California Too Big to Fail

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California: Too Big Not to Fail?Posted by Jeffrey M. O'Brien

October 21, 2009 8:19 AM

The state of the state? " A train wreck," s ays one official.

If the worlds eighth-largest economy were a member of the proper religious order, itd be time to

call in a priest to administer last rites.

Name almost any serious malady and the state of California has it: the nations highest marginal tax

rate coupled with an abysmal public education system; the most home foreclosures; a free-falling

commercial real estate sector; lame-duck governor with no legislative support and a disdain for an

annual budget process that he refers to as kabuki theater; unemployment somewhere between theofficial number of 12% and the whisper number of 18%; a 20% drop in year-over-year revenue;

municipalities that have either declared bankruptcy (Vallejo) or are on the verge (Los Angeles); and

a black-box permitting process that scares away business investment even while every week, 3,000

more taxpayers migrate to greener pastures.

Californians may be a can-do lot, but faced with all that evidence and much more, the political and

economic leaders who spoke at the Milken Institutes annual State of the State conference held

yesterday at the Beverly Hilton could hardly have been more dour. Its a train wreck, and its getting

worse, said Bill Lockyer, California State Treasurer. Added former Assembly speaker Bob

Hertzberg, now co-chair of governance reform group California Forward, A high-speed train

wreck.

Whats this got to do with technology? Nothing, unless you consider that California is home to the

many of the biggest tech companies on the planet (and 51 members of the FORTUNE 500), the

bulk of the venture capital industry, many leaders of green-tech, two of the most patent-producing

universities in the world in Stanford and UC Berkeley, and top thinkers across all spectra.

California represents 10% of the population of the United States, said Eric McAfee, chairman of

McAfee Capital and CEO of AE Biofuels. but probably 50% of innovation.

Tech into ploughshares?

Ironically, Silicon Valley has built the tools and infrastructure to allow talented people to work

anywhere in the world they choose, and as the state circles the drain, the fear is that businesses,

entrepreneurs, and students will no longer feel the pull of the Golden State.

From a political and budgetary perspective, California has myriad problems from Proposition 13 to

direct-democracy ballot initiatives to abysmal credit ratings. But the biggest problem may be girth.

The state increasingly seems too big not to fail.

States were never intended to be the size of the entire eastern seaboard, said Hertzberg. What is

the commonality between the folks in Calexico and Crescent City? This manifests itself in a

politboro style of government in Sacramaento.

None of the speakersincluding gubernatorial candidates Gavin Newsomand Steve Poizneroffered a magic bullet, but there was some consensus on where to start.

Many called for an adjustment to the mandate that 2/3 of the legislature must approve a budget or a

repeal of term limits that seem to enslave legislatures to special interests.

Others craved less (or more, take your pick) taxes and a lessened (or at least consistent) regulatory

structure. Chevron's (CVX) John Watson, who will assume the CEO role in January, said the permit

process for an upgrade to the company's Richmond, California, refinery took four years while an

Indian company built its own entire refinery in half the time.

Still others offered hope that things will somehow work themselves outbecause California has

been in the dumps before and that the state will continue to be a magnet for the brightest

immigrants.

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About This Author

Jeffrey O'Brien

Jeffrey O'Brien joined the San Francisco bureau ofFORTUNE in June 2006 as a senior editor covering the

intersection of science, technology, culture, andbusiness. From 1999-2006, he was a senior editor atWired magazine. As a writer, his work has beenanthologized in The Best of Technology Wri ting 2007 andin The Best Science and Nature Writing 2005. As aneditor, his features have been featured in The BestAmerican Science Writing 2006, The Best AmericanScience and Nature Writing 2006, and The BestTechnology Writing 2006. He is also the recipient of aJesse H. Neal Award for editing best single issue, whichhe earned in 1998 as the editor of Marketing Computers(Adweek). O'Brien is a graduate of the SI NewhouseSchool of Public Communications at Syracuse Universityand was a 2006 Templeton fellow in science & religion atthe University of Cambridge (UK).

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Tags: California, eBay, Genentech, Google, government, Intel, Nvidia, SanDisk, Yahoo

20 Comments| Add a Comment| Email Twitter Facebook Digg

So, 3000 citizens leaving California each week. Not to worry! Probably 3000 non-citizens moving in.

Posted By Gary Spencer, Ketchum, OK: January 16, 2010 3:59 PM

Lived in CA all my life. Biggest problems are big govt, free handouts and state employee unions that milk thestate dry. Stimulus money: Compton just put up several new BIG dual facing bill-boards on both sides of the 91fwy. This instead of fixing pot holes and warped pavement on on-ramps and streets. Why? Cities looking forways to spend stimulus that will keep the $$$ rolling in! Smart, eh?!

