Governor Arnold Schwarzenegger: California's Last Action Hero?

30 Sep, 2004

By: Edwin D. McDonell

Bad press about California's economic woes is not fresh news. Often-repeated downsides concerning California as a home for new business can be quickly summarized: rampant government taxation and spending fueled by the boom years, the lack of a long-term plan to control energy expenses, high housing costs and skyrocketing Workers' Compensation expenses.

Undeniably, the state faces a looming economic crisis. The 2004-05 budget deficit is estimated at a staggering $15 billion. In the November 10, 2003, issue of USA Today, under the headline, "California Proves too Costly for Departing Businesses," Los Angeles-based Coast Converters, a plastic bag manufacturer, is reported as moving to Las Vegas for a more "business friendly" environment. Will Governor Schwarzenegger's California Recovery Plan be "too little, too late" or can the momentum of California's growth be restored, leaving its image untarnished?

Growing Competition for New Jobs

The traditional wellsprings of California's past economic growth are undeniable: enormous natural resources, a booming and diverse workforce and ports of international trade. But competing Western states, especially Utah and Nevada, have raised the bar in the quest for new jobs. On January 7, 2004, Reuters news service quoted Julie Ponzi, a fellow of the Claremont Institute, a conservative think-tank: "Businesses won't come here[to California] if they don't have a reasonable expectation of lower taxes, reasonable Workers’ Compensation expenses, and so forth. Political salesmanship is just like any other kind of salesmanship in that it depends on realistic expectations one might have of the product." Some estimates suggest that business costs are 30 percent higher in California than in other Western states - this is the dilemma now faced by Governor Schwarzenegger.

The California Recovery Plan

Referring to himself as “California's Job Czar” in his recent State of the State Address, Schwarzenegger appears committed to business tax reform as a means to encourage economic growth, create jobs and ensure the long-term financial health of the state. Gov. Schwarzenegger has presented a $76 billion state budget for fiscal year 2004-05, calling it a responsible plan that “puts California on a path to recovery.” The California Recovery Plan includes:

• The Economic Recovery Bond Act, to refinance a portion of the debt inherited from past administrations (Proposition 57)

• A budget for 2004-05 that moves toward structural balance

• A Constitutional amendment to require balanced budgets with prudent reserves in the future (Proposition 58)

• Improving the business and jobs climate in order to revitalize the State's economy and improve revenue growth over time (including Proposition 55, a bond for kindergarten-university facilities that California Chamber of Commerce President Allen Zarember calls, “A sound, fiscally responsible investment in our economy and future workforce.”)

A strong case can be made for California, based on foreseeable trends. Areas of change include Workers’ Compensation insurance reform, control of energy costs and strengthening support for international trade. Further, a business argument can be made for IT specifically, including call centers or any businesses requiring an infusion of venture capital and creativity.

Workers’ Compensation Insurance Reform

According to California’s Department of Finance, "The Workers’ Compensation system has ballooned from $11billion to $28 billion in just five years - resulting in 200 to 300 percent premium increases for many of the state's employers."

Workers' Compensation insurance has become an unacceptably high expense for companies doing business in California. Schwarzenegger is demanding an overhaul of the system. As reported by writer Deborah Lohse in the January 12, 2004 issue of the San Jose Mercury News, the Governor's master plan to fix the problems driving up employers' premiums is being shepherded through the legislature by Republicans, Sen. Chuck Poochigian of Fresno and Assemblyman Abel Maldonado of San Luis Obispo. Insurance Commissioner John Garamendi is also playing a behind-the-scenes role.

The battle to slash expenses in the costly and chaotic Workers' Comp system may have been around for years, but Schwarzenegger has demanded that new reforms be on his desk by March 1, 2004, or he threatens to take his proposal directly to the voters in November. As reported by the San Jose Mercury News, the Bill’s biggest changes are:

• A requirement that doctors use ‘objective medical standards’ in deciding if an employee is disabled.

• A provision requiring proof that the predominant cause of an employee's cumulative injuries is work and not outside activities or behavior.

• A better definition of the longstanding mandate that Workers'' Compensation must “cure and relieve” workers' ailments.

The new definition will likely disallow payments for treatments that relieve pain, but don't do much to return a person to work. The result is tighter standards and lower costs to business.

The Manufacturer’s Investment Credit (MIC)

One of the most important tax credits for business currently on the books, according to Jack M. Steward, CMTA President (California Manufacturers & Technology Association), is the Manufacturers Investment Credit (MIC), which helps industry offset the cost of new equipment, enabling companies to increase production and capacity as well as create jobs. This program services manufacturers - small and large - by offsetting a small portion of their expenses.

