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CALIFORNIA
From Site Selection magazine, September 2010
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Perception and Reality

The two are linked, but not
congruent in the Golden State.

by MARK AREND
CALIFORNIA
Gov. Arnold Schwarzenegger participated in a demolition ceremony July 27 to mark the start of construction on the March LifeCare project, a 6-million-sq.-ft. (557,400-sq.-m.), 236-acre (95.5-hectare) health and wellness city built on surplus land at the former March Air Force Base south of Riverside, Calif. The project is forecast to create 12,700 construction jobs and 7,200 full-time healthcare and related jobs.
Photo courtesy of the Governor’s Office of Economic Development
B

asket case or horn of plenty? California is both — it depends on whom you ask. The Golden State's business-climate burdens are well documented in the business press — including in these pages, where interviews with corporate executives who have moved operations out of the state to more business-friendly locations are commonplace. At the same time, California remains a gold mine of higher education resources and R&D talent, unparalleled logistics assets for companies requiring a West Coast presence and easy access to Asian markets, and high-tech and biotech industry clusters that are second to none. For now.

Gov. Arnold Schwarzenegger has worked tirelessly to change the course of the super tanker that is the California economy to make it less onerous on capital investors large and small. Consider this excerpt from his weekly radio address on August 6: "How many jobs has California already lost because of government, because of all the obstacles and permits and people abusing the kind of system we have? I have always said that government must not be an obstacle to success, but rather a partner in prosperity. We should open up our arms and welcome businesses. We should get a reputation in California that it is so good to do business here [that they say], 'let's all move to California.' Because that is how you expand businesses. That is how you stimulate the economy. That is how you create jobs. That is why I say let's not raise taxes [on] businesses as some in Sacramento are proposing. Let's be more business-friendly, because that will create the revenues we need. Let's create incentives and streamline regulations to help businesses expand and create jobs, which then, of course, generates revenue for the state. That way everyone wins. The economy wins. The people win. The state wins."

But super tankers don't turn on a dime, especially against currents — political and otherwise — that are bent on resisting a change of course.

The governor (or his staff on his behalf) has not accepted repeated requests for interviews from Site Selection over the past several years, foregoing opportunities to communicate directly with the capital investors most in need of answers with respect to the Golden State portions of their portfolios — or potential portions. But the governor's current economic development team, under the direction of Joel Ayala, director of the Governor's Office of Economic Development, has been frank and highly cooperative in the publication's mission to correct perceptions — or misperceptions — that may exist in the corporate real estate community about investing capital in California in 2010. An open invitation to the governor, prior to vacating his executive office in Sacramento in January, stands.

In the meantime, Site Selection submitted to Gov. Schwarzenegger's office five widely agreed upon perceptions of California any corporate site seeker would likely raise in person if he or she had the opportunity. Following are the rebuttals:

1. Business costs in California, such as workers' comp, are off the charts, which makes it difficult for businesses there to be profitable.

When Governor Schwarzenegger first came into office, he made it a priority to reform a broken workers' compensation system that has reduced the cost of doing business in California. In fact, the 2004 workers' compensation reforms reduced rates by 65 percent and have saved employers more than $50 billion so far. And, Gov. Schwarzenegger is continuing the fight to keep costs for workers' compensation down. [On August 10th], he sent a letter to Insurance Commissioner Steve Poizner urging him to reject a 30-percent increase in rates the Workers' Compensation Insurance Rating Bureau's (WCIRB) Governing Board was slated to recommend. The Governor sent a similar letter last year, and the Commissioner did reject the massive increase, because such an increase would be an undue burden on California businesses. GoED will continue to build on this legacy and look for ways to further reduce costs for businesses.

2. The personal income tax structure makes California an onerous and unpredictable location for higher-income earners. They can keep more of their income elsewhere, so they tend to move their businesses elsewhere.

California's tax structure is a topic of critical interest to the state. That's why Gov. Schwarzenegger issued Executive Order S-15-09 last year. The EO established the bipartisan Commission on the 21st Century Economy in order to make recommendations about modernizing California's out-of-date revenue laws that contribute to feast-or-famine state budget cycles. GoED is also pushing for ways to make it easier for individuals to run a business and will work with legislative partners and economic development stakeholders to do this.

Editor's Note: In September 2009, the bi-partisan Commission on the 21st Century Economy issued its recommendations to modernize, stabilize and simply California's tax system. They include: (1) a reduction in tax brackets from six to two — 2.75 percent for taxable income up to $56,000 and 6.5 percent for above that threshold; (2) elimination of the 8.84-percent corporate tax and the $800 minimum franchise tax; (3) elimination of the 5-percent state general purpose sales tax over five years; (4) creation of a business net receipts tax not to exceed 4 percent; and (5) creation of an independent tax-dispute forum. For more on these recommendations, visit www.cotce.ca.gov.

3. California is still a great location for research and development work because of the plentiful supply of university grads and schools. But it's not desirable any more for manufacturing due to high costs and the regulatory burden.          

