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  • Cynthia McDonald

March 2024 City Council Update - Budget, Cannabis and Fireworks!

Here’s an update on the last two City Council meetings:

MIDYEAR BUDGET. On March 12 there was a study session at which Staff gave a midyear report on the City budget. For the most part, the news is good – the City’s finances are in excellent shape, mostly due to surpluses in the past two years and grants the City received, and despite cannabis revenues underperforming by about $500,000 (expected revenues were $3 million). City management requested changes in staffing to accommodate upticks in workloads. One notable change would be the addition of a Planning and Sustainable Development Manager to lead and administer long-range plans, such as Measure K and the Housing Element to achieve State Certification. This will cost the City an additional $171,267 per year. For how many years? My guess is at least 10 years to achieve the Housing Element certification.

FIREWORKS (NOT THE ONES IN THE SKY). The end of the meeting was particularly interesting. Mayor Stephens stated that he wanted Staff to produce information to him about current development services employees, so he could determine if any potential new hire would satisfy the City’s needs. As someone with some HR experience, I found this to be troubling and could feel the tension in the room. While a lot of the information is on websites, such as LinkedIn, some of what he requested is confidential information that is usually only privy to HR. The City Manager pushed back on his request, giving a long (but good) explanation of the process by which Staff requests additional staffing and hires new personnel. The bottom line: hiring new personnel is the job of the City Manager and departmental management. Stephens, not taking no for an answer, reiterated his request, and then abruptly adjourned the meeting.

CANNABIS STORES. The second meeting was this Tuesday, March 19, and the only public hearing was the proposed revisions to the cannabis regulations. This item will return to the City Council, as the City Attorney and Staff need to draft specific language for the City Council to approve.

The meeting had a presentation by Staff, questions by the Council, public comment, a break, and then more questions and finally motions for Staff to use to write new language for the ordinances, all of which took about four hours. Some of the discussion was hard to endure (such as the one on the font size of the warning notice), so here is a summary of the final motions:

BADGES. Each employee of a cannabis storefront must currently undergo scanning of fingerprints and a background check before an employee badge, required by the City, can be issued. The fees currently total $631, which amount is not set by the ordinance, but rather by Council resolution. Those fees were estimated by a consultant prior to the City Council setting them, based on the cost to other cities at that time.

Councilmember Gameros moved to reduce the badge fees as follows: the $81 that currently goes to the Police Department will continue to be assessed from applicants; the $550 that is currently assessed that goes to the Developmental Services Department will be reduced to $225 (in other words, the City will subsidize each badge fee by $225). He also requested that the badge issuance process be changed to include that a company can hire and issue a temporary badge while the permanent badge process (fingerprint scanning and background check) is being completed. It takes about 6 weeks to complete the scanning and background check, which is about the same time it takes the State to perform these tasks for notary screening. The motion was seconded by Councilmember Chavez who stated he was responding to comments by the industry.

However, Mayor Stephens made a substitute motion to put this specific topic on a separate agenda, which was seconded by Councilmember Harper. Councilmember Gameros added to that substitute motion that the Council should consider the issuance of one badge to employees who work for different businesses in multiple locations in Costa Mesa. The substitute motion carried 7-0.

SECURITY. Councilmember Harper moved that the presence of security guards be limited to business hours, including during deliveries. That motion passed 5-2, with Councilmembers Reynolds and Marr voting No.

NUMBER OF STORES ALLOWED. Councilmember Harper moved to increase the number of applications allowed to proceed to be the ones that are past the pre-application stage, which would be up to 35 Cannabis Business Permits (CBPs), 5 more than what the Planning Commission recommended. Once those applications are approved, no further applications will be accepted until fewer than 10 storefronts are open. Any applications that don’t make the cut will have their pre-application/waitlist fees refunded ($1500 each). Motion carried 6-1, with Mayor Stephens voting No.

RESIDENTIAL SETBACK. Councilmember Marr moved that the setback from dispensaries to residential properties be changed to 250 feet; motion was seconded by Councilmember Reynolds and carried 6-1 with Mayor Stephens voting No.

YOUTH CENTER SETBACK. Councilmember Reynolds moved that the setback from youth centers be changed to 1000 feet; motion was seconded by Councilmember Marr and carried 7-0.

NOTICE TO EXISTING TENANTS. Councilmember Marr moved that either the landlord or cannabis applicant provide notice to existing tenants after a CBP applicant has submitted its application; motion carried 7-0.

