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This paper reviews the activities of the Congressional Budget Office (CBO) during 1997 in carrying out the Unfunded Mandates Reform Act of 1995. It also examines how the law has worked and some proposals for reforming Congressional treatment of unfunded mandates.

The paper was prepared by Theresa Gullo, Chief of CBO's State and Local Government Cost Estimates Unit, under the supervision of Paul N. Van de Water and Robert Sunshine, and by Elliot Schwartz, Chief of CBO's Commerce Unit, under the supervision of Jan Paul Acton.

The paper was edited by Christian Spoor and proofread by Melissa Burman. Angela McCollough and Rae Wiseman prepared the final version; Rae Wiseman and Brenda Trezvant typed the early drafts. Laurie Brown prepared the electronic version for CBO's World Wide Web site (http://www.cbo.gov/).

June E. O'Neill
Director
February 1998
 
 

SUMMARY

INTRODUCTION

AN OVERVIEW OF UMRA'S SECOND YEAR

COSTS TO STATE AND LOCAL GOVERNMENTS FROM 1997 LEGISLATION

• Mandates Enacted into Law
• Other Legislation Affecting State and Local Governments

• Defining Intergovernmental Mandates
• Proposed New Procedures for Private-Sector Mandates

• Determining Whether a Bill Contains a Mandate
• Determining Whether the Mandate's Direct Costs Exceed the Threshold
• Applying UMRA to Tribal Governments

A - Contributors to CBO's Analyses of Mandates
B - Bills and Proposals in 1997 That Contain Intergovernmental Mandates
 

SUMMARY

After two years, the procedures established by the Unfunded Mandates Reform Act of 1995 (UMRA) appear to be achieving their goals of focusing greater attention on the costs of federal mandates and ensuring that the Congress knows about those costs when it considers legislation. In addition, despite some analytical problems that have existed since the law took effect, the Congressional Budget Office (CBO) has been able to provide the Congress with substantially more information about federal mandates and their costs. At the same time, some Members of Congress and other observers question whether UMRA's definition of intergovernmental mandates is adequate and whether the legislative procedures that apply to private-sector mandates should be bolstered.

1997 in Review

UMRA requires CBO to review virtually all bills reported by authorizing committees for the presence of federal mandates and, if found, to estimate their costs. In addition, CBO reviews some proposed floor amendments and draft bills. Of the approximately 500 mandate statements that the agency transmitted to the Congress in 1997, 64 (12 percent) identified mandates on state, local, or tribal governments and 65 (13 percent) found mandates on the private sector. Eight of the statements identified intergovernmental mandates whose estimated annual costs would exceed the statutory threshold for such mandates ($50 million in 1996 dollars, indexed annually for inflation). Because more than one CBO statement was issued for many of those mandates--since, for example, bills including the same mandate are often reported in both Houses of Congress--those eight statements identified a total of three Intergovernmental mandates over the threshold in 1997. Another 18 statements found a total of 11 private-sector mandates with costs exceeding their threshold ($100 million in 1996 dollars, indexed annually for inflation).

Overall Costs to State and Local Governments from 1997 Legislation

Although some intergovernmental mandates became law last year, the overall effect of Congressional action in 1997 was to benefit state and local governments. Fourteen of the 153 public laws enacted in 1997 (or 9 percent) contained intergovernmental mandates, mostly in the form of preemptions of state and local laws. However, CBO estimates that none of them will raise costs significantly for state, local, or tribal governments. Over the course of the year, CBO identified more than 85 bills that included other provisions, such as conditions of a federal grant, that would result in additional costs to those governments. However, over 60 bills contained provisions that, if enacted, would result in significant benefits or savings to state and local governments.

Evaluating UMRA

The Unfunded Mandates Reform Act has increased both the demand for and the supply of information about federal mandates. In addition, the Congress appears to be paying greater attention to mandate issues when it considers legislation. Despite those successes, two criticisms of the law could lead to efforts to amend UMRA in 1998. Those criticisms focus on the law's definition of an intergovernmental mandate, especially for large entitlement programs, and its procedures for private-sector mandates, which some Members of Congress consider inadequate.

Groups representing state and local governments have asserted that UMRA's definition of an intergovernmental mandate is too restrictive because it does not include changes to long-standing grant programs. A particular point of controversy is the definition of a mandate for large entitlement programs, such as Medicaid, and how CBO interprets that definition. For a specific set of large entitlements, UMRA defines an increase in the stringency of grant conditions or a decrease in federal funding as a mandate only if the state or local governments that administer the program lack the flexibility to make changes to offset the new costs or loss of funding. In most cases, CBO has found that state and local governments have enough flexibility to offset higher program costs or lower funding. Some people argue, however, that the Congress intended that unless the same bill that makes the changes also provides new flexibility, increased program costs or reduced funding should be viewed as an intergovernmental mandate.

