California's New Stem Cell Initiative and Its $7.8 Billion Cost, Including Interest

The price tag for refinancing California's unique and ambitious stem cell research program could run to close to $7.8 billion, give or take a few hundred million dollars or more. 

So says the state's legislative analyst in a financial analysis of a proposed ballot initiative that is likely to be on next November's ballot. The measure would provide $5.5 billion more for research awards to California scientists by the California Institute for Regenerative Medicine (CIRM), as the state stem cell agency is formally known. 

The increase in the price tag is caused by the fact that the $5.5 billion would be borrowed money -- bonds that would be issued by the state. The legislative analyst estimated that the interest costs could total $2.3 billion, bringing the actual expense to taxpayers to $7.8 billion. 

Significant caveats exist, however. The legislative analyst, who prepares these sorts of analyses for all ballot measures, cautioned that the $7.8 billion estimate could rise or fall depending on how interest rates rise or fall. Another unknown involves the length of the payback period. 

What the legislative analyst has to say is a significant matter for the proposed initiative, whose success will determine the financial survival of the agency. CIRM is running out of cash. It was funded by voters 15 years ago with $3 billion. If the proposed initiative fails, CIRM will wither away over the next two to three years. 

Should the initiative qualify for the ballot, the seven-page financial overview of the measure would be delivered, via the state's official voter's guide, to about 20 million California voters prior to the election. The overview would also serve as the basis for news stories in virtually all of the media, which is always looking for bottom line figures.

Beyond the interest costs, the analysis carried other financial bits of interest. It said that over an initial, five-year period the agency would use some the bond proceeds to pay the interest on the money it is borrowing. The analyst said, 

"Were the state to begin issuing bonds shortly after approval of the measure, CIRM would likely make interest payments totaling in the low hundreds of millions of dollars from bond proceeds by the end of 2025."

The proposed initiative also places a 6.5 percent cap on total funding for certain operational expenses including administration and grant oversight. Other changes would give more freedom to the agency, which originally had a 50-person cap on staff. That cap was later removed by state legislation. The new initiative would set the cap at 70 with a provision for more employees beyond that number, under certain conditions involving, among other things, compensating them with cash raised privately. 

The new initiative stipulates that the agency improve access to stem cell therapies, funding that effort with up to 1 percent of the $5.5 billion, a change from the current law involving CIRM.  Other changes from the current situation: 1.5 percent for starting "community care centers" for new clinical trial sites, $1.5 billion for research into brain and nervous system diseases and up to 0.5 percent for a shared lab program. 

Royalties from any therapies financed by CIRM research would go to the agency and not the state general fund, as currently is the case. So far, royalties have totaled only about $200,000. Larger amounts are likely to appear in the next decade as the therapies emerge from the research that was financed years ago. 

Regarding possible savings as the result of more cost-effective therapies, the analysis said, 

"To the extent the measure results in new treatments that are more cost-effective than existing treatments, state and local governments could experience savings in some programs such as Medi-Cal, the state’s subsidized health care program for low-income people. The magnitude of these and other indirect effects is unknown."

The stem cell agency, which was created by voters in 2004, has yet to finance research that has led to stem cell treatments that are approved for general public use. 

In 2004, the legislative analyst prepared an interest cost estimate of $3 billion on the original amount for awards, also $3 billion. However, the projections did not anticipate the recession of 2008, which resulted in a long-term drop in interest rates. Today, the interest on the original $3 billion is expected to be about $1 billion.

Here are links to more information on proposed initiative and related matters:

SUNDAY, DECEMBER 08, 2019

LA Times: $5.5 Billion Measure for California Stem Cell Agency Could Actually Be a 'Downfall'

FRIDAY, NOVEMBER 15, 2019

$5.5 Billion Stem Cell Ballot Measure: Questions in California but Apparently No Foot-Dragging

MONDAY, NOVEMBER 04, 2019

California Stem Cell Agency Chalks Up its 60th Clinical Trial as Funds Dwindle

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. 

State Lawmaker Aims to End California Stem Cell Program, Calls It a 'Boondoggle'

State Sen. John Moorlach in video from his office

A California legislator has launched an effort to terminate the $3 billion California stem cell agency, which is already set to go out of business in about three years.

Republican state Sen. John Moorlach of Costa Mesa said in a video,

"It's time to shut this down....We as taxpayers need some protection. We need to stop the boondoggle."

Moorlach has authored a proposed constitutional amendment that has been referred to the Senate Health Committee. No hearing date has been set. The measure would strip from the state constitution the language that created the agency in 2004.

The proposal, SCA7, requires a two-thirds vote of both houses of the legislature and approval by a vote of the people. Given the Democratic dominance of the legislature, that makes the chances of enactment of SCA7 unlikely.

Nonetheless, Moorlach's effort reflects the sentiments of a certain segment of the public. It also provides ammunition for those seeking to fund the agency with another $5 billion, which would additionally be placed before voters, probably in November 2018.  It is useful for campaigns for such measures to be able to point to what they consider threats to science and medical progress.

Backers of a $5 billion bond measure are proposing it because the agency is slated to run out of cash for new research awards by June 2020.

Moorlach's office produced a short statement in support of elimination of the California Institute for Regenerative Medicine or CIRM as the agency is formally known. It said,

"California voters approved a ten year stem cell program that they thought would produce widespread cures and save thousands of lives. They were also promised revenue-producing intellectual property that would help the state financially. These remain empty promises.

"More than thirteen years after its passage, around $2 billion in funds have been dispersed and $1.2 billion has been spent on servicing the principal and interest of the debt . With a $1.6 billion dollar budget deficit and crumbling infrastructure, we need to stop the issuance of bonds on an ineffective and unaccountable agency. Scarce taxpayer funds could be of better use elsewhere."

Asked for a comment on the legislation, an agency spokesman, Kevin McCormack, said,

"We are aware of the bill and are monitoring it."