Tuesday, October 25, 2005

Chronicle: Klein Failed to Disclose Royalty Problem with Prop. 71

Stem cell chairman Robert Klein knew before last fall's electoral approval of Prop. 71 that the promised stem cell royalty sharing with the state was under a federal cloud, but he did not disclose the fact publicly, the San Francisco Chronicle reported Tuesday.

Reporter Bernadette Tansey wrote the story that said California "might actually be forbidden from sharing royalties by federal tax laws -- that is, if California chooses to finance the program by the cheapest possible route: tax-exempt bonds."

The problem with the tax laws has been floating around for at least several months. What is new in Tansey's thorough-going piece is that Klein was aware of the issue before voters approved creation of the stem cell agency. Passage of Prop. 71 came in the wake of a campaign-financed study that predicted the state could receive one billion dollars or more in royalties.

The Chronicle reported that neither Klein or CIRM would comment on the question of when he knew about the royalty sharing problem.

Tansey quoted Robert Feyer, an attorney with Orrick, Herrington & Sutcliffe, as the source for Klein's prior knowledge. Orrick helped draft the initiative and also serves as bond counsel to the state of California.

"'It starts to have the look of a bait and switch," said Jesse Reynolds, a spokesman for the Center for Genetics and Society," according to Tansey.

She reported, "The potential problems have to do with a complex and unsettled question: how federal tax law will apply to a novel state research venture, supported by tax-exempt bonds, that involves a state split of private profits.

"But IRS rules largely forbid the states to use tax-exempt bonds to benefit specific private enterprises rather than serving a general public good -- and to share revenue from an enterprise to the extent that the state becomes like a business partner."

How the question will shake out is very much up in the air.

"Whether Klein should have told voters (about the issue) depends on how you look at it, said Robert Stern of the Center for Governmental Studies in Los Angeles, a nonprofit institute focused on government reform," the Chronicle reported.

"'A legal obligation? No,' Stern said. 'A moral obligation? Sure." Sphere: Related Content

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