By Reeve T. Bull, Deputy Director of the Commonwealth of Virginia Office of Regulatory Management.
Regulatory modernization isn’t anywhere close to the top of most people’s list of hot topics. But it occasionally has its time in the sun. And the last few weeks have been such a time.
On June 20, 2023, the federal Office of Management and Budget (OMB) finished receiving comments on its revised Circular A-4, which is the document that tells federal agencies how to do cost-benefit analysis of regulations. The revised document sprawls over nearly 100 pages, and it would be impossible to summarize the hundreds of changes it adopts here. Suffice it to say that it represents a potentially massive expansion of the regulatory state, as explained in numerous comments filed with OMB.1
As the federal government doubles down on the view that heavy-handed government interference is needed to right all of society’s wrongs, several states have taken a very different approach. Foremost among them is the Commonwealth of Virginia, where Governor Glenn Youngkin has adopted a new approach to regulatory modernization that seeks to right-size regulatory burdens while unleashing the unmatched power of human ingenuity to grow the economy and improve people’s lives.
In many ways, Virginia’s innovative model consists of doing things that the federal government used to do quite effectively. That alone represents a major advancement at the state level, since virtually no state has implemented the sort of comprehensive economic analysis, centralized regulatory review, and regulatory planning that has long been standard in the federal regulatory space.
But Virginia has also charted new territory, including adopting a highly sophisticated approach to regulatory streamlining that builds on the successes of past state and national streamlining initiatives and creating a first-of-its kind permitting dashboard.
This Legal Backgrounder seeks to highlight those reforms and provide a how-to kit for states that are interested in taking a similar approach. Though each state is different, there are many commonalities in all state regulatory models. There is therefore nothing stopping another state from adopting the key elements of the Virginia approach, tailoring certain aspects to meet its particular needs.
And as the Virginia reforms make the Commonwealth a more attractive place to start a business and raise a family, perhaps the federal government will eventually take note as well. At a time of sky-high inflation and stalling economic growth, policymakers are eager to find a way to bring down costs without further stifling economic activity. Regulatory streamlining is one of the few reforms that has been shown to spur economic growth while simultaneously driving down prices and expanding market participation. Virginia’s success provides a blueprint for what could be attainable nationwide.
Virginia Reform #1: Regulatory Economic Analysis
Roughly fifty years ago, the federal government began applying the principles of economics to regulatory policy. Even before that time, regulators understood that the notion of tradeoffs applied to regulatory interventions. Passing a law that, for instance, caps industrial emissions has clear benefits (cleaner air, healthier lungs), but it also has obvious costs (higher business expenses, higher prices).
Beginning with President Nixon’s Quality of Life Review, federal agencies began attempting to calculate these costs and benefits. President Carter formalized this process via executive order, President Reagan built upon it with another executive order, and President Clinton issued yet another executive order that instituted the system that we know today.
The various states have partly embraced and in some ways even built upon the federal model. But, as a general rule, state agencies perform less robust economic analysis than their federal counterparts. This is true for several reasons.
First, state statutes often require agencies only to analyze specific effects of regulations, such as their impact on the operation of small businesses or job creation, and seldom require a comprehensive cost-benefit analysis. Second, state governments often make only limited use of the analysis their agencies produce. For example, some states merely provide the analysis to a legislative panel, which can then decide whether to propose statutory action to revise a regulation (which seldom happens).
Finally, and most significantly, state agencies are almost entirely on their own in determining what use, if any, to make of the economic analyses they conduct. In theory, state courts could review agencies’ economic analysis and strike down rules that rely on faulty reasoning, but they have almost never done so.2 And with the notable exception of Virginia, state governments have not created centralized regulatory review bodies equivalent to the Office of Information and Regulatory Affairs (OIRA), which is responsible for reviewing the economic analysis federal agencies produce. As a result, state governments often produce low-quality economic analysis.
Governor Youngkin’s Executive Order (EO) 19 fundamentally alters this dynamic. Prior to its issuance, Virginia agencies, like many of their state counterparts, were not required to do a comprehensive economic analysis of regulations. Instead, they would analyze specific effects of regulations, including their impacts on small businesses or on real estate development cost, as part of an “economic impact analysis” that was conducted in conjunction with the Department of Planning and Budget (DPB). Under EO 19, agencies now must do a full economic analysis for their regulatory actions, which includes a complete cost-benefit analysis as well as an analysis of effects on small businesses, local governments, and families.
