Los Angeles Faces Decline as Employers Flee City’s Costs

Frederic Scheer employed 70 people making plastic resins from plant starches in suburban Los Angeles until he calculated in 2010 that he could save $600,000 a year by moving Cereplast Inc. to the middle of Indiana.

Cereplast paid $25,000 a year for a 120,000-square-foot plant in Seymour, south of Indianapolis, instead of $60,000 for less than half as much space in El Segundo, near Los Angeles International Airport, said Scheer, who founded the company in 2001. Health insurance, workers’ compensation and wages were all much cheaper in Indiana, he said.

Complaints like Scheer’s underscore a “serious human problem” in the second-largest U.S. city, the only metropolitan area to show a net decline of jobs in the past two decades, an independent panel of lawyers, developers, union leaders and former elected officials said last week. The Los Angeles 2020 Commission called for changes to stem job loss, poverty, and paralyzing traffic threatening to make Los Angeles “a city in decline.”

“Clearly the climate here was not good at all for us,” Scheer said in a telephone interview from his home in Manhattan Beach, California. “The climate is not good for manufacturing in California. It’s terrible, quite frankly.”

The Midwest move wasn’t enough to save Scheer’s company: Cereplast filed for Chapter 11 reorganization in February. The case was converted to Chapter 7 liquidation March 27.

Los Angeles has lost production jobs at almost twice the national rate over the past decade and the slide continues, even as manufacturing has rebounded nationally since 2010, Bureau of Labor Statistics data show.

Angels, Last

The City of Angels ranks at the bottom of the 32 largest metropolitan areas in payroll employment growth, losing 3.1 percent of jobs since 1990, according to economists at the University of California, Los Angeles.

Christopher Thornberg, founding partner of Beacon Economics LLC in Los Angeles, said the report paints an unnecessarily gloomy picture by starting in 1990, when post-Cold War cuts in defense spending devastated Southern California’s aerospace industry.

“Why should what happened between 1990 and 1994 be put out there as some sign of panic about today’s economy?” Thornberg said in an interview. “It’s ancient history.”

Los Angeles continues to be the largest manufacturing center in the U.S., the Brookings Institution said in a 2012 report. Manufacturing employed 358,200 in the metropolitan area in February, according to the Bureau of Labor Statistics.

While Los Angeles County is the nation’s most productive by output, the region lacks a signature industry like automobiles or computers. Its products include apparel, chemicals, foods, furniture and electronics, according to William Yu, a UCLA economist.

Lower Costs

Scheer said his company recouped the cost of moving to Indiana in nine months and realized savings of as much as $1 million a year on payroll, health insurance, workers compensation, rent and electricity. California industries paid an average of $10.48 per kilowatt hour in January, compared with $6.96 across the U.S., according to the federal Energy Information Administration.

“There is no silver bullet that is going to fix this,” said Gino DiCaro, a spokesman for the California Manufacturers and Technology Association, an industry trade group. “Energy costs are the biggest factor. The smaller guys have a bigger problem with workers compensation costs. People making the investment decisions need some certainty about what the long-term costs are going to be. Right now, they don’t have that.”

Fewer Checks

The loss of manufacturing jobs means fewer middle-income paychecks. Manufacturing pays an average of $63,000 a year in the metropolitan area, compared with $52,000 for education and health care and $36,000 for leisure and hospitality work, according Yu of UCLA.

“We are talking about a bifurcated California, a bifurcated Los Angeles,” he said, “On the one hand, we still have a very highly educated, high-skill workforce. On the other, we have a growing low-skill workforce.”

Boeing Co. (BA)’s decision to close its Long Beach C-17 cargo plane factory next year leaves Southern California without any large-scale aircraft, space vehicle or assembly plant, according to the report by the commission, headed by former U.S. Commerce Secretary Mickey Kantor.

Los Angeles has just three Fortune 500 companies based in the city, a problem the commission blamed partly on “red tape and overlapping bureaucracies.” Three decades ago, the city had 12 Fortune 500 headquarters.

1-in-10 Jobs

Non-farm employment grew 2.1 percent in metropolitan Los Angeles in the past year, led by a 7.1 percent gain in construction workers, according to federal data. Manufacturing fell 2.4 percent, while still accounting for almost one in 10 jobs.

Los Angeles Mayor Eric Garcetti, who took office last year, pledged in his campaign to phase out the city’s tax on gross receipts, which he said hurt business. The tax was retained in his budget proposal released April 14. The Los Angeles 2020 Commission didn’t address the tax in its recommendations.

In his first state of the city address, delivered last week, Garcetti said he persuaded a cosmetics company to stay in Los Angeles by securing broadband Internet access.

“My business team and I have breathed a new sense of urgency into our efforts to recruit and retain businesses in L.A.,” said Garcetti, a 43-year-old Democrat.

Scheer said more is needed. California needs to work on its energy costs, workers compensation system and health insurance to be competitive for manufacturing.

“California is not a friendly state when it comes to entrepreneurship,” he said.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Pete Young, Anthony Palazzo

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