Note: A link to the event where the speech was given can be viewed online at the website for California Assemblyman Dan Logue and a link to an audio of a follow-up appearance is available the "John & Ken Show" on KFI Radio.
Governing for Success:
How To Stem the Tide of Businesses Fleeing California
Comments by
Joseph Vranich
The Business Relocation Coach, Irvine, California
Before the
Economic Recovery Group
CalChamber Building
Sacramento, California
How To Stem the Tide of Businesses Fleeing California
Comments by
Joseph Vranich
The Business Relocation Coach, Irvine, California
Before the
Economic Recovery Group
CalChamber Building
Sacramento, California
February 24, 2010
How many of you remember the movie “Mars Attacks!”? You may recall that the first words from the Martian Ambassador were “We come in peace.” Well, I’m an Irvine Business Relocation Coach and I really come in peace. Please know that I’ve never persuaded anyone to leave California. People have made that decision before they ever contacted me.
As one who has been a Californian for 14 years – I’d love to be involved in relocations or expansions that stay within our borders. In fact, I’m helping an entrepreneur grow a California business that uses geo-spatial imagery in a dramatic new way and I love working with them. The problem is I have no one calling me to say, “I’d like to move to California.”
Good News: Some Companies Are Moving Here
There is some good news. Some companies are coming or expanding here. It’s understandable why California grew from 6 million people at the beginning of World War II to about 38 million today. It is a beautiful state, and all things being equal people want to live here.
Virgin America selected Burlingame for its headquarters. Fisker Automotive is relocating people from Michigan to Irvine – only about 30 people, we wish it were more – but that’s better than 30 moving out. And companies are expanding, such as Tesla Motors in San Carlos, Tower Semiconductor in Newport Beach, and Vizio in Irvine – they make the big flat TVs and they’re going gangbusters.
Executive Coaching for Relocation
My comments today cover three basic elements. First, who relocates and where do they go? Why they move; I’ll be brief on that because you know the reasons why they move. And recommendations as to how the state can become friendlier to business.
I’ll tell you what happens in my coaching relationships with company leaders who experience angst in just considering relocation. I don’t know how many of you have worked with an executive coach, but it’s amazing how many times the conversation gets down to serious personal issues reflecting upon their values and their lives. They can be worried about leaving much that is familiar to them and to their families. The questions they ask relate to the human element, such as:
- I’ve considered the idea of relocating, but it all seems overwhelming to me – how can I be more comfortable if I do this?
- How do I best explain this to my employees?
- What constitutes a fair relocation package and what constitutes a fair severance?
- How about timing – if I announce too far in advance doesn’t that give an unhappy employee time to sabotage something?
- What do I say if the mayor calls, or, worse, the press?
The coaching I do is distinct from what my associates do in relocation studies, site selection, incentive negotiations and government affairs. So if Nevada calls and says “move your company here,” we say, “No, don’t do that. Work with us and we will represent you anonymously in various places and get you competitive bids. Then you can select what’s best for you, your people and your company.”
Perceptions Define the Problem
Let’s look at the underlying causes of the business exodus. In coaching there is a saying, “The problem you define is the one you solve.” Here, I’ll focus on one client who is a friendly, happy and somewhat humorous business owner – a delightful guy to work with.
He completed the move of his company to Colorado this month, motivated in part because California has one of the highest corporate tax rates in the country. Colorado has a more affordable 4.6% rate with no escalating penalties as the company becomes more successful. And isn’t this what we want? Companies to become more successful? He expects his state tax savings to reach 20% this year, more in future years. Also, his facility expenses there are about half what they were here.
He said when he called a California state agency he would get the run-around, or be put on hold forever, or get vague answers. He told me, “In Colorado the customer service is great with workers’ comp, licensing agencies, even the DMV!” He added: “It’s like night and day!”
Quality-of-life issues were key to him and his wife, especially education. He said, “The teachers in our Colorado school email us at night about how our kids did during the day. We’d never get that in California. And people who could not afford to buy homes in California are thrilled with what they could purchase in Colorado.” This California native said, “Our business and personal lives have taken a great leap upward. We’ll never go back.”
The company is small and the move eliminated only ten California jobs. However, he told me: “I’m not spending that extra money on toys for myself. I’m plowing it all back into the company and I’m creating new jobs. Last year we had 14 employees, in January alone I’ve grown to 19, and I expect to have 40 by next year.”
I see that as an opportunity cost whereby California will suffer the absence of all 40 jobs and their economic ripple effects year after year.
