Your company might be next–to Leave California

Guv Newsom tells us the economy in California is good.  Guess, he is not reading the paper or looking at the statistics.  People are fleeing the State—in 2018 a net out migration of 203,000.  Major firms are leaving the State–=many from the city his mismanaged for eight years as Mayor, San Fran.  Oracle just moved its yearly convention for 80,000 people from San Fran to Las Vegas.  Does he not see the coming crisis?

“In the fall of 2016, a top San Francisco economic development executive took a walk down Market Street to pay a courtesy call on McKesson Corp. The longtime San Francisco corporate giant had recently announced plans to sell and lease back its headquarters, and Dennis Conaghan wondered what it meant for its future in the city. Inside, his worst fears were quickly realized: The company had one foot out the door.

“They said, ‘We don’t need to be here,’” Conaghan said, recalling a lengthy list of complaints that ranged from the high cost of doing business in California to homeless people on their doorstep to neglect from city officials. “They were already moving people to Texas.”

In this newsletter I am reporting on another Bay Area firm moving out—to Florida.  Then you have the disaster for the poor, the young and the elderly in the gig economy.  AB 5 is going after music festivals the deaf community, AMWAY, truckers, rider share drivers—possibly 2,000,000 Californians.

To me the big question is will the GOP make this an issue?  Will they reach out to the affected and the afflicted by government?  The November election is important—it could be the last time the Republican Party in California is relevant. 

Your company might be next

The California exodus could get worse — and no one seems to have a plan to stop it

Ryan Gilbert, general partner at Propel Venture Partners, says he frequently hears from investors and entrepreneurs leaving the state. “Who can blame them,” he says.

Is Your Company Next?

 

By Mark Calvey  – Senior Reporter, San Francisco Business Times, 1/9/20 

TO SEE COMPLETE ARTICLE CLICK ON HEADLINE

In the fall of 2016, a top San Francisco economic development executive took a walk down Market Street to pay a courtesy call on McKesson Corp. The longtime San Francisco corporate giant had recently announced plans to sell and lease back its headquarters, and Dennis Conaghan wondered what it meant for its future in the city. Inside, his worst fears were quickly realized: The company had one foot out the door.

“They said, ‘We don’t need to be here,’” Conaghan said, recalling a lengthy list of complaints that ranged from the high cost of doing business in California to homeless people on their doorstep to neglect from city officials. “They were already moving people to Texas.”

Last year the rest of the company joined them, with San Francisco’s largest Fortune 500 company relocating its corporate headquarters to suburban Dallas. The 80,000-person company, which moved to San Francisco in 1970, had more than 1,300 employees here when it announced its departure.

McKesson is the largest Bay Area company recently to move its headquarters out of the state, but it’s certainly got lots of company, from fellow Fortune 500 companies Charles Schwab Corp. and Core-Mark Holding Co. to privately held engineering giant Bechtel Corp. to hundreds of smaller companies and startups whose departures have largely flown far under the radar. It is an exodus that shows every sign of accelerating.

More than civic pride and bragging rights are at stake for California and the Bay Area. Not only do such departures erode the region’s jobs base, they threaten large swaths of revenue from state taxes on high executive salaries and large capital gains windfalls.

California is extraordinarily dependent on taxes paid by its wealthiest residents. In 2016, state figures show, the top 1% of taxpayers generated nearly 46% of the state’s tax revenue on personal incomes, including from capital gains.

Many factors cited by companies and executives looking to leave the state are familiar: As well as the nation’s highest state income taxes, California has plentiful business regulations and aggressive bureaucracies at both state and local levels. The cost of living has skyrocketed, particularly for housing. Social ills like traffic and homelessness are intensifying.

California raised state taxes on high incomes from 10.3% to as much as 13.3% in 2012, a move many advisers say piqued clients’ interest in leaving. Federal tax law passed in 2017 hits high-earning California executives and entrepreneurs with almost surgical precision. San Francisco voters in 2018 approved two new taxes targeted at larger businesses. At both the state and city level, other proposed tax increases are being aimed at future ballots.

