HOUSE BILL NO. 273 "An Act extending the termination date of the Marijuana Control Board; and providing for an effective date." 1:34:19 PM REPRESENTATIVE SAM KITO, SPONSOR, introduced the bill. He relayed that the purpose of the bill was to extend the termination date for the Marijuana Control Board for six years. He communicated that the extension was for six years instead of the full 8 years, which indicated that the board was functioning in the public's interest but acknowledged that the board was still in a "formative" stage. The current sunset period lasted 3 years, which provided the opportunity for the board to become operational and time for the legislature to access how the board was functioning. 1:35:38 PM CRYSTAL KOENEMAN, STAFF, REPRESENTATIVE SAM KITO, noted that Erika McConnell, Director of the Alcohol and Marijuana Control Office (AMCO) was online for questions. Representative Wilson asked why the board was not self- supporting. She ascertained that the two boards funds were "mingling." She wanted the marijuana board to take care of its own needs. Representative Kito deferred to the Department of Commerce, Community and Economic Development (DCCED) and the legislative auditor. He mentioned that the two boards shared the same staff and costs. The situation was unique, and he was uncertain how the costs were distributed. He explained that general funds (GF) were appropriated to establish the board and $500 thousand was appropriated in the current fiscal year. The marijuana board was expected to be self-sustaining the next fiscal year based on its fee structure. Representative Wilson thought that the GF was supposed to be reimbursed. Representative Kito was unable to answer the question. Representative Pruitt heard that currently the board was 70 percent sufficient. He recently read that "there was a request to reduce the tax" on marijuana. He asked whether the board would be self-sustaining by FY 2020 and how that would happen if the board wanted to reduce its revenues. Representative Kito responded that there were 2 distinct issues to his question. He elaborated that the board's responsibility was to control the application process and ensure that the process was fully sustainable. The license fees became designated general funds (GDF) allowing the board access to the funds for its budget. The marijuana tax set at $50 per ounce was deposited into the GF and was not governed or accessible by the board. 1:39:15 PM Representative Pruitt asked if the board was confident they would be able to be self-supporting by FY 2020. Representative Kito deferred to Ms. McConnell. ERIKA MCCONNELL, DIRECTOR, ALCOHOL AND MARIJUANA CONTROL OFFICE (via teleconference), indicated that the marijuana board was expected to be financially self-supporting through license and application fees by FY 2020. Representative Pruitt wondered whether the licensing fees would be lowered in the future or if the fees would remain the same for a period to potentially build up an excess of funds. He asked what the board would do with an excess funds. Ms. McConnell responded that it was difficult to guess whether the fees would need to be raised or lowered in the future. The board would evaluate the fee structure on a yearly basis to ensure self-sufficiency. Representative Pruitt thought that intent language was added to the budget at the time the initial $1.5 million GF was appropriated for start-up expenses, which specified that the GF was expected to be reimbursed. He asked whether the expectation remained and if he was correct about the expectation of repayment. Ms. McConnell was unable to answer the question. She would provide follow-up. 1:43:20 PM Representative Guttenberg acknowledged the unique situation of having one administrative entity for two industries. He addressed the audit recommendations and surmised that some recommendations were related to "conflicting priorities" between the boards. He asked whether Ms. McConnell engaged in discussions about or saw a future where both boards would "stand alone." Ms. McConnell replied that currently 2 separate boards existed. She wondered if he was asking whether both boards would be combined. Representative Guttenberg clarified that he was referring to AMCO. He wondered whether there were any conflicts of priorities because of the shared staff. Ms. McConnell replied that the answer was a policy call for the legislature. She related that the staff worked very hard to meet the priorities for both boards and that things were operating well. She reiterated that if the legislature wanted to split up the support staff, the action would be a policy call. Representative Guttenberg referred to recommendations regarding timing and following up on investigations in a timely manner. He wondered if she needed additional staff to support the marijuana board. Ms. McConnell explained that the recommendation regarding creating a prioritization plan for enforcement applied to both boards. The office had 8 enforcement staff for a "very large state." The support staff recognized the level of resources available and was working diligently to address the recommendation concerning health and safety. She related that AMCO agreed with the auditor's recommendation for a written prioritization plan. Co-Chair Seaton acknowledged that Representative Grenn joined the meeting. 