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Opinion: Stem cell royalty promise just election ruse?

by Stuart LeavenworthSacramento Bee
November 7th, 2005

Mark Twain said it best when he commented: "There are lies, damn lies and ballot initiatives."
Actually, Twain didn't say that, but he might have, had he lived longer. Almost every year, California voters are deluged with mistruths and untruths about measures on the ballot. Tomorrow, voters will engage in another exercise of "direct democracy," even as the deceptions from last year's initiatives are still coming to light.

One of these deceptions involves Proposition 71, the measure that created California's $3 billion stem cell research agency in 2004. In marketing this initiative, proponents said the state would receive not only miracle cures and reduced medical costs, but also up to $1.1 billion in royalties from new stem cell innovations.

Now we are learning that this promise, at best, was misleading. At worst, it was a cynical ruse.

As was entirely predictable, biotech leaders and many university leaders - key supporters of Proposition 71 - are now opposing any return of royalties to California. They want to retain such payments at their own institutions, even though taxpayers are the ones who will provide $3 billion in venture capital ($6 billion if you include the interest costs on the bonds).

Moreover, state officials have now disclosed another obstacle to any return of royalties - the Internal Revenue Service. Federal tax law prevents government entities from selling tax-exempt bonds to finance a private enterprise that feeds royalties back to its coffers. If California expects to get direct royalties, most experts agree it has to sell taxable bonds to finance research. Depending on whose estimates you believe, such bonds will add $423 million to $700 million to the interest costs of the bonds.

Amazingly, leaders of Proposition 71 - including Robert Klein II, a bond expert and developer who wrote the initiative - knew about this complication during the campaign but didn't make it public. Nor did Klein mention it to consultants he commissioned to prepare an economic analysis of Proposition 71 - one that was widely touted during the campaign.

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.

"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."

Since August, I've been trying to get Klein, who now chairs the institute he helped sell to voters, to explain why he wasn't completely forthcoming about what he knew during the campaign.

I phoned his P.R. staff and e-mailed him questions, but got nowhere. Then, last week, I re-sent those questions to Klein and the entire oversight board of the stem cell institute. Finally, I got some answers.

In an interview, Klein confirmed 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 Proposition 71 to allow use of both tax-exempt and taxable bonds.

That reply makes sense, but it doesn't answer why Klein failed to tell the authors of the economic study that any royalties might be offset by higher interest costs.

Why didn't he?

Klein equivocated when asked that question. "I'd want to go back and review this area," he said, unable to provide more information.

In the view of some Proposition 71 supporters, the royalty issue is a distraction. Regardless of whether the state receives royalties, they argue, California has an opportunity to advance medical research, possibly finding treatments for diabetes, spinal cord injuries and many other diseases.

Such advances, they add, could save billions of dollars in medical costs, and stimulate a biomedical industry that provides needed tax revenues.

Perhaps so. But the integrity of Proposition 71 is at stake in the royalty debate. During the campaign, advocates of Proposition 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.

The whole saga is so cynical, but it typifies how initiatives are run in this state. Assertions are made about ballot measures, but there is little independent verification of complex claims that only the authors fully understand.

It makes me want to buy a used car tomorrow. If I did that, I'd have more consumer protection than I will when visiting the ballot box.



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