NY Times Examines the California Budget Mess that Ensnared CIRM

California's $42 billion fiscal fiasco, which is threatening its $3 billion stem cell research effort, today drew some major and dubious media attention.

In a piece by Jennifer Steinhauer, The New York Times reported on the shameful shenanigans in Sacramento. Ballooning deficits, intransigent lawmakers and a governor who is "free of allies or influence" were just part of her first paragraph. The budget issues are so great that CIRM's relatively picayune problems did not merit even a word, although they have raised a loud alarm in state stem cell circles.

California faces a $42 billion budget shortfall. A partial solution is now before lawmakers in Sacramento, but a handful of Republicans, who are more interested in ideology than solving problems, are blocking passage.

Steinhauer wrote that the state, in a nearly unheard of move, has lost access to much of the credit markets and that its bonds are now rated the lowest in the nation. That is the reason that the California stem cell agency is now facing a hefty financial shortfall. The agency relies on bond funding, and the state has not sold any since last June.

Steinhauer continued,

"'No other state is in the kind of crisis that California is in,' said Iris J. Lav, the deputy director of the Center on Budget and Policy Priorities, a liberal research group in Washington. The roots of California’s inability to address its budget woes are statutory and political. The state, unlike most others, requires a two-thirds majority vote in the legislature to pass budgets and tax increases. And its process for creating voter initiatives hamstrings the budget process by directing money for some programs while depriving others of cash."

It was a voter initiative that created the California stem cell agency and isolated it from control by the governor or the state legislature. Instead the ballot measure, Prop. 71, gave CIRM direct funding from state bonds. The measure initially protected CIRM but now the agency has become part of the financial collateral damage in California's budget battles.

Robert Klein, chairman of the stem cell agency, has proposed an effort to sell bonds privately to ease CIRM through its hard times. The state has never before sold bonds privately, but is reportedly ready to do that soon – but not for CIRM. The stem cell agency will have to wait in line while more pressing needs are addressed. Meantime, Klein is trying to cobble together a plan for CIRM to peddle the bonds directly to foundations in the hopes of meeting two of the foundations' needs – a solid return on their investment (probably 5 to 6 pecent) and funding worthwhile research. He is expected to report on that effort at CIRM board meeting on March 12.

Klein, who is an attorney and real estate investment banker, led the drafting effort on Prop. 71. The idea was to make the agency immune from "political" tinkering. In the process, however, he wrote into the measure the seeds of a number of problems that have surfaced since its passage in 2004. The reliance on bond funding is just one, and it now puts the agency, once fiscally well-endowed, near the end of the line for cash as California works its way out of its budget mess. And because the whole arrangement is locked into the state Constitution and state law and virtually impossible to change, CIRM's tenuous situation will continue for some time regardless of what makes good sense either scientifically or in terms of sound policy.

Concerning our earlier comment about the shenanigans in Sacramento, many folks working up there deserve some responsibility for the budget crisis. But fundamentally it is failure of leadership – particularly that of Gov. Arnold Schwarzenegger, who appears to have lost much of the clout he once had and is also unwilling to devote his remaining political and financial resources to "persuading" GOP lawmakers to vote for a budget. (He would do well to study the exercise of power by Lyndon Baines Johnson.) The state GOP legislative leadership seems to be locked into some fantasy unconnected to the realities of the California economy. Democrats also have not conducted themselves well along with the host of special pleaders lobbying in Sacramento, ranging from teachers and business interests to environmentalists and prison guards.