The President's recent Executive Order (Order) on reducing regulation and controlling regulatory costs represents the greatest potential change in federal regulatory policy since President Reagan's 1981 Executive Order on federal regulation first provided for White House oversight of the regulatory process. This article explains what the Order does and why it is so significant, highlights some of the implementation questions that remain open, and identifies some of the deregulatory opportunities it could create for nonprofit federal grant and cooperative agreement recipients (nonprofit federal grant recipients).
What Does the President's Executive Order Do?
Executive Order 13771, along with related guidance issued by the Office of Information and Regulatory Affairs (OIRA), which is part of the White House Office of Management and Budget (OMB), does three principal things:
- First, whenever a agency proposes a new rule, it requires the agency to identify two existing rules that will be eliminated to offset the cost of the new rule, with certain exceptions;
- Second, it mandates that the total incremental cost of all new rules in fiscal year 2017 (October 1, 2016 – September 30, 2017) be no greater than zero, with certain exceptions; and
- Third, it provides that, from fiscal year 2018 onward, the OMB Director will establish annual regulatory budgets capping the total amount of incremental costs that each agency will be allowed when issuing and repealing rules, with certain exceptions. The cap could even be a negative number, thereby requiring a reduction in regulatory costs for a specific agency. OIRA's guidance allows agencies to "bank" cost savings from deregulatory actions for use in future years, a policy that encourages agencies to take deregulatory actions even when they don't have a specific rulemaking to be offset.
The guidance also indicates that certain types of rules do not need to be offset by two deregulatory actions and are not subject to a regulatory cap. These include rules that expand consumption or production options; rules that must be promulgated to allow economic activity to take place, such as regulations that the National Oceanic and Atmospheric Administration (NOAA) promulgates to manage fisheries; and rules that are required for national security reasons, such as export control regulations promulgated by the Bureau of Industry and Security.
Why Is the Executive Order Significant?
It builds on the work of past administrations, Republican and Democrat. The Order maintains the same structure of centralized OMB oversight of federal rulemaking that has been in place since President Clinton issued his Executive Order on regulatory planning and review in 1993. The guidance also clarifies that OMB Circular A-4, which was issued under President Bush in 2003 and sets out guidance for agencies on how to analyze the costs and benefits of rules, remains operative.
It had an immediate and pronounced short-term impact. The zero cost cap for fiscal year 2017, coupled with the January 20 "regulatory freeze" memorandum from the President's Chief of Staff to agency heads, had the effect of halting most rulemaking activities through the end of September. As of April 24, 2017, there were only ten draft rules under review by OIRA – an astoundingly low number, as the number is typically well over 100. The Administration also signaled its intent to transform federal rulemaking culture long-term by changing the name of the Unified Agenda of Regulatory Actions – the biannual report setting out projected rulemaking activities by agencies – to the Unified Agenda of Regulatory and Deregulatory Actions.
It makes OIRA more powerful. The most repeated phrase in the OIRA guidance is that many different regulatory decisions to implement the Executive Order will be made by OMB "on a case-by-case basis." At least in the early years of the Trump regulatory program, OIRA will have a great degree of new discretion over agency actions as the ground rules for the process are worked out.
OIRA already exercises immense power over agencies, since it can bring in any of their proposed or final rules that it deems "significant" for review by other agencies that may have equities in a particular rule, followed by policy review and clearance by the White House. Under the Clinton Executive Order, OIRA can deem a rule to be "significant" for a variety of reasons – for example, if the rule will have an annual effect on the economy of $100 million or more, is inconsistent with something that another agency is doing, or if it raises "novel legal or policy issues," a broad catch-all category that can be contracted or expanded by the White House to suit the President's policy preferences.
For obvious reasons, an agency would usually prefer that OIRA not find its draft rule to be significant, because OIRA review takes time – often much longer than the 90-day review period set out in the Clinton Executive Order – and changes are typically made to the rule during the review process to accommodate the views of OIRA and other reviewing agencies in the White House and Cabinet. (Although in a bit of irony, an agency is often very happy when OIRA decides to review a draft rule being considered by another agency that could impact its equities.) In rare instances, with White House authorization, OIRA can even reject a significant rule and send it back to the agency as being inconsistent with the President's program. This tends to happen with much greater frequency in Republican administrations, where publicly rejecting a rule would probably constitute a net-positive news event for an administration, than in Democratic ones, where publicly rejecting a rule would likely constitute an unnecessary, negative news event for an administration (which is why some significant rules remain under OIRA review for long periods of time).
