Posted on 07/31/2005 12:53:19 PM PDT by churchillbuff
Unable to sell bonds to finance California's $3 billion stem cell initiative, the state treasurer's office is trying an unprecedented new approach.
With any bond sale delayed by lawsuits over the initiative, the new plan is to issue "bond anticipation notes" that the state would repay if it wins the legal challenges and is able to issue actual bonds.
Treasurer Phil Angelides and the committee overseeing the state's stem cell program see the notes as a unique and legally sound way to generate the money to start awarding stem cell research grants this year.
But the plan leaves some consumer legal groups uneasy.
"Trying to sell state notes when the repayment funds are tied up in court reminds me of Wimpy's line, 'I'll pay you Tuesday for a hamburger today,' " said Harold Johnson of the conservative Pacific Legal Foundation, referring to Popeye's burger-loving pal.
"I wouldn't be surprised if there aren't many takers for what the treasurer's peddling. These notes may be to state financial instruments what the Edsel was to cars, or New Coke was to soda."
The grant-making agency that will control the money has been running for the past seven months on a $3 million state loan and a $5 million donation by the Dolby Foundation. The agency, known as the California Institute for Regenerative Medicine, needs cash from the sale of bond anticipation notes so it can keep paying administrative costs, hire staff and begin issuing what is supposed to be up to $300 million annually in stem cell research grants and loans.
Robert Klein, chairman of the institute's oversight committee, had been pushing to start awarding grants in May. But the original plan to fund research through the issuance of government-backed bonds has been set back by several lawsuits questioning the constitutionality of the stem cell initiative.
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The idea of using bond anticipation notes is not new. Such notes are used to get money flowing quickly to government funded projects while the administrative paperwork of issuing bonds is being completed.
Generally, bond anticipation notes are paid off in 60 to 90 days in rare cases up to a year after the bonds are issued, said LeeAnn Napolitana, a bond lawyer with Foley and Lardner in San Francisco. For investors, the interest rate on bond anticipation notes is higher than on bonds because, unlike with bonds, the government doesn't promise to repay them.
But in most cases, Napolitana said, there are no legal issues that might hinder the issuing of such bonds, and no question they will eventually be issued.
That is why California's plan is unique.
There is no certainty that bonds to fund Proposition 71 will ever be issued to pay off the notes. So investors who buy the bond anticipation notes run the risk of never recouping their money.
Should that happen, according to the treasurer's office, investors could not hold the state liable. The term sheet given to investors will clearly explain the risk involved, according to the treasurer's office.
"Bond anticipation notes are tailor-made for the situation the California Institute of Regenerative Medicine finds itself in because it permits the state to obtain funds without the state exposing itself to any liability whatsoever," said James Harrison, the institute's attorney.
Finding buyers for the notes may be a big hurdle. After circulating the bond anticipation notes to institutional investors, the state determined this month that there were no interested buyers. The treasurer's office is now circulating the term sheet to philanthropic investors, such as foundations that support medical research.
Harrison said there was never any expectation that institutional investors would be interested in buying the notes because they are relatively risky and unusual. But philanthropic groups would be able to write off a loss as a grant if the state loses the legal challenges and cannot issue bonds and repay the notes.
"It's always been our view that prospective purchasers would be charitable foundations whose mission it is to fund medical research," Harrison said. And, he added, buying the bond anticipation notes would be consistent with that mission.
In any event, stem cell initiative officials say they are confident they will prevail in the legal challenges.
The primary issue in some of the cases involves the legality of spending taxpayer money without oversight by elected officials. In addition, a lawsuit was filed this month in Sacramento Superior Court questioning the validity of the bonds.
Proposition 71 insiders have referred to the legal challenges as a tyranny of the minority.
"Sixty percent of California voters approved Proposition 71 and recognized the urgency of the mission," Harrison said.
But Short contends that the lawsuits seek to uphold the state Constitution, "which represents the enduring will of the people across decades."
She questioned how California can justify issuing millions in bond anticipation notes, when the state Constitution requires voter approval of any measure that would take on more than $300,000 in taxpayer debt.
That section of the Constitution refers to debt that would be paid from the state's general fund, not from bonds, said Nick Papas, a spokesman for Angelides.
Harrison, the institute's attorney, points out that taxpayers approved the state's spending $3 billion, and that the plan for bond anticipation notes does not entail spending more than that.
Critics of the treasurer's plan say it shows disregard for the sanctity of the legal system and will only create more court wrangling.
"It's a ploy to end-run really, to nullify the legal challenge to the bonds while that challenge is still being considered by the courts," said Johnson, of the Pacific Legal Foundation.
"I suspect that these notes will themselves be challenged, and the courts may not find the state's borrowing stunt very amusing," he said.
An attorney at the California Public Interest Research Group, Steve Blackledge, said he would not oppose the funding plan, but that he found it "dubious."
"It is troubling that they are rushing so fast to get money before all the kinks are ironed out," said Blackledge, legal policy director for CalPIRG. "I understand the voters spoke and said that they want to do this, and that people are oh, so very hopeful that some cure and medical breakthrough was the rationale. But I wish they would take the time to get things right."
If embryonic stem cells can cure what ails us, why are massive government subsidies needed? Can someone answer this question?
ping
Where ESCRers go...hucksters follow.
I agree that embryonic stem cell research is a bill of goods, and full of ethical questions, but isn't this an example of conservative judicial activism? If the voters of the state voted to support this, then like prop. 189, the measure shouldn't be tied up in the courts. The voters have a right to expect that the initiatives they vote for are carried out.
bond anticipation notes.. should be BANned.
'BAN' them. ;-)
LOL.. tell that to the voters that supported 187 and 209
Well you do have to remember that leftist support these bonds and they don't quite understand the idea of "R&D followed by huge profits off discoveries" concept.
Yep. Those leftists did it again.
Governor Arnold Schwarzenegger Endorses Prop 71 ($3B Stem Cell Research)
I voted *no* but was in the minority. Sometimes you win some arguments in election cycles and sometimes you don't. That's the double-edged sword of California's initiative process.
Yes he did. Yes he's a leftist. And you prefer leftists with a (D) after their name? I don't.
Do Californians believe in republican form of government, or direct democracy?
That is false. I abhor leftists, no matter what letter they put next to their name. I have never voted for a democrat.
I agree the whole thing is stupid. I'm just pointing out that when people vote, sometimes they have to live with unintended consequences. What is going to happen when Roe is overturned and the abortion issue is properly returned to the states? Some states (Ca. for example) are going to have more liberal laws allowing some, or most abortions, and some states aren't. That's been our argument the whole time. Let the states decide. I think that escr falls into the same catagory.
ESCR is legal and all 50 states.
When you're drowning in debt, the idea is to spend less money...not borrow more so you can spend more. Only a Liberal will argue otherwise.
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