State Auditor: State agencies fall short in compliance with Regulatory Fairness Act

The state auditor released an important performance audit December 27 (not exactly the peak of anyone’s news cycle) that examined how well state agencies complied with the Regulatory Fairness Act. In The Lens, TJ Martinell reports

State agencies have frequently ignored the financial impacts of proposed regulations on small businesses, in violation of state law. That was the big take-away from a recent State Auditor’s Office (SAO) audit that examined 331 proposed rules affecting Washington employers in 2014 and 2015.

In the dryer words of the audit,

Lawmakers recognize that small businesses are likely to bear a disproportionate share of regulatory costs and burdens, and that the failure to recognize differences in the scale and resources of regulated businesses can adversely affect competition in the marketplace, discourage innovation, and restrict employment opportunities. Washington’s Legislature enacted the Regulatory Fairness Act (19.85 RCW) in 1982 to reduce the disproportionate impact of state administrative rules on small business.

However, we examined 331 rules affecting businesses proposed by regulatory agencies during 2014 and 2015, and found they did not always fully meet every requirement of the law. We found a number of opportunities, many of which are no- or low-cost, for increasing the likelihood that agencies complete all the requirements of the Regulatory Fairness Act when proposing rules. They include clarifying certain parts of the law, modifying the form that agencies use to propose rules, and giving all employees tasked with rule development access to tools and training about meeting the law’s requirements.

This is important. As we wrote in our foundation report,

Many state-level regulations reflect Washingtonians’ commitment to protecting human health and the natural environment. However, the costs of regulatory compliance have a direct impact on investment and job creation.


Addressing regulatory policy typically involves two dimensions: determining whether the regulations themselves are reasonable, and judging how ef ciently they are administered.

In terms of regulatory content, Washington regulations routinely exceed the minimums required by federal law…While regulations ultimately reflect Washingtonians’ policy preferences, they should be regularly reviewed to see if, for example, the benefits justify the added costs of compliance.

Martinell reports,

In 2015, small companies (those with fewer than 50 employees) constituted 96 percent of Washington businesses, according to SAO. Almost half of Washington’s private sector employees work for a small business.

However, a July study that same year by the Pacific Research Institute ranked Washington at the top nationally for most burdensome state regulatory structures for small businesses. 

The RFA, if followed, gets close to the close-benefit requirement we recommend. Martinell writes,

The RFA was passed by the state legislature in 1982 and requires that state agencies evaluate how a proposed rule will impact small businesses. If it is expected to add more than minor costs, the agency must release an SBEIS demonstrating whether or not the rule will have a disproportionate financial impact to smaller employers, versus larger companies. If so, the proposed rule must include compliance cost mitigation.

The SAO audit found that of the 25 proposed rules that did include an economic impact statement, only seven were done fully according to RFA rules.

The Lens reports Rep. Norma Smith intends to introduce legislation this year to address some of the identified shortcomings. The executive branch favors another approach.

Inslee’s Office of Financial Management Director David Schumacher, in an agency response within the audit, said any changes to RFA at this time would be “premature.” Inslee has proposed a work group comprised of state rule-making agencies, small business customers, and other stakeholders to discuss the impacts of RFA reforms.

Schumacher added that “agencies must strike a balance between maintaining the intent of regulations mandated by law and limiting the costs to business.”

That last statement pretty much sums up the objective of cost-benefit analysis. We agree.