2017 marked the County’s first full year of legal medical cannabis cultivation regulation. Now, as the County considers next steps, staff recommends the Board consider a coordinated approach to medical cannabis cultivation that includes three primary components. First, staff recommends that a general tax measure be placed on the June ballot. A general tax measure will provide revenue for activities such as illegal grow enforcement that can’t otherwise be funded by cannabis fees. Second, staff recommends continuing the existing effort to develop a long-term land use regulatory process to appropriately site cannabis cultivation operations. Last, for those cultivation operations seeking to make a significant capital investment in the near term, staff recommends development of a fast track development agreement process.
Staff suggests that these three components are complementary and together form the framework needed to successfully administer a medical cannabis cultivation program over the next few years. The purpose of today’s workshop is to examine this proposed strategy; discuss each element, and how they intertwine; and provide direction to staff. Ideally, today’s workshop will help refine this proposed strategy and conclude with the Board providing concurrence to proceed. Staff would then return at subsequent Board meetings, beginning January 23, with the necessary implementing actions.
In March 2016, the Board approved an interim medical marijuana cultivation ordinance (“Interim Ordinance”) which banned outdoor cultivation of medical marijuana unless 1) for personal use by and for a qualified patient; and 2) for commercial purposes in compliance with Central Valley Regional Water Quality Control Board (CVRWQCB) Order No. R5-2015-0133. The Interim Ordinance created a ministerial licensing program for medical cannabis cultivation in the County. The Interim Ordinance was amended four times between October 2016 and March 2017 to further define and enhance the implementation and enforcement of the program.
In March 2017, the Board directed staff to return in approximately six months with any additional proposed changes to the Interim Ordinance. On August 1, 2017, staff provided the Board with an update on the cannabis program and recommendations on further amendments to the Interim Ordinance based on the experience of the County’s Cannabis Task Force in implementing the program and for consistency with state law. Staff also provided the Board with information on preparing a tax measure as a revenue source for items such as, among other things, law enforcement for illegal cannabis cultivation sites and drug abuse-related programs and services for children and adults. In addition, staff recommended that the cannabis program be converted to a land use based program that would function as part of the Zoning Code.
As a result of the Board’s direction at the August 1 meeting, staff moved forward with amending the Interim Ordinance (amendments to the Interim Ordinance were approved on November 7, 2017), developing a tax measure, and developing comprehensive land use regulations for medical cannabis cultivation. Information on the tax measure and the development of the comprehensive land use regulations are discussed further below.
Tax Measure
In September 2017, the Board directed staff to prepare a cannabis business tax measure for the June 2018 ballot. A Board ad hoc tax subcommittee was formed to assist in the development of the ballot measure. The purpose of the tax measure was to generate funds to cover indirect costs associated with cannabis cultivation in the County, as well as to provide revenue to support other public services and functions.
The Interim Ordinance approved on November 7 includes a sunset provision or “poison pill”. The provision automatically repeals the Interim Ordinance as of December 31, 2018 with wind down periods of varying lengths for outdoor cultivation (December 31, 2018), cultivation in greenhouses (December 31, 2019), indoor cultivation (December 31, 2020) and cultivation pursuant to a development agreement (for the term of the agreement) unless the Board of Supervisors submits a County tax measure on commercial marijuana activity to the voters on the June 2018 ballot, the voters approve the tax, and the tax is certified by the County pursuant to Section 15372 of the California Elections Code. The Interim Ordinance would also be automatically repealed if the tax is approved but successfully challenged and repealed or otherwise invalidated.
On December 12, 2017, staff provided the Board with proposed general and special tax ordinances. The ad hoc subcommittee and staff recommended a general, gross receipts tax at a rate range of 1-15% of gross receipts on all commercial cannabis activities. Cultivation would be taxed at an initial rate of 4% of gross receipts, effective July 1, 2018, and increasing to a rate of 5% of gross receipts on July 1, 2020. All other commercial cannabis activities including but not limited to nurseries, dispensing/retailing, processing, manufacturing, laboratory testing, distributing, or delivery of cannabis in the unincorporated area would be taxed at an initial rate of 5%, effective July 1, 2018. The Board would have discretion to set the rate within the previously described range, but the Board could not alter the rate more than once in a 12-month period or by more than two percentage points. The December 12 staff report and draft general tax ordinance are included in Attachment A.
