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The Cost of Doing Business: Study Ranks Most Expensive Cities in CA for Business

The 17th annual Kosmont-Rose Institute Cost of Doing Business Survey has been released by Claremont McKenna College’s Rose Institute of State & Local Government and the rankings determine which cities in California, as well as the nation, are the most expensive for doing business. The rankings were based on business fees and a variety of tax rates. Larry Kosmont, President and CEO of Kosmont Companies, which partnered on the study, commented that “California puts its own cities in a difficult spot. If a municipality succeeds in attracting a new or expanding firm, that new employer is inevitably squeezed by increasing local fees and the underlying cost of the state’s high tax schedule. The truth is, companies want to be in California. But somewhere a CEO is pondering, ‘how small an office in California can I get away with and still service that market?’ The sales office then goes up in LA or the Bay Area, but the bulk of jobs and back office functions end up in Tennessee or Texas.”

The most expensive cities for business in CA are ranked as follows:

• Berkeley
• Beverly Hills
• Culver City
• Inglewood
• Los Angeles
• Oakland
• San Bernardino
• San Francisco
• Santa Monica

The least expensive cities for business in CA are as follows:

• Apple Valley
• Costa Mesa
• Dos Palos
• Hesperia
• Moorpark
• Roseville
• Sutter Creek
• Unincorporated El Dorado County
• Unincorporated Lake County

Other highlights from the study include:

• California remains an expensive state in which to do business, even after the state sales tax rate dropped by 1% after July 1, 2011.
• Los Angeles County and the Bay Area remain some of the most expensive areas in the state, while San Diego is one of the most affordable for business.
• All of the least expensive cities are located west of the Mississippi River, with five cities in Texas and eight in Washington.
• Seventeen of the twenty least expensive cities are located in states that do not impose income tax, and two are located in states that do not impose sales tax.

 

Guest Feature: Lake Elsinore Councilwoman on Solving CA’s ‘Number One’ Problem

Guest Feature
By Melissa Melendez

Melissa Melendez is Council Member in the City of Lake Elsinore and candidate for the 67th Assembly District

We’re number one!  As the worst state in the Union in which to do business, that is. California has held this embarrassing title for seven years in a row. Rich in natural resources and a labor pool other states can only dream of, Sacramento has yet to figure out that encouraging business growth does not involve squeezing every last dime out of their pockets or whipping up regulations that cost more than the profits their goods and services produce.

Recently, Jack Stewart from the California Manufacturers and Technology Association (CMTA) said it best, “While much of the nation is beginning to show signs of recovery, California is still trying to find the bottom.”

There is far too much uncertainty regarding what new rules, mandates, or taxes are lurking on the horizon for our businesses.

California utility costs have risen, taxes and regulatory burdens increased, yet no one ever asks the most important question to small businesses, the lifeblood of our economy: “How can we help you?”
 
When jobs are scarce, or simply not available, self-employment and start-up businesses become less of a dream and more of a financial necessity for the unemployed.  Subsequently, this creates the small and medium sized businesses that turn the economic engine of California.

When you consider what has happened to our state in the last decade, I don't believe we can really ask, "How did this happen?" The more important question is, "How did we allow this to happen and what must we do to fix it?”
 
It's easy for elected officials to point the finger of blame at the federal government for our situation, citing Wall Street bailouts and never-ending wars as the cause for economic distress. Focusing our attention in all the wrong places, rather than taking the needed steps to cure what ails California, has led us to this pivotal point in history.

A business start-up is an important element of long-term job growth. Rather than cultivate and nurture our entrepreneurs, we have all but abandoned them. California has taxed, regulated and strangled the business community with a never-ending supply of red tape. Far too many businesses say if they could relocate to another state they would.

Sacramento could take a page from the playbook of local municipalities in how to foster growth. Recently, the City of Lake Elsinore voted to waive the licensing fees and some planning fees for their businesses. This move not only exhibits the good faith efforts government should extend to their primary revenue generators, but also provides needed relief to the most important segment of the community: the job creators. The City chose to lessen the burden on its businesses, something Sacramento would be wise to duplicate statewide.

Let’s stop the rhetoric, let’s shift the blame to where it belongs, and get back to business once again.  After all, if the bottom line for our businesses isn't in the black, we can expect California to continue to operate in the red.

