7. Rule Analysis

Table of Contents

7.1 Analysis of Rules

7.2 Definitions

7.3 Requirements Prior to Publishing Proposed Permanent Rule Changes

7.4 OSBM Approval After Publishing Proposed Permanent Rule Changes

7.5 Fiscal and Regulatory Impact Analysis Requirements

7.6 Requirements for Rules Agencies are Readopting

7.7 Requirements for OSBM to Review Certain DHHS Temporary Rules

7.8 Submitting Information to OSBM and OSBM Notification of Agencies

 

7.1 Analysis of Rules

The Administrative Procedure Act, Chapter 150B of the General Statutes, and Executive Order No. 70 from October 21, 2010 (hereinafter referred to as E.O. 70), as amended by Executive Order No. 48from April 9, 2014, establish procedural requirements for the adoption, amendment, and repeal of administrative rules. These procedural requirements include standards for OSBM review and certification of proposed rule changes and for review and approval of associated fiscal and regulatory impact analyses, also referred to as fiscal notes. Compliance with the procedures outlined below will satisfy the minimum analysis required for OSBM review, approval, and certification under Chapter 150B, E.O. 70, and the policies of the Director of the Budget.

A fiscal and regulatory impact analysis is used to anticipate and evaluate the likely consequences of rules. It provides a formal and systematic way of organizing evidence on the impacts of rules on affected parties. Agencies should aim to produce analyses that inform the public and other stakeholders of the effects of the proposed rule changes. Analyses should also demonstrate whether a proposed rule change is reasonable and justified.

 

7.2 Definitions

  • Affected Parties means those persons who will experience costs and/or benefits, whether quantified or unquantified, from the proposed rule change.
  • Agency means any institution, board, commission, bureau, department, division, council, or officer of the state, but does not include any agency in the legislature or judicial branch of state or local government. (See G.S. 150B-2(1a) for further description.)
  • Approval means the requirement that the agency must receive OSBM approval before it may adopt a proposed rule change. (See G.S. 150B-21.4.)
  • Baseline means the best assessment of what the world would be like absent the proposed rule change. This assessment must account for independently enforceable N.C. General Statutes currently in effect and rules contained in the N.C. Administrative Code. Informal agency policies not adopted as rules in compliance with Chapter 150B must be excluded from the assessment of the baseline.
  • Certification against regulatory principles means certification that the agency has adhered to the regulatory principles set in G.S. 150B-19.1(2), (5), and (6) and Section 2 of E.O. 70 during the rulemaking process.
  • Certification of federal requirement means (specifically, as required under G.S. 150B-19.1.(g) the certification identifying:
    • The federal law that the rule is purported to implement;
    • The federal law that requires the rule or for which the rule is necessary for compliance;
    • The federal law that places conditions on the receipt of federal funds.

    If all or part of the proposed rule is not required by federal law or exceeds the requirements of federal law, then the certification shall state the reasons.

  • Certification of state funds availability means the requirement in G.S. 150B-21.4(a) that an agency must receive OSBM certification prior to adoption of the proposed rule change that sufficient state funds are available to cover state government expenditure or distribution required by the proposed rule change.
  • Fiscal and regulatory impact analysis or "Fiscal note" means a document including all of the following:

     