1:47:25 PM Representative Wilson referred to page 8 of the Legislative Audit [A Sunset Review of the Department of Commerce, Community, and Economic Development, Marijuana Control Board October 6, 2017 Audit Control Number: 08-20100-17] (copy on file). She read the following: Additionally, as included in AMCO's FY 17 operating budget,3 it is the intent of the legislature that application and licensing fees cover the cost of regulation and recover unrestricted general fund appropriations made while the program was being established. Ms. McConnell replied that the board was not currently reviewing fees and she would follow-up with a plan to reimburse the initial operating costs. Representative Kito interjected that the legislature authorized the board's expenditures. He suggested that additional legislative authorization might be required if a board was spending money to reimburse the GF. He was uncertain whether a board could statutorily reimburse the GF. Representative Wilson commented that the repayment was a cost and doubted additional authorization was required. Representative Thompson understood that other boards did not have their own investigative staff. Ms. McConnell responded that AMCO had 8 investigators on staff. Representative Thompson deduced that other boards had to reimburse for investigative time but AMCO would not be accessed additional investigative fees since the investigators were on AMCO's staff and already paid for their work. 1:50:22 PM Vice-Chair Gara suggested that when the initiative was passed it was estimated that marijuana tax revenue would generate $4 million or $7 million in tax revenue. He asked for the amount of tax revenue generated to date. Ms. McConnell reported that through the end of December taxes collected to date were $6.314 million. She clarified that the amount was collected from October 2016 through December 2017. Vice-Chair Gara voiced that the initiative should be honored as written. He asked whether she was concerned that the board had been too strict when issuing licenses. Ms. McConnell did not think the board had been too strict. They had approved 95 percent to 97 percent of the applications received. 1:52:56 PM Representative Guttenberg knew that the industry had a plan to change the tax structure that did not lower taxes. He inquired whether the industry had approached the board regarding taxes. Ms. McConnell responded in the affirmative. She delineated that about two weeks prior the board decided to draft a resolution that suggested changing the tax from an excise tax to a percentage-based sales tax. The resolution would be reviewed and voted on at the next meeting in April 2018. Representative Guttenberg asked what the expected impact would be on revenue. Ms. McConnell was unaware of what the percentage would be. She informed committee members that the concern over a flat tax was that it kept the wholesale price artificially high. The current wholesale price was $800 per pound. She noted that in other legalized states the marijuana wholesale price was $100 per pound. The issue for the board was to allow the price of marijuana to naturally fluctuate with supply and demand. KRIS CURTIS, LEGISLATIVE AUDITOR, ALASKA DIVISION OF LEGISLATIVE AUDIT, reminded members that the purpose of the audit was to determine whether the board was meeting its mission of serving the public's interest. She referred to the Background Information section on page 3 and noted that the section summarized the boards implementation process. Ms. Curtis read from the Legislative Audit Report Conclusions on page 5: Overall, the audit concludes the board is serving the public's interest by effectively licensing marijuana establishments and developing and adopting regulations necessary to implement statutes that allow for the cultivation, manufacture, and sale of marijuana in Alaska. Ms. Curtis reported that the audit recommended a six-year extension. She characterized the findings of the audit as "positive." She continued to read from the audit's conclusions: Board operations were conducted in an effective manner. The audit found that from July 2015 through April 2017, the board held 21 meetings and met in each judicial district of the state during calendar year 2016 as required by statute. Board meetings were public noticed and each meeting allowed time for public comment. The audit also found that board membership and composition complied with statutes and a quorum was consistently met. The board met its statutory mandate to adopt regulations necessary for implementing statutes.1 Significant regulations (3 AAC 306) specify requirements for the issuance, renewal, suspension, and revocation of registrations to operate marijuana establishments; qualifications for registration; and a schedule of application, registration, and renewal fees. The board also amended regulations to clarify submissions to the board and conduct of board meetings. Regulatory additions and changes during the audit period were public noticed according to the Administrative Procedures Act. To help evaluate board effectiveness, surveys were conducted as part of the audit. A survey was sent to 101 licensees and 71 (70 percent) responded. A second survey was sent to 16 local governments that had a license issued in their jurisdiction and 14 (88 percent) responded. Licensee and local government survey questions and responses are presented as Appendices B and C of