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The funding of embryonic stem cell research in California to the tune of $3 billion (repayable with at least $6 billion in taxpayer funds) approved in November, 2004, by California voters who gave a 3-to-2 margin of support to Proposition 71, already taking on the appearance of a three-ring circus of legislative uncertainty and confusion, nomadic litigation, and serial misrepresentation, with a sideshow of document withholding, took a big step towards becoming a chaotic farce on Friday, September 9, 2005, with the awarding of as-yet-unfunded stem cell research training grants by the Independent Citizens' Oversight Committee (ICOC) to anonymous grantees through a process involving the serial recusal of panel members with undisclosed conflicts-of-interest.

The sordid and ludicrous details of the current operations of the ICOC, authorized by the creation and passage by the voters of Proposition 71, can be examined in a comprehensive September 8, 2005, article about them by the Sacramento Bee's Laura Mecoy entitled "Stem cell grants, minus cash, on tap--State agency is betting on novel way to fund awards amid legal challenge."

According to this article, the ICOC is planning to "award" $45 million in stem cell research training grants to establish its credibility as the leading institution in the field, even though it has no money to fund those grants, the sale of $300 million in California State general obligation bonds (backed by "the full faith and credit" of the State of California) having been put on indefinite hold due to the filing of lawsuits against the ICOC on grounds that it has no right to spend taxpayer money, sell any bonds, or even exist, and the uncertainty this has generated in the bond market.

The Sacramento Bee article attributes to ICOC Chair Robert Klein the opinion that "those lawsuits could take an additional nine to 15 months to resolve."

So far, no other philanthropic or research institution has followed the "model" being experimented with by the ICOC in this instance of trying to attract investors in "bond anticipation notes" to make contributions to finance impressive projects for which there is at present no funding.

The attempt by a coterie of Stanford University-based bio-tech companies, venture capitalists, and lawyers, coordinated by bond expert and attorney Robert Klein, to jump-start an embryonic stem cell research gold rush by convincing California voters of the imminent availability of nearly-miraculous cures for diseases such as Alzheimer's, Parkinson's, and diabetes if only they'd vote to authorize the sale of $3 billion in California State general obligation bonds and turn the cash over them to spend without any interference from elected officials, bureaucrats, or the people of California themselves has been running into trouble almost from the day it passed, and the problems have been accumulating at an accelerating pace in recent weeks.

Two reports, issued in October of 2003 and September of 2004, immediately before the vote on Proposition 71, prepared by a Stanford professor of health economics, claimed that if only the voters approved the Stanford-centric Proposition 71, the state economy would be thoroughly stimulated and the State of California itself might become the beneficiary of up to $1.1 billion in royalties from the discoveries to be financed with tax-exempt stem cell research bonds to be sold under the provisions of that initiative.

A more recent report from the California Council for Science and Technology warned California taxpayers that they shouldn't expect to get any money back any time soon from the $3/6 billion dollar stem cell investment authorized by California voters in November, 2004.

Meanwhile, as first brought to public attention in an August 29, 2005, editorial in the Sacramento Bee:

"In a May 23 letter to state Treasurer Phil Angelides, the state's bond counsel warned that patents and royalties resulting from state grants might be construed as taxable 'assets,' making them ineligible for financing by tax-exempt bonds."

You can access a California Politics Today audio interview with Stuart Leavenworth, who wrote that editorial, by clicking here.

You can access a long and detailed audio interview about the underlying legal and financial aspects of this issue with the State of California's chief bond counsel, Robert Feyer, by clicking here.

You can access nearly a hundred previous California Politics Today articles and interviews about the background of the mess this project is turning into by retrieving Stem Cell Wars, Volume 1, a compilation of these articles as they appeared online between August 14, 2004 and August 26, 2005.

Here is a detailed analysis of what is emerging as a veritable "three-ring circus" of litigation, refusal to release pertinent documents, and legislative confusion concerning Proposition 71, its progeny, and its aftermath:

The first is the pending lawsuit being brought by Dana Cody and David Llewellyn on behalf of People's Advocate and the California Family Bioethics Council, respectively, to prevent the ICOC/CIRM from selling any stem cell research bonds at all or investing any of the proceeds in stem cell research, or even existing as a viable legal entity.

Ms. Cody spoke on the afternoon of September 9, 2005, to California Politics Today about the ICOC's granting of unfunded awards to undisclosed recipients and about the status of the consolidated anti-ICOC lawsuit to which she is a party.

You can listen to her comments about these developments, in their entirety, by clicking here.

The second is the growing controversy surrounding what State Treasurer Phil Angelides (also a candidate for Governor of California) knew about the legal impossibility of returning money to the State from its investments in stem cell research financed by tax-exempt bonds, and when he knew it. Claims are being made that he knew about the problem before the election and failed to mention it during his campaign to pass Proposition 71.

