies collected were seized by the Federal government. There are jurisdictions in California who have been collecting fees and taxes from medicinal cannabis businesses for over 10 years. Whether or not this changes with the advent of recreational cannabis businesses is unknown. However, it appears that a series of best practices has evolved around issues such as employee benefits and paychecks, transport of cash, payment of government fees and taxes, and building security. These best practices will be further refined through State licensing requirements.
Other Miscellaneous Changes
Staff has made the following minor substantive modifications to the draft ordinance presented on September 5, 2017, as such the revised draft ordinance:
• Raises the ownership interest (from 5% to 20%) required to qualify as a Cannabis Business Owner in a publicly traded company. For privately traded companies, defer to State regulations.
• Adds grounds for permit denial: incomplete, speculative, and third-party applications.
• Adds 30-day grace period for failure to pay taxes or monies owed to the City.
• Clarifies no grace period exists for expiration of a permit.
• Clarifies change of ownership requires a modification of a permit, which requires city approval.
• Clarifies that applicants and permittees have a continuing duty to notify the City of change of ownership, changes to an application, or changes to information or circumstances upon which a permit was issued. Failure to abide by this duty is grounds for revocation.
• Modifies hours of operation for deliveries (now 7:00 a.m. to 9:00 p.m.); clarification that specified hours of operation apply to cash pick-ups.
• Clarifies that security guards are required for dispensaries and discretionarily required for other Cannabis Businesses.
• Adds a requirement to maintain proof of worker’s compensation and employer’s liability insurance.
• Adds a requirement to provide a waiver of sovereign immunity in the case of tribal applicants, consistent with State regulation.
• Clarifies that any use not expressly permitted is prohibited.
Next Steps
The purpose of this special meeting was to present a revised draft ordinance for Council’s consideration based on the feedback staff received at the September 5 Council meeting and to address issues of concern, and to provide an opportunity for Council to review and comment upon the revised ordinance. As noted above, if staff has captured the Council’s intent regarding regulation of cannabis businesses, an ordinance can be prepared for introduction at the Council’s November 7 meeting. If Council wishes to continue to work on a framework for regulating cannabis businesses, it should direct staff to prepare an ordinance banning cannabis businesses until it has sufficient time to develop an ordinance that best reflects the Council’s direction on this issue.
FINANCIAL IMPACT
There could be a significant negative impact to the General Fund from adopting an ordinance that permits cannabis business activity in the City of Alameda if a fee schedule that ensures full cost recovery is not implemented. There are significant resources that would be devoted to permitting, regulating, monitoring and enforcing local requirements. Therefore, staff is recommending that a fee study be undertaken to fully identify and document those costs and that the Master Fee Schedule be amended to ensure full cost recovery.
There is also an opportunity to positively impact the City’s General Fund through the imposition of a tax on cannabis business activities. Such a tax is subject to a vote of the people. It is generally estimated that taxing cannabis businesses could generate $800,000 - $1.6 million annually. However, there is some uncertainty about how quickly a tax can be put in place, how quickly a maximum tax could be achieved, and how the industry will perform over time. Staff will be further analyzing the issue of taxation and will provide a follow-up staff report to the City Council with its recommendations.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
Any ordinance adopted related to cannabis business activity will be done in a manner consistent with the Alameda’s Municipal Code (AMC). Based on City Council direction, certain provisions of the AMC will need to be deleted, along with numerous changes the AMC as reflected in the draft Ordinance.
ENVIRONMENTAL REVIEW
Adoption of this Ordinance is exempt from the California Environmental Quality Act (“CEQA”) pursuant to Business and Professions Code section 26055(h) as discretionary review and approval, which shall include any applicable environmental review pursuant to Division 13 (commencing with Section 21000) of the Public Resources Code, shall be required in order to engage in commercial cannabis activity within the City of Alameda under such Ordinance. Adoption of this Ordinance is additionally exempt from CEQA pursuant to section 15061(b)(3) of the State CEQA Guidelines because it can be seen with certainty that there is no possibility that the adoption of this Ordinance may have a significant effect on the environment.
RECOMMENDATION
Provide direction on a proposed Ordinance amending the Alameda Municipal Code by repealing Section 30-5.15 (Medical Dispensaries and Cultivation) in its entirety; adding a New Article XVI (Cannabis Businesses); adding a new Section 30-10 (Cannabis); and amending Sections 24-11 (Smoking Prohibitions in Places of Employment and Unenclosed Public Places) and 24-12 (Smoking Prohibitions in Housing).
Respectfully submitted,
Debbie Potter, Community Development Director
Financial Impact section reviewed,
Elena Adair, Finance Director
Exhibits:
1. September 5 study session staff report
2. Redline/Strike-out Revised Draft Ordinance
3. Summary of Cannabis License Types
4. AUSD Resolution
5. Maps
6. Additional information on drugged driving
7. Police Sector Map
* This sentence has been corrected to “If the local jurisdiction adopts its own regulations, it can adopt regulations that are more, or less, stringent than the State’s requirements.” The correction was made on 10/16/2017 at 1:00 p.m.