DCC’s ‘Inadequate Oversight’ of $100M Undermined California Licensing Program for Cannabis Growers

The California Department of Cannabis Control (DCC) did not correctly oversee a $100 million grant intended to help 17 jurisdictions assist cannabis cultivators in their transition from provisional to more permanent annual licenses, according to an Aug. 29 state auditor’s report.

The state’s Local Jurisdiction Assistance Grant (LJAG) Program, approved by the California Legislature in June 2021, provided the one-time funding source to aid thousands of small, legacy and equity cannabis businesses in complying with a state environmental mandate.

The state mandate requires local jurisdictions to oversee site-specific environmental reviews for each cannabis operator to ensure compliance with the California Environmental Quality Act (CEQA). The law aims to minimize the impacts of development projects. These reviews—which can help protect sensitive species, natural waterways and air quality—are often time-consuming and complicated.

But even if a cannabis cultivation site doesn’t pose a threat to the environment, a license holder cannot automatically transition to an annual permit without having completed a site-specific review, which often involves biological surveys and studies, Origins Council Executive Director Genine Coleman told Cannabis Business Times.

Origins Council is a nonprofit that advocates for roughly 900 small, independent cannabis businesses and homestead farming families, primarily in the rural areas of Northern California.

“The fact is, the way CEQA functions, there is a baseline, which is a snapshot in the moment in time in which you are going to apply for a license for a new activity,” Coleman said. “This is not new activity. We represent predominantly legacy cultivators. These sites, in some cases, have been producing cannabis for decades. So, they’re all treated like brand-new projects. … It is part of what has created this problem and this bottleneck at significant costs to these very, very small [operations].” 

The state mandate to move all cannabis businesses from temporary provisional licensure to more permanent annual licensure was initially supposed to transpire in 2019, but the deadline was extended multiple times amid the largely underfunded expectations put on local jurisdictions to oversee the CEQA reviews.

Under the current statutory timeline, the DCC cannot renew provisional licensure beyond Jan. 1, 2025, and those license holders must convert to annual licensure by Jan. 1, 2026, or face a forced market exit.

The one-time LJAG Program funding of $100 million to counties and cities was specifically to help this license conversion process. However, the state auditor’s office recently questioned whether the program’s goals were being met.

“We determined that DCC’s inadequate oversight and the local jurisdictions’ inappropriate expenditures during the first year of the grant program have weakened the program’s ability to achieve its purpose, which is to assist certain local jurisdictions needing assistance in transitioning cannabis businesses that hold provisional licenses to obtain annual state licenses,” State Auditor Grant Parks wrote in an Aug. 29 report to Gov. Gavin Newsom and state lawmakers.

Newsom, who proposed the funding in his 2021-2022 budget summary, said in his proposal that the grant program, in part, would help transition larger populations of legacy operators to the regulated market and those who are located in areas rich in natural resources and require additional capital to meet environmental compliance standards.

State law requires the DCC to administer the grant program. While the DCC took steps to improve its administration after the state auditor communicated concerns to the department’s leadership in July 2023, some of the department’s managerial shortcomings remained unresolved as of May 2024, according to Parks.

The state auditor provided two examples:

• The DCC cannot accurately measure whether the 17 grantees are on track to accomplish the purpose of the grant program because the department’s officials did not ensure that they provided clear goals or measurable benchmarks in their grant agreements; and
• The DCC also did not obtain documents from grantees that would have revealed problems with their expenditures, including unallowable and underreported costs.
  

In addition, the DCC did not initially establish a spending plan for its administrative funds, according to the state auditor.

“Consequently, DCC has spent just $350,000 of the $5 million it has to administer the program, has understaffed the program with staff who are underqualified to manage a program of this complexity, and has not responded to grantees’ amendment requests in a timely manner,” Parks wrote in the report. That $5 million came from the $100 million LJAG Program total.

The state auditor also determined some grantees did not manage their funds properly. Parks questioned $26,000 in costs by two grantees that could not substantiate that their spending was appropriate, according to the audit.  

While it’s unclear how much of the $100 million remains unspent, the 17 counties and cities must expend or encumber their grant money before June 30, 2025, or forfeit their funds back to the state.

DCC spokesperson Moorea Warren provided CBT with a statement from the department expressing appreciation for the California State Auditor (CSA) team’s examination and evaluation of the DCC’s performance in managing and overseeing the LJAG Program.

“Throughout the grant program’s operations, the department has actively worked to implement changes to address CSA concerns and address opportunities for improvement,” according to the statement. “Prior to the audit report’s publication, many of the issues highlighted in the report had been addressed, including hiring dedicated grant management staff, consolidating licensing systems, and adopting CSA-recommended best practices for administering similar grant programs. DCC looks forward to continuing its work to implement recommendations and build upon existing improvements.”

Still, some California industry stakeholders have called into question the competency of those charged with overseeing California’s regulated cannabis market, which continues to face hardships nearly eight years since Proposition 64 went into effect (to legalize adult-use cannabis).

