Improving California's Regulatory Analysis

Improving California’s Regulatory Analysis MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2017 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY Analysis Can Help Select Preferred Regulatory Approach. The Legislature passes laws that direct agencies to implement policies, but the laws often do not identify all of the details of how those policies should be implemented. As a result, agencies evaluate different options for implementing the law and develop regulations to clarify the details. When developing regulations, agencies are required to analyze the potential effects of proposed rules—including anticipated benefits and adverse economic effects. The goal of this analysis is to help regulators evaluate trade-offs between different options and select the approach that achieves the Legislature’s policy goal in the most cost-effective manner. Senate Bill 617 Established New Requirements for Major Regulations. Chapter 496 of 2011 (SB 617, Calderon) established a new process for analyzing regulations having an estimated economic impact of greater than $50 million—known as major regulations. It required agencies to develop a more extensive regulatory analysis before major regulations are proposed. In addition, SB 617 required the Department of Finance (DOF) to (1) provide guidance on the methods that agencies should use when analyzing major regulations and (2) review and comment on the analysis before a rule is proposed. Limitations of Current Process for Analyzing Major Regulations. Based on our review of the analyses developed under the new SB 617 process, we find that some of the changes have led to improvements in the quality and consistency of agencies’ analysis of major regulations. However, we also identified the following limitations: • Analyses of Major Regulations Do Not Consistently Follow Best Practices. In many instances, agencies did not consistently follow best practices for regulatory analysis. For example, agencies often analyzed a limited range of alternatives and did not quantify benefits and/or costs of alternatives. As a result, the likely effects of different regulatory options were often unclear, and, therefore, it is frequently difficult to know whether the proposed approaches were the most cost-effective. • Certain Analytical Requirements Offer Limited Value. In some cases, the existing analytical requirements appear to provide information of limited value to making cost-effective regulatory decisions—which is the main goal of the analysis. • No Requirement for Retrospective Review. There is no statewide requirement for agencies to regularly evaluate the effects of a rule after it has been implemented—also known as retrospective review. As a result, the Legislature and regulators might not have adequate information in the future to determine whether the laws or rules should be eliminated, modified, or expanded in order to better achieve statutory goals. www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT LAO Recommendations. We make several recommendations to ensure agencies provide information that can be used to support regulatory actions that implement legislative objectives cost-effectively. • Establish More Robust Guidance and Oversight. We recommend the Legislature direct an oversight entity to (1) develop more detailed guidance on best practices for analysis of major regulations and (2) review updated analyses when agencies make substantial changes to a major rule after it is initially proposed. The Legislature could also consider giving this oversight entity authority to reject an agency’s proposed major rule if the analysis is inadequate or does not show the rule to be cost-effective. These oversight activities could be conducted at DOF or some newly created entity with economic and analytical expertise. • Reduce Requirements That Provide Limited Value. We recommend the Legislature identify opportunities to reduce or eliminate analytical requirements that provide limited value for assessing trade-offs and making cost-effective regulatory decisions. For example, an agency could be exempt from certain requirements if (1) it demonstrates that the analysis is not necessary to adequately compare regulatory options or (2) state or federal law limit agency discretion. Reducing unnecessary requirements would free up agency resources and allow the agency to implement regulations more quickly or focus on other aspects of regulatory analysis that likely have greater value. • Require Agencies to Conduct Retrospective Review. We recommend the Legislature consider requiring agencies to plan for and conduct retrospective reviews for major regulations. An oversight entity should be responsible for issuing guidance on best practices for conducting these reviews and overseeing the reviews. To ensure retrospective reviews are not too administratively burdensome, the Legislature could allow the oversight entity to exempt an agency from retrospective review requirements under certain conditions, such as if collecting adequate data is infeasible or too costly. 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT INTRODUCTION Chapter 496 of 2011 (SB 617, Calderon) made and the recent changes made by SB 617. Although significant changes to the way California analyzes there have been some improvements in recent and reviews major regulations under the state’s years, we identify some significant limitations Administrative Procedures Act (APA). These that still remain. We provide recommendations changes were intended to promote regulations that that are aimed at addressing these limitations by achieve the Legislature’s policy goals in a more ensuring that the potential effects of regulations cost-effective manner. In this report, we provide are thoroughly analyzed and regulators are a brief description of California’s regulatory implementing the Legislature’s policy direction in process, the potential value of regulatory analysis, the most cost-effective manner. STATE REGULATORY PROCESS General Overview of Regulations developed by state agencies that are subject to the APA. Regulations Implement State Law. Broadly, APA Aims to Ensure Rules Are Consistent regulations are rules issued by a government With State Law. The APA aims to ensure that authority. In many cases, the Legislature passes rulemaking is transparent, agencies consider laws that direct agencies to implement policies, public input, and regulations are consistent with but it does not clearly identify all of the details of state law. There are two major types of rulemaking how the policy should be implemented. As