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CA Controller Backs Bill to Study Conflicts Of Interest in State’s Stem-Cell Program

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California’s chief financial officer is supporting a bill that would order a study of how the state’s stem-cell research agency is governed, and its vulnerability to conflicts of interest — the issue that sparked a just-completed audit by his office that largely gave the agency a clean bill of health.
 
Controller John Chiang contends that the bill holds the best hope of eliminating future conflicts involving board members and others connected with the California Institute for Regenerative Medicine, such as the one that sparked the audit, his spokeswoman Hallye Jordan told BioRegion News last week.
 
“The controller believes that the public accountability is critical to ensure public confidence in the stem-cell program, that their dollars are being spent on finding cures through stem cell research, rather than benefiting individual biotech companies or institutions that are conducting the research,” Jordan said in an interview. “Transparency and accountability to the public about how their dollars are being spent is important.”
 
The audit and the bill came to life after John Reed, president of the Burnham Institute in La Jolla, Calif., and at the time also an ICOC board member, in August 2007 asked a CIRM administrator to reverse a decision rejecting a $638,000 grant request by Burnham — an apparent conflict of interest.
 
The measure also calls for CIRM to require that its licensees and grant-funding recipients develop plans giving uninsured residents access to “any drug that is, in whole or in part, the result of research funded by” the agency.
 
“If the public is not confident that their investment is being adequately protected and that they’re not going to see any financial benefits from the research as promised, then the public is likely going to be less inclined to support funding future research,” Jordan said.
 
At deadline, Chiang’s office was working on a letter declaring formal support for Senate Bill 1565, introduced by state Sens. Sheila Kuehl (D-Santa Monica) and George Runner (R-Antelope Valley), the state Senate’s second-most powerful Republican.
 
The legislation, available here, directs the state’s Little Hoover Commission to examine by July 2, 2009, how CIRM’s governing board, the Independent Citizens Oversight Committee, performs its duties.
 
SB 1565 has picked up steam in recent weeks as it heads to the state Assembly after clearing the state Senate last week. The bill passed off the Senate floor without discussion May 14 on a 40-0 consent vote after it passed the Senate’s health, and appropriations committees on votes, respectively, of 11-0 and 14-0. No vote was recorded for a 15th member of the appropriations panel.
 
The Assembly is expected to refer the measure to its health committee for a hearing next month. One Assembly member, Dave Jones (D-Sacramento), is shepherding the bill in that chamber as a co-author.
 
Jordan disclosed Chiang’s support for SB 1565 on May 15, three days after Chiang released a 35-page audit concluding that CIRM followed all but one of its own policies intended to minimize conflicts of board members between their duties as overseers of the agency, and their duties to their employer institutions.
 
“CIRM has extensive conflict-of-interest policies and processes that are modeled after and, in some instances, go beyond National Institutes of Health requirements,” Chiang concluded in his audit or “Review Report” on CIRM, released May 12.
 
Chiang found fault with CIRM over a single issue: the institute’s failure to require specialists used by the agency’s Grants Working Group to sign statements after their meetings declaring they would not disclose financial and other confidential information of grant applicants, and that their dealings with applicants did not result in conflicts of interest. CIRM required the specialists to sign similar statements before their calls.
 
But the controller stressed that CIRM was in compliance with its other conflict-of-interest policies, as well as policies covering grant administration, administrative expenses, and expenditures. In addition, he concluded, those policies conformed with Proposition 71, under which voters approved borrowing $3 billion to be spent over 10 years for stem-cell research and facilities statewide.
 
CIRM responded to Chiang’s single criticism by implementing the post-meeting statement rule for members of the Grants Working Group, also called the Scientific and Medical Research Funding Working Group. The agency cheered the rest of the audit as “very gratifying and helpful in demonstrating to Californians that we are succeeding in our efforts to be good stewards of state funds.”
 

“CIRM needs to be directly accountable to elected officials. I would have liked to have seen the bill go straight to that principle. Instead it is taking an intermediary step.”

“We are committed not just to our scientific mission of advancing stem-cell science to therapies and cures, but also to earning the public’s trust. In this regard, the Review Report has been helpful and has made us a stronger agency,” CIRM President Alan Trounson said in an April 14 letter to Chiang, which the controller released as an attachment to his report.
 
Don Gibbons, a CIRM spokesman, told BioRegion News the agency was “thrilled” with the audit: “It shows that our policies and procedures are working.”
 
