Regulating medical marijuana was not without its challenges. HB10-1284 allowed existing medical marijuana businesses to continue to operate pending licensure so long as they applied to the MMED by August 1, 2010.
The medical marijuana legislation wasn’t effective until July 1, 2010, which meant there was barely a month to get things in order; we started about 1500 businesses in the hole.
The MMED had to develop application processes and begin to accept applications and application fees immediately after the effective date of the legislation.
The legislation was effective July 1, 2010, and there was no time to lease space for the newly formed Division, so those hearty souls, led by Dan Hartman who was the first MMED Director, set up shop at the Mile High Kennel Club, the dog race track in Commerce City, Colorado.
Since marijuana was illegal under federal law, proceeds and profits from this business couldn’t be placed in banks, so applicants came with cash in bags and hastily filled out applications. Luckily, the Revenue Department also regulated Gaming, which is a largely cash industry, and we were able to employ some of those cash-handling best practices.
Vertical Integration of Medical Marijuana Businesses
The legislation also required vertical integration, also known as common ownership of the medical marijuana center and its cultivation. Vertical integration meant that medical marijuana centers were required to grow 70% of their medical marijuana themselves.
This meant that businesses that had limited their business model to cultivating and those that had limited their business model to selling, now had to create partnerships with each other very quickly in order to be able to apply for licensure. Interestingly, a few of those partnerships were actually created in the parking lot of the dog race track. As you can imagine, some of those business arrangements worked out, but some did not. When businesses determined that an existing partnership was not working out, they filed changes in ownership applications, which added to the churn.
Licensing the Existing Marijuana Operating Businesses
Throughout this time, the MMED was working to license these operating businesses, many of whom were not accustomed to regulation or taxation. The statute required a number of checks –
- First financial checks – MMED had to understand where the money to operate these businesses was coming from, to ensure that there was complete disclosure of all persons having a direct or indirect financial interest in the business – as the statute prohibited unlawful financial assistance.
- Second – background checks – all owners and employees were required to undergo a fingerprint-based FBI criminal background check.
- An early requirement, which was removed during the Sunset Review in 2015, was that before individuals could get an occupational license, which is required to work in the industry, they had to satisfy all government debts such as unpaid taxes, unpaid government debts, and unpaid child support. This not only increased the time and complexity to complete all licensing activities for occupational licensees, at times it prohibited individuals from obtaining an occupational license to work in the medical marijuana industry, who would otherwise have been qualified.
Need for Sustainable Funding Model
The initial thought was that the MMED would be funded by a new cash fund comprised of application fees. Two major components of the law created an unsustainable funding model, which meant that MMED would not have enough funds to operate effectively.
- Application fees were only assessed on new applications. Annual licensing fees could only be assessed on licensed businesses. While those two concepts seem innocuous initially, they were extremely impactful given the environment regarding regulation. With HB10-1284 and HB11-1043, the Legislature imposed a moratorium on new applicants for a total of two years, meaning that no new application fees were assessed during that time.
- The ability to assess annual licensing fees was also impacted during this time. HB10-1284 had imposed a dual licensing structure between the State Licensing Authority and the local jurisdictions. Because this licensing structure was coupled together, both the State and Local Licensing Authorities had to approve the application before a license could be issued. The local jurisdictions were also in the process of identifying and implementing their own licensing requirements. Remember, both the State and Local Licensing Authorities were dealing with the backlog of approximately 1500 operating businesses and as you can imagine, there were delays in licensure. This meant that very few annual licensing fees were being assessed.
Those two situations taken together created an unsustainable funding model –MMED was unable to assess additional fees – and the initial fees were not sufficient to sustain the operation of the MMED on an ongoing basis.
The irony of this situation was that, at the same time, MMED was responsible for performing all licensing and compliance activities as if the businesses were fully licensed. The work was there, but the funding was not.
Local Control of Medical Marijuana Businesses
The statute gave local jurisdictions great authority to opt in or opt out of the commercial, regulated program. If a local jurisdiction opted out, that meant that no licensed medical marijuana business could operate within that jurisdiction’s boundaries. In those situations where businesses were operating in a local jurisdiction that opted out, this created challenges for the local jurisdiction, the operating business, and the MMED.
When that happened, MMED worked with the local jurisdiction and the business to establish a timeline for the business to discontinue operating in that local jurisdiction. In some cases, the medical marijuana business was able to move to a different local jurisdiction that had opted in. Then they all worked together to address a new local application, approval of the new licensed premises, and safe transport of the product to the new location. However, if the operating business could not obtain another licensed premises, then MMED worked with it to address voluntary destruction of the medical marijuana. Both scenarios created additional work for the MMED and churn for the industry.
Addressing the Issues
During the latter half of 2011, the impacts of the funding anomaly began to emerge and the MMED and I worked to identify and address those items. I will discuss that work in an upcoming post.
Lessons Learned
- Make sure you have a sustainable and sufficient funding model – everything stems from the ability to properly implement the regulatory program.
- Make sure you have some upfront time to create the program and processes before you have to actually use them.
- Make sure you have sufficient time to implement the program – when you start with operating businesses in the mix, it takes longer and is more challenging to get control of the program.
Preview of Upcoming Discussions
To address the challenges in implementing a medical marijuana regulatory program as discussed in this post, we began a comprehensive internal review. I made some leadership changes and directed the MMED and the Department’s Internal Audit group to evaluate the program. Together, we identified next steps. At the same time, the State Auditor initiated a formal audit of the program. In the next post, I will discuss the leadership changes and the rationale behind them, the internal evaluation, and the state audit.