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A spokesperson for California State Senator Deborah Ortiz, Chair of the California State Senate Health and Human Services Committee and principal author of SCA 13, a proposed amendment to the California Constitution that would modify the terms of stem cell initiative Proposition 71, told California Politics Today this afternoon that the goal of returning money to the State of California from royalties on patents generated by research funded by the $3 billion in grants and loans to be provided under Proposition 71 (to be repaid by California taxpayers with at least $6 billion in money from the state's general revenue fund) from the sale of tax-exempt stem cell bonds was "unattainable."

California Politics Today today received, in response to its September 6, 2005, request, under the California Public Records Act, for relevant documents and an interview with California State Treasurer Phil Angelides about what he knew prior to the November, 2004, election that passed Proposition 71 about the impossibility of California getting money from any investment it makes in stem cell research with money raised by selling tax-exempt bonds, a letter from Mark Paxson, General Counsel in the Office of Treasurer Angelides, indicating that documentary evidence concerning what Treasurer Angelides knew about this problem before the election "are covered by the attorney/client privilege and, pursuant to the Public Records Act, will not be provided."

This refusal to provide documents prepared by state bond counsel Orrick, Herrington & Sutcliffe LLP for Treasurer Angelides, and referenced in a May 23, 2005, letter to Mr. Angelides, which previous documents Orrick has told California Politics Today it won't release either, comes after California Politics Today published, on September 13, 2005, in an article entitled "No answers yet about whether Treasurer Phil Angelides or Controller Steve Westly knew about "tax-exempt bonds vs. revenues for California" contradiction during their campaign to pass Proposition 71 on these conflicting bases," an analysis arguing that both Treasurer Angelides and California State Treasurer Steve Westly (both currently candidates for Governor of California) had to have known about this problem before the election in November, 2004, in which they both strongly urged voters to support Proposition 71, which was being touted to voters as source of up to a billion dollars in revenue to the State from royalties that would be generated by the sale of tax-exempt stem cell bonds.

Treasurer Angelides' office did, however, provide California Politics Today with a copy of a May 26, 2005, memorandum from Robert P. Feyer, chief bond counsel to the State of California, to Peter Hansel, lead consultant for Proposition 71 matters with the California State Senate Health and Human Services Committee, in which Mr. Feyer wrote:

"In order to maximize the opportunity to issue bonds on a tax exempt basis, any provisions relating to receipt of money by the State from intellectual property derived from research funded by State bonds should be left flexible, rather than mandating a specific type or amount of return for every grant. As we told you yesterday, we understand Proposition 71 was enacted with some expectation of a return to the State from IP rights, and to the extent this occurs, we may have to issue some of the bonds on a taxable basis. If CIRM retains some flexibility to set terms of IP rights in its grants, the State can make a balance between lower cost borrowing and the ability to obtain longer-term returns from IP rights developed from the research done under this program. We will be happy to review with you any further language which Senators Ortiz and Runner or others may develop on this subject."

The discussion in this excerpt about the State of California making "a balance between lower cost borrowing and the ability to obtain longer-term returns from IP rights developed from the research done under this program" refers to the possibility of the State of California issuing taxable bonds, revenue from which would be used to fund research where significant monetary returns from royalties on patents derived from that research might result, while funds raised through the sale of tax-exempt bonds might be applied to research that would not deliver such a revenue stream.

A problem with this approach, however, is the difficulty, perhaps the impossibility, of knowing before the research is concluded, conducted, or even funded whether or not it will yield such lucrative and patentable discoveries.

According to Senator Ortiz' spokesperson, selling $3 billion in taxable bonds rather than $3 billion in tax-exempt bonds would cost the State (and taxpayers) of California approximately $900 million more in interest payments over the life of the bonds issued.

The California Council on Science and Technology (CCST) issued a report on August 23, 2005, based on legislation authored by California State Assemblymember Gene Mullin containing its views on the proper intellectual property regime to be implemented in regard to discoveries generated by Proposition 71-originated funding of embryonic stem cell research in California.

In a press release issued that day and entitled "IP Policies For New State Stem Cell Program Should Follow Federal Approach", the CCST opined that:

"In addition, the study group expressed its concern that heightened expectations about quick returns on investment could result in policies that require unrealistic revenue returns to the state. It is unlikely that the program will quickly provide a new direct stream of revenue for the state, the report said. However, over the longer term, substantial economic benefits are expected to come through the creation of new jobs and new industries, with the associated increased tax base.

"'Expectations that there will be major new treatments forthcoming in the short term are overstated,' said Stephen Rockwood, executive vice president of SAIC and co-chair of the study."

Mr. Rockwood's comments echo those of Paul Berg, PhD, the Robert W. and Vivian K. Cahill Professor of Cancer Research, Emeritus, at Stanford University, also a pioneer in the 1970s in what was then called "recombinant DNA"/ "genetic engineering" research, and winner of the 1980 Nobel Prize in chemistry, who, during a guest appearance at the May 23, 2005, meeting (on page 6 of the draft version of the July 12, 2005, "ICOC Meeting Agenda Item #5") of the Independent Citizens' Oversight Committee (ICOC) (the board of directors of the California Institute for Regenerative Medicine [CIRM]) told that panel:

"The presupposition that there will be substantial royalty streams from the CIRM's patented research discoveries is counting chickens long before they've even been conceived."

The press release from the CCST also noted that questions "such as the matter of using tax-exempt bonds to fund research…were beyond the scope of the study group's expertise and experience."

