2007 Silicon Valley Projections - Silicon Valley Leadership Group

2007 Silicon Valley Projections
Tough Challenges—Hopeful Signs
• Housing • Transportation • Education & Workforce Preparation
• Energy & Environment • Healthcare • Tax Policy

Silicon Valley
Forty cities in four counties

Tough Challenges – Hopeful Signs.
Let us start with a rather bold statement: Silicon Valley is still the
preeminent technology region in the world. What we must realize is that
our valley is not the only top-tech region in the world. We must sustain
our strengths while not white-washing our weaknesses.
Projections 2007 is a first of its kind look at Silicon Valley compared to not
only twelve top innovation regions in the United States, but also several
key technology clusters around the globe.
Let’s start with our strengths. We have a world class university system, an
overwhelming advantage in venture capital funding, promising signs for
clean technology clusters, a diverse mix of technology and life science
industries, and the best workers in the world.
Yet we must also direct attention to our disadvantages – high housing
costs, an inadequate transportation system, uneven performance in our
k-12 education system, the rising costs of healthcare, and steep energy
prices. Add to this mix regulatory and tax policies that are not competitive
with other states let alone other nations.
The entrepreneurial spirit that drives Silicon Valley must also drive our
public policies to keep and grow jobs, our economy, and quality of life.
Silicon Valley is still the capital of innovation that is the envy of the earth’s
economy, but our success is not a birthright, we must rise up and compete
for it everyday.
We hope “Projections 2007: Tough Challenges – Hopeful Signs” will further
initiate the dialogue and innovation necessary to move Silicon Valley
forward.
Contents
Silicon Valley Market Dyanmics
3
Transportation
13
Education and Workforce Preparation
17
Environment
23
Healthcare
31
Energy
37
Housing
43
Tax Policy
47
Acknowledgements
53
Carl Guardino
President and CEO
Silicon Valley Leadership Group
William T. Coleman III
Chairman of the Board
Silicon Valley Leadership Group
Chairman and CEO
Cassatt Corporation
1

Introduction
Silicon Valley continues to assert itself as a global center of innovation. And the pioneering tradition of the Valley
is alive and well, with both private and public sector initiatives underway to begin to tackle the persistent chaland
to address the quality of life concerns that — if allowed to continue unchecked — threaten to weaken the Valley’s
lenges for the region’s business climate. Nonetheless, the future competitiveness of the Valley hinges on the ability
to make the tough decisions and explore the creative options needed to reduce the excessive costs of doing business
position as a global and US innovation leader.
Over the years the Valley has been buffeted by the severe crosswinds of change:
• The Valley has become one of the costliest places in the United States — and the world — to do business
• Investment in infrastructure, housing stock, and education have lagged the growth and needs of the population
and businesses
• The United States — and the Valley — have not produced the volume of engineering, scientific, math, and other
core talent necessary to fuel the high technology engine
• Outsourcing — and offshoring — have blown through the Valley in successive waves of manufacturing,
customer service, information technology, and shared services
• Looking at manufacturing, beyond certain capital intensive and logistics-sensitive processes, manufacturing
activity has fled the Valley in waves to lower cost jurisdictions
So significant and fundamental are these forces that the pace of the recovery and the very future of the Valley are at stake.
It is in this context that we present a framework for viewing the private sector engine that propels Silicon Valley.
This framework examines the requirements of individual companies to prosper at different stages of a company’s
evolution. It provides a useful way to view the needs of companies at different levels of maturity and, at the macro
level, offers insights into the overarching trends for industries clustered in Silicon Valley:
• Value Chain — Operationally, in functional units and by the needs of each unit
• Lifecycle — Over time, as the company and these units develop and mature, the evolving drivers of company
success
From a public policy perspective — the Value Chain and Lifecycle vantages provide unique insights into the needs of
the private sector and the economy, to prioritize, and gain perspective on how different levels of government can
best respond.
In the next section of this report, the industries that serve as the engine for Silicon Valley are reviewed, with a distinction
between primary and secondary industries. Next, the Value Chains and Lifecycles for core industries are presented.
Finally, a discussion of Silicon Valley’s competitiveness relative to other U.S. and global innovation centers.
2

Silicon Valley
Industry Overview

Silicon Valley Industry Overview
Definition of Industries
The Silicon Valley Leadership Group has historically organized
its view of issues, the analytic work that it conducts, and
its framing of policy recommendations by industry sectors.
Member companies were organized into 12 business sectors in
2006 Economic Competitiveness Survey and CEO Business
Climate Summit. Those 12 sectors were collapsed into seven
categories. For the purpose of this year’s Silicon Valley
Projections study and focus of policy, we are focusing on the
same seven industry clusters, distinguishing between the
Internet/Communications and the utility sectors.
We have distinguished the eight industries into two groups,
listed in the table below:
• Primary (or Core)—the industry clusters that drive the
Silicon Valley economy. These industries can be thought of
as the economic engines of Silicon Valley, at the center of
innovation, competitive advantage, employment, and
around which the economy and other economic sectors
revolve. These industries are outwardly focused, competing
in the global marketplace. These primary industries are the
focus of the Value Chain and Lifecycle frameworks that we
have developed and competitive analysis that we have conducted.
As described later in this section, the value chain
of functions for these and secondary industries span all
types of operations, including R&D, manufacturing/distribution,
and supporting shared services. The table to the
right defines the key segments within each industry.
• Secondary—For the most part, secondary industries support
primary industries—the core companies and their
economic activities or the major impacts that emanate
from them. Generally locally focused in their products and
services, companies within these support industries may be
locally-based or the local operations of national or global
firms. While General Manufacturing would typically be
classified as a primary industry in many local economies, as
it is predominantly outwardly focused and also drives secondary
industry support services, based on the size and
nature of the General Manufacturing sector in Silicon
Valley, it is classified as a secondary industry in this study.
The main sectors within General Manufacturing are listed
below, the listing a function of employment in the Silicon
Valley region. It should be noted that, a sizable portion
of the general manufacturing sector within the Valley,
supports the Valley’s primary industries.
Industry
Primary
Technology
(High-Technology)
Life Sciences
Financial & Professional
Services
Secondary
General Manufacturing
Telecommunications
Utilities
Education
Healthcare
Definition
Software
Hardware/Equipment
Internet Commerce
Medical Device/Diagnostics
Biotechnology
Venture Capital
Investment Banking
Engineering
Consulting
Food
Chemicals
Transportation Equipment
Fabricated Metals
Machinery
Service providers
Service providers
Service providers
Service providers
Defining the Value Chain
Any given company is comprised of a chain of highly interrelated,
but distinguishable activities—a “value chain” of
activities. Depending on the industry and focus of the company,
these activities can be broken down by functions or types
of operations. These activities are intertwined both linearly
by sequential processes (e.g. sourcing/manufacturing/distribution)
and/or tie into one another through hierarchies driving
or supporting one another (senior management directing
functions and business units; shared services supporting the
business units). These activities are broadly encapsulated into
the following clusters of activities:
• Leadership and Strategy: senior management, research &
development, product development & engineering, product
marketing
• Manufacturing/Production: core manufacturing, delivery
of services (for service companies), product testing, quality
assurance, and manufacturing support
4

Silicon Valley Industry Overview
• Logistics Network: direct/indirect materials supply chain,
inbound/outbound logistics, and distribution network
• Shared Services: support functions, traditionally includes
finance, information technology, human resources, legal,
procurement, and corporate real estate.
• Customer Focus: sales, retail, technical support, customer
support.
Along this continuum, the operations can be conducted by the
company (“captive”) or by an outside party (“outsource”), with
many variations and combination between these two bookends.
The company and components of the value chain may be
physical, organizational, and/or led in a centralized or decentralized
manner. In the case of the latter, operations may be
widely dispersed across the globe, often with business units
highly autonomous and with distinct support operations and
infrastructure.
For each value chain function the primary operating success
drivers are divided into two categories:
• Cost of operations: focus is on major costs that impact the
overall cost of the value chain activity.
• Operating conditions: focus is qualitative and non-cost
operating factors in the external environment that can
be leveraged for success or that may adversely impact the
success of the value chain activity.
In the tables that follow, the key value chain functions for each
of the Silicon Valley primary industries and the key operating
cost and condition factors are listed for each function. The
functions and factors have, by necessity, been generalized
across sectors and companies within the primary industries,
with the focus on the key operating cost and condition success
factors.
Consulting LLP.
Consulting LLP.
Consulting LLP.
5

Silicon Valley Industry Overview
Life Cycles
Beyond the Value Chain in our model of industries and companies,
we layer the perspectives gained from viewing the
needs of a company over its lifespan. This maturity model
charts a company over four stages: 1) Start-up, 2) Adolescence,
3) Adulthood, and 4) Maturity. The exhibit below presents the
characteristics typically exhibited by a company in each of the
four stages.
As the company evolves, it changes its strategy and focus, the
nature and depth of its operations, and its cost and profitability
structure. We caution that in today’s highly competitive,
global business climate the evolution of a company is far from
smooth or certain, and not as straightforward as is represented
in the exhibit. The leap from Start-up to Adolescence is particularly
precarious. Beyond simple survivability, challenges
can include being acquired/taken over, loss of control to equity
holders, merging, joint ventures, internal disputes, and
going public.
As those of us approaching and fording middle age know,
Adulthood and Maturity bring their challenges—sustaining
innovation can be difficult, there is a need to build infrastructure,
but bureaucracy lurks around every corner, while
headcount and costs can escalate with a life of their own. With
size, a company must continually innovate–competition can
sprout up overnight.
Leadership changes, with
operations a focus
Multiple products & services
Expanding markets
Focus on revenue & profitability
Corporate infrastructure developed,
but tactical, and inefficient
Consulting LLP.
6

Silicon Valley Industry Overview
Competing Metro Areas
As innovation within the Valley’s primary industries becomes
more global, competition from domestic and international
communities has increased. Given the differing attributes for
various aspects of each industry’s value chain, no competing
area has a strong advantage across all value chains.
However, many areas have attributes similar to the Valley
and will continue to compete in the innovation space. Many
competing communities also have attributes that support
manufacturing and distribution more competitively than the
Valley due to attractive operating conditions and moderate costs.
Technology
Community
Silicon Valley
Domestic
Communities
Austin, TX
Boston, MA
Denver, CO
Portland, OR
San Diego, CA
Seattle, WA
Washington, DC
International
Communities
Bangalore, India
Berlin, Germany
Dublin, Ireland
Grenoble, France
London, England
Prague, Czech Republic
Shanghai, China
Singapore
St. Petersburg, Russia
Stockholm, Sweden
Tokyo, Japan
Software/
Hardware
development
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Manufacturing/
Production
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Distribution/
Media
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Customer
Support
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓ Competitive Advantage ✓ Moderately Competitive Less Competitive
7

Silicon Valley Industry Overview
Life Sciences
Community
Research &
Development
Clinical
Trials
manufacturing Distribution
Silicon Valley
✓
✓
✓
Domestic
Communities
✓
Boston, MA
✓
✓
✓
Chicago, IL
✓
✓
✓
New Jersey
✓
✓
✓
Raleigh-Durham, NC ✓
✓
✓
San Diego, CA
✓
✓
✓
Seattle, WA
✓
✓
✓
Washington, DC
✓
✓
International
Communities
Basel, Switzerland
✓
✓
✓
Dublin, Ireland
✓
✓
✓
San Juan, Puerto Rico ✓
✓
✓
Singapore
✓
✓
✓
✓
✓ Competitive Advantage ✓ Moderately Competitive Less Competitive
Financial & Professional Services
Community
Silicon Valley
Boston, MA
New York
Washington, DC
Service
Innovation/
Marketing
✓
✓
✓
✓
Core
Service
Delivery
Shared
Services/Back
Office
✓ Competitive Advantage ✓ Moderately Competitive Less Competitive
✓
✓
✓
✓
8

Silicon Valley Industry Overview
Silicon Valley Market Dynamics
Key market dynamics for Silicon Valley are anticipated to continue
to reflect the innovation focus of the area, including a
highly compensated workforce and the availability of venture
capital. Median household income in the Valley continues to
significantly exceed that of competing metro areas. Further,
venture capital investments in the Valley have continued to
be four times that of the closest competing metro area and
commonly approach the aggregate investment levels of
all competing metro areas combined. However, global competition
for skills, cost of living, limited housing stock, and
erosion in the region’s quality of life will have an impact on
the Valley. Population and civilian labor force growth are
expected to lag lower-cost areas of the country, especially in
the South and Southeast. An additional limitation to future
competitiveness is the relatively low number of housing units
in relation to the number of households. Additional housing
stock within a reasonable commute of employment centers
within the Valley will be key to attracting and retaining
talent within the region.
2005 Median Income Population
, Association of Bay Area Governments (ABAG).
Consulting LLP.
Consulting LLP.
Venture Capital Investment by Region, 2003-2005
9

