Regulatory Reforms

8/14/2019 Regulatory Reforms

1/17

Regulatingthe Regulators

Seven Reforms for Sensible Regulatory Policy in North Carolina

Daren Bakst, J.D., LL.M.FeBruary2010

PoLicyrePort


2/17

Regulating

the RegulatorSeven Reforms for Sensible Regulatory Policy in North Caroli

Daren Bakst, J.D., LL.M.

Contents

2 Executive Summary

3 Introduction

3 What Are Regulations?

3 The Importance o Strong Oversight

4 Existing Oversight in North Carolina

5 RefoRm one: The Legislature Should Not Delegate an ExcessiveAmount o Power to Agencies

5 RefoRm Two: The Legislature Should Give the RRC the Power toRequire Clear Statutory Authority

6 RefoRm ThRee: The Legislature Should Empower the RRC to RejectRegulations Inconsistent with Legislative Intent

6 RefoRm fouR: The Legislature Should Require Agencies to ConductCost-Benet Analysis with Proper Oversight

9 RefoRm five: The Legislature Should Require Agencies to ConductSmall Business Regulatory Flexibility Analysis

11 RefoRm Six: The Legislature Should Require Periodic Review oRegulations

12 RefoRm Seven: The Legislature Should Prohibit Agencies rom PassinRules that Exceed Federal Standards

12 Conclusion

13 End Notes

The views expressed in this report are solely those o the author and do not necessarily refect those o the sta or boathe John Locke Foundation. For more inormation, call 919-828-3876 or visit www.JohnLocke.org.2010 by the John Locke Foundation.


3/17

s e v e n r e f or m s f or s e n s ib l e r e g u l a t or y p ol ic y in n or t h c a r ol in a

p o l i c y r e p o r

exeCutive suMMary

Unelected and unaccountable bureaucrats and ap-pointees regularly make major policy decisions that a-ect the lives o North Carolinians.

They have the power to issue regulations aectingalmost every acet o our lives, rom the air we breatheto who may attend community colleges.

The people o North Carolina need protections putin place to provide oversight over government agenciesso that their rule-making decisions represent the will othe legislature and not the whims o the agencies.

Most state governments and even the ederal govern-ment have ar better controls over the regulatory powero government agencies than does North Carolina.

The excessive regulatory power allowed by North

Carolina imposes great costs on its citizens and busi-nesses and hurts the economic competitiveness o thestate.

This report identies seven reorms that North Car-olina should adopt to improve the regulatory environ-ment in the state:

1) The Legislature Should Not Delegate an ExcessiveAmount o Power to Agencies

When legislation is drated, clear parameters shouldbe in place so that there are limits as to what an agencycan do when implementing specic legislative provi-sions.

2) The Legislature Should Give the Rules Review Com-mission the Power to Require Clear Statutory Authority

Agencies are tasked with rulemaking and are un-likely to constrain their own power voluntarily. Theywill tend to take the most expansive reading o theirstatutory powers when developing regulations

When statutory authority is in question, the pre-

sumption by the Rules Review Commission should beagainst statutory authority, not in avor o it.

I questions regarding statutory authority are suchthat it is reasonably unclear whether an agency headedby unelected bureaucrats may make major policy deci-sions (i.e., through regulations), then the Rules ReviewCommission should presume that those decisions restwith the state legislature, the representative body ac-countable to all citizens.

3) The Legislature Should Empower the Rules ReviewCommission to Reject Regulations Inconsistent with Legis-lative Intent

Oten an agency can have statutory authority butstill take action beyond the scope o the legislatures in-tent. An example o this problem is the State Board oCommunity Colleges proposed regulations to admit il-legal immigrants into community colleges.

It would be dicult to argue that the Board doesnot have the authority to determine whether illegal im-migrants can be admitted to community colleges. Itwould also, however, be very dicult to argue that thelegislature intended to delegate this major policy deci-sion to the Board when it passed language giving the

Board power to set admissions standards. The peopleneed protections put into place to ensure that an agen-cys actions are consistent with the intent o the legisla-ture when it decided to delegate power to the agency.

4) The Legislature Should Require Agencies to ConductCost-Benet Analysis with Proper Oversight

For nearly 40 years, the ederal government hasused some orm o cost-benet analysis to review regu-lations. The North Carolina General Assembly shouldpass a law that also requires cost-benet analysis.

The cost-benet analysis process should include:Rejection o rules i costs exceed benets.Consideration o alternatives to achieve the statedobjective and selection o the alternative that im-poses the least cost to society.Selection o the least burdensome regulatory op-tion.

5) The Legislature Should Require Agencies to ConductSmall Business Regulatory Flexibility Analysis

One-size-ts-all regulation can cause signicantproblems, especially when it comes to compliance.Small businesses simply are not in as good o a positionto meet regulatory mandates as larger businesses.

To address the dierences between small businessesand larger businesses, agencies should be required toconsider regulations that reduce the impact on smallbusinesses. That consideration would include havingless stringent compliance requirements or small busi-


4/17

J o h n l o c k e f o u n d a t i o n

r e g u l a t in g t h e r e g u l a t or s

nesses or even exempting small businesses rom regula-tions. Regulatory fexibility analysis requires this kindo analysis to ensure that regulations are developed withenough fexibility to address the needs o small busi-nesses.

According to the U.S. Small Business Administra-tion, there are 35 states with small business regulatoryfexibility analysis. Thirty years ago, Congress passedthe Regulatory Flexibility Act, which established reg-ulatory fexibility analysis or small businesses on theederal level. The General Assembly needs to pass a lawso that small businesses in North Carolina will have thesame protections as their counterparts in most otherstates.

