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. 

San Francisco Business Times: Can Clinical Trials Save California's Stem Cell Agency?

Tippi McKenzie on front page of San Francisco Business Times

Long, difficult and expensive -- that's how the San Francisco Business Times describes stem cell therapy development in an article about the 33 clinical trials currently backed by the $3 billion California stem cell agency.

Will it all prove to be worthwhile? Reporter Ron Leuty addressed the matter in an Aug. 25, front-page piece that featured Tippi McKenzie of UC San Francisco. She recently received a $10.9 million award from the California Institute of Regenerative Medicine (CIRM), as the agency is formally known, to test her possible therapy on 10 pregnant women.

In what will be the first clinical trial of an in-utero blood stem cell transplant, McKenzie will transplant a mother's own stem cells into her fetus. Leuty wrote that it could be a precursor to pre-birth cures for other blood diseases, such as sickle cell disease.  He continued,

"It’s also the sort of high-profile medical breakthrough that could give the state stem cell funding research agency momentum as it prepares to (possibly) seek billions in fresh money to extend its life beyond 2020."

Leuty wrote,

"Still, any potential treatments are years into the future. Are trials such as MacKenzie’s too little, too late to help CIRM? "  

"It’s all an illustration of the long, difficult and expensive path for bringing any drug to market. Only four of every 10 late-stage trials succeed, according to a 2016 Biotechnology Innovation Organization study of clinical trials from 2006 to 2015. As a relatively new field, in which regulators and companies are seeking a new pathway to Food and Drug Administration approval, stem cell therapies take eight years to translate into clinical trials; non-stem cell therapies take 3.2 years, according to CIRM Chairman Jonathan Thomas. That’s a potentially awkward narrative as efforts ramp up to keep CIRM alive longer. "

Leuty said,

"CIRM can point to 33 projects that have reached clinical trials. For example, an $11.9 million grant to UCSF and St. Jude Children’s Research Hospital is paying for a mid-stage study in 'bubble boy disease.' The agency wants to fund another 40 clinical trials over the next four years, and it is pitching that scale and scope as a reason to keep CIRM going."

The article continued,

 "If anyone has a chance of showing CIRM’s value, it may be MacKenzie, an associate professor of surgery at UCSF’s pediatric surgery unit and head of its Fetal Treatment Center. Her lab since 2010 has been awarded $14.9 million in grants, including cash for basic research, translational research and now in the clinic. 

"CIRM is about more than funding for studies, MacKenzie said. Agency staff has provided advice about how to translate animal studies into work in humans, she said, as well as hiring an FDA consultant, writing an investigational new drug application and setting up a clinical protocol. 'I’m a clinician, but running a clinical trial is different,' MacKenzie said. 'CIRM’s been incredibly helpful in helping me navigate that.'"

A Critical Perspective: Klein's $100 Billion Stem Cell/Genomics Plan 'Boggles the Mind'

The San Diego U-T newspaper today reported the first criticism of the $100 billion stem cell/genomics research plan being floated by the former chairman of the California stem cell agency, Bob Klein.

The challenge to the proposal came from John Simpson of Consumer Watchdog of Santa Monica, Ca., in an article by reporter Bradley Fikes.

Simpson, a longtime observer of the agency and once heavily involved in formulation of its intellectual property rules, said the proposal for the international consortium “boggles the mind.”

Fikes reported that Simpson found the international plan flawed on several counts: It would lock money into specific areas of research regardless of the state of the science; it would be cumbersome to run, and it would be expensive because it would use borrowed money.

Fikes wrote,  

"’I don't understand how this could possibly work,’ Simpson said in a Monday interview. ‘The logistics of getting together such a (15 nation) coalition boggles the mind.’”

Simpson said Klein, a real estate investment banker who left the agency in 2011, was peddling illusory benefits. Fikes reported,

"'That's the same premise as he's tried to argue with Prop. 71, and I don't think that's been true at all,’ Simpson said. While the (California stem cell) program has resulted in some major research advances, it hasn't yet generated enough of an economic return and proven treatments to justify it, he said.

