Regulatory Reform

Michigan’s regulatory environment is so onerous and inefficient that it’s stymieing job creation and revenue growth. And, ironically, it’s also lowering tax receipts.
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Officials at Hart Enterprises, a manufacturer of medical equipment in the small town of Sparta, north of Grand Rapids, figure they’re the kind of business Michigan wants to hang on to. For one thing, the company is hiring, and second, it operates in a growth industry. However, they’re not so sure the state feels the same way.

Hart Enterprises’ experience with state officials may be a perfect case study among the many daunting challenges facing the Snyder administration in reforming the state’s business climate.

Bob Striebel, Hart Enterprises’ executive vice president, says the company received a bizarre and unexpected visit in March from an air quality inspector from the Michigan Department of Environmental Quality. What was unusual about it? For one thing, Hart Enterprises is not required to have an air quality permit.

“We have never been inspected by (the DEQ) in the 30-some years we’ve been doing business in the state, so we were curious as to why they were there,” Striebel says.

However, it was the inspector’s explanation that really got Striebel’s attention.

“The inspector said since larger businesses have closed down in recent years and things have slowed down (for the DEQ), the agency had more opportunity to visit smaller companies where inspections have not been performed,” Striebel recalls.

That didn’t satisfy Striebel, who refused the inspector’s entry in spite of their threats to return with an armed conservation officer and a warrant. What’s more, Striebel suspects it was more than just a random visit, since the company’s president, Alan Taylor, had been tied up in court with the DEQ for several years — the result of a dispute over a nearby parking lot the DEQ says was built partly on a wetland.

Taylor says that, in March, Hart Enterprises sued the DEQ for alleged harassment over the “unannounced” air quality inspection.

On the wetland issue, Taylor says he was personally charged with three violations and convicted of two of them as it related to the state’s wetland regulations. Taylor says the case is now under appeal.

 

During his campaign for governor, Rick Snyder put a major focus on reforming the state’s tax and regulatory structures for business. Shortly after taking office he came roaring out of the gate with his tax reform proposals, prompting heated debate. Slower to develop, but still likely to emerge this year, will be Snyder’s vision for reforming the state’s regulatory climate. And the input for transformation won’t only come from the administration, but from the Legislature and the business community, as well.

Already, the Republican-controlled Legislature is working on reforms in areas like prevailing wage laws, union-bidding requirements, and record-keeping — a signal that, at least in some categories, Snyder may face pressure from lawmakers to go further than even he is inclined.

The changes can’t come fast enough for Striebel.

“It’s been a disaster,” Striebel says, referring to the company’s ongoing battle with the DEQ and the resources it has eaten up. “We’re growing. We increased our employment by 30 percent (in the first quarter). We’re not the kind of company Michigan wants to drive out. But the DEQ doesn’t care about that at all. They don’t care.”

Asked to comment about the episode at Hart Enterprises, DEQ director Dan Wyant emphasized that the incident occurred only two months after he took over as director, indicating that he’s working under some of the old rules while eyeing reforms. And while he says Hart was absolutely not targeted, he acknowledges the incident is an example of why the state has to change its approach to regulatory matters.

“We understand the history with Hart goes back to the previous administration,” Wyant says. “We appreciate they feel like they were targeted, and we apologize for the way they received the random visit from DEQ inspectors. To be absolutely clear: They were not targeted. All DEQ air inspectors around the state keep lists of companies [that are in line] for random inspection.”

Even so, Wyant doesn’t duck the larger issue.

“The goal we have in the Snyder administration, and at the DEQ, is to be leaders in environmental stewardship,” Wyant says. “But what’s relatively new is a commitment that the DEQ is a full partner in economic development, and that we must excel at customer service. So in this case, we want to make sure we’re working with a business like this. They’re important to our economic recovery and our economic condition.”

The center of Snyder’s plan is the Office of Regulatory Reform, which operates within the Department of Licensing and Regulatory Affairs under new director Steve Hilfinger, who joined the administration after serving as managing partner at the law firm of Foley & Lardner in downtown Detroit. “Our office will be the final approver on new regulations — or disapprover, as the case may be,” Hilfinger says, referring to the administration’s development of reform recommendations. “We’ll be core to the regulatory review process. And secondly, we’re going to look at the existing regulations that are out there, and we’re chronicling those now.”

 

Already-brewing legislative action, plus various interviews with those familiar with the situation, suggest changes the business community should expect are:

• Streamlining the process for obtaining environmental permits, which would reduce the amount of time developers and contractors have to wait to start building.

• Bringing uniformity to local zoning laws and other ordinances, or at least reducing the time it takes to gain approval for projects.