Gibbons said CIRM has yet to take a position on SB 1565. Last March, the ICOC developed draft regulations similar to the drug-access provision of the bill; that proposal awaits board action.
 
Chiang’s office oversees CIRM by reviewing the agency’s annual financial reports, prepared for the ICOC by an outside accounting firm.
 
In January, Macias Gini and O’Connell completed its audit of CIRM’s finances for the year ended June 30, 2007. According to that audit, available here, CIRM’s net asset deficit rose by 46 percent, or nearly $7 million, to $22.2 million, “primarily due [to] expenses exceeding revenues.”
 
And while CIRM generated nearly 13 times, or $4.55 million, above its 2006 fiscal year revenue — almost all of it through higher investment earnings — expenses dropped by $6.1 million.
 
That $6.1 million figure reflects the difference between a $13.6 million cut in research grant expenses and two expenses that rose in FY ’07: Operational expenses that zoomed up 47 percent or nearly $2 million; and interest expenses on its bonds that rocketed 25-fold over the previous year ($5.5 million, vs. $225,416). CIRM cut another $2.1 million in operations costs, however, by cutting back on travel and meetings.
 
Not recorded in the audit: The $1 million “fair” value of CIRM’s roughly 20,000 square feet of office space donated by the city of San Francisco to the stem-cell agency free for 10 years. CIRM moved into that space in November 2005.
 
Based in San Francisco, CIRM is the agency created by California to oversee how it spends the $3 billion approved by voters under Proposition 71. The ballot measure was approved in November 2004 and then withstood nearly two and a half years of legal challenges that ended last year when California’s Supreme Court upheld lower court rulings [BRN, May 28, 2007].
 
Missed Opportunities?
 
Two groups long critical of CIRM over conflict and governance issues have faulted the audit, contending in interviews with BRN that Chiang’s office missed an opportunity to stamp out the potential for conflict of interest within CIRM.
 
John Simpson, director of the Stem Cell Oversight and Accountability Project for the Santa Monica, Calif., group Consumer Watchdog, cited the requirement under Proposition 71 that 13 members of ICOC’s 29 member board be leaders of research institutes that may potentially seek funding through CIRM.
 
While institution leaders must recuse themselves from specific ICOC discussions and votes concerning their institution, Simpson contended “they are going to bring the view of the institutions that want money to making the regulations about how that money is handed out.”
 
Not long ago, he said, CIRM issued a request for applications for grants to fund new stem-cell tools and technologies. Research institutions like those represented on ICOC were eligible for up to four grants, while private companies could only seek up to two. CIRM later imposed a single limit on the number of applications, following complaints by Simpson and others.
 
“It’s that kind of built-in bias and conflict that exists simply by the fact so many [board members] represent the institutions themselves,” said Simpson.
 
It was Simpson’s group, under its previous name of Foundation for Taxpayer and Consumer Rights, which prompted Chiang to audit CIRM last November after it was discovered that in August 2007, John Reed, president of the Burnham Institute in La Jolla, Calif., and at the time also an ICOC board member, had asked a CIRM administrator to reverse a decision rejecting a $638,000 grant request by Burnham.
 
In a response upholding its denial of the grant request, CIRM also questioned the eligibility of a Burnham researcher, David Smotrich, to serve as a principal investigator for the grant, intended to help support Burnham’s Stem Cell Resource.
 
CIRM noted that Smotrich was not a full-time Burnham faculty member, while principal investigators requesting funding through CRIM’s Scientific Excellence through Exploration and Development program “must be full-time employees of the grantee organization,” according to SEED. Reed insisted that Smotrich was qualified for faculty status and “is treated by our organization as a full member of the faculty in every way.”
 
“The controller basically asked, ‘is [CIRM] following all the procedures required by Proposition 71?’ And he said, ‘Yes, they are.’ And I would say, ‘Yes, they are,’” Simpson told BRN last week. “I don’t think [Chiang] could have done anything more than that. But that misses the point. The problem is, the law itself that created the stem cell agency from the beginning built in conflicts of interest.”
 
Agreeing with Simpson is Jesse Reynolds, director of the project on biotechnology in the public interest for the Center for Genetics and Society, an Oakland, Calif., policy research group focused on the social implications of new and emerging human biotechnologies.
 
