California Summit—Perception vs. Reality: Is California Business Friendly? 

December 11, 2015

The beginning and ending sessions at the California Summit posed the same basic question: How good, or bad, is California's business environment? Perhaps not surprising for a state with a hugely diverse and complex economy, the two sessions suggested different answers.

In the morning event, Chevron Corp. Chairman and CEO John S. Watson scolded Sacramento for pushing a green agenda that he said imposes onerous burdens on California businesses and consumers.

But in the day's final session, Milken Institute Chairman Michael Milken presided over a discussion titled "Perception vs. Reality: Is California Business Friendly?" and frequently found his co-panelists answering in the affirmative—with the caveat that there's plenty of room for improvement.

To illustrate the upside, the Institute released “Best-Performing Cities 2015” during the Summit. The report ranks U.S. cities based on such economic yardsticks as job and wage growth and discusses the elements of success. California claimed three of the top 10 spots, with San Jose and vicinity leading the pack and San Francisco right behind it.

Then, in his introduction to the “Business Friendly” panel, Los Angeles Mayor Eric Garcetti offered a long list of the city's economic strengths, including the resurgence of TV and movie production, the housing construction boom, and burgeoning commercial development downtown. And he pledged to make the city even more appealing to businesses by fostering "a government that isn't there when they don't need us to be and they want us to be out of the way, and is there when they need us to be."

Of course, California's economic success is partly a function of its critical mass: a population of about 40 million people. When Milken asked the panel to name the "greatest strengths of California's business environment," Donna Davis, regional administrator for the U.S. Small Business Administration, included the wealth of investment capital, a skilled workforce, a high level of innovation, and "just access to one of the largest markets in the world."

Another panelist, CIT Bank Chairman Steven Mnuchin, considers the “diversity of so much that's here" a major asset—a theme that Milken, too, has stressed as a key economic attribute. Davis noted the contributions of California's Latino-owned businesses, in particular. "We've seen Hispanics in the state starting businesses at three times the rate of the national average," she noted.

Still, as Chevron's Watson detailed earlier, California retains a reputation as a tough place to do business, not least for its regulatory regime and high tax rates.

Treasurer John Chiang, a member of the afternoon panel, conceded that despite his optimism about the state's economy, "the cost to do business in California is extraordinarily challenging." As many Californians know too well, the lack of affordable housing has become a critical problem, in turn affecting businesses' ability to attract workers. For that reason, Chiang said, he has championed new affordable-housing initiatives. "We are losing young people" to lower-cost states, Chiang said, which he likened to losing "seed capital" for the economy's future.

After Milken presented a chart showing the long-term decline in California funding for higher education, Chiang called the trajectory "indefensible" and potentially ruinous for the state economy in the long run.

Milken wrapped up the session by asking panelists for their best ideas to make California more business-friendly.

Chiang said he is working on the concept of "one-stop shopping" for businesses that are dealing with state and local government regulation, casting it as an alternative to forcing them to run a gauntlet of agencies with differing or duplicate demands. Mnuchin, no doubt echoing many businesspeople, said California’s strong rebound since the Great Recession is a great opportunity to "diversify and simplify" the tax regime. "We've got to take advantage while times are good," he said.

Davis agreed that "anything to make the tax structure more appealing to companies of all sizes" would be a welcome move. But she also exhorted the state to "continue the bold, audacious leadership" it's known for on social, environmental and other issues, even if "sometimes that's painful."