BILL ANALYSIS �
AB 541
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Date of Hearing: April 12, 2011
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel P�rez, Chair
AB 541 (Morrell) - As Introduced: February 16, 2011
SUBJECT : California Small Business Board recommendations on
regulatory reforms
SUMMARY : Directs the California Small Business Board (Board)
to focus for the next two years on, among other items, the
impact of licensing and permitting regulations on small business
startups. The Board is required to report its findings and
recommendations to the Governor, the Small Business Advocate,
and the Legislature in July 2012, July 2013 and December 2013.
EXISTING LAW :
1)Finds and declares that it is in the public interest to aid,
counsel, assist, and protect the interests of small business
concerns in order to maintain a healthy state economy.
2)Finds and declares that there has been an unprecedented growth
in the number of administrative regulations, in recent years
and that correcting the problems requires the direct
involvement of the Legislature, as well as that of the
executive branch of state government. Further, statute finds
and declares that the complexity and lack of clarity in many
regulations put small businesses, which do not have the
resources to hire experts to assist them, at a distinct
disadvantage.
3)Establishes basic minimum procedural requirements for the
adoption, amendment, or repeal of administrative regulations,
including assessing the potential adverse impact of an action
on California businesses and individuals with the purpose of
avoiding the imposition of unreasonable and unnecessary
regulations, reporting, recordkeeping, or compliance
requirements. Among other requirements, a rulemaking agency
is required to:
a) Base decisions on adequate information;
b) Consider its impact on an industry's ability to compete
with businesses in other states; and
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c) Assess its potential impact on the creation or
elimination of California jobs, as well as its potential
impact on the creation, expansion and/or elimination of
California businesses.
Further, no regulation adopted after January 1, 1993 that
requires a report can be applied to a business unless the
state agency makes a finding that it is necessary for the
health, safety or welfare of the people of the state.
4)Establishes the Office of Administrative Law (OAL) as the
entity with purview of the state's regulatory process,
however, OAL is not authorized to substitute its opinion
relative to specific content over that of the state adopting
agency. In submitting a regulation for OAL's procedural
review, the rule making agency is required to provide, among
other things, a description of reasonable alternatives to the
regulation that would lessen any adverse impact on small
business and the reason for rejecting those alternatives.
5)Establishes the Office of the Small Business Advocate (OSBA),
within the Governor's Office of Planning and Research, for the
purpose of advocating for small businesses including
responding to complaints from small businesses concerning the
actions of state agencies and the operative effects of state
laws and regulations.
6)Requires the OSBA to report to the Legislature, every two
years, on the efforts of the state in assisting minority and
other small business enterprises, and make recommendations on
how to strengthen minority and other small business
enterprises.
7)Establishes the Board, which is comprised of the Secretary of
the Business, Transportation and Housing Agency (BTH), six
Governor appointees and two Members of the Legislature. The
purpose of the Board, among other responsibilities, is to hold
public hearings that facilitate the role of BTH as an advocate
and ombudsman for the small business community. The Board is
also responsible for advising the Governor and the OSBA
regarding issues affecting the small business community.
FISCAL EFFECT : Unknown
COMMENTS :
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1)Purpose : According to the author, over the past 20 years,
regulations have been created in California, often in a
vacuum, without a proper perspective on how they impact and
affect the business environment. This sometimes haphazard
nature of regulation has led to unintended consequences and
California being regularly rated as one of the worst states to
create and do business. Last year, according to the
California Association of Independent Businesses (CAIB),
"California's small businesses, which average 5.8 employees,
comprise 98% of all businesses in the state, provide 82% of
the private sector jobs, and 75% of the gross state product.
With small business being such a driving factor in our
economy, we must identify what is standing in the way of small
businesses if we hope to turn our economy around. AB 541 is
crucial in identifying the rules and regulations that are
preventing small businesses from opening their doors and
keeping their doors open. This bill will help identify what
hurdles small businesses face. In identifying the problems,
we will be able to take action to keep businesses in
California.
2)Small business studies : Due to their importance in the state
economy, small business issues have been a particular focus of
the Assembly Committee on Jobs, Economic Development and the
Economy (JEDE) for the past two legislative sessions. In
March 2009, JEDE produced a state economic recovery strategy
that included several key recommendations on the challenges
facing small business, including how the state can help small
businesses access short-term capital, the importance of
regulatory reforms, and workforce development programs that
can more directly link to the needs of businesses.