WARNING NOTICE. Councilmember Gameros made a motion regarding changing the size of the font of the warning notice posted next to the doors of the dispensaries; there was some discussion about the font size, which ended up causing Councilmember Reynolds to withdraw her second. Mayor Stephens wanted a two-inch font size, which was seconded by Councilmember Chavez; that motion passed 6-1 with Councilmember Reynolds voting No.

ADMINISTRATIVE REGULATION: Councilmember Gameros moved to publish administrative regulations on the City’s website; motion passed 7-0.

PROHIBITION OF ADVERTISING TO MINORS: Councilmember Reynolds moved to prohibit advertising to minors; discussion ensued because Mayor Stephens wanted only to incorporate the current state law on cannabis advertising into the ordinance; Councilmember Chavez seconded Reynolds’ motion. Mayor Stephens made a substitute motion to incorporate state law; that motion passed 6-0 with Councilmember Marr voting No.

ADDITIONAL ASKS BY CITY COUNCIL. Councilmember Harper requested that Staff return with an explanation of why an application is taking longer than 15 months. The City Attorney responded that would be explained in a closed session or confidential memo. Why can’t the public know that too?

WHAT’S MISSING? There was no motion to change the separation in storefronts as recommended by the Planning Commission twice now. That means we can have 2 or 20 next door to one another. Perhaps Newport Boulevard should be renamed “Cannabis Row!”

HOW MANY IS TOO MANY? HOW LONG IS TOO LONG? Before the meeting I researched how many storefronts other cities have. There are only 3 cities that allow retail stores in Orange County, so comparing those I found:

  • Santa Ana allows 30 stores, which is 1.03 per 10,000 residents.

  • Stanton allows 4, which is 1 per 10,000 residents.

  • Cap the stores in Costa Mesa at 35, we’d have 3.45 shops per 10,000 residents.

  • Follow the Planning Commission recommendation and cap it at 30, 2.98 per 10,000 residents.

  • Cap it at 10, .9926 per 10,000 residents.

But how long would the attrition take to get us to 10 storefronts? No one knows! It might not EVER happen.

Are the taxpayers benefiting from legalizing cannabis sales in Costa Mesa, now that we see how the City is regulating (or not regulating) the operators? If the object of allowing legal sales was to discourage the black market, has it happened? The taxes on legal cannabis make it more expensive. The police chief reported there are fewer illegal dispensaries being shut down in Costa Mesa, but does that mean the buyers are just relying on delivery from the good old-fashioned dealers?

Since consuming cannabis is still against federal law, most employers have policies prohibiting illegal drug use, they can test for illegal drug use, and legally terminate employees that violate company policy. In the past two years cannabis revenue for Santa Ana, Los Angeles, and other cities has dropped considerably. It is hard to tell if the decline in cannabis revenues is due to more employers demanding their remote employees return to work without their habits, or if the expense of legal cannabis is driving folks back to the underground economy. We will be able to see proposed budgets for Los Angeles and Santa Ana in the next few months, and that will tell us whether these experienced cities are predicting another year of declining revenues.

In terms of subsidizing cannabis businesses, these are businesses that, for the most part, operate on a cash-only basis (the exceptions are Canadian companies that can get bank accounts because cannabis is legal in the entire country of Canada). Because of this, the City, at taxpayer expense, had to install a special bank lockup for taking cash payments from the operators. How much did that cost? And how do we know the operators are honest in their reporting to the City? For the most part, there are no bank statements to back up their reports. Even if all 35 dispensaries were to open, will the revenues be enough to compensate the City for its costs, especially if it is subsidizing badge fees? Perhaps the City Council should wait for the 35 dispensaries to open before it starts giving away the store.

Is the City Council listening to the residents? They did establish a distance between dispensaries and homes, and it is a greater than the Planning Commission proposed. However, the City Council is basing many of its decisions on what is good for the cannabis operators. So far, the cannabis revenue hasn’t lived up to its promise. Giving a business group that contributes a very small portion to the City budget the same treatment as the Segerstroms and South Coast Plaza, who have given so much to Costa Mesa year after year, isn’t warranted.

How long are we going to smoke this pipe dream?

Smoking Marijuana Cigarette
Is Costa Mesa the cannabis capital of Orange County? Do we want it to be?

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