California Stem Cell Debt: Refinancing $146 Million

The state of California is planning a $2.2 billion bond sale next week with about $146 million of it going to refinance debt run up by the California stem cell agency.

The new, long-term borrowing will pay off short-term debt used for stem cell research over the last two years.

The $3 billion agency was set up to subsist on money borrowed long-term by the state with general obligation bonds. The ballot initiative that created the agency, Prop. 71 of 2004, authorized the bonds. Interest on the bonds roughly doubles the cost of the research.

In 2011, Gov. Jerry Brown sounded an alarm about California's burgeoning wall of debt and sales of bonds were cut back. The agency maintained its operations through the short-term borrowing (commercial paper).

Authorization for the bonds ends in 2017 and the agency is scheduled to run out of cash for new grants that year as well. The agency is attempting to devise some sort of public-private mechanism to generate funds after 2017.

A financial statement prepared by the state treasurer's office for the Oct. 22 bond sale said that $1.2 billion in stem cell bonds was outstanding and $1.6 billion was unissued as of Sept. 1.
Individuals will have an opportunity this month to buy the bonds during an early order period. But they will not enjoy the benefits provided by non-taxable bonds.

All of the stem cell bonds are taxable, as opposed to many state bonds that are not. During the 2004 ballot campaign for Prop. 71, the public was led to believe that the agency would be financed with non-taxable bonds, which would have meant much lower borrowing costs for the state to the tune of hundreds of millions of dollars.

In 2007, Bernadette Tansey, then of the San Francisco Chronicle, reported that Robert Klein, head of the Prop. 71 campaign and first chairman of the stem cell agency, knew that taxable bonds were likely to be required but did not disclose that fact to the public.

The agency has awarded $1.9 billion and has about $600 million in uncommitted funds. The remainder of the $3 billion is going for administrative expenses over the life of the agency. The agency said last week it had $61.4 million on hand as of Sept. 30.

Earlier this month, Michael Marois of Bloomberg News reported,

"(State Treasurer Bill) Lockyer has said he plans to offer an estimated $12.5 billion of debt in the next 18 months. As of Sept. 1, California had $79.4 billion in long-term bonds outstanding, out of $147.8 billion authorized by voters, according to Lockyer’s website.”