Unfunded mandates - the regulatory problem.

Passage of the unfunded mandates act was hailed as victory for state and local governments. Now, however, it appears that federal agencies may be removing the bite from the law, tooth by tooth.

Each agency shall, unless otherwise prohibited by law, assess the effects of Federal regulatory actions on State, local, and tribal governments, and the private sector..."

- Title II, Sec. 201 Unfunded Mandates Reform Act of 1995

Passage of the Unfunded Mandates Reform Act in 1995 was hailed as an historic victory for state and local governments. No one claimed that it would halt the federal practice of imposing regulations without funding. But, by requiring an estimate of the cost to state and local governments to accompany legislation imposing new mandates, it would at least make it more difficult, forcing the issue into the open and making cost consideration part of the discussion when new laws are debated.

Concern over federal mandates was never limited to Congress. Frequently, battles won in the legislative struggle would be overturned by agency rules. Having dissuaded Congress from imposing a particular mandate (or imposing it in a certain way), state and local officials might find the same objectionable provision included later on by the agency issuing regulations for the new statute. Thus, it was important for states that the executive branch be included under the law.

Title II of the act took aim at regulatory mandates by imposing a "fiscal note" requirement on agencies. They, too, would have to publish estimates of the costs to state and local governments when promulgating new rules. The president's Office of Management and Budget (OMB) would have to report annually on agency compliance. So how's it working? The results so far are underwhelming.

Two years after its enactment, the mandates reform law seems to have had less impact on federal agencies than it has had on Congress. Whereas the point-of-order provisions have been invoked and (perhaps more importantly) threatened on a number of occasions, to this point OMB has named only two proposed regulations as imposing federal mandates on state or local governments. (Another 27 have been identified with private sector mandates.)

To some it appears that federal agencies are taking the bite out of the law, tooth by tooth. Of course, it's possible that federal agencies have gotten religion on unfunded mandates and ceased issuing them. Some observers argue that the terms of the law are not well-defined, making compliance difficult to determine. In any case, it seems that an important part of the protections that states thought they were winning in mandate reform may never take hold without further congressional action.

A brief examination of the complexities of implementing the law's Title II provisions reveals some of the reasons for the small number of regulations to which it has been applied.

THE LAW AND FEDERAL AGENCIES

UMRA does not prevent regulations that may impose unfunded mandates. As with the congressional provisions, the intent of the law is procedural. Title II of the act imposes requirements on agencies before the issuance of a notice of proposed rulemaking that may result in an unfunded mandate. For regulatory actions likely to impose costs of $100 million or more, agencies must provide Congress with an estimate of the costs and benefits of the mandate, including costs to state and local governments. This includes an estimate of future compliance costs and any disproportionate budgetary impact upon any region, state or locality.

Title II also requires the agency to "develop an effective process" to permit state and local elected officials to provide "meaningful and timely input in the development of regulatory proposals containing significant federal intergovernmental mandates."

Before promulgating any rule, agencies are required to identify a number of alternatives and select from among them the one that is least costly, most cost-effective or least burdensome for state and local governments.

In many ways the law complements Executive Order 12866, issued by President Clinton in 1993, which requires the Office of Management and Budget to assess the impact of "economically significant" regulations. (Of more than 1,000 regs of all kinds reviewed by OMB in fiscal years '95 and '96, only 160 were found to be economically significant.) Several hurdles must be overcome to identify a regulation at a mandate on state and local governments for which the act's requirements apply. First, it must pass the "economic significance" test - that is, it must force expenditures of $100 million or more. Those that do pass this high hurdle may still be eliminated on several other grounds. If the regulation is tied to federal money as a condition of aid, then it is not counted as a mandate. And, if there is "any other provision of law" that requires the activity, the requirements of Title II may be waived.

The broad sweep of these principles suggests that there are likely to be many proposed regulations that look like mandates to state and local officials, but which OMB will classify as exempt from the unfunded mandate law's requirements.

THE EPA EXAMPLE

Recent action by the Environmental Protection Agency provides a case in point. Pursuant to the Clean Air Act, EPA has issued proposed changes to ambient air quality standards for ozone and particulate matter. The standards themselves are a matter of controversy. (NCSL has not taken a position on the actual standards.)

There can be little doubt that implementing the new standards will involve substantial costs for state and local governments. Among other things, states will be required to install new air quality monitoring stations (with financial assistance from EPA) and make modifications to their implementation plans. Under the new regs there may be many new nonattainment areas, with accompanying requirements, that may include new restrictions on commuters and tougher requirements for vehicle inspection and maintenance. It is equally clear that the standards will affect certain parts of the country more than others due to the location of emission sources that will cause the standards to be exceeded.

Yet EPA, supported by the Office of Management and Budget, maintains that Title II provisions of the mandate relief law do not apply. Seeing a conflict between UMRA and the requirements imposed on them by the Clean Air Act, EPA argues, essentially, that the new clean air regulations are excused from the law because of the "any other provision of law" test. EPA points out that, under the Clean Air Act, they may not consider the results of cost-benefit analysis in setting the air quality standard; costs will be considered, instead, in the implementation process. Therefore, they argue that the agency is exempt from performing the analysis in the first place. In other words, since the Clean Air Act gives them their marching orders, the Unfunded Mandates Reform Act is swept aside.

It is not hard to imagine other agencies making similar cases to the budget office, appealing to "other provisions of law." This may partly account for the minuscule number of regulations thus far identified as imposing new intergovernmental mandates.

CONGRESS TO THE RESCUE?

The essential purpose of the mandate reform legislation was not necessarily to stop regulations from being implemented, but to force consideration of the intergovernmental impacts before they are enacted, to make the process more honest and open. If members of Congress mean to impose an unfunded mandate on state and local governments, their intentions should be explicit, and their votes on the record. If regulations are proposed that would have the same effect, the promulgation should promote discussion of the intergovernmental implications. This is the spirit of the mandate reform law. If OMB and federal agencies can define themselves out of the law, they will have effectively thwarted that purpose for the executive branch.

Will Congress quietly accept the regulatory gutting of its mandate reform law? Senator Fred Thompson of Tennessee, chairman of the Governmental Affairs Committee, and Senator John Glenn of Ohio, the ranking minority member, have requested a Government Accounting Office study of the implementation of Title II of UMRA. Findings later this year may determine what congressional action if any may be necessary.

In the meantime, precedents being established today may govern agency behavior well into the future, and perhaps determine whether the mandates relief act will ever be a significant factor in regulatory mandates on state and local governments.

Christopher Zimmerman is NCSL's chief economist.