KEY ISSUES FACING CALIFORNIA

Transcription

1 KEY ISSUES FACING CALIFORNIA The California economy is in a period of strong economic growth. The 400,000+ jobs added in 1997 cap three consecutive years of robust job and income growth. The findings in Section 5 suggest that California firms and workers are well placed to participate in the leading sectors of the 21 st century economy. California should regain its traditional role as a growth leader in the U.S. economy in the coming years. The economic trends of the past three years have erased two concerns that were voiced often in the early 1990s. California remains an attractive location for growth industries. California is a center of innovation and leadership in many highly competitive world growth sectors like motion pictures, multimedia, Internet tools, semiconductor equipment manufacturing, and many other sectors that draw on the technological, design, and creative talents of California firms and workers. California can prosper without high defense procurement spending. California s economy has absorbed substantial cuts in defense related manufacturing and has re-emerged as a manufacturing job leader. Each year CCSCE reminds readers that abundant opportunities do not mean guaranteed success. In this section each year CCSCE discusses some of the major public policy challenges facing California in securing prosperity for the state s workers and their families. Three challenges will be directly addressed by business, community, and public policy leaders in ) A rising tide is still not lifting all boats. In 1998 the state s attention will move beyond welfare reform to address the next step challenges facing working poor families in escaping from poverty. This will present an opportunity to focus on comprehensive and broad based approaches to developing a workforce preparation strategy for California a strategy that simultaneously addresses escaping from poverty, middle class wage stagnation and job insecurity, and shortages in the number of highly skilled workers. 2) The impacts of growth will become a major policy issue in Job growth is already leading to increased congestion and escalating housing costs in areas like Silicon Valley. As job growth continues and spreads, 6-2

2 more communities will feel the negative side of economic prosperity. On the other hand a high quality of life is one of California s major attractions for new firms and industries. CCSCE believes that 1998 will bring renewed attention to the connection between job growth and quality of life pressures and will reopen the questions of how to manage the substantial growth ahead for the state. 3) Californians will continue to push for development of a long term economic strategy. More budgetary resources will bring more options for investing in California s future. Yet there is still no basic agreement on the most appropriate or effective public policy role in creating the foundations for private sector economic growth. Challenge One A Rising Tide is Not Lifting All Boats California, like many other states, faces a labor market paradox. Many workers in low and middle skill jobs are not experiencing rising wages. Yet their ranks will soon be increased by the entry of former welfare recipients. On the other hand California firms talk of serious labor market shortage but these are almost always in positions requiring experience and technical training. It is too much to expect existing low skilled workers to fill these shortages immediately. How can California develop a workforce preparation strategy that addresses these two different problems simultaneously? California s Multiple Workforce Challenges: Why a Universal Workforce Preparation Strategy is Needed Four current trends symbolize California s challenges in developing new workforce preparation strategies and programs: In 1997 California developed state rules and programs to move welfare recipients into the workforce. Despite recent caseload declines, there are more than 500,000 adult welfare recipients in California who must find jobs or eventually face reduced welfare support. The first step for most welfare recipients will be a low paying entry level job in competition with millions of Californians seeking similar jobs. There are approximately 1 million California workers who meet the strictest definition of working poor. These workers are doing everything that the new laws require of welfare recipients yet they live in households with incomes below the poverty level. 6-3

3 The first step out of welfare for most recipients will be to become members of the working poor. Working poor families have seen economic recovery increase the income disparity between themselves and more highly skilled workers. California s business leaders are calling for increases in the number of highly skilled workers. It is in the high skilled occupations that employers have difficulty filling available jobs. Moreover, California s economy is anchored by industries that depend on technological leadership for competitive advantage. It is too much to expect that welfare recipients and existing entry level workers can fill immediate high skill job openings. These shortages, which can eventually threaten California s technological leadership, must be approached with a different set of strategies. Most Californians work in jobs that require somewhere between entry level skills and highly technical training. Three years of strong income growth has brought some increase in living standards for these workers and their families. Yet, even in 1998 many in the middle have seen two decades of wage stagnation, increasing pressures and changes in their work life. Including the middle class in California s workforce preparation strategy is very important for several reasons The middle class is a target for welfare recipients. The major goal of welfare reform is to help recipients and their families move out of poverty through work. If escaping poverty for workers and children is an accepted goal for welfare recipients, then the same goal must apply to people who are already working but still poor. Many members of the middle class are also being left behind in terms of rising living standards. It is existing middle skilled workers who are the best candidates for getting additional training to fill existing high skilled job vacancies. 6-4

