Tuesday, October 20, 2009
7:00 am TUE 10/20
8:00 am - 8:30 am TUE 10/20
After welcoming remarks by Milken Institute President and CEO Mike Klowden, the 2009 State of the State Conference got under way as Ross DeVol, Director of Regional Economics, provided an overview of California's economy.

The recession hit California more severely than the rest of the nation, but an economic rebound is in sight, he said. But the question for Californians is how much of the downturn is a result of the particulars of this business cycle and how much is due to a long-term erosion in the state's competitive edge.

Calling recent events a "perfect storm" for California, DeVol compared the magnitude of the state's downturn to that of the rest of the nation.

* In August, California's unemployment rate was 12.2 percent vs. 9.8 percent nationally. However, in the past few months, employment in the state has improved at a faster pace than in the rest of the country.

* Exports took a major hit in this recession. For example, information technology orders plummeted as much as 40 percent during the downturn, which did serious damage to Bay Area employment and volume at the state's ports.

* While California was at the epicenter of the housing collapse, DeVol said the state has likely seen the bottom in new construction and sales, if not home prices.

* Tax collections in the state were down almost 20 percent earlier this year.

While DeVol is "cautiously optimistic" about the state's future, he maintained that California's business climate needs real attention. Retaining businesses will be key to the state's future prosperity.

Easing the regulatory and tax burden and ending today's inconsistent enforcement of regulations will go a long way toward business retention, he said, noting that these are not expensive moves to implement. However, the state must address the longer-term threat that a faltering education system poses to its future work force.

In 1996, 43 percent of 19-year-old Californians were attending college, but just 30 percent were college students last year, DeVol said. The percentage is worse among Hispanics, an education gap the state must close if it expects to remain competitive.

In short, DeVol believes it's time for policy-makers to focus squarely on sustaining quality companies, quality jobs and a solid, well-trained work force.

Ross DeVol, Executive Director, Economic Research, Milken Institute
Michael Klowden, President and CEO, Milken Institute
Michael Klowden, President and CEO, Milken Institute
8:15 am - 9:30 am TUE 10/20
This private meeting brought together a select group of women — all recognized leaders in government, business and finance — to discuss some of today's most pressing economic challenges.
8:30 am - 9:30 am TUE 10/20
U.S. home prices are back to 2003 levels. Moderator Lewis Feldman of Goodwin Procter posed the burning question on everyone′s mind: Does that mean that the housing market has hit bottom?

The answer is that it's actually a tale of two housing markets.

At the affordable end of the scale, panelists agreed, there is a healthy uptick in demand, spurred on by state and federal tax credits for first-time home buyers. But a 41-month supply of inventory is still bogging down the high end, noted Laurie Goodman of Amherst Securities. Those buyers have been more cautious about where values are headed, explained Todd Dal Porto of Bank of America Home Loans, adding that it is still difficult to obtain a jumbo mortgage.

Jason Reese of Imperial Capital called for a greater focus on job growth, noting that it doesn't matter how low your mortgage rate is if you've lost your job. Emile Haddad of Five Point Communities agreed, stating that without jobs, there is no long-term stability.

Haddad called for an extension of the $8,000 tax credit for first-time home buyers. Steven Mnuchin of OneWest Bank Group went even further, proposing that the tax credit be expanded to all buyers.

As for the secondary mortgage market, Goodman observed that Fannie Mae and Freddie Mac have become extremely conservative, but she sounded a note of caution about the FHA, warning that a lot more FHA delinquencies are likely in the coming year.

Liquidity is still an issue, noted Reese, adding that the market for construction financing doesn′t exist. Mnuchin recounted that OneWest had inherited lots of construction loans in its takeover of IndyMac, and these are the most problematic part of OneWest′s portfolio. In fact, he sees defaults on commercial mortgage-backed securities as the biggest looming problem for the banking industry.

Dal Porto said he takes heart in the fact that federal loan modification programs are gaining traction. Goodman cautioned that there is a huge shadow inventory and a wave of additional foreclosures still ahead. But all panelists agreed that the housing market is showing signs of life—signs that will solidify as the economy improves.

To keep the market moving, they called for a combination of tax credits, loan modification programs and job creation plans to aggressively attack the housing problem on all fronts.

Lewis Feldman, Partner/Los Angeles Chair, Goodwin Procter LLP
Todd Dal Porto, Senior Vice President, Bank of America Home Loans
Laurie Goodman, Senior Managing Director, Amherst Securities
Emile Haddad, President and CEO, Five Point Communities Management
Steven Mnuchin, Chairman and CEO, OneWest Bank Group LLC
Jason Reese, Co-Founder, Chairman and CEO, Imperial Capital Group LLC
9:35 am - 10:35 am TUE 10/20
Describing California's budget as a "high-speed train wreck," a panel that included several state officials found common ground on one potential fiscal reform: a two-year spending plan.

