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Growth of California's Life-Sci Sector Hinges on Amount of State Cash It Receives

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California's ability to grow its life-sciences sector will diminish depending on how much state funding Gov. Arnold Schwarzenegger and lawmakers agree to cut from the state's public education system, as well as from economic development incentives — including a tax break agreed to earlier this year but put on hold due to the state's wobbly finances, life science and education advocates agreed in interviews this week.

Schwarzenegger has proposed a combined more than $1 billion in cuts to the state's two public university systems and its community college system, part of his 2009-10 May Revision package intended to plug a $24 billion shortfall in the budget for the fiscal year that starts July 1.

Spokespeople for two of those systems told BioRegion News this week that their administrators have yet to decide how much of that money will be sliced from their biotech-education and worker-training programs, while they scramble to salvage as much funding for FY 2010 as they can.

Even if funding for state colleges and universities survives, California's life-sciences industry faces another challenge. One regional life sciences leader told BRN that talk has surfaced in industry circles that the state may look to save money by scuttling altogether the "single-source factor" tax factor measure agreed to by Schwarzenegger and legislators last February.

"I've heard rumblings that that might come off the table," Joseph Panetta, president and CEO of BIOCOM, the association that represents San Diego life sciences companies and institutions, said in a June 3 interview. "We've fought for four years to get that, and for it to be given to us and then pulled back would be a pretty negative sign."

At deadline, the Conference Committee on the Budget, which includes members from both the Assembly and state Senate, was preparing its own FY 2010 state budget as a counter-proposal to Schwarzenegger's spending plan. Aides to Assembly Speaker Karen Bass (D-Los Angeles), Assembly Biotechnology Committee Chairman Jerry Hill (D-San Mateo), and state Senate President Pro Tem Darrell Steinberg (D-Sacramento) last week did not respond to messages from BRN seeking to learn the fate of single-source sales factor in the FY 2010 budget.

As part of a $130 billion spending plan intended to balance the 2008-09 and 2009-10 state budgets, Schwarzenegger and state lawmakers agreed to change how California calculates the corporate income taxes owed by life-science companies and many other multi-state employers. The change will allow them to determine the percentage of corporate income or “franchise” taxes they owe the state based solely on their sales, rather than combining double-weighted sales with two other factors: the size of their payroll and the amount of property they own. Current law calculates each factor as a ratio of in-state activity to activity everywhere.

In a bow to the state's budget woes, California life sci-leaders went along with the state suspending the new single-source sales factor for two years, until Jan. 1, 2011. But the tax break was part of a budget deal that hinged on voter approval of five ballot questions — boosting state spending for community colleges and local K-12 school districts, lottery payouts, children's programs, mental health programs, and the state “rainy day” fund, which would grow from 5 percent to 12.5 percent of the General Fund. Voters defeated all five by two-to-one margins on May 19.

Since then, Schwarzenegger and state lawmakers have scrambled to revise their budget for FY 2010, setting a June 15 deadline. While officials have blown past previous deadlines, taking months to craft new spending plans, they say this year is different because Controller John Chiang has warned that California will run out of cash by the end of July and will lack the ability to borrow money absent a budget deal.

The governor has proposed chopping $322 million from the 10-campus University of California system, another $481 million from the California State University system, and $581 million from the California Community College System. That does not include $1 billion in potential additional cuts to the 2008-09 budgets of those systems.

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Jack Scott, chancellor of the California Community Colleges, told the panel his system has estimated it will lose an additional $117 million in funding from local property taxes during 2009-10. And unlike the K-12 system, his system is not guaranteed repayment of the gap through the state General Fund to make up for such losses.

"All I ask is that after all funds are calculated, including the allocation of federal stimulus dollars, that the cuts to community colleges be fair and equitable," Scott said in prepared testimony to the Conference Committee on the Budget during a June 1 hearing.

Echoed Charles Reed, chancellor of the 23-campus CalState system, in his testimony to the panel: "Give us the number we have to live with and give it to us as soon as possible."

Whatever that number, "We're going to be cutting our enrollment for sure. It's just by how much and how fast we can do it — that's another question," CalState spokeswoman Claudia Keith told BRN on Wednesday. She said new facility construction could also be slowed down or halted again under the new budget, as it froze this past fiscal year until the February 2009 budget deal.

The system is awaiting word from Schwarzenegger on whether it can proceed with projects paid for with bonds and which won't involve General Fund money for at least two years.

"At a time when more people are going back to school because the economy's so bad, they're looking to cut education programs. That's a great indicator of how backward the timing of this process is. It's a dreadful time to do this," Matthew Gardner, president and CEO of BayBio, the San Francisco Bay Area's life sciences group, told BRN in an interview at the Biotechnology Industry Organization's 2009 International Convention in Atlanta.

