Regulating the Regulators
Regulatory Process Reform in the 104th Congress
by John Shanahan
When Republicans assumed control of Congress in 1995, many hailed the takeover as a revolution that would finally limit the power of government. Republicans decried the enormity of the regulatory burden and made regulatory process reform a key component of the Contract With America. Now, two years later, few legislators are calling for reform. What did the 104th Congress achieve and what are the lessons for the current Congress?
Much effort during the 104th Congress went into regulatory process reformthat is, changing the procedures for making and administering regulations. Far less effort went into substantive process reformthat is, repealing regulations and shutting down agencies. In 1995, most of the initial reforms from the Contract With America passed the House but not the Senate. Yet in 1996, a number of process reform provisions passed in Congress and garnered the presidential signature.
The Contract With America contained the major elements of process reform, which later became part of an umbrella bill, H.R. 9. The principle elements of process reform included (1) Title III, cost-benefit analysis and risk assessment; (2) Title IV, regulatory budgeting; (3) Title V, strengthening the Paperwork Reduction Act; (4) Title VI, allowing agencies greater flexibility when applying regulations; (5) Title VII, requiring a regulatory impact statement for all new rules; (6) Title VIII, protection for citizens against arbitrary abuse by regulators; and (7) Title IX, compensation for the value of property taken by regulations. Some of those provisions ultimately became law through different bills, while others were dropped from consideration altogether.
So far the effects of the successful provisions have been minimalnone have rolled back regulations. Some arm citizens with weapons that they can use to protect themselves in court against some of the more egregious regulatory abuses. Others are weapons that will be useful only if members of Congress have the political will to employ them. Overall, regulatory process reform appears to have been more about rhetoric than real reform.
Passing unfunded mandates on governments and businesses has been a way for the federal government to pass costly legislation without raising taxes. With governors from the two major parties wanting that practice curtailed, the 104th Congress passed the Unfunded Mandates Reform Act that requires estimates on the regulatory costs of new laws. Any bill that places a burden of more than $50 million on states or $100 million on the private sector is subject to a point of order. At that time, Congress has to provide the funding or take a special vote exempting itself from that requirement.
The results of UMRA have been mixed (see "Promises Unfulfilled," Regulation, 1996 No. 2). Perhaps the acts greatest success is that it changed the rulemaking culture in the legislative branch; legislators now work closely with the Congressional Budget Office during the early stages of developing bills to avoid the embarrassment of introducing a bill that would be subject to a point of order. This has led to improvements in several pieces of legislation, including the Telecommunications Act, the Farm Act, and the Immigration Act.
The administration, however, seems intent on evading the law. In its March 1996 report assessing the impact of regulations (as required by UMRAs Title II), the administration reported that only sixteen rules were "economically significant," although it typically reviews seventy-five to one hundred economically significant rules. In other cases, the administration has simply failed to comply with the acts dictates.
According to Thomas Hopkins of the Rochester Institute of Technology, in 1995 the cost of paperwork accounted for approximately one-third ($200 billion) of the total cost of regulation. The cost of paperwork regulations for businesses with fewer than twenty employees is more than $2,000 per employee. Since the passage of the original Paperwork Reduction Act in 1980, the amount of paperwork has continued to increase. That is not surprising since it is difficult to reduce paperwork under a barrage of new federal rules and the Byzantine procedures and reporting processes required by the government.
Because no interest group benefits from burdensome paperwork, the Paperwork Reduction Act of 1995, H.R. 830, passed Congress without a dissenting vote. The act requires that the agencies reduce the burden hours of paperwork 40 percent by 2001. One could expect the act, if honored, to reduce the cost of the paperwork burden by approximately $80 billion annually.
President Clinton signed the act with much fanfare and pledged that the EPA would reduce its paperwork hours 25 percent in the first year. Instead, under the helm of EPA administrator Carol Browner, the paperwork hours imposed by the EPA increased by 4.5 million annually, according to the Office of Information and Regulatory Affairs.
