California's Five-Buck Stem Cell Mystery and Prop. 14 Campaign Hype

The campaign to save California's stem cell agency with a $5.5 billion cash infusion is peddling a variety of claims that stretch the facts or that the campaign is unwilling to support publicly.  

Leading the pack is the assertion that the multibillion-dollar proposition will cost no more than a bottle of aspirin per person, per year. Unspecified by the campaign, however, is the number of persons and the number of years. The five-buck claim is clearly an attempt to minimize the cost of the proposal, which actually totals an estimated $7.8 billion, according to the state's legislative analyst. 

Robert Klein, leader of the Proposition 14 campaign, made the five-buck claim back in July. It has also appeared on the campaign web site. And Klein brought up the figure again this month in a radio broadcast.

"Proposition 14 will cost the state an average of less than $5 per person, per year – about the cost of a bottle of aspirin" is the way Klein put it last summer.

The California Stem Cell Report has asked the campaign several times to explain how it arrived at that figure. The first request was made 44 days ago (Sept. 1). The campaign has not responded. 

On Oct. 5, Klein brought up another number during a KQED broadcast. He said $4.1 billion was put into CIRM research in 2019 via matching funds. The state stem cell agency declined to verify that figure. A query to the campaign has not been answered. 

The campaign additionally uses a figure of 90 to describe the number of clinical trials in which the stem cell agency is involved. The agency, which is known officially as the California Institute for Regenerative Medicine (CIRM), says that it is  involved in 64.  That is a more than respectable number, more than Klein would have predicted back in 2005 when he was the first chairman of CIRM.

The campaign's justification for using the larger figure seems to be that somehow, someway, that some piece of CIRM-funded research, however tiny, has played a role in some sort of trial. By that criteria, John J. Loud could be also credited with contributing to a CIRM-backed clinical trial. He invented the ballpoint pen in 1888.  

Over the past several years, the agency, during public meetings, has been careful to limit its focus on clinical trials to those that involve meaningful financial participation, for which it deserves ample credit. (It should be noted that the number has grown as CIRM has helped to fund more trials.) 

Pushing the envelope is normal practice for ballot campaigns. It may be unrealistic to expect the stem cell campaign to behave any differently.  Winning is everything in an election campaign. As I have remarked in the past, a ballot campaign is like a war with a deadline. The losers are like so much charnel on the electoral battlefield.

That said, Proposition 14 involves the credibility of science, a matter much in the news nowadays. And backers of the stem cell initiative continue to suffer from the ill effects of the hype of the 2004 campaign, which was also led by Klein. 

The excessive and unrealized voter expectations raised by 2004 campaign are popping up this year in news stories and editorials about Proposition 14 in a way that does not improve its chances of approval, at least for some people. Of course, constant repetition of misleading or bogus information can have an impact on some voters as the country has seen on a national level. 

Art Caplan, a nationally prominent bioethicist, said in 2014, 

“Stem cell research seems, again and again, to go off the rails when it comes to the ethics of research.”

Caplan was speaking mainly about hyped claims involving stem cell research that could not be replicated. The general concern, however, remains alive.

In 2016, five researchers highlighted ongoing issues involving stem cell hype in a piece in the journal Science, They wrote,

"This (trend) raises the risk of harmful consequences, including misleading the public, creating unrealistic expectations, misinforming policy debates, devaluing methodical approaches to research, and driving premature or unwarranted clinical use. This is particularly important in light of mounting concern about the marketing of unproven stem cell treatments. This trend may have led to a gap between public expectations and the actual state of stem cell science and clinical development."

More recently in California, Hank Greely, director of Stanford's  Center for Law and the Biosciences, this week was quoted in an article about Proposition 14.  He said, 

“Politics has a corrupting influence on everything — it pushes toward exaggeration." 

As for what that means for voters evaluating Proposition 14 and the claims of its backers and opponents, the ancient admonition of caveat emptor would seem to be the order of the day -- buyer beware.  That is a deeply unfortunate position for those who believe that the nation should trust science.  

(Editor's note: This is an updated and lightly edited version of an earlier version of this item.) 

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​Read all about California's stem cell agency, including Proposition 14,  in David Jensen's new book. Buy it on Amazon:  California's Great Stem Cell Experiment: Inside a $3 Billion Search for Stem Cell Cures. Click here for more information on the author.

A Good Sign for California's Stem Cell Agency? Californians Like to Say Yes to More Bonds

An ambitious campaign to stave off the death of the California stem cell agency with a $5 billion jolt of state borrowing could have an easy ride in a couple of years. 

At least that would seem to be the case if one bets on the odds as perceived in a column carried today in the Los Angeles Times. 

The headline on the piece by John Myers, the Times' Capitol Bureau chief in Sacramento, said,

"California voters almost always say yes to bonds..."

Myers wrote, 

"It’s the closest thing to a sure bet that exists in statewide campaigns, with an approval rate hovering around 90%."

Myers, however, focused mainly on this November's ballot -- not 2020. And he did not comment directly on the plan to present a $5 billion bond measure to voters in November 2020 to keep the stem cell agency alive.

