SB 1262

Page 1

Date of Hearing: August 13, 2014

ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair

SB 1262 (Correa) As Amended: August 4, 2014

Policy Committee: Public Safety Vote: 6-1
Business and Professions 10-2

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY

This bill creates a licensing and regulatory framework for the cultivation, transportation, testing,
and sale of medical marijuana, administered by the Bureau of Medical Marijuana Regulation
(bureau) in the Department of Consumer Affairs (DCA). Specifically, this bill:

1) Requires the Medical Board of California to include in the cases it prioritizes for
investigation and prosecution, repeated acts of excessively recommending marijuana to a
patient for medical purposes without an examination of the patient and a medical rationale.
2) Makes it a misdemeanor for a physician who recommends medical marijuana to a patient to
accept, solicit, or offer any form of remuneration from or to a licensed medical marijuana
facility if the physician or immediate family has a financial interest in that facility.

3) Prohibits a physician from recommending medical marijuana to a patient unless that person
is the patient's attending physician as defined by the Compassionate Use Act (CUA).

4) Exempts from licensure a patient who cultivates or possesses marijuana for personal medical
use, or a primary caregiver who cultivates, possesses or provides marijuana to no more than
five patients, as specified.

5) Creates in DCA the Bureau of Medical Marijuana Regulation (bureau), and provides the
bureau with authority to license the cultivation, manufacture, transportation, distribution and
sale of marijuana and to collect related licensing fees. Specifies protection of the public is
the paramount priority of the bureau. Provides the bureau the authority to:

a) Set application, licensing and renewal fees necessary to cover the costs of administration
and enforcement.
b) Establish licensing procedures.
c) Establish standards for cultivation, manufacturing, transportation, storage, distribution,
and provision of medical marijuana.
d) Impose penalties.

6) Requires the bureau, by July 1, 2016, to promulgate regulations for implementation and
enforcement, as specified.

7) Requires, Beginning Jan. 1, 2015, the bureau to provide for provisional licensure, as follows:
SB 1262
Page 2


a) Cities or counties that authorize cultivation and provision of marijuana shall provide the
bureau a list of approved entities. If the entity has been operating in compliance with
local laws and regulations for at least six months, the bureau shall issue a provisional
license until the entity's licensure application is accepted or denied.
b) Applicants shall pay a fee of up to $8,000 to cover administration and enforcement and
provide specified information.
c) The bureau shall not issue a provisional license if there are pending proceedings against
an applicant related to applicable local ordinances.

8) Beginning Jan. 1, 2016, the bureau shall provide for standard licensure, as follows:

a) Applicants shall pay required fees (amounts not specified) and provide specified
information, including detailed operating procedures and fingerprints for Department of
Justice background checks.
b) Cities or counties that authorize cultivation and provision of marijuana shall provide the
bureau a list of approved entities. If the entity has been operating in compliance with
local laws and regulations, the bureau may issue a license.
c) A licensee may not hold a license in more than one class of activities, except as specified,
and a licensee may not be a member, owner, or operator in another licensed entity.
d) Licensure may be denied, suspended or revoked for specified circumstances, including
criminal history, violation of local ordinances, untrue or misleading statements related to
the application, or failure to comply.

9) Creates the fee-based and continuously appropriated Medical Marijuana Fund; specifies all
penalties are deposited into the GF; and authorizes the bureau to administer a grant program
to allocate funds to state and local entities to assist with administration and enforcement.

10) Specifies medical marijuana transportation requirements, including secure vehicles and
minimum staffing.

11) Provides cities and counties authority to enforce this statute and rules and regulations
adopted by the bureau.

12) Requires licensed facilities to implement specified security measures, including access and
storage and inventory.

13) Requires annual audits of all licensees, the cost of which is paid by licensees.

14) Makes licensees subject to local jurisdiction restrictions, including prohibitions on operation.

15) Makes willful violations of this act punishable by a civil fine of up to $35,000. Technical
violations are punishable by fines of up to $10,000.

16) Provides this act does not supersede in any way the City of L.A.'s Measure D.

17) Requires the bureau to limit the number of licensed cultivation sites, as specified, to prevent
diversion of marijuana for non-medical use.

SB 1262
Page 3

18) Authorizes boards of supervisors to impose, by ordinance, applicable to voter approval
requirements, a tax on cultivation, storing, distributing or selling marijuana by a licensee.

19) Requires the bureau to establish quality assurance protocols to ensure uniform testing
standards of medical marijuana, including a list of certified labs. Licensees bear testing costs.

FISCAL EFFECT

Costs/Fees:

1) Significant annual costs, likely in excess of $20 million, to create the Bureau of Medical
Marijuana Regulation (bureau) in the Department of Consumer Affairs (DCA) to regulate the
medical marijuana industry. It is not clear these costs would be fully covered by the
unspecified fees authorized by this bill, as the division will be created regardless of the
number of applications. (The bill specifies a maximum $8,000 fee for a provisional
registration, but is silent regarding a ceiling for ongoing mandatory applications.)