    • A plain-language summary of the proposed rule change, a description of the problem the proposed change attempts to address, and an explanation of how the proposed change attempts to address the problem identified;
    • A realistic estimate of the impact, including costs and benefits, of a proposed rule change on affected parties;
    • Any additional information required by the provisions of G.S. 150B-21.4 and E.O. 70, as applicable to the proposed rule.
  • Local funds means receipts from non-federal and non-state governmental units and public interest organizations, including county and city funds, third-party matching funds, and in-kind contributions.
  • Opportunity cost means the value of benefits that could have been received from an alternative that is forgone as a result of the regulatory action. The use of any resource, including a person’s time, has an opportunity cost. That opportunity cost is equal to the net benefit the resource would have provided in the absence of the regulatory action. For example, if a regulatory action adds paperwork and reporting requirements, the opportunity cost is the value of the staff time now used to comply with the added requirements.
  • Person means any natural person, partnership, corporation, body politic, unincorporated association, organization, or society that may sue or be sued under a common name.
  • Permanent rule means a rule adopted in accordance with the requirements of G.S. 150B-21.2.
  • Responsible agency fiscal officer means the person designated by the department to certify that the agency has prepared an accurate impact analysis or fiscal note.
  • Review before publication means the requirement that agencies proposing a permanent rule affecting local funds submit the rule to OSBM for review at least 60 days prior to publishing the rule in the North Carolina Register. (See G.S. 150B-21.26 for further clarification.)
  • Rule means each agency regulation, standard, or statement of general applicability that implements or interprets laws enacted by the General Assembly or Congress, or amends or repeals a prior rule. (See G. S. 150B-2(8a) for further clarification.)
  • Rule Change means the package of individual rules that are new or proposed for amendment that the agency is requesting to publish and adopt together. Collectively this package of rules is the new policy the agency is proposing to implement.
  • State funds means any moneys, including federal funds and any funds appropriated by the General Assembly, deposited in the state treasury except moneys deposited in a trust fund or agency fund as described in G.S. 143C-1-3.
  • Substantial economic impact means an aggregate financial impact on all persons affected of at least one million dollars ($1,000,000) in a 12-month period (see G.S. 150B-21.4(b1) for further clarification). Both costs and benefits must be included when estimating this financial impact. For example, a rule change with $600,000 of estimated benefits and $400,000 of estimated costs would have a substantial economic impact.
  • Temporary rule means a rule adopted in accordance to G.S. 150B-21.1.

 

7.3 What Are the Requirements Prior to Publishing Proposed Permanent Rule Changes

7.3.1 When Does a Rule Change Require OSBM Review and Approval?

For any permanent rule change that has one or more of the impacts outlined below, agencies must submit a fiscal and regulatory impact analysis (see Section 7.5 below and G.S. 150B-21.4 for fiscal and regulatory impact analysis requirements) to OSBM for review and obtain approval prior to publishing in the North Carolina Register:

  • State funds impact – The rule change requires the expenditure or distribution of state funds.
    • "Expenditure of funds" includes new agency activities required to be implemented by state employees or other agents of the state (contractors, temporary employees, etc.) paid with state funds. The agency must include in the analysis the opportunity cost of these activities to the extent they affect the ability of state employees or other agents of the state from performing already assigned tasks. Furthermore, any new agency costs must be included, even if additional receipts may offset the cost.
    • "Distribution of state funds" includes funds paid out by the state or reallocation of funds across agencies or divisions.

     

    In short, a rule change that causes any additional costs to the state or that changes the allocation of funds requires OSBM approval.

  • Local funds impact – The rule change impacts local government expenditures or revenues. Agencies must submit to OSBM the proposed rule text and fiscal and regulatory impact analysis of rule changes with impacts on local funds at least 60 days prior to the intended date of publication in the North Carolina Register, as per G.S. 150B-21.26.
  • Substantial economic impact – The rule change has a substantial economic impact, i.e., an aggregate financial impact on all persons affected of at least one million dollars ($1,000,000) in a 12-month period.

7.3.2 When Does OSBM Certify Availability of Funds?

For rule changes with state funds impact, the agency must obtain, in conjunction with the fiscal and regulatory impact analysis approval, an OSBM certification of the state funds availability to cover the state impact from the proposed rule change prior to publishing the rule in the North Carolina Register. (See G.S. 150B-21.4(a) .

7.3.3 When Does OSBM Certify Against Regulatory Principles?

  • Rule Changes with Substantial Economic Impact
    G.S. 150B-21.4(b1) requires OSBM to certify that agencies proposing a rule change with a substantial economic impact adhered to the principles set forth in G.S. 150B-19.1(a)(2), (5), and (6) before the agency publishes the proposed text of any permanent rule change in the North Carolina Register. OSBM will determine whether the proposed rule change adheres to the above regulatory principles on the basis of the information provided in analysis submitted by the agency.
  • Rule Changes Proposed by Cabinet Agencies
    E.O. 70 requires OSBM to ensure during the fiscal and regulatory impact analysis review and approval process that cabinet agencies adhered to the principles outlined in Section 2 of the Order in adopting a proposed permanent rule change.

