Oregon’s marijuana program has failed to keep up with mandatory inspections, its weak testing system threatens to expose consumers to contaminants and regulators haven’t done enough to address black market diversion, according to an unsparing new audit the Secretary of State released Wednesday.

The audit represents the first detailed examination of Oregon’s regulation of the legal cannabis market since voters said yes to legalization in 2014, when supporters promised that state oversight would rein in an industry that had flourished for decades in the underground market.

Auditors concluded that regulators have failed to meet even basic promises. It found, for instance, that just 3 percent of recreational marijuana retailers had been inspected and only about a third of growers. It said the state’s medical marijuana program, long a source of black market diversion both in the state and nationally, has “structural weaknesses” that “greatly increase the risk of diversion.”

The audit also found an inadequate testing system. For years, Oregon has struggled with its pesticide testing regulations, which are intended to ensure that products meet certain standards before they land on retailers’ shelves.

In 2015, The Oregonian/OregonLive exposed critical gaps in the state’s pesticide regulations that resulted in tainted products entering the regulated market. The series tested cannabis products and found they contained more than a dozen chemicals, including a common household roach killer.

The state has since imposed tighter regulations, but the audit found that it lacks a way to verify the accuracy of test results. It also said that while the state requires certain tests for recreational cannabis, testing isn’t required for most medical marijuana.

And while other states require tests for heavy metal and microbiological testing, Oregon does not.

“Oregon’s marijuana testing program cannot ensure that test results are reliable and products are safe,” the audit says, adding that the Oregon Health Authority, which regulates marijuana testing labs, has “limited authority, inadequate staffing and inefficient processes.”

It found that pressure in the highly competitive cannabis industry “may affect lab practices and the accuracy of results.”

FEW CHECKS ON SELF-REPORTING SYSTEM

Growers are identified in the audit as the most likely to sell marijuana on the black market because they have taken the brunt of a drop in prices in Oregon. They also self-report how much they grow and where it goes.

It would take an inspector going through the self-reported figures and then matching them with the inventory and records to verify if those numbers are true.

That rarely happens, the audit says.

Even as the state’s tracking system catches errors and strange inputs, there is little capacity for inspectors to determine if the problems come from typos or deliberate fudging.

Another way to determine if everyone is honest is conducting proactive inspections both of retail stores and growers. But only 32 percent of all recreational marijuana growers have had what is called a “harvest inspection” in the fall when they cull marijuana, clean it, sort it and send it off for sale. None of those who have been inspected are indoor growers.

When a harvest inspection was done, the audit found that the majority of growers had followed all the state’s rules. But 12 percent had serious enough violations that they risked license cancellation.

And only 16 out of 591 licensed retail stores have been inspected as of October 2018, when auditors checked. That’s likely 3 percent of all stores in Oregon -- but the exact figure is unknown because managers for the Oregon Liquor Control Commission, the agency that regulates the state’s recreational marijuana program, haven’t tracked inspections consistently.

Part of the problem is the workload.

The liquor control commission projected that it would receive between 800 and 1,300 applicants for the first two years of the state’s new recreational market. By the end of December 2017, the agency had fielded more than twice the top estimate.

The load became so burdensome that in June 2018, the agency placed a moratorium on processing new applications, but it still struggles to keep up with the 1,400 backlog of new applicants plus operations that must renew their applications.

Washington and Nevada when legalizing recreational marijuana eventually limited or capped the number of plants that growers are allowed to produce or licenses the state gives out.

The Oregon Liquor Control Commission has 23 inspectors who are supposed to inspect applicants before they receive a license and launch proactive inspections on already-licensed growers, producers and retail stores.

With a ratio of one inspector for every 88 operations with a license, the program is far behind.

The commission plans to ask Oregon lawmakers to fund five more inspector positions in the February session, but that would still leave Oregon with a higher ratio than many other states.

Nevada inspects all its marijuana businesses at least once a year and has one inspector for every 48 of those companies. Rhode Island and Maryland have ratios that barely crack double-digits, according to the audit.

Commission officials have said they want to do more inspections and also send decoys into retail stores to catch people who sell to minors. But they don’t know how many people they would need to achieve that because no one has analyzed current inspectors' responsibilities and workloads.

The medical marijuana program is even worse.

Less than 3 percent of all medical marijuana growers have ever been inspected. The Oregon Health Authority, which oversees the medical program, has six inspectors to cover 6,850 grow sites. That leaves the agency with a ratio of one inspector for every 1,142 growers.

Many medical marijuana growers grow so few plants that they don’t have to account for how many they have and where that marijuana goes. The ones above the threshold are supposed to self-report in the state’s tracking system or send monthly reports to the Oregon Health Authority.

Only 40 percent of those nearly 7,000 growers who were supposed to send monthly reports actually did, the audit found. The state has no way of knowing how much marijuana they’re producing.

Last year, a tiny proportion -- about 11 percent -- of medical marijuana growers began to transition to the same tracking system that the recreational marijuana system uses. The state has little idea whether the information they input is accurate because there’s little capacity for inspections.

On top of that, during the transition, almost 200 growers said they would shut down but the state doesn’t know if most of them actually did, auditors said.

Oregon is one of the few states with a sophisticated recreational market that shows such leniency to medical growers. Several other states require all medical marijuana growers to track plants and products with a state database.

Medical marijuana operations are also exempted by state law from any of the surveillance and security measures that recreational growers must follow, such as installing surveillance cameras and keeping footage on hand. They also don’t need inspections before receiving a license.

