OMB Papers

Towards a Regulatory Budget:
A Working Paper on the Cost of Federal Regulation (1979)

Jim Tozzi, ed. 1979.

PART 7: THE LEGAL FOUNDATIONS OF A REGULATORY BUDGET

STATEMENT OF THE ISSUE

The fundamental legal issue to be discussed is: Assuming that the decision has been made to institute a regulatory budget, what legal means could most effectively and responsibly be used to implement that decision?

DEFINITIONS

A. Our discussion uses the definition of "regulatory budget" provided earlier in this paper. We ionterpret that term to entail an overall "ceiling" or "maximum" figure, setting a limit on the total amount of non-Federal expenditures needed for compliance with all regulations promulgated by all Federal departments and agencies. We further assume that each individual Federal department or agency (hereinafter, "Federal agency") made subject to the regulatory budget would be required to operate within the constraints of its own specific "agency regulatory budget", which would be a subset of the Government-wide regulatory budget.

B. "Federal agency" as used in this chapter refers only to agencies of the Executive Branch and the independent regulatory commissions. It thus does not apply to the courts and other judicial agencies such as the Administrative Conference, or to the Congress and other legislative agencies such as the General Accounting Office.

Independent regulatory commissions are multi-member bodies whose commissioners are appointed for fixed terms and which enjoy a notably greater degree of "independence" from Presidential control than do Executive Branch agencies. For example, the head of an Executive Branch agency (e.g., the Commerce Department or EPA) serves at the pleasure of the President, while a Commissioner of an independent regulatory commission can be removed from office only by the impeachment process. In fact, the President may not fire even a staff member of an independent regulatory commission. Independent regulatory commissions include the Interstate Commerce Commission, the Consumer Product Safety Commission, the Federal Trade Commission, and the Federal Reserve Board.

The President's unilateral authority over independent regulatory commissions is narrowly limited. Therefore, where Executive Orders are discussed in this chapter without enabling legislation, their applicability to independent regulatory commissions is intended to be advisory but not mandatory. This was the procedure used in the promulgation of Executive Order 12044, on "Improving Government Regulations", discussed infra.

The term "Executive Office of the President" as used in this chapter refers not only to the President himself but also to the White House staff, the Office of Management and Budget, the Domestic Policy Staff, the Council of Economic Advisers, the Council on Environmental Quality, and the Council on Wage and Price Stability.

THE BASIC OPTIONS TO BE CONSIDERED

Our question concerning the appropriate legal means to implement the regulatory budget could be analyzed by reference to many possible "options" or mechanisms, each of which would vest a differing amount of authority in the President or the Congress, respectively, to establish regulatory budgets for the various federal agencies. To keep this discussion manageable, it will focus on two principal options.

OPTION 1: INFORMATIONAL REGULATORY BUDGET

A President's inherent constitutional powers as Chief Executive are formidable; with these powers undoubtedly could accomplish many of the objectives of the regulatory budget without a new congressional grant of statutory authority.

As is explained hereinafter, at present the President does not have authority to make the regulatory budget legally binding throughout the Executive Branch by means of an Executive Order, because Congress has delegated directly to agency heads discretionary authority over most Federal regulatory programs. Consequently, in most instances the President has no legal authority to order an agency head to delay or cease promulgation or enforcement of a regulation, or to modify the substance of that regulation, to comply with a regulatory budget.

Nevertheless, frequently the President or the Office of Management and Budget (0MB) might be able to persuade the head of an Executive Branch agency to use the agency head's own discretion to modify the substance of a regulation, or to delay or cease promulgation or enforcement thereof. The President and the Executive Office of the President obviously exert great influence over all Executive Branch agency heads, first, by means of budgetary controls and second through the President's power to dismiss his appointees with or without cause, and other informal controls. It follows that the President and his staff could use informal means--chiefly persuasion--to limit the burdens which Federal regulations impose upon the private sector and upon state and local governments.

Of course, the President has already attempted to use his power over Executive Branch agencies to check and monitor the burdens which Federal regulations impose on the private sector and on state and local governments. For example, Section 3 of Executive Order No. 12044, of March 23, 1978, requires every Executive Branch agency (i.e., exempting the independent regulatory bodies) to prepare a "regulatory analysis" for any proposed regulations identified as likely to have "major economic consequences for the general economy, for individual industries, geographical regions, or levels of government."