7.3.4 Are Fiscal and Regulatory Impact Analysis Required for Rule Repeals

Agencies are not required to submit a fiscal and regulatory impact analysis to OSBM for proposed rule repeals (see G.S. 150B-21.4(d)). If the agency proposes to repeal a rule but also to adopt or amend one or more rules to replace the repealed rule, and if the rule(s) proposed for adoption or amendment require OSBM review or approval of an analysis, the agency may include the rule proposed for repeal in the package of rules subject to fiscal and regulatory impact analysis.

 

7.4 When Must an Agency Obtain OSBM Approval After Publishing Proposed Permanent Rule Changes?

An agency must submit a newly drafted or amended fiscal and regulatory impact analysis for OSBM review and approval after it has adopted the text of a proposed rule if:

  • An agency adopted a rule that differs substantially from the text of a previous version of the proposed rule published in the North Carolina Register and must republish the text, as outlined by G.S. 150B-21.2 (g), and if the previous version of the proposed rule change required submitting a fiscal and regulatory impact analysis to OSBM;
  • An agency adopted a rule that differs substantially from the text of a previous version of the proposed rule published in the North Carolina Register and must republish the text, as outlined by G.S. 150B-21.2 (g), and if the new version of the proposed rule change would cause the rule to require submitting a fiscal and regulatory impact analysis to OSBM; and
  • The Rules Review Commission objects to the proposed rule change, and the commission requests additional or revised data that changes the impact analysis or requires a new impact analysis.

An amended or newly drafted analysis should incorporate the new circumstances created by the revised proposed rule, and the agency shall submit the new or revised analysis according to the procedures outlined in this chapter.

 

7.5 What Are the Fiscal and Regulatory Impact Analysis Requirements?

7.5.1 How is the Proportionality Principle Applied?

A good fiscal and regulatory impact analysis does not follow a strict formula or template. Different rule changes require different emphases and levels of analysis, and the depth of the analysis must be proportional to the nature and complexity of the rule change. Agencies must ensure they invest the appropriate level of resources in gathering and analyzing the rule change. The two key factors determining the depth and comprehensiveness of analysis are:

  1. the size, duration, and distribution of expected impact, and
  2. the degree of discretion the agency has in developing the policy.

Other contributing factors in determining the appropriate level of analysis include: the degree to which the policy is novel, contentious, or irreversible, the level of uncertainty around likely impacts, the data available and resources required to gather further data, and the time available for policy development.

Agencies are encouraged to contact OSBM during the drafting stage of the fiscal and regulatory impact analysis for guidance in identifying the appropriate level of analysis.

The principle of proportionality relates only to the scale of effort invested in the analysis required and should not be used as a determinant of whether an analysis should or should not be performed.

7.5.2 What Are the Different Types of Rule Changes?

Depending on the scale of regulatory impacts, permanent rule changes generally correspond to one of two different tiers of analysis:

  • Tier I - Non-substantial economic impact rules> – Rule changes that have (1) an aggregate economic impact of less than one million dollars ($1,000,000) in a 12-month period, and (2) impact state or local funds, as described in section 7.3.1 above.
  • Tier 2 - Substantial economic impact rules – Rule changes with an aggregate economic impact on all persons affected of at least one million dollars ($1,000,000) in a 12-month period.

7.5.3 What Information Must Agencies Submit to OSBM?

Below is the information agencies must include in a fiscal and regulatory impact analysis corresponding to each tier of analysis:

