NewGeography.com blogs

Why would companies located in one of the most beautiful states in the country – California – undertake the costly proposition of relocating to places with less scenic appeal and less-than-ideal weather?

There are three answers and they relate to California’s business environment: Regulations, taxes and anxiety.

Let’s take anxiety first. Corporate leaders and business owners fear what will happen in the future regarding proposals to raise taxes on business property, extend the Proposition 30 taxes that were supposed to be “temporary,” raise cap-and-trade fees to curb carbon emissions, and impose new workplace regulations regarding family leave and health care. We’re talking about billions of dollars in new operating and ownership costs.

Some of those proposals were defeated this year. But the energy level of the zealotry in California’s legislature means they are certain to rise again in 2016 and 2017. Projecting the resulting cost and complexity in future operations causes leaders in corporations and small businesses to worry – then they worry some more over the unpredictability of it all.

About taxes: This could be discussed for hours, but suffice to say that the Tax Foundation's 2015 State Business Tax Climate Index lists California at No. 48.

The regulatory environment can be brutal. Examples include fines for trivial errors such as a typo on a paycheck stub – not on the check, just the stub – and putting into law costly overtime provisions that in most states aren’t codified in a statute.

Last year, when Gov. Jerry Brown was asked about business challenges, he revealed his aloofness by saying, “We’ve got a few problems, we have lots of little burdens and regulations and taxes, but smart people figure out how to make it.” The Wall Street Journal responded: “California’s problem is that smart people have figured out they can make it better elsewhere.”

In short, California is so difficult that companies relocate entirely or, if they keep their headquarters here, find other places to expand.

In an effort to offset Sacramento’s head-in-the-sand approach to business concerns, my firm completed a new study that provides details of business disinvestments in the state. Over the seven-year period that includes last year, the study estimates that 9,000 businesses disinvested in California in favor of other locations.

The study shows that 1,510 California disinvestment events have become public knowledge and provides details on each and every event. Site selection experts I've been in touch with conservatively estimate that a minimum of five events fail to become known for every one that does. One reason is that when companies with fewer than 100 employees relocate it almost never becomes public knowledge. Hence, it is reasonable to conclude that about 9,000 California disinvestment events have occurred in the last seven years.

Los Angeles County #1 in Losses

The study found that the Top Fifteen California counties with the highest number of disinvestment events put Los Angeles with the most losses at No. 1, followed by (2) Orange, (3) Santa Clara, (4) San Francisco, (5) San Diego, (6) Alameda, (7) San Mateo, (8) Ventura, (9) Sacramento, (10) Riverside, (11) San Bernardino, (12) Contra Costa tied with Santa Barbara, (13) San Joaquin, (14) Stanislaus and (15) Sonoma.

The report excluded instances of companies opening new out-of-state facilities to tap a growing market, acts unrelated to California’s business environment. It also points to shortcomings in Federal and state reporting systems that result in underreporting of business migrations. Those factors reduced the number of California losses.

It is easy to verify circumstances described in the report since every disinvestment event is public information, is outlined in detail and sources are identified in endnotes.

When a company launches a site search, it always wants to examine potential costs. I’ve seen many business people smile upon learning that operating cost savings are between 20 and 35 percent in other states. By the way, the appeal isn’t necessarily to the lowest-cost states, but to lower-cost states with the proper workforce.

Winning Locations

The Top Ten States to which businesses migrated puts Texas in the No. 1 spot, followed by (2) Nevada, (3) Arizona, (4) Colorado, (5) Washington, (6) Oregon, (7) North Carolina, (8) Florida, (9) Georgia and (10) Virginia. Texas was the top destination for California companies each year during the study period.

Metropolitan Statistical Areas (MSAs) benefiting from California disinvestment events, in the order starting with those that gained the most, are: (1) Austin-Round Rock-San Marcos, (2) Dallas-Fort Worth-Arlington, (3) Phoenix-Mesa-Scottsdale, (4) Reno-Sparks, (5) Las Vegas-Paradise, (6) Portland-Vancouver (WA)-Hillsboro, (7) Denver-Aurora-Lakewood, (8) Seattle-Tacoma-Bellevue, (9) Atlanta-Sandy Springs-Marietta and (10) Salt Lake City tied with San Antonio.

