2016 CA Summit - A Hard Sixth: Keeping California Strong in a Competitive Global Economy

Economic Status and Performance

• California currently ranks as the 5th largest economy in the world by GDP, surpassing the United Kingdom.
• In August 2016, California created approximately 40% of all new jobs in the United States.
• The state achieved larger job growth than the combined totals of Texas and Florida.
• Despite high per capita income, California ranks 4th highest in the United States for poverty levels when adjusted for cost of living.
• The state is the world's leading filer of bioscience patents, particularly in the Bay Area, San Diego, and Los Angeles.
• California receives over 60% of all U.S. venture capital due to its favorable investment environment.

Fiscal Challenges and Credit Ratings

• Standard & Poor's rates California at "Double A minus," three notches higher than the "minus" rating at the start of Governor Brown's term, but still lower than 41 other states.
• California relies on personal income taxes for 67% of revenue, with the top 1% of taxpayers contributing 48% of that total.
• This revenue structure creates significant volatility; a modeled 2% GDP decline and 25% stock market drop would create a $14.7 billion revenue shortfall exceeding current rainy day reserves.
• Unfunded retiree health benefit liabilities (OPEB) total approximately $74 billion, with the state budgeting only $2 billion annually instead of the actuarially recommended $6 billion.
• Pension systems are roughly 70% funded, which is considered average compared to other states but remains a source of fiscal stress.
• California receives approximately 72 cents of federal funding for every dollar contributed, effectively subsidizing other states.

Health Care and Demographics

• Advances in public health and medical research have driven over 50% of economic growth in the last century, increasing life expectancy by 40 years in the last 115 years.
• Blue Shield of California reported a 25% reduction in prescription opioid dispensing in the last year, correlated with parallel reductions in ER visits and hospitalizations.
• Obesity drives over $1 trillion in annual U.S. economic costs due to reduced resources and health issues.
• California's population is shifting rapidly; children under five are now 75% non-white, making the state a demographic precursor for the entire U.S.
• Senator De Leon advocates for early childhood education investments, citing a rate of return where $1 invested at age 5 yields $10 by age 30.
• The "California Secure Choice" Act will automatically enroll workers without retirement benefits into a defined contribution plan starting in 2018, potentially creating an $8 billion fund.

Policy, Regulation, and Business Environment

• Representative Mimi Walters advocates for corporate tax reform to address the current ~35% corporate tax rate, arguing it causes companies to move headquarters overseas.
• Walters cites that California lost 250,000 residents in 2013–2014 due to regulatory and cost burdens, with zero manufacturing jobs remaining in the state.
• Senator Kevin de Leon emphasizes bipartisan cooperation in the state legislature, contrasting it with federal dysfunction, and highlights success in clean energy job creation.
• The state has passed Proposition 25 (majority vote budget) and Proposition 2 (rainy day fund deposits) to improve fiscal resilience.
• A new R&D tax credit was made permanent in Congress, intended to provide stability for bioscience companies.
• De Leon argues that the loss of manufacturing is due to globalization and technology rather than just regulation, predicting a return to advanced manufacturing hubs.

Future Outlook and Strategic Priorities

• Panelists identify biotechnology, artificial intelligence, and alternative fuels as key future drivers of economic growth.
• Scott Bessent suggests that pension funds must shift investment strategies from traditional fixed income to infrastructure and private equity to meet return assumptions in a low-yield environment.
• Gabe Miller identifies the massive increase in housing supply and infrastructure investment as critical requirements for a higher credit rating.
• Kevin de Leon proposes democratizing access to clean energy technologies (like solar) to ensure economic growth across all income strata.
• Marcus Milken highlights the "value per employee" of tech giants (e.g., ~$25 million for Facebook) versus traditional retailers, noting the ability of high-value firms to offer superior benefits despite high local housing costs.
• Scott Bessent suggests a structural shift in work culture, proposing a transition to shorter work weeks (e.g., 10 hours) as automation replaces manual labor, rather than relying on direct government income support.
• The consensus among panelists is that education, specifically early childhood education and vocational training, is the primary mechanism for maintaining a competitive workforce amidst demographic shifts.