Silicon Valley’s Competitive Position
Silicon Valley Industry Overview
Civilian Labor Force Employment and Unemployment 16+, 2005, 2010
Silicon Valley, CA 1,109,800 1,899,374 58% 1,199,200 2,041,200 59%
, Association of Bay Area Governments (ABAG).
Consulting LLP.
NOTE: Silicon Valley is defined as San Mateo and Santa Clara Counties.
Number of H1-B Visa Certifications
Housing Statistics 2005
Consulting LLP.
Viewed from the perspectives gained from the frameworks and
comparative review presented earlier, Silicon Valley’s core
strengths are clearly in the innovation, creativity, and product
and service development at the front-end of the value chain,
which drive the success and global eminence of its primary
industries. And it is noteworthy that Silicon Valley stands out
compared with leading global innovation centers for having
diverse strengths, significant competitive advantages across
several value chain segments in both technology and life sciences,
the two industries we evaluated for global competitive
standings.
Consulting LLP.
1.02
1.05
1.04
1.05
1.05
1.05
1.08
1.06
1.07
1.05
1.05
1.05
This “power alley” is a function of the high talent that resides
in the Valley, its significant agglomeration of companies large
and small, the Bay Area’s leading engineering and science
programs at its world-class universities, and a highly unique
spirit and culture of innovation that exists in the high technology,
life sciences, and other sectors.
The lifecycle model provides further perspective on Silicon
Valley’s economy and its future. In the Start-up and
Adolescence phases, innovation and the creation of products
and services drive the success of the company. At these stages,
other aspects of the value chain are immature and less substantial
contributors to the core success of the company.
10

Silicon Valley Industry Overview
Manufacturing/production, distribution, shared services, and
customer support are developing platforms upon which to
support the launch of a new product or service into the market.
They are necessary to keep the company going–but not at the
core to the early success. Some are outsourced, some growing
in scale and maturity internally. Generally speaking, the
talent needs are more ubiquitous, yet the costs of this labor
and capital investment, real estate, taxes, and services begin
to rapidly escalate as the company progresses through the lifecycle
to adulthood. As the company finds its way into the
adulthood and maturity stages, the size, scale, and costs of the
downstream value chain have escalated to the point that they
can be a drag on growth and profitability. Not only have these
support activities grown disproportionately in size, put they
typically grow without design for efficiency, process,
economies of scale, and performance.
In the Bay Area, with its high-cost structure and the business
climate that has evolved, the costs to maintain and operate the
downstream activities of the value chain may well become
prohibitive. Facing the dramatically lower costs of geographies
that compete for each of these segments of the Value
Chain, especially international competitors, many Silicon
Valley companies are forced to explore reducing the size
of these functions–through reengineering, outsourcing or
redeployment–not uncommonly offshore.
• The 1970’s witnessed the beginnings of the exodus of
manufacturing from the Valley. Moving in concentric
waves— manufacturing operations fled first to lower-cost
locations in the Bay Area and the State, then to surrounding
states and the West, then Mexico, and now China and
other, once unimagined niches around the globe. Today, it
is largely highly specialized manufacturing linked to core
processes that remain in the Valley.
Silicon Valley’s Competitive Position
Consulting LLP.
11

Silicon Valley Industry Overview
• Customer support and shared services have followed.
While concentric redeployment has similarly taken place,
the patterns and geographies have been different than for
manufacturing. With a deep pool of educated, productive
labor, low labor costs, solid language skills, relatively
low risk, and a supportive government as requisites in a
location, companies began moving these operations from
the Valley. As companies grow and their markets and
operations have become global, they have typically developed
global/regional models for customer support and
shared services.
• The developing next wave is the sourcing of engineering
and higher skilled talent to other geographies. Companies
are diversifying their talent and innovation through the
development of centers in key technology centers across the
globe, in both established and emerging locales.
This expansion outward has at its core a combination of
pull and push factors:
• While Silicon Valley is in its scale, depth, and breadth
unrivaled in the talent that resides here, other locations
across the globe are producing deep and strong talent.
Spreading operations across the globe provides 24-hour
access and speed to innovation. It also diversifies the
risk associated with having all of your talent and innovation
in one market.
• As the cost of living escalates, housing choices become
limited, public education degrades, commutes become
unbearable, and public services and infrastructure are
not able to keep up with the demands of the population,
it is becoming difficult to retain and attract talent to
the Valley.
12

Transportation

Transportation
By 2017, approximately 160,000 more cars will be competing
for space on Silicon Valley’s roads-the equivalent of a lane of
cars, lined up bumper to bumper, from San Jose to San Diego.
And that’s just counting cars owned by Silicon Valley residents.
Thousands more will be pouring over the Pacheco and
Altamont passes, or chugging up Hwy 101 from the Monterey
Bay Area, to jobs in Silicon Valley.
That increase demonstrates the challenge Silicon Valley-and
indeed all of the high tech regions in the nation-face. As our
population, the ratio of car ownership, and commute distances
increase, congestion on our roadways is rising. All of the
nation’s top high tech regions currently endure “undesirable”
highway congestion levels, according to the U.S. Bureau of
Transportation Statistics. These conditions erode our quality
of life. But the situation poses another less visible, but grave,
threat. The more we drive, the more greenhouse gases we generate-emissions
that are dramatically and rapidly changing the
climate of our planet.
Transportation & Greenhouse Gases
Scientists generally agree that the Earth’s temperature is rising
and human activities are accelerating that trend. Human-generated
greenhouse gases-pollutants such as carbon dioxide,
methane, and nitrous oxide that trap the Earth’s heat, are
increasing at a faster rate than any period over the last several
thousand years.
The earth has been getting markedly warmer since the late
19th century, evidenced by, among other things, melting glaciers,
decreased snow pack in the Sierra Nevada and other
mountain ranges, and increasing drought in the American
Recommended Strategies to Reach California
2020 Greenhouse Gas Emissions Goal
Other Transportation Strategies: Transit,
Biofuels, Efficient Land Use, Technology,
Fees, Truck Improvements (anti-idling,
Efficiency, etc.), Other.
Note: 2020 Emissions Goal=California 1990 GHG Emissions level.
Source: Climate Action Team.
Southwest. But the most rapid changes have occurred within
the last two decades. According to the California Climate
Action Team, that trend is expected to escalate in the 21st
century due in large part to as yet unrealized warming from
climate change pollutants already in the atmosphere-pollutants
generated by burning coal, oil, and natural gas and clearcutting
forests to make way for agriculture and other human
activities.
While there is some disagreement about the speed at which
the earth is warming and the specific changes it will trigger,
there is wide concurrence that if we continue on our current
trajectory there will be severe consequences. According to the
California Air Resources Board (CARB), California will likely
experience more weather extremes (stronger and more frequent
storms, flooding and heat waves), reduced water supply
due to snowpack melt, extensive coastal damage due to rising
sea levels, more forest fires and more respiratory illness.
Recognizing the threat, in 2005 Governor Schwarzenegger
established ambitious greenhouse gas emission reduction targets
for California. Those reductions are being pursued
through a variety of means; including replanting forests,
increasing the energy efficiency of appliances and utilizing
biogas digesters to reduce methane emissions from farms and
landfills. But transportation offers the opportunity for the
biggest reductions.
Reducing Vehicle Emissions
Passenger vehicles, freight, rail and aviation account for more
than 40% of California’s greenhouse gas emissions. Passenger
vehicle emissions comprise two-thirds of that total. What is
more, vehicle emissions are one of the fastest growing sources
of greenhouse gas emissions. Those statistics spurred
California to adopt strict emission standards for new passenger
vehicles in 2004-the first in the nation.
The regulations issued by CARB require automakers to reduce
greenhouse gas emissions of vehicles sold in the state by 30
percent by 2016, starting with the 2009 model year. Since
then, 10 other states have followed California’s lead, including
three states that are home to high tech regions–Massachusetts,
Washington and Oregon.
The nation’s major automakers sued to overturn the regulation
arguing that the standard is so severe it would drive up prices
and cripple new-car sales. The regulation is in limbo until the
suit is resolved. But record high gas prices have created a
demand for more fuel efficient vehicles-which also have lower
emissions.
14

Transportation
In 2005, Californians purchased one-quarter of the hybrids on
the market. Currently 1.2% of total vehicle sales in the nation
are hybrids. National sales of hybrids have generally doubled
every year since 2000. Other alternatives, such as biodiesel,
ethanol and hydrogen are gaining ground, but still represent
only a tiny fraction of our fuel portfolio. Hydrogen fuel cells
are still prohibitively expensive and we don’t yet have the ability
to produce and distribute large quantities of ethanol and
biodiesel. Improved battery performances are giving a boost to
plug-in hybrids, which can operate for 20 miles solely on electricity.
The technology relies on an existing distribution system-the
electrical grid-but must overcome concerns about
power plant emissions. At least two auto manufacturers,
Toyota and Honda, have said they plan to offer flexible-fuel
plug-in hybrids soon
Two-Pronged Approach: Reduce Emissions
and Increase Commute Alternatives
If CARB’s greenhouse gas reduction rule is upheld, the state
would be able to stabilize its greenhouse gas emissions by
2010. That would be a significant achievement. But if
California is to avoid the devastating impacts of global warming,
we will need to reduce our emissions even further. Plus,
swapping petroleum-guzzling cars to alternative fuel vehicles
will do nothing to address our very real congestion problems,
particularly in job centers such as Silicon Valley.
We need a two-pronged approach: we need to reduce our
tailpipe emissions and decrease the number of miles we drive,
particularly solo. We need to increase our use of transit, carpooling,
telecommuting, walking and biking.
California Global Warming Emissions by Sector
Transportation Sector Greenhouse Gas Emissions
Region/
Metro-Area
Commute
by Auto
Carpool
Commute by
Mass Transit
1.7%
2.6%
4.7%
Work at
Home
Walk
Bicycle
Raleigh-Durham, NC
Austin, TX
Silicon Valley (Santa Clara
and San Mateo counties)
San Diego, CA
Fairfax County, VA
Portland, OR/Vancouver, WA
Seattle, WA
Boston, MA
78.5%
76.5%
75.8%
12.9%
13.7%
12.4%
3.5%
3.6%
3.3%
2.3%
2.1%
1.9%
0.4%
0.6%
1.1%
73.9%
73.4%
73.1%
70.4%
68.2%
13.0%
13.1%
11.5%
12.6%
8.2%
3.4%
7.3%
6.3%
80%
13.9%
4.4%
4.2%
4.6%
4.4%
3.4%
3.4%
1.3%
3.0%
3.2%
5.3%
0.6%
0.1%
0.8%
0.7%
0.5%
Source: US Census Bureau
15