The agency, formally known as the California Institute for Regenerative Medicine (CIRM), expects to run out of cash for new awards by the end of next year. Its only significant source of funding is money that the state borrows (bonds), which roughly double the costs of its operations because of interest expense. The borrowing was approved by 59 percent of the voters in 2004.

Myers related the current condition of the Golden State's indebtedness:

"State general obligation bond measures approved since 1986 total more than $167.7 billion. Lenders must be repaid with interest, averaging about 5% a year, over a span of several decades. Most general obligation bond payments come from the same bank account that provides cash for services such as education, healthcare and prisons." 

He continued, 

"A recent report by the nonpartisan Legislative Analyst’s Office estimated that California’s general fund is currently paying off $83 billion in bond obligations. Annual debt payments total about $6 billion. That’s roughly equal to a year and a half in general fund spending on the University of California system, or about triple what the state spends on firefighting."

"'When we make these decisions, we have to look at the big-picture context,' state Sen. Bob Hertzberg (D-Van Nuys) said during a legislative hearing last month on November’s slate of bond measures."

State Sen. Bob Hertzberg, News Growl photo

Hertzberg zeroed in on backers of a clean water measure on the fall ballot. The Times piece reported,

"'You’ve got to tell the truth,' he said to the measure’s proponents. 'You back up an armored car to the treasury, and you can take $430 million out of the back door because you can poll [on] something, spend a few million dollars because it’s an issue that looks sexy to voters, and draw the dough.'"

Myers continued,

"Voters are rarely asked to think about which needs government should meet. In 2004, they agreed to borrow $3 billion for stem cell research. In 2008, voters said yes to $9.9 billion in seed money for high-speed rail. Even though the (rail) bonds have only recently begun being sold to Wall Street investors, it’s debatable whether voters would make the same choice if asked again.

"And campaigns rarely offer enough information to fully consider the pros and cons of a bond measure. Voters must do their own homework, beginning with the understanding that a bond is a mandatory expense, an investment decision that can have profound impacts for more than a generation."

Preview of Bond Campaign: California Stem Cell Agency Described as 'Dismal,' 'Disappointing' and a 'Waste'

A couple of die-hard opponents of the $3 billion California stem cell agency minced no words this weekend. In an op-ed piece in the Orange County Register, they described the agency as nothing more than an "advanced high school science project."

The article was written by Jon Coupal, president of the Howard Jarvis Taxpayers Association in Sacramento, and state Sen. John Moorlach, R-Costa Mesa. 

They described the agency's efforts as "dismal" and declared that "this disappointing abuse of taxpayer dollars" should be terminated.

The print version of the article appeared in Sunday's paper, which has a circulation of about 312,000. Both the print and online version carried photographs involving stem cell research. But neither was from UC Irvine, which has received $108 million from the agency and has a member on the board of the California Institute for Regenerative Medicine (CIRM), as the agency is formally known.  UC Irvine is located only 17 minutes away from the offices of the newspaper. 

The piece is a relatively tame preview of the rhetoric that will confront CIRM if it goes to the ballot in 2020 for more billions from California taxpayers. The article cited arguments from the 2004 Prop. 71 ballot measure campaign that created the agency. 

Coupal and Moorlach said, 

"According to the ballot pamphlet mailed to voters, proponents promised the bond proceeds would advance the 'cure and treatment' of  'cancer, diabetes, heart disease, Alzheimer’s, Parkinson’s, spinal cord injuries, blindness, Lou Gehrig’s disease, HIV/AIDS, mental health disorders, multiple sclerosis, Huntington’s disease, and more than 70 other diseases and injuries.' 

"But actual outcomes for these promised advances are speculative at best and nonexistent at worst. Similar benefits were promised to the California economy to 'generate millions of new tax dollars.' 

"With such a dismal record, this would be a good time to shut the spigot on issuing the remaining $345 million — meaning some $690 million would be saved by state taxpayers. That money could be better spent on pensions, schools, roads, housing or better basic medical care for our residents."

As for the high school project business, the article said CIRM "continues to operate as a kind of advanced high-school science project, instead of moving toward the cures promised to voters in Prop. 71."

Ballot Measures to Mergers: California Stem Cell Agency Examines Alternatives to Its Demise

Discussing the future of CIRM on Monday: Left to right, Chair Jonathan 

Thomas,  Vice chair Art Torres, Director Diane Winokur. Photos behind

 them are  of  persons helped by the agency's clinical trials. 

Photo by The California Stem Cell Report.

OAKLAND, Ca. -- Directors of California's $3 billion stem cell research effort are looking at ways to stave off the agency's death ranging from asking voters for billions more to being acquired by some sort of private entity.

The choices came before a new Transition Subcommittee of the agency's governing board last Monday. It is considering options as the money runs out for the California Institute for Regenerative Medicine (CIRM), as the agency is formally known.

Current projections estimate that cash for new awards will end in mid 2020. However, directors could alter the award rate and survive longer. That would shrink the flow of cash to possibly hundreds of researchers from Sacramento to San Diego.

CIRM's funds come from money that the state borrows. The ballot initiative that created it in 2004 provided for $3 billion in state bond funding but no other significant revenue. The agency has roughly $650 million remaining.

No directors at the meeting expressed support for simply letting financial nature take its course and permitting the agency to slowly expire.