a result, procedures: regular and emergency. In this report, agencies have to develop regulations through a we focus on regular rulemaking. (Emergency rules rulemaking process to clarify these details. For are subject to somewhat different requirements.) example, the law could direct an agency to ensure Figure 1 (see next page) summarizes the key businesses and/or households reduce a certain type steps of the regular rulemaking process. The of pollution to a specified level. If the law does not process begins after the Legislature passes a law specify exactly how pollution must be reduced, that gives authority to a state agency, and the state the agency will establish a regulation outlining the agency decides it needs to issue a rule. In some requirements in more detail. cases, the new law could require the agency to do The APA is state law that establishes procedural so. The agency then develops the regulation, as well requirements that state agencies must follow when as various additional documents as summarized they “implement, interpret, or make specific” in Figure 2 (see page 7). Once the agency has policies established by the Legislature through developed its proposed rule, it publishes the the establishment of new or revised regulations. Notice of Proposed Action (notice) along with These requirements apply to rules developed by the other materials. For example, as we discuss all state agencies, unless otherwise exempted by in more detail below, the agency is required to law. For example, most regulatory activities at the complete an analysis of various effects—including California Public Utilities Commission are exempt economic and fiscal effects—of the proposed because the commission has a separate regulatory rule. The agency is then required to solicit public process in place. This report focuses on regulations www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT comments and respond to those comments. The different agencies propose rules, and the number of agency may also modify the proposed rule, which rules proposed by each agency varies from year to then triggers additional public comment period(s). year. The top ten rulemaking agencies in 2014 and The agency must submit the final rule to the Office 2015, in terms of the number of rules submitted to of Administrative Law (OAL) within one year of the OAL, are shown in Figure 3 (see page 8). issuing the notice, and OAL has 30 working days Regulatory Analysis Requirements to review the rulemaking documents to ensure that the agency fully complied with APA procedural The APA requires agencies to analyze the and legal requirements. effects of proposed rules to help justify their About 600 Regulations Submitted to OAL merit. Below, we describe some of the APA’s major Annually. This total includes regular rules, regulatory analysis requirements. We also describe emergency rules, and other minor technical some of the changes SB 617 made to the regulatory adjustments to rules that are not required to process and requirements for analyzing regulations. go through the full rulemaking process. Many Figure 1 Summary of Regular Rulemaking Process Legislature Passes law giving authority to state agency. Agency • Identifies need to adopt regulation to implement law. • Develops rule and supporting documents, including economic analysis and fiscal estimate. • May hold public workshops and meet with stakeholders. DOF: reviews economic analysis for major rules. • Publishes proposed rule, notice of proposed action, and other supporting documents. • Conducts 45-day public comment period and potentially a public hearing. • Considers comments and may change proposed rule. • If substantial changes to rule, conducts additional public comment period (either 15 or 45 days). DOF: must approve fiscal estimate for major and nonmajor rules. • Finalizes rule and supporting documents. • Submits final rule and supporting documents to OAL. Office of Administrative Law • Reviews rulemaking documents for compliance with APA requirements within 30 days. • If approved, rule published. If rejected, rule returned to agency. DOF = Department of Finance; OAL = Office of Administrative Law; and APA = Administrative Procedures Act. 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT General Requirements. Agencies are subject to businesses and individuals. For example, various requirements to assess the potential effects agencies are required to assess potential of a regulation. For example, a proposed regulation effects of the proposed regulation on (1) the must be based on adequate information concerning creation or elimination of jobs within the the need for, and consequences of, action. In state and (2) the creation, elimination, addition, for nearly all regulations, agencies are expansion, and competitiveness of required to provide the following information: businesses in California. • Purpose of the Regulation. Agencies • Evaluation of Alternatives. Agencies are required to provide an explanation are required to evaluate alternatives for why the regulation is reasonably and provide reasons for rejecting the necessary. Agencies also have to list alternatives. Agencies are also required to the specific provisions of law that are determine, with supporting information, being implemented and that authorize that no alternative approach would be the regulation. Senate Bill 617 added a more effective, or would be as effective requirement that an agency describe the and less burdensome to private persons. problem it intends to address and how Senate Bill 617 further required that the regulation addresses the Figure 2 problem. Key Regulatory Documents Developed by Agencies When Regulation Is Initially Proposed • Anticipated 9 Benefits. Senate Regulation Text. The proposed language that would be added, Bill 617 added modified, or eliminated in the California Code of Regulations. a specific 9 Notice of Proposed Action. A notice provided to interested parties that requirement that includes a summary of the proposed rule, the objective of the rule, and a summary of the agency’s assessment of the likely effects of the rule. agencies identify 9 monetary benefits Initial Statement of Reasons (ISOR). The agency’s primary justification and nonmonetary for and analysis of the rule, including: • An explanation for why the agency needs to adopt the rule. benefits of the • The agency’s analysis of the likely effects of the rule (including an regulation, such economic analysis or SRIA for major regulations). • A description of reasonable alternatives to the rule and the agency’s as public health, reason for rejecting those