The Board also discussed changing and adding provisions to the tax ordinance presented by staff. Issues raised during that discussion included: revising the ordinance to reduce the initial rate of taxation, including a community advisory body to provide guidance on revenue expenditures, and including in the tax measure a brief, general indication of services and programs that could be funded by tax revenues. A revised tax ordinance could address each of these issues in the following manner:
- Maintain proposed application to all cultivators and other cannabis enterprises that may be authorized in the future;
- Maintain proposed variable rate of 1-15%;
- Reduce initial rate to no more than 3%, with an increase to no more than 4% in year two and 5% in year three, then adjustments (up or down) of no more than 2% annually in subsequent years;
- Add a community oversight and accountability group to provide guidance on expenditures;
- Include language in the resolution placing the tax measure on the ballot, describing a potential use of revenues to support services such as criminal enforcement of illegal cultivation, rural infrastructure and programs, early childhood education and development, and substance abuse treatment; and
- Maintain June 2018 election target
Should the Board be interested in considering this approach, staff could prepare an ordinance for the Board’s consideration that reflects the bullets set forth above.
For a tax measure to be placed on the June 2018 ballot, the introduction and first reading of the ordinance must occur on January 23, with a second reading of the ordinance on February 6. Staff continues to recommend approval of the general tax measure as the best means to generate revenue, including funding to address enforcement of illegal cannabis cultivation and the impacts of cannabis consumption.
As discussed on December 12, development agreements offer an alternative way to obtain revenue for the same purposes. In staff’s judgment, however, a tax measure is far superior to development agreements as a means of obtaining revenue. A table included as Attachment B compares a tax measure and development agreements and identifies the benefits of a tax measure including earlier implementation, greater revenue potential, inapplicability of CEQA, fairness/equity, and reduced litigation risk. Many other jurisdictions have reached the same conclusions and local cannabis taxes are becoming increasingly common across the state.
Comprehensive Land Use Regulations
At the Board’s October 10, 2017 meeting, the Board approved guiding principles for the development of comprehensive land use regulations for medical cannabis cultivation. The guiding principles are included in Attachment C. The guiding principles were developed based upon feedback received from the Board, provisions in the Interim Ordinance, and staff experience in implementing the County’s cannabis program.
In developing the comprehensive land use regulations, staff has conducted nine public outreach meetings to date to discuss the scope and purpose of the proposed cannabis land use regulations and obtain public input on the guiding principles and purpose. Specifically, meetings were held in November and December in the Capay Valley, Dunnigan, Esparto, West Davis, Winters, Knights Landing, Clarksburg, and Woodland. A meeting was also held with cannabis cultivators and industry stakeholders to obtain their input. The final initial outreach meeting is scheduled for January 11 in South Davis.
The schedule for the land use regulations development is included in Attachment D. Specifically, staff intends to present an outline of the land use regulations to the Planning Commission on January 18. Staff will then conduct additional public outreach meetings on the land use regulations outline, as part of scheduled General Plan Citizen Advisory Committee meetings. First and second drafts of the regulations are scheduled to be developed by approximately February and March 2018, respectively. Staff intends to provide the Board with an update on the development of the regulations in March 2018.
Preparation of a CEQA document would occur concurrently with development of the comprehensive land use regulations. Staff expects the regulations would be sufficiently developed to enable a stable project description for CEQA review by approximately March 2018. Staff is assuming an 8-month timeline for preparation of a Programmatic Environmental Impact Report (EIR), if necessary, or a bit less for a negative declaration. The schedule included in Attachment D conservatively assumes an EIR is prepared. Once the EIR process is complete, the Planning Commission would hold a final hearing on the EIR and regulations, which is estimated to occur in November 2018. Hearings before the Board would begin in approximately December 2018 and it is anticipated that certification of the EIR and adoption of the regulations could occur in March 2019.
During the development of the comprehensive land use regulations, cultivators will continue to be required to obtain annual licenses. The licensing process will also continue once the land use regulations are in place.
