The City Council directed staff during a recent City Council budget discussion to bring back information on the potential benefits of allowing adult-use sales of cannabis in Union City. This report will first present information on emerging trends in Alameda County and in the State of California regarding adult-use sales. The report will include independent data and testimonial letters regarding necessary program revisions that are vital to the viability of the City's commercial cannabis program and in realizing the anticipated $1.4 million in new tax revenue. Following the presentation, staff will seek formal direction from the City Council regarding revisions to the existing commercial cannabis program to permit the retail sale of adult-use cannabis products. 

Proposition 64 was passed by voters in California in November 2016 allowing for the personal use and sale of adult-use cannabis products in California. It also created a pathway for the State to develop and administer commercial cannabis regulations and gave local jurisdictions the authority to establish their own local policies on commercial cannabis. In response to the new State law, local jurisdictions, including Union City, responded with their own policies on commercial cannabis uses within their communities.

Specifically, in November 2017, the City Council adopted a regulatory ordinance and a formal resolution governing the number of permits and types of commercial cannabis uses, which includes:

• UCMC 5.44 allows for the cultivation, distribution, manufacturing, testing and adult-use and medical dispensary;
• UCMC Section 5.44.030(D)(1) also dictates that the City Council may establish the number of permits issued for each type of commercial cannabis use by resolution, as may be adjusted from time to time;
• Resolution 5144-17 formally establishes three permits for each of the following types of commercial cannabis uses for a total of permits: cultivation, distribution, manufacturing, testing and dispensary (medicinal only).

As pointed out in the adopted resolution, the City intentionally took a cautious approach in limiting the number of permits and allowing medical cannabis sales only. A public poll of residents at the time showed overall support for allowing commercial cannabis operators in Union City as long as the City had responsible regulations and enforcement in place. In addition, the City had yet to experience the impacts of a State-wide rollout of commercial cannabis; therefore, a more cautious approach was warranted at the time. Nearly two years later and in monitoring the rapid change in State regulatory laws and the cannabis market, there are reasonable concerns of the program's viability raised by the City’s cannabis consultant, HdL Companies, and the City’s current cannabis operators. 

In addition, the examination and discussion into allowing adult-use cannabis sales is directly related to achieving Goal A/Strategy 7 of the City’s soon-to-be adopted Strategic Plan, which states:

“Implement the City’s cannabis program to attain the anticipated $1.4 million in new revenue with a commitment to adapting where necessary in light of evolving Statewide trends.”

The City Council’s thoughtful approach to commercial cannabis regulations over the past two years has enabled the City to launch and manage a successful commercial cannabis program with three strong permit holders:  Jiva Life, Garden of Eden (GOE), and Redwood Medical Supply (RMS). Unlike many cities, the City’s high-bar process has yielded the most qualified candidates that the industry has to offer, which means there is a higher likelihood for cannabis businesses to thrive and for the City to realize the $1.4 million in anticipated new tax revenue. In addition, the City Council’s early approach in favoring quality over quantity has meant that we have not had to experience the loss of failed businesses, as in other cities.

A staff team that spans multiple departments has invested time and resources over two years to develop an industry-recognized commercial cannabis program. Routine feedback is expressed to staff about the City’s good faith commitment to maintain open lines of communication, manage a fair process and accommodate business needs when necessary. The League of California Cities turned to Union City last month to ascertain best practices for municipal government cannabis programs in preparation of a forum they were hosting for Mayors and City Managers from up and down the State.

City staff and stakeholders have developed positive working relationships with GOE, Jiva Life and RMS. In total, over $10,000 has been donated to social services, police officer training and local events, like the State of the City. These investments have been made by the City’s cannabis retailers far in advance of the initial expectation of after the first year of sales. 

However, the program is at a turning point as the industry evolves at a rapid pace. It is within the City’s best interest to understand these changes and to adapt and enhance City policies appropriately to ensure the viability of the City’s commercial cannabis enforcement and revenue, specifically around the sale of adult-use cannabis.

The purpose of this report is to present the trends related to adult-use sales of cannabis and seek the City Council’s direction on making the appropriate policy changes.

Trends with Adult-Use Sales

There are two key factors that will help the City Council to understand the potential benefits and logic of allowing the sale of adult-use cannabis products in the existing licensed retail storefronts in Union City.

#1 Competition from Neighboring Jurisdictions is Growing

With the passage of Proposition 64 and the establishment of a new State-wide commercial cannabis regulatory system that launched in January 2018, many jurisdictions throughout the State and in Alameda County have transitioned from medical only to adult-use sales.  The following is a list of neighboring jurisdictions that are considering or allow for adult-use sales:

Staff consulted the City’s cannabis expert, David McPherson from HdL Companies (McPherson), on the impacts of remaining a medical-only city when many other jurisdictions around us are transitioning to adult-use. McPherson indicated that approximately 56% of the State’s market for cannabis is adult-use and it is project to reach as high as 70% within the next five years. As such adult use consumers will turn to other local markets such as Hayward, San Leandro, Oakland, San Jose or other neighboring Santa Clara County retail stores to purchase their cannabis products.