So far, the Paperwork Reduction Act has been a disappointment. Senate hearings and General Accounting Office findings indicate that the administration will fall far short of its goal because the OIRA is not enforcing the act. Estimates now show that in the first year of implementation, federal regulators reduced paperwork hours by a mere 1 percent. In response to the criticism, Office of Management and Budget director Frank Raines issued an OMB bulletin in January 1997 that directed agencies to reduce their paperwork hours 25 percent by fiscal year 1998, which would get the administration back on target.
Perhaps the most important procedural and substantive regulatory reform proposed in the 104th Congress was the requirement that the federal government compensate owners for "takings" of private property through regulation. The Fifth Amendment states, "Nor shall private property be taken for public use, without just compensation." The takings provision in H.R. 9 had its origin in the Freedom and Fairness Restoration Act, introduced by Representative Dick Armey (R-Tex.) in the 103rd Congress. Representative Charles Canady (R-Fla.) reintroduced the concepts embodied in Armeys bill in the Private Property Protection Act of 1995, H.R. 925. That bill required the federal government to compensate property owners if a regulation restricting the lands use reduced the value of the property by more than 10 percent. Later, the bill was changed to include only those properties that had been devalued by more than 20 percent. Many property rights advocates correctly argued that a more appropriate measure would be whether a right had been violated, which would protect property owners against any loss.
The House leadership worked to modify H.R. 925 by allowing an amendment. Introduced by then-Democrat Representative Billy Tauzin (R-La.), the amendment gave the landowner the right to force the government to buy any "portion" of property that it had devalued by 50 percent or more. Tauzin said, "When the federal government owns more of your property than you do, they should have to pay you for it."
A weaker version of H.R. 925 eventually passed the House, but its companion bill died in the Senate. Opponents made the erroneous argument that the bill would require the government to "pay people not to pollute," which eventually kept the Senate bill from receiving serious consideration. In fact, neither bill granted the right to damage another persons property, for example, by dumping pollutants into a river.
Title IV would have required the president to submit an annual regulatory budget to Congress with estimates of the costs to be imposed by the various programs and agencies. Each year Congress would have had to approve the regulatory budget the same way it approves appropriations. By making explicit the costs of regulation, supporters believed Congress and the executive branch would be pressured to reduce the regulatory burden.
Title IV did not make it into the final version of the regulatory reform bill voted on by the House. Although Representative Lamar Smith (R-Tex.) reintroduced the concept in the Regulatory Accountability Act, that bill never came up for a vote either. However, one step towards regulatory budgeting was taken with the passage of the Regulatory Accounting Act (see below).
The Regulatory Reform Act
Title III of H.R. 9 became the Risk Assessment and Cost-Benefit Act, H.R. 1022, which was the flagship regulatory reform bill proposed during the first year of the 104th Congress. H.R. 1022 would have subjected all new rules to cost-benefit analysis and risk assessment. The provision passed the House with a 286-to-141 vote, but it was strongly opposed by the Clinton administration.
Then-Majority Leader Bob Dole (R-Kan.) and Senator J. Bennett Johnston (D-La.) introduced a companion bill out of the Senate Judiciary Committee, S. 343. That bill would have eliminated, for example, the Delaney clause that required a zero cancer risk for additives used in processed foods.
Johnston, however, steadily retreated from his ardent support for enforceable process reforms. In the end, S. 343 was severely watered down. Unable to cut off debate by summoning the sixty votes needed for cloture, Dole pulled the bill from consideration.
One of the contentious points in the bill concerned its enforceability. The administration wanted language that would allow the agencies to assert that benefits justified costs without having to prove it. Most reformers wanted stronger language that would require that benefits outweigh costs. Some even argued that incremental benefits should outweigh incremental costs. A major problem with cost-benefit analysis, as one EPA employee confidentially explained, is that "youre putting me in charge of deciding whether or not a rule should go forward. . . . Ill tell you, I can make the benefits greater than the costs almost every time."
