Federal Mandates: Identification Process Is Complex and Federal Agency Roles Vary
Released: 2005-03-08T00:00:00

Letter

Identifying Federal Mandates in Statutes Is Complex

Legislation must go through several steps to be identified as containing a federal mandate. Once mandates are identified based on UMRA’s definitions, exclusions, and exceptions, CBO determines whether the mandate meets or exceeds UMRA’s cost thresholds. As we reported last year, in 2001 and 2002, CBO identified few statutes containing federal mandates at or above UMRA’s cost thresholds. In addition, CBO reports and testimonial evidence indicate that UMRA may indirectly impact the costs of and number of federal mandates enacted at or above UMRA’s cost thresholds. However, when asked, some nonfederal parties said they continue to be subject to costs associated with laws containing mandates that do not meet the statutory definition of a mandate at or above UMRA’s cost thresholds.

Legislation Must Undergo a Multistep Process to Be Identified as Containing Federal Mandates at or above Applicable Cost Thresholds

UMRA does not require CBO to automatically review every legislative provision; further, the process takes several steps to determine whether a statutory provision would be identified as a federal mandate at or above UMRA’s cost thresholds (see fig. 1). Specifically, CBO does not automatically review provisions that are (1) not contained in authorizing bills or (2) not reported by an authorizing committee. This means that appropriations bills are not automatically subject to CBO review under UMRA. However, CBO told us that it will informally review provisions in appropriations bills and communicate their findings to appropriations committee clerks when CBO finds potential mandates in these bills. Although provisions contained in an authorizing bill are subject to automatic review by CBO, the bill also must be “reported” by that committee.

UMRA also does not require an automatic CBO review of provisions added after CBO’s initial review. UMRA states, however, that “the committee of conference shall insure to the greatest extent practicable” that CBO prepare statements on amendments offered subsequent to its initial review that contain federal mandates. For example, CBO reported that for 2002, three laws were enacted that contained federal mandates not reviewed by CBO prior to enactment because they were added after CBO reviewed the legislation. For example, the Terrorism Risk Insurance Act of 2002 includes a provision requiring insurers of commercial property to offer terrorism insurance, which was added to after CBO’s UMRA review and thus not identified as a private sector mandate under UMRA prior to enactment.

Once a decision is made about CBO’s review, CBO analyzes the provision to determine whether the provision is excluded under UMRA. An exclusion applies to any provision in legislation that 1. enforces Constitutional rights of individuals; 2. establishes or enforces any statutory rights that prohibit discrimination on the basis of race, color, religion, sex, national origin, age, handicap, or disability; 3. requires compliance with accounting and auditing procedures with respect to grants or other money or property provided by the federal government; 4. provides for emergency assistance or relief at the request of any state, local, or tribal government or any official of a state, local, or tribal government; 5. is necessary for the national security or the ratification or implementation of international treaty obligations; 6. the President designates as emergency legislation and that Congress so designates in statute; or 7. relates to the old age, survivors, and disability insurance program under title II of the Social Security Act (including taxes imposed by sections 3101(a) and 3111(a) of the Internal Revenue Code of 1986 relating to old-age, survivors, and disability insurance).

Next CBO applies UMRA’s definition of a federal mandate—a provision that would impose an enforceable duty upon state, local, or tribal governments or upon the private sector. To be identified as a mandate, a provision must meet this definition of a mandate and not be classified as an “exception.” Generally, exceptions are defined as enforceable duties that are conditions of federal financial assistance or arise from participation in a voluntary federal program.

Once the provision is identified as a mandate under UMRA, CBO determines whether the cost estimate, if feasible, exceeds the applicable threshold ($50 million for intergovernmental and $100 million for private sector mandates, in any of the first 5 fiscal years during which the mandate would be effective). If CBO determines that a cost estimate is not feasible, CBO specifies the kind of mandate contained in the provision, but reports that the agency cannot estimate the costs. For example, CBO reported that it could not estimate the costs of mandates in nine bills that ultimately were enacted during 2001 and 2002. Common reasons why a cost estimate may not be feasible include (1) the costs depend on future regulations, (2) essential information to determine the scope and impact of the mandate is lacking, (3) it is unclear whom the bill’s provisions would affect, and (4) language in UMRA is ambiguous about how to treat extensions of existing mandates.

