The California economy has staying power. Despite its highly publicized budget problems and high unemployment rate, California continues to attract new business and envious amounts of venture capital. According to the Center for Continuing Study of the California Economy (CCSCE) in Palo Alto, California's posted GDP growth is still slightly more than the national average and is increasing at an annual rate of about 2.7 percent.
California is typically the leader or a close second when it comes to hauling in federal funding. Last year, more than $44.5 billion in U.S. government contracts flowed into the state, much of it targeted for high-tech research and development. Food products are also purchased by various federal agencies, including the military for its commissaries. The University of California received more than $2 billion in federal funding in 2007 to carry out research for the Department of Energy, the National Institutes of Health, NASA, the U.S. Army, and other government entities.
Even in this uncertain global economy, California has a strong, diverse economic foundation and continues to be a market leader for high-growth industries, such as biotech, electronics, telecommunications, and aerospace. Whether California can exceed its projected 2.7 percent growth rate will depend on the overall performance of high-tech sectors, the vitality of foreign trade, and the tourism and entertainment sectors.
Regional Performance
CCSCE projects that California will add about 2.3 million jobs between 2007 and 2017. This represents an overall job increase of 13.3 percent, which will outpace the nation's projected gain of 10.6 percent. Much of this growth will be located in three sprawling MSAs along the California coast - the San Francisco Bay Area, Los Angeles, and San Diego, which already account for 75 percent of the state's economy.
For the last two years, the Bay Area economy has rebounded nicely and has led the state in job growth. Above-average job growth is predicted for 2007-2017, with the strongest gains expected in tech-related fields and venture capital funding.
The Los Angeles Basin has shown the steadiest job growth in recent years. More than 90,000 new jobs per year are expected to be added over the next decade, led by foreign trade, professional services, and entertainment and tourism. The Los Angeles Economic Development Corporation (LAEDC) indicates there has been a dramatic increase in exports out of the Los Angeles Customs District. "The total value of two-way international trade handled at the local Customs District in 2008 should increase by 5 percent to a new record level of $367 billion," indicates Jack Kyser, LAEDC's chief economist and senior vice president.
Anchored by a diverse economy, San Diego has been a dependable economic performer for decades. The San Diego region is projected to add about 25,000 jobs annually through 2017. Experts forecast the region will lead California in job growth, with a 17.2 percent increase in jobs from 2007 through 2017.
San Diego's economic strength comes from its high-tech clusters and its proximity to Mexico (trade and maquiladora activity). San Diego is a leading center for biotechnology, communications, and software development. The city is home to more than 500 biomedical companies. San Diego's companies and research institutes received $892 million in National Institutes of Health funding in 2007. In September 2008, the National Institutes of Health awarded nearly $180 million in grants to the Burnham Institute for Medical Research and Scripps Research Institute for advanced disease research.
"If 65 percent of that money stays in San Diego, that's $120 million, which comes down to an enormous number of jobs," states Joseph Panetta, director of Biocom, the regional biotechnology industry association. "In terms of funding for research, it is the kind of money that any one company would have an enormously difficult time raising by itself right now."
High Tech a Key Driver
AeA, the largest technology trade association in the United States, recently announced California's high-tech industries added 21,400 net jobs in 2006, bringing the tech industry total to 940,700 - a 2 percent increase over the previous year. The report found that California continues to lead the nation in most high-tech industry metrics. California's tech workers had the highest average wage at $101,200. Venture capital investments increased 8 percent to $13.8 billion in 2007 - nearly 50 percent of all venture capital in the country.
More than one quarter of all U.S. biotech firms have operations in California and collectively earn 53 percent of national biotech revenues. Venture capital is particularly strong in the state, especially for the rapidly advancing nanotechnology and clean technology industries.
Other high-growth high-tech industries in California are advanced manufacturing, aerospace, software, telecommunications, automotive, energy, geospatial technology, healthcare, and information technology - all industries that are vital to the growth and productivity of the U.S. economy.
"The people and leaders of California - and Silicon Valley in particular - continue to find new ways to innovate and new industries to develop," says Deirdre Hanford, chairperson of the AeA board of directors and a senior vice president at Synopsys. "However, maintaining the Valley as the preeminent high-tech hub in the state, the country, and the world will depend on a number of variables. These include maximizing the skills of a diverse work force, improving the quality of our education system, and investing in research and new technologies, such as green technology."
Enterprise Zones
California's Enterprise Zone (EZ) program was established in 1984 to stimulate economic growth in depressed areas and create new jobs through special state and local incentives that encourage business start-ups and expansions in these areas - a win/win for the state and the private sector (especially in the current economy). Enterprise Zones have created thousands of new jobs and infused millions of dollars into local economies. According to the California Department of Housing and Community Development, from 1990 to 2000 Enterprise Zones have shown the following impressive gains:
• Poverty rates declined 7.35 percent more than in the rest of the state.
