Cannabis regulation: DCR recommends zoning changes, fee updates and equity grants; CAO to model no-fee-increase budget

The Department of Cannabis Regulation told the Budget and Finance Committee on May 2 that it has transmitted a land-use amendment package and a fee-study to the council to ease locational constraints and to reach full cost recovery for licensing and compliance activities.

Why this matters: DCR licenses retail and other commercial cannabis activity in the city and enforces compliance. The city expects cannabis business tax revenue and wants a viable legal-market alternative to illegal storefronts; DCRs fees and enforcement tools determine how quickly legal businesses can form, relocate and remain compliant.

Land-use and enforcement changes: DCR said it transmitted proposed amendments (council file 20-1125-S1) to make zoning and distancing rules more closely aligned with state law and to expand the number of locations where licensed businesses can operate. The department said the amendments will also clarify how to treat parcels with prior unlicensed activity (so-called "scorched earth" rules) and recommended tightening rules to hold property owners accountable for illegal retail activity.

Fees and compliance inspections: DCR transmitted a fee study and told the committee it is working toward full cost recovery. Example fee changes the department cited include raising the storefront annual licensing and inspection fee from about $19,000 to $24,346 and raising renewals to about $19,392 (renewal fees were reported as increased to recover annual inspection and compliance costs). DCR said its fees remain competitive with other California cities, though local and state fees and the structure of state-tiered charges vary widely across jurisdictions.

Equity funding and grants: DCR said it received a $3.5 million cannabis-equity grant from the state to provide fee waivers (about $3.1M) and business support (about $350K) and that DCR will retain 1% for administrative reporting. The grant period closed March 31 and the department said it successfully moved hundreds of provisional licensees to local annual licenses before the state deadlines.

State grant and LJAG reconciliation: DCR acknowledged a prior Local Jurisdiction Assistance Grant (LJAG) issue and said the state has not directed repayment; DCR stated the $10M figure cited as a possible repayment was a ceiling estimate of risk that DCR had earlier included in a midyear schedule. The department said it is working with the state to provide supplemental documentation and that any final repayment is not expected this fiscal year.

Illegal market and enforcement capacity: The department and committee discussed the persistent illegal retail market. DCR said it lacks direct civil-fine authority to levy many penalties and relies on cross-agency enforcement (LAPD, Building & Safety). The committee asked for a study of enforcement approaches in other jurisdictions and for options for funding enforcement through property-owner penalties or liens. DCR said it will transmit proposed changes to the definition of "good standing" to permit pathways for businesses to return to compliance without immediate license denial for tax delinquencies.

Committee requests: The committee sought a CAO budget memo modelling DCR's operations without fee increases, and department memos showing fee tables and comparative city fees. Members also asked for a study on use of civil penalties or other enforcement structures that could be self-funded to support enforcement and pathways to legalization of underground providers.

Next steps: DCR said it will return with the fee tables and additional information requested by the government operations committee; CAO was asked to produce an alternative budget model that does not assume the DCR fee increases.