Is California Killing Its Tech Industry?
December 22, 2003

By James Klein, Larta VOX Editor

California has cut state technology funding as other states are doing everything they can to develop, attract and retain technology companies, projects, and research centers. As competition from other states increases, it is less likely the next technology revolution will happen in California.

Don't it always seem to go, that you don't know what you've got till it's gone?
Joni Mitchell

California Cuts

California's premier source of matching technology funds, CalTIP, was eliminated in 2003. The technology-oriented investment program was created in 1994 with $6 million from the Petroleum Violators Escrow account. The program included a grant-making provision to leverage federal grant dollars. Later, the program was moved to the General Fund, making it vulnerable to the boom and bust cycles that mark California's budgetary problem.

"This program was the most viable of its kind in the country because California is a leader in university spin-offs, startups and applied technologies," explains Rohit Shukla, President and CEO of Larta, which managed the CalTIP program for Southern California (excluding San Diego) since 1993. Based on early successes, the program's budget was increased to $8 million in 1999. But by 2001, when budget pressures increased, CalTIP was cut back to $3 million. Tech boosters weren't surprised when the ax fell this year.

"California's leadership in these areas is threatened by the lack of matching support for companies unable to derive funding from the open market," Shukla says. Without state and federal funds, development could take far longer, stretching already tight resources to the breaking point."

"The impact on the start-ups looking for funding is not just great, it is catastrophic," claims Shukla. "Especially as other companies from other states become more competitive because their states still have similar programs providing matching funds." For some startups, the lack of financing could force them out of business altogether.

While the impact on larger companies may not be as severe, cuts in state support are still problematic.

"Many established technology companies took advantage of CalTIP to push risky areas of development, such as products based on research conducted by employees or external partners engaged in innovative research," says Shukla. "Potentially, the elimination of the program robs these companies of vital and innovative technologies."

"The entire infrastructure of support was stimulated by CalTIP," Shukla notes, "which was a preliminary raison d'être of the technology program in the state."

CalTIP's success does not seem to be in question. The program has created about 1,245 jobs each year with an average annual salary of $63,000. Tax revenue generated by CalTIP has returned $2.27 for each dollar invested, representing a 127% return on investment for the State. CalTIP has leveraged $500 million in federal matching funds, attracted $900 million in private follow-on funding to California, and helped introduced 134 products to market.

Many of California's elected officials, including former Governor David, have praised CalTIP as instrumental in maintaining California's lead in technology and life sciences. The $6 million short-term savings resulting from CalTIP's elimination could result in significant long-run losses to the state: hundreds of million in federal and private funds, millions in business taxes, thousands of high-wage jobs and hundreds of innovative products.

"CalTIP was born in a time of economic distress, in the early 90's. What it took was a bipartisan group committed to a vision of the future. California's government today, however, is both fractured and unable to focus on the future. And they've allowed a wonderful program to be eliminated at the very time when federal money is available for such urgent national priorities as homeland defense and the life sciences. CalTIP provided California with a seat at the table for federal funds," explains Shukla.

"It's a shame to lose the program," said Rocky Spingstead, Co-Founder of Fidelys, a Los Angeles-based investment banking and corporate advisory services company. "Many promising companies aren't a good fit for VCs for one reason or another, but are still viable and require capital to fulfill their potential. CalTIP is a good compliment to traditional forms of financing, filling a vital gap in the fundraising process, helping companies develop to the point where they're attractive to outside investors. It allows companies to commercialize their products without increasing their debt burden or diluting their shareholder value."

Other States Investing

In the last ten to twenty years, several regions of the United States have developed strong local economies based on fast-growing high-technology industries. Encouraged by these successes, public and private sector groups in many regions have launched initiatives to promote high-technology development of their own.

