State agencies have frequently ignored the financial impacts of proposed regulations on small businesses, in violation of state law. That was the big take-away from a recent State Auditor’s Office (SAO) audit that examined 331 proposed rules affecting Washington employers in 2014 and 2015.
The state probe was one of several almost extinguished before birth in a proposed raid last year by Governor Jay Inslee and lawmakers on performance audit funding. However, endgame 2016 supplemental budget negotiations yielded enough money for it to go forward.
Among other things, SAO in the audit took state agencies to task for failing to justify nearly half of exemptions made to a state law, The Regulatory Fairness Act (RFA). It is intended to ensure small businesses are protected from potentially onerous regulatory costs, through issuance of a Small Business Economic Impact Statement, or SBEIS.
Warning Of Hiring Impacts
The SAO audit warned that “failure to recognize differences in the scale and resources of regulated businesses can adversely affect competition in the marketplace, discourage innovation, and restrict employment opportunities.”
SAO has offered what it says are low-cost recommendations to correct the problem, while Inslee has proposed a new work group to examine possible changes to state law. One state lawmaker plans to introduce a bill this session to ensure better state agency accountability, based on SAO’s recommendations. Other legislation on rule-making is already in the pipeline.
Too Many Small Business Regulations
In 2015, small companies (those with fewer than 50 employees) constituted 96 percent of Washington businesses, according to SAO. Almost half of Washington’s private sector employees work for a small business.
However, a July study that same year by the Pacific Research Institute ranked Washington at the top nationally for most burdensome state regulatory structures for small businesses.
The impact of state rule-making is felt by many, including homebuilders and buyers, and farmers. There are more than 22,000 pages of state agency regulations, and there were 1,046 rules adopted in 2015.
State Rep. Norma Smith (R-12) intends to introduce a bill this session that would “improve the regulatory climate” for small businesses by addressing the problems highlighted in the SAO audit.
“The RFA was enacted to protect small businesses from burdensome regulations, so it’s troubling state agencies are so often disregarding this important law,” said Smith in a statement. Smith said she hopes to learn if state agencies have been trying to work around the SBEIS requirement of RFA, to avoid economic mitigation costs.
“We don’t have many tools in our arsenal that compel state agencies to respect small businesses,” added Smith. “This is one of them, however, and I will do everything in my power to ensure these agencies are complying with state law. We will get this cleaned up for the citizens of Washington state.”
State Agencies: We’re Exempt, But Don’t Know Why
The RFA was passed by the state legislature in 1982 and requires that state agencies evaluate how a proposed rule will impact small businesses. If it is expected to add more than minor costs, the agency must release an SBEIS demonstrating whether or not the rule will have a disproportionate financial impact to smaller employers, versus larger companies. If so, the proposed rule must include compliance cost mitigation.
The SAO audit found that of the 25 proposed rules that did include an economic impact statement, only seven were done fully according to RFA rules. As well, state agencies claimed an exemption to RFA’s economic impact statement requirement for 127 of the 331 proposed rules. Only half of those 127 rules referenced a specific exemption in RFA. Even when specific exemptions were claimed, the audit found inconsistency in how state agencies interpreted them.
Takko: Law Is Too Vaguely Written
While Smith questions whether there was a “concerted effort” by state agencies to avoid full RFA compliance, State Sen. Dean Takko (D-19) says the law is written “vaguely enough it could be interpreted a lot of ways.”
The SAO audit recommendations include clarifying RFA exemptions and modifying the proposed rule form used by agencies, two ideas that Takko supports.
“Have it pretty much (say) in statute, ‘Here is what you will use,’ so there isn’t ambiguity,” Takko said.
The audit also recommended better RFA compliance training for state workers, noting that “few agencies give employees complete and accurate guidance or templates.”
Inslee’s Office of Financial Management Director David Schumacher, in an agency response within the audit, said any changes to RFA at this time would be “premature.” Inslee has proposed a work group comprised of state rule-making agencies, small business customers, and other stakeholders to discuss the impacts of RFA reforms.
Schumacher added that “agencies must strike a balance between maintaining the intent of regulations mandated by law and limiting the costs to business.”
A House bill sponsored by State Rep. David Taylor (R-15) seeks to eliminate the state rule-making process “except in certain specified instances.” It has been pre-filed but not yet assigned a committee.
The latest SAO report is not the first to raise concerns about the impact of rule-making on Washington employers. A 2015 state performance audit urged agencies to shrink and unify business rules and regulations.