Making It Worth Their While to Stay : Incentives: Firms that have looked at greener pastures elsewhere hope the state will build on its business-friendly efforts and justify their decision to remain here.

George Derby and his partner, Stephen Sellwood, have survived a host of horror stories that would scare any company out of California.

Their operation, All Metals Processing of Orange County Inc., was getting buried under onerous California regulations, high taxes and enough red tape to strangle the profits out of even the biggest blue-chip business.

The partners decided to talk with officials in four other states, with the idea of moving their Stanton metal finishing company and its 110 employees. But recently, with great reluctance, they spurned attractive offers and decided to stay put.

“It was just too expensive to move, and we would have lost our customers,” Derby said. “Now we’re betting that in three to five years, this will be a viable, profitable business here.”

Derby, like many business owners that have looked at greener pastures elsewhere, is hoping that state lawmakers and regulators like the South Coast Air Quality Management District will shed their hostile attitude, build on their budding business-friendly efforts and eventually justify All Metals’ decision not to abandon the Golden State.

The general problem for business owners is that California, with stricter environmental and business regulations than other states, has become a world unto itself, said Doug Mills, vice president for Fender Musical Instruments, a maker of electric guitars and amplifiers.

“The crux of the issue is, do we move out of this area and become part of the rest of the world, or do we stay here and learn to survive,” Mills said. “For a myriad of reasons, we decided to stay.”

Through legislation and the use of so-called “red teams,” state and local leaders have become increasingly effective at getting to disgruntled business owners quickly and easing such burdens as high electric costs or the quagmire of obtaining clean-air permits.

The red teams, especially, have become more efficient and visible in the last 18 months in halting the flight of the state’s industrial and commercial tax base. The teams are ad hoc groups of utility company executives and government officials, from the governor’s office to the AQMD and local city halls.

Some companies that decided to stay in California rave about the efforts of the red teams.

“They really showed me that the state was trying to swing the pendulum back from how bad it was for business in the last four or five years,” said Ron Kishen, plant manager for Avery Dennison Fasson. The self-adhesive paper maker decided last fall to keep its 120 employees in Rancho Cucamonga instead of moving the plant to Phoenix.

The California Trade and Commerce Agency, which leads the state’s overall efforts at economic development, has been prodding the state Legislature, state agencies and local governments to pay more attention to the needs of business.

“Just as a company on a continuing basis looks at what it needs to grow and remain competitive, California and governments at all levels have to do the same thing,” said Julie Meier Wright, who heads the agency. “Corporations continue to evolve, and government can do no less.”

The agency, as well as the business community, is lobbying the Legislature to adopt new laws for the second straight year to give companies tax credits and relief from some of the nation’s strictest laws.

But some lawmakers do not want to offer business incentives because they believe the cash-strapped state cannot afford it. Still, Gov. Pete Wilson has stashed away $110 million to pay for the first two years of a proposed five-year plan to give a 6% tax credit to big companies that generate new construction and new jobs. But the tax-credit bill so far is languishing in the Legislature.

The regional air quality district, once one of the most intransigent state bureaucracies, also is changing its approach.

“The fact of the matter is that we were starting to get dinged around pretty badly in the media, and we paused to consider the complaints,” said Richard (Nick) Nikkila, an assistant deputy AQMD executive officer. “The more we looked at it, the more we realized these guys are taking some big hits out there.”

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Henry W. Wedaa, the South Coast agency’s chairman, said the district is driven by state and federal clean-air laws but now is “doing things in moderation.” He said the agency no longer can “simply pass rules without concern about the economy.” Instead of dictating how to reduce certain emissions, for instance, it is letting companies find their own ways to do it.

Business owners notice the changing attitude, but some think Sacramento should do more to compete with the attractive benefit packages put together by such states as Texas and Nevada.

Taco Bell Corp., which has been on a well-publicized yearlong search for new headquarters, was believed to be ready to announce that it would build a new home near its Irvine location. But it paused when a state Senate committee voted down the proposed 6% tax credit last month.

