Sacramento's Growth Dilemma

Sacramento rests on the edge of what could prove a difficult decade, which could either make or break its momentum toward becoming one of the regional winners in the new century.

For much of the late '90s and in the early 2000s, Sacramento seemed to be finding itself and spreading its wings. Boosted by an ever-expanding government sector, the region also was becoming an important "spillover" region for the Silicon Valley and for educated professionals fleeing the congested, overpriced Bay Area housing market.

From the early 1990s to 2003, both the city and the region enjoyed population growth rates close to those of booming cities like Reno, Phoenix and Las Vegas. But unlike these other communities, the Sacramento region's economy now seems to be decelerating in what could be a very dangerous pattern.

Perhaps the most immediate factor may be the shrinking of the government sector -- accounting for roughly one in every four jobs in the region -- which lost an almost 3.5 percent of all its positions between 2003 and 2004. This has taken out the longtime generator of high-wage jobs and lure for educated workers for the region.

But the problems extend well beyond the state employees. Last year, for example, the Sacramento region experienced virtually flat economic growth. Not only did government jobs drop, but even larger losses were registered in the region's still fledgling information sector. Manufacturing and financial service sectors also declined.

The prime cause for this depressing pattern, according to economic development experts and entrepreneurs, lies with California's inability to reform adequately its high tax and oppressive regulatory regime. This has shifted job growth in high-end sectors -- including offshoots of Silicon Valley -- to places like Boise, Reno and Las Vegas.

Meeting the competition from such places remains a primary challenge faced by Sacramento as it seeks to carve out its niche in the evolving economic environment. Unfortunately, much of the power to reverse this negative inertia lies in the most inertial institution in California, the Legislature.

Perhaps even more than the coastal areas, Sacramento and Central California desperately need regulatory relief. Inane rules that arguably can be endured in some places -- like Santa Monica, San Francisco or Silicon Valley -- where urban amenities still attract young, highly paid singles and empty nesters. It may constitute a death sentence to more modestly endowed places like Sacramento, which compete directly for residents and businesses with other states.

The ill effects of this regime can be seen in the decision of entrepreneurs like Darik Volpa to locate his firm in Reno rather than in the Central Valley, where he both grew up and went to college. When in 2003 he decided to leave his medical instrument company job in the Bay Area and start his new Web-based firm, UnderstandingSurgery.Com, his first choice was to locate somewhere in the state's interior.

But the actions of the Legislature persuaded him to leave California entirely. "We are Web-based and could go anywhere," Volpa explains. "In 2003 about every day there was something that told me not to be in California, even in the Valley. Reno simply made more sense."

The factors that led Volpa to rule out places like Sacramento -- including high workers' compensation rates and personal income taxes -- are the same factors leading other companies to skip over the Central Valley and settle down in places like Nevada. Even David Crane, the governor's chief economic adviser, admits there is little reason for many firms to locate in Sacramento or elsewhere in the Valley when they can move to lower-tax, more business-friendly places in Arizona, Nevada, Idaho or Utah.

Unfortunately, instead of focusing on these regulatory and tax issues, many in Sacramento seem more interested in another kind of competition, one that seeks to transform the region into a "hip and cool" city along the lines of San Francisco, Portland or Boston. This notion, widely if not wisely embraced by many economic development professionals, holds that to compete in the "new economy" an area must first lure a so-called "creative class" of skilled professionals.

What these people want, the development gurus tell us, are dense, walkable downtown neighborhoods filled with jazz clubs, coffee shops, gay bars and art galleries. And this indeed would be the basis for a wonderful strategy -- almost everyone likes walkable, "fun" urban areas -- if it were only true.

Yet the reality is that most of the "cool" cities have also been frigid in terms of their economy. This is true even in higher wage sectors. A recent UCLA study found that since 1994 places like San Bernardino-Riverside and Sacramento were adding these kinds of jobs at a decent clip while both Silicon Valley and San Francisco were actually losing them.

"It's glitzy and sexy," suggests Leslie Parks, former economic development for San Jose, "but it doesn't deal with the fundamentals like education, job readiness of the work force and housing affordability."

A prime case for the inappropriateness of this strategy can be seen in Portland, which has gained totemic status among some local officials. One former Portland official was recently imported to head the Sacramento Area Council of Governments while the city nabbed its top development expert from the same city. Perhaps, the thinking goes, some of the Rose City hipness will somehow rub off on old River City.

To be sure, Portland has nice transit and a restored, if slightly seedy, central core, but few talk much about its economic performance since 2000, which generally has lagged both the nation and Sacramento. John Mitchell, a Portland-based economist for US Bank, says that in fact almost all the growth in the Portland area has taken place in the suburbs and, increasingly, in more rural areas like Medford and Bend.

"People like the downtown but the growth is elsewhere," he notes.

In fact, looking at the national evidence, having a hip downtown actually may not be so critical to luring educated workers to a region. Even during the dot-com boom of the 1990s, the fastest growth in this demographic group took place in fast growing although decidedly suburban, and unhip, areas such as Las Vegas, southwest Florida, Phoenix, Charlotte, N.C., and Atlanta.

Since the 2000 dot-com crash, suggests Brookings Institution demographer Bill Frey, this process has likely accelerated, with educated workers actually fleeing once hot locales like the Bay Area, Portland and Boston for more affordable, livable places. It is this shift, particularly aimed at skilled people over 30, which constitutes the real competitive opportunity for Sacramento.

This region's basic appeal lies in its basic assets such as a prime location on key east-west and north-south transport lines, still reasonable housing prices and a good environment for raising children. Jim Hunter, a local Sacramento small business consultant, observes that many people he works with are largely family oriented and looking for affordable housing.

"We have some culture here, but face it, San Francisco and Silicon Valley have much more," explains Hunter, who moved back to Sacramento after nearly decade in the Bay Area. "People may move to those places for culture, but that's the reason they move to Sacramento. They come here for a quality of life that allows you to raise a family."

If there is anything slowing business and professional migration to Sacramento, he adds, it is not a lack of nightclubs, but the regulatory burdens that drive up housing prices, depress business and push aspiring people further east. Correcting the state's abusive business climate and building on Sacramento's comparative lifestyle and location advantages -- not cultivating an ersatz hipness -- constitutes the essential elements of the successful long-term regional strategy.