Some Members have proposed expanding UMRA's treatment of private-sector mandates. Legislation now before the Congress would make two changes. First, a provision would be added to the law that would create an additional procedural hurdle (a "point of order") against considering a bill with costs estimated to exceed the private-sector mandate threshold of $100 million in a year; such a provision would be similar to the existing point of order for intergovernmental mandates. The second change would direct CBO to expand the cost information it gives the Congress about private-sector mandates to include secondary impacts on consumers, workers, and small businesses, including any disproportionate impact on particular regions and industries. CBO already provides some information of that nature when data and time permit.

Challenges in Carrying Out UMRA

In preparing more than 500 mandate statements in 1997, CBO continued to encounter a few procedural difficulties. They involved problems in identifying mandates, estimating mandate costs, and applying UMRA to tribal governments for specific legislative proposals.

In most cases, determining whether a bill contains a mandate as defined by UMRA is relatively straightforward. However, in five cases last year, CBO was unable to make such a determination with regard to intergovernmental mandates, mostly because UMRA is unclear about how to view a bill that might raise the costs of an existing mandate without imposing a new one.

Other factors sometimes make it impossible to estimate the direct costs of mandates--including, for example, ambiguous language in a bill, uncertainty about whom the bill affects, ambiguous language in UMRA, lack of knowledge about future regulations, and lack of other essential information. Those problems prevented CBO from determining whether the relevant threshold had been exceeded for seven of the 64 intergovernmental mandates (11 percent of bills containing such mandates) and five of the 65 private-sector mandates (8 percent of such bills).

How to apply the definitions in UMRA to tribal governments is also unclear. For many programs, tribes lack control over the provision of services and the nature of the services provided; those controls may reside with federal agencies such as the Bureau of Indian Affairs. Thus, it is difficult to determine whether some federal programs that tribes participate in are voluntary or constitute intergovernmental mandates.
 

INTRODUCTION

Through legislation and subsequent regulation, the federal government frequently requires state, local, and tribal governments as well as private parties to expend resources to meet certain goals. Those resources are not counted in the federal budget, nor are they constrained by the federal government's ability to pay. The Unfunded Mandates Reform Act of 1995 (UMRA) was enacted to focus more attention on the costs of such federal mandates; to ensure that the Congress carefully weighs those costs before imposing mandates on other levels of government or the private sector; and to encourage the federal government to provide financial assistance for the costs of intergovernmental mandates. To accomplish those goals, the law established a variety of procedural requirements, which are summarized in Box 1. A major requirement was that the Congressional Budget Office (CBO) inform Congressional committees about the presence of federal mandates in legislation.
 

In this paper, CBO details its mandate-related activities during calendar year 1997, the second year in which the Congress has operated under the rules established by UMRA.⁽¹⁾ The paper also reviews how well the law has achieved its purposes and discusses some of the important issues that have arisen with respect to intergovernmental and private-sector mandates.
 

AN OVERVIEW OF UMRA'S SECOND YEAR

During 1997, CBO provided mandate cost statements for virtually all bills reported by authorizing committees and for many proposed bills and amendments. Before markups, committee staff and individual Members are increasingly requesting CBO's judgment on whether proposed legislation would create any new federal mandates, and if so, whether their costs would exceed the thresholds set by UMRA. In many instances, CBO can inform the sponsor about the existence of a mandate and provide informal guidance on how the proposal might be restructured to either eliminate the mandate or reduce its cost. For example, in the case of the Internet Tax Freedom Act (S. 442 and H.R. 1054), CBO worked with both supporters and opponents of the bills to identify mandates and their costs before the bills were marked up by full committee.

In all, CBO analyzed more than 500 bills and other legislative proposals in 1997 to determine whether they contained federal mandates (see Table 1). About 12 percent had intergovernmental mandates, and approximately 2 percent (eight bills in all) had mandate costs exceeding the $50 million a year threshold. Those percentages are close to CBO's long-run experience in estimating the costs of federal legislation to state and local governments, which it has been doing since 1983 (as required by the State and Local Cost Estimate Act). CBO identified private-sector mandates in about 13 percent of the bills and amendments that it examined; nearly 4 percent (18 bills) had costs over the $100 million a year threshold.
 

Different bills can contain similar mandates, however, especially if companion bills are introduced separately in the House and Senate. Thus, the eight bills with intergovernmental mandates over the threshold contained three mandates in all: a reduction in the federal contribution to administer the Food Stamp program; a moratorium on state and local taxation of the Internet; and a requirement that certain fees owed by nuclear utilities, including one that is publicly owned, be paid more quickly. (Appendix B lists all of the bills and proposals reviewed by CBO in 1997 that contained an intergovernmental mandate regardless of its size.) The 18 bills with private-sector mandates over the threshold contained 11 mandates in all.