alternatives. safety, and social 9 equity. Economic and Fiscal Impact Statement. Provides a summary of the agency’s assessment of the likely economic effects, as described in the ISOR, and an estimate of the fiscal effects on state and local • Adverse Economic governments. Effects. Agencies When Regulation Is Finalizeda must assess 9 the potential Final Statement of Reasons. An update of the information contained in the ISOR, including a summary of public comments and how the agency for adverse responded to those comments. economic impact a If there are changes after the rule is initially proposed, updates to the regulation text and economic and on California fiscal impact statement are also included. SRIA = Standardized Regulatory Impact Assessment. www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT than $50 million—known Figure 3 as major regulations. Agencies With Most Rules Submitted to Senate Bill 617 required Office of Administrative Law in 2014 and 2015 agencies to develop a Agency 2014 more extensive economic Department of Food and Agriculture 55 analysis known as a Fish and Game Commission 28 Department of Corrections and Rehabilitation 25 Standardized Regulatory State Water Resources Control Board 25 Impact Assessment Fair Political Practices Commission 20 (SRIA) before a major Department of Social Services 19 Department of Health Care Services 18 regulation is proposed. Board of Equalization 17 Agencies are responsible California Energy Commission 14 for determining whether California Horse Racing Board 13 Other 366 a regulation is major. In Total 600 addition, the Department Agency 2015 of Finance (DOF) reviews Department of Food and Agriculture 51 agency estimates of California Health Benefit Exchange 31 economic impact to State Water Resources Control Board 24 ensure that agencies are Department of Insurance 23 Fish and Game Commission 22 submitting SRIAs for all Department of Corrections and Rehabilitation 20 regulations with economic Occupational Safety and Health Standards Board 18 impacts greater than Board of Forestry and Fire Protection 17 Air Resources Board 16 $50 million. The analyses Board of Equalization 15 are intended to provide Other 385 agencies and the public Total 622 with tools to determine whether the proposed agencies determine that no alternative regulation implements the Legislature’s policy would be more cost-effective to affected decisions in a way that is cost-effective. private persons and equally effective in To ensure agencies are conducting more implementing statutory policy. rigorous analyses, SB 617 required DOF to provide • Fiscal Effects. Agencies are required to guidance to agencies on methodologies for estimate the fiscal effects of the regulation developing SRIAs. This includes methods for: on state and local governments. • Estimating whether a regulation will have a Agencies are also required to estimate how $50 million economic impact. the regulation would affect specific groups or • Assessing benefits and costs of a proposed outcomes. For example, agencies must estimate regulation, expressed in monetary terms effects on small businesses and housing costs. to the extent feasible, but also other SB 617 Required Additional Analysis and nonmonetary factors such as fairness and Oversight for “Major” Regulations. The most social equity. notable changes made by SB 617 are for regulations having an estimated economic impact of greater 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT • Comparing proposed regulatory Senate Bill 617 also established a greater alternatives with an established baseline oversight role for DOF. In addition to issuing so agencies can make analytical decisions guidance for agencies developing SRIAs, DOF must for regulations necessary to determine the review the SRIA before a major rule is proposed most effective, or equally effective and less and provide comments on the extent to which burdensome, alternative. the analysis adheres to its guidance. Agencies must include a summary of DOF’s comments and • Determining the impact of the regulation agency responses to the comments when the rule is on jobs, businesses, and public welfare. initially proposed, but the agencies are not required As shown in Figure 4, agencies developed by law to update the analysis to reflect comments 22 SRIAs from the time the law was implemented from DOF. Finally, DOF is available to provide in late 2013 through 2016. technical assistance to agencies and has recently implemented a new training program. Figure 4 SRIAs Developed for 22 Regulations Since 2014 Agency Date Submitted to DOF Regulation Air Resources Board February 2014 Amendments to Truck and Bus Regulation October 2014 Low Carbon Fuel Standard and Alternative Diesel Fuels April 2014 Oil and Gas Regulation June 2015 Zero Emission Vehicle Credit Amendment April 2016 Cap-and-trade December 2016 Portable Engine Airborne Toxic Control Amendment California Energy Commission December 2014 Water Appliance Efficiency August 2015 LED Efficiency June 2016 Computer Efficiency Department of Insurance January 2014 Mental Health Parity July 2015 Network Adequacy CalRecycle July 2014 Compostable Materials, Transfer/Processing October 2014 Used Mattress Recovery and Recyclinga Department of Industrial Relations October 2014 Return-to-Work Program March 2016 Refinery Safety GO-Biz August 2014 California Competes Tax Credit Fish and Game Commission November 2014 Hunting: Nonlead Ammunitiona Department of Transportation March 2015 Affordable Sales Program November 2016 Electronic Toll Collections Health Benefits Exchange January 2016 Eligibility and Enrollment State Water Resources Control Board October 2016 Drinking Water Standards Department of Conservation December 2016 Underground Gas Storage a Regulation later determined to not exceed $50 million threshold for “major.” SRIA = Standardized Regulatory Impact Assessment ; DOF = Department of Finance; and CalRecycle = California Department of Resources Recycling and Recovery. www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT ANALYSIS AIMS TO CLARIFY EFFECTS AND INFORM DECISIONS Below, we describe the primary reasons for Federal Government Has Long History of analyzing regulations and some of the key methods Regulatory Analysis. The federal government for conducting good analysis. imposes a variety of requirements on federal Analysis a Tool for Improving Regulatory agencies proposing regulations. These requirements Outcomes. Regulators have options for how to largely date back to an executive order established implement state laws, and their decisions can have in 1981. Although there have