February 1, 2018

Advancing Evidence-Based Regulation in Colorado

Testimony before the Colorado House Business Affairs and Labor Committee

Thank you for granting me the opportunity to submit this testimony on Colorado’s benefit-cost analysis (BCA) requirements for regulations. My name is James Broughel, and I am a research fellow at the Mercatus Center at George Mason University, where I study state regulatory issues as part of the State and Local Policy Project.

My message here today can be summarized in three points:

  1. Colorado has demonstrated a commitment to evidence-based policy generally and to benefit-cost analysis (BCA) for regulations specifically. The state should be commended for its leadership in this area.
  2. Institutional hurdles, however, make BCA less useful than it should be. These hurdles appear to be a structural feature of the administrative procedures in Colorado.
  3. Fortunately, a few very simple and uncontroversial reforms that the General Assembly can make to Colorado’s rulemaking procedures would make BCA more central to the process and help to ensure that state regulations are based on sound evidence.

Background

We are here today because of Colorado’s sunset review process for expiring boards and programs. Specifically, the requirement that state regulations receive the scrutiny of a BCA in certain circumstances is set to expire later this year. BCA is a decision-making tool that helps policymakers organize the best available information about different ways to solve a problem. When BCA is useful, it helps ensure that the regulators we rely on to protect the health, safety, and well-being of state residents can make decisions in an informed way, based on the most up-to-date and credible evidence. At the federal level, BCA has been a fixture of the regulatory process for going on 40 years.

Colorado BCA Capabilities Are Advanced Relative to Other States

Colorado is actually ahead of most states when it comes to its commitment to evidence-based policy. Last year, the Pew-MacArthur Results First Initiative released a study that found that Colorado is “established” in its use of evidence-based policy, meaning the state has pursued more evidence-based actions than most other states. The focus of the Pew study was broader than just regulation, but Colorado has also demonstrated impressive capabilities when it comes to analysis of state regulations.

While most of the BCAs that Colorado agencies write appear to be very short, consisting of several pages of standardized forms, examples of more technical analysis exist. Some are of comparable quality and sophistication to the analyses produced by the federal government.

In some circumstances, these analyses appear to have been commissioned by the government from outside consulting firms, so it is unclear the degree to which the technical capability to produce BCA exists within the career civil service staff working at Colorado regulatory agencies. Nonetheless, it is notable that the state of Colorado is willing to devote the resources and time needed to commission such documents. One such example is a 2010 analysis from the Department of Natural Resources’ Colorado Water Conservation Board (CWCB). The analysis studied the potential consequences of changes being made to rules governing floodplains in Colorado. The report was quite sophisticated in that it included monetized estimates of both benefits and costs, and it discounted benefits and costs to present value to account for the fact that impacts accrue across different time spans. The analysis also referred to technical concepts such as the value of a statistical life, which is used to apply dollar values to the health benefits of regulations.

At the federal level, these components of BCA are common, but in my experience, they tend to be quite rare as part of analysis of regulations at the state level. While most of the analyses produced by regulatory agencies in Colorado are not nearly as sophisticated as the 2010 CWCB analysis, other examples of best practices are not too hard to find. For example, the “regulatory analysis” document—a separate but similar analysis often required in Colorado—can also be quite sophisticated. One notable example is a 2014 regulatory analysis from the Colorado Department of Public Health and Environment’s Air Pollution Control Division. The document reported the anticipated impacts of changes to a Colorado air quality regulation. It included an evaluation of the baseline scenario—which represents the state of the world as it would evolve in absence of a new regulatory change—and included cost-effectiveness estimates for various regulatory alternatives.

In addition to these analyses, other BCAs have been commissioned by the Colorado government over the years, sometimes unrelated to specific regulations. A 2007 study requested by the Governor’s Energy Office and produced by an outside consulting firm analyzed the costs and benefits of LEED energy efficiency certification for buildings. The analysis was informed by original surveys of individuals with experience of going through the LEED certification process.

These examples demonstrate that Colorado currently devotes significant resources to analysis, even if not all analytic expertise is held by career civil servants. The threat of litigation may have played a role in some cases where analysis was of higher-than-average quality, which highlights how oversight from third parties—in this case the courts—can give agencies incentives to produce more careful and detailed analysis.

Shortcomings of the Colorado Regulatory Process

While Colorado can be proud that fairly sophisticated analyses get produced for some regulations, this is not the normal state of affairs for a typical rule. In fact, there are some serious shortcomings with respect to the process by which this analysis is carried out, which leads to questions about the overall quality of BCA in Colorado and concerns that the analysis is not being used to inform policy decisions.

