On March 7, 2012, MAXIMUS attended a meeting of the Dallas Regional Chamber, a group of economic development professionals from cities across the Dallas/Fort Worth area committed to the economic prosperity of this region. Speaking at the meeting was Joseph Vranich, Principal at Spectrum Location Solutions. Mr. Vranich is a longtime resident of California and has become one of the most vocal opponents of what he calls an “excessively adversarial” government stance toward business in that state.
Mr. Vranich provided us with the text of his presentation. We believe it is a very insightful (and often shocking) assessment of the combination of issues that have driven businesses out of California and toward the Dallas/Fort Worth region:
“As a public speaker, I often worry about what my opening line will be. For a Dallas audience, it was easy. The idea popped into my head, and that is to quote from the Charles Dickens novel A Tale of Two Cities – “It was the best of times, it was the worst of times.” What we have today is California experiencing the worst of times, and if it isn’t exactly the “best of times” in the Dallas-Fort Worth area, it is, well, a lot superior to what we have out West.
There is a business exodus underway in California. I’ll share with you the causes and what it could mean to you and your communities. I don’t know if any of you have ever worked with an Executive Coach – I’ve been one for ten years; today I mix that in with my relocation consulting – and we have a saying, “The problem you define is the one you solve.” California has a lot of problems, and it is not solving any of them.
Why Companies Move
If you were to ask me, “Tell me in one sentence why companies leave California” I’d have to say this – “We treat our businesses with contempt instead of nurturing them as the enriching resources that they are.” Business departures are one reason why California has gone from being the world’s 5th largest economy in 1985 to being the world’s 9th largest in 2011. By the way, Texas is the world’s 11th largest economy.
Recently in California, I met with representatives visiting from your Chamber – Mike Rosa and Erica Flores – and shared with them some of the reasons why California businesses feel they are suffering “death by a thousand cuts.” To keep this a bit lighthearted, I’ll present it here as a David Letterman type of list:
The Top Ten Reasons Why California Businesses Are Calling the Moving Companies
#10 – Severe Existing Tax Treatment: The Tax Foundation in their newest index lists California at No. 48 out of 50 for business tax climate among the states. CFO Magazine ranked California the worst state for tax treatment and it will deteriorate further. This year, Sacramento will try to increase taxes on all employers again.
#9 – Worst Regulatory Burden: The consulting firm Bain & Co. constructed a “regulatory hassle index” and found that “California is far worse than any other state by a very significant margin.” And that study was completed before hundreds of pages of new regulations went into effect this year.
#8 – Unprecedented Energy Costs: Commercial electrical rates already average 50% higher than in the rest of the country. But new “green” energy mandates (2012-2018) will boost rates by another 19% in many California localities — and to a reportedly 74% in Los Angeles.
#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 least reasonable litigation environment in the entire country, although, frankly, Philadelphia is about to overtake Los Angeles.
#6 – Most Expensive Locations: The Milken Institute found that California businesses pay 23% more than the national average in operating costs. McAfee avoids hiring in California and saves about 30% to 40% for every employee it hires outside state. It’s estimated that an astonishing 60% of business leaders said their policy is to restrict job growth in California or move jobs out of state.
#5 – Oppressive Permitting Procedures: Obtaining permits from public agencies is extraordinarily expensive and time consuming. It can take 2 years to obtain permits just to build a restaurant in California while in Texas it’s 1-1/2 months.
#4 – 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.
#3 – Unfriendly Even to Small Businesses: In 2011, the Small Business & Entrepreneurship Council in Virginia found that California ranked 45th overall in terms of business tax friendliness to small business and entrepreneurs.
#2 – ‘Composite’ Findings Put California Last: The “Pollina Corporate Top 10 Pro-Business States for 2010” study placed the state at the bottom based on labor costs, taxes, litigation abuse, crime rates, demographics, school dropout rates, traffic and other factors.
#1 – Excessively Adversarial: For 7 years in a row Chief Executive magazine has found California to be the worst state for business. Said one CEO, “California is terrible. Even when we’ve paid their high taxes in full, they still treat every conversation as adversarial. It’s the most difficult state in the nation.” The publication called California the “Venezuela of North America.” The best state in which to do business? Texas. Also seven years in a row.
Number of Biz Departures
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 their headquarters may stay in California. Economic Modeling Specialists found California lost 4,600 businesses in 2010, averaging 12 a day. But many California politicians deny that business departures are a problem or claim the number is exaggerated.
So, I created a system where I catalog what I call “California Business Disinvestment Events” and I do so only from public domain information like newspaper stories and company announcements. Last year alone, I tallied 254 events – virtually 5 per week – that qualify for the listing. Every industry cluster is affected. Even a couple of dozen “green” companies have left the state despite all the incentives available to stay. Yet, California politicians deny that it’s much of a problem.