Given California's world-renowned universities, research facilities and the state's new Innovation Hub (iHub) initiative, there is little doubt about California's commitment to inventing the products and technologies of tomorrow. Moreover, it is growing increasingly clear that in order to stay globally competitive, the state must work with various stakeholders to ensure all industries are performing well. This includes manufacturing. A diversity of industries is what will best ensure economic growth across all sectors, and it will help shield the state from the economic vicissitudes of individual industries. California is a global economy and it must think and act as such.

Editor's Note: California launched its network of iHubs in early 2010 to foster competitiveness by stimulating partnerships, economic development and job creation around specific research clusters. Locations are Livermore Valley, Orange County, Sacramento, San Francisco area, North Bay, Palm Springs and San Diego. For more information contact Katy McKenzie at GoED, katy.mckenzie@gov.ca.gov.  

4. Even if the governor's office wanted to be more pro-business, the legislature will prevent California from being more competitive relative to other U.S. states.

There are challenges to making the state of California a model state for economic growth, but we are focused and determined on working with all our governmental partners to convince them of the importance of making it easier for people to start, expand and keep their businesses in California. Moreover, the California Governor's Office of Economic Development is pursuing better economic policies and will work with all stakeholders to demonstrate just how critical it is for the state to have consistent and common-sense business regulations. We can't afford to put off reforming an inherently inefficient regulatory framework, because our economy and the people of the state will suffer unnecessarily.

5. California is mainly interested in working with "green companies creating green jobs" on establishing new operations.

This is probably one of the worst misconceptions. Inventing tomorrow's economy today does not mean relying exclusively on one industry, sector or trend. Creating the economy of the future — and that's what California is all about — means growing tomorrow's industries in a methodical way. In other words, it's about getting people to think and act based on a long-term plan that identifies future needs and works on meeting those needs with a skilled work force and innovative entrepreneurs who, in turn, create the products and services that improve the quality of life here and elsewhere.

Editor's Note: In May 2010, the California Manufacturers & Technology Association issued a report, "The Truth About Green Jobs and California," that drew these conclusions: (1) Where existing jobs are counted as green and when policies create green jobs at the expense of existing jobs, the true impact of green policies can't be determined; (2) Green job policies are counterproductive if California becomes economically inefficient — creating green jobs but raising costs or reducing output; and (3) Due to these and other factors, no study yet proves that green job policies will be beneficial to the California economy. For the full report, visit www.cmta.net/greenjobstruth.

Meanwhile, green projects are under way in California that any state would fight for, all things being equal. They include "the world's largest wind energy project," according to builder Terra-Gen Power LLC when ground broke July 27 on the Alta Wind Energy Center (AWEC) in Tehachapi, in Kern County. The project is designed to produce 1,550 MW of renewable energy — enough to supply power to 1.1 million people or 275,000 homes. Terra-Gen says AWEC will increase wind-energy jobs in California by 20 percent and reduce CO2 emissions by more than 52 million metric tons. The project will house nearly 600 wind power turbines. AWEC is forecast to create more than 3,000 domestic manufacturing, construction and maintenance jobs and to contribute more than $1.2 billion to the Kern County economy.

R&D Resources Carry the Day

Atlanta-based Wheego is assembling its LiFe all-electric car in Ontario, Calif., where it benefits from California's Research and Development Tax Credit. This incentive gives companies a 15-percent credit against their bank and corporation tax liability for qualified R&D expenses — wages, supplies and contract research costs — and a 24-percent credit for basic research payments to outside organizations. The LiFe runs on a lithium battery pack that delivers 100 miles (161 km.) per charge and retails for about $33,000.

Why California? That's where the customers are, in large part.

"The advantages are wonderful, and the disadvantages are rather large. When making a decision to do business there, you definitely have to go through a checklist and balance things out, much more so than in a lot of other places," says Michael McQuary, Wheego's chairman and CEO. "It's one of the toughest states in terms of the regulatory requirements. Standards to be met, especially for manufacturing, are extremely stringent.

"But on the other hand, there are some wonderful R&D tax credits. And in my industry, electric cars, you have in California what I think will probably be the largest pooled area of potential customers relative to anywhere else we could be in the country. That will give us a large freight advantage. That was a big factor in deciding to put a facility there."

Oklahoma had been a contender for the assembly facility until a 50-percent state consumer tax credit for electric vehicles expired on January 1. McQuary says municipalities in the Sooner State worked hard to mitigate the tax change with local work-force incentives.

"But what tipped the scale for us in terms of California is that it is where a lot of our intellectual capital is — our engineering firm is headquartered there, for example," says McQuary. "Having our assembly operation near the engineers, particularly as we were starting out, is a big advantage. When you're involved in a product that is cutting edge or is about new technology, California is one of the places where you'll find the intellectual capital that will carry the day."


Story in Pictures

Gov. Arnold Schwarzenegger participated in a demolition ceremony July 27 to mark the start of construction on the March LifeCare project, a 6-million-sq.-ft. (557,400-sq.-m.), 236-acre (95.5-hectare) health and wellness city built on surplus land at the former March Air Force Base south of Riverside, Calif. The project is forecast to create 12,700 construction jobs and 7,200 full-time healthcare and related jobs.
Photos courtesy of the Governor’s Office of Economic Development
Click for a larger view.
Click for a larger view.


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