California Business Picture: (Rated R for Rough)

Washington Matters

California Business Picture: (Rated R for Rough)

California's latest budget impasse is just one example of how the most populous state's long-term business outlook is growing increasingly grim. Weather, scenery and a big consumer market will carry the Golden State only so far.

Since July 1, the state has been reduced to issuing IOUs for tax refunds, student grants and purchases from businesses because it ran short of funds. If that's not bad enough, major banks have announced they won't honor the state-imprinted IOUs after July 10. That should make for some fun in the sun, right?

With Sacramento in near paralysis, Republicans refuse to vote for higher taxes to close the $26.3 billion deficit, far and away the largest of any state. Democrats won't support cuts in welfare and education spending. And Republican Gov. Arnold Schwarzenegger promises to veto anything without long-term reforms in it. Lenders are worried. They are already reducing the bond ratings, making the cost of  borrowing even higher.

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The impasse is simply a microcosm of the contradictory trends undermining California's future. Over time, the state has spent freely on state employees' salaries, aid for the poor and environmental improvements.

It has set aside pools of money for high-speed rail, stem-cell research and transportation. Yet, it has limited property tax revenue by passing Proposition 13 in 1978 and it has been cutting back on auto taxes and it is adamant about exempting all manner of services from the sales tax.

Now businesses are complaining not only about taxes but also spending cuts that are being considered. Their highly skilled workers won't want to be in a state with faltering schools, closed state parks, damaged roads and rickety rapid transit systems.

California already has a poor reputation for its treatment of businesses. Workers' comp costs are rising again, and state and local authorities are imposing more restrictions on expansion. California ranks last in a 2009 survey of CEOs by Chief Executive magazine.

Nearby states such as Colorado and Nevada are taking advantage of the poor publicity by sending groups to California to lure away businesses.

Manufacturing is drifting away from California at a faster rate than elsewhere. And a  new study  by the Public Policy Institute of California sees a shortage of 1 million college grads by the year 2025. Big budget cuts coming to state colleges won't help matters.

Not everything is discouraging. Tourism, international trade and entertainment are naturals for California with its climate and location. Silicon Valley will still be a center of innovation for the coming green industries.

But the bloom is off the rose...California is no longer setting an example for other states that want to attract innovating, job-creating industries. It's a fact of life and economics and business evolution that we all will see in coming years. For decades, California was more than a dream. It was a compass heading for business and innovation. The needle on the compass is quietly but surely shifting.