LAO Releases its Fiscal Outlook in Highly Anticipated Report; St Faces Deficit of $13 Billion

The state Finance Department and Controller John Chiang have already had their say about the state’s revenue forecast and troubling fiscal outlook and now the Legislative Analyst's Office has released its take on the numbers, which are garnering so much attention because the status of the state’s shortfall will affect the likelihood of dreaded trigger cuts. As a refresher, Chiang reported the state has a gap of $1.5 billion in revenues and soon after the Finance Department said the state was $1.3 billion behind projections. Under the budget, it was estimated that the state would take in $88.5 billion in revenues, but the LAO has concluded revenues will only amount to $84.8 billion, which means the numbers will be $3.7 billion short of the $4 billion officials were hoping to receive in order to close the budget and avoid mid-year cuts. The revenue shortfall is supposed to translate into $2 billion in trigger cuts to various state programs, but while the governor’s administration is now acknowledging that some cuts will be necessary, they are not committing to a precise number and will gather further details come December. On December 15th the Department of Finance will release its final revenue projections, and its report will play a major factor in deciding cuts.

Overall the LAO has posited that the state's deficit will be nearly $13 billion through June 2013. The report concisely states: “The remaining work of eliminating the state's persistent, annual deficit will require more difficult cuts in expenditures and/or increases in revenues.”

In response to the LAO’s projections, Controller Chiang released the following statement:

“Today’s news is no surprise.  Our economy’s sluggish growth means a tax windfall is unlikely, and not a penny of the estimated $4 billion has been collected to date. The Governor and lawmakers were smart to backstop their hopeful budget projections with mid-year cuts, but they may not have gone far enough.  Today’s report tracks with the troublesome pattern we have seen in the State’s receipts and spending, which could mean a cash-flow problem in California’s near future.”

The LAO’s outlook has also reenergized debate about how the state should tackle its deficit, with Democratic leaders calling for tax hikes and Republicans unsurprisingly disagreeing with that assessment and criticizing the shaky budget that Democrats passed on their own. You can read the LAO’s full report here.

Finally, the LAO released the following video to explain the conclusions it reached:

Download Video as MP4

Under Pressure: Controller’s Latest Cash Update Says State Has $1.5 Billion Gap

The latest cash update from the State Controller shows that revenues are once again below projections for the month of October. To be specific, the monthly report covering California's cash balance, receipts and disbursements shows that the state is $810.5 million below projections from the recently passed state budget. Percentage-wise, that is 16.3 percent below expectations. This means that California is now $1.5 billion short for the fiscal year. The report also indicates that the state ended the last fiscal year with a cash deficit of $8.2 billion and the combined current year cash deficit stands at $20.3 billion. John Chiang, the state controller, commented the following about the recent cash figures:

“October's poor revenues capped a very disappointing first four months of the fiscal year. Unless revenues and expenditures begin to track with projections, the State will face increasing cash pressure in the months ahead.”

October’s financial statement can be seen here. A summary analysis is available here.

However, this week the Department of Finance has countered the Controller’s estimates by putting the revenue shortfall at $1.275 billion as opposed to $1.5 billion. The Bee points out that “The nonpartisan Legislative Analyst's Office is expected to release its forecast later this week.”

So what about those trigger cuts? The latest cash update is sure to raise concerns that deeper cuts are all the more likely this winter. But nothing is a given at this point. That being said, if revenues fall as high as $2 billion short of projections, then we could potentially see cuts to higher education, social services, public safety, K-12 schools and community colleges. In recent weeks the Controller has skirted around saying whether or not he thinks the trigger cuts are likely, but he has said that legislators should be looking for alternatives now in preparation. It was revealed recently that Assembly officials believe the state will face a deficit of about $5 billion to $8 billion in the next fiscal year, according to a legislative memo. See more here.

Census Report Covers Decline in Local Govt Revenues during 2009; NLC Calls for Jobs Act

A new report from the U.S. Census Bureau demonstrates the economic impact of the recession with new figures about state and local government revenues. For instance, in 2009 there was a 22.1 percent ($587.5 billion) decrease in revenues in comparison to 2008, according to the 2009 Annual Surveys of State and Local Government Finances, which covers stats on revenues (including taxes), expenditures, debt and assets (cash and security holdings) for state and local governments. State and local governments brought in nearly $2.1 trillion in 2009, and most tax revenue categories saw declines except property tax, which saw a 3.7 percent increase to $424 billion. Here are some key findings from the report:

• “Debt outstanding for state and local governments increased $131.1 billion (5.1 percent) to $2.7 trillion in 2009
• Spending increased 4.6 percent for state and local governments, totaling almost $3.0 trillion in 2009. Education continued to be the largest expense ($850.7 billion), followed by public welfare, which consisted of support of and assistance to needy people ($431.1 billion) and insurance trust ($275.5 billion)
• Revenue from the federal government increased 12.3 percent from $478.0 billion to $536.8 billion between 2008 and 2009
• State and local spending on education comprised more than 33.0 percent of expenditures in nine states (Alabama, Arkansas, Georgia, Kansas, New Jersey, Texas, Vermont, Virginia and West Virginia)
• Unemployment compensation saw an 86.0 percent increase from $35.6 billion in 2008 to $66.2 billion in 2009
• Revenue from individual income taxes decreased 11.3 percent from $304.9 billion to $270.5 billion

You can see more of the report’s findings here.

