The leak of companies leaving California has become a flood. With the implementation of AB 5, small businesses will close and those close to poverty will be the first to lose their jobs—if they want to work, they will move to Nevada, Arizona, Idaho or Texas—and that will cause of loss of more business, government revenues and jobs.
“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.”
The real problem is that the city of San Fran and the State of California does not care anymore if you stay or leave. With the implementation of AB 5, Sacramento has assured a California recession—and companies no longer have trust or respect for our government. This is an economic disaster in the making.
By Mark Calvey – Senior Reporter, San Francisco Business Times . 1/9/20
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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.
Nobody cares
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.
Outside the Business Times, departures such as McKesson’s have created barely a ripple of news in the Bay Area. According to a Google search, a single story appeared in the San Francisco Chronicle and a version on its web site, though Schwab’s recent headquarters move drew greater attention.
“I hesitate to call it apathy. It’s arrogance,” said Vranich, president of Spectrum Location Solutions. “They think, ‘If McKesson leaves, another company will just take its place.’ ”
‘Eat your heart out, Texas’
Things look different at the highest level of the state, as Gov. Gavin Newsom made clear when he took aim at Texas and Tennessee’s economic development efforts in speaking to a Bay Area Council summit in June.
“I see that CEO Magazine (lists California as the) ‘worst place in America to do business’ and yet our GDP growth outperforms every damn one of those other states they highlight,” Newsom said, citing California’s economic growth averaging 3.8% in the last five years.
“Eat your heart out Texas, Tennessee. They didn’t come close to that,” Newsom said.
“For all the bitching and complaining, I think businesses are doing pretty damn well,” Newsom said, adding that he owns 23 businesses with close to 1,000 employees. “I don’t need folks to start lecturing me on regulations and costs of doing business.”
Newsom acknowledged the need to address quality-of-life issues, such as homelessness and soaring housing costs that are frequent flashpoints for companies seeking to leave.
“I get it. And I understand the stress and travails each and every one of us feels around the rental issues and housing issues and our deep anxiety about what the hell is happening to our state related to the issue of homelessness. It is a disgrace,” Newsom said.
Does it matter?
As Newsom implied, if an exodus of businesses and high-net-worth individuals is indeed underway, it is difficult to see it reflected yet in the state’s economic data. California has added $1 trillion in gross domestic product over the last decade and at more than $3 trillion would rank as the world’s fifth-largest economy.
History is on the side of the optimists. For nearly two centuries, California’s economy has regularly been lifted by the Next Big Thing, from the gold rush to the silver bonanza, agribusiness to semiconductors, apple orchards to Apple iPhones, to robotics, artificial intelligence and big data.
In recent decades it has largely been fueled by an abundance of investment capital. Venture capitalists poured almost half of their money nationally — some $46 billion — into Bay Area companies in 2019. All that money has long fueled a virtuous cycle of financing successful startups that are sold or go public, creating more wealth to invest in the next round of startups.
But VCs are among those seeing the allure of leaving California.
“I frequently hear about investors and entrepreneurs who are leaving California for states that have friendlier tax policies. Who can blame them? They’ve worked hard and taken significant bets over many years and now they need to protect their gains,” said Ryan Gilbert, a serial entrepreneur turned venture capitalist at San Francisco-based Propel Venture Partners.
California’s reliance on personal income taxes to support its budget makes it especially susceptible to economic downturns or the departure of high-income individuals and generators of capital gains. When those revenues shriveled during the last downturn, the state’s budget fell almost $40 billion into the red, forcing major cuts to almost every service.
In a 2015 report, the California Legislative Analyst’s Office said that in 2013 Bay Area residents made up 17 percent of the state population, but represented 36 percent of the state’s income tax.
“Given California’s economic and fiscal reliance on the Bay Area, a key question now arises: when will the Bay Area’s current, technology-fueled growth subside,” the Legislative Analyst’s Office asked in that report.
More recently, even some major tech players are having second thoughts.
“At this point, we’re growing primarily outside of the Bay Area,” Facebook CEO Mark Zuckerberg told employees in October. “The infrastructure here is really, really tapped. The housing prices are way up. The traffic is bad.”
Facebook is far from alone.
“A lot of companies will be moving their people out of here, unless something happens,” Schwab said. “They can move to Nevada or other places with a lower cost of living. That’s really important if you’re raising a family.”
Conaghan, the economic development consultant who met with McKesson, is now working with California to prevent the next big departure.
But some say it’s too late.
Asked whether he had any regrets about his decision to depart California later this year, DeMartini said, “Yes — I regret that I didn’t leave earlier.”
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