Development Agreements
At the December 12, 2017 Board meeting, the Board directed staff to provide a pathway for integrating development agreements (DA) into the County’s medical cannabis cultivation program. Below is background information on DAs and how they may be used as part of the cannabis program on both a short term and longer term basis.
Overview
A DA is a unique planning tool authorized by State law (Government Code Section 65864 et seq). A DA is a voluntary contractual agreement between a jurisdiction and the property owner detailing the obligations of both parties and specifying the standards and conditions that will govern project implementation. A DA can be used to provide a developer certainty early in the development process by shielding a project from subsequent changes in policy, zoning, and/or other regulations for the term of the agreement. The early “vesting” of a development approval and the protection it affords against later changes in local laws and other regulations is the main reason why such agreements may be appealing for complicated projects or projects occurring in an evolving regulatory environment. In return for this assurance, a project applicant typically agrees to provide public benefits that exceed what a local government can otherwise legally require through project mitigation measures and development impact or regulatory fees.
DA approvals are legislative acts and require adoption of an ordinance for each such approval. They must be consistent with the state Development Agreement Law, the local General Plan and any applicable ordinances, and are subject to annual compliance review. They require a public hearing before the local planning commission and before the Board of Supervisors. They are subject to CEQA review and have a somewhat longer period of exposure to legal challenge than is typical for most land use approvals (90 days rather than 30-35), and they are also subject to referendum. Compliance with DA terms must be reviewed annually and third parties can sue to enforce the terms of a DA if they feel the jurisdiction has not fulfilled its enforcement duty.
Process
In general, the process for consideration of a DA is guided by Yolo County Code Title 8 (Land Development), Chapter 5 (Development Agreements). This ordinance requires submission of an application and other pertinent information, a draft of the proposed DA, CEQA compliance, public hearings, approval, execution, and recordation. This ordinance does not apply to DAs for cannabis nurseries and processing facilities, but many of the procedural elements of the ordinance are based on requirements of state law and will govern the processing and review of any development agreement proposed for such facilities.
As noted above, a key component of a DA is the achievement of public benefits beyond those otherwise attainable through conditions and mitigations on project approval. This is the “bargained for exchange” that a developer provides the approving local government as consideration for the early vesting of its development rights pursuant to the agreement. An example relevant to the regulation of cannabis would be a commitment to pay revenue at a rate possibility exceeding that required by a tax measure. In exchange for this public benefit, the applicant would achieve regulatory stability in advance of the comprehensive land use regulations, and their project would be vested for the term of the agreement.
At the December 12 meeting, the Board raised the possibility of using DAs to obtain revenue instead of a tax measure. Based on an assessment of these as competing options, staff advises against this (see Attachment B, Comparative Benefit Analysis). This comparison demonstrates the strong advantages of the tax measure versus DAs if evaluated as alternative means of raising revenue. However, consideration of DAs in conjunction with the proposed tax measure is possible.
Consideration of a DA typically occurs in connection with a development application for other discretionary approvals such as a general plan amendment, a rezoning, and/or a conditional use permit CUP. Section 8-5.104(b)(1) codifies this as a local requirement; however, this is not a State requirement and therefore could be modified if the Board decides to authorize development agreements for cannabis cultivation facilities. There is no prohibition in State statute against utilizing a DA in connection with a ministerial approval such as a building permit or annual marijuana cultivation license. As such, the DA could be considered for both early implementation (short-term) and long-term regulation of cannabis, in conjunction with a tax measure and development of comprehensive land use regulations, as described further below.
Early Implementation
Early implementation would allow qualified applicants to enter into a DA as a way to secure regulatory stability and provide desired revenue for public benefits in advance of consideration of a tax measure at the polls and in advance of adoption of the comprehensive land use regulations.
Staff recommends that the Board consider limiting early development agreements to certain operations that require significant initial capital investments and that are otherwise likely to be “no regrets” projects since they will be given a long-term entitlement in advance of completion of the comprehensive land use regulations. Cultivation operations that will occur in greenhouses or indoors with technology sufficient to effectively minimize odor and lighting impacts are the most obvious category of projects meeting these criteria. Regardless of how broadly the County defines the opportunity for early DAs, staff expects the opportunity will appeal primarily to a limited universe of applicants with capital-intensive projects and sufficient funding for the cost of CEQA review, agreement negotiations, and other tasks associated with the processing and approval of a development agreement.