In addition, the State currently allows the delivery of adult-use cannabis to residents in Union City (with no authority for the City Council to regulate or ban out-of-town deliveries). Therefore, there is a market share of Union City cannabis consumers that will opt to order their cannabis products on online for delivery to their home without much verification that the delivery services are complying with remitting their cannabis tax to the City.  

There are case studies confirmed by the City’s cannabis expert, McPherson, that medical-only cannabis businesses are losing viability fast due to competition from nearby adult-use cannabis retail storefronts. Maintaining a medical-only policy is likely to constrain business opportunities and competitiveness for Union City’s current three storefront CCU holders, as over 90% of the cannabis retailers in the region are transitioning to be authorized to conduct adult-use sales.

#2 The Pre-Existing Medical Cannabis Industry is Shrinking

An August 2019 news report from Business Insider adult-use cannabis sales in California are expected to surpass medical cannabis sales by this year, and that by 2025, recreational sales are projected to be $4 billion per year, which is five times the size of the estimated Medical market revenues.

The shift Statewide and County-wide from medical to adult-use is likely due to the significant limitations and challenges that medical card holders face in light of legalization. The benefit of obtaining a medical card is a reduction in sales and use tax costs associated with the purchase of cannabis products. However, the effort and expense of obtaining a Medical Marijuana Identification Card in Alameda County has not proven to be a worthwhile investment for a medical card holder.

In order to receive a reduction in sales and use tax for “medical patients,” those patients are required by the State to first obtain a doctor’s recommendation costing between $30 and $80 dollars, plus the additional costs and expenses associated with doctor visits.  Following the doctor’s recommendation, the patient must then obtain a Medical Marijuana Identification Card from the local County Health Department at a cost of $100.00.

Prior to legalization, the only way to purchase cannabis products was to go through these steps. However, the storefront and delivery of adult-use cannabis has changed that for cannabis users as they no longer have to go through these steps to purchase cannabis products.

In 2004, the Alameda County Health Department registered a total of 5,997 Medical Marijuana Identification Cards to the County's over 1.5 million residents. Since legalization, a total of 560 cards were issued in 2017 and 211 in 2018.  This year the County has issued a mere handful of cards, according to the County Public Health Department.

In addition, customers would need to purchase over a thousand dollars’ ($1,000) worth of cannabis products within a year in order to see a cost-savings. Therefore, in some cases after the cost of obtaining a medical card, medical patients may end up paying more than going through the hassle-free process of purchasing products at an adult-use retail storefront or having it delivered to their house.

The graphic below is data from a cannabis retail point of sale (POS) software, TREEZ, who currently provides direct POS services to one-third of the State’s commercial cannabis retailers:

Consultation with the City’s cannabis expert, McPherson, confirmed that many previous medical patients have opted out of the medical card program simply because it is easier to purchase adult-use cannabis even though it may be for a medical need.

#3 Twenty-two percent (22%) of Consumers Have Replaced “Over the Counter” Prescriptions with Cannabidiol (CBD)

The U.S. Food and Drug Administration is currently conducting public hearings looking into the safety, manufacturing, product quality, marketing, labeling and sale of products containing cannabis and cannabis-derived compounds, including CBD.

A national January 2019 Consumer Reports survey of more than 4,000 CBD users across the country found that 22% of consumers have replaced traditional “over the counter” drugs, such as Tylenol and prescription drugs, including opioids, anti-anxiety medications and sleep aids, with CBD. In terms of generational preferences, millennial users of CBD tend to use the product to reduce stress and anxiety; whereas, baby boomers tend to use the product to help joint pain.

Consumers of CBD do not have to obtain a Medical Marijuana Identification Card to purchase this product. In fact, the Consumer Report found that 40% of CBD consumers purchase their product from a dispensary; while 27% purchase the products from online retailers. The most popular forms were infused edibles, including both food and beverages (35%), drops or sprays (30%) and vaping devices (30%). The findings of the Consumer Report also represent the current shift in Alameda County away from the use of medical cards to purchase cannabis products for medical needs.

Conclusion

To reiterate the opening framework, the consideration to allow adult-use sales aligns with Goal A/Strategy 7 of the City’s soon-to-be-adopted Strategic Plan. The City’s cannabis businesses simply need the ability to sell adult-use cannabis in order to be viable and compete with the region. A two-year, multi-departmental effort to develop the City’s cannabis program will only be considered a rewarding investment for the City if the $1.4 million in new tax revenue is realized. The City's outside expert has confirmed that City's who continue to allow medical sales only stand the chance to lose out on their tax revenue.  

There are no additional public safety or enforcement implications associated with the sale of adult-use cannabis outside of what has already been addressed in earlier policy discussion with the City. 

Attached to the staff report are:

• Status report on each of the three cannabis permit holders and the work to be completed to open the business

• Jiva Life letter of support to allow adult use

• Garden of Eden letter of support to allow adult use

Transitioning the awarded commercial cannabis permits to allow the sale of adult-use cannabis will ensure that the City can generate the anticipated $1.4 million in new tax revenue.

Staff recommends that the City Council direct staff to make the necessary revisions to the existing commercial cannabis program to permit the retail sale of adult-use cannabis products.