"It certainly affects [the biotech industry in California]. You've got to maintain leadership, and you've got to continue feeding the human capital pipeline to continue employment growth. It's a serious threat to companies staying in the region," Gardner said.

The industry and public education systems, he said, need more than just more state money for existing programs if the industry is to keep growing. "In some places, the structure of [real estate permitting] reviews takes too long or is too bureaucratic. In some places, the basic availability of even the more essential tools in a classroom is not established, so the foundations are broken.

One such needed tool, he said, is targeting of funding to larger-scale training programs, rather than perpetuating current pilot programs that serve fewer students. "Unfortunately, temporary funding for a pilot program doesn’t establish new faculty positions, build new classrooms, and train new cohorts."

California's problems, Gardner noted, have prompted the Bay Area Council, a regional business group, and other organizations and individuals to seek a state constitutional convention aimed at repairing the state's dysfunctional budget-making.

For now, Panetta said, budget cuts to state colleges and universities will further chill California's already frosty business climate, creating a competitive disadvantage that other states can capitalize on: "Anything that cuts education and worker training is something that other states can compete with us on."

And will compete with California on, it might be added. Earlier this year, a delegation headed by Massachusetts' top life-sci official visited the Golden State on a trade mission to promote the Bay State as a better alternative for growing life-sci companies.

"The impression we've gotten from the comments at [a Feb. 4] roundtable at Genentech is that California is going to really be struggling just to pay some basic bills. And I think there is real concern about whether the state will be able to stay the course with its commitment" to the life-sci industry, Susan Windham-Bannister, president and CEO of the Massachusetts Life Sciences Center, told BRN minutes after the roundtable talk, which the state co-organized with BayBio [BRN, Feb. 9]

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Massachusetts is not alone in challenging California, Ross DeVol, the director of regional economics for the Milken Institute, told BRN in an interview this week.

"States know the budget problems that California is having, the negative perception that many businesses feel, and the uncertainty over whether or not California is going to be able to provide the same service level in terms of workforce training, or whether or not taxes are going to go up," DeVol said.

"The challenge to California is that many other states are being very aggressive in offering incentives," DeVol added. "California's philosophy has been for many years that people are here because they need to be, whether it is accessing capital or the research that comes out of the universities, and they'll offset the higher cost of doing business in California. But there comes a point where there's the straw that broke the camel's back. You have to wonder whether or not this might be that time."

Beyond the life sciences, California-based tech giants have opted to expand beyond the state. This week Apple, for example, announced it had selected North Carolina as the site of a server farm, while Google has expanded in recent years within Cambridge, Mass.

Panetta said California's fiscal woes have prompted the San Diego Workforce Partnership — a nonprofit public benefit corporation created by the city and county of San Diego — to pursue federal funding for training programs through the American Recovery and Reinvestment Act, President Obama's $787 billion economic stimulus measure.

ARRA is the source of a total $1.5 million in life-sci research grants announced by CalState on June 3 — $814,826 from the National Institutes of Health to biology professor Constantine Tsoukas and $643,173 from the National Cancer Institute to chemistry and biochemistry professor Shelli McAlpine.

Last month, the San Diego Workforce Partnership solicited responses to a formal request for proposals from public community colleges, continuing education, and public university extended studies programs interested in creating or expanding training programs for jobs in biotechnology as well as healthcare, construction, and alternative or "green" energy jobs. The deadline was May 27. On June 19, the San Diego Consortium Policy Board is set to make final selections of approved programs, with contract negotiations and signing to follow.

In past years, Panetta said, the partnership has put together federally funded programs that have trained manufacturing employees for jobs as lab technicians. One disadvantage of federal funding until now, he said, was that the money was limited to technical-level training, and did not allow on-the-job training or training that stays at the community college level.

"There's going to continue to be a need as the industry grows. Once we get out of the recession, we're going to see the opportunity for companies to expand, where they haven't been able to now," Panetta said, adding that at present, "we're more worried about life-sciences companies just surviving, and getting through the next six months."

Also worried about getting through the next few months are the state's community colleges, which industry leaders have increasingly touted as key players in developing workers capable of filling thousands of anticipated new jobs — some of which will be created in the current economic slump.

Terri Carbaugh, a spokeswoman for California Community Colleges, noted that this past academic year, the system added more than 150,000 students, many priced out of costlier colleges due to the economy. The system, which serves 2.5 million students in 110 two-year schools statewide, has projected it would lose 250,000 students if Schwarzenegger's cuts took effect as proposed.