this report. One hundred percent of local government survey respondents and 75 percent of licensee survey respondents rated the board's overall effectiveness in serving the public interest as effective or very effective. Additionally, 93 percent of local government survey respondents rated the board's effectiveness in enforcing marijuana laws in their area as good or excellent Ms. Curtis cited a table on page 8, titled "Exhibit 2" that reported the board's licensing activity from July 2016 through April 2017. She noted that 122 licenses had been issued during the time and 80 percent of licensee survey respondents rated their overall licensing experience as good or excellent. She addressed the application and licensing fees and read the following: Additionally, as included in AMCO's FY 17 operating budget,3 it is the intent of the legislature that application and licensing fees cover the cost of regulation and recover unrestricted general fund appropriations made while the program was being established. AMCO staff has implemented a process for tracking both revenues and expenditures, but reported it is too early in the development of the board to determine whether the current fees are set at sufficient levels to cover the cost of regulating the marijuana industry. AMCO management expects to be fully funded by application and licensing fees by FY 20. Ms. Curtis pointed to "Exhibit 3" on page 9 and mentioned that the table presented a schedule of application and license fees established by the board. She elaborated that the audit contained 4 recommendations beginning on page 11. She moved to Recommendation 1, "The board members, the Alcohol and Marijuana Control Office (AMCO or control office) director, and enforcement supervisor should work together to formally establish an enforcement plan to direct limited enforcement resources." She read the following: The audit identified the enforcement section is operating without a formally established enforcement plan. Neither the Marijuana Control Board (board) nor AMCO director had considered the need for or importance of establishing enforcement goals or plans to ensure the effective allocation of enforcement resources. Per AS 17.38.121, the board is vested with the powers necessary to enforce laws related to marijuana and may employ enforcement agents and staff it considers necessary to carry out its duties. The board has tasked the enforcement section with the responsibility of detecting violations and enforcing marijuana laws. By not formally establishing an enforcement plan, the enforcement section has no guidance for prioritizing its limited resources and runs the risk of not adequately protecting the public. Ms. Curtis moved to Recommendation 2, "The board and AMCO management have not maintained a process to monitor and track all actions taken on complaints to ensure they are resolved in a timely manner." She noted that the first two recommendations also applied to the Alcohol Control Board audit. She read the following from the audit" The board does have a process to receive complaints from licensees, law enforcement agencies, and the general public through their website, telephone, or emails; however, complaints are only tracked if they result in an inspection or investigation. Furthermore, the basis for a decision not to investigate is not documented and maintained. According to AMCO staff, a process to log all complaints received previously existed for the Alcoholic Beverage Control Board; however, when the Marijuana Control Board was created, staff responsibilities were realigned, and the maintenance of the complaint log took a lower priority compared to new responsibilities associated with marijuana regulation. By not tracking complaints, there is an increased risk that board staff may not investigate complaints and/or not investigate complaints in a timely manner. Such instances could reduce the board's ability to effectively enforce marijuana laws. Additionally, complaints received directly by board staff via telephone or email may never be resolved in the event of staff turnover. Ms. Curtis reviewed Recommendation 3, "The AMCO director should develop written procedures for establishing the expiration dates of marijuana handler permits and ensure staff receive the appropriate training." She conveyed that 47 of 53 marijuana handler permits tested were issued by AMCO with incorrect expiration dates. The auditors discovered that the errors resulted from the lack of written procedures and insufficient training contributed to AMCO staff's varying interpretations for calculating permit expiration dates and felt that the issue was easy to remedy. She turned to Recommendation 4, "The AMCO director should develop and implement procedures to segregate the duties for calculating and remitting fees to local governments." She read the following: AMCO management does not adequately segregate duties over remittances of application fees to local governments. The audit found one AMCO employee is responsible for calculating and approving the amounts to be remitted to local governments, and no separate review is performed. Upon receipt of a new or renewal application, AS 17.38.200(c) requires the board to immediately forward a copy of each application and half of the registration application fee to the local regulatory authority for the local government in which the applicant desires to operate. Management is responsible for establishing internal controls to ensure fees remitted are accurate and complete. Segregation of duties is a key internal control for appropriately receiving and distributing funds. Ms. Curtis delineated that $113 thousand in fees were remitted to local governments. She believed the issue would be easily solved. She indicated that the department's response was located on page 33 and the board's response was on page 35 and both DCCED and the board agreed with all the recommendations. 