"'Pay as you can afford to pay,’ Simpson said. ‘I think that's a better approach to research, generally. That's what democratically elected governments are supposed to do, is come up with appropriate funding for the various things they're faced with. If you had this kind of money to throw at certain problems, it's not entirely clear to me, by any means, that stem cells would have the biggest impact. You might do a hell of a lot more with simple things like malaria eradication.’" 

Fikes wrapped Simpson’s critique into the earlier version of his article on Klein’s plan.

California's Bob Klein Proposes $100 Billion, International Stem Cell/Genomics Venture

The man some consider the father of the California stem cell agency has come up with another grand research plan – a $100 billion, 14-nation effort plus California, along with creation of a federal research “trust.”

The proposal comes from Robert Klein, who led the 2004 ballot campaign to create the $3 billion state stem cell agency. He was also its first chairman and a figure revered by some.

Katherine Connor of the San Diego Transcript reported today on Klein’s quest for a “new paradigm in funding scientific research.” During remarks at an oncology symposium yesterday at UC San Diego, Klein said his collaborative venture is needed given the current state of federal research funding. 

Connor wrote,

Robert Klein

“Klein is working on spearheading such a collaboration, where 22 different partners -- including 14 nations, the NIH and the state of California -- commit to long-term funding of scientific research on stem cells and genomics via a World Bank bond. The money invested by each partner would be used to fund work by that entity." 

Connor continued,

“He said if Congress would appropriate a long-term commitment to support this international bond, the research community could leverage it up to a $100 billion program with surplus funds around 35 to 40 percent more than what each individual country or partner could raise from the same amount of money.” 

Klein is a California real estate investment banker who works closely with bond financing. He said his proposed research venture “would go a long way in diffusing the ingrained competitive attitude toward funding.”

Connor continued,

“'The fundamental problem here is that, long term, we have difficulty holding these interest groups together,' Klein said. ‘In California, with Prop. 71, the way it approached that was if you have a unitary decision, you’re either for the bond or against the bond. You can’t go and say 'I want my appropriation,' you have a unitary decision -- it brings all those groups together as a coalition, they have to work together.’”

$145 Million Bond Sale Next Month for California Stem Cell Agency

The state of California will offer up $1.6 billion in general obligation bonds next week but none will be for the state stem cell agency.

The next round of bond funding involving the agency is scheduled for April 22 with $145 million slated to go for stem cell financing, Tom Dresslar of the state treasurer's office told the California Stem Cell Report.

The $3 billion agency is financed through state borrowing (bonds), which roughly doubles the cost of its activities because of the interest expense on the bonds. The state currently provides cash to the agency via short-term debt (commercial paper). Then the state sells taxable bonds to repay the short-term debt.

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 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.

Sharing Jerry Brown's 'Reality Sandwich:' The California Stem Cell Angle

California Gov. Jerry Brown yesterday served up a “reality sandwich” that may not augur well for the financial future of the $3 billion California stem cell agency.

It was a “lower-your-expectations” message that harkened back to Brown's first term in office when he surprised many in the state with his frugal ways.

Brown delivered the news to the University of California regents, one of whom is also Sherry Lansing, a longtime and influential member of the 29-member governing board of the stem cell agency.

Brown told the regents that he plans to budget the university for a $146 million increase (5 percent) in state funds during the upcoming fiscal year. The regents want an additional $120 million. Brown said that was not going to happen.

David Siders of The Sacramento Bee reported that Brown, who once studied for the Catholic priesthood, told regents that they may think that his "Jesuitical harshness is not nice.” But he said that there are many competing interests within the state and "that's kind of the reality sandwich we have to chew on."

UC Regent Lansing said that she is not ready to give up on more cash for UC and that she believed in UC's “power of advocacy,” according to Katy Murphy, writing in the San Jose Mercury News. Last summer, at the stem cell agency's governing board meeting in July, Lansing also stressed the need for “renewal of the (state) bond money” that finances the operations of the agency, which is known as CIRM.