And speaking of the economy, the National League of Cities is pushing for Congress to pass the President’s jobs act as the unemployment rate remains high at 9 percent, according to the latest figures for the month of October. James E. Mitchell, Jr., Council Member, Charlotte, NC and President of the National League of Cities, released the following statement about the nation’s jobless figures:

“The nation’s cities and towns continue to call on Republicans and Democrats in Congress to set aside their partisan differences and put the country first by passing a jobs plan. The Senate said no to a proposal to save thousands of teacher and first responder jobs in our communities. [And] the Senate rejected a $60 billion infrastructure proposal that would help modernize our roads, rails, airports and waterways while creating thousands of jobs in our communities. 

A plan from Congress to accelerate jobs and economic growth is overdue.  A nine percent unemployment rate is unacceptable to our country and our communities.  We need Congress to say yes to a jobs plan and we need it now.”

Rising Costs Threaten Stockton’s Credit Rating; Downgraded Once Again

In early October we relayed that the city of Stockton’s depleted reserves were a partial reason for the Standard & Poor’s (S&P) decision to downgrade the local government’s credit rating by three notches. At the time, the S&P posited that a persistent structural imbalance continued to exacerbate the city’s weak financial position, and adding to the mix was the projection that tax revenues would fall short of expectations. The downgrade was notable in that Fresno is California’s fifth biggest city and in an update, Stockton’s credit rating now has been downgraded once again for the third time this year. And the S&P also repeated yet again that the city could face another downgrade in the near future.

In an ominous report, Moody’s states that “The city has been resolute to date in addressing its financial difficulties. However, the potential challenges keep mounting and increasing in size." High unemployment, a high foreclosure rate, and the weak economy are all contributing factors to Stockton’s struggles, and as a refresher, the city declared a fiscal emergency back in May. The Stockton Record reports:

“The downgrade moves the city four steps down the scale from where Stockton began the year. The city's credit rating has not reached the level of junk status - still three steps away. ‘The outlook on the city's ratings remain negative,’ Moody's says.”

The negative outlook indicated by Moody’s suggests that future cuts are likely on the table. Taxable pension obligations and lease-revenue bonds have also been downgraded. In response to the drop, Stockton Chief Financial Officer Susan Mayer commented that “It's a challenging fiscal environment for all cities, not just for the city of Stockton.”

Vallejo Climbs Its Way Out of Bankruptcy

After more than three years, Vallejo is finally out of bankruptcy. Council members, residents, law enforcement, and others are breathing a sigh of relief. "I think we're all exhausted but exulted," said City Councilwoman Stephanie Gomes. "It's been a rough road."

With large deficits, expensive police and fire contract, and low revenue (both existing as reserve and coming in from taxpayers), the city was out of options, and declared bankruptcy in May 2008. It is the third municipality to do so in the state’s history, following Orange County in 1994 and the City of Desert Hot Springs in 2001. 

Since filing bankruptcy in 2008, the city has closed fire stations and cut funding to senior centers, libraries, and public works. Sacrifices and hard work have paved the road to financial stability for Vallejo. City staff now put more into their own health insurance, firefighters have lower pension plans, and the fire department no longer has minimum staffing requirements. In hopes of further increasing revenue, Vallejo now has a one-stop permit center and is asking for extra tax money from voters on the ballot November 8, including a one-cent sales tax increase and a medical marijuana tax.

While Vallejo’s bankruptcy story has ultimately been one of success, local officials don’t recommend it: 

“The bankruptcy proceedings cost Vallejo $8 million in legal fees and cast a stigma on the city of 117,000. Real estate agents were required to disclose the city's status to buyers, and national media pointed to Vallejo as a nightmare scenario for cash-strapped cities everywhere.

‘I'd only advise cities to go this route if they have no other options,’ [Assistant City Manager Craig] Whittom said. ‘The money spent on bankruptcy should be spent on providing services to residents.’”

Mayor Osby Davis has also noted that this is a positive shift for residents, who no longer have to deal with the social burden of living in a bankrupted city. Local citizens now look forward to more local jobs and reduced crime rates. 