One option that seemed to attract significant interest would call for the agency to ask the legislature and the governor to place another multi-billion dollar ballot measure before voters in 2020. That option would involve the governor who succeeds Jerry Brown in 2019.  Brown is wary of adding any height to what he calls California's "wall of debt."

Such an option requires a two-thirds vote of both houses of the legislature and the signature of the governor. (A CIRM memo on legislative options incorrectly said that only a majority vote was needed. It was corrected during the meeting.)

One possibility would involve another ballot initiative, a process that would not need approval of the legislature. However, under new state law provisions, the legislature is required to hold hearings on ballot initiatives. Such a process could result in changes in a proposed initiative.

CIRM directors seemed to acknowledge that either going to the legislature directly or using a ballot initiative would likely mean significant changes involving the agency. Director Steve Juelsgaard said the result could be a "very different CIRM."

The options considered this week also included private fund-raising. Some directors indicated that raising $200 million to $300 million a year was not entirely realistic. However, some combination of fund-raising and public support was also a possibility.

The last-ditch option involved acquisition of the agency by another enterprise including possibly a venture capital driven entity.  CIRM Chairman Jonathan Thomas said a possibility could involve an organization such as the Gates Foundation or the Wellcome Trust. He said California has a "tremendous asset" in CIRM and a "ton of IP(intellectual property)."

Director Jeff Sheehy said he had "never heard of a state agency that was merged or acquired."
"I wouldn't put my head in that noose," Sheehy said.

Thomas said the next step will be to hold a joint meeting of the directors' Science and Transition Committees in November and take the resulting recommendations to the full board in December.

Curtailing Research Awards and Other End-of-Life Matters at California Stem Cell Agency

If you are interested in whether the $3 billion California stem cell agency is going to live or die, you may want to check in on a meeting one week from today.

A new committee of the agency's directors that was formed to deal with transition issues is scheduled to meet for three hours next Monday to consider various scenarios and how the agency might deal with them.

The impetus for the meeting is a projection that it will run out of cash for new awards in mid 2020 with no funding  in realistic sight.

One of the possibilities for extending the life of the agency is to curtail its award programs, which could possibly give the agency another one or two years of existence. The California Institute for Regenerative Medicine, as the agency is formally known, has roughly $650 million left but has been taking on clinical trials, some of which have been running $20 million a pop.

The session will be based out of the agency's headquarters, but teleconference locations are listed in Los Angeles, Duarte and La Jolla. The public can ask questions or make statements from those locations in addition to the main site in Oakland. Listen-only access is also available on the Internet. Full instructions and addresses can be found on the meeting agenda.

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.”

Latest California Budget Proposal Not the Best News for CIRM

California Gov. Jerry Brown is proposing a "dramatically" reduced sale of state bonds, which are the only real source of income for the California stem cell agency, during the coming fiscal year.

His plan was contained in what is the known as the May revise of the governor's budget. Randall Jensen(no relation to this writer) wrote today in The Bond Buyer, a newswpaper devoted to public finance, that the plan is part of an effort to reduce what Brown called California's $81 billion "wall of debt."  Jensen said,

"The state already skipped its usual springtime general obligation bond issue at Brown’s behest. The revised budget proposal calls for selling only about $1.5 billion of GO (general obligation) bonds in the fall, as the state’s only GO issue of calendar year 2011, after selling $10.5 billion of GOs in 2010."

Brown also proposed a $2.4 billion bond sale in the spring of 2012. He said the state currently has a backlog of $48.2 billion in unsold bonds.

If CIRM bonds are not part of the fall sale, it could lead to a cash flow crunch at CIRM, which says it has only enough funds on hand to meet its current commitments through about June of 2012. Competition for inclusion in the bond sale is likely to be stiff.

Brown's bond sales plans also assume enactment of his budget. However, Republicans have in the past  successfully blocked tax increases, which are part of the spending plan, because of the requirement of a two-thirds vote for approval.

(Editor's note: An earlier version of this item incorrectly indicated that CIRM had funds through June. The correct date is about June of 2012.)

California Budget Mess Hamstrings Fresh Funding for Stem Cell Agency

The prospects for new sales of California state bonds – the only source of funding for the $3 billion California stem cell agency – remain dim, according to an article today in Bond Buyer.

"The California bond market has become hamstrung by the delay" in coming up with a prudent state budget in Sacramento, wrote Randall Jensen in the public finance newspaper.

Jensen(no relation to this writer) reported,

"California has no plans to go to market until the fall, and even that is far from ­certain. 'We still hope to be in the market this fall to sell $5.5 billion to $6 billion of GO bonds.  But the treasurer has no interest in selling bonds without a balanced budget in place,' said Tom ­Dresslar, a spokesman for state Treasurer Bill ­Lockyer.

"Dresslar said GO-bond financed public works programs have enough funds to make it though the end of the calendar year, but added that if the state doesn’t go to market until next year current projects could face a shutdown."

The stem cell agency says it has sufficient cash to fund current commitments until roughly June of next year. There is no guarantee, however, that the agency would receive funds via the first round of bond sales even when they do occur. The state has about $37 billion in bonds awaiting sale. Competition for allocations will be stiff.

