State Woes Temper Optimism

Survey of Area Executives Finds Most Expect Growth

By KATE BERRY

Staff Reporter

Southern California executives are optimistic the U.S. economy will show improvement next year, according to a Business Journal survey, and nearly half of the companies queried plan to increase hiring, albeit by modest amounts, in 2004.

Behind the strained optimism, though, is growing anger directed at state government for failing to rein in costs for workers’ compensation insurance, taxes and regulations that threaten to cut into corporate profits, according to the survey, which was conducted for the Business Journal by the accounting firm Deloitte & Touche.

The responses came before the Commerce Department reported that gross domestic product grew at a 7.2 percent clip in the third quarter the fastest growth rate since the first quarter of 1984, when the economy expanded at a 9 percent pace.

Few respondents saw such a dramatic rebound from the dismal first half of the year. The fault may lie in the fact that nearly 30 percent of the executives surveyed came from the downtrodden manufacturing sector, which is struggling with low-cost competition from China and other developing countries.

Still, executives in a wide range of industries from commercial aviation to office construction to consumer products are cautious about an overall turnaround.

“The first seven months of this year were hell in my business,” said Robert Solomon, president of Applause Inc., a Woodland Hills maker of plush toys and gift items. Solomon rattled off a laundry list of problems, beginning with last year’s bleak winter on the East Coast, the war in Iraq and the SARS outbreak, which made it impossible to travel to Asia to develop new products.

“My company had to make up in 60 days everything we didn’t do in the prior six months, including products for ‘Cat in the Hat’ and ‘Brother Bear,'” he said, referring to merchandise from two movie releases. “I don’t think it could get worse even though we’ve done everything we can to make it a flat year.”

Threat of leaving

Tony Buzzelli, regional managing partner at Deloitte & Touche, characterized the current business climate as one in which executives are “appropriately optimistic” but still holding back on major hiring or capital spending.

“People can see through the rear-view mirror what happened in Northern California a short time ago,” he said, referring to the dot-com meltdown. “No one wants to go through the pain of restructuring so they would rather put pressure on job creation in the short term and wait for long-term stability.”

A common refrain among executives surveyed was the prospect of relocating or moving out of state. A few said that if given a chance, they would leave California. Others continue to outsource operations to other states.

About 16 percent of L.A. County executives surveyed said they plan to relocate their business next year. Of those, 63 percent plan to move out of California.

In addition, 44 percent of executives said that the high cost of living in Southern California made it tough for the area to attract and retain businesses. In Orange County, where a separate survey was conducted (along with San Diego County), the cost of living was cited by 70 percent of respondents. Generally, the responses were similar, although Orange County executives were significantly more optimistic than their Los Angeles counterparts about an improving economy in 2004.

Dick Kreidel, president of Adams Rite Manufacturing Co. in Pomona, a maker of doors and locks, said he has been moving operations to China and Taiwan in the past year because of skyrocketing workers’ compensation insurance. Family-owned Adams Rite has been in Southern California for 108 years.

“We’ve had huge double-digit increases in workers’ compensation in the last three years even though our safety record has improved,” he said. “It’s horrible. We don’t want to shift jobs to Asia but we don’t have much choice.”

Richard Greenwood, president of Certified Alloy Products Inc. in Long Beach, a maker of alloys for the aerospace industry, said rising costs aren’t as much of a concern compared to the general slump in the industry.

“Frankly, businesses that provide services to the commercial aviation industry have really been affected by the downturn,” he said.

Among the survey findings of L.A. County executives:

> 93 percent said the high cost of workers’ compensation was the biggest financial challenge, while 64 percent said state and local regulations made it tough to remain competitive.

> The high cost of health insurance was considered the biggest challenge in 2004 (cited by 60 percent of respondents) followed by maintaining and growing market share (48 percent).

> Nearly seven out of 10 respondents said they expect an increase in sales this year, with 26 percent forecasting up to a 5 percent increase and 22 percent expecting a more than 10 percent increase.

> Forty four percent said they expect to boost staffing levels in 2004, but 73 percent of those said that the increase would be limited to five percent of current levels.

> About a quarter said that their businesses had been impacted by the recent accounting scandals and corporate governance legislation. Of those, 83 percent said they are spending more money to comply with the new regulations.

‘Corrupt thugs’

Generally, executives complained about a lack of political will to fix problems in California. Many pointed to an unfriendly business climate fostered by the state Legislature that appears unwilling to rein in spiraling costs.

A sampling of anonymous responses to questions from the Business Journal/Deloitte survey:

> “Workers’ compensation costs will drive us out of California if it is not brought under control.”

> “I am scared to death about tax increases for companies.”

> “Stop the corrupt thugs running the state.”

> “California’s state Legislature is doing everything possible to make California uncompetitive in relation to other states and countries.”

> “My company plans to shift 80 percent of its operations out of California within two years.”

> “Trains, subways and mass transit must increase if businesses are to grow.”

Still, executives said there are many advantages to operating a business in Los Angeles. Companies have access to a broad customer base and the quality of life remains high. In addition, Los Angeles is a center of international trade with a talented labor force and the benefits of many nearby colleges and universities.

Many lamented that the biggest problems health care costs and workers’ compensation insurance are issues beyond any one company’s control.

“It’s the most worrisome thing. Workers’ compensation is up 40 percent to 50 percent for no reason whatsoever,” said Bob Myerson, chairman of Ben Myerson Candy Co. in Sherman Oaks, which has between 500 and 600 employees.

Myerson said he has written letters to state legislators but doesn’t expect changes any time soon. “This is something that really sinks small businesses, which is why so many are moving out of state to Nevada.”

The Business Journal/Deloitte survey was sent in September and October to 1,800 companies in Los Angeles County and had a 13 percent response rate.