Briefing Report: The Mountain Brought Forth a Mouse

The 2011 regulatory reform legislation was but a small step towards reforming California’s broken regulatory system
Wednesday, January 25, 2012

"A mountain was in labour, sending forth dreadful groans, and there was in the region the highest expectation. After all, it brought forth a mouse."[1]  – Phædrus (c. 15 BC – c. AD 50)

In the waning days of the 2011 legislative session, members of the Senate Democratic Caucus introduced a measure implementing what it characterized as “major” regulatory reform. Senate Bill 617, jointly authored by Senators Calderon and Pavley, was touted as the answer to the, “[P]erception state government is too complex, the permit process is too burdensome, and that it simply takes too long for businesses to get started and expand in California.”[2]   Great expectations abounded as major business groups such as the California Chamber of Commerce (Cal-Chamber) and California Manufacturing and Technology Association (CMTA) offered their support. Was the legislative majority finally acknowledging that California’s regulatory system was out of control and needed an overhaul? Alas, the old allegory by the Roman fabulist, Phædrus, “[W]as now made good. ‘The mountain had brought forth a mouse.’”[3]

Mounting pressure

Senate Republicans had presented an entire package of substantive regulatory reform legislation during the 2011 Legislative Session to address the systemic flaws with the existing regulatory regime in this state. These were serious measures to not only help bring the burdensome regulatory process under control and make it more responsive to the needs of Californians but, also, to review, modify, and eliminate obsolete, duplicative, and conflicting regulations already on the books. Clearly, any serious regulatory reform effort needs to include a review of existing regulations – not just tinkering with the drafting process. Unfortunately, none of these measures were allowed to survive the House of Origin.

Along with a significant segment of California’s remaining business community, Senate Republicans supported SB 617’s unpretentious effort with the notion that some reform, no matter how small, was better than none at all. It did, after all, contain some good elements – things that many stakeholders had long wanted as part of the regulatory drafting process.  These elements included instating an economic analysis procedure for regulatory changes that requires agencies to perform a “Standardized Regulatory Impact Analysis” (SRIA) for major regulations (defined as those with an economic impact of $50 million or more) and an “Economic Impact Assessment” (EIA) for minor regulations. It requires “alternative assessments” for accepting/rejecting alternatives considered by the agency that could be more effective in carrying out the purpose of the proposed regulatory change. These were developments business had sought for years. SB 617 was coupled with Assembly Bill 29 by Speaker Perez which establishes the Office of Business and Economic Development to serve as the lead entity for economic strategy relating to business development, private sector investment and economic growth.

Despite being murine-like, SB 617’s emergence was clear evidence that significant pressure had come to bear on the Legislature’s ruling majority party to do something about the increasingly imperious regulatory system. It was viewed as a positive step forward – a small step but, a step in the direction of at least getting the regulatory reform discussion under way in California. However, by no means was it an all-encompassing solution to the very complex and burdensome regulatory process that hinders business development in this state. Indeed, many further efforts in this regard are still needed as this bill fell far short of real, substantive reform.

Failures and flaws

When a bureaucracy comes along and uses the strong-arm of government to impose new rules on business, it is only right that it generates a thorough and reliable fiscal analysis of the economic impact of that regulation if implemented. This is especially the case when the economic impact is believed to be more than $50 million statewide. An economic impact of this nature is, in essence, a tax on businesses which, inevitably, is passed on to the consumer in the form of higher prices.

But, the beefed-up “Standardized Regulatory Impact Analysis” created by the bill are required to include “non-monetary” considerations such as, “protection of public health, safety, the environment, prevention of discrimination, promotion of fairness or social equity and the increase in openness and transparency in business and government amongst other things”. Therefore, when considering a potential regulation, the regulating entity will weigh the economic costs against the "non-monetary" impacts such as "social equity". Determining "social equity", for instance, is a highly subjective and often emotional criterion. As for "protection of public health, safety, and the environment," an argument can be made that every regulation has been established to protect public health, safety, and the environment. Any effort to stop the implementation of a regulation, limit its applicability, or take advantage of the “alternatives” section of the bill could be undermined by this provision, alone. In any regard, this language severely weakens the impact of the measure.

Perhaps more notable about this bill is what it lacks rather than what it contains. It lacks any sort of systematic review of existing regulations for duplication and overlap which is the major problem facing the regulated community. The time has come to re-examine the entire California Code of Regulations to improve the performance and quality of service delivery in government. Yet, it makes no attempt at this critical component of regulatory reform. Nor is there any attempt at streamlining the vast and convoluted permitting process that plagues business growth and activity in this state. In the past, California has implemented successful permitting simplification systems that could be used as models, such as "one stop permitting shop" that was established following the Loma Prieta Earthquake. It is an established fact that such a model works and should be implemented again.

