Regulatory Flexibility Act: Key Terms Still Need to Be Clarified
(24-APR-01, GAO-01-669T).
The Regulatory Flexibility Act of 1980 (RFA) requires federal
agencies to examine the impact of their proposed and final rules
on small businesses, small governmental jurisdictions, and small
organizations and to solicit the ideas and comments of such
entities for this purpose. Specifically, whenever agencies are
required to publish a notice of proposed rulemaking, the RFA
requires agencies to prepare an initial and a final regulatory
flexibility analysis. However, the RFA also states that those
analytical requirements do not apply if the head of the agency
certifies that the rule will not have a ''significant economic
impact on a substantial number of small entities.'' The Small
Business Regulatory Enforcement Fairness Act of 1996 was enacted
to strengthen the RFA's protections for small entities, and some
of the act's requirements are built on this significant impact
determination. Although both of these reform initiatives have
clearly affected how federal agencies regulate, their full
promise has not been realized. The RFA does not define what
Congress meant by the terms ''significant economic impact'' and
''substantial number of small entities'' and does not give any
entity the authority or responsibility to define them
governmentwide. As a result, agencies have had to construct their
own definitions, and those definitions vary.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-669T
ACCNO: A00882
TITLE: Regulatory Flexibility Act: Key Terms Still Need to Be
Clarified
DATE: 04/24/2001
SUBJECT: Environmental legislation
Agency proceedings
Economic analysis
Proposed legislation
Reporting requirements
Small business assistance
EPA Toxic Release Inventory
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GAO-01-669T
GAO United States General Accounting Office
Testimony Before the Committee on Small Business U. S. Senate
For Release on Delivery Expected at 9: 30 a. m., EDT
on Tuesday April 24, 2001
REGULATORY FLEXIBILITY ACT Key Terms Still Need to Be Clarified
Statement of Victor Rezendes, Managing Director, Strategic Issues Team
GAO- 01- 669T
Page 1 GAO- 01- 669T
I am pleased to be here today to discuss the implementation of the
Regulatory Flexibility Act of 1980 (RFA), as amended, and the Small Business
Regulatory Enforcement Fairness Act of 1996 (SBREFA). 1 As you requested, I
will discuss our work on the implementation of these two
statutes in recent years, with particular emphasis on a report that we
prepared for this committee last year on the implementation of the acts by
the Environmental Protection Agency (EPA).
The RFA requires federal agencies to examine the impact of their proposed
and final rules on “small entities” (small businesses, small
governmental jurisdictions, and small organizations) and to solicit the
ideas and
comments of such entities for this purpose. Specifically, whenever agencies
are required to publish a notice of proposed rulemaking, the RFA requires
agencies to prepare an initial and a final regulatory flexibility analysis.
However, the RFA also states that those analytical requirements do not apply
if the head of the agency certifies that the rule will not have a
“significant economic impact on a substantial number of small
entities,” or what I will- for the sake of brevity- term a
“significant impact.” SBREFA
was enacted to strengthen the RFA's protections for small entities, and some
of the act's requirements are built on this “significant impact”
determination. For example, one provision of SBREFA requires that before
publishing a proposed rule that may have a significant impact, EPA and the
Occupational Safety and Health Administration must convene a small business
advocacy review panel for the draft rule, and collect the advice and
recommendations of representatives of affected small entities about the
potential impact of the draft rule. 2 We have reviewed the implementation of
the RFA and SBREFA several
times during recent years, with topics ranging from specific provisions in
each statute to the overall implementation of the RFA. Although both of
these reform initiatives have clearly affected how federal agencies
regulate, we believe that their full promise has not been realized. To
achieve that promise, Congress may need to clarify what it expects the
agencies to do with regard to the statutes' requirements. In particular,
Congress may need to clearly delineate- or have some other organization
delineate- what is meant by the terms “significant economic
impact” and “substantial number
of small entities.” The RFA does not define what Congress meant by
these 1 The RFA is codified at 5 U. S. C. 601- 612 and took effect on
January 1, 1981. 2 This provision of SBREFA is codified at 5 U. S. C. 609
and took effect on June 29, 1996.
Page 2 GAO- 01- 669T
terms and does not give any entity the authority or responsibility to define
them governmentwide. As a result, agencies have had to construct their own
definitions, and those definitions vary. Over the past decade, we have
recommended several times that Congress provide greater clarity with regard
to these terms, but to date Congress has not acted on our recommendations.