been some changes substantial costs and benefits for businesses and over the last 35 years, the key principles have largely households in California. Collectively, agencies that remained in place. For example, most agencies have developed SRIAs so far have estimated billions issuing economically significant rules are required of dollars in costs and benefits annually from to select the approach that maximizes net benefits these regulations. The primary goal of regulatory to society and demonstrate that the benefits of the analysis is to inform the public, stakeholders, and rule justify the costs. In addition, when an agency government of the likely effects—good and bad—of determines a regulation is necessary, it must design various regulatory options. This information can the regulation in the most cost-effective manner then be used to evaluate the trade-offs between to achieve the objective. Agencies must provide different options and select the preferred approach. the analysis of its proposed and final regulations Improved regulatory decisions have the potential to to the Office of Information and Regulatory increase benefits, lower costs, and ensure benefits Affairs (OIRA), within the President’s Office and costs are fairly distributed. of Management and Budget (OMB). OIRA is A regulatory analysis can take different responsible for reviewing agencies’ regulations and forms—each of which is meant to provide different the accompanying analyses. information that answers different questions. Federal Guidance Describes Best Practices For example, a regulator might conduct one or for Regulatory Analysis. As part of its oversight, more of the following: (1) a cost-benefit analysis the OMB has developed best practices for analysis. to determine whether the overall benefits of a Most notably, after public input and peer review, rule exceed the costs, (2) a cost-effectiveness the OMB and the President’s Council of Economic analysis to determine which approach achieves Advisors issued “Circular A-4” in 2003—the a predetermined goal for the lowest overall cost, central guidance document designed to assist and/or (3) a distributional analysis to determine regulatory agencies. Circular A-4 identifies three how costs and benefits are distributed among key elements of an effective regulatory analysis: different types of households and businesses. • Statement of need for regulatory action. As discussed above, California’s analytical requirements primarily focus on cost-effectiveness. • Clear identification and examination of a Regardless of which tool is used, the analysis range of regulatory approaches. is meant to help regulators make better, more • Evaluation of the costs and benefits— informed decisions that implement the Legislature’s quantitative and qualitative—of the policies more effectively. 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT proposed regulatory action and the main in delays in implementing policies. Third, some alternatives. have criticized regulatory analysis, particularly cost-benefit analysis, as being biased against It also offers more specific guidance on the basic regulations that benefit health, welfare, and safety. methods that should be used for analysis. A This is because the costs of a regulation are often summary of this guidance is shown in Figure 5. easier to quantify than the broad types of societal Regulatory Analysis Has Some Trade-Offs. benefits that can result from such regulation. For Although analysis has the potential to help example, the costs of a new regulation requiring inform better regulatory decisions, there are also a specific pollution control technology might be trade-offs. First, detailed analysis takes time and easier to estimate than the improved health effects resources for regulators. This results in additional of lower pollution and the value of those health administrative costs that are ultimately paid benefits. To the extent decision-makers give greater for by businesses and households in the form of weight to effects that can be quantified, the analysis higher fees and taxes. Second, analysis can result Figure 5 Summary of Federal Guidance for Regulatory Analysis 9 Describe Need for Regulatory Action. Explain need for regulation and how the regulatory action will meet that need. 9 Define Baseline. Estimate what the world would be like absent the action, including changes in the market and the effect of other regulations. 9 Set Time Horizon for Analysis. Cover time frame long enough to capture all the important benefits and costs likely to result from the rule. 9 Identify a Range of Regulatory Alternatives. Alternative approaches could include: • Market-oriented approaches rather than command and control. • Performance standards rather than design standards. • Informational measures. • Different enforcement methods, stringencies, compliance dates, and requirements based on firm size or location. At a minimum, agencies should compare their preferred option with more stringent and less stringent alternatives. When the preferred option includes a number of distinct provisions, the benefits and costs of each provision should be analyzed separately. 9 Identify Consequences of Regulatory Alternatives. Identify the potential benefits and costs for each alternative and the timing of benefits and costs. This could include analysis of co-benefits and a distributional analysis that characterizes where benefits and costs are likely to accrue. To the extent feasible, quantify and monetize benefits and costs. Use discounting to assess benefits and costs that occur over different time horizons. Identify important benefits and costs that are difficult or impossible to quantify or monetize and how they affected the regulatory choice. 9 Characterize Uncertainty in Benefits and Costs. Analyze important uncertainties connected with a regulatory approach and describe the range of plausible benefits and costs. 