Unfunded Mandates: Analysis of Reform Act Coverage
Released: 2004-05-21T00:00:00

Letter

Background

Many federal statutes, and the regulations that implement them, impose requirements on state, local, and tribal governments or private sector parties in order to achieve certain legislative goals. Such statutes and their regulations can provide substantial benefits, as well as imposing costs. OMB’s 2003 final report on the costs and benefits of federal regulations estimated that the total annual quantified benefits of major rules issued from October 1, 1992, to September 30, 2002, ranged from $146 billion to $230 billion, while the total annual quantified costs ranged from $36 billion to $42 billion.

Title I of UMRA focuses on the legislative process, and title II focuses on the regulatory process. For both legislation and regulations, UMRA was intended to provide more information on and prompt more careful consideration of the costs and benefits of federal mandates that affect nonfederal parties. UMRA generally defines a federal mandate as any provision in legislation, statute, or regulation that would impose an enforceable duty on state, local, or tribal governments or the private sector or that would reduce or eliminate the amount of funding authorized to cover the costs of existing mandates. However, as discussed in the body of this report, some other definitions, exclusions, and thresholds in the act vary according to whether the mandate is in legislation or a rule and whether a provision imposes an intergovernmental or private sector mandate.

If legislation or a rule contains a federal mandate, as defined by UMRA, a major consequence is that other requirements in the act are triggered. Under title I, when a committee of authorization of the Senate or the House of Representatives reports a bill or joint resolution that contains any federal mandates to the full legislative body, the committee is required to provide the bill or resolution to the Director of CBO and identify the mandates it contains. UMRA then requires CBO to analyze each of these bills and resolutions—and, on request, other legislative proposals—for the presence of such mandates and to estimate their associated costs. CBO prepares UMRA statements that are to be included in the authorizing committees’ reports. The CBO mandate statements must also include an assessment of whether the legislation authorizes or otherwise provides funding to cover the costs of any new federal mandates.

UMRA’s specific enforcement mechanism for the requirements of title I is a point of order, which a member of Congress may raise to indicate that a rule of procedure has been or will be violated. Generally, a point of order is available under UMRA if there is no CBO UMRA statement for the legislation or if the legislation contains an unfunded intergovernmental mandate with costs over UMRA’s threshold or if it was not feasible to estimate the costs of the intergovernmental mandate. However, points of order are not available under UMRA for private sector mandates that exceed the cost threshold or if the private sector mandates’ costs are not feasible to estimate. UMRA’s rules are not self-enforcing and a point of order must be actively raised to hinder the passage of unfunded federal mandates. Specifically raising an UMRA point of order may serve to heighten the profile of “unfunded mandate” implications in the challenged legislation. As of March 2004, 13 points of order had been raised in the House of Representatives and no points of order had been raised in the Senate under UMRA. Only 1 of these 13, regarding the minimum wage in the Contract with America Advancement Act in 1996, resulted in the House voting to reject consideration of a proposed provision.

For rules that contain federal mandates, title II of UMRA requires the agencies to prepare written statements containing specific descriptions and estimates, including a qualitative and quantitative assessment of the anticipated costs and benefits of the mandate. For such rules, agencies are to “identify and consider a reasonable number of regulatory alternatives and from those alternatives select the least costly, most cost-effective, or least burdensome alternative that achieves the objectives of the rule” or explain why that alternative was not selected. UMRA requires OMB to collect the written statements prepared by the agencies on federal mandates in rules and periodically forward them to CBO. UMRA also requires OMB to submit annual reports to Congress detailing agencies’ compliance with title II. OMB’s Office of Information and Regulatory Affairs (OIRA) has the primary responsibility for monitoring agencies’ compliance with this title.

CBO and OMB regularly produce reports on, respectively, activities under titles I and II of UMRA. CBO has prepared an annual report on its activities under title I each year since UMRA’s enactment. Included in these reports is information on two requirements placed on CBO by title I, identifying (1) proposed legislation that would have imposed federal mandates on another level of government or the private sector and (2) the subset of the legislation examined by CBO that was found to contain mandates with costs at or above the relevant thresholds. Although not required by UMRA to do so, CBO also reviews all statutes enacted to identify mandates enacted into law for its annual reports. Since 2001, OMB has fulfilled its requirement to report to Congress on compliance with title II in the same document used to fulfill a statutory requirement for reporting to Congress on the costs and benefits of federal regulations. OMB’s reports provide information on the rules that agencies have identified as containing federal mandates and also discuss agencies’ efforts to consult with state, local, and tribal governments in the development of significant rules.

Scope and Methodology

To describe the applicable procedures, definitions, and exclusions for identifying federal mandates in statues and rules under UMRA, we reviewed the act, other related guidance documents, and CBO and OMB reports on the implementation of UMRA. We also interviewed persons knowledgeable about the implementation of UMRA in OMB, CBO, and other congressional offices. To identify statutes and final rules that were and were not identified as containing federal mandates under UMRA and analyze the reasons for those determinations, we focused our review on statutes enacted and final rules published during 2001 and 2002, as agreed with your staff.