The stem cell enterprise faces a more serious fate than the University of California. The agency will run out of money for new awards in 2017. It is looking at some sort of public-private partnership to continue its efforts. Its initial assumptions include as much as $200 million in public support.

The state's economic situation could improve within two years. However, the pressing demands of a host of high priority needs in California will increase as well. Stem cell research will face tough competition against the many compelling state problems that have been given short shrift during the past five years or more.

That's all part of the “reality sandwich” for CIRM to sample in December when its directors will be briefed on a new plan for financing the agency's future.

California Stem Cell Agency Bonds On Sale in March

Early next month, the state of California will sell $2.7 billion in bonds, a tiny fraction of which will go towards the California stem cell agency.

It is all part of an arrangement that currently involves short-term borrowing as well to keep the cash pipeline at CIRM properly filled.

To refresh some of you, the agency subsists off money that the state borrows (bonds) instead of going to the legislature annually for financial support. While that avoids competing against school children, the poor, the University of California, state colleges, parks, highways and other interests seeking state funding, it also means that the cost of a $20 million grant is something closer to $40 million because of the interest expense.

The California Stem Cell Report last week asked the state treasurer's office about the bond sale March 12-13 and what it means for the stem cell agency. Here is what Tom Dresslar, spokesman for the treasurer, replied in an email.

“CIRM’s funding needs now are met via the issuance of commercial paper (CP).  They’re authorized a certain amount of CP periodically.  Then we work with them on a regular basis to issue the commercial paper on an as-needed basis.  Last fall, they were authorized $160 million of CP.  We will issue the first $27 million under that authorization (this) week.  This spring, CIRM is scheduled to receive another $100 million authorization. The Department of Finance , consulting with CIRM officials, determined the $100 million would be needed to meet CIRM’s funding requirements through the end of 2013.

“Now, here’s where it gets a little complicated.  The state pays down the CP with bond proceeds.  The March ....bond sale includes $60 million of stem cell bonds.  Those proceeds won’t provide new money for CIRM, but will pay down the CP proceeds CIRM already has used.”

Proposition 71, which created the stem cell agency in 2004, authorized bond sales for stem cell research for only 10 years. CIRM's financial timekeepers say the clock started running when the first bonds were sold. The upshot is that the agency will run out of money for new grants in less than four years.

California Budget Slashing Misses Stem Cell Agency

The $3 billion California stem cell agency dodged the governor's financial knife today.

This morning, Gov. Jerry Brown announced sweeping cuts throughout California state government as he attempted to close a new, $15.7 billion deficit. A report in the Los Angeles Times said the governor was "grabbing any spare change available." But this afternoon, in response to a query, Kevin McCormack, CIRM's spokesman, said,

"The answer is no, we won't be affected."

The question arose because California's financial picture is much bleaker than it was just four months ago. And the stem cell agency's only real source of cash is money borrowed by the state -- general obligation bonds.

Under Prop. 71, which created the agency in 2004, the bond funds flow directly to the agency without intervention by the legislature or the governor. However, Brown has been chary of additional bond sales since they create an increasing burden in the form of interest costs. Those costs must be financed out of money that otherwise might go to the University of California, K-12 schools and medical help for the poor.

Under an agreement arrived at last year, CIRM has what amounts to a $225 million line of credit with the state, which should take care of its needs until January. The cash is coming from short-term borrowing by the state instead of bonds.

The Brown Administration has cut back on bond borrowing and intends to cut more this fall. According to the state Department of Finance, the cost of borrowing has declined $173 million this fiscal year, down to $5.2 billion. CIRM's share of the debt service is more than $200,000 a day.  

Stem Cell Agency Cuts Travel Under Pressure from Governor

No more lollygagging in London – that's the message from Gov. Jerry Brown to the California stem cell agency.

Brown is trying to crack down on out-of-state travel, including two dozen "mission critical" international CIRM trips to such locations as Paris, Amsterdam, Japan and Australia.

