While the most recent previous issue of California Politics Today, entitled "Robert Feyer, Chief Bond Counsel for the State of California, says he had no contact with State Controller Steve Westly about stem cell financing prior to the November 2, 2004, election; declines any further comment on questions about his conversations with State Treasurer Phil Angelides on this subject," was being prepared, California Politics Today received, in response to its inquiry to Treasurer Angelides' press office about whether Treasurer Angelides knew about the problem "tax-exempt vs. returned revenue" problem prior to the November 2, 2004 election, in .pdf format, a copy of a letter from California Treasurer Phil Angelides, sent by his office on October 26, 2005, to Zach Hall, President of the California Institute of Regenerative Medicine (CIRM).
In this two-page letter, Treasurer Angelides, an early endorser and strong and prominent supporter of Proposition 71, distances himself from "proponents" of Proposition 71 who "offered California voters the hope of finding life-saving cures, reducing health costs, and creating jobs for California's future," and points out, from that distance, that "the campaign also noted that the measure created a possibility for the State to share in licensing and royalty revenues that might flow from new technologies and therapies created through the Institute's grants."
Treasurer Angelides begins his letter to Dr. Hall by positioning himself, now, as a strong supporter of the view that California taxpayers are entitled to at least some return on their massive investment in stem cell research, saying: "I am writing this letter to urge the California Institute for Regenerative Medicine [CIRM], as it puts together its strategic research plan, to ensure that the State of California and its taxpayers share the financial benefits resulting from the research funded by the Institute."
He concludes the letter by saying "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. As the Institute moves forward to develop its strategic plan and intellectual property policies, the Treasurer's Office will continue to be available to advise you on the Institute's funding options and help find the most cost-effective way to finance the next generation of medical discoveries for Californians and the world."
Treasure Angelides suggests that using taxable bonds might be the long-sought solution to the "tax-exempt bonds vs. returned royalties" conundrum
In the body of the letter, Treasurer Angelides states his desire to see the CIRM "seek advice from the U.S. Treasury Department and Internal Revenue Service to determine which portions of the research program can be financed with tax-exempt bonds and under what royalty conditions."
He goes on to say that "…contrary to a misconception, tax-exempt financing may not always offer the lowest-cost choice for the Institute." Rejecting the figure cited in
"The $700 Million Piffle," based on "informal estimates from the (legislative analyst's office)" saying that "if the state were required to use taxable bonds in lieu of tax-exempt bonds for funding stem cell research, it could raise the debt servicing costs to the state by $700 million or more over the life of the program," Treasurer Angelides tells the President of CIRM:
"My staff estimates that the interest rate differences between issuing taxable and tax-exempt 30-year general obligation bonds is currently about 0.75 percentage points. Even in the worst-case scenario – where, to obtain royalties, the State must sell only taxable bonds to fund the Institute's entire research grant program – my staff estimates that the added interest cost to the State over the 30-year term of the bonds would be $423 million. By contrast, the economic study released by the Proposition 71 campaign last year estimated that the Institute could reasonably expect to receive as much as $1.1 billion in licensing fees and royalties over the next three decades. If that is the case, even the maximum use of taxable bonds would result in $677 million more in net revenues to the State and its taxpayers than if the Institute uses only tax-exempt financing and forgoes any royalties."
To view the October 26, 2005, letter sent by California State Treasurer Phil Angelides to California Institute of Regenerative Medicine President Zach Hall, which directly, eloquently, and creatively addresses the ""tax-exempt bonds vs. returned royalties" issue, click
here.
true, if you accept all the assumptions and ignore the larger context
All this is true, within the stated assumptions, but neglects to mention that the "$677 million more in net revenues to the state and its taxpayers" accepts as fact that the taxpayer-funded stem cell research will actually deliver over a billion dollars in "licencing fees and royalties," even though the projected revenue stream as estimated in the aforementioned
"study released by the Proposition 71 campaign last year" was said to be "from $537 million to $1.1 billion," rather than a "reasonable expectation" of "as much as $1.1 billion."
