Roy Lee First District Laura Capps Board of Supervisors Second District, Chair County Administration Building Joan*

Published: August 19, 2025 8 pages

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Findings and Recommendations 5 findings

Cannabis tax revenues have been declining due to market oversupply and price collapse, stressing the County's operating expenditures for the Cannabis Program. The Board of Supervisors agrees. Cannabis tax revenues are indeed declining and could stress the County's operating expenditures if timely reductions and corrective measures were not recently implemented. The downward trend in cannabis tax revenues is attributed to several factors, including market oversupply; price collapse; infrastructure, licensing and regulatory costs; and operators going out of business, downsizing, and/or consolidating. As referenced in the above preamble, the Board recently directed several changes to right-size cannabis tax revenue spending. It is important to note that there are two categories of cannabis program expenses: 1) full-cost recovery licensing fees, associated with Cannabis Program administration and the issuance of cannabis business licenses, which pay for the labor and overhead associated with these tasks, and 2) Board-directed ongoing and one-time cannabis tax revenue allocations provided to cannabis and non-cannabis programs, projects, and staff. Surplus reserves from higher revenue years previously helped fund various County initiatives unrelated to the Cannabis Program. However, in more recent years the decrease in annual cannabis tax revenues and a consequently dwindling reserve necessitated a reduction in ongoing and one-time expenses. See Attachment D for "Historical Cannabis Revenue" ongoing and one-time use allocations (2018-2025). In fiscal year 2021-22, the ongoing and one-time use total allocations exceeded actual revenue for the first time since program inception. Since that time, the cannabis tax revenue fund balance has covered the cannabis program expense shortfall for ongoing and one-time cannabis revenue uses. The decrease in cannabis tax revenue has since leveled off and afforded opportunities to right-size program management and expenditures. The County of Santa Barbara's Cannabis Program has generated approximately $55 million since program inception in 2018, averaging $9.2 million annually over a six-year period. Original revenue projections were between $5 to $25 million annually. Fiscal years 2019-20 and 2020-21 were the highest grossing years, generating $12 million and $15 million respectively. Revenue has declined annually, beginning in fiscal year 2021-22.

Related Recommendations (1)

The Grand Jury recommends that the Board of Supervisors ensure that the Cannabis Program's annual operating expenditures do not exceed annual cannabis tax revenues. This recommendation has been implemented. Operator-paid cannabis business licensing fees pay for the majority of Cannabis Program licensing activities. Cannabis tax revenue is not the primary funding source for the Cannabis Licensing Program annual operating expenditures. At the FY 2025-26 Budget Workshops on April 16, the Board directed the CEO's Office to recommend reductions to cannabis revenue expenditures of a minimum of $1.2 million - enough to cover the budget shortfall and balance the program budget with no planned draw from reserves. Board direction included review of all ongoing uses, with specific emphasis on enforcement costs and identifying potential efficiencies between the County Health and Behavioral Wellness (BWell) departments pertaining to cannabis education. Staff returned on June 3, 2025 with proposed reductions for the FY 2025-26 budget, and the Board approved all staff recommendations including District Attorney and Sheriff staffing reductions; additionally, reductions were made to the BWell treatment providers' perinatal cannabis use prevention education program. The June 17, 2025 adopted program budget resulted in reducing approximately $1.28 million in ongoing cannabis program expenditures and is expected to close the gap between fiscal year 2025-26 ongoing revenue and expenditures, ensuring a balanced budget related to cannabis tax revenue and reserves. When "balanced budget" is discussed in this Grand Jury response, it means balanced within the Cannabis Program. The Board plans to evaluate and adjust program budgets annually depending on tax revenue and other considerations. See Attachment C for the "FY 2025- 26 Adopted Cannabis Tax Revenue Budget."

The County's allocation for deferred maintenance and capital project expenses from cannabis tax revenue has not been adjusted to reflect the decline in tax revenue over the past five years. The Board of Supervisors disagrees. The cannabis tax revenue allocated towards deferred maintenance was $900,900 in FY 2020-21, with an additional $1,518,500 added in FY 2021-22, for a total of $2,419,400. In FY 2023-24, it was reduced to $1,572,800, a 35% reduction, and remains at this amount today. While developing the FY 2023-24 budget, the Board recognized the dip in cannabis revenue was unlikely to quickly rebound and acted proactively to bring projected ongoing costs in line with projected ongoing revenues (estimated to be $7,500,000 in that fiscal year) by replacing $3,010,800 of ongoing costs in programs and projects unrelated to administration of the Cannabis Program with other discretionary general revenues. The reduction of the allocation to deferred maintenance was part of this funding swap.

Related Recommendations (1)

The Grand Jury recommends that the Board of Supervisors revisit its capital projects allocation to be funded by cannabis tax revenues, ensuring that such allocations do not exceed available funds. This recommendation has been implemented. The Board took direct action on this recommendation on June 3, 2025 prior to issuance of the Grand Jury report on June 20, 2025. Capital project expenditures were reviewed as well as other on-going expenditures, proportional reductions were made to eliminate the budget shortfall and preserve the reserve balance. No new capital projects were added to the fiscal year 2025-26 cannabis budget. The Board of Supervisors is committed to a balanced budget and plans to revisit and adjust projects and programs funded by cannabis tax revenue allocations on an ongoing basis in accordance with annual County Budget development.

