The Federalist Society's Administrative Law Practice Group participated in the State Policy Network's Seventh Annual meeting in Dallas, Texas on October 8, 1999. The State Regulatory Reform Subcommittee of the Administrative Law Practice Group conducted a program on state regulatory reform issues during the first afternoon session of the two-day annual meeting. The State Policy Network is made up of state and local think tanks throughout the United States. The Network began as a group of these think tanks and has grown to include representatives from virtually every state.

The program, sponsored by the Federalist Society, focused on state regulatory reform efforts and how state policy groups can address regulatory reform in their own states. Mike Gadola, who spearheaded regulatory reform for Governor John Engler of Michigan and now serves as Counsel to the Majority of the Michigan House of Representatives, spoke about Michigan's regulatory reform efforts. He explained the actions taken by Governor Engler to improve the state's regulatory process to prevent burdensome regulations. Gadola explained that Michigan's efforts can help serve as a model for other state efforts.

Scott Pattison, Director of the Virginia Department of Planning and Budget, discussed other state regulatory reform efforts and focused on Virginia's actions over the last five years to reform regulatory review in Virginia. Pattison, who previously headed the Department's Regulatory and Economic Analysis section, discussed executive branch oversight of regulatory promulgation and the importance of public participation. He also discussed Virginia's comprehensive economic impact analysis system in which every regulation must undergo a rigorous analysis of its impact on economic activity.

Gadola and Pattison also discussed the efforts of the Federalist Society and the State Regulatory Reform Subcommittee of the Administrative Law Practice Group to highlight regulatory reform efforts at the state level. Following the panel discussion, the state policy groups were encouraged to work with the Practice Group as well as local Federalist Society chapters to focus attention on and learn more about regulation and regulatory reform efforts. Many state policy group representatives enthususiatically agreed that they should work with the Federalist Society.

Pattison, the Subcommittee chair, also mentioned that the Subcommittee plans further efforts on regulatory reform issues at the state level. A portion of the Practice Groups website will be devoted to state regulatory reform and another forum on state regulatory reform issues is being planned for the Heritage Foundation sponsored Resource Bank meeting in Chicago in April 2000. A revised transcript of Mike Gadola's and Scott Pattison's remarks are included in this newsletter.

Presentation of Scott Pattison

We have been brought here at the encouragement of the Federalist Society so that the State Policy Network folks are aware of what the Federalist Society is doing and the fact that there is a network of lawyers and academics out there who are interested in administrative law and can work with you.

The Federalist Society will be developing a website on state regulatory reform. The one message I have today is there is a lot of good regulatory processes that are not being enforced and the State Policy groups can really help to make sure that states are doing what they need to be doing to prevent unbridled regulation.

I think everyone is probably familiar with the book, The Death of Common Sense and I think, especially from a populist perspective, that outlines as well as anything the problem with unbridled regulation and burdensome regulation.

We talk a lot about federal regulatory burdens, but I think focus on the states is also very critical. The states are indeed the "laboratories," and many states are now in the process of testing or experimenting with various strategies for regulatory reform.

Most reform efforts involve either a comprehensive review of existing regulations or a setting of the criteria for the promulgation of regulation. In my discussion today, I have three brief points. First, I will discuss mechanisms for executive policy oversight, second, a brief discussion of economic impact analysis, and third, the importance of public participation.

Most states have a statute or executive order that says you have to have a special justification for regulations, and often these are more stringent on paper than the federal laws and regulations. However, the problem is that they are not always being enforced.

In New York, Governor Pataki, issued Executive Order 20 and there he set out criteria for the review of regulations. His executive order discusses the importance of making sure that regulations produce public benefits which outweigh the costs. The executive order states, that "regulations should favor market-oriented solutions and performance standards over command and control regulation."

The Virginia executive order requires certain questions to be addressed at different steps in the regulatory process, such as: Is this the best alternative, the best idea for this regulation?

Each rule is scrutinized to ensure that a regulation is "essential for the protection of health, safety, and welfare, that the rule reflects the least burdensome alternative available."

Agencies are required to document their discussion of these "tests" in their regulatory packages. But, of course, having bureaucrats justify their own rules is frequently not adequate. The more effective programs also include some form of independent scrutiny by an office that is adequately staffed and given the authority to conduct a meaningful review.

We have our own version of the federal "OIRA" in Virginia — a division of economic and regulatory analysis that is part of the Budget Office. Several Ph.D. economists and attorneys on staff conduct the economic and regulatory impact analysis.