Lack of Appreciation
Often, California business people feel like Rodney Dangerfield – “I get no respect!”
I offer you Los Angeles as an example. The company is Creators Syndicate and Rick Newcombe is its president. He met with Los Angeles officials about an outrageous business tax reclassification, which by the way is a speech in and of itself. When Mr. Newcombe and his wife walked into a meeting with city officials, an employee greeted them as “The enemy!” The enemy? The city employees in the room laughed.
Skipping details, Mr. Newcombe informed me last week that he is developing a contingency plan and may move his company elsewhere because of the treatment he receives. The city behaves badly but there’s no logic for it. No explanation. No apologies. Rick said in the Wall Street Journal, in an op-ed, “As long as City Hall operates like a banana republic, why is anyone surprised that jobs have left the city in droves and Los Angeles is teetering on the brink of bankruptcy?”
Considering the city’s 15% unemployment rate, a $208-million budget shortfall, and Moody’s downgrading the city’s credit rating to negative just last week, the city has a choice: Work to retain every business you have or put your attorneys on overtime to study bankruptcy law, namely "Chapter 9: Reorganization for Municipalities."
So much for that. What constitutes good treatment?
Listen to Ken Shirley of BPI Labs, which moved to Wyoming. He said that California’s “antagonistic regulatory environment basically drove [me] out. Had I stayed in California, I don’t know if I would still be in business . . . At one point, Wyoming’s governor even offered to meet me and let me use his plane to fly around the state and scout locations . . . . I mean, do you think Gov. Schwarzenegger would do that for me?”
I don’t think so.
Getting back to Creators Syndicate, Rick Newcombe said many mayors from all around the country called to urge him to select their cities as the future headquarters location. Colorado Springs offered to fly five executives there, put them up in the nicest hotel, and even find jobs for employees’ spouses. That was one of many communities calling with such offers.
Top Ten List of Why California Companies Are Calling the Moving Companies
You could say that everything I’ve said up to now is anecdotal. Let’s look at published findings. To keep this a bit lighthearted, I’ll present this as a David Letterman type of list – the “Top Ten Reasons Why California Companies Are Calling the Moving Companies.”
#10 -- Unfair Taxes: The Tax Foundation in their newest report lists California at No. 48 for tax fairness – ahead of only New York and New Jersey.
#9 -- Most Expensive Business Locations: The Rose Institute of State and Local Government reported in the latest "Cost of Doing Business Survey" that California cities continue to be some of the most expensive locations to do business in the United States.
#8 -- Worst Performing Labor: The Pacific Research Institute found that California’s labor performance in a recent five-year period is among the worst performing in the nation.
#7 -- Dreadful Legal Treatment: The Civil Justice Association of California said the state ranks 44th in legal fairness to business. Los Angeles was again named the least fair and reasonable litigation environment in the entire country.
#6 -- Worst Regulatory Burden: A study by the consulting firm Bain & Co. measured the cost, uncertainty and complexity of regulations and in constructing a “regulatory hassle index” found that "California is farworse than any other state by a very significant margin."
#5 -- Harsh Treatment Motivates Exists: Again Bain & Co. (they’re a busy group) found that more than half of California business leaders – an astonishing 60 percent – said they have policies in place to restrict job growth in the state or move jobs to other U.S. locations.
#4 -- Downright Unfriendliness:: The Small Business & Entrepreneurship Council in Virginia found that California ranked 49th overall in terms of business friendliness.
#3 -- High Misery Index: The Associated Press calculates what it calls a monthly "misery index" – California is close to the bottom of the list.
#2 -- Uncontrollable Spending: Extravagant state spending continues and pollsters have found people are much angrier about California government – more than they've ever been in recorded polling history.
And the #1 reason why California companies are calling the moving companies” – Chief Executive magazine recently found California to be the worst state in the nation in which to do business. Texas was found to be the best.
It’s no wonder that California has lost more than one million jobs in recent years while Texas employment levels have remained relatively stable.
The governor said on national television the other day that the economy is turning around in California. Well, when a real economic turnaround occurs, California is likely to lag behind other states. The Brookings Institution said in December that our cities have nearly the poorest recovery rates and – here’s a shocker – old “rust-belt” cities like Pittsburgh and Buffalo are actually having a faster economic recovery that our cities.
Who Leaves?
It’s difficult to quantify the extent of business departures. No state agency keeps track of enterprises that move out . . . or which companies elect to expand elsewhere even though they’re headquartered here. No one catalogs what I call “moving-out-of-state events” – but I’ve tried.
