California’s economic crisis – businesses are leaving the state – includes related articles – Cover Story
John S. DeMott
Custom Stamping Inc.’s $2 million factory in the Los Angeles County town of Covina has oak-paneled front offices and a squeaky-clean shop floor. The company’s machinery hums, turning out millions of tiny precision metal parts for the computer and telecommunications industries. Annual sales are $15 million.
But Custom Stamping, most of its 68 workers, and 43 punch presses will soon leave California for a new plant near Carson City, Nev. The company expects that its costs there will be about half what they are in California.
Custom Stamping is hardly alone in its disenchantment with the state that has been its home for 23 years: A number of companies are either moving to or expanding in other states because of what many executives describe as excessive regulations, high taxes, too much crime, and an oppressive workers’ compensation system that Gov. Pete Wilson calls “a national disgrace.”
The loss of these tax-paying and job-providing companies in the nation’s most populous state is adding to California’s already formidable problems–the national recession, swelling immigration and its heavy demands on state agencies, defense and aerospace downsizing, a prolonged drought’s lingering impact on the agriculture industry, scheduled military base closings, and vast construction cutbacks.
Because of California’s size, political clout, and tradition as a national trendsetter, the impact of what business generally views as excessive taxation and regulation on companies is being watched closely by businesses and governments in other states for the lessons that the current situation in California offers to other parts of the country.
Business disenchantment with taxes and regulation is not unique to California of course. New York, Connecticut, and other states are struggling with similar difficulties. But the concept of California up against such serious problems represents a tremendous change in the image that Americans generally have long held 1950. Although New York and Pennsylvania had the largest populations well into the 20th century, California now has more people than those two states together.
California’s 52-member U.S. House delegation is equal to the combined delegations of New York and Pennsylvania and accounts for 12 percent of the entire House membership. California’s 54 electeral votes are 20 percent of the total needed to elect a president.
California’s role as a trendsetter extends from fashions and fads to such significant initiatives as the tax revolution of the early 1970s, widely viewed as the beginning of the political shift that eventually brought Ronald Reagan to the White House and transformed American politics. The state had been viewed as a land of economic promise from the Gold Rush through the emergence of Silicon Valley as the mother lode of American technology.
Despite its growth and drastically expanded political presence, California has been experiencing problems that not only affect individual businesses but also have triggered fiscal crises in the state government. At one point last year, the state was paying employees and vendors with vouchers in lieu of cash while Gov. Wilson and the legislature debated ways to close a multibillion-dollar budget gap. The solution put additional tax pressures on businesses, which have also been forced to cope with regulations that go further than those of many other states.
The Economic Development Corporation of Los Angeles County, a privately funded organization that helps small businesses deal with workers’ compensation and other regulatory problems, says nearly 400 businesses and 66,000 jobs have left Southern California since 1990.
In a recent survey by Hankin & Co., a Los Angeles consulting firm, 10 percent of the 90 Southern California companies responding said they “definitely” plan to move some or all operations from California within a year, and an additional 13 percent said they would “probably” do so.
The picture is much the same in Silicon Valley and the San Francisco area. Richard Pimentel, managing partner in the accounting firm of BDO Seidman in San Francisco, says: “Any expansion by my clients is being done outside California. It just costs too much money to do business here.”
Kirk West, president of the California Chamber of Commerce, recognizes the problems of recent years-he has a list of corrective actions he says the legislature should take to help the economy–but he rejects allegations that the state has gone into permanent decline. “There is an excellent chance for a turnaround,” he says.
A basic problem, West says, is what one state official has termed a growing imbalance between “taxpayers and tax receivers.” The business-backed reforms to create jobs will rectify that situation, he adds.
The need for greater employment opportunities was cited frequently in the wake of the riots in south-central Los] Angeles last year, which wiped out businesses and jobs that the city and state could ill afford to lose. Many analysts argued that high unemployment contributed to the riots, whose immediate cause was a not-guilty verdict in the first trial in the police beating of Rodney King.
A key goal of business leaders such as West in pressing for pro-growth reforms is to halt the exodus of firms seeking more comfortable business climates in states such as Arizona, Idaho, Nevada, New Mexico, Oregon, Utah, and Washington. All of those states have vigorous, sophisticated, aggressive, and warmly welcoming economic-development staffs ready to offer tax incentives, lower business costs, and other attractions to lure companies from California.