For our review and analysis of the implementation of title I, we relied on information provided to us by the CBO officials responsible for preparing UMRA statements on proposed legislation and the annual CBO reports on UMRA. At our request, CBO identified from that 2-year period the 5 statutes that contained federal mandates at or above UMRA’s cost thresholds and 43 examples of statutes that were not so identified but nevertheless contained provisions having impacts on nonfederal parties. We did not ask CBO to compile a comprehensive list of all statutes in those years that might have impacts on nonfederal parties. For our review and analysis of the implementation of title II, we reviewed all 122 major and/or economically significant final rules—generally, those that would have an annual effect on the economy of $100 million or more or raise other significant economic or policy issues—that federal agencies issued during 2001 and 2002. Parallel to the information on statutes provided by CBO, we focused on identifying two sets of final rules—those that were identified as containing federal mandates at or above UMRA’s threshold and those that were not but included provisions affecting nonfederal parties that might be perceived by those parties as potential “unfunded mandates.” To determine whether the statutes and final rules we examined were perceived by affected parties as potentially having “unfunded mandate” implications, we shared them with the following national organizations representing nonfederal levels of government: National Association of Counties, National Conference of State Legislatures (NCSL), National Governors Association, the National League of Cities, and the U.S. Conference of Mayors. We then analyzed the statutes and rules to identify how they had been treated under UMRA, in particular identifying the application of procedural, definitional, and other provisions of UMRA that guide the identification of federal mandates.

The scope of our review was limited to a 2-year period and, within that period, only to examples of legislation enacted and rules that were finalized (i.e., we did not include all legislation considered by Congress or rules that were proposed but not finalized). Therefore, the examples we reviewed might not illustrate all possible ways that a statute or rule with a perceived mandate could be enacted or issued without being identified as a federal mandate under UMRA. However, the representatives from external public sector organizations who reviewed the statutes and rules we examined generally concurred that they were perceived as potential “unfunded mandates” and that we did not exclude any major examples that they believed should have been included. It is also important to recognize that perceived “unfunded mandates” could result from nonstatutory, nonregulatory federal actions, such as Homeland Security threat level adjustments, which are not covered by UMRA and therefore were outside the scope of our specific objectives. (See app. I for a more detailed description of our objectives, scope, and methodology.)

Identification of Federal Mandates in Statutes under Title I

Statutory provisions that impose requirements on nonfederal parties might not be identified as federal mandates under UMRA because some legislative actions do not trigger a review and even if the provisions are subject to review, UMRA circumscribes the definition of a federal mandate. When legislation containing “mandates” does undergo UMRA’s formal scrutiny, it has to meet three definitional requirements, not fall into any of seven exclusions, and impose costs at or above certain thresholds to be identified as containing federal mandates exceeding the cost thresholds under UMRA. In 2001 and 2002, 5 of the 377 statutes enacted were identified as containing provisions that were federal mandates exceeding the thresholds. From the remaining statutes, CBO identified 43 examples that had some kind of impact on nonfederal parties but were not identified during the legislative process as containing federal mandates at or above UMRA’s thresholds. For 24 of those examples, this was because their estimated direct costs were below the thresholds. There is some evidence that the existence of UMRA served to hinder the introduction of intergovernmental mandates, or led to their modification before enactment in the past. There is also evidence that suggests that some of CBO’s cost estimates under UMRA may have led lawmakers to reduce the cost of some mandates before enactment.

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

The type of legislation that a provision is contained in and how the legislation is considered determines if it is subject to automatic review by CBO. If provisions are subject to automatic CBO review, they are analyzed based on UMRA’s definitional requirements and exclusions. The feasibility of developing a cost estimate and the level of the cost estimate is then compared to applicable thresholds. Figure 1 depicts this general sequence of conditions that must be met before a statutory provision would be identified as a federal mandate at or above UMRA’s cost thresholds.

The following sections discuss these procedures, exclusions, definitions, and cost thresholds in more detail.

UMRA Procedures Do Not Require All Legislative Provisions to Be Automatically Reviewed by CBO

Provisions that are (1) not contained in authorizing bills, or (2) not reported by an authorizing committee are not automatically subject to CBO review before going to the floor (see fig. 1), and thus a CBO UMRA statement may not be issued. For example, appropriations bills are not automatically subject to CBO review under UMRA. In addition, even if a provision is contained in an authorizing bill, it still must be “reported” by that committee—as opposed to going directly to the full House or Senate or “discharged” by the committee without a vote to send it to the full House or Senate—to be subject to automatic CBO review.