The questions that remain unanswered are numerous and varied. For example,
does Congress believe that the economic impact of a rule should be measured
in terms of compliance costs as a percentage of businesses' annual revenues
or the percentage of work hours available to the firms? If so, is 3 percent
(or 1 percent) of revenues or work hours the appropriate definition of
“significant?” Should agencies take into account the
cumulative impact of their rules on small entities, even within a particular
program area? Should agencies count the impact of the underlying statutes
when determining whether their rules have a significant impact? What should
be considered a “rule” for purposes of the requirement in the
RFA that the agencies review rules with a significant impact within 10 years
of their promulgation? Should agencies review rules that had a significant
impact at the time they were originally published, or only those that
currently have that effect? These questions are not simply matters of
administrative conjecture within the agencies. They lie at the heart of the
RFA and SBREFA, and the answers to the questions can have a substantive
effect on the amount of regulatory relief provided through those statutes.
Because Congress did not answer these questions when the statutes were
enacted, agencies have had to develop their own answers. If Congress does
not like the answers that the agencies have developed, it needs to either
amend the underlying statutes and provide what it believes are the correct
answers or give some other entity the authority to issue guidance on these
issues.
Page 3 GAO- 01- 669T
Proposed EPA Lead Rule
The implications of the current lack of clarity with regard to the term
“significant impact” and the discretion that agencies have to
define it were clearly illustrated in a report that we prepared for this
committee last year. 3 One part of our report focused on a proposed rule
that EPA published in August 1999 that would, upon implementation, lower
certain reporting thresholds for lead and lead compounds under the Toxics
Release Inventory program from as high as 25, 000 pounds to 10 pounds. 4 EPA
estimated that approximately 5,600 small businesses would be affected by the
rule, and that the first- year costs of the rule for each of these small
businesses would be between $5, 200 and $7, 500. EPA said that the total
cost of the rule in the first year of implementation would be about $116
million. However, EPA certified that the rule would not have a significant
impact, and therefore did not trigger certain analytical and procedural
requirements of the RFA.
Mr. Chairman, last year you asked us to review the methodology that EPA used
in the economic analysis for the proposed lead rule and describe key aspects
of that methodology that may have contributed to the agency's conclusion
that the rule would not have a significant impact. You also asked us to
determine whether additional data or analysis could have yielded a different
conclusion about the rule's impact on small entities. Finally, you also
asked us to describe and compare the rates at which EPA's
major program offices certified that their substantive proposed rules would
not have a significant impact. We did not examine whether lead was a
persistent bioaccumulative toxic or the value of the Toxics Release
Inventory program in general.
EPA's current guidance on how the RFA should be implemented gives the
agency's program offices substantial discretion with regard to certification
decisions but also provides numerical guidelines to help define what
constitutes a significant impact. For example, the guidance indicates that a
rule should be presumed eligible for certification as not having a
significant impact if it does not impose annual compliance costs amounting
to 1 3 Regulatory Flexibility Act: Implementation in EPA Program Offices and
Proposed Lead Rule (GAO/ GGD- 00- 193, Sept. 20, 2000).
4 The proposed lead rule was published at 64 Fed. Reg. 42222 (1999). Toxics
Release Inventory reporting is required by section 313 of the Emergency
Planning and Community Right- to- Know Act of 1986 (EPCRA) (42 U. S. C.
11001- 11050, 11023). Reporting is also required under the Pollution
Prevention Act of 1990 (42 U. S. C. 13101- 13109, 13106), which added
reporting requirements to EPCRA's reporting requirements in 1991.
Page 4 GAO- 01- 669T
percent of estimated annual revenues on any number of small entities.
However, if those compliance costs amount to 3 percent or more of revenues
on 1, 000 or more small entities, the guidance indicates that the
program office should presume that the rule is ineligible for certification.
These numerical guidelines establish what appears to be a high threshold for
what constitutes a significant impact. For example, an EPA rule could
theoretically impose $10,000 in compliance costs on 10, 000 small
businesses, but the guidelines indicate that the agency can presume that
the rule does not trigger the requirements of the RFA as long as those costs
do not represent at least 1 percent of the affected businesses' annual
revenues. The guidance does not take into account the profit margins of the
businesses involved. Therefore, if the profit margin in the affected
businesses is less than 5 percent, the costs required to implement a rule
could conceivably take one- fifth of that profit and, under EPA's
guidelines,
still not be considered to have a significant impact. Neither does the
guidance take into account the cumulative impact of the agency's rules on
small businesses. Therefore, if EPA issued 100 rules, each of which imposed
compliance costs amounting to one- half of 1 percent of annual sales on
10,000 businesses, the agency could certify each of the rules as not having
a significant impact even though the cumulative impact amounted to 50
percent of the affected businesses' revenues. Consideration of cumulative
regulatory impact is not even required within a particular area like the
Toxics Release Inventory program. Each toxic substance added to
the approximately 600 substances already listed in the program, or each
change in the reporting threshold for a listed toxin, constitutes a separate
regulatory action under the RFA.