Current County budget projections indicate that Cannabis Program ongoing expenditures will exceed expected cannabis tax revenues by $1.1 million in fiscal year 2025-26, posing a burden on County taxpayers. The Board of Supervisors partially disagrees. The fiscal year 2025-26 Cannabis Program ongoing expenditures could have exceeded projected cannabis tax revenues if the Board had not acted and made appropriate reductions on June 17, 2025. During the fiscal year 2024-25 Q2 Cannabis Update in March 2025, CEO staff updated the Board regarding the upcoming shortfall, which was exacerbated because the $6.1 million budgeted tax revenue was reduced to a projected $5.4 million. This early awareness alerted the Board to agendize the topic for further discussion during the April 2025 Budget Workshops, to minimize the projected burden on County taxpayers. No cannabis expenditures are funded by monies received outside of cannabis tax and cannabis licensing fees.

Related Recommendations (1)

The Grand Jury recommends that the Board of Supervisors prioritize covering the direct operating costs of the Cannabis Program so as to achieve more balanced budgets in the future. This recommendation has been implemented. During the Fiscal Year 2025-26 Budget Workshops, the Board directed the CEO's Office to return with a recommendation to reduce ongoing Cannabis Program expenditures instead of relying on the fund balance, thereby addressing the estimated $1.2 million gap. As referenced in the response to Finding 1, the Board adopted the recommended reductions to achieve a balanced budget. In addition to this action, CEO staff conducted a Cannabis Licensing and Regulation fee study in fiscal year 2024-25. As part of the fee study, the CEO's Office reduced the licensing team by 1.0 full-time equivalent (FTE) to account for program contraction. New fees have gone into effect as of July 1, 2025. The fees were adjusted to reflect updated salaries, benefits, overhead costs, and the average amount of time spent on processing license applications. Per the Board's direction, licensing fees are calculated to achieve full- cost recovery for participating departmental staff. CEO staff will conduct annual analysis to track labor hours and respective payments. Additionally, staff plans to conduct subsequent fee studies on a three-year cycle to update license fees as needed to ensure full program cost recovery.

Currently Santa Barbara County's budgeting, tracking, and reporting of cannabis related revenue, expenses, and compliance violations are decentralized, making it difficult to provide comprehensive and detailed information on demand. The Board of Supervisors partially disagrees. Presently, the County's budgeting, tracking, and reporting of cannabis related revenue and expenses are all managed in a centralized financial system accessible by applicable County staff in the Treasurer-Tax Collector's office and in the CEO's Office. Staff utilize program codes to track activities related to administration, licensing, and enforcement among other activities. Reports can be run on demand to provide timely, comprehensive, and detailed information upon request. Cannabis program management documents are housed in Accela, the County's online tracking software. Accela stores the application, inspection dates, and license approvals. Compliance violations are outliers and are not uploaded to Accela. Violations are decentralized because multiple departments conduct compliance activities to administer Chapter 50. Cannabis business license issuance is dependent upon the approval of eight Departments and Districts including the Agricultural Commissioner's Office, CEO's Office, Community Services (Sustainability Division), County Fire, County Health (Environmental Health Services Division), Planning and Development, Sheriff's Office, the Treasurer-Tax Collector's Office, and the Carpinteria-Summerland Fire District. Cannabis licensing activities are often one of many responsibilities managed by participating division and departmental staff. Individual departments manage violations on servers unique to their departments. Each department has particular systems and protocols in place to manage data according to their processes and standard operating procedures. CEO staff engages in cross-departmental coordination efforts to assess and prioritize compliance violations and areas of concern. The County will continue tracking budget information through the internal financial database and licensing information through Accela.

Related Recommendations (1)

The Grand Jury recommends that the Board of Supervisors direct the County Executive Officer to develop an automated and centralized information database to track and report the budget, revenues, expenses, and administrative activities related to licensing and compliance specific to the Cannabis Program. This recommendation will not be implemented. The Cannabis Program utilizes two centralized information databases, a financial system and licensing system. The financial system includes all budget, revenue, and expenses. The administration of the licensing program, including cannabis business license applications, inspection dates, and license approvals is accessible online through Accela. There would be significant cost to integrating both the financial and administrative systems. Although the recommendation will not be implemented, the CEO Office is confident that the existing systems provide timely, accurate information on demand. In addition, CEO staff tasked with coordinating cross-departmental cannabis business license activities are prioritizing process improvements to streamline budgeting, licensing and compliance efforts. These efforts are geared towards maintaining compliance while simplifying processes, reducing redundancies, and issuing timely business licenses. Staff is committed to transparent, clear communication with internal and external stakeholders to achieve these objectives.

Despite declining illicit cannabis cultivation activity in the County, a significant portion of the County's cannabis tax revenues continue to be allocated to combat this activity each fiscal year. The Board of Supervisors partially disagrees.

Related Recommendations (1)

The Grand Jury recommends that the Board of Supervisors annually reevaluate the allocation of cannabis tax revenue for combating illicit cannabis cultivation activity in the County. This recommendation has been implemented. At the June FY 2025-26 Budget Hearings, County staff presented options to re-envision the Sheriff's Office Enforcement Team remaining $1.5 million dollar budget. This review of cannabis tax revenue enforcement uses was timely considering program contraction and the declining enforcement activities from large-scale raids to fewer, slower, and longer investigations pertaining to alleged diversion and illegal resale of legally purchased products. The reduction in cannabis enforcement activities necessitated a re-evaluation of Sheriff enforcement program costs. The Board adopted a proposal that reduced the Cannabis Enforcement Team budget dedicated to the illicit cannabis market. Two detectives were reassigned to the North and South County Narcotics Teams as Cannabis Specialists; these are ongoing positions. The third detective was reassigned to manage the countywide warrant backlog funded with one-time monies. See Attachment C for the "FY 2025-26 Adopted Cannabis Tax Revenue Budget." The Board will continue to annually review ongoing and one-time expenses in the budget development cycle.

* This report's PDF did not contain easily extractable text and required Optical Character Recognition (OCR) for analysis. There may be minor errors in the extracted findings and recommendations due to OCR limitations with scanned documents.