CBO was not required to review seven bills that contained federal mandates during 2001 and 2002 that ultimately became law because they either were appropriations bills or were authorizing bills not reported by authorizing committees. For example, a provision prohibiting states from issuing a permit or lease for certain oil and gas drilling in the Great Lakes was not reviewed by CBO prior to enactment because it was contained in the Energy and Water Development Appropriations Act of 2002.

Although UMRA does not require an automatic CBO review of provisions not contained in authorizing bills or bills not reported by authorizing committees, CBO told us that it initiates an informal review of provisions in appropriations bills and the results of these informal reviews are communicated to appropriations committee clerks when CBO finds potential mandates in these bills. During these informal reviews, CBO does not estimate costs unless CBO already has cost data from an earlier review or unless Congress requests it. CBO will also review any legislation on request.

UMRA does not require automatic CBO review of provisions added after CBO’s initial review. Amendments containing mandates may be added to legislation after CBO issues its statement about whether the legislation contains any federal mandates. 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. According to CBO’s annual report for 2002, three laws were enacted in 2002 that contained federal mandates not reviewed by CBO prior to enactment because they were added after CBO reviewed the legislation. For example, a provision requiring insurers of commercial property to offer terrorism insurance was added to the Terrorism Risk Insurance Act of 2002 after CBO’s UMRA review, and thus not identified as a private sector mandate under UMRA prior to enactment.

There is one other important caveat regarding legislative provisions for which a CBO UMRA review is not required. The Joint Committee on Taxation (JCT), rather than CBO, has jurisdiction over proposed tax legislation and produces revenue estimates for all such legislation considered by either the House or the Senate. In addition, JCT examines legislative provisions that affect the tax code for federal mandates and estimates their costs. According to a JCT legislative counsel, a statement regarding the existence of federal mandates should be included in the House or Senate committee report. Also, according to CBO, JCT estimates of revenue impacts are included in CBO cost estimates for legislation.

When Provisions Are Reviewed, They Are Subject to Many Definitional Requirements and Exclusions

A provision must meet the formal definition of a mandate and not be not be classified as an “exception” to be identified as a federal mandate. UMRA defines a federal mandate as a provision that would impose an enforceable duty upon state, local, or tribal governments (intergovernmental mandate) or upon the private sector (private sector mandate). Exceptions are defined as enforceable duties that are conditions of federal financial assistance or arise from participation in a voluntary federal program.

UMRA does include as intergovernmental mandates certain conditions on federal assistance programs and reductions in the authorization of appropriations for federal financial assistance and the control of borders under certain conditions. A provision would also meet the definition of a intergovernmental mandate if it relates to an existing federal program of $500 million or more (annually) to state, local, and tribal governments if the provision would increase the stringency of conditions of funding, place caps or reduce the funding and the state, local, or tribal governments cannot modify their financial or programmatic responsibilities regarding the federal program.

A private sector mandate is also a provision that would reduce or eliminate the amount of authorization of appropriations for federal financial assistance that would be provided to the private sector for the purposes of ensuring compliance with such an enforceable duty.

UMRA also excludes certain provisions from its application. Specifically, UMRA does not apply 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).

If provisions are excluded, CBO will state the reason for the exclusion and make no statement regarding mandates in those provisions.

If a provision is not excluded and meets the definition of a federal mandate without exception under UMRA, CBO identifies the provision as a federal mandate under UMRA, and then determines if a cost estimate is feasible. For intergovernmental mandates, if a cost estimate is feasible, the direct costs (to state, local, or tribal governments) of all mandates contained within the legislation must equal or exceed $50 million (in 1996 dollars) in any of the first 5 fiscal years that the relevant mandates would be effective for CBO to determine that the mandate meets or exceeds UMRA’s cost threshold. The same requirements apply for private sector mandates, except that the cost threshold is $100 million (in 1996 dollars) or more. CBO adjusts both the intergovernmental and private sector cost thresholds annually for inflation. If an intergovernmental mandate exceeds the cost threshold, a point of order is available under UMRA. However, if a private sector mandate exceeds the cost threshold, a point of order is not available. If an intergovernmental or private sector mandate is below the applicable threshold, CBO states that a mandate (intergovernmental or private) exists with costs estimated to be below the threshold. Although this highlights the provision as mandate, it does not provide for a point of order under UMRA.

Cost Estimates May Not Be Feasible or Complete

Developing a cost estimate for federal mandates must be feasible, and their direct costs must meet or exceed applicable cost thresholds for CBO to identify them as such under UMRA. However, in some instances, it is not feasible to develop a cost estimate.

CBO indicated in its annual report for 2002 that 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. If a cost estimate for legislation is not feasible, CBO specifies the kind of mandate it contains, but that the agency cannot estimate its costs. This does not prevent the legislation from moving through the legislative process, but in the case of an intergovernmental mandate, UMRA would still allow a member of Congress to raise a point of order.