4 Seeing Labor Force Policy Connections One of the criticisms of existing workforce preparation programs is that the nation has many separate programs but no overall policy or strategy. For example, there are programs for 1) unemployed workers, 2) workers displaced by trade policies, 3) welfare recipients, 4) disadvantaged youth, and 5) workers affected by defense conversion. Moreover, the nation has a workforce policy for the most skilled workers in the forms of large programs of support for college students and students in specialized graduate training. On the other hand there is no organized workforce strategy for existing workers. The working poor and middle level workers who want training to raise their living standards face a hit and miss system of both world class private sector training and a total vacuum of programs depending on what industry and size of firm they work in. For example, there is no workforce strategy designed to help the working poor escape poverty. CCSCE believes that the best answer for meeting the needs of the California economy is a universal workforce strategy, i.e. a strategy that addresses the needs of all workers and firms simultaneously. With that goal in mind, a starting point is to understand the labor force connections between different groups of workers. Connection 1: Welfare Recipients and the Working Poor California is embarking on an initiative to help more than 500,000 welfare recipients enter the California labor force. CCSCE conducted an analysis of this challenge in the summer of 1997 with support from the Rockefeller Foundation. Much of this section is drawn from that analysis. 1 CCSCE s analysis identified that there is a large pool of jobs for which welfare recipients might qualify. On the other hand these jobs usually bring low pay and often have many applicants and high turnover. There is broad bipartisan agreement that welfare recipients and employers will need support to achieve success even if there are many low skill jobs available. There is agreement that not all welfare recipients are prepared for entry level jobs. Depending on their circumstances welfare recipients and their families will need Child care assistance 1 The California Economy and Developing Annual Goals for Moving Welfare Recipients into the Workforce, CCSCE, August

5 Transportation assistance Basic education and training Job search skills Job retention attributes such as punctuality, consistent attendance, interpersonal skills, and work effort California has adopted programs to provide assistance in many of these areas. Only time will tell whether the programs are effective or adequately funded. Welfare recipients are being encouraged to seek jobs similar to those currently held by the working poor. This is the first connection between the two groups. While it is not true in every case, for the most part welfare recipients and the working poor are competing in the same job markets. If welfare reform is successful, California will have a larger number of working poor residents and a smaller number of continuing welfare recipients. Attention will then focus on the challenges facing the working poor. Developing workforce strategies to help working poor families will be the next step in welfare reform policy. It is already being discussed in many states and the National Governors Conference has identified the working poor as a policy focus area in Welfare recipients are interested in strategies to help the working poor escape poverty because that is where they will be soon. The working poor are interested in escaping from poverty and have the additional incentive that unless more upward paths out of poverty are established, their job markets will see substantial increased competition from former welfare recipients. There will be a strong push to make the support programs designed for welfare recipients available to existing low wage workers. There are two reasons why this push will occur 1) Many welfare recipients will not be able to retain jobs without some support, for example, with child care. 2) If support is given to former welfare recipients who are now working and poor, it will be difficult to justify withholding similar services from similarly situated residents who have been working all along. Finally, it will then be clear to everyone that former welfare recipients and other working poor residents share a common hope to get a better job and escape from poverty for themselves and their families. 6-6