On my blog – “The Business Relocation Coach” – you can see an entry I put up yesterday with the headline "California's Hostile Business Climate: 100 'Moving-Out-of-State' Events." By the way, there is nothing magic about the number 100. It was 78 a few months ago, then 85, and for all I know it may be 105 next week. Here is a sampling of the items listed:
- Digital Domain, the Academy-Award-winning visual effects studio, placed new studios in Canada and Florida, which combined will have about 500 employees.
- Facebook is not building a $180 million data center in Palo Alto, but – in Oregon.
- Apple Computer will built a new $1 billion dollar server farm – in North Carolina.
- Northrop Grumman, SAIC and Hilton Hotels are all moving their headquarters this year to the Washington, DC area.
Sometimes where a company moves to can be surprising. In January a large building materials distributor, BMC Select, which had relocated its headquarters from Idaho to the Bay Area, moved again – back to Idaho.
Also, StarKist headquarters is leaving San Francisco and returning to Pittsburgh.
Why Companies Move
It's no mystery why companies leave California -- high taxes, undue regulation, workers’ comp costs, a legal environment stacked against businesses, and lengthy and costly construction permitting requirements.
Also, wildly excessive government spending contributes to unpredictable government behavior at the state level – remember those warrants? – and also at the local level, as illustrated by the abuse the City of Los Angeles heaps on companies located there.
Recommendations & Reforms
I will recommend what California should do to retain jobs. I coach executives and business owners who grapple with these issues. I’ve spoken with some of them to prepare for this presentation. So consider me a messenger – here’s what they say:
- First, lower the income tax. The Tax Foundation shows California’s taxes with rates as high as 10.55% – an albatross to all. I like to point out that when Warren Buffett owned a home in Laguna Beach, he always kept his domicile in Nebraska where the top rate is 6.84%.
- Next, abandon the proposed withholding regulation that would require businesses using independent contractors to send 3 percent of all payments to Sacramento. This is a hot-button issue. I hire independent contractors. Does Sacramento think I don’t have anything to do with my time except to fill out more forms, send more checks off, keep track of more things, and pay my CPA more money? Instead of hiring a California contractor, I could go to Guru.com – a great dot-com headquartered in Pittsburgh – and I could hire people from all over the country and all over the world, pay them less than I’ve got to pay a Californian, and avoid the hassle of meeting California’s rules. One IT contractor told me, “You know, this is just plain mean.”
- There are three other tax proposals that should be stopped. One is the move to separate business property from the protections of Proposition 13, opening the floodgates to tax businesses at higher rates. The Howard Jarvis Taxpayers Association has great arguments on this issue. The second is the proposal for a net receipts tax, which will be imposed upon companies even when they are in a loss position. Third is the “digital services tax.” If it passes, several IT-managed services firms will implement contingency plans and move to Nevada.Class action reform is a must. When a company makes an innocent, minor mistake it’s treated as a malicious act. A study released this month for the Judicial Council of California showed employment-related class-action filings increased by 314% over the last seven years. Legally, it’s so risky to do business here that it should be considered a miracle when a company decides to locate here. By the way, it hardly surprised me when Knight Protective Industries – fed up with restrictions on daily overtime – moved to Oregon, where four-day work weeks are permissible under law. Note: Four-day work weeks were what the employees wanted.
- Fix workers’ comp, again. California made progress on reducing costs through reforms, but even so we remain one of the most expensive states. According to an OSHA evaluation, on a scale from “C-“ to “A+” the state received a “C.” OSHA issued that grade four months ago prior to the most recent rate increase.
Having said all of that, I know there is an “elephant” in the room today – and that’s AB 32, the California Global Warming Solutions Act.
Business people see paying unprecedented pollution-related fees and being subjected to unprecedented regulations as amounting to increased taxes leading to higher costs that will reduce their competitiveness everywhere.
The concern is best expressed by a client who is hit with environmental fees at California ports, fees that competitors using East Coast and Gulf of Mexico ports do not endure. Here is what he told me:
Why should we surrender debate over AB 32? The people most happy about it are in China and India because of the cost advantages they’ll gain over us. Let them pass the AB 32 provisions for themselves. Let them increase their manufacturing and shipping costs. And how can we possibly think there are economic plusses in having our costs increase again when our competitors in other states and other nations don’t have such costs?His reference to China and India was more prescient than he realized because both plan big increases in the burning of carbon-generating coal. Asia wants so much of our coal that we will probably build a new coal-export port on the west coast to augment the busy coal port near Vancouver, B.C. If you’re an environmentalist and you’re worried about a dirty coal port, don’t worry. It will not be in California; it may be sited in Longview, Washington.
