Pubdate: Wed, 05 Feb 2020
Source: Wall Street Journal (US)
Copyright: 2020 Dow Jones & Company, Inc.
Author: Heather Gillers


South Beloit, Ill., faces steep bills to fund its firefighter and
police pensions and repave its cracked streets. Now, Mayor Ted Rehl
has a plan to help cover the shortfall: marijuana.

South Beloit, less than a mile from the Wisconsin state border, will
welcome its first cannabis dispensary later this year. Recreational
cannabis became legal in Illinois on Jan. 1 but remains illegal in
Wisconsin. The Illinois town hopes to collect roughly $1 million a
year in taxes on marijuana purchases, mostly by Wisconsinites.

"If we made that million dollars, we would be able to do streets and
we would be able to put a nice amount in the retirement fund," Mr.
Rehl said.

The past decade has been difficult for American cities and states,
where tax revenues and public-worker pension funds took massive hits
as a result of the 2008 economic crisis. Even when the stock market
recovered after the financial crisis, superlow interest rates have
also weighed on the pension plans. With recreational cannabis now
legal in 11 states, public officials are looking to marijuana tax
revenue to help shore up government finances and address funding shortfalls.

Illinois, where lawmakers are grappling with the highest pension debt
of any state, was the first state to legalize retail sales of cannabis
through legislation rather than a popular vote. Towns in Illinois and
California, facing state-level mandates to increase annual pension
payments, are eagerly anticipating revenue from recreational marijuana
sales. Cities in several other states, including Oregon, Massachusetts
and Alaska, are also collecting cannabis taxes.

To be sure, many cities and states are directing portions of their
cannabis revenue toward residents or communities that were historic
targets of marijuana enforcement. But plugging budget holes remains at
the top of many public officials' to-do lists.

In the aftermath of state cannabis-legalization measures, "you tended
to see poorer towns that are not in such good fiscal shape being more
welcoming and willing to license dispensaries," said Roy Bingham, CEO
of BDS Analytics, a Boulder, Colo., cannabis-industry consultant.

California local governments collected a total of $1.86 billion in
revenue from cannabis sales during calendar year 2018 and nearly as
much in the first three quarters of 2019, according to Brea,
Calif.,-based HdL Cos., a consultant to local governments and public

Cannabis revenue last year helped Port Hueneme, Calif., balance its
budget without dipping into reserves for the first time in eight
years. Rather than charge a tax, Port Hueneme is requiring its seven
retail dispensaries to turn over 5% of their gross sales and donate
another 1% to local charities, said police chief and interim city
manager Andrew Salinas.

Mr. Salinas said Port Hueneme, which collected $1.8 million from
cannabis in 2019, has used cannabis tax revenue to help cover the
city's growing pension payments, to pay for additional police officers
and to add recreation programs. The donations, meanwhile, have
benefited a local homeless shelter and subsidized a July Fourth
fireworks display.

"Cannabis saved the fireworks show," Mr. Salinas said.

But researchers and analysts expect marijuana revenues, which rely on
changing tastes and disposable income levels, to be unpredictable and
volatile. California's cannabis revenue for the first six months of
2018 came in 54% below what the state projected, according to the
state Legislative Analyst's Office.

Another risk is more widespread legalization. South Beloit's market
advantage, for instance, depends on a continued ban in Wisconsin.

Cities and states also face a delicate balance: Tax marijuana too much
and people will stick with the black market, which Moody's Investors
Service pegs at about $40 billion nationwide. BDS Analytics estimates
that marijuana flowers cost 77% more to buy legally than illegally in

A cannabis-infused chocolate bar purchased in Illinois' capital city
of Springfield might cost $25 before taxes. But after the state, city
and county take a cut, the consumer would end up paying $33.19.

City officials say they are budgeting conservatively and keeping their
expectations low. Springfield plans to use a portion of its marijuana
taxes to promote economic development on the city's blighted East Side
and another portion to shore up the city's police and fire pension
funds. But Mayor Jim Langfelder is well aware that even the full
$700,000 in projected revenue won't go far in comparison with the
funds' combined shortfall of $354 million.

"The cannabis sales is going to be a small piece of it," said Mr.
Langfelder. "But every little bit helps."

Even the possibility of minimal revenue is appealing to cash-strapped
public officials.

The governor of New Jersey, a state also struggling to fund pensions,
has pushed for legalization and voters are set to weigh in on the
issue this year. The Virgin Islands' governor is asking lawmakers to
approve additional marijuana taxes and recently proposed borrowing
against that revenue to bolster the territory's near-empty pension

Pension costs, in particular, tend to dwarf cannabis revenue
projections. The city of Chicago expects to make a total pension
payment of $1.7 billion this year but expects to collect only $4.1
million from marijuana taxes.

In contrast, Chicago estimated it would receive $32.5 million in
alcohol taxes and $18.9 million in cigarette taxes in 2019.

"The one thing that's clear, and this is true of a lot of different
vice taxes-alcohol, gaming-it's not going to solve a state or local
government's revenue problems in and of itself," said Fitch Ratings
analyst Eric Kim.
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MAP posted-by: Matt