Stem Cell Research: CheckUp

In November 2004, 59.1 percent of voters approved Prop. 71, the California Stem Cell Research and Cures Act. The measure created the California Institute for Regenerative Medicine (CIRM) to regulate stem cell research and provide grants and loans for research and research facilities.

Prop. 71 also:

• Established a constitutional right to conduct stem cell research in California;
• Prohibited the Institute from funding human reproductive cloning research;
• Created an oversight committee to govern the Institute;
• Provided a General Fund loan of up to $3 million for the Institute’s initial administration and implementation costs;
• Authorized the issuance of general obligation bonds to finance Institute activities up to $3 billion subject to an annual limit of $350 million; and
• Appropriated monies from the General Fund to pay for bonds.

Read a post-election timeline of events.

A rough start: Prop. 71 implementation has lagged because of legal challenges against it that started five months before voters approved the measure. Until these lawsuits were resolved on May 16, 2007, over two and a half years after the initiative passed, the Prop. 71 bonds could not be disbursed.

Despite legal setbacks, CIRM and the ICOC sought temporary funding sources and were able to get some work done. CIRM and its 29-member governing board, the Independent Citizens’ Oversight Committee (ICOC), were established when Prop. 71 passed in November 2004. The 27 appointed members of the ICOC elected Robert Klein to chair the committee. Appointed members were chosen based on their experience in academics, research, patient advocacy, and biotechnology.

In addition, the agency began drafting a funding strategy in May and June 2006, and the ICOC met to consider CIRM’s grant policies, governance, legislative outreach, and ways to address the challenges to developing stem cell-related therapies and diagnostics. CIRM also drafted its Scientific Strategic Plan, outlining the agency’s objectives and funding initiatives for the next ten years. The ICOC approved the plan in December 2006.

Any California for-profit or non-profit research institution may apply for Prop. 71 funding, which is allocated based on guidelines developed by the ICOC. CIRM does not disclose the list of organizations that have sought funding but whose applications have not been approved.

In September 2005, the ICOC approved several multi-year training grants to increase the number of researchers with the skills necessary to conduct stem cell research. CIRM awarded the first of these grants in April 2006, totaling $12.1 million, to 16 California nonprofits.

Financial challenges: Now that the constitutional challenges against Prop. 71 have been resolved, funding may come from the $3 billion in bonds authorized by California voters to be sold over a ten-year period. The sale of these bonds and the full funding of CIRM were delayed because of lawsuits challenging the measure’s constitutionality.

Until February 2007, the institute’s operating costs were covered by a $3 million loan from the state General Fund, which was authorized under Prop. 71, and a $5 million donation from the Dolby Family Foundation.

To fund research before the lawsuits ended, CIRM, the Office of the State Treasurer, the state Department of Finance, and the state controller sold $45 million in bond anticipation notes (BANs), which will now be repaid with bond proceeds. In July 2006, Governor Schwarzenegger authorized an additional $150 million loan to CIRM from the state General Fund after President Bush vetoed a federal stem cell research bill. Between the BANs and the governor’s loan, CIRM reported a total of $181 million available at the end of 2006 to fund research, training, and facilities development grants.

The ICOC has granted a total of $208.5 million to 23 California research institutions as of June 5, 2007. (See a complete list of Prop. 71 grant awards.) In addition to these funds, the state treasurer’s office has been authorized to issue up to $250 million in bonds immediately after the constitutional challenges were resolved, and the ICOC expects to issue these bonds in July or August 2007.

Read CIRM’s 2006 annual report for further details on everything from who sits on the ICOC to how Prop. 71 has been implemented in light of the legal challenges against it.

Legal challenges: Two constitutional challenges were brought against Prop. 71. Both plaintiffs in the first case, the People’s Advocate and National Tax Limitation Foundation v. Independent Citizens’ Oversight Committee (case #HG05206766), received funding from the Life Legal Defense Foundation. The California Family Bioethics Council (CFBC), an affiliate of the evangelical organization Focus on the Family, brought the second case against the measure.

Plaintiffs challenged Prop. 71 on constitutional, statutory, and common law grounds. The first plaintiffs asserted that the measure violates Article XVI, §3 of the state constitution because it mandates appropriations from the state General Fund to fund an institution not under the exclusive management and control of the state.