For intergovernmental mandates that exceed the cost threshold or cost estimates that are not feasible, a point of order is available under UMRA. However, UMRA does not provide for a point of order for private sector mandates. For intergovernmental or private sector mandates below the applicable cost threshold, CBO states in its report that a mandate exists with costs estimated to be below the applicable cost threshold. Although this highlights the provision as a mandate, it does not provide for a point of order under UMRA.

UMRA also contains a mechanism designed to help curtail mandates with insufficient appropriations, but it has never been utilized. UMRA provides language that could be included in legislation that would allow agencies tasked with administering funded mandates to report back to Congress on the sufficiency of those funds. Congress would then have a certain time period to decide whether to continue to enforce the mandate, adopt an alternate plan, or let it expire—meaning the provision comprising the mandate would no longer be enforceable. Our January 2004 database search has resulted in no legislation containing this language.

CBO Identified Few Laws in 2001 and 2002 as Containing Federal Mandates at or above UMRA’s Cost Threshold, but UMRA May Have an Indirect Effect

Few laws containing federal mandates at or above the cost thresholds were enacted in 2001 and 2002. Further, there is some evidence that the existence of UMRA may have indirectly discouraged the enactment of some federal mandates in proosed legislation and reduced the potential costs of others. Of 377 laws enacted in 2001 and 2002, CBO identified at least 44 containing a federal mandate under UMRA. Of these 44, CBO identified 5 containing mandates at or above the cost thresholds, and all were private sector mandates.

As we previously reported, from 1996 through 2002, only three bills with intergovernmental mandates and 21 private sector mandates with costs over the applicable threshold became law. UMRA may have indirectly discouraged the passage of legislation identified as containing mandates at or above the cost thresholds. Similarly, UMRA may have also aided in lessening the costs of some mandates that were enacted. From 1996 through 2000, CBO identified 59 proposed federal mandates with costs above applicable thresholds. Following CBO’s identification, 9 were amended before enactment to reduce their costs below the applicable thresholds and 32 were never enacted. The remaining 18 mandates were enacted with costs above the threshold.

Although CBO has not done an analysis to determine the role of UMRA in reducing the costs of mandates ultimately enacted, it reported that “it was clear that information provided by CBO played a role in the Congress’s decision to lower costs.” CBO also testified in July 2003 that “both the amount of information about the cost of federal mandates and Congressional interest in that information have increased considerably. In that respect, title I of UMRA has proved to be effective.” Similarly, the Chairman of the House Rules Committee was quoted in 1998 as saying that UMRA “has changed the way that prospective legislation is drafted… Anytime there is a markup , this always comes up.” Finally, although points of order are rarely used, they may be perceived as an unattractive consequence of including a mandate above UMRA cost thresholds in proposed legislation.

Nonfederal Parties Perceived Some Enacted Provisions to Be Unfunded Mandates

Although CBO’s annual reports for 2001 and 2002 showed that most proposed legislation did not contain federal mandates as defined by UMRA, we asked CBO to compile a list of examples from among those laws enacted in 2001 and 2002 that had potential impacts on nonfederal parties but were not identified as containing federal mandates meeting or exceeding UMRA’s cost thresholds. We then analyzed these 43 examples to illustrate the application of UMRA’s procedures, definitions, and exclusions on legislation that was not identified as containing mandates at or above UMRA’s threshold, but might be perceived to be unfunded mandates. We then shared CBO’s list of 43 examples with national organizations representing nonfederal levels of government, and they generally agreed that those laws contained provisions their members perceived to be mandates.

As figure 2 shows, for 12 of the 43 examples, an automatic UMRA review was not required for one of the reasons I discussed earlier, such as that they were in an appropriations bill or were not reported by the authorizing committee. Out of the remaining 31 laws that did undergo a cost estimate, 24 were found to contain mandates with costs below applicable thresholds, 3 contained provisions that were excluded from UMRA coverage, 2 contained provisions with direct costs that were not feasible to estimate, 1 contained a provision that did not meet UMRA’s definition of a mandate, and 1 was reviewed by the Joint Committee on Taxation and found not to contain any federal mandates.

