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Pot revenues not city’s salvation – for now

• Mayor not convinced money woes disappear

Pot revenues not city’s salvation – for now

Marijuana is expected to become California’s new cash crop and cities like Ceres are granting permits in exchange for windfall profits.


POSTED December 27, 2017 10:22 a.m.
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With three developer agreements approved by the city for cannabis operations and the required hefty fees to be paid into city coffers, why all the doomsday talk at City Hall about record budget deficits and laying off 12 public safety employees?

Answer: The revenue isn't here yet and the city cannot count on it coming in.

Ceres is the few cities in Stanislaus County that has opened the door to marijuana operations through the development agreement process. Modesto allowed dispensaries but voters there recently passed a tax structure of 10 percent on marijuana sales. Riverbank, Oakdale and Patterson are also open to dispensaries.

Mayor Chris Vierra said it remains to be seen how dependable the marijuana permit revenue stream will be in the future.

"We all know there will be a big upcycle in the marijuana deal and then a settling out," said Vierra. "So one of the things that we want to do is hitch our wagon to the guys who are going to be left standing when the bubble bursts."

He said other states that have legalized marijuana for medical or recreational use have seen the same cycle. But he's encouraged by the sales numbers rolling in from the north Modesto dispensary that sells about $1.7 million in product each month.

"I want to see some solid numbers first," the mayor added. "Even if we get those numbers, we're still not living within our means when it comes to the general fund and we're not the only jurisdiction that's in this problem and it's going to continue to get to be a bigger and bigger problem."

On May 22 the City Council approved the Kase Manufacturing facility as part of a development agreement that calls for the city to be paid $50,000 per month during the first year. The plant is operational in southwest Ceres but the first monthly payment of $50,000 is not due until Jan. 2. At the end of the first year, the city will have received $600,000. If Kase is still operational in year 2, the city will get $75,000 per month, for a total of $900,000 for the year. The third year fees jump to $100,000 per month, or $1.2 million - the approximate size of the city's budget deficit for the 2018-19 fiscal year.

Before a single payment was issued, the City Council bet on the come, saying it planned to budget half of the expected $600,000 for year one in the current budget cycle. Wells said that's expected to be on target.

However, since that time, the council has approved two developer agreements for medical marijuana dispensaries. On Oct. 23 the council approved an agreement for Pacafi Cooperative to open a 6,000-square-foot medical marijuana dispensary in an industrial area north of Hatch Road at 1442 Angie Avenue. Then on Dec. 11 the council approved the city's second dispensary - this one to be operated by Mike Reynolds, the same applicant for the Kase Manufacturing plant.

Both agreements inked between the city and the two dispensary operators call for a one-time upfront payment of $80,000 and whopping monthly fees to the city based on monthly gross receipts as follows:

• $40,000 per month if $500,000 or less in gross receipts are earned;

• $50,000 per month if between $500,001 and $800,000;

• $75,000 per month if between $800,001 and $1,100,000;

•$100,000 per month if receipts are more than $1,100,001.

Using the minimum payment of $40,000 per month by the two dispensaries and the fees paid by Kase Manufacturing, the city would realize $1.56 million in 12 months of operations. If the two dispensaries reach maximum sales, and Kase is into its third year of operation, the city could realize $3.6 million per year in pot revenues alone.

Some privately are concerned that Stanislaus County's decision to allow marijuana dispensaries in unincorporated areas could result in an oversaturation that could dilute sales and threaten the viability of operations in Ceres. Any revenues in the county will go to the county. Vierra said he favored approving Reynolds' dispensary because there was talk about putting one at the former Animal Shelter across the river and one off of Mitchell Road.

City leaders, however, don't seem to share any sense of optimism that the city's budget deficits can be erased in a short period of time. Mayor Vierra said the city has slowly watched its general fund reserves whittle from 42 percent down to dangerous levels because of escalating employee costs, particularly public pension costs. The council, he said, believed it would end the current 2016-17 budget year with a 19 percent in reserves - "about as low as we really wanted to go." Now it appears the city could end the year with just 14 percent in savings.

"The revenues that were non-marijuana did not materialize," said Vierra.

Vierra feels confident that Kase Manufacturing is tapping into a unique niche of the market.

"I use the analogy that it's like tomato paste or diced tomato. It becomes the base ingredient for barbecue sauce, catsup, pizza sauce, everything. When you look at Mike's product, the oil is not only used in his product but a lot of different products across the board so it allows for the diversification of it. What we believe will happen is that he and the (Pacifi) group will have the staying power to be in there when the market buckles a little."

Vierra still believes the city will get "big revenue from them" and hopes it occurs over a long period of time but he's also looking to reorganize city services.

"If we have this giant windfall of cash that comes in, we can always add people back."

In the meantime, city officials will be faced with cutting expenses to deal with a huge budget shortfall before the new fiscal year starts on July 1. A deficit of $1.2 million could result in a combined loss of 12 public safety employees.

 

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