Businesses are impacted by local, state, and federal regulations. Regulatory reform is needed at all three levels to ensure that small businesses are not unduly burdened by unnecessary regulation. When drafting and proposing new regulations, agencies should consider the cumulative impact of all three levels of regulation and try to ensure that state regulations do not overlap or duplicate those already in effect from other jurisdictions. The state should pursue comprehensive reviews of rules and regulations to initiate reform efforts that harmonize state and federal regulations to reduce compliance burdens, or providing waivers or variances.

Enactment of SB 617 will give business some additional input during the regulation drafting phase. Indeed, it appears to inoculate some reform on the absurd power of government regulating agencies by beefing-up the economic impact analyses of proposed regulations and requiring agencies to explain why alternatives offered by stakeholders are not acceptable. But the process is compromised by “mitigating” language that requires agencies to weigh the “non-monetary” benefits such as “fairness and social equity” against the economic impacts or proposed alternatives.

Substantive legislation that should be enacted

Senate Republicans have offered real and substantive regulatory reform ideas for improving the business environment in this state with an eye on creating more jobs in a stable economy. The following concepts should also be enacted:

Why not provide for a perpetual review process to clean up the regulatory codes similar to Senator Huff’s SB 396, which would have required an ongoing regulatory review process to review all regulations that are at least 20 years old and have not been reviewed in 10 years?

Why not require all regulations promulgated by any state agency include a “sunset” provision repealing the regulation after a certain period of time in order to give regulators and the regulated community the opportunity to review the regulation’s impact and continued need as suggested by Senator Fuller in her SB 401?

Why not require agencies, before adopting regulations, to consider all the possibilities that both implement statute and do no harm to the business climate? Wouldn’t it be better to have agencies justify their reasons why a stakeholder process would be inferior to their process? Any regulatory review process would only benefit from more eyes and input on proposed rules and regulations. Why not provide for an entity tasked with overseeing the analyses and giving more “teeth” to the current Administrative Procedure Act process as was contemplated in Senator Blakeslee’s SB 353?

Why not allow for a third-party review and analysis of agency assessments as was dealt with the Republican regulatory proposal, SB 196 by Senators Cannella, Berryhill, Emmerson, and Harman? It is not enough for agencies to complete these analyses without strict guidelines and oversight. For the economic impact analysis to be effective, it must be thorough, transparent, and reviewed.

Why not require state agencies to analyze the potential for adverse economic impact on California business enterprises and individuals for any proposed new or amendments to regulations as suggested by Senator Dutton in SB 400?

Why not allow the regulated community to have additional time to prepare for the imposition of a new or amended regulation as Senator Fuller proposed in SB 553, which would have delayed the implementation of regulations with a $10 million or more impact until 180 days after it is filed with the Secretary of State, rather than after 30 days as is current law?

A mouse can roar…

Looking on the bright side, California’s regulated community may experience greater input into the regulatory process, perhaps diluting the dilatory economic impacts of some regulations that could allow them the ability to create and retain meaningful jobs for Californians. For business, the California regulatory process is unpredictable at best and paralyzing at worst. With proper reform, such as that suggested by Senate Republicans, businesses could find more certainty in the California business climate. As noted above, the 2011 effort should be viewed as only a first, tiny step – certainly not the ultimate solution – to the regulatory quagmire in California. The fear is that Democrats might claim to have solved the problem and that there is no need to revisit this issue in the future. The opposite could not be truer.

Although, by no means can they claim to have solved the state's regulatory problem with a mouse, such efforts by our Democratic colleagues need to be encouraged. With a little bit of luck and positive reinforcement, they may start to understand the folly of over-regulation and bureaucratization that we Republicans have recognized for years and curse of Phædrus’s fable will be overcome.

For more information on this report or other Governmental Organization issues, contact Richard Paul, Senate Republican Office of Policy at 916/651-1501.

[1] Phædrus: Fables, “The Mountain in Labour”, Book IV: 22, 1.

[2] Press release: “Steinberg, Pérez Announce Major Agreement with Business Leaders on Regulatory Reform and New Office of Business and Economic Development”, September 1, 2011

[3]   Plutarch “Lives” AD 95-120. The ‘Dryden Translation’, 1683.