Offshoring still occurs, and the Top Ten Foreign Nations that gained the most put Mexico at No. 1, followed by (2) India, (3) China, (4) Canada, (5) Malaysia, (6) Philippines, (7) Costa Rica, (8) Singapore, (9) Japan and (10) United Kingdom.

Capital diverted to out-of-state locations totaled $68 billion, a small fraction of actual experience because only 16 percent of public source materials provided capital costs for the 1,510 events. Moreover, the top industry to disinvest in California is manufacturing, a capital-intensive sector, and more detailed knowledge of this industry alone would likely increase the capital diversion.

As California companies relocated or expanded facilities elsewhere they transferred more than capital – they also shifted jobs, machinery, taxable income, intellectual capital, training facilities and philanthropic investments.

Indicators are that California’s business climate will worsen, enhancing prospects that more companies will seek places that are friendlier to business interests.

The report is based exclusively on news stories and company reports to the U.S. Department of Labor, the Securities and Exchange Commission and the California Employment Development Dept. Although all entries are based on public information, it’s rare for so much data to be gathered into one report.

Read the full study: “Businesses Continue to Leave California - A Seven-Year Review” available as a PDF here.

Joseph Vranich is the Principal of Spectrum Location Solutions, a Site Selection firm that helps companies identify optimum locations to accommodate growth or to improve competitiveness. In doing so, he conducts an in-depth analysis of business taxes, the regulatory climate, labor rates and lifestyle factors.

A fast growing economy usually requires a growing working-age population.  It is informative in this regard to look at the size of the working-age population (wap) for different regions and countries of the world.

This data, compiled from the UN’s World Population Prospects – the 2015 Revision, tells us the following:

In the 25 year interval 1990-2015, the wap of BRIC countries grew by 650 million, driven by India, China and to a lesser extent Brazil. The question now is whether sub-Saharan Africa and India can translate their own booming wap into rapid and sustainable economic growth. With developed and BRIC countries slowing down, the world economy depends on it.

This piece first appeared at Populyst.com.

Detroit's downtown is gentrifying— or, to be more accurate, a very small portion of the 139 square miles that make up the city is doing so, as it becomes populated by a new generation of workers. But the city's vast, remaining area is mostly blighted. A massive effort has been made to remove substandard and neglected homes, creating large sections ripe for redevelopment. We believe that a model community for families could be built within that devastated area, and we've launched a kickstarter campaign to get development going. You can look at this idea in detail on our new video, too: https://www.youtube.com/watch?v=cGOY_04k7Vw. A minimum land area of fifty acres would be a significant enough mass to provide a sustainable approach to growth. Here's what we would like to see:

At Rick Harrison Site Design Studio our redevelopment model is vastly different from existing models that either want to turn Detroit into farmland, or to place the existing population into high-rise projects. Both those approaches would need subsidies to be achieved. Our model takes a 'market focused' approach that is competitive with the cookie-cutter housing of the surrounding suburbs.

The plans we've developed at well over 900 sites during the past twenty-five years have averaged a 25 percent reduction of infrastructure, compared to conventional design. This reduction of street paving and utility mains has translated into increased green space per resident. For Detroit, our goal is to eliminate 60 percent or more of the existing infrastructure, and recapture the right-of-ways for residents. That will enable us to increase density while also increasing space.

We will start from scratch and design the main trails first. The street system will reduce both time and energy, compared with designs in the surrounding suburbs. All the homes will have interior floor plans and living spaces that coordinate with adjacent open spaces and views. And every home will have an energy savings HERS rating of 50 or better, so more of the resident funds can be used for better living, rather than going towards energy that escapes from a chimney. Elegant, meandering walkways will connect every home to the main trail system.