2:00:37 PM Co-Chair Seaton announced that Co-Chair Foster joined the meeting and handed the gavel over to Co-Chair Foster. Representative Kawasaki referred to the Recommendations 1 and 2. He asked whether the alcohol board was supporting the marijuana board's enforcement duties under AMCO. Ms. Curtis replied that the board was partially covered by GF but was able to track the activity for the board separately. Representative Kawasaki wondered whether statute dictated that both boards "must have receipts that support the services they provide." Ms. Curtis deferred the question to the auditor who lead the audit. Representative Kawasaki repeated his question and asked whether both the alcohol and marijuana boards "had to seek the same receipts? to make the board work." CHRISTINE LUMBA, AUDITOR, LEGISLATIVE AUDIT DIVISION (via teleconference), answered that no "explicit statutory requirement" existed but noted the existence of the legislative intent language. Representative Kawasaki asked if the same requirement applied to a business license. Ms. Lumba replied that the marijuana statutes included authority for the board to employ enforcement agents that were considered necessary to carry out their purposes. 2:04:24 PM Representative Kawasaki questioned whether a statute prohibited colleting revenues more than what was necessary to address the board's recommendations. Ms. Lumba was not unaware of any statutory requirements relating to excess fees. Representative Kawasaki thought that occupational licensing seemed different from the marijuana license because fees were expected to cover enforcement. Ms. Lumba agreed that the marijuana board was a bit different and was not under the Division of Corporations, Business, and Professional Licenses. She explained that both boards had its own supporting office, AMCO that employed its own staff to support the board's activities. Vice-Chair Gara asked if the auditors reviewed board actions for their legality. Ms. Curtis answered in the negative and specified that was the case for all sunset audits. Vice-Chair Gara remembered that the marijuana initiative authorized the use of concentrates, but the board prohibited its use. He supported the use of concentrates for medical marijuana. He inquired whether the issue was something an audit would address. Ms. Curtis responded that during the survey phase of the audit, if auditors discovered that it was an issue, Legislative Audit would evaluate the concern. She noted that auditors did not find any issue relating to concentrates. 2:08:00 PM Representative Guttenberg referred to the audits recommendations regarding procedures and timeliness. He asked whether addressing the recommendations would create the efficiencies that allowed the board to carry out the duties specified in the audit. He wondered whether AMCO had requested authority for additional staff from Office of Management and Budget (OMB). Ms. Curtis reported that it was not something auditors had looked at in the audit. She was aware the board had limited resources, but the audits results were positive consequently, the audit focused on how the board was using its limited resources and if improvements could be made within the resources available. Representative Guttenberg asked if the recommendations could be mitigated with the board's current resources. Ms. Curtis reported that the survey results were positive, and the audit found that the board was operating effectively. Co-Chair Foster asked Ms. McConnell to address the fiscal note. 2:10:24 PM Ms. McConnell reviewed the fiscal note. She explained that the previously published fiscal impact note for DCCED FN1 (CED) appropriated to AMCO requested a total of $1.815 for $920 thousand in Personal Services, and $73 thousand in travel expenses. She reminded committee members that the board was mandated to meet in each judicial district at least once per year and the board had a minimum of 5 board meetings per year. She added that $750 thousand was allocated to services that included Information Technology, support from DCCED and the Department of Law (DOL), administrative hearing services from the Department of Administration, leases, and meeting space rental. Finally, $71 thousand was the total for Commodities like printing regulation books, cleaning and office supplies, etc. The FY 2019 request included $523.8 thousand in Unrestricted General Funds (UGF). She relayed that UGF was expected to be zero in outlying years and anticipated the program would be fully supported by program receipts by FY 2020. Representative Pruitt asked whether she foresaw any increase in costs for personal or other services over the timeframe on the fiscal note. Ms. McConnell did not have a sense of what would be needed in the future. Representative Pruitt wanted to ensure they were currently setting the right fees to recover costs. He expected that costs would increase, and wanted the scenario considered when setting licenses and application fees. Co-Chair Foster OPENED Public Testimony. 