6 Building Skills Will Get Increased Attention As former welfare recipients and the working poor become one group trying to move up from poverty, public policy strategies to increase skill and training levels will become more important. While public policies to help welfare recipients get first jobs may emphasize job search and good worker attributes like effort and punctuality, the next step up will be based primarily on skills acquisition. Since there is no organized public and private approach to helping low wage workers move up from poverty, developing an overall strategy will be a first necessary step. This will require the bipartisan commitment that public policies to help existing workers upgrade their skills is appropriate. Connection 2: Middle Class Workers and Meeting California s High Skill Shortages The labor force challenge that threatens California s lead industries is a shortage of skilled workers. There are ample examples of how business feels about these shortages The number one recommendation of the California Economic Strategy Panel after listening to managers of California s world class growth industries was for the state to develop a comprehensive workforce preparation system oriented to the skills needed in California s 21 st century economy. In 1997 Bay Area papers were filled with stories of vacancies for highly trained workers and the steps that firms were beginning to take. For example, Intel is working with San Jose City College to develop a clean room technician hands-on training program. At the end of 1997 the Los Angeles Economic Development Corporation posted an notice asking readers to send in stories of vacancies and high skill shortages and has received a steady stream of reports back in the first month. It is not realistic to expect that these shortages will be filled mainly by new entrants into the labor force or by people moving up from entry level jobs. It is more realistic to expect that existing workers with experience and some skills already are the best candidates to move up in the near term. This is the strategy being used by companies who can afford to do in-house training. Most companies cannot afford to do their own technical training. The Intel San Jose City College model suggests a broader approach. Private companies 6-7

7 working with community colleges and specialized post secondary training institutions can develop programs that have a larger scale but retain direct industry input into the program design. Policies that help existing workers move up to take higher skilled vacancies directly support the expansion of high wage jobs in California. Connection 3: Connecting the Top, Middle and Entry Level Workforce There is little disagreement that California needs a workforce strategy to help welfare recipients enter the job market and a workforce strategy to help California s lead industries find all the highly skilled workers they can hire. What is now being increasingly understood is the implication that California also needs a workforce strategy for the middle groups. 1) A middle class move up strategy helps middle class workers and directly addresses critical skills shortages. 2) A middle class move up strategy gives hope to the working poor (including former welfare recipients) that upward mobility into middle class jobs is a real possibility for escaping poverty. 3) A middle class move up policy is a welfare to work policy. There is no great shortage of entry level workers in California. Helping existing entry level workers move up is critical to the transition of welfare recipients into entry level jobs. Otherwise California will have instituted a sort of musical chairs in the low skill job market where an increasing number of workers compete for a limited number of jobs. Workforce Preparation: Developing a Universal Approach in California A major effort is underway in California to reexamine the state s workforce preparation ideas and programs. Based on our ongoing work on the California economy, CCSCE offers some principles to guide the state s effort. We believe that California can be a model for the nation in developing information on future workforce trends and finding successful approaches. Workforce preparation should be viewed as a universal challenge not as a set of programs for special groups. The different groups listed above share part of a common challenge to prepare for the future world of work in California. Workforce preparation is for everybody and needs to be continually pursued. America s businesses are the leaders in workforce preparation. Many of the nation s best models for lifelong workforce 6-8

8 preparation have been developed by private corporations where the value of highly skilled and motivated employees is well known. The primary focus of workforce preparation should be oriented to the future California economy. What skills, education, and specific training will be needed to be successful not just today but over time and into the 21 st century economy? Many current programs are oriented to putting people to work immediately. While this is a worthy goal, it forces attention on today s, not tomorrow s, jobs and skills. By focusing on workforce preparation as a universal challenge oriented to future needs, California can be a leader in developing policy approaches that will help the state and nation. Challenge Two: Economic Growth, Land Use Policies, and Quality of Life: The Paradoxes of Growth Last year CCSCE wrote that 1997 would mark the beginning of a new debate about growth in California. The debate has begun as job gains have filled freeways and pushed housing prices higher. The challenges of growth will intensify in 1998 and the decade ahead if CCSCE s economic projections for California are anywhere near correct. Where does the debate stand in 1998 and what are the prospects for combining continuing growth (in jobs, population, households, and income) with a high quality of life and sustainable development patterns? The Paradox of Growth The evidence of the 1980s and 1990s suggests two strong technical relationships exist about the growth process in California. Job growth pushes population growth upward in an open regional economy like California. California s population growth responds to changes in the rate of job growth as evidenced by 1) the sharp slowdown in domestic migration after California s economy started to do more poorly than neighboring states and 2) the sharp rebound in domestic migration after three years of strong job growth in California. A high quality of life attracts people to California. Indeed, for many of California s leading growth industries a high quality of life is necessary to attract a skilled workforce to choose California as their home. 6-9