The Sacramento Bee this afternoon reported the governor's efforts to limit CIRM travel at a time when the state is under extreme financial duress. Reporter David Sider of The Bee quoted Evan Westrup, a Brown spokesman, as saying,

"Now is not the time to be lollygagging in London on the taxpayer's dime. We have quite a bit to focus on here in California."

The travel issue comes as the stem cell agency will be seeking support from the governor for a significant allocation from the sale of state bonds this fall. The agency will face a severe cash crunch late next spring unless it receives additional bond funding.

The Bee said that following an inquiry earlier this week by the newspaper, new CIRM Chairman Jonathan Thomas wrote to CIRM board members that he is reducing his office's travel by more than 50 percent and "has asked officials to consider similar reductions elsewhere in the agency."

According to The Bee, Thomas noted that like former CIRM Chairman Robert Klein he considered the proposed travel "mission critical," but said,

"I believe we can accomplish these goals while doing our part to reduce expenditures in these times of fiscal challenge."

However, the amount of travel expense involved is tiny in comparison to the agency's research grants, which now total more than $1 billion. CIRM's operational budget is only $18.5 million.

For the 54-person agency, the total budgeted travel (in state and out of state) for this fiscal year is $494,000,down from the $500,000 budgeted in 2010-11. The out-of-state travel budget for the office of the chair is $100,000. For the president's office, it is $107,356.

One reader commenting on The Bee story said,

"In the world of research, there are meetings all over the world, and if you don't attend you become irrelevant. ...I know none of you(other readers) will agree, but research is very different than going to Las Vegas for the WIz BAG Conference, then out on the town.  Research meetings are working meetings where people doing primary research work on the problems disjointed but collaboratively in the same breath."

Our comment: CIRM's travel expenses are a symbol in the context of the governor's public austerity efforts. While symbols are important, the travel expenses do not affect or come out of the state budget. They come from bond funds. CIRM's operational budget – also funded by bonds – is very tight, some say too tight to do the job right. If Brown is concerned about spending by the stem cell agency, he should focus on significant expenditures – grants and loans -- and whether the state is getting the most for its money. One way would to do that would be a true performance audit conducted under the auspices of the state controller instead of under the control of the agency itself.

Here is the text of the memo by Thomas to board members:

"The Governor’s Office recently confirmed that CIRM’s Governing Board has the authority to approve the agency’s out-of-state travel, but requested that CIRM consider reducing its travel expenditures by 50 percent. I have reviewed the proposed budget for out-of-state travel for the Office of the Chair. Although I believe the proposed travel is mission critical, as it is intended to advance CIRM’s mission by leveraging CIRM’s investment in stem cell research with investments by other countries and states with which CIRM has collaborative funding rrangements, I believe we can accomplish these goals while doing our part to reduce expenditures in these times of fiscal challenge. I have therefore decided to reduce the out-of-state travel budget for the Office of the Chair by more than 50 percent. Furthermore, I have requested that the Finance Subcommittee review the out-of-state travel budget for the other offices within CIRM to determine whether similar reductions can be made consistent with CIRM’s mission."

State Treasurer's Office Says Stem Cell Report 'Violated Fundamental Principles of Journalism'

Tom Dresslar, a spokesman for state Treasurer Bill Lockyer, is sharply critical of some of what has appeared on the California Stem Cell Report concerning Lockyer's role in the election of Jonathan Thomas as chairman of the California stem cell agency.

Following publication of the "price of defiance" item yesterday, we emailed Dresslar and asked him if the treasurer's office would like to make a comment that would be carried verbatim.

Here are Dresslar's remarks. Our response follows.

"Crock conspiracy theories from the shadows might serve the interests of folks who want to generate 'public outrage,' but they do zilch to advance California's stem cell enterprise. Unfortunately, the Stem Cell Report has chosen to give voice to the black helicopter set and, in the process, violated fundamental principles of journalism.

"On multiple occasions, this blog -- either on its own assertion or though anonymous sources -- has reported that in advocating the selection of Jonathan Thomas as ICOC chairman, State Treasurer Bill Lockyer issued an implicit warning to the board: If you don't kowtow to me, the stem cell institute will have a heckuva time getting bond funding any time soon. Not once did the Report contact this office and seek comment before publishing this bunk.

