Yesterday I presented testimony to the Assembly Committee on Accountability and Administrative Review regarding the implementation of legislative regulatory reforms enacted in 2011. Following are excerpts from that testimony.

This morning I would like to spend just a few minutes talking about SB 617 and regulatory reform efforts in a historical context, the advantage of this approach to regulatory reform, and some suggestions for next steps both implementing SB 617 and in related areas.

But first I want to observe that SB 617 is a notable example of what some pundits and politicos bemoan is lost in Sacramento: bipartisan, legislative-executive cooperation on policy development that quietly, prosaically, will make a difference in how government works. This isn’t big, ballot measure reform – it’s even bigger. Because it demonstrates that when the lights aren’t quite so bright that elected and appointed officials and constituencies can in good faith hammer out productive solutions – building on the work of others – to improve government accountability and transparency.

The two most important forebears to SB 617 were, first, in 1979, under the leadership of Governor Jerry Brown and Speaker Leo McCarthy, AB 1111, which created the Office of Administrative Law, establishing the legal framework for regulatory review and transparency. In 1993, under the leadership of Senator Chuck Calderon and Governor Wilson, SB 1083 created in the Trade and Commerce Agency the Regulatory Review Unit, which for the first time established inside state government an agency to look over the shoulder of regulatory agencies concerning their economic analyses of new administrative rules.

SB 617 takes the next logical and critical step, which is to establish within an executive branch control agency, the responsibility to not only systematize the analysis of economic impacts and regulatory alternatives, but to create a feedback loop to the agencies that both holds them accountable and improves regulatory outcomes.

The Legislature correctly designated the Department of Finance as the critical path through which agencies can vet their economic analyses – at least for major regulations. But at the end of the day, their comments and directives on individual regulatory packages are recommendations, not mandates.

From a policy development perspective, the most important thing to keep in mind is that for almost every regulatory exercise, it is the Legislature that sets the objective of the policy by statute. That is, the “benefits” of a regulation are already the law of the state.

From a regulatory analysis perspective, the key task of a regulatory agency is to determine the best way to achieve the benefit already set forth in law. SB 617 requires that agencies use “as a baseline” a regulatory analysis that is “the most cost-effective set of regulatory measures that are equally effective in achieving the purpose of the regulation in a manner that ensure full compliance with the authorizing statute.”

In other words, the genius of SB 617 – and measure of how we will judge the implementation by the Department of Finance – will be how the development of the analytical tools will be used to inform the alternatives analysis. Nobody should be interested in an economic analysis in and of itself. This isn’t an academic exercise. We need good analysis to inform our regulators and policy makers as to the most cost-effective regulatory approach that will meet the objectives of the law.

In this spirit, I would like to leave you with three recommendations that your committee should consider for next steps:

First, add teeth to the alternatives analysis. Right now the law requires Finance to develop methodologies to help agencies identify the most cost-effective alternative. Current law requires agencies to determine that no alternative considered by the agency would be more effective or less burdensome than the regulation proposed to be adopted. Legislation should close that loop by requiring agencies to demonstrate to Finance that they have chosen the most cost effective alternative that would meet the objectives of the statute and, if they did not, provide findings supported by substantial evidence in the record as to why they should not choose the most cost-effective alternative. OAL should be empowered to reject regulations if these steps are left undone.

Second, as the analytical process is standardized and road tested it should be used to review existing regulations. After all, the $50 million threshold for analysis of new major regulations is a fairly high bar; only the very top tier of regulatory proposals will be subjected to this analysis. This new capacity should therefore also be devoted in part to revisiting the economic impacts of existing regulations and determining if there is a more cost-effective regulatory approach to achieve the goals. Indeed, such an exercise could help inform the Legislature as to the efficacy of existing regulations in meeting the goals of the statutes, perhaps opening the door to legislative improvements.

Third, the Legislature should begin its own institutional effort to examine the cost-effectiveness of proposed statutes. Congress has a long and fruitful history of using the services of the Congressional Budget Office to determine economic and fiscal effects of federal legislation, and of the Joint Committee on Taxation on the economic effects of tax proposals. Since most of the economic impacts of public policies are attributable to the original legislation, it would behoove the Legislature to create a deliberate, high-quality analytical capacity and process to ascertain the economic impacts of legislative proposals. Fore-knowledge of serious economic impacts would be very helpful for the Legislature in mitigating unintended consequences of new laws, mandates and taxes. There is every reason for the Legislature to want to know these impacts prior to voting on these measures.

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