CBO reported that it could not estimate the costs of mandates in nine bills that ultimately were enacted during 2001 and 2002. Of these nine laws, seven contained intergovernmental mandates and two contained both private sector and intergovernmental mandates. For example, CBO could not estimate the costs of provisions requiring manufacturers of medical devices to comply with certain labeling and notification conventions and to submit their registrations electronically contained in the Medical Device User Fee and Modernization Act of 2002. CBO stated that since many of the requirements in the act would depend on the future actions of the Secretary of Health and Human Services, CBO could not determine whether their direct costs would exceed UMRA’s threshold.

Even if costs can be estimated, UMRA focuses only on the direct costs imposed by federal mandates in legislation. According to UMRA, such costs are limited to spending that results directly from the mandates imposed by the legislation, rather than from the legislation’s broad effects on the economy. The direct costs of a federal mandate also include any new revenues that state and local governments are prohibited from raising. While CBO has estimated the indirect costs of some federal mandates, CBO is limited to including only direct costs when determining if the aggregate total costs of federal mandates in legislation meet or exceed the applicable cost thresholds under UMRA. CBO testified in July 2003 that, “federal mandates often have secondary effects, including the effects on prices and wages when the costs of a mandate imposed on one party are passed along to other parties, such as customers or employees.” CBO told us that if it determined that indirect costs (including secondary effects) would be significant, it would include the estimate in its UMRA statement, but that its determination of whether a mandate meets or exceeds the applicable thresholds is based only on direct costs. Therefore, although information on indirect costs may be available, legislation with significant total costs (direct and indirect) on nonfederal parties may not be identified as exceeding the cost thresholds under UMRA.

CBO may conclude that legislation contains a federal mandate and is funded because the legislation authorizes funds to be appropriated to carry out or comply with the mandates. However, if the appropriation subsequently provided is less than the amount authorized, the federal mandate’s costs may be at or above the threshold.

UMRA 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. A CBO official did not recall any legislation ever containing this provision, and our database search has also resulted in no legislation found containing this provision.

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

Although few laws have been identified as containing federal mandates at or above applicable cost thresholds, there is some evidence that UMRA has a discouraging effect on the enactment of intergovernmental mandates and the magnitude of costs to nonfederal parties in proposed legislation.

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 (see tables 1 and 2 below). From 1996 to 2000, CBO identified 18 mandates (2 intergovernmental and 16 private sector) with costs at or above cost thresholds that became law.

UMRA may have indirectly discouraged the passage of legislation identified as containing intergovernmental mandates at or above UMRA’s cost threshold. Since 1996 only three proposed intergovernmental mandates with annual costs above the applicable threshold had become law (an increase in the minimum wage in 1996, a reduction in federal funding for Food Stamps in 1997, and a preemption of state laws on premiums for prescription drug coverage in 2003).

Between 1996 and 2002, CBO reported that 21 private sector mandates with costs over the applicable threshold were enacted. Of these, 8 involved taxes, 4 concerned health insurance, 4 dealt with regulation of industries, 2 affected workers’ take home pay, 1 imposed new requirements on sponsors of immigrants, 1 changed procedures for the collection and use of campaign contributions, and 1 imposed fees on airline travel to fund aviation security.

UMRA may have also aided in lessening the costs of some mandates. From 1996 through 2000, CBO identified 59 proposed federal mandates with costs above applicable thresholds. Subsequent to CBO identification, 9 were amended before enactment to reduce their costs below the applicable thresholds, while 18 mandates were enacted with costs above the threshold, and 32 were never enacted. Although CBO has not done an analysis to determine the role of UMRA in reducing the costs of mandates ultimately enacted, it did state in its report that “it was clear that information provided by CBO played a role in the Congress’s decision to lower costs.”

There is also some testimonial evidence regarding the effectiveness of UMRA on legislation. CBO stated in its July 2003 congressional testimony 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.” 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.” Although points of order are rarely used, they may be perceived as an unattractive consequence of including a mandate above cost thresholds in proposed legislation. The director of policy and federal relations at the National League of Cities stated, “This is like a shoal out in the water. You know it is there, so you steer clear of it.”

Nonfederal Parties Perceived Some Enacted Provisions as Having Unfunded Mandate Implications

Overall, CBO’s annual reports from 2001 and 2002 showed that most proposed legislation did not contain federal mandates as defined by UMRA. Further, most of the proposed legislation with mandates would not have imposed costs exceeding the thresholds set by UMRA. We asked CBO to compile a list of examples from among those laws enacted in 2001 and 2002 that it perceived as having 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 have “unfunded mandates” implications. We shared CBO’s list of 43 examples with national organizations representing nonfederal levels of government, and they generally agreed that those laws contained provisions perceived by their members as mandates.

For 12 of the 43 examples, an automatic UMRA review was not required of at least some provisions prior to enactment because of the legislative process used to enact the bill, for example, not being reported by an 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, 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 JCT and found not to contain any federal mandates (see fig. 2). It should be noted that the number of laws in any of the categories listed do not necessarily correlate with the magnitude of perceived or actual impact on affected nonfederal parties.