"'Politics and the Price of Defiance (July 11)' provides the latest example. 'Implicit in some of the lobbying by (Governor Jerry) Brown and Lockyer was the likelihood that failure to follow their lead could endanger bond funding for CIRM.' The item went on to hint that it was not so far-fetched to think that Brown and Lockyer were prepared to engage in 'Tammany Hall tactics.' To bolster that point, it cited the example of an assemblyman who alleges he faces office budget cuts
because he voted against the recently adopted state budget. After the item ran, I received this email from you:

"'Today I ran an item on the lobbying on Thomas by Brown and Lockyer. If your office would like to comment, I would be glad to carry any statement verbatim. Thanks.'

"That's not the way journalism works. You don't throw mud on someone and offer to let them try to clean it off after the fact. You give them the opportunity to defend themselves against the mud-throwing. I understand blogs aren't newspapers. But that doesn't absolve blog writers from the responsibility of adhering to basic tenets of fairness and journalistic integrity.

"To set the record straight: Lockyer engaged in no threats -- implicit, implied, hinted, winked or any other kind -- as he advocated for Thomas. Additionally, your readers should know that, while Lockyer sells stem cell bonds and other state bonds, he has no power to refuse to sell any
type of bond.

"Lockyer cares deeply about CIRM, its mission and its success. That's why he nominated Thomas. That's why wrote to his appointees on the ICOC in support of Thomas. Both candidates were exceptionally well-qualified. But considering the qualifications set forth in Proposition 71, and the challenges CIRM faces, Lockyer strongly believed Thomas was the best man for the job. And, in contrast to the other candidate, Thomas was prepared to give the job his all, not half his all. That's what CIRM needs and deserves."

Here is the response from the California Stem Cell Report.

"We respect both Dresslar's professionalism and his frank and forthright opinion. He has been both responsive and accessible to the California Stem Cell Report. 

"However, this blog is first and foremost an expression of opinion and analysis. The traditional reporting that we engage in is there because the mainstream media simply does not cover one of the more extraordinary experiments in state government, the California stem cell agency. 

As a matter of opinion and analysis, it is fair to say that in our judgment some of the actions by the state treasurer can be construed to contain an implicit warning that CIRM's funding could be affected negatively. Certainly some of the CIRM board members took it that way.

"In retrospect, it would have been preferable to have a comment from the treasurer's office in the original post on June 21. However, it is very unlikely that it would have materially altered what we wrote. Did our accounts amount to 'mud-throwing?" Hardly. Whatever Lockyer and Brown did was within their responsibilities as elected officials. To fail to support vigorously their nominee for CIRM chair would be more reprehensible in the eyes of many.

"Finally, one of the operating principles of this blog is to allow and encourage those with differing views extraordinary access to this web site. We have a standing offer to leaders of the California stem cell agency, including all its directors, and others to write on California stem cell matters with the promise that their words will be carried verbatim. That is an offer you will not find from the mainstream media or its opinion writers. We have done that as the result of more than three decades in the news business and two years as a press aide to the governor of California. From that experience, we learned that short shrift is often given to many voices in the public arena. The California Stem Cell Report can provide much greater access. And we would like to encourage its full utilization."

'A Critical Crossroads:' California Stem Cell Agency's Finances and 'Communications War'

The new chairman of the California stem cell agency, Jonathan Thomas, last week spoke more forthrightly in public about the financial condition of the research effort than we have heard from other CIRM officials.

Thomas also addressed the "communications war" involving the $3 billion research endeavor along with the dual executive arrangement at CIRM. In a conversation at last week's meeting of the CIRM board, he took issue with the coverage of the management structure by the California Stem Cell Report.  Thomas said his prepared statement would more clearly represent his position on the much-criticized arrangement.

Here are excerpts from his remarks dealing with those three areas. The full text of his remarks, which he provided at the request of this blog, can be found at the end of this item.

