On The Cover

Cannabis in Crisis

Participants in a Jan. 18 rally calling on the Humboldt County Board of Supervisors to repeal Measure S pose for a photo outside the courthouse.

Submitted

Behind the push to repeal the county’s Measure S and what it might cost

By Thadeus Greenson

thad@northcoastjournal.com

To hear insiders tell it, Humboldt County’s cannabis industry can be likened to a small ship in rough seas. Battered by an onslaught of waves seemingly coming from all directions — taxes, fees, compliance costs, COVID disruptions and fierce market forces — the boat has capsized, leaving its occupants struggling to keep their chins above water as their legs grow numb and tired.

Local growers are now clamoring for the county to throw them a life vest, asking the Humboldt County Board of Supervisors to temporarily repeal Measure S, the countywide cultivation tax approved by 66 percent of county voters in 2016. The hope, says Natalynne Delapp, executive director of the Humboldt County Growers Alliance, is not so much that the brief tax reprieve on its own would be enough to save the county’s 1,000 or so licensed farms, but that it would keep them afloat until reinforcements — federal legalization, state tax relief or a seismic shift in market forces — rights the proverbial ship.

But the ask comes at a time when the county itself is taking on water. COVID-19 and the cratering cannabis economy have destabilized sales tax revenues, while the county’s well documented fiscal dysfunction — it has yet to close its books from the past two years due to ongoing turmoil in and around the Auditor-Controller’s Office — has cast a shroud over all its budgeting projections. Plus, the county just agreed to pay out its largest round of employee raises in recent memory — a minimum of 10 percent hikes across the board this year, with additional bumps in the coming two years — significantly increasing payroll expenses without a corresponding increase in revenue.

All this leaves some asking whether the county is in a position to throw anyone a life vest, much less whether doing so would be enough to even temporarily buoy a drowning industry, while others ask if it can afford not to.

“That’s a hard balance when you’re a supervisor who is directly responsible for fiscal surety throughout the county and also to your constituents, especially in the second district, where I have about 80 percent of the county’s cannabis farms,” says Second District Supervisor Michelle Bushnell. “My community is screaming that they’re not making it.”

To hear DeLapp tell it, of all the challenges facing local growers, market forces have been the most severe. The bottom line is that the state of California has licensed far more cannabis cultivation than its market can sustain, with the state’s licensed farms producing more than 6 million pounds of cannabis, roughly triple the amount consumed. As a result, wholesale prices have plummeted, particularly for sun-grown cannabis.

While the merits of sun-grown cannabis are sacrosanct in Humboldt County — where people point to its lower carbon footprint and higher percentages of the terpenes that many believe bring enhanced flavors, medical benefits and contribute to an overall entourage effect on potency — the market has been on a different page. According to Cannabis Benchmarks’ U.S. Cannabis Spot Index analysis, almost 65 percent of the cannabis flower sold legally in the U.S. for the week ending Jan. 14 was grown indoors, while only 6 percent was grown outside in the full sun. (The balance was grown in mixed-light or light-deprivation greenhouses.) This poses a disquieting trend in Humboldt County, where 95 percent of licensed farms are sun-grown or use light-deprivation greenhouses.

The combination of industry-wide overproduction and consumer preference has sent the aggregate wholesale price of outdoor cannabis cratering, falling from up to $1,000 a pound around this time last year to less than $500 a pound currently. And that’s for farmers who can actually get their product sold, which DeLapp says is no longer a given.

DeLapp says the problem really dates back to late 2020, when local farms harvested their crops in October and November. Typically, she says, the market contracts a bit in December, January and February, when the glut of fall harvests begins to ease, pushing prices up and giving farmers a second chance to move their product. But that didn’t happen in the first months of 2021, she says, as other regions already had fresh 2021 harvests coming to market. Local farmers started seeing their product sit with distributors, who were unable to move it to retailers, who preferred the fresh buds just making it to market.

“A lot of the 2020 weed got returned to farmers because they just couldn’t sell it,” DeLapp says, adding that continued overproduction — much of it coming from the southern parts of the state — led to a “price collapse” in June and July. “We’re now looking at two harvest cycles locally with very, very reduced income.”