9 These two links create the paradox of growth. Strong job growth attracts people which, in turn, places pressure on infrastructure and environmental resources (e.g., roads, congestion, parks, and air quality) while at the same time leading to rapidly rising housing prices and rents. On the other hand efforts to improve the quality of life (e.g., by mitigating the impacts of growth) make California communities even more attractive for continued job growth. Why are Job and Population Growth Connected? Most adults make long distance migration decisions for job related reasons. Workers (and their families) move in response to economic opportunities. It is widely accepted that great migration movements (e.g., Blacks in the South to the Midwest fifty years ago and Hispanics and Asian immigrants to California today) are caused by large differences in economic opportunity between the origin and destination labor markets. The empirical evidence is convincing. Regions that have above average job growth have above average rates of population growth over any extended period of time. The timing is clear too. Job trends change first, then population trends follow. The discussion on pages 5-62 to 5-65 examines the recent history in California. The key graph (reprinted below) shows that 1) domestic migration to California turned negative after the recession in the state became long-lived and 2) domestic migration turned up nearly three years after the California economy recovery began Job Growth vs Migration California Domestic Migration Job Growth 6-10

10 The reason for the lagged response of population growth is simple. People move after they determine that change in job trends will be more than short term. In the early 1990s it took some time for people to realize that unemployment rates in California were so much higher than elsewhere. Only in 1997 did it become clear to many people that California s recovery was solid and would continue. There is also no uncertainty about the connection between job growth, population growth, and negative impacts on traffic, housing, and the environment. Congestion is sensitive to small changes in the number of cars and recent job gains in high tech centers like Silicon Valley and Orange County have brought visible increases in traffic and time delays. Time delays on Silicon Valley freeways doubled from 1994 to 1996 and undoubtedly increased again last year. Housing prices in the high job growth markets are also surging. Median prices throughout the Bay Area are up 25% in the last two years and rents are also up by 25%. Median resale prices and rents are growing in Orange County which is a year or so behind Silicon Valley in the economic recovery. In the near term job growth is far outpacing housing growth. The Silicon Valley/Orange County trends will spread to more metro areas in In 1997 California added four times as many jobs as households although the average number of jobs per household overall is approximately 1.4 jobs per household. The air quality situation in California has benefited from good weather and slow job growth. Now, however, pressures on the air and other environmental resources will build as strong population growth continues year after year. The pace of population growth will increase. The first job gains in California s economy did not bring added population pressure. More than 500,000 recently added jobs went to employ existing residents who had lost jobs during the recession. Now California s unemployment rate is below 6% and below 4% in many high growth centers. Continuing job gains will be filled by people entering the labor force in California and by migrants from elsewhere. The population growth impact of continuing job gains will be larger than it was during the economic recovery. A High Quality of Life is Good for Business A high quality of life is not just an amenity for California residents. It is, increasingly, a key determinant in attracting workers in California s leading industries. 6-11

11 A quote from October 1996 (fifteen month ago!) illustrates the business recognition of the importance of quality of life. Suddenly, instead of agonizing over how to survive with stagnation, Silicon Valley executives are worrying about how to cope with prosperity. There has been a major shift in conversations with chief executives over the last six months, says Connie Martinez, executive director for business climate initiatives for Joint Venture:Silicon Valley. Chief executives used to complain about the regulatory environment, taxes and the cost of doing business, she says. Now the top issues are the availability of a skilled workforce, transportation and housing. It takes 20 to 30 minutes longer to drive from San Jose to San Francisco than it did two years ago and 10 minutes longer for local trips. Even mediocre high-tech workers are being approached in company parking lots by recruiters offering huge wage increases, some employers complain. And it can take months to find an apartment. Clearly, this region s infrastructure is being pushed to its limits. Without substantial additional investment, Silicon Valley s economic growth and quality of life will decline. 2 California firms are trying to attract managers and workers in world leading industries. Other regions and countries are also trying to build strong industry clusters in these sectors. Firms and employees have choices about where to locate. A nice place to live is a key determinant in these choices. A high quality of life means many things. The transportation system must be able to move people and goods with minimum delay and congestion. The air and water must be safe. Public facilities and cultural amenities must be top notch. Recreational opportunities must be varied and accessible. Finally, the region must offer a variety of housing choices. Moreover, the region s high quality of life must be sustainable. One indication of the importance of quality of life to business is the strong participation of business leaders in regional sustainability discussions in California s major regions. For example, the Joint Venture:Silicon Valley Network board is dedicating 1998 to developing a vision and policies for sustainable development in Silicon Valley. The opportunity may exist to evolve a new type of metropolitan form to match Silicon Valley s new economy. At this stage of the 2 Mitchell, James J. Job Growth Has Valley Straining at its Seams, San Jose Mercury News, October 27, 1996, page E