Posted By Linda, Los Angeles, CA: January 15, 2010 6:06 PM

I am a young California High School history teacher (I am 27). When in college I had to take classes onCalifornia history. In those classes you begin to realize that the state has had problems for quite some time. Thebiggest seem to arise whenever the state attempts to fix something. It typically puts a Band-Aid over the problemand causes problems in another area.

California in modern times has so many problems it does not know where to start. From jobs, the economy,water, safety, etc. The Unions and interest groups do have significant control of the state (Though CTA doesn'tseem to have much say anymore). The state Constitution is a mess. The cities are a mess.

The idea that the state is a "train weck" is accurate. There are people that think that California needs to bebroken off into two states (Northern and Southern). I agree and disagree at the same time. The biggest problemwith the idea is Southern California houses the majority of the population and holds Northern California hostagebecause of the South's reliance on the water of the North. The South would be highly unlikely to agree to breakup.

That being said, in a picture perfect world the state needs to be blown up. The state needs to be divided intomultiple states (as many as 4). Each state needs i ts own Constitution and representation that reflect theprinciples of THIER constituents (Most politicians care about representing their party leadership and not thierconstituents). The state needs to start over. Consider previous propositions when forming your Constitution andhave the people vote on it. It will hurt for a few years, but not for as long the current issues will.

Posted By Eddie, Technically San Bernardino,Ca: January 15, 2010 4:38 PM

The biggest cause of CA's trouble, according to most of those I associate with, is the 2/3 mandated legislativeapproval of budget. It gives the minority the power to hold the majority hostage so that either has to face theconsequences of their actions.

Posted By Ron, San Bernardino, CA: January 15, 2010 12:15 AM

It sounds like it is time to revive the State of Jefferson idea that was cut short by WWII. Jefferson was a stateproposed to be formed from Northern California and Southern Oregon, both of which have nothing in commonwith their state capitols.

Posted By Larry, Myrtle Creek, Oregon: October 26, 2009 6:21 PM

All the grass is brownAnd the sky is redI'm being stalked

The combination of great science and great local universities and venture capital money started

not just Genentech in 1976, but an entire industry, says former Genentech president and current

UCSF chancellor Susan Desmond-Hellmann, showing a slide of California tech companies that

were either founded by immigrants or where immigrants played key roles in the early days,

including Yahoo (YHOO), Sun (JAVA) , eBay (EBAY), Intel (INTC), Google (GOOG), Viewsonic,

SanDisk (SNDK), and Nvidia (NVDA). Theres something special about California: the atmosphere,

the diversity, a wish to be curious and ask questions. The secret sauce behind Genentech, the

Googles, Yahoos, and Amgens is the combination of entrepreneurial spirit, great universities, and a

willingess to marry business and science.

Desmond-Hellman warned, however, that Genentech has remained a biotech powerhouse because

it has never lost sight of where its power comes from. We always believed that the company would

be no better than the people we recruited and we keep," she said. "We never took for granted that

people had to work at Genentech. They have choices.

So do the 3,000 Californians leaving the state every week.

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On a winters dayI feel hate and scornAs L.A. it burnsCalifornians screamingLike every other day

Posted By Bill, Albuqueque, NM: October 22, 2009 9:41 PM

CA must remain united, and diversified.

"Christians w/ no morals", and amoral people of people of all varieties, are equally to blame for the strive.Liberals and conservatives with morals can live peaceably in CA, and have more many years.

I was born and raised in CA and love to move back!

For now, I am stuck in AZ.

Posted By LT in AZ: October 22, 2009 8:57 PM

I have lived in CA the past 40 years. I also don't believe Proposition 13 is the problem. Proposition 13 is the taxpayers fighting back at the run away legislature that doesn't know how to li ve within a budget. It's the publicemployees unions breaking municipal, county, and state budgets. I have seen the freeways and roads needingrepairs and wonder where did all the money go ? We all know that it went to overly generous wellfare and socialservices payments. We also know that not only people are leaving CA but a number of comapnies are leavingCA as well. I wonder whether the only way for CA to come out of this mess is to declare bankruptcy.

Posted By Ken Pao, Orange, CA.: October 22, 2009 8:39 PM

THE VERY WORST PART OF U. S. A. TO LIVE, IS HUDSON COUNTY, N. J. IN WEST NEW YORK, N. J.07093 THE TAXES WENT UP 50% IN ONE SHUT THIS YEAR, THE MAYOR SAL VEGA AND THECOMMISSIONERS ARE TAKING HOME "BIG FAT CHECKS" AND NONE IS LIVING HERE; THE HOMEOWNERS ARE LOOSING THEIR PROPERTIES AND THE ABUSE OF POWER BY THESE POLITICIANS NOEVEN THE F.B.I. CAN STOP THIS ABUSE.SO PLEASE CALIFORNIANS DO NOT EVEN THINK ABOUTCOMMING TO N. J.

