HB 273-EXTEND: MARIJUANA CONTROL BOARD  3:22:40 PM CHAIR KITO announced that the first order of business would be HOUSE BILL NO. 273, "An Act extending the termination date of the Marijuana Control Board; and providing for an effective date." 3:22:51 PM CRYSTAL KOENEMAN, Staff, Representative Sam Kito, Alaska State Legislature, paraphrased from the Sponsor Statement [Included in members' packets], which read: House Bill 273 extends the termination date for the Marijuana Control Board until June 30, 2024. Per statute, this board is scheduled to sunset on June 30, 2018 with a one-year wind down if the legislature does not pass legislation extending it. The licensing function will remain after this date; however, the administrative functions of the board would transfer to the department. Legislative Audit reviewed the board's operations and determined that it is in the best interest of the state to extend this board. The audit makes four recommendations and recommends a six-year extension with a new termination date of June 30, 2024. This is shy of the full eight-year extension that Legislative Audit is authorized to provide. The recommendations are as follows: 1. The board members, Alcohol and Marijuana Control Office (AMCO) director, and enforcement supervisor should work together to formally establish an enforcement plan to direct limited enforcement resources. 2. The board and the AMCO director should implement a process to monitor and track complaints to ensure they are assessed for follow up action and investigated in a timely manner. 3. The AMCO director should develop written procedures for establishing the expiration dates of marijuana handler permits and ensure staff receive the appropriate training. 4. The AMCO director should develop and implement procedures to segregate the duties for calculating and remitting fees to local governments. The Marijuana Control Board is a regulatory and quasi- judicial board consisting of five members appointed by the governor, created for controlling the cultivation, manufacture, and sale of marijuana in the state. The board consists of one member from the public safety sector, one from the public health sector, one residing in a rural area, one actively engaged in the marijuana industry, and one who is either from the general public or actively engaged in the marijuana industry. The continuation of the Marijuana Control Board is important to the health and safety of Alaskans. 3:24:14 PM REPRESENTATIVE BIRCH asked how the duties and responsibilities of the board in terms of state law interacted with federal law. CHAIR KITO offered his understanding that previously the administration implemented a memo which stated that the federal priorities were "not on enforcing the drug situation locally except in the cases of significant crimes." He noted that, as the memo had since been withdrawn, it would be best to hear about implementation of state statute on the role between the state and federal government. REPRESENTATIVE BIRCH related that he had served on various boards and there was always a concern for board liability. He expressed his concern for the protection of board members. CHAIR KITO offered his belief that this could be brought up later. REPRESENTATIVE KNOPP offered his belief that the former chair of the Alcohol and Beverage Control Board was a police chief, and when the memo was revoked, the chief had felt it was his duty to step aside. 3:28:17 PM KRISTIN CURTIS, Legislative Auditor, Legislative Audit Division, Alaska State Legislature, directed attention to the Sunset Review [included in members' packets] and stated that the purpose of the sunset review was to determine whether the Marijuana Control Board was serving the public interest and whether it should be extended. She explained that this was a new board created as a result of the 2014 ballot measure, that there was background information on page three, and report conclusions on page five of the review. She paraphrased from the Report Conclusions in the review, which read, in part: 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. The audit makes four recommendations for operational improvements. The board met its statutory mandate to adopt regulations necessary for implementing statutes. 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 operated in the public interest and did not duplicate the efforts of other entities, 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. Eighty-six percent of local government survey respondents believe the board does not duplicate efforts. 3:30:15 PM MS. CURTIS directed attention to page 8 of the review and reported that the [Marijuana Control] Board had issued 122 licenses from July 2016 through April 2017, with 80 percent of the licensee survey respondents rating the overall license experience as good or excellent. She further paraphrased from page 8, which read: 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. Exhibit 3 presents a schedule of fees established by the board. MS. CURTIS directed attention to page 11 of the review, which listed the first of four recommendations made by the audit, titled, "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," which read: 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. We recommend the board members, the AMCO director, and enforcement supervisor work together to formally establish an enforcement plan to direct AMCO's limited enforcement resources. MS. CURTIS paraphrased from the second recommendation, titled "The board and the AMCO director should implement a process to monitor and track complaints to ensure they are assessed for follow up action and investigated in a timely manner," beginning on page 11, which read: 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. 