The 2024‑25 Budget

Department of Cannabis Control—Legal and Administrative Hearing Costs

Background

Department of Cannabis Control (DCC) Regulates Cannabis. DCC licenses and regulates commercial cannabis activity, including the cultivation, manufacture, testing, sale, and transportation of cannabis goods. For example, the department oversees testing laboratories that make sure cannabis is safe for consumption, which includes reviewing license applications, conducting routine inspections, investigating complaints, taking enforcement actions, and conducting investigative sample analysis. The Governor proposes a total of $171 million for the support of DCC in 2024-25, primarily from the Cannabis Control Fund, which receives revenues largely from cannabis licensing fees.

DCC Transitioning From Provisional to Annual Licenses. DCC issues annual licenses to applicants who have fulfilled all license requirements, including a completed application, local permitting, and California Environmental Quality Act (CEQA) compliance. Previously, DCC also issued provisional licenses to applicants if they submitted a completed license application and were in the process of completing local permitting processes and CEQA requirements. However, the state has been gradually phasing out the types of provisional licenses that DCC can issue. Under current law, DCC is authorized to issue provisional licenses only for applicants that meet certain criteria until January 1, 2031, after which time DCC can only issue annual licenses going forward. As of February 9, 2024, DCC reported there were 5,754 active annual licenses and 3,924 active provisional licenses.

Department of Justice (DOJ) Provides Legal Services for DCC. Under the direction of the Attorney General, DOJ provides legal services to state agencies. State agencies can request—and are generally billed for—DOJ services to initiate legal action, defend or represent them in legal actions filed by others, or provide legal advice. DOJ provides legal services to DCC, including representing the department in administrative law cases and civil cases. Currently, DOJ charges an hourly rate of $220 for attorney services, $205 for paralegal services, and $195 for analyst services. State agencies, including DCC, generally pay for these costs from their own budgets. The 2021-22 Budget Act provided DCC with $2.7 million annually for three years to support its costs for DOJ legal services.

Office of Administrative Hearings (OAH) Hears Cannabis-Related Cases. OAH provides administrative law judges to hear administrative disputes for over 2,500 state and local agencies, including DCC. These judges conduct adjudicatory hearings, prehearing and settlement conferences, and mediations. OAH charges fees to state and local agencies for the services it provides. Currently, OAH charges state and local agencies an hourly rate of $373, as well as other filing and recording fees. OAH is responsible for hearing four primary types of cannabis-related cases: (1) appeals of a denial of an initial annual license or a renewal license, (2) discipline of an annual licensee, (3) citations for unlawful activity by an annual licensee, and (4) administrative citations and civil penalty actions for unlicensed activity. State law limits the ability of those who do not hold an annual license from appealing DCC decisions. For example, those denied a provisional license renewal are not entitled to a hearing before OAH. Accordingly, as provisional licenses are phased out and more annual licenses are in effect, the department anticipates referring more cases to OAH. This could result in increased OAH costs from the new case filings, case management responsibilities, hearings, and decisions, as well as related licensing and disciplinary activities. The 2021-22 Budget Act provided DCC with $8.6 million annually for three years to support its costs for OAH hearings.

Governor’s Proposal

Funding for Laboratory Services, Legal, and Administrative Hearing Costs. The Governor’s budget proposes $8.2 million from the Cannabis Control Fund (decreasing to $8.1 million in 2025-26 and 2026-27 and $1.3 million ongoing beginning in 2027-28) and seven positions to support DCC workload and DOJ and OAH costs. This includes $1.4 million in 2024-25 (decreasing to $1.3 million beginning in 2025-26 and ongoing) and seven positions to support additional workload in DCC’s laboratory services and legal affairs divisions. It also includes $2.7 million for DOJ costs and $4.1 million for OAH costs annually in 2024-25 through 2026-27. The 2021-22 Budget Act initially provided DCC with three years of funding for its DOJ and OAH costs. Accordingly, this proposal would continue to provide funding for an additional three years to give the department more time to evaluate ongoing funding needs.

