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Thursday, May 28, 2009 | Among the 14,000 or so people who traveled to Atlanta last week for Bio — the world’s largest biotechnology convention — was Gov. Deval Patrick of Massachusetts, which has more biotech companies than all but one state. Gov. Arnold Schwarzenegger, who leads the state with the most biotechs, didn’t make it.
“He had other business to attend to in Sacramento,” said Joe Panetta, CEO of Biocom, San Diego’s biotech industry association.
The other business was an ultimately futile effort to persuade California’s taxpayers to approve a series of taxing and borrowing measures to close the state’s current budget hole, which is between $24 billion and $36 billion, depending on the estimate. The ballot propositions failed by a large margin, and this week the governor is unveiling proposals for even deeper budget cuts than originally expected.
Cuts will be felt acutely in the higher education system, which has produced biologists, physicists, chemists and engineers who have made the state’s technology industry the envy of the world. And economists, along with local technology industry leaders, fear the long-term consequence if this pillar of the vaunted innovation economy in San Diego and statewide takes too many hits.
“We aren’t going to have many smart people left once they start hacking and slashing education,” said Christopher Thornberg, and economist with Los Angeles-based Beacon Economics.
There was further evidence at the Bio conference, beyond Schwarzenegger’s absence, that other regions both nationally and internationally are making big pushes to lure biotechs as California is diverted by a fiscal mess that is breathtaking even by today’s standards.
For the first time in years, the biotech industry newsletter FierceBiotech left California off its list of the top regions targeting biotech, citing the fiscal crisis as a primary reason. “After several years of setting the pace for innovation and focus, California is coming off the Top 5 list,” the newsletter reported.
Meanwhile, Georgia’s Emory University is planning a new drug discovery institute and is partnering with Australia’s Queensland Institute of Medical Research to develop new vaccines, according to the newsletter. Maryland Gov. Martin O’Malley last week unveiled plans for the Maryland Biotechnology Center, which the state is billing as a one-stop shop to help its biotech industry. And even Massachusetts, which is faced with a $5.8 billion deficit, is spending $1 billion to maintain its place in the biotech world.
Partisans have long debated the wisdom of Sacramento’s tax policy and regulatory framework. But there is widespread agreement that the state’s historically heavy investment in colleges and universities has paid off. The University of California system in particular has built some of the world’s best research institutions.
This year it is the system of hard knocks. In addition to several billion in cuts to K-12 schools, Schwarzenegger has also proposed more than $600 million in cuts to state universities, with the University of California system bracing for a 20 percent reduction in state support. He has also proposed killing the Cal Grants program, which provides $180 million annually to a total of 77,000 students enrolled in community colleges and the UC and Cal State systems.
California is far from the only state facing a gaping budget hole. In fact, only North Dakota, Wyoming and Montana have balanced budgets this year, according to the Center on Budget and Policy Priorities, a nonprofit think tank.
But California’s deficit, which represents 35.5 percent of the general fund, is the largest in the nation both on a total dollar and percentage basis, according to the Washington D.C.-based center. And the state’s penchant for passing propositions has made budgeting extremely inflexible. Proposition 13, for example, limits how the state can levy property taxes. And Prop. 98 created a strict formula for how K-12 schools and community colleges are funded.
“More and more people are talking about the state being ungovernable,” said Alan Gin, and economist at the University of San Diego. “One of the problems is these initiatives that have locked in all these funding commitments.”
This rigidity could eventually close the avenues to innovation that regions like San Diego have used, Gin said. He outlined the role the state-funded higher education system has played in San Diego’s rise as a technology hub. “Our university system attracts a lot of people,” he said. “And once they get their degrees here, they want to stay here. That has helped in terms of the start-ups of new business and innovation.”
Duane Roth, CEO of the local technology industry association Connect, said California’s innovation economy has grown “organically,” while other places — Texas and China are examples — are known as importers of technology clusters. Economists and industry experts have no doubt that California’s homegrown institutions are strong enough, and entrepreneurialism a large enough part of the state’s DNA to survive a budget crisis, even one as severe as this one.
But Roth and others also acknowledge that the importers have made their inroads. California has already lost out to other states and countries when it comes to high-tech production and manufacturing. Consider that San Diego-based General Atomics is spending tens of millions of dollars on developing algae-based fuels, but its test facility is in Texas because the state government there provided matching funds to get the facility built.
Marney Cox, an economist with the San Diego Association of Governments, believes that this “after the innovation” erosion in those areas has happened because of a lack of investment in infrastructure in California. And research and development operations, attractive because of their high-paying jobs and relatively small carbon footprints, could be next.
“Competition is all around us and we’ll have less and less money available to us to shore up our competitive advantage,” he said.
Gerald Yakatan, co-founder of IriSys, a San Diego-based drug development company, said the state does not have a patent on the passion and energy needed for a vibrant technology hub. “In the global economy you can create Californias in other places,” he said. “San Diego is a nice place to live, but that’s not enough if you can’t accomplish the things you want to do.”
Among the Bio conference attendees was Kini Schoop, who grew up in San Diego, and graduated from University of California, Berkeley. These days she is working for the Invest in France Agency, an arm of the French government.
Part of Schoop’s job is to sell France as a biotech hub, something that the French ambassador to the United States recently said is a priority for the administration of President Nicholas Sarkozy. She acknowledged that California’s budget nightmare makes her job a little easier.
“I have faith — as a Californian — that things won’t always be this way,” Schoop said. “But in the meantime it is an advantage to France, which can offer tax incentives and other incentives for research and development.”