2:12:43 PM BRUCE SCHULTE, CAMPAIGN TO LEGALIZE MARIJUANA, ANCHORAGE (via teleconference), supported HB 273 in its current form. He commented on the auditor's recommendation to have a concise policy on enforcement. He hoped that the recommendation became a "priority" for the board. There had been occasions where a "somewhat objective interpretation" of regulation or statute had been enforced, which "created some angst" amongst the industry. He indicated that the board granted "fairly broad authority" to enforcement staff, which created some problems. He thought that addressing enforcement would reestablish "trust and credibility" with industry. He commented about testing. He informed the committee that presently, there were only 2 labs in the state. He reported that a committee was established to address the issue. He hoped that the committee would develop positive recommendations. He suggested that one remedy would employ existing state laboratory resources as third-party validations for these labs. He wished that the legislature would consider the option and provide funding. However, he agreed that "the effort needed to be self-sustaining." Finally, he commented on taxes. He mentioned that the ballot initiative specified a $50 per ounce excise tax that equated to $800 per pound cost. He indicated that a change in the tax was only possible via legislative action. The initiative also authorized the Department of Revenue (DOR) to establish a different tax on other parts of the plant. He detailed that the board recommended a $10 per ounce tax on the lower quality parts of the plant in 2015 and DOR implemented the tax at $15. He was not suggesting that the state should not receive revenue from the industry but recommended that the state adopt a more creative approach to taxation. He thought it would translate to more consistent revenue for the state. He voiced that by the following year the industry would have two solid years of market data to examine and make more informed decisions regarding any changes to the tax structure. 2:18:42 PM Representative Wilson asked whether he thought that the fees were adequate to support board activities without extra support from the alcohol fees. Mr. Schulte was not aware of the exact finances of the board. He surmised that her question related to whether to separate or combine the boards. He supported the structure of separate boards with a shared staff. Representative Wilson commented that she was not concerned with the structure. She was concerned that the fees were not adequate to cover the board's functions. She asked whether he had determined if the fees were adequate to cover the needs of industry. Mr. Schulte originally thought the state was setting the fees high, but he discovered that the fees were necessary to fund the board's efforts. He did not think any licensees would "balk" at the fee structure if they were treated fairly. Representative Pruitt acknowledged that Mr. Schulte had mentioned that he had encouraged the board to request more state support related to laboratory use and additional funding to help maintain the industry. He asked whether he understood him correctly. 2:24:20 PM Mr. Schulte replied that he could not speak for the board and was alluding to discussions he had with industry representatives. He elaborated that the industry was challenged by the limited lab testing facilities; only 2 testing sites operated in the state and their results varied, raising the question about which test results were valid. Testing could be done in labs outside of the state. In terms of validating actual results, "it might be more economical" to validate the results by turning to a laboratory that was not affiliated with the industry. He supported the marijuana industry paying for the testing validation. However, if using a state laboratory facility was a viable option "to achieve surety in the public's mind he hoped the legislature would be open for a discussion on the matter. MARK SPRINGER, CHAIRMAN, MARIJUANA BOARD, BETHEL (via teleconference), relayed that he was the chairman and rural member of the board since its inception in 2015. He responded to Vice-Chair Gara's concerns about concentrates. He reported that the board did license concentrate manufacturers and had never ruled against concentrates. He reported that the Marijuana Control Board had 5 members, met every 2 months, and had a "significant workload". He noted his appreciation of the AMCO staff and the DOL counsel of William Milks, Attorney V, Civil Division. He believed that the board was successful in protecting the public's health and safety and keeping the industry "Alaskan" via regulation. He stated that "as citizen regulators they took their responsibilities very seriously" through their enforcement and regulatory actions. He noted that the board did not regulate medical marijuana. He reported the board refused to license some products out of concern and caution that they were attractive to children. The board followed the guidelines set out in the U.S. Department of Justice's "Cole Memorandum". He spoke to fees and pointed out that the fees were a function of the number of applications received. He did not want to put the board in a position of maintaining a quota of licenses to approve if the fees were calculated by the number of applications. 