The 2017-18 Budget

The Governor's May Revision Cannabis-Related Proposals

LAO Bottom Line. The Governor’s May Revision proposes 201 positions and $43.2 million in 2017‑18 from various funds to conduct cannabis regulation-related activities. These resources are provided across seven state departments. Based on our initial review, we recommend making key policy choices regarding how the cannabis industry will be regulated before finalizing budget decisions, as well as limiting the amount of out-year funding provided to departments given the high level of uncertainty regarding future workloads. Accordingly, we also provide recommendations on each department’s specific proposal.

Governor’s May Revision Proposals

May Revision Proposes Additional Resources for Cannabis-Related Regulatory Activities. The Governor’s May Revision proposes 201 positions and $43.2 million in 2017‑18 for cannabis regulation-related activities. These resources are provided across seven state departments—the Department of Fish and Wildlife (DFW), State Water Resources Control Board (SWRCB), Department of Public Health (DPH), California Department of Food and Agriculture (CDFA), Department of Pesticide Regulation (DPR), Cannabis Control Appeals Panel (Appeals Panel), and Department of Consumer Affairs (DCA). The proposals are funded from the Cannabis Control Fund (CCF)—using loans from the General Fund—as well as various other special funds.

May Revision Adds to Previous Budget Requests. The resources proposed in the May Revision for cannabis-related activities are in addition to those proposed in the Governor’s January budget. (See our analysis of the January proposals here.) We note that the Legislature also provided resources for cannabis implementation in the 2016‑17 budget, which we summarize here. As shown in Figure 1, together, the proposed and previously approved cannabis proposals total $118 million and 527 positions for 2017‑18.

Governor Also Proposed Budget Trailer Legislation. In addition to the Governor’s May and January budget requests, the administration also proposed budget trailer legislation in April 2017 that creates a single regulatory structure for medical and nonmedical cannabis. The legislation includes various provisions. For example, in cases where local governments do not have permitting systems for cannabis but allow for cannabis activities, the proposal requires individual license applicants to comply with the California Environmental Quality Act (CEQA). Additionally, the proposed legislation generally prohibits medical and nonmedical commercial activities from occurring on the same premises. (See our analysis of the proposed budget trailer legislation here.)

LAO Overarching Comments on May Revision Cannabis Proposals

Consistent with our recommendations on the Governor’s January budget proposals related to cannabis, we have the following overarching comments.

Make Key Policy Choices Before Finalizing Budget Decisions. The administration’s proposed budget trailer legislation regarding alignment of state regulations for medical and nonmedical adult use of cannabis includes a number of significant policy decisions. The Legislature’s ultimate decisions regarding these proposed changes will affect the level of resources state agencies need to implement their programs. For example, the May Revision includes proposals from DPH, CDFA, and DCA to conduct CEQA compliance reviews of the CEQA documents provided by applicants for licenses operating in jurisdictions that do not have permitting systems for cannabis. However, the level of resources needed to perform these reviews, if any, would likely depend on the specific requirements included in the budget trailer legislation that is ultimately adopted by the Legislature to address CEQA compliance issues. As another example, DPH’s proposal requests additional resources to license nonmedical manufacturers (beyond those provided in 2016‑17 to license medical manufacturers). However, the level of additional licensing staff needed would likely depend on whether separate premises are ultimately required as proposed in the budget trailer legislation. This is because the requirement for separate premises could affect whether manufacturers apply for both medical and nonmedical licenses and thus the number of applications that will be submitted. Accordingly, to the extent possible, we continue to recommend that the Legislature make its policy decisions regarding the regulatory structure for the cannabis industry before making its decisions on the Governor’s requested funding and related positions.

Limit Funding Provided for Out Years. The Governor’s May Revision proposals reflect requests for out-year funding as shown in Figure 2. We continue to believe that there is a high level of uncertainty regarding departments’ future resource needs to regulate cannabis. Accordingly, we recommend taking an incremental approach to budgeting for departments by authorizing certain budget requests on a limited‑term basis, as described in our comments on individual proposals below. Taking an incremental approach to budgeting will better enable the Legislature to use the annual budget process to oversee the implementation of the new cannabis laws.

LAO Specific Comments Related to Individual Proposals

Below, we describe and make recommendations on the budget proposals for each of the seven departments proposed for cannabis-related funding in the May Revision.

