By many measures, the $3 billion California stem cell agency is a remarkable success.
Only four years old, it is now the largest funding source in the world for human embryonic stem cell research. It crushed its foes in a legal battle that went all the way to the California State Supreme Court. It pioneered standards for hESC research in the United States and broke new ground with its intellectual property policies.
Today the agency is a benchmark for stem cell research and is creating alliances as if it were a nation state, drawing in Australia, Canada, the United Kingdom and Spain.
But it now confronts a looming cash crisis as the result of the $42 billion budget shortfall in the Golden State. The stem cell agency–officially known as the California Institute for Regenerative Medicine (CIRM)–will run out of money next fall unless it succeeds with an unusual effort to privately market California state bonds.
How CIRM arrived at this point is a story filled with a bit of irony and a lesson in unintended consequences. And if CIRM fails to raise the cash, it will cast a pall over stem cell science in California and damage CIRM’s prestige both nationally and abroad.
The stem cell agency, which has pumped out about $24,000 an hour in grants since late 2005, was created by a ballot measure that was designed to assure funding for hESC research regardless of the sentiments of the governor or state lawmakers. "No tinkering with us" was the message in Proposition 71, the ballot initiative that enshrined CIRM in the state Constitution and outside of the normal legislative process. The measure was a response to former President George Bush’s restrictions on federal funding of hESC research.
To assure a constant flow of cash, Proposition 71 specified that CIRM would be financed through $3 billion in general obligation state bonds. No messy annual legislative appropriations where lawmakers and the governor might meddle with science.
For a time, the bonds isolated CIRM from the plummeting economy and related state budget woes. But CIRM had only tapped $500 million of its bonding capacity. The rest sat unsold. And then last year the state said it could no longer sell bonds because of its own budget turmoil and the rocky conditions in the bond markets. But CIRM’s reliance on bonds left it outside the normal money loop in Sacramento, where teachers, prison guards, universities, cities, counties and others are fighting over the fiscal scraps.
Not that CIRM would have had a warm financial reception. Lawmakers last year passed by vast margins (37-1 in the Senate, 64-7 in the Assembly) legislation aimed at bringing CIRM partially to heel. CIRM was only saved by a veto by Republican Gov. Arnold Schwarzenegger, who is a good friend of the stem cell agency.
In late January, the 29-member CIRM board of directors was brought up short when they received a long briefing on CIRM’s financial plight. Even the relentlessly positive chairman of CIRM, Robert Klein, called it a "crisis environment" during a meeting that began in the afternoon and stretched well into the evening.
In addition to the budget briefing, directors had before them applications for $58 million in training grants. Some talked about holding off action. But Sherry Lansing, former head of a Hollywood film studio, said, "If we don’t, we are sending a clear message that we are out of business."
Ultimately the board approved the grants, but decided to make a decision later on the timing of the funding.
Last month, California cobbled together a state budget, but decisions on bond sales are weeks, if not months away. And CIRM bonds will be well down the list in terms of sales priority, agency directors were told.
That is the reason why Klein, a millionaire real estate investment banker, came up with the plan for private placement of California bonds. Democratic State Treasurer Bill Lockyer, the ultimate arbiter on bond sales, has given the effort his approval as long as it does not compete with other possible private placements. The effort is novel. The state had never placed bonds privately until last week (CQ) when it completed a $200 million deal aimed at shoring up transportation projects in the San Francisco Bay area.
News coverage of CIRM’s troubles has been very light, dwarfed by the larger state issues. The agency itself has taken a low profile position. It wasn’t until weeks after January briefing that it posted a brief and buried statement on its web site, declaring that "additional bond funds will become available by the time they are needed."
The three paragraph statement said that CIRM hopes to sell $200 million in bonds this year and an identical amount in 2010.
Klein told directors in January that he hoped to find buyers among foundations seeking good returns (5 percent plus) on their investments while at the same time serving their charitable missions of funding worthwhile endeavors.
More details are likely to be forthcoming on Thursday March 12 at a meeting in Sacramento when Klein will update directors on his ambitious plans.
The fact is that CIRM has little alternative than to push forward. It has multiyear, legal commitments to grantees. The funds needed to meet those commitments cannot be found elsewhere in CIRM’s operations. Klein’s personal prestige is also at stake. He not only originated the current bond sales plan, but says he wrote the 10,000-word Proposition 71 and devised the financial structure which has led CIRM to its current condition.
Nonetheless, selling the bonds is likely to be daunting. John M. Simpson, stem cell project director of Consumer Watchdog, a nonprofit group in Santa Monica, CA, is a longtime participant in California stem cell matters. He was there for the January finance briefing. Simpson says that potential buyers of CIRM bonds "are feeling the pinch like all the rest of us–perhaps in some cases even more so."
"It is by no means clear that a significant amount can be raised for CIRM by selling bonds privately," Simpson says.
David Jensen is a retired journalist who has covered the California stem cell agency via his blog, the California Stem Cell Report since its inception. He has written more than 2,000 items on the agency, including pieces in Wired.com and The Sacramento Bee