The Mexican-style, fast-food chain has missed three self-imposed deadlines to announce a decision. Now, the company is believed to be waiting to see if the state Legislature can resurrect the tax credit in a budget law expected at the end of the month.

In addition, Hughes Aircraft Co. is considering closing a Fullerton plant that employs 6,800 workers. The El Segundo-based company, suffering from the severe downturn in the defense and aerospace industries, has closed other plants in Southern California as it consolidated operations out of state.

Other companies, big and small, simply are not waiting for the state any longer. Thrifty Drug Stores fled Los Angeles in April for Oregon, and house component maker Heydon Building Systems, with four employees in Santa Ana, recently relocated to Tucson.

Heydon spokesman Peter Beher said he is upset with the state’s efforts to “save” Taco Bell and its 1,000 jobs at the expense of smaller companies.

“What happens is they try to do a quick fix for the big company, but what needs to be fixed is the entire underlying structure,” Beher said.

“They’ve got to remember that a small business has two employees today, but it becomes a five-man office, then a 10-man operation,” he said. “California’s future is encouraging small businesses . . . not trying to keep the big company by offering one incentive or another.”

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Companies like All Metals Processing, Avery Dennison Fasson, Fender Musical Instruments and Martin Molded Rubber Products in north Orange County certainly hope the state continues to improve business conditions. They are part of a group that, with little fanfare and for a variety of reasons, have decided to stick it out in California.

Mills said that a big reason for Fender’s decision to remain in Corona was a red team’s help in negotiating “reasonable solutions” to the company’s air quality problems.

Fender moved from Brea three years ago without a comment from city officials. Now it is working with the city of Corona, the state and “people we didn’t even know existed,” Mills said, to determine ways to comply with air quality limitations on the use of paints and lacquers with ozone-depleting emissions.

Southern California Edison’s special Consumer Technology Application Center assisted Fender by finding manufacturers capable of producing paints that meet AQMD emissions standards. Edison also worked with the agency in testing and evaluating available coatings. Edison’s tech center in Irwindale helps small and mid-size companies that do not have the expertise, time or money to research and test new methods of manufacturing.

“Leaving the state is always an option,” Mills said. “We want to be compliant with state regulations. There are technological advances in paint manufacturing, and the day will come when we will have no volatile paint emissions.”

Fender now expects to add up to 300 employees by this fall in a new 103,000-square-foot addition at its Corona facility.

Yet with workers’ compensation premiums still higher than in other states and other restrictions on business operations here, Mills said, “Oklahoma doesn’t look too bad.”

Avery Dennison Fasson also praises a red team that worked to keep the company’s plant in Rancho Cucamonga. Fasson, a subsidiary of Avery Dennison in Pasadena, employs about 120 people in the San Bernardino County plant to put adhesives on paper to be used as labels, tags, stamps and a host of other pressure-sensitive products.

One of Fasson’s divisions, which makes rolls of adhesive paper, wanted to put a major plant in the West last year but looked to Phoenix instead of California. Division executives figured the cost of doing business in California was 14% to 16% higher than it would be in Arizona, said Kishen, Fasson’s plant manager.

“I didn’t exactly buy those numbers. I wanted to take another look at it,” Kishen said, noting that if the rolled-paper division went to Phoenix, headquarters would follow.

He called the office of his state senator, Bill Leonard (R-Upland), and within 15 minutes an Edison employee--a member of that area’s red team--called back to ask about the problems Fasson faced and to set up a meeting the following week.

“They brought in just about everybody to that meeting,” Kishen said. “There were people from the city, the county, the AQMD, the state and the utility companies. About 15 people were there to find out why we wanted to leave.”

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After Kishen detailed the problems--sky-high workers’ comp premiums, high wages, bureaucratic red tape, high utility bills--he told them that the added costs amounted to a big penalty to do business here.

Within two months, the red team returned with a series of proposals and also kept the company informed of the legislation then winding its way through the state Legislature to reform workers’ compensation laws.

The proposals included ways to reduce all utility bills by 30% to 35%, Kishen said, which meant a savings of $250,000 a year. Soon, it became obvious that the added cost of doing business in California was not so high, certainly not high enough to justify the cost of relocating.