Executive Order 12044 provides the following criteria to define which regulations require "regulatory analyses":

"(a) Criteria. Agency heads shall establish criteria for determining which regulations require regulatory analyses. The criteria established shall:

(1) ensure that regulatory analyses are performed for all regulations which will result in a (an) annual effect on the economy of $100 million or more; or (b) a major increase in costsor prices for individual industries, levels of government or geographic regions; and

(2) provide that in the agency head's discretion, regulatory analysis may be completed on any proposed regulation."

Agencies subject to Executive Order No. 12044 must comply with the following procedures for any regulations which require a "regulatory analysis":

"(b) Procedures. Agency heads shall establish procedures for developing the regulatory analysis and obtaining public comment.

(1) Each regulatory analysis shall contain a succinct statement of the problem; a description of the problem; a description of the major alternative ways of dealing with the problem that were considered by the agency; an analysis of the economic consequences of each of these alternatives and a detailed explanation of the reasons for choosing one alternative over the others.

(2) Agencies shall include in then public notice of proposed rules an explanation of the regulatory approach that has been selected or is favored and a short description of the other alternatives considered. A statement of how the public may obtain a copy of the draft regulatory analysis shall also be included.

(3) Agencies shall prepare a final regulatory analysis to be made available when the final regulations are published."

The Federal Courts and legal scholars continue to debate about which legal restrictions, if any, govern the manner in which a President or his appointees can attempt to persuade an Executive Branch official to exercise discretion vested in that official, in a particular way. One of the most noteworthy cases raising that question arose in late 1978 when the President's Regulatory Analysis Review Group and its component members, the Council of Economic Advisers and the Assistant to the President for Domestic Affairs and Policy, wished to consult at length with the Department of the Interior concerning a rulemaking under the Surface Mining Control and Reclamation Act. From this situation arose two questions about which the Secretary of the Interior sought the legal opinion of the Department of Justice (DOJ): first, whether there is any statutory or constitutional prohibition against meetings of that nature between the Department of the Interior and the President's economic advisers (i.e., to discuss the substance of proposed rules); and second, assuming that meetings of that type are legal, what procedures should be followed to comply with decisions of the U.S. Court of Appeals for the District of Columbia Circuit restricting ex parte communications relating to rulemaking?

The resulting opinion from the DOJ Office of Legal Counsel, dated 17 January 1979, concluded that there is no statutory or constitutional prohibition against full and detailed communications between the President's advisers and those persons legally responsible for promulgating the rules in question, even if those communications take place after the close of the comment period for proposed rules. Nevertheless, the DOJ Opinion states that decisions of the D.C. Circuit Court bar interested persons from outside the Executive Branch from having ex parte communications with Federal officials who are preparing rules for promulgation, so the President's advisers should not serve as a conduit for such ex parte communications. The DOJ opinion also cites several procedures which the President's advisers should follow to ensure that their consultations with Federal rulemakers will of the prohibitions against ex parte communications.

If the President were to decide that a non-mandatory, purely informational version of the regulatory budget should be implemented as a first step toward an eventual statutory plan, undoubtedly the President has adequate inherent authority as Chief Executive to implement that through an Executive Order.

OPTION 2: CONGRESS AND EXECUTIVE WORKING TOGETHER IN A REGULATORY BUDGET PROCESS

Under Option 2 Congress would enact legislation designating which Federal departments and agencies are to be subjected to regulatory budgets, and creating a comprehensive regulatory budget process analogous to the existing process with which the Executive Branch and Congress formulate the fiscal budget. Under this approach, the President would annually propose a regulatory budget covering each of the designated agencies; Congress would review the proposed regulatory budget and make those adjustments it desires; then Congress would enact the budget into law with the President's signature.