Transportation
Reducing the number of cars on our roads by 1 percent would
decrease traffic congestion by 5 percent. But making that shift
would be a major cultural change. Silicon Valley has one of the
highest rates of solo commute driving compared to the
nation’s other high tech centers, according to the 2000 US
Census. Only Raleigh-Durham, NC and Austin, Texas exceed
the Valley’s 76% solo driving record.
Nevertheless, high fuel prices are providing a real incentive for
many to use commute alternatives. In 2006, ridership on
VTA’s light rail line, Caltrain and on BART, met or exceeded
2000 levels. Caltrain’s decision to increase its baby bullet
(express) service and VTA’s light rail extension to Milpitas and
Campbell made those systems more convenient to commuters.
And transit agencies are using technology to try to make transit
more attractive: providing real-time transit information;
offering wi-fi connections, and enabling transit users to find,
reserve and pay for limited parking via cell phone, the internet
and on board navigation systems. We also need to build
more homes and jobs in walking distance to transit, and make
our neighborhoods more pedestrian and bicycle-friendly. But
all of this takes money which, despite an upturn in the state’s
economy, is still in short supply.
Best Practices - Lessons Learned
The City of Portland was the first local government in the
nation to adopt a greenhouse gas reduction plan. Since 1990,
the city has reduced its emissions by 12.5% while national
emissions increased by about 13%.
The reason is due in part to Portland's 75% boost in transit
usage and nearly 10% increase in bicycling and walking since
1990. The city accomplished this by expanding transit service
(adding two major light rail lines, a streetcar line and increasing
service frequency on major arterials), building more than
100 miles of bicycle infrastructure and constructing numerous
high-density, pedestrian-friendly developments near its transit
stations. The city also uses incentives, mass marketing, and
grassroots outreach to promote commute alternatives.
Building a Sustainable
Transportation System
Ironically, the extent to which we succeed in reducing our fuel
consumption, we diminish California’s primary sources of
transportation funding: the gas tax and the sales tax on gasoline.
Yet, the need to maintain, improve and operate our roads,
highways, and transit systems continues to grow. The state is
still digging its way out of a decade-long, multi-billion transportation
infrastructure shortfall that will only be partly
assuaged by the passage of a $20 billion transportation bond
on the November 2006 ballot. To reduce greenhouse gas
emissions and address California’s sizeable infrastructure
needs, California will need to restructure the way it finances
transportation. For instance, California could:
• Substantially Increase the Gas Tax, which was last raised in
1990 and has lost 1/3 of its value to inflation since then.
This would also discourage solo driving. But it would not
resolve the conflict between greater fuel efficiency and
shrinking revenues.
• Adopt Distance-Based Fees based on vehicle fuel efficiency
and distance traveled. Europe has applied such fees to
freight trucks with enormous success, significantly reducing
emissions and miles driven without reducing the volume
of goods transported.
• Institute Congestion Pricing on User Fees, varying the fee
in relation to demand. For example, tolls priced higher
during peak commute hours can encourage those who can
to shift their time of travel to non-peak hours. This distributes
demand across other time periods when there is more
roadway capacity. The rate can be set so that it is revenue
neutral or generates excess funds.
• Adopt Feebates—a combination of fees and rebates—to
encourage the manufacture and purchase of cleaner, more
fuel efficient vehicles. Consumers purchase the vehicle of
their choice, but receive a rebate or pay a surcharge if their
selection is above or below a certain standard of performance.
The program can be designed so that it is revenue
neutral or generates a positive cash flow.
“Lifeline” rates could be established for low-income motorists
for all of these policies to ensure equity.
Magnifying the Impact
California’s emissions policies alone cannot curb global warming.
Its real power is that other states are following California’s
lead, magnifying its impact.
Yet as bold as it is, California’s vehicle emissions policy is only
a first step. We will need to pursue a variety of policies—better
integrate transportation and land use, provide more and
better transportation alternative for commuters, and transition
our entire economy off of carbon-based fuels-to avoid the
more severe consequences of global warming. Our task now is
to adopt the right combination of economic incentives, fiscal
policies and regulatory standards that will spur the type of
technological innovation and institutional change necessary to
more radically reduce our emissions. If it does, Silicon Valley
is well positioned to serve as the locus of that innovation.
16

Education

Education
In the Silicon Valley Leadership Group 2006 CEO Survey, 65% of valley CEOs cited improving K-12 education as
a “top 5” way to improve the region’s business climate. This was second only to housing (at 67%) and nearly
30 percentage points higher than in the previous year’s survey.
There is one constant in Silicon Valley: Change
Change resulting from innovation; innovation propelled by
a dynamic labor force that is itself specialized and evolving
rapidly. Silicon Valley is dependent on a labor force that is
grounded in math, science, engineering and analytical and
communication skills, but one that is adaptable.
Competitive pressures continue to intensify, and Silicon Valley
faces increased domestic and international competition.
Although Silicon Valley remains an important driver
of California and the nation’s economy–with large concentrations
of information and biotechnology companies, for
example–our own recent history to be and remain competitive
is not automatic.
The pressures to recruit new talent are increasing, and we are
not producing enough scientists and engineers. A widely cited
statistic from the National Science Foundation tells us that
South Korea, with 1/6 the population of the United States,
awards nearly the same number of engineering degrees.
Moreover, nearly half of all Master’s Degrees and Ph.D.s
awarded in the US are to foreign nationals, whose incentives
to stay, work and build companies in the United States are
diminishing, as is our ability to grow our own talent to fill
these voids.
At the same time, California’s population and workforce are
changing; in particular, the demographics in our classrooms
are changing.
California, with 12% of the nation’s overall population, has
more than 40% of the country’s English language learner
(ELL) students. Over the past 10 years, Silicon Valley’s student
population has grown by more than 10,000 ELL students
alone, even at a time when the net change for all of Silicon
Valley was 7,600 students.
Additionally, more and more Latinos are becoming a part of
California’s workforce. In fact, over the last 15 years, Latinos
have gone from 1/4 of the state’s workforce to 1/3 of the workforce,
and one third of the population of Latinos is projected
to be under the age of 20 by the year 2020 (Source: Calif.
Budget Project; Boom, Bust & Beyond in the San Francisco
Percent Change
4
3
2
1
0
-1
-2
-3
Tech Regions
San Diego, CA . . . . . . . . . . . . . . . . . . . . . . . . .23
Silicon Valley, CA . . . . . . . . . . . . . . . . . . . . . . .23
Denver, CO . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Austin, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Portland, OR . . . . . . . . . . . . . . . . . . . . . . . . . .10
Washington, DC . . . . . . . . . . . . . . . . . . . . . . . . .9
Seattle, WA . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Raleigh-Durham, NC . . . . . . . . . . . . . . . . . . . . .7
Boston, MA . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
New Jersey/Philadelphia . . . . . . . . . . . . . . . . . . .2
New York, NY . . . . . . . . . . . . . . . . . . . . . . . . . .2
Chicago, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Silicon Valley Students Enrollment Growth: English
Language Learners (ELL) and Total Enrollment
1997
1998
1999
2000
ELL Enrollment
2001
2002
ELL, % of
Enrollment
(2003)
2003
2004
Total Enrollment
2005
18

Education
Bay Area, 2005). However, the rate at which Latinos and other
population subgroups in Silicon Valley and throughout
California are enrolling in college preparatory classes, in
colleges and universities, and filling high growth industry
jobs is lagging.
In light of our changing economy and demographics, how can
all California students meet increasing expectations and be
part of a vibrant innovation economy?
Competition from all sides
How California and Silicon Valley Match Up
California’s K-12 schools continue to fall behind their counterparts
nationwide on indicators like per pupil funding, student-teacher
ratio, and counselors per student.
Although the high school graduation rate in California is
comparable to the other technology regions in the country at
84.9% (using the federal NCES definition)—and as with
other aspects of educational achievement in the state, Silicon
Valley is higher than the state average (90.1%)—the number
falls within ethnic subpopulations. Moreover,
California students as a whole continue to make gains in math
and English, as demonstrated through the National
Assessment of Educational Progress (NAEP). However, when
looking at states with other high tech centers, California students
have a lot of ground to make up in the “proficient” and
“advanced” levels.
Student & Workforce Demographics:
How California and Silicon
Valley are Changing
Silicon Valley’s student population is changing. In 2004,
Latino students surpassed white students in the region as the
largest student group. In less than a decade, the California
Budget Project estimates that 54% of K-12 enrollment in
California will be Latino students, a trend that will no doubt
be felt in Silicon Valley.
Student Enrollment & Percentage of English Language Learners
430,000
27
Number of Students
410,000
390,000
370,000
350,000
330,000
310,000
290,000
270,000
25
23
21
19
17
Percentage of Students
250,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
SV Student
Population
Percentage of
ELL Students,
California
Percentage of
ELL Students,
Silicon Valley
15
Sources: Table, National Center for Education Statistics, Deloitte Consulting LLP
Graphs, CA Dept. of Education, SVLG
19

Education
2005 Public School Rating
Public
School
Rating
Academic
Percentile
Education
Spending
Percentile
Overall
Percentile
Location
Washington, DC . . . . . . . . . . .***** . . . . . . . . . .82 . . . . . . . . . 95 . . . . . . . . . .99 . . . . . . . . . .88
Austin, TX . . . . . . . . . . . . . . . .***** . . . . . . . . . .80 . . . . . . . . . 71 . . . . . . . . . .94 . . . . . . . . . .86
Raleigh-Durham, NC . . . . . . . .***** . . . . . . . . . .90 . . . . . . . . . 32 . . . . . . . . . .92 . . . . . . . . . .84
Seattle, WA . . . . . . . . . . . . . . . .**** . . . . . . . . . .65 . . . . . . . . . 34 . . . . . . . . . .86 . . . . . . . . . .65
New Jersey/Philadelphia . . . . . . .**** . . . . . . . . . .66 . . . . . . . . . 96 . . . . . . . . . .87 . . . . . . . . . .62
Boston, MA . . . . . . . . . . . . . . . .**** . . . . . . . . . .54 . . . . . . . . . 93 . . . . . . . . . .93 . . . . . . . . . .54
Silicon Valley (San Jose) . . . . . . . .*** . . . . . . . . . .56 . . . . . . . . . 60 . . . . . . . . . .95 . . . . . . . . . .65
Portland, OR . . . . . . . . . . . . . . . .*** . . . . . . . . . .60 . . . . . . . . . 23 . . . . . . . . . .75 . . . . . . . . . .59
San Diego, CA . . . . . . . . . . . . . . . .** . . . . . . . . . .35 . . . . . . . . . 49 . . . . . . . . . .66 . . . . . . . . . .39
New York, NY . . . . . . . . . . . . . . . .** . . . . . . . . . .26 . . . . . . . . . 91 . . . . . . . . . .80 . . . . . . . . . .35
Chicago, IL . . . . . . . . . . . . . . . . . . .** . . . . . . . . . .26 . . . . . . . . . 84 . . . . . . . . . .69 . . . . . . . . . .31
Denver, CO . . . . . . . . . . . . . . . . . .** . . . . . . . . . .18 . . . . . . . . . 74 . . . . . . . . . .89 . . . . . . . . . .30
Source: Expansion Management, Relocation Toolkit
Note: New Jersey/Philadelphia is represented by an average of Trenton (NJ) and Philadelphia (PA)
Adult &
Income
Percentile
Student per Teacher Ratio
2000 2001 2002 2003
Location
Boston, MA . . . . . . . . . . . . . . . .N/A . . . . . . . . .N/A . . . . . . . .13.3 . . . . . . . .13.9
New Jersey/Philadelphia . . . . . .15.1 . . . . . . . . .14.6 . . . . . . . .14.5 . . . . . . . .14.3
Raleigh-Durham, NC . . . . . . . .14.7 . . . . . . . . .15.1 . . . . . . . .14.4 . . . . . . . .14.7
Austin,TX . . . . . . . . . . . . . . . . .14.5 . . . . . . . . .14.2 . . . . . . . .14.5 . . . . . . . .14.8
Washington, DC . . . . . . . . . . . .15.8 . . . . . . . . .14.9 . . . . . . . .16.3 . . . . . . . .14.9
Chicago, IL . . . . . . . . . . . . . . . .17.0 . . . . . . . . .17.1 . . . . . . . .17.0 . . . . . . . .17.6
Denver, CO . . . . . . . . . . . . . . . .18.2 . . . . . . . . .17.8 . . . . . . . .17.4 . . . . . . . .17.8
Seattle, WA . . . . . . . . . . . . . . . .15.8 . . . . . . . . .20.1 . . . . . . . .20.3 . . . . . . . .20.5
Portland, OR . . . . . . . . . . . . . . .20.2 . . . . . . . . .20.6 . . . . . . . .21.0 . . . . . . . .20.8
San Diego, CA . . . . . . . . . . . . . .20.9 . . . . . . . . .20.9 . . . . . . . .20.8 . . . . . . . .20.9
San Jose, CA . . . . . . . . . . . . . . . . . .20.6 . . . . . . . . . . .20.3 . . . . . . . . .20.3 . . . . . . . . .21.0
New York, NY . . . . . . . . . . . . . . . .15.9 . . . . . . . . . . .15.8 . . . . . . . . .21.9 . . . . . . . . .36.4
Source: National Center for Education Statistics, US Dept. of Education.
20

