Firms Have a Long List of California Turnoffs
Victor Monia is pleased that Gov. Arnold Schwarzenegger is wrapping his arms around the California workers’ compensation problem. That doesn’t mean the president of Visa Technologies, an electronics manufacturer in San Jose, is canceling his plans to move the 23-year-old business to Reno.
“Workman’s comp is a big issue, but it’s just one of many items,” Monia said, rattling off a list of California’s comparatively high operating costs: energy, rents, labor, taxes. “Even the garbage costs are cheaper in Nevada.”
For other restless businesses in California, the progress Schwarzenegger and lawmakers have made on a new workers’ comp reform plan is cause for hope. Some executives say they’ll wait it out and see what the governor can do about what they say is the state’s lousy business climate.
But Schwarzenegger is racing against powerful headwinds.
The exodus of businesses and jobs to lower-cost states like Nevada has picked up in the last year, experts say. Now, with the economy gaining steam, many companies are nearing a point where they must decide whether to expand in California or invest and create jobs elsewhere.
Many have already made up their minds. In a recent survey for the California Business Roundtable, consultants reported that nearly 30% of 50 California companies interviewed had explicit policies to move jobs out of state if possible. And half said they planned to avoid adding jobs in California. Some cited high housing costs, others the widening gap between operating expenses in California and other states.
If businesses continue to flee, it could make a notable dent in the state’s job growth. State officials reported Friday that California added a measly 5,200 jobs in March, while the nation created 308,000 payroll jobs. It’s unclear whether a shift of jobs to other states played a role in California’s lagging performance. But there’s little doubt that rising business costs are restraining hiring and discouraging new employers from setting up shop.
“California cannot expect any large companies that have a choice to come to this state, regardless of whether we fix workers’ comp,” said John Husing, an economist who specializes in the Inland Empire, a low-cost region that continues to grow rapidly but also finds itself struggling to keep manufacturing firms.
Recruiters from other states are stressing cost differentials in stepped-up campaigns. Last month, a delegation from North Dakota welcomed about 100 guests at the Beverly Hilton, where officials spoke about the virtues of their state -- including its workers’ comp costs.
“Utility rates, tax rates, unemployment insurance rates are all less in North Dakota,” Lee Peterson, commissioner of that state’s Department of Commerce, said in an interview. “We believe there are tremendous opportunities to grow our economy by working with companies in California.”
Nevada recently launched a print ad campaign with the slogan “You can’t hang on.” The campaign focuses heavily on workers’ comp, reminding businesses that California’s rates are double the national average and Nevada’s rates have fallen 12.3% this year.
If workers’ comp is overhauled, Nevada will just change the message to concentrate on something else, said Somer Hollingsworth, president of the Nevada Development Authority.
“You’ve still got the problem of the cost of power. You’ve still got the family leave program.... You still have the health insurance mandate, which will cost a bundle,” he said. (The California law requiring employers with 50 or more workers to provide health insurance by 2006 could be overturned in a referendum vote in November; California’s paid family leave program, which gives many workers up to six weeks’ paid leave per year to care for a new child or a seriously ill family member, begins July 1.)
Nobody knows exactly how many businesses have left California. Unlike migration of people, the comings and goings of companies aren’t tracked. By all indications, there wasn’t a lot of movement until recently; relocating is expensive and disruptive, and during uncertain times, companies generally hunker down and focus on the basics.
Dennis Taylor, a corporate relocation specialist for consulting firm Runzheimer International, says corporate out-migration is picking up along with the strengthening economy. At the same time, Taylor doesn’t see a mass movement because people in California “still have the weather, they still have the lifestyle,” and “that’s going to keep companies there.”
Beyond that, many companies can offset higher operating expenses in California with higher productivity, which goes hand in hand with the state’s vast infrastructure and brain trust for industries such as aerospace, entertainment, technology and biotech, said Ross DeVol, director of regional economics at the Milken Institute in Santa Monica.
“It’s nice having suppliers virtually next door,” said John Belzer, president of TCI Precision Metals in Gardena.
But then there are the downsides. Although TCI Precision has seen its orders accelerate since last fall, it hasn’t added a single new job. Doing so would only add to workers’ comp premiums, which Belzer expects to rise to $355,000 this year from $227,000 in 2002.
That’s not all: Even though TCI Precision is getting discounted power rates because it agreed to curtail energy use when supplies were short, Belzer says the discounted California rate is higher than what he would pay in Arizona or Nevada.
TCI Precision is still in Gardena only because Belzer believes moving would be too hard on the employees. “As time goes on and more companies in California go” to other states, he said, businesses like his just might “find it easier to make the decision” to join them.