2:28:06 PM Representative Guttenberg thanked Mr. Springer for serving on the board. He referred to the bill on hemp farming [SB 6 (Industrial Hemp Product.; Cannabidiol Oil - CHAPTER 5 SLA 18 - 04/12/2018). He noted that a significant issue was the distance between a hemp farm and a marijuana facility. He asked whether the board had examined the issue in terms of the "safety" of marijuana licenses. Mr. Springer answered that he had not looked at that bill. He had received comments via email related to hemp farming. He shared that marijuana licensees had a restricted area around their establishments. He imagined there were some licensed individuals who would also like to cultivate hemp. He noted that hemp did not appear in the board's statute, but as the hemp farming bill progressed the board would learn about the provisions in the bill and make recommendations on the distance issue. Representative Guttenberg related that in Colorado a marijuana facility could not be located within 5 miles of a hemp farm and in Canada the distance was 10 miles due to pollen traveling in the air. He indicated that the hemp bill included a provision that both departments would come up with a reasonable restriction relating to distance. 2:33:38 PM JASON BRANDEIS, SELF, ANCHORAGE (via teleconference), shared information about his professional background as a Professor of Justice and Legal Studies and attorney representing clients on a variety of marijuana related issues. He was testifying on behalf of his clients and the marijuana industry. He had monitored the board's and AMCO's work in developing a strong regulatory framework for the marijuana industry in Alaska. He believed the board had functioned in a fair and professional manner and that maintaining the board was necessary to the future success of the industry and ensuring the public's safety. He strongly supported the bill. KIM KOLE, SELF, ANCHORAGE (via teleconference), owned Raspberry Roots, a cultivation and retail business. She spoke in support of the board. She thought it was critical for the board to remain in place as the industry grew and matured. 2:36:37 PM LEAH LEVINTON, SELF, ANCHORAGE (via teleconference), spoke in support of HB 273. She owned the business Enlighten Alaska. She firmly believed that the board was critical to the development of the industry. She though the board would help keep the industry consistent. Her relationship with the board had been very positive. She reiterated her support for the bill. EDWARD MARTIN, SELF, COOPER LANDING (via teleconference), commented about the initial chairman of the board recently resigning. Co-Chair Foster asked the testifier to refrain from making negative comments about individuals. 2:40:40 PM Mr. Martin continued to discuss his disgruntlement over the board and the conflicts the state had with federal law. He mentioned Mr. Schulte's testimony regarding out-of-state testing facilities. He stated that the legislature did not approve the board members replacements and thought the approval process should happen before considering the bill. He favored the immediate authorization of the use of hemp in the state. He made comments about his loss of the Permanent Fund Dividend and licensing. He continued to make comments unrelated to the topic of HB 273. He requested that the legislature "get its act together." 2:42:42 PM Co-Chair Foster CLOSED Public Testimony on HB 273. Representative Wilson asked for a breakdown of revenues and expenditures for the Alaska Marijuana Control Board prior to bringing up the bill in committee again. Representative Kito responded that the statute indicated that the board had authority to set and collect fees and specific expenditures were not restricted. He had learned that the board had the statutory authority to repay the GF start-up money. The board was still operating with the $1.5 million initial funding and was uncertain when the board could adequately "quantity their costs." Ms. Koeneman interjected that in AS.08.01.065, the central licensing statutes that governed professional licenses stated that the regulatory costs must be maintained by the board and there was no such restriction for the Marijuana Control Board. She suggested that the statute that governed the marijuana board AS.17.38.121 did not explicitly mandate that the fees cover the regulatory costs. She deduced that that was the reason a breakdown of board costs was not included. 2:45:51 PM Representative Wilson replied that the state was in a financial crisis. She was mistaken that the board was not required to be self-sufficient but thought that the voters wanted the industry to become self-sustaining. She understood that UGF monies were being used for the board. She wanted assurances that the board would not be in arrears in six years and need GF. Ms. Koeneman would work with the board to get the information. Representative Kito noted that the fiscal note included information regarding an estimate of revenues and expenses through 2024. He related that a more accurate set of expenses was not yet achievable since a full year had not been completed. Co-Chair Foster relayed that amendments for the bill would be due on Friday, February 9 at 5:00pm. HB 273 was HEARD and HELD in committee for further consideration.