The Order and related guidance build upon and significantly raise the stakes of the OIRA "significance determination" for the following reason: only rules that OIRA finds to be "significant" are subject to the annual agency regulatory caps and, if such rules impose costs, the requirement to be offset by two deregulatory actions. In election years and in tough economic times, OIRA tends to find a larger number of rules to be "significant" under the "novel legal or policy issues" catch-all provision, which will make it even more difficult to promulgate rules during those times. In addition, the OMB Director has discretion under the new policy to allow one agency to transfer cost savings it realized from issuing deregulatory actions to a second agency, which would enable the second agency to promulgate a significant rule that would otherwise be prohibited. Whereas OIRA career staff have traditionally been the ones to determine whether a rule is significant – without much interference from their political leadership – some agencies will likely seek to elevate many of these determinations to the political level, given that the stakes will now be much higher.
The increased import of the "significance determination" will likely encourage agency gamesmanship, including agencies looking for ways to chop up proposed rules into smaller pieces to avoid a significance determination, as well as asking for a larger annual regulatory cap than necessary, knowing that putting forward a high number may be a good negotiating tactic ahead of annual regulatory cap discussions with the OMB Director, in which the initial number put forward by the agency will almost always be reduced.
For this reason, the OIRA guidance – which OIRA can update at will, without clearing it with the agencies – attempts to narrow or close potential loopholes that could render the cap illusory or otherwise hamper the push toward deregulation. For example:
- Even if a statute does not allow an agency to consider costs during rulemaking, the agency will still be required, as a matter of internal Executive Branch policy, to offset any new rule with two deregulatory actions and fit that new rule under its annual regulatory cap. Rules issued without consideration of costs will have a substantial impact by crowding out other rules that an agency might otherwise issue.
- Agencies cannot change how they have historically accounted for benefits and costs, or revise any analyses from recent rulemakings, without new evidence.
- Agencies are not permitted to indicate that the basis or rationale for a deregulatory action was to offset a new rule, since such a statement would undermine the Administration's ability to defend the deregulatory action in court.
- Rules required by statute or by a court also must be offset by two deregulatory actions and fit under the regulatory cap. Moreover, such rules must strictly adhere to what the statute or court requires and go no further: agencies are prohibited from coupling discretionary provisions with such mandatory rules, in an effort to circumvent the caps, similar to what happens with "must-pass" legislation in Congress.
- Agency guidance documents can also be deemed "significant" by OIRA, which would make them subject to the offset requirement and the relevant agency cap. This closes a significant potential loophole.
- Even if a rule was previously listed in last year's Unified Agenda as a "non-significant" rule, the relevant agency will need to submit the rule to OIRA again in the year of its issuance for a new significance determination. This is important for at least two reasons:
- A draft final rule may turn out to be significant even if a draft proposed rule was not, because the agency's response to public comments on the proposed rule might produce a final rule that would be more expensive than the agency estimated, for instance.
- It is also possible that a final rule could be significant even if the proposed rule was not, if the regulator posed a question to potential commenters in the proposed rule and, as a result of that question, inserted additional text into the draft final rule that would not be subject to public comment. This could have been done for very good reasons. However, it also could have been done to artificially reduce the cost of the proposed rule (so as to avoid a significance determination and OIRA review), while allowing the agency in any subsequent judicial action to rebut a claim that interested parties were denied due process, since the agency technically requested comment on the concept.
The regulatory budget makes the regulatory process fairer for small agencies. While the agency-specific caps will restrict the number and types of rules that are promulgated, they will also introduce an element of fairness into the system of OIRA planning and review that is currently lacking. The reality is that every administration is very sensitive to, and keeps careful track of, the number of rules it promulgates and their total cost, both as a general matter and as compared to previous administrations. In essence, there is already a de facto regulatory budget managed by every White House covering all non-independent executive agencies and departments. Since large, powerful regulators with broad jurisdictions (e.g., EPA, Interior) tend to promulgate a high percentage of the overall rules and more expensive rules than small regulators do, they take up most of this unofficial budget at the expense of smaller agencies, whose rules are more likely to be postponed in order to manage overall costs, particularly in a President's first term or in times of economic distress when the unofficial budget contracts. Planning a regulatory budget in advance and instituting agency-specific caps make it less likely that small regulators will see their rules crowded out by larger ones.