12 region s development, there are signs that the current suburban form is starting to undermine the quality of life once provided. A new kind of metropolitan vision could value qualitative growth (e.g., higher incomes, higher value), yet accommodate a level of quantitative growth in jobs and population. Because Silicon Valley has birthed a new type of economy, the region could enjoy the kind of positive growth envisioned by the Presidents Council on Sustainability: To achieve our vision of sustainability some things must grow jobs, productivity, wages, profits, capital, savings, information, knowledge, education and others pollution, waste, poverty, energy, and material use per unit of output must not. 3 Principles for Managing Growth California s projected job growth will add 5 million residents in the next eight years. Even if CCSCE is too optimistic in the California growth projections, population will grow by millions in the next decade and continue growing in the following decades. These trends have two major implications: More people will need to fit into the existing major regional land areas in California The pressures of these added residents will create negative quality of life impacts unless offset by other policies Californians have been struggling with land use, growth, quality of life and sustainability issues for more than two decades. While no consensus has developed, several principles have been identified to move the discussion forward. Principle One: Land Use Densities Will Increase; Land Must be Used More Efficiently This is mostly arithmetic. Most job gains are expected in the existing urban regions. People will live in or near these regions. Densities will increase. The only question is whether they will increase in a planned or haphazard manner. With this exuberant growth, however, come challenges. Most of the region s new housing stock is being built in outer suburbs, far from the areas where jobs are concentrated. Transportation 3 Silicon Valley s Built and Natural Environment Implications for Long - Term Sustainability, prepared for Vision Leadership Team of Joint Venture:Silicon Valley Network; Collaborative Economics, November

13 systems are burdened with an ever-growing number of commuters. And already-high housing prices are skyrocketing. In large part, the future viability of the Bay Area hinges on how the region s remaining land is used. Yet, decisions about land use are complicated by the fact that people hold widely differing ideas about what constitutes an appropriate use of land or pace of development. Although land use is clearly a regional issue, it is also the most basic local issue. With a region as large and diverse as the Bay Area, these are bound to be a variety of views about land use and economic development. 4 CCSCE has three suggestions for focusing the next round of thinking about land use in California s communities and regions Focus on the Where as well as the Where Not Develop examples of what works Make base re-use decisions regional Here, Not There Most discussions of local land use decisions usually have a strong tone of not here and make it smaller or this land should be preserved from development. There is usually little attention given to alternative (better) sites for development. The reasons are easy to understand often the alternative sites would be in other jurisdictions and owned by different landowners. Focusing on the here s (here is where development will fit) rather than the not there s will require a broader, regional look at land resources, their utilization, and regional sustainability. Examples of Positive Development Higher density uses of California land goes against the pattern of recent development. Many residents associate higher densities (whether residential or commercial) with negatives like congestion and crime. If higher densities are required to accommodate even minimum expected growth while preserving unique resources and providing open space, one challenge is to show Californians successful examples of higher density development. The most important challenge is to find examples of successful higher density residential development because it is in new housing that the greatest conflicts between growth and sustainable land use will occur. 4 Bay Area Futures Where Will We Live and Work; Association of Bay Area Governments, Bay Area Council, San Francisco District Council of the Urban Land Institute; November