State Director of Finance Michael Genest recounted how the economic downturn played havoc with state revenue, causing a $60 billion budget gap. Half the gap was closed with spending cuts, mostly in education and the schools-related Proposition 98. The rest was closed by tax increases, federal stimulus dollars and other measures.

Genest pointed out that virtually all those measures are temporary, guaranteeing that budget gaps will re-emerge. In fact, State Controller John Chiang said the state hasn't been cash-positive since July 12, 2007.

State Treasurer Bill Lockyer said cuts make for difficult decisions because transfers to local governments account for 75 percent of the budget, and the rest is education, health care and prisons. Eliminating waste in government programs is the equivalent of "fairy dust," he said.

Results-based budgeting was one of several proposals discussed by Robert Hertzberg of California Forward. This organization intends to ask voters to approve a plan that would implement results-based budgeting and a pay-as-you-go system, switch to a two-year budget, and change the number of votes required to pass a budget to 50 percent plus one instead of the current two-thirds.

Panelists generally agreed that a two-year budget could work to the state's advantage, with some caveats. Former Gov. Pete Wilson cautioned that the process would have to accommodate a mid-point correction, and Hertzberg said lawmakers would have to change their mindset and seek out efficiencies for the process to work.

Chiang said a two-year budget would give lawmakers a better sense of the long view. But the law would need a trigger to force lawmakers to act in an emergency, citing what he viewed as the legislators' paralysis this year. Reforms aside, he said, courageous legislators must ensure that the state saves during good times to prepare for the bad.

Genest said two-year budgeting has some value, but budget issues still boil down to more revenue, less spending or a combination of the two.

Among other topics discussed were:

• A constitutional convention: Former Gov. Pete Wilson called it a well-intentioned but bad idea that opens a Pandora's box. He said the state can′t increase its competitiveness until it relieves itself of such constraints as Proposition 98, which he called the biggest mistake the voters and the courts that upheld it ever made.

• Changing the tax structure: Hertzberg said the state's tax structure is based on manufacturing, but the economy is now service-based. Wilson and Lockyer countered that reworking the tax structure might be detrimental to businesses.

• Lengthening term limits: Term limits complicate budget negotiations because lawmakers lack experience and are perpetually campaigning and fundraising, resulting in lawmakers who can't say no, Lockyer said. He advocated changing term limits, switching to publicly funded campaigns or, he joked, picking the Legislature by lottery.

Frank Mottek, Anchor, KNX 1070
John Chiang, California State Controller
Michael Genest, Director, California Department of Finance
Robert Hertzberg, Partner, Mayer Brown LLP; Co-Chair, California Forward
Bill Lockyer, California State Treasurer
Pete Wilson, Principal, Bingham Consulting Group; former California Governor
10:35 am - 10:50 am TUE 10/20
10:50 am - 11:50 am TUE 10/20
A Chevron refinery in Richmond wants to upgrade, reducing its emissions and creating a host of new jobs in the process. Sounds like a win-win, right?

But thanks to California's cumbersome regulatory structure, that refinery project went through a permitting process that lasted for four years. No sooner did construction begin than a lawsuit was filed, putting 1,000 people out of work.

John Watson, currently vice chairman of Chevron and soon to be its chairman and CEO, shared this anecdote to illustrate how California has acquired a reputation for being unfriendly to business. His fellow panelists agreed that state bureaucracy needs to be held accountable for its impact on job creation.

California has long been seen as the land of opportunity. But past results offer no guarantee of future performance. Especially in today's economy, state officials need to focus like never before on retaining companies and creating jobs.

David Crane, special advisor to Gov. Arnold Schwarzenegger, emphasized that businesses need a talented work force, certainty and market opportunity. California can deliver that by emphasizing education, tax reform and budgetary reform. But he warned that the state is facing hard decisions about long-term investment in human capital.

"We're either going to embrace education and infrastructure or welfare and incarceration," Crane declared. He noted that the state has lagged the nation as a whole in employment since 1991 and urged a greater focus on understanding this structural deficit.

Perry Wong of the Milken Institute agreed that California is not just facing temporary impacts from the current recession. Its high-tech manufacturing base has disappeared over the years. He insisted that California is going to have to work harder than ever to change perceptions.

Entrepreneurs are now global, observed Eric McAfee of McAfee Capital. If the cost of doing business is too high or too much red tape slows start-ups, they will go elsewhere. Despite the challenges, McAfee thinks new technology and federal spending in fields like renewable energy make this the most exciting time ever to be a California entrepreneur.

Is it possible to reconcile California's commitment to environmental protection with business growth? Watson, along with moderator Nancy McFadden of PG&E Corporation, argued that strong environmental standards can go hand-in-hand with a vibrant economy. The key is to streamline the regulatory process. Crane added that government should set the goals, but then let industry choose the most efficient way to get there.