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. The efficiency with which complaints are investigated is one of the sunset evaluation criteria used in the legislative oversight process. Alaska Statute 44.66.050(c)(6) specifies the sunset review must evaluate: The efficiency with which public inquiries or complaints regarding the activities of the board or commission fi led with it, with the department to which a board or commission is administratively assigned, or with the office of victims' rights or the office of the ombudsman have been processed and resolved. 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. We recommend the board and the AMCO director implement a process to monitor and track complaints received to ensure they are assessed for follow up action and investigated in a timely manner. 3:32:57 PM MS. CURTIS paraphrased from the third recommendation, titled "The AMCO director should develop written procedures for establishing the expiration dates of marijuana handler permits and ensure staff receive the appropriate training," beginning on page 12, which read: Forty-seven of 53 marijuana handler permits tested were issued by AMCO with incorrect expiration dates. Of these, 45 were issued for a longer period than allowed by regulation. Regulation at 3 AAC 306.700(c) states that: To obtain a marijuana handler permit, a person who has completed the marijuana handler permit education course described under (b) of this section shall present the course completion certificate to the director. Th e director shall issue a marijuana handler permit card valid for three years from the date of issue. Management interprets the three-year validity period to start on the date of the course completion. In most instances, expiration dates of the handler permits were established at three years from the date the individual applied for the permit. The lack of written procedures and sufficient training contributed to AMCO staff's varying interpretations for calculating permit expiration dates. By not issuing permits in accordance with regulation, AMCO is allowing permit holders to handle marijuana and marijuana products beyond the period set in regulation without obtaining updated training on marijuana laws. We recommend the AMCO director develop written procedures for establishing the expiration dates of marijuana handler permits and ensure staff receive the appropriate training. 3:33:20 PM MS. CURTIS paraphrased from the fourth recommendation, titled "The AMCO director should develop and implement procedures to segregate the duties for calculating and remitting fees to local governments," beginning on page 13 of the review, which read: 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. AMCO management did not consider the need for segregating the duties for remitting fees to local governments. The lack of adequate segregation of duties increases the risks of error or fraud. We recommend the AMCO director develop and implement procedures to adequately segregate the duties for calculating and remitting fees to local governments. MS. CURTIS shared that the response from Department of Commerce, Community & Economic Development was on page 33 and the response from the Marijuana Control Board was on page 35. She added that both expressed agreement to all four of the recommendations. 3:34:20 PM CHAIR KITO offered his belief that there had not been withdrawal of the aforementioned memo during the completion of the sunset review. He asked if that decision by the federal government would have any impact on the efficacy or the applicability of the Alaska Marijuana Control Board. MS. CURTIS replied that it was outside the scope of the review, and it had not been considered during the audit. 3:35:24 PM ERIKA MCCONNELL, Director, Alcohol and Marijuana Control Office (AMCO), in response to Representative Birch, said that there was a work project to develop regulations regarding on-site consumption. This proposal had received more than 500 pages of comment when it had been opened for public comment and that several issues had been identified which needed work through the regulations. These issues had been forwarded to a sub-committee for work with a new proposal due at the April meeting. REPRESENTATIVE JOSEPHSON referenced a break-in in Anchorage resulting in the loss of more than $100,000 in assets in less than 65 seconds. He asked if it was necessary to show the floorplan of the business on-line. MS. MCCONNELL expressed concern for the security of the licensees. She explained that the application forms had been revised to no longer request that the applicant show any security apparatus. She added that the AMCO was also trying to find the balance between public access to information for the board and the security concerns of the