Outgoing CIRM Chairman Robert Klein told directors last month that he had hoped for new bond funds this past winter. According to the transcript of the directors' Finance Subcommittee meeting on April 19, Klein said,

"It should be remembered that because of the large collaborative teams we build in California for disease teams, for example, or large collaborative teams that are necessary for clinical trials, and the international teams that we need to make certain that we retain a working reserve so that we provide assurances to these teams that this extraordinary effort they put together to bring together institutions and special expertise is not defeated, although we have an approved loan or grant. So, for that matter, it's important to the industry as well."

The Dark Side of Financing Stem Cell Research

Every day of the year, the California stem cell agency is racking up “hidden” costs of about $192,000. By the time CIRM gives away its allotted $3 billion, those “hidden” costs will soar to about $600,000 a day.

The expenses are the dark side of paying for scientific research with borrowed money – in this case California state bonds. That's what CIRM uses to pay the hundreds of researchers it is backing. The mechanism was set up five years ago, when voters approved Prop. 71, which created CIRM.

The cost of the bonds – interest on the borrowed money – is rarely, if ever, seen in CIRM's public documents. That's not much different, however, than other state agencies which use bond financing, such as the University of California. But the cost of state borrowing is attracting increased attention because of the state's $21 billion budget gap and draconian cuts in some areas of state services. Students at UC campuses are being forced to accept 32 percent tuition hikes at the same time CIRM is giving UC scientists $471 million.

Scores of stories have appeared in the last several weeks about the impact of borrowing on California's financial health. But a column by George Skelton of the Los Angeles Times caught our attention today. He focused on warnings by state Treasurer Bill Lockyer, the man who orchestrates the sale of state bonds. Skelton wrote,

“The state's credit card is about maxed out, the veteran Democratic office-holder warns. Payments on bond borrowing are becoming uncomfortably high, crowding out funds for universities, healthcare, parks -- and all the other government services being slashed these days.”

Skelton quoted Lockyer as saying the Golden State is “paying substantially more than Third World countries, er, emerging markets” for interest on its bonds.

That's because California has the lowest bond rating of any state in this country. Every $1 billion in bonds costs taxpayers $70 million a year, Skelton said. That translates to about $192,000 a day for the $1 billion in grants that CIRM has now approved.

Meanwhile the state has not kept up with its financial binging. Since 1999, the overall cost of interest on state bonds has skyrocketed 143 percent. General fund revenue, which pays those costs, has grown only 22 percent.

What does this sorry mess mean for CIRM? Probably the most serious impact is a less than warm environment in the Capitol should the stem cell agency ask lawmakers to remove the 50-person cap on the CIRM staff, which it seems likely to do. To win the required 70 percent approval from lawmakers, CIRM is likely to have to compromise on other proposals that it may not fancy.

The stem cell agency is only a flyspeck in the state's fiscal muddle. But it serves as an illustration of some of the state's more dubious political practices. One of which is ballot box budgeting – enactment of initiatives and approval of bonds with little attention to the long-term consequences.

However, unless something exceedingly unusual pops up, CIRM will continue with its programs, using borrowed money. CIRM's opponents may find fodder in all the concern about state borrowing. But even CIRM's most adamant supporters should understand the true cost of the effort to turn stem cells into cures.

CIRM Watching Upcoming Bond Sales

The folks at the California stem cell agency will be keeping a weather eye on the bond market during the next couple of weeks as both the Golden State and Wisconsin move forward with their bids to sell more than $5 billion in bonds.

The agency depends on California state bonds for its operations and grants. And California has not sold any bonds since last June. That means that CIRM will run out of cash next fall unless it is successful in marketing about $200 million in bonds this year.

On Friday, California announced its plan to offer up $4 billion next week, the largest long term muni bond sale since October 2007, according to Bond Buyer. Fearing an overcrowded market, Wisconsin bumped up its $1.5 billion sale to this week.

CIRM Chairman Robert Klein, who came up with the plan for CIRM to privately market the bonds, will be watching both the Wisconsin and California sales for their interest rates and for the tenor of the market. Wisconsin has a better credit rating than California, which is the lowest of any state in the nation.

Placing state bonds privately is unusual, which creates uncertainty. Smooth sales this week and next would be a good sign for Klein.

He needs to move with some dispatch. More bad economic and state budget news surfaced on Friday with a forecast from the state Legislative Analyst that state revenues will fall $8 billion short of the assumptions in the budget passed last month in California.

One of those assumption is that a package of budget measures will be approved in May by voters. Initial polling shows considerable voter dissatisfaction with the state budget deal (55 percent negative). The respected Field Poll shows initial support for the measures but large numbers of undecided voters. Without passage of the measures, the state's revenue picture will turn decidedly bleak.

While Klein will be beating the bushes for bond buyers, state Treasurer Bill Lockyer has final say on sale of state bonds. Tom Dresslar, spokesman for Lockyer, told us in an email on Thursday,

"As far as I know, no final decision has been made on whether to sell the next stem cell bonds through a private placement or public offering. We may still opt for the latter. But, given the still-precarious condition of capital markets, and the CIRM's financial condition, it's nice maximize your financing options."