Kishen, however, did not contain his analysis to California. Turning to Arizona, he decided that the infrastructure--roads, sewers and all the amenities needed to operate a sizable company--was in poor shape. With rapid growth in the number of companies moving there, he said, state and local governments would have to start “taxing like crazy” to pay for improvements.

Besides, he pointed out, “there were a lot of reasons to stay here.” Among those, he said, was that Southern California was a better distribution center for his company. Last fall, the company decided to remain at its Rancho Cucamonga plant, where the rolled-paper division will join it in January.

“Maybe the pendulum for business in California is now starting to swing the other way,” Kishen said.

If it is, the state might want to amend workers’ compensation laws again.

Reforms in the workers’ comp system last year lowered premium rates by 17% at Martin Molded Rubber in La Habra, and “that’s a help,” owner Russ Martin said. But it is not enough, he said. If he decides to move in the future, “workers’ comp will be the reason,” he said.

Half of his 20 employees only examine products, yet the company must pay the same workers’ comp rate for them--$16 per $100 in wages--as it does for other employees engaged in actual manufacturing, where the risk of injury is much greater. The company produces gaskets and other rubber products for medical and aerospace products and for household appliances.

Martin is considering creating a second company that would employ the examiners and pay a drastically lower insurance premium--98 cents for every $100 in wages.

He also is looking for a bigger plant in Anaheim, where electricity rates are lower. Currently, he spends up to $5,000 a month during the summer on electricity, mainly for the heat machines needed to mold rubber.

“I looked at Carson City (in Nevada), and I can save $3,000 a month just on workers’ comp rates and electricity,” Martin said. “The only thing really stopping me from moving there is the fear of losing growth. I know I’m going to grow here.”

He hopes to stay in Southern California, at least for five more years, but relocation remains an option.

But if any company had reason to leave the state, it would appear to be All Metals Processing, which paints and coats finishes on a variety of metals, from golf clubs to medical instruments.

Partner George Derby said that after battling with workers’ compensation laws and numerous air quality regulations, the company was hit this year by a special 6% city tax on utilities that is costing it more than $500 a month just in added electricity costs.

But the company’s woes stem mainly from air quality regulations.

The company, for instance, has a permit to use 17 gallons of special paint to coat metals. It had a chance to land a big golf club contract that would have added six additional employees to its 110-member work force and $40,000 a month in revenue. But AQMD bureaucrats refused to allow any expansion of its existing metal painting operations, Derby said.

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Instead, air quality officials told him that All Metals could open a new metal processing plant across the street, obtain a permit for that operation and then merge the companies. That, he said, was time-consuming, expensive and unreasonable. Eventually, All Metals could not sign the contract and lost the work.

AQMD has also vetoed a number of other plans, Derby said, including a request to reinstall a hazardous-waste treatment machine All Metals wanted to buy from another company.

“These are the kinds of things that are making us feel we can’t survive,” Derby said. “The recession is wasting us away, profit margins are down, and California wants to beat on you and never let go. It’s amazing.”

He said he has met often with AQMD officials, agency staff and local politicians, but laws and rules have stymied them.

Edison, though, helped the company by providing rebates for cheaper lighting and new heating and air-conditioning components. The savings in electric bills over the next 1 1/2 years will cover the cost of the new equipment, Derby said.

The partners had entreaties from 17 states to move their operations out of California. They negotiated with cities in Colorado, Missouri, Nebraska and Texas.

“They all said we were clean and complied with federal regulations,” Derby said. “Some were going to build us a building-to-suit (for lease). One year’s rent would have been one month’s here.”

But the costs of moving the heavy machinery and disposing of hazardous chemicals proved to be so prohibitive that the company could not even relocate to Santa Ana, where a specially designated enterprise zone could have cut the company’s costs. The company would have had to spend $2 million--or 40% of its annual revenue--to move.

“If I had a machine shop, I’d be out of here,” Derby said. “We have every reason to move and no ability to do it.”

Now, he said, he and his partner will likely sell the company to the employees over time through an employee stock ownership plan.