Of the 12 examples of laws with provisions that CBO was not required to review prior to enactment, CBO later determined how they would have been characterized under UMRA: 5 laws contained mandates with direct costs below UMRA’s thresholds, 4 laws contained mandates with direct costs that could not be estimated, 1 was excluded under UMRA for national security so would not be reviewed for the presence of mandates, 1 did not meet the definition of a mandate, and 1 had some provisions with costs below the threshold and some provisions excluded (again, for national security). (See app. II for more detailed information on the 43 examples.)

Some Legislation Had Potentially Although cost estimates of the full impact (including direct and indirect Significant Impacts on costs) are not available for all 43 examples discussed previously, table 3 Nonfederal Parties describes 10 laws among the 43 that we consider important to highlight and/or have multiple uncertainties surrounding the magnitude of their potential impacts on nonfederal parties.

Procedurally, the identification of federal mandates under title II of UMRA is simpler than under title I. Although regulatory agencies generally are to assess the intergovernmental and private sector effects of all their actions, under UMRA title II they only need to publicly identify and prepare UMRA “written statements” on those rules that the agencies believe include a federal intergovernmental or private sector mandate that may result in expenditures of $100 million or more (adjusted for inflation) in any year. However, there are 14 definitional exceptions, exclusions, or other restrictions applicable to the identification of federal mandates in rules, compared to 10 that are applicable to identifying mandates in legislation. Agencies identified 9 of the 122 major and economically significant final rules published in 2001 and 2002 as containing federal mandates as defined by UMRA. However, based on our review of the published rules, we determined that 65 of the remaining rules imposed new requirements on nonfederal parties. Agencies cited, or could have cited, a variety of reasons that these 65 rules did not contain federal mandates under UMRA. Nevertheless, at least 29 of the 65 rules appeared to have significant financial impacts on affected nonfederal parties of $100 million or more in any year.

UMRA Procedures for Rules Are Less Complex than for Legislation, But More Restrictions Apply to Identifying Federal Mandates

UMRA’s process of identifying and reporting on rules with federal mandates is more straightforward than that for legislation. UMRA generally directs agencies to assess the effects of their regulatory actions on other levels of government and the private sector. However, the agencies only need to identify and prepare written UMRA 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. Thus, unlike CBO’s reviews of proposed legislation, one cost threshold applies to both intergovernmental and private sector mandates in rules, and there is no public identification of potential federal mandates in rules before agencies determine whether such mandates exceed the threshold. As is the case for legislation, UMRA contains many definitions and exclusions that affect the extent to which agencies’ rules are considered to have federal mandates at or above the threshold.

The three definitional provisions and seven general exclusions from UMRA that we previously identified as applicable to legislation also apply to federal rules. However, there are four additional restrictions to the identification of federal mandates in rules (i.e., in an UMRA statement): 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 does not apply to any rule for which the agency does not publish a general notice of proposed rulemaking in the Federal Register. This means that UMRA does not cover interim final rules and any rules for which the agency claimed a “good cause” or other exemption available under the Administrative Procedure Act of 1946 to issue a final rule without first having to issue a notice of proposed rulemaking.

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. Under title I, though, the direct costs of a mandate in legislation also include any amounts that state and local governments are prohibited from raising in revenues to comply with the mandate. However, as in reviews of legislation, indirect costs of rules are not considered when determining whether a mandate meets or exceeds UMRA’s threshold.

Two of these restrictions on UMRA’s scope in the regulatory process are essentially procedural. If a rule’s path to issuance was through an independent regulatory agency or a final rule with no prior proposed rule, any “mandate” included in the rule would not be subject to identification and review under UMRA.

OIRA Monitors Agencies’ Compliance with Title II Requirements

OIRA is responsible for the centralized review of significant regulatory actions published by executive branch agencies, other than 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 the rules. As part of this regulatory review process, OIRA monitors agencies’ compliance with UMRA. 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, consideration of UMRA is then incorporated as part of these regulatory reviews, and draft rules are expected to contain appropriate UMRA certification statements.

OIRA’s guidance to agencies notes that the analytical requirements under Executive Order 12866 are similar to the analytical requirements under UMRA, and thus the same analysis may permit agencies to comply with both analytical requirements. However, OIRA representatives pointed out that UMRA might also require 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. The officials also pointed out that UMRA provides OIRA a statutory basis for requiring agencies to do an analysis similar to that required by the executive order (which 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

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).

Only one of the nine rules that agencies identified as containing federal mandates under UMRA—EPA’s enforceable standard for the level of arsenic in drinking water systems—included an intergovernmental mandate. The remaining rules imposed private sector mandates: four Department of Energy rules that amended energy conservation standards for several categories of consumer products, including clothes washers and heat pumps; three EPA rules that adopted emission standards to reduce air pollution from various sources, including paper and pulp mills and heavy-duty highway engines and vehicles; and a Department of Transportation (DOT) rule that established a new federal motor vehicle safety standard that required tire pressure monitoring systems, controls, and displays.