Efforts were underway to qualify a measure for the November 2020 state ballot that would have asked voters to raise California’s top rate to 16.3%. Supporters are now expected to wait until 2022 to pursue the initiative.

Newly elected San Francisco Supervisor Dean Preston said that he’d like to put a new business tax on the city ballot in 2020 to put the city on the road to free public transit. It would be modeled on Prop. C, a November 2018 city tax on business revenue above $50 million to fund anti-homelessness efforts.

“Everyone said it was impossible with Prop. C, that you can’t tax these big companies. They’re all going to go out of business,” Preston told voters ahead of the November 2019 election. “None of them are going out of business. They’re paying their tax. None of them are leaving.”

Companies and their advisers, however, say many are now reaching the tipping point, helped along by the lavish incentive packages dangled by economic development officials from Texas, Arizona, Tennessee and elsewhere. 

“There’s more momentum right now in terms of people looking at leaving California,” said Jeff Pera, managing partner of Northern California at accounting firm Marcum in San Francisco, whose client base is mainly midsized businesses and their owners. “They never thought of Texas or Nevada, but when they put pencil to paper … it’s like, ‘Whoa, where’s the downside here?’”

But on a more basic level, the exodus is also being fueled by a widely held perception among California businesses that their interests are rarely considered or listened to by state and local officials. A frequent refrain is that nobody cares whether they stay or go. And to be sure, the California and Bay Area economies remain the envy of the world.

“We have conveyed to people that we don’t care, and I think that is a very dangerous conveyance. I’ve heard that myself all throughout the state,” Barry Broome, president and CEO of the Greater Sacramento Economic Council, told a conference of real estate professionals in March.

“I’ve had companies say, ‘Why do you care if we leave, because nobody else cares?’ I’ve heard that a lot,” Broome said.

Bay Area business leaders are bracing for further departures.

“We’ve seen a couple, and we’ll probably see a few more over time,” said Jim Wunderman, CEO of the Bay Area Council, a business advocacy group. “You would expect that, because there’s just tremendous pressure.” 

Outward bound

Site selection consultant Joseph Vranich has spent the past 12 years helping companies relocate, often recommending they leave California. In 2018, he took his own advice: He moved his company, Spectrum Location Solutions, to Pennsylvania.

In a November 2019 report, Vranich said about 660 California companies had moved 765 facilities out of state since the start of 2018, and the Bay Area was among the biggest losers. That report followed an earlier one that showed California had 1,800 relocations out of state, or so-called “disinvestment events,” in 2016 alone and 13,000 from 2008 to 2016. That number includes headquarters relocations and decisions to open operations elsewhere rather than expand in California.

In the latest report, covering 2018 and 2019 until November, Spectrum found that three Bay Area counties hit the top five for disinvestment events: San Francisco came in second place, with 35; Santa Clara was third, with 24; and San Mateo was fifth, with 15.

Other major companies may be keeping their headquarters in the Bay Area but are gradually shifting their employment base elsewhere.

Before announcing Nov. 25 it would move its headquarters to the Dallas area, Charles Schwab had created thousands of jobs in Colorado and Texas, while moving hundreds of back-office jobs out of San Francisco.

Founder Chuck Schwab has said “the costs of doing business here are so much higher than some other place.”

Transferring employees out of the Bay Area is seen as a way to hold on to those workers. “When we looked at our business for the next couple of years, we knew our employees want to be able to start families and buy homes without commuting for hours,” said Kyle Hency, the co-founder of Chubbies Shorts Co., who announced in September that his San Francisco company would move most of its 65 employees and headquarters to Austin, Texas.

The email to Chubbies’ customers sharing the news carried the subject line: “The sun is setting on SF.”

