The State of the States
May 6 2011 by Dale Buss
Three years ago, AAA Insurance was looking to move more of its call-center operations out of high-cost California. AAA already had siphoned some work into a new center in Glendale, Ariz., and wanted to build another to handle customers of affiliates stretching from Arizona to Ohio. Sites in 10 states made the short list, with Indianapolis as the sole finalist city.
But Oklahoma City landed the prize: 200 decent-paying jobs in a state-of-the-art new facility that opened in 2009 during the depths of the Great Recession. Neal Krueger, president and CEO of the AAA regional holding company, credited Oklahoma’s “great work ethic,” ample labor pool and overall business-friendliness. But what clinched his decision was a new state law that provides seven-figure checks to new employers as incentives to rebate some payroll costs.
“It provides cash rebates on what you’ve already paid out, so cash flow is better,” said Krueger, “and it comes every quarter rather than making us wait for tax credits to be applied against future income” as other states do.
Cha-ching! Cha-ching! AAA’s win has been Oklahoma’s, too, as the company has already expanded its payroll to 825 jobs at the site and plans further expansion. Oklahoma City also has landed other big economic development prizes recently, including the relocation of Boeing’s C-130 and B-1 programs from Long Beach, Calif., and the permanent relocation of the Oklahoma Thunder franchise of the National Basketball Association.
A handful of states have been emerging as leaders in corporate site selection these days, including Utah, Arizona, Florida, Tennessee and, of course, Texas and Oklahoma. Many others are trying hard to climb into the top tier. And because of changes in political administrations and the harsh realities created by budget deficits, there is also new hope even for recently business-backward states like New Jersey and Michigan.
Creating win-win deals is more important than ever for both companies and the states courting them. Whether they’re expanding in place, relocating significant operations or adding new capacity, CEOs are betting big in an economy still demonstrating only anemic growth—and risking more of the hundreds of billions of dollars of cash that have been sitting safely on corporate sidelines.
“Companies with strong balance sheets now are in a good position to expand and grow, and they have to, because otherwise they’re just resting on their dollars,” said Spencer P. Eccles Jr., executive director of the Utah governor’s office of economic development, a former Wells Fargo banker, and scion of a prominent family in Utah business.
At the same time, states are really at a crossroads “Do they want to use the Michigan-California-New York-New Jersey model or the Texas-Utah-Florida model?” asks Jonathan Williams, director of tax and fiscal policy for the American Legislative Exchange Council, a conservative think tank. “And now with the new census out, they can see more clearly why they want to be on the winning side. People are voting with their feet, and so are businesses.”
Don Cardon, president and CEO of the Arizona Commerce Authority, added that, “as capital returns to dirt, the next two or three years will greatly determine where business goes in the U.S.—for the next 10 to 15 years. So we’re dead serious about becoming the leading state in terms of attractiveness.”
For a lesson in the painful consequences of being a least-attractive state, behold California. It has become economic carrion being picked away by rival states. Things are so bad in California that it even lost W Solar Group, a solar-energy company that recently decided to pack up its bags in Chatworth, Calif., and establish up to 600 new jobs in cloudy, high-tax Wisconsin. In fact, California has lost more jobs over the last decade than any other state, more than 800,000 of them.
“ABC—Anywhere But California,” said T.J. Rodgers, CEO of Cypress Semiconductor, a $668 million chip maker headquartered in San Jose, Calif., and with plants in 10 countries. “It’s expensive; it’s hostile to business; and environmental regulations are more of a drag on business than protection to the environment. Our head count in California peaked at 1,500, and now we’re down to about 600.”
While California was kissing moving vans goodbye, Texas created 129,000 jobs last year—more than every other state combined. According to the Tax Foundation, net migration specifically from California to Texas was about 32,000 people in 2008, making the Lone Star State the No. 1 destination of those leaving the coast.
Two years ago, Texas Gov. Rick Perry sent letters to hundreds of Golden State companies touting the advantages of relocating to Texas. Enclosed was a “Competitiveness Index” that showed California in the lower-left quadrant, among a smattering of unfortunate states with low job growth and unfriendly-to-business climate, and Texas alone in an upper-right quadrant, with Virginia, as having high job growth and a business-friendly climate.
“As the State of California continues to support legislation and initiatives that cause undue burden and taxation on companies doing business within the state,” Perry wrote, “I invite you to consider your future in America’s new land of opportunity, the State of Texas.”
Abilio Gonzalez, CEO of San Diego-based Solera Holdings, was listening. His software-development company, which employs 400, just picked up shop and moved most of those jobs to Westlake, Texas, investing $3 million in a 15,000-square-foot new headquarters near Ft. Worth.
Solera liked Texas’s more central location and a cost of living that Gonzalez gauged as about half that of San Diego. But also important, he said, was the labor pool. “San Diego is a difficult labor market for the high-end global positions that we are trying to fill,” he said. “People there price themselves out of the marketplace.”
Like Gonzalez, most CEOs and corporate site-selection chiefs insist that broad and innate attributes of a state and its economic environment are the most important considerations. That means low or at least fair taxes, consistency from one statehouse administration to the next, reasonable costs and perhaps subsidies for infrastructure and utility expenses, and a qualified and available work force perhaps above all.
“Labor, real estate, transportation and taxes—those are the big four location-specific factors,” said Gregg Wassmansdorf, manager of the location practice, in Toronto, for Colliers, the world’s second-largest real-estate services company. “Then for most CEOs it’s a matter of order of priority and order of magnitude.”
Yet when it comes down to a final decision for a CEO, often all of those factors—crucial as they are—become only table stakes. That’s when states become like hopeful partners at a dance, showing off particular attributes that may even be unique. For Arizona, it’s “quality of life.” For Michigan, it’s a depth of engineering talent. Utah surprises many corporate executives by being able to boast of second-language proficiency by up to 80 percent of its residents, thanks to the two-year missionary trips around the world most young Mormons take.