Of the 12 examples of laws with provisions that CBO was not required to review prior to enactment, CBO later determined that 5 contained mandates with direct costs below UMRA’s thresholds, 4 contained mandates with direct costs that could not be estimated, 1 was excluded under UMRA because it involved national security, 1 did not meet the definition of a mandate, and 1 had some provisions with costs below the threshold and some provisions excluded because it involved national security. For example, the Sarbanes-Oxley Act of 2002 contained both intergovernmental and private sector mandates but CBO determined that a cost estimate was not feasible for all mandates. Specifically, CBO estimated the costs of providing notification of blackout periods— specified periods of time when trading securities is prohibited—fell below the UMRA thresholds but provided no quantified estimate, and CBO estimated the cost of running the Public Company Accounting Oversight Board and an associated standard-setting body to be approximately $80 million per year, which would be funded from fees assessed on public companies. However, CBO stated it was uncertain if the rest of the mandates contained in Sarbanes-Oxley exceeded UMRA’s cost threshold of $115 million (inflation adjusted).

Identification of Federal Mandates in Rules Is Less Complex Than for Statutes

The process for identifying federal mandates in regulations is less complex than for legislation, but additional restrictions apply to identifying federal mandates. In 2001 and 2002, agencies identified few of the major and economically significant final rules as containing federal mandates as defined by UMRA. Most often, rules with financial effects on nonfederal parties did not trigger UMRA’s requirements because they did not require expenditures at or above UMRA’s threshold. We also determined that at least 29 rules that did not contain federal mandates defined under UMRA appeared to have significant financial impacts.

UMRA Procedures for Rules Are Less Complex Than for Legislation, but More Restrictions Apply

The process for rules is less complex than for legislation. However, in addition to the definitions and seven general exclusions for legislation, there are four additional restrictions that apply to federal mandates in rules: UMRA’s requirements do not apply to provisions in rules issued by independent regulatory agencies.

Preparation of an UMRA statement, and related estimate or analysis of the costs and benefits of the rule, is not required if the agency is “otherwise prohibited by law” from considering such an estimate or analysis in adopting the rule.

The requirement to prepare an UMRA statement generally does not apply to any rule for which the agency does not publish a general notice of proposed rule making in the Federal Register.

UMRA’s threshold for federal mandates in rules is limited to expenditures, in contrast to title I which refers more broadly to direct costs. Thus, a rule’s estimated annual effect might be equal to or greater than $100 million in any year—for example, by reducing revenues or incomes in a particular industry—but not trigger UMRA if the rule does not compel nonfederal parties to spend that amount.

UMRA generally directs agencies to assess the effects of their regulatory actions on other levels of government and the private sector. The agencies only need to identify and prepare written statements on those rules that the agencies have determined include a federal mandate that may result in expenditures by nonfederal parties of $100 million or more (adjusted for inflation) in any year.

Within the OMB, the Office of Information and Regulatory Affairs (OIRA) is responsible for reviewing compliance with UMRA as part of its centralized review of significant regulatory actions published by federal agencies, other than certain independent regulatory agencies. Under Executive Order 12866, which was issued in September 1993, agencies are generally required to submit their significant draft rules to OIRA for review before publishing them. In the submission packages for their draft rules, federal agencies are to designate whether they believe the rule may constitute an unfunded mandate under UMRA. According to OIRA representatives, for such rules, consideration of UMRA is then incorporated as part of these regulatory reviews, and draft rules are expected to contain appropriate UMRA statements. The same analysis conducted for Executive Order 12866 may permit agencies to comply with UMRA requirements. UMRA requires agency consultations with state and local governments on certain rules, and this is something that OIRA will look for evidence of when it does its regulatory reviews. UMRA provides OIRA a statutory basis for requiring agencies to do an analysis similar to that required by this. (Unlike laws, however, executive orders can be rescinded or amended at the discretion of the President).

Agencies Identified Few Final Rules Published in 2001 and 2002 as Containing Federal Mandates Because Most Rules Did Not Trigger UMRA’s Requirements

Federal agencies identified 9 of the 122 major and/or economically significant final rules that federal agencies published in 2001 or 2002 as containing federal mandates under UMRA (see fig. 3). As we previously reported, the limited number of rules identified as federal mandates during 2001 and 2002 is consistent with the previous findings in our 1998 report on UMRA and in OMB’s annual reports on agencies’ compliance with title II.

Of the nine rules that agencies identified as containing federal mandates under UMRA, only one included an intergovernmental mandate—EPA’s enforceable standard for the level of arsenic in drinking water. The remaining rules imposed private sector mandates ranging from Department of Energy rules that amended energy conservation standards for several categories of consumer products, including clothes washers and heat pumps, to a Department of Transportation rule that established a new federal motor vehicle safety standard requiring tire pressure monitoring systems, controls, and displays.

