President Obama raked in a hefty $15 million from Hollywood’s elite at George Clooney’s home last week. The $40,000 per plate star-studded crowd cheered the president’s just-in-time conversion to same-sex marriage; are they equally enthused about Mr. Obama’s economic prescriptions?
Californians should know better. Their state, best known for red carpets, is awash in red ink, just like the federal government. Earlier this week, Governor Jerry Brown announced that the state’s budget deficit will approach $16 billion this year, up from $9.2 billion projected just a few months ago. Years of misguided financial policies have led to this: stifling taxes and savage cuts to public services – including Medicaid, childcare and welfare programs.
Even movie stars occasionally venture out. What do they find? A state with 12 percent of the country’s population and one third of its welfare recipients. A state with the nation’s lowest bond ratings, the second-highest marginal income tax rate and the third highest unemployment rate. Most important -- a state that CEOs rank the worst in the country for doing business. Dead last! For the eighth year in a row.
The upshot? Businesses are leaving California. Spectrum Locations Consultants reports that 254 California companies moved some or all of their work and jobs out of state in 2011, an increase of 26 percent over the previous year and five times as many as in 2009. According to the Labor Department, California’s private employment actually shrank 1.4 percent over the past decade, while Texas added 1.15 million jobs.
Last year California – once considered the most prosperous state in the land – passed Assembly Bill 506, specifically designed to keep cities in the state from rushing into bankruptcy. Vallejo became one of the first in the nation to resort to this ultimate measure a few years ago; Stockton, a city of 290,000, teeters on the edge.
What makes California so special? A profound antipathy to private enterprise and simultaneous embrace of public employee unions. (Does this sound familiar?) In Shakedown, author Steven Malanga notes that public school teachers in the state are the highest-paid in the country, prison guards make six-figure salaries and that “state workers routinely retire at fifty-five with pensions higher than their base pay for most of their working life…”
He also chronicles the rise of the powerful public employee unions who, alarmed by tax-restraining Proposition 13 passed in 1978, moved to solidify their clout through strikes, advertising campaigns and political endorsements. Riding the wave of the tech boom thirty years ago, union-backed state legislators passed uber-generous benefits packages for public employees that continue to strangle local economies.
As Stockton proceeds through the mediation process now required of cities considering bankruptcy, it faces the most problematic legacy of union power – invincible public employee pensions. The city pays $37 million annually into its pension scheme – a hefty chunk of its annual $196 million budget. Another $17 million goes to retiree health care. While corporations in bankruptcy expect to negotiate with all its creditors, including pension funds, in California the public unions, aided and abetted by CalPERS, refuse to enter into discussions with cities seeking relief. Pensions are sacrosanct – a position that may well end up before the courts.
While state and local obligations have soared, California has steadily hiked taxes and enacted regulations that make it difficult to do business in the state, leading to shrinkage of the tax base. What to do? California needs to enter the jobs sweepstakes, and staunch the exodus. This will require addressing the complaints of large and small companies that have been wooed by Texas, Arizona and other states.
Unfortunately, Joseph Vranich, a corporate relocation coach who chronicles his state’s decline, says, “there is no evidence that California’s hostility to business has changed one iota.” He cites as an example the recent decision by the legislature not to revisit the state’s constricting laws concerning overtime.
“In most states overtime terms are set by companies or unions,” he says. “In California, the legislature has codified the rules. For instance, companies that would like to move employees to a four-day week and add a couple of hours to the workday find it too expensive. We had one company move to Oregon just to have more flexibility.”
The Milken Institute says operating a business in California costs 23 percent more than the national average. Permitting is expensive and time consuming; restaurant permits available in other states within a couple of months can take 2 years. On his blog, Vranich says a company leaving the City of Los Angeles for another state can save up to 40 percent.
Business people complain of California’s cumbersome environmental codes and the high cost of energy – handicaps that are self-induced and about to get worse. Having adopted the nation’s most aggressive “renewable portfolio standards” – along the lines of those proposed by President Obama for the entire country, California’s utilities are loading up on renewable energy sources that cost 50 percent more than plentiful natural gas.
Moreover, Cap and Trade rules are set to go into effect next January – rules that will add an extra burden on top of the state’s already high power costs. Firms are dealing not only with escalating fines and costs, but also with uncertainty. “No one really knows how it’s going to work”, says Mr. Vranich.
This isn’t rocket science. Governments can’t continue to load higher costs onto a shrinking taxpayer base. In tough times, half of the state’s income tax is shouldered by one percent of filers. This is an unhealthy situation, especially since the number of tax returns in the state reporting income above $500,000 dropped by one third between 2007 and 2009 as the economy softened and people left the state.
Hollywood thrives on happy endings. Cutting California’s taxes and regulations that are driving employers out of the state could provide just that, but such policy decisions could well require a new cast -- and a new director.