Late last month, we discussed the general framework of the CIRM bond sales with Dresslar. Here is what he told us,

"The Treasurer's Office will determine the structure, amount and timing of any sale. In making that determination, the office will consult with CIRM and set a course of action that best meshes the interests of CIRM and taxpayers. We have told CIRM we'll consider the private placement route, as long as they can find suitable investors.

"CIRM has the same ability to obtain loans from the Pooled Money Investment Account as any other GO (general obligation) bond program. The PMIA's governing board will meet soon to make decisions on when and to what extent it will thaw the freeze on PMIA loans imposed last Dec. 17. Assuming the freeze is lifted, CIRM could apply for loans along with all other GO bond programs."

Investing in Stem Cell Bonds

Re our earlier piece on buying California's stem cell bonds, Tom Dresslar, spokesman for the state treasurer's office, points out that the minimum buy-in is $5,000. Don't forget you need permission from the treasurer's office if you want to buy more than $1 million. And as always, do your investment homework before you buy anything.

Attention Stem 'Cellists:' Buy Your Bonds Now

Supporters of human embryonic stem cell research have a chance to put their money where their rhetoric is early next month and help fund California's ambitious effort at pushing the field forward.

On Oct. 4, the state of California has scheduled its first ever bond sale for the California stem cell agency – a $250 million proposition that individual investors would have been hard-pressed to take part in, at least until this year.

State Treasurer Bill Lockyer, however, has set up a procedure to let smaller, individual investors buy California state bonds in the amounts that mom-and-pop investors are comfortable with. Typically in the past, institutional investors would buy huge chunks of state bonds, and the treasurer would not bother with what he regarded as nickel-and-dime sales, known officially as "retail" accounts.

Buying the bonds does take a little homework, however. You must set up a brokerage account, if you do not already have one. You should also check with your broker soon to be sure he or she sure is on board and can send in the orders well ahead of Oct. 4. There are restrictions: You generally can't buy more than $1 million worth of the bonds without seeking permission from the state. You can read all the details and deadlines here.

State bonds pay a dividend that will be determined later, but they can be described as undoubtedly a safer investment than putting money into a stem cell or biotech company. After all, California's millions of taxpayers stand behind the bonds.

And you might even get a certificate suitable for framing that you could post on your front door.

Stem Cell Bonds, Royalties and Campaign Promises

The upcoming sale of California state bonds for its unprecedented stem cell research effort raises anew a $700 million question along with allegations of deceit in the campaign for Prop. 71, the measure that created the Golden State program.

On the surface, the matters involve an arcane financial issue. Can California sell non-taxable bonds to finance the activities of CIRM or must they be taxable. If they are taxable (meaning the dividends are taxable to buyers), the state will have to offer a higher interest rate to purchasers. That, according to one estimate, could mean as much as $700 million in additional costs to the state.

Such additional potential costs did not surface in the 2004 campaign. At the time, interest costs to the state were reported as $3 billion, rather than as much as $3.7 billion. Those amounts would be needed to borrow the $3 billion for the grants for stem cell research.

Nearly a year after Prop. 71 passed, reporter Bernadette Tansey of the San Francisco Chronicle wrote that California stem cell chairman Robert Klein knew before the election that taxable bonds might be needed but did not disclose the matter to the public. Klein was leading the effort on behalf of Prop. 71.

What triggers the use of taxable bonds is CIRM's requirement that royalties be paid to the state if state-funded research generates a significant amount of income.

Tansey reported,

"The potential problems have to do with a complex and unsettled question: how federal tax law will apply to a novel state research venture, supported by tax-exempt bonds, that involves a state split of private profits.

"But IRS rules largely forbid the states to use tax-exempt bonds to benefit specific private enterprises rather than serving a general public good -- and to share revenue from an enterprise to the extent that the state becomes like a business partner."

The issue of taxability was nearly invisible prior to Tansey's article, which subsequently generated allegations of bait-and-switch tactics and statements that Klein had a moral responsibility to be more forthright about the matter.

Stu Leavenworth, associate editor of The Sacramento Bee, interviewed Klein following the Chronicle report. Leavenworth wrote,

"The integrity of Prop. 71 is at stake in the royalty(taxable bond) debate. During the campaign, advocates of Prop. 71 mentioned royalties repeatedly, with Klein touting it on the PBS NewsHour with Jim Lehrer. This wasn't by accident. California was in the midst of a budget crisis, so Klein needed to create the impression - no matter how tenuous - that Californians would get some direct return on their investment."

Leavenworth described the conduct during the campaign at best misleading. "At worst, it was a cynical ruse," he wrote.

We queried both CIRM and the office of state Treasurer Bill Lockyer, which issues the bonds, concerning whether future stem cell bonds would be taxable.

Dale Carlson, chief communications officer for CIRM, replied,

"Bonds have never been used before to fund research, and so we want to be certain that the Prop 71 offerings are eligible for tax-exempt status. (See, for example, the transcript of the 11/05 IP task force meeting beginning at page 19 (http://www.cirm.ca.gov/transcripts/pdf/2005/11-22-05.pdf)) The Treasurer's office assumes that they'll qualify, but will be seeking guidance from the IRS to be sure. In the meantime, this first offering will be taxable."