The bill specifies startup costs for establishment of the bureau are to be advanced as a loan
from the DCA.

For order of magnitude comparisons, the entire budget of the ABC is $58 million and 430
positions. The ABC is charged with licensing and regulating persons and businesses engaged
in the manufacture, importation and distribution of alcoholic beverages, and administering
the provisions of the ABC Act to protect the health, safety, welfare and economic well-being
of the state. In addition, the ABC Appeals Board has a $1 million budget.

Based on funding and staffing levels of the ABC, and considering the complexities of the
undertaking and the significant start-up costs of any new entity (adoption of regulations and
fee schedules, office equipment and expenses, etc), it appears reasonable to assume the costs
of providing statewide regulation for cultivation, manufacture, testing, transportation,
distribution, and sale of medical marijuana, along with associated hearings, appeals, litigation
and enforcement, would conservatively be in the range of 35% of the ABC budget.

2) This bill establishes unspecified registration fees. The costs of creating and maintaining the
bureau, as specified, within the DCA would require significant application fees. For purpose
of illustration, the average fee to cover the cost of a $20 million entity, if there were 1,000
annual applications, would be about $20,000 per application. (Colorado charges up to
$18,000.)

Given the current legal environment surrounding medical marijuana, with the California
Supreme Court ruling last year that local governments can ban medical marijuana production
and distribution, and given the federal government's interest in shutting down dispensaries, it
is not clear there would be a sufficient number of applications to fully fund the bureau.

3) This bill creates a continuous appropriation from the Medical Cannabis Regulation Fund,
supported by registration fees, to support the division. Continuous appropriations are
contrary to the general practice of this committee, which prefers annual budget review of
expenditures.

SB 1262
Page 4

4) Unknown special fund costs to the California Medical Board, likely in excess of $1 million,
for investigating physicians who overprescribe marijuana without an exam.

5) Unknown, potentially significant, likely in the low millions of dollars, non-reimbursable
local law costs for enforcement of medical marijuana regulation.

6) Minor ongoing costs to DOJ for background checks; covered by applicant fees.

7) Unknown, potentially significant litigation costs to DOJ to defend DCA. Costs would be
reimbursed by DCA, presumably with applicant fee revenue, if sufficient.

Tax and penalty revenue:

1) Unknown moderate local revenue increase, potentially in the millions of dollars, from a
permissive and unspecified local tax. For order of magnitude purposes, based on a 2009 BOE
estimate that potential sales and use tax revenue on marijuana would be about $400 million,
based on a 9% combined rate, if 20% of the taxable sales amount was medicinal marijuana,
and if half of the state's cities and/or counties, representing 50% of the state's population,
levied an average 3% TUT, the annual local revenue increase would be about $13 million.

2) Unknown GF revenue from fines of up to $35,000 for willful violations and up to $10,000
for technical violations of the act.

COMMENTS

1) Rationale. The author's intent is to create statewide regulation and a model to resolve the
considerable confusion and controversy in cities and counties where elected officials have
expressed contradictory opinions about the legality of activities related to medical marijuana.

According to the author, "Since the approval of the Compassionate Use Act (Proposition
215) and passage of SB 420 (2003) no broader, feasible regulatory structure has been
established, and the implementation of these laws has been marked by conflicting authorities,
regulatory uncertainty, intermittent federal enforcement action, and a series of lawsuits.

"Nearly all recent attempts to regulate medical marijuana do not have appropriate health and
safety standards and neglect the importance of local control.

"SB 1262 will require licensing, set quality assurance and testing standards, and establish for
the sale of medical marijuana while protecting public safety and local control."

2) Current Medical Marijuana Law. In 1996, California voters passed Prop 215, the
Compassionate Use Act (CUA), which prohibits prosecution for growing or using marijuana
if a person has an oral or written recommendation of a physician.

In 2003, SB 420 (Vasconcellos, Statutes of 2003), the Medical Marijuana Program Act
(MMP), created a voluntary identification card that patients and caregivers could obtain to
protect them from arrest, and limited the amount of marijuana that could be legally grown
and possessed.

SB 1262
Page 5

In 2005, the U.S. Supreme Court ruled in Gonzales v. Raich (2005) that the federal
government can enforce marijuana prohibitions despite state medical marijuana law.

In 2010, the CA Supreme Court ruled in People v. Kelly that the MMP section limiting
quantities of cannabis is unconstitutional because it amends a voter initiative.

In 2013, the CA Supreme Court held medical marijuana statutes do not preempt a local ban
on facilities that distribute medical marijuana, and that municipalities may prohibit such
conduct as a public nuisance (City of Riverside v. Inland Empire Patient's Health & Wellness
Center).