DISCUSSION

Option 2 maximizes Congressional involvement in the regulatory budget process; nevertheless, Option2 still involves a Congressional delegation of authority to the Executive Branch. That is, if Congress were to adopt an agency-by-agency regulatory budget, each affected agency head would have discretion to choose which of his agency's regulatory programs would not be implemented fully, or would be postponed to the degree necessary to stay within that agency's regulatory budget. Where the agency's programmatic enabling legislation had been written so that the agency head "may" promulgate regulations, he already would have that discretion; but where the enabling legislation mandates that he "shall" promulgate regulations, the regulatory budget statute would constitute a new grant of discretion.

A COMPARISON OF THE OPTIONS

Besides providing the needed Congressional involvement, Option 2 has an important pragmatic advantage. It is closely analogous to the current fiscal budget process, so the Congress and the Executive are already familiar with the administrative mechanisms. Thus the regulatory budget could be adopted and implemented with considerable legal certainty.

THE REGULATORY BUDGET AND THE CONGRESSIONAL BUDGET & IMPOUNDMENT CONTROL ACT OF 1974

The regulatory budget bears an important relationship to the Congressional Budget and Impoundment Control Act of 1974, Public Law 93-344. Should the regulatory budget result in the elimination or reduction of a regulatory program, the question arises whether such an elimination or reduction would amount to an impoundment requiring a special message to Congress in accordance with provisions of the Act.

Section 1012(a) of the Congressional Budget and Impoundment Control Act (31 U.S.C. 1402) states:

"Whenever the President determines that all or part of any budget authority will not be required to carry out the full objectives or scope of programs for which it is provided or that such budget authority should be rescinded for fiscal policy or other reasons (including the termination of authorized projects or activities for which budget authority has been provided), or whenever all or part of budget authority provided for only one fiscal year is to be reserved from obligation for such fiscal year, the President shall transmit to both Houses of Congress a special message. . ."

A similar provision is contained in section 1013(a)', (31 U.S.C. 1403):

"Whenever the President, the Director of the Office of Management and Budget, the head of any department or agency of the United States, or any officer or employee of the United States proposes to defer any budget authority provided for a specific purpose or project, the President shall transmit to the House of Representatives and the Senate a special message..."

Both sections require that the special message to Congress specify amounts, reasons, justifications, and other relevant information relating to the rescision or deferral.

One of the threshold issues to be addressed is whether funds appropriated for regulatory programs constitute "budget authority" as used in the Act. Section ' of the Budget Act defines "budget authority" as "authority provided by law to enter into obligations which ill result in immediate or future outlays involving Government funds," 31 U.S.C. 1302.

Regulatory programs are funded through the Congressional appropriation process but with varying degrees of specificity. For example, the Occupational Safety and Health Administration (OSHA) received all Fiscal Year 1979 funds in one lump sum appropriation: "For necessary expenses for the Occupational Safety and Health Administration, $171,224,000..." Title I, Public Law 95-480 (1978). The regulatory program of the US Army Corps of Engineers was funded under the category of "Operation and Maintenance, General". Under this lump-sum appropriation of $795,500,000, funds are earmarked for regulatory functions through the general language"... administration of laws pertaining to preservation of navigable waters...". Title II, H.R. Res. 1139, 95th Congress, Public Law 95-482 (1978). The Environmental Protection Agency's (EPA) regulatory functions funded under the heading of "Abatement and Control": "For abatement and control activities, $692,915,000 to remain available until September 30, 1980." 'Title II, Public Law 95-392 (1978).

The Office of Management and Budget ( FIB), through Circular No. A-34, Instructions on Budget Execution, defines "budget authority" in a manner that would include funds received by agencies for regulatory programs through the appropriation process, as follows:

"Budget authority. - Budget authority for any year represents the authority provided by law and becoming available during the year to incur obligations. The basic forms of 'budget authority' are the following:

Appropriation. - Statutory authority that allows Federal agencies to incur obligations and to make payments out of the Treasury for specified purposes. This is the most common form of budget authority. (note that certain types of appropriations are not counted as budget authority; these are appropriations: (a) to liquidate contract authority, (B) applied to the reduction of outstanding debt, (c) for refunds of receipts, and (d) for payment to the International Monetary Fund.).. ." 0MB CircularNo. A-34 at 6 (1976). (emphasis in original).