In each of these final rules, the agencies addressed the applicable UMRA analytical and reporting requirements. (See app. III for more detailed information on these rules.) The limited number of rules identified as federal mandates during 2001 and 2002 is consistent with the findings in our 1998 report on UMRA and in OMB’s annual reports on agencies’ compliance with title II.

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

Of the 113 major and/or economically significant rules not identified as including federal mandates under UMRA, we determined 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 Agriculture (USDA) published a final rule that expanded loans, loan deficiency payments, and working assistance loans for certain agricultural commodities, such as cotton and honey, and was expected to increase federal outlays by about $1.1 billion annually. The Department of Health and Human Services (HHS) 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.

However, we determined that 65 of the 113 rules contained new requirements that would impose costs or result in other negative financial effects on state, local, and tribal governments or the private sector. We shared this list of rules with national organizations representing other levels of government affected by these rules.Representatives of those organizations generally confirmed that all of the 65 rules were perceived by their members to have at least some “unfunded mandates” implications.

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

Our review of the 65 rules indicated that agencies did not cite all of the applicable reasons they could have for determining that the rules did not trigger UMRA’s requirements (see fig. 5). For example, although in only 3 of the 65 rules did the agencies identify the absence of a notice of proposed rulemaking as the reason the rule did not trigger UMRA, this reason applied to another 25. Similarly, although 5 rules cited the exclusion that any enforceable duties would occur as a consequence of participation in a voluntary federal program, another 21 rules could have claimed this exclusion. Between what agencies cited or could have cited, 47 of the 65 rules (72 percent) had more than one applicable reason. (For each of the 65 rules, app. IV identifies the reasons that agencies cited or could have cited for their rules not triggering UMRA.)

At least 29 of the 65 rules with new requirements appeared to result in significant costs or other negative financial effects on state, local, and tribal governments or the private sector. In these 29 rules, 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. (Appendix V provides more detailed information on each of the 29 rules that were not identified as federal mandates under UMRA, but that could impose significant costs or have other negative financial effects on state, local, and tribal governments or the private sector.)

These 29 rules not identified as federal mandates under UMRA, but with significant financial impacts on nonfederal parties, can be roughly categorized as follows: 9 that imposed costs on individuals—a category included in UMRA’s definition of the private sector—exceeding $100 million in any year; 5 that reduced the level of federal payments to nonfederal parties by more than $100 million in any year; 4 with substantial indirect costs or economic effects on nonfederal 4 from independent regulatory agencies that imposed substantial fees or other costs on regulated entities; 3 published by DOT on aviation security in the aftermath of the September 11, 2001, terrorist attacks, which the agency noted “may impose significant costs,” although it did not prepare quantified estimates; 2 with voluntary options that might increase Medicaid costs to states by over $125 million in some years; 1 amending the Federal Acquisition Regulations that could result in nonfederal costs ranging from $92 million to $377 million annually, depending on the “uncertainty of manufacturers to distribute these costs over the general population;” and 1 USDA rule imposing private-sector costs to limit retained water in raw meat and poultry products.

Table 4 provides more detailed information about selected examples from among the 29 rules.

We determined that 1 of the 29 rules, a USDA rule on retained water in raw meat and poultry products, probably was a federal mandate under UMRA. The rule establishes a requirement of zero retained water, unless the water retention is unavoidable in processes necessary to meet food safety requirements. USDA did not mention UMRA in the rule but estimated that, if extensive modifications to chilling systems were needed throughout the poultry industry, the fixed costs could run to “well over $100 million.” USDA provided only a “lower bound” estimate of $110 million in private- sector costs for the first year of implementation (representing the costs of reducing retained water in the range of 1 percent to 1.5 percent). While that estimate was under the $113 million UMRA threshold (adjusted for inflation) in 2001, the agency did not quantify median or upper bound cost estimates, which reference to a lower bound estimate implies. Because the lower bound estimate was so close to the UMRA threshold, it is reasonable to assume that a median or upper bound estimate would probably have equaled or exceeded the threshold, and the rule would have been a private sector mandate under UMRA. No other UMRA exclusion appeared to apply to this rule. However, to address the requirements of Executive Order 12866 the agency provided an analysis of the costs and benefits of the rule, as well as an analysis of the regulatory alternatives considered. As noted earlier, OIRA guidance points out that the same analysis may permit agencies to comply with both the executive order’s and UMRA’s requirements.

For the remaining 36 of the 65 rules, 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, USDA’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.

Conclusions

UMRA was intended to restrain the imposition of unfunded federal mandates on state, local, and tribal governments and the private sector, primarily by providing more information and focusing more attention on potential federal mandates in legislation and regulations. There is some evidence that the information provided under UMRA and the spotlight that information places on potential mandates may have helped to discourage or limit federal mandates. CBO’s annual reports indicate that, at least with regard to the legislative process, UMRA sometimes does have such an indirect preventive effect.