It is no wonder that California has lost more than one million jobs in just the last few years.
Texas v. California
Texas is doing a lot of things right in recruitment. I’d be remiss if I failed to mention someone who could be considered the “Recruiter-in-Chief.” Gov. Rick Perry has been known to pick up the phone, call a company’s CEO, and make a pitch to move here. The most famous example is his call to Andrew Puzder, CEO of CKE Restaurants – which owns Carls Jr. and Hardees – to discuss doing business in Texas.
Mr. Puzder has been quite open about his views. He loves California but has harrowing tales about doing business in a state that has gone from an entrepreneurial heaven to a bureaucratic nightmare. “It costs us $250,000 more to build one restaurant in California than in Texas.” He complains about industrial-era requirements regarding overtime and said his company has had to fire hardworking, ambitious store managers who insist on working longer hours than the state allows. He wants to tell these people, ‘Come to Texas where we’re opening restaurants and we will hire you there.”
Texas Is Doing a Good Job
It’s clear that your economic development efforts are producing good results. Of all the states, Texas is the number one destination for California companies making out-of-state expansions or outright relocations. Just look at the names of the companies that have moved here from California on the comprehensive list published by the Chamber and allow yourselves to be very impressed.
City of Vernon
Meanwhile, to illustrate just how distressed some Californian officials are about Texas soliciting companies, I will play a 1-minute radio advertisement aired last year by the City of Vernon. Vernon is a troubled community and to keep the legislature from dis-incorporating the entity, city officials carried out a scare campaign about jobs to deflect attention from their own corruption problems. The city asserted that dis-incorporation will cause taxes and utility costs to increase at the same time that – oh my gosh! – Texas Governor Perry was sending friendly letters to Vernon businesses saying, “Move Here!”
Click here to listen to the radio advertisement.
Your visits have spooked California officials. That commercial was based on fear, panic, and hyperbole.
The fact that your representatives visit and over time become trusted is key. This kind of nurturing must be carried out on a long-term basis. That’s especially true because the future will bring difficulties to California businesses that transcend what’s already on that Top Ten list.
New Laws Will Make It Worse
I don’t know how Charles Dickens would say that the “worst of times” will become . . . even worse! You need only consider California’s so-called “job-killing bills.” I’m almost afraid to tell you about these because I fear you won’t believe me.
One bill would criminalize almost any legitimate wage dispute with a terminated employee that takes longer than 90 days to resolve. Another bill would make it more difficult for an employer to refuse to hire a job applicant based on that applicant’s prior criminal convictions.
We also fear future tax increases – enormous tax increases. The state has no credible plan to pay off unfunded liabilities that now total $237 billion. And Governor Jerry Brown wants to proceed with an incompetently designed high-speed rail system that reeks of corruption. In no way will the system meet its fraudulent ridership, revenue and cost figures – a boondoggle that will cost at least $114 billion to build. California is planning to spend this money while we’re laying off police officers, firemen and teachers. All in all, it’s like California is being run by Bernie Madoff with staff hired from Worldcom, Enron, Tyco, Global Crossing and the Kremlin.
If any of you in the audience moved here from California – and if you like me still feel some loyalties to the place, all I can say is, “Weep for the Golden State, which is no longer Golden.”
With all that in mind, it’s clear to me that you are doing the right thing in targeting California.
There Are Continuing Positive Signs for Texas – and Competition
Last week, Area Development magazine issued its 26th Annual Survey and found heightened interest in the Southwest region (Arizona, New Mexico, Oklahoma, and Texas). The largest percentage of new facilities (15 percent) is slated for this region, up from 10 percent the prior year, meaning that you are in the most promising region in the country.
That’s a nice position to be in, but you need to be alert to competition that will increase from states that not only are in your region but are elsewhere. For example, the so-called rust-belt city of Pittsburgh, Pa. has a higher economic recovery rate today than any city in California. They are telling their success story all over the state of California. So how do you differentiate yourself?
My Suggestions
Incentives: I offer no recommendations about your state incentives program because the Texas Enterprise Fund and other options have proven to be attractive generally, and with regards to California are indeed superior.
Carbon Offsets: Fortunately for you, Texas has not passed one of the worst laws imaginable (which California has), the “Global Warming Solutions Act.” This law will boost electricity costs by another 50% while collecting billions of dollars more annually through higher gasoline and fuel taxes. Also, the law will impose the most draconian carbon-offset fees and fines ever seen by businesses anywhere in the United States. When it comes to carbon offsets, California politicians have literally learned how to make money out of thin air. The elites running the Roman Empire became unpopular when they began taxing bread, but even they did not tax air. If we had truth-in-labeling for legislation, that law would be called the “California Economic Destruction Act.” Whatever you do, refuse to pass anything remotely resembling that law.
