1. Training: Fiscal and Regulatory Impact Analysis Office of State Budget and Management December 2015 1 Office of State Budget and Management Balancing Needs – Improving Government

2. Agenda I.Intro to Fiscal & Regulatory Impact Analyses II.Process Rules Requiring OSBM Review, Approval, and Certification Federally Required Rules Requirements for Readoptions Regulatory Principles Process III.Tips for Approval IV.Takeaways and Resources 2

3. Why Do a Fiscal & Regulatory Impact Analysis? Helps analyze policy and identifies realistic consequences -Estimates impact of proposed rule change -Presents distributional effects (winners and losers) -Reveals unintended consequences Informs decision makers and public -Translates rule language into policy implementation -Provides information for planning purposes Published to OSBM website Is required by Administrative Procedure Act (APA) -G.S. 150B ‑ 21.4. Fiscal and regulatory impact analysis on rulesG.S. 150B ‑ 21.4 3

4. Why Do an Analysis? (cont’d) Truth Seeking v. Policy Defense 4

5. Definitions 5 Rule Change is the package of permanent individual rules that the agency is requesting to publish together and that constitutes the new policy the agency is proposing to implement. Baseline is the best assessment of the way the world would look absent the proposed rule change (counterfactual) -Includes current rules and standalone statutes -Excludes existing policy, statutes requiring rules to be implemented, and “already compliant” argument

6. Definitions (cont’d) Opportunity cost is the value of the best alternative foregone as a result of choosing the regulatory action -The use of any resource, including a person’s time, has an opportunity cost regardless of whether the resource is already acquired or not -Accounts for choices and trade-offs -Example: If you decide to quit and open a restaurant, then the opportunity cost of your time is the compensation you would have received from your current job. 6

7. Definitions (cont’d) NPV stands for Net Present Value and it is a way of taking into account the time value of money and of comparing benefits to costs (or comparing different alternatives), which may not occur in the same timeframe. -Examples: If you are hungry, would you rather I gave you $10 now or $10 in 2 days? Congratulations, you won! Would you rather receive $100,000 now or $100,000 in three years? Would you agree to pay me $1,000 now and for me to pay you back $1,000 in five years? 7

8. Definitions (cont’d) Discounting is a way of bringing costs and benefits occurring at different times to a common time period. -Example: Cost = $ 10 in Year 1, Benefit = $100 in Year 2 Discount rate is 7% NPV of Cost in Year 0 = $10/(1+.07) 1 = $9.3 NPV of Benefit in Year 0 = $100/(1+.07) 2 = $87.3 Net Effect in Year 0 terms = $87.3 - $9.3 = $78 8

9. Agenda I.Intro to Fiscal & Regulatory Impact Analysis II.Process Rules Requiring OSBM Review, Approval, and Certification Federally Required Rules Requirements for Readoptions Regulatory Principles Process III.Tips for Approval IV.Takeaways and Resources 9

10. Rules Requiring OSBM Approval or Certification 10 Review and Approval before Publication of Rules with Impact Certification before Publication of Rules with Substantial Economic Impact Local Impact Affect expenditures or revenues of any local government Local Impact Affect expenditures or revenues of any local government Substantial Economic Impact Aggregate annual impact to all affected Parties (costs + benefits) of ≥ $1M Unless identical to federal regulation Substantial Economic Impact Aggregate annual impact to all affected Parties (costs + benefits) of ≥ $1M Unless identical to federal regulation Regulatory Principles Seek to reduce the burden on the regulated community Base rules on sound, reasonably available scientific, technical, economic, and other relevant information Design rule to achieve the regulatory objective in a cost-effective and timely manner Regulatory Principles Seek to reduce the burden on the regulated community Base rules on sound, reasonably available scientific, technical, economic, and other relevant information Design rule to achieve the regulatory objective in a cost-effective and timely manner State Impact Require expenditure or distribution of State funds subject to State Budget Act -New staff, new cost, opportunity cost -Distribution of federal funds -Not revenues State Impact Require expenditure or distribution of State funds subject to State Budget Act -New staff, new cost, opportunity cost -Distribution of federal funds -Not revenues

11. 2. Substantial Economic Impact 1. Non-Substantial Impact What Do We Send OSBM? 11 General Information -Rule title and NCAC citation -Agency name and contact -Rulemaking authority -Brief impact statement Rule Description and Purpose Economic Analysis by Affected Persons (impact description, cost & benefit estimates): -State gov’t (include source of funding costs) -Local gov’t -Federal gov’t -Different private entities Proposed Rule Text Certificate of Federal Requirement General Information -Rule title and NCAC citation -Agency name and contact -Rulemaking authority -Brief impact statement Rule Description and Purpose Economic Analysis by Affected Persons (impact description, cost & benefit estimates): -State gov’t (include source of funding costs) -Local gov’t -Federal gov’t -Different private entities Proposed Rule Text Certificate of Federal Requirement +In-Depth Economic Analysis +Economic Principles  Explain how the agency sought to reduce the regulatory burden  Cite assumptions and sources for the information and data used +Alternatives (at least 2) – Discuss and compare +Time Value of Money – Compute NPV +Risk Analysis – Analyze events and changes in assumptions that may jeopardize estimated benefits or costs +In-Depth Economic Analysis +Economic Principles  Explain how the agency sought to reduce the regulatory burden  Cite assumptions and sources for the information and data used +Alternatives (at least 2) – Discuss and compare +Time Value of Money – Compute NPV +Risk Analysis – Analyze events and changes in assumptions that may jeopardize estimated benefits or costs