6) The Legislature Should Require Periodic Review oRegulationsThe passage o new laws or changes in technology

can cause regulations to become outdated or unneces-sary. They also may prove to be ineective at achiev-

ing their objectives. For those reasons, 32 states haveperiodic review o regulations. The General Assemblyshould pass a law to create a process whereby all agen-cies review their regulations on a periodic basis.

7) The Legislature Should Prohibit Agencies From Pass-ing Rules that Exceed Federal Standards

The legislature should prohibit state agencies rompassing regulations that exceed ederal standards. Thistype o law, sometimes reerred to as a no more strin-gent law, ensures that legislators as opposed tobureaucrats determine i North Carolinians shouldsuer a greater regulatory burden than citizens in otherstates.

According to the U.S. Environmental Protection

Agency, about one-third o all states already have nomore stringent prohibitions that apply to at least someareas o state law. A strong no more stringent lawwould be an important component in developing a bet-ter regulatory environment in North Carolina.

introDuCtion

Unelected, unaccountable bureaucrats and appointeesregularly make major policy decisions that aect the lives

o North Carolinians. These largely unseen individuals,who lead numerous state agencies and commissions,1 is-sue regulations that can have a major impact on everycitizen.

This power in the hands o the unelected is inconsis-tent with a representative orm o government. Unortu-nately, as with Congress and with other state legislatures,the North Carolina General Assembly has delegated sig-nicant power to these agencies and will likely continueto do so.

While vesting these agencies with enormous power,

legislatures have long wrestled with how to provide properoversight and controls over their actions. It is a challengethat persists to this day. This report recommends sevensimple reorms North Carolina should adopt to rein inexcessive agency power and to promote sound regulatorypolicy.

What are reguLations?

Regulations are agency-created rules that help to im-plement or interpret enacted legislation.2 They have the

ull orce o law and can subject those being regulated tones and even imprisonment. State regulations addressalmost every acet o our lives, rom the air we breathe to

who may attend community colleges. Agencies sometimes develop regulations that mirror the exact language used in the bill passed by the statelegislature. Since legislation oten ails to provide specicdetails on what lawmakers expect o regulated partiesagencies are let to develop regulations that provide themissing details. The legislation also can be very vague andoverbroad in scope, thereby giving agencies wide discre-tion in determining what should be regulated.

the iMportanCeof strong oversight

Good GovernmentThe legislature oten delegates signicant power to

agencies. Regardless o whether it is necessary, the legisla-ture will continue to delegate to agencies, and the courtswill almost always allow legislative delegation o powerAs the North Carolina Court o Appeals has said, Somedelegation is inescapable.3

Thereore, procedures need to be put into place with-in the regulatory process so that agencies truly implemen


5/17



the will o the legislature and make sound regulatory deci-sions. I the unelected and unaccountable individuals inagencies are going to make major policy decisions, thereshould be some common-sense oversight protections toensure their decisions are consistent with the intent o thelegislature.

Economic GrowthThe regulatory burden on businesses in North Caro-

lina is a signicant problem. In a 2005 John Locke Foun-dation survey o more than 600 North Carolina businessleaders, regulatory burden was ranked as the second mostimportant actor reducing the states economic competi-tiveness (only North Carolinas tax burden ranked high-er).4 About 81 percent o N.C. business leaders said thatthe cost o most government regulations exceeded theirbenets.5

Other states, including neighboring states, have over-

sight procedures in place that genuinely take into con-sideration the impact regulations have on businesses.North Carolina does not, giving the other states a majoradvantage in encouraging new businesses to come to theirstates.

Too many policymakers in North Carolina think thatthe way to promote economic growth is to give money toselect businesses in the orm o incentives. A more bene-cial approach would be to take some simple steps to createa riendlier regulatory environment or all businesses.

existing oversightin north CaroLina

The states Administrative Procedure Act (APA) is thelaw that governs the regulatory process in the state.6 Onekey protection established under the APA is the power othe Rules Review Commission (RRC).7 The RRC, a ten-member commission appointed by the House and Senateleaders, is a body that must approve regulations prior tothem becoming nalized.8

This much-needed Commission is generally limitedto, among other things, making sure that an agency hasollowed proper procedures, had statutory authority orits regulation, and developed clear rules.9 The RRC is ex-pressly prohibited rom evaluating the merits o regula-tions.10

The APA also includes a process or the public to ob-ject to a rule. I 10 objections to a rule are led with theRRC, the rule is delayed, giving the legislature a chance topass a bill disapproving o the rule. I the legislature takes

no action, the rule goes into eect.11

While this check is very important, it is not as valu-able as it seems. A legislative block o a proposed regula-tion must pass both chambers and be signed by the gover-nor, all o which can be quite challenging (see Figure 1).

Current protections are all useul, but they do not goar enough. Other state governments and the ederal gov-ernment have much greater oversight protections in placeMoreover, they represent simple reorms North Carolinaneeds to adopt.

Figure 1. Rules subject to legislative review and rules disapproved, 2004-09

Fiscalyear

Rulesintroduced*

Rules subject tolegislative review

Number o bills introduced todisapprove rules**

Number o enacted billsdisapproving rules

2004-05 1,078 56 3 0

2005-06 1,320 15 5 1

2006-07 1,299 22 2 0

2007-08 1,548 54 8 4

2008-09 1,265 71 10 2

Total 6,510 218 28 7

* Permanent rules only.

** Even when disapproving a rule, the legislature could simply make changes to it while keeping a signicant part o it.

The Rules Review Commission is the source o the data on rules introduced and rules subject to legislative review. Since RRC rules dataare based on the scal year o July 1-June 30, introduced and enacted bills were placed in the corresponding scal year. Introduced andenacted bills data were calculated by searching or the bills on the North Carolina legislatures web site.


