California Audit Criticizes Cannabis Regulatory Agency’s Management of $100 Million Grant Program

California’s chief cannabis regulatory agency, the Department of Cannabis Control (DCC), is under scrutiny for mishandling a $100 million grant program aimed at speeding up the transition from provisional to annual cannabis business licenses in 17 cities and counties. A state audit released last week by State Auditor Grant Parks revealed that, despite the funding being established in 2021, the DCC has struggled with oversight, leading to improper use of funds and delays in the licensing process.

Grant Program Aimed at Streamlining Cannabis Licenses

The $100 million grant program was created to help 17 jurisdictions across California expedite the process of transitioning cannabis businesses holding provisional licenses to full annual permits. These jurisdictions include major cities like Los Angeles, San Francisco, Oakland, and Sacramento, as well as several counties known for their cannabis production, such as Humboldt, Mendocino, and Sonoma.

The program was intended to help cannabis businesses comply with California’s strict regulations, including the California Environmental Quality Act (CEQA), and to assist local governments in processing applications more quickly. The goal was to help businesses complete their licensing by January 2026, with the program set to expire in June 2025, after which any unused funds would have to be returned.

Audit Finds Poor Oversight and Mismanagement

The audit, which focused on the DCC’s performance in 2022, found that by January 2023, almost a year after the funds were distributed, only $2 million of the $80 million allocated to local jurisdictions had been used. Worse still, the funds that were used did not consistently support the intended purpose of helping provisional license holders secure annual licenses.

In total, the DCC handed out nearly $80 million to the 17 jurisdictions, but by early 2023, only 535 cannabis companies had obtained annual licenses, while more than 4,600 were still waiting. The slow progress prompted concerns about the program’s effectiveness and raised doubts about whether it could achieve its goals by the 2025 deadline.

Parks noted that many jurisdictions were using grant money for unrelated expenses or failing to track the funds properly. “Four of the 17 grantees did not adequately track their grant funds,” the audit reported, adding that some cities and counties had used the money for staff salaries unrelated to the program or other expenses not tied to the intended purpose.

Staffing and Experience Problems at the DCC

A key issue identified in the audit was the DCC’s understaffing. The audit found that the program was initially managed by just two part-time employees, which limited the agency’s ability to effectively oversee how the grant money was used. While staffing has since increased to four employees, the DCC admitted that the staff lacked experience in managing large-scale grant programs, which contributed to the oversight issues.

The audit also highlighted that the DCC itself had spent only $350,000 of the $5 million allocated to it for administrative purposes, some of which was also used improperly.

Impact on Cannabis Businesses and Licensing Progress

The audit’s findings raised concerns about the future of cannabis businesses in the affected jurisdictions. As of January 2023, more than half of the provisional license holders in the 17 jurisdictions had yet to obtain annual licenses. Parks warned that if the current pace continues, many businesses will still be operating under provisional licenses by the 2026 deadline, at which point they could lose their ability to legally operate.

Provisional licenses were never intended to be permanent. They were created as temporary permits to give cannabis businesses time to meet the extensive legal requirements for full licensure. However, many companies have struggled to comply with regulations like CEQA, and the audit noted that some businesses have waited more than three years for annual licenses.

“If DCC continues to issue the same number of annual state licenses to provisional license holders that it did during 2022, more than half of the provisional license holders in the grantees’ jurisdictions will still not have obtained an annual state license by 2026,” Parks wrote.

Jurisdictions and Improper Spending

The audit detailed how several cities and counties misused the grant funds. In some cases, local governments did not adequately track how the money was spent, and in others, the funds were directed toward projects or expenses unrelated to licensing cannabis businesses. For example, two jurisdictions failed to document whether staff time was spent on grant-related tasks, while two others used grant money for unrelated expenditures.

This mismanagement has raised the possibility that the DCC could demand some of the funds be returned if they were not used properly, further complicating the program’s objectives.

DCC Response and Changes

In response to the audit, the DCC acknowledged the shortcomings in its administration of the grant program. The agency stated that it has since made improvements, including hiring dedicated grant management staff, consolidating licensing systems, and adopting best practices recommended by the auditor.

“Throughout the grant program’s operations, the Department has actively worked to implement changes to address CSA concerns and address opportunities for improvement,” the DCC told KCRA. “Prior to the audit report’s publication, many of the issues highlighted in the report had been addressed.”

The DCC also pointed to significant progress made since the audit period. As of September 2023, California had reduced the number of provisional licenses statewide to 2,594, while the number of full annual licenses had increased to 6,201.

The Future of the Grant Program

Despite the progress made, the audit casts doubt on whether the $100 million grant program can fully achieve its goals by 2025. Parks noted that the relatively small number of provisional licenses transitioned to annual permits in the program’s first year “is not promising.” If the DCC and local governments fail to significantly speed up the licensing process, many cannabis businesses could be left without the full legal protections of annual licenses.

The report also raises questions about the future of cannabis regulation in California, as the state’s complex permitting requirements continue to challenge both businesses and regulators. The DCC’s success in implementing changes will be crucial to ensuring that California’s cannabis industry remains both compliant with the law and competitive in the marketplace.