Oracle Corp., the Redwood Shores software giant that hosted its OpenWorld convention in San Francisco for 20 years, announced in December that it is moving the event to Las Vegas. Tourism officials said the company cited the city’s lack of low-cost hotel rooms and “poor street conditions,” believed to be a reference to increased homelessness and public hygiene issues.

It’s not just businesses heading for the exit. State and federal statistics are starting to reflect an exodus of residents from California and the Bay Area.

According to figures released in December by the California Department of Finance, the state’s population increased just 0.35% in the year ending July 1, 2019, its slowest annual growth rate since 1900. San Francisco’s growth was 0.31% and Santa Clara County’s 0.26%. Overall, six of the Bay Area’s nine counties grew slower than the state, with three showing a population decrease during the year.

Meanwhile, national and state population estimates released last month by the U.S. Census Bureau said California lost a net 129,386 residents in the year ending July 1. While the state has been shedding residents for the last decade, in-migration from foreign countries had more than made up for departures.

It no longer does. Last year’s net loss was the second in a row, and a sharp increase from the net 38,271 residents lost in the year ending July 1, 2018.

Different census data shows that Texas was the most popular destination, with 86,200 Californians moving there in 2018.

Nearly half of the respondents to a Bay Area Council survey in 2019 said they were considering leaving the Bay Area within the next three years.

The eyes of Texas are upon you

Texas officials were able to celebrate one of their biggest recent victories in August, when San Francisco-based Uber chose downtown Dallas for a major hub that will eventually employ 3,000 people and have a $400 million annual payroll. 

Uber received $36 million in state government incentives for what is billed as a “new U.S. general and administrative hub.”

Uber denied speculation that its headquarters is heading to Dallas.

“We are expanding our presence in Dallas … but we are not moving our corporate headquarters there, and we don’t have plans to,” an Uber spokesman said.

Fueling the speculation is the fact that the state of Texas is providing Uber with one of its largest awards in the past decade. Part of the Texas playbook is to offer big incentives for a regional office that eventually becomes the corporate headquarters. That was the story with McKesson.

Texas has set its sights beyond just Uber, Schwab and McKesson.

“What we think we provide is a value proposition — when you’re ready to scale, when you need space fast and when you need talent fast, when you’re making sure your revenue is tripling or quadrupling as your investors expect you to do, Texas is a good place for you to do that,” said Robert Allen, president and CEO of the Texas Economic Development Corp., while on a recruiting trip to the Bay Area.

In Texas, Allen and his team work with economic development officials at the local level in crafting incentives to lure companies to move or expand in the Lone Star State.

Such efforts make even some of the Bay Area’s smaller high-growth companies targets for economic recruiters.

“Texas is definitely the most aggressive,” said Thomas Sponholtz, CEO of San Francisco-based Unison, a company that buys stakes in Americans’ home equity. The company grew 300 percent in 2018.

With just 200 employees, Unison might not seem an economic development prize, and Sponholtz said he has no plans to move the 16-year-old company yet. Still, he rattles off a list of states that have visited him, hoping to change his mind: Idaho, Utah, Colorado and Arizona, in addition to Texas. 

“They want to bring innovation. It is not just jobs. Everybody is jealous, globally, about the innovation in San Francisco and the Bay Area.” 

The fight for talent

Recruiters pitching California companies have also upped their game, touting their communities’ hip neighborhoods, pro sports teams and cultural amenities to lure the talent companies require before moving to a new city.

“If a company is going to make the long-term decision to move from California or New York or wherever to Plano, they don’t want to lose their people,” said Plano Mayor Harry LaRosiliere, who counts Toyota’s 2014 North American headquarters move from California as one of his city’s biggest wins. “It used to be the first conversation was with a CEO, CFO and a real estate person. Now it’s the chief human resources officer and their team along with the financial people, because the human capital is way more costly than the real estate.”

The availability of tech talent is also a high priority for Nashville as it courts Redwood Shores-based tech giant Oracle for a tech hub that would create 1,000 jobs.