licensees. She acknowledged that the licensed premise diagram would still be required for review, but it would be removed from the website once the facility began operation. REPRESENTATIVE JOSEPHSON noted that the Alaska State Legislature had introduced many bills after the marijuana initiative had been passed, although very few were passed. He asked if this hands-off approach by the Legislature was working, or if there was a need for "greater guidance." MS. MCCONNELL shared her belief that the Marijuana Control Board had been very responsive throughout the regulatory process, to address issues that had been found in reviews by the AMCO. She deferred to the board members for their comments. REPRESENTATIVE WOOL asked about the investigations for complaints. MS. MCCONNELL replied that, in general, AMCO only investigated submitted complaints and was not looking for problems. REPRESENTATIVE WOOL asked if there were "stings" or operations to intentionally get people to break the rules. MS. MCCONNELL relayed that, with alcohol, there was the compliance check and the shoulder tap program. She noted that AMCO was working to resurrect those programs and would also apply them for marijuana. She explained that the compliance check was an attempt by underaged people to purchase the regulated product, and the shoulder tap was an underaged person waiting outside the facility and asking people to purchase for them. She offered her belief that these were important ways to enforce the laws for regulated substances. REPRESENTATIVE WOOL asked if there was enough staff to enforce both marijuana and alcohol. MS. MCCONNELL offered her belief that it made sense to have these two substances regulated through the same office, even as the staff was extremely busy. She relayed that although they could use more people, she was not going to ask for more staff and that the office was managing. REPRESENTATIVE WOOL referenced an infraction for inaccurate labeling by a Fairbanks business, in which the business was fined $500,000. He asked if there was a schedule of fines, or if this was an arbitrary amount, as it appeared to be a very high fine for a new business. MS. MCCONNELL explained that the situation went far beyond a labelling issue, that this was a product manufacturing facility that was not testing the vast majority of its product, a major health and safety issue. She shared that it was the result of a tip that the business was not testing or tracking the product as required. She explained that she then wrote an accusation with a recommendation for the license to be revoked and submitted it to the Board for consideration. She reported that the Board decided that a fine was important, and although there was not a table of fines, there was a proposal for certain amounts for each subsequent violation or three times the profit of the licensee. She noted that, as the business had a profit of more than $1 million, the board decided that a high fine was warranted. 3:46:14 PM CHAIR KITO referenced the fiscal note [Include in members' packets] which identified $532,000 from general funds and asked about the necessity for this funding. MS. MCCONNELL offered her understanding that when the program was created there was a requirement that it be funded by the fees. In FY16 and FY17, the office was funded by unrestricted General Funds, with the understanding that there would be subsequently less in the ensuing years and for it to be entirely self-supported by FY2020. She explained that for FY19, the general fund allocation request was for half of the FY18 amount. She pointed out that the industry was still determining the number of licenses to determine the income necessary to support the needs of this regulated industry. CHAIR KITO mused that this was in recognition for the transition from start up to regular operations. MS. MCCONNELL expressed her agreement. REPRESENTATIVE BIRCH offered his understanding that "there's a lot of cash moving around." He asked if the annual license fees were paid with "a fistful of cash." MS. MCCONNELL relayed that most people paid with checks or cashier's checks, and that they did not receive very much cash. REPRESENTATIVE KNOPP asked how the shoulder tap program worked and who was held accountable under the program. MS. MCCONNELL explained that every store must have a security person at the front entrance to make sure that no one under 21 [years of age] entered. She said that the shoulder tap program was a bit challenging because someone had to notice that after the purchaser went outside, they gave it to someone who appeared to be underage. She said that they tried to address each situation on a case by case basis for accountability. REPRESENTATIVE JOSEPHSON shared his observation that in Anchorage there were "dozens of retail operations." He asked about the determination for the number of licensees. He questioned whether there was enough demand for them to all be profitable. MS. MCCONNELL replied that there was not a limit to the number of state licenses; however, the local governments were able to set a limit, even though the Municipality of Anchorage had not done so. 3:52:21 PM BRANDON EMMETT, Industry Seat Board Member, Marijuana Control Board, stated his support for the proposed bill and offered his