However, there are multiple ways that both statutes and final rules containing what affected parties perceive as “unfunded mandates” can be enacted or published without being identified as federal mandates with costs or expenditures at or above the thresholds established in UMRA. Our review demonstrated that 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 review were limited to a 2-year period, our findings on the limited effect and applicability of UMRA are similar to the data reported in previous GAO, CBO, and OMB reports on the implementation of UMRA. The findings raise the question of whether UMRA’s procedures, definitions, and exclusions adequately capture and subject to scrutiny federal statutory and regulatory actions that might impose significant financial burdens on affected nonfederal parties.

This report provides descriptive information and analysis regarding UMRA’s implementation, focusing specifically on the coverage and identification of federal mandates under UMRA. We are making no specific recommendations for executive action nor identifying any specific matters for consideration by Congress at this time. As requested, we will be continuing our work on other aspects of UMRA.

As agreed with your office, unless you publicly announce the contents of this report earlier, we will not distribute it until 30 days from the date of this letter. We will then send copies of this report to the Director of OMB and will provide copies to others on request. It will also be available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staff have any questions concerning this report, please contact me at (202) 512-6806 or daltonp@gao.gov. Key contributors to this report were Curtis Copeland, Naved Qureshi, Michael Rose, and Tim Bober.

Objectives, Scope, and Methodology

In this report, you asked us to describe and provide examples of how federal statutes and rules with potentially significant financial implications for state, local, and tribal governments or the private sector may be enacted or issued without being identified as federal mandates under titles I and II of UMRA, which respectively address the legislative and regulatory processes. Our specific reporting objectives were to: 1. Describe the applicable procedures, definitions, and exclusions for identifying federal mandates in statutes and rules under UMRA.

2.

Identify statutes and final rules that contained federal mandates under UMRA. 3. Provide examples of statutes and final rules that were not identified as federal mandates, but that affected parties might perceive as “unfunded” mandates, and the reasons these statutes and rules were not federal mandates under UMRA.

As agreed with your staff, we focused on statutes enacted and final rules published during 2001 and 2002 to address the second and third objectives.

To address the first objective, regarding the procedures, definitions, and exclusions applicable to the identification of federal mandates under titles I and II of UMRA, we reviewed the act and other related guidance documents and reports on the implementation of UMRA. These other related documents included the various annual reports on UMRA prepared by CBO and OMB, materials used in a congressional parliamentary process training seminar on unfunded mandates and points of order, and OMB’s March 1995 guidance to federal agencies on the implementation of title II. We also interviewed persons knowledgeable about the implementation of UMRA in congressional offices, CBO, and OMB.

To address the second and third objectives regarding statutes that were and were not identified as federal mandates under title I of UMRA, we consulted with the CBO officials responsible for preparing UMRA statements on individual bills. The CBO officials identified the 5 statutes enacted during 2001 and 2002 that contained federal mandates at or above UMRA’s cost thresholds. At our request, they also identified 43 examples of statutes enacted during that 2-year period that they believed, based on professional judgment, had potential intergovernmental or private sector impacts but had not been identified as containing mandates at or above UMRA’s thresholds. (We did not ask CBO to compile a comprehensive list of all statutes passed by the 107th Congress that may have had intergovernmental or private sector impacts.) To assure that this set of examples was relevant for our purposes and to confirm CBO’s characterization of the potential impacts of these statutes and the reasons why provisions were or were not identified as federal mandates, we reviewed available source material on each of these statutes. In particular, we examined the detailed descriptions and information on each statute that were contained in CBO mandate statements, cost estimates, annual reports, and testimony, as well as other relevant information on each statute from the Legislative Information System of Congress.

To address the second and third objectives regarding final rules that were and were not identified as federal mandates under title II of UMRA, we conducted a content analysis of all 122 major and/or economically significant final rules that agencies published in 2001 or 2002 to identify the rules that could have significant financial effects on nonfederal parties and determine why they were or were not considered federal mandates. We chose not to review other rules because, by definition, they were less likely to have significant effects on nonfederal parties, although arguably some could have had a significant effect. To arrive at our final set of 122 rules, we relied primarily on the list of 119 major rules published during the 2- year period, as identified in GAO’s compilation of reports on federal agency major rules. Our Office of General Counsel takes several steps to assure the completeness of the list of major rules; however, to generally corroborate that this list of major rules included those that could have significant effects on nonfederal parties, we also compared GAO’s major rules list to the rules identified as “economically significant” by the Regulatory Information Service Center (RISC). As a result of this exercise, we supplemented our initial list with 3 additional rules. We then reviewed the Federal Register notices that agencies published for all 122 of these rules to confirm that they were major and/or economically significant and to identify whether, and to what extent, they imposed requirements on nonfederal parties. On the basis of our comparisons and reviews, we concluded that these data were sufficiently reliable for our purposes.