The response from spokesmanTom Dreassler in the treasurer's office was similar:

"We want to complete the initial sale ASAP so we can pay back the bridge financing provided by the state General Fund and private foundations. At this point, however, we do not have an IRS determination that we can sell stem cell bonds as tax-exempt. So, we will issue this initial $250 as taxable. Then we hope to get a formal determination from the IRS that establishes the extent to which we can issue tax-exempt stem cell bonds. Once we get that ruling, we can refinance the $250 million as tax-exempt, thus cutting taxpayers' costs. Our long-term intent is to sell as much as possible of the $3 billion as tax-exempt, consistent with the IRS determination."

CIRM presumably could eliminate the cost of the added interest by withdrawing requirements that royalties be paid. However, that is extremely unlikely. Meanwhile, the IRS opinion could be some time in coming.

You can find all the coverage by the California Stem Cell Report and links to the stories mentioned above, plus much, much more by searching the label "bonds" below.

Ortiz Pushing CIRM on Conflicts and Openness

The California stem cell agency comes under increased scrutiny next week as the legislature considers two major bills, including one that would dramatically open up the agency's meetings, require tougher economic disclosure by agency officials and require 50 percent royalties on some CIRM-funded inventions.

California Sen. Deborah Ortiz, chair of the Senate Health Committee, is the author of both measures, one of which involves egg donations. The other is SB401, which she quietly amended to tighten up regulation of the stem cell agency. She told stem cell Chairman Robert Klein in a letter that she wanted "push" the agency's own rules further to ensure public transparency and accountability.

Last week, the CIRM Oversight Committee voted to oppose the bill as "unnecessary and premature" although it said it was willing to work with the legislature.

SB401 embodies many of the concepts in Ortiz' proposed constitutional amendment, SCA13, which is on the floor of the state Senate in its "inactive" file. Making SB401 her main vehicle has several advantages. It has already passed the Senate and is now before the Assembly Health Committee, where it will be heard Tuesday. The measure also requires only a majority vote by each house, as opposed to the 2/3 vote for a constitutional amendment. Both measures require voter approval. But SCA13 could go to the ballot without the governor's signature, which is required on SB401.

Here are some of the provisions of the measure.

It would require 50 percent royalties on "net licensing revenues" to the state from grant or loan recipients if the state shares in the expenses of developing and protecting any patent on a CIRM-funded invention. If there is no sharing of such expenses, 25 percent royalties would be required. Higher royalties would be required if taxable bonds are the source of the funding.

The state attorney general would be required to review any proposed intellectual property agreements.

Businesses receiving grants would have to agree to sell CIRM-funded inventions to state and county health programs at the best price available to any purchaser.

Businesses would have to pay royalties to the state that are "consistent with the rates historically received by the University of California" for similar research.

The bill would require Oversight Committee members to place in a blind trust or divest financial holdings of more than $2,000 in entities that apply for funding or contracts with the Oversight Committee or any other organization that has a "substantial interest in stem cell therapy." An organization with a "substantial interest" is defined as one that allocates more than 5 percent of its current annual research budget to stem cell therapy.

The legislation would require that members of working or advisory groups to CIRM disclose to the Oversight Committee any income, real property and investments that they or a close family member have in a California-based academic or nonprofit research institution, a biotech or pharmaceutical company or in real property interests in California. The disclosures would be provided to the state auditor, who would be required to compare the interests to the voting records of the members. The auditor would be required to file an annual report with the Legislature "containing findings on conflicts of interest."

SB401 would extend the state's open meeting laws to include working or advisory groups to Oversight Committee, including the Financial Accountability Oversight Committee, with provisions for closed meetings dealing with confidential matters. Currently such groups do not have to abide by state open meeting rules. The agency has argued that scientists must have their privacy in order to critique applications for state money from other scientists.


The other measure, SB1260 by Ortiz, who is seeking the Democratic nomination for California secretary of state, would ban the sale of human eggs and require that donors be properly informed about the medical risks of the egg extraction. A similar measure was vetoed last year by the governor. The stem cell agency has already adopted policies on egg donations that in many ways are similar to the protections proposed by Ortiz' bill. The legislation would also give the state Department of Health Services oversight responsibilities for the law.

Ortiz' proposal would affect all egg donations in California. The regulations by CIRM only affect eggs used in research funded by CIRM. The bill, which states that it is not an attempt to amend Prop. 71, comes before Ortiz' committee on Wednesday.

Ortiz Praises Proposed IP Policies -- With Caveats

A key California legislator and the California stem cell agency seem to be edging closer to an agreement on how the state should benefit from inventions funded by CIRM.

The latest indication came in identical letters Monday from Sen. Deborah Ortiz, D-Sacramento, to Robert Klein and Ed Penhoet, chair and vice chair respectively of the agency. She praised the draft intellectual property policies that are expected to come before the Oversight Committee on Feb. 10. She said they would help ensure that CIRM-funded inventions "are freely available to researchers, that California taxpayers see a return on their investment, and that all Californians have access to the stem cell therapies made possible through Proposition 71."