• A change in state labor laws to make it easier for nonunion shops, or those that don’t pay the “prevailing wage,” to bid for public-sector contracts.

Hilfinger says the full slate of proposed reforms will likely emerge later in the year, and could include ideas not yet even contemplated. Much like Snyder’s emphasis on simplifying the tax code, Hilfinger says his priority is to improve and, where possible, reduce the number of hoops businesses must jump through to operate in Michigan.

“It might mean rescinding rules,” Hilfinger says. “We’re trying to make the business environment more conducive to job creation. The regulatory environment is kind of the flip side of the tax environment, and that is making it simple, fair, and efficient. And it has to be transparent. Because if we have a great process and nobody knows how to jump through these streamlined hoops, it’s not very effective.”

While the Legislature will obviously have a major role to play in shaping policy, much of the work is likely to take place at the agency level, as state bureaucrats have long had the ability to make and enforce rules that carry the same force as formal regulations. “We’re looking at the things that are not quite formal rules but operate as informal guidelines, or policies that are promulgated by the different departments,” Hilfinger says. “Some of them have been around for awhile, and while they don’t have the same formality as a written rule or a regulation, the business community and constituents follow them. So we’re going to look at those with the same kind of criteria.”

You might think that Snyder, coming from the business sector, would have arrived on Day One with a detailed list of regulations he wanted to see eliminated or changed. That has not been the case, says Hilfinger. His office is ready to listen to any direction the governor offers, of course, but for now it is gathering input from the business community and developing a game plan to pre-sent to Snyder.

“Certainly, we’d welcome the governor’s input on any of the areas we’re dealing with,” Hilfinger says. “But the governor is basically telling the departments to be accountable for their affairs, and that means doing that in a way that supports his policies.”

Not surprisingly, a heavy portion of the state’s business regulatory burden comes in the area of environmental protection — from contamination cleanup, to air quality inspections, to caps and fees on pollutants.

 

Russ Harding, who served as director of the Michigan Department of Environmental Quality under the Engler administration, and now serves as a senior environmental policy analyst at the Midland-based Mackinac Center for Public Policy, expects to see major reform initiatives coming out of the Legislature.

“We have had tremendous support from the House, and some from the Senate, and there is going to be a whole batch of bills coming out on environmental regulatory reform,” Harding says. “I think that’s very positive, and I would predict this stuff will move through the House fairly easily. The Senate will be a little tougher, but I think a lot of things will pass.”

As it stands, environmental regulations represent a top area of concern for the Michigan Manufacturers Association. For example, a potential change of pollution caps will impact 829 facilities in the state. “We’re going to propose raising those caps, and probably holding the line on the fee, which is $43 per ton right now,” says Andy Such, the association’s director of environmental and regulatory policy. He says a proposal would raise the hackles of environmental groups, who will foresee an increase in air pollution; however, business groups are hoping residents of the state are more focused on economic matters.

Many in the business community are anxious about regulations passed by some legislators — especially new legislators — who may not understand the technical nature of the rules they are creating, or their impact on the businesses that have to operate under them. According to Such, the Michigan Manufacturers Association recently provided information to legislators that spelled out concerns about the technical areas of current and proposed regulations. “These issues are extremely important to the bottom line,” Such says. “We realize we can’t do much but educate folks about the concerns we have.”

One of the challenges for business groups, Such says, is that problems posed by regulatory inefficiencies are not easily solved through simple steps. “There’s been proposed legislation that would require certain types of permits to be issued within a certain amount of time,” he says. “That’s a very simplistic solution to a very complex problem. If you tell the department to simply get the permit issued by such-and-such day, they’ll get to that day and, if they’re not prepared to issue it, they’ll just deny it. Or they might say that an application is not technically complete, and the applicant has to go back and review it and submit it again.”

And while many in the business community may like the idea of a leaner state government, they aren’t necessarily interested in seeing regulatory staff reduced. The concern is that less manpower will only perpetuate delays and backlogs for permit approvals.

 

To that point, Michigan often is rated poorly as it relates to efficiency in approving permits. “We’re working in 14 different states on a federal project,” says Damon Tooles, president of Detroit-based Tooles Contracting Group. “That’s 16 different sites we’ve had to permit, and we’ve seen the various processes, the ones that are efficient and the ones that are inefficient. From that perspective, (Michigan is) the most inefficient.”

Tooles also says the motivation of the regulators is misdirected — it should be about getting the job done, and letting businesses get about their tasks. “It’s revenue-driven for (the state),” Tooles says. “Permitting is a revenue-driver. The more services you add to the business process, the less revenue you derive from it.”