The third contemporaneous battle about Proposition 71 is being waged by State Senator Deborah Ortiz, who tried and failed to pass legislation prior to Proposition 71 that would have funded embryonic stem cell research in California but in a way that would have retained control of the process by the state. Senator Ortiz is now the sponsor of SCA 13, legislation that would require the Independent Citizens' Oversight Committee (ICOC) to require payments to the state from intellectual property (patents) generated from the investments in bio-tech research with money raised by the sale of the $3 billion in bonds authorized by voters when they approved Proposition 71 by a 3-2 margin.

The problem here is that if the State of California ends up receiving payments on account of patents generated by its investments in stem cell research, then the bonds financing that research will most-likely be taxable. This directly contradicts the representations made to California voters during the campaign to pass Proposition 71 and, if taxable bonds need to be used to raise the $3 billion (which will cost California taxpayers $6 billion to pay off if they are tax-exempt), then the state (i.e., its taxpayers) will need to pay a higher interest rate to those well-heeled individuals and institutions that look forward to buying the bonds and making (at least) $3 billion for their trouble.

Despite the rampant expertise in all quarters of this increasingly-complicated playing field, no one has yet calculated the relative size of the possible payments to the state versus the likely increase in the amount of taxpayer funds that will need to be used to pay off the taxable (rather than tax-exempt) stem cell bonds that are at the heart of the emerging legal-financial-political-bio-technological-ethical mess that is emerging from Proposition 71.

Forces led by Senator Ortiz are determined to get a piece of the action for the state. Bond counsel for the State has told Treasurer Angelides that there are serious problems involved in structuring the stem cell bond sales so as to allow them (bond counsel) to "give an opinion on" (in English, "approve and sign-off on") the issuance of federally tax-exempt bonds as long as the State of California is in line to get payments from institutions owning or licensing the patents generated by the research funding coming from the sale of these bonds.

Finally-mobilizing political forces are now demanding something back for the $6 billion in state funds that are slated to be spent on this project. Some lawyers are scrambling to find a way out of the conundrum they've created. Other lawyers (including the State Attorney General, Bill Lockyer, who is defending Robert Klein and other "real parties in interest" in the case to invalidate the bond sales entirely) are arguing about whether to change the venue of the recently-consolidated anti-Proposition 71 lawsuit from Alameda County, where the California Institute for Regenerative Medicine (CIRM), the funding mechanism set up by Proposition 71, under the control of the ICOC, was first situated, to Sacramento County, where counsel for one of the lawsuits recently consolidated has his office, and where he'd prefer to argue the case-in-chief.

The Sacramento Bee has asked Treasurer Angelides (and he has refused, citing attorney-client privilege) to turn over documents referenced in a May 23, 2005, letter to him from the bond counsel which says, in pertinent part:

"In an earlier memorandum outlining our initial analysis of Proposition 71, we advised you that it was likely that intellectual property rights (e.g. patents) derived from research which was financed from proceeds of State bonds would be treated as assets financed by the bonds. Therefore, if private industry licenses the patents to produce drugs or therapies and the State receives royalties, we have a situation where bond financed assets are arguably used in a private trade or business, and the State will receive a payment in respect to that asset from private industry. In our earlier memorandum, we identified this issue but indicated the exact impact on future bonds would depend on the details of the intellectual property arrangement which CIRM would include in its grants. Among other things, Proposition 71 as originally enacted did not appear to mandate that the State receive royalties in all cases, nor did it indicate any "target" for how much money the State would seek to recover from intellectual property rights.

"SCA 13 would make it clear that royalty provisions in favor of the State would be standard in all grants, and that substantial private payments could result from a successful discovery. This would definitely make it more difficult to structure bonds under Proposition 71 which would bear tax-exempt interest."

The Bee would like to see that "earlier memorandum."

So would California Politics Today, which sent an e-mail to California State Treasurer (and candidate for Governor of California) Phil Angelides on Tuesday, September 6, 2005, asking for copies of these documents and requesting an interview to talk about what he knew and when he knew it in regard to information he may have had prior to the election that passed Proposition 71 about the difficulties involved in returning revenues to the State of California derived from intellectual property generated by the State's investment, through the ICOC, in embryonic stem cell research financed with tax-exempt State of California general obligation bonds.

California Politics Today was notified the next day, Wednesday, September 7, 2005, by a representative of Treasurer Angelides that, as provided in law, a response to that request would be forthcoming within ten days, presumably meaning sometime between Friday, September 16, 2005, and the close of business on Monday, September 19, 2005, the 17th being a Saturday.

Readers of, and listeners to, the California Politics Today web site will be among the first to see/hear that response when it arrives.