Ortiz is chair of the Senate Health Committee and author of a proposed constitutional amendment dealing with stem cell IP issues, among other matters. She has indicated that the concerns motivating the measure could be satisfied without actually placing the measure on the ballot.

However, she said that the proposed IP policies should be regarded as a floor for IP agreements and that the Oversight Committee "should negotiate higher economic benefits for the state when feasible without impeding important research."

She said they should not preclude the state from requiring a larger share of royalties if taxable bonds are used to fund the research. She also said that the proposed policy to require sale of CIRM-based therapies at the lowest cost to the state should be extended to county health programs and community clinics.

A copy of the Ortiz letter follows below since it is not available on the Web at the time of this writing.

Text of Ortiz Letter to Klein, Penhoet

Here is a copy of the Jan. 30, 2006, letter from Ortiz to Klein and Penhoet.

I want to commend the Independent Citizen’s Oversight Committee (ICOC) working group on intellectual property for the progress it has made in developing a proposed policy for handling intellectual property for grants to nonprofit organizations from the California Institute for Regenerative Medicine (CIRM). The proposed policy will help ensure that findings and discoveries developed with Proposition 71 funds In particular, I support and urge the ICOC to adopt the proposed policies requiring grantees to negotiate nonexclusive licenses of CIRM-funded inventions wherever possible, make licensed inventions reasonably accessible for research purposes, and make CIRM-funded patented inventions available at no cost for further research. These policies will ensure that research findings and inventions developed with Proposition 71 funds are freely and openly disseminated among researchers.

I similarly support the proposed requirements that grantees share 25 percent of net royalties received with the state and that they license inventions to organizations that 1) agree to provide resulting therapies to Medi-Cal and other state health care programs at the lowest cost they provide them to other purchasers and 2) have plans for access to the therapies for uninsured patients.

Finally, I agree that CIRM must retain march-in rights in cases where grantees or licensees have not made reasonable efforts to achieve practical application of a CIRM-funded patented invention.

However, I believe it is important that the proposed policies be regarded as a floor for negotiation of intellectual property agreements. I believe the ICOC. I believe this is required by the balancing language of Proposition 71, which clearly states the “ICOC shall establish standards that require that all grants and loan awards be subject to intellectual property agreements that balance the opportunity of the State of California to benefit from the patents, royalties, and licenses that result from basic research, therapy development, and clinical trials with the need to assure that essential medical research is not unreasonably hindered by the intellectual property agreements.”

The policy also should not preclude the ICOC from requiring a larger share of royalties when necessary to offset the higher cost to the state of using taxable bonds and ensure a net return to the state, as suggested by Treasurer Phil Angelides in his letter to Dr. Hall, dated October 26, 2005.

Finally, I believe the provisions requiring licensees to sell resulting therapies to Medi-Cal and other state health care programs at the lowest cost should also apply to county health programs and community clinics since they operate health care safety net programs that serve low-income uninsured patients.

The intellectual property policy the ICOC is on the verge of adopting is very important and will set a precedent that will affect the state for years to come. I look forward to working with the ICOC to advance stem cell research while ensuring that California receives a fair return on its investment in stem cell research, consistent with the intent of Proposition 71 and the promises made during the campaign.

Chopped Mitochondria?

State Treasurer Phil Angelides says tax-exempt financing of stem cell research "may not always offer the lowest-cost choice" for the California stem cell agency, according to the web site, California Politics Today.

Reporter Marc Strassman disclosed the treasurer's position, quoting from an Oct. 26 letter by Angelides to the stem cell agency.

"It is more likely that the Institute will want to pursue a strategy that involves a mix of taxable and tax-exempt financing, as the state will do with the recent housing bond approved by the voters," Angelides wrote to CIRM.

Strassman said Angelides, who is seeking the Democratic nomination for governor, "distanced" himself from other proponents of the Prop. 71 in the October document.

In the letter, Angelides said his staff estimated that if the state were to use taxable bonds to fund the agency, the increased interest costs would be $423 million. Other estimates have placed it as high as $700 million.

Strassman said that under Angelides' scenario, the state would spend $6.5 billion for stem cell research with a net return of $1.1 billion. Strassman continued:

"How many of the venture capitalists clustered on Sand Hill Road in Menlo Park up in the hills behind Stanford, whose investments in existing and future bio-tech start-ups could see triple-digit increases in value as a result of Prop. 71-funded grants, would accept a deal like that....?

"Would Treasurer Angelides be willing to make, or be allowed to stay in office after making, any other investment on these terms with the billions of dollars of taxpayer money under his control as the State's chief financial officer? Would any CFO?

"Why then should the voters and taxpayers of California accept such terms either? What do the folks in and around the Stanford bio-tech venture capital community think the rest of us are, anyway, chopped mitochondria?"

Strassman carried another item that recounted a history of Angelides' statements concerning tax-exempt financing of the agency and expectations of significant returns for the state. Also included was a similar history for state Controller Steve Westly, who is also seeking the Democratic gubernatorial nomination. Look for the material towards the end of the article which leads with the state's bond counsel refusing further comment about conversations with Angelides.

Klein Says He Knew about Federal Tax Problem Prior to Election

California stem cell Chairman Robert Klein has confirmed that he knew that Prop. 71 had a $700 million problem prior to last fall's election that created the agency he now heads.