14 Base Re-Use Californians are getting a second chance at development options through the elimination of defense needs for major land parcels in our most crowded regions. Bases like the Presidio, Treasure Island, Moffett Field, the Long Beach Naval facilities, Norton Air Force Base, El Toro Marine Station, and Mather and McClellan Air Force facilities are being returned to nonmilitary uses. There are two main challenges in using the former military facilities; 1) funding and implementing clean-up activities so the land is safe for civilian use and 2) finding a way to broaden decision making over re-use decisions so they can reflect regional analysis and priorities. Principle Two: Sustainable Land Use Planning Needs Fiscal Reform Land use decisions are sensitive to the fiscal rules facing local governments. Many others have written about the perverse linkages that exist in current law. Prop 13 made most housing cost local jurisdictions. In response to Prop 13 local jurisdictions added fees to new housing development which pushed costs up, often by more than $10,000 per unit. Local governments still get sales taxes based on development in their jurisdictions. Accordingly, they favor retail development over industrial or office projects. State government has reallocated revenue streams away from cities and counties. The above measures have made it difficult for communities to maintain service levels, especially with growth. Two-thirds voting requirements have made it difficult for local communities to meet the challenges of growth through infrastructure improvement and open space acquisition. Fiscal reform is required to change the current incentives for local land use decisions. Fiscal reform is, therefore, a key element of sustainable land use, high quality of life policies in California. Fiscal reform will need to include some revision of Prop 13 property tax rules to reform land use decision making incentives. 6-15

15 Principle Three: Public Investment is Required Public facilities are overcrowded throughout most of California. Transportation facilities are over capacity at peak hours. Schools were crowded even before class size reductions. Airports are operating near or above capacity. It has been tempting for residents to withhold public investments in the hope that lack of facilities will reduce growth. There are two problems with this strategy: 1) It hasn t worked. Most studies of growth control in California find that growth is relocated within the same region, not stopped, as a result of growth control policies. 2) It leaves existing residents with a diminished quality of life. Public investments are needed to both make California s regions competitive for world class industries and to improve the quality of life for residents. Principle Four: Equity Considerations Are Involved There are complicated, and usually unintended, equity considerations in land use and sustainability debates. Policies that restrict housing developments usually push prices higher and have relatively more impact on young and newly arriving households. In California young and newly arriving households are mostly Hispanic and Asian and often immigrants. These are complicated issues but they do exist and deserve open discussion in developing California s strategies to deal with future growth. A New Group Enters the Growth Discussion A new group concerned about the connections between the economy, growth, and sustainability has formed to push the public discussion of California s future. The New Leadership Project of Californians and the Land. The New Leadership Project, convened by the Hewlett, Irvine, and Packard Foundations and the Bank of America, is focusing on infusing land use issues into the political debate in California is expected to grow by nearly 18 million people by the year 2025, a 50% increase in our current population. Although many Californians seem to like the state just the way it is, those who look toward the future accept that growth is inevitable due to welcome growth in the economy. At the same time they cannot help but have concerns about where all that growth will go and how the California quality of life can be maintained for future generations. 6-16

16 Participants in Californians and the Land have come together to seek ways to address these questions regarding the future of our state. We see an urgent need to find collaborative solutions to the looming problems facing us, and in a positive way we call for leadership from political candidates, potential state and local elected officials, and citizens who demonstrate civic engagement. Unless we have new leaders willing to address the issues of sustainable land use, California will surely lose the opportunity to preserve our quality of life for the next generation and beyond. The mission of the New Leadership Project is to inform and educate in a non partisan manner the candidates for Governor and other political leaders so that they recognize and address the need for policies and programs that strengthen communities and support sustainable land use to enhance the quality of life for current and future Californians. 5 Challenge Three: California Developing a Long Term Economic Strategy for Abundant opportunity does not equal guaranteed success. California will need to work hard to convert opportunities into gains in real wages, income, and profits. California does start with an advantage. The state s economic base is already well positioned in future growth sectors. California s challenge is not to create a new economic base but, rather, to nurture and expand the state s leadership position in key industries. The actions of California s firms and workers will be the primary determinant of the pace of economic growth. Private sector investment and management decisions will be critical for converting opportunity into prosperity. Public policy has a significant role to play in creating a positive environment for private investment. Numerous past studies and bipartisan commissions have identified five major areas where public policy can strengthen the environment for private investment in California. Moreover, there is broad agreement that many levels of government and non profit organizations have a role to play. The summary headline from these many efforts is A Diverse Economy Requires a Diverse Economic Strategy. No single public policy response, whether in streamlining regulations or strengthening education, is sufficient. Each of the five major areas listed on page 6-19 is important. 5 The New Leadership Project Introduction and Mission, December