That bureaucrats remarks explain why another contentious point of debate over S. 343 concerned judicial review. A strong judicial review provision might subject analyses and assessments by regulators to a de novo or another strict judicial review standard. Agencies would have had a strong incentive to put forth reasonably accurate cost estimates or risk having their rules judged invalid. While not ensuring "good" regulations nor wholly unbiased estimates, S. 343 would have minimized the bias problem and given the regulated community a tool with which to challenge regulatory actions. But S. 343 was amended to allow rules to stand as long as the analyses and assessments on which they were based were not "arbitrary and capricious, or an abuse of discretion," which is an almost impossible standard to prove.
Reformers in the 104th Congress also sought a regulatory moratorium. When Republicans took control of Congress in January 1995, many feared that the federal agencies would quickly issue harsh regulations in anticipation of a new Congress hostile to red tape. Thus, reformers led by House Majority Whip Tom DeLay (R-Tex.) and Representative David McIntosh (R-Ind.) introduced the Regulatory Transition Act, H.R. 450. The act imposed a thirteen month freeze on new regulations promulgated from 20 November 1994 to 31 December 1995. The temporary freeze was meant to give the new Congress an opportunity to review new rules. A similar Bush administration freeze on regulations in 1992 had received widespread approval by the business community.
The bill passed the House in late February 1995, with a bipartisan vote of 276 to 146. The Senate version, S. 219, introduced by Senator Don Nickles (R-Okla.), faced tough opposition. Nickless bill contained exceptions to the moratorium, for example, if a delay in implementation would create an "imminent threat of harm to the public." In a letter to Senator John Glenn (D-Ohio), Patrick Griffin, assistant to the president for legislative affairs, outlined President Clintons opposition to the bill saying, "The term imminent is undefined, and it is therefore far from clear whether the bill would permit the administration to take sufficient measures to ensure that the American people are not needlessly put at risk." This was something of a straw-man argument since the bill allowed the president to exclude any regulatory action from the moratorium simply by finding in writing that it responded to an imminent threat.
Opponents claimed, incorrectly, that the moratorium would prevent food inspectors from performing their tasks. While proponents denied that this would be the case, opponents took the offensive, throwing up one scare scenario after another.
As prospects for passage of even a weakened moratorium dimmed, Nickles and Senator Harry Reid (D-Nev.) offered a substitute bill that established a forty-five day congressional review period after issuance of new rules. That bill was approved unanimously by the Senate. The moratorium died, but its substitute became the forerunner of the Congressional Review Act, which Congress enacted the next year.
Automatic sunsets of regulations are appealing because they force lawmakers to vote to renew regulations or to see them expire. Such process reform can result in substantive reformthat is, the termination of regulations.
The sunset bill, H.R. 994, was introduced in the House March 1995 by Representatives John Mica (R-Fla.) and Jim Chapman (D-Tex.). The bill would have terminated all existing regulations within seven years and all new regulations within three years unless they were reauthorized by Congress. The bill was later amended to apply only to regulations that place a burden of $100 million or more on the economy.
Senator Spencer Abraham (R-Mich.) introduced a similar measure in S. 511, but the Senate never seriously considered the issue. Although the sunset provisions were approved by the House in the Debt Limit Extension bill, the effort died with the close of the first session.
The Regulatory Accounting Act, passed in the final weeks of the 104th Congress, requires the executive branch to produce an annual report for Congress estimating the total benefits and costs of all federal regulations. The act requires that the report separate the quantitative benefits (such as economic benefits of improved fishing due to cleaner water) from the nonquantitative benefits (such as improved visibility over the Grand Canyon). That eliminates one of the agencies favorite tactics to inflate benefits. Moreover, it requires the OMB to report significant public suggestions to correct any part of any regulatory program that is "inefficient, ineffective, or not a sound use of the nations resources."
An interesting aspect of this law, as Glenn stated approvingly in the Congressional Record, is that the "sponsors . . . intend that the report be based on a compilation of existing formation, rather than new analysis." Thus, agencies cannot easily undermine the intent of the law by concocting new analyses of the benefits of regulation. On the other hand, some cost data already exist for regulations where no benefit analyses were attempted. Thus, a less contrived estimate may emerge from the report than would occur if the data were subject to periodic review, and the result may well show costs exceeding benefits.