Thomas summarized the "huge success" story of CIRM and then said,

"Having said all that, CIRM is at a critical crossroads in its history. As the events of the past week continue to remind us, California is in a state of full-out fiscal crisis. No one knows when it will end or how it will ultimately play out. As a result, the agency faces the real possibility that it will not have timely access to the amount of bond proceeds it expected and may be forced to look elsewhere in very short order to the full funding required to meet its projected short term needs or to evaluate how to push grants out or otherwise modify expenses if that becomes necessary. And let's not kid ourselves – this problem could last for a long time. As a result the medium and long term funding questions are no less profound. As the agency enters a translation phase with the goal of getting more and more products into clinical trials, will CIRM be able to help its grantee and loan recipients get the money they need to cover this most expensive part of therapy development? Will CIRM be able to line up funding to sustain it beyond the target last award in 2017? These are huge questions. 

"On other fronts, the agency is in the middle of a communications war. In spite of its great story, the world seems to be focused on internal issues instead of the grand, big picture. These negative impressions distract from CIRM's mission and unnecessarily create adversaries where there would be many fewer if the true story were known. For that reason, CIRM must mount a robust public communications and information effort to get the message out. Front and center in any public communications stragetgy must be the patient advocates and their vast networks. These are the people that it's all about. When you tell their stories, you put a real life face on the marvelous science and cannot help but compel public enthusiasm and compassion."

On the subject of the shared responsibilities of the chair and the president, Thomas said,

"On reading the statute (Prop. 71), the positions of chair and president are designed to be complementary, not overlapping. When carried out as defined in a collaborative and respectful manner, they should together provide 100 percent of what the agency needs to be effective.

"On this latter point, some have decried having two chief executives. I couldn't agree more. If elected, I would attend to my many responsibilities and would expect (CIRM President) Alan (Trounson) to do the same. I would not look to micromanage but would instead empower Alan to handle his considerable job duties. He and I spoke on Sunday on this very issue and agreed that a complimentary, highly collaborative relationship was the best way to bring the agency towards fulfilling its goals."

Here is the full text of Thomas' remarks.
Statement by Jonathan Thomas to CIRM governing board 6-22-11

California Stem Cell Agency Plans a More Than 16 Percent Budget Boost

The California stem cell agency is proposing an $18.5 million operational budget for the coming fiscal year that will include a more than 12 percent increase in staff and reflect the rising costs of monitoring more than 400 grants and loans.

The agency did not disclose the size of the increase for the spending plan compared to actual spending projected through the end of the current fiscal year June 30. CIRM only offered a comparision to spending that was approved last June ($16 million). The proposed budget is up 16 percent from that figure. The agency, however, has been running behind the approved spending levels so the actual budget increase is likely to be substantially higher than 16 percent.

In documents prepared for a meeting Tuesday of the CIRM directors' Finance Subcommittee, the agency's staff briefly noted that a cash crunch could occur in the coming fiscal year if the state does not sell additional bonds, the only real source of funding for CIRM's $3 billion effort. A continued suspension of bond sales is likely this year because of the state's financial crisis.

The budget document said,

"If no new bonds are sold during FY 2011-12, expenditures could reach the 6% (legal, Prop. 71)cap by June 2012. However, plans are progressing to request authorization for new bond sales this year."

No further information was provided concerning the bond situation, although it is to be considered as a separate item at the meeting next week.

The budget document said CIRM is "well aware" and "sensitive" to California's fiscal crisis and said its spending plan is aimed at controlling spending.

The document said it reflects "continued increases in the programs, activities and overall workload at CIRM, and it mirrors changes in the number of fulltime employees, which is expected to grow to 56 from the target for FY2010-11 of 50 (an increase of 12%)."

With $1.2 billion committed out of $3 billion, CIRM cited a significant increase in workload, including a 47 percent hike in "payment transactions" for grants and loans from 663 to 975 and a 21 percent increase from 467 to 563 in scientific progress reports and "prior approval requests" for changes in awards.