9 Summarize the Regulatory Analysis. Include one or more tables that summarize the benefit and cost estimates for each regulatory action and alternative under consideration, including benefits and costs that cannot be monetized or quantified. Agency should also report distributional effects. Source: Office of Management and Budget’s Circular A-4. www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO REPORT could encourage regulators to reject more stringent analysis should clearly identify all significant types alternatives that achieve additional, non-monetized of benefits and costs, including those that are hard benefits that outweigh the additional costs. To to quantify, so they are considered when making help avoid this potential issue, good regulatory regulatory decisions. LAO ASSESSMENT We reviewed (1) the APA’s analytical Analyses of Major Regulations requirements, (2) the SRIA guidance issued Do Not Consistently Follow Best Practices by DOF, and (3) the SRIAs that agencies have We find that the new SB 617 requirements have developed so far. The purpose of our review was increased the consistency of agencies’ analyses and, to examine whether state agencies are conducting as a result of the additional DOF oversight, agency high-quality analyses of major regulations and analyses of proposed rules are often more robust whether the analyses provide information that and higher quality. Despite some improvements, helps ensure regulations are implemented in a however, we identified many instances where state cost-effective manner. Our review focused on agencies did not consistently follow best practices analysis of major regulations because they represent for regulatory analysis, such as those outlined a disproportionately large percentage of the overall earlier in Figure 5. As a result, the likely effects costs and benefits of state regulations. (See the of different regulatory options are often unclear nearby box for a brief discussion of nonmajor and it is difficult to know whether the proposed regulations, which were not the focus of this regulatory approaches are the most cost-effective. report.) Based on our review, we identify several We discuss the major limitations in more detail limitations, which are summarized in Figure 6 and below. discussed in detail below. Benefits and Costs of Alternatives Not Quantified. The costs and benefits of regulatory Figure 6 options—including the Summary of LAO Findings preferred approach, as well 9 Analyses of Major Regulations Do Not Consistently as alternatives—are often Follow Best Practices unmeasured or unclear. • Benefits and costs of alternatives not quantified. This makes it difficult • Limited range of alternatives analyzed. • Future benefits and costs not discounted. to determine why the • Limited assessment of uncertainty. proposed regulation is • Distributional analysis often lacking. preferable to alternatives. • Limited guidance and oversight contribute to shortcomings. For example, the 9 Certain Analytical Requirements for Major Regulations California Department of Offer Limited Value Resources Recycling and • Macroeconomic analyses less useful than evaluating direct effects. • Analysis of regulations with limited feasible alternatives. Recovery’s SRIA for the 9 Compostable Materials No Requirement for Retrospective Review regulation—which made 12 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT changes to the way solid waste facilities must an examination of two alternatives to the proposed handle compostable materials—did not quantify regulation. This may be reasonable in some cases the environmental benefits of any of the options where limited feasible alternatives exist. In most it considered. This makes it difficult to assess cases, however, an analysis of a greater range of the trade-offs between the different options. alternatives could generate valuable information In addition, the SRIA for the Air Resources about which approach is the most cost-effective or Board’s (ARB’s) revisions to the Bus and Truck generates the greatest net benefits. For example, Regulation—which delayed requirements for additional analysis of the following types of truck owners to install new pollution control alternatives could help inform the agency’s action: technologies or purchase cleaner engines—did not • Subparts of a Regulation. Some clearly quantify how alternatives to the proposed regulations are complicated and rule would affect industry costs or the level of air multifaceted with multiple distinct pollution emissions. components. Yet, SRIAs did not always Limited Range of Alternatives Analyzed. In include an analysis of these distinct most cases, agencies have options for how they components of a regulation. For example, can implement a law, such as how stringent a the SRIA for ARB’s extension of the requirement to impose, as well as what specific rules cap-and-trade regulation did not include to impose. State law directs agencies to describe an analysis of the effects of specific parts reasonable alternatives and the agencies’ reasons of the program, such as linking the state’s for rejecting those alternatives. In our view, SRIAs program with Ontario. Therefore, the generally included an analysis of too few alternatives. degree to which linking with Ontario As a result, agencies might have ignored some would affect the overall costs and benefits potentially viable alternatives. Most SRIAs included is unclear. Oversight and Guidance for Nonmajor Regulations Less Robust This report focuses on major regulations, but there are actually far more nonmajor rules. Although we did not review agencies’ analyses of nonmajor rules, many of the statutory requirements are the same. For example, agencies are required to adopt the most cost-effective regulatory approaches and estimate effects on jobs, businesses, and small businesses. However, the Department of Finance (DOF) provides much less guidance and oversight over the analyses. Much of DOF’s review focuses on state and local fiscal effects. There is limited review of methods used to estimate overall benefits and costs, including costs to private parties and environmental improvements. In the future, the Legislature might want to consider changes to the analytical requirements and processes for nonmajor rules in a way that improves the quality of analysis and/or removes unnecessarily burdensome requirements. For example, once the Legislature is comfortable that the current standardized regulatory impact assessment process is leading to improved regulatory decisions and the analytical requirements are not overly burdensome, it could consider extending the process to other regulations, such as some regulations that have an economic impact of less than $50 million annually. www.lao.ca.gov Legislative Analyst’s Office 13 AN LAO REPORT • Different Stringencies. Some SRIAs Future Benefits and Costs Not Discounted. It evaluated a limited range of different is a standard analytical practice to weight benefits stringencies. For example, the State and costs that occur in the future less than those Water Resources Control Board proposed that occur more immediately. To help policymakers a new drinking water standard for evaluate regulations that have benefits and costs 1,2,3-Trichloropropane—a chemical that that occur at different