12. No More OSBM Form 4! OSBM Form 4 no longer exists (as of 2006) Allows flexibility in level of analysis Smaller rules require very little work -Example: See DENR/DCM analysis on the Excavation of Upland Basins rules on OSBM websiteExcavation of Upland Basins Larger rules require more work -Examples: -DHHS/DPH analysis on the Newborn Screening for Critical Congenital Heart Defects rulesNewborn Screening for Critical Congenital Heart Defects -DENR/ DWR analysis on the Triennial Review of Surface Water Quality Standards rulesTriennial Review of Surface Water Quality Standards 12

13. Federally Required Rules 13 Send to OSBM before Publication: Certificate of federal requirement -Federal law/regulation that requires rule or places conditions on the receipt of federal funds -Reason if all or part of rule is not required by or exceeds federal law Fiscal & Regulatory Impact Analysis if there is a State or Local Impact -Rule change is not considered substantial if it is “identical to a federal regulation that the agency is required to adopt,” [G.S. 150B-21.4(b1)]G.S. 150B-21.4(b1) -Baseline: federal rule if funding depends on adoption -Easier economic analysis: scale the federal analysis to NC

14. Requirements for Readoptions Fiscal & regulatory impact analysis is required for readoptions (G.S. 150B-21.3A) if all criteria apply:G.S. 150B-21.3A -Rule readopted with substantive change Agencies are not required to publish the rule text if rule readopted without substantive changes (G.S. 150B-21.2(c))G.S. 150B-21.2(c)) G.S. 150B-21.4 requirements triggered by publication of rule text G.S. 150B-21.4 -Change results in State, Local, or Substantial Impact -At least one rule in the package of rules the agency is proposing to adopt together creates a net cost on any part of the regulated community. One analysis per package of proposed readoptions Baseline is current rule, unless expired All other requirements for analysis apply 14

15. OSBM’s Tasks Determines if an analysis correctly identifies and assesses the impacts, costs and benefits, on all affected persons Certifies that “the [state government] funds that would be required by the proposed rule change are available” as required in G.S. 150B-21.4(a)G.S. 150B-21.4(a) -Rule changes may not require an expenditure of more money than is budgeted Establishes if the agency adhered to economic principles -Principles G.S. 150B-19.1(2),(5),(6) for substantial rulesG.S. 150B-19.1(2),(5),(6) -Principles in Section 2 of E.O. 70 (as amended) for rules proposed by cabinet agenciesE.O. 70 15

16. Regulatory Principles Principles in G.S. 150B-19.1G.S. 150B-19.1 1)Be expressly authorized and serve the public interest 2)Seek to reduce burden 3)Be clear, unambiguous, and necessary 4)Consider cumulative effect of rules 5)Consider sound, reasonably available information 6)Achieve rule objective in cost-effective and timely manner Additional Principles for Cabinet in E.O. 70 Section 2E.O. 70 -Quantify costs and benefits to greatest extent possible -Identify and assess alternatives -Encourage public comment and ensure access to information -Coordinate rule action with other agencies for overlap -Update analysis for significant changes before adoption 16

17. Approval Process 17 Agency studies rule change and decides if required/ necessary Agency studies rule change and decides if required/ necessary Optional: RMC/Agency Analyst Contacts OSBM for feedback Optional: RMC/Agency Analyst Contacts OSBM for feedback Agency emails fiscal & regulatory impact analysis and rule text to: osbmruleanalysis@osbm.nc.gov osbmruleanalysis@osbm.nc.gov Agency emails fiscal & regulatory impact analysis and rule text to: osbmruleanalysis@osbm.nc.gov osbmruleanalysis@osbm.nc.gov Approved? OSBM posts approved analysis to website, sends URL to agency OSBM posts approved analysis to website, sends URL to agency Agency sends to OAH for publication Yes, notified by email Yes, notified by email No If State impact, OSBM budget analysts certify If State impact, OSBM budget analysts certify OSBM reviews rule and analysis OSBM reviews rule and analysis

18. Agenda I.Intro to Fiscal & Regulatory Impact Analysis II.Process Rules Requiring OSBM Review, Approval, and Certification Federally Required Rules Requirements for Readoptions Regulatory Principles Process III.Tips for Approval IV.Takeaways and Resources 18

19. Response Time Expectations Non-substantial Impact Rule Change -Local impact: Submit at least 60 days prior to publication [G.S. 150B-21.26(a)]G.S. 150B-21.26(a)] -State impact: Encouraged to submit at least 60 days prior to publication Substantial Rule Change -OSBM must review within 14 days [G.S. 150B-21.4(b1)]G.S. 150B-21.4(b1)] -Clock starts again if revised version is submitted Plan to allow enough time for revisions, especially for rules that are complex and have a substantial impact 19