Nancy McFadden, Senior Vice President, Public Affairs, PG&E Corp.
David Crane, Special Advisor for Jobs and Economic Growth,
Office of Gov. Arnold Schwarzenegger
Eric McAfee, Chairman, McAfee Capital
John Watson, Vice Chairman, Chevron Corporation
Perry Wong, Senior Managing Economist, Milken Institute
11:50 am - 12:20 pm TUE 10/20
12:20 pm - 2:15 pm TUE 10/20
California's higher education system has long been the envy of the world. But dramatic budget cuts are taking their toll. The state is on the brink of undermining its ability to train the work force of tomorrow.

Bonnie Reiss, a regent of the University of California system, and William Hauck, a trustee of the California State University system, emphasized how important their institutions are to the state's quality of life and its economic vitality. Hundreds of companies have been started in California based on UC research, while the CSU system educates the backbone of the work force, including many of the state's teachers.

Both systems have implemented painful cost savings: raising student fees, losing some of their best faculty members and putting staff on unpaid furloughs. Some classes have been eliminated, making it harder for students to meet their requirements and graduate in four years.

Reiss and Hauck emphasized that the state is at a crossroads and asked the assembled business leaders to take a more active role in supporting higher education.

The state now spends more on prisons than on higher education, Reiss said, but it's critically important to invest in human capital. Recalling the many doors that education had opened in her own life, she called on the audience to consider making sacrifices to support education for the sake of the state's future.

Hauck challenged the audience by asking if we want to remain world leaders in public education or not. We are the beneficiaries of previous generations of Californians, who were willing to invest in education, water systems and parks. What legacy, he asked, will we leave to future generations?

Michael Klowden, President and CEO, Milken Institute
William Hauck, Current Member and former Chairman, Board of Trustees,
California State University; President, California Business Roundtable
Bonnie Reiss, Partner, Pegasus Sustainable Century Merchant Bank
Regent, University of California
12:20 pm - 2:15 pm TUE 10/20
Forget about the markets. The best investment people can make is in public safety, according to Los Angeles Police Chief William Bratton.

It's no surprise that low crime rates improve economic development, tourism and residents' quality of life. But they also have ripple effects throughout the economy, Bratton said. Several studies that were reviewed by Rand Corp. put a dollar amount on crimes. For example, a single homicide costs an economy $4 million to $11 million in economic ripple effects, Bratton said.

Taking the most conservative estimate, the LAPD under Chief Bratton has saved the Los Angeles economy $1.6 billion, he said, based on 400 fewer homicides since he took the reins in 2002.

Bratton's appearance was one of his last as chief. He will leave the department Oct. 31 to join the global security firm Altegrity. Bratton expects the LAPD to continue to improve crime rates and race relations as well as the crime-mapping techniques and relentless follow-up that he implemented.

When asked why he joined the LAPD, Bratton cited three challenges he wanted to take on: the city's high crime rate, a federal consent decree requiring policing reforms and the threat of a terrorist strike. The 2001 attacks are what made Bratton want to leave the private sector to return to public safety, he said.

Bratton also wanted to see if he could apply the crime-mapping techniques he implemented in New York City to the smaller LAPD.

Bratton said he had accomplished the goals he set in 2002. Overall crime is down 38 percent, and violent crime is down 53 percent. The consent decree that was imposed eight years ago was lifted in July. And the LAPD is ahead of the game in defending against terrorism. Bratton said his department pioneered many programs adopted by the Department of Homeland Security.

The chief, who repeated the mantra "cops count, police matter" several times during his speech, said the conventional wisdom used to be that police could only respond to crime, not prevent it. People thought crime was caused by the economy, unemployment, poverty and racism.

But crime is caused by human behavior, Bratton said, and police can control behavior. As proof, he pointed out that unemployment has skyrocketed since the recession began, but crime rates, including shoplifting and theft, have remained the same. If done correctly, law enforcement can have a positive impact on joblessness, racial conflict and the economy, he said.

The challenge to preventive policing is to do it lawfully, compassionately and consistently, he said.

William Bratton, Los Angeles Chief of Police
2:15 pm - 2:30 pm TUE 10/20
2:30 pm - 3:30 pm TUE 10/20
There's no magic formula that produces innovation. But it's clear that if California wants to stay on the cutting edge, it all starts with education and immigration, a panel of experts said.

Innovative companies cannot thrive without a well-trained work force. California has a bigger population of foreign students than any other state, yet often the best students are forced to return to their home countries after they graduate because of immigration issues, said Susan Desmond-Hellmann, UC San Francisco's chancellor and a former Genentech executive.

Fifteen percent of the companies founded in Silicon Valley were launched by students from India who remained in the United States after finishing their education. But gaining legal residency has grown more difficult this decade.