times, analyses typically use was not previously regulated. The SRIA a method known as discounting—whereby future included a comparison of the proposal benefits and costs are adjusted downward based to two alternatives: do nothing (not on how far in the future they occur. Agency SRIAs imposing a new standard) and a slightly did not always include discounted future benefits less stringent standard than the proposed and costs. For example, the California Energy regulation. It would have been helpful to Commission (CEC) energy efficiency standards estimate the costs and benefits of a broader for computers and monitors were expected to range of feasible standards—such as a increase initial equipment costs, but generate more stringent standard and additional future consumer savings from lower energy bills. less stringent options. This would provide However, the future savings were not discounted. a better understanding of trade-offs As a result, the analysis overstates the overall associated with a broader range of feasible benefits of the efficiency rule. options which could be used to ensure the Limited Assessment of Uncertainty. For any proposed standard is the best option for regulatory approach that is adopted, the exact meeting the statutory goals. consequences of the regulation are uncertain. Therefore, it can be important to identify a range of • Alternatives Outside the Scope of the outcomes that could occur and assess the likelihood Rulemaking. Some regulations were not of each outcome—referred to as sensitivity analysis. compared to alternatives outside the This provides the agency and the public with a scope of the regulation. For example, the better understanding of the risks—both positive ARB’s Low Carbon Fuel Standard (LCFS) and negative—of a particular approach. Several regulation aims to reduce greenhouse gas agencies had little or no analysis of uncertainty in (GHG) emissions by reducing the carbon the SRIA. For example, the California Department content of fuel. The SRIA did not include of Transportation’s (Caltrans’) analysis of the a comparison of the costs of LCFS to other Affordable Sales Program—a program to dispose of policies that can reduce GHG emissions, surplus residential property owned by Caltrans— such as cap-and-trade or more stringent did not estimate how benefits would differ under vehicle efficiency standards. Comparing a different assumptions about future real estate regulation to options outside the scope of property values, which can be subject to substantial the rulemaking is particularly important uncertainty. A sensitivity analysis that assessed the when agencies have broad authority to issue benefits under different property value assumptions multiple regulations to achieve a particular could have, for example, provided information goal. Such authority has been given to the about whether there were scenarios under which ARB to regulate air pollution and GHG the proposed approach would have yielded emissions. However, this type of authority insufficient benefits to justify the costs. is relatively rare in California. 14 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Distributional Analysis Often Lacking. There public comments. OAL generally does not have is often limited discussion of how the benefits the responsibility, or expertise, to evaluate the and costs of the regulation would be distributed quality of the agency’s analysis. DOF provides some among different communities and households. additional oversight, but its role is limited in the Distributional effects might be an important following ways: consideration when evaluating alternatives if • Review After Rule Is Initially Proposed. either benefits or costs disproportionately accrue DOF is not required to review an updated to certain types of businesses and households, SRIA if the agency modifies the proposed such as low-income households. For example, rule or if new information about the effects the CEC’s analysis of the regulation establishing of the rule becomes available. For example, energy efficiency standards for LED light bulbs ARB made substantial changes to its recent did not provide information on how the effects cap-and-trade regulation that affects how of the regulation—including the up-front costs of millions of allowances—worth hundreds of more expensive light bulbs, savings on electricity millions of dollars annually—are allocated bills from more efficient light bulbs, and reduced to businesses. These changes could have pollution associated with electricity generation— significant implications for business would be distributed among households with competitiveness and GHG emissions, but different levels of income or in different parts of the there is no requirement for DOF to review state. an updated SRIA. Limited Guidance and Oversight Contribute to Shortcomings. Limited guidance and oversight • Authority to Require Changes. Although likely contribute to many of the analytical DOF issues guidance and comments issues identified above. DOF and OAL provide on the SRIA, it has no legal authority to guidance on what impacts agencies need to require agencies to change the analysis, analyze and estimate in order to comply with APA consider additional alternatives, or provide requirements. In addition, for major regulations, additional analytical justification for the the guidance issued by DOF provides some useful, regulatory decision. Also, it does not have more detailed guidance on analytical methods. the authority to reject or modify proposals However, relative to the federal guidance, it is that do not meet legislative goals and/or are incomplete. For example, there is little or no not cost-effective. guidance for (1) discounting future benefits and costs, (2) identifying a potential range of Certain Analytical Requirements for alternatives to analyze, or (3) characterizing Major Regulations Offer Limited Value uncertainty. In some cases, the existing analytical Oversight of agency analysis is also still requirements appear to provide limited limited. Although most regulations are subject valuable information that can be used to inform to OAL review, OAL largely reviews whether cost-effective regulatory decisions—which is agencies comply with the APA’s procedural and the main goal of the analysis. We discuss these legal requirements. For example, OAL reviews particular requirements below. whether the agency has provided the information Macroeconomic Analyses Less Useful Than required in statute and adequately responded to Evaluating Direct Effects. A significant part of www.lao.ca.gov Legislative Analyst’s Office 15 AN LAO REPORT