No intergovernmental mandates with costs above the threshold were enacted in 1997. The three such mandates that CBO identified were still pending before the Congress at the end of 1997 (see Table 2). Since January 1996, when UMRA took effect, Congressional committees have reported few bills with intergovernmental mandates whose costs exceeded the threshold.
 

Interestingly, over the past two years most of the proposed mandates on state and local governments resulted because those governments were part of a larger regulated community, such as employers or owners of nuclear utilities, not because they were governmental units. In those cases, state and local governments were facing costs similar to those faced by other members of the mandated group. (Last year, however, the two most expensive intergovernmental mandates--the Food Stamp and Internet tax provisions--were specifically aimed at state and local governments as governmental entities.)

The track record for private-sector mandates is different from that of intergovernmental mandates. In 1997, CBO identified more than twice as many private-sector mandates above the threshold as intergovernmental mandates. Four of those private-sector mandates were enacted (in the budget reconciliation bills and the bill reinstating the airline ticket tax).

In addition, CBO identified 12 bills in 1997 (about 2 percent of the total) that were wholly or partially excluded from the procedures of UMRA--generally because they would enforce the constitutional rights of individuals, would be necessary for national defense, or would be required for the ratification or implementation of treaty obligations. Such exclusions, spelled out in section 4 of UMRA, apply equally to intergovernmental and private-sector mandates.

Although not conclusive, last year's experience suggests that UMRA was helpful in limiting the imposition of unfunded mandates on state and local governments. Besides floor actions to reduce the costs of such mandates, a number of changes were made in committee or before markups to eliminate or minimize mandate costs after consultation with CBO. The three intergovernmental mandates whose costs did exceed the threshold are described below.

Agricultural Research, Extension, and Education Reform. A provision in S. 1150 (as reported by the Senate Committee on Agriculture, Nutrition, and Forestry on September 5, 1997, and passed by the Senate on October 29, 1997) would limit the federal government's responsibility to provide funding to states for administrative costs of the Food Stamp program. As described in Box 1, UMRA considers cuts in federal funding for certain entitlement programs (including Food Stamps) to be a mandate if the state, local, or tribal governments that participate in the program cannot change their financial or programmatic responsibilities to continue providing required services that are affected by the legislation. Because states have limited authority to amend their programmatic responsibilities under the Food Stamp program, CBO determined that the funding reductions imposed by S. 1150 would constitute a mandate, with costs totaling between $200 million and $300 million a year. The companion bill (H.R. 2534), which did not contain the mandate, was passed by the House on November 8, 1997. A conference to reconcile the differences in those bills is pending.

Internet Tax Freedom. S. 442, as introduced in the Senate on March 13, 1997, would prohibit state and local governments from imposing direct or indirect taxes on the Internet or on interactive computer services. CBO determined that the prohibition would constitute a mandate under UMRA because it would prevent state and local governments from collecting tax revenue that they would otherwise collect. The costs of that proposed mandate vary depending on how one interprets direct or indirect taxes and the term "interactive computer services," as used in the bill. However, given the broad nature of those terms, CBO estimated that the mandate imposed by this version of S. 442 would prohibit state and local governments from collecting a variety of taxes and that those losses would far exceed the threshold established in UMRA. A substitute version of S. 442, which was much narrower in scope and whose costs may or may not exceed the threshold, was ordered reported by the Senate Committee on Commerce, Science, and Transportation on November 4, 1997.

Nuclear Waste Policy. Several versions of the Nuclear Waste Policy Act (S. 104 and H.R. 1270) contained a provision that would accelerate the payment of certain fees by nuclear utilities--including the New York Power Authority, a publicly owned utility. Under current law, those payments would be made in 2010 or later, when the Department of Energy is slated to open a permanent storage facility for nuclear waste. CBO identified the acceleration of those payments as a federal mandate imposed on both the New York state government and a number of private-sector utilities. By CBO's estimate, the direct cost of that mandate in 2002--$180 million for the publicly owned utility and over $2.3 billion for private utilities--would exceed the statutory thresholds for both intergovernmental and private-sector mandates. The net long-term cost to nuclear utilities would actually be much less than that, however, because they would no longer have to make the currently scheduled payments in 2010 or later. In addition, their costs would be partially offset by any savings in storage costs that would occur when an interim storage facility began accepting nuclear waste, as directed by the bill. S. 104 was passed by the Senate on April 15, 1997; H.R. 1270 was passed by the House on October 30, 1997. Both bills still contain the mandate. A conference to reconcile other differences in the bills is pending.

In addition, the Congress considered another 11 mandates in 1997 that would impose costs of $100 million or more a year on the private sector. In six cases, those mandates involved taxes or nonvoluntary fees imposed by government programs, such as licensing or inspection fees. Of the 18 cost statements that CBO provided in 1997 for private-sector mandates above the threshold, 11 involved the payment of taxes or fees (including the nuclear waste fee discussed above).