6/17



reforM one

The Legislature Should Not Delegate an ExcessiveAmount o Power to Agencies

When legislation is drated, clear parameters shouldbe in place so that there are limits as to what an agency

can do when implementing specic legislative provisions.This is the simplest and most important reorm.Unortunately, many legislators oten want to dele-

gate away responsibility to agencies to defect hot-buttonissues and the political repercussions rom them-selves.

There is, however, no way to mandate this reorm.Excessive delegation o power should be a concern regard-less, something lawmakers need to bear in mind whendrating legislation.

Even a small number o legislators could call atten-

tion to vague and overbroad bills that would give agenciestoo much regulatory power.

reforM tWo

The Legislature Should Give the RRC the Power toRequire Clear Statutory Authority

For an agency to have statutory authority means, insimple terms, the agency has been granted permissionrom the legislature to issue regulations on the specicsubject matter. Under the Administrative Procedure Act

(APA), the Rules Review Commission (RRC) does reviewrules to make sure that they are within the authority del-egated to the agency by the General Assembly.12 Thatlanguage, however, in no way prevents an agency romtaking an unreasonably expansive view o its power andthe RRC rom approving those regulations.

The RRC may be hesitant to challenge statutory au-thority out o ear that agencies may bring lawsuits. In1999, the Pharmacy Board sued the RRC, challenging itsdecision that the Board had exceeded its statutory author-ity by trying to regulate pharmacists working hours.13

The Board did not stop there they also argued that theRRC was unconstitutional.14 In 2006, the North Caroli-na Supreme Court rejected the RRCs decision regardingstatutory authority but did not address the constitutionalquestions.15

In 1996, the RRC rejected an Environment Man-agement Commission (EMC) rule on wetlands, arguingthat the EMC did not have statutory authority.16 TheEMC ignored the RRC decision17 and moved ahead withthe publication o the rule anyway. The North Carolina

Homebuilders Association and other organizations suedthe EMC, arguing that the EMC did not have authorityto adopt the rules.18 In 2002, the North Carolina Courto Appeals ruled in avor o the EMC.19

Owing to those cases and in light o the act that courts

are more than willing to support the expansive readings ostatutes, the RRC may be a bit gun-shy regarding uturechallenges to statutory authority. Since statutory languageusually is broad, courts oten are correct in nding thatstatutory authority exists or regulations.

Here, however, is not a question o how the courtswill rule; instead, it is question o what standard shouldapply in the regulatory review process to prevent agen-cies rom pushing their authority beyond what has clearlybeen delegated to that agency. When statutory authorityis in question, the presumption should be against statu-

tory authority, not in avor o it. I questions regardingstatutory authority are such that it is reasonably unclearwhether an agency headed by unelected bureaucrats maymake major policy decisions (i.e., through regulations)then the RRC should presume that those decisions restwith the legislature, a representative body accountable toall citizens.

I the RRC does not believe that statutory author-ity exists, it should not ear drawing that conclusionThrough stronger and more precise review language, the

RRC would be more empowered to reject rules wherestatutory authority is in question.Specically, the legislature should amend the APA

The RRC should review rules to make sure they areclearlywithin the authority delegated to the agency bythe General Assembly (emphasis added). In addition, todene what clearly within the authority means, the lawshould clariy that clear statutory authority exists whenno reasonable argument can be made that statutory au-thority does not exist.

When a reasonable argument against statutory au

thority does exist, the RRC should be required to rejectthe rule.

Agencies are tasked with rulemaking and are unlikelyto constrain their own power voluntarily. They will tendto take the most expansive readings o their statutorypowers when developing regulations.

I North Carolina had higher standards or provingthe existence o statutory authority, agencies would beprevented rom adopting regulations inconsistent withthe will o the legislature.


7/17



reforM three

The Legislature Should Empower the RRC to RejectRegulations Inconsistent with Legislative Intent

Oten an agency can have statutory authority but stilltake action beyond the scope o the legislatures intent.

An example o this problem is the State Board o Com-munity Colleges proposed regulations to admit illegalimmigrants into community colleges.20

The statutory authority is derived rom statutorylanguage that authorizes the Board to establish and ad-minister standards or admissions.21 It would be di-cult to argue that the Board does not have the authorityto determine whether illegal immigrants can be admit-ted to community colleges. The language is clear on itsace that the Board has the broad power to set admissionsstandards, which presumably would include developing

regulations on whether admitted students can be illegalimmigrants.

It would also, however, be very dicult to argue thatthe legislature intended to delegate this major policy de-cision to the Board when it passed language giving theBoard power to set admissions standards. The legislaturemost likely gured that the Board would sort out moremundane details such as whether students needed highschool diplomas, not major issues o social policy.

Determining the Legislatures Intent When Delegating ItsPowerEstablishing a standard by which to determine wheth-

er the legislature intended or an agency to take certain ac-tions under their delegated power is very dicult. NorthCarolina case law on the delegation o legislative powercan help to provide useul guidance. The North CarolinaSupreme Court has explained:

A modern legislature must be able to delegate in proper

instances a limited portion of its legislative powers to

administrative bodies which are equipped to adapt legisla-

tion to complex conditions involving numerous details with

which the Legislature cannot deal directly.[S]uch trans-

fers of power [delegation] should be closely monitored to

insure that the decision-making by the agency is not arbi-

trary and unreasoned and that the agency is not asked to

make important policy choices which might just as easily

be made by the elected representatives in the legislature.22

[Internal citations omitted.]

Using that explanation as guidance, the legislature

should amend the Administrative Procedure Act (APA)to clariy that the Rules Review Commission (RRC) mayapprove regulations only i the agency has proven that:

The legislature when enacting the statute likely be-lieved the agency, due to its expertise, was in a betterposition than the legislature to address the specicsubject matter o the regulation; and

The legislature likely believed that it was delegat-ing to the agency the power to issue the proposedregulations.

