Security giant McAfee has had a very nice run. The company has doubled revenues to $1.9 billion in the past four years and aggressive hiring has followed. This should be fantastic news for California, where McAfee was founded. But it isn't, and the reasons are troubling.
David DeWalt, who heads McAfee , is very intentionally not hiring new staff in the Golden State. Even worse for California, the company a while ago transferred entire departments elsewhere. Is McAfee based in California? Kind of. Only 14%, or roughly 900, of McAfee's 6,500 employees are left in Silicon Valley.
This is a cost-saving measure. McAfee ranks Silicon Valley fourth with the dubious distinction of most expensive places to do business, behind Russia, Japan and London. That's kind of shocking. Mountain View, Calif. sure ain't Tokyo in any sense.
DeWalt figures he can save 30 to 40% every time he hires outside of California. And that's roughly the premium he has to pay in the form of a moving bonus to get someone to relocate to California. Sunshine, pretty hills and nice beaches aren't enough? Apparently not.
"We have to compensate them generously for coming here," he says. There is, of course, the higher housing costs that push up salaries. And California's high income tax rates, which act as immediate surcharges on salaries. But DeWalt also has to make up for the state's lousy public schools, which push people into distant suburbs where schools tend to be better (meaning longer commute times) or pay for those pricey private school tuitions.
"I have watched with real disdain as California has lost its edge," says DeWalt, who has spent the last 25 years building his career here. "On education, infrastructure and general competitiveness, we're falling behind."
A few years ago McAfee shifted some 1,000 jobs relating to back-office functions--legal, human resources, finance--to Texas, where the company was rewarded with government subsidies, cheaper real estate and lower costs ofliving for employees.
The job flight extends to areas that California, and Silicon Valley in particular, are supposed to be ideal for: engineering. DeWalt has been expanding research labs in Oregon and Ontario. Both places gave him nice tax credits. Where does McAfee have the most employees, overall? India. He's hiring there, too.
McAfee has applied for research tax credits in California nine times but was denied. DeWalt is frustrated and baffled by this and has kind of given up. He is still acquiring smaller companies based here but sees a similar trend. "The top guys are here, so maybe two dozen, then four times that are based outside of the state. The engineering isn't happening in Silicon Valley," he says.
This is bad on a lot of levels. It means Silicon Valley's high joblessness will likely continue. It also means a crucial slice of California's tax base is gone or leaving just as the state is facing a $52 billion deficit, double the next worst, New York. According to public policy lecturer Joe Nation, who recently spoke at Stanford's SIEPR economic summit, California's debt service soon will balloon to 10% of the state's budget, from just 1 or 2% historically.
Californians are already taxed more than most. And this only increases as Washington imposes more taxes on high earners and investments. Some well-heeled residents will flee for income-tax-free havens like Texas, Nevada and Wyoming.
This doesn't seem like a big deal until you consider that half of California's income tax revenue is from a stunningly elite group of some 142,000 taxpayers.
In a recent survey by Field Research, two-thirds of Californians rank jobs as the most important issue in the upcoming gubernatorial race. Candidates should be courting businesses like MacAfee with big reasons to grow here.