Company Town

You hear the complaint all the time: Los Angeles is inhospitable to business. But is it? Sifting myth from reality

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Almost from the moment Eric Garcetti took the oath of office as L.A.’s 42nd mayor in June, he made it clear that his highest priorities were the economy and jobs. “We have to start with the most basic task of all: hanging a bright neon sign on our city that says Los Angeles is open for business,” Garcetti declared in his inaugural address. He was, in effect, responding to the decades-old myth that the city (and more broadly the state of California) is at the bottom of the pack as a place to do business. I must say the designation never made sense. If L.A. is so awful, why the bustle? Why are thousands of companies starting up here each year? Why are shopping malls jammed to prerecession levels? And why are developers champing at every mixed-use opportunity? In truth, L.A. has become too receptive.

Calibrating the right business climate can be tricky. If you give companies everything they want—little or no taxes, minimal regulation, multiple tax giveaways—the quality of life is decimated. You can’t have that. But severely restricting growth so as to stifle job creation isn’t the answer, either. You’re looking for a middle ground, and L.A., perhaps surprisingly, has gotten fairly close. The accounting firm PricewaterhouseCoopers, along with the Partnership for New York City, studied dozens of areas—from health care to intellectual capital—in 27 global cities, and Los Angeles placed a respectable 13th overall (behind New York and San Francisco but ahead of Seoul and Shanghai). The city does poorly with transportation, as you might expect, but in the “ease of doing business” category it ranked seventh, ahead of Tokyo. “Actually, it’s a hell of a place,” says Christopher Thornberg, a founding partner of the L.A. research firm Beacon Economics, who suspects that Angelenos don’t realize they have it so good. “Part of that is driven by the fact that so many people have made fun of us. But go check out our museums,” he says. “Very few cities in the U.S. have the kinds of things that we have access to here.”

For a considerable price, of course, which might be another reason for the bad rap. Among the persistent irritants is a convoluted business tax, in which rates are based on arbitrary—and sometimes inaccurate—descriptions of companies (multimedia ventures, for instance, are taxed at a lower rate than law firms). L.A. cannot easily undo the levy because of the nearly $500 million in annual revenue that would be lost. Real estate is also a killer for companies trying to recruit from other parts of the country: You can place a losing $1 million bid on a home that in other cities would be worth half that. Perhaps the loudest gripe centers on the huge income tax burden on Californians who make more than $250,000 a year (made more onerous after the passage last November of Proposition 30, which boosted rates for upper-income earners). The assumption is that the wealthy can afford to pay a disproportionately larger share.

“In hindsight I would have never started here,” says Sam Naficy, the owner of DTT, a Los Angeles surveillance company that restaurants hire to make sure employees are not stealing. Recently named L.A. Entrepreneur of the Year by the accounting firm Ernst & Young, Naficy, an Iranian immigrant who has spent much of his life in Southern California, is moving a large portion of his company to Nevada, where there’s no state income tax and much lower property and sales taxes. “Of the 200 employees eligible for relocation, 100 accepted to go—that’s shockingly high,” he says. But when I ask why he isn’t relocating the entire company, Naficy mentions his wife and two kids. “I’m not going to leave; I love California,” he says. “L.A. is my home.”

I run into that answer all the time. Business owners may grouse about the state’s encumbrances and threaten to pack up for cheaper locales in Florida and Texas, but they rarely make the leap. Life is too good here. In a typical year, says economist Jed Kolko, California loses a net 25,000 jobs while picking up 16,000. That’s in an economy of 18 million jobs (4.4 million in L.A. County). Between 1992 and 2006, when businesses were supposedly fleeing the state en masse, California ranked 21st lowest in out-of-state relocation, according to Kolko, who along with economist David Neumark has studied migration patterns extensively. Even among businesses like DTT that don’t have to be in L.A.—what economists call “footloose businesses”—departures are not common.

Viewed industry by industry, the arguments for leaving are weak. Entertainment? Not with both NBC Universal and Disney receiving approvals for big production facilities in the San Fernando and Santa Clarita valleys. Banking? L.A. may have lost First Interstate Bank in the 1990s, but it remains full of investment firms and financial services. Health care and retail? In an area so flush with people and money, they aren’t going anywhere. Neither are the lawyers and accountants who service L.A. County’s 413,000 businesses. Tourism? Visitor counts are at record levels. Trade? Asia and Southern California are like economic soul mates. Technology? If anything, employment levels are expected to rise, what with the expansion of Google and Facebook and the dozens of start-ups in and around the coastal communities.