A half-century ago Detroit was America’s model city. Then, segregation and racial tensions led to the riots of 1967, which created a mass exodus to the suburbs. Those residents and businesses that could afford a new home on a large lot left the city. I began my planning career in 1968, designing those Detroit suburban subdivisions.

Let’s make Detroit a leader again by increasing living standards, connectivity, property values, tax base, open space, density, and safety while significantly decreasing construction costs, environmental impacts, energy usage, and the enormous infrastructure that currently plague the city. Detroit was once an inspiration for other cities. We'd like to make it an inspiration again.

Wodonga (Victoria) mother of two Mel Wilson has made headlines across Australia with an open letter to Federal Treasurer Joe Hockey on housing affordability. In commenting on Australia's housing affordability crisis, the Treasurer has told a press conference "The starting point for a first home buyer is to get a good job that pays good money."

Australia has a severe housing affordability problem. As the Demographia International Housing Affordability Survey showed in January, Sydney median house prices had reached 9.8 times median household incomes of by the third quarter of 2014. In the intervening months house prices have escalated so much that some say the median price will soon pass $1 million.

It was not that long ago that house prices were far more reasonable in Australia. Nationally, in the early 1990s, house prices averaged around three times incomes. Since that time, house prices have more than doubled relative to incomes. This is placed a considerable burden on purchasing households, especially first home buyers.

Ms. Wilson incredulously took Treasurer Hockey through the economics of buying a first house in Sydney. She reminded him that it would take all of the average wage earner's take home pay for four years to save the down-payment on the median house, now priced at A$915,000 (approximately US$700,000.  The entire letter is published below.

In a later statement, the Treasurer, to his credit, indicated the need for strong lobbying of the states to make more land available to increase supply. The problem in Sydney and Australia is not unique. Similar house cost crises have developed from London to Toronto and San Francisco, where governments have severely limited the land that can be used for new residences, with the wholly predictable result that prices escalate out of control.

Ms. Wilson, and other concerned (or baffled, as Ms. Wilson puts it) Australians should hope that Treasurer Hockey's "strong lobbying" is successful. The economic reality is that until there is liberalization of the land use restrictions responsible for much of the housing cost escalation, there will be no relief, other things being equal. Indeed, house prices are likely to just keep going skyward. This requires a mid-course correction toward policies that place improving the standards of living and reducing poverty at a higher priority than urban design.

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Letter from Ms. Mel Wilson to Treasurer Joe Hockey:

Dear Joe,

I just wanted to touch base with you regarding your comment that young people are able to enter the property market if they just “get a good job that pays good money.”



I just wanted to ask you how one might go about this?

Are you going to be reviewing all the current Awards that are in place to ensure that most jobs pay “good money”?

Are you going to be creating hundreds of thousands of new jobs that, under your Awards, pay over $100,000 per year?

Apologies if I have missed this fantastic news, but as someone working in 2 senior HR roles, I believe I would have known about this so that I could pass the message on to some very tired, over qualified employees who currently fall under various Federal and State awards and are being paid between $18 to $25 per hour.

Are you aware of what the average Australian wage is?

Are you aware of what the average Australian mortgage in Sydney is?

Are you aware of the first-home buying process?

Just in case these facts and figures aren’t available to you, I thought you might be interested.

The average weekly wage according to the Australian Bureau of Statistics on 1st January 2015 was $1,128.70, or $58,692.40 before tax. This means a take home amount of about $904.00 per week.

The median house price in Sydney, according to the Domain Group Housing Price Report, as of March 2015, was $914,056.

Not sure if you know how first home buying works at the moment, but you normally need a deposit of about 20%. This is to pay for the Stamp Duty (which is a State Tax you must pay every time you buy a property), and also to assist in the approval process so that you don’t need to pay Lenders Mortgage Insurance.

So in this instance, the first home buyer would need about $182,811.00 saved to purchase a house that is the average price in Sydney.

So to go out and get one of these “good jobs that pay good money” I assume these young people you speak of would need to go to university first.