Prior to EO 19, many regulatory actions escaped even the more limited economic impact analysis process. Roughly half of regulations qualified for an exemption from the normal regulatory process created by the Virginia Administrative Process Act (APA), and they therefore were not subject to analysis by DPB. And all guidance documents agencies issued did not go through the normal regulatory process and therefore did not include any economic analysis. Under EO 19, every single regulatory action and every single guidance document must now include a full economic analysis.
Most importantly, EO 19 tasks a newly created Office of Regulatory Management (ORM) with reviewing all agency regulations and the associated economic analyses. This provides the accountability that is lacking in every other state. And it is already yielding impressive results. ORM rolled out its Regulatory Economic Analysis Manual, which provides clear, non-technical instructions on how to conduct the required analysis, in December 2022, and state agencies have since conducted comprehensive analyses on dozens of regulations and guidance documents.
These analyses have enabled agencies to identify millions of dollars in savings and to eliminate dozens of unnecessary regulatory requirements. They have also provided important information to Virginia stakeholders who now have a much better understanding of the effects of state agency rules and can provide better informed comments on those rules.
Other states could easily adopt similar reforms. The Regulatory Economic Analysis Manual was intentionally designed to avoid abstruse economic jargon and to be a resource that any agency regulator could pick up and use to assess proposed regulations. It was designed for the non-economist. Any state could likely adopt the Manual with very limited modifications to reflect its state-specific requirements.
States would also be well-served to consider creating offices modeled on ORM. In ORM’s experience, state regulators are eager to consider the economic effects of their proposed actions and to use that information to design well-informed, cost-effective regulations. But state agencies, unlike their federal counterparts, have never spent much time conducting economic analysis. As a result, high-level leadership is absolutely critical in providing agencies with the resources they need and ensuring a consistent approach across the dozens of separate regulatory bodies.
Virginia Reform # 2: Regulatory Streamlining
Performing economic analysis on proposed regulations is critical in ensuring that they do more good than harm. But even if every single regulation on the books produces positive net benefits (which is highly unlikely), the cumulative effect of thousands (or potentially millions) of regulatory restrictions can prove overwhelming. Small businesses, in particular, have found it virtually impossible to navigate the modern regulatory thicket, with many choosing simply to close down, or never launch, rather than incur the considerable costs of achieving full compliance or run the risk of violating the law. The resulting loss of market dynamism is almost impossible to measure (and is not accounted for in traditional regulatory cost-benefit analysis), but its effects are very real and disconcerting.
For decades, regulatory economists have proposed the idea of a regulatory budget to correct this problem. But the idea failed to pick up steam until about ten years ago. Since then, a handful of countries and a similar number of U.S. states have adopted numerous variations on the basic theme.
At the national level, regulatory budgets have had mixed success. Both the UK government and the U.S. federal government ultimately abandoned their budgets, both of which involved eliminating a set number of regulations or requiring a specified cost savings for each new regulation or dollar/pound in new costs. The Canadian government adopted a similar “1-in-x-out” approach, but it limited it to regulations creating so-called “red tape” (e.g., reporting requirements, training mandates) rather than extending it to all regulations.
State governments, by contrast, have had more success in adopting durable, far-reaching regulatory streamlining efforts. Most have imposed an overall regulatory reduction target, such as 25% or 33%, rather than deploying the “1-in-X-out” approach that has been more common in nationwide budgets. And most have focused on the overall number of regulatory restrictions (including “musts” and “shalls”) rather than the total number of regulations or their cumulative cost.
The regulatory streamlining initiative created by Governor Youngkin’s EO 19 is similar to that of other states in several respects: it embraces a 25% reduction target and it focuses on regulatory requirements.
But the approach that ORM has taken to implementing EO 19 is different from that of any other state. First, ORM has recognized that there are many different ways to reduce regulatory burdens besides deleting “musts” and “shalls” from the regulatory code. For example, reducing the number of training hours from 1500 to 1000, as Virginia’s State Board for Barbers and Cosmetology recently proposed for cosmetologists, produces considerable savings for aspiring cosmetologists and opens the market up to new entrants. The training requirement remains, and the agency therefore has not eliminated any regulatory restriction, but it has significantly reduced a regulatory burden. ORM therefore provides partial credit for agencies that show how their action produce cost savings (i.e., at least a 33% reduction in this case).
Second, ORM plays an ongoing role in providing guidance to agencies on how to achieve the 25% reduction target. ORM began by producing the Regulatory Reduction Guide, a first-of-its-kind resource that state agencies use to identify regulatory requirements and consider different approaches to regulatory reduction. No other state that has implemented a regulatory streamlining effort has provided similar guidance to its agencies.