DeLapp says local farmers have also had to navigate the same supply chain disruptions and labor challenges as other industries through the COVID-19 pandemic, but have had to do so without the federal aid and loans that have kept many small businesses afloat. Meanwhile, she says, state and local licensing fees and taxes haven’t relented.

On the tax front, local growers face a state cultivation tax of $161 per pound on their harvest, regardless of whether it is sold or not, as well as the Measure S levy of $1, $2 or $3 per square foot of cultivated land for outdoor, mixed light and indoor farms, respectively, meaning a 10,000-square-foot outdoor grow would face a local annual tax bill of $10,000, while an indoor grow of the same size would face a levy of $30,000.

The bottom line, DeLapp says, is most local farms are on the brink of insolvency.

“The landscape right now is pretty bleak,” she says. “Because of the absolute collapse in the wholesale price of cannabis flower, the price to the farmer is often below the cost of production or maybe, sometimes, right at the break-even point, which means there’s no salary for the farmer. … I haven’t talked to a single farmer who says they’re doing fine, and we have 275 members. We did a survey recently and 88 percent said they are moderately to very unstable. We have members who have branded, packaged flower for sale at local dispensaries that are communicating with me that they’re not even sure they’re going to make it the next two months.”

The Humboldt County Board of Supervisors is well aware of the challenges facing local growers. Back in October, the board gave growers a bit of a tax reprieve, agreeing to allow them to submit late payments on their October 2021 tax bills (Measure S is levied in two annual installments) until May 31. But with the second

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installments due March 15, growers who put off payment now face their whole tax bill coming due over the span of three months, right at the start of the growing season.

“What’s been created is a balloon payment situation,” DeLapp says, adding that because county permits are tied to tax compliance, more is at stake than simple late fees. “If the farmers cannot pay these taxes in advance of the growing season, then their county permits are in jeopardy, which means state licenses would be in jeopardy.”

But while local farms say they face a potential extinction event few will survive, the county faces looming financial problems of its own.

For the Humboldt County budget, there’s no question Measure S revenues have been a boon, sending more than $47 million into the county’s coffers since its passage in 2016. While that money is pumped into the county’s general fund and not tracked specifically, officials have credited Measure S with helping fund everything from road maintenance to the hiring of additional sheriff’s deputies. (An appellate court ruling last year found the county overstepped in modifying Measure S, opening the door for some growers to apply for refunds and casting future revenue projections in doubt. To date, approximately $200,000 in Measure S payments have been refunded with another $133,000 awaiting approval, according to Deputy Clerk of the board Tracy Damico, who added that roughly another 100 refund applications remain in various stages of processing.)

Coupled with a half-cent sales tax hike (Measure Z) first approved by voters in 2014, Measure S has helped the county increase services while keeping its budget in the black. But the situation is precarious — even without the uncertainty that looms amid outstanding audits and reports from the Auditor-Controller’s Office, which some department heads worry could lead to the county losing grants and federal and state funding streams. The county faces an unfunded pension liability of more than $330 million, according to a budget report from former County Administrative Officer Amy Nilsen, and a seven-year budget forecast prepared in 2018-2019 projected the county’s general fund would face a more than $20 million shortfall in 2024-2025.

And that was obviously before the county approved employee raises earlier this year, which are projected to result in added costs of $3.2 million this year, $16.9 next year and $21.5 million in 2023-2024. Add that to the law enforcement raises the county approved late last year, which are projected to cost a combined $17.6 million this year, $20.3 million next year and $23 million in 2023-2024. With two votes, the board of supervisors committed the county to a combined $44.5 million in additional labor costs in 2023-2024 that were not included in the previously forecast shortfall of more than $20 million.

“We felt [the raises] were necessary because we are in crisis,” Bushnell says. “We don’t have enough employees. Every department needs people. They have openings. And without our county paying a reasonable rate, they can’t attract and retain them.”

Bushnell, who serves with Fifth District Supervisor Steve Madrone on the county’s ad-hoc cannabis committee, has asked the that board hold a Feb. 1 public hearing to discuss the Measure S conundrum and whether the county can afford to throw its cannabis farmers a life line. She says a number of ideas are on the table — everything from staying the course to forgiving the bills of farms operating in the red to a full reprieve — but all of it needs to be weighed in the context of the impact to the county budget and the services it funds, and the reality facing local farmers.