The circular applies to "all appropriations, funds, and other authorizations, funds, and other authorizations, except deposit funds...". Id. at 3. Thus, for purposes of executive agencies, appropriations for regulatory programs do constitute "budget authority". This fact is dispositive of the issue, as the Conference Report on the Congressional Budget and Impoundment Control Act of 1974 states:

"The managers intend that the definition of 'budget outlays' and 'budget authority' for purposes of the congressional budget process be the same as that used for the executive budget and that any item which is excluded by law from the executive budget may be excluded from any specification of budget outlays or budget authority in the congressional budget process." H.R. Rep. No. 1101, 93rd Cong., 2nd Sess. 50 (1974). (emphasis added).

Thus, funds received by agencies for regulatory programs do constitute "budget authority" for purposes of the congressional Budget and Impoundment Control Act of 1974.

After satisfying the initial requirement of funds constituting budget authority, additional questions must be answered to determine the actions a regulatory budget will require to under the Budget Act.

"Regulatory budget" is defined as:

"A fiscal plan of the non-Federal expenditures (i.e., compliance costs) needed for compliance with Federally promulgated regulations".

The non-Federal expenditures would be limited to those which would not otherwise have been incurred but for the Federal regulations. Opportunity costs are not included. A regulatory budget would place ceilings on expenditures on agency's regulations could impose on non-Federal entities. The following hypotheticals illustrate the impact of the ceilings on an agency's regulatory programs.

A. As noted earlier, funds for the regulatory programs of OSHA are provided in one lump sum with all of the agency's funds. For fiscal year 1979, the agency received $171,224,000. Title I, Public Law 95-480 (1978). Assume that $75,000,000 of that amount is earmarked for regulatory programs. (In actuality, breakdowns of lump sum appropriations are made in Committee reports, however, these breakdowns".. .are not binding on administrative officers unless carried into the appropriation act itself." 17 Comp. Gen. 147 (1937).) Assume further that the regulatory budget of OSHA, i.e. the ceiling on the amount of expenditures OSHA's regulations may impose on non-federal entities is $3,000,000,000. Faced with a ceiling on compliance costs, OSHA determines that an expenditure of $50,000,000 from the regulatory program budget will impose $3 billion in compliance costs on non-Federal entities, thus reaching the agency's limit under the regulatory budget. OSHA now has $25,000,000 of appropriated funds for its regulatory programs that cannot be expended since to do so would impose compliance costs on non-Federal entities in excess of those allowed by the regulatory budget. Since the funds for OSHA's regulatory programs were received in a lump sum appropriation, with no relevant limitations contained in the appropriation act, the agency would be allowed to spend those funds on other authorized purposes. The Comptroller General has held:

"Congress has recognized that in most instances it is desirable to maintain executive flexibility to shift around funds within a particular lump-sum appropriation account so that agencies can make necessary adjustments for 'unforeseen developments, changing requirements, incorrect price estimates, wage-rate adjustments.. .and legislation enacted subsequent to appropriations'" 55 Comp. Gen. 307, 318 (1975).

Thus OSHA has the authority to shift its regulatory program funds to non-regulatory programs.

The final issue to be determined is whether the agency actually will spend the funds. If funds ear-marked for regulatory programs are expended for other authorized purposes, then no message to Congress is required. In an unpublished opinion, the Comptroller General examined what was called a "rephasing" of funds from one autorized purpose of the lump-sum personnel appropriation of the Department of Defense, to another. In discussing "rephasing", the Comptroller General stated:

"The central feature of the proposal, for purposes of your inquiry, related to the disposition of the amounts of outlays to be 'saved' by this proposal. The 'savings' referred to in the President's message--$58 million for fiscal year 1975--presumably represent that portion of the amount justified and provided for lump-sum bonus payments which will no longer be needed when the estimated number of bonuses originally programmed for lump-sum payment are recalculated on an installment basis, i.e., the total amount estimated for lump-sum payments less the amount of first year installment payments for these bonuses. However, the President's message states that these outlay savings will be applied to off-set increased salary costs, which would be payable from the same personnel appropriations. In this case this would have the effect of reducing, to the extent of the amount of savings referred to, the need for supplemental appropriations to meet increased salary costs. Accordingly, the full amount of 1975 personnel appropriations originally justified for payment of reenlistment bonuses will actually be expended within the scope of the personnel appropriations. The only difference is that a portion of this amount will be applied for a use other than that originally justified to the Congress, i.e., payment of salaries rather than re-enlistment bonuses. Therefore, we do not believe that this action constitutes a rescission or deferral of budget authority for purposes of the Impoundment Control Act." Decision of the Comptroller General B-ll539~ 23, 1975. January 23,1975. (emphasis added)