the analysis in the SRIA is devoted to estimating • Less Transparency. Given the complexity effects on such things as statewide employment of many macroeconomic models, it is often and economic activity—sometimes known as difficult for the public and stakeholders macroeconomic effects. This focus is largely driven to evaluate some of the underlying by the APA’s requirement to assess certain adverse assumptions in the models. As discussed economic effects of a regulation, such as effects above, these models typically make on jobs and businesses. Before conducting the assumptions about business and household macroeconomic analysis, agencies estimate the behavior that can have significant effects on regulation’s direct costs (such as costs to install the overall results, yet most stakeholders are a new technology) and direct benefits (such as unable to fully vet these assumptions and reduced pollution or savings from reduced energy understand how they affect the final results. consumption). Most agencies then contract with Based on our review of the discussion of an outside consultant, which has a model that alternatives in the SRIAs, agencies rarely used the attempts to estimate how the direct effects would results from the macroeconomic analysis to justify change statewide macroeconomic outcomes. the agency’s approach and its decision to reject For example, the model might estimate how other options. Instead, agencies largely use the requiring a businesses to purchase technology assessment of direct costs or benefits as the basis for to control pollution would affect employment, their decisions to reject alternative approaches. prices, production, and investment—including for In our view, relying on high-quality assessments businesses that purchase the technology, businesses of direct effects is a reasonable approach in most that sell the technology, and other businesses that cases. Even if policymakers are concerned about are indirectly affected by these changes. macroeconomic outcomes, estimates of direct costs These macroeconomic analyses have the and benefits are often sufficient for understanding following limitations that reduce their value for the direction and relative scale of overall making cost-effective regulatory decisions: macroeconomic effects. For example, an energy • Significant Uncertainty. The models used efficiency regulation that results in large energy to estimate macroeconomic effects rely savings for very little cost will likely have substantial on a wide variety of assumptions that positive effects on macroeconomic economic are subject to significant uncertainty. conditions. A macroeconomic analysis is likely not For example, the model has to make necessary to make this basic determination, nor is assumptions about how an increase in it needed to determine that alternatives with higher costs to a business would affect prices for energy savings and/or lower compliance costs will its product, new investments, employment, have greater positive effects. and wages for employees. Furthermore, the Analysis of Regulations With Limited Feasible model has to make assumptions about how Alternatives. Although an analysis of alternatives those employees will spend their money is typically one of the most important aspects of and how that affects other businesses in a regulatory analysis, it is less valuable when few the economy. As a result, the findings are feasible alternatives exist, such as when state or more uncertain than a simple assessment federal law limits agency discretion. As a result, of direct costs and benefits. agencies may spend time and resources to develop the SRIA with little added benefit. This appeared 16 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT to be an issue for a couple of agencies developing environmental or safety improvements? Was it SRIAs. For example, the Governor’s Office of more or less costly than the agency expected? Business and Economic Development (GO-Biz) Such information can improve accountability estimated the economic effects of a regulation to and oversight. In addition, it encourages agencies implement the California Competes Tax Credit, to assess the main factors that led to unexpected which was established by the Legislature and outcomes. Policymakers can then use the provides up to $200 million in annual tax credits information to decide whether the law or the rule for businesses. The law establishing the tax credit should be eliminated, modified, or expanded. also identified 11 criteria that the agency must The federal government requires agencies to consider when awarding credits. Therefore, the incorporate plans for conducting a retrospective range of feasible alternatives was limited because review as part of rulemaking. many of the key characteristics of the program were Unlike major state programs that are annually already established in law. As a result, the agency’s reviewed in the budget process, regulations are SRIA largely focused on different administrative not regularly reviewed. In addition, although the approaches to evaluating applications, such as APA requires agencies to analyze the potential whether GO-Biz would conduct a more extensive effects of a regulation before it is adopted, there is review of applications when they are initially no statewide requirement for agencies to conduct submitted or after first relying on an up-front retrospective reviews of regulations. As a result, screening process. The difference in the overall agencies proposing major rules do not include benefits and costs of the program under these a plan for conducting retrospective reviews, options is unclear, but likely minor. and outcomes are not consistently assessed. For example, agencies do not identify the data and No Requirement for Retrospective Review methods that would be used to evaluate the Evaluating the effects of a rule after it has been program in the future. Consequently, agencies implemented is known as retrospective review. The generally do not incorporate into their regulations primary goal of a retrospective review is to assess specific data collection and reporting requirements whether the regulation had the intended effect. needed to evaluate the actual outcomes of their For example, did the rule result in the expected regulations after they are implemented. LAO RECOMMENDATIONS Below, we provide recommendations aimed Establish More Robust Guidance and Oversight at improving analysis of major regulations We recommend the Legislature establish a in California. The primary goal of these more robust system for regulatory guidance and recommendations is to