The budget reconciliation bill for revenue (H.R. 2014, the Taxpayer Relief Act of 1997) contained several provisions that CBO identified as private-sector mandates because they would require some form of payment to the federal government. CBO also identified a private-sector mandate in the reinstatement of the Airport and Airway Trust Fund ticket tax. In House Joint Resolution 79--disapproving the extension of nondiscriminatory (or most-favored-nation) treatment to the imports of the People's Republic of China--CBO found that the resolution would raise tariff rates on goods imported from China, thus imposing a cost on the private sector. For three bills--the United States-Caribbean Trade Partnership Act, the Education Savings Act, and the IRS Restructuring and Reform Act--revenue provisions were needed to maintain budget neutrality (in the last two cases, the provision, which would change the tax deduction for accrued vacation pay, was the same). The remaining five private-sector mandates over the cost threshold are described below.

Biomedical Research. CBO responded to a request to analyze a draft bill related to biomedical research by noting that one provision would impose a private-sector mandate over the statutory threshold. That provision would prohibit manufacturers of generic drugs from producing copies of certain brand-name drugs that contain an active ingredient initially approved by the Food and Drug Administration within the past five years. CBO estimated that the prohibition would cost generic-drug manufacturers more than $500 million in lost profits (after taxes) between 1998 and 2002.

Budget Reconciliation: Medicare. The reconciliation recommendations of the Committees on Finance, Ways and Means, and Commerce (for H.R. 2015, the Balanced Budget Act of 1997) contained several largely similar private-sector mandates related to Medicare. Those provisions would make permanent an existing mandate on health insurance providers that requires them to treat Medicare as the second payer for enrollees with disabilities or end-stage renal disease who also have employment-based insurance. The provisions would also require private insurers who offer either employment-based or medigap supplemental insurance coverage to Medicare enrollees to notify enrollees of their rights under Medicare if their insurance policy is terminated.

In addition, medigap insurers would be prohibited from excluding coverage of preexisting conditions for aged Medicare enrollees who buy a medigap plan within six months of their enrollment in Part B. Such insurers would also be required to cover preexisting conditions for Medicare enrollees who change coverage from another medigap plan, a health maintenance organization, or an employment-based plan within a specified time period.

CBO estimated that the combined costs to the private sector of those provisions would total between $150 million and $1.5 billion per year, depending on the interpretation of UMRA's provisions for extending a mandate that is scheduled to expire under current law. Those provisions were essentially unchanged when H.R. 2015 was signed into law on August 5, 1997.

Budget Reconciliation: Federal Employee Retirement. The reconciliation recommendations of the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight (for H.R. 2015) contained a private-sector mandate because they increased the contributions that federal employees are required to make to the civilian retirement systems. Such retirement contributions are compulsory withholdings made by the federal government and thus are an enforceable duty required of federal employees. CBO estimated the direct costs of that mandate at $1.9 billion between 1999 and 2003. That provision was essentially unchanged in the enacted version of H.R. 2015.

Encryption. H.R. 695, the Security and Freedom through Encryption ('SAFE') Act of 1997 (as reported by the House Permanent Select Committee on Intelligence) would establish controls on domestic encryption technology. Specifically, the bill would require public network service providers that offer encryption services, as well as manufacturers, distributors, and importers of encryption products, to include features that allow duly authorized people to gain immediate access to encrypted material without the knowledge or cooperation of the user of that material. Thus, the bill would impose a federal mandate on a wide variety of entities--private and public--selling goods and services for electronic communication, including many producers and sellers of computer hardware and software.

CBO estimated that the total direct costs of complying with the encryption mandate could range from $200 million to $2 billion per year. Most of those costs would fall on private firms or individuals and thus would exceed the statutory threshold for private-sector mandates. It is less clear, however, whether the costs imposed on state and local governments would exceed the threshold established for intergovernmental mandates. Various versions of H.R. 695 have been reported by House committees.

Financial Services Reform. H.R. 10, the Financial Services Competition Act of 1997 (as reported by the House Committee on Banking and Financial Services) contained private-sector mandates that CBO estimated would exceed the statutory threshold. The bill would require the Federal Home Loan Banks (FHLBs) to replace a $300 million fixed annual payment for interest on Resolution Funding Corporation bonds with a 20.75 percent annual assessment on net earnings. It would also reduce the banks' level of investments to the amount necessary for liquidity, safety and soundness, and housing finance. CBO estimated that those requirements would cost the FHLBs $158 million in net earnings in 2003, the fifth year after the mandates would take effect. The House Committee on Commerce also reported a version of H.R. 10, but it did not contain the FHLB provision. The bill has not yet been considered on the House floor.
 