Tier I - Non-Substantial Economic Impact Rules

  1. General Information
    • The title of the rule change and North Carolina Administrative Code citation;
    • The name of the agency proposing the rule and agency contact information;
    • A citation to the statute(s) authorizing the rule change or the federal law(s) or regulation(s) requiring the rule;
    • A brief statement identifying whether or not the rule change has a state, local, and/or federal government impact, a private sector impact, and/or a substantial economic impact;
    • Information on the source of funds that would be used to cover new costs if the rule change requires disbursement of state funds so that OSBM can certify the existence of funds (see G.S. 150B-21.4(a));
    • A copy of the proposed rule text; and
    • The certification of federal requirement, if applicable.
  2. Summary of the Proposed Regulation
    • Necessity and purpose of the rule change – Describe the need for the proposed action, including a clear description of the problem or issue a rule change is intended to address.
      • Description of the change – Given the broad intended audience for impact analyses, the rule change description should clearly explain how the proposed changes would address the identified problem or issue. The description must be clear, concise, and avoid technical jargon. Discuss any expected improvements in public health, safety, or welfare, or how the rule change serves the public interest.
    • Economic Analysis – This section is the heart of the analysis and must describe the estimated impact on affected parties from the proposed rule change, as well as explain how the agency estimated the impact and how the proposed rule change interacts with existing regulatory requirements affecting the parties affected by the proposed rule change. Below are some general considerations that must be taken into account when evaluating the economic impact of the proposed rule change:
      • Scope of Analysis – The appropriate time frame for analysis is dependent on the nature of a specific rule change and must cover a period long enough to encompass the important costs and benefits likely to result from the rule change. For many rule changes, a per year or one-time estimate may be sufficient. For others, such as a rule change with a phased implementation over a number of years, the appropriate time frame may be much longer.
      • Baseline – The impacts identified must be measured against a baseline. This baseline must be the best assessment of what the world would be like if the agency were not to adopt the rule change. This assessment must account for independently enforceable N.C. General Statutes currently in effect and rules contained in the N.C. Administrative Code. Informal agency policies not adopted as rules in compliance with G.S. 150B must be excluded from the assessment of the baseline.
      • Cost Estimates – The economic impact of the rule change is the incremental difference between the baseline and the future condition expected after implementation of the proposed regulation. Cost estimates must include all direct costs, including opportunity costs. How is the rule change expected to change the current state? What costs, including financial costs and opportunity costs, are associated with these changes?
        • Agencies must include tables and schedules of the cost estimates. Cost estimates must be monetized to the greatest extent practicable, while ensuring that the depth of analysis is proportional to the complexity and impact of the rule change.
        • Where costs are not quantified in dollars, they must be listed and described and include quantification of factors related to costs in non-monetary terms where feasible (e.g., the number of persons, facilities, or localities affected). In cases where precise cost estimates are infeasible, estimating a range of costs under various plausible assumptions may be appropriate.

      • Benefit Estimates – Explain how the actions required by the rule change are linked to the expected benefits. Benefit estimates must be quantified in dollars to the greatest extent practicable, with the need for quantification increasing for rule changes of larger or more complex effects.
        • Where benefits are not monetized, they must be listed and described in detail and include quantification of factors related to benefits in non-monetary terms where feasible (e.g., the number of persons, facilities, or localities affected). In cases where precise benefits estimates are infeasible, estimating a range of benefits under various plausible assumptions may be appropriate.
        • Transparency and Reproducibility – A good analysis must clearly set out the basic assumptions and methods employed, as well as cite the scientific, technical, economic, and other data and information used in the analysis. This enables readers to understand how the authors of the analysis reached their conclusions.
        • Stakeholder Input – Relevant stakeholder information deemed to have merit that the agency gathered during the drafting phase of the rule change.
        • Table of Impacts – Agencies must include a summary table of annual or one-time costs and benefits. In constructing this summary table, it may be helpful to organize annual costs and benefits by rule provision and/or affected party.

      • Persons Affected – The analysis must identify the persons affected by the rule change within the categories listed below. Within each category, describe the number of different entities impacted by the rule change and briefly summarize how these units will be affected. In some cases, depending on the complexity of the rule change, it may be useful to organize the discussion by type of entity affected:
        • State government entities,
        • Local government entities,
        • Federal government entities, and
        • Private-sector entities.

Tier II - Substantial Economic Impact Rules

A rule change is considered to have a substantial economic impact if aggregate costs and benefits for all persons affected equal at least $1,000,000 in a 12-month period. For example, a rule change with $600,000 in estimated benefits and $400,000 in estimated costs in a 12-month period would have a substantial economic impact.