Associate Editor Stu Leavenworth of The Sacramento Bee reported today that Klein confirmed in an interview "that one of the state's bond lawyers - Chas Cardall, of the firm Orrick, Herrington & Sutcliffe - briefed him during the campaign about the IRS complications. (That fact, without the lawyer's name, was reported by the San Francisco Chronicle last week.) Because of advice from Cardall and others, Klein says he purposely wrote Prop. 71 to allow use of both tax-exempt and taxable bonds."

Klein also told Leavenworth that he did not disclose the problem with tax-exempt bonds to analysts who prepared an economic study touting the economic benefits of Prop. 71.

"Why didn't he?" Leavenworth wrote in a column. "Klein equivocated when asked that question. 'I'd want to go back and review this area,' he said, unable to provide more information."

"Laurence Baker, a Stanford University professor who helped write the economic study, said he now wishes he had known that IRS rules could limit the receipt of royalties. Baker's study projected that stem cell research could bring in $537 million to $1.1 billion in royalties over 20 years.

"Now, says Baker, it appears that any royalties might be partly or completely offset by higher interest rate costs(which could run to $700 million).

"'Had we known, we would have factored it into our analysis,' said Baker. 'We worked hard to incorporate as much information as we could into our report.'"

Leavenworth continued:

"The integrity of Prop. 71 is at stake in the royalty debate. During the campaign, advocates of Prop. 71 mentioned royalties repeatedly, with Klein touting it on the PBS NewsHour with Jim Lehrer. This wasn't by accident. California was in the midst of a budget crisis, so Klein needed to create the impression - no matter how tenuous - that Californians would get some direct return on their investment."

Leavenworth described the conduct during the campaign at best misleading. "At worst, it was a cynical ruse," he wrote.
We should note that the interview with Leavenworth is the first time that Klein has publicly said he knew of the issue prior to the election. He would not comment on the question for the Chronicle.

Klein's Silence Ill Serves Stem Cell Agency

California stem cell Chairman Robert Klein remains publicly mum on a $700 million question involving his actions during the Prop. 71 campaign a year ago.

Each day, his continued silence damages his credibility as well as that of the California Institute for Regenerative Medicine.

At issue is a report in the San Francisco Chronicle last week that said Klein knew that there was a federal cloud over the use of tax-exempt bonds during the campaign but failed to disclose the information. At least one neutral observer, Bob Stern from the Center for Governmental Studies in Los Angeles, has said Klein had a moral obligation to disclose the matter.

While it is seemingly a technical tax issue, it could increase taxpayer costs for the stem cell research program by an additional $700 million – close to $7 billion instead of $6 billion.

The Chronicle article came up again at the legislative hearing earlier this week into billion-dollar intellectual property issues involving CIRM, an agency that has taken a "trust us" position on many key matters before it.

"If this report is true, then Mr. Klein knowingly misled the voters of California and the supporters of Prop. 71," said Jesse Reynolds, director of biotechnology accountability for the Center for Genetics and Society in Oakland.

Trust is what is involved here. Klein was the most visible advocate for Prop. 71, carrying its water on television, radio and print media. It would be one thing if he had slipped out of the public limelight following the campaign, as do many electioneers. Instead he took charge of the agency that he is credited with creating. Now he is in a different role – that of a public steward, whose rhetoric must be connected to reality.

It hardly seems in his best personal interest or that of CIRM to let stand unanswered allegations that he deceived the public. How does that reflect on his future promises and plans for the stem cell agency? Can he be trusted on the complex and financially important issues of intellectual property?

One public relations strategy on issues such as this is to ignore them publicly, hoping that they will go away. The public has a short memory, goes the reasoning. In many ways, however, the public may not be the most significant constituency. In this instance, the international stem cell community is probably more important. So are the political and business decisionmakers in California. The questions raised by the Chronicle article are not likely to be forgotten when they evaluate future statements by Klein.

He may want to look at the example of Nelson Rockefeller, the former governor of New York. Rockefeller once had a tough re-election campaign that focused heavily on taxes. During the election, he promised that he would not support a tax hike. Rockefeller won the election and offered up a tax increase the next year. He was asked how he could square that with his election promise. "That was the biggest mistake of my life," he replied.

Penhoet on IP and Stem Cells

Ed Penhoet, vice chairman of the California stem cell agency and chair of the IP task force, did not break a lot of new ground with his testimony earlier this week on intellectual property. Here is the essence of what he had to say. The full text can be found at the CIRM web site.

"Our role is to spur development of new treatments and therapies – science in the service of therapies – in the promising area of stem cell research. To accomplish this, we recognize the importance of partnerships, especially with the private sector, to develop new tools to treat and study disease and injury.

"I believe that the State of California may achieve economic benefits from CIRM-funded research in a number of different ways including:

"• Providing cures as opposed to lifelong therapies for patients

"• Increased economic activity resulting from growth of an industry based on stem cell science: jobs, taxes, and economic development

"• Direct remuneration to the state from arrangements with industry which provide royalties or other forms of revenue-sharing

"• Attracting substantial increases in research and development funding to California by non-Californian entities."