For example, Santa Clara-based Intel Corporation points to the MIC as a key reason for the more than $1 billion invested in California's Silicon Valley. The company's D2 development lab has been upgraded and expanded twice since the MIC went into effect, making it the largest and most advanced wafer fabrication plant in Silicon Valley.

California is number one in startups, according to Wayne Schell, President and CEO of CALED (California Association for Local Economic Developers). “California is the largest state in the Union when it comes to new ventures capital,” says Schell. “Nobody surpasses California when it comes to the high concentration of venture capital, university facilities and workforce efficacy. And that is a very big advantage for technology and bio-technology firms.”

Support for International Trade

“There is a repair job underway in Sacramento and growing support for international sales,” says Michael D. White, Publisher & Editor of CalTrade Report. This orientation is certainly a boost to growth in the call center and high tech products and services sector of the economy. “In the past, most of the programs to promote California internationally had been decided by a legislature that didn't have an understanding of the importance of this marketplace. Finally, there is a movement to create the kinds of strategic alliances that should have existed all along between the public sector in Sacramento and the private sector throughout the state. We now have a governor who is unwilling to rubber stamp what the legislature does, a governor who is a former business person, who knows how business works and is open to listening to any and all creative ideas to get California back on track,” White adds.

Workforce Development

A diverse, energetic and creative workforce has long been a California tradition, and it shows no signs of abating. In addition to Proposition 55, to be confirmed by voters on March 1, 2004, job-training funds in California amounting to $8.5 million have been approved through a total of 48 new job-training contracts. The State of California Employment Training Panel (ETP) will provide funding. ETP is a state agency, supported by business and labor that reimburses California companies that provide high-skilled, high-wage training to their employees. Under ETP's various programs, eligible businesses apply for reimbursement of funds used for training new and current employees. This program is funded by the employment training tax paid by California employers and one of its missions is to target firms threatened by out-of-state and international competition.

Control and Growth of Utilities

California businesses pay energy rates nearly double those in other Western states. Without change, Schwarzenegger predicts that California may face energy shortages as early as 2006. Currently, there are thirteen different state energy agencies. “There is something wrong,” says Schwarzenegger, “when it is easier to create energy agencies than power plants.” In this sector, the Governor is committed to:

• Reforming the retail power market, so large customers can get competitive prices

• Renegotiating high-priced electricity contracts that locked California into energy prices at the market’s peak

• Creating a “Green Bank” to make loans to retrofit old, energy inefficient buildings

• Encouraging the construction of a “hydrogen highway to take us [California] to the environmental future.”

“Energy is one of the top priorities for this administration,” says Schell. “The intention is to build more utility plants and to be sure that we're ahead of the curve when it comes to funding our lower cost energy. We now have an administration that has a much stronger pro-business outlook and a willingness to help reduce those costs.”

Technology Infrastructure

According to Yahoo International, California has five of the most "wired" cities in the country, as reported in a recent issue of Internet Life. “Companies wanting to stay online are finding it profitable when they don't have to absorb the cost of start up technology in these particular areas,” says Schell. “This is also advantageous when highly innovative small companies grow into big companies, which typically happens when they have great management teams, ‘protectable’ intellectual properties, and can successfully tap into an international market which would require a network that can support technological advanced infrastructure.”

Knowledge strategy consultant Michael Utvitch believes California carries with it an inherently fluid, dynamic culture that fosters this innovation in IT and other businesses. “The automotive example is that Nissan and others are locating their design studios in California, rather than Detroit,” says Utvitch. It is not a matter of either/or when considering California, according to Utvitch, but rather of moving ‘productization’ and ‘monitization’ elsewhere, as appropriate, once the product has been conceived and developed.

The Fifth Largest Economy

Let it not be forgotten that if California were a separate country, it would have the fifth largest economy in the world. Governor Arnold Schwarzenegger's ongoing reforms reflect a determination to restore California’s vigorous business environment.

Reuter’s news service had these comments on his State of the State address: “Underneath the muscles and the makeup, filmdom’s “Terminator” is really the Master Salesman. Schwarzenegger zeroed in on what may prove to be his greatest strength, an ability that may make him a successful governor of California, despite no previous experience in office.”

“I am a salesman by nature,” the former Mr. Universe said in his address to the legislature that was televised around the world. “If I can sell tickets to ‘Sonia’ and ‘The Last Action Hero’, I can sell anything. California is the easiest sell I’ve ever had.”

As former Californian Mark Twain might say, news of California’s death has been highly overrated.