Posted By TONY, WEST NEW YORK, N. J. 07093: October 22, 2009 8:37 PM

I was born and raised in California. It was once a wonderful state to live. My education took me out of the stateand when it was finished, the California I knew was gone. I knew I would never want to l ive there again andthese days I am not even interested in visiting.

How can you take a state that chose the Terminator as their leader seriously?

Posted By James Drake Morgantown, PA: October 22, 2009 5:54 PM

CAL is not a unified state and has been adrift for a number of years controlled by "special" interests and corruptpoliticians. It started several decades ago at the City level, moved to the County level and now whole regions ofCAL have the appearance and lifestyle of a third world country. Despite restrictive business practices, agovernment can not continue liberal welfare policies without constituents breeding a society into a governmentbased economy. The largest county in the nation, San Bernardino, had 25,000 welfare cases in 1980 now theyare well over a 250,000. Take a look, would you want to live there?

Posted By Kim T., San Bernardino, CA: October 22, 2009 12:31 PM

As always, prop 13 gets the blame. Well a few weeks ago at dinner with friends prop 13 came up. So I did a poll,I ask the other 4 home owners at the table if their property taxes went up or down. They all said taxes went up.That's because they have owned their home 20+ years. They were so surprised to hear that my taxes WENT

DOWN. You see I got my home in 2004 and it's worth less now. This is the best example on how prop 13protects government. Can you imagine the lost tax income if everyone's home was taxed at the peak value in2006.

Posted By Steve, Alhambra CA: October 21, 2009 4:38 PM

California represents 10% of the population of the United States, said Eric McAfee, chairman of McAfee Capitaland CEO of AE Biofuels. but probably 50% of innovation.

I was curious whether the statement was obviously true or not. Patents issued are a fair measure of creativityand innovation and Mr. McAfee is comparing the innovation per capita and patents are something easy to lookup using the USPTO Patent index. On a per capita basis, for the summed timeframe of 1/1/1999 to today, MAhad the lowest persons/patent ratio of any state I checked, and not all were compared. CA came in at #4, afterMA, CT, DE, CA MN, in that order. At least one of the inventors listed had to reside in the state credited. Thislittle exercise was interesting and made a list that was not completely what I would have expected.

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Posted By Doug Sulphur, LA: October 21, 2009 3:50 PM

I thin So Cal is a drag on No Cal. If they were separate states, No Cal would be in much superior state.

Posted By DK, San Jose, CA: October 21, 2009 2:23 PM

I welcome 3,000 people leaving the state. By all means, go!

That especially goes for "conservative Christians w/morals". You've at least got that right.

Posted By Tool, San Diego, CA: October 21, 2009 12:24 PM

i was born in santa cruz. left when i was 12 you couldn't pay me to move back to california. of course, since iam a conservative christian w/morals, i assume they wouldn't want me there either!

Posted By jaime, charlotte nc: October 21, 2009 11:52 AM

Nice summary. And where does the Speaker of the House come from, California. Should we say Washington &America beware. She'll even throw in floor mats.

Posted By Bernie, San Bruno,CA: October 21, 2009 10:53 AM

I have lived in the "Golden State" for the last 42 years and the downward spiral is continuing. The author is justparroting the standard line that "prop 13" is to blame for this mess. That is baloney. The problem is an out ofcontrol legislature dominated by Bay area liberals who have spent every dime they can get their hands on whilekilling the job creating aspects of our economy through excessive environmental and nanny-state regulations(global warming, toilet tanks, car colors, etc.). California has always been looked to as a "harbinger" of what's tocome for the rest of the country (our progressive nature). If that is the case, then we are a glimpse of what therest of the country will look like in the next 8 years under the Obama administration. Our only hope is to breakour state in to 2 states, Coastal California(Los Angeles to Marin County) and the rest. The loonies can runCoastal California, while allowing some conservative sanity to be restored to the rest of our state government,bringing business and job creation with it. We can once again show how it can be done.

Posted By Lindsay Thompson, Fullerton, CA.: October 21, 2009 10:34 AM

Things will not change until California breaks the backs of the employee unions that are controlling every aspectof the political processes.

Posted By Paul Fontaine, Marietta, GA: October 21, 2009 10:29 AM

look like its time to cut spending and get rid of the unions that control the gov't and their defined benefit plan,guess they will have to have a 401k like the rest of us.

Posted By John New York, NY: October 21, 2009 10:19 AM

Steve Jobs is $300 million richerHow high will AAPL fly?

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