California's fight to stop corporate flight

State has made strides in easing rules on business, but housing and other costs still bring moving vans.

Lee Mason has seen the latest statistics telling her California is creeping slowly but surely out of recession. She's read the recent headlines about Gov. Arnold Schwarzenegger signing a budget with no new taxes and overhauling the state's costly workers' compensation system.

And she knows he has launched a national billboard drive to drum up business for the state from neighboring Nevada to Georgia, Illinois, and Texas. But none of that is helping right now for Ms. Mason, the vice president of Clarke Gear Co. - a 50-year old Los Angeles firm which makes gears for planes and rockets.

She says there are still so many other concerns (utility price hikes, soaring healthcare premiums, restrictive overtime policies, a new family-leave policy, and sky-high housing costs) that she is having to scramble to keep the company viable and competitive. Of late, that means shifting company quarters, after 50 years at the same location in North Hollywood, to cheaper facilities about 25 miles north. Cheaper for California that is. Her workers, she hopes, might find homes for under $400,000.

"We are starting to see the end of recession but are not yet seeing the big changes promised by [Governor] Schwarzenegger," says Mason. "It doesn't take a rocket scientist to figure out that if things don't get easier, more and more businesses will say enough is enough and move out of state altogether."

That kind of anxiety is being reported by scores of California firms, economists say. And how local businesses respond could shape population and economic patterns across the West for years to come. For now, the delay in California's economic reform is keeping the state's financial recovery behind that of its neighbors - Utah, Nevada, Arizona - and even helping to fuel their prosperity, as some Californians flee rising costs.

Still-booming Nevada is No. 1 in the United States in business growth, with 4.6 percent job growth over the past year; Arizona is at No. 4 with 2.5 percent growth; Utah is up 1.4 percent. California is up much less, at 0.6 percent, according to the Blue Chip Economic Forecast published by Arizona State University (ASU).

"California's business reforms are going far slower than people hoped in the first, great burst of optimism when Schwarzenegger took office," says Jack Kyser, president of the Los Angeles Economic Development Council.

A workers' compensation reform package passed several months ago only cut expensive premiums by half of what businesses had hoped for. Unemployment insurance premiums remain high. The country's first, family-leave program - allowing workers to take up to six weeks paid leave to care for newborns or ill relatives - is forcing employers to work around new patterns of employee absence.

"Legislators don't seem to get it that businesses have far more options now. They can open another factory in another state, send manufacturing offshore, go into the cash economy, or even go out of business," says Mr. Kyser. "How they deal with the reforms will have serious consequences on states around us for years."

Business raiders from Phoenix, Salt Lake City, and Las Vegas have been eager to welcome frustrated California businesses, and developers can barely suppress smiles over new home sales generated by newly arrived California families.

Another recent major initiative by Schwarzenegger - a sweeping plan to revamp every corner of state government - is being seen as promising in the long run but without any short-term fixes.

Partly because of California's housing costs, higher taxes, more regulation, and higher utility rates, Arizona, Utah, and Nevada are all faring better than California from job growth to personal income. Because employment and the ability to spend are the springboard to all other aspects of economic well-being - generating the spending and tax revenue that get state economies moving - economists are touting the latest figures as evidence of how the West overall (excluding California) is doing better than the nation as a whole.

"People have never really stopped moving to Nevada and Arizona, so those states are chugging along," says Tracy Clark, spokesman for ASU's Economic Outlook Center, which publishes the Blue Chip forecast. "Population growth, some of it from California, continues to drive those numbers up," he says.

If the California numbers which occupy the cellar position of these four states are the bad news, the good news is that Moody's Investment Services recently raised the state's bond rating for the first time in four years - the first time that has ever happened before the state's annual budget was announced.

"Arnold has prevented more hemorrhaging," says Joel Kotkin, senior economist at the Pepperdine Business School. "Had he not come in, the state would be in even worse shape. His influence for now is more about what he has prevented than what he has accomplished."

The Golden State isn't out of the woods yet, however. The state recently sought and won voter approval to borrow billions of dollars to avoid deep cuts in government services when it passed a $103 billion budget. And many analysts say the recovery has not hit the state evenly, with inland and southern regions doing far better than the north.

The area was hit hard by the bursting of the high-tech bubble and is still struggling from the loss of 25 percent of its jobs between 1993 to 2001. "The best way to describe California and much of the West is that the further from San Jose you are the better off you are," says Ed Leamer, economist with the UCLA Anderson Business Forecasting.

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