When the city of Lompoc considered licensing the manufacturing, distribution, sale, and on-site consumption of cannabis in our city, the subject of how many permits to issue was discussed.
If our City Council would have bothered to listen to the information presented by the staff when this issue was decided, they would have understood that there are some accepted permit-to-population ratios used in other jurisdictions to determine how many permits of this type would be considered reasonable.
One former council member convinced the others that the “market should determine how many the city could support.” Some of the members of the majority who agreed are still serving on the council. Since then, 24 retail/dispensary and 28 manufacturing/distribution licenses have been issued.
The population of the city of Lompoc is about 42,000 people and an additional 10,000 to 12,000 live in the surrounding unincorporated areas of the Lompoc Valley. So the local population served by these businesses is about 55,000 people. Of course, not everyone buys or uses these products, just like any other retail commodity.
According to a recent State of Cannabis Equity presentation by The United CORE Alliance, “Currently, the dispensary to resident ratio in Sacramento is 1:17,000; with Sacramento allowing 10 more dispensary permits, that number will drop to 1:13,000, which is in line with the ratios for cities like Los Angeles, Oakland, and San Francisco.”
But in Lompoc the City Council majority seemed to feel that an unlimited number, with 24 current retail/dispensary permits, or a ratio of 1:2,290, is appropriate for the area served. So why did they allow an unregulated number of permits?
As they were debating the permit issue, you could almost see the council members salivating at the concept of millions of dollars in new revenue flowing into city coffers; soon they would be able to spend like drunken sailors on liberty in a foreign port. But they may have forgotten a costly key provision that is part of their licensing authority.
Cannabis business operators must submit an annual self-certification that they are complying with all permit conditions of state and local laws pertaining to their business. They must also submit financial information to assure that all taxes are paid. The city staff then verifies that the information submitted is true and correct with both financial audits and on-site inspections.
People familiar with this process have indicated that they estimate the cost of these verification and compliance audits will be about $2 million annually, but it doesn’t include audit, regulatory, and other costs.
During the current fiscal year budget update presented on Feb. 1, the staff estimated that the annual revenue from the cannabis tax would be about $2 million annually; so the cost of regulating these businesses is about equal to the new revenue stream. Of course, this was only an estimate, so we’ll have to wait and see what the actual revenue increase and compliance review expenses are.
Using the revenue estimate and taking the estimated cost of compliance into consideration, it would mean a net zero revenue increase in disposable revenue from this business sector.
The council included a cost recovery provision in the ordinance enabling cannabis operators requiring that license holders “pay all initial and annual fees to cover the city’s costs for processing, reviewing, and auditing the commercial cannabis use license and activity.”
But, in past council meetings there have been hints from some council members that they felt that the cannabis taxes met this requirement.
I am sure that they have been getting pressure from some operators to adopt this position, but the council would be wise to consider that other businesses pay fees for annual compliance inspections as indicated on the master fee schedule in addition to business license fees and sales taxes. All businesses should be treated equally, and if the council waives audit fees for the cannabis industry, then they should also waive similar fees for all other businesses.
But the initial question was, “How many cannabis retail/dispensary permits are too many?”
For a city the size of Lompoc, if you included the population of the unincorporated areas and used a basis of 55,000 residents and then considered accepted retail/dispensary-to-population ratios in other jurisdictions, a maximum of four licenses would be more than enough.
To get to that number from the current 24 retail/dispensary licenses, the city would have to suspend any new retail license approvals, disallow license transfers to new owners, and allow attrition to reduce the number down to the new level over the next several years.
Survival of the fittest applies to cannabis dispensaries and retail outlets too. The first failed business will undoubtedly point to the city’s taxes/fees as the only reason they couldn’t make it as a going concern and not, say, poor management by the owner or any of dozens of reasons why so many other businesses fail soon after opening.
The license reduction plan should receive some serious consideration in future council meetings since the city doesn’t appear to be gaining anything except a regulatory burden from the glut of permits. Perhaps the candidates for the three council seats open in the next election would be willing to discuss this issue during their campaigns.
Ron Fink writes to the Sun from Lompoc. Send a letter for publication to letters@santamariasun.com.
This article appears in Mar 10-17, 2022.