What Deregulatory Opportunities Does the Order Potentially Create?
At its core, the Order and related OMB guidance incentivize agencies to find ways to cut costs since, in general, taking deregulatory action that reduces overall costs will provide the only path forward if they want to promulgate new rules that impose costs. Several types of actions, some of which are mentioned in the guidance and which have not typically been high priorities for most agencies, could assist agencies in meeting their obligations under the Order in cases where such actions would reduce costs:
- Eliminating ineffective rules. Too often, federal regulations require certain activities or impose specific requirements because such activity has long been the standard. The paradigm has changed, and nonprofit federal grant recipients should be relieved of having to comply with regulations that are ineffective in practice.
- Setting sensible thresholds that eliminate costly and burdensome requirements on lower-dollar-value matters. An example that may be of interest to nonprofit federal grant recipients would be the establishment of clear dollar thresholds for subrecipient risk assessments. As currently constituted, grant recipients must determine when and the degree to which a risk assessment is warranted, thereby exposing the grant recipient to potential liability and/or criticism if a federal audit disagrees after the fact.
- Promoting and permitting the use of nongovernmental practices. Much like the federal contracting community, nonprofit federal grant recipients that handle private, nongovernmental funds should be permitted to use their long-standing fiduciary practices for safeguarding federal funds. By allowing nonprofit federal grant recipients to use a single set of practices, such organizations would necessarily reduce their total costs.
- Engaging in international regulatory cooperation. By recognizing other, well-founded regulatory requirements, nonprofit federal grant recipients would be able to reduce unnecessary costs by avoiding duplicative, yet inconsistent and potentially conflicting requirements. Being able to provide the same program or service in multiple markets while needing to comply only with the U.S. regulation would certainly aid in reducing costs.
- Using private sector conformity assessment – For example, testing, inspection, and certification bodies, procedures, and systems – as the basis for agency requirements, rather than creating government-unique ones.
- Using stakeholder-driven regulatory tools, such as negotiated rulemaking and convening official agency rulemaking committees, to issue recommendations to the agency on specific rules. These tools usually work only in cases where all of the major stakeholders are supportive of a rule.
- Reductions in paperwork and reporting burdens. A significant percentage of paperwork and reporting burden reduction can take place through regulatory change, so there could be additional opportunities to reduce such burdens, including through digitization.
Are There Major Issues That the Order Does Not Address?
Perhaps the biggest challenge the President's new policy presents for agencies is that, to promulgate a deregulatory action that revises or eliminates an existing rule, an agency would need to put new evidence on the record, since the existing administrative record supports the existing rule and would be cited by opposing litigants in any subsequent court action as grounds for the rule to be remanded or vacated.
Developing a new evidentiary record may require a substantial investment of time and money that agencies and relevant stakeholders may not be able or want to undertake, especially in cases where some or all of the industry already has undertaken expensive measures to comply with the existing rule – costs which cannot be recovered. In these circumstances, the deregulatory action would provide a cost advantage to new entrants.
The OIRA guidance also punted – necessarily, in our view – on several key issues that arise from the Order, relegating their resolution to a "case-by-case" decision and future guidance by OIRA. This includes how to allocate costs regarding rules promulgated by more than one agency; and if and how to adjust the regulatory caps subsequently in instances where a rule whose costs or savings were counted in one fiscal year is later remanded or vacated in another, possibly much later, fiscal year.
Several other issues can be addressed only by Congress and/or the White House:
Can OMB manage the increased workload generated by the Order without obtaining a significant budget increase in staffing for OIRA? OIRA's mandate has now expanded into regulatory budgeting, which will incentivize new agency deregulatory actions that will also need to be reviewed. It will be very difficult for OIRA to handle these new responsibilities at current staffing levels without significantly slowing down the regulatory process. Congress has kept OMB and OIRA on a tight appropriations leash for many years as a method of reducing presidential power. Keeping the budget lean in an environment where OIRA has been granted much new policy authority over agency rules might have the intended effect of slowing the regulatory state.