Education
These changes in student demographics have ramifications at
the end of the “pipeline.”
For our Latino students, the college pipeline—and thus the
workforce pipeline—is narrow. According to the Public Policy
Institute of California, Latino students make up 33% of the
state’s public high school graduates, but 14% of UC enrollees
and 23% of CSU enrollees. Moreover, only 16% of Latino students
are eligible for CSU and 7% are eligible for UC—half of
their white counterparts. (Source: PPIC; Educational
Resources and Outcomes by Race & Ethnicity, 2005)
In Silicon Valley, the scope of the path and reliability of this
“pipeline” becomes evident upon examination of the class
enrollment data for ethnic groups in the region.
In large part, the past decade shows increasing enrollment in
college preparatory classes within each of the ethnic groups in
Silicon Valley (see bar graphs). But, in the context of all of the
9-12th grade students enrolled in those courses, as the courses
progress, the share of Latino students enrolling declines dramatically.
(Note: SVLG data analysis found this to be true in
1st year chemistry and physics enrollment.)
How California and Silicon Valley
Can Make Progress
Student success in K-12 will come from a strong teacher
and principal corps. The teaching profession is in constant
change, and the demographics surrounding it are not promising:
more teachers retiring than entering, mandates from
Sacramento multiplying, and teacher salaries lagging behind
the cost of living, to name a few.
The state must support professional development to ensure
that schools are implementing a sound, standards-based
curriculum and instructional programs, and provide teachers
and principals with the tools needed to instruct a diverse population
in a changing world. If the state is serious about developing,
recruiting and retaining teachers—particularly in
math and science—then it should invest with “both feet.”
The California Teach program, which is designed to recruit
science and math graduates into the teaching profession,
received most of its initial funding from the private sector and
$1 million from the state.
Investing in what matters. Achievement and advancement
in math and science are the bedrock of Silicon Valley’s innovation
economy. Our nation, state and region—particularly
within high-need schools—are facing a critical shortage of
math and science teachers. The way that the state allocates
funding—in an overly complex manner and through a myriad
of restrictive categorical programs—does little to allow our
public K-12 and higher education systems to adapt to changing
times. Moreover, market forces must enter into the equation
for recruiting and retaining talent in critical fields.
Hold districts to high standards and give them flexibility
to meet those standards. It is common practice to give districts,
in the name of local control, additional resources that
are quickly followed by restrictions. The state has established
a standards and accountability system. Districts should be
allowed to retain flexibility in meeting those standards; districts
that are successful retain flexibility and districts that are
not as successful receive less. The current system does not
allow innovation at the district or school level.
Students need to be aware of the pathways ahead of them
(workplace, college, financial aid, etc.). This is particularly
important for students of immigrant families or from underrepresented
populations. The fact that an entire high school
might share a guidance counselor or two is unacceptable,
although recent efforts by the Legislature and Governor to earmark
funding for guidance counselors is a step in the right
direction.
Access to college needs to be available and predictable.
Students and families should not have to wonder from year to
year whether there will be a place for qualified applicants at
state colleges and universities and what it might cost.
Skills for entering the workplace and for entering college
are converging. A high school diploma needs to convey that
the graduate has mastered a specific set of skills; that, in large
part, the student is prepared to enter college, university or
the workforce; and that it is not the end of the individual’s
learning. California needs to maintain high standards and
expectations, and students will rise to the occasion.
Make decisions based on accurate student and teacher
data. As California rightfully raises academic standards, it
needs a data system that will support accountability, particularly
when it comes to high school graduation and proficien-
21

Education
cy. We cannot expect to know where students are going or
have gone if we do not accurately track their progress.
Encourage private-public partnerships. There is more that
business and industry can do, particularly by way of internships
and fellowships for students and teachers. SVLG regularly
hears from our education partners about the importance of
providing relevant and engaging opportunities that expose
our educators and students to changes in technology, the
workplace and career path options. This is particularly important
for socio-economically disadvantaged populations.
Support for K-12 and higher education infrastructure
needs to be sustainable, equitable, and should be commensurate
with the cost to educate students. We need to
ensure reliable funding streams that do not unduly place the
burden on one constituency. Voters in recent state and local
elections have been cautious about substantial program
changes (e.g., universal preschool) that tax one group or activity
for a larger benefit.
If steps are not taken to develop and harness the brainpower
that powers our innovation economy, our region could face a
“fuel shortage” that would have ripple effects throughout the
economy and from which it would be difficult to recover.
Change, it has been said, is a constant. It goes hand-in-hand
with Silicon Valley, with advancement, with California.
California and Silicon Valley have a lot of ground to cover, and
the world, as it continues to “flatten,” will not wait.
Best Practices - Lessons Learned
The Teacher Advancement Program (TAP) was
launched in 1999 by the Milken Family
Foundation to attract, retain, develop, and motivate
talented people in the teaching profession. The
program contains four core elements: 1) multiple
career paths for teachers within the classroom; 2)
ongoing, applied professional growth; 3) instructionally
focused accountability; and 4) performancebased
compensation. The career paths component
provides teacher leaders with advancement opportunities
and compensation increased accordingly. The
professional development component requires
teachers to meet weekly in subject or grade-level
“cluster groups” led by master or mentor teachers to
address challenges in their particular classrooms.
The TAP model requires that teachers are evaluated
4 to 6 times a year by a school leadership team, and
it provides TAP teachers with bonuses based on
their classroom evaluations and the achievement
growth of their students. TAP also supports incentive
pay for “hard-to-staff” schools and subjects.
In the preliminary results from the 2005 TAP study,
the average TAP schools gained 10-21 percent more
than control schools did each year on achievement
tests.
TAP is in various stages of implementation in more
than 100 schools across the nation, including
schools in Austin (TX), Tucson (AZ), and
Washington, D.C.
22

Environment

Environment
Silicon Valley has always operated at the crossroads of change.
From ranching to orchards, orchards to factories, factories to
board rooms, board rooms to the next wave of technology and
innovation that responds to local, national and global challenges
and opportunities. Silicon Valley also exists in the
crossroads of circumstances unique to this region as well as
those common to any high tech region in the world.
Fostering Innovation and Businesses that can
Change the World
“Clean Tech” is an emerging sector of service or technology
businesses that economize the use of natural resources, employ
less hazardous methods or materials, or offer solutions to problems
such as water treatment, waste management or energy
supply challenges.
Silicon Valley has a proud legacy of being the birthplace of
many businesses and ideas that have changed the world. It is
possible that the next wave of innovation and opportunity will
transform Silicon Valley into an incubator for “Clean Tech,”
especially the clean energy aspect of clean tech.
Venture Capital Investing
Venture capital investment is one metric used to describe the
development of new technology clusters.
United States-based venture capital (VC) investments in energy
technologies increased from $716 million in 2004 to $917
million in 2005. As a percent of total VC investments, energy
tech increased from 3.3 percent in 2004 to 4.2 percent in
2005. Global wind and solar markets reached $11.8 billion
and $11.2 billion in 2005—up 47% and 55%, respectively,
from a year earlier. The market for biofuels reached $15.7 billion
globally in 2005, up more than 15% from the previous
year. According to Clean Edge research, biofuels (global manufacturing
and wholesale pricing of ethanol and biodiesel) will
grow from $15.7 billion in 2005 to $52.5 billion by 2015.
Clean-energy sources, particularly wind power and biofuels,
are now often price-competitive with their conventional rivals
—and in some cases, they’re cheaper. This is the result of
prices for oil and natural gas increasing and clean-energy costs
falling due to market growth, economies of scale, and technology
advances.
150
Unique U.S. Cleantech Companies Receiving Venture Capital
Funding, by Region, 2001-2005 (Number of Companies)
126
119
100
75
50
40 40
29
18
0
West
Coast
Northeast
Midwest
South-
East
South-
West
Rockies/
Plains
North-
West
Source: Cleantech Venture Network
24

Environment
California Venture Capital in Clean tech
California attracted $484 million in “Clean tech” venture capital
in 2005. California also dominated in the number of deals
for the two year period 2004 -2005, capturing 30% of the 367
deals.
California has repeatedly taken the lead in adopting environmentally-conscious,
business friendly policy. The PIER
(Public Interest Energy Research) program, the CalPERs and
CalSTERs clean tech initiatives, California’s Renewable
Portfolio Standard, and various
State incentives for solar and wind energy have all made
California an attractive place for clean tech businesses.
While California leads, the Boston area is catching up quickly,
and the percentage of increase in investment is rising faster
in the Northeast, Midwest and Southwest.
150
126
Unique U.S. Cleantech Companies by Region,
2001-2005 (Number of Companies)
119
100
California’s Share of CleanTech VC 2005 - by Sector
75
50
40 40
29
18
0
West Coast Northeast Midwest
Source: Cleantech Venture Network
Southeast South Coast Rockies/
Plains
Northwest
$800
$700
$600
$500
$400
$300
$200
$100
$0
Source: Cleantech Venture Network
$738.8
CleanTech VC 2005 - by Sector
VC Investments in Focus Area
($1.6B invested in 2005)
$361.5
$120.9 $87.2 $62.9 $46.9 $27.2
$161.3
Source: Cleantech Venture Network
E n e r g y
M a t i s & N a n o
W a t e r
M a n u f a c t u r i n g
E n a b l i n g T e c h
T r a n s p o r t a t i o n
E n v i r o n m e n t a l
O t h e r
There is also growing recognition by policy-makers at the
national and state level that clean tech can be a valuable asset
in creating jobs, improving environmental performance, and
promoting national resource independence. California and
Silicon Valley in particular have the potential to capitalize on
market and investment trends. To ensure Silicon Valley
remains pre-eminent in the innovation arena, local and regional
governments should continue to encourage the incubation
of small start-ups, and support policies that encourage businesses
to locate and remain in Silicon Valley.
Global Investments
In 2005, clean tech captured 8.5% of the $6.02 billion in venture
capital that was invested in North America. There were
67 clean tech deals in North America and another 36 deals in
Europe during the first quarter of 2006. Among the deals: 19
of the companies were from the UK, 3 from Denmark, 2 each
from Germany and France, and one each from Sweden,
Finland, Switzerland and Israel. While North America leads,
and California is the leader in North America, there are strong
challenges from other regions and abroad.
25

Environment
“Best Practices—Lessons Learned”
Regions attracting clean tech venture capital investments
have the following characteristics:
• Local, regional and state-level proactive
environmental policy
• Existing technology ‘clusters’ that raise the
collective profile of the industry as a group
and enable businesses to compete with as well
as support each other
• Proximity to centers of advanced education and
research such as universities and government
research laboratories.
• Access to capital
• Desirability of location as characterized by: strong
networks among ‘up-and-coming’ entrepreneurs,
high quality of life or ‘hip-ness’
• Plentiful managerial and entrepreneurial talent
• Fiscal policies that support emerging clean tech
businesses
The emerging Clean Tech sector in Silicon Valley and
California benefits by having all of these characteristics
as a foundation for growth. Additional California
policies encouraging clean tech include:
• The 2004, CalPERS “Green Wave” Environmental
Technology Investment Program
• A 20% by 2017 Renewable Portfolio Standard
• The PIER Program, awarding $62 million annually
to energy research by partnering with RD&D
organizations, individuals, businesses, utilities,
and public or private research institutions.
• Use of Public Goods Charges to fund energy
efficiency and conservation programs.
• State Green Building and Green Purchasing
policies.
70%
60%
50%
40%
30%
20%
10%
69%
Semiconductors
California’s share of US VC Invesment,
by Sector (2005)
49%
Med. Devices
&
Equipment
Source: Cleantech Venture Network 2006
47% 46%
Software Biotechnology Telecom CLEANTECH
Silicon Valley’s unique challenges: What could be
on our horizon?
Like any place, Silicon Valley has a mixture of blessings and
challenges. While we count our blessings, we must be mindful
of the challenges and strive to address these as proactively
as possible.
Water Reliability
Silicon Valley is fortunate in having multiple sources of water.
Depending on the year, local supplies make up about half of
our water. In the southern part of Silicon Valley, Delta water
makes up most of the other half. Water from the San Francisco
Hetch Hetchy system is the largest source, often the exclusive
source, in the northern/peninsula portion of Silicon Valley.
Like an investor with a diverse portfolio of stocks, our multiple
sources of water and the cooperative linkages that now
exist between water systems, ensure that the region’s supply is
secure. However, each source has some significant challenges.
43%
CA total = 47%
36%
26

Environment
The Delta
The Sacramento/San Joaquin River Delta provides much of
Silicon Valley’s and two thirds of the state’s population with
drinking and irrigation water. The Delta is also a rich ecosystem
and provides the state with fisheries, agricultural and
recreational resources. However, the Delta system is under
stress and there are some serious threats to be addressed.
Levees
There are more than 1100 miles of levees in the Delta. Levees
are a critical part of the Delta’s structure and ensure that residential
and agricultural lands are protected from flooding, and
that salt water from the San Francisco Bay is not drawn into
the Delta where it can contaminate drinking and irrigation
water. However, there are several stresses on delta levees all
adding up at once. According to Dr. Jeffrey Mount, of UC
Davis, the Delta ‘looses ground’ due to soil decomposition,
subsidence and erosion at a rate of 23,000 cubic meters of
additional space below sea level every day. Some parts of the
Delta are approaching 20 feet below sea level. As this volume
of below sea level space increases, more and more pressure is
put on the levees. Because it is not possible to stop these
changes, California will eventually face some difficult and
costly choices about how to manage the delta and the levees
that protect people, infrastructure, property and water supply
resources.
According to the Department of Water Resources, both the
federal Central Valley Project and the State Water Project,
built to deliver water to millions of Californians, are dependent
on fragile Delta levees to protect water supply and water
quality.
State highways, railroad lines, water supply pipelines that
serve much of the San Francisco Bay area, energy transmission
lines, and petroleum pipelines now cross the Delta, and rely
on the continued stability of Delta levees. All together, more
than $47 billion in infrastructure is protected by central valley
levees.
In addition to the concerns regarding levees, the Delta is also
facing fishery ecosystem deterioration and declining water
quality. While the detailed analysis as to the causes of these
challenges is still underway, some known pressures on the
Delta include; increased urban and agricultural run-off,
impacts of invasive species, fresh water diversions/lower flowthrough
volumes, and changes in seasonal flow patterns as rain
replaces snow in the Sierras and spring thaws come earlier and
faster due to global warming.
The Department of Water Resources has recently begun a
study of the long term risks and possible mitigations or adaptation
strategies for the Delta. With better information about
the long term risks facing this vital resource, Silicon Valley
and the state will be able to better prepare for the future.
The Hetch Hetchy System
Almost 100 years ago, the City and County of San Francisco
implemented an unprecedented water supply project that conveyed
water over 200 miles from the Sierras to the City of San
Francisco by gravity power alone. The project flooded a pristine
valley in a national park, but also provided a secure supply
of very high quality water and electricity to San Francisco
and many other communities in the Bay Area.
27