Wireless: I know this is a big telecom area so maybe what I’m about to say is superfluous, but do your best to expand wireless accessibility and eliminate dead spots. Two years ago Steve Jobs was exasperated when his cell phone would not work in San Francisco. He said adding a cell tower in Texas or elsewhere “takes three weeks to get approval [but] in San Francisco it takes something like three years.” In my business, some companies tell me they must have freight railroad service for a plant. Some want to be near an airport. To others, wireless has become just as important. So, when it comes to wireless, don’t be like San Francisco.
Education: Play up your Higher Education Characteristics. The educational qualifications of California’s workforce are declining. For example, California ranks 2nd in the percentage of its 65-year-olds holding an associate degree or higher. But when you look at the 25-to-34 age group, that ranking fades to 30th.
Lifestyle: California has a great climate, but I say promote the heck out of your positive lifestyle factors. I say that because I’ve learned something new from my clients that I haven’t heard in prior years, and that is Californian employees are asking their companies to leave the state. For example, a decision-maker told me he had evaluated moving a department out of Los Angeles. He told me: “When I discovered how substantial the savings would be, I quipped in front of my staff, ‘We should move to Texas.’ I was surprised by what happened next – people approached me one by one and asked that we move to Texas.” Here is a sampling of what employees said in that and other instances:
“I lived in Texas before and I’d like to go back – there are fewer traffic jams and I can afford to buy a house there.”
“I have an equity stake in this startup and we can grow faster in just about any other state than we can here.”
A younger man said, “This company is fabulous and I want to stay with it. I’ll move wherever it goes. If it’s someplace that’s cold, I’ll get used to it!”
Municipalities Must Follow Sound Fiscal Policies: Economic development comparisons are often made between states, but the attitudes and policies at the municipal level can make or break a location decision. Again, factors are in your favor as California municipalities tax and spend in irresponsible ways while treating business people with contempt.
Taxes: Let’s look at Los Angeles, which is a downright awful place in which to do business. A small-business owner went to Los Angeles City Hall to discuss the city’s illegal reversal of his company’s long-standing tax classification. When he walked in a meeting room, a city official greeted him by saying, “Well! The enemy has arrived!” All the city employees laughed. The enemy? What city employees did to “the enemy” was force them to send a check to Los Angeles for $200,000 for a fee that was not legitimately owed. The action was overturned in an appeals hearing, but the owner spent six figures in legal fees to get his money back. Is it a surprise that this small business had to lay off employees? So who was “the enemy” in that situation?
Spending: We could have a number of municipal bankruptcies in California. Stockton is on the verge of becoming the largest city in the United States to declare bankruptcy. One reason is the city’s huge unfunded guarantees for health care. If you work for the City of Stockton for one month, you and your spouse will receive lifetime health care coverage. This is not a joke, and union leaders say the benefits are not excessive. Next year, the city will spend more on health benefits for retired workers than for current employees. As the city skips bond payments — rating agencies have downgraded Stockton to junk bond status. There also are bankruptcy concerns for the cities of San Diego and Los Angeles because of benefits that result in things like a retired librarian who will receive pension funds of $6 million if she reaches her life expectancy.
So, as you influence public policy think not of just the state but think of the municipalities, too.
Population Migration
With all that, is it any wonder that in 2010 California was the #1 state in net domestic out-migration? The departures continue. I went onto the U-Haul website and put in today’s date to look for the cost of renting a 26 ft. truck from Dallas to Los Angeles – it came to $1,024. However, the cost from Los Angeles to Dallas is $1,762. So it costs 72% more for an eastbound truck because U-Haul has to underwrite the costs of moving empty trucks to L.A. to match up with the departure demands.
More Positive Here than There
The evidence shows that you’re doing a great job in attracting and keeping companies. I’m compelled to reach many more positive conclusions about this place than that place. I encourage you to take pride in what you have accomplished.
Conclusion
I started my comments by quoting Charles Dickens, but I was curious. What words came right after “It was the best of times, it was the worst of times.” Well, here they are: “it was the age of wisdom, it was the age of foolishness . . . “
In California, we have unadulterated foolishness. Texas is exhibiting wisdom, which can be seen in your positive rankings and the migration of companies and jobs to your state.
I don’t know if anyone else has said this, but if both states keep doing what both are doing, someday Texas will surpass California. California will become the world’s 11th largest economy while Texas becomes 8th or 7th or even hit California’s old record of being the world’s 5th largest economy.
Congratulations on all that you have accomplished.”
Joseph Vranich is the Principal at Spectrum Location Solutions in Irvine, California.
MAXIMUS works in conjunction with Spectrum Location Solutions to facilitate optimized site selection and business incentives for companies seeking to expand or relocate their business. Please contact us for additional information.
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