Administrative Office*

Current revenues do not provide sufficient margins over expenses to fund community services at prior years' levels. Without operational changes, the Cannabis Program's sustainability is in jeopardy, and future funding for community services from this source will be minimal and/or unavailable. Response to F1: The Respondent disagrees partially with the finding. It is true that 2022 cannabis tax revenues did not provide sufficient net revenues to fund community services at prior years' levels; which is why the Board of Supervisors directed operational changes to facilitate the program in a sustainable manner. The Respondent believes that it is speculative and premature to state that the sustainability of the Cannabis Program per se is in jeopardy and that further funding for community services will be minimal or unavailable. In fact, the recently released 2023 County of Monterey Crop & Livestock Report from the Agricultural Commissioner's Office reports a $78 million increase in cannabis revenues, which indicates that the industry is stabilizing and recovering. It is believed that the program's sustainability is trending in a positive direction given the anticipated additional revenue and expanded square footage of cannabis production. The Board of Supervisors has directed various operational changes to facilitate sustainability of the Program.

The 2020 Cannabis Program Strategic Plan, intended to be updated every two years, was not revised until January 2024, causing delays in assessing key metrics and whether program goals are being met. The Respondent agrees with the finding. The first Cannabis Strategic Plan was Response to F2: approved by the Board of Supervisors in 2018 and updated in 2020; however, an update was not provided in 2022. The next update will be presented to the Cannabis Committee in September 2024 and to the Board of Supervisors by December 31, 2024. A subsequent update is planned for 2026.

Current tax rates have stabilized. Revenues for FY 2024-25 are projected to be consistent with prior years, contributing to the Program's sustainability if Program expenses are aligned with revenues. The Respondent agrees with the finding. The Board of Supervisors is committed to Response to F3: ensuring that, as part of the annual County budget process, Cannabis Program expenses remain aligned with available Cannabis tax revenue. 1 of 5

An internal audit of the Cannabis Program, recommended by the Citygate Report, was not completed, thus risking inefficient operating practices and the potential for inaccurate record keeping. Response to F4: The Respondent disagrees partially with the finding. As part of the fiscal guidance, analysis and training provided to County departments by the Auditor-Controller (ACO), the ACO assessed the operating practices and record keeping of the Cannabis Program. This effort resulted in updates to the accounting structure and improved financial reporting/record keeping of the Cannabis Program and rendered an internal audit unnecessary.

More than 50 cannabis businesses have closed or filed bankruptcy leaving the County with $6M in unpaid taxes, resulting in reduced revenues for community services. Response to F5: The Respondent agrees with the finding.

A community survey indicated that a high priority for cannabis tax revenues should be allocated toward drug education and prevention. However, only a small fraction of the cannabis tax revenues has been allocated toward such programs. The lack of funding for these programs is inconsistent with community priorities and increases the potential for drug abuse and death. Response to F6: The Respondent disagrees partially with the finding. In November 2016, Monterey County voters approved Measure Y as a general tax on commercial cannabis activities. Pursuant to State law, general tax revenues may be used at the discretion of the Board of Supervisors. State law requires that general tax revenues must be allocated annually as part of the County budget process. In January 2018, the Board approved a community engagement process under the direction of the County Administrative Office. The goal of the process was to engage the public in each Supervisorial district to gain input on potential prioritization related to the use of cannabis tax revenue beyond administrative costs of the Cannabis Program. As part of this community engagement process, participants were informed that, as a general tax, the ultimate discretion regarding allocation of this revenue resided solely with the Board of Supervisors as part of the annual County budget process. The Board of Supervisors has allocated $1.5 million of cannabis tax revenue for staff and non-staff costs dedicated to public awareness and youth prevention since FY 2018-19. Additional funding sources have also become available to further drug education efforts within the County. For example, in the past several years the Health Department has conducted extensive messaging and drug education offering to communities to address the significant growth of Fentanyl use in our communities. Illicit activities are one of several major factors contributing to the reduction in funds available

for community needs. Response to F7: The Respondent agrees with the finding.

Criminal/Civil penalties for most illicit business activities may be adjudicated as a misdemeanor by the District Attorney's office with less than a year probation and/or a fine of $1,000 or less, resulting in an ineffective deterrent system. Response to F8: The Respondent agrees with the finding.