I’ve decided to look at three major campaign issues this season – crime, cannabis, and homelessness – to see how they might impact the City Council races. I started with this piece looking at the local crime rates. Let’s now turn to cannabis.

A confession: I know I’ve taken a bit of an exhausted tone with cannabis without ever having really addressed the issue, which I admit is lazy. It’s time to correct my error.

The Challenges of Retail Cannabis

To start off, I have almost no problem with cannabis in the abstract. When used responsibly, cannabis seems more similar to alcohol than to hard drugs such as cocaine or heroin. Marijuana also compares favorably to alcohol use in terms of social harm: while alcohol confers plenty of social benefits, it also gifts society with the horrific social ills of alcoholism, increased domestic violence, and drunk driving. Cannabis, on the other hand, isn’t a social lubricant but it does have strong benefits for the individuals that need it for medicinal purposes, and thus far it doesn’t appear to broadly induce increased risk-taking, aggressiveness and violence as alcohol does.

But what about marijuana as a “gateway drug”? I think this argument rests on two assumptions that don’t really hold water for me. The first assumption is that marijuana is more likely to be the first step into the world of illicit drugs than drinking, which addiction centers don’t really agree with. The second assumption is that, while alcohol is omnipresent, adding marijuana to the mix would be “new”. But everyone knows that illicit cannabis is very easy to obtain and has been for many decades. Many high school students smoke pot and many, many more know someone who does. If marijuana is tempting our children into a life of delinquency, then addressing the black market for the drug would be a policy priority. And, ironically, legalization is one of the tools in the toolbox to dismantle black markets, though whether this really pans out in reality is a subject of considerable academic debate.

That said, there is another wrinkle that sets cannabis apart from alcohol, which is that cannabis is technically still illegal at the federal level. So, not only do cannabis manufacturers, wholesalers, and retail locations operate in a bit of a legal gray area, highly regulated industries like banking and credit bureaus won’t touch it. This in turn means that almost all cannabis retail storefronts are cash businesses. Cannabis stores already maintain large stocks of a highly valuable commodity with an active black market. Now, they also must hold large quantities of cash onsite. That these locations will be the target of theft seems obvious.

The Costa Mesa Cannabis Trade-Off

Regardless of these challenges, Costa Mesa voters have been surprisingly enthusiastic about cannabis legalization. Not only did they endorse permitting cannabis manufacturing in the city’s industrial zones in 2016, they also overwhelmingly supported Measure Q in 2020, which allowed retail cannabis stores to open in the City’s commercial zones. Measure Q didn’t even have an official “argument against”, which is somewhat unusual for a controversial ballot proposal.

Following the embrace by the public of retail cannabis at the ballot box, the City Council set about writing the actual ordinance to make legal retail cannabis a reality. Without getting into the nitty gritty details, here is basically how the City approached regulating cannabis retail locations (CRLs) until the reforms that were passed earlier this year:

• CRLs can only locate in commercial zones;
• CRLs may not be located within 1,000 feet of schools, playgrounds, daycare centers, and homeless shelters, or within 600 feet of youth centers;
• CRLs must post security guards video monitor the premises 24 hours a day, 7 days a week;
• No onsite consumption of cannabis is allowed;
• CRLs must implement measures to contain odors; and
• CRLs may only serve customers 21 years of age or older.

To ensure all of these requirements are met, the city requires CRLs to obtain two permits: first, a cannabis business permit, which is issued to a particular CRL operator, and second, a conditional use permit, which is a zoning adjustment to the land on which the CRL sits to allow a retail cannabis store to operate in that location. Note that, as originally drafted, the cannabis ordinances did not place a cap on how many CRLs could operate in the city. This is in stark contrast to neighboring cities who, anticipating overwhelming demand, chose to place either hard caps or caps based on population size on the number of CRLs that could operate. Costa Mesa, contemplating perhaps the legally murky process of forcing the city to ration licenses, opted to proscribe the number of available sites through the establishment of buffer zones around sensitive uses and then let the market sort out the number of stores that would open. More on that in a moment.

