How Will One-In, Two-Out Regulatory Order Actually Work?

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By Cheryl Bolen

Federal agencies may not only be able to implement an executive order requiring them to offset the costs of new regulations, but it might not be as bad as everyone thinks, a former British government official told Bloomberg BNA.

“Agencies need to start by thinking about ways in which they can streamline the costs of regulations whilst maintaining protections,” Jitinder Kohli, a director in Deloitte Consulting LLP’s public sector practice, said.

Kohli previously was the chief executive of the U.K. Better Regulation Executive, an office established in 2005 to monitor the measurement of regulatory burdens and coordinate their reduction. The stated goal of the office is to ensure the regulation that remains is smarter, better targeted and less costly to business.

Still, this is a brand-new policy in the U.S. and has been established differently than what now exists in the U.K. The Office of Information and Regulatory Affairs, an office within the White House Office of Management and Budget, issued interim guidance on the order, but questions remain.

What It Does

There are three requirements in the executive order, Kohli said. The first requirement is, for every dollar of regulatory cost an agency brings in, it has to take a dollar of regulatory cost out, he said.

The secondary requirement can be called the “net zero” requirement, Kohli said. This is provision 2(b) in the order for fiscal year 2017, directing that the total incremental cost of new regulations, including repealed regulations, shall be no greater than zero, he said.

There is also a third, separate requirement, which is provision 2(c) in the order, Kohli said. That can be called the “one-in, two-out” requirement, Kohli said. This provision directs that, for any new costs associated with new regulations, they should be offset by the elimination of existing costs associated with two prior regulations, he said.

“My read of 2(c) and the OMB guidance is it doesn’t require you to get rid of an old regulation, it requires you to find savings in two places,” he said.

The OMB guidance states that, in general, executive departments and agencies may comply with the requirements by issuing two “deregulatory” actions for each new significant regulatory action that imposes costs.

“Any existing regulatory action that imposes costs and the repeal or revision of which will produce verifiable savings may qualify,” the guidance said.

Differences with U.K

Unlike the U.S., the U.K. started with a simple 25 percent reduction target, Kohli said. The U.K. took a subset of regulatory costs and pledged to reduce them by 25 percent over five years, he said.

That policy evolved to cover the overall cost of regulation and a requirement that, for every pound brought in, agencies had to take a pound out, which then turned into two pounds out, and now three pounds, he said.

“The U.S. system—this new regime has two layers in it, and the two layers are complementary, but don’t always fit very well together,” Kohli said.

Still a question is what counts in terms of the trigger for the order’s requirements, Kohli said. The OMB guidance appears to say the order’s requirements are triggered only for “significant” regulations, which are often defined as those with an economic impact of $100 million or more annually.

“The system doesn’t appear to apply to smaller regulatory costs,” Kohli said. “That is a difference between the U.S. and the U.K., because in the U.K. it did apply broadly,” he said.

Finding Savings

What the U.K. and other countries such as Australia, Canada, Denmark and the Netherlands have found is their systems are most effective when they incentivize regulators to look for ways to reduce the costs associated with existing regulations.

Often that streamlining is achieved through administrative changes, like redesigning a form so it’s easier to fill in or issuing better guidance to small businesses so it’s easier for them to know how to comply, Kohli said.

“Part of your agency culture, you need to constantly look for ways to tidy up the existing stock of regulations and to reduce costs associated with the existing stock of regulations, and you need to do both of those things at the same time,” Kohli said.

There will need to be a new function within agencies to do that, Kohli said. Agencies will need to start coming up with regulatory simplification ideas, banking the costs of those, building credit and then drawing that credit down in order to bring in new regulatory proposals, he said.

Reducing Ongoing Costs

A long-standing complaint by business is the first-year, up-front costs of complying with a regulation, which become minimal over time. Thus, eliminating old regulations often does not produce much in the way of savings.

“There is some truth to that statement,” Kohli said, adding that it’s a more complicated calculation than that. There are some costs associated with just understanding what the new requirements are or buying a new piece of equipment, he said.

Then there are ongoing costs associated with the regulation that are normally related to time, or the time spent by employees complying with that regulation and any distorting effect in the way the business operates, Kohli said.

“There’s an ongoing cost, which is annualized,” Kohli said. “If you can get rid of a regulation, or if you make a significant change to the way a regulation operates, then in many cases the ongoing costs will reduce significantly,” he said.

To contact the reporter on this story: Cheryl Bolen in Washington at cbolen@bna.com

To contact the editor responsible for this story: Paul Hendrie at phendrie@bna.com

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