17 Two main themes have emerged in the discussion of how state policy can help prepare California firms and workers to succeed in the 21 st century economy. One theme stresses reform. The reform agenda includes: Reform of the workers compensation system Reform of legal liability laws Use economic efficiency as a guide in developing environmental regulations Reform the attitude of public officials in dealing with business ( user friendly ) Reform in the provision of public services like education and health care Progress has been made in some areas like permit streamlining and workers compensation. However, differences remain unresolved on most issues. Another theme stresses resources the need to invest in people and in physical infrastructure. Many studies have documented the decline in California s public investments the last great public investment commitment was in the 1960s. When the state s economy was being examined and re-examined during the recession, every bipartisan study group and commission documented California s failure to invest for the future. The California Business-Higher Education Forum, California Council for Environmental and Economic Balance, California Business Roundtable, and Republican and Democratic study groups all concluded that world class public investment is a key to attracting world class private investment. To date the public discussion of these two themes has resulted primarily in a political statement as a choice of either reform or resources. Groups favoring more reform remain in conflict with groups favoring more resources. Leading private sector firms worldwide know the power of reform combined with investment. Leadership in the private sector means organizing resources efficiently, empowering people to perform at their peak, and investing to retain a leadership position into the future. Attracting Private Investment Requires Public Investment A Diverse Economy Requires A Diverse Economic Strategy 6-18

18 Business Costs & Regulatory Environment Workers Compensation Taxes and Fees Housing Prices Tort Reform Capital Access Streamlined Permitting Market Based Environmental Regulations Education and Training K-12 Higher Education School to Work Transitions Reform of Public Sector Training Programs Infrastructure Highways & Public Transportation Ports Airports Water Systems & Solid Waste Disposal Quality of Life Good Schools Low Crime Air Quality World Class Amenities Helping Industries Organize for Success Reducing Trade Barriers Increased R&D and Technology Support Fostering Industry Networks and Collaboration Linking Industry with Government and Schools Regional Economic Initiatives 6-19

19 The needs of the economy are clear. Every group that has examined the California economy in recent years agrees that California s leading industries require both more public sector reform and more public sector investment. Public investment is also a major tool for minimizing the negative impacts of growth. Public investment today simultaneously helps businesses and residents. Public investment is a requirement for maintaining the state s growth industries and a requirement to handle projected population growth. School attendance is again growing faster than recent projections. Tidal Wave Two is the name given to the anticipated surge in college attendance after the year Recent moves to reduce class size further increase the demand for classroom space and teachers. California s ports and airports are nearing capacity. The improved economy is putting more cars and trucks on crowded highways. The prison population continues to grow. There are at least three elements of state strategy for public investment. A sorting out of public investment priorities Development of funding strategies including prudent limits on the amount of debt in relation to state income Active assessment of reform alternatives to minimize the need for capital investment from how to house and handle people convicted of crimes to using higher education facilities and personnel more efficiently in response to Tidal Wave Two to exploring market based programs for water, transportation, and pollution reduction Past commissions have made recommendations in these areas. Today the California Governance Consensus Project is attempting to bring forth a consensus plan on moving ahead. While there is no consensus yet, the tone of the business climate debate in California has changed dramatically. Moreover, stories about firms leaving California for other states have been replaced by stories of new innovations and new sales and profit records by California firms. The focus has changed from saving the state from depression to taking advantage of opportunities. This new tone is reflected in the report of the California Economic Strategy Panel whose members spent two years assessing California s new economy and talking to business leaders throughout the state. 6-20

