Ryan Kunkel, a co-owner of five marijuana dispensaries, counts tens of thousands of dollars in cash at his office in Seattle in 2014. Banks are reluctant to work with marijuana businesses, fearing federal regulators. California’s ballot measure to legalize recreational pot doesn’t fix that problem. David Ryder New York Times
Ryan Kunkel, a co-owner of five marijuana dispensaries, counts tens of thousands of dollars in cash at his office in Seattle in 2014. Banks are reluctant to work with marijuana businesses, fearing federal regulators. California’s ballot measure to legalize recreational pot doesn’t fix that problem. David Ryder New York Times

Foon Rhee

Associate editor, editorial writer and Viewpoints editor

Foon Rhee

What to do with a bumper crop of cash if California voters legalize marijuana?

By Foon Rhee

frhee@sacbee.com

August 29, 2016 12:30 PM

UPDATED August 29, 2016 05:19 PM

Marijuana is the very definition of a cash crop – and the windfall will only grow if California voters legalize recreational pot in November.

But what to do with all that cash?

It’s a pressing problem – and it isn’t fixed by Proposition 64.

Never miss a local story.

Sign up today for a free 30 day free trial of unlimited digital access.

The big hurdle is that the federal government still treats marijuana – medical or otherwise – as an illegal drug. So major banks and other financial institutions won’t take pot businesses as customers for fear of losing their federal charters. That forces dispensaries and other marijuana businesses to deal almost entirely in cash, an invitation to robbery and shady accounting.

Jason Kinney, a spokesman for the pro-Prop. 64 campaign, says while the measure can’t change federal banking laws, it does make sure that the state receives tax revenues and also requires stricter safety measures for marijuana businesses.

While the feds haven’t relented even after Colorado, Oregon and Washington state made recreational pot legal – so banking efforts fizzled in those states – proponents say because California is such a huge market, the pressure for change will build if Prop. 64 passes.

California’s marijuana market is projected to mushroom from $2.7 billion in 2015 to $6.5 billion by 2020 if recreational pot becomes legal, according to a study released last week by two industry-related groups. Even in the world’s sixth-largest economy, that’s a big chunk of change. A lot of people are poised to make a lot of money, and some are helping fund the legalization campaign.

Though polls suggest Prop. 64 has a good chance of passing, voters will still have to sort out lots of issues and sift through a barrage of competing ads. As I make up my mind, I’d feel a lot safer with a better idea of how the avalanche of cash will be handled.

The California Bankers Association is also concerned and urges federal officials to address the problem. Rodney Brown, the association’s president and CEO, told The Bee’s editorial board recently that he hopes the ballot measure “elevates” the issue in Washington, D.C.

George Cook, CEO of El Dorado Savings Bank, said California is coming to a crossroads on this problem as more local governments allow marijuana cultivation.

Last year, some members of the state Board of Equalization floated the idea of a state-run bank to handle marijuana deposits, but it has gone nowhere.

The bankers say it’s a bad idea. Of course, they do. If they get the marijuana cash, it would increase deposits and loans, their bread and butter.

Kinney says that a state banking structure for pot businesses isn’t possible, and even if it were, including it in the ballot measure would have opened it up to a court challenge.

Lt. Gov. Gavin Newsom, who is out front promoting Prop. 64, led a blue ribbon commission that produced a thoughtful and detailed road map last year for legalization, including ways to protect children, consumers and the environment. But its 93-page report mentions the banking problem only in passing, saying it has forced dispensaries to act as “cash businesses that are the targets of robbery and violent crime.” And it just recommends urging the federal government to provide better access to banking.

In a statement, Newsom repeats the Prop. 64 campaign line: There’s no “silver bullet” on the state level, but passage of the measure could spur Congress to act. He also points to provisions in Prop. 64 to force transactions from under the table, including tax stamps, seed-to-sale tracking and audits.

How Gavin Newsom is convincing his wife to support legal pot

Lt. Gov. Gavin Newsom's wife, Jennifer Siebel, is concerned about how legal marijuana will affect their children, so Newsom has shown her articles about how new rules would make the drug harder for kids to get their hands on.

Christopher Cadelago The Sacramento Bee

The commission report also cited the problem of “massive cash payments” being delivered to tax collectors. The Legislature is trying to fix that, approving Assembly Bill 821, which would before 2022 let marijuana businesses pay their state taxes – which could rise by hundreds of millions of dollars with recreational pot – in cash without penalty. Under current law, there’s a 10 percent levy on tax bills of $10,000 or more a month that aren’t paid by electronic transfer.

But even if Gov. Jerry Brown signs the measure, it wouldn’t address all the cash in the first place.

A small group in Congress is pushing to update federal marijuana laws to keep up with legalization by states. That includes removing banking barriers and allowing pot businesses to operate much like other companies.

But the latest effort stalled in June. A House committee killed a budget amendment that would have prevented federal regulators from penalizing financial institutions that work with legal marijuana businesses.

If California is counting on federal bureaucrats and Congress to come to the rescue, we could be waiting a long time.