Even small-business people with no immediate plans to move are plainly worried. One is Barry Baszile, owner of BasfAle Metals Service, Inc., which distributes sheet and bar aluminum to military and commercial customers. “I love California,”he says, yet he notes that his annual workers’ compensation premium has been driven up by 70 percent by pending workers’ comp claims.
In the case of Covina’s Custom Stamping, factors that developed in recent years finally combined to provoke its move to Nevada. For one thing, crime got worse. And Nevada’s business costs looked far preferable to California ‘s. Health-insurance premiums, which run to $8,000 per employee per year in California, will drop by half for Custom Stamping in Nevada, and workers’ compensation insurance will be two-thirds of the $12,000 the firm paid monthly in Covina.
What’s more, Nevada doesn’t tax income of individuals or businesses.
Also important to Custom Stamping is pending Nevada legislation that would bar employees from suing employers on grounds of stress and other presumably nuisance reasons. A former employee who was earning $36,000 is saying he was terminated unjustly and is suing for $1.7 million, plus punitive damages. “How many times does $36,000 go into $1.7 million? How much is a person supposed to get?” asks Woody Wurster, who owns the company with his wife, Jeannette.
Then there are California’s environmental regulations, which extend down to the smallest businesses and provide for fines of up to $25,000 for some violations. One regulation, for example, required Custom Stamping to dispose of waste machinery oil at least every 90 days, which meant it had to pay $600 for disposal of about 45 gallons. The company raised the logical question: Why not simply store it twice as long and effectively pay half as much to have it hauled away?
Says Jeannette Wurster: “I’ve written to the legislature. I’ve written to Gov. Wilson. I said we’re getting ready to move. I say we’re going to leave the state of California.”
The response came from a bureaucrat, says Wurster. “He says there’s nothing he can do about it. He says, ‘I’m only here two years from New Jersey.”
Other examples of pressure on employers abound. The 1,000 California firms responding to a survey by Kemper National Insurance Companies reported that they had laid off or decided against hiring a total of 10,000 workers because of workers’ compensation costs. The companies cited fraud as the principal cause of that work-force reduction, an average of 10 jobs per company.
Statewide, annual employer costs of premiums and self-insurance for workers’ compensation have gone from $4.2 billion to $10.6 billion over the past decade. (See the chart on Page 22.)
“The system is out of control,” .says Michael Hoy, Kemper’s Western Division president, based in Folsom, Calif. He says some sectors of the medical, legal, and vocational-rehabilitation fields view workers’ compensation as “a big money machine.” The California Workers’ Compensation Institute, an independent research organization, says that litigation costs take up 20 percent of expenditures under the compensation program.
Hoy points out that California law requires that only 10 percent of a claim of disability attributed to stress be job-related. He says the compensation benefits are simply “too easy to access.”
Another example of the regulatory problems faced by employers is the recent $1 million damage award to a man who had alleged sexual harassment by a female supervisor. An award of that magnitude was possible because unlike the federal government and most other states, has no ceiling on potential awards in such cases.
Business defections stemming from excessive regulation–or any other reason–are the last thing California needs right now. From a dynamo creating an average of 300,000 jobs a year in the 1980s, a total of 3 million for the decade, California now is losing them at a furious pace–estimates range to 1 million over the past three years alone. Unemployment in Los Angeles County hovers at 10.2 percent, more than three points above the U.S. average. And the California economy would have to create 250,000 jobs annually just to absorb the immigrants–57 percent of the U.S. total–from Mexico, Japan, Korea, and China arriving in California.
The costs and other problems of dealing with a fast-expanding population are going to grow substantially. The state finance office estimates that California will have 63.3 million people by 2040, more than double the present number.
Some economists and most California politicians initially rejected the prospect that the state–long recognized as an engine of permanent growth–had encountered basic difficulties. Their state’s $780 billion economy, they pointed out, is the seventh-largest in the world and subject to the same cycles that affect nations. But the reality is that the state faces “a significant restructuring of the economic base,” says Jack Kyser, chief economist for the Los Angeles County economic-development corporation.
Another factor is the sharp decline in defense spending in a state where defense contracts and military bases have been major economic factors. Aerospace and high-tech jobs in Los Angeles County have dropped from 301,000 in 1985 to 185,000, with further cuts expected. Seventeen California military bases, with 140,000 civilian jobs and a combined annual payroll of $4.2 billion, are slated for dosing, and 10 more installations were added to the list this year.