Not too long ago, this office received a proposal to amend governing tradespeople. The main point of the proposal was to implement a new legislative provision providing for additional flexibility. But there was another change that was not documented at all in the agency discussion that was required by the regulation. It was a "hidden" one-word change, but it would have more than doubled the amount of education required before a person could sit for the certification exam. The agency was never able to justify the increase. In fact, investigation of their own testing data showed that those with fewer educational hours were just as likely, if not more likely, to achieve higher scores on the agency exam. Faced with this evidence, the agency decided to withdraw its proposal.

Secondly, let me focus on economic impact analysis and cost benefit analysis.

Even states that have not explicitly embarked on a reform program usually require some type of cost benefit analysis. The question is: is that being used? Is that requirement being enforced?

There was a '96 survey that found 40 states actually require some form of cost benefit analysis, but I ask the question "Is it being done"? State policy groups must push to encourage states to enforce these requirements.

North Carolina, New York and other states have a requirement that the agency do an economic impact analysis, and I think that that is a good idea. The budget department or some other oversight office must then approve those.

In Virginia, we perform that function a little differently. We actually do the economic impact analysis itself at the Budget Department. As I mentioned earlier, we have several Ph.D. economists who conduct the economic impact analyses and work with agencies on appropriate regulatory design. We have found this approach to be effective in providing a high quality, objective analyis.

We compare the costs with the value of anticipated benefits and we spell out alternatives in the economic impact analysis.

There are no formal consequences to "bad" economic impact analysis in Virginia. However, the process is an effective check on burdensome regulation. No agency head in Virginia likes to have an economic impact analysis that is negative. I can list several examples if we had more time.

I will throw out an example of where an economic impact analysis was very effective. The Board of Cosmetology actually came up with a burdensome regulation that would have effectively eliminated countless small salons across the state. Basically, the proposal required that one had to have a separate entity where you did the hair cutting, and you had a separate entrance. Anyone who cut hair in their homes, anyone who had a salon incorporated into a cosmetology school, would have been closed down without undertaking very expensive structural modifications.

Our economic impact analysis indicated the problems, and the lack of any measurable health or safety benefits that could be expected from these changes. Agencies generally prefer to withdraw such proposals, rather than having them go forward with such an unfavorable analysis. We have at least found in Virginia that promulgation of regulations in the sunshine is a very good idea.

And this leads to my third point, the value of public input.

Many states, including New York and Michigan, have started web pages that try to involve the public. In Florida, agencies must produce a regulatory impact statement if individuals "substantially affected" by a proposed regulation submit a lower cost alternative for achieving the same purpose as a statutory mandate.

In Virginia, and I know other states are starting also to do this, we have a process to get as much public participation as possible. We have added extra public hearing requirements. We have developed a fairly extensive website to make sure that all of the economic impact analysis, all the proposed texts of the regulations, the meetings, everything is out in the open and accessible to anyone interested in the promulgation of the regulation. For those who have signed up, this web site will actually send out emails letting you know that the agency is taking some step in the process, or that a new meeting has been scheduled.

The fact is that even the best regulatory reform programs cannot function in a vacuum. Regulatory reform depends on the input of those being regulated, to point out problem areas and to make sure agencies are abiding by the guidelines that have been set. One of the jobs our regulatory review division is to make sure that agencies have adequately addressed meaningful public comments.

Now I will just close by saying again that I think that there is a great opportunity here for State Policy groups to keep an eye on bad regulations and also either improve the process of regulatory promulgation in their states or, if there's something on the books, go ahead and try to make sure that the state governments aren't just paying lip service or ignoring those requirements, but are actually enforcing the requirement. This will prevent bad regulation, and again the Federalist Society and the network of attorneys and academics who are focusing on administrative law and particularly the State Regulatory Reform Subcommittee are good avenues to work with, to share information and float ideas.

Presentation of Mike Gadola

It is a pleasure being here this afternoon. I hope my remarks aren't too parochial. I am going to talk to you about what I know, which is Michigan, by focusing on three points: first, why Governor Engler created the Office of Regulatory Reform ("ORR") in 1995; second, what the Executive Order did; and third, its level of success.

On March 31st of 1995 Governor Engler signed Executive Order 1995-6, which created the Office of Regulatory Reform ("ORR"). I think that there are several goals embodied in the text of the order. First, the Governor wanted enhanced planning and coordination of agency rulemaking. Prior to the creation of the ORR rulemaking efforts were dispersed among 20 principal executive departments with no effective means of coordination. The office has brought some degree of uniformity and coordination in the overall regulatory effort of the state.

The Governor also wanted the Executive Office involved in rulemaking at the front end of the process instead of just the back end. That was accomplished through a mechanism I will talk about in just a minute, the Request for Rulemaking, which requires that each agency submit a request to the ORR before proceeding with a rulemaking.