In some cases, regulatory reform may simply involve preventing administrative staff from making rules that are tougher than those already being enforced by the federal government. That is the case with a recently passed bill that prevents regulations and rules mandating workplace ergonomics rules.

David Jessup, director of government relations with the Small Business Association of Michigan, says reform efforts are promising. “The driving force behind this philosophy is to get government out of the way of small business in the state so they can create jobs and economic prosperity,” Jessup says. “We’ve been engaged in a lot of the issues coming out of the Legislature, including the ergonomics legislation, which would guarantee that Michigan would not formulate any regulations that are more stringent than federal policy.”

Jessup adds the Small Business Administration is more focused on tax reform than on regulatory reform, although he sees some overlap between the two. Paying taxes involves more than just writing a check, after all, if the tax is very complicated to understand and comply with. That has been the major complaint with the Michigan Business Tax, which the Snyder administration and Legislature recently replaced with a straight corporate tax of 6 percent.

“The amount of resources that are eaten up trying to understand the tax code, and what a particular business’s liabilities are under the tax code, is something that’s extremely onerous and costly,” Jessup says.

At the same time, Jessup says the SBA welcomes recent proposals like the one that opens up more bidding on public projects to what he calls “merit shops” (read: nonunion). Labor reforms are typically popular among business leaders, but that isn’t universal.

 

A bill now pending in the Legislature to eliminate the prevailing wage requirement for those bidding on public construction contracts may be popular, but Tooles thinks it could be a loser for those who have a stake in the quality of a project’s outcomes.

A more difficult challenge for the governor and the Legislature may involve business delays that originate in the court system. Joe Welch, chairman, president, and CEO of ITC Holdings Corp. in Novi, says the electric transmission company experiences some of its greatest frustrations from legal actions taken by residents — some of them over items as seemingly mundane as tree removal from power corridors.

Welch emphasizes that there is nothing mundane about overgrown vegetation, since it causes many of the power outages that so infuriate customers. Try to remove the trees, though, and you could end up facing legal delays that put the action in limbo indefinitely.

“In 2003, the blackout that took out the eastern interconnect and put 50 million customers out of service was brought about by vegetation contact,” Welch says, even though news reports indicated the blackout was caused by a capacity problem. “It caused $10 billion worth of damage. One report I read said that in Detroit, they had to scrap over 1,000 automobiles that were in production because of the blackout. In any event, the laws that we have don’t make it clear that we have to keep these corridors clear.”

What the law does say, however, is that ITC will be fined $1 million for every “vegetation contact” — which has the effect of adding to the energy costs of customers. But it costs more to eliminate the delays clearing out the encroaching trees. “We spend millions of dollars a year just litigating our right to clear the vegetation,” Welch says.

Just as cost-intensive for ITC, Welch adds, are the state’s siting regulations. “I am not a person who doesn’t think that local communities should have input into where high-voltage sitings are located. However, we don’t have a closed-end process. If you don’t like it, you take it to court, and if you don’t like it then, you appeal it in court. And it just goes on and on. Once we get it through the regulatory process, the way it works in this state is that it just keeps going.”

In one recent situation, Welch says it took ITC three years to get approval to install and connect electric lines to serve a business operation that was constructed in nine months. “It frustrated the customer so much that they moved their operation elsewhere,” Welch says, adding that it was “not in this state.”

Not all regulations that trouble the business community come from Lansing. A common complaint is that regulations differ — in terms of both cost and complexity — from city to city, and from county to county.

 

“A couple of years ago, I had a fast food firm call me, a well-known chain,” Harding recalls. “They said that in Michigan, on average, it costs $160,000 more to locate a restarturant than it does in Indiana, mainly because of local zoning laws and ordinances, things they have to comply with and hoops they have to jump through in Michigan that they don’t have in Indiana.”

Harding believes the question of who defines and enforces the regulations is just as important as how many there are. In a recently released document, “A Blueprint for Reform,” Harding urged the Legislature to wrest control of the regulatory process away from state agencies, which now maintain wide latitude on how legal actions are enforced.

“The Legislature passes laws in the environmental regulatory area and they leave all the discretion to the agency,” Harding maintains. “You have laws that are difficult to comply with, and they’ve got to get control of that rules process.”

Harding also wants to see some basic guidelines that apply to all regulations. One such guideline would attach automatic sunset dates to all regulations, requiring the Legislature to reauthorize them if it wants to keep them in place.

“Our system is so difficult and dysfunctional that you need to make structural changes,” Harding says.

Companies like Hart Enterprises would clearly like to see this next round of reforms have more staying power, as the company’s future in the state may well depend on it. db

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