This trend first started in the 1990's, when the growth of Silicon Valley spawned a large number of initiatives, each tagged with the "silicon" moniker. Some examples: Silicon Hills (Austin), Silicon Alley (New York) and overseas, Silicon Fen (Scotland). Now, with the bursting of the tech "bubble", the trend has abated only slightly, supporting the notion that economic development lags market realities. Some tech-based economic development programs have been cut as a result of states' budget shortfalls, but others are being created in the hope that they'll attract and grow new businesses, which will increase future tax revenues.

Technology development projects continue to be funded by many states, including the creation of enterprise zones, incubators and research centers to help grow indigenous technology projects and attract companies from out-of-state.

Few programs have proven more successful than the New Jersey Commerce & Economic Growth Commission's nationally acclaimed Urban Enterprise Zone (UEZ) program. Since 1984, it has been a hallmark for urban revitalization and a cornerstone for economic growth and development. Enterprise Zones were created in California to stimulate business investments in areas that are economically disadvantage as well as spur job growth in areas of high unemployment.

Some states are jumping on the Enterprise Zone bandwagon. Officials in Maine announced a plan May, 2003 to create eight enterprise zones to promote economic development around the state. Companies within the enterprise zones would receive special tax breaks and other incentives. Despite considerable efforts to advance the plan, however, there is growing opposition from those who argue in favor of more investment in education, health care and infrastructure improvements rather than benefits for corporations.

It was reported at the end of May, 2003 that Minnesota will create several "tax-free zones" for businesses. Gov. Tim Pawlenty, who has championed the controversial concept, is expected to sign legislation that will establish up to ten "Job Opportunity Building Zones" (JOBZ) in greater Minnesota. Revenue forecasters now estimate the potential costs of the JOBZ program to be at least $5 million annually. Officials in Southington, Connecticut, home to the largest enterprise zone in Connecticut, announced recently that six industrial companies have made plans in 2003 to relocate their operations to Southington.

Even incubators, which have largely fallen out of favor, are attracting federal technology-oriented economic development grants. Pennsylvania's Pottsville/Schuylkill Technology Incubator announced May 16, 2003 that it had received a $400,000 federal grants from the EDA. The Montana Technology Enterprise Center in Missoula County received $702,540 from the EDA to fund construction of Phase II of the MonTec business incubator. The Ben Hill-Irwin area Joint Development Authority of Fitzgerald, Georgia, and Fitzgerald Water, Light & Bond Commission got $1,300,000 in federal EDA grants for the development of a new technology business park.

The City of Anderson Redevelopment Commission, and Anderson University in Anderson, Illinois was granted $1,603,000 by the EDA to construct a manufacturing technology-based business incubator to be known as the Anderson Business Development Center. New Jersey City University in Jersey City, New Jersey received $1.5 million from EDA to rehabilitate a vacant building for use as a computer-technology business incubator facility. The City of Alexandria, Louisiana won a $900,000 EDA grant to support the renovation of a building for a business incubator. University of Texas at Arlington, Texas received a $1.4 million EDA grant to assist in acquiring and renovation an existing office building as the Arlington Technology Incubator.

A proposal was presented early May, 2003 by a coalition of development groups seeking to build a showcase technology facility in Franklin County, Pennsylvania. It is hoped the 25,000 square-foot building will be constructed using federal EDA grants, which are expected to pay for as much as half of the anticipated $2 million cost to develop the facility. The Franklin County Area Development Corporation and Chambersburg Area Development Corporation are partners in the plan to purchase a six-acre tract in the business park for the high-tech, multi-tenant building.

Sometimes just providing commercial real estate is enough for a project to build momentum and attract federal grants. A New Hampshire state development agency announced May 16, 2003 that it will receive a $358,000 federal EDA matching grant to the New Hampshire Community Development Finance Authority (CDFA) to assist its efforts to build a 39-acre corporate office park.

Regions can benefit from government money even by improving services in industrial parks. The City of Vineland, New Jersey, announced June 3, 2003 that it had been awarded a $1.66 million federal grant to boost sewer and water services in the city's industrial park. The grant was awarded to the City of Vineland and the Landis Sewage Authority to help with the $2.4 million cost of the project.