These problems can be summarized as follows:

First, only a small number of rules ever receive the scrutiny of a BCA. For fiscal years 2013 through 2016, the Department of Regulatory Agencies (DORA) reviewed 1,383 rule submissions from Colorado state agencies. During the same time period, however, BCAs were required and submitted by agencies for just 10 rules. This suggests that fewer than 1 percent of rule reviews have accompanying BCAs.

Second, the rules that receive a BCA may not be the most important. A BCA is triggered when a request is made by a member of the public. DORA then makes a determination as to whether a BCA should be required. Some important rules will therefore be overlooked if, for example, industry supports a regulation, but the rule is otherwise contrary to the public interest and the general public is not attuned to state rulemaking activity.

Third, Colorado has multiple analytic requirements for regulations that are very similar and somewhat redundant. One is a requirement for a BCA, and the other is the requirement for a “regulatory analysis.” Air quality regulations in Colorado sometimes require an additional “economic impact analysis.” The duplicative nature of these requirements likely leads to unnecessary work for regulators and expense to taxpayers.

Fourth, BCA in Colorado may come too late to meaningfully inform how regulations are designed. The analysis requirement is triggered after a regulation has already been formally proposed by an agency. Crafting analysis after the decision to regulate has been made puts the cart before the horse. This is known as the “ready, fire, aim” problem with regulations. This backwards process threatens the objectivity of analysis because it increases the likelihood that a BCA will be written to justify a predetermined policy decision rather than to inform that decision.

Fifth, it appears that agencies typically have only a few days to produce a BCA—the time between when a regulation is published in the Colorado Register and when a public hearing is held. At the federal level, a rigorous analysis can take months to produce. It is therefore likely that analysis is rushed in Colorado, which leads to questions about its quality.

Simple Administrative Reforms will Improve Colorado Regulatory Analysis

Fortunately, these problems are not insurmountable, as there are a few simple changes that (1) can help improve the quality and objectivity of analysis, and (2) can help ensure analysis is actually used to inform regulatory decisions:

The legislature should clearly define the factors that trigger an analysis. Too few rules receive the scrutiny of a BCA, and the rules that do may not be the most important rules. The simplest form of trigger would be to set an economic threshold (e.g., $1 million in financial costs) that triggers when an analysis is required. The most logical time to make this determination is when agencies submit their annual regulatory agendas.

The BCA and regulatory analysis requirements should be combined. There should be a single requirement for one comprehensive form of analysis that includes the following: a description of the problem the agency is trying to solve; multiple potential regulatory or nonregulatory solutions to that problem; the costs and benefits of those alternative solutions; a distributional analysis explaining how different subpopulations are impacted; and a commitment to tracking the future progress of the rule. Combining analytic requirements would simplify Colorado rulemaking and save state taxpayers money.

Tie analysis to a preproposal notice. Agencies should be required to publish an advance notice of proposed rulemaking (ANPRM) whenever a BCA is triggered. In the ANPRM, the regulating agency would present the regulatory options it is considering, along with an accompanying analysis of those options, and would then seek public feedback to this information. Critically, the agency would not move forward with a formal proposal until after it received public input. Such a process gives the analytic body more time to produce a detailed analysis, ensures analysis is made early on in the process so analysis can assist in the design of regulations, and increases the likelihood that analysis will be objective, since analysis predates any formal proposal.

Third-party oversight or production of analysis is needed to ensure that it is high quality and objective. Although DORA already reviews agency BCAs and can urge changes to rules based on analysis, part of DORA’s statutory mission should be to ensure that the analysis is of sufficient quality. This role would be akin to the role that the Office of Information and Regulatory Affairs (OIRA) plays in federal rulemaking. For decades, presidents of both parties have recognized the importance of OIRA’s review of regulations and their accompanying analysis. Legislators may also want to consider appropriating funds to hire additional personnel—such as economists—capable of producing or reviewing BCAs. Other methods of improving the quality and objectivity of analysis include housing analysis production in an independent regulatory analysis agency or granting an oversight role for the courts.

Conclusion

Colorado has a lot to be proud of with respect to its commitment to evidence-based policy and evidence-based regulations. But there are institutional hurdles that stand in the way of BCA being as influential as it should be. Fortunately, the Colorado General Assembly has the power to change these institutions through its ability to modify administrative procedures in the state. A few simple tweaks to the process should lead to better analysis, better-designed rules, and ultimately better outcomes for state residents.