The acts cost-benefit requirements will be necessary if Congress ever requires the executive branch to submit annual regulatory budgets. And the law, by providing information on the costs of regulations, could help generate political pressure for reform. But the value of the law might be indicated by the fact that it passed with little legislative effort. Few observers even noted its passage, yet it will modestly advance efforts to curb regulatory excess.
The Small Business Regulatory Enforcement Fairness Act (SBREFA) passed in the final days of the 104th Congress was a sleeper law that seemed to rise from the ashes of the prior years legislative failures. The intent of the law, as Senator Kit Bond (R-Mo.), chairman of the Senate Committee on Small Business said, is to "level the regulatory playing field" for small businesses by giving them a franchise in both the development and enforcement of regulations.
Currently, the Small Business Administration estimates that the combined cost of compliance with regulations, paperwork, and taxes for firms of five hundred or fewer employees is $5,000 per employee50 percent more than the cost for firms with more than five hundred employees. Small businesses complain that government demands and sanctions are excessive, but many are afraid to challenge regulators because they do not have the financial resources or expertise, or they simply fear retaliation.
SBREFA provides small businesses with substantive due process rights enforceable in a court of law. SBREFA passed rather quietly, garnering bipartisan support and the presidents signature. The act contains five subtitles establishing (1) congressional review of certain new rules; (2) judicial review of the bureaucracys compliance with regulatory flexibility; (3) a "plain English" regulatory compliance guide for small businesses; (4) a small business ombudsmans office; and (5) cost recovery for excessive agency actions.
The Congressional Review Act enables Congress to oversee regulatory agencies by rejecting rules that it considers excessive or inappropriate. But like other reforms, it could be a waste of political effort if specific steps are not taken soon to strengthen its effectiveness.
The act became law without partisan wrangling, which no doubt stems from its origin as an unanimous Senate substitute to the Regulatory Transition Act. President Clinton signed the CRA into law in March 1996 but later expressed regret at having done so. The law does not reduce agency authority in any manner. It does, however, delay implementation of agency actions for sixty days. If a member of Congress objects to a rule, he can send it to the appropriate committee for consideration with no amendments. If the committee does not vote on the rule, thirty members can have it brought to the floor for a vote. Moreover, the CRA requires agencies to report both to Congress and the General Accounting Office whenever they take final actions, providing them with all the relevant information necessary to decide whether an agency action makes sense or is an instance of governmental overreach. Even if Congress disapproves a rule, the president can veto the measure. As with any other bill, the CRA requires a two-thirds majority to override the presidential veto.
A number of agencies, including the Department of Agriculture, the Department of Transportation, and Health and Human Services already have violated the laws requirements. For example, the DOT refused to conduct a cost-benefit analysis when it issued a new light-truck standard that will have a wide-ranging impact on the economy. The HHS set an effective date for a regulation within the sixty day period when actions are supposed to be delayed. Without strict agency compliance, Congress will be unable to consider and reject rules it finds unreasonable. As Chairman McIntosh of the House Oversight Subcommittee on Regulatory Affairs says,
Our subcommittee has begun an oversight investigation of the administrations implementation of the act, which has revealed troubling instances where agencies have attempted to evade key provisions of the law. We will be vigilant in ensuring that agencies fully comply with the law.
That resolve is critical to the acts success, but more is necessarythe leadership must take this law seriously.
The 105th Congress could set up an internal mechanism, such as a joint House-Senate committee, to track agency rulemaking, monitor agency compliance, and steer potential disapproval of agency action through the legislative process. If Congress establishes such a committee, agencies likely would learn to adjust their behavior and comply with the law. They probably would write fewer regulations and make them more reasonable, flexible, and cost-effective in order to avoid disapproval. Moreover, a joint House-Senate committee might help shore the political backbone of Congress in tackling complicated issues. If no mechanism is set up to deal with this time-consuming and specialized process, however, the CRA likely will prove a disappointing example of regulatory process legislation.