Another goal of the Executive Order was the elimination of obsolete and burdensome rules. I think Michigan has been very successful in that area and I will touch upon some statistics that bear that point out. The final goal of the Executive Order was enhanced public access and participation in the rulemaking process. Michigan has also successfully achieved this goal.

The executive order significantly revamped the rulemaking process by putting the ORR in the driver's seat at the beginning, middle and end of the rulemaking process. Agencies must submit a Request for Rulemaking ("RFR") and have it approved by the ORR before they can proceed with a rulemaking. ORR reviews draft rules and then certifies the legality of proposed rules in the middle of the process, a function that the executive order transferred from the Department of the Attorney General to the Executive Office of the Governor. The ORR also files rules with the Secretary of State at the end of the process before they become effective. This system ensures that the Executive Office has the ability to shape rules and that the public and the regulated community can gain access to the process directly through the Governor's office. This means that there is one publicly accountable elected official who bears ultimate responsibility for rulemaking, instead of a group of faceless bureaucrats spread out over 20 executive branch departments.

The order also requires agencies to submit an annual regulatory plan to the ORR. The plan must outline the rulemaking efforts that the agency expects to engage in over the course of the following 12 months and sets forth the legal basis and need for the proposed rules. Agencies are also required to conduct an annual review of existing rules, with a view towards rescinding obsolete or unnecessarily burdensome and duplicative rules. Instead of piling rule upon rule, agencies are now forced at least once a year to review their existing rule set in order to root out burdensome or obsolete rules. Each agency is also required to appoint a Regulatory Affairs Officer so that there is one person responsible for each department's rulemaking efforts and one point of contact between the Governor's office and the department.

Agencies must also conduct a cost-benefit analysis through what is called a Regulatory Impact Statement. The Regulatory Impact Statement forces at least some degree of critical thinking on the part of the regulators and invests them in the process by making them decision-makers. It forces agency personnel to decide whether a regulation is sensible and ought to move forward after considering its relative costs and benefits.

By most measures I think the Governor's Office of Regulatory Reform has been a success. There have been 559 requests for rulemaking submitted to the ORR since the inception of the office. Twenty-eight percent of those requests have been for rule rescissions. As a result of those requests 3,128 rules have been rescinded over the course of the last four years in Michigan. That is a significant accomplishment.

The greatest area of success, however, may be in the area of public access to the rulemaking process. The administrative code in Michigan is now online and available to the public. We also have the text of proposed rules online, so that the regulated community can find out what agencies are proposing to do to them in the future. The online administrative code receives an average of 717 hits per day, so it is something that the public utilizes to a great extent.

I would be remiss if I failed to mention Michigan's version of the Chadha case, which is Blank v. Michigan Department of Corrections. This case, which was recently argued to the Michigan Supreme Court, has resulted in overturning the legislative veto of proposed rules by the legislature's Joint Committee on Administrative Rules. Because the committee no longer possesses the authority to stymie agency rulemaking, the regulated community must now involve itself in the rulemaking process by communicating its concerns to the ORR and the relevant regulatory agency.

The Blank case may cause the legislature to be a bit more reluctant to grant rulemaking authority to agencies in the first instance. Furthermore, because the legislature will no longer have a "second bite at the apple" through the legislative veto, once it grants an agency rulemaking authority the legislature might be more definitive in setting standards for agency rulemaking and more vigilant about whether the rules, once promulgated, are faithful to legislative intent.

Ultimately, however, it is my view that any state level regulatory reform effort is hampered by two things. First, the stuff that really matters in terms of over-regulation, especially in an industrialized state like Michigan, is all federalized. I point particularly to OSHA rules (i.e., workplace safety) and environmental rules. A lot of our regulations are federally driven and there is not a whole lot we can do to reform them.

The second reason that state-level regulatory reform efforts are hampered is the schizophrenia of the regulated community. They tend, first of all, not to be very specific about what it is they want reformed. Unfortunately, when they are specific in their requests they tend to be seeking more, not less, regulation. I agree wholeheartedly with Michael Greve's comments from lunch that the business community "reflexively desires uniformity," which leads to a desire for more regulation.

In addition to that, I think the business community wants greater specificity in rules in order to eliminate bureaucratic discretion. They want certainty. They want uniformity. They don't want bureaucrats who don't have standards to apply and decisions to make. They want all that circumscribed by the regulations, so instead of tending to want less rules I think they tend to want more, so that there is a narrower area of discretion for state regulators.

Scott Pattison is Director for the Virginia Department of Planning & Budget.