The second plaintiff, CFBC, challenged the measure on the same grounds as People’s Advocate and the NTLF. In addition, CFBC argued that Prop. 71:

• Violates various provisions of conflict of interest law;
• Violates the single subject rule (by law, propositions in California must be limited to one subject);
• Unlawfully revises the state Constitution;
• Revised statutes without providing proper notice to voters by including the full text of the revised statutes;
• Violates the equal protection clauses in the state Constitution;
• Violates Article II, section 12 of the state Constitution by requiring a private entity to perform a public function;
• Violates Article IX, section 9 of the state Constitution by limiting the University of California Regents’ powers to organize and govern the University; and
• Violates state securities laws.

These two cases were consolidated and first heard in the Alameda County Superior Court, which upheld the constitutionality of the measure in April 2006. Read the 2006 court decision. People’s Advocate, the NTLF and the CFBC then appealed the decision to the state Court of Appeals, which upheld the lower court’s decision in February 2007. Read the 2007 court decision.

On May 16, the state Supreme Court declined to hear the plaintiffs’ next appeal.

Stem cell research and the federal government: Prop. 71 proponents spearheaded the measure in California largely because they believed that the Bush administration would not authorize additional federal funding for embryonic stem cell research. They have proven correct so far.

Congressional efforts to fund embryonic stem cell research, as well as the Bush administration’s refusal to allow such funding, have attracted a good deal of attention. To ease the restrictions that the Bush administration imposed on stem cell research in 2001, the U.S. Senate passed the federal Stem Cell Research Enhancement Act (HR 810) with a vote of 63-37 in July 2006 (see the Senate roll call on THOMAS). The House of Representatives had already passed the bill in May 2005 with a 238-194 vote (see the House roll call).

President Bush vetoed the bill the day after the Senate passed it, using his veto power for the first time during his tenure in the White House. Congress tried to override the veto but failed to gain the necessary 2/3 vote in the House. The vote was 235-193 (see the House roll call).

In response to Bush’s veto, Governor Schwarzenegger directed a $150 million loan to CIRM in July 2006. The $45 million granted from this loan in February 2007 exceeded the $38 million the National Institutes of Health spent on human embryonic stem cell research nationwide in 2006.

In April 2007, the Senate passed another Stem Cell Research Enhancement Act (S.5), this time with a vote of 63-34 (read the Senate roll call). The House passed the bill on June 7 with a vote of 247-176. President Bush veto the bill on June 20.

According to the Los Angeles Times (5/17/07), the next U.S. president is expected to lift the Bush administration’s stem cell restrictions, but even then, federal spending is not likely to match California’s spending.

Costs: The Legislative Analyst’s Office (LAO) estimated that Prop. 71 would cost the state about $6 billion over 30 years to pay off both the principal ($3 billion) and interest ($3 billion) on the bonds in payments averaging about $200 million per year.

Because Prop. 71 bonds have been tied up in court until May 2007, the measure has not yet begun to meet the LAO’s projection. The interest rate the state will pay for Prop. 71 bonds is market variable and, as a result, depends on current economic conditions when the bonds are sold. Because this has not yet taken place, it is not yet possible to determine whether the LAO’s estimate was correct.

A CIRM press release (5/16/07) announced that the agency intends to use its first bond funding to repay the state and private philanthropists who provided funds while the bonds were being challenged in court. The bond anticipation notes (BANs) sold during the court proceedings have a 5 percent interest rate for a 30-year period, which would amount to $35 million ($14 million plus $21 million in interest) if the debt were paid off over 30 years. Because CIRM will repay these BANs in the short run, however, their cost will be far below $35 million and will be absorbed by the $3 billion 10-year budget approved by voters. Governor Schwarzenegger’s $150 million loan from the state General Fund was also a temporary cost that will be repaid now that the court has upheld the constitutionality of the Prop. 71 bonds.

Potential savings: The LAO forecasted unknown potential state and local revenue gains and cost savings to the extent that the research projects funded by Prop. 71 result in additional economic activity and reduced public health care costs. Because Prop. 71 has been held up in court until recently, however, it is not yet possible to determine to what extent the measure will result in such savings.