The Regulatory Flexibility Act of 1980 was designed to minimize the burden of regulation on small businesses. The act requires agencies to conduct a regulatory flexibility analysis of the impact of the proposed rule on "small entities." But agencies have been able to escape the analysis requirement simply by certifying that the proposed rule will not have a "significant economic impact on a substantial number of small entities." As one Department of Labor official noted, however, this certification merely requires agencies to fill out another form:
We routinely certified [that] proposed rules would have no significant impact on a substantial number of small entities without a second thought. We didnt even bother to decide internally what constituted a small entity, or what significant meant either. But I think [SBREFA] will have a significant impact because of judicial review. Weve had a lot of meetings on it.
SBREFA amended the Regulatory Flexibility Act in four ways. First, the amendments established judicial review, the lack of which had led to disregard for the act. Businesses can now challenge an agency in court for failure to comply with the law. Second, the amendments attempt to plug the acts loopholes by more clearly defining terms such as "small entity." Third, the amendments require that if an agency certifies that its proposed rule has no significant impact on small businesses, it must state in writing the factual basis for its finding. And fourth, if an agency does not certify that there is no significant impact, then it must conduct both an initial flexibility analysis and a final flexibility analysis. The agency must provide a description of what has been done to minimize the impact of the regulation and an explanation of why it did not do more.
SBREFA is not a silver bullet and does not ensure intelligent rulemaking. At least, however, it requires the agencies to grapple with the consequences of their regulations, which could foster a change in agency culture. At most, it will give small enterprises a tool to bring agencies to court over some of their more ill-conceived regulatory plans.
Plain English Guide
Small businesses complain that they are unable to understand the highly technical regulations written in bureaucratese, forcing them to employ expensive consultants or to guess at the regulations meaning. SBREFAs Subtitle A tries to correct that problem by requiring federal agencies to publish "small entity compliance guides" whenever they issue regulations that must be easy to understand. Those guides will be made available to the public and distributed to small businesses through a variety of means.
The act wisely does not define exactly what plain English entails, since that would be impossible. It leaves to courts the task of deciding in disputes if the guides are intelligible. The act also allows agencies to contract out to private organizations to produce the guides, thereby increasing the probability of creating a useful guide for the average person without relieving the agencies of the responsibility of what they say.
If an agency fails in that duty, a small business can use the agencys failure as a defense in actions against it. Thus, the provision serves two important purposes. First, it forces agencies to acknowledge the likely effects of their regulations and to communicate that information in a way that can be easily understood by reporters, policy institutions, and the public at large. And second, the law has a built-in mechanism that gives small businesses an opportunity to escape punishment until the regulating agency itself is in compliance, which greatly encourages agency compliance.
Another chronic problem for small businesses is navigating the bureaucratic maze of federal regulatory agencies. When small businesses make inquiries of regulators, they are often ignored, given vague or unhelpful answers, or routed through an agency without ever being directed to the appropriate person. In enforcement actions against owners, regulators can be equally difficult to deal with. For small business owners who can be held legally liable for the consequences of failing to comply with a regulation, the situation is intolerable and increases incidences of noncompliance.
Subtitle B of the act rectifies that problem by creating the Small Business and Agriculture Regulatory Enforcement Ombudsman at the Small Business Administration. The concept is based on the idea that you get what you measure. Enforcement agencies and their personnel have a vested interest in levying fines for noncompliance. They ostensibly show by that measure that their agency is actively protecting the public. The goal of the ombudsman is to invert the measure and, consequently, the behavior of agencies. Thus, rather than being rewarded merely for fines, agencies will be rewarded for how "nice" they are.
One of the ombudsmans primary duties is to report annually to Congress on how well the agencies treat small businesses. The ombudsman also coordinates with the Regional Small Business Regulatory Fairness Boards that SBREFA created to assess the performance of the various agencies in working with small businesses. Those boards will report to the ombudsman instances of excessive enforcement actions. In essence, the ombudsman and the regional boards will act as watchdogs on enforcement agencies, which will encourage the agencies to adopt a business friendly attitude.
Cost Recovery for Excessive Agency Demands
Small businesses are particularly susceptible to the strong-arm tactics used by some unethical enforcement officials. Those agency officials, with enormous resources and armies of government lawyers at their disposal, often seek excessive restitution for alleged regulatory violations in order to secure an admission of guilt in exchange for a less onerous penalty. Small business owners, whose first priority is to meet weekly paychecks, often cannot withstand such tactics.
