The State Auditor’s Office has identified several ways to make Washington’s Regulatory Fairness Act work better. This new performance audit is part of a regulatory reform series the SAO began in 2011. We’ve written about the previous work in two policy briefs: Regulatory Reform: A Win-Win-Win for Agencies, Businesses, and Taxpayers (2015) and A Complex Maze of State and Local Laws and Regulations (2012).

The new audit looks at how agencies complete the Small Business Economic Impact Statement process that is part of the Regulatory Fairness Act (RFA). According to the audit, the RFA was enacted in 1982

. . . to reduce the disproportionate impact of state administrative rules on small businesses. It requires state agencies to consider how their proposed rules will impact businesses and to mitigate the costs to small businesses that are disproportionately affected.

Under the RFA (RCW 19.85), agencies must:

1. Determine whether a rule is exempt.
2. If not, determine whether a rule has “more-than-minor” costs.
3. If so, prepare a Small Business Economic Impact Statement (SBEIS).
4. Show whether a rule would have a disproportionate impact on small businesses (which are defined as having fewer than 50 employees).
5. If so, mitigate those costs.

The SAO considered 331 rules proposed by 16 agencies that were published in 2014 and 2015. Among the findings:

• “Agencies provided clear, fully-supported, and complete information consistent with the law’s requirements in their initial rule filings about half the time.”
• When agencies claimed exemptions, only 54 percent were actually allowable. Interestingly, some agencies claimed exemptions “because the proposed rules did not affect small businesses.” This may seem reasonable, but “the RFA does not contain language to explicitly exempt agencies for this reason.” Overall, exemptions seemed to be an area of confusion; the SAO recommends clarifying the law and reworking the form used when proposing rules.
• When agencies said a proposed rule would impose less-than-minor costs, they provided full support for that position only 51 percent of the time.
• When agencies completed an SBEIS, only 28 percent included all the information required.
• Three agencies “concluded that when a proposed rule addressed only small businesses, its costs could not be disproportionate because there were no large businesses to compare them to.” The SAO, on the other hand, concludes “that a rule imposing costs on small business and no cost on large business should be considered to have a disproportionate impact on small business.”
• There is no entity that provides statewide guidance or oversight on RFA compliance.
• Working with small business associations “could reduce agency staff time and the cost of administering surveys, and could improve response rates by businesses.” In turn, this could improve the quality of cost information used in the RFA process.

In the agency response letter (beginning on page 26 of the audit), the director of the Office of Financial Management writes,

As a next step, the Governor’s Office plans to invite rulemaking agencies, small business customers, stakeholders and representatives from the Office of the Attorney General and Office of the Code Reviser to better understand how any proposed changes to the act, or alternative statutes, would impact small businesses and agencies. Convening a robust working group such as this could also help increase consistency in how agencies follow the RFA and allow them to participate in efforts to refine and develop standardized implementation tools.