California Cannabis is Still Dealing With Growing Pains. Throwing Money at the Problem Won’t Help.

18 Jun California Cannabis is Still Dealing With Growing Pains. Throwing Money at the Problem Won’t Help.

Hard to believe that it’s been five years since the passage of Prop. 64, which legalized the distribution and sale of cannabis for adults 21 and up in the State of California.

Like all “cannabis friendly” states, California has had issues and time delays getting a licensing framework off the ground. Of course, this is made doubly difficult by the fact that cannabis is still a Schedule I controlled substance under federal law. In my ten years of practice in the space, I’ve learned that regulators are often flying by the seat of their pants in dealing with rulemaking to address industry issues only as they arise. (Keep in mind that the states are in complete control of the fate of these democratic experiments and there is no gold standard yet for the ideal cannabis licensing system.) Oftentimes, cannabis businesses experience frustrating operational and compliance issues simply because regulators (and legislators) haven’t yet caught up with the real-world issues these businesses face in this unique area of commerce.

California cannabis though seems to suffer more than most other states because of its massive size, incredibly diverse interest groups, and its correspondingly huge illegal market that on the whole refuses to pursue state licensing. Current regulators also seem to prioritize piecemeal enforcement of the most egregious, unlicensed cannabis activities while other bad behavior and rule violations goes unaddressed. Further (and kind of unbelievably), an overwhelming majority of cannabis business licensees are still struggling to secure full blown annual licenses that are renewed from year to year. Instead, licensees are being propped up by an interim provisional licensing system with seemingly no end in sight.

We’ve written a lot about the provisional licensing system in California (see here, here and here). And the biggest hurdle from provisional to annual licensing is no doubt the California Environmental Quality Act (“CEQA”) review done at the state (and sometimes local) level. In order to secure a provisional license in California, you have to submit a “complete” annual license application, which incorporates a full blown CEQA review (this in particular impacts cultivators probably more than any other licensee because of the acute environmental impacts of cultivation).

The Governor’s Office of Planning and Research provides a brief summation of CEQA (which can be incredibly complex) as follows:

CEQA generally requires state and local government agencies to inform decision makers and the public about the potential environmental impacts of proposed projects [CEQA-triggering “projects” are subject to discretionary government agency approval, which may result in physical changes to the environment, and are non-ministerial in nature], and to reduce those environmental impacts to the extent feasible. . . . The laws and rules governing the CEQA process are contained in the CEQA statute (Public Resources Code Section 21000 and following), the CEQA Guidelines (California Code of Regulations, Title 14, Section 15000 and following), published court decisions interpreting CEQA, and locally adopted CEQA procedures.

Taking a snippet from the California Department of Food and Agriculture’s (“CDFA”) requirements for securing an annual license application, the CDFA requires:

“[e]vidence of exemption from, or compliance with, [CEQA]. The evidence provided shall be one of the following: (1) A signed copy of a project specific Notice of Determination or Notice of Exemption and a copy of the associated CEQA document, or reference to where it may be located electronically, a project description, and/or any accompanying permitting documentation from the local jurisdiction used for review in determining site specific environmental compliance; (2) If an applicant does not have the evidence specified in subsection (1), or if the local jurisdiction did not prepare a CEQA document, the applicant will be responsible for the preparation of an environmental document in compliance with CEQA that can be approved or certified by the department, unless the department specifies otherwise.

The Bureau of Cannabis Control and the California Department of Public Health have their own CEQA requirements too when it comes to annual license applications.

The problem with CEQA is the time and money it takes to successfully complete a review while also avoiding legal challenges from the public. The basic CEQA trajectory is:

1. The government’s determination if the proposed activity is a “project” subject to CEQA.
2. If subject to CEQA, then the government determines if the project is exempt in accordance with legal exemptions codified at law.
3. However, if the project is subject to CEQA and not exempt, then the government determines, through an “Initial Study” if the proposed project has the potential to have a significant effect on the environment.
4. The Initial Study is used to decide whether to prepare an (a) Environmental Impact Report (“EIR”), which contains in-depth studies of potential impacts, measures to reduce or avoid those impacts, and an analysis of alternatives to the project, or (b) a Negative Declaration (notably, too, a key feature of CEQA process is the opportunity for the public to review and provide input on both Negative Declarations and EIRs).
5. The government can issue a Negative Declaration if it finds the proposed project has no potential for significant environmental impacts. If the Initial Study identifies potentially significant effects resulting from the project, but the project is altered or the applicant agrees to conditions which will mitigate the identified significant impacts, then the government may issue a Mitigated Negative Declaration.
6. Nonetheless, if the Initial Study finds substantial evidence that the project will have a significant effect on the environment, then an EIR must be prepared.

As you can imagine, the government agency review timeline for CEQA projects is relatively unpredictable but certainly lengthy depending on the details of the project. Still, for private projects, an agency has 30 days to review an application and to let the applicant know if additional information is required, which can be extended by an additional 15 days with the applicant’s consent. A Negative Declaration for “certain private projects” should be completed within 180 days from the date the application was deemed complete per the CEQA Guidelines, and EIRs should be completed by one year. Time limits may be extended for a variety of certain circumstances outlined in the law. Regarding the Initial Study, the actual processing review time frame may span several weeks or even months. In reality, about 12 to 18 weeks is typical to just get to a Negative Declaration. And a standard EIR determination can easily take up to a year or more to complete.

What’s been happening to a lot of licensees is that they try to avail themselves of certain CEQA exemptions by submitting to the state cannabis agencies CEQA documents from their cities or counties in which their “cannabis projects” are situated where those documents provide Negative Declarations regarding the local governments’ cannabis ordinances. This though does not absolve licensees of having to comply with CEQA as their individual “projects” have to receive Negative Declarations or EIRs.

In attempt to remedy California’s licensing woes, on June 14, the Assembly passed a plan to deploy $100 million to California’s cannabis industry. These funds are supposed to assist local governments regarding licensee CEQA compliance to ensure more annual licensing. While it’s great to see the state support this still emerging industry, I question whether this financial infusion will do much to ease the pain of dealing with CEQA, since potential licensees must still undergo these potentially draining, lengthy, and wildly expensive environmental reviews. Moreover, it’s highly unlikely that cannabis businesses will receive some special carve out from CEQA compliance when it comes to the laws and statutes in play.

Bottom line: So much of the problematic California cannabis regime is directly attributable to CEQA compliance requirements. Cities and counties will now be better equipped and staffed to deal with CEQA compliance and cannabis businesses with this million dollar boost, but it won’t be enough. Licensees will still need to help themselves by coming up to speed on the complexities and nuances of CEQA compliance if they have any hope of securing annual licenses in California.