SBREFA amends the Equal Access to Justice Act by allowing small businesses to recover costs in civil and administrative proceedings when the court determines that an agencys demands or threatened penalties are excessive compared to the final disposition of the case. If an agency loses a case and if the judge finds the agencys demands for restitution on the business to be excessive compared to the outcome, the business may recover up to all of its legal costs from the agency. If an enterprise loses a case but the judge finds the agencys demands excessive, the enterprise can recover part of its legal costs, limited to $125 per hour for attorney fees.
It is unclear at this point what constitutes the agency action that is being evaluated. Representative Henry Hyde (R-Ill.) believes that the governments final demand, usually lower than its initial one, should be used as the benchmark to judge whether a demand is excessive. Bond thinks the worst offer should be the benchmark, or agencies will still be able to intimidate enterprises and drive up their legal bills.
The effort that went into process reform in the 104th Congress is disproportionate to the returns. Hundreds of organizations formed coalitions, such as Project Relief and the Alliance for Reasonable Regulation, spending thousands of hours pushing contentious reform legislation. Yet the successes of the Congress occurred quietly with bipartisan support. Virtually every contentious reform died in the Senate, and most of them were so watered down before they were shelved that it is highly doubtful that they would have been of any real benefit.
The contrast between those laws and substantive process reform is stark. Whereas the watered down regulatory reform bills pushed in the Senate would have done little to rein in runaway bureaucracies, the passage of legislation that affects the underlying laws in the areas of telecommunications, agriculture, drinking water, clean air, and food-quality protection likely will have a significant impact on the kind of restrictions imposed on businesses and the public. That is not to suggest that all of those laws went as far as they should have or that some provisions did not worsen the regulatory environment. But those laws will significantly change the status quo for good or bad, and mostly for the good.
Similarly, some of the most significant failures in the last Congress centered on its inability to enact various substantive reforms. For instance, although Superfund wastes billions of dollars annually and is grossly unfair to those caught in its liability web, the leadership failed to put in the necessary effort and resources to enact fundamental change. Now, during the 105th Congress, proposals for reforming Superfund are anemic compared with those proposed by the 104th Congress.
Some of the regulatory process reforms passed in the 104th Congress were definitely worthwhile. The most powerful reforms expanded the ability of the regulated community to check the power of the agencies regulating them. The key to those reforms is judicial review. For instance, SBREFA provisions on cost recovery and plain English guides provide small businesses with rights they can enforce in court.
Other process reforms also may be significant, but it is too early to tell. Those reforms were bipartisan and rely heavily on congressional oversight as the mechanism to ensure they have the intended impact. While oversight can be a valuable tool for exposing executive branch abuses and pressuring agencies to correct their behavior, it provides a less systematic and reliable outcome than laws enforced by judicial review. Indeed, the benefit of the Regulatory Accounting Act is that it does not require continuous oversight but rather short-term, focused oversight. By the same token, the Paperwork Reduction Act and SBREFAs Congressional Review Act may prove beneficial. Past experience with laws such as the Regulatory Flexibility Act of 1980, however, indicates that more than simple reliance on traditional oversight is neededthe culture of the agencies needs to change.
For process reform, it will require the House and Senate leadership to invest heavily in oversight activities by giving those committees more latitude, authority, and support. For instance, unless the leadership commits to creating the right internal support structure through the creation of a joint House-Senate review committee, the Congressional Review Act likely will be a paper tiger instead of the valuable tool it otherwise promises to be.
Many reformers are too optimistic in believing that process reforms are the silver bullet that will slay the regulatory beast. The regulatory juggernaut cannot be curbed without changing the underlying statutes that grant agencies power. But process reforms that provide the regulated community with the ability to defend itself in a court of law and those that systematically pressure agencies to change are small steps in the right direction.
John Shanahan is vice president and counsel of the Alexis de Tocqueville Institution in Arlington, Virginia.
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