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Next Steps on the Executive Order on Reducing Regulation: OMB's Guidance Provides Some Clarity

February 7, 2017

The Trump Administration's January 30 Executive Order on Reducing Regulation and Controlling Regulatory Costs established broad principles that federal agencies are now expected to follow:  (1) for every new regulation an agency issues, two must be eliminated; (2) for fiscal year 2017, the total incremental cost of all new regulations for each agency, including revoked rules, can be no greater than zero; and (3) starting with fiscal year 2018, a regulatory budget will be set by the Office of Management and Budget ("OMB") that caps the total incremental costs each agency may impose on the regulated community for a given year.  Written in bold strokes, the Executive Order left implementation logistics and critical details to be worked out by OMB.  

OMB's Office of Information and Regulatory Affairs ("OIRA") moved quickly to fill the gaps, issuing on February 2 an Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017, Titled Reducing Regulation and Controlling Regulatory Costs ("Interim Guidance"). The Interim Guidance clarifies a number of points left ambiguous in the Executive Order and offers a practical sense of how it will be implemented.  Many questions remain unanswered, however, and may be addressed in final guidance, which hopefully will benefit from public comments, due by February 10.  Particularly noteworthy aspects of the Interim Guidance are discussed below.     

Some New Regulations Will Not Trigger the Requirement to Repeal Two Existing Rules

The Interim Guidance recognizes exceptions and waivers that exempt some new rules from the "two for one" requirement. For starters, for Fiscal Year 2017, only "significant" regulatory actions as defined in Executive Order 12866 are covered. This definition encompasses regulatory actions that have "an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities." Further, Executive Order 12866 applies only to executive agencies, so rules issued by independent agencies such as the SEC, FTC, FCC, CPSC, and CFPB are outside the scope of the January 30 Executive Order, although OMB encourages independent regulatory agencies to follow the Interim Guidance. 

Regulatory action that is subject to an "imminent statutory or judicial deadline" may be promulgated, even if the issuing agency is not "able to identify offsetting regulatory actions by the time of issuance." However, the wording suggests that an offset may be required at a later date. This exemption is likely to be quickly tested as a series of EPA rules begin to be issued pursuant to the 2016 amendments to the Toxic Substances Control Act.

The Executive Order also contains a general exemption for situations in which issuance of a regulation is "otherwise required by law." OMB explicitly notes that this is an unlikely circumstance, but interest groups that oppose repeal of environmental regulations may well seek to use this language to thwart the mandatory repeal regulations. However, an overly broad interpretation of this language is clearly contrary to the plain meaning and underlying purpose of the Executive Order and the Interim Guidance cautions that agencies will have to identify regulations that will be repealed to offset the cost of even regulations required by law.

In addition, the two for one requirement does not apply to "[e]mergencies addressing critical health, safety, or financial matters, or for some other compelling reason," although OMB approval is required. Finally, "deregulatory actions" that result in only savings to all affected parties "generally will not trigger the requirement to identify two existing regulatory actions to be repealed." 

Other Considerations

The Interim Guidance states that OMB will credit cost savings from: (a) Congressional repeal of final regulatory actions, such as disapprovals of rules under the Congressional Review Act; (b) "meaningful burden reduction through the repeal or streamlining of mandatory reporting, recordkeeping or disclosure requirements" (although agencies should confirm that these repeal or streamlining actions allow the agency to "continue to achieve their regulatory objectives after the deregulatory action is undertaken"); (c) cost savings from another agency's rule on a case-by-case basis; and (d) new significant guidance or interpretive documents, on a case-by-case basis.  However, regulations vacated or remanded by a court normally will not qualify as saved costs (because the implication is that such rules were not valid), although there may be individual cases in which OMB will recognize such savings. 

Congress is in the process of repealing a number of EPA and potentially other agency rules, which may, if successful, create a "bank" of regulatory savings in Fiscal Year 2017. This could be significant in arguing that the costs of new regulations in Fiscal Year 2017 do not exceed the total savings from deregulatory actions, and could move quickly enough to allow some cost-imposing regulations to be finalized this year.

Calculating Cost Savings May Not Be Simple

Among other requirements, the cost savings from deregulatory actions must be "verifiable," may not include sunk costs, and cannot simply be the cost calculated by EPA in the original Regulatory Impact Analysis (RIA) that is put forward when a rule is promulgated. The calculation must use the most current information available, including the actual cost and other effects of eliminating regulatory actions. The regulated community may be the most accurate source of this information.

OMB specifies the appropriate measure of cost savings as "the opportunity cost to society," as defined in OMB Circular A-4. This OMB document states that "opportunity cost is equal to the net benefit the resource would have provided in the absence of the requirement." The Circular and the economic analysis methodologies that have evolved around calculating regulatory costs are as arcane as they are complex. Economists and attorneys familiar with these practices will be needed by companies, trade associations, and other interested parties to navigate this process. 

Clark Hill will continue (Trump Administration Memorandum Imposes Regulatory Freeze Pending ReviewFederal Agency Action to Reduce Regulatory Burden on Manufacturing) analyzing developments on the Administration's major regulatory reduction initiatives and working with clients on strategies to make a compelling case for change where it is needed.  

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