COSTS TO STATE AND LOCAL GOVERNMENTS FROM 1997 LEGISLATION

Although several intergovernmental mandates were enacted into law in 1997, none will impose significant costs on state, local, or tribal governments, CBO estimates. Rather, the net result of Congressional action in 1997--particularly enactment of the Balanced Budget Act--will be significant gains for those governments, in terms of both greater program flexibility and additional funding from new grant programs.

Mandates Enacted into Law

Of the 153 public laws enacted in 1997, 14 (or 9 percent) contain intergovernmental mandates as defined by UMRA (see Table 3). Most of those mandates take the form of preemptions of state and local laws. As noted above, however, none of them will require significant spending by state, local, and tribal governments, CBO estimates.
 

Some lawmakers continue to worry that mandates are being enacted without adequate scrutiny under the procedural requirements established in UMRA. However, only three of the bills enacted in 1997 that contained intergovernmental mandates were not reviewed by CBO at some point during the legislative process. (Two of them were appropriation bills.) CBO estimates that none of those mandates will impose significant costs on state and local governments.

Other Legislation Affecting State and Local Governments

Not all of the costs imposed by federal legislation result from mandates as UMRA defines them. More than 85 bills that the Congress considered in 1997 contained provisions that would have increased costs for state, local, or tribal governments but that were not the result of mandates as defined by the law. Most of those provisions dealt with conditions for receiving federal aid. In such cases, states or localities are subject to the legislated requirements only if they choose to accept certain federal grants. For example, the Housing Opportunity and Responsibility Act of 1997 (H.R. 2) would require local public housing authorities to meet new conditions to continue receiving federal assistance. Those conditions include establishing and enforcing work requirements and self-sufficiency agreements with residents, preparing more detailed management plans, and submitting new performance and evaluation reports. Although those requirements are not considered mandates under UMRA because they are conditions for the receipt of federal aid, their enactment would have a significant budgetary impact on public housing authorities. CBO is not required to estimate such impacts, but it does so whenever possible.

A review of the impact of federal legislation on state and local governments would not be complete without considering how often bills and legislative proposals would produce benefits or savings to those governments. By CBO's count, the Congress considered more than 60 such bills in 1997. The most important was the Balanced Budget Act. Among other things, the act repeals the Boren Amendment, which placed minimum requirements on the amount that states reimburse hospitals and nursing homes for medical care. That change is expected to save states a total of $900 million over five years. In addition, new grant programs for children's health care ($20 billion) and welfare-to-work programs ($3 billion) will give states substantial additional funding. Although the Balanced Budget Act also contains several intergovernmental mandates and imposes some conditions of aid that are likely to increase costs for state and local governments, those costs will not approach the estimated savings and extra financial assistance that state, local, and tribal governments stand to gain from the act.
 

PROPOSALS TO CHANGE UMRA

The Unfunded Mandates Reform Act has clearly increased both the demand for and the supply of information on the costs of federal mandates. Moreover, that information played a role in Congressional debate about several issues in 1997, particularly in the area of intergovernmental mandates. From that perspective, the law has accomplished what it set out to do. Some questions remain, however, about whether the law's definition of an intergovernmental mandate is sufficiently broad and whether curbs against considering private-sector mandates are sufficiently strong.

Defining Intergovernmental Mandates

For large entitlement programs such as Medicaid, UMRA defines an increase in the stringency of grant conditions or a decrease in federal funding as a mandate only if the state or local governments that administer the program lack the flexibility to make changes to offset the new costs or loss of funding. In the case of Medicaid, CBO determined that imposing a cap on per capita spending did not constitute a mandate as defined in UMRA because, under current law, states have the flexibility to offset any loss of federal funds by reducing the amount of money they spend or the services they provide. Some people have argued that the Congress intended for UMRA's flexibility provision to apply only to new flexibility provided by the same legislation that imposes the added costs or lower funding. They assert that section 421(5)(B)(ii) of the act should be amended to make it clear that any new federal requirement or reduction in funding for those programs would constitute a mandate unless the legislation that creates the mandate also provides new flexibility for state and local governments to amend their programmatic or financial responsibilities under the program in order to offset the additional costs.

Some critics also argue that UMRA's definition of a mandate is too restrictive. In general, the law defines a mandate as an enforceable duty unless that duty is a condition of federal assistance or a duty arising out of participation in a voluntary federal program. Yet, as the review of 1997 legislation showed, the costs that federal laws impose on state and local governments often result from other types of impacts, particularly grant conditions. Thus, legislation can impose costs on states and localities without being considered a mandate.

Groups representing state and local governments have suggested that grant conditions can pose a problem for those governments when the conditions are attached to a federal program years after it was established. It is unrealistic, they argue, to view participation in a large and long-standing grant program, such as federal highway aid, as voluntary. They assert that new conditions on such assistance, particularly when those conditions are unrelated to the original purpose of the program, should be considered new mandates.