Proponents said: Proponents’ primary argument in favor of Prop. 71 was that it would be “an affordable solution that closes the research gap, so new treatments and cures can be found.” It is still too early to assess either of these claims. Treatments and cures that could eventually reduce state health care costs have not yet materialized. CIRM's draft ten-year plan indicates that clinical trials will be just beginning ten years from now. If after that time the measure pays for itself by saving more than it costs, as proponents suggested it could, then its affordability would be difficult to dispute.

Proponents also argued that Prop. 71 does not create or increase any taxes. The measure itself does not create or raise taxes, but as with any increase General Fund expenditures, the money has to come from somewhere: raising taxes, borrowing, or reallocating funds from other services. In some form, taxpayers still pay for Prop. 71.

Opponents said: Opponents argued against launching “a costly new state bureaucracy when vital programs for health, education, and police and fire services are being cut. We cannot afford to pile another $3 billion in bonded debt on top of a state budget teetering on the edge of financial ruin.” This argument’s strength depends partly on how much CIRM costs relative to how much it saves the state General Fund, as well as when any potential savings take place.

In the short run, CIRM will probably cost more than it saves. On the other hand, if Prop. 71 eventually saves more than it costs and therefore does not detract from any other state programs or services, then the expenditure may be financially justifiable in the long run.

The state expects to spend $7 billion more than it will receive in revenues in 2006-07 alone and plans to cover this deficit with funds from the state reserve, which is similar to taking money out of a savings account. With this deficit, new programs like CIRM must be covered by raising taxes, borrowing, or reallocating funds from other programs or services. Whether any of these funding strategies are right or wrong depends on how one prioritizes stem cell research relative to other state fiscal responsibilities.

Opponents also argued that Prop. 71 “prohibits the governor and legislature from exercising oversight and control over how this money is spent—or misspent. Even if the state teeters on the brink of financial ruin, our elected representatives will still have to borrow and spend this money, because the proponents are putting this money grab into our constitution.” It is true that Prop. 71 constitutionally requires the legislature to appropriate funds to CIRM, and that oversight and control by the governor and legislature over CIRM are more limited than is the case for many public agencies.

The governor and legislature do not completely lack authority over CIRM, however. They appoint three-quarters of the ICOC members, who oversee CIRM’s operations and finances. Twenty-two of the 29 ICOC members are appointed by the governor, lieutenant governor, state controller, state treasurer, state Senate pro tempore and speaker of the Assembly. The chair and vice-chair are then nominated by the governor, lieutenant governor, state controller and state treasurer and elected by the 27 appointed members. (The chancellors of the University of California at San Francisco, Davis, Los Angeles, Irvine, and San Diego each appoint an executive officer from his or her campus.) These provisions afford the governor and legislature significant control over who sits on CIRM’s decision-making and oversight body, and this authority is renewed every six years as ICOC members’ terms expire.

The legislature also has some authority over how CIRM conducts its competitive bidding process. All CIRM contracts, excluding loans and grants, that the ICOC approves, are subject to the same competitive bidding requirements followed by the University of California, which the state legislature determines.

The public can also act as a watchdog over CIRM. Prop. 71 requires the agency to issue an annual report and to commission an independent audit of its financial activities, both of which must be publicly available. Moreover, the state controller must report publicly on the audit. Prop. 71 also requires a Citizens’ Financial Accountability Oversight Committee, including the controller as chair, four members appointed by elected officials and one member appointed by the ICOC. Finally, with some exceptions, the ICOC must conduct public meetings consistent with the Bagley-Keene Open Meeting Act.

Another argument set forth against Prop. 71 was that the measure “specifically supports ‘embryo cloning’ research—also called ‘somatic cell nuclear transfer’….” This is not true. The measure allows “somatic cell nuclear transfer,” but this process involves unfertilized eggs in the early stages of development—not embryos. Moreover, Prop. 71 prohibits the use of bond proceeds from the measure for funding human reproductive cloning.

According to the Association of American Medical Colleges (AAMC), “Somatic Cell Nuclear Transfer (SCNT) or therapeutic cloning involves removing the nucleus of an unfertilized egg cell, replacing it with the material from the nucleus of a ‘somatic cell’ (a skin, heart, or nerve cell, for example) and stimulating this cell to begin dividing. Once the cell begins dividing, stem cells can be extracted 5-6 days later and used for research. … Reproductive cloning, on the other hand, is intended to create human beings by cloning human embryos. The AAMC and the National Academy of Sciences recommend a ban on all forms of this type of cloning.”