During the 2007-08 academic year, the state spent $1.23 million to fund six centers for applied biological technologies that served a total 2,147 students taking courses for a total 17,089 credit and noncredit hours — as well as a total $366,261 in a pair of Industry-Driven Regional Collaborative grants, the community college system noted March 4 in its most recent annual report on its Economic and Workforce Development Program to the state legislature, Making a Difference.

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The centers served 1,607 employees and 533 businesses in 2007-08, and carried out 333 job placements, according to the report.

"Between 100,000 and 125,000 Californians are currently employed in the biotechnology field, and it is projected that there will be about 10,000 to 12,000 new jobs every year due to growth and turnover," the report projected.

The prospect of publicly funded university or college cuts comes weeks after California's K-12 education system drew a mediocre grade in a report measuring the performance of each state, Washington, DC, and Puerto Rico in preparing middle and high school students for college-level life sciences programs.

California was among 11 states in the "middling performance" third tier of five measured by Taking the Pulse of Bioscience Education in America: A State-By-State Analysis, a report released at BIO 2009 by the Milken Institute, Battelle Technology Foundation, and the Biotechnology Institute.

California's ranking in the report came despite its distinction of having the nation's largest number of biotech, pharmaceutical, and medical device businesses and employees, most within three clusters anchored by the state's three largest cities of San Francisco, San Diego, and Los Angeles. Joining California in the middle tier were states with much smaller bioclusters — Alabama, Arizona, Hawaii, Indiana, Kentucky, Maine, Michigan, Montana, South Carolina, and Wyoming [BRN, May 21].

This past week, a newer Milken Institute report showed signs that the competitiveness of California's life sciences clusters compared with those of other states and regions is starting to show signs of slippage, albeit slight ones. According to North America's High-Tech Economy; The Geography of Knowledge-Based Industries, the San Diego-Carlsbad-San Marcos region dipped from first to second in the ranking for scientific research and development services between 2003 and 2007. Despite a 6.6 percent increase in jobs, to 25,975 from 24,375, the region's share of employment compared with other North American regions fell to 3.93 percent in '07 from 4.27 in '03, and its share of wages dipped from 6.95 percent to 6.47 percent.

The Silicon Valley region of Sunnyvale, San Jose, and Santa Clara, Calif., fell from third to sixth place in the scientific R&D ranking, paced by a 4 percent slide in jobs from 20,085 in 2003 to 19,275 in 2007, and slides in its shares of North American employment and wages.

Some of those jobs lost in the two regions may have shifted within California to the San Francisco-San Mateo-Redwood City region, where employment in the category rose to 14,036 in 2007 from 12,788 in 2003, explaining in part a ranking rise from 11th place in '03 to ninth place in '07. Yet that region's share of North American life-sci jobs actually fell by 0.03 of a percentage point, to 2.21 percent in 2007.

San Francisco-San Mateo-Redwood City fared better in pharmaceutical and medicine "manufacturing," a drug-making category that includes non-manufacturing jobs, inching up from ninth to eighth in the category, thanks to the number of jobs rising to 8,118 in '07 from 5,091 four years earlier. And Sunnyvale-San Jose-Santa Clara retained its 2003 top ranking as the nation's most concentrated center for 19 different specialties of high tech, including four specialties that fully or partially include life-sci companies.

"Despite all the problems that California has had with the budget, it has five of the 10 high-tech clusters in North America. The question is, whether or not this budget crisis and other problems of the state are going to result in lower investment, and whether California can retain these positions in the future. That is the real question," the Milken Institute's Ross DeVol told BRN.

While California has long been a high tax state, access to employees has until now offset the state's higher cost of doing business, DeVol said. "One of the issues coming out of this budget crisis is going to be California cutting back on its funding of the University of California system, where some of the top graduates come out of. And it's going to be raising the tuition rate, which suggests that fewer foreign graduates may be coming to California, and many of those are the future technology entrepreneurs.

"If they don't come to California and [they] go somewhere else, that will harm the state over the long term," DeVol added. "If those workforce training programs are cut at community colleges, that is going to be much more difficult to retain the firms that are there, or in a best case scenario, they wouldn’t expand in California; they would expand somewhere else. It's going to cause, I think, a lot of employers to re-evaluate whether or not they may alter their operations."

Panetta agreed, saying that the state doesn't spend as much on life-sci economic development as other states. He expressed concern about whether the state budget knife would spare life-sci programs ranging from the bioengineering and bioinformatics programs at CalState's San Diego State University; to the research programs of UC San Diego, whose Rady School of Management will offer training for biotech executives from June 8-10.

"In general, overall cuts to higher level education are going to have an impact on us," Panetta said. "Any funding that benefits us benefits us more through the investment that's made in the UC system and other higher education institutions. That's where we see the innovations that hopefully get turned into products and companies. Not to mention, that's where we get the majority of our home-grown and trained scientists and business folks."

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