“Workforce development is critical,” Tennessee Gov. Bill Lee told the San Francisco Business Times, while on a recruiting trip to the Bay Area. “We are beginning to attract technology-related companies fairly consistently to our region, which means we have to be creating technologically skilled workers. We are focusing on that in our education system.

“It’s a big issue. It’s something we talk about every day: Our commitment to these companies to provide them the workers they need to fill the jobs they’ll be creating in the future,” Lee said.

Advisers to California business owners and executives say such accommodation stands in sharp contrast to what they hear closer to home.

“If you heard some of the words I’ve heard them say about California, they are mad. They feel they have no voice in the state,” Marcum’s Pera said.

That can make companies receptive when the recruiters from elsewhere come calling.

“With the companies that we’ve spoken with, they say things like, ‘We tried to call our state rep and they’re not calling us back.’ There is an appetite to leave because of the lack of response they’re getting at the state level,” said Jessica Heer, senior vice president of talent attraction and leadership for the Dallas Regional Chamber.

“Meanwhile, we’re knocking on the door saying, ‘Hey, we’ve got this lower cost. Your talent can live in the bigger house. The American Dream can happen in the  Dallas-Fort Worth region.” 

Jim DeMartini, a third-generation Californian farmer, business owner and Stanislaus County supervisor, is among the disgruntled who has voiced his concerns about the burdens California places on businesses to his representatives in Sacramento.

“There’s not much they can do. We’re a one-party state,” said DeMartini, a Republican. After acquiring commercial properties in five Nevada cities, DeMartini said he is leaving the state in 2020 as soon as his term expires

About Stephen Frank

Stephen Frank is the publisher and editor of California Political News and Views. He speaks all over California and appears as a guest on several radio shows each week. He has also served as a guest host on radio talk shows. He is a fulltime political consultant.

Comments

  1. ExCaliExpat says

    Amgen, “expanding” in Florida….
    That’s corporate IR speak for “we’re making plans to GTFOOH but don’t want to spook the natives”

  2. John Steele says

    The CA GOP is clueless and plain stupid. This a golden opportunity and they won’t lift a finger to take advantage of it

  3. You are right John. I raised hell with them for not supporting one or both of the RECALL NEWSOM petitions. One just dropped out for lack of support.

  4. Gotta Gedada Displace says

    ““None of them are going out of business. They’re paying their tax. None of them are leaving.”……Dean Preston
    – The new “Baghdad Bob” for CA’s own tyrant, Gavin Newsom

  5. The problems are the lazy voters and crooked Democrats. Both do not realize they are killing themselves slowly. For example, the gas taxes (like Prop 6) that keep getting passed by the Democrats hurt the poor (the very people they say they are trying to help). Who does it hurt more, someone making $25k or someone making $100k? But the Democrat’s reasoning is they are raising money to help make everything “greener” and provide better transportation for the poor. What a load of garbage. No one has yet to answer where the “green” vehicles are getting their electricity from. Solar Power, yeah right. Nuclear Power? No way says the environmentalist. In addition, CA AG Javier Becerra mislabel the repeal efforts by removing the “Gas Tax Repeal Initiative” from the ballot and changed it to: “Prop 6: Eliminates Certain Road Repair and Transportation Funding.” Talk about being a crook. Now Gov Nuisance is talking about using the gas tax money for other project. Yet each time they pass these taxes and not fixing infrastructures, it is hurting their voters.
    In addition, we have these rich Democrat supporters who keep giving money to Democrat politicians that want to raise taxes. People like Tom Steyers and Eli Broad state how the “rich” should pay their fair share but no one is stopping them from giving away their billions or paying more in taxes. Tell me what government agency is efficiently run so the citizens truly benefit from it? The DMV? The VA? Medical? Medicaid? Social Security? None. But these facts are lost on the voters in CA and they go with whatever the Democrats want.

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