Stockton Officials Issue a Warning about Possibly Defaulting on Debt

High unemployment numbers and some of the worst real-estate foreclosure rates in the country have rocked the city of Stockton and back in May the city had to declare a fiscal emergency. The local government’s financial position seems to be going from bad to worse, as officials recently announced that due to a shortfall, the city may have to default on redevelopment agency debt issued in 2006. Stockton’s RDA notified the Municipal Securities Rulemaking Board that projected increases in tax increment revenues were likely to miss the mark due to weak property assessments, which means it would be difficult to pay bondholders. The Wall Street Journal reports:

“A local redevelopment agency acknowledged that it is struggling to keep current on $87.7 million of debt it sold in 2006. The city, a former farming center that aspired to become an exurb of the Bay Area, guarantees some of those agency bonds. […] For the current fiscal year which began July 1, the city's budget deficit was $37 million, amounting to about one-fifth of its general fund revenues.”

Real estate values have continued to fall in Stockton and the RDA expects to see a 3.17 percent drop in values for fiscal 2012. A report from Standard & Poor’s comments that “The city has experienced persistent negative economic effects of housing market stress and the recent recession in our view, but the declines in some economic indicators appear to be moderating.” Stockton’s redevelopment agency tax allocation bonds have been put on a list for a negative credit watch, which means that further downgrades could occur. The S&P also cites legislation eliminating redevelopment as a factor that “further deteriorates already weakened credit characteristics.”

The financial troubles of the city’s RDA could have a negative impact on the city’s overall budget as well (despite already being strained) because it could require as much as $6 million from the city's general fund through June 2012. The Wall Street Journal points out that “That's because the redevelopment agency "may no longer have the cash flow" to reimburse the city for some administrative costs, the presentation said. The city also guarantees two of the agency's bond deals, and if the agency can't make its debt payments, the money will come from the general fund, the presentation said.”

Job Growth Sputters in State’s Latest Finance Bulletin; 27,300 Govt Jobs Lost in the Past Yr

The Department of Finance has released a new economic bulletin for the month of October and the overall picture isn’t exactly encouraging. The report reveals that an average of 900 jobs were lost each month from May to August and that the state’s economic recovery lacks any apparent momentum at this point. Year-to-date revenues are $654 million below the expected $19.39 billion and as for those trigger cuts, the report states “In November and December, the Legislative Analyst’s Office and Finance will produce new forecasts of revenue for the 2011-12 fiscal year based on the economic and cash data available at those times. It is these forecasts that will determine whether the “trigger” budget reductions will be implemented.” Here are highlights from the bulletin:

• California lost 8,400 nonfarm jobs in August 2011—the second consecutive month-over-month loss and the fourth loss in six months.
• Only five of the state’s 11 major industry sectors gained jobs in August. After three consecutive month-to-month losses, a strong gain in retail trade employment led the trade, transportation, and utilities sector to add 5,700 jobs. Manufacturing added 1,600 jobs; leisure and hospitality, 1,500; mining and logging, 200; and professional and business services, 100.
• Construction lost 7,200 jobs; financial activities, 4,000; government, 3,600; other services, 1,300; information, 800; and educational and health services, 600.
• From August 2010 to August 2011, nonfarm payroll employment rose by 171,300 (1.2 percent)—the 11th consecutive annual increase.
• Over the year, employment fell by 27,300 in government; 6,600 in financial activities; and 4,200 in other services.
• The number of people unemployed in California rose 8,800, but was down 82,800 compared with August of last year.

For the full report, see here.

A Leg Up on the Competition: LA Ordinance to Favor Local Businesses for City Contracts

On a 12-0 vote, the Los Angeles City Council recently voted to give local businesses an advantage when it comes to securing lucrative contracts with the city. Under the ordinance, California companies would have an 8 percent advantage in their bid for city business. In addition, a 5 percent advantage would go toward companies that subcontract with Los Angeles-based firms. Known as the Local Preference Ordinance, it will apply to city projects worth more than $150,000. The council hopes that the change will boost the local company by giving local businesses a leg up on the competition. Councilman Paul Krekorian and Councilman Bernard C. Parks introduced the measure almost a year ago. Companies will need at least 50 full-time employees (or half their total employees or their headquarters in Los Angeles County) in order to qualify for the preferential treatment. The LA Times reports:

“Mayor Villaraigosa said in a statement after the vote that the program ‘helps level the playing field, making it possible for local businesses to compete more effectively for city government contracts.’ The cost of doing business in Los Angeles is about 10% higher than in other cities. About 85% of the money Los Angeles spends on contracts goes to businesses outside the city, according to an analysis by the mayor's office covering the 2008-09 fiscal year. The city does not know how much it spends each year on contracts. Los Angeles spent more than $2.4 billion last fiscal year, the mayor's office said, but that doesn't include almost 20 departments that have not provided data.”

The mayor is arguing the ordinance could create as many as 10,000 jobs. The city also hopes to benefit from more revenue in the long term through sales, property and other taxes. There are concerns that businesses in nearby cities like Pasadena and Glendale will suffer under the city’s more parochial outlook.