New Stem Cell Boss Grabs $400K Salary
By WAYNE LUSVARDI
People are upset.
The Los Angeles Times reported that the new chairman California stem cell research center, Jonathan Thomas — an investment banker — will draw a salary of more than $400,000 per year. Current Chairman Alan Trounson also makes a salary of $490,000.
About 98 percent of more than 150 online comments to the story were outraged at the news.
The stem cell research center — euphemistically called the California Institute for Regenerative Medicine (CIRM) to give it a private-sounding name — was originally authorized under Proposition 71 in 2004 with $6 billion in bonds, including interest. The California stem cell institute has already requested another $6 billion in voter-approved bonds when its funds run out in 2014.
Many of the online newspaper commentators who stated they originally voted for public funding of stem cell research in 2004 vowed that they would not be burned twice and would not vote for it again.
Apparently the commentators did not realize that the father of Prop. 71 and its outgoing chairman of the board — Robert Klein II — already has created two arguably unnecessary and gratuitous state bureaucracies: the California Housing Finance Agency (CHFA) and the California Institute for Regenerative Medicine (CIRM), both of which depend on bond proceeds. Those who oppose any more government bonds for state-sponsored stem cell research have already been taken to the cleaners twice. They just don’t realize it.
Klein has been a master of influencing California’s voter initiative system, public opinion, and backstage political wheeling and dealing to create public agencies ex nihilo — Latin for “out of nothing.” California is a state where whole bureaucracies can be created without the approval of the Legislature or governor. Once created, like all bureaucracies, they have a life of their own and are almost impossible to phase out even if their organizational mission no longer exists.
As economist Milton Friedman once quipped, “Nothing is so permanent as a temporary government agency.”
Klein has not only fathered two state bureaucracies in California, he has served since 2004 as the chairman of the board of the stem cell research financing agency with a $150,000 a year salary for half-time work. He learned how to game the political system to launch the stem-cell agency from his experience in founding the Housing Finance Agency, whose function is for the public sector to capture low-income housing finance away from the private sector.
CHFA Origins and History
The California Housing Finance Agency (CHFA) came into being in 1973 after the Nixon administration ended public housing subsidies and replaced them with block grants. Klein and associate Michael J. BeVier influenced the state Legislature to create the California Housing Finance Agency to subsidize low-income housing developments with tax-exempt bonds. In 1979, BeVier wrote about their exploits in a book titled, “Politics Backstage: Inside the California Legislature.”
In order to avoid any conflicts of interest, Klein reportedly never used CHFA bond monies in his own real estate projects.
In September 1973 — the year the CHFA was formed — market interest rates on a 30-year fully amortized mortgages reached 8.82 percent. By October 1981, the interest rates had reached 18.45 percent after the 1979 Energy Crisis, the Iranian Hostage Crisis, President Jimmy Carter’s continuation of of price controls on gasoline and natural gas and rampant inflation. Offering a tax-exempt rate on a 19 percent mortgage for low-income housing was useless.
But by October 2003, the 30-year mortgage rate had dropped to 4.23 percent, and together with subprime loans, made low-income housing bond financing effectively superfluous. At one point during the Real Estate Bubble of the mid-2000s, the effective interest rate on low-income mortgages had reached below zero and Fannie Mae was essentially giving away free money.
Subsidized financing for new construction of low-income housing is a contradiction. Affordable low-income housing is typically old, obsolescent, and located far from amenities such as shopping centers and light rail stations. That is what makes it affordable. But in California, affordable housing has been redefined as a dwelling that is new, with gyms, spas and pools — and which is located in a mixed-use development with an adjacent supermarket and rail transit station. Redevelopment and bond financing have mostly contributed to low-income housing becoming luxury housing.
Nonetheless, like all bureaucracies that have long ago lost their original missions, the CHFA continued to provide below-market interest rate financing to low income housing developers. By 2011, the CHFA was staying out of the bond market altogether for fear that buyers would not buy the bonds. But the agency still had an overhead of more than a quarter billion dollars per year ($255 million).
Stem Cell Institute History
The rationale used by Robert Klein in 2004 to get Prop. 71 approved by voters was ingenious. Then-President George W. Bush had issued an executive order to ban the use of new embryonic stem cells in medical research funded by the federal government. (Although federal funding for old embryonic stem cell lines was allowed. And private and state-funded research was not affected.)
Much of the California opposition to Bush for the Iraq War was cleverly redirected into repudiating him by voting for stem cell research for miracle cures promised for paralysis, cancer, and heart disease. But what it actually did was shoot the state budget and the medically needy in the foot.
In 2009, a Little Hoover Commission report scrutinized Klein’s organizational structure and administration of the stem cell institute. In particular, the Commission was critical that the job qualifications Klein wrote for the position of chairman of the board were essentially reflected in his own resume. The Hoover Commission commented that Klein often overstepped the boundaries between policy setting as chairman and day-to-day administration, which should have been separated.
The Hoover Commission also became worried that the stem cell agency could become “leaderless” in the event of his departure, which is precisely what happened last year when Klein had to step down under pressure from critics.
Reportedly, Klein was accused of arranging for a crony to succeed him in a proverbial backstage deal. Eventually, Klein was allowed to stay another six months and now an apparent successor has been found, albeit for a whopping $400,000 salary.
Another point of contention by the Hoover Commission was that the membership of the oversight committee of the stem cell financing agency included those who benefitted from agency grants and loans. The Hoover Commission was concerned that the oversight committee was full of “self dealing.”
Today, the major rationales for why government-funded stem cell research was once thought to be needed have unsurprisingly mostly disappeared:
* Medical researchers discovered that stem cells could be harvested from many different types of human cells, thus rendering the use of embryonic stem cells for research unnecessary, vindicating Bush.
* President Bush’s executive order banning federal funding of stem cell research using human embryos was overturned by President Barack Obama in 2009.
* There is no need for a redundant state financing mechanism for stem cell research to private venture funding and grants from the National Institutes of Health. The private International Stem Cell Corporation is on track to emerge as one of the first profitable stem cell companies, mainly due to vanity skin care products sold to wealthy customers, although breakthrough skin-burn products have also been notable.
* California’s Medi-Cal program has been deeply cut, resulting in the state funding redundant stem cell research while Medi-Cal patients can’t get kidney dialysis and chemotherapy treatments.
Stem cells can’t cure bureaucratic opportunism. Bureaucracies such as the March of Dimes continue to exist long after the Salk vaccine eliminated polio. Such is the case with bond financing for low-income housing and stem cell research.
Infrastructure Financing Districts
State Assemblyman Tom Ammiano, D-San Francisco, has recently proposed Assembly Bill 664, which would authorize dropping the long-standing requirement for voter approval of bonds for Infrastructure Financing Districts (IFDs).
Like Robert Klein, Ammiano uses populist propaganda to sell his proposed legislation to the public. He asks, “Why should the state general fund subsidize the America’s Cup IFD bonds?”
This is a trick question, because IFD bonds aren’t backed by property taxes outside the project area. Nor do they rob funds from public schools. IFDs are revenue bonds backed by the collateral of the land and improvements in the infrastructure district and by revenue stream it is anticipated to generate. However, revenue bonds are more risky than general obligation bonds and could ruin the credit rating of a city or state.
But if history is any guide to the future, the gullible California public will evidently continue to vote for feelgood voter initiatives and legislation that creates autonomous self-dealing and superfluous bureaucracies funded by bonds. Despite protestations that they may have been fooled once but won’t be twice, California voters have already been fooled more than twice and continue to fall for the propaganda of bond hucksters.
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