Later in the year, JEDE held a number of hearings specifically
to receive testimony from small businesses and manufacturers
about their economic recovery needs. During these hearings
small business prioritized two areas: increasing access to
capital and reducing the costs associated with doing business
in California, including costs related to business permits,
licenses and other areas of regulatory compliance.
There are two major sources of data on the cost of regulatory
compliance on businesses, the federal Small Business
Administration and the state OSBA. For the last 10 years, the
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federal Small Business Administration has conducted a peer
reviewed study that analyzes the cost of federal government
regulations on different sizes of businesses. This research
shows that small businesses continue to bear a
disproportionate share of the federal regulatory burden. On a
per employee basis for firms with less than 20 employees, it
costs about $10,585, or 36%, more for small firms to comply
with federal regulations than their larger counterparts.
In the federal peer reviewed study, the most costly
regulations for small businesses were found to be
environmental compliance where small business costs were 364%
higher than in large-size firms. The regulatory category with
the least disproportionate cost impact between large and small
businesses related to occupational safety and health and
homeland security.
The impact of California regulations on small businesses was
unknown until 2009, when the study required by AB 2330
(Arambula), Chapter 232, Statutes of 2006, was published by
the OSBA. Although state agencies have been required to
consider the costs of adopted regulations on the California
economy, in general, and on small business specifically, state
agencies have historically failed to meaningfully undertake
such an analysis, and instead, have indicated that the need
for the regulation was an overriding state concern. This
first state study found that total cost of regulations to the
State of California was $493 billion. Since small businesses
constitute 99.2 % of all employer businesses in California and
all of non-employer business, the regulatory cost, according
to the report, is shouldered substantially by small business
(averaging $134,123.00 per small business in 2007).
AB 2330 also required that state agencies examine the
cumulative impact of regulations. Due, in part, to the
difficult economic times, state agencies have done a poor job
in meeting this new requirement when developing and amending
regulations.
3)Adoption of regulations in California : Existing law sets
forth an extensive process for the development and adoption of
regulations, including requiring the identification of
potential adverse impacts of regulations on California
businesses and individuals. Statute states that the purpose of
the rulemaking process is to avoid the imposition of
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unreasonable and unnecessary regulations, reporting,
recordkeeping, or compliance requirements. Businesses,
however, have repeatedly testified before this policy
committee that they believe that California's regulatory
process is expensive, overly burdensome, and that compliance
has not necessarily provided a better quality of life for
people in the state.
One of the criticisms of the process has been that OAL has no
real authority to ensure that the intent of the law is
enforced because its oversight is limited to a procedural
review. Other criticisms have included that the regulations
are developed without adequate regard to their cumulative
impact or challenges faced by small versus large companies.
This means that while the rulemaking entity is required to
consider the impact of a regulation on businesses and consider
alternatives, the OAL may only check to be sure that an
assessment has been done. Rulemaking agencies may even
decline to consider alternatives and may limit their
assessment of a regulation's impact to only information
supplied by interested parties. AB 541 would call on an
existing small business board to review the existing
regulatory framework and make recommendations on how to reduce
the impact of licensing and permitting regulations on small
business startups.
4)Starting a Business : Entrepreneurs who want to start a
business in California are required to obtain one or more
licenses and/or permits issued by different federal, state,
and local government agencies. Due to the complexity of the
state license and permitting rules, entities such as the
Permit Assistance Unit within the Governor's Office of
Economic Development and the regional network of Small
Business Development Centers are available to help small
business identify and understand how to apply for required
licenses and permits. Even with this assistance, small
businesses often find the process confusing, expensive and
time consuming. The list below provides a number of examples
of permits and licenses that may be required by businesses
getting started in California.
Federal employer identification number from the IRS and
a state employer account number from the Employment
Development Department.
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A seller's permit and other arrangements for collecting
and transferring state sales and use taxes with the State
Board of Equalization.
Business operation license from the city or county where
the business locates.
Special state business licenses and permits relating to
the sale and/or distribution of such products such as
liquor, lottery tickets, gasoline and firearms.
Fictitious business name permit also called "dba" or
"doing business as" permit.
Various state and local land use permits including
permits for conditional use of land, still photography on
public lands, filming on public land, construction and
rehabilitation, air and water quality permits.
Commercial driver's license and other various Department
of Motor Vehicle Occupational licenses including those for
a dealer, dismantler, distributor, driving school,
manufacturer, registration service, and traffic school.
State licenses for consumer services and product safety
from the State Fire Marshal including building materials,
portable fire extinguishers, and flame retardant and
automatic extinguishing systems.