What does the city get for providing all of this regulation and oversight? Well, every CRL must pay an annual 7% tax on gross receipts from retail cannabis sales, on top of the city’s sales tax. While most of this money goes towards the City’s General Fund, the city diverts 50 basis points of this tax (or 1/2 cent of each $1.00 of gross receipts taxed) to fund the City’s Arts and Culture Master Plan, and another 50 basis points to a first-time homebuyer’s program. Basically, the trade-off for permitting lucrative retail cannabis into Costa Mesa was to use those businesses to support the city’s overall budget as well as two policy priorities that otherwise struggled to get consistent funding.

So, how did this regulatory regime work out in practice?

Good: Imposing 7% annual business tax on retail cannabis

While the receipts from this 7% tax haven’t been world-beating thus far — the Finance Department estimated we’d see about $3.5 million in such taxes this year, and the Arts Master Plan/first-time homebuyer funds have racked up about $200k each at this point — I think a lot more revenue is coming. I ran across this story the other day that was celebrating the resiliency of Costa Mesa’s cannabis industry, and it noted that retail sales from the first quarter of 2024 were up an astonishing 450%+ year-over-year. The same source reports that the taxable revenue from retail cannabis in Costa Mesa in the first quarter of 2024 alone was $9.7 million. Assuming that holds the rest of the year, that would result in $38.8 million of taxable revenue in 2024, and $2.7 million of cannabis tax revenues. Since more stores have come online since the first quarter of 2024, I don’t think the Finance Department’s $3.5 million estimate is unreasonable. And based on approvals, we should expect the number of locations to expand from ten operational stores today to 25 in the next year or so.

Bad: Creating a convoluted approval process that cost the city valuable planning time

Possibly in an effort to preempt popular backlash, the ordinance attempted to slow the pace of approving CRLs by both placing strict restrictions on where CRLs could locate and requiring each CRL to go through a laborious vetting process to receive a site-specific conditional use permit.

Unfortunately, this approach totally backfired. Limiting the number of potential sites but not the total number of CRLs that could operate in the city created a “rush to the door” phenomenon that ultimately saw 64 potential CRL operators get in line for permits. And worse, the rigorous staff review required by the ordinance of each such application created a horrific backlog of work for the city’s planning division as well as the Planning Commission.

How bad was it? Well, consider in 2023, the Planning Commission held 19 public meetings. Of those 19 meetings, 13 of them featured at least one cannabis-related item. And worse still, of the 34 total new business and public hearing items the Planning Commission heard during the same year, half of them — 17 separate items — were either cannabis retail applications or items related to cannabis regulation.

If you’ve ever attended a Planning Commission meeting, you know that a single item can generate hundreds of pages of staff reports and chew up hours of debate time. CRLs were no exception. So expending 50% of the Planning Commission’s items on CRLs represents an outrageous misallocation of our planning time and resources, especially when we have HCD breathing down our necks about our Housing Element compliance, we’re way behind on re-zoning, we want to pass huge reforms like the inclusionary housing ordinance, and our planning departments are suffering from key departures. If the City Council screwed up managing cannabis, this is the screw up: not realizing that we have a very limited planning time and attention budget, and inadvertently establishing an intensive permitting regime that quickly overwhelmed those limited resources.

Good: Requiring every cannabis store to have 24/7 security and video monitoring

I won’t spend too much time on this one, but one knee-jerk reaction to CRLs is that they are crime magnets because of their all-cash nature and the “seedy” aspect of cannabis itself. However, I have yet to hear anyone from our public safety personnel come forward and say that any CRL has been a hot spot for calls for service. In fact, there is anecdotal evidence from social media posts and public comments that the CRLs have been net benefits to neighborhood security, precisely because they are so tightly monitored. Therefore, while the security guards are a very expensive indirect tax on CRLs, overall, I think requiring them was a smart move.

Bad: Not regulating the number of cannabis business permits in the city from the outset

As noted above, almost all of the time and attention of the Planning Commission has gotten sucked up into reviewing conditional use permits (CUPs) for CRLs, which are land entitlements that are specific to the location where the CRL wants to locate. And as noted above, the city did not place a cap on the number of CRLs that could operate, and instead attempted to allow its geographic restrictions on plots eligible for these CUPs to function as a de facto cap on the number of stores that would ultimately open.