ensure agencies provide oversight. In our view, this should include requiring information that can be used to support regulatory an oversight entity to: actions that implement legislative objectives with • Develop more detailed guidance on best greater benefits and/or lower costs. practices for analysis of major regulations, www.lao.ca.gov Legislative Analyst’s Office 17 AN LAO REPORT including (1) discounting, (2) identifying oversight would have some relatively minor and analyzing an adequate range of administrative costs. For example, doubling alternatives, (3) assessing uncertainty, and DOF’s current staffing of a couple of full-time (4) clearly describing the distribution of people would cost only several hundred thousand benefits and costs across different types of dollars annually, but could improve analysis and businesses and households. The guidance promote regulations that achieve state policy goals could largely be based on Circular A-4. at significantly lower overall cost to businesses and households. • Review updated SRIAs when agencies make substantial changes to a rule after it Identify Opportunities to Reduce is initially proposed or if agencies receive Requirements That Provide Limited Value significant new information about the We recommend the Legislature identify potential effects of a regulation. opportunities to reduce or eliminate analytical We further recommend that the Legislature requirements that provide limited value for consider giving the oversight entity the authority assessing trade-offs and making cost-effective to reject proposed rules that do not include an regulatory decisions. The Legislature could adequate analysis and/or do not demonstrate eliminate these requirements in statute or cost-effectiveness. give an oversight entity discretion to exempt Determining Appropriate Oversight Entity. agencies in specified circumstances. As part The Legislature has different options for which of this effort, the Legislature could consider oversight entity should conduct these activities, directing the administration to report on the including DOF or some newly created entity. These current requirements that provide the least value options have trade-offs. For example, locating these for making regulatory decisions, relative to the activities in DOF would build on existing expertise cost of conducting the analysis. For example, an for reviewing SRIAs. To ensure the regulatory review agency could be exempt from modeling statewide process at DOF does not focus too heavily on fiscal macroeconomic effects if it demonstrates that effects at the expense of broader social effects, the direct costs are relatively small and the analysis is Legislature could consider creating a separate office not necessary to adequately compare regulatory within DOF that focuses solely on regulatory review alternatives. In addition, the Legislature might similar to OIRA at the federal level. Alternatively, the want to exempt agencies from certain requirements Legislature could create a new oversight entity that if they demonstrate that state or federal law limits focuses exclusively on reviewing agencies’ analyses agency discretion. of regulatory proposals. For example, it could create Reducing unnecessary requirements would a new commission comprised of appointees from free up agency resources and staff time for other the Governor and both houses of the Legislature activities. The freed up resources could be used that operates more independently from the executive to help the agencies implement regulations more branch. quickly or focus on aspects of regulatory analysis Providing Additional Resources. It is that likely have greater value. For example, agencies important that the administration have adequate could devote more resources to estimating direct resources to conduct timely and high-quality costs and benefits of alternatives or conducting analysis. Providing additional guidance and retrospective reviews. 18 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Require Agencies to are unclear and would vary for each regulation Conduct Retrospective Reviews depending on its characteristics and the proposed strategy for conducting the retrospective review. We recommend the Legislature consider However, given the size of overall economic requiring agencies to plan for retrospective reviews effects of major regulations (over $50 million when proposing a major regulation. Agencies annually), if these additional resources resulted would be responsible for carrying out the reviews, in even a small increase in regulatory benefits although they could have the option to contract with and/or decrease in regulatory costs, the statewide an outside organization. An oversight entity—such benefits would likely far outweigh state fiscal as DOF or a newly formed entity, in consultation costs. To ensure retrospective reviews are not too with outside experts—could be responsible for administratively burdensome, the Legislature could issuing guidance on best practices for conducting allow the oversight entity to exempt an agency from these reviews and overseeing the reviews. Better retrospective review requirements under certain information about the effects of regulations after conditions, such as if the agency demonstrates they are implemented can improve accountability, that it would be infeasible or too costly to collect oversight, and future regulatory actions. adequate data. Agencies would likely have additional costs to conduct the reviews. The amount of costs CONCLUSION Senate Bill 617 enhanced guidance and analytical requirements appear to provide limited oversight of agency analysis of major regulations value and there is no statewide requirement for in California. However, based on our review of agencies to conduct retrospective reviews. As a the analyses of major regulations conducted so result, we recommend the Legislature direct the far, the analyses still do not consistently follow administration to establish more robust guidance best practices. These limitations make it difficult and oversight of major regulations, identify to understand trade-offs associated with different opportunities to reduce analytical requirements regulatory options and determine which options that provide limited value, and require agencies to are most cost-effective. In addition, certain plan for and conduct retrospective reviews. www.lao.ca.gov Legislative Analyst’s Office 19 AN LAO REPORT LAO Publications This report was prepared by Ross Brown and reviewed by Brian Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 20 Legislative Analyst’s Office www.lao.ca.gov