Furthermore, and crucially, the economic study from which this figure comes was not just "released by the Proposition 71 campaign," as Treasurer Angelides rightly says, but was commissioned and paid for by that campaign as well.
Remaining unaddressed in this letter, or elsewhere, is the fact that Proposition 71 was sold to voters on the basis of raising the $3 billion for stem cell research (to be paid back with $6 billion in taxpayer funds) with lower-cost tax-exempt bonds, even though, as the lawyers and others sponsors of Proposition 71 never tire of pointing out, the actual letter of the law in the extremely-complex
Proposition 71 (specifically, Article XXV. Medical Research, Section 6, which provides that: "Notwithstanding any other provision of this Constitution or any law, the institute, which is established in state government, may utilize state issue tax-exempt and taxable bonds to fund its operations, medical and scientific research, including therapy development through clinical trials, and facilities" and Section 125291.45 (a), which says: "…The bonds may bear interest which is includable in gross income for federal income tax purposes if the committee determines that such treatment is necessary in order to provide funds for the purposes of the act") definitely allows for the sale of taxable, as well as tax-exempt, general obligation bonds, which bonds, in the language of Section 125291.30 of Proposition 71: "when sold, shall be and shall constitute a valid and binding obligation of the State of California, and the full faith and credit of the State of California is hereby pledged for the punctual payment of both the principal of, and interest on, the bonds as the principal and interest become due and payable."
(Never publicly scrutinized or discussed, but worthy of both scrutiny and discussion, is Section 125291.80 of Proposition 71, which says:
"Notwithstanding any provision of this article or the State General Obligation Bond Law, if the Treasurer sells bonds pursuant to this article that include a bond counsel opinion to the effect that the interest on the bonds is excluded from gross income for federal tax purposes, subject to designated conditions, the Treasurer may maintain separate accounts for the investment of bond proceeds and the investment earnings on those proceeds. The Treasurer may use or direct the use of those proceeds or earnings to pay an rebate, penalty, or other payment required under federal law or to take any other action with respect to the investment and use of bond proceeds required or desirable under federal law to maintain the tax-exempt status of those bonds and to obtain any other advantage under federal law on behalf of the funds of this state.")
you do the math
And in doing the math, consideration must also be given to the larger picture, in which California taxpayers will be asked to provide at least $6 billion dollars of their money to begin with, in addition to Treasurer Angelides' estimated $423 million in "added interest cost to the State over the 30-year term of the bonds."
What this means is that taxpayers, under the scenario suggested by Treasurer Angelides, will be making an investment of approximately $6.5 billion dollars from which they can expect, at the most, $1.1 billion in return, a net cost to them of $5.4 billion dollars.
They are also allowed, through their representatives in the California State Legislature, to beg for access to, and affordability of, the breakthrough treatments and therapies developed with their money by California's universities and bio-tech companies.
Under these terms and conditions, building contractors, California's great public and private research universities, and an assortment of privately owned and managed bio-technology companies will be in line to receive $3 billion dollars in grants, will be required to pay the State of California around one-third of that back (if everything works out), and will then be entitled to any and all additional remaining revenues and profits derived from the research they will have been well-paid to do in the first place by California taxpayers functioning as the venture capitalists in this project "to finance the next generation of medical discoveries for Californians and the world," as Treasurer Angelides so eloquently puts it in his letter to CIRM President Hall.
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 Proposition 71-funded grants, would accept a deal like that (receiving a third-of your investment back while others enjoy the lion's share of the profits?) if it involved THEIR money?
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?
See, in this regard, and for purposes of historical reminiscence, this reporter's August 16, 2004, news commentary entitled
"Socializing the Risk while Privatizing the Health Benefits and Profits, as California's Proposition 71 does, is Unethical."
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