An agency's conclusions about the impact of a rule on small entities can
also be driven by the agency's analytical approach. In its original economic
analysis for the proposed lead rule, EPA made a number of assumptions that
clearly contributed to its determination that no small entities would
experience significant economic effects. For example, to estimate the annual
revenues of companies expected to file new Toxics Release Inventory reports
for lead, EPA assumed that (1) the new filers would have employment and
economic characteristics similar to current filers, (2) different types of
manufacturers would experience similar economic effects, and (3) the
revenues of the smallest manufacturers covered by the proposed rule could be
exemplified by the firm at the 25 th percentile of the agency's projected
revenue distribution for small manufacturers. As a result of these and other
assumptions, EPA estimated that the smallest manufacturers affected by the
proposed lead rule had annual revenues of
Page 5 GAO- 01- 669T
$4 million. Using that $4 million revenue estimate and other information,
EPA concluded that none of the 5,600 small businesses would experience
first- year compliance costs of 1 percent or more of their annual revenues.
Therefore, EPA certified that the proposed lead rule would not have a
significant impact.
EPA revised these and other parts of the economic analysis for the proposed
lead rule before submitting it to the Office of Management and Budget (OMB)
for final review in July 2000. According to a summary of the draft revised
economic analysis that we reviewed, EPA changed several analytic assumptions
and methods, and revised its estimates of the rule's
impact on small businesses. Specifically, the agency said that the lead rule
would affect more than 8,600 small companies (up from about 5,600 in the
original analysis), and as many as 464 of them would experience first- year
compliance costs of at least 1 percent of their annual revenues (up from
zero in the original estimate). Nevertheless, EPA again concluded that the
rule would not have a significant impact. During our review, we discovered
that the agency's revised estimate of the number of small companies that
would experience a 1 percent economic impact was based on only 36 of the
69 industries that the agency said could be affected by the rule. EPA
officials said that the other 33 industries were not included in the
agency's estimate because of lack of data.
We attempted to provide a more complete picture of how the lead rule would
affect small businesses by estimating how many companies in these missing 33
industries could experience a first- year economic impact of at least 1
percent of annual revenues. We obtained data from the Bureau of the Census
for 32 of these 33 industries and estimated that as many as 1,098 additional
small businesses could experience this 1- percent effect. If EPA had used
this analytic approach in combination with its own studies, it would have
concluded that as many as 1,500 small businesses would
experience compliance costs amounting to at least 1 percent of annual
revenues. Therefore, using its own guidance, EPA could have concluded that
the rule should not be certified, prepared a regulatory flexibility
analysis, and convened an advocacy review panel for the rule. However, we
ultimately concluded that the agency's initial and revised analyses and
the conclusions that it based on those studies were within the broad
discretion that the RFA and the EPA guidance provided in determining what
constituted a “significant economic impact” on a
“substantial number of small entities.”
Page 6 GAO- 01- 669T
In the final lead rule that EPA published in January 2001, EPA set the new
reporting threshold for lead at 100 pounds- up from 10 pounds in the
proposed rule. 5 However, just as it did for the proposed rule, EPA
concluded that the final rule would not have a significant impact. EPA said
that it reached this conclusion because it did not believe the rule would
have a significant economic impact (defined as annual costs between 1 and 3
percent of annual revenues) on more than 250 of the 4,100 small businesses
expected to be affected by the rule. EPA also illustrated what it viewed as
nonsignificant impact in terms of work hours. The agency said
that it would take a first- time filer about 110 hours to fill out the form.
Because the smallest firm that could be affected by the rule must have at
least 20, 000 labor hours per year (10 employees times 50 weeks per year
per employee times 40 hours per week), EPA said that the 110 hours required
to fill out the Toxics Release Inventory form in the first year represents
only about one- half of 1 percent of the total amount of time the
firm has available in that year. EPA' determination that the proposed lead
rule would not have a significant impact on small entities was not unique.
Its four major program offices certified about 78 percent of the substantive
proposed rules that they published in the 2 1/ 2 years before SBREFA took
effect in 1996 but certified
96 percent of the proposed rules published in the 2 1/ 2 years after the
act's implementation. In fact, two of the program offices- the Office of
Prevention, Pesticides and Toxic Substances and the Office of Solid
Waste- certified all 47 of their proposed rules in this post- SBREFA period
as not having a significant impact. The Office of Air and Radiation
certified 97 percent of its proposed rules during this period, and the
Office of Water certified 88 percent. EPA officials told us that the
increased rate of certification after SBREFA's implementation was caused by
a change in the
agency's RFA guidance on what constituted a significant impact. Prior to
SBREFA, EPA's policy was to prepare a regulatory flexibility analysis for
any rule that the agency expected to have any impact on any small entities.