Proposed New Procedures for Private-Sector Mandates

UMRA's perceived success in raising the consciousness of the Congress about unfunded federal mandates for state and local governments has prompted some Members to propose expanding the law's provisions for private-sector mandates. The most prominent proposal is the Mandates Information Act of 1997 (MIA), sponsored by Senator Spencer Abraham (as S. 389) and Congressman Gary Condit (as H.R. 1010). That bill would set new procedural constraints on the legislative process for private-sector mandates and direct CBO to provide additional types of cost information about those mandates.⁽²⁾

Specifically, the MIA would establish a point of order against considering bills that contain private-sector mandates whose costs exceed $100 million, regardless of whether federal funding is provided. As with the existing point of order against considering unfunded intergovernmental mandates, only a simple majority vote of Members would be necessary to overcome the objection. Thus, the new point of order would not stop the Congress from passing bills that a majority of Members want to pass. But it would impose a hurdle for the Congress to clear during deliberations on bills that contain private-sector mandates and would increase the demand for additional cost information.

The Mandates Information Act also directs CBO to provide expanded cost information about private-sector mandates that exceed the threshold. CBO would be required to analyze the impact of the proposed mandates on consumers, workers, and small businesses, including any disproportionate impact on particular regions or industries. That analysis would also include the effect on consumer prices, workers' wages and benefits, employment opportunities, and the profitability of small businesses. Economists call those indirect effects, such as when the mandated costs are passed along to other parties in the form of higher prices for finished goods or lower prices for intermediate inputs (including lower wages for workers). Such effects go beyond the direct costs of complying with a federal mandate, which CBO is now required to estimate.

CBO included information about significant indirect effects in some of its cost statements for private-sector mandates last year (see Table 4). For example, analyses of the biomedical research, encryption, and financial services reform bills noted that the costs of the mandates would be passed on to other parties. When sufficient time and data are available, CBO has also estimated the size of indirect effects.
 

Typically, however, time constraints and data limitations mean that CBO can include such extensive analyses only for topics that have already been widely researched. Subjects for which an extensive body of scholarly work does not exist are considerably more difficult to evaluate. They are also more typical of the private-sector mandates that CBO has reviewed so far. For example, CBO knows of no economics literature on the indirect costs of encryption, the air passenger ticket tax, or similar, more narrowly focused, mandates. In such cases, the agency would be limited to commenting on the general tendency of mandated entities to attempt to push the costs of the mandate onto other parties--either suppliers, workers, or consumers.

When time and the availability of data permit, CBO could provide quantitative estimates of private-sector mandates, as it did for the biomedical research bill. Of course, UMRA currently allows a committee Chairman or Ranking Minority Member to request that CBO analyze the mandates in a bill well before the legislation is considered. If they had enough lead time, CBO analysts might be better able to gather the data and perform the analyses required to provide more information about the indirect effects of mandates.
 

CHALLENGES IN CARRYING OUT UMRA

For the most part, UMRA's provisions have been straightforward to carry out. In some cases, however, it has not been possible to determine clearly whether a bill would impose a mandate as defined in the law or whether the cost would exceed the legislated thresholds.

Determining Whether a Bill Contains a Mandate

In most cases when CBO reviews legislation, determining whether it contains a mandate is relatively easy. Sometimes, however, such a determination is impossible to make because of uncertainty about how to interpret some provisions of UMRA. Of the 521 bills that CBO reviewed in 1997 for possible intergovernmental mandates, it was unable to make any determination for five of them, or 1 percent. (CBO did make determinations for all of the bills reviewed for private-sector mandates.)

In four of those cases--S. 104 and H.R. 1270, the Nuclear Waste Policy Act; H.R. 1109, a bill to amend the Immigration and Nationality Technical Corrections Act of 1994; and H.R. 1486, the Foreign Policy Reform Act--the bills contained provisions that by themselves would not establish any new enforceable duties and would not directly amend existing mandates. However, those provisions would have indirect effects on existing mandates, making them more expensive to carry out. The law is unclear about whether a bill's effect on the costs of existing mandates should be counted as a new mandate cost when the bill itself contains no new duty.

In the one remaining case--H.R. 2487, the Child Support Incentive Act--the bill reduced federal funding for the Child Support Enforcement program, an entitlement program that provides over $500 million annually to states. CBO was unsure whether the states had enough flexibility in that program to offset the lost funding (in which case, the change would not be considered a mandate).

Nevertheless, CBO estimated that the additional costs associated with all five of those bills would be relatively small, and in no instance would they impose costs greater than the threshold for intergovernmental mandates.

Determining Whether the Mandate's Direct Costs Exceed the Threshold

Out of 64 intergovernmental mandates identified last year, CBO could not determine whether seven of them (12 percent) had costs exceeding the threshold. The percentage was only slightly smaller for private-sector mandates; five of the 65 (about 8 percent) had uncertain costs. Those uncertainties arose for at least one of five reasons: ambiguous language in the bill, uncertainty about who is affected by the bill's provisions, ambiguous language in UMRA as it relates to extensions of existing mandates, the costs' dependence on future regulations, or lack of essential information.

