Thursday, December 18, 2008

Handouts vs. Cutbacks: Strange Financial Tales from the Golden State

Citing the state's severe financial problems, California officials Wednesday shut down $3.8 billion in cash for public works projects, including some closely connected to directors of the state's stem cell agency. The action came coincidentally just one week after the agency gave away $20 million in state funds to stem cell researchers.

The cuts in bond-financed programs struck at projects to aid both the deaf and ailing veterans as well as to assist in genomics research. Also hit were construction projects at medical facilities at UC Davis and UC San Diego, both of which have representatives on the CIRM board.

Funding for hundreds, perhaps thousands, of housing projects was halted, raising the possibility that the moves could personally affect CIRM Chairman Bob Klein, whose real estate investment banking firm specializes in affordable housing.

CIRM spending, however, is a mere piffle compared to the state's $40 billion budget shortfall. But their financial disparity highlights the stem cell agency's unusual nature and the public policy issues that arise when ballot initiatives lock up state funds and create a favored place for some state programs.

The stem cell agency enjoys a relatively rosy position compared to nearly all other state departments. As the result of Prop. 71, which altered the state constitution and state law, CIRM is assured of state bond funding that goes directly to the agency and which cannot be touched by the governor or the legislature. In response to questions from CIRM directors last week, Klein said that the agency had enough money to operate normally at least until the end of June next year. Compare that to predictions that California will not be able to pay its bills by the end of February.

CIRM currently is drawing its cash primarily from the proceeds of a $250 million bond offering that was completed in the fall of 2007.

However, the state is not currently issuing any additional bonds because of the state's budget crisis, which includes $60 billion in debt and the worst credit rating of any state in the nation, according to the Wall Street Journal. Without additional funding, CIRM could run out of money at some point. However, Klein last week told the California Stem Cell Report that CIRM has $160 million to tide it over through the end of June. He also said he is working on a private placement plan for CIRM funding, just in case. Klein said he has already identified some potential participants although he did not spell out details.

Gov. Arnold Schwarzenegger and California lawmakers are wrestling with the budget crisis but have a long history of financial fumbling. At the heart of their failures is a daunting requirement that the legislature must pass a budget or increase taxes only with a two-thirds vote. That gives a minority extraordinary power. In California's case, Republican legislators stand in the way as they have for decades, chanting a mantra of no-new-taxes regardless of the state's needs.

Putting together solutions that will right the foundering Golden State will require compromise and policy changes that ultimately may affect such privileged endeavors as the state stem cell agency. Good arguments exist for steady funding of any sort of scientific research, much less stem cells. But good arguments also exist for steady funding of the state's now troubled institutions of higher learning, once an example for the nation, as well as many other laudable state programs.

CIRM must step carefully in the next few months to avoid becoming a symbol of what is wrong with much of California state government and its finances.

(Note: We have asked CIRM for comment on the issues raised by the disparity between its financial condition and that of the state. We have also asked whether Klein is affected by the housing cuts. We will carry CIRM's response when we receive it. Additionally, the San Francisco Chronicle carried a report this morning that the cutbacks would affect the "state's stem cell research center in San Francisco." No further details were provided, and we could not find anything to support that in the list of projects from the treasurer's office that we reviewed.) Sphere: Related Content

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