Environment
The San Francisco Public Utilities Commission (SFPUC)
launched a $4.3 billion Water System Improvement Program
to repair, replace, and seismically upgrade the aging system.
More than 75 projects are to be completed by the end of 2015.
Some of these projects include:
• New and rehabilitated pipelines from the Sierra Nevada to
the Bay Area, adding redundancy for rerouting water in
emergencies
• A new or repaired Calaveras Dam in southern Alameda
County, to meet seismic safety needs (a proposal to increase
capacity has been shelved)
• A new Irvington Tunnel, as a backup to carry water
through the East Bay hills
• Installing valves and strengthening pipelines where they
cross the Hayward Fault
• Upgrades and capacity increases at the Sunol Valley Water
Treatment Plant
• Improvements to regional system facilities within San
Francisco—new or improved reservoirs, an upgrade at the
Lake Merced pump station, and new transmission pipelines
28

Environment
Proposal to dismantle the dam and restore the
Hetch Hetchy Valley
In the past few years, various environmental activist organizations
in California have been pressing for studies and consideration
of a proposal to dismantle the O’Shaunessey dam, drain
the Hetch Hetchy reservoir and restore the valley to its preinundation
condition. Recently the Department of Water
Resources completed its evaluation of all previous studies related
to this proposal and provided a gap analysis of necessary
additional information and a cost estimate for such a project.
While the DWR determined that the proposal was hypothetically
feasible, there are many significant impediments,
including; removal of the dam, replacing the water and energy
with equally high quality and reliable supplies, water
rights, protection of Native American sacred sites, and not
least—a $10 billion dollar price tag.
The proposal to restore the beauty of the valley that was sacrificed
to provide San Francisco and the Bay Area with water
will continue to have an emotional appeal, even though the
cost is astronomical. It remains to be seen if this proposal will
receive continued consideration, given the magnitude of the
cost, and the many other pressing priorities for those
resources.
(Source: Jeffrey Mount, Ph.D, Professor; Director, Center for Watershed Sciences
Roy J. Shlemon Chair in Applied Geosciences)
29

Environment
Municipal water rates per 1000 cubic feet (not including meter charges and taxes)
San Jose, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.87
San Diego, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.60
Phoenix, AZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.86
Washington DC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.93
North Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.09 (rates decrease as use increases)
Boston, MA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 4.32 (rates increase as use increases)
San Francisco City and County . . . . . . . . . . . . . . . . . .$1.97
San Francisco dependent water customers . . . . . . . . . .~$2.45 (varies somewhat by municipality)
Austin, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2.46
Seattle, WA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2.88 (rates vary by season)
Portland, OR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.77
Sources: Current municipal or water supply agency websites
30

Health Care

Health Care
Throughout our country, there is widespread agreement that
the health care system is too expensive and inefficient, yet
there is little agreement on what reforms and solutions we
need. Despite this lack of consensus, changes are underway,
including here in our region, which could lead to permanent
structural improvements in cost and quality.
Any discussion of the health care system in Silicon Valley and,
indeed, the United States, requires careful definition. First, is
health care a quality-of-life or a cost of doing business issue?
Is there a greater social good or a long-term cost incentive in
providing universal access to care? While the system provides
for our well-being, a deeply personal human need, it is provided
as a quantified benefit of employment, or even a government-sponsored
program. In addition, any significant changes
in the regulation of the system pose a potential threat to its
cluster of supporting industries.
How, therefore, do we approach reform and improvements in
the system? What best practices and emerging trends hold the
most promise? This section will offer some different perspectives
and seek to identify common ground.
Regional business leaders are becoming more interested about
the system, due largely to increased healthcare costs. Their
concerns are being expressed through efforts such as the
Silicon Valley Health IT Pay for Performance Program, which
provides financial incentives for local providers to adopt electronic
medical records and best practices in automation. In
2005, former Intel CEO Andy Grove published an article in
the Journal of the American Medical Association drawing parallels
between the microchip and medical industries, in which
he suggested process improvements and lessons about efficiency
which the medical system might learn from. 3
In general, employers continue to see their employees’ health as
an imperative, but are struggling to reconcile price increases
with the many other expenses that Silicon Valley companies face.
By the Numbers–the Cluster
Average wage in the bioscience cluster in 2004: $65,775.
National average wage, private sector: $39,000. 4
By the Numbers –the Costs
According to the Centers for Medicare & Medicaid Services,
health care expenditures in the US were over $1,877 billion
in 2004; this represented about 16% of GDP. Per capita
expenditures were $6,280 per person in the same year.
The Employer Perspective
In Santa Clara County, the percentage of residents with insurance
by their own employer or someone else’s (e.g. spouse, parent)
is 76.8. 1 Most employers in California offer, and pay for
at least some portion of, their employees’ health care/insurance:
recent data indicate this is true for about 66% of
employers, representing nearly 90% of workers in the state,
with an estimated 63% of workers taking advantage of this
benefit. 2 However, this percentage has been slowly decreasing,
due both to some employers dropping coverage and fewer new
small businesses offering insurance.
Costs, as measured by annual premium increases, are rising at a
rapid rate. Many recent studies peg the rate of increase in health
care costs in the US ranging from 8-12% per year over the past
5 years, compared with an economy growing at 4% or less.
The Business Cluster Perspective
Hospitals, clinics, medical practices, insurers, bio-tech and
pharmaceutical companies, and medical device companies are
among the major business interests in the health care field.
Silicon Valley’s unique ecosystem of venture capital, education
institutions and the highly educated workforce they spawn creates
a dynamic where changes in the policy environment for life
sciences and medical fields are felt acutely. For example, the
passage of the ballot initiative for state-funded stem cell
research, and subsequent establishment of its managing institute
in San Francisco, has been met with an enthusiasm far
greater than the dollars it represents. Companies have been
formed and made expansion decisions largely predicated on the
institute and the commitment it represents to the industry.
Silicon Valley is home to concentrated clusters in the medical
devices as well as the research, testing and medical laboratories
field, which are both large and rapidly growing in our
region compared to other areas. However, Southern California,
New York/New Jersey, and other regions are major competitors;
and California struggles to maintain its position as other
states aggressively pursue tax and economic development
strategies to lure companies. 5
32

Health Care
By the Numbers–Consumers
According to the Centers for Medicare & Medicaid Services,
households expended 32% of the dollars for health care in
the US in 2003. Private-sector employers represented 26%,
and the government paid 39%.
While a plurality of health care expenses continue to be borne
by government, the trend in spending is toward greater consumer
costs and away from employer costs. There are several
components to this equation: increased employee participation
in their premiums, larger co-pays, and a new “consumerism”
represented by trends such as high-deductible
plans with health savings accounts.
Ideally this trend would also reflect a growing number of individuals
having insurance coverage; unfortunately, it is not.
Rates of uninsured adults continue to rise in the US.
However, our coverage rate in Santa Clara County is 88.3%
overall (by all sources) 6 , and there are some very positive developments
in Silicon Valley that may reverse the tide. Santa
Clara County is home to one of the earliest and most aggressive
local efforts to get all children insured. It has had tremendous
success enrolling eligible kids into existing state and federally-funded
programs, as well as directly insuring others.
Several other counties in the state have followed suit, and our
state government has looked at the possibility of expanding
the program statewide.
100
98
96
94
92
90
88
86
84
0
The Consumer
Insured Children, 0-18 Years
San Diego
Santa Clara
A comparison region to Silicon Valley, Boston, is at the center
of the statewide program initiated in Massachusetts to extend
health insurance to all residents.
Best Practices—Lessons Learned
Massachusetts Health Care Reform Plan
The Massachusetts plan requires the participation of both
individuals and employers. It mandates everyone in the
state to purchase health insurance by July 1, 2007, and
would impose financial penalties of up to 50 percent of the
cost of a health insurance plan on those who do not via
income tax filings. It also includes a requirement that
employers with more than 10 employees provide health
insurance coverage or pay a “Fair Share” contribution of up
to $295 annually per employee. The Governor vetoed this
provision of the plan; however, the legislature has the votes
to override the veto.
The plan creates the Commonwealth Health Insurance
Connector to “connect” individuals to insurance by offering
affordable, quality insurance products. Small businesses
and individuals can purchase insurance through the
Connector. The Connector will also offer specially
designed, lower-cost products for 19-26 year-olds. It is
expected that up to 215,000 residents will purchase coverage
through the Connector.
Employers with more than 10 workers will be required to
offer a Section 125 “cafeteria plan” that permits workers to
purchase health care with pre-tax dollars. Using these pretax
dollars, workers not offered insurance will be able to
purchase insurance products through the Connector.
Massachusetts Health Care Reform Plan, Publication
#7494, Kaiser Family Foundation
While it is too early to determine if the combination of
employer and personal responsibility for costs will change
the competitive landscape, it will be interesting to follow
in the future. At the same time, 2 local jurisdictions, the
City and County of San Francisco and San Mateo County,
are looking to adopt universal health care for adults, but
under different models.
33

Health Care
Encouraging Trends
The interest of the medical community in adopting
evidence—based medicine is increasing, which bodes well for
achieving better outcomes. This body of practice emphasizes
clinically validated best practices and protocols, an area that
has been somewhat neglected in the past. These practices are
as simple as regularizing inventory control procedures for
drugs, or more complicated, such as adopting four effective
practices to prevent ventilator-acquired pneumonia (VAP). 9
While not every aspect of evidence-based medicine will be
adopted by all practitioners (or institutions), there is great
promise for increased effectiveness and decreased avoidable
errors, which have very dear human and fiscal costs.
While it appears that Americans on the whole are becoming
less healthy, the resurgence of wellness programs discussed in
last year’s Projections continues. As data continues to point
towards greater proportions of obesity and other risk factors
for complex chronic illnesses (diabetes, heart disease, etc.),
prevention has never been more important. California’s demographics
are a challenge in terms of obesity, which is becoming
more prevalent among Latinos, a group which is traditionally
hard to reach with lifestyle change programs.
Emphasis on exercise and nutrition through the K-12 education
system is one effective means of reaching vulnerable populations.
Current budget constraints make these programs difficult
to begin and sustain, but Santa Clara County is trying
to reach all 5th graders with a uniform program.
Some very large corporations and government employers in
Silicon Valley are self-insured, which entails either negotiating
with providers and/or directly paying employee expenses.
This provides some latitude in dealing with providers, as well
as more direct returns on wellness programs.
How Uninsured Are Covered Under the
Massachusetts Health Care Reform Plan
Remain Uninsured
35,000 residents
Private Insurance
215,000 residents
Medicaid Expansion
92,500 residents
Subsidized Coverage
207,500 residents
By the Numbers–Best Practices
Adoption of VAP-Avoidance techniques at Virginia
Mason Medical Center reduced the number of cases from
34 in 2002 to 1 in 2005, with an estimated cost reduction
from $500,000 to $15,000 for the hospital. 10
Total Uninsured – 550,000
34

Health Care
Jurisdiction San Francisco 7 San Mateo County 8
Brief Description
Creation of a Health Access Program
that offers comprehensive health-care
services to uninsured San Franciscans
and their employers at a reasonable
cost, with subsidies for small and
medium-sized businesses and low
and moderate-income individuals.
Would emphasize preventive care
through regular checkups, which
would limit the amount of people
who need the emergency room.
However, this would not be the same
as health insurance because it will
not extend health care coverage outside
of the city limits.
The county already provides universal
children’s health coverage
through its Children’s Health
Initiative program (Healthy Kids),
and the same could be done for
adults earning less that 400% of the
federal poverty level.
The current Health Plan of San
Mateo and WELL (Wellness
Education Linkage Low Cost) program
work independently to provide
health coverage for people with very
low incomes, but fails to help homeless
and those making slightly more
than the low salaries that qualify for
the programs. However, there are
talks of the Health Plan taking over
the county’s WELL program, which
believe it will save money that can
be used to create new adult programs.
Payors
Estimated to cost $200 million
annually, and is planned to be paid
through city funds, and also through
a combination of business contributions
and member premiums.
The cost of providing such a plan
could be lessened by using a combination
of taxpayer dollars from its
health care districts, and a contribution
from private hospitals and business
owners to put together its plan.
Benefits
Low-cost medical services for thousands
of uninsured, including non-
US citizens.
The Health Access Program would
give individuals access to a primarycare
doctor, nurse or medical assistant
at one of the city’s public or
nonprofit clinic. Enrollees can receive
acute care and specialty services
through a network, including San
Francisco General Hospital and the
city’s nonprofit hospitals. It would
cover services such as doctor visits
and surgeries, as well as prescription
drugs.
Low-cost medical services for thousands
of uninsured, including non-
US citizens.
35

