Weighing costs of compliance

Last spring, Drew Boyles got the news that his junk-hauling operation would have to pay as much as $510,000 to retrofit its 17 diesel trucks under new state anti-pollution rules.

The El Segundo business owner, who runs several 1-800-Got-Junk? franchises, said he feared that buying equipment to curb diesel exhaust for his entire fleet would put him “in grave financial distress.”

What really bugged him, he said, was knowing that the big players in the solid-waste industry had heard well before he did and had lobbyists that helped shape the requirement.

“The intention of the rule is good, but small businesses are left to find out by surprise, or after the fact, about what could have potentially put us out of business,” said Boyles, who signs paychecks for 41 Californians, half working full time.

To help other small firms avoid a similar fate, a bill introduced last month would require California to pay more attention to small-business interests when creating regulations. Senate Bill 356 would mandate that agencies determine the economic effect of potential rules on small businesses, justify why alternatives for small firms weren’t pursued, and seek small-business comments during rule drafting.

“In California, there is clearly little or no accountability for state government to consider and engage small business in the regulatory process,” said John Kabateck, California executive director of the National Federation of Independent Business, backer of the bill introduced by state Sen. Roderick Wright (D-Inglewood).

“Small businesses from Chico to Indio are telling me the regulatory boa constrictor is strangling them out of business,” Kabateck said.

Small-business supporters are hoping that a study showing the cost of regulations for the state’s small firms will boost the bill’s prospects. California is home to 718,200 firms with 499 or fewer employees, according to a federal analysis of 2006 data, the latest available. Those firms employ 52% of the private workforce in California.

The regulatory cost study, due by law in October 2007, was submitted to state officials last fall. It was delayed by revisions to ensure the report was “easily understood by policymakers,” a spokeswoman for Gov. Arnold Schwarzenneger said.

California already had a reputation as an unfriendly place to do business, even without the poor showing in Forbes magazine’s annual ranking last year of the best states for business, when it fell to 40th place from 34th the previous year.

For small firms, complying with the ever-increasing regulatory burden can cost proportionately more than it does for their larger competitors, according to a 2005 national study. To comply with federal rules, small businesses with fewer than 20 workers paid $7,647 per employee, or 45% more than firms with 500 or more employees.

California’s study, which was modeled after the federal one so total regulatory costs could be calculated, is expected to show a similar trend.

“We are much more sensitive when the economic downturn impacts businesses because our cost structure and tax structure, our utility costs, our regulatory environment, including environmental regulations, basically impose a higher cost on our businesses which results in higher unemployment,” said Sanjay Varshney, coauthor of the study and dean of the College of Business Administration at Cal State Sacramento.

Varshney declined to provide details on the report’s findings before it was officially released but said it “goes into huge detail to show you quantifiably how bad it is.”

Most small-business owners, including Boyles, don’t need a study to tell them that it costs a lot for a small firm to do business in California. His junk-hauling franchise in Chicago, which has six trucks and 21 workers, isn’t subject to the same expensive rules, he said.

Bill supporters hope that lawmakers and state agencies will get the message.

“This is a major, major effort by the small-