The coming boom in Asian coal-burning gives credence to a Wall Street Journal observation that “No matter what one thinks of climate science, it makes little sense for an individual state to unilaterally impose major new tax and regulatory costs on its own industries."
There are those who claim AB 32 will create jobs. But, only one month ago Maxwell America, which makes boat equipment, relocated its Santa Ana office to Maryland. The company said many California boat builders relocated to the Midwest and East, where they don't face the same environmental regulations. He was referring to regulations that predate AB 32.
Green Companies
Well, maybe they meant creating new “green” jobs when we add the benefits of federal tax credits to AB 32. That may be true – which makes it mystifying as to why some green companies would even think of leaving California or reducing their presence here – but some are.
- The federal government granted Santa Clara-based Solaicx $18 million in tax credits to advance green energy and California officials hailed the action. The company said the majority of jobs created by the credits will be – in Oregon.
CalStar Products in the Bay Area located its newest green plant – in Wisconsin. Since, it was awarded nearly $2.5 million in federal clean-energy tax credits. The company said, “We expect to build additional plants down the Mississippi Valley and East Coast over the next couple years." - SolarWorld in Ventura County consolidated manufacturing and next year 1,000 employees will be concentrated in one facility – in Oregon.
Schott Solar closed its sales and customer service office in Roseville and will relocate the office to Albuquerque, NM. - Some “green” companies left completely. Barefoot Motors moved from Sonoma to Oregon. Mariah Power – they manufacture small wind turbines – moved from California to Nevada. I suspect there are others, but early-stage companies usually are so small that their relocations are difficult to detect.
Assemblymen here today – including Dan Logue – want to suspend AB 32 until the unemployment rate in the state drops to 5.5 percent. People I’ve talked with say that’s wise and that is resonating well with them.
But not all. The Silicon Valley Leadership Group said its members oppose suspending AB 32. For the record, those members include companies that have or will spend at least $1.5 billion on new facilities – in other states. I've already mentioned Apple Computer in North Carolina; Yahoo opened a data center in Quincy, Washington; and eBay will create 450 jobs in Draper, Utah. These events follow prior shifts by Hewlett-Packard to Tennessee and Texas, and by Intel, which expanded outside of California. Now if AB 32 is so great as to deserve support from these companies, why are these very companies locating facilities out of state?
Utility bills will increase. I wonder how much of a role AB 32 played in Apple Computer’s selection of a Southern state for its server farm. Apple’s cost for electricity in North Carolina is estimated to be approximately 70% less expensive than in California – and that’s before the full impact of AB 32.
By the way, I have no connection with the AB 32 Implementation Group, but I have to endorse their efforts to reduce the potential staggering costs that AB 32 will lay on California’s employers, workers, consumers, families, business people, manufacturers, service providers, transportation people – you name it, we’re all going to get hit.
General Recommendation
That’s the limit to my recommendations today. In general, however, I urge Sacramento to consider the well-considered proposals by groups like the California Chamber of Commerce and the California Manufacturers and Technology Association. Concerns of smaller enterprises are on the agendas of the National Federation of Independent Business/California and California Small Business Association.
I know that my urging you to review their agendas sounds rather ordinary – but as a coach I say to my clients, ordinary things executed well can lead to extraordinary results. And one such result would be to dampen California’s hostility toward businesses, which are suffering “death by a thousand cuts.”
Conclusion -- "A Perfect Storm"
Perhaps because I’ve been to Hollywood once too often, I will refer to another movie. If you remember “The Perfect Storm,” it showed how an alignment of unique conditions in the North Atlantic caused a hurricane stronger than any in recorded history – and one with tragic consequences.
My penultimate thought is this: The California economy is facing a its own “Perfect Storm.” We have a state that if it were a corporation would be bankrupt. We have big city governments staffed with people who have contempt for business. And we have a coming financial tsunami from AB 32. This economic storm can sink some companies and induce others to “abandon ship” – the ship called California. That storm is underway right now as companies move out of state right now.
In conclusion, I ask, do you want me to continue picking up the phone and hearing, “Joe, we want to move our business out of California – can you help us with that?” Or do you want callers to be inquiring about moving into our state?
The changes that Sacramento makes in our business climate will influence the kinds of phone calls that companies will make in the future about relocating to here or out of here.
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