In considering this approach, staff encourages the Board to consider that under the Interim Ordinance, executed DAs enable an applicant to continue operation pursuant to the terms of the agreement whether or not the tax measure passes. Such operations are thus exempt from the “poison pill” provision in the current code.
Long-Term Use of Development Agreements
As part of the comprehensive land use regulations that are under development, staff expects qualified applicants would be eligible to enter into a DA to obtain early vesting in exchange for public benefits negotiated with the County. This option would be integrated into the comprehensive land use regulations that are under development, allowing it to be linked with approval of a land development permit such as a conditional use permit as is more traditionally the case when DAs are considered.
Agreement Streamlining
The following is a brief summary of the recommendations for streamlining the DA process in the context of cannabis regulation, including for “early” implementation and as part of any cannabis land use regulations:
Form
Staff recommends that a template agreement be developed by County Counsel. This will ensure that all concerns of the County are addressed, provide consistency in form and content which will simplify the negotiation and review process, and provide equity across all applicants.
Term
A standard period of time for the term of the agreement is important. The ideal term will provide enough regulatory certainty that the project can be successfully financed, yet not extend so far into the future that the County is precluded from integrating these operations into the final regulatory scheme at some reasonable future point. Staff recommends a ten-year period as reflecting the best balance between two key considerations: ensuring sufficient time for applicants to realize a reasonable return on their investment, and the likelihood that the County’s understanding of such operations will improve over time and shape related changes to (for later projects) conditions of approval and other regulatory controls. This does not necessarily mean that a project would terminate at the end of the initial agreement term, as the term could later be extended through a renegotiation process that considers (among other things) the application of updated conditions for project operation.
Public Benefits
A standard list of public benefits should be developed that will apply equally to all applicants, through the use of formulas or other methods. It should exceed what will likely be achieved through the tax measure, while also allowing future tax payments to count against the public benefit obligation. It may also allow for additional public benefit requirements such as a commitment to implement technologies that reduce energy consumption, provide or contribute to local infrastructure improvements, and other community benefits, such as participation in Valley Clean Energy Alliance.
Vesting
The DA should vest the proposed operation for the term of the agreement, including policies, land use regulations, and public benefits.
Performance Standards
Particularly for the early implementation of DAs, which will be proceeding in advance of the comprehensive land use regulations, the DA must identify the performance standards to be achieved and maintained by each operation. To the greatest possible extent, these should be developed to cover the same topics likely to be regulated in the comprehensive land use regulations. Odor control for example, is known to be one of, if not the, biggest area of concern. The DA template should include special performance standards for odor control during the term of the agreement, with the requirement to transition to the requirements of the final adopted comprehensive land use regulations following expiration of the DA.
CEQA Compliance
DA applicants (early implementation or long-term) would bear the responsibility for appropriate CEQA compliance based on the possibility of unmitigated adverse impact from their proposed operations. In each case this will be a project-specific and site-specific determination made by the County. For early implementation applicants that qualify for an exemption, the estimated cost could be around $1,000, plus County fees. For those that qualify for a Negative Declaration, estimated costs would increase to $10,000 or more, plus County and other fees. For those that require an EIR, estimated costs would likely exceed $100,000, plus County and other fees.
For applicants under the long-term scenario, the goal is to achieve CEQA compliance for the program as a whole and greatly reduce CEQA review for individual applications. Subsequent applicants could tier from the program EIR or possibly fully rely on it. This will minimize the costs for individual applicants.
Decisions
In light of the discussion provided above, staff requests Board concurrence with an integrated strategy for regulating medical cannabis cultivation that includes the following actions:
1. Setting the introduction and first reading of a general tax ordinance for the Board’s consideration on January 23, with the objective of approving a measure by February 6 for the June 2018 election.
2. Completing the comprehensive land use regulations for siting and permitting cultivation operations.
3. Returning to the Board with a strategy for the early implementation of DAs in conjunction with a tax measure and in advance of the development of comprehensive land use regulations.
4. Integrating DAs into the land use regulations under development as part of Item 2, above, including methods for streamlining agreement processing and approval.
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