3) Current support and opposition is somewhat murky as the current version of this bill was in
print less than a week at the time of this analysis. Proponents police chiefs and the League
of Cities continue to propose substantive amendments to address numerous concerns from
marijuana industry entities, most of whom oppose the bill, as well as CSAC and the City of
L.A., who also oppose the measure.

4) Support. The California Police Chiefs Association, a co-sponsor of this bill, states, "Among
the most troublesome issues with Proposition 215 includes the ability of virtually anyone to
obtain a medical marijuana recommendation from a compliant doctor; unreliable quality
control for consumers with respect to potency and the presence of carcinogenic pesticides or
other contaminants, as well as retail outlets that often become magnets for criminal activity.

"Senate Bill 1262 establishes an improved regulatory structure to ensure that Prop. 215
works as originally envisioned to assist patients with legitimate medical needs, in a manner
that works for law enforcement, city and county governments, local community
organizations, and medical professionals."

According to the League of Cities, the other co-sponsor of this bill, "This legislation, in
contrast to nearly all previous attempts, acknowledges local regulatory authority by
establishing a state licensing scheme that defers to local land use powers; under SB 1262, it
will not be possible for a prospective operator to obtain a state license to operate a dispensary
or other facility until and unless that operator can produce evidence of local permitting
approval. This protects both the jurisdictions that have enacted bans on such facilities, as
well as those that have elected to allow and actively regulate them.

"SB 1262 addresses the many public safety concerns that arise with a marijuana regulatory
scheme by requiring minimum security requirements that must be observed at dispensaries,
as well as transport and inventorying procedures, to minimize the possibility of diversion of
marijuana for non-medical/recreational uses which could stimulate cartel activity."

5) Opposition. Most industry groups, who supported Assemblymember Ammiano's regulation
bill (AB 1894, which failed on the Assembly floor earlier this year), appear to oppose SB
1262, stating it is too restrictive and costly by limiting the number of licensees, and
encouraging the punishment of physicians who overprescribe without an good faith exam,
when the Compassionate Use Act, adopted by statewide initiative, clearly states,
"Notwithstanding any other provision of law, no physician in this state shall be punished, or
denied any right or privilege, for having recommended marijuana to a patient for medical
purposes (HSC 11362.5(b)(2).
SB 1262
Page 6


The California National Organization for the Reform of Marijuana Laws states the bill "fails
to provide a realistic, economically viable framework for state regulation. Unless it is
substantially revised SB 1262 will not attract sufficient applicants or licensing fees to
establish a statewide industry or pay for the substantial costs of regulation and will only
exacerbate chaos in California's medical cannabis industry."

The Drug Policy Alliance cites divers criticisms of the bill, from concerns the bill would
disproportionately impact poor people of color as they are most likely to be convicted of a
felony for marijuana sales (and therefore under the bill could be prohibited from licensure),
to the contention that the bill "creates a system of unworkable regulations."

The Marijuana Policy Project cites 24 points of opposition, stating, "The upending of the
current system of access, couple with a failure to replace it with a workable system that
would be operational before mid to late 2016. With a few notable exceptions, the vast
majority of medical marijuana is currently produced by individual patients who provide
excess amounts to other patients through collectives and cooperatives. SB 1262 would make
this system impractical or illegal, while failing to replace it with something else that works
during the transition period."

In addition, in a joint letter, the CA State Association of Counties (CSAC) , the Urban and
Rural County Caucuses, and the County Health Executives Association, oppose the bill,
citing numerous local control issues.

6) This bill will not end confusion between federal, state and local governments. Possession and
sale of marijuana is a crime under federal law, and federal law preempts state law. California
patients who obtain a physician's recommendation are protected from prosecution for
possessing or cultivating an amount of cannabis reasonably related to their current medical
needs, as are patients' caregivers. Patients and caregivers who obtain a state MMP
identification card from their county health department are protected from arrest and
prosecution for possessing, delivering, or cultivating cannabis. Patients and caregivers who
engage in these activities, however, remain liable to federal arrest and prosecution, and those
who operate dispensaries face frequent federal enforcement actions.

7) Prior Legislation.

a) AB 1894 (Ammiano), 2014, which established the Medical Cannabis Regulation and
Control Act to regulate the cultivation, testing, transportation, distribution, and sale of
medical cannabis, and created the Division of Medical Cannabis Regulation (division) in
the ABC, failed passage on the Assembly floor, 26-33.

b) AB 473 (Ammiano), 2013, which created the Division of Medical Marijuana Regulation
and Enforcement within the ABC to regulate cultivation, testing, transportation,
distribution, and sale of medical marijuana failed passage on the Assembly floor (35-37).

c) AB 2312 (Ammiano), 2012 , which established the Medical Marijuana Regulation and
Control Act, authorizing local taxes on medical cannabis and creating a board to regulate
the medical cannabis industry, was never heard in the Senate.
Analysis Prepared by: Geoff Long / APPR. / (916) 319-2081