These requirements are subjective, but they wouldhelp to provide some protection to ensure the intent othe legislature is respected. Taking the admissions o il-legal immigrants as an example, the legislature likely did

not believe the State Board o Community Colleges wasin a better position to address that issue than the legisla-ture itsel.

While the Board members may know the issues acingcommunity colleges, they probably do not have exper-tise on immigration issues. Further, the legislature likelywould have thought an issue o such magnitude, whichinvolves so many issues unrelated to admissions, wouldnot have been best served by the Board.

As or whether the legislature believed it was delegat-ing this power to the Board, similar arguments as above

would apply. It is unlikely the legislature thought it wasgiving the Board the power to set immigration policywhen it authorized it to set admissions standards.

reforM four

The Legislature Should Require Agencies to ConductCost-Beneft Analysis with Proper Oversight

BackgroundI an agency does choose to adopt regulations, it

should do so ater considering that decision properly andcareully. For nearly 40 years, the ederal government hasused some orm o cost-benet analysis to review regula-tions.23 The General Assembly should pass a law that alsorequires cost-benet analysis.

What is Cost-Benet Analysis?At its most basic level, cost-benet analysis is an at

tempt to evaluate a regulatory proposal by comparing itscosts to its benets. Costs and benets are quantied in


8/17



monetary terms and should examine the impact on all a-ected parties, not just regulated entities.

A central requirement o cost-benet analysis is to de-termine opportunity costs. It is important to know whatwould happen i there were no regulations, including how

resources (e.g., money and time) would have been used.The application o opportunity costs can be seen inour own personal lives. For example, i an accountantneeds his ront lawn mowed, he could take time to mowthe lawn or hire someone or $50. I he decides to mowthe lawn himsel, he has just saved $50. But i he other-wise would have used that time at work earning $500,he would not have been better o in monetary terms.By mowing the lawn himsel, he incurred an opportunitycost o $500; in terms o costs and benets, by hiringsomeone else to mow his lawn or $50, he would wind

up $450 ahead.The same concept applies to cost-benet analysis or

regulations. For example, assume that regulations impose$1,000 in compliance costs on a business. I the busi-ness could have used that money on an investment thatwould have yielded $10,000, the true cost to the businessis $11,000 ($10,000 or the lost investment and $1,000or the compliance costs).

Cost-benet analysis also requires an evaluation ovarious alternatives to determine the best possible policy

option. In evaluating dierent options, there should bean option with no regulations.There are many more details to proper cost-benet

analysis, but providing a comprehensive discussion wouldinvolve a report unto itsel. There are some additional keypoints though that should be highlighted.

Key Points

Taking Action Based on Cost-Benet Analysis. Re-quiring agencies to perorm cost-benet analysis isnot very helpul i there is no requirement or themto take action based on the ndings. I costs exceedbenets, then a rule should be rejected.24

Rights Are More Important Than Benets. Thereare many imaginable scenarios where a cost-benetanalysis could be used to justiy some chilling poli-cies. The individuals that pushed or the sterilizationo the eeble-minded in North Carolina claimedthat there were signicant benets, including ewerindividuals on the welare rolls.25 Certainly, individ-

ual rights should have trumped any alleged benetsin that situation.

Requiring Regulations to Achieve a Clearly StatedPurpose. Each agency should identiy, in specicterms, what goals are being met by adopting the

regulations. Regardless o what costs and benetsare identied, i the regulations do not achieve theirstated purpose, the RRC should reject the regula-tions.

Alternatives. As stated above, various alternativesneed to be considered. Similar to the ederal lev-el,26 agencies should be required to identiy alter-natives to achieve their stated purpose which iscrucial to cost-benet analysis. The alternative withthe largest benet-to-cost ratio should be chosen

As stated in President Reagans Executive Orde12291, Among alternative approaches to any givenregulatory objective, the alternative involving theleast cost to society shall be chosen.27

Reducing Regulatory Burden.The burden on regulat-ed entities should be given serious consideration. Asstated in President Jimmy Carters Executive Order12044, regulation should be approved i the leastburdensome o the acceptable alternatives has beenchosen.28

Benets Should Really Be Benets. Just because anagency claims something is a benet does not meanthat it is a benet. For example, the Environmen-tal Management Commission (EMC) may wantto regulate carbon dioxide (CO

2) emissions or the

purpose o addressing global climate change. Theymay claim that a benet o regulating CO

2emis-

sions is the reduction in CO2

emissions.However, a reduction in CO

2emissions is not

a benet in and o itsel. The benet would be a

reduction in global temperature. The emissions re-duction is simply a means to the end (i.e., the pur-pose). Cost-benet analysis that relies on these non-benets should be rejected.

Current Cost-Beneft Analysis in North Carolina: In GeneraThe Administrative Procedure Act (APA) does not

have a cost-benet analysis requirement.29 HoweverNorth Carolinas Oce o State Budget and Management(OSBM), which reviews the scal and economic impact


9/17



o regulations, does require agencies to do some orm ocost-benet analysis on three types o regulations:

Non-signicant rule changes that impact state or

local unds;

Signicant rule changes that impact state or localunds; and

Signicant rule changes that have a substantialeconomic impact.30

Limiting cost-benet analysis to certain types o regu-lations does make sense owing to practical concerns re-garding workload. Regulations that would be signicantrule changes, however, should be analyzed regardless o

whether there is an impact on state or local unds or asubstantial economic impact. OSBM denes a signi-cant rule change as a

proposed rule change that may:

(a) have a significant effect on the economy, state, or local

funds;

(b) create an inconsistency with an action taken or planned

by another agency; or

(c) raise novel policy issues.31

1)

2)

3)

The APA denes regulations with a substantial eco-nomic impact as an aggregate nancial impact on alpersons aected o at least $3 million dollars in a 12-month period.32 An impact includes both costs and ben-ets. As a result, a rule that may have $2.1 million dollarsin benets and $1 million dollars in costs has a substantiaeconomic impact.33

OSBM requires agencies to do a very limited analysisor non-signicant rule changes that have an impact onstate or local unds (what it calls a brie impact analysis)34

and a more extensive analysis or signicant rule changesthat have an impact on state or local unds (what it calls abasic economic impact analysis).35 Agencies are requiredto do the most extensive analysis or regulations that have

a substantial economic impact. This analysis includes theconsideration o policy alternatives.36 All signicant rulechanges should be subject to true cost-benet analysis, asdescribed in Figure 2.