Eight new positions are proposed, up from the current staff level of 48(a 17 percent increase). One is a "director of public communications" in the office of the chair of the agency. Two others are an information technology director and a special projects officer to help CIRM President Alan Trounson develop new initiatives and deal with biotech industry executives.

The largest budget category is for compensation, $10.3 million. The second largest category is outside contracting at $3.3 million. "Direct legal costs," many of which are contracted, are scheduled to hit $2.3 million. The agency is heavily reliant on outside contracting because of the former legal limit of 50 on the size of its staff. That limit was removed by legislation that went into effect at the beginning of the year.

The spending plan shows that CIRM is still wrestling with its critical grants management system after several years of work. It proposes spending $933,977 on the effort this year out of a total information technology budget of $1.3 million. It is not clear whether that figure includes the hiring of an information technology director, as proposed elsewhere in the spending plan.

The office of the chair, which includes both outgoing Chairman Robert Klein and co-vice chair Art Torres, is budgeted for $3.9 million. Again no comparision is available to estimated spending for this year, but the figure is up from the $3 million approved last June for the current year. Klein says he will leave his post this June. No successor has been chosen. The largest increases in Klein's budget appear to be in compensation (new hires) and outside contracting.

The Finance Subcommittee is expected to forward its recommendations on the budget to the full CIRM board at its meeting in early June.

The budget information from CIRM is coming much earlier than it has in the last several years, a significant improvement in an important aspect of the agency's openness and transparency. It also provides directors and the public with ample time to examine the proposal, raise questions and make suggestions for changes.

The public can take part in the meeting at locations in San Francisco (3), Pleasanton, Palo Alto, Irvine, La Jolla and Berkeley, Specific addresses can be found on the agenda.

State Treasurer Confirms Possible Delay in Stem Cell Bond Sales

California state Treasurer Bill Lockyer has confirmed that there is a reasonable possibility that the California stem cell agency will not be able to access new funds until sometime next year.

In a report in the Los Angeles Times yesterday, Lockyer said that sale of all state bonds could be delayed because of inaction on California's state budget woes. State bonds are the only real funding source for CIRM's $3 billion effort.

On Wednesday, the California Stem Cell Report discussed the likelhood of continued delays of state bond sales and the impact on CIRM.

The following day Tom Petruno of the Times reported,

"Without a balanced-budget deal in hand, however, Lockyer would be unlikely to try to sell bonds before the election, his office says. Even if the measure passed in November, it isn’t clear whether there would be enough time to get a deal together before the end of the year, said Tom Dresslar, Lockyer’s spokesman."

California's Bond Sale Suspension, Stem Cells and Cutbacks

Simmering beneath the surface of California's financial crisis is the possibility that the state's $3 billion stem cell agency could become a victim, waylaid as state leaders look for more ways to cut state spending.

Lawmakers and others are discussing the likelihood of a continued suspension of sales of state bonds, which are the lifeblood of the $3 billion California stem cell agency. Without the funds from the bonds, the agency has no cash for its ambitious grant programs.

Currently CIRM has enough money on hand to last roughly through June 2012 in support of existing programs, according to its top officials. But the state has suspended sales of bonds through the middle of this year. Already, the state is forking over to investors $5 billion a year in interest for all its bonds, a figure that has skyrocketed in recent years. The interest cost to California taxpayers for CIRM is roughly $200,000 a day for the $1 billion the agency has borrowed so far.

Should sales of bonds, which take months to arrange, be resumed in a timely fashion, CIRM would not be affected. However, without the certainty of cash coming in, the agency would likely delay, as a minimal response,  additional grant rounds and loans, interrupting its efforts to transform stem cell into cures.  In January 2009, CIRM directors made a move along those lines when they were surprised by a financial crunch. More drastic measures might be required if bond sales are delayed for a lengthy period.

Proposals to prolong the suspension of bond sales surfaced during budget debate in the legislature last week. In February, the state's legislative analyst also said halting bond sales was one on a list of moves that could meet the $26 billion state budget shortfall if tax extensions were not approved in June by voters. Efforts to place such a measure on the June ballot have come up short in Sacramento.