“It’s one of the most entrepreneurially friendly cities in the world,” says Tony Safoian, chief executive of Sada Systems, a computer consulting firm in North Hollywood. With three-year revenue growth of 262 percent, Sada ranks 16th on the Los Angeles Business Journal ’s list of the 100 fastest-growing private companies in L.A. County. Safoian, who describes himself as “kind of a weird guy in that I enjoy paying taxes,” says he has no interest in leaving the San Fernando Valley, much less Los Angeles. “I don’t think it’s difficult to get a business license. I don’t think it’s difficult to rent an office,” he says. “I just don’t think there are many hurdles to doing business here.”

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No matter—the corporate-flight narrative has been retold so many times, especially by conservative groups like the Tax Foundation, that the positives can be hard to spot. “We just haven’t done basic brand management of L.A. We’ve forgotten to tell the story,” Garcetti says, reeling off such virtues as a deep talent pool, a long-standing culture of innovation and reinvention, and a growing number of international investors. Little argument there, but marketing alone is not always the problem. While Garcetti wants to bring in more major businesses, for example, the city’s distance from power centers back east makes it unlikely that L.A. will ever become a corporate town (it’s home to only six Fortune 500 companies compared with New York’s 43). Northrop Grumman moved its headquarters from L.A. to northern Virginia in 2011 not because of excessive taxes or bad traffic but because it wanted to be close to its largest customer, the U.S. government. Besides, the aerospace company still maintains numerous facilities and thousands of jobs in Southern California.

The new mayor might be better off focusing on other initiatives he has proposed, from public safety to transportation. Something as basic as streamlining the permit process so that a restaurant expansion doesn’t become a protracted ordeal would represent a giant step for thousands of small businesses. Containing the cost of public worker pensions would help as well. “There are a lot of things that can make us more business friendly and places where we consistently lag and even fail,” Garcetti tells me. “But those by themselves aren’t deal breakers—otherwise we wouldn’t have what we have.”

The funny thing is that L.A. used to be a town where most anyone peddling his wares—from name-brand industrialists to two-bit hucksters—found a receptive constituency. “Los Angeles has always been the city of phony business opportunities, the city of swaps and trades, the city of auctions,” wrote historian Carey McWilliams in 1946, describing how newcomers considered the place “one vast conspiracy of crooked real estate agents.” But neighborhood activism beginning in the early 1960s, along with Sacramento’s tax-heavy, antigrowth fervor, managed to restrict—some would say smother—the anything-goes attitude. Which brings us to the present push-pull between commerce and containment.

With an unemployment rate hovering well above the national level, commerce currently has the edge at City Hall (ironic in light of the perpetual naysaying). Just invoke the words “job creation” and you’ll likely go far, whether it’s the monster Millennium Hollywood development, which would upend the area’s scale and livability (and could be located over a seismic fault); or the $59 million tax break for the Australian shopping mall developer Westfield Group, which is looking to speed up an expansion on the western edge of the San Fernando Valley; or the favored treatment of the entertainment business, which has lobbied for overgenerous tax breaks; or the waiving of well-established zoning restrictions so that more stores and affordable-housing units can be put up near transit corridors—despite little evidence that this will mitigate congestion.

What elected officials don’t realize or choose to ignore is that their benevolence seldom determines whether a company stays or goes, hires or fires. And it doesn’t necessarily improve a city’s business climate. A survey of corporate executives by the publication Area Development found that state and local incentives were only the 13th most important factor in deciding location and that more than half the respondents hadn’t even used them. In a high-octane town like L.A., receiving a break from the city frequently comes down to ego rather than necessity. In other words, “if that guy got one, I want one, too.”

I bring this up with Russell Goldsmith, chief executive of City National Bank and a leading voice in the business community, who says that improvements can be made without giving things away. “Not every incentive is a good one, and not every payment is appropriate,” he says. “You need people in government who can separate the wheat from the chaff.”

Another dirty secret: Job creation doesn’t always determine economic growth, certainly not in the short term. During the mayoral campaign, candidates were talking about how their policies would lead to lower unemployment—as if jobs could be picked up at Ralphs on the way home from the office. It doesn’t work that way. In 2012, city council members glommed on to the promised economic benefits of having a downtown football stadium, even though job-count estimates from the stadium’s would-be owner, Anschutz Entertainment Group, were wildly exaggerated. “Too many politicians are looking for the quick score,” says Beacon Economics’ Thornberg. “Jobs are more organic than people think. It’s rare that a politician will create them.”

Nor should they try. The thing about Los Angeles is that its economy is rich enough and broad enough to keep prospering—in spite of a spotty recovery not everyone has profited from, in spite of chronic budget deficits, and in spite of a city government that doesn’t operate terribly well. Rather than engage in any full-scale reengineering, city officials might want to focus on getting the basics right, which means police, fire, parks, libraries, and roads. If that ever happens, L.A.’s business climate will take care of itself.      

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