belief that the Marijuana Control Board had done "quite a lot of great work for the State of Alaska" and that he would like to see that work continued. He opined that a functional regulated marijuana industry was more in line with the needs of the state than the previously unregulated system. REPRESENTATIVE JOSEPHSON asked if the board was seeking any guidance from the legislature or would they prefer a hands-off approach. MR. EMMETT replied that the board currently "does not have any specific asks of the legislature." He acknowledged that there were some issues that he believed could be addressed by the legislature. REPRESENTATIVE WOOL drew attention to page 23 of the sunset audit [APPENDIX B] depicting survey data for the overall licensing experience, the overall renewal experience, and the overall board effectiveness. He pointed out that the percentage of responses for poor, creates an unnecessary barrier, or not at all effective was at least 20 percent and asked if any of these applicant responses concerned him as a board member. MR. EMMETT offered his understanding that many of the complaints had been made at the beginning of the process, as there had been significant barriers at entry, mainly financial barriers which made it "a pay-to-play system." He opined that although some applicants found it difficult to enter the industry, as it matured the number of complaints would diminish. He suggested that the process was relatively smooth in comparison to that of other states. REPRESENTATIVE WOOL asked if the merger of the alcohol and marijuana boards had been effective or divergent. MR. EMMETT stated that there were some subtle differences between the alcohol and the marijuana industries and that the greatest challenge was for total resources. He opined that the staff has "been stretched to the limit," working very hard with very limited resources. He acknowledged that, although the State of Alaska was in trying economic times, an expansion of resources would be applicable. 3:59:28 PM CHAIR KITO opened public testimony on HB 273. 3:59:57 PM JANA WELTZIN, Owner, JDW Counsel, LLC, stated that her law firm serviced about 40 percent of the marijuana licenses in Alaska, as well as marijuana licensee holders in Washington, Oregon, Arizona, and Nevada. She declared her support of the proposed bill, pointing out that the Marijuana Control Board had worked hard to create an evolving structure for the industry, and had built an efficient office. 4:01:20 PM LEAH LEVINTON, Enlighten Alaska, stated that she was one of the first marijuana retail license holders in Alaska. She added that the license process was very involved, and that she had learned a lot alongside the Marijuana Control Board. She lauded the hard work of Ms. McConnell and declared support for the Marijuana Control Board in the progress and development of responsible regulation to help keep the industry consistent. She stated support for the proposed bill, noting that the AMCO office could use additional staff. 4:03:46 PM BRUCE SCHULTE, Campaign to Regulate Marijuana, shared that he had served on the Marijuana Control Board and he praised the office staff. He referenced an earlier recommendation to establish enforcement priorities, which he declared to be "imperative." He shared that although it was a new process, there had been enforcement of subjective interpretation for what the regulation should be. He stated that this was unfair and a misapplication of law. He offered hope that the Legislature would not have to become involved in this, unless the AMCO office was not able to arrive at specific limitations on the enforcement staff and protect the due process. REPRESENTATIVE JOSEPHSON asked for an example. MR. SCHULTE offered an example of an incident when the Marijuana Control Board had met on a Thursday and Friday, and received input from the staff, although nothing had been said about CBD oil on the shelves of the retail stores. On the following Monday, several stores around the state were raided and the CBD oil was confiscated under an interpretation of regulation. He reported that many of the products were identical to products carried on other retailer shelves. He acknowledged that, although the discussion about CBD oil was valid and appropriate, this could have been handled differently. He opined that it would have been appropriate for the staff to have discussed this at the meeting of the Marijuana Control Board. It was not until several months later that the head of enforcement asked the board for guidance in areas that enforcement was unsure of how to respond. He expressed his concern that, although there was law enforcement authority, they were not bound by the same levels of due process. REPRESENTATIVE WOOL asked if the dual enforcement responsibilities for the two separate areas was a good thing. MR. SCHULTE said that, given the economic environment, it made sense to "keep things as lean as possible." He offered his belief that, when affordable, it would be better to maintain separation of the two offices. He acknowledged that there were similarities in the two industries and that the staff was stretched thin. 4:10:54 PM CHAIR KITO announced that public testimony would remain open. CHAIR KITO announced that HB 273 would be held over.