On June 5, 2003, the Scott County Economic Development Authority, the Virginia Tobacco Indemnification and Community Revitalization Commission, and the Virginia Coalfield Economic Development Authority announced a $2.5 million expansion of the Duffield Industrial Park. The Virginia Tobacco Indemnification and Community Revitalization Commission agreed to grant a total of $1.66 million, while the commission's Southwest Economic Development Committee agreed to spend $830,000 on the project. It is hoped the EDA will provide the remaining one-third of the $2.5 million needed for the project.

Some economic development projects focus on specific technology sectors, such as the biotechnology industry. On May 20, 2003, it was announced that the Economic Development Administration is contributing $432,850 toward the funding of the Thomas M. Teague Biotechnology Center, a biotech park in the City of Fairfield, Maine.

The Biomedical Research Foundation of Northwest Louisiana secured over $1 million in federal funding to jumpstart tech-based economic development in Shreveport, Louisiana. The US Department of Housing and Urban Development's Economic Development Initiative Program is providing the funding, which will go toward obtaining land for the Foundation's InterTech Science Park and purchasing equipment for a $10 million wet lab incubator. Construction of the 60,000 square-foot incubator is expected to begin later this year. The Foundation promotes economic development by supporting enterprises that advance healthcare delivery, medical research and medical technology.

Sometimes just providing commercial real estate is enough for a project to build momentum and attract federal grants. A New Hampshire state development agency announced May 16, 2003 that it will receive a $358,000 federal EDA matching grant to the New Hampshire Community Development Finance Authority (CDFA) to assist its efforts to build a 39-acre corporate office park.

Regions can benefit from government money even by improving services in industrial parks. The City of Vineland, New Jersey, announced June 3, 2003 that it had been awarded a $1.66 million federal grant to boost sewer and water services in the city's industrial park. The grant was awarded to the City of Vineland and the Landis Sewage Authority to help with the $2.4 million cost of the project.

States and cities sometimes create economic development programs without the benefit of federal money. The City of Camden, New Jersey is offering banks and insurance companies rebates of as much as 100 percent of their corporate taxes for up to 10 years to relocate into or expand operations in the city. The program has already attracted Cigna Corp., which is considering relocating its corporate offices and 1,500 jobs to Camden. Camden is benefiting from a state revitalization plan that calls for the investment of $175 million in the city over the next five years. Minnesota will create a biotech tax-free zone aimed at building a biotech industry on the coattails of research at the University of Minnesota and the Mayo Clinic.

Some economic development projects focus on specific technology sectors, such as the biotechnology industry. On May 20, 2003, it was announced that the Economic Development Administration is contributing $432,850 toward the funding of the Thomas M. Teague Biotechnology Center, a biotech park in the City of Fairfield, Maine.

The Biomedical Research Foundation of Northwest Louisiana secured over $1 million in federal funding to jumpstart tech-based economic development in Shreveport, Louisiana. The US Department of Housing and Urban Development's Economic Development Initiative Program is providing the funding, which will go toward obtaining land for the Foundation's InterTech Science Park and purchasing equipment for a $10 million wet lab incubator. Construction of the 60,000 square-foot incubator is expected to begin later this year.

Recruiting Companies

Some panelists at the Milken Institute's 2003 State of the State Conference emphasized how aggressive other states have been recruiting companies to their regions, while California has been relatively laissez-faire in its efforts to retain companies and attract those from out of state.

"I got a call yesterday from the state of Virginia, trying to recruit us there," recounted Kellie Dodson, President of ACE Clearwater Enterprises, a metal forming company located in Dominguez Hills.

"I wish that California would be more proactive," continued Dodson. "Other states are very aggressive trying to recruit business, offering tax credits, helping with relocation costs, and training of the workforce. Mexico is just as aggressive. We need to learn a lesson from this."

Poaching Projects

Other states are not only investing in home-grown technology development, they are even poaching major projects, luring technology centers away from other states - including California.

