Deep Impact: California's budget crisis vs. technology development

An Opinion Editorial by Rohit Shukla, Larta CEO, Wendy Hall, Larta Staff Writer

August 5, 2002

California's budget crisis is the largest in its history, rivaling the terrible economic crises of the early '90's. Part of this is due to its extraordinary reliance on capital gains, especially during the high-tech boom of the last seven years. And while many states currently are experiencing deficits due to the slowing economy, the scope and scale of California's deficit is having a severe negative impact on its economic and social base, and threaten the very foundations of its recent growth. Legislators in California face Hobson's choices everywhere they turn. And in one area, especially, these choices could threaten the long-term gains the state has made in an area of central importance to its future: the nurturing and growth of its technology base.

California's recovery from the devastating impact of the early 1990's has been remarkable. It has also led to the spread of a laissez-faire attitude that may be unhelpful in bad times, like the present. Many people believe, for example, that the state is fated forever to be the natural breeding ground of new technologies, new products and services that play in an increasingly globalized, technology-driven economy, with or without any involvement by the State, by public policy or by careful, strategic planning. And so, while other states, caught in budget squeezes seek to maintain (and in the case of Pennsylvania and Indiana, for example, expand) the current outlays in early-stage technology programs, California looks to gut its exemplary program.

That program, the California Technology Investment Partnership (or CalTIP) has been around since a bipartisan legislature created it during the worst slowdown in California's history, during the early 1990's (specifically, in 1992-93). It is a modest matching grants program, at $6 million a year, encouraging entrepreneurs to go after the considerable federal investments in technology development, spread over several agencies. The State would provide only up to 30 percent of the total project cost, the rest financed by the federal government and by private sources. Moreover, the State's choices were always biased towards companies who took real steps towards commercialization, thus ensuring relatively near-term growth in jobs, revenue and markets, and assuring a payback to the State's coffers. The results have been impressive. The State's investment of $32 million has yielded revenue in taxes alone of 127 percent, and investments from the private sector of over $200 million. The program is managed by the State's Technology, Trade and Commerce Agency, along with the regional technology alliances (RTA's), of which Larta is one.

But the program is both very small (at $6 million dollars) and relatively invisible, both because of its size and because of its targets: early stage technology entrepreneurial ventures cannot compete with neighborhood programs. And in a year when everything, from children's programs to elderly care is on the chopping block, cutting this program has no downside in the minds of legislators. "Our biggest problem is the short sightedness of our legislators," says Tyler Orion, President of the San Diego Regional Technology Alliance (SDRTA). "The CalTIP returns don't come today, and the legislator of today who puts this money in the budget cannot necessarily say that tomorrow he's going to bring this impact to his neighborhood."

The time frame on the ROI is the contending point for legislators who are already caved in with political pressure for having to cut human service programs--health care, education, etc. Because the effects of CalTIP won't be reflected in the short term for their individual districts, the program is frequently argued away as either unnecessary corporate pork or worse, as too esoteric to their interests in the here and now. The short term impact for not funding the growth of a major California-wide concern like technology is not threatening, yet negative long term ramifications for the state in cutting CalTIP are real. These implications fly in the face of the reflexive opposition to the public sector's involvement in such an investment program, from people all across the political spectrum. "Long-term innovation, which is what CalTIP spurs, cannot be victim to the fears created by short-term economic cycles," says Victor Hwang, the COO of Larta, which administers the CalTIP program for Southern California and Santa Barbara (SDRTA oversees San Diego). "Cutting CalTIP now is like giving away one's shoes in the middle of a marathon. Many of the biggest and best companies today were created in the middle of the last down economy."

CalTIP is also particularly important to boost the lack of alternative capital for business development, something which an economic rebound is dependent upon. If a technology has been developed through the point in which it's ready for commercialization, there's often a huge gap between the science and the business activity. The CalTIP money can be applied towards IP protection, market research, management, development of a business model--money which would only come from private sources. The fund provides grants of up to $250,000 per company to advance commercialization activities and has functioned without being a handout or a stand-in for corporate welfare for larger companies who would pursue specific R&D regardless of government support. By and large, many CalTIP companies would never have been able to pursue their work without this support.

"We have a project of a high risk area of nanotechnology and the gains are very big if we win," says Scott Broadley of the Broadley-James Corporation, which received a grant in 2001. "The CalTIP funds make these things happen, otherwise the barrier is just a little too steep. In tough times, even within corporations, R&D gets cut first. But this is short term thinking, especially when you see what high tech has done for the state of California. We'd all be sitting here growing strawberries and making movies if it wasn't for the tech industry."

In the past, we have reminded readers of LA VOX about the importance of keeping open the pipeline of early, technology-driven products and services, especially during a downturn, when private investment rarely does much to stimulate such growth. Government alone cannot do so, but a partnership between governments and the private sector can, and should continue to reinvest in the strategic underpinnings of the economic base, mindful of the benefits for their societies. The current budget impasse in California may or may not be resolved in the next few weeks. But, as Margaret Thatcher pointedly said to Mikhail Gorbachev in the middle of a mid-80's summit, "The ice is most difficult when it is breaking up." Indeed, the chilling days of our budgetary woes are severely trying on all of us, and should not become the executioners of our children's futures.

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