California Economy Driving Firms Away

CALIFORNIA, the world's seventh largest economy, has sprung a leak. Disgruntled over what they perceive as a harsh business climate, companies have been leaving lock, stock, and balance sheet.Now, however, new efforts are under way to stem the exodus in what may presage fundamental political and economic shifts in the nation's most populous state. Up and down California, groups are being formed to push for regulatory changes and keep companies under the state's sunny skies. Jobs are becoming a dominant issue - and, business leaders hope, the new mantra for politicians here, as it is across the country. "I think economic development will be the big issue in California," says Joel Kotkin of the Center for the New West. "Growth management was the issue. Now economic development is going to become a mainstream concern." Behind the ferment is a recession that continues to pilfer more jobs here than in much of the rest of the country. After growing at a gazelle-quick rate in the 1980s, the state has an unemployment rate that remains stubbornly high, and torpor endures in key sectors such as aerospace, real estate, and construction. Even if the US economy recovers soon, many economists believe the Golden State will lag behind. At the same time, concern has been growing over the number of companies fleeing to Nevada, Utah, Mexico, and other areas. The California Business Roundtable, in a survey of 836 corporations last November, found that 14 percent plan to leave and 41 percent intend to expand elsewhere. The organization will release its second annual survey Nov. 14, and those who have seen it say the sentiment in the board room is that the business climate has only worsened. In Los Angeles County, the nonprofit Economic Development Corporation (EDC) predicts that as many as 36,000 nonfarm jobs will be lost in the area this year as a result of recession, restructuring, and business flight. While some analysts, such as Mr. Kotkin, believe the business exodus problem is being overdramatized for political reasons, there is general agreement that the state is not the magnet it once was. Some corporate complaints about California relate directly to business operation (high taxes, worker-compensation costs, environmental rules, zoning strictures), others to lifestyle (housing prices, traffic, and poor schools). Zero Corporation recently employed 450 in Burbank making cases and cabinets to house electronics. It is moving the plant to Salt Lake City. "We will save 60 percent on workers' compensation" costs alone, says company executive Wilford Godbold Jr. To curb the exodus, groups are being set up to cater to companies and seek regulatory and policy changes. EDC, for instance, is heading up an unusual coalition of business and government groups in Los Angeles County. Unveiled two weeks ago, the group plans to work with disgruntled firms and solve whatever problems they can. It will host trade fairs, sound the alarm about corporate flight, and seek to soften the adversarial relationship between regulators and business. "Clearly, this is an emerging area of public concern," says EDC president Gary Conley. In September, Gov. Pete Wilson, a Republican, appointed a blue-ribbon commission to look at problems affecting state competitiveness and business retention. The California Chamber of Commerce has a task force examining the issue, and one in southern California is looking at the aerospace industry. "Groups like EDC can make a difference in raising consciousness," says Ken Ackbarali, a senior economist with First Interstate Bank here. But stopping the exodus, he adds, will take a long, sustained effort. How successful the business community is at changing policies will depend on prevailing political perceptions. Last week the South Coast Air Quality Management District, the agency that oversees pollution regulation in the Los Angeles area, changed some of its air-quality rules and permit processes in the wake of enduring complaints that they were driving companies out of the state. The reforms pleased businesses but worried environmentalists - a portent of clashes to come. "We are seeing a gradual awareness of the [business flight] problem," says Ray Remy, president of the Los Angeles Chamber of Commerce. "But I don't think it has taken hold across the board with the leadership." Not everyone is alarmed. Some argue that the state has many assets - ties to the Pacific Rim and Mexico, skilled work force, major ports, huge consumer market, enviable climate - that will make it an inevitable destination for companies. Others agree there needs to be more emphasis on jobs, but not in the way some groups are doing it. Mr. Kotkin, for one, believes the need is to encourage the transition to the "new California economy entertainment, fashion, high-tech, speciality manufacturing, and other industries. "I'd rather concentrate on those that can create jobs and wealth rather than spend an inordinate amount of time on companies that have one foot out the door," he says.