Improving a good thing: making regulatory reform better

Loren Kaye
President of the California Foundation for Commerce and Education

One of the few significant pro-business reforms to emerge from the Legislature during the recession was a more robust cost-effectiveness requirement for administrative regulations.

Authored by Senator Ron Calderon but written and shepherded by then-Senate staff and now Assemblyman Ken Cooley, the measure required agencies to analyze regulatory alternatives more diligently, provide more extensive economic analysis of major regulations, and require the Department of Finance to provide guidance to agencies on how to best assess cost-effectiveness of regulations and giving the Department limited oversight of agency regulatory analysis.

Since the administrative process was implemented in late 2013, agencies have taken a deep dive on 22 major regulations. The Legislative Analyst recently reviewed agency compliance with the Legislative mandates and made some useful findings and recommendations.

  • Agency often do not adequately analyze regulatory alternatives. At the heart of high-quality rulemaking is careful and good faith review of regulatory alternatives. At best, this process will result in the least costly and burdensome approach to implementing the goal set forth by the Legislature. From a robust give-and-take among regulators, industry and experts can emerge sensible and minimally invasive proposals. Unfortunately, some agencies chose to analyze a narrow and unhelpful range of alternatives. Others ignored categories of alternatives that would have achieved the same legislative goals at lesser costs.
  • Agencies also ignored or underutilized basic analytical tools designed to reveal weaknesses in a proposed regulation. An agency did not discount future savings from a regulation, thereby putting its thumb on the cost-benefit scales. The Analyst found that agencies rarely discussed ranges of uncertainty in their analyses. Distributional analysis – how a regulation may affect some societal, income or geographic sectors differently – were often lacking.
  • The Analyst noted that the Department of Finance was granted only limited authority to review agency analyses, and no authority to reject inadequate analysis.

The Analyst made several recommendations that mirror proposals many regulatory reformers, including the Little Hoover Commission, have made in the past:

  • Establish a more robust system for regulatory guidance and oversight, including higher standards for analyzing alternatives, discounting future costs and benefits, revealing uncertainty, and describing distributional costs and benefits.
  • Authorize an oversight agency (either the Department of Finance or an independent commission) to reject proposed regulations that do not have an adequate analysis or that demonstrate cost-effectiveness.
  • Require agencies to conduct retrospective reviews to understand whether the regulation is achieving the goals set forth by the Legislature.
  • Significantly, the Analyst specifically called for additional resources to achieve these objectives.

When it comes to adding or removing costs to doing business in California, the Legislature is the central player. No amount of regulatory reform can overcome a bad bill. But agencies often have a choice on how to implement the will of the Legislature, which is where thoughtful analysis and oversight come into play.

Here is a rare chance for the Legislature to improve administrative processes to advance a more competitive business climate – without upsetting other constituencies. The Analyst has clearly and carefully provided a roadmap to improve administrative rulemaking.

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