Since July, Nevada officials say, they have helped 18 California firms with an average of 52 workers relocate to the Las Vegas area -- as many as they attracted during the previous 12 months. Recruiters from Phoenix, another popular destination for California businesses, report much the same trend.
Analysts say those statistics probably represent a fraction of the total departures and that they don’t include the many companies that have moved parts of their operations or have expanded outside of California.
Los Angeles consultant Larry Kosmont, who has been tracking California regional business costs for the last decade, this year compared costs in many other American cities with those in the state. Among his findings: Of the 50 U.S. cities and communities deemed to be most expensive, half were in California.
Kosmont believes Schwarzenegger and other leaders in Sacramento have no more than two years to turn the business climate around. By then, he figures, more leases for warehouses and factories will have expired and many business owners will be faced with hard choices.
“This is the time for California to resuscitate itself by being competitive,” Kosmont said.
This week, negotiations continue in Sacramento on a proposed measure to revamp the workers’ comp system and, the theory goes, reduce employers’ premiums. Beyond that, regulations employers complain about include one mandating paid family leave and the requirement that employers pay overtime to workers putting in more than eight hours in a day, as opposed to more than 40 hours a week, which is common in other states.
Some costs are out of Sacramento’s control, such as housing. And the governor’s hands are tied by California’s budget crunch. He isn’t in a position to support lower corporate tax rates. In fact, the state this year did away with a 6% tax credit for capital investments made by manufacturers. On top of that, California businesses this year and next are projected to pay an additional $925 million in taxes -- a 6.4% boost -- because of the suspension of a “net operating loss” provision for corporations, according to the California Finance Department.
Scott Moody, a senior economist at the Tax Foundation, says the nonpartisan group’s latest state rankings of tax burdens put California in the middle of the pack, with 9.8% of business and household incomes going toward sales, property and other local and state taxes. That percentage would have been higher without the tech bust, which sharply reduced capital gains tax collections, and it also doesn’t take into account the loss of the manufacturers’ tax credit or additional collections from businesses.
On the whole, Moody says, California’s tax climate remains one of the nation’s worst. The state’s top corporate tax rate of 8.84% is the highest in the West and the 10th highest in the nation. Furthermore, he says, California’s tax system is complex and antagonistic to business development because of its graduated rates and exemptions for special interests.
Moody predicted the situation would get worse because the state is borrowing billions of dollars to cover its budget shortfall. “Borrowing money to pay for the deficit could mean higher taxes in the future,” he said.
Vince Sollitto, a spokesman for Schwarzenegger, wouldn’t comment on the state’s tax situation but said the governor was committed to restoring California’s economic competitiveness. After reforming workers’ comp, he said, Schwarzenegger plans to address the state’s drained unemployment insurance fund, which has sharply raised businesses’ contributions in recent years.
Sollitto added that the governor had ordered a review of all agency regulations to ferret out unnecessary red tape and also had created a commission to identify barriers to job growth. “He’s asked employers to give the state a chance to right itself,” Sollitto said.
Lonnie Kane, president of Karen Kane Inc., a garment manufacturer in Vernon, doubts whether Schwarzenegger and lawmakers can get workers’ comp under control, given all the special interests. If they can, Kane said, it would make a huge difference. Workers’ comp premiums are maddening because they are unjustifiably expensive, he said, whereas with income taxes, “at least you’re paying for what you make.”
For Monia, the San Jose business owner planning to move to Reno, the fate of workers’ comp reform doesn’t really matter. In Reno, the company’s monthly power bills will be 28% lower, he said, and rents for his manufacturing operations will be $22,000 less a month. All told, Monia estimates that Visa Technologies will see its operating costs fall by $60,000 a month with a move 250 miles east.
What’s more, he figures he and his partner in the business will save at least $100,000 annually in corporate and personal income taxes -- there aren’t any in Nevada.
“I don’t know if I’m going to be competitive two years from now” if the company stays in California, Monia said. “The time you do something is when you have something.”
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Costly state
With high labor, energy and tax costs, California is the most expensive state for business in the West and the second costliest in the nation after Massachusetts, according to Economy.com.
Cost-of-doing-business index, 2003
*--* Labor State and U.S. State costs Energy local taxes Total ranking California 109.1 160.9 110.0 117.0 2 Colorado 109.9 80.7 91.0 103.7 14 Washington 107.5 78.0 107.8 103.1 17 Nevada 100.9 115.0 93.1 102.2 19 Arizona 99.6 102.4 97.9 99.9 23 Utah 96.7 72.6 108.7 94.3 36 Oregon 91.1 80.1 106.4 91.0 43
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Source: Economy.com
