CALIFORNIA CITY — The California City city council selected a consulting firm during its Tuesday, Sept. 22 meeting to conduct a selected audit of the growing pot industry going back three years.
The agreement will see HdL Companies conducting three audits on cannabis businesses’ manufacturing and distribution elements in the city. Council approved it in a 3-2 vote, with Councilmembers Bill Smith and Ron Smith voting no.
When the city first adopted a cannabis ordinance in 2016 allowing medical marijuana dispensaries and cultivation, distribution and production of the plant, part of the requirement was to hire a tax administrator. Voters approved Measure A in June 2017, which placed an annual growth tax on cannabis, based on square-foot grown.
Cal City has lagged behind that requirement, according to Mayor Pro Tem Don Parris. The city had initially done a few audits but nothing since then.
“It’s time that we have someone come in and show us what we are doing wrong,” Parris said.
Christian L. Bettenhausen told the council the goal is to eventually train city staff to absorb the role HdL will perform, or evaluate the ongoing cost of keeping HdL or another firm performing the function.
Bettenhausen added that as part of the cannabis administrator’s duties, the ordinance allows “shall have the power to inspect any location where commercial cannabis cultivation occurs and to audit and examine all books and records” to ensure all fees, local, state and federal taxes are in compliance.
Bettenhausen said City Manager Anna Linn put the service out to bid but received only two bids: one from HdL and one from West Coast Anti-Money Laundering. He added Linn had considered soliciting a third bid but decided not to.
“She thought it was not fair to do because the first two bids were public at that point,” Bettenhausen said. In theory, a third company could provide a lower bid compared to the other two companies.
HdL will be paid from the city’s cannabis permit fee revenue, which generated $248,462 from fiscal year 2019-2020.
Councilmember Ron Smith argued against hiring HdL for the task because there were only two bids. He asked that it be pushed back out to bid.
“I think it sets a horrible precedence to not have the three bids,” Smith said.
Smith also noted the ordinance was worded to have the tax administrator duties be conducted by an individual, not an entire company.
“It doesn’t seem to line up with the ordinance,” Smith said.
Parris countered that the then-city manager Tom Weil hired a cannabis administrator in 2016 “but realized they were in over their heads and needed somebody to come in to teach a person to do it.”
“Consequently, we’ve kicked this can down the road over and over again,” Parris said. “We need to bring an auditor into audit but also teach one of our staff members to do the audit.”
Kicking it down the road yet again, he added, would mean the possible loss of tax revenue. For the cost of $6,000 per business, Parris said HdL could do three audits and train a city employee as a compliance officer.
Smith said the city had a prior relationship with HdL that was terminated and was cautious about re-entering another contract with them. He later addressed concerns of fees outside the contract’s scope.
Under the contract, HdL would charge an annual $6,000 per business audit, $1,250 for regulatory compliance inspections per business (assuming just two inspections a year), $3,500 for a cost recovery analysis, $2,500 for subject matter expertise and technical assistance and $600 travel costs for each site visited, as needed. Optional services would cost extra, including staff training and HdL would charge its standard hourly fee; HdL bills $250 an hour for half its staff and $195 for the other half.
During public comment, California City resident and former finance director Jeanie O’Laughlin also opposed the contract. O’Laughlin said the services offered by AML and HdL were different. She added one was asked to do a cannabis compliance check and the other one a full audit.
“An audit is something different than compliance,” O’Laughlin said, adding a full audit is necessary.
O’Laughlin said she asked the city manager for a request for proposals, but did not receive one; she added no RFP had been sent out, something she could have in theory bid on herself.
“Not that I want to do it, but to me the process is important,” O’Laughlin said. “These are backroom deals that are being done. I don’t understand why the council cannot do an RFP so everyone is bidding on the same thing.
O’Laughlin added one of HdL’s problems was due to excessive fees.
O’Laughlin also agreed with Smith’s assessment of having an in-house compliance officer/tax administrator to handle day-to-day operations for the cannabis industry.
“We need someone here,” she said, adding in her brief tenure at the city, people came in to ask questions. “There are a lot of things that go day-to-day that you’re not going to have anyone here to address. And if you do, they’re going to charge you.”
Resident DJ Twohig noted that the 2017 ballot measure never mentioned an audit on the cultivation aspects of the cannabis industry.
“We have to vet these proposals and make sure they are consistent with is required in the ballot,” Twohig said. He added the ballot measure doesn’t require hiring a company either.
Parris motioned for approval of the contract but asked for all segments of cannabis businesses to be included in the audit process.
Councilman Nick Lessenevitch said cultivation should be removed from an auditing purpose. He called cultivation tax revenue easy, noting staff just had to calculate the square footage by the tax rate.
Smith also added cultivation audits weren’t necessary “because we don’t have large grows in our town yet.”
Parris initially resisted, saying some discrepancies exist but without detail, and stressed a person needs to go into a business and determine how much is under cultivation.
Parris amended his motion to audit just distribution and manufacturing.