Oversight o Cost-Benet AnalysisExisting cost-benet analysis in North Carolina has

a catch, however. Agencies have to submit their rules orOSBMs review only i the agency has determined thatthere would be an impact on state or local unds, or there

Figure 2. Required Analysis or Rules: Current vs. Recommended Requirements

Type o Rule

Required Analysis

Current Recommended

Non-signicant rule change with

state or local scal impact*Brie impact analysis

Brie impact analysis

(maintain status quo)Signicant rule change withoutstate or local scal impact orsubstantial economic impact*

NoneExtensive cost-benet analysis(as discussed in this paper)

Signicant rule change with stateor local scal impact*

Basic economic impact analysisExtensive cost-benet analysis(as discussed in this paper)

Signicant rule change withsubstantial economic impact

OSBMs more extensive analysis (the onlylevel o analysis that appears to be a truecost-benet analysis; or example, it requiresthe evaluation o policy alternatives)

Extensive cost-benet analysis(as discussed in this paper)

* OSBM denes a signicant rule change as a proposed rule change that may have a signicant eect on the economy, state, or local unds;create an inconsistency with an action taken or planned by another agency; or raise novel policy issues.

The Administrative Procedure Act denes substantial economic impact as an aggregate nancial impact on all persons aected o at least$3 million dollars in a 12-month period. It is possible, though unlikely, that a rule with a substantial economic impact might not be asignicant rule change. In such a situation, however, it is unclear what level o analysis would apply.


10/17

10



would be a substantial economic impact.37 I the agencyincorrectly makes this assessment or just does not wantOSBM to review the rule, there is little that can be done(see Figure 3).

The APA does not include any oversight mechanismto ensure that a rule would actually not be a signicantrule change with a state or local scal impact. Agencies

just have to be trusted.The APA does allowthe RRC to ask OSBM i a rule would have a substantial economic impact.38 This al-lowance, however, is not a requirement imposed on theRRC.

In addition, an individual can submit a request tothe RRC or clarication o whether a rule would havea substantial economic impact. Upon receiving a writtenrequest, the RRC is required to ask OSBM whether therule would have a substantial economic impact.39 With somany rules being produced, however, it would be unreal-

istic to expect individuals to provide the necessary over-sight.

The RRC should be required to ask OSBM whethera rule would be a signicant rule change or a rule witha substantial economic impact so long as the rule couldreasonably all into one o those two categories or uponreceiving a written request by an individual.

There also needs to be stronger oversight over wheth-er cost-benet analysis has been conducted properly. Cur-rently, OSBM reviews the cost-benet analysis or agen-

cies. OSBM should continue in that oversight capacity,but the RRC should have nal say on whether the cost-benet requirements have been met.

reforM five

The Legislature Should Require Agencies to Conduct SmallBusiness Regulatory Flexibility Analysis

The Importance o Small Businesses in North CarolinaSmall businesses, dened by the United States Smal

Business Administration (SBA) as businesses with ewerthan 500 employees,40 account or 98.1 percent o all em-ployers in North Carolina.41 They employ 48.6 percent othe states private-sector workorce.42

In terms o total net new jobs, small businesses re-cently have been ar more important than larger busi-nesses. From 2003 to 2006, small businesses had totalnet new jobs o 166,083, compared with only 18,171 or

large businesses.43 That means small businesses accountedor nine times more net new jobs than large businessesIn addition, small businesses had more total net new jobsthan large businesses in each o the years between 2003and 2006 (see Figure 4).44 As can be seen rom the datasmall businesses are critical to our economy.

Disproportionate Regulatory Costs on Small BusinessesOne-size-ts-all regulation can cause signicant prob-

lems, especially when it comes to compliance. Small busi-

Figure 3. APA Oversight o Agency Decisions Determining that a Rule Does Not Impact State or LocalFunds, or the Rule Does Not Have a Substantial Economic Impact

Reviewing Whether State orLocal Funds Are Aected

Reviewing Whether There Isa Substantial Economic Impact

Does ReviewExist?

No * Yes. There is a limited review.

Type o Review N/A

RRC may ask OSBM to review whether there is a substantialeconomic impact.

An individual may submit a request to the RRC regardingwhether there is a substantial economic impact. The RRC isthen required to contact OSBM about reviewing the rule.

1)

2)

* There is no oversight to determine whether rules have an impact on state or local unds. This omission aects rules that could have animpact on state or local unds and also be signicant rule changes. It is o particular importance because the only signicant rule changessubject to some orm o cost-benet analysis, other than rules that also have a substantial economic impact, are rules that have an impacton state or local unds.


11/17



nesses simply are not in as good o a position to meetregulatory mandates as larger businesses.

Small businesses do not have the in-house legal orcompliance personnel that larger businesses do. Compli-ance costs take a larger share o small businesses resourcesthan they do o large businesses.

The SBA points out that small businesses spend$6,975 each year per employee just to comply with ed-

eral regulations and mandates. That is 60 percent morethan large rms.45

Regulatory Flexibility Analysis or Small BusinessesTo address the dierences between small businesses

and larger businesses, agencies should be required to con-sider regulations that reduce the impact on small busi-nesses. That consideration would include having less

Figure 4. Net job change by frm size in North Carolina, 2003-06*

YearsTotal

net new jobsEmployment size o rm

1-499 500+

2003-04 21,218 56,559 -35,341

2004-05 48,872 26,767 22,105

2005-06 114,164 82,757 31,407

2003-06 184,254 166,083 18,171

* Includes non-arm positions only.