Specifically, the military departments received lump-sum appropriations under the heading "Military Personnel. For pay, allowances.. .". The Committee report breakdown for "pay and allowances" stated that it included among other items, basic pay and re-enlistment bonuses. H.R. Rep. No. 1255, 93rd Cong., 2d Sess. 11 (l974).

Likewise, in the hypothetical OSHA example, transfers from the regulatory program budget to other authorized projects is allowed, and does not require a special message to Congress. On the other hand, should OSHA decide not to expend the extra funds, then a message to Congress is required. This action is a "rescission" or "deferral" as contemplated by the Act since OSHA would not be complying with the mandate of the appropriation act which directed that $171,224,000 be spent on necessary expenses.

Congress must be informed under sections 1012 or 1013 of the Congressional Budget and Impoundment Control Act of 1974.

The OSHA example illustrates three issues that must be resolved in order to determine whether or not a special message must be transmitted to Congress: (1) Do the regulatory program funds constitute budget authority? If the answer is yes, and the regulatory budget mandates program cuts or reductions, then: (2) Does the agency have the authority to expend the funds for other authorized purposes? If the answer is yes, then: (3) Will the agency actually expend the funds for other authorized purposes?

If the answer to this third question is yes, then a special message will not have to be sent to Congress. Negative answers will either establish that the Budget and Impoundment Control Act is not applicable (if "no" to issue 1) or that a message must be sent to Congress under the provisions of the Act (if "no" issues 2 or 3). The final two illustrations will follow the issue pattern listed above.

B. EPA regulatory programs are funded under specific heading of "Abatement and Control.. .$692,915,000...". Assume that $150 million of that amount is designated for regulatory programs:

(1) Do the regulatory program funds constitute budget authority?

Under the definition of 0MB Circular A-34, and the Budget Act of 1974 Conference Committee report language above, the funds do constitute budget authority. Assume further that a regulatory budget of $5.5 billion has been established for EPA. The agency determines that an expenditure of $100 million in regulatory program funds will impose $5.5 billion in compliance costs on non-Federal entities. EPA will have $50 million in funds earmarked for regulatory programs that cannot be expended due to the regulatory budget.

(2) Does the agency have the authority to expend the funds precluded from use, for other authorized purposes?

As was the case with OSHA, the regulatory program of EPA is funded via a lump-sum appropriation. Unlike OSHA, the EPA lump-sum for regulatory programs comes under a line item, albeit a general one. EPA would have the authority to expend or obligate the $50 million for other authorized purposes within the scope of the line item heading "Abatement and Control", e.g., the funds could be shifted to provide greater technical assistance to Federal, state, local, interstate and private entities, a function that is carried out under the "Abatement and Control" heading. It could not be transferred to a municipability for the construction of a wastewater treatment facility, a function that is carried out under the heading of "Construction Grants' H.R. Rep. No. 1255, 95th Cong., 2nd Sess. 26, 29 (1978).

(3) Will the agency actually expend the funds for other authorized purpose?

Assume that all authorized purposes under the heading "Abatement and Control", except regulatory programs, have full funding available; the $50 million will not be expended for the other authorized purposes. Congress must be notified of that fact:

"Whenever the President determines that all or part of any budget authority will not be required to carry out the full objectives or scope of programs for which it is provided... the President shall transmit to both Houses of Congress a special message..." 31 U.S.C 1402 (emphasis added).

