From Workers' Comp to Minimum Wage Hikes, Businesses Will Get Slammed on Several Fronts.

ONE of the hallmarks of the last several. boom years has been the ability of L.A. area businesses to keep costs down.

But that's coming to an abrupt end. The cost of doing business in L.A. is exploding on several fronts, and that trend will continue well into 2001 and maybe even beyond.

From escalating workers' compensation premiums to soaring energy costs, business are shelling out 30 percent, 40 percent and in some cases even double or triple what they were paying a year ago. And that's before a hike in the minimum wage and expected increases in health care and workers' comp take effect on Jan. 1.

"We are seeing higher costs across the board for practically everything," said Jack Kyser, chief economist for the Economic Development Corp. of Los Angeles County.

What's more, most of these higher costs were not anticipated by firms earlier this year, making it even more difficult to factor them into the cost of doing business.

"Many of these costs, like workers' comp and energy, have come in from left field and caught businesses totally off guard," Kyser said. "Nobody anticipated the extent to which these costs would rise. I wouldn't be surprised if many industries see their overall cost of doing business more than double in the next several months over what they were a year ago."

In good times, businesses can usually put up with most of these costs, although a doubling of expenses would sting any time. But with widespread. predictions of a slow down next year, businesses can't count on. increasing revenues to offset these rapidly rising costs.

And that spells trouble for large and small companies alike. It also could .have a dramatic impact on the region's. economy, magnifying the impact of a general nationwide slowdown and resulting in the loss of thousands of local jobs.

"Large companies. with multiple facilities around the nation are once a gain going to look at their operations and decide whether it would be more cost-efficient to relocate their L.A. operations elsewhere;" Kyser said. "Small companies may try to absorb these costs or pass them on to their customers, but if they can't, they'll be forced to lay off people and maybe even shut their doors."

A quick rundown of all the cost increases gives some sense of what the typical chief financial officer is up against:

* Statewide workers' compensation premium increases next year will average. 10 to 20 percent over this year, with sine firms in highrisk industries seeing much steeper hikes in their January premium renewals.

* Health-care premium costs are projected to rise an average of 13 percent in 2001 nationwide, with most policy renewals starting on Jan. L

* A hike in the minimum wage will go into effect Jan. 1, pushing the current rate from $5.75 an hour to $6.25 an hour, with another 50-cent hike to follow on Jan. 1, 2002.

* Higher general labor costs are expected in the tightest labor market L.A. has seen in 30 years.

* Natural gas bills already rose an average of 40 percent in November alone, with even steeper hikes on the way in December and January statements.

* A possible hike of 20 percent or more is predicted in electricity bills for many, if not all, Southern California Edison customers, perhaps taking effect as early as January or February.

* Steep penalties will be charged to those companies that signed, up for energy-reduction programs but are unable to comply with the cutback requirements.

* Costs will rise for transportation and distribution of products, especially if gasoline prices take another jump next spring.

* There will also be increases in prices for components and services supplied by companies hit with all these costs and. passed through to their customers.

"When you look at any one of these costs, it's not a back-breaker. But the cumulative impact is quite another matter,". said Ezunial "Eze" Burts, president and chief executive of the L.A. Area Chamber of Commerce. "And so many businesses are getting hit with several of these at the same time."

Of course, different industries will be hit in different ways by these various-cost increases. If you're in the restaurant business, the minimum wage increase and natural gas rate hike will hammer you If you're a roofing contractor, you're workers' comp premium could double come January. And if you're a machine tool manufacturer, you've already been hit with a doubling or tripling of your natural gas bill, with worse hikes yet to come.

The key question for the L.A. economy is how businesses will react to all these increases. Many will try to pass the costs on to their customers, although those facing very steep increases will likely be unable to recover all the hikes that way. And passing the costs on could trigger a vicious inflationary cycle.

Others may first try to cut any fat out of their operations.

"The only good news is that quite a bit of fat has crept into companies' operations during these last four or five years of plenty," Kyser said. "Companies will now have to become lean and mean again."

Of course, cutting the fat in many cases means laying off personnel, consolidating operations or closing unprofitable divisions.

Kyser and other observers of the L.A. economy say layoffs are inevitable at many companies that will simply be unable to cope with the rapidly rising costs.

In such a tight labor market, one might think that layoffs at some firms would have minimal impact on the overall economy. But the L.A. region is bracing for a huge actors' strike against television and film producers next spring. If that strike lasts more than a few weeks, it could shutter many businesses that depend on the industry, throwing tens of thousands more people out of work. That in turn would depress spending even more and cut into overall retail and business sales.

Together, layoffs resulting from the higher costs of doing business and the actors' strike could turn what otherwise would have been a mild slowdown into the much-feared crash-landing that plunges the L.A. area into a recession.

If there is any good news in all this, it could come from Washington, D.C. Many Federal Reserve Board watchers and economists believe the Fed will soon act to lower interest rates, a move that would lower borrowing costs for companies around the nation, including California.

"A cut in interest rates would go a long way toward offsetting many of these rising costs," said Esi Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University.