The defense cutbacks are not the result of any state policies, of course, but the extent to which those policies have reduced the number of nondefense jobs contributes to the problem.
Even companies born and bred in Silicon Valley are reacting similarly to California’s business climate. Cypress Semiconductor of San Jose, a supplier of chips to the workstation and supercomputer markets, went offshore in 1992, opening a low-tech assembly plant in Thailand that will save $17 million in costs this year, says CEO T.J. Rodgers. For one thing, wages will drop from $10 to 50 cents an hour. More to the regulatory point, Rodgers says he got the Bangkok plant up and running in less time than it takes to obtain local government approval to install an awning in San Jose.
And in April, Intel Corp. chose its 25th anniversary year to deliver a stunning blow to California . The company, whose sales of $5.8 billion make it the largest U.S. maker of microprocessors, is building a $1 billion, l,000-employee factory in Albuquerque, N.M., where it already has two plants and 2,400 employees. Although Intel is spending $400 million to expand a chip-making plant near its new Santa Clara headquarters, the much larger project went out of state-despite vigorous countering efforts by Gov. Wilson and Julie Meier Wright, the former aerospace executive who is California’s secretary of trade and commerce.
In the end, says Bob Perlman, the Intel vice president who headed the team that recommended New Mexico to Intel’s directors, there was little the state’s officers could do. The California sales tax applies to production machinery, and that alone would have cost Intel some $65 million. New Mexico does not impose such a tax.
Says Perlman of New Mexico’s advantages in this case: “If the other location is equally attractive and cheaper, it’s a no-brainer. We sure like to be nice to our community and our employees and our customers, but the first allegiance is to the shareholders.”
Why is this happening in the closing years of the century that made California a destination of such promise and appeal? Although there is consensus that external economic conditions such as the end of the Cold War play a big role, there is an almost equal consensus that the state has brought many of its problems upon itself. Even Wilson admits that California suffers from “self-inflicted wounds.”
Dennis Morin, president and CEO of Orange County’s fast-growing Wonderware Software Development Corp., says, “The California government is shooting itself in the foot.”
In Southern California, there are 72 “permitting agencies” at local, state, and federal government levels covering air, water, and other regulations. While no new business would have to get approvals from all of them, at least a dozen agencies might have to be approached, and the process can take months and cost up to $150,000. Eight permits are required to plant a tree in Los Angeles County. To turn that tree into furniture could call for 47 forms required to start a manufacturing business in Southern California.
The Wilson administration and the California Legislature are exploring ways to start easing burdens that the state puts on business. “What we’ve got to do is retain what we have and hopefully entice some new employers,” the governor says.
Organizations seeking to improve the business climate toward that end include Californians Against Red Tape (CART), a consortium of business groups ranging from the Ventura County Economic Development Association to the California Chamber of Commerce.
In making five key proposals and tracing them to specific problems, CART spotlights areas that have contributed to the reasons for so much disenchantment with governmental trends as they affect business. Here are the problems and the group’s recommended solutions:
Problem: Hundreds of local, state, and federal agencies regulate businesses in California. More than 70 agencies have environmental authority to regulate businesses in Los Angeles County alone …. In addition, California’s regulations often differ from federal requirements. All of this adds up to a confusing maze …. The result? Wasted taxpayer dollars, fewer jobs for Californians, and exasperated employers looking for a way out.
Recommendation: Eliminate regulatory duplication and overlap that waste taxpayer dollars, cost California jobs, and add nothing to environmental protection.
Problem: Many California agencies are self-funded, relying entirely on the fees and fines they can collect for their survival. Allowing fines to be used to support a regulatory agency’s budget encourages bureaucracies to put a premium on the number of fines imposed …. Too often, fee hikes represent the desire to protect or expand agency budgets, not the actual cost of regulation …. This built-in incentive to increase the fines collected along with a lack of budget oversight has led to alarming escalation in the size of fees and agency budgets.
Recommendation: Stop the explosive increases in fees; ensure that existing fees represent the actual cost of regulation rather than the cost of keeping the bureaucracy alive.
Problem: Many bureaucrats who work for regulatory and permitting agencies look upon employers as “the enemy.”