Unfortunately that didn’t work in practice. Instead, potential CRL operators seemed undaunted by the prospect of locating their stores near existing competitors, even on parcels right next door. This in turn created a PR problem for the city: while residents were broadly in favor of retail cannabis, no neighborhood signed up to become “cannabis row”. Tony neighborhoods like Mesa Verde and the Eastside were especially sensitive to their local commercial drags and strip malls becoming dominated by cannabis shops.

In response to these complaints, the City Council took a stab at correcting this error this past May by retroactively imposing a cap on the number of cannabis business permits that could be issued in the city, even though doing so would leave many permit latecomers out in the cold. We now have a cap of 35 such permits, of which 25 have been issued. And for reasons that only make superficial sense, the City Council went further and declared that it will not issue any new cannabis business permits until the total number operating in the city falls below ten. Which, assuming cannabis remains popular, will never happen.

Obviously retroactively capping the number of cannabis business permits is not ideal. Not only does the City Council look entirely reactive (which it was), it is a very unfair way to ration the available permits. Despite the Council’s original concerns about finding the best operators and ensuring a transparent, fair process, it turned out to be first come, first serve after all. Which is a shame.

But was there a better solution? Well, the decision to refuse to issue new permits until the total number operating in the city falls below ten is nonsense regulation that only allows the City Council to save face, so that should have been rejected out of hand. But operationally? The only thing I might have considered doing differently is capping the number of cannabis business permits at the outset and uncoupling those permits from any particular location.

The result? Potentially, Costa Mesa could have developed a secondary market in cannabis business permits, similar to alcoholic beverage control licenses. This would allow good operators to trade these permits amongst themselves, and allowed successful operators elsewhere to potentially bid for or take over less successful brands. It would also allow operators to move their shops to other locations in the city without having to go back through the cannabis business permit process — an important reform to keep these operators from becoming glued in place. And, while these permits would be expensive, there would be at least a path into the business for newcomers. As it stands, M&A would be the only way to break into this business now, because the number of business permits are capped and they are tied to particular locations. Regulatory barriers to entry aren’t exactly hallmarks of a well-functioning market.

So what’s the verdict? Do the challengers have a point?

During this whole saga Mayor John Stephens has been a clear proponent of legal retail cannabis, and at every turn he has championed lighter regulation of the industry. He was the most vocal opponent to capping the number of cannabis business permits when the original Measure Q ordinances were being drafted, and he opposed them during this year’s reform efforts as well. Similarly, Mayor Pro Tem and District 6 Council Member Jeff Harlan has taken a fairly laissez faire approach to cannabis regulation, though he notably did oppose a cannabis shop opening on the edge of his district that he adjudged to be too close to an existing CRL. Meanwhile, over in District 1, Adam Ereth has had to personally preside over the entire cannabis debacle as the current Chair of the Planning Commission, and he likely knows more about the city’s ordinances than anyone.

Obviously I think the City Council’s approach to retail cannabis left a lot to be desired. But the issue the challengers to the incumbents face, and that Mike Buley must address in his election against Ereth, is that there is very little to be done about the cannabis shops now. There is zero appetite on the dais to reopen the cannabis reforms that were passed this year, which themselves sucked up an enormous amount of time and effort. That won’t change even if all of the challengers succeed in winning their races. Furthermore, other than very vocal objections from discrete neighborhoods who objected to concentrations of CRLs nearby, most of Costa Mesa seems to have adjusted to the presence of retail cannabis. And the strong revenue numbers that will likely be reported next year will make undoing this market particularly painful.

So all the challengers can do is frame cannabis as a pure punishment vote. If you don’t like the idea of cannabis in the city, you can punish the incumbents (and Ereth, as a Planning Commissioner) for allowing it. Doing so won’t change anything. But, maybe it will feel good politically to hold them accountable. Unfortunately for the challengers, that’s likely to be an uphill political climb. Recall that Measure Q passed with close to 66% of the vote. The existing CRLs have been good neighbors and they have a very low profile. If anything, they’ve improved their neighborhoods where they’ve taken over blighted businesses, rebuilt crumbling buildings, and added security to otherwise lonely streets. That’s tough to run against.