Wednesday, October 30, 2019

Billion Dollar Questions and the True Cost of California's Ambitious Stem Cell Program

Robert Klein, a believer in bond financing and backer of the 
stem cell  agency -- California Stem Cell Report photo

Will California's stem cell research program really cost $6 billion dollars? 

That is a figure that has been widely used over the years by many in the news media and elsewhere, including this web site.  The number is based on the projected interest expense on $3 billion in state bonds that pay for the California Institute for Regenerative Medicine (CIRM), as the state stem cell agency is formally known. 

The $6 billion projection originated as an official estimate in the 2004 state voters pamphlet by the state Legislative Analyst, the respected source of nonpartisan financial information about state government.  The pamphlet was released by state election officials in connection with the ballot measure that created the stem cell agency. 

However, times were different 15 years ago. Interest rates were substantially higher. The Legislative Analyst did not forsee the low interest rates that the country has seen since then, particularly since 2008.  

The latest estimate of the total interest expense is about $1 billion, making the total costs for the stem cell agency about $4 billion instead of $6 billion. The figure comes from CIRM, which based it on information from the state treasurer's office, which sells the bonds. The treasurer did not respond to direct email queries by the California Stem Cell Report. 

Kevin McCormack, senior director of communications for CIRM, told us, 
"Per the state treasurer’s records as of 9/5/19, the interest cost on the bond proceeds that have been issued to date for CIRM is $836,579,927."
In response to questions, McCormack said another $600 million in bonds remain to be sold. With their sale, he said that the total interest expense will rise to roughly $1 billion.

The use of borrowed money to finance biomedical research is one of the very unusual aspects of the stem cell agency. State bonds are generally used to finance construction of long-term facilities such as roads and prisons.

The use of bonds was championed by Robert Klein, a California real estate investment banker, a profession that is deeply reliant on the use of borrowed money. Klein directed the writing of the 2004 initiative, led the subsequent ballot campaign and became the agency's first board chairman. 

Klein founded a stem cell advocacy group called Americans For Cures and  this month submitted a proposed ballot initiative to provide $5.5 billion more in state bonds to the agency, which is running out of cash. 

The website for Americans for Cures, which has offices in Klein's Palo Alto, Ca., offices, stoutly defends the use of bonds as a "new paradigm for funding medical research." It says, 
  • "First, bonds spread the cost of a massive public investment over a period of 30 to 50 years.
  • "Second, bonds provide a critical mass of financial assets that can be marshaled in the near-term increases dramatically.
  • "Third, when funding structure changes to long-term bonds authorized by voters, healthcare constituencies are united in support. It is in their collective interest that voters approve bonds—if the bonds fail, the capital demands for research will fall back upon the appropriations process.
  • "Using bonds to fund medical research creates a large-scale, long-term portfolio; historically, these have high statistical opportunities of success due to broad risk diversification.
  • "Stem cell research is also funded by the federal government’s National Institutes of Health (NIH) budget. It may also be funded by the private sector, but such investment generally occurs later, during the testing and development phase, than during initial basic research."
The use of borrowed money is likely to be campaign issue, as it was in 2004, should Klein's new initiative qualify for the November 2020 ballot. Opponents of the 2004 measure argued against the state borrowing money for stem cell research. They declared in the state ballot pamphlet:
"We cannot afford to pile another $3 billion in bonded debt on top of a state budget teetering on the edge of financial ruin.
"General Fund bond debt will grow from $33 Billion on May 1, 2004, to a Legislative Accounting Office projection of $50.75 Billion in debt by June 30, 2005-a staggering 54% increase in just 14 months!"
Currently the state has about $80 billion in general obligation and revenue bond debt, according to state documents.  The state's financial situation is better than in 2004. And in June, California Gov. Gavin Newsom signed a $215 billion state budget that contained a $21.5 billion surplus. 

The price tag on California's stem cell program, however, is only one part of the political mix during the next 12 months. How it all will play out is far from clear. 
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