“[The audit] looked at the routine finances and administrative practices of the CIRM. The troubles at CIRM run somewhat deeper than that,” Reynolds said. “Prop 71 created an inherently flawed structure from the beginning – built-in conflicts of interest exemptions from the norms of oversight and accountability, an exceptionally high barrier to subsequent modification and reform by the state.”
 
Proposition 71 bars any change during its first three years. After that, the stem cell law can be amended only with 70-percent supermajorities of the Assembly and state Senate, as well as the signature of Gov. Arnold Schwarzenegger.
 
CIRM’s spending cannot be cut by the Assembly or Senate appropriations committees, and lawmakers cannot remove the agency’s officials. Reynolds said SB 1565 is a key first step toward building political will for reforms.
 
“I would have liked to have seen the bill go further,” Reynolds said. “CIRM needs to be directly accountable to elected officials. I would have liked to have seen the bill go straight to that principle. Instead it is taking an intermediary step.”
 
Jordan said Chiang’s office is limited by law to examine only the finances of state agencies, and not issues related to their performance, such as whether Reed should have lobbied CIRM. She also noted that Chiang referred Simpson’s complaint about Reed’s actions to the California Fair Political Practices Commission.
 
FPPC, a five-member panel that interprets and enforces California’s political campaign, lobbying, and conflict of interest laws, has kept its review of the complaint open. The commission has given no indication on its web site that it has come to any decision, and FPPC typically does not publicly discuss its cases or its timing for when they may be resolved.
 
So far this year, one life sciences company has run afoul of FPPC, according to a BRN review of commission records available on its web site. On Jan. 10, Pfizer was fined $1,695.38 for failing to file in a timely manner a semi-annual campaign statement disclosing contributions totaling $64,769 in 2007 [case 2007-0745]. Those contributions included a $2,500 donation by Pfizer made Jan. 23, 2007, to Chiang’s campaign committee, John Chiang for California 2006.
 
Simpson and Reynolds have not criticized Chiang for involving FPPC in a review of Reed’s actions. Instead, their groups have thrown their support to SB 1565.
 
In a statement included with a staff analysis of the legislation, Kuehl and Runner cited three justifications for the Little Hoover study of CIRM and ICOC: Their status as public entities, the “close-knit nature of the scientific community,” and the level of state funding approved for the stem cell initiative — $3 billion in bonds, with repayment expected to cost $6 billion when interest is included.
 
“CIRM and the ICOC should be thoroughly scrutinized by an independent body to ensure the highest level of public trust and confidence,” Kuehl and Runner stated. “Such a study would help maximize CIRM and the ICOC's ability to achieve the goals of Prop 71 and protect the integrity of the institution from real or perceived conflicts of interest.”
 
Bill Backlash?
 
An advocate of increased research funding has publicly argued that a study of CIRM and ICOC would hurt the agency and its board more than it would help citizens.
 
Testifying May 12 before the state Senate’s appropriations committee, Don Reed, chair of Californians for Cures, said such a study would only serve to slow down the pace of its funding of research and other activity – in effect, delaying cures for crippling diseases.
 
Reed – who did not respond to written questions from BRN last week – is a retired schoolteacher who spearheaded the passage of California’s Roman Reed Spinal Cord Injury Research Act of 1999. The law is named for his son, who is paralyzed.
 
Reed, who is also director of policy outreach for a national counterpart to his California group, Americans for Cures, also said CIRM’s value in helping research institutions leverage private donations outweighed any concerns over conflicts of interest raised by the watchdog groups, and voiced last week by Chiang’s office.
 
“The California electorate voted for this governance structure precisely because it brought together outstanding leaders in the crucial areas — medicine, science, education, patient advocacy — this is not a conflict of interest, but a convergence of expertise,” Reed said, highlighting the last three words in boldface in the text of his testimony, available here.
 
The agency that would examine CIRM under SB 1565, formally known as the Milton Marks "Little Hoover" Commission on California State Government Organization and Economy, was created in 1962 as an independent watchdog to investigate state government operations, issue reports, and propose bills to root out inefficiency.
The 13-member commission consists of five citizen members appointed by Schwarzenegger, four citizen members appointed by the Legislature, two Senators, and two Assembly members.
 
While the commission’s web site says that it can study topics “that come to its attention from citizens, legislators and other sources,” Little Hoover has told the Legislature that it alone has exclusive authority over the subject and timing of its research, prompting the Senate appropriations panel to seek a legal opinion before its May 12 vote in favor of the bill.

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