Like the Regulatory Economic Analysis Manual described above, Virginia’s Regulatory Reduction Guide is written in plain language and is designed for non-economists. Though it was only released in April 2023, ORM has already received extremely positive feedback from the agencies that have used it. Those agencies universally indicate that the standardized guidance has proven invaluable in tabulating their regulatory requirements and identifying new and innovative ways to reducing regulatory restrictions while maintaining the important public health and safety protections contained in existing regulations.
As with the Regulatory Economic Analysis Manual, any state that has adopted a regulatory streamlining initiative could likely adopt some version of the Regulatory Reduction Guide. But maintaining ongoing oversight of the process is essential to guaranteeing success. Already, ORM has fielded dozens of inquiries from agencies that have encountered unique situations that cannot be addressed in a short manual designed for use across state government. Any state wishing to adopt similar reforms should therefore consider creating an ORM-like office that will supervise the regulatory streamlining initiative.
Virginia Reform #3: Enhanced Transparency
Transparency is fundamental to any well-functioning regulatory system. Citizens and businesses cannot easily comply with regulatory requirements if they are unable to find or understand them. Public commenters also must be able to access proposed regulations to recommend changes to agency officials.
One of the first tasks ORM undertook upon opening its doors was to implement basic reforms designed to enhance regulatory transparency. It required that all proposed regulations, including the roughly half that previously qualified for an APA exemption, as well as guidance documents appear on the Virginia Regulatory Town Hall website. It required all executive agencies to prepare a Unified Regulatory Plan, which lists all regulatory actions and guidance documents that agencies anticipate issuing, changing, or rescinding in the coming year. And it ensured that agencies described all economic impacts of their proposed actions in clear, plain language that is accessible to a non-expert audience.
The most significant transparency-minded reform led by ORM is the so-called Permitting Enhancement and Evaluation Platform (PEEP). Early in the Youngkin Administration, Virginia’s Department of Environmental Quality (DEQ) designed an online dashboard that listed the agency’s water protection permits. For each permit, the program laid out the key approval steps and provided a timeline for each. It also featured a series of Gantt charts illustrating whether each step was on time. Finally, the system included internal management tools that alerted agency leadership whenever deadlines had been missed.
ORM plans to roll out the PEEP platform to all DEQ permits and, eventually, to all major permitting agencies in state government over the coming year. This enhanced transparency should prove invaluable to permit applicants, state agencies, and anyone else interested in the permitting process. It also provides a strong incentive for permit reviewers and writers to proceed in a timely manner, since any delays are now publicly noted. Over time, the data the PEEP system produces should identify opportunities for speeding up the permitting process and cutting out unnecessary steps.
As with the previously mentioned reforms, other states could easily tailor the PEEP platform to accommodate their needs. In addition, both the federal government and the thousands of local governments across the nation could either adopt a system similar to PEEP or participate in a state-run platform. The Virginia PEEP program already includes a variety of permitting steps that reflect actions undertaken by the U.S. Army Corps of Engineers. And Virginia is running a pilot program in which a local government will receive funding to integrate its permits into the PEEP system.
Justice Louis Brandeis famously declared that a “single courageous state” could “serve as a laboratory” to experiment with something new. Like any good experiment, Virginia’s regulatory modernization reforms build on past work.
Some reforms involve adopting tried-and-true methods for enhancing regulatory transparency and accountability: the Unified Regulatory Plan and the Regulatory Economic Analysis Manual, for instance, are all closely based on successful federal efforts. Other reforms learn from and build upon previous experiments: the Virginia regulatory streamlining initiative, for example, pulls in several elements of past national and state initiatives, retaining and refining those elements that have worked well. Still other reforms represent entirely new approaches to addressing recognized problems of the past: the PEEP system is an innovative solution to the oft-cited problem of permitting delays.
In the roughly 12 months since it was created, ORM has enjoyed major successes in rolling out each of these initiatives. Over the next two-and-a-half years, it looks forward to continuing to build upon this work in achieving Governor Youngkin’s goal of making the Commonwealth the best place to live, work, and raise a family.
But it is most decidedly not ORM’s or Governor Youngkin’s goal to treat these innovations as trade secrets. Everything described above can be found on publicly available websites maintained by the Commonwealth, and ORM has met with numerous state officials and regulatory experts interested in exploring similar reforms. It is only when the “Virginia model” becomes the gold standard for state and even national regulatory modernization that this experiment will have reached its goals.