March 9, 2010

Hon. Kevin De León
Assembly Member, 45th District
Room 2114, State Capitol
Sacramento, California 95814

Dear Assembly Member De León:

This responds to your request relating to California’s regulatory environment and AB 32 (Núñez), the Global Warming Solutions Act of 2006 (Chapter 488, Statutes of 2006). Specifically, you have asked that we analyze the methodologies, data, and reliability of the findings of two studies by Varshney and Associates. You noted in your request that:

In our response below, we summarize the methodologies and analyses contained in these two studies, discuss their findings, and provide our assessment of the analyses supporting their conclusions.

Legislative Analyst’s Office (LAO) Conclusion. Both of the two studies you have asked us to review have major problems involving both data, methodology, and analysis. As a result of these shortcomings, we believe that their principal findings are unreliable.

The First Study—Overall Cost of State Regulations

This study was written by Professors S. Varshney and D. Tootelian (V&T) of California State University, Sacramento. It was mandated by Chapter 232, Statutes of 2006 (AB 2330, Arambula). This measure, among other things, required the Office of Small Business Advocate to commission a study on the costs of regulations on small businesses that is parallel to the study on the impact of regulatory costs on small firms conducted by the United States Small Business Administration, to be completed no later than October 1, 2007.

Key V&T Study Findings. The V&T’s principal conclusions are that the total annual economic cost of all regulations in California amounts to a loss of $493 billion in GSP and 3.8 million jobs. It also concluded that regulatory costs are born almost entirely by small businesses, and in 2007 amounted to over $134,000 per firm.

V&T’s Methodology and Data

The basic methodology employed by V&T was to use the statistical tool of multiple linear regression analysis to attempt to isolate the contribution of different factors, including the regulatory environment, on California’s GSP. Specifically:

LAO Comments

Our review of this study indicates that it contains a number of serious shortcomings that render its estimates of the annual economic costs of state regulations essentially useless. The most significant of these problem areas include the following.

The Second Study—Cost of AB 32 on Small Businesses

This study also was written by V&T. It was commissioned by the California Small Business Roundtable in March 2009 to examine the possible impact of AB 32 on the California economy, and specifically the impacts it will have on small businesses in California.

Key V&T Study Findings. The V&T’s principal conclusions are that the annual costs to small businesses of implementing AB 32 are likely to total $183 billion in reduced GSP and the equivalent of 1.1 million fewer jobs. The average annual cost of AB 32 per small business was estimated to be approximately $50,000.

V&T’s Methodology and Data

The general approach used by V&T in this study was to use certain assumptions about the direct effects of AB 32 on California consumers and businesses. The V&T then constructed three alternative scenarios regarding the effects of AB 32’s implementation through the Scoping Plan (SP) adopted by the California Air Resources Board (CARB), and used IMPLAN to estimate the associated economy-wide effects of the SP under each scenario. Specifically:

LAO Comments

As with the first study above, our review of this second study indicates that it contains a number of serious shortcomings that render its estimates of the economic effects of AB 32’s proposed implementation through the SP highly unreliable. The most significant of these issue areas are as follows.

Should you have questions regarding this information, please feel free to contact David Vasché of my staff at (916) 319-8305.


Mac Taylor
Legislative Analyst

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