New Year Brings Old Fears for State Firms

At the beginning of 2004, it doesn’t look a whole lot better than 2003.

California’s business climate was one reason voters put Republican Arnold Schwarzenegger into the governor’s office. And business leaders are happy that there’s a pro-business Republican in Sacramento who appears sympathetic to their concerns.

But they said in recent interviews that he would need to move quickly to convince companies that they should stay in California, where there hasn’t been a single monthly net job gain for nearly three years and the costs of staying in business are higher than ever.

“They are going to take a wait-and-see attitude before they move more jobs out of the state,” said Allan Zaremberg, president of the California Chamber of Commerce. “But they haven’t made any commitments beyond that.”

Heading the list of top business issues for 2004 is California’s troubled workers’ compensation system, which provides medical care for employees injured on the job. Rates for the mandatory insurance are more than twice the national average, and some employers have seen their premiums double or even triple in the last few years. That has been a drag on California’s weak labor market, as many employers have frozen payrolls or shifted work out of state.

Legislators took a whack at the $29-billion system in September, passing a reform package some say will save as much as $6 billion annually when its provisions become law today. But many business organizations doubt the size of the projected savings, and insurers clearly don’t believe it.

Despite the urging of Insurance Commissioner John Garamendi to trim 2004 workers’ comp insurance premium rates by almost 15% to reflect the proposed savings, insurers, which are virtually free to set their own rates in California’s deregulated market, have announced rate cuts averaging 3.6% for renewed policies.

The size of the reductions has sparked heated debate over what to do next. Some Democratic legislators accuse the insurance companies of using the reform savings to line their pockets and are supporting greater government control over rates. Republicans point to fraud, waste and excessive litigation in a system that appears to benefit attorneys and other middlemen at the expense of employers. Schwarzenegger is backing a Republican measure that seeks to chop $11 billion more from the system by attacking some of those areas.

A special legislative session on workers’ compensation called by the governor in November so far has yielded little fruit. Garamendi is urging legislators to get back to the table after the first of the year and deliver more reforms by the end of March. Zaremberg of the Chamber of Commerce said that he hoped that would happen but that his group was prepared to help put a proposal to overhaul the system on the November ballot if the Legislature failed to act, an action Schwarzenegger has said he would champion if needed.

“We now have a spokesperson on our side who can communicate with the people very well,” Zaremberg said. “His agenda is our agenda.”

Indeed, emboldened by having a tough-talking Republican at the helm, business groups are planning other ballot initiatives to bypass the Democrat-controlled Legislature.

One of the first is an attempt to undo SB 2, the legislation passed in September and signed by then-Gov. Gray Davis that will require many California business owners to provide health coverage to their employees or pay the state for a government-run program. Employers with 200 or more employees will be required to participate by Jan. 1, 2006. Those with 20 to 199 workers will follow the next year but only if the state enacted tax credits to offset some of the cost.

Proponents of the measure say the plan will cost businesses about $1.3 billion. They say it will save taxpayers money and level the playing field by requiring major employers such as Wal-Mart Stores Inc. to pick up more of the tab for insuring low-income workers, many of whom rely on public clinics because they don’t qualify for or can’t afford the plans offered by their employers.

Business groups estimate the cost at something closer to $7 billion and say it will hit California’s small and medium-size businesses the hardest by requiring them to solve an enormous social problem that has the entire country stymied.

“This will be devastating for California’s competitiveness,” said Martyn Hopper, state director for the 37,000-member California chapter of the National Federation of Independent Business. “We’ve got members telling us it will bankrupt them.”

His group joined with others in October to launch a drive to overturn SB 2. The effort quickly garnered 620,000 signatures and appeared headed for the March 2 ballot. But in December, a Superior Court judge in Sacramento ruled that the state attorney general’s official summary of the referendum was misleading and that the petitions did not properly display descriptions of the measure on every page as required by law.

The business groups are appealing the decision; oral arguments are scheduled to be presented Jan. 15 before the 1st District Court of Appeal in San Francisco, said Sara Lee, spokeswoman for the California Chamber of Commerce.

Although no efforts are yet afoot to reverse them, other new laws coming on line this year have employers concerned about escalating costs.

Beginning in July, for example, workers will be able to take paid family leave to care for a sick relative or bond with a new child. Workers will be eligible to take up to six weeks leave every 12 months, regardless of a company’s size. The program will be paid for by employees, who will see their payroll withholding taxes for the state disability insurance program rise by 0.08% or a maximum of $56 annually. Maximum benefits will be $728 a week.

Although they don’t have to pay for the new benefits, employers are concerned about the effect lengthy worker absences will have on their businesses. They also are worried that the payroll tax hike won’t be enough to pay for the benefits and will lead to financial trouble for the disability insurance program.

Their concerns aren’t unfounded. California’s unemployment insurance trust fund has become so depleted that the state is seeking a $1.3-billion federal loan to prop up the troubled program.

In addition, it will require the state’s employers, who foot 100% of the cost of jobless benefits, to begin paying an additional $2 billion this month to ensure that checks keep flowing to jobless workers. The average company will pay an extra $110 per worker in 2004, according to the state Employment Development Department. And additional hikes are expected.

Flush with $6 billion in cash a few years ago, the unemployment insurance trust fund has been drained by a crush of jobless claims and is projected to fall into the red by early this year when the Legislature is expected to take up the issue.

Many suspect that employer taxes, which are paid on the first $7,000 of each employee’s wages, will be raised beyond their current statutory limits to bail out the fund. That has business leaders fuming. They blame the crisis on lawmakers and Davis, who in 2001 passed legislation boosting weekly payments for the unemployed despite warnings that the increase could lead to the program’s insolvency. Currently at $370 a week, the maximum weekly benefit will increase to $410 in 2004 and reach $450 in 2005.

“We’re talking about billions more in new costs on employers,” said Jack Stewart, president of the California Manufacturers & Technology Assn.

Meanwhile, California businesses continue to suffer from some old headaches, among them the electricity crisis.

California regulators last month approved a plan to pull Pacific Gas & Electric Co. out of bankruptcy protection, where it sought shelter from creditors in 2001. If approved by the Bankruptcy Court, the restructuring plan would require ratepayers, not shareholders of parent company PG&E; Corp., to foot the bill for soaring power costs stemming largely from market manipulation by Enron Corp. and other electricity wholesalers.

The agreement is expected to lead to some rate reductions for PG&E; customers. Ratepayers of Edison International’s Southern California Edison, which hammered out a rescue plan with the state Public Utilities Commission in 2001, saw their electricity rates decrease early last year.

Still, experts say, even with the reductions, California businesses will remain saddled with some of the highest electricity bills in the country for years to come.

“It’s the gift that keeps on taking,” said Mindy Spatt, spokeswoman for the Utility Reform Network, a San Francisco-based consumer advocacy group.