Tiny budget piece could have huge impact on $12B stem cell agency

A crack opened last week for the first time in 17 years in the firewall between state politicians and the $12 billion California stem cell agency.

It involves only $600,000 — at least for now — and is buried deep in the 1,069-page state budget bill that was introduced June 8. But its implications are far-reaching. They range from opening the agency to major changes — wanted and unwanted — to creating a basis for the agency’s currently dubious, long-term financial sustainability.

The crack is the product of Proposition 14 of 2020, the $5.5 billion ballot initiative that saved the agency from financial extinction. The measure also added 7,000 words to the already 10,000-word law that created and regulates the Calfornia Institute for Regenerative Medicine (CIRM), as the agency is legally known.

The language gives lawmakers power over royalties that CIRM wants to use.

Tucked away in those new provisions are 21 words that have altered the financial and legal relationship between lawmakers and CIRM. They involve royalties from therapies and inventions financed by the agency. The language gives lawmakers power over royalties that CIRM wants to use. And that opens CIRM to all manner of political fun and games as well as quite legitimate efforts to correct flaws within the organization and the law that governs it.

The new provisions stand in sharp contrast to the original ballot initiative that created CIRM, Proposition 71 of 2004.  That measure was carefully crafted by multimillionaire real estate developer and lawyer Robert Klein, who sponsored the proposal and who oversaw the drafting of the measure and personally wrote large portions of it.

Klein wanted to bar the lawmakers and the governor from meddling with the agency and its finances. His 2004 initiative required that CIRM’s bond funding be delivered to the stem cell agency with none of the usual budgetary oversight of state departments by lawmakers or the governor.

Klein also wrote into the initiative a don’t-mess-with-CIRM legislative roadblock. It consisted of a requirement for a super, super-majority vote (70 percent) of both houses of the Legislature and the signature of the governor to make even minor changes in CIRM’s 17,000-word charter. The 70 percent vote is difficult to achieve, which protects CIRM from idle tinkering.  To kill offending legislation, CIRM needs the support of only 13 of the 40 state senators.

The delay has dismayed some CIRM board members, including its chair, Jonathan Thomas.

That language is still in place today. But two years ago, a backdoor that makes it possible to pressure CIRM was written by Klein into the $5.5 billion CIRM refinancing initiative, Proposition 14 of 2020. Instead of funneling royalties directly to the state for general use as previously required, Proposition 14 requires that royalties be used to help with the patient expenses related to CIRM-financed treatments. However, the measure did not specify that CIRM must administer the as-yet-undefined assistance program. Lawmakers can, if they choose, route the funds through another state agency such as the Department of Health or a non-governmental entity.

That’s where the current state budget bill comes into play. At CIRM’s request, the bill gives $600,000 in royalties to CIRM to help it devise the new patient assistance program during 2022-23. Another $15 million in royalties remains available in state coffers. CIRM has assumed that it will receive some of the $15 million in 2023-24. It has tentatively earmarked those funds for patient assistance in that fiscal year, meaning that patients would not see any help until nearly three years after Proposition 14 was approved in November 2020.

The delay has dismayed some CIRM board members, including its chair, Jonathan Thomas.

“Is there any conceivable way,” Thomas asked at a February meeting of CIRM’s affordability committee,  that “it could be considered for deployment any sooner?” CIRM Vice Chair Art Torres, a former state lawmaker and chair of the affordability committee, replied that the governor’s office was also concerned about the delay and was looking into it.

Another major player in all this is the governor, who has the power to eliminate the funding with a stroke of a pen once the budget bill reaches his desk.

The amount involved in this year’s state budget, which must be passed by July 1, is financially microscopic. The same can be said of the $15 million, which is hardly even a rounding error in terms of the $301 billion state budget. However, royalties are expected to grow significantly as stem cell science and treatments advance. One study in 2004 estimated that royalties could hit $1.1  billion.

Legislators are not likely to pay much attention to this year’s $600,000. But next year the $15 million could be another matter.

Any lawmaker(s) with sufficient votes or behind-the-scenes power can sidetrack the funds away from CIRM to some other organization. Or they could simply strip the allocation from the state budget bill. Such a threat would give legislators leverage over CIRM to compel it to make changes in order to appease the lawmakers and secure the royalty revenue.

Another major player in all this is the governor, who has the power to eliminate the funding with a stroke of a pen once the budget bill reaches his desk.

The royalty change contained in Proposition 14 serves at least two purposes for the agency. It enables CIRM, if the legislature chooses to give it the royalty money, to say that it is helping to make extremely expensive therapies more affordable.

Creation of a strong affordability program would also help to build a justification for CIRM’s continued existence when its $5.5 billion in current funding begins to run out in about a decade or so. No provision has been made to support the agency beyond those billions.

CIRM will need some well-informed assistance, either via its own staff or a well-connected lobbyist.

Another ballot measure would be needed or appropriations made by the legislature. But CIRM’s 2020 refinancing initiative was approved by only 51 percent of voters, well below the 59 percent of 2004. It is likely to be difficult to build voter support for more billions without a dramatic cure or therapy. Negotiations with lawmakers would also be problematic.

A steady stream of royalties would help CIRM to continue its operations, although substantially altered as a patient assistance program. The royalty funding, however, could be a springboard to alternative financing via a non-profit or raising private funds directly, which the law permits. Such an alternative could enable CIRM to continue funding research at least at some level.

The final machinations involving this year’s state budget are conducted behind closed doors. The public and patient groups are not likely to have a good vantage point. CIRM will need some well-informed assistance, either via its own staff or a well-connected lobbyist. And it will be a task that needs to be performed every year given the nature of the budget process.

Of course, CIRM could seek to alter the Proposition 14 language to make it friendlier to CIRM, but that is a daunting task, requiring that super, super-majority vote, courtesy of the ballot measures that created the firewall crack in the first place.
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Editor’s Note: David Jensen is a retired newsman who has written extensively about the California stem cell agency since 2005 on his newsletter, The California Stem Cell Report.