Source: United States Small Business Administration

NewJ

obs(Net)

1499 employees 500+ employees

175,000

150,000

125,000

100,000

75,000

50,000

25,000

0


12/17

12



stringent compliance requirements or smallbusinesses or even exempting small businessesrom regulations. Regulatory fexibility anal-ysis requires this kind o analysis to ensurethat regulations are developed with enough

fexibility to address the needs o small busi-nesses. The RRC should have oversight toensure that the needs o small businesses havebeen properly considered.

The SBA has developed model languageor state regulatory fexibility analysis itis listed in Figure 5. According to the SBA,there are 35 states with small business regula-tory fexibility analysis.46

Thirty years ago, Congress passed theRegulatory Flexibility Act, which established

regulatory fexibility analysis or small busi-nesses on the ederal level.47 The General As-sembly needs to amend the APA so that smallbusinesses in North Carolina have the sameprotections as their counterparts in most oth-er states.

reforM six

The Legislature Should Require PeriodicReview o Regulations

The passage o new laws or changes intechnology can cause regulations to becomeoutdated or unnecessary. They also may proveto be ineective at achieving their objectives.For those reasons, 32 states have periodic re-view o regulations,48 and the SBA also rec-ommends periodic review.49

The General Assembly should amend theAPA in order to adopt a process whereby allagencies review their regulations on a peri-odic basis. The SBA recommends that reviews be carried

out every ve years.50 In making this decision, agenciesshould examine, among other things:

The success or ailure o the regulations in achiev-ing the stated objectives.

Whether compliance with the regulations is toocomplicated or costly.

Whether new laws, including ederal laws, makethe regulations duplicative.

1)

2)

3)

Whether new technology, economic conditions, or

other actors make the regulations unnecessary orin need o change.

Agencies would submit their ndings to the RRCwhich would draw its own conclusions based on the arguments made by the agencies.

As in Tennessee, agencies should have the burden to justiy the continued existence o their regulations.51 Ithe regulations were no longer needed, they would be re-pealed.

4)

Figure 5. United State Small Business AdministrationsModel Regulatory Flexibility Analysis Legislation

(a) Prior to the adoption o any proposed regulation on and aterJanuary 1, 2007,* each agency shall prepare a regulatory fexibility

analysis in which the agency shall, where consistent with health, sae-ty, environmental, and economic welare consider utilizing regulato-ry methods that will accomplish the objectives o applicable statuteswhile minimizing adverse impact on small businesses. The agencyshall consider, without limitation, each o the ollowing methods oreducing the impact o the proposed regulation on small businesses:

(1) The establishment o less stringent compliance or reportingrequirements or small businesses;

(2) The establishment o less stringent schedules or deadlines orcompliance or reporting requirements or small businesses;

(3) The consolidation or simplication o compliance or report-ing requirements or small businesses;

(4) The establishment o perormance standards or small busi-nesses to replace design or operational standards required inthe proposed regulation; and

(5) The exemption o small businesses rom all or any part o therequirements contained in the proposed regulation.

(b) Prior to the adoption o any proposed regulation that may havean adverse impact on small businesses, each agency shall notiy the[Department o Economic and Community Development or similarstate department or council that exists to review regulations] o itsintent to adopt the proposed regulation. The [Department o Eco-nomic and Community Development or similar state department orcouncil that exists to review regulations] shall advise and assist agen-cies in complying with the provisions o this section.

* Refects only the date this model legislation was drated.


13/17



reforM seven

The Legislature Should Prohibit Agencies From Pass-ing Rules that Exceed Federal Standards

The legislature should amend the APA to prohibitstate agencies rom passing regulations that exceed ed-

eral standards. This kind o law, sometimes reerred toas a no more stringent law, would ensure that legisla-tors as opposed to bureaucrats determine whetherNorth Carolinians should suer a greater regulatory bur-den than citizens in other states.

According to the EPA, about one-third o all states al-ready have no more stringent prohibitions that apply toat least some areas o state law.52 A strong no more strin-gent law would be an important component in develop-ing a better regulatory environment in North Carolina.53

Recent state regulations provide a great example o

why such a reorm is needed. In 2005, the United StatesEnvironmental Protection Agency (EPA) issued regula-tions that required coal-red power plants to reduce mer-cury emissions by 70 percent.

To put these regulations in context, they were the rstregulations ever issued in the United States that concernedcoal-red power plant mercury emissions.54 Furthermore,as a result o these regulations, the United States becamethe rst country in the world to regulate mercury emis-sions rom coal-red power plants.55

Environmental extremists in North Carolina, how-ever, were not satised. Instead, they pressured the statesEnvironmental Management Commission (EMC) toadopt even tougher standards. The EMC passed regula-tions, giving in to the environmental groups.56

To be very clear, the question is not whetherNorthCarolina should exceed ederal standards. The question iswho should decidei North Carolina exceeds ederal stan-dards, the legislature or political appointees and bureau-crats. Clearly, as a matter o good government, it shouldbe the legislature.

No more stringent laws are ar rom new in NorthCarolina. Between the 1970s and 90s, North Carolinaused them to prohibit state agencies rom exceeding ed-eral standards in numerous environmental areas.57 By the

mid-1990s, however, the environmental extremists suc-ceeded in repealing those protections.58

Why environmental groups preer that the legislaturenot make major policy decisions is not hard to under-stand. Those groups can capture relevant agencies and

commissions. It is much easier to infuence a small num-ber o unelected individuals, who oten have close con-nections to these environmental groups, than to convincea large number o legislators, who are also beholden tovoters. Also, because o the nature o the legislative pro-cess, it is dicult to get laws passed.