Ambiguous Language in Bills. In a number of cases, the uncertainty about the costs of intergovernmental mandates stemmed from how broadly to interpret provisions that would preempt state and local taxes. For example, the introduced version of the Internet Tax Freedom Act (S. 442) would prohibit state and local governments from imposing direct or indirect taxes on the Internet or on interactive computer services, thus preventing those governments from raising tax revenues. CBO estimated that revenue losses from that prohibition would surpass the threshold for intergovernmental mandates. However, the revenue impact of two other versions of the bill that attempted to narrow the scope of the tax moratorium was much less clear. Those versions specifically protected a number of state and local taxes (income taxes, property taxes, telecommunications taxes, and certain sales and use taxes) but would still preempt other taxes. Because it was unclear whether the specific language of the bill would preempt taxes on certain on-line information services, CBO could not determine whether the total loss of tax revenues for all state and local governments would exceed the threshold. Ultimately, if the Congress did not clarify the legislation, such issues would probably be resolved in court. The cost of the mandate would not become clear until such decisions were made.

Who Is Affected. Occasionally, it is impossible to determine accurately how many of the more than 90,000 state and local governments in the United States would be affected by a proposed mandate. For example, when analyzing H.R. 695 (the SAFE Act), CBO determined that state and local governments offering Internet access and other computer services to the public met the bill's definition of "network service providers" and would be required to comply with the provisions governing encryption products and services. However, no information was available about how many state and local governments provide such services or about the possible alternatives they would have if the legislation was enacted. As a result, CBO could not estimate whether total compliance costs would exceed the intergovernmental threshold.

Ambiguous Language in UMRA. Some of the mandates that CBO found occurred in bills that would extend, and sometimes expand, an expiring mandate. In such cases, an ambiguity in UMRA's definition of direct costs makes it unclear whether to measure the change in the cost of the mandate from the current level or from the level that would exist if the mandate was allowed to expire (usually zero cost).⁽³⁾ If the former is correct, a mandate extended with no changes would result in no additional costs. If the latter holds true, the extended mandate would be treated as a new mandate, and all costs above those that would be incurred anyway would be attributed to the legislation.

The Balanced Budget Act (H.R. 2015) contained certain provisions that would both extend and expand primary-payer provisions in the Medicare program. In addition to their effects on private insurers, those provisions cause states to remain the primary payer for certain health benefits for their employees longer than they would otherwise under current law. Extending those requirements beyond 1998 effectively shifts $240 million to $280 million in annual spending from Medicare to state and local health plans. CBO estimated that as a result, state and local governments would face $24 million in direct costs in 1999 until they could shift those costs to their employees. UMRA leaves it unclear whether those costs should be regarded as new mandate costs.

Similarly, for two bills that extended or expanded current private-sector mandates (H.R. 400, on improving the patent system, and the subtitle of H.R. 2015 dealing with the Nuclear Regulatory Commission), CBO was unable to say whether the mandates would exceed the cost threshold because they extended existing mandates. For some other bills (notably, the private health insurance mandates relating to Medicare that were contained in the budget reconciliation bills), that uncertainty did not affect the threshold determination but did cause the estimate of costs to vary--by as much as $1.4 billion in the case of the budget reconciliation bills.

Unknowable Future Regulations. On occasion, especially for private-sector mandates, an estimate could not be made, or could only be made based on crude assumptions, because the costs would depend on specific regulations that would be developed and issued some time in the future. In one case (S. 363, on violent video programming), that limitation prevented any estimate of costs. In other cases (such as the SAFE Act, as reported by the House Permanent Select Committee on Intelligence), CBO's estimate of the cost of mandates required a wide range--from $0.2 billion to $2.0 billion for the SAFE Act--because CBO could not predict the technical and functional criteria for the mandate, which would be established in regulations after the bill's passage.

Other Missing Information. Reliable information is necessary for any estimate, but sometimes it is impossible to obtain. With H.R. 748 (the Prohibition on Financial Transactions With Countries Supporting Terrorism Act of 1997), no estimate of the private-sector mandate was possible because no reliable data exist on the volume of nonexempt financial transactions between U.S. entities and Syria and Sudan, countries that would be subject to the mandate. Further, CBO could not predict whether transactions with other countries might become subject to the restrictions during the first five years that the mandate was in effect.

A similar estimation problem occurred in CBO's analysis of private-sector mandates in H.R. 1625 (the Worker Paycheck Fairness Act). That bill would require labor organizations that have union security agreements--which require union and nonunion members to pay dues or fees to the union as a condition of employment--to obtain written authorization from workers before using any portion of those payments for activities other than representing employees. The cost of that mandate would depend on the number of workers from whom authorization was requested and the average cost to the union of requesting an authorization. Little information exists about either of those quantities. Moreover, the prevalence and magnitude of unions' spending on nonrepresentation activities, which could be used as a basis for estimating both of those unknowns, is also not known.