Provisional Language Authorizing Increase in Budget for Litigation and Administrative Hearing Costs. The Governor also proposes provisional language allowing the Department of Finance (DOF) to augment DCC’s budget from the Cannabis Control Fund for litigation and administrative hearings costs. The language specifies that DCC must demonstrate to DOF a need for additional resources and that the augmentation shall be authorized no sooner than 30 days after notification to the Joint Legislative Budget Committee. DCC indicates that the provisional language would give the department flexibility should additional DOJ or OAH costs materialize, as the department indicates there is uncertainty over the level of these costs it will incur in the near term.

Assessment

Resources Proposed for DCC Laboratory Services and Legal Affairs Divisions Appear Reasonable. We find that the proposed funding and positions for the laboratory services and legal affairs divisions appear reasonable. These resources would address workload associated with DCC’s oversight of cannabis testing laboratories and legal services to carry out the department’s responsibilities.

Proposed DOJ and OAH Funding Significantly Higher Than Past Expenditures. As shown in Figure 1, the Governor’s proposal for DOJ and OAH costs is significantly higher than DCC’s expenditures on these services in 2021-22 and 2022-23.

Additional Costs May Materialize, but Amount Is Uncertain. On the one hand, it is reasonable to expect that DCC’s DOJ and OAH costs may increase over time. For example, DCC anticipates taking additional enforcement actions, which may lead to an increase in legal actions that would require representation and support from DOJ. In addition, the department anticipates that its DOJ and OAH costs may increase as more provisional licenses transition into annual licenses, as annual licensees have the ability to appeal DCC decisions to OAH. On the other hand, the department’s DOJ and OAH expenditures have decreased over time, despite the department issuing more annual licenses. As shown in Figure 1 above, these costs decreased from 2021-22 to 2022-23. Moreover, year-to-date expenditures for DOJ and OAH costs in 2023-24 were lower than the same period a year earlier in 2022-23, further suggesting that expenditures may not necessarily increase in the near term. Specifically, DCC spent $165,896 for DOJ costs and $384 for OAH costs in 2023-24, as of October 2023. These amounts compare to $250,453 and $2,046, respectively, in 2022-23, as of October 2022.

Cannabis Control Fund Balance Has Significantly Declined Since 2021-22. The Cannabis Control Fund is structurally imbalanced, meaning that its expenditures exceed its revenues. As a result, the fund balance has declined from $169.1 million in 2021-22 to a projected $80.5 million in 2024-25—a decrease of 52 percent. Accordingly, it will be important for the Legislature to closely monitor the Cannabis Control Fund’s revenues and expenditures going forward to ensure it maintains a healthy fund balance.

Recommendation

Approve Resources Proposed for DCC Laboratory Services and Legal Affairs Divisions. We recommend the Legislature approve the proposed funding and positions for the laboratory services and legal affairs divisions as the department has identified workload justifying the need for these additional resources.

Approve Provisional Language, but Reduce DOJ and OAH Funding to More Closely Align With Past Expenditures. We recommend that the Legislature approve the proposed provisional language but reduce the proposed funding to $1.2 million for DOJ costs and $23,000 for OAH costs. We acknowledge that there will be some uncertainty in these costs going forward, in particular, as the department continues to transition from provisional to annual licenses. Accordingly, we believe that these funding levels—which allow for an increase in costs approximately 50 percent above the maximum amount spent in any prior year—should be sufficient to account for this uncertainty. However, the Legislature could choose to approve a different amount that it believes more appropriately accounts for past expenditures and potential growth in the future. In the event that the actual costs exceed the reduced funding amounts we recommend, the administration could use the proposed provisional language to augment its expenditure authority, as needed. This would also allow the Legislature to oversee additional expenditures from the Cannabis Control Fund, which is particularly important given the significant decline in the fund’s balance. Moreover, when the limited-term funding for DOJ and OAH costs expires, the administration will have another opportunity to submit a request for ongoing resources for legislative consideration as part of the Governor’s 2027-28 budget.