C. The final illustration will be completely hypothetical, including the manner in which the regulatory program is funded. The agency is the U.S. Coast Guard, Department of Transportation. Assume that the Coast Guard receives "budget authority" (for purposes of satisfying issue 1), for its regulatory program, e.g., 33 U.S.C l57a, via the following appropriation language: "For regulatory programs and functions of the U.S. Coast Guard, $10,000,000 for the fiscal year ending September 30, 1979." Assume that the agency receives a regulatory budget of $100,000,000, and determines that an expenditure of $8.5 million of regulatory programs funds will impose the maximum $100 million in compliance costs on non-Federal entities.

Does the agency have the authority to expend the funds precluded from use, for other authorized purposes?

In this illustration the only "authorized purposes" are "regulatory programs and functions". If the expenditure of $8.5 million imposes the regulatory budget ceiling, and there is no way in which the remaining $1.5 million may be expended for "regulatory programs and functions", then the Coast Guard does not have the authority to expend the funds for any other purpose. The Comptroller General noted:

"If the Congress desires to restrict the availability of a particular appropriation to the several items and amounts thereof submitted in the budget estimates, such control may be effected by limiting such items in the appropriation act itself". 13-149163, June 27, 1963 (emphasis added)

Thus with the appropriation itself limited to regulatory programs, an inability to expend those funds for regulatory programs will preclude their use elsewhere and the President must so inform Congress under the provisions of the Budget Act of 1974. There is no need to advance to Issue 3. It should be noted that unexpended regulatory funds, might still be used for regulatory functions which do not impose costs on the private sector: for example, training programs for regulatory personnel, advertising programs to increase public awareness of regulatory requirements, etc. When used in this way, no message to Congress is necessary.

The examples given above illustrate the settings in which a special message to Congress may or may not be required. All examples passed the threshold test of whether funds constituted budget authority. Example A, OSHA, illustrates the authority to transfer regulatory program funds precluded from expenditure by the regulatory budget, and the agency decision to actually expend the funds. Thus there is no requirement that Congress be notified through a special message. Example B, EPA, illustrated the existence of authority to expend funds elsewhere, but an executive decision not to. Thus, there was a requirement for the transmittal of a special message. Finally, Example C, the Coast Guard, illustrated the lack of authority to expend funds elsewhere, thus requiring that Congress be notified.

These examples were, out of necessity, extremely simplified. The designation of amounts for regulatory programs will be difficult to ascertain, even at the Committee report level. The examples show that each individual case of a regulatory budget that causes the cancellation or curtailment of an agency's regulatory program would have to be closely examined to determine whether any action is required under the Congressional Budget and Impoundement Control Act of 1974. The examples also point out that in some instances the holding back of program funds to comply with the regulatory budget will result in an "impoundment" or "deferral", while in other instances it will not. There should be a consistent result if agencies are to be affected in the same manner (cancellation or curtailment of programs) by the same legal restriction (regulatory budget). A policy decision will have to be made in order to achieve a uniform result. Three possible solutions are:

1. Determine that in all cases where program funds must be withheld due to limits imposed by a regulatory budget, such an action will not constitute an impoundment or deferral for purposes of the Budget Act of 1974. This can be accomplished with appropriate legislative language.

2. Determine that in all cases where program funds must be withheld due to limits imposed by a regulatory budget, such an action will constitute an impoundment or deferral for purposes of the Budget Act of 1974. This can be be accomplished through appropriate legislative language.

A compromise solution could be:

3. Where program funds are withheld due to limits imposed by regulatory budget, such an action will not constitute an impoundment or deferral for purposes of the Budget Act; however, the agency would inform the appropriate committees of Congress. This is a practice that is followed where lump-sum appropriations are utilized in a manner different from that intended by Congress as evidenced in Committee report language:

"If an agency finds it is desirable or necessary to take advantage of that flexibility by deviating from what Congress had in mind in appropriating particular funds, the agency can be expected to do so inform Congress through recognized and accepted practices." 55 Comp. Gen. 307, 318 (1975).

This can be accomplished either with the appropriate legislative language, or with a combination of legislative and executive orders.

The policy decision under discussion should take into account the historical background and occurences that culminated in the enactment of the Congressional Budget and Impoundment Control Act of 1974, because a regulatory budget may have results that closely mirror pre-1974 "impoundments."