Health Care
References
1
Santa Clara County Public Health Department, Santa Clara
County Behavioral Risk Factor Survey 2004, Oct. 2004
2
California HealthCare Foundation, Snapshot: Employer-Based
Insurance: Coverage and Cost, 2006
3
Andrew S. Grove, PhD, Efficiency in the Health Care Industries:
A View From the Outside, Commentary, Journal of the American
Medical Association, Volume 204, No. 4, 2005
4
Growing the Nation's Bioscience Sector: State Bioscience Initiatives
2006, Battelle Technology Partnership Practice and SSTI, April
2006.
5
IBID, Battelle.
6
IBID, Santa Clara County Public Health Department
7
Allday, Erin, and Cecilia M. Vega. "Health Proposal May Pay
Off Big." San Francisco Chronicle. 2 June 2006.
Rosselli, Glen. "S.F. Plan a Path to Universal Health Care." San
Francisco Chronicle. 12 July 2006.
8
San Mateo universal health care faces challenges,
InsideBayArea.com, Laura Ernde, 7/14/2006
Hundreds call for new deal in health care, The Daily Journal, San
Mateo County, Dana Yates
County explores universal health care, The Half Moon Bay Review,
Marc Longpre
9
Virginia Mason Medical Center, Harvard Business Review,
January 11, 2006 revision, pp 10-11.
10
Virginia Mason Medical Center, Harvard Business Review,
January 11, 2006 revision - p11.
36

Energy

Energy
The 2000-2001 California Energy Crisis made almost daily
worldwide news and thrust energy policy irrevocably to the
forefront of the public's attention. Five years later, we now see
that period as a watershed in attitude and policy for the state,
as well as for the U.S.
What is different today? What trends have shaped our present
policy from that crucible? What technological breakthrough
will revolutionize our efficiency and cost?
These are some of the major shifts in thinking in the public
arena in the past year:
• Record-breaking weather is underscoring a growing belief
that man-made warming is leading to a global disaster
• Record cost of gasoline is fueling the desire to wean
California and the U.S. from sources of fuel produced
by unstable foreign governments
• The cost of natural gas tripling after Hurricane Katrina
• The belief that renewable sources of power, especially
solar photovoltaic, wind power and biomass to replace
petroleum-based fuel can compete now
GDP ($1,000 / Capita)
Energy and Prosperity
45
40
United States
35
30
Germany
France Australia
25
20
United Kingdom
Sweden
South Korea
15
Czech Republic
10 Brazil
Africa
IranSouth
5 China
Indonesia
0
0 50 100 150 200 250 300 350 400
Energy Use (Million Btu / Capita)
California Energy Commission
The U.S. uses more
energy and is more
productive than
other countries
Source: CIA, World Factbook 6
Heat Waves and Record Electric Demand
How would our new policies and system upgrades perform
under pressure? California would find out much sooner than
expected.
In late July, a high-pressure system locked over the American
Southwest. Ten days of record heat, a 1 in 50 occurrence,
exceeded peak demand five years before the power systems
operator expected it with more than 50 Gigawatts needed on
July 24. (See Figure 2 Demand curve) The news after it was all
over is that nothing happened. Not a single power outage due
to lack of resources (although there were distributed outages
resulting from transformer equipment failure). With Flex
Your Power and Voluntary Load Reduction Programs in place
we had a large voluntary public response in conservation with
approximately 1500 Megawatts saved (enough to power most
of Silicon Valley). In all but one day, operating reserves
exceeded 7 percent.
The Central Dilemma
So, we sailed through it all, even better than heat waves in
other parts of the country. Not one power plant went down.
Not one power line was lost. Not one blackout occurred.
This appears to verify that California has new polices wired for
success, principally:
1. Energy efficiency is now first priority at the utilities and
with the business community.
2. The spinning bubble meter is dead! Five million smart
meters are being installed by PG&E. Companies like
Energy Connect have moved into the California market to
help customers save 25% and more with electricity timeof-use
strategies as they have in the Philadelphia /New
Jersey area and Chicago.
3. The priority of renewables is state law and Governor
Schwarzenegger spearheaded solar spending of $3 billion
on 3000 megawatts of solar power in the next ten years,
enough to power nearly two Silicon Valleys.
4. Wind power has become a juggernaut, nearly as cheap as
natural gas power.
5. We have solved our “wires” challenges across the state and
near San Francisco allowing us to begin closing old, inefficient
plants like Hunter’s Point.
6. Some of the most successful and innovative solar power
companies have their headquarters here in Silicon Valley
(ReGRID, Akeena Solar, Miasole, and Sun Power).
7. We even have a new solar manufacturing plant committed
to the Valley, setting us up to become a center of excellence
in this arena.
Is there still any reason to be concerned about our future?
Maybe.
38

Energy
Price Volatility
Comparing Gas Volitility
to the Dow Jones
• The natural gas price rally and
subsequent price break in the last
year would be equivalent of the
Dow Jones going from 10,000 to
25,000 and then back to 10,000.
Over-Reliance on Natural Gas?
One hurricane, then a second one exposed our weakness. Just
like 6 years ago, the first rumblings of revolutionary change
began in the natural gas market.
Three headlines further clarified the emerging risk:
• India declares a moratorium on new natural gas plants
after 2012.
• New natural gas pipeline to connect the gas-hungry
eastern market with sources in the west.
• Russia cuts off natural gas to customers in Europe.
When hurricane Katrina mowed over the Gulf of Mexico,
wrecking 15% of the nation’s capacity to deliver natural gas,
prices soared 200% to an all time high of $15.62 (per thousand
cubic feet).
Now customers are paying attention. Risk management plans
become required strategy. We were saved by a very mild winter,
but experts predict $10-15 gas may become normal.
The problem exposed by these events: “Half of our baseload is
supplied by natural gas.”
We are vulnerable and there is currently no workable substitute.
New policies to control CO2, which will be signed by
the Governor and the CPUC this year will render abundant
and cheap conventional coal power not available. In addition,
nothing has less legislative support than new dams for clean
hydropower, and building a new nuclear plant is still officially
illegal in the state.
Can Wind and Solar Step In?
Why can’t we just switch to renewable power like solar and
wind? Why not indeed?
Unfortunately, the physics of power production include limitations
that are seldom discussed. Wind generated power’s
secret is that the closer we get to the peak, the more it disappears.
For July 24, 2006, our all-time record day, wind sources
lost 80% of its capacity by the time we reached the peak in
late afternoon, not even providing 2% of what we needed.
This is typical. California use peaks from 3 to 6 pm, but wind
typically peaks at 2 in the morning. Wind power must be
backed up by baseload such as natural gas, nuclear and
hydro-power. This fundamental weakness will remain until
cost-effective energy storage technology catches up.
What About Solar?
Although less intermittent, solar power similarly suffers from
a lack of coincidence with peak use, and is 2 to 5 times more
costly per kilowatt generated. The good news is that breakthroughs
in thin-film technology may change this.
Further, neither solar nor wind can function to uphold the
voltage of the grid to keep it stable from damaging surges and
sags. Only baseload plants provide these “ancillary services” to
smooth the bumps and dips created by these resources. This
adds even more hidden costs.
What, then, does our future hold? That depends.
39

Energy
Future Cost of Power in a Carbon
Constrained World
What will be the cost premium for our policy choice to tax
carbon-based sources of fuel? The Electric Power Research
Institute has researched this and has presented their findings
in a diagram. It displays the heavy toll on coal-fired power
sources. Depending on the carbon tax selected, the cost of coal
could double. Natural gas costs could increase by nearly as
much.
Nuclear power’s low cost is low and stable over the entire
period of concern.
What policy decisions do these suggest? First, there is a significant
cost to California customers from our CO2 policy
leadership. Because we have shut off the cheapest and cleanest
baseload resources, namely hydro and nuclear, we will have a
default natural gas only policy.
Like Europe and China, we may need to change to compete in
the long term.
IGCC = Integrated Gasification Combined Cycle
NGCC = Natural Gas Combined Cycle
PC = Pulverized Coal
Capture = Carbon Dioxide sequestration
Levelized Cost of Electricity, $/MWh
100
90
80
70
60
50
40
30
0 10 20 30 40 50
Cost of CO 2
, $/metric ton
Policy and Technology Needs and Breakthroughs
First some good news. There are some bona-fide technological
revolutions coming that will bring breakthrough efficiency
and customer control of the cost challenges. We will highlight
just two, LEDs and vanadium batteries.
Light Emitting Diodes(LED’s)
In ten years your home may have lights that may not need to
be changed in our lifetime (unless your toddler breaks it). It is
the same glow from your cell phone and traffic lights.
In an incandescent lamp, the heating causes the filament to
glow. With an LED it’s the semiconductor material itself that
emits light. In addition, the intensity of the light can be
changed, along with the color, unlike traditional lights that
after installed are always the same.
LEDs have a 50 to100 times longer lifetime than incandescent
lamps and save 90 percent in energy costs. LED home lighting
will be commercially available in the next three to four years.
Lighting is presently responsible for roughly 20 percent of
electricity consumption. Researchers believe that the adoption
of LEDs could reduce the U.S. electrical demand by 10 percent.
New Storage Technologies
A sophisticated Silicon Valley energy manager recently said,
“If I had access to vanadium battery technology three years
ago, I would have installed them instead of my cogeneration
plant.
The concept is simple. Put the facility on Time-of-use pricing.
Charge the batteries during the night when power is very
cheap (often less than 2 cents/kWh). Expend the batteries during
the daytime when prices exceed 10 cents. What is the
breakthrough? An expanded source of electrolyte solution to
keep the battery working all day. (Insert schematic). This
holds the potential to make wind a more meaningful source.
For customers, it can cut costs many fold and eliminate timeintensive
operations and maintenance as well as natural gas
procurement.
A comparison of promising new storage technologies is presented
below highlighting their advantages and disadvantages.
NGCC @ $6 Wind @ 29% CF PC w/o capture IGCC w/o capture Biomass Nuclear
©2005 Electric Power Research Institute, Inc. All rights reserved.
40

Energy
Tough Decisions in the Next Few Years
California will do well for electric capacity in the coming few
years. But new carbon taxes on fossil fuel plants and the high
cost of dependence on renewables threaten to drive California
costs up even further, making it even harder to compete with
other high tech regions. (See Figure below)
Electricity Cost Comparisons Between U.S. Regions
This year, California’s residential, commercial, and industrial
electricity costs are already the third highest among the
10 regions compared. Most troubling is that California’s residential
and industrial rates have jumped over 10% compared
to last year. New statewide policies in procurement may exacerbate
this trend. However, new customer risk management
strategies and emerging efficiency and demand response
choices will also mitigate this effect.
PG&E Diablo Canyon
Vanadium Redox Battery
Multi Function VRB–3.000kW, 1.5sec. for UPS and 1.500kW, 1h for load leveling
Photo courtesy of Sumitomo Electric Industries, Ltd. (SEI)–Copyright2001
41

Energy
Nuclear Power’s Resurgence Beyond California
Average Retail Price of Electricity to Ultimate Customers by
End-Use State Year-to-Date through February 2006 and 2005
Residential Residential Commercial Commercial Industrial Industrial
Location 2006 2005 2006 2005 2006 2005
California
Colorado
District of Columbia
Illinois
Massachusetts
North Carolina
New Jersey
New York
Oregon
Washington
U.S. Total
12.98
9.10
8.55
7.77
17.88
8.82
11.31
16.45
7.43
6.69
9.67
11.75
8.68
7.81
7.51
12.97
8.30
10.53
14.27
7.20
6.44
8.60
11.32
7.63
9.28
7.40
16.69
7.13
10.18
12.83
6.90
6.53
8.95
10.94
7.13
7.90
7.43
11.92
6.80
9.25
11.58
6.79
6.28
8.09
8.39
5.98
2.53
4.40
11.18
5.10
8.64
8.32
4.35
4.00
5.76
7.92
5.32
2.66
4.43
8.71
4.78
7.61
6.31
4.17
4.05
5.07
Best Practices - Lessons Learned
The Pennsylvania/New Jersey/Maryland grid
operator has created a deep and effective market
for demand response, perhaps the best in the
country. The reasons? First, fewer customers are
made immune from the real cost of power
because of time-of-use rates. Second, aggregators
have direct access to demand response incentive
money.
42

