Next test for California: fixing business climate

Reforms to the controversial workers' compensation laws constitute Schwarzenegger's next major challenge.

When John Lawrence says his business is thriving, it is not a profession of pride. It is a statement of defiance. The way Mr. Lawrence sees it, his manufacturing firm has been under siege the past few years - not so much from an indecisive economy or overseas competition, but from the state of California itself.

Unemployment insurance rates are doubling. The minimum wage has increased. New rules have expanded overtime. And payments to the $20 billion workers' compensation system have spiraled beyond all reason.

Now, as Gov. Arnold Schwarzenegger nears a deal to reform the system, business owners like Lawrence are watching. It is the first test of whether the governor can change California's business climate and stand up to what he called "Sacramento's job-killing philosophy."

Yet the debate over an arcane California program hints at much more, even the future of the American workplace. In recent years, California passed an unprecedented suite of worker-friendly bills, from employer-paid healthcare to the broadest paid family-leave program in the US.

To some, it is a path that can only hurt California, as businesses increasingly take their jobs to other states and California lags behind the US in job creation. To others, though, the Golden State is at the forefront of a shift in workplace values. Where California ends up on workers' comp, both agree, will provide insight into which way Schwarzenegger's California will lead.

"The pendulum had swung far to the left," says Jack Kyser of the Los Angeles Economic Development Corporation. "Now it is swinging back toward the center."

On workers' compensation, both sides of the political spectrum acknowledge the need for reform - a change that could come soon, according to some reports, with "a fair to strong" possibility that the Assembly and Senate would see legislation as early as Thursday. California's system of compensating workers for job-related injuries is widely criticized as the worst in the nation. It demands the highest premiums of employers and pays some of the lowest benefits to workers.

Fixing it "is a big deal," says Steven Levy of the Center for the Continuing Study of the California Economy in Palo Alto, Calif. "Every other [workplace issue here] is sort of chump change by comparison."

Business owner Carmen Murray has seen her monthly premiums quadruple in the past year or so, even though her carpet mill sees relatively few injuries. If things haven't improved by the time her lease runs out in 2007, she'll likely move. "I'm giving it a lot of thought," says Ms. Murray, based in Los Angeles. "It's just getting worse."

The bottom line, she and other owners say, is that it is expensive to do business in California. Some of these costs have little or nothing to do with state business policy. Housing and electricity are expensive, and a state budget wildly off balance makes tax hikes a constant threat.

Yet many in the business community believe that the state - in policy and personality - is becoming increasingly hostile.

A more partisan and liberal Legislature is one element of that. Though the healthcare and paid family-leave bills haven't taken effect, they have created unease about the future. "We can follow the [social] programs of Germany and France and get unemployment way up into double digits," says Lawrence, the Los Angeles business owner. "That's the result of bad legislation."

Moreover, the state's general litigiousness and hurdles for big business led corporate attorneys to rank it No. 46 in legal fairness, according to a survey by the US Chamber of Commerce. Another survey found that California had the most "costly, complex, and uncertain" regulatory environment in the US. The study by the California Business Roundtable noted that California changed labor-law statutes 15 times a year from 1992 to 2002 - four times the average for all other states.

At Clarke Gear in North Hollywood, Calif., owner Lee Mason says she might have to cut jobs to make up for all the fees and taxes. "The strains on small-business owners in California are very great," says Ms. Mason, whose company manufactures parts for aerospace and motorcycles.

So far, however, there is no solid evidence that businesses are fleeing the state in massive numbers - as Schwarzenegger was fond of claiming during the recall race. Indeed, some analysts suggest that the image of California as unfriendly to business is largely a myth brought out in tough economic times.

"California, like other high-income states, tends to have more of these social-welfare type regulations," says Alan Auerbach, an economist at the University of California at Berkeley. Yet it has lost only 1.8 percent of its jobs, exactly the national average. California's overall business climate ranks No. 16 in a survey by Site Selection magazine, thanks to its openness to trade and dynamic workforce.

Still, how executives will interpret such findings is unclear. All executives interviewed for the California Business Roundtable survey viewed California's business climate as unfavorable, and half the companies planned to expand out of state.

It's the sort of trend Schwarzenegger hopes to reverse, and reforming workers' comp would be a crucial first step. Says Mr. Kyser: "We'll have to see how far [he] can go to make the business environment better."

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