The $700 Million Piffle

Just a mere piffle, this business about royalties endangering the tax-exempt status of bonds to be issued for stem cell research in California, right?

Not exactly. The first estimate we have seen places the size of this piffle at roughly $700 million or more. It is contained in the legislative staff report on IP issues involving the California stem cell agency.

Here is the key language from the report: "According to informal estimates from the (legislative analyst's office), if the state were required to use taxable bonds in lieu of tax-exempt bonds for funding stem cell research, it could raise the debt servicing costs to the state by $700 million or more over the life of the program."

The report also cites a legislative counsel opinion that "indicates that research projects containing intellectual property agreements that call for the state to receive direct royalty payments are more likely to require use of taxable bonds, if the above thresholds are met, than those containing agreements requiring that clinical treatments, products, and services resulting from the research be made available at reduced cost to state health care programs."

The report discusses the various federal tests that are used to determine whether bonds can be tax exempt. And it says there may be ways to structure "agreements and bond sales to avoid having to use taxable bonds. For example, bonds for stem cell research may be packaged with bonds for other public purposes and have relatively short maturity dates that allow basic research to be funded and paid off before any intellectual property is developed. Alternatively, intellectual property agreements may be structured in a way that requires any revenue generated to be paid not to the state, but to a nonprofit entity. It is likely that further guidance will be sought by the Treasurer’s Office and CIRM from the Internal Revenue Service on permissible options for structuring grants and intellectual property provisions that permit use of tax-exempt status of bonds for Prop. 71 grants to the greatest extent."

The full text of the staff report is below.