Klein Says He Knew about Federal Tax Problem Prior to Election

California stem cell Chairman Robert Klein has confirmed that he knew that Prop. 71 had a $700 million problem prior to last fall's election that created the agency he now heads.

Associate Editor Stu Leavenworth of The Sacramento Bee reported today that Klein confirmed in an interview "that one of the state's bond lawyers - Chas Cardall, of the firm Orrick, Herrington & Sutcliffe - briefed him during the campaign about the IRS complications. (That fact, without the lawyer's name, was reported by the San Francisco Chronicle last week.) Because of advice from Cardall and others, Klein says he purposely wrote Prop. 71 to allow use of both tax-exempt and taxable bonds."

Klein also told Leavenworth that he did not disclose the problem with tax-exempt bonds to analysts who prepared an economic study touting the economic benefits of Prop. 71.

"Why didn't he?" Leavenworth wrote in a column. "Klein equivocated when asked that question. 'I'd want to go back and review this area,' he said, unable to provide more information."

"Laurence Baker, a Stanford University professor who helped write the economic study, said he now wishes he had known that IRS rules could limit the receipt of royalties. Baker's study projected that stem cell research could bring in $537 million to $1.1 billion in royalties over 20 years.

"Now, says Baker, it appears that any royalties might be partly or completely offset by higher interest rate costs(which could run to $700 million).

"'Had we known, we would have factored it into our analysis,' said Baker. 'We worked hard to incorporate as much information as we could into our report.'"

Leavenworth continued:

"The integrity of Prop. 71 is at stake in the royalty debate. During the campaign, advocates of Prop. 71 mentioned royalties repeatedly, with Klein touting it on the PBS NewsHour with Jim Lehrer. This wasn't by accident. California was in the midst of a budget crisis, so Klein needed to create the impression - no matter how tenuous - that Californians would get some direct return on their investment."

Leavenworth described the conduct during the campaign at best misleading. "At worst, it was a cynical ruse," he wrote.
We should note that the interview with Leavenworth is the first time that Klein has publicly said he knew of the issue prior to the election. He would not comment on the question for the Chronicle.