Housing

Housing
Projections
Conventional indicators and statistics still show that housing
affordability and availability in Silicon Valley remains a challenge.
Median home prices are high at $746,800 and we have
managed to be successful in retaining our status as one of the
least affordable places to live, according to the National
Association of Homebuilders Housing Opportunity Index.
The Housing Opportunity Index shows that only 14.9% of
homes are affordable to families and individuals earning the
median income. This puts Silicon Valley in second place
behind New York at 6% with Boston in third at 24%.
The most affordable high tech region is Raleigh-Carey, North
Carolina at 65.8%.
2006 Q1, Housing Opportunity Index (%)
San Jose, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14.90%
Austin, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58.30%
Boston, MA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24.80%
Chicago, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51.30%
Denver, CO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62.40%
New Jersey/Philadelphia* . . . . . . . . . . . . . . . . . . . . .56.40%
New York, NY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.10%
Portland, OR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42.50%
Raleigh-Cary, NC . . . . . . . . . . . . . . . . . . . . . . . . . . .65.80%
San Diego, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.20%
Seattle, WA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32.60%
Washington, DC . . . . . . . . . . . . . . . . . . . . . . . . . . .23.60%
Source: National Association of Home Builders, www.nahb.org
Residential property appreciation rates over a short period
of time show a more pleasant picture. Our region sits in the
middle of the pack with housing prices appreciating 25.9%
between 2003 and 2006. The lowest rate of appreciation was
at 6.7% in Austin, Texas and the highest was in Washington,
DC at 52%.
Focusing on Silicon Valley, recent data collected by the
Association of Bay Area Governments (ABAG) offers some
insight into why prices continue to escalate. In their recently
released report called “A Place to Call Home” ABAG measures
how well cities are doing in achieving the housing goals
set for the 1999-2007 housing element cycle. For the ninecounty
Bay Area, ABAG found that 80% of the homes
needed were permitted. For Santa Clara County and San Mateo
County, the figure is 75% and 58% respectively. Digging a
little deeper into these numbers shows that cities excel in permitting
homes for the above moderate range. Only 19% of the
2005 4th Quarter, Average Monthly Rental Rate
Silicon Valley, CA (San Jose) . . . . . . . . . . . . . . . . . . .$1,330
Austin, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$733
Boston, MA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,216
Chicago, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,003
Denver, CO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$761
New York, NY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,400
Portland, OR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$698
Raleigh-Durham, NC . . . . . . . . . . . . . . . . . . . . . . . . . .$728
San Diego, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,213
Seattle, WA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$859
New Jersey/Philadelphia . . . . . . . . . . . . . . . . . . . . . .$1,046
Washington, DC . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,160
Source: M/PF YieldStar for all cities but New York;
NYC data from Reis Client Services
MSN Real Estate article,
http://realestate.msn.com/Rentals/Article.aspx?cp-documentid=262175
homes needed in San Mateo County for very low-income
families was met. Santa Clara County, a county who’s numbers
are significantly bolstered by the leadership of San Jose,
permitted 55% of the very low income homes needed. The
regional average was 34%. These numbers show that Silicon
Valley is falling short in meeting the overall need for homes.
They also show that we are doing particularly poorly in
permitting homes for those most in need.
Residential Property Annual Appreciation Rates
Region/Metro Area 2003- 2004- 2005- 2003-
2004 2005 2006 2006
Silicon Valley, CA* . . . . . . .17.80% . . . .6.60% . . . .1.40% . . .25.90%
Austin, TX . . . . . . . . . . . . .-1.30% . . . .5.90% . . . .8.50% . . . .6.70%
Boston, MA . . . . . . . . . . . . .8.70% . . . .6.00% . . .-1.50% . . . .8.90%
Chicago, IL . . . . . . . . . . . . .9.00% . . .10.00% . . .11.00% . . .19.70%
Denver, CO . . . . . . . . . . . . .0.40% . . . .3.30% . . . .3.50% . . . .2.50%
New Jersey/Philadelphia . . .10.00% . . .13.60% . . .16.00% . . .26.80%
New York, NY* . . . . . . . . .12.30% . . .15.40% . . .11.20% . . .33.50%
Portland, OR . . . . . . . . . . . .9.30% . . .18.60% . . .21.80% . . .41.70%
Raleigh-Cary, NC . . . . . . . . .4.90% . . .14.70% . . . .3.60% . . .23.20%
San Diego, CA . . . . . . . . . .29.80% . . . .9.60% . . . .4.00% . . .42.90%
Seattle, WA . . . . . . . . . . . .19.00% . . .11.30% . . .16.40% . . .41.60%
Washington, DC . . . . . . . .22.30% . . .25.30% . . .11.00% . . .52.00%
Source: National Association of Realtors, Deloitte Consulting LLP
44

Housing
The Biggest Barriers to Success…
There are many barriers to building more homes but there are
a few that are most significant, namely, how local governments
are financed.
In every decision that we as individuals make, cost is usually
a factor. The same goes for cities. When considering a land use
permit, an important question the city must ask itself is what
kind of financial impact the future development’s needs will
have upon the city. Demands on city services, schools and
infrastructure, all of which must be maintained at some cost,
are associated with housing construction and to a lesser extent,
office parks or big box retail. As a result, fiscal considerations
have become a major barrier to building homes. These considerations
were made more acute five years ago when the State
government decided to balance its budget, in part, by taking
local government money.
Percent of Regional Housing Needs Allocation
(RHNA) Permitted
County Very Low Low Moderately Total
Income Income Low Income
Alameda . . . . . . . . . .24% . . . . . . .38%. . . . . . . . . 20% . . . . . . .65%
San Mateo . . . . . . . . .19% . . . . . . .45%. . . . . . . . . 16% . . . . . . .58%
Santa Clara . . . . . . . .55% . . . . . . .98%. . . . . . . . . 17% . . . . . . .75%
Regional Total . . . . . .34% . . . . . . .70%. . . . . . . . . 29% . . . . . . .80%
(9-County region)
Source: Association of Bay Area Governments
Proposition 1A was passed in 2004 to protect local governments
against future State “raids” and to provide local governments
with much-needed financial certainty from year to year.
Housing advocates also hoped this certainty would lead to more
favorable outcomes when considering housing permits.
However, the allegation that housing doesn’t pay for itself still
persists. Residents wary of a decline in city services and quality
of life continue to express concern over new home construction,
especially if those homes don't mirror the ones they live in.
This is a problem that is difficult to solve. Cities are
entrenched in the way local governments are financed and any
talk of change makes them very uncomfortable. For example,
cities such as Gilroy have worked hard to grow their revenue
base through outlet stores. Any changes to how local governments
are financed would need to respect those decisions.
It is unrealistic to expect substantial change to how local
governments are financed. However, there are ways that we
can provide a work-around solution. Very simply, cities and
counties should be rewarded for good land use planning and
the resulting housing production.
Programs such as the Metropolitan Transportation
Commission’s Transportation for Livable Communities are an
excellent example of a way to reward cities. The program
awards grant funds to cities that meet certain housing production
requirements at specific densities near transit. So far,
23 housing developments have been awarded $7 million to
create nearly 2,700 new housing opportunities throughout the
Bay Area. MTC expects to provide up to $30 million to qualifying
projects in the upcoming round of grants. This success
should be expanded locally, regionally and statewide.
Another huge challenge in meeting the need for more homes
is community opposition. Rarely does a community open up
its arms to welcome a developer. Instead, developers are seen
as people who wish to bring unwanted change to a neighborhood,
change residents fear will decrease the quality of
schools, increase traffic congestion, and add demands for existing
city services such as parks and libraries.
The end result of systematic community opposition can be
found in reduced densities, heights and the overall number of
homes being built. Council by council, project by project, our
ability to meet the demand for homes with the limited land
available is whittled away through a reduction in the number
of homes ultimately approved for construction.
A good illustration of this is the Hyatt Rickeys site in Palo
Alto. The applicant originally sought 304 homes. The
surrounding community did not like the proposal for a number
of reasons and at the end of the day, a significantly scaled
back version was approved by the council for 181 homes. In
essence, the opportunity to house 123 additional families on
that site was lost.
This story is played out all across the State every week as cities
approve developments that squander housing opportunities.
Couple this with recent research out of UC Berkeley on infill
capacity statewide and the problem is magnified. The study
projects that 25% of the need for more homes can be accommodated
through infill, meaning 75% will be sprawl, leading
to the consumption of valuable open space, farmland and
requiring heavy taxpayer investments in new infrastructure to
serve sprawling communities.
To make matters worse, there has been an increase locally of
citizen backed measures to control or stop growth. Last year,
three initiatives in Cupertino that would have made it infeasible
to build condominiums and publicly funded affordable
homes qualified for the ballot. All three were defeated but the
this year some Cupertino residents qualified two more initiatives
to rescind the approval of two condominium proposals
near Vallco shopping center. In 2003, Palo Alto citizens tried
45

Housing
unsuccessfully to referend a city council-approved proposal
and in Redwood City, citizens overturned city council
approval of a cutting edge development for high rise residential
towers on the Bay. Sunnyvale citizens and San Carlos
residents have also tried to qualify measures but were narrowly
unsuccessful in meeting the letter of the law needed to place
them on the ballot.
Not all is gloom and doom. In downtown San Jose, leadership
has been taken by the council to kickstart highrise home production.
The end result is that 7 highrises are currently under
construction or are actively seeking a development permit
from planning totalling 1,747 new downtown residences. Five
more highrise projects are in the early stage for planning proving
that innovative policies can really help move the market
and help us reach our housing goals. This also shows that the
efforts San Jose has made in working with community members
have paid off.
The bottom line is that sincere community concerns must be
addressed and done so in a way that builds trust between
developers, neighborhoods and local government. Time and
resources must be spent in ensuring the neighborhoods are
brought into the planning process and money is made available
to address the legitimate neighborhood issues.
Looking Forward….
Last year, this report described the need for upfront planning
but the monetary resources did not materialize. This year, we
have a very real opportunity to put our money where our
mouth is. Proposition 1C, the affordable housing bond has
more than $1 billion set aside for unspecified transit-oriented
development programs and better planning. This money will
require additional legislation to determine how it is spent and
should be seen as an opportunity to create a statewide incentive
program for cities to build more homes.
The last major challenge to building more affordable homes
is the availability of funding. Proposition 46 resulted in an
influx of money to build affordable homes but that money has
been spent. Fortunately, Proposition 1C on the ballot in
November would provide $2.85 billion for affordable housing.
Although not all the money goes directly to affordable
homes, it is hoped that the passage of this bond will help
create the bridge needed until housing advocates, statewide,
are able to bring about a permanent source of funding for
affordable housing.
Much rests on the passage of Proposition 1C. It promises to
address several of the challenges to meeting the need for more
homes, homes that ensure the well being of families and individuals
who make our economy strong.
Best Practices - Lessons Learned
Arlington County, Virginia-between Fairfax County
and the District of Columbia-is nationally recognized
for effectively concentrating dense, mixed-use infill
development around five Metro stations known as
Rosslyn-Ballston Corridor. As of 2004, the roughly
two-square-mile corridor included more than 21
million square feet of office, retail, and commercial
space; more than 3,000 hotel rooms; and nearly 25,000
homes. The plan for each station focuses growth within
a walkable radius of the stations and preserves established
neighborhoods and natural areas. Arlington's
“urban villages” emphasize pedestrian access and safety,
and include “pocket” parks, bike lanes, wide sidewalks
with restaurant seating, street trees and street-level
retail. At typical suburban densities, this development
would consume more than 14 square miles. Incentive
zoning attracts private-sector transit-oriented development.
The corridor is so popular that preserving affordable
housing was a challenge. In 2001, the county
adopted a 25% density bonus to encourage the construction
of more affordable homes. Metro ridership in
the corridor doubled between 1991 and 2001; nearly 50
percent of corridor residents commute by transit.
The median income information for 2006
Family Size 1 2 3 4
Extremely Low Income 22,300 25,500 28,650 31,850
Very Low Income 37,150 42,450 47,750 53,050
Low Income 59,400 67,900 76,400 85,900
Median Income 73,900 84,400 95,000 105,500
(9-County region)
Source: Association of Bay Area Governments
46