20 The tone of the discussion about the role of state and local government in creating an attractive climate for economic growth has changed also. In the early 1990s government was viewed as the enemy of economic development. Cutting government regulations, cutting taxes and cutting government spending were major themes in the discussion of California s business climate. Now, in early 1998, there is active discussion of developing a public investment program in California in support of broad economic growth and quality of life objectives. Here is a summary of recent developments. Education funding per capita has increased in excess of inflation for the past two years as a result of strong revenue growth and Prop 198 requirements. Most of the extra money has been directed to class size reductions in K-3 grades. Nevertheless, California funding remains well below the national average ($5,035 versus $5,787). In a survey just published by Education Week, California received an F in school spending (ranked last among 50 states), an F on overall school climate, and C pluses on quality of teaching and standards and assessments. It is likely that per pupil funding increases will outpace inflation again in Moreover, there is broad bipartisan support for both state bond issues and a change in the rules for lowering the voter passage requirements for local bond issues. There are still major differences on how best to use additional money, how best to increase educational choices for children, and how best to meet the Tidal Wave Two which will hit the state s post-secondary educational institutions in the coming years. Several bond issues will be on the state ballot in June 1998 to increase funding for schools, parks, and water projects. Moreover, 1997 brought a large number of successful local bond measures for public schools. Economic growth seems to have brought a new willingness to invest for the future. Major state-local fiscal reform initiatives will not be developed in The California Governance Consensus project is now targeting 2000 for a comprehensive initiative. As noted above, some of the school construction bond initiatives to be on the ballot in 1998 also contain provisions lowering the majority needed to push some local bond issues. 6-21

21 The pressures of growth (see the previous section) are increasing and will build momentum for public investment in quality of life areas such as transportation, open space, water, and air quality. In 1998 bridge tolls are being raised in the Bay Area to fund transportation improvements. Now that state leaders are talking actively about a public investment agenda for the 21 st century, the one critical item missing still is state and local fiscal reform. The reasons why fiscal reform are a critical economic development tool are discussed below. Matching Local Government Responsibilities with Appropriate Revenue Raising Rules California is filled with studies that agree on three basic points about local governments and economic growth. Local governments have an important role in creating a climate for private investment in their communities through the rules they adopt and the public investments they make. Many local governments do not currently have a revenue base that is either sufficient or stable enough to support these objectives or to keep pace with the demands of continuing population growth. The current fiscal rules for local governments have encouraged actions which penalize new industrial and residential development and encourage competition for a fixed set of retail sales generating activities. The California Constitutional Revision Commission in 1994 and 1995 and the California Governance Consensus Project in 1996 and 1997 have tried to reach agreement on local government fiscal reform. A few key ideas keep reappearing on the agendas of these and other groups studying local government finance and governance. Sorting out responsibilities for public services State responsibilities Shared responsibilities Local responsibilities Providing secure and growing local revenue sources to match local responsibilities 6-22

22 Developing incentives for local governments to find operational efficiencies and eliminate duplication of services Adopting majority only (not two-thirds) voting requirements for most local finance measures One additional step is necessary. The move to make local government a strong partner in economic growth requires some property tax reform. Without property tax reform new businesses and homeowners will be increasingly penalized by differentially high property taxes and special fees. Communities will have the wrong incentives for economic development. The property tax base will not keep pace with economic growth. California s revenue structure will become increasingly unbalanced as Californians are asked to support even higher sales and income taxes. All bipartisan analyses of the California economy have stressed the need to reexamine the state s property tax system. The report by the California Economic Strategy Panel adds one more voice. California currently imposes significantly higher property taxes on new and expanding businesses than are imposed on existing businesses. This policy threatens the long-term health of the state... Current constitutional limitations on local government finance and state budget practices have made it difficult for local governments to reliably provide services required by industries. Industry leaders expressed the need to allow more local control of finances to allow jurisdictions to be more responsive to local needs. 6 6 Collaborating to Complete in the New Economy: An Economic Strategy for California, California Economic Strategy Panel, February 1996, page