Postcards from the Edge
http://www.fortune.com/fortune/investing/articles/0,15114,465792,00.html Postcards From the Edge
What message is California sending to companies? Get lost!
FORTUNE
Monday, July 21, 2003
By Shawn Tully
California has a long tradition of bombarding businesses with regulations, from rules that give Native Americans wide latitude to veto construction projects to environmental laws that favor exotic plants over power plants. But the Golden State's sumptuous assets—its climate, its appeal to immigrants, and its splendid universities—always trumped the business bashing. At least until now. The state government under embattled Democratic Governor Gray Davis is turning so stridently antibusiness that it threatens to inflict permanent structural damage. Since 2002 the left-leaning legislature has enacted or expanded half-a-dozen laws dealing with burdensome regulations like family leave and overtime pay. Some corporate leaders think California is becoming Sweden-on-the-Pacific. "I've never seen anything like this is 35 years," says Angelo Mozilo, CEO of Countrywide Financial, the big mortgage company based near Los Angeles. "The state is punishing business, yet it's somehow convinced that business will not leave."
Wrong: Companies—and jobs—are departing in droves. The state has lost 289,000 manufacturing jobs since 2001. "The jobs that have to stay here are ones that involve direct contact with customers," says Liam McGee, head of Bank of America in California. "The mobile jobs—in systems development, manufacturing, call centers—are moving to other states." Fidelity National, the nation's biggest title-insurance company, is shifting its headquarters from Santa Barbara to Jacksonville. Scores of the small businesses that form the backbone of California's economy are moving either jobs or headquarters out of state. Buck Knives is going to Idaho, and Coast Converters, a bagmaking company, to Las Vegas. Taylor-Dunn, a manufacturer of cartlike vehicles for airports, is expanding in Ohio and Missouri. Though Countrywide is growing rapidly, Mozilo is shrinking operations in California and shifting all expansion to low-cost states like Texas. By his estimate, the flood of new legislation will increase Countrywide's cost per worker by $4,000 to $5,000 a year.
Three of the new laws are particularly harsh. First, California recently approved the nation's only paid family-leave act. Starting in July 2004, employees can request six weeks' leave every year (which can be taken days at a time) to care for a new baby, a sick relative, or a host of other medical tasks a state agency deems legitimate—even migraines qualify. Companies themselves have no say in the decision. Workers earning as much as $69,000 will collect 55% of their pay tax-free (highly compensated workers would collect a much smaller percentage). All employees—even those with no intention of taking time off—will pay a small payroll tax into a state fund that will foot the bill for workers on leave. "We'll spend a lot more training replacement workers, and our productivity will decline because of all the absenteeism," says Tim McCallion, Verizon's chief in California. Other companies worry that so many people will take advantage of the generous leave policy that the state fund will be quickly depleted—and that businesses will be forced to assume most of the costs.
Second, the legislature made workers' compensation more expensive by mandating a large increase in benefits. California businesses now contribute the highest premiums by far per $100 of employee wages: $5.85, vs. a national average of about $2.50. Yet instead of cutting costs, as other states have done, the legislature recently raised maximum benefits by 71%, from $490 per week in 2002 to $840 in 2005. Countrywide and Verizon both pay four to five times more in workers' comp per employee in California than in Texas.
Third, California is imposing onerous rules on overtime. Federal law requires that companies pay overtime when employees work more than 40 hours a week. But California companies must pay it to anyone who works more than eight hours a day, a particular hardship for businesses whose employees choose to log, say, four ten-hour days, or for call centers, where flexible schedules often entail 12-hour days. "Companies will simply move their call centers from Los Angeles to Las Vegas," says McCallion. Though this regulation has been around for two years, legislators are constantly making it tougher and extending it to previously exempt workers (a fairly recent addition: the lumber industry).
Why is all this happening now? Largely because the Republican recall effort against Governor Davis has pushed him to the left. Davis needs union money and support to fight his opponents, so he has embraced the unions' agenda. So has the legislature, where Democrats control both houses. But the recall effort has gone further than most Californians thought it would, and hopeful Republicans are talking about a conservative—Bill Simon (who lost the 2002 race to Davis) or even Arnold Schwarzenegger—becoming the next governor. We can see the movie already—T-4: Return of the Capitalists.
I made it to one of the Farmers Markets not far from home today. Spent about $35 on "FRESH" vegies