Applying UMRA to Tribal Governments

The definitions in UMRA are particularly hard to apply to tribal governments. For many programs, such as those in the areas of housing and law enforcement, control over the provision of services and the nature of the service provided is primarily in the hands of federal agencies, such as the Bureau of Indian Affairs (BIA). Tribes are allowed varying levels of input, but unlike state governments, they do not always control the essential elements of those programs.

The nature of the relationship between tribes and the federal government makes it difficult to determine whether the tribes are participating in a voluntary federal program. For example, when a tribe asks the federal government (through the BIA) to take land into trust for the tribe, it must follow certain procedures established by the bureau. Should those procedures be considered mandates, or is the whole process a voluntary federal program? The question would become particularly relevant if the Congress imposed any additional requirements on tribes as part of that process. CBO's preliminary conclusion is that such requirements, because they involve the federal government's sovereign powers, would constitute mandates. However, little in the language or the legislative history of UMRA sheds light on how to apply the law in such instances.

Furthermore, federal agencies can have different opinions about how and even whether federal laws apply to tribal governments. Thus, determining whether a bill would directly affect tribes is not always straightforward. For example, federal agencies and the courts appear to disagree about whether laws such as the Occupational Safety and Health Act apply to tribal governments as employers. In reviewing legislation that would amend that act, CBO received conflicting opinions from agencies about whether tribal governments would be affected by it. Court precedents--which frequently help determine the meaning and application of federal laws--were also in disagreement about that issue.
 

APPENDIX A: CONTRIBUTORS TO CBO'S ANALYSES OF MANDATES
 

Primary Contributors
Intergovernmental Mandates
Budget Analysis Division
Theresa Gullo	Chief, state and local government cost estimates
Brenda Trezvant	Secretarial support
Kristen Layman	Transportation
Leo Lex	Justice, immigration, state tax issues, health
Karen McVey	Transportation
Marjorie Miller	Natural resources, agriculture
Marc Nicole	Education, banking, social services
John Patterson	Health, social services
Pepper Santalucia	Environment, state tax issues, commerce
Private-Sector Mandates
Natural Resources and Commerce Division
Elliot Schwartz	Coordinator, natural resources and commerce
Rae Wiseman	Secretarial support
Lesley Frymier	Energy, natural resources, international affairs
Patrice Gordon	Environment, banking, small business
Jean Wooster	Agriculture, commerce, transportation
Health and Human Resources Division
Bruce Vavrichek	Coordinator, health and human resources
Nabeel Alsalam	Education, labor
James Baumgardner	Health
Linda Bilheimer	Health
Sandra Christensen	Health
Julia Matson	Public health, social services
Kathryn Rarick	Labor, education
Ralph Smith	Labor, income security
Special Studies Division
Matt Eyles	Coordinator, special studies
National Security Division
Neil Singer	Coordinator, national security
Bill Thomas	National security
Tax Analysis Division
Richard Kasten	Coordinator, tax analysis
Alyssa Trzeszkowski	Revenues
Office of the General Counsel
Jennifer Smith	Legal counsel
Other Contributors
Natural Resources and Commerce Division
Angela McCollough	Secretarial support
Perry Beider	Superfund
Gail Cohen	Energy
Anna Cook	Pharmaceuticals
Roger Hitchner	Agriculture
Judy Ruud	Financial services
Tim VandenBerg	Insurance
Philip Webre	Internet
Health and Human Resources Division
Sharon Corbin-Jallow	Secretarial support
Ron Moore	Secretarial support
Terri Devine	Labor
Portia Defilippes	Labor
Carol Frost	Health
Susan Labovich	Labor
National Security Division
Rachel Schmidt	Military and veterans' health care
Eric Labs	Intelligence

 

APPENDIX B: BILLS AND PROPOSALS IN 1997 THAT CONTAIN INTERGOVERNMENTAL MANDATES
 

1. CBO's report on its activities during 1996 is contained in Congressional Budget Office, The Experience of the Congressional Budget Office During the First Year of the Unfunded Mandates Reform Act, CBO Paper (January 1997). A partial report on CBO's activities during 1997 is contained in the statement of James L. Blum, Deputy Director, Congressional Budget Office, before the Subcommittees on Rules and Organization of the House and on Legislative and Budget Process of the House Committee on Rules, October 30, 1997.

2. This section is based on the statement of James L. Blum, October 30, 1997.

3. See Congressional Budget Office, The Experience of the Congressional Budget Office During the First Year of the Unfunded Mandates Reform Act, pp. 11-12, for a more complete discussion of this issue.