The officials said that this guidance was changed because the SBREFA
requirement to convene an advocacy review panel for any proposed rule that
was not certified made the continuation of the agency's more inclusive RFA
policy too costly and impractical. 5 66 Fed. Reg. 4500 (2001).
Page 7 GAO- 01- 669T
Previous Reports On the RFA and SBREFA
We have issued several other reports in recent years on the implementation
of the RFA and SBREFA that, in combination, illustrate both the promise and
the problems associated with the statutes. For example, in 1991, we
examined the implementation of the RFA with regard to small governments and
concluded that each of the four federal agencies we reviewed had a different
interpretation of key RFA provisions. 6 We said that the act allowed
agencies to interpret when they believed their proposed regulations affected
small government, and recommended that Congress consider amending the RFA to
require the Small Business Administration (SBA) to develop criteria
regarding whether and how to conduct the required analyses.
In 1994, we noted that the RFA required the SBA Chief Counsel for Advocacy
to monitor agencies' compliance with the act. 7 However, we also said that
one reason for agencies' lack of compliance with the RFA's requirements was
that the act did not expressly authorize SBA to interpret key provisions in
the statute and did not require SBA to develop criteria for agencies to
follow in reviewing their rules. We said that if Congress wanted to
strengthen the implementation of the RFA, it should consider amending the
act to (1) provide SBA with clearer authority and responsibility to
interpret the RFA's provisions, and (2) require SBA, in consultation with
OMB, to develop criteria as to whether and how federal agencies should
conduct RFA analyses. 6 Regulatory Flexibility Act: Inherent Weaknesses May
Limit Its Usefulness for Small Governments (GAO/ HRD- 91- 61, Jan. 11,
1991). 7 Regulatory Flexibility Act: Status of Agencies' Compliance (GAO/
GGD- 94- 105, Apr. 27, 1994).
Page 8 GAO- 01- 669T
In our 1998 report on the implementation of the small business advocacy
review requirements in SBREFA, we said that the lack of clarity regarding
whether EPA should have convened panels for two of its proposed rules
was traceable to the lack of agreed- upon governmentwide criteria as to
whether a rule has a significant impact. 8 Nevertheless, we said that the
panels that had been convened were generally well received by both the
agencies and the small business representatives. We also said that if
Congress wished to clarify and strengthen the implementation of the RFA
and SBREFA, it should consider (1) providing SBA or another entity with
clearer authority and responsibility to interpret the RFA's provisions and
(2) requiring SBA or some other entity to develop criteria defining a
“significant economic impact on a substantial number of small
entities.” In 1999, we noted a similar lack of clarity regarding the
RFA's requirement that agencies review their existing rules that have a
significant impact within 10 years of their promulgation. 9 We said that if
Congress is concerned that this section of the RFA has been subject to
varying interpretations, it may
wish to clarify those provisions. We also recommended that OMB take certain
actions to improve the administration of these review requirements, some of
which have been implemented. Last year we convened a meeting at GAO on the
rule review provision of the RFA, focusing on why the required reviews were
not being conducted. Attending that meeting were representatives from 12
agencies that appeared to issue rules with an impact on small entities,
representatives
from relevant oversight organizations (e. g., OMB and SBA's Office of
Advocacy), and congressional staff from the House and Senate Committees on
Small Business. The meeting revealed significant differences of opinion
regarding key terms in the statute. For example, some agencies did not
consider their rules to have a significant impact because they believed the
underlying statutes, not the agency- developed regulations, caused the
effect on small entities. There was also confusion regarding whether the
agencies were supposed to review rules that had a significant impact on
small entities at the time the rule was first published in the Federal
Register or those that currently have such an impact. It was not even clear
what should be considered a “rule” under RFA's rule review
requirements-
the entire section of the Code of Federal Regulations that was affected by 8
Regulatory Reform: Implementation of the Small Business Advocacy Review
Panel Requirements (GAO/ GGD- 98- 36, Mar. 18, 1998). 9 Regulatory
Flexibility Act: Agencies' Interpretations of Review Requirements Vary (GAO/
GGD- 99- 55, Apr. 2, 1999).
Page 9 GAO- 01- 669T
the rule, or just the part of the existing rule that was being amended. By
the end of the meeting it was clear that, as one congressional staff member
said, “determining compliance with (the RFA) is less obvious than we
believed before.” Mr. Chairman, this concludes my prepared statement.
I would be happy to respond to any questions. (450038) Lett er
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