A Colorado State Economic Development Commission has initiated a major effort to persuade the U.S. government to move the Space and Missile Systems Center at the Los Angeles Air Force Base to the Peterson Air Force Base in Colorado as part of the upcoming Base Realignment and Closure process.

"This is not a fight we can afford to lose because it's vital to LA County's economy," said CEO & President Lee Harrington Los Angeles County Economic Development Corporation (LAEDC).

"LAEDC believes such a move could have dramatic implications for the economy of Southern California and for the safety of the space program," continued Harrington. "We are committed to the retention and growth of the LA Air Force Base (LAAFB) and the Aerospace Corporation here in Los Angeles County."

The Aerospace Corporation is a private, nonprofit corporation whose primary customer is the Space and Missile Systems Center (SMC).

Harrington said LAEDC has been working with "the County of Los Angeles, the South Bay and the cities of El Segundo, Hawthorne and Redondo Beach for the last six months to ensure they stay. Now, we are launching a major public retention initiative. Loss of these operations would bring a catastrophic set back to our aerospace/defense industry."

LAEDC's Chief Economist, Jack Kyser, claims more than 65,000 current high wage jobs worth $3.3 Billion annually are at stake in Southern California.

"Based on new contract awards, this job base will grow to 75,000 in the next few years and $3.8 billion in wages. These jobs will generate at least $270 million in state and local taxes annually. LAAFB and the Aerospace industry support thousands of other businesses in LA County and Southern California. In short, they are a real plum that other regions would love to pluck," said Kyser.

"This is not a fight we can afford to lose," concluded Harrington. "We invite members of the community to join us in this effort."

SSTI Weekly Digest, a publication of the State Science and Technology Institute, reported in November that the California-based Scripps Research Institute, lured by hundreds of millions of dollars from the state of Florida and Palm Beach County, agreed to locate its first branch or satellite office in Florida.

With a $310 million commitment passed by the state legislature and as much as $200 million in additional support from the county government, the California-based Scripps Research Institute has agreed to locate its first branch or satellite office in northwest Palm Beach County, Florida.

In return for the financial support, Scripps is to work toward employing as many as 545 workers on the site by 2011. At $935,780 per job - if the 545 target is met over the eight-year period - the project could be the most expensive tech-based economic development risk yet undertaken by the public sector.

The state and county government will be providing Scripps the land, the infrastructure, the building, equipment and other physical assets for a state-of-the-art research laboratory and administrative complex. Scripps will supply the intellectual capital, potentially the human capital, and the prestige. Up to $155 million of the state's contributions may be repaid by Scripps over 20 years through royalties on technology developed at the new lab.

Florida, of course, is assuming that the new Scripps lab is only the first and most critical piece of the gambit. Governor Jeb Bush compared it to the initial groundbreaking from Walt Disney World and the NASA Kennedy Space Center. The state is banking on other pieces to fall into place as a result: more federal life-science related research funding to the state's public research universities, spin-off companies from Scripps and university-generated technology, other companies being attracted to the area to be close to Scripps, royalty and licensing income, tax revenues from the higher-skilled employees and higher-valued properties, etc.

Gov. Bush projects overall that Scripps Florida's impact will boost the state's gross domestic product by $3.2 billion over the next 15 years and create 6,500 local jobs directly from spin-offs from Scripps Florida. The state projects an additional 44,000 jobs would be created by biotech firms that would locate near the institute.

The legislature took less than a week to review and approve the state's share of the inducement package.

Impact on California's Future

Spending cuts could spell trouble for technology innovation in California, where IT and scientific research and development - in the public and private sectors - is a major source of economic development.

"Startups with the kind of technologies relevant to an increasingly important national mission and national priorities are likely to have a harder time -- especially because private funding is unable (and unwilling) to take up the slack," said Rohit Shukla.

California's investments in education and technology have fuelled the state's meteoric economy in the last three decades. We may have been able to ride on our laurels in the past, but those laurels have dwindled, and will not sustain us in the future without commitment and leadership from Sacramento.