Tax Policy

Tax Policy
A state’s ability to attract business, retain commerce, and continue
innovation and economic growth depends on the soundness,
stability and quality of a locality’s tax policy. Frequently,
California’s tax system seems disorganized, because it is. Our
state’s tax policy is a patchwork of political compromises
largely borne out of the negative legacies and unintended consequences
of previous policies which threaten our ability to
create more Research & Development, more production, and
added jobs.
In California, Prop. 13 has provided a degree of certainty to
property owners as to the levels of their property taxes. Yet,
Prop. 98 established a minimum funding guarantee to local
schools, which are distributed from the Prop. 13 pool. Despite
certain protections to taxpayers afforded under both propositions,
with every rule, there seems to be an exception. In
recent years, the exception to such protections has been clear.
Whenever a state budget shortfall occurs, infrastructure funds
are raided by the state. If the state exercises its authority to
take funding back from schools, cities and counties to cover
deficits, taxpayers only suffer, sending the state more deeply
into infrastructure and fiscal jeopardy. Rather than creating a
flexible tax system that provides a steady stream of reliable
funding for state and local government services, the state
seems to patiently await a successful private-sector boom and
the resulting tax receipts.
Unfortunately, the state legislature has responded to this series
of events by rejecting most policy proposals that aim to
encourage hi-tech and bio-tech job stimulus with the rationale
that “any economic stimulus proposal is too costly due to
the state’s budget shortfall.”
California’s Unintended Consequences:
• Long-term investments are not made by the state in areas
such as enhancing R&D incentives, eliminating the double
taxation on equipment purchases, and the playing field
isn’t level with how tax formulas calculate businesses tax
liability.
• Layers upon layers of parochial tax policy have resulted,
leaving the business taxpayer with an unavoidable decision
with where to locate their operations—growth is more
frequently occurring in other states and countries.
• State, County, and City governments rely on the ballot
process for revenue generating measures (e.g. property tax
levies, parcel taxes, benefit assessments, and sales tax measures)
to fund infrastructure projects.
• Voters distrust government at all levels and their ability to
manage taxpayer provided revenue unless they are able to
oversee and have accountability for their investment.
• Legislators doubt that business taxpayers will actually
grow their facilities and jobs in California if incentives are
approved, and some also believe businesses will expand in
any event.
California Compared
California and Silicon Valley especially are fortunate to have
highly skilled workers, beautiful surroundings, superior higher
education institutions, and close proximity to supply
chains. However, continuing convoluted tax policies will produce
more headlines from other states and countries boasting
of the opening of new facilities and added jobs. For example:
• Arizona’s calculation of state income taxes for an Intel fabrication
plant which includes 1,000 new jobs. Arizona’s
recent adoption of an 80 percent sales factor formula;
• AMD receiving $1 billion in incentives to open a chip factory
in New York;
• And, Michigan’s deal-specific tax incentive of $38 million
over 20 years to Google.
Due to the realities of global competition, employers are faced
with the tough decision of operating in costly California or
a state or country where tax policies provide lower costs of
operation.
Similar to other sections in this report, several key tax policy
indicators can be comparatively measured with respect to
California’s high-tech rivals in corporate property, sales and
use, and income taxes. In this report, California’s property and
sales tax rates and policies are compared with our competitors
including the trends and realities of doing business in
California through a tax policy lens. California’s taxes rank
among the highest in three of four categories (sales tax, corporate
income tax, and personal income tax).
With respect to property taxes, California continues to have
rates ranking among the highest. The property tax rates in
California fluctuate from county to county and even at times
from city to city and school district to school district, depending
on parcel tax measures and special district levies.
Generally, Silicon Valley’s property tax rate is higher than the
state average of 1.08%, with 1.25% for Santa Clara County,
1.20% for San Mateo County, and 1.31% for Alameda County.
48

Tax Policy
Compare this with San Diego’s high-tech area where the propit’s
worth noting that while overall property tax rates in
erty tax rate is only 1.11%—closer to the state average. Also,
California seem modest, California has much higher property
values than most other competitive areas. In fact, a 2003
report from the US Census Bureau showed California as the
state with the second highest property values in the nation,
behind only Hawaii, a place where land is genuinely scarce.
Tax Rates
Sales Income Property
California . . . . . . . . . . .6.25% . . . . . . . .8.84% . . . . . . . . .1.12%
Tax Cost . . . . . . . . .$6,250,000 . . . .$8,840,000 . . . . .$1,120,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$16,210,000
Massachusetts . . . . . . . .5.00% . . . . . . . .9.50% . . . . . . . . .1.33%
Tax Cost . . . . . . . . .$5,000,000 . . . .$9,500,000 . . . . .$1,330,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$15,830,000
Illinois . . . . . . . . . . . . . .6.25% . . . . . . . .7.30% . . . . . . . . .1.51%
Tax Cost . . . . . . . . .$6,250,000 . . . .$7,300,000 . . . . .$1,510,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$15,060,000
New Jersey . . . . . . . . .6.00% . . . . . . . .9.00% . . . . . . . . .0.00%
Tax Cost . . . . . . . . .$6,000,000 . . . .$9,000,000 . . . . . . . . . . . . .-
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$15,000,000
Virginia . . . . . . . . . . . .7.00% . . . . . . . .6.00% . . . . . . . . .1.11%
Tax Cost . . . . . . . . .$7,000,000 . . . .$6,000,000 . . . . .$1,110,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$14,110,000
Texas . . . . . . . . . . . . . .6.25% . . . . . . . .4.50% . . . . . . . . .2.62%
Tax Cost . . . . . . . . .$6,250,000 . . . .$4,500,000 . . . . .$2,620,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$13,370,000
New York . . . . . . . . . . .4.25% . . . . . . . .7.50% . . . . . . . . .1.53%
Tax Cost . . . . . . . . .$4,250,000 . . . .$7,500,000 . . . . .$1,530,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$13,280,000
North Carolina . . . . . . .4.50% . . . . . . . .6.90% . . . . . . . . .1.10%
Tax Cost . . . . . . . . .$4,500,000 . . . .$6,900,000 . . . . .$1,100,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$12,500,000
Colorado . . . . . . . . . . .2.90% . . . . . . . .4.63% . . . . . . . . .0.82%
Tax Cost . . . . . . . . .$2,900,000 . . . .$4,630,000 . . . . . . .$820,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8,350,000
Oregon . . . . . . . . . . . . .0.00% . . . . . . . .6.60% . . . . . . . . .1.48%
Tax Cost . . . . . . . . . . . . . . . . .- . . . .$6,600,000 . . . . .$1,480,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$8,080,000
Washington . . . . . . . . .6.50% . . . . . . . .0.00% . . . . . . . . .1.29%
Tax Cost . . . . . . . . .$6,500,000 . . . . . . . . . . . . .- . . . . .$1,290,000
First Year Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$7,790,000
ASSUMPTION: A company investing $100M in equipment used in
manufacturing or R&D, with $100M of net income and $100M of
property in the state it operates in.
Best Practices - Lessons Learned
News story after story show compelling examples of
why companies choose to grow jobs and expand
operations in states other than California. What do
they have that we haven’t? In Arizona, companies are
being drawn to the state by tax breaks creating 1,000
direct jobs and thousands of indirect supporting
industry
Hold
jobs.
for Draft
Arizona's
Projections
recent adoption
2007
of an 80
percent sales factor formula, which stops short of
considering only a company's sales tax calculations, has
created a more positive environment for investment in
the state. Most states give equal weight to three
factors — the share of a company's total nationwide
investments: payroll, property, and sales that occur in
that particular state—
when deciding tax burden. But
under the sales factor formula, they would consider a
higher fraction of the company's sales within the state.
In the Arizona example, “about 70% of a chip plant’s
cost is the equipment that goes into it, not the labor . .
.a tax break can help mitigate that cost . . .[in this case]
a huge boost from a new Arizona law that allows
companies to cut income taxes if they spend at least $1
billion in capital investments” (USA Today, 2005).
Regarding sales and use taxes, it must be noted that CA’s lack
of an exemption for productive business assets, which is prevalent
in virtually every other state, makes California’s sales tax
burden comparatively higher.
A state or region’s tax rates may seem byzantine, but tax rates
can provide companies’ insight into the costs of doing business
in, and the potential competitive advantages of relocating
to, certain regions. Especially when considering “greenfield”
or new developments, the tax rates and especially the tax
incentives that local economies provide can make or break site
location decisions.
To remain competitive, California, and municipalities in
Silicon Valley, must embrace pro-growth tax policies and
attempt to avoid the unintended consequences of the past.
This chart illustrates where California stacks up relative to our
competition throughout the country in terms of tax policies to
promote new business and spur expansion.
From an international perspective, corporate rates vary greatly,
but the U.S. ties France for the fourth highest corporate tax
rate out of the nations compared below. Although the countries
of France, Germany, India are equal to or higher than the
U.S., these countries have been successful in wooing U.S.
manufacturing operations due to offsetting tax incentives and
business friendly environments in those countries.
49

Tax Policy
Suggested Solutions/Conclusion
How can we strengthen our economic competitiveness, retain,
and grow facilities and jobs? California should continue to be
fiscally responsible, but also lower where possible overall tax
burdens and proactively address employers’ retention, expansion,
and growth needs (without unduly jeopardizing local
goods and services). Also, the following steps should receive
immediate attention:
• Eliminate double taxation by implementing a full sales tax
exemption for manufacturing equipment purchases;
Country
Corporate Tax Rate
India. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42%
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41%
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40%
France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35%
United States . . . . . . . . . . . . . . . . . . . . . . . . . 35%
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33%
United Kingdom. . . . . . . . . . . . . . . . . . . . . . . 30%
Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28%
Czech Republic. . . . . . . . . . . . . . . . . . . . . . . . 24%
Russia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24%
Singapore. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . 16%
Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13%
Puerto Rico. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7%
publicly funded program in health or human service—
such factors should take into account the experience of
companies utilizing the tax provision and also the secondary
and tertiary businesses supporting such companies,
such as a supplier, construction firms, transportation company,
etc.).
• Avoid disproportionate tax policies which unfairly place
burdens on employers and act as a disincentive that hinder
growth (for example, split roll property taxation is a separate
assessment value for business versus residential property
owners);
• Create simplicity and predictability in the tax system
• Enable and encourage online filing of assessments and
assessment appeals
• Update depreciation/valuation tables for business property
• Allow ex parte communication with the Board of
Equalization and the Franchise Tax Board and at all agency
levels of the state
Tax Rate by State
Source: Deloitte Consulting LLP
• Provide a more level playing field with other states by
adopting a more heavily weighted if not solely a sales
apportionment formula;
• Support state R&D tax policy enhancements (and also
encourage enhancement and making the federal R&D permanent);
• Employ “dynamic” rather than “static” economic modeling
when evaluating the anticipated revenue consequences of
proposed tax policy programs to more realistically gauge
the fiscal impacts and benefits to California’s economy and
competitiveness. This means not just looking at the forgone
tax revenues relating to the incentive for budgetary
purposes, but also looking at the return on investment
through new jobs created or retained (e.g., personal income
taxes, sales tax from increased consumption, employment
of targeted populations currently relying on some form of
Source: Deloitte Consulting LLP
50

Tax Policy
Location Business Tax Policy Incentives 2006
State Sales
Tax
Single Sales or Hyperweighted
Sales
apportionment
State Sales Tax
Exemption
Research
Credit
Investment
Credit
Source: CCH, Multistate Charts, 680-200 and U.S. Master Sales and Use Tax Guide, 116 (For more detailed information, see: http://www.cch.com/default.asp); Single Sales Apportionment (SSF)/hyper-weighted Sales apportionment compiled by
FTA from various sources, 2006; Note: The formulas listed are for general manufacturing businesses. Some industries have special formula different than those reported.
51

Acknowledgements
Sponsors
Title Sponsors
Wells Fargo
Robert Half International, Inc.
Deloitte Consulting
Host Sponsors
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Co-Sponsors
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Applied Materials
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Contributors
Mark Klender, Deloitte Consulting
Matt Szuhaj, Deloitte Consulting
Tina Lee, Deloitte Consulting
Carl Guardino, President & CEO, SVLG
Kristina Scott, Acting Director, Communications
Nicholas Ortiz, Associate Director, Communications
Melinda Jenkins, Coordinator, Communications
Kara LaPierre, Director, Economic Vitality
Thomas Pham, Coordinator, Economic Vitality
Dennis Cima, Director, Education & Workforce Preparedness
Eric Berglund, Coordinator, Education & Workforce Preparedness
Alina Din, Coordinator, Education & Workforce Preparedness
Andrea Bruce, Student Researcher/Volunteer, Education & Workforce Preparedness
Justin Bradley, Director, Energy Programs
Margaret Bruce, Director, Environmental Programs
Frank Teng, Associate Director, Energy & Environmental Programs
Marina Wiant, Coordinator, Energy Programs
David Baker, Coordinator, Environmental Programs
Shiloh Ballard, Director, Housing & Community Development
Bena Chang, Associate, Housing & Transportation Policy
Alex Chen, Coordinator, Housing
Kirk Everett, Director, Tax Policy
Laura Stuchinsky, Director, Transportation & Land Use
Evan Grey, Coordinator, Transportation
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