California State Senator Deborah Ortiz responded to this press release and issuance of an "interim report" by the CCST by issuing a press release of her own, in which she said:

"The report is premature. The legislative resolution asking the council to explore intellectual property policies for stem cell research, ACR 24 by Assemblyman Gene Mullin, D-San Francisco, has yet to be voted on by the Senate. The resolution also asks the council to broaden its membership beyond its current bio-tech and university representatives and study policies that would ensure California sees a financial return on its generous investment. That was the promise made to voters in November 2004, and that’s the promise that must be kept to ensure voters’ confidence in their huge investment in cutting-edge research.

"As the council notes, there is an expectation that intellectual property policies need to direct a revenue stream to the state. The council also acknowledges that federal tax laws prevent Proposition 71, as written, from delivering on its promise to provide royalties or revenue streams back to the state while using tax-exempt bonds."

Then Senator Ortiz attempts to resolve the riddle of how to provide some benefit (but not necessarily "revenue") to the State and People of California from tax-exempt stem cell bonds. She says:

"Senate Constitutional Amendment 13, however, would establish a method for providing benefits to the state without jeopardizing the use of tax-exempt bonds. SCA 13 would require that the state’s public health programs have access at affordable, below-market costs to the products, medicines and therapies that eventually will be developed under Proposition 71. California should not have to pay twice for medical therapies that can assist our citizens who suffer from debilitating and life-threatening chronic conditions."

The latest version of SCA 13 (as last amended on June 8, 2005, and as "Placed on inactive file on request of Senator Ortiz" on June 23, 2005) includes a provision requiring

"the ICOC, when negotiating or overseeing intellectual property agreements associated with technologies or inventions derived from grants awarded pursuant to the act, to seek to ensure that treatments, therapies, products, and services resulting from or utilizing these technologies and inventions are accessible and affordable to low-income residents, including those residents eligible for state and county-funded health care programs."

Removed from the text of SCA at that time was language demanding a revenue stream from royalties from patents developed with Proposition 71 money, as follows:

"The measure would require these financial arrangements to provide that the state recoup the full amount of its legal and administrative costs incurred with respect to patenting and licensing activities related to biomedical research, would require that the state be provided with its share of royalties or licensing revenues, derived from the development of clinical treatments, products, or services resulting from the research, that is sufficient to repay its expenses incurred in developing these treatments, products, or services, and would also require that these royalties or licensing revenues be transmitted to the state in an amount sufficient to repay the costs of issuing bonds incurred by the state in funding the biomedical research."

The pending version of SCA 13 still contains language that:

"would require each member of a working or advisory group, appointed to assist the institute or its governing body, to disclose to the ICOC his or her income and investments in any entity that has sought funding from the institute or that is engaged in biomedical research"

and also says:

"This measure would require that records and meetings of the ICOC, the institute, or the institute's governing body, and any working or advisory group appointed to assist the institute or its governing body be subject to state open meeting and public record laws that are applicable to state agencies, with certain exceptions."

As reported and analyzed in "A second look at a Stanford professor's study touting both "tax-free, general obligation state bonds" and "state royalty revenues of from $537 million to $1.1 billion" as reasons to vote for Proposition 71, a California Politics Today article published on September 2, 2005, a study published on the campaign web site of the "Yes on 71/the California Stem Cell Research & Cures Initiative" on September 14, 2004, less than two months before the statewide vote on Proposition 71, claimed that California voter-taxpayers could expect "State royalty revenues of from $537 million to $1.1 billion, resulting from the provisions in Proposition 71 that give the state an opportunity to share in royalties resulting from research funded by the Initiative."

On page 12 of the draft version of the July 12, 2005, "ICOC Meeting Agenda Item #5"of the Independent Citizens' Oversight Committee (ICOC), which includes the minutes of the May 23, 2005, ICOC meeting, ICOC Chair Robert Klein weighs in on the possibility of providing a stream of revenue for compassionate care for low-income Californians to be funded by royalties from patents on discoveries generated by ICOC/CIRM research support. He says:

"The other area we haven't yet touched on deeply are the Intellectual Property provisions, suggesting we set royalties and patent revenue at a level that would recoup 100% of the cost of the research for the state.

"I don't know of any precedent in the national for assuming you can set royalties at a level they would have 100% payback of the scientific costs.

"It will also create problems for bonds, making them taxable, which would actually increase the cost to the state.

"The legislature has the ability to set aside part of IP revenues for compassionate care. That's in their domain.

"Another issue is that she [California State Senator Deborah Ortiz, author of SCA 13]'s approaching all diseases as if they are the same. It would be a disservice to the patients and the state. We need to address affordability for patients of lower income, and that can happen through IP revenue. The other approach to this same goal may disable the whole ability to develop therapies at all. I think some of the members of this committee have been exposed to that background in terms of what happens if you take the approach outlined in SCA 13 with price fixing. Does anyone want to comment on that?"

Even though SCA 13 no longer contains any reference to providing the State and People of California with a "revenue stream" based on royalties from patents generated by discoveries funded with Proposition 71 bonds, ACR 24, which authorizes the CCST to study the intellectual property rules for Proposition 71-funded research, contained at the time of the May 23, 2005, ICOC meeting and still contains now that it's been passed (on June 7, 2005) by the California State Legislature, language that harks back to the days when SCA 13 demanded that research funded by California tax money yield cash payments back to the state, in these words:

"Resolved, That the Legislature requests the study group [of the CCST] to study how the commercialization of technology developed with the investment of taxpayer dollars in the form of contracts, grants, and agreements could generate some public benefit, including, but not limited to, state revenues, favorable pricing, revenue sharing, and reinvestment into research."

Perhaps this refers only to Proposition 71-funded research that's funded with taxable bonds, or maybe only that not even the California State Legislature as a whole is capable of keeping straight the conflicting demands, rules, and changes being generated by the dynamic interaction of the ICOC/CIRM, the CCST, and the California State Legislature itself.