Both the recreational and medical programs heavily rely on fines and fees for funding. The recreational marijuana program is entirely paid for this way, even though Oregon has some of the lowest fees among all states with recreational marijuana.

The medical program is also largely funded solely through fees -- which becomes more of an issue the fewer participants there are. With only five dispensaries dedicated to medical marijuana and three processors, that leaves few resources to hire more inspectors. The Legislature also has diverted more than $25 million from the medical marijuana program to other public health programs in the past two budget cycles.

The risk, the audit says, is that the lack of rigorous inspections could indicate to federal authorities that Oregon isn’t serious about keeping homegrown marijuana off the black market and out of the hands of minors. The Trump administration has signaled an inclination to crack down on state programs and the audit posits that Oregon could make itself a target.

TESTING MAY LEAVE USERS AT RISK

Since The Oregonian/OregonLive found that harmful pesticides were present in recreational marijuana, Oregon officials have made an effort to create standards for what growers are allowed to use.

The auditors found success. From January 2017 to July 2018, the number of marijuana samples that failed pesticide tests dropped from nearly 6 percent to just over 2 percent. That percentage continued to drop into the first half of 2018.

Yet auditors found troubling examples of laboratory staff who appeared to doctor results to gain more customers. The report notes that many growers will shop around for labs that will return the results they want -- high THC levels on potency tests and passing grades on pesticide tests. It’s up to the professionalism of staff to ensure they follow state guidance because the agency that accredits Oregon’s labs doesn’t proactively enforce those standards.

In fact, some labs have operated for months to years on provisional accreditation while they await inspection or after they have failed tests of their systems, the audit said.

Like most states, Oregon doesn’t have the capacity to verify lab results. If a lab says a marijuana sample meets pesticide standards, that’s rarely challenged. While marijuana regulators have supported the idea of an independent state-funded lab to do that work, there has never been money allocated for it.

But perhaps even more problematic, auditors said, is that while the level of rigor in testing has increased, Oregon doesn’t look for mold, heavy metals, E. coli or other harmful germs that could be in marijuana.

Oregon pioneered testing in many ways, but has fallen behind other states in the breadth of what it tests for.

Auditors encouraged state regulators to look to other states. Maryland, for instance, found that 30 percent of all marijuana samples had yeast, mold and chromium when the state first started to test for those. Within months, that dropped to 5 to 10 percent -- an indication that testing is an effective deterrent.

Medical marijuana in Oregon is still largely untested. Only medical marijuana that is sold in stores must submit to tests -- a near anomaly in the national medical marijuana market. The vast majority of medical marijuana in Oregon remains untested because it’s sold between growers and patients directly, which allows some of the state’s most vulnerable people to potentially take in large amounts of carcinogens and other harmful elements.

Similar to inspections, the lab accrediting body is overloaded. The state conducts assessments on 150 labs in multiple states and countries for various state and federal benchmarks, including clean water and air as well marijuana. The only money those assessors receive for marijuana lab regulation is from fees that cover just paperwork processing and an initial inspection.

The auditors say that leads to marijuana labs falling to the bottom of the priority list, which perpetuates a backlog of work.

AGENCIES LOOK TO LEGISLATURE

Both state agencies that regulate the recreational marijuana and medical marijuana industry supported the audit’s findings. Oregon Liquor Control Commission Executive Director Steve Marks said in a statement that his agency has made great strides in enforcing state laws and holding bad actors accountable.

“Over three short years the OLCC has established a strong foundation for a recreational marijuana market that accounts for and contains marijuana within the state," Marks said. "It is true, though, that Oregon as a whole can do more to account for all marijuana supply and expand proactive compliance inspections to ensure that all licensed and legal operators are conducting their business in accordance with Oregon’s laws and rules — and being punished if they are not.”

He said the commission will ask for money from the Legislature this year to tackle many of the secretary of state’s recommendations.

Oregon Health Authority Director Patrick Allen said the audit mirrors an internal audit from early 2018. He also called for the Legislature to tweak state laws to allow the medical marijuana program to be more stringent in its requirements of growers and its ability to provide oversight.

“The issues heightened the risk for medical marijuana to be diverted from patients, who rely on cannabis to treat medical conditions, into the black market,” said a health authority statement.

U.S. Attorney Billy Williams, who has repeatedly talked about Oregon’s failure to do enough to address the black market for marijuana, said the audit confirms his fears. He said he has not had time to digest the details of the report but said he’s happy to see auditors focused on the state’s marijuana program.

“I think the key findings are obviously things to be concerned about,” he said Wednesday. He said it appears regulators “are taking it seriously.”

Auditors’ warnings about Oregon’s failure to keep marijuana from seeping into the black market also echo concerns raised by the Oregon State Police in a 2017 draft report. Former U.S. Attorney General Jeff Sessions had seized on the report to raise concerns in a letter to Gov. Kate Brown. In response, the governor took the unusual step of publicly discrediting her own law enforcement agency’s findings.

On Wednesday, The Oregonian/OregonLive asked the governor if she agreed with auditors’ findings about black market diversion and why she had not pushed for the state’s marijuana regulators to hire more inspectors. The news organization also asked Brown if she could assure marijuana consumers that Oregon products are safe, given the problems with testing.

Through a spokeswoman, Brown declined to answer any of the questions, saying the questions “don’t align with the findings of the audit.”

Oregonian staff writer Hillary Borrud contributed to this report.

-- Noelle Crombie

503-276-7184

ncrombie@oregonian.com

@noellecrombie