Will independent agencies ultimately be covered by the Order? Where multiple agencies are regulating the same product, service, or substance, it is sensible public policy that they should take a coordinated and consistent regulatory approach. Placing independent agencies under OIRA review would be one way of ensuring that happens.
While the Order does not carve out independent agencies from its scope, the current OIRA guidance does. This is likely due to the fact that the proposal to place independent agencies under OIRA's regulatory review program has always been very controversial politically. If it is going to happen, it should ideally be accomplished by Congress. It was Congress that structured these agencies to be independent of the President in the first place. OIRA review of independent agency rules would necessarily compromise their independence to varying degrees, depending on whether OIRA's analysis is binding on the agency before it can promulgate a rule or merely advisory. At the very least, a Senate-confirmed OMB Director and OIRA Administrator should make this decision. Given that regulatory reform legislation is being debated in Congress and there is no confirmed OIRA Administrator, the White House's decision to punt on this issue in the current guidance makes sense.
In either case, the success or failure of covering independent agencies will depend on ensuring that sufficient agency budgets are made available to support the new analytical requirements with which these small agencies would need to comply. OIRA would need to add significant numbers of additional staff to handle the increased workload of reviewing rules promulgated by the independent agencies. The independent agencies themselves may also need to be given additional funds if they are required to comply with the Order. A recent example is Congress's failure to provide additional budget resources for regulatory development to independent agencies that were required to issue hundreds of rules required by the Dodd-Frank Act. Enhanced responsibilities and a flat budget are a prescription for delay and less-than-optimal regulatory analysis.
Given the President's push to shrink the size of government, it seems doubtful that the requisite resources will be provided. It is also unclear whether sufficient funding could be reallocated from other parts of the independent agencies to their regulatory shops to comply with the Order without compromising the agencies' ability to perform their core functions.
How does the Administration plan to address the cumulative burden of regulations in specific sectors? The OIRA guidance appears to incentivize agencies to focus on specific sectors of the economy. In particular, it encourages agencies, in cases where they are promulgating a rule that affects a specific sector, to prioritize deregulatory actions in that sector. This guidance is welcome, particularly for nonprofits and small and medium-sized businesses. Based on past experience, however, the guidance is unlikely to yield meaningful results without a concerted push from the White House and OMB.
Tackling cumulative burden has been a difficult task for past administrations, even where it was a priority, since it is typically a cross-agency issue, and agencies indicate that it is too difficult and too expensive to make progress for that reason. OMB could help by pulling in rules for review as significant if they adversely affect a specific sector in a material way, even if the rules themselves do not reach the $100 million threshold. The White House could also convene sector- or issue-specific task forces with the relevant regulators and stakeholders to map out the combined burden of regulations, guidance, and permitting, and propose a unified and streamlined approach through issue- or sector-specific retrospective reviews. The Memorandum issued by President Trump on January 24, which addresses streamlining permitting and reducing regulatory burdens for domestic manufacturing, is a promising example of this type of approach. The Obama Administration's focus on Single Window deployment – which provided streamlined electronic filing options for over 300 forms that are required to import or export specific products – is another.
In addition, OMB should consider leveraging its efforts to develop cross-cutting reform proposals under the President's Executive Order on a Comprehensive Plan for Reorganizing the Executive Branch with a push to reduce cumulative regulatory burdens in specific industry sectors. OMB's guidance for that Order calls on agencies to look for ways to streamline reporting burdens and reduce duplication of activities across multiple parts of the same agency. The guidance also indicates that OMB will work with agencies and stakeholders to develop reform proposals involving the work of two or more agencies – including to address situations where multiple agencies are interacting with state and local governments in redundant or otherwise suboptimal ways – and could seek to merge agency programs or activities where there is duplication.
The President's new Executive Order on regulation could enable ambitious initiatives to eliminate unnecessary costs, including initiatives that would streamline regulation, permitting, and information collection, promote the use of private sector standards, and encourage U.S. regulators to engage in cooperation with their foreign counterparts as a normal course of business. Strong and sustained engagement by the private sector, including nonprofit federal grant recipients, with the Administration – especially by providing specific reform ideas, backed up by data and analysis – will be essential to ensure that implementation of the Order supports such initiatives.