On average, it takes about 3 -4 years to get a degree, so if a young person goes to University straight out of school, they can expect to finish their course and be ready for the workforce at about 21, with a HECS-HELP debt of over $20,000. To make this a bit easier for you to understand, let's say there is a young person named Joe Junior who has done just this.

If Joe Junior is extremely lucky, and is up there with the best of the graduates from that course and that year, he will get a job straight out of University paying usually under the average wage.

However, lets just be extremely generous here and say that Joe Junior got a job and was on the national weekly take home wage of $904 per week.

Joe Junior needs to only save every single dollar worked for about 4 years to save his $182,811 deposit for their first home. Thank you, Mr Hockey, for throwing in that $7,000 first home owner grant too – that meant Joe Junior could get into his first home 8 weeks earlier!

Just a quick side note, this example does not take into consideration the rising house prices, or Joe Junior’s HECS-HELP debt that he obtained from getting his degree to get one of your so-called “good jobs”.

Joe Junior is now 25 (not so junior anymore), has been living at home with his parents this entire time and has not been able to spend a single dollar on any bills, board or holidays or public transportation. He also can’t afford a car or petrol for a car but then again “poor people don’t drive cars”. Oh wait, Joe Junior isn’t a poor person – he has a “good job that pays good money.”

Luckily Joe Junior’s parents have been happy to drive their little Joe Junior to and from work every day and provide free housing, clothing, medical expenses and also provide the food for his breakfast, lunch and dinner each day.

So finally Joe Junior has saved his $182,811 deposit (of which only about half will go towards his mortgage due to the stamp duty cost), and can now purchase his first home, with a mortgage of about $822,650.00.

According to the Commonwealth Bank’s online mortgage estimator, the repayments for a mortgage of this amount are $1,073.00 per week over 30 years.

So hopefully Joe Junior’s average weekly wage of $904.00 has gone up enough to cover the cost of the mortgage.

Joe Junior has been applying for these “good jobs hat pay good money" that you speak of (I assume by "good money" you mean more than the average wage as you have just seen it is not even enough to cover the cost of the average house prices' mortgage in Sydney), but hasn’t had any luck as yet. He needed to stay in the same job post university to demonstrate to the bank job stability so that he could purchase his first home. So he only has a degree, and experience in the one job, one industry, and there are just not that many jobs out there paying “good money.”

Joe Junior now also can’t wash his clothes, eat food, or get to and from work as he no longer lives with his parents, so getting one of these “good jobs” is even more difficult.

So Joe Senior, are you really aware of all the facts and figures when you says things like buying your first home is “readily affordable” to young people?

Just slightly confused as to what you were thinking when you said these words at the media conference in Sydney.

Looking forward to another one of your politically correct, direct and well thought out responses.

Regards,

Another baffled Australian

Intercensal population estimates, while generally reliable, are prone to substantial variation in some cases. This is especially so with municipal population estimates.

Between 2000 and 2010, the average discrepancy between the US Census Bureau 2010 estimates and the 2010 census counts at the county level was 3.1% (absolute value). By comparison, among the 50 largest municipalities and census designated places, the average discrepancy was more than one-half higher, at 4.7 using the 2000 to 2009 estimates (there were no 2010 sub-county population estimates). The variations, however, can be substantial in sub-county population estimates. Between 2000 and 2010, the Census Bureau estimated that New York had added more than 410,000 residents. However, the 2010 census count showed a much smaller gain, at approximately 165,000 (2010 estimates are available for New York because it is composed of whole counties).

There were even more substantial variations. The 2009 population estimates for Atlanta and Detroit were more than 25% higher than the 2010 census count. In the case of Atlanta, the 2000 to 2009 population growth estimate was more than 120,000, more than 100 times the actual increase of approximately 1,000. The discrepancies in Atlanta and Detroit were greater than in all but a three of the nation's more than 3,000 counties and each of the counties with larger discrepancies had populations of less than 1,000 in 2010.