For rule changes with a substantial economic impact, the agency's fiscal and regulatory impact analysis must include the following:

  • The information required for non-substantial economic impact rules (see Section 7.5.3.1 above).
  • Alternatives – Agencies must demonstrate that the proposed rule change achieves the regulatory objective in a cost-effective manner by describing at least two alternatives considered, evaluating their impacts to the extent practicable, and stating reasons why the agency rejected those alternatives. The alternatives may have been identified by the agency, stakeholders, or members of the public. When there is a "continuum" of alternatives to address a particular problem, an agency must examine a preferred option, a more expensive or stringent option, and a less expensive or stringent option. Agencies must also consider, when feasible, alternatives that would not require rulemaking, such as using economic incentives, implementing information disclosure requirements, or performance standards. When the status-quo is a possible alternative, it may be used as one of the two required alternatives. (See G.S. 150B-21.4(b2))
  • Time Value of Money – Benefits and costs do not always take place in the same time period. When they do not, an agency may not simply add up all of the expected benefits or costs without accounting for when the impacts occur. Benefits or costs that occur sooner have a higher present value than equivalent benefits or costs occurring later. Given this preference, a discount rate of 7.0% must be used to adjust future benefits and costs when appropriate. At the discretion of OSBM, other discount rates may be used in addition to 7.0% for comparative purposes. (See a href="http://www.ncleg.net/EnactedLegislation/Statutes/HTML/BySection/Chapter_.... 150B-21.4(b1) and the U.S. Office of Management and Budget’s Circular A-4 on Regulatory Analysis.)
  • Risk and Sensitivity Analyses – A risk is a factor or possible event that may jeopardize anticipated benefits or affect the cost of a rule change. The agency must evaluate possible risks for their likelihood of occurrence and the effects of such an occurrence on anticipated costs and benefits. The effects of a risk-event occurrence must be described in terms of the costs and/or benefits it would affect. The risk analysis must relate to the assumptions and parameters used in the primary analysis of benefits and costs. Each significant risk must be listed and described. Given the uncertainty of various estimates, it may also be useful to provide a sensitivity analysis to reveal whether, and to what extent, the results of the analysis are sensitive to alternative underlying assumptions.

 

7.6 What Are the Requirements for Rules Agencies are Readopting?

G.S. 150B-21.3A sets up the process by which all agencies subject to rulemaking are required to perform a periodic review of their existing rules. For rules that the final determination report (see G.S. 150B-21.3A(c)(3)) identifies as needing to be readopted, an agency must submit a fiscal and regulatory impact analysis of the rule change to OSBM if all of the following conditions are met:

  1. The agency is proposing substantive changes to the rule, i.e. they have to publish the text of the rule in the NC Register as per G.S. 150B-21.2(c)(1)
  2. The proposed changes result in a substantial economic impact or have an impact on state government or any unit of local government; and
  3. At least one rule in the package of rules the agency is proposing to adopt together creates a net cost on any part of the regulated community.

The agency must meet the same fiscal and regulatory impact analysis requirements as stated in Section 7.5. However, the baseline for rule changes agencies are proposing for readoption are the current, unexpired rules contained in the North Carolina Administrative Code, as well as any stand-alone statute.

 

7.7 What Are the Requirements for OSBM to Review Certain DHHS Temporary Rules

In accordance with G.S. 108A-54.1B(c), prior to submitting the proposed text of a temporary rule change to the Rules Review Commission and the Office of Administrative Hearings (as per G.S. 150B-21.1), the agency must submit to OSBM an impact statement that includes the following:

  1. General information
    • The title of the rule change and North Carolina Administrative Code citation;
    • The name of the division proposing the rule change and contact information;
    • A citation to the statute(s) authorizing the rule change or the federal law(s) or regulation(s) requiring the rule;
    • An indication of whether or not the rule change will generate state or local government impacts; and
    • The text of proposed temporary rule change.