Tennessee demonstrated a superior ability to coordinate all of its players and lure Volkswagen of America to situate its first U.S. plant in nearly 30 years in Chattanooga, creating up to 2,000 high-paying jobs as the company’s German parent attempts a major comeback in the U.S. market. VW eliminated Alabama and Michigan as the other finalists.
Yet the Chattanooga decision also underscores the fact that a hefty package of special economic incentives almost always is required to land a facility like the VW plant. State and local governments made concessions to Volkswagen with a net present value totaling $577 million, ranging from $70 million in road construction to a $28 million credit for purchase of industrial machinery.
“It’s hard to identify a single one of those that was most important, but when you’re competing for a big investment like this, and other localities are putting forth programs, it was important for Tennessee to step up and present an impressive package on top of their highly desirable site,” said David Geanacopoulos, general counsel of Volkswagen.
Smaller companies can play the same game to a lesser extent. Webi-Max is a search-engine-optimization company based in Mount Laurel, N.J., with about 100 employees at headquarters, about 20 at a satellite office in Jacksonville, and a handful in sales locations across the country. As the company grows from about $5 million in 2010 to as much as $15 million this year, it is stretching the physical limits of its current location.
Founder and CEO Ken Wisnefski intends to leverage the growth into expansion incentives. He may try to get suburban Philadelphia counties to fight each other for the bulk of new Webi-Max jobs with “enterprise-zone” and “tech-zone” credits, but he plans to elevate the battle to involve New Jersey, Pennsylvania and Florida. Wisnefski also is checking out incentives that Toronto offers Internet companies as it tries to become an internationally recognized “technopolis.”
“To an extent I can play them off against one another,” he said. “They get excited when I tell them that I have more than 100 employees already and I want to double that. There’s a big opportunity for us to leverage some of our costs if we play it right.
How Utah Wooed P&G
Procter & Gamble hadn’t built a new manufacturing plant in the United States in 40 years, so the Cincinnati-based consumer products giant wasn’t about to make a mistake when it finally did.
That’s why P&G selected Box Elder County, Utah, as the site for its recently opened, $350 million, 600,000- square-foot factory that initially employs about 200 people making Bounty and Charmin paper products. And it’s why both P&G CEO Bob McDonald and Utah’s Gov. Gary Herbert showed up for the grand opening in March. “It’s very likely that over the next three or four years, this site will double its employment, and we can bring in other P&G product categories too,” said Julio Nemeth, P&G’s vice president of product supply and global operations.
Utah won for a variety of reasons. Because the plant was to be a regional supplier, only western states were in the competition. P&G loved Utah’s 3.5 percent average annual economic growth over the last five years, friendly taxes, promise of refundable tax credits, low construction costs, a smart waste-treatment plan for a very water-intensive operation and the state’s offer of substantial help with up to $20 million in costs for bringing the right utilities to the green-field site. Utah impressed P&G even though Washington and Oregon, the other two finalists, could provide utility hook-ups already at the front gate in existing industrial parks.
Another cluster of benefits was around the workforce. P&G appreciated the “very strong principles” of the Mormon work culture, Nemeth said, as well as the young average age of workers. And once a company commits to a location, Utah provides what Nemeth called “superior” training of hirees, specific to many of their actual new jobs, at its technical schools.
Yet one more factor played a role. “Utah is seen as a real land of stability because of our fiscally conservative state government,” said Jeff Edwards, president and CEO of the Economic Development Corp. of Utah, a public-private partnership. “At the end of the day, companies like that.”
How Four States Play To Win
Here are snapshots of how four states are looking to win the economic-development derby:
The desert state makes the short lists through its overall lifestyle appeal—and eight major new incentive programs for luring business expansion. After spiking last decade, housing is more affordable. Intel is making a $4-billion addition to a chip-fabrication plant in Tempe and building a cutting-edge, $5-billion chip plant in the state, adding 4,000 more jobs by 2013. “Water issues don’t often come up,” says Don Cardon, CEO of the Arizona Commerce Authority. And over the last year, “Arizona’s once-hot immigration issue has cooled.”
The ruin of Hurricane Katrina brought a promising approach to public education in New Orleans. Economic Development Secretary Stephen Moret also touts the logistics edge offered by the Mississippi River and a program to train new employees, noting that companies can happily “look past the historical perceptions of our state.” Gardner Denver, ConAgra and Globalstar have been on the move to Louisiana with big new facilities.
Michigan is battling its legacy of an auto industry that lost its way, heavy unionization and fumbling Democratic administrations. But New Republican Gov. Rick Snyder is throwing a long bomb by simplifying business taxes. “We have the potential to cut taxes by up to 80 percent for business,” says Michael Finney, CEO of the Michigan Economic Development Corp. “How many states have done that?” The state also is leveraging its manufacturing and technical base into hybrid-battery manufacture for autos and a burgeoning LED-based sector.
Since the legislature passed a $57 million new economic development program last year at the behest of new Republican Gov. Bob McDonnell, Virginia has aggressively pursued expansions and relocations. Northrup Grumman got $13 million in incentives to relocate from Los Angeles. Recently, burgeoning federal spending by adjacent Washington, D.C. has become a big factor. “While there’s a risk of being dependent on that engine, there also are opportunities for growth,” says the Virginia Economic Development Partnership’s Liz Povar.
How CEOS Grade the States
In rating each state in three general categories, Tax & Regulation, Workforce Quality and Living Environment, CEOs measured each against five to six subcategories with the elements of greater importance appearing nearer the top in the bar charts below.