Recommendation: Promote a more efficient permit and regulatory system, eliminate the hostile attitude many agencies have toward employers,
Problem: Too often, the input of industry and other outside scientists is discouraged or ignored, and the work of state scientists is questioned by industry and academic scientists. Result: Regulations are adopted with limited scientific input.
Many of California’s regulations are developed with little consideration given to the marginal costs and benefits. In some cases, as much as 80 percent of the goal could be achieved for a fraction of the cost while saving jobs at the same time.
Recommendation: Open the regulatory process to ensure policies are based on the best scientific knowledge available, marginal costs as well as benefits are considered, and employers are given some flexibility in meeting regulatory goalS.
Problem: The original goal of the California Environmental Quality Act (CEQA) was to ensure that the environmental impacts of projects would be considered. The reality has become a costly, time-consuming, cumbersome process that too often stops legitimate projects while doing little to advance CEQAs original goal. CEQA is administered by multiple agencies and, according to the state’s Council on Competitiveness, there is no limit on the number or type of reviews that a local jurisdiction may require.
Spending two or more years obtaining a government permit is not uncommon. The entire commercial life span of many of today’s manufactured products, such as computer chips, is but one or two years. California manufacturers cannot effectively compete under those circumstances.
Recommendation: Streamline CEQA and environmental-permit processes to meet their goals without causing unnecessary costs or delays to legitimate projects.
Given the seriousness of the business-climate situation that is reflected in those recommendations and their rationales, business is optimistic that the state government is now receptive to corrective action.
Several of the business proposals in the regulatory and other areas have been introduced in the state legislature. Economist Kyser says that “you finally have the recognition in Sacramento that workers’ comp is a significant issue.” Many bills would severely limit, though not eliminate, the stress claims that have been a source of expensive litigation to many employers.
Critics find the legislative initiatives encouraging. Woody Godbold, CEO of Los Angeles’ Zero Corp. and chairman of the California Chamber, sees them “as symbols to the people who have jobs here that this is going to be a reasonable place and a competitive place to have your business.”
Zero, a 41-year-old maker of stylish aluminum carrying cases under the Zero and Halliburton labels, with 1992 sales of $160 million, moved two of its nine California plants to Salt Lake City last year but deferred relocation of a third when Godbold became optimistic that the California business climate was improving.
Godbold, who is also a lawyer, says that if he had to execute the incredibly intricate $6 million move all over again, he wouldn’t. “Things are happening to move California in the right direction,” he says. “The legislature is fully aware of what’s going on.”
For her part, Trade and Commerce Secretary Julie Wright says companies who are thinking of leaving California should think again.
The state chamber’s Kirk West agrees. Steps needed to improve the business climate make up a challenging agenda, he says, “but California is more than equal to the task–we have a phenomenal brain trust, a diverse economy, one of the best higher-education systems in the world, an ethnically diverse population, superb location on the fast-growing Pacific Rim, and a spectacular asset in our climate, coastline, and natural beauty.”
West and business leaders generally emphasize the key role of government in bringing about the turnaround they believe is possible.
Just as the results of the state’s moves toward greater business regulation and government spending serve as a warning to other states considering those routes, the fact that an improved business climate is crucial to recovery also sends a message to those states.
“Now is the time for action,” says the state chamber official. “All the business community has to do is show a unity of purpose–a determination to work with the legislature, the governor, and other concerned groups to solve California’s problems.”
That type of concerted effort, West predicts, “will put California back to work.”
The Resident Raider
Chuck Paskerian is a 60-year-old former California businessman who lives in Orange County but who now works full time to enrich Spokane and inland Washington state by persuading discontented companies to leave California.
Though other states wooing California businesses have full-time economic-development staffs that make regular forays into California , only a few have resident raiders like Paskerian.
Paskerian works trade shows in Southern California like the one earlier this year in Anaheim called Trends 2000, where 34 industry-hunting groups from as many states talked to some 400 interested California companies. He also combs prospect lists sent by fax to his home from the Spokane Area Economic Development Council, his employer.
With his long experience with California-including a stint for an MBA at Stanford and 20 years in the plastic-packaging industry, which put him in contact with many other industries–Paskerian has a head start over neophyte competitors who know only what they’ve read or been told. “I’ve been living in California 30 years,” he says. “I just talk to people I know.”
Currently, Paskerian is working with 20 companies that are entertaining the idea of moving. Sensitive to employee and customer reactions to what they are doing, the companies are reluctant to talk about their intentions publicly–at least until their plans are further along.