Opponents o no more stringent laws oten arguethat prohibiting state agencies rom exceeding ederalstandards would amount to the ederal government dic-tating the standards that would apply in the state, com-pletely ignoring the legislature (the actual lawmaking

body o the state).The General Assembly always could decide that the

state should have tougher standards. North Carolinasstate sovereignty is not violated because state bureaucratsor political appointees are prohibited rom deciding orthemselves that North Carolina should exceed ederalstandards.

North Carolina should apply no more stringent re-quirements to all laws, and at a minimum to environmental laws. The RRC should review all proposed regulations

to ensure agencies are meeting these requirements.

ConCLusion

The reorms discussed in this report would improvedecision-making by agencies, properly restrain agencypower, and help to ensure that agencies implement lawsas opposed to create laws. Unortunately, North Carolinahas been slow to adopt meaningul reorms comparedwith other states and even the ederal government theederal government is decades ahead o North Carolinawhen it comes to real regulatory reorm. The General As-

sembly should take action soon and develop a regulatoryprocess that eases the burdens on business and the econo-my, is mindul o liberty and the democratic process, andremains attentive to achieving real social benets.


14/17

1



enD notes1. For purposes o this report, whenever the word agencies areused in regards to North Carolina, it also encompasses state boardsand commissions. Also, the Council o State agencies do have elect-ed ocials, so to the extent those ocials can have nal say on thepromulgation o regulations, the unelected problem does not apply

or those select agencies.2. The legal denition o rule in the state Administrative Pro-cedure Act (APA) is broader than regulation (regulation is a sub-category o a rule); however, or the purposes o this report, ruleand regulation are used interchangeably, in keeping with commonusage, not the legal usage, o the terms.

3. Town o Spruce Pine v. Avery County, 123 N.C. App. 704(1996).

4. Chad Adams and John Hood, Unsteady Ground: A Survey oNorth Carolina Business Leaders on Competitiveness, Taxes, andReorm, John Locke Foundation Policy Report, November, 2005,http://www.johnlocke.org/acrobat/policyReports/unsteadyground_busns-

survey2005.pd.

5. Ibid.

6. N.C. Gen. Stat. 150B-1 et seq.

7. Ibid. The statutory section creating the Rules Review Commis-sion (RRC) is N.C. Gen. Stat. 143B-30.1, http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/BySection/Chapter_143B/GS_143B-30.1.html.

8. N.C. Gen. Stat. 143B-30.1(a).

9. N.C. Gen. Stat. 150B-21.9(a).

10. Ibid.

11. N.C. Gen. Stat. 150B-21.3(b1)-(b2).12. Op. cit., note 9.

13. North Carolina Board o Pharmacy v. The Rules Review Commis-sion, 174 N.C. App. 301 (2005), http://www.aoc.state.nc.us/www/public/coa/opinions/2005/040929-1.htm.

14. Ibid.

15. North Carolina Board o Pharmacy v. The Rules Review Commis-sion, No. 673A05, November 17. 2006, http://www.aoc.state.nc.us/www/public/sc/opinions/2006/673-05-1.htm.

16. N.C. Home Builders Assn v. Envtl. Mgmt. Commn (In re De-claratory Ruling by the Envtl. Mgmt. Commn, 155 N.C. App. 408

(2002).

17. Through discussions with RRC sta, it was claried that the oldregulatory process was in eect at the time o the EMC rule. There-ore, the EMC ignored the RRC decision applying this old processthat allowed such an action.

18. Op. cit., note 16.

19. Ibid.

20. Proposed Rule Amending 23 NCAC 02C .0301, North Caro-lina State Board o Community Colleges, North Carolina Register,Oct. 13, 2009, Vol. 24, No. 8, page 568-569, http://www.oah.state.

nc.us/rules/register/Volume24Issue08October152009.pd.

21. N.C. Gen. Stat. 115D-5(a).

22. Adams v. North Carolina Department o Natural and EconomicResources, 295 N.C. 683 (1978).

23. Dave Mason, Executive Order on Regulatory Review, Com

ments to the Oce o Management and Budget, March 16, 2009http://www.heritage.org/Research/Regulation/tst032309a.cm.

24. I an agency is simply implementing the specic requirements oa statute, then a rule should not be rejected i costs exceed benets.

25. Adrienne Dunn, Human Betterment League o North Carolina, North Carolina History Project, John Locke Foundation, http:/www.northcarolinahistory.org/encyclopedia/314/entry.

26. See, e.g., Exec. Order No. 12044, 43 Fed. Reg. 12661 (Mar. 241978). Exec. Order No. 12291, 46 Fed. Reg. 13193 (Feb. 19, 1981)Exec. Order No. 12866, 58 Fed. Reg. 51735 (Oct. 4, 1993).

27. Exec. Order No. 12291, 46 Fed. Reg. 13193 (Feb. 19, 1981).

28. Exec. Order No. 12044, 43 Fed. Reg. 12661 (Mar. 24, 1978).29. The APA does require scal notes, but in no way would thesnotes qualiy as cost-benet analyses. For example, the most extensiveanalysis deals with rules with a substantial economic impact; however, all that is required is a description o benets, not an analysisquantiying the benets. There is no requirement to identiy costsexcept or expenditures necessary or compliance.

30. According to discussions the author had with OSBM, it is possible that a rule with a substantial economic impact may not be asignicant rule change; however, such an outcome is unlikely. It isunclear what level o analysis would apply in such a situation.

31. State o North Carolina Budget Manual, Oce o State Budge

and Management, April 2009, page 172.