Special state-issued occupational/professional licenses,
for business that employ people who will be offering a
number of state-regulated services, including medical care,
auto repair, real estate sales, tax or insurance services,
cosmetology, and legal representation (attorneys).
1)Federal model for regulatory reforms : In 1976, the federal
government established the Office of Advocacy (FAO) within the
federal Small Business Administration. The purpose of the FAO
is to "protect, strengthen and effectively represent the
nation's small businesses within the federal government's
legislative and rule-making processes."
Among its duties, the FAO reviews federal regulations and
makes recommendations on how to reduce the burden on small
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firms and maximize the benefits small businesses can receive
from the federal government. In 2010, the FAO issued 46
letters (up from 39 in 2009) to federal agencies, each posted
on the FAO website and accompanied by a fact sheet summarizing
key points in the FAO letter. The letters covered a range of
rulemaking including, but not limited to:
The Truth in Lending Proposed Rule, the U.S. Treasury;
National emission standards for hazardous air pollutants
for major and area sources: industrial, commercial and
institutional boilers, Environmental Protection Agency; and
Proposed changes to the consultation procedures rules at
the Department of Labor, Occupational Safety and Health
Administration.
Another activity of the FAO is the convening of issue specific
Small Business Advocacy Review Panels. Having a specific
government entity responsible for the review and comment on
federal regulations is particularly useful because the FAO can
provide more detailed comments and make specific and technical
recommendations to assist the rulemaking entity modify a rule
to lessen its impact on small businesses, without necessarily
reducing its policy objective.
While California has an OSBA, the state advocate does not
currently have the staff, or the directed statutory mission,
to formally comment on pending state regulations. AB 541
would direct the existing California Small Business Board to
review regulations relating to small business start-ups, but
is silent as to whether the Board would engage during the
rulemaking process or after.
1)New Federal Flexibility Act : In January 2011, President Obama
signed Executive Order 13563 for the purpose of improving
regulation and regulatory review. Among other factors, the EO
stated that the federal "regulatory system must protect public
health, welfare, safety and our environment while promoting
economic growth, innovation, competitiveness, and job
creation."
In furtherance of these objectives, the EO outlines the steps
federal agencies are required to take in adopting regulations
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including tailoring rules to impose the least burden on
society, while achieving policy objectives; developing rules
through an open exchange of perspectives from affected
stakeholders in the private sector (among others), and
promoting the use of retrospective analysis on impacts of
previously adopted regulations.
The EO also states that federal regulators should recognize
that some industries face significant regulatory requirements,
some of which are redundant, inconsistent and overlapping.
Federal agencies are then directed to increase coordination,
simplification and harmonization of regulations applied to the
same industry when rulemaking.
2)California Small Business : California's dominance in many
economic areas is based, in part, on the significant role
small businesses play in the state's $1.9 trillion economy.
Businesses with less than 100 employees comprise nearly 98% of
all businesses, and are responsible for employing more than
37% of all workers in the state.
Small- and medium-sized businesses are crucial to the state's
international competitiveness and are an important means for
dispersing the positive economic impacts of trade within the
California economy. Of the over 57,461 companies that
exported goods from California in 2008, 96% were small- and
medium-sized enterprises (SME) with fewer than 500 employees.
These SMEs generated nearly half (44%) of California's exports
in 2008. Nationally, SMEs represented only 31% of total
exports. Again, these numbers include the export of only
goods and not services.
Small businesses function as economic engines, especially in
challenging economic times. During the nation's economic
downturn from 1999 to 2003, microenterprises (businesses with
less than five employees) created 318,183 new jobs or 77% of
all employment growth, while larger businesses with more than
50 employees lost over 444,000 jobs. From 2000 to 2001,
microenterprises created 62,731 jobs in the state, accounting
for nearly 64% of all new employment growth.
Unfortunately during the current recession, small businesses
have not been able to play their traditional economic recovery
role due to, among other reasons, the double impact of losing
their access to capital resulting from the financial crisis
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and a drop in consumption. Equifax reports that small
business bankruptcies were up 81% for the 12 months ending
September 2009, as compared to the same period in the previous
year. Nationally, bankruptcy filings were up 44% during the
same term.
