March 31, 2004 - From the March, 2004 issue

CBRT's 'Cost of Doing Business' Report Concludes California Is No Longer Competitive

Controlling the costs associated with workers compensation and employer sponsored health care is dominating discussion in Sacramento. A recent study commissioned by the California Business Rountable suggests that those discussions are both warranted and overdue. MIR is pleased to present this interview with Bill Hauck, President of the California Business Roundtable, in which he discusses the results of the Bain & Company report (see page 9) on the competitiveness of California's business climate and potential policy solutions available to improve the situation.

Bill Hauck

Bill, the California Business Roundtable recently released a study done by Bain & Company on the cost of doing business in California. Why don't we begin by giving our readers a brief synopsis of Bain's conclusions?

We found that the cost of doing business in California is 30-percent greater than other Western states, particularly Texas and other states that California competes with for jobs. As a consequence, virtually all of the executives that Bain & Company talked to have indicated that if they plan to expand, they are going to do so outside the state.

What was the Roundtable's purpose for enlisting Bain & Company to do this report on the State's business climate?

Bain did this work for us on a pro bono basis. It was triggered by a session that the Roundtable members had in the Capitol last year with a number of legislators, including Senator John Burton. Following that session, Vernon Altman, the managing partner of Bain, asked me whether I thought it would make sense to try to document what was happening here with respect to California's competitiveness. He pointed out that there is a great deal anecdotal evidence that gets talked about, but no one had really had a comprehensive look at the subject.

The purpose here was simply to lay out what's actually happening in the state in a way that could be quantified, so that we have an accurate picture of how businesses are responding to the various costs of doing business here. Then we could relate those findings to the costs in competing states. Bain started with no particular conclusion, but with the premise that we need to understand what's happening-we need to know whether the job situation is a cyclical one or not. Their findings indicate that it is not cyclical. Personal income in California, compared to the national average, has been declining for the last 20 to 25 years. That's been indicative of what's been happening in our economy, and suggestive in relation to jobs going elsewhere.

We also wanted to find out if the jobs were going to other countries. They discovered that the number jobs that have moved to China and India combined doesn't equal the number of jobs that have moved to Texas. So, the problem is more about the cost of doing business in this state in relation to the states with which we compete.

Let's focus in both on what Bain found re the cost of doing business in California and on their recommendations for improving the state's business climate.

The elements of cost are pretty clear. There are some costs we can't do much about, such as the high price of real estate. However, there are other costs that can be addressed through public policy. We can deal with the costs of electricity, the costs of regulation, and with employee costs. At the moment, we're right in the middle of a debate over one of those principal costs-worker's compensation. Taxes also are included, although they are not as significant a number as all of the costs associated with employees and with regulation.

There are any number of approaches we can take to reduce the differential in terms of cost of doing business, even if we just concentrate on the costs of regulation and the cost of employees. Bain demonstrated that if we could reduce that 30-percent differential down to 15-percent, we'd create about 175,000 new jobs and generate significant revenue for the state.

Bill, what public policies have contributed to the deterioration of the state's business climate? In past interviews with MIR, you've suggested that both the Republicans and Democrats in the Legislature seem to be increasingly disconnected from the private economy. Elaborate.

That's a complex question. One element of the cost is that California has a more generous benefit system for citizens who receive governmental aid than other states. There are groups in our society who have taken advantage of those benefits.

Second, for a long time California had the attitude that it didn't need to compete with anybody else. Many felt that because we had such advantageous natural attributes and such a huge market that businesses would locate here even if it was more expensive. That's just not true anymore. This state definitely has to compete.

One of the elements of this study included taking a look at a specific small manufacturing company that was started in California, has lots of roots in California and wants to remain in California. Last year, the business had a net income of about $200,000. If they moved that business to Nevada, their net income would go up to $1.4 million. If they moved to Alabama, their net income would go up to almost $2 million. A company like that, which really wants to remain here, looks at those numbers and has a difficult time justifying staying in California.


We need to do all that we can to make this state more business friendly without abrogating our environmental laws. We don't need to change the law necessarily, but we need to try to get governmental organizations that are involved in these processes working more efficiently. We need to hold people accountable for outcomes rather than process.

Bill, under the heading of "Conclusions," the Bain report recommends charting a new course. Building from what you've just said, what reforms must be a part of charting a pragmatic, policy course change for California?

We're in the process of trying to come up with some comprehensive recommendations that also are doable, which is not easy. We have complex governmental processes in California both at the state and local level. But we do believe there are measures that can be taken.

The first and the clearest need is to reform the workers compensations system in this state. It is literally driving businesses, particularly medium and small businesses, out of business or out of the state.

We also need to look at the Paid Family Leave law, which will go in to effect July 1. This will involve significant costs to employees and employers. The forecasts that I've seen predict that the usage of Paid Family Leave by citizens in California is likely to bankrupt the fund that is being built up at this point, possibly even in six months.

The voters will determine the fate of employer provided healthcare, SB 2, in November. Mandating the provision of health benefits is a problem for some employers, particularly small-to-medium-sized employers. But there are other elements of that proposed law that may not be as advisable as another approach to try to achieve the same objective.

Bill, obviously the support of the governor for any of these options would be essential. How receptive is the governor's administration likely to be to this report and its recommendations?

We haven't had any direct dialogue with the governor on this report, but we will do so soon. Clearly, he is open and receptive to the workers compensation reform agenda, and has already begun that process. In the next month, there will be intensive negotiations in Sacramento related to workers compensation. The governor has made it clear that if a legislative deal is not reached, he is prepared to go to the people in November. There is an initiative that's being circulated on workers compensation that the governor supports, and I'm told that there will be sufficient signatures before the April 16th deadline to qualify the initiative for the November ballot. Even if we didn't get anything else done this year but workers compensation reform, it would be a substantial step forward.

Bill, MIR would be remiss if we concluded this interview without asking you to comment on the results of the March 2nd primary, and for your predictions re what's being planned for inclusion on the November ballot?

As far as I'm concerned, the results of the March 2nd election are very good. Voters defeated Proposition 56, which would have made it easier to raise taxes, exacerbating the current business climate. The governor's bond measure passed with flying colors. It is, as everyone has agreed, not the most ideal solution, but it was what was doable and it gives the governor the first piece of a workout plan for the state. I think that he will continue that process so that we can get California back on stable financial footing. It also is gratifying that voters approved Proposition 55, the state school bond. We are making substantial progress in improving physical facilities at our public schools and in building needed new classrooms.

The November ballot looks like it could be very divisive. There could be numerous measures on the November ballot that are both pro- and anti-business. There could be as many as ten initiative measures on the November ballot, so voters will once again be confronted with a series of controversial proposals.


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