Crisis May Be Used as Bait by Other States

As details of Orange County’s multibillion-dollar bond fiasco surfaced last week, Shelia Langdon of Des Moines and a dozen Iowa officials fanned out through Orange County and other parts of Southern California, trying to lure corporate executives to relocate companies to the Midwest or expand there.

Though the trip had been planned earlier, it could not have come at a better time for Langdon and her “Sell Iowa” team. Orange County’s financial crisis--leading to the largest municipal bankruptcy filing in U.S. history--has tarnished the image of one of the richest counties in the nation. It also has raised the specter of tax increases to cover the losses, giving corporate recruiters such as Langdon yet another weapon.

“It was just an opportune time to be there,” Langdon said. The county’s financial mess “was an issue that did come up at meetings. . . . Of course, when they’re considering places to move, they’re looking at the financial stability of the areas.”

Indeed, like vultures perched above a fallen victim, officials in other states are waiting for the bankruptcy’s fallout to settle and watching to see whether California companies are more willing to flee the Golden State.

“They’re going to use this as just another hook,” said Jack Kyser of the Economic Development Corp. in Los Angeles. He worries that corporate departures, which had slowed this year after three years of increases, could be propelled by the latest disaster to hit Southern California.

Orange County last week filed for Chapter 9 bankruptcy protection after disclosures that the county’s investment fund--once valued at more than $20 billion--had lost more than $1.5 billion in value between Jan. 1 and Dec. 1 because of risky investments. The filing shook financial markets nationwide and made news around the globe.

Orange County and the more than 180 cities, school districts and other agencies that invested in the county pool say it is premature to talk about higher taxes or fees, but many believe they may have no choice because of the staggering losses. “You either eliminate service or increase fees,” said Don Bankhead, a Fullerton city councilman.

Allan Johnson, chairman of Tapmatic Corp., can see the writing on the wall.

“They’re going to have more fees and inspections that they’ll charge for,” said Johnson, whose metalworking firm left for Idaho in March after 30 years in Orange County because he was fed up with the onerous business environment. Other businesses, Johnson said, are sure to follow suit.

“Every time something happens, there is a new exodus of companies that say they are sick of the place,” said Bob Cooper, president of the Spokane (Wash.) Area Economic Development Council. “This Orange County bankruptcy just shows that California’s problems are real. It is sad, but it is reality.”

Several recruiters say they would never think of using another state’s woes to attract a major corporation.

“Certainly companies thinking of moving or expanding would be concerned” about a local government’s solvency, said Charles Gatlin, marketing and research director for Atlanta’s Industry, Trade and Tourism Department. “But people like us are using the positive things we have to attract companies, telling them what they would discover in Georgia.”

But there is little doubt that Orange County’s bankruptcy filing will play into the hands of those whose job is to persuade companies to leave California.

“It’s a little too early to say, but I expect that any moves being contemplated will be accelerated by this,” said Jon Roberts, director of business development for the Texas Department of Commerce.

Some business executives agree. Furniture maker Studio K Inc. in Orange had planned to move its 15-employee operation to Idaho. But owner Eric Kearn said Friday that the prospect of more taxes or fees for businesses “will add to the momentum” of departures.

The Orange County Chamber of Commerce says the county and state have worked diligently over the last two years to shed the image many corporate executives have of the area--a high-cost, congested metropolis that is unfriendly to business. And they point to such changes as the state’s workers’ compensation reform and the establishment of a 12-acre enterprise zone in Santa Ana that provides tax credits and other incentives to companies.

The enterprise zone was one reason Derlan Industries of Toronto set up operations last summer in Santa Ana. But had the county’s recent financial problems arisen earlier, Derlan might not have come, said Michael Forsayeth, the company’s chief financial officer. “I would be concerned about business tax increases,” he said.

H. Fred Mickelson, chairman of the Orange County chamber, said that in the last 18 months, local and state efforts have kept 31 companies and more than 10,000 jobs from leaving the county. The financial crisis is a major issue, he said, “but it hasn’t stopped us in our tracks.”

“Business is still bullish on Orange County,” he said. “The things that caused us to be successful haven’t changed: good schools, a diverse work force, an entrepreneurial work ethic, business leadership and an improved business climate.”

Yet, he acknowledged, the business community is worried about higher utility taxes or property assessments because of the bankruptcy filing, and companies with plans to build or expand in the county will likely wait three to six months to see how the situation is handled.

Mickelson also said he sent reports last week to five foreign companies to reassure them that the bond fiasco should not alter possible plans to move major portions of their operations to Orange County. He refused to identify the firms.

“Despite the county of Orange’s current financial situation,” the chamber said in a statement last week, “the businesses within Orange County remain economically strong and the county itself remains a great place to live, visit and work.”

Even so, recruiters such as Bill Scott, director of the Oregon Economic Development Department, say they are still hearing complaints about California’s historically higher taxes, higher real estate prices, higher development costs and slower approvals for a host of permits needed to do business. Plus there are increasing concerns about crime in Orange County, out-of-state recruiters say.

“California likes to say it has an image problem,” Scott said. “Our response is that if it is an image problem, it is a real problem.”

Bob Potter said he has persuaded 30 California companies to move to Idaho and is talking with 10 more just in Orange County. Potter, who lives in La Canada Flintridge, said that if Orange County is forced to raise taxes and other fees, his work will be all that much easier.

“If you continue to price yourself out of the market, people like me will continue to hit home runs,” he said.

Lorie Black, marketing director for Arizona’s Commerce Department, said her office assisted 19 of the 315 California companies that moved to Arizona last year.

“A reduction in services and increased taxes (in California) may make some companies who are considering moving actually do it,” she said.

In Texas, recruitment officials are offering companies more incentives and tax breaks than possibly any other state. Texas also provides stable taxes and a financially sound government, said Jon Roberts, the state’s business development director. But in the wake of Orange County’s problems, Texas’ investment pool has come under scrutiny. On Friday, municipalities pulled $326 million out of the state-run fund.

“Everything’s a package deal now,” Roberts said about offers made to recruit companies. “So when you have one leg getting shaky, the package could fall apart.”