DFW—No Concerns. The May Revision proposes a total of $17.2 million and 63 positions for DFW in 2017‑18. This includes funding from the CCF ($10.5 million) and fee revenue from Lake and Streambed permits ($5.2 million) for DFW to help ensure that the new cannabis regulatory program protects fish and wildlife. These funds would be used to (1) help develop new permitting requirements and the new regulatory framework, (2) process an increased number of permit applications, and (3) monitor and enforce compliance with laws and permit requirements. Additionally, the proposal includes a one-time allocation from the Timber Regulation Forest Restoration Fund ($1.5 million) to fund grants to restore watersheds that have been negatively impacted by cannabis cultivation. As shown in Figure 2 above, the Governor’s proposal would provide a lower overall level of funding for the regulatory and enforcement efforts ($10.3 million) beginning in 2020‑21, once the initial workload of developing regulations and permit requirements has been completed.

Based upon our initial review, we are not raising any issues with this proposal. The department’s proposal seems to be based on reasonable assumptions of workload. In particular, we believe the proposal to only provide three years of funding for 18 of the 63 positions to be a prudent approach, and the Legislature can revisit the appropriate funding level and sources for these positions in the future as the industry and the department’s program develop.

SWRCB—Limit Out-year Funding. The May Revision proposes a total of $9.8 million and 65 permanent positions for SWRCB in 2017‑18. This includes funding from the Waste Discharge Permit Fund ($6.3 million), CCF ($2.8 million), and Water Rights Fund ($740,000), mostly to support the new proposed positions. Beginning in 2018‑19, funding would increase by $3.7 million to $13.5 million ($10.1 million Waste Discharge Permit Fund, $2.7 million CCF, and $740,000 Water Rights Fund), and permanent positions would increase by 20, for a total of 85 new positons over the next two years. The positions will address water quality-related impacts of cannabis cultivation and its effects on instream flows. The proposal includes $750,000 per year for three years for contract funding to expand the Cannabis Identification and Prioritization System (CIPS)—a software program that interprets satellite imagery to help SWRCB identify the locations of cannabis cultivation sites and prioritize the board’s field efforts. As shown in Figure 2 above, the proposal would provide a lower level of funding after three years, once the CIPS contract funding expires.

We find that SWRCB clearly will need additional resources to perform cannabis-related workload as it expands its regulatory activities, and much of the new regulatory activities performed by SWRCB will be permanent and ongoing. However, given the high level of uncertainty about how the cannabis industry and the board’s program will develop over the next few years, it is unclear what the extent of the SWRCB’s regulatory and enforcement activities will be over the long term. Therefore, we recommend that the Legislature approve a share of the SWRCB’s position funding on a three-year limited-term basis, similar to the proposals for other departments. We also recommend denying the SWRCB’s request for 20 additional positions in 2018‑19. While the department might need to increase its staffing over time, it is too early to tell what the board’s ongoing level of resource needs will be. Under this more incremental funding approach, the Legislature can revisit the appropriate funding level and sources for these positions in the future as the cannabis industry and the board’s regulatory program continue to develop.

DPH—Consider in Context of Policy Decisions and Limit Out-year Funding. The May Revision proposes a total of $9.3 million from the CCF and 50 positions for DPH in 2017‑18. This includes funding to handle workload associated with the regulation and licensing of nonmedical cannabis manufacturers. Specifically, the additional staff would (1) promulgate and enforce regulations about safe manufacturing and product labeling; (2) process license applications, including verification of local jurisdiction authority and review of CEQA documents; (3) collect license fees; (4) conduct site assessments and investigations; and (5) collect and test cannabis samples. The administration also proposes provisional language that would provide the Department of Finance the authority to increase DPH’s funding by $2.3 million and position authority by 20 positions upon notification to the Joint Legislative Budget Committee.

We identify a few issues for legislative consideration regarding DPH’s proposal. First, we recommend the Legislature consider this proposal in the context of pending policy decisions. This proposal would provide five positions to implement provisions of the administration’s proposed budget trailer legislation intended to ensure license applicants are in compliance with CEQA before license applications are approved. However, whether to adopt the administration’s proposed language and implement its approach to CEQA compliance is a pending policy decision for the Legislature that should be decided before additional positions are provided to the department. If the Legislature adopts the administration’s budget trailer legislation, we find that the level of resources requested appear reasonable. Moreover, the funding for the positions is provided only for three years, which we find to be a prudent approach given uncertainty around future workload.