Because we were asked to identify rules that affected parties might perceive as intergovernmental or private sector mandates, even if not technically identified as such under UMRA, our initial screening used a broader definition of a potential mandate than delineated in UMRA. For this screening, we used the information in the published rules to make a team consensus judgment on whether a nonfederal party (state, local, and tribal governments or the private sector) might consider provisions of the rule to impose requirements or mandates that had at least some costs or negative financial effects. In particular, we focused on identifying rules that imposed new requirements and costs (direct or indirect) on affected parties. For each rule identified as including a potential “mandate,” team members then independently reviewed the text of each rule to code the reasons agencies may have cited that their rules were not federal mandates under UMRA, as well as other reasons available under UMRA that might have applied to these rules. The team members generally concurred in their initial coding, and, based on team discussions, we were able to resolve any differences and determine a team consensus judgment on the appropriate coding for each rule.

To provide corroboration that the examples of statutes CBO identified and final rules we identified to address objective three were perceived by affected parties as having “unfunded mandate” implications, we shared our draft lists of examples with national organizations representing other levels of government. These organizations included the National Association of Counties, National Conference of State Legislatures, National Governors Association, the National League of Cities, and the U.S. Conference of Mayors. Their representatives generally concurred that the statutes and rules we focused on were perceived by their members to have “mandate” implications and that we had not left out any major examples from our time period that they believed were important.

One limitation of our review was that, in agreement with your staff, we focused on statutes enacted and final rules published during 2001 and 2002. Those statutes and rules may not reveal all of the ways in which provisions with significant cost effects might not be identified as federal mandates. Neither CBO nor we reviewed the many bills that were not enacted and rules that were proposed, but not finalized, during 2001 and 2002. However, our findings and the specific examples we identified were sufficient to illustrate how statutes and rules with potentially significant effects on nonfederal parties might not be identified as federal mandates under UMRA. In addition, our findings for this review were consistent with those in prior GAO, CBO, and OMB reports on the implementation of UMRA. In general, we also recognize that perceived “unfunded mandates” could also result from other nonstatutory, nonregulatory federal actions, such as Homeland Security threat level adjustments. However, UMRA does not cover such nonstatutory or nonregulatory actions, so they were out of the scope of this review.

We conducted our review from August 2003 through February 2004 in Washington, D.C., in accordance with generally accepted government auditing standards. On April 22, 2004, we provided a draft of this report to the Director of the Office of Management and Budget (OMB) for his review and comment. On April 29, 2004, an OMB representative notified us that OMB had no comments on our report. We also provided the draft to CBO officials for their technical review. We incorporated their comments and suggestions as appropriate.

Examples of Statutes with Impacts on Nonfederal Parties that Were Not Mandates at or Above UMRA Thresholds

CBO provided us the following examples of laws enacted in 2001 and 2002 that it believed had impacts on nonfederal parties, but were not identified as federal mandates at or above applicable cost thresholds (see table 5). A number of groups representing nonfederal parties generally agreed that these examples were statutes perceived to have “unfunded mandate” implications.

Final Rules with Federal Mandates under UMRA

The following table presents information on each of the nine final rules published by federal regulatory agencies during 2001 and 2002 that the agencies identified as federal mandates under UMRA (see table 6). For each rule, we provide (1) GAO’s identification number for the rule, (2) the title of the rule and its date of publication in the Federal Register, (3) the agency that published the rule, (4) summary information about the potential costs or other negative financial effects of the rule on affected nonfederal parties, and (5) the agency’s statement, as it appeared in the Federal Register notice, regarding the applicability of UMRA.

Reasons that Selected Final Rules Did Not Trigger UMRA

The following table provides information on 65 major or economically significant final rules published during that 2001 and 2002 that did not trigger UMRA but that would result in at least some costs or negative financial effects on state, local, and tribal governments or the private sector (see table 7). The table displays the various reasons that agencies cited or could have cited to explain why the rules did not trigger UMRA. Code “A” identifies reasons the agencies cited, and code “O” identifies other reasons that could have applied. Note that only 11 of the 14 possible reasons under UMRA were applicable to any of these rules.

Examples of Final Rules that Did Not Trigger UMRA But Had Potentially Significant Financial Effects on Nonfederal Parties

The following table presents information on 29 final rules published by federal regulatory agencies during 2001 and 2002 that did not trigger UMRA but that had potentially significant costs or financial effects on state, local, and tribal governments or the private sector (see table 8). For each rule, we provide (1) GAO’s unique identification number for the rule, (2) the title of the rule and its date of publication in the Federal Register, (3) the agency that published the rule, (4) summary information about the potential costs or negative financial effects of the rule on affected nonfederal parties, and (5) the agency’s statement in the Federal Register notice, if any, regarding the applicability of UMRA.

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