And from where she sits, Bushnell says she believes that even if tax bills are sent, they won’t necessarily be paid. She said the county anticipated receiving $4.2 million in revenue from its October Measure S bills but only received about $2.5 million. Now, she says the county is preparing to send out approximately $8.5 million in bills that will come due in March.

“My thought process is they’re not going to pay it if they don’t have it, if they can’t buy groceries or pay their mortgages,” she says. “The bottom line is if they don’t have the money — and I don’t believe they do — they’re not going to pay it anyway.”

While DeLapp says she wants to wait to see exactly what options are put on the board’s Feb. 1 agenda before really weighing in on the best course forward, she says Humboldt County’s growers have been clear in what they are asking.

“We are asking the board of supervisors to forgive the Oct. 15 payment, waive the upcoming March 15 payment and then suspend Measure S for the coming year, so we have time to come back with amended cultivation tax that works for farmers and the community,” DeLapp says.

The ask has some, including Humboldt County Sheriff William Honsal, on edge.

“I have a huge concern with that,” he says, adding that while he understands the plight facing local growers, Measure S funds have been relied upon to fund services county residents have deemed

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Local cannabis farmers say plummeting wholesale prices have left many on the brink of insolvency, prompting them to push for tax relief. Submitted

essential. “I don’t know how we can make up the general fund shortfall if we waive Measure S.”

Honsal says he imagines Measure Z revenues — which have brought in $11 million to $14 million annually — would have to absorb some of the hit to protect county services, meaning the $4 million or $5 million the county spends on Measure Z funds to outside agencies would likely have to be cut.

The sheriff also questions how big a difference Measure S forgiveness would make for local growers, pointing to the market forces and state tax bills that would remain in place.

“Their biggest liability is not the Measure S taxes, it’s the state taxes, it’s labor costs, it’s compliance costs, it’s all of this other stuff,” he says. “If they’re not making money as a business, it’s not because of Measure S. It’s because the price per pound is too low for them to make ends meet.”

Contraction in the local industry, he says, “is inevitable.”

DeLapp doesn’t disagree that state taxes are more burdensome than Measure S but, she says, they’re also much more difficult to change. Even if growers were able to overcome the entrenched opposition from groups the legalization measure Proposition 64 earmarked to receive the tax revenue, she says the legislative process is slow and wouldn’t bring relief until January of 2023, at the earliest.

The only place the state could move quickly is in changes to its licensing fee, Bushnell says, which could be modified “tomorrow” to reduce fees, or even allow farmers to reduce their fees by reducing the square footage of their farms. But despite meetings with the Department of Cannabis Control and a letter from the board in October, “there’s been no movement,” she says.

But with Measure S, DeLapp says, county voters gave three county supervisors the power to amend or repeal the measure almost instantly, and that leaves the ball squarely in the board’s court.

“The county is going to have to figure out how to balance its budget anyway,” she says. “Is it going to insist on getting the last golden egg out of the goose before it’s roasted?”

Honsal says he feels for what some cannabis growers are facing, having put so much into becoming compliant and toward the dream of owning a sustainable, licensed farm, only to feel it all slipping away.

“I understand the predicament,” Honsal says, adding that if he were in growers’ shoes he’d probably ask for a reprieve on Measure S, too. “But I wouldn’t be a good advocate as far as a sheriff goes if I didn’t talk about the ramifications, as far as losing this revenue. If [the board] planned for this revenue and budgeted for it, then they have to talk about how they plan to make up the shortfall if it goes away.”

Caught between the reverberating impacts of the “potential collapse” of one of the county’s biggest industries and its already outsized fiscal commitments, Bushnell says the board faces a difficult discussion, adding that a full reprieve on Measure S could lead to hiring freezes, which would undercut a significant part of the rationale for all those recently approved raises.

No matter which way the board ultimately falls on Measure S, Bushnell says the economic reality facing Humboldt is “very scary.”

“Our county is really going to have to tighten our belts everywhere,” she says. l Thadeus Greenson (he/him) is the Journal’s news editor. Reach him at 442-1400, extension 321, or thad@ northcoastjournal.com. Follow him on Twitter @thadeusgreenson.