Nonetheless, their chief reason for considering a move, they generally say, is regulations rushed through with no consideration of their impact on the business community; it’s not so much regulations themselves but the accompanying paperwork, processes, and bureaucratic bumbling, they explain.
Few companies that approach Paskerian are having severe economic difficulties; most are doing well but simply want to do better.
Paskerian’s pitch can be powerful: Spokane’s workers’ comp costs can be as much as 90 percent less than California ‘s. Housing is half as costly. Average wages aren’t that far below California’s, but there are no personal income taxes, and other taxes are minimal. The city has 377,000 residents, is pro business, and offers an orchestra, three colleges, and an opera.
If necessary, a company can go through the permitting process and erect a plant in six to nine months, compared with years for California.
Spouses of executives and other employees can influence a family’s or even a company’s–decision on whether to move and usually are hesitant to pull up stakes, says Diane Paskerian, who monitors her husband’s activities. Recognizing that, the Spokane development council attempts to garner the favor of spouses. Says Diane: “Once they go up there and see the family life and the beautiful homes–probably two or three times as nice as the one they have in California– well, there have been wives who have made a decision for the husband.”
Paskerian says he has no qualms about inducing firms to leave California , a state he says he still loves. He has two sons in the California university system and two who are graduates. “You know, my friends said: Why are you doing this? Are you a traitor?’ And I said absolutely not. California must recognize that it has to change. And if I catalyze that and it helps the U.S. economy, so be it. This is not just a job I’m doing to make some money. This is something I believe in very strongly.”
Just as Brigham Young and his hardy band of 148 Mormon followers chose Utah as their new home 146 years ago after a grueling l,300-mile westward trek from Illinois, a growing number of California companies are also looking to the Beehive State.
Since 1989, 13 companies have disassembled themselves in California and reassembled at various locations in Utah, joining nationally known companies already in the state, such as WordPerfect in Orem, Novell in Utah County, and IOMEGA and Thiokol in Weber County.
Peter Metcalf, 37, CEO of Black Diamond Equipment, a maker of carabiners, harnesses, camming devices, and other gear used by climbers in this summer’s high-altitude box-office thriller “Cliffhanger,” moved Black Diamond and 48 of its 65 employees from Ventura to the Salt Lake City area a couple of years ago.
The move put Metcalf’s company in the middle of a skier’s and climber’s paradise-which is also one of the best product-testing arenas it could have in North America. Result: Sales have expanded to $11.3 million from $8.4 million last year, mainly to specialized retailers who cater to serious alpinists.
For Black Diamond’s headquarters, Metcalf worked out a deal to buy an abandoned “Scandinavian” shopping mall and village for a bargain $1,050,000, with financing through Utah industrial revenue bonds held by Zions First National of Salt Lake City. Zions also lent Metcalf $350,000 for moving and improvements. The deal, says Metcalf, “was one of the things that convinced me to come to Utah.”
Among other pluses: Black Diamond’s workers’ compensation premium is about $75,000 a year less than what it was in California, even though the company has increased employment to 98 people. Lower housing prices enabled many of the erstwhile CaLifornians to buy houses, some for the first time.
Other business transplants from California report similar successes. Elaine Barnes, president of the Arrowhead International dental lab, says from her office in the firm’s new $1.7 million building: “In California , our employees couldn’t park their cars outside like you see here or they’d be ripped off.”
Much of this is happening with the vigorous promotion of the Economic Development Corporation of Utah, which is funded by businesses and other private groups and, with the help of influential politicians, sells the state as “metropolitan Utah.”
Jan Graham, the first woman elected as Utah’s attorney general, said at a briefing for visitors not long ago: “You can have what I call a ‘normal’ life here. You can have a good job and have a safe neighborhood for your children. That’s becoming a bit unique in this world.”
There are some downsides. One is loss of sales from California markets for some companies. Though it saved $3 million in business costs such as workers’ comp, Natter Manufacturing Inc., a maker of precision metal parts for computers and telecommunications, lost $8 million to $10 million in California business “because we moved out of the state,” says owner Tony Kiss Sr.
In addition, just the act of moving was a major headache. Says Earl Jess, materials manager for Natter, whose 691-mile move from Temple City to the Salt Lake City area cost $1.2 million and took up 14 oversized highway loads requiring permits from three states: “It’s something I never want to have to do again.”
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