20. Tips for Faster Approvals Involve OSBM early! Impact is the difference between the world with the rule change and the Baseline (world without the rule) “Beg, borrow, and steal” prior research -Federal agencies (OMB, EPA, CMS, others) -Other states -Academic journals -Local academics Make reasonable assumptions, defend them with data/information, cite sources, and use sensitivity analysis to understand the impact of the assumptions Quantify costs and benefits as much as possible 20

21. Rule Summary Description and Purpose/Necessity Discuss what problem the rule is addressing Describe the rule and how, and to what extent, the rule solves the problem Include background information, such as: -Impetus for the rule change (statutory change, executive action, or federal requirement/law) -History of related rule changes -Parties likely to be affected by the rule change 21

22. Cost Analysis Costs First-order effects – direct results of the policy Choose time horizon appropriate for future costs Consider each group affected by the rule change List and describe non-monetized costs Calculate opportunity costs Include table(s) with costs by affected persons Good data is hard to find -Estimate -Make some assumptions (state what they are!) -Perform sensitivity analysis 22

23. Cost Analysis (cont’d) Examples of Costs Increased government expenditures -Transfers to segment of population -Investment in equipment, materials, etc. -Overhead or administrative expenses Lower government revenue Reduced revenue for private entities Increased compliance cost of regulated parties Opportunity cost of -Existing staff -Existing resources 23

24. Benefit Analysis Benefits First-order effects – direct results of the policy Choose time horizon appropriate for future benefits Consider each group affected by the rule change List and describe non-monetized benefits Consider cost-effectiveness analysis ($ per life saved) Include table(s) with benefits by affected persons Good data is even harder to find -Estimate -Make some assumptions (state what they are!) -Sensitivity analysis 24

25. Benefit Analysis (cont’d) Examples of Benefits Decreased government expenditures Transfers from government Higher revenue for local governments Higher revenue for private entities Decreased compliance cost Better health, life expectancy Higher earnings Value placed on cleaner environment 25 Per your request, below is one of the comments you sent to the Setting Government Straight Initiative.

26. Alternatives At least 2 Alternative to Substantial Impact Rule Consider alternatives to regulation -Economic instruments: incentives, taxes, tradable permits -Performance standards -Information disclosure requirements -Information campaigns Consider alternatives to proposed text -Different threshold -More/less stringent requirement -Bigger/smaller regulated community Discuss why rule was chosen over the alternatives 26 Per your request, below is one of the comments you sent to the Setting Government Straight Initiative.

27. Agenda I.Intro to Fiscal & Regulatory Impact Analysis II.Process Rules Requiring OSBM Review, Approval, and Certification Federally Required Rules Requirements for Readoptions Regulatory Principles Process III.Tips for Approval IV.Takeaways and Resources 27

28. Key Takeaways Impact analysis helps create better government policies Fiscal & regulatory impact analysis is required if there is State, Local gov’t, or Substantial Economic (≥ $1M) impact Involve OSBM early to expedite final approval Quantify costs and benefits as much as possible State assumptions and cite sources Include NPV, Risk Analysis, and at least 2 Policy Alternatives for economic impact ≥ $1M Fiscal & regulatory impact analysis is required for readoptions if: -Agency makes substantive changes to the rule, -There is a state, local gov’t, or substantial impact, and -Rule creates net cost on any part of regulated community. Baseline for readoption is unexpired current rule 28

29. Where Do We Go for Help? OSBM Rule Analysis website: http://www.osbm.nc.gov/management/regulatory http://www.osbm.nc.gov/management/regulatory -Training slides -Link for submitting an analysis for OSBM review -Analysis of OSBM approved rule changes OSBM Budget Manual (Chapter 7): https://ncosbm.s3.amazonaws.com/s3fs- public/documents/files/BudgetManual_2015November.pdf https://ncosbm.s3.amazonaws.com/s3fs- public/documents/files/BudgetManual_2015November.pdf -In-depth information on OSBM requirements Ask OSBM staff: -Anca Grozav: (919) 807-4740 or anca.grozav@osbm.nc.gov anca.grozav@osbm.nc.gov -Ed McLenaghan: (919) 807-4749 or ed.mclenaghan@osbm.nc.gov ed.mclenaghan@osbm.nc.gov 29

30. Additional Resources General Statute 150B, Administrative Procedure Act: http://www.ncleg.net/EnactedLegislation/Statutes/HTML/ByChapter/C hapter_150B.html NC Register http://www.oah.state.nc.us/rules/register/ Executive Order No. 70 from 10/21/10 (note, Section 3 was repealed by E.O. 48 from 4/9/14): http://wayback.archive-it.org/org- 67/20130104002324/http://www.governor.state.nc.us/NewsItems/Uploa dedFiles/26c9a046-53f8-4e14-a8d3-ed6225db2780.pdf Federal Regulatory Impact Analyses: http://www.regulations.gov/#!home 30

31. Thank you for your attention! Q & A Session 31