• Unemployment rates declined 1.2 percent more than in the rest of the state.
• Household incomes increased 7.1 percent more than in the rest of the state.
• Wage and salary income increased 3.5 percent more than in the rest of the state.
There are currently 42 EZs in California, each with an effective lifetime of 15 years. While all EZs have similar goals for improving the economic vitality of their communities, each one is unique in the local incentives and special assistance it provides to businesses interested in locating or expanding within its boundaries. In January 2008, Governor Arnold Schwarzenegger announced the conditional designation of eight additional EZs, which will replace eight zones that are expiring over the next several months.
Businesses within EZs are eligible for substantial tax credits and benefits. These include:
• Tax credits of $37,440 for each qualified employee hired, and
• Sales tax credits on purchases of $20 million per year of qualified machinery and machinery parts.
• Certain depreciable property can be expensed up front.
• Lenders to zone businesses may receive net interest deductions.
• Unused tax credits can be applied to future tax years
• EZ companies can earn preference points on state contracts.
• Up to 100 percent of net operating loss (NOL) can be carried forward for up to 15 years.
Other California Incentives
Companies don't have to just locate in EZs to receive attractive incentives. A variety of incentives can be customized to meet the needs of individual companies, depending on the resources and motivation of local, state, and federal agencies, economic development corporations, and nonprofit organizations. For example, Tesla Motors, a Bay Area car manufacturer, was planning on building a new assembly plant for electric cars in Albuquerque, New Mexico. To keep this valuable 1,000-job expansion in California, Governor Arnold Schwarzenegger and Treasurer Bill Lockyer provided a highly competitive incentive package, which included waiving the sales tax on $100 million worth of equipment. Now Tesla Motors has narrowed its choice down to three locations - all of them in California.
Other tax incentives include a 5 percent partial sales or use tax exemption, in-lieu sales or use tax refund, and R&D tax credits (up to 11 percent credit for qualified research expenses and up to 24 percent for basic research payments to outside companies) - the highest R&D tax credit in the nation.
Net operating loss carryover allows businesses to carry a loss forward to the next year in order to offset income in the following year. New businesses can carry over 100 percent of their losses for eight years if the loss is in their first year of operation, 100 percent over seven years if the loss is in the second year of operation, and 100 percent over six years if the loss is in the third year of operation.
Financing assistance is available for pollution-control and hazardous-waste-reduction expenses. And California's Small Business Loan Program differentiates itself from the U.S. SBA programs by providing a niche in guarantee financing on revolving lines of credit, small loans, and agricultural loans. The California Capital Access Program (CalCAP) encourages banks to make loans to small businesses. The California Treasurer's Office, through the California Pollution Control Financing Authority (CPCFA), will also provide "loan loss" guaranty accounts to participating banks that make loans to banks with higher-than-normal risks.
The California Export Finance Office (CEFO) helps small and medium-sized California companies finance their export sales by providing working capital loan guarantees to financial institutions. CEFO will cover up to 90 percent of an export loan, allowing for a maximum guarantee of $750,000 and a loan of $833,000. Through co-guarantee agreements with both the U.S. Small Business Administration and The Export Import Bank of the United States, CEFO can double its guarantee capacity to provide the exporter with a guaranteed loan of up to $1.6 million. CEFO has the authority to administer their loans, guarantees, and insurance products for California companies.
The Golden State Capital Network (GSCN) specializes in funding entrepreneurial ventures, which often cannot meet the lending requirements of most financial institutions. GSCN connects start-up companies with interested investors who are looking for opportunities, with a focus on northern California and underserved rural areas of the state.
Technology and innovation grant programs are available through the California Technology Investment Partnership (CalTIP). These grants facilitate the creation of new high-tech businesses in California. CalTIP is supported by its nonprofit affiliates and Regional Technology Alliances (RTAs) throughout the state. Similar programs specific to the manufacturing, aerospace, rural e-commerce, and next-generation Internet industries are also available.
Still the Promised Land
California is well positioned to maintain its role as an innovation leader and economic powerhouse. Its key professional and high-tech industries have some of the best growth numbers in the country and are projected to outpace national averages over the next decade.
"Job growth will be led by computer, management, architectural, and Internet-related services," comments Stephen Levy, director and senior economist for the CCSCE in Palo Alto. "More than 500,000 jobs will be added in this sector, and many industries have average wages above $100,000."
With the weaker U.S. dollar, foreign trade will also continue to grow. Shipping and receiving at bustling California ports are at an all-time high. California is also the country's leading center for Pacific Rim trade and for distributing those goods throughout the United States.
"California holds a 20 percent share of the nation's major high-tech industry production and jobs," adds Levy. "While job levels have declined overall in the state and the nation, rising production and exports create jobs in other sectors. If there is to be a new `industry x' with substantial growth, it can come from emerging ventures in alternative energy, biotech, and Internet-related services," he concludes.
All this adds up to retaining the allure of California as the "promised land."
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