3)Related legislation : Below is a list of related bills. The
first group of bills represents four examples of the more than
one dozen regulatory reform bills introduced in the Assembly
during the current session. The eight similar-in-concept
regulatory reform bills introduced by Senate authors have been
omitted due to space limitations. The second group of bills
reflects legislation from the prior session.
a) Group one:
i) AB 273 (Valadao) Regulations: economic impacts
review: This bill requires the Department of Finance to
adopt and update instructions for inclusion in the State
Administrative Manual that prescribe the methods that any
agency shall use in making certain determinations,
estimates, statements, and findings relating to the
economic and cost impacts of a regulation on businesses
and private individuals. Status: Pending in Assembly
Accountability and Administrative Review.
ii) AB 535 (Morrell) Regulations: five-year review and
report: This bill requires a state agency to review and
report on regulations that it adopts or amends on and
after January 1, 2012, five years after adoption, as
specified. The bill would require that the review and
report include 10 specified factors, including a summary
of the written criticisms of the regulation received by
the agency within the immediately preceding 5 years and
the estimated economic, small business, and consumer
impact of the regulation. The bill would require the OAL
to make the review and report available on the office's
Internet Web site. Status: Pending in Business,
Professions and Consumer Protection.
iii) AB 586 (Garrick) Administrative regulations:
legislative review: This bill requires a standing
committee of the Legislature with jurisdiction over a
state agency proposing to adopt a regulation with a gross
cost in excess of $10,000,000 to hold an informational
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hearing regarding the proposed regulation. Status:
Pending in Business, Professions and Consumer Protection.
iv) AB 1037 (V. Manuel P�rez) Regulations: small
business impact: This bill removes statutory barriers
that inhibit the full consideration of the impacts of
state rules and regulations on the economy, including the
small business sector, and requires a review of all
regulations on small businesses after five years to
identify opportunities to mitigate negative impacts.
Status: Pending in Assembly Committee on Business,
Professions and Consumer Protection.
v) AB 1213 (Nielsen) Regulations: philosophy and
principles of regulation: This bill adopts the
regulatory philosophy and the principles of regulation,
as outlined in Presidential Executive Order 12866 and
Presidential Executive Order 13563, by directing state
agencies to improve, among other things, public
participation in the rulemaking process, to reduce
redundant, inconsistent, or overlapping regulations
through increased agency coordination, to improve
flexibility, and to develop and submit to the office a
preliminary plan under which the agency will periodically
review its existing significant regulations to determine
whether any regulation should be modified, streamlined,
expanded, or repealed. Status: Pending in Business,
Professions and Consumer Protection.
b) Group two : During the 2009-10 legislative session, more
than a dozen bills relating to reforming the process
whereby regulations are developed and approved were
introduced. Although several bills relating to the
reforming the California Environmental Quality Act passed
and were signed by the Governor, no regulation adoption
process bill passed. Below are examples of three failed
passage bills, including AB 2692 (Tran and V. Manuel
P�rez), which is identical to AB 541.
i) AB 1949 (Logue) Regulations: Five-year Review: This
bill requires specified state agencies to review and
report to the OAL on regulations that it adopts five
years after adoption. The bill would require the review
and report include 10 specified factors, including a
summary of the written criticisms of the regulation
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received by the agency within the immediately preceding
five years and the estimated economic, small business,
and consumer impact of the regulation. Status: The bill
remained with the Assembly Committee on Business,
Professions and Consumer Protection until the close of
the 2009-10 legislative session.
ii) AB 2529 (Fuentes) State Auditor Cost Benefit
Analysis: This bill requires the State Auditor to
conduct a specified cost benefit analysis of regulations.
If a proposed regulation is approved that has an annual
statewide economic cost of more than $10 million or the
benefits of the regulation do not equal or exceed the
costs of the regulation, the State Auditor is required to
notify the Legislature, and specified legislative
committees are then required to conduct a public hearing
to review the regulation. Status: The bill remained
with the Senate Committee on Business Professions and
Consumer Protection until the close of the 2009-10
legislative session.
iii) AB 2692 (Tran and V. Manuel P�rez) Small Business
Reforms: Directs the California Small Business Board
(Board) to focus for the next two years on, among other
items, the impact of licensing and permitting regulations
on small business startups. Status: The bill was held
on the Suspense File by the Assembly Appropriation
Committee in May 2010.
iv) SB 356 (Wright) Impact of Regulations on Small
Businesses: This bill requires an agency considering the
adoption of a regulation to consult with those persons
and businesses potentially affected and would delete the
condition that the agency only involve those parties if
the proposal is large or complex. Status: The bill
passed its policy committee hearing, but was referred to
the Assembly Committee on Rules where it remained until
the close of the 2009-10 legislative session.
REGISTERED SUPPORT / OPPOSITION :
Support
None received
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Opposition
None received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090