Verena Kloos of BMW Group DesignworksUSA said the company has design offices in Los Angeles, Munich and Singapore, so it can't hire just from California. But often green cards aren't granted in a timely manner, she said, so BMW trains people who then can't stay.

Moderator Mike Milken quoted venture capitalist John Doerr: "When you graduate from Stanford University with an advanced degree in the sciences or engineering, we then make you go home. We should be stapling a green card to your diploma."

Milken pointed to the state's stem-cell initiative as one example of how education and science work together to drive innovation. Desmond-Hellman said UCSF alone has attracted $84 million in research funds since 2006 because of the initiative.

San Francisco Mayor Gavin Newsom and Insurance Commissioner Steve Poizner, both of whom are running for governor, said early childhood education and K-12 schools also need attention. Roughly a third of California students arrive at college in need of math and English remediation.

Poizner, a former teacher, railed against state mandates that have made the education code too long and unwieldy and advocated the charter school model for public schools.

Economic development is also key to attracting and keeping innovative companies in the state, both candidates said.

Poizner described his proposal for 10 percent cuts across the board for all taxes and a 50 percent cut in the capital gains tax. He also advocated streamlining the permitting process so companies can build new factories and offices in California.

In addition to streamlining start-up processes and offering financial incentives, Newsom stressed workforce training, especially at the community college level, and targeting recruitment efforts to the industries that have the brightest futures: high-tech, green-tech and clean-tech companies.

He added that the state should emulate San Francisco's approach to global recruiting. San Francisco recently established a trade office in China and already has agreements with eight Asian companies to open offices in the city.

Newsom said the state needs government reform as well. He called for a rainy-day reserve, two-year, pay-as-you-go, results-oriented budget; a reduction in the number of votes needed to pass a state budget; empowering local educators; and using cities and counties to model best practices for the state.

Despite its issues, Desmond-Hellmann reminded the audience that the state has great scientists, great universities and lots of venture capital. Combined with open-minded, intellectually curious people and a diverse population, those attributes become a sort of "secret sauce," she said, that makes the state inherently attractive to innovative people and businesses.

Michael Milken, Chairman, Milken Institute
Susan Desmond-Hellmann, Chancellor, UC San Francisco
Verena Kloos, President, BMW Group DesignworksUSA
Gavin Newsom, San Francisco Mayor; Candidate for Governor
Steve Poizner, California Insurance Commissioner; Candidate for Governor
3:35 pm - 4:35 pm TUE 10/20
California's aging infrastructure is simply not adequate to serve the state's growing population. But major new investments seem unlikely in the current fiscal crunch. Scott Minerd of Guggenheim Partners moderated a panel that focused on how to pay for next-generation infrastructure and the potential role of private investors.

The water shortage demands our attention, said former California Gov. Gray Davis. Doing things the traditional way — moving vast quantities of water from north to south — won't meet our needs, he said, urging more creative thinking. He pointed to an innovative water recycling program in Orange County as a good model to follow.

California State Senate Majority Leader Dean Florez pointed out that private investors are buying water storage capacity. He said we have to make sure, even in difficult times, that the public has a seat at the table when water issues are concerned.

Public pension funds may offer a way to do that. George Diehr of the CalPERS Board of Administration discussed the pension fund's early forays into infrastructure investing and indicated that its role may grow.

In addition to water systems, the panelists touched on high-speed rail, the smart grid, California's ports and health-care IT. They agreed that public-private partnerships (P3s) are needed to meet California's vast needs. The traditional method of financing through municipal bonds won′t get us there, Davis said.

Dale Bonner of the California Business, Transportation and Housing Agency predicted that California "can be the best P3 market on the planet." But he cautioned that we must understand which infrastructure projects will really work under these arrangements and educate the public about the advantages. He thinks that private investors would do a better job of mapping out expenses over the lifetime of a project and that many international investors would love to participate in California.

Davis said he created four centers of innovation based at California's universities when he was governor. He thinks targeted research and education investments can generate jobs and even new industries. Networks of innovative companies have now been linked to those research centers, building on their momentum.

Innovation and infrastructure are related issues, Bonner noted. In a knowledge economy, California is in a battle to attract the best and the brightest. We have to be able to offer those workers a good quality of life and a reasonable commute to attract and retain them.

Scott Minerd, Chief Investment Officer, Guggenheim Partners; Chairman, Milken Institute California Center Advisory Board
Dale Bonner, Secretary, California Business, Transportation and Housing Agency
Gray Davis, Former California Governor; Of Counsel, Loeb & Loeb LLP
George Diehr, Vice President, CalPERS Board of Administration
Dean Florez, Majority Leader of the California Senate
Kevin Klowden, Managing Economist, Milken Institute
4:45 pm - 5:45 pm TUE 10/20