Complicating the issue is the possiblity that a ballot initiative on tax extensions would be placed before voters in the fall. The Sacramento Bee reported yesterday that Gov. Jerry Brown is considering such an effort and could announce it this week. That would raise the need for additional cuts this year in the state spending. Deferring sales of state bonds could be a relatively politically painless way of saving some money. ($248 million was the estimate for a six-month suspension.)

The possibility of a bond delay comes after CIRM Chairman Robert Klein in December warned the agency's governing board that it was "essential" that the agency quickly provide assurances of "reliabity of our funding."

He said,

"Recent applications for clinical trial rounds and the acceleration of our funding commitments on our other programs require an immediate focus on this issue, given there may not be another opportunity until late 2011 to authorize additional bond funding.”

Klein added that “our collaborative funding partner nations” would require early this year “assurances of our future performance.” 

All of the discussion concerning further delays in bond sales is cloaked in the sometimes murky politics of Sacramento and could change suddenly – for better or for worse. Nonetheless, it would behoove CIRM directors to begin examination of their possible responses if bond sales should be substantially delayed this year and next.

California Stem Cell Agency Says It Unaffected by Suspension of State Bond Sales

Suspension of California bond sales because of the state's budget crisis will not have an “immediate impact” on the state's stem cell agency, whose only real source of cash is state bonds.

James Harrison, outside counsel for the CIRM board, said that the agency “has cash reserves to cover its current needs and it does not need to issue bonds in the spring.” As recently as December, other CIRM staff members had also said that the agency had funding to cover its programs to about June 2012.

However, on Dec. 14, CIRM Chairman Robert Klein told agency directors that the reliability of the agency's funding needed “immediate attention” because of a notice that his office had “just” received from the state treasurer. Klein also said that “our collaborative funding partner nations” early this year will require “assurances of our future performance.” His warning came on the eve of his successful bid for re-election as chair and was much different than a rosy assessment he offered 12 days earlier. .

Here is the text of Harrison's response to our query to Don Gibbons, CIRM's communications chief, concerning the impact of the bond sale delay on CIRM. In his comment, Harrison refers to earlier items on the California Stem Cell Report about Klein's changing positions on the state of CIRM's bond financing. Some of those items can be found here, here and here.

Harrison's statement:

“As we have stated in the past, we disagree with your characterization of Chairman Klein's comments to the Board.  At the time of the Treasurer's request, CIRM had no authority for the Treasurer to issue bonds on CIRM's behalf.  The Chairman therefore considered it a priority to respond to the Treasurer's request in light of CIRM's projected need for additional bond funding for the 2011/2012 fiscal year.  You are confusing the Chairman’s desire to get a required authorization approved (before he left the agency) that could cover any bonds sold in 2011 or 2012.  As the Chairman previously reported, the agency has cash reserves to cover its current needs and it does not need to issue bonds in the spring. CIRM therefore did not request bond funding as part of a Spring 2011 bond sale, and as a result, the Treasurer's decision not to go to the market in Spring 2011 does not have an immediate impact on CIRM.”

For those interested in more details about CIRM's borrowing, as of last November, the state owed about $2 billion on stem cell bonds, including $1 billion in principal and about the same amount in interest, according to the state treasurer's office. Payments on the interest come out of the state budget each year and affect the amount of cash available for other state expenses, ranging from education to health services for the poor.

Prop. 71, which created CIRM in 2004, authorized $3 billion in bonds that flow directly to CIRM and cannot be touched by the governor or the legislature. The borrowing is expected to cost another $3 billion to $4 billion over the lifetime of the bonds.

A special, six-person committee, the California Stem Cell Research and Cures Finance Committee, is charged with determining by majority vote whether it is “necessary or desirable” to issue bonds for stem cell research. Three members of the CIRM board of directors, including Klein, sit on the committee. The other three members are the state treasurer(who is the chairman), the state controller and the state finance director.