32. N.C. Gen. Stat. 150B-21.4(b1).

33. Fiscal Note Training, slide 10, Oce o State Budget andManagement, http://www.osbm.state.nc.us/les/pd_les/FiscalNoteTraining.pd.

34. Op. cit., note 31, page 174.

35. Ibid., page 175.




39. Ibid.

40. Frequently Asked Questions, U.S. Small Business Administration: Oce o Advocacy, September 2009, http://www.sba.gov/advostats/sbaq.pd.

41. Small Business Prole: North Carolina, U.S. Small BusinesAdministration: Oce o Advocacy, October 2009, http://www.sbagov/advo/research/proles/09nc.pd.

42. Ibid.

43. Ibid.


15/17

15



44. Ibid.

45. Small Business Regulatory Flexibility Model Legislation Initia-tive, U.S. Small Business Administration: Oce o Advocacy, Sep-tember 2005, http://www.sba.gov/advo/laws/law_modeleg.html.

46. Ibid.The SBA identies 42 states with regulatory fexibility analy-sis. Seven o those states, however, do not have small businessspecicregulatory fexibility analysis. Although regulatory fexibility analysisdoes not necessarily have to be small businessspecic, in this authorsopinion it should adjust regulatory requirements according to the sizeo businesses. For example, Marylands regulatory fexibility analysisis not small businessspecic but it does require agencies to considerthe impact o regulations based on the dierent sizes o businesses.

The other six states without small businessspecic regulatoryfexibility analysis did not have language that was comparable toMarylands. The number o states with regulatory fexibility analysisprobably should be 36, not 35, but to establish a bright line distinc-tion, I did not include Maryland in the number o states with regula-tory fexibility analysis.

47. Regulatory Flexibility Act o 1980, P. L. 96-354 codied at 15U.S.C. 601612, http://www.sba.gov/advo/laws/regfex.html.


49. Ibid.

50. Ibid.

51. Tenn. Code Ann. 4-5-226.

52. United States Environmental Protection Agency web page entitled State No More Stringent Laws, http://www.epa.gov/nps/elistudy/appendix.html.

53. EPA Announces First-Ever Rule to Reduce MercuryEmissions rom Power Plants, United States Environmen-tal Protection Agency press release, March 15, 2005, http://yosemite.epa.gov/opa/admpress.ns/b1ab9485b098972852562e7004dc68691ab7266e65751b985256c50067d9b0!OpenDocument.

54. Ibid.

55. Ibid.

56. North Carolina Administrative Code, 15A NCAC 02D .2503http://ncrules.state.nc.us/ncac/title%2015a%20-%20environment%20and%20natural%20resources/chapter%2002%20-%20environmenta%20management/subchapter%20d/15a%20ncac%2002d%20.2503.html.

57. Milton S. Heath, Jr. and Alex L. Hess, The Evolution o Modern North Carolina Environmental and Conservation Policy Legislation, 29 Campbell L. Rev. 535, Spring 2007.

58. Ibid.


16/17



aBoutthe authorDaren Bakst, J.D., LL.M., is the Director o Legal and Regulatory Studies or the John Locke Foundation. In

this position, he analyzes numerous public-policy issues aecting North Carolinians, including regulatory reormenvironmental and energy issues, and property rights. He regularly drats comments on regulatory proposals, pro-duces reports, and makes a wide range o media appearances and presentations to organizations. His op-eds have beenpublished in many newspapers in North Carolina and nationally in publications such as National Review OnlineandAmerican Enterprise Online.

Prior to joining the Locke Foundation, Bakst was Policy Counsel or the National Legal Center or the PublicInterest, a Washington, D.C., think tank that ocused primarily on business regulation. The organization recentlybecame part o the American Enterprise Institute, one o the oremost national think tanks in the country. He alsoworked in government relations in Washington, D.C., and ounded and still is president o the national non-prot

organization, Council on Law in Higher Education, which provides policy and legal analysis or colleges and universi-ties the organization is celebrating its 12th anniversary.

Bakst serves on the Federalist Societys Administrative Law and Regulations Executive Committee and is a mem-ber o the American Legislative Exchange Councils Natural Resources Task Force. He currently is an adjunct proessorteaching business law at Barton College in Wilson, N.C. A licensed attorney, Bakst earned his J.D. rom the Universityo Miami and his LL.M. in Law and Government rom American University, Washington College o Law. Both hisB.A. and M.B.A. are rom The George Washington University.

aBoutthe John LoCke founDation

The John Locke Foundation is a nonprot, nonpartisan policy institute based in Raleigh. Its mission is to developand promote solutions to the states most critical challenges. The Locke Foundation seeks to transorm state and lo-cal government through the principles o competition, innovation, personal reedom, and personal responsibility inorder to strike a better balance between the public sector and private institutions o amily, aith, community, andenterprise.

To pursue these goals, the Locke Foundation operates a number o programs and services to provide inormationand observations to legislators, policymakers, business executives, citizen activists, civic and community leaders, andthe news media. These services and programs include the oundations monthly newspaper, Carolina Journal; its dailynews service, CarolinaJournal.com; its weekly e-newsletter, Carolina Journal Weekly Report; its quarterly newsletterThe Locke Letter; and regular events, conerences, and research reports on important topics acing state and local

governments.The Foundation is a 501(c)(3) public charity, tax-exempt education oundation and is unded solely rom vol-

untary contributions rom individuals, corporations, and charitable oundations. It was ounded in 1990. For moreinormation, visit www.JohnLocke.org.


17/17

200 West Morgan St., #200Raleigh, NC 27601V: 919-828-3876; F: 919-821-5117

[email protected]

To prejudge other mens notionsbefore we have looked into themis not to show their darknessbut to put out our own eyes.

JOHN LOCKE (16321704)Author, Two Treatises of GovernmentandFundamental Constitutions of Carolina

Documents

Regulatory Reforms