“The state auditor’s report is particularly disheartening in light of the fact that the punitive levels of taxation used to pay for this program have driven hundreds of California cannabis businesses into bankruptcy, with more than 15% of businesses statewide in default on their taxes,” Hirsh Jain, founder of industry consultancy Ananda Strategy, told CBT.

“Ultimately, the mismanagement of these funds harms ordinary Californians most of all, many of whom remain without convenient access to safe, tested cannabis products almost eight years after the passage of Prop. 64,” said Jain, who is also on the Cal NORML Board of Directors and the vice chair of the Cannabis Chamber of Commerce.

Overall, 1,146 of California’s 4,973 active cultivation licenses statewide, or 23%, remain listed as having provisional permits, according to the DCC’s licensing database as of Sept. 4.  

Among the eight counties that received LJAG Program grant funding, 29.5% of active cultivation licenses still have provisional licenses in those jurisdictions.

*San Francisco's grant money went to both the city and county.

In addition, nine cities received LJAG Program grant funding, including Los Angeles ($22.3 million), Oakland ($9.8 million) and Sacramento ($5.8 million). Los Angeles County, in particular, still had 264 active cultivation licenses listed as provisional.

Operating in the most acute pain point, however, Mendocino County cultivators continue to face an existential crisis under “unreasonable” statutory deadlines to convert their licenses, Coleman said. Coleman cultivated cannabis for more than 20 years before founding the Origins Council. She is also one of the founding board members of the Mendocino Cannabis Alliance.

“The mandate that every specific site has to undergo this review puts an enormous burden on local jurisdictions, particularly rural jurisdictions that are significantly less resourced and don’t normally navigate such a significant workload of discretionary review,” Coleman said

But why does neighboring Humboldt County have nearly double the number of cultivation licenses as Mendocino yet a superior conversion rate, with 949 of 1,083 licenses having already transitioned to annual permits?

When Humboldt County officials stood up local ordinances for cannabis, they set up a system that was better aligned with state mandates in terms of discretionary review for every project, so they had the correct local infrastructure to match state requirements, Coleman said.

On the other hand, Mendocino County officials stood up a program before California’s state licensing framework was in place, she said.

“This is really not to blame Mendocino County because they try to really serve the legacy farming community in transitioning as painlessly and quickly as possible into licensing,” Coleman said. “They set up what would be completely the way to go. However, it didn’t align with the state mandate for site-specific CEQA.”

In other words, Mendocino County set up a pass-fail ministerial permitting system that was absent of discretionary review for environmental standards, she said.

“And so, because the state requires a site-specific discretionary review of every single project in order to qualify for the state license and CEQA compliance, Mendocino County essentially didn’t have a system to satisfy the state licensing requirements,” Coleman said.

Contributing to the licensing logjam in Mendocino, cannabis cultivators have had to navigate a flux of three local regulatory departments and six department heads in the six years following the county’s rollout of an adult-use program under Proposition 64.

Eventually, the Mendocino cannabis program was so fraught with hurdles that county officials forfeited their cannabis department’s sole managerial responsibilities over the LJAG Program money in a move to streamline the permitting process through DCC intervention.

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“So, the DCC hired an environmental firm to do an environmental impact review for the whole program,” Coleman said. “And they’re also going to effectuate the site-specific CEQA review. And everybody’s rowing in the same direction. There’s political will. There’s focus. But there’s not enough time.”

As part of the reviews, Environmental Impact Reports (EIRs) are often generated to document any impacts as well as potential and planned mitigations. EIRs can also be programmatic, meaning once the site-specific reviews are performed, they can include multiple options for environmental paperwork, such as a notice of exemptions or mitigated negative declarations.

Mendocino still needs to adopt and certify the county’s proposed programmatic EIR, but the draft proposal requires seasonal biological surveys and studies, Coleman said.

“We are going to run out of time,” she said. “And some hundred, 200, 300, 400, 500 small family farms who have been hanging in there for eight years are about to fall off of a provisional licensing cliff for no good reason. … I think the timelines have just created an enormous amount of pressure.”

While some state-mandated biological surveys have to happen in the spring, that may be too late for many of California’s provisional license holders whose permits are set to expire at various points in late 2024 or 2025.

The whole provisional licensing program is “kaput” at the end of 2025, meaning cannabis cultivators who haven’t transitioned to annual licensure will find themselves up a certain creek with no paddle, Coleman said.

“What really sucks about this whole thing is you have no right of appeal,” she said. “You have basically no due process rights as a provisional licensee. You have not secured your investment, which at this point for cultivation, in most cases, is several hundred thousand dollars into the site. We’re talking about a specific site, and you can’t even sell your business to someone until you have an annual license. You have not secured your investment. So, I mean, it’s just heartbreaking what’s happening.”

While environmental controls are important to the state and industry operators alike, Coleman compared the $100 million in LJAG Program funding to throwing gasoline on a fire. If there’s not adequate capacity and time to effectuate the solution that the grant money is intended to solve, then it can unintentionally cause more harm than good, she said.

“I think that’s the lesson here.”