HOUSE BILL NO. 123 "An Act establishing the Marijuana Control Board; relating to the powers and duties of the Marijuana Control Board; relating to the appointment, removal, and duties of the director of the Marijuana Control Board; relating to the Alcoholic Beverage Control Board; and providing for an effective date." CYNTHIA FRANKLIN, DIRECTOR, ALCOHOLIC BEVERAGE CONTROL BOARD, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, discussed the legislation. She reported that HB 123 created a five member volunteer board that would be housed under the same agency as the Alcoholic Beverage Control Board (ABC). Both boards would share one director and a staff of 16 employees statewide who were tasked with licensing, enforcement, and administrative duties. Co-Chair Thompson OPENED public testimony. Co-Chair Thompson CLOSED public testimony. Representative Wilson questioned the fiscal note. She cited the $756.4 thousand appropriation for services and wondered what services were included. Ms. Franklin replied that the budget included an initial outlay of $500,000 for technology to track both licensees and marijuana. She detailed that the services category included a database for licensees and software to track marijuana. Software called "Seed to Sale" was available and was designed to track marijuana sold in retail outlets to ensure it was legally grown. Once the software and required technology was implemented the costs in the out-years would be reduced. Representative Wilson inquired about the remaining $256 thousand. Ms. Franklin answered that the remainder included expenses for enforcement vehicles, office lease costs, and costs associated with additional employees. Representative Wilson asked whether eventually the board costs would be divided by the number of licensees and included in the licensing fees in 2017. Ms. Franklin replied in the affirmative. She expected that the board costs would be "receipt supported." Representative Wilson wondered what the estimated cost of a license would be based on other states with legalized marijuana. Ms. Franklin answered that the closest comparison was the city of Denver, Colorado with a population of 650 thousand. The city issued approximately 900 marijuana licenses. The city had 37 full-time employees at a total cost of $5.9 million to regulate marijuana. The city had made $14 million in tax revenue in 2014. 2:03:11 PM Co-Chair Thompson OPENED public testimony. LEIF ABLE, SELF, KASILOF (via teleconference), supported the bill. He believed that the regulatory structure set up in HB 123 was a "good idea" for regulating marijuana and associated costs to the state. He felt Ms. Franklin had done a good job educating herself about the topic and would perform her duties as Chair well. Co-Chair Thompson CLOSED public testimony. Representative Kawasaki related that the bill delineated the required background of potential Marijuana Control Board members and noted that the requirements for board membership were more extensive than the ABC board and asked why the difference existed. Ms. Franklin answered that the composition of the ABC board was designated under Title 4 rules and was limited to two members from industry and three public member; one of whom must be from a rural area. A Title 4 stakeholders group met and discussed composition of the ABC board and recommended revisions that ABC board members reflected the composition and requirement of the Marijuana Control Board. The group responded to concerns from the public safety and public health partners of the ABC board to expand the requirements of board members. She noted that SB 99 (ALCOHOLIC BEVERAGE CONTROL; ALCOHOL REG) contained the revised ABC board designee requirements. Vice-Chair Saddler asked how the board would determine the license fees. Ms. Franklin answered that the bill contained a $5000 cap on licensing fees. She added that other fee provisions required that half of the licensing fees must be be refunded to municipalities if a licensed premise was located within a municipality. She detailed that fees for alcohol licensing varied from approximately $1,250 to $3500. on a biennial (renewed every other year) basis and increases were recommended by the Title 4 group to reflect the work and time associated with regulation. She anticipated that the marijuana fees would cost close to the $5000 cap based on sister states (Colorado and Washington) that had legalized marijuana, the state's alcohol liquor license, and the work involved in licensing and regulation in order for the board to be properly funded by program receipts. Representative Guttenberg wondered about the ability to track marijuana as a new legal industry. He wondered how it was possible to track an industry that was not able to bank. He referred to a National Conference of State Legislatures (NCSL) conference that invited representatives from the banking industry and the state of Colorado that concluded that the marijuana industry was prohibited from banking. He wondered how the legalized states dealt with receiving money from an industry that the federal government considered an illegal source. Ms. Franklin agreed that the banking industry issue was challenging. She shared that initially, the marijuana industry in the state would be "unbanked." She noted that Colorado had come up with banking solutions for 40 percent of the industry and was considered "underbanked." The state would analyze the Colorado solutions for possible resolutions in Alaska. The "Cole Memorandum" [federal guidance on marijuana enforcement issues] required a "strict enforcement scheme that lessens or minimizes criminal activity" for states with legal recreational or medical