Second, we find that DPH likely will need some additional resources to perform nonmedical cannabis-related workload. However, it is unclear what the workload demands will be over the long term. As one example, the level of future licensing resources needed could be substantially different depending on whether the Legislature approves the administration’s proposed statutory changes to require separate premises for medical and nonmedical facilities. Therefore, we recommend that the Legislature approve some or all of this funding on a three-year limited-term basis, similar to the proposals for other departments. Under this approach, the Legislature can revisit the appropriate funding level and position authority in the future.

Third, we recommend the Legislature modify the requested provisional language by limiting the administration’s authority to increase budget-year funding to only apply to funding for licensing activities and if the additional funding is necessary to reduce a backlog of manufacturer licenses. The department can request additional resources for other purposes—such as information technology—as needed in future years.

CDFA—Consider in Context of Policy Decisions. The May Revision proposes a total of $3.9 million from the CCF in 2017‑18 to support ten positions on a three-year limited-term basis for CDFA to establish a CEQA compliance-related regulatory program for cultivators of commercial cannabis. The proposal also includes one-time funding in 2017‑18 for (1) cooperative agreements with county agricultural commissioners ($350,000), (2) a contract for the state’s programmatic environmental impact report related to cannabis regulation ($981,000), (3) track and trace system ($600,000), and (4) licensing software ($616,000).

We recommend the Legislature consider the proposal to provide ten CEQA-related positions in the context of pending policy decisions. Whether to adopt the administration’s budget trailer legislation and implement its approach to CEQA compliance is a pending policy decision for the Legislature that should be decided before additional positions are provided to the department.

If the Legislature adopts the administration’s proposed language, we find that the level of resources requested appear reasonable. Moreover, the funding for the positions is only proposed on a three-year limited-term basis, which we find to be a prudent approach given uncertainty around future workload.

DPR—No Concerns. The May Revision proposes a total of $1.3 million from the CCF to support nine existing positions on a three-year limited-term basis beginning in 2017‑18. These positions would provide training and outreach to pesticide applicators and sellers, as well as reviews of cannabis-related scientific analyses to inform future updates to departmental policies and guidelines. Beginning in 2018‑19, the May Revision proposes an additional $1 million per year for two years from the CCF to provide county agricultural commissioners with resources for cannabis-related pesticide use training and outreach.

Based upon our initial review, we are not raising any concerns with this proposal. The department’s proposal seems to be based on reasonable assumptions of workload. In particular, we believe the proposal to only provide three years of funding for all nine positions to be a prudent approach, and the Legislature can revisit the appropriate funding level and sources for these positions in the future as the industry and department’s program develop.

Cannabis Control Appeals Panel—No Concerns. The May Revision provides a total of $1 million from the CCF in 2017‑18 to support eight positions on an ongoing basis for a new Appeals Panel, as required by Proposition 64. Based upon our initial review, we are not raising any concerns with this proposal. The proposed staffing levels for the Appeals Panel are in line with those of the Alcoholic Beverage Control Appeals Board, which provides a reasonable baseline level of staffing for this new organization. Additionally, it is reasonable to provide ongoing resources for this level of staffing for the Appeals Panel because their workload will clearly be ongoing.

DCA—Consider in Context of Policy Decisions. The May Revision proposes a total of $664,000 from the CCF in 2017‑18 to support five positions on a three-year limited-term basis. This funding would support DCA’s implementation of provisions of the administration’s proposed budget trailer legislation intended to ensure license applicants are in compliance with CEQA before license applications are approved.

We recommend the Legislature consider this proposal in the context of pending policy decisions. As described with reference to the CDFA proposal, whether to adopt the administration’s language and implement its approach to CEQA compliance is a pending policy decision for the Legislature that should be decided before additional positions are provided to the department. If the Legislature adopts the administration’s budget trailer legislation, we find that the level of resources requested appears reasonable. Moreover, the funding for the positions is provided only for three years, which we find to be a prudent approach given uncertainty around future workload.