  2. Description – The division must provide a description of the rule and changes from existing regulation, as well as an explanation of the need for the rule and the issue(s) or problem(s) it is intended to address;
  3. Analysis – The analysis is the main part of the impact statement and must explain the fiscal impacts on state and local governments that would result from the temporary rule change. The division must also explain any current or future impacts on agency budgets and information on affected budget codes if there is a state-government impact. Below are some general considerations that must be taken into account when performing the analysis:
    • Baseline – Agencies must measure costs and benefits compared to a baseline scenario. This baseline must be the best assessment of what the world would be like if the agency were not to adopt the rule. This assessment of the baseline scenario must account for independently enforceable N.C. General Statutes currently in effect and rules contained in the N.C. Administrative Code. Informal agency policies not adopted as rules in compliance with G.S. 150B must be excluded from the assessment of the baseline.
    • Impact Estimates – The agency must determine the budgetary impact of the proposed rule change. The impact of the rule change is the incremental difference between the baseline and the future condition expected after rule implementation. The agency must monetize estimates to the greatest extent practicable, while ensuring that the depth of analysis is proportional to the complexity and impact of the rule change. Where the agency cannot quantify impacts in dollars, it must list and describe these impacts and include quantification of factors related to budgetary impacts in non-monetary terms where feasible (e.g., the number of persons, facilities, or localities affected). In cases where precise budgetary impacts estimates are infeasible, estimating a range of impacts under various plausible assumptions may be appropriate.
    • Scope of Analysis – The appropriate time frame for analysis is dependent on the nature of a specific rule change and must cover a period long enough to encompass the important budgetary impacts resulting from the proposed rule change, especially impacts affecting the current and next biennia. Agencies must include tables of cost estimates over the appropriate time frame for analysis.
    • Transparency and Reproducibility – A good analysis must clearly set out the basic assumptions, methods, and data used, enabling the reader to understand how the authors of the analysis reached their conclusions and, in the absence of confidential or proprietary information, reproduce the results themselves.

 

7.8 How Must Agencies Submit Information to OSBM and How Will OSBM Notify Agencies?

All required submissions of rule information to OSBM must be sent electronically to osbmruleanalysis@osbm.nc.gov. Faxes and paper submittals of information will not be accepted and will not constitute the submittal of a proposed rule change and supporting fiscal and regulatory impact analysis. Analysis must be reviewed by the responsible agency fiscal officer prior to being submitted to OSBM for review or approval.

Once OSBM has certified, reviewed, or approved the proposed rule change and the associated fiscal and regulatory impact analysis (see sections 7.3 and 7.4 above), OSBM will notify the agency electronically. OSBM will post on its website a PDF version of any analysis reviewed or approved by the Office, along with the title of the rule change and the OSBM approval date. In the electronic notification, OSBM will provide a link to the posted document, which OSBM encourages agencies to use in informing the public and complying, where applicable, with G.S. 150B-19.1(c).

The agency is responsible for submitting the OSBM-approved rule change to the Office of Administrative Hearings for publication in the North Carolina Register or to the Rules Review Commission for review.

OSBM encourages agencies to review thoroughly public comments and modify fiscal and regulatory impact analyses based on pertinent information received from the public. G.S. 150B-19.1(c) requires agencies to publish the updated fiscal and regulatory impact analysis on their website. OSBM asks that agencies send electronically to osbmruleanalysis@osbm.nc.gov any updated version of an OSBM approved fiscal and regulatory impact analysis so that the Office can updated the analysis posted on its website.

 

Rule Analysis Index

Administrative Procedure Act

Affected Parties

Agency

Alternatives

Approval

Baseline

Benefit Estimates

Certification against Regulatory Principles

Certification of State Funds Availability

Certification of Federal Requirement

Cost Estimates

Economic Analysis

Executive Order 70

General information

Fiscal Note

Fiscal and Regulatory Impact Analysis

Fiscal and Regulatory Impact Analysis Requirements

Local Funds

Opportunity Cost

Person

Permanent Rule

Proportionality Principle

Responsible Agency Fiscal Officer

Readoptions

Review of Local Government Impact

Risk Analysis

Rule

Rule Change

Scope of Analysis

State Funds

Substantial Economic Impact

Summary of the Proposed Regulation

Time Value of Money

Temporary Rule Change

Transparency and Reproducibility

Types of Rule Changes