marijuana. The states of Washington and Colorado had dealt with the banking issue by collecting taxes in cash. The state was working with the tax division to ensure that if taxes were missed on growing operations the state had the statutory authority to collect taxes from any licensed establishment that obtained marijuana that had not been taxed. She conveyed that the statute prevented a black market or criminality in the "downstream" marijuana industry (retail shops). She indicated that the Seed to Sale software tracking system was an essential tool in Washington and Colorado to ensure that the marijuana sold was legally grown. She believed the task was formidable, but could be achieved. Representative Guttenberg asked whether specific tracking software existed to meet Alaska's needs. Ms. Franklin answered that there were several options for the software. She referred to software in use by Washington and Colorado called "Biotrack." Twenty-two other states had medical marijuana and used tracking systems. The board intended to research software best suited for Alaska's needs. Representative Gattis wondered why dealing in cash was legal since cash money was issued by the federal government. Ms. Franklin answered that the issue of using cash had not been legally challenged for use in the marijuana industry. Vice-Chair Saddler wondered how other states tracked the sale of marijuana. Ms. Franklin replied that other states utilized an ID tagging system. She explained that in legal states, marijuana was grown from cuttings from mother plants. When the plant reached 8 inches tall the plant was tagged. The tag remained with the product from bud, leaf, trim, and even THC extraction and followed it throughout its product life in any form via sales. 2:15:35 PM Representative Pruitt referred to the license fees contained in the bill. He acknowledged that license fees were determined by the board but felt that the state should benefit from the value of the licenses. Ms. Franklin responded that the ABC board had the statutory authority under AS 1738 to determine how to issue licenses or whether to issue population limits. The Marijuana Control Board would have the same authority. Alcohol regulation contained a population limited system with transferability. Discussion among the ABC board on the "concept of a secondary market value" had taken place. The board had considered the concept of going with a high- quality merit based matrix system where an applicant would receive points for meeting qualifications. Licenses would be issued to the highest quality applicants as opposed to a minimum qualification system chosen by lottery as employed in Washington State. The minimum qualification system potentially lead to businesses least likely to succeed or comply with regulations. The merit based matrix system did not limit licenses on the front end. However, AS 17.38 clearly established municipalities' authority to set numerical limits on licenses. The combination of no population limits and a merit based system without transferability so that the licenses would transfer back to the state in the event of a business failure was being discussed among the preliminary regulations team and would be openly and publically debated in the actual regulation process. Representative Pruitt wondered if the board had the authority to increase licensing fees based on the board's expenses if a merit based system was adopted. Ms. Franklin replied that the license selection process and fee rate were intended to be set by regulation. She added that the $5 thousand limit on license fees was placed in the referendum to limit the ability of the legislature or regulatory entity to institute extremely high fees as a way to discourage licensure. Representative Pruitt asked for a definition of high fees. Ms. Franklin indicated that in one state the initial fee was $25 thousand and naturally limited the ability of applicants from entering the industry. She believed if fees were set "logically" reflecting the board's workload and services, the fee would be deemed reasonable. She believed the fee approach was supportable versus setting an arbitrarily high fee structure. Representative Pruitt did not want a barrier to recovering licensing and regulatory costs because of the cap. Ms. Franklin answered that the initiative stated that a regulatory body shall implement "reasonable" fees not to exceed $5 thousand. She communicated that once the board and licensure was established and it became apparent that $5 thousand would not cover the services required to issue the licenses the board would take appropriate action. She expressed confidence that a legal solution could be reached if the cap was inadequate to cover costs and the board maintained proof of insufficient funds. The division did not know the cost of regulation because marijuana licensure was entirely new. The fiscal note costs to establish the board were initially much higher and had been trimmed because of the state's fiscal situation. The division attempted to implement the voter initiative in the safest way possible for the least amount of money and keep the second and third year costs conservative while implementing the will of the voter in a fiscally conservative way. Representative Pruitt asked the division to keep the legislature apprised if the fee was not sufficient to cover costs. Representative Wilson MOVED to REPORT CSHB 123(JUD) out of committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. CSHB 123(JUD) was REPORTED out of committee with a "do pass" recommendation and with two previously published fiscal impact notes: FN2 (ADM) and FN3 (CED). 2:27:03 PM AT EASE 2:29:23 PM RECONVENED