NEWS ANALYSIS : State Myopia Becomes Financial Minefield : Hughes’ Job Exodus Will Cost California Millions

The threat seemed absurd to state officials in 1983 when former Hughes Aircraft Chairman Allen Puckett assailed California as anti-growth and declared that he would no longer invest in new plants here.

California officials had their hands full in those days managing an explosive spurt of economic growth, but the robust economic times masked deep undercurrents that were setting up the state for a bruising fall.

The depth of those problems would become apparent only when the current recession began, but the warning signals seemed unmistakable by the late 1980s: Manufacturers were increasingly expanding out of state, and the stream of investment into the state was drying up.

The stunning announcement this week that Hughes would transfer 1,900 engineering-related jobs to Arizona, which was met with surprise by state officials, is the manifestation of a decade of inaction by state government.

“They wanted to think palm trees and beaches and skiing in the mountains was enough to attract business to the state,” said Puckett, now retired. “We didn’t get the attention to the problems that you would expect from state government.”

After an initial flurry of state attention, led by then-Gov. George Deukmejian, the concerns raised by Hughes in 1983 and other major industrial firms fell into a political deep freeze. Even now, when the issues seem clear and state officials have pledged to rectify such problems as workers’ compensation and regulatory permitting, the progress has been too slow to stem the job exodus.

Elected officials and bureaucrats are quick to point the fingers at each other along partisan lines in fixing blame for the mess--evoking all the more scorn from executive offices for the shortsightedness of the California system of government.

“There is enough blame in Sacramento for all of us,” California Controller Gray Davis acknowledged. “The question now is what can we do to improve the situation and bring Hughes back.”

The withdrawal of the Hughes missile systems company from its Canoga Park research park--along with its closure of production plants in Pomona, Rancho Cucamonga and San Diego--will cost local and state governments $600 million in annual taxes, Hughes Aircraft Chairman C. Michael Armstrong said in an interview.

Those revenue losses will ultimately have to be raised elsewhere or government will be forced to reduce service, education or infrastructure investments--choices that clearly would further damage the business climate.

“I believe it is time to let the public in on the consequences of legislative inaction,” Armstrong said. “The consequences are higher taxes. I hope the pressure on the Legislature is such that we will get some change.”

Clearly, Hughes’ decision was a complex one, based only in small part on the state’s business climate and far more on Hughes’ need to consolidate its missile business at one location.

Further, not every corporation weighing a decision to expand or modernize elects to flee the state.

Robinson Helicopter Co. in Torrance, Rockwell International’s Rocketdyne division in Canoga Park and Lockheed’s Skunk Works in Palmdale are expanding. And some companies that left the state failed to realize the cost savings they expected.

Yet, a significant minority of aerospace companies foreclosed years ago on any future expansions in California.

In 1991, Kenneth W. Cannestra, president of Lockheed’s aeronautical systems company, said the state “ignores the whole damn industry. The only time anybody seemed to notice us is when we got up and left. And even then they didn’t care.”

The aggressive strategies of other states have easily won over major plants. While California was denying its problems in the 1980s and rebuffing industry concerns, Utah developed a 100-page detailed strategy to recruit aerospace firms from California. Western Gear moved a plant there from City of Industry, and Douglas Aircraft opened an aircraft parts plant.

Two years ago, major aerospace chieftains flew to Sacramento for a summit conference with Gov. Pete Wilson and had expected action on such issues as excessive costs in workers’ compensation, regulatory permitting, environmental rules, civil liability and taxation.

They are still waiting today. Douglas Aircraft President Robert Hood noted in an interview this week that the state’s malfunctioning workers’ compensation system alone adds $600,000 to the cost of every airplane produced.

“It has caused us to look strategically at our business to see if we should be doing something different,” Hood said about business costs unique to California.

Douglas, which also faces much larger problems than simply the state’s business climate, has been among the most aggressive exporters of jobs out of California, setting up plants in Ohio, Georgia and Utah to help lower costs. Production workers in aerospace earn an average of $15 per hour--50% above the average manufacturing wage.

Davis believes, however, the worst is over.

“I am sure there are people on the left and the right who would prefer gridlock for their own ideological reasons, but 80% of the elected officials in the state support a compromise in the middle,” Davis said. “The corner has been turned.”

But Hood said he hasn’t seen any improvement in the problems facing Douglas Aircraft, measured by the number of regulations by which he must abide or in the cost of direct levies against his company.

Similarly, Hughes Vice Chairman Michael F. Smith Jr. said the evidence of new companies entering the state and existing companies leaving the state casts doubt on whether any corner has been turned.

“In terms of Hughes, as far as our future investments and our current investments, they are not being made here,” he said.

Aerospace executives have long disparaged the state’s feeble efforts--and sometimes arrogant attitudes--in industrial recruitment. Wilson has said he wants to improve the responsiveness to industry and held an industry summit earlier this year.

Two key studies have laid a detailed plan for change, one by Peter Ueberroth’s council on competitiveness and the other the Adept Report by Assemblyman John Vasconcellos (D-Santa Clara). Armstrong endorsed those two reports and advised against a piecemeal effort to take care of the one or two largest problems.

The state’s efforts to retain Hughes’ missile business appear to be surrounded by doubt. The firm had a compelling economic need to consolidate its research and production at a single site, which virtually assured it would move its research staff in Canoga Park to the factory site in Tucson, regardless of the business climate here.

But even California’s eleventh-hour efforts to head off the defection seemed feeble.

California’s Trade and Commerce Agency told state Sen. David Roberti (D-Van Nuys) in a letter on March 16 that they had formed a “red team” to discuss with Hughes the advantages of staying in California.

But agency Secretary Julie Meier Wright said in an interview this week that no red team had been sent to Hughes because it appeared that it would be impossible to change the company’s mind about leaving.

A Hughes spokesman confirmed that Armstrong talked to Wright in September and she offered then to send in a red team. The spokesman said that, at that time, Armstrong discouraged her because he did not want to get California’s hopes up.

Outside experts say the state faces a difficult battle on two fronts--to improve business conditions and to turn around a very negative image that has developed.

“The business climate has moved from a negative approach to a neutral approach, whereas what is needed is a proactive one to keep industry here,” said John Harbison, director of the aerospace practice at Booz Allen & Hamilton.