Posted on: Sunday, October 26, 2003

States seek to gain from California's faltering economy

By Gillian Flaccus
Associated Press

PORTLAND, Ore. — With California roiled by the recall campaign and struggling to right its foundering economy, Oregon and other states are swooping in to try to lure some of its businesses away.

Two days after the recall election, Oregon Democratic Gov. Ted Kulongoski mailed letters to 250 California businesses, urging them to consider moving to a state with a "clean, green and healthy reputation," lower levies for workers' compensation and less regulation.

"It's always terrible when you take advantage of a sister state in difficult times," Kulongoski said. "But the truth of it is, I've been talking to a number of people for some time about the advantages Oregon has as a place to do business."

At least half a dozen states have approached businesses in California, trying to capitalize on the political instability and the economic problems that led to Gov. Gray Davis' removal.

The most aggressive recruiters have been neighboring Oregon and Nevada, but states from Idaho to Oklahoma to Texas have joined in.

Howard Roth, chief economist for the California Finance Department, did not return repeated calls for comment on attempts to poach some of the state's businesses.

But Arnold Schwarzenegger's election as governor has created optimism among the state's business leaders that California is going to turn things around. And the states trying to lure away businesses from California may find that many industries are more interested in moving jobs overseas than out of state.

California does not keep records on how many of its 1 million businesses leave for other states, but Nevada has attracted up to 35 this year and Oregon up to 25.

During the recall campaign, Schwarzenegger repeatedly charged that California was losing businesses under Davis.

California's tax rate is 24 percent higher than the national average, and workers' compensation rates have increased fourfold since 1999. The state has an $8 billion deficit and the lowest credit rating in the nation. Also, Davis signed a bill two days before the recall that would require employers to offer health insurance to more than 1.1 million employees and their families.

"California has become one of the worst places to do business, not only in the United States but around the world," said Chuck Mulloy, a spokesman for computer-chip manufacturer Intel Corp. of Santa Clara, Calif. Intel has 12,000 employees in California and 15,000 in Oregon.

An April survey of 400 California business leaders by the California Chamber of Commerce found that one-fifth planned to expand or move out of state. Fifteen percent reported being actively courted by other states.

Nevada pooled $650,000 during the summer to advertise in major California publications. Oregon leaders have visited Intel and Hewlett-Packard and hosted technology conferences intended to attract investment from California and elsewhere.

Still, analysts point out that California's economy is no worse than the nation's. In many ways, California is stronger than some of the states stalking its business.

In his letter, Kulongoski failed to mention that Oregon has had the highest unemployment rate in the nation for nearly two years and its legislature has struggled to plug a multimillion-dollar budget hole by cutting spending and proposing $800 million in new taxes. Oregon's unemployment rate stands at 8 percent, versus 6.4 percent in California. In recent months, Wall Street downgraded Oregon's bond rating.

"You keep hearing about California and how bad things are here," said Christopher Thornberg, a senior economist with UCLA Anderson Forecast. "But there's no evidence that California is doing any worse than anyone else."

In addition, an increasing number of companies that choose to expand do so in developing countries, where costs are lower.

Many California high-tech companies are expanding in India, China, Russia and Southeast Asia. According to the research firm Gartner Inc., about one in 10 technology jobs will move overseas by the end of next year.

In the past four years, Intel has opened facilities in Russia, China and India totaling nearly 3,000 employees.

"We've said in the past five years that strategically we must invest in those markets that are growing," Mulloy said. "The U.S. workforce will remain relatively flat, but we will invest overseas."

Schwarzenegger, who ran on a pro-business campaign, may help reverse the perception that the state is bad for business.

"I think that between his business acumen and his broad-based political support, he might be able to actually do something. We had to get rid of Mr. Gray Davis," said Barbara Adelson, office manager for Plumber 1, a 72-employee company in Carson, Calif.

— Associated Press