Of the 113 major and/or economically significant rules in 2001 and 2002 not identified as including federal mandates under UMRA, we reported that 48 contained no new requirements that would impose costs or have a negative financial effect on state, local, and tribal governments or the private sector.

Often, these were economically significant or major rules because they involved substantial transfer payments from the federal government to nonfederal parties. For example, the Department of Health and Human Services published a notice updating the Medicare payment system for home health agencies that was estimated to increase federal expenditures to those agencies by $350 million in fiscal year 2002.

In the remaining 65 of 113 rules, we determined that the new requirements would impose costs or result in other negative effects on nonfederal parties. In 41 of the 65 published rules, the agencies cited a variety of reasons that these rules did not trigger UMRA’s requirements (see fig. 4). There were 26 rules for which the agencies stated that the rule would not compel expenditures at or above the UMRA threshold and 10 rules for which the agencies stated that rules imposed no enforceable duty. For the remaining 24 rules, the agency did not provide a reason. However, independent regulatory agencies, which are not covered by UMRA, published 12 of these rules, and there is no UMRA requirement for covered agencies to identify the reasons that their rules do not contain federal mandates.

Some Rules That Did Not Trigger UMRA Had Potentially Significant Effects on Nonfederal Parties

At least 29 of the 65 rules with new requirements published in 2001 and 2002 could have imposed significant costs or other financial effects on nonfederal parties. In these 29 rules, we reported that the agencies either explicitly stated that they expected the rule could impose significant costs or published information indicating that the rule could result, directly or indirectly, in financial effects on nonfederal parties at or above the UMRA threshold. For example, more than half of them imposed costs on individuals exceeding $100 million per year, reduced the level of federal payments to nonfederal parties by more than $100 million in a year, or had substantial indirect costs or economic effects on nonfederal parties.

For the remaining 36 of the 65 rules that imposed costs or had other financial effects on nonfederal parties in 2001 and 2002, either the agencies provided no information on the potential costs and economic impacts on nonfederal parties or the costs imposed on them were under the UMRA threshold. For example, a Federal Emergency Management Agency interim final rule on a grant program to assist firefighters included some cost- sharing and other requirements on the part of grantees participating in this voluntary program. In return for cost sharing of $50 million to $55 million per year, grantees could obtain, in aggregate, federal assistance of approximately $345 million. Similarly, the U.S. Department of Agriculture’s interim rule on the noninsured crop disaster assistance program imposed new reporting requirements and service fees on producers estimated to cost at least $15 million. But producers were expected to receive about $162 million in benefits.

Even when the requirements of UMRA did not apply, agencies generally provided some quantitative information on the potential costs and benefits of the rule to meet the requirements of Executive Order 12866. Rules published by independent regulatory agencies were the major exception because they are not covered by the executive order. In general, though, the type of information that UMRA was intended to produce was developed and published by the agencies even if they did not identify their rules as federal mandates under UMRA.

In conclusion, UMRA was intended, in part, to provide more information to Congress and agencies when placing federal mandates on nonfederal parties by providing more information to help them determine the appropriate balance between desired benefits and associated costs. Based on CBO’s experience, there is some evidence that UMRA is in some ways achieving this desired goal. However, UMRA’s many definitions, exclusions, and exceptions result in many statutes and rules never triggering UMRA’s thresholds, which means they are not identified as federal mandates.

As we reported last year, in 2001 and 2002 many statutes and final rules with potentially significant financial effects on nonfederal parties were enacted or published without being identified as federal mandates at or above UMRA’s thresholds. Further, if judged solely by their financial consequences for nonfederal parties, there was little difference between some of these statutes and rules and the ones that had been identified as federal mandates with costs or expenditures exceeding UMRA’s thresholds. Although the examples cited in our report were limited to a 2-year period, our findings on the effect and applicability of UMRA are similar to the data reported in our previous reports and those of others on the implementation of UMRA. The findings raise the question of whether UMRA’s definitions, exclusions, and exceptions adequately capture and subject to scrutiny federal statutory and regulatory actions that might impose significant financial burdens on affected nonfederal parties.

Mr. Chairman, this completes my prepared statement.

Contacts and Acknowledgments

For further information, please contact Orice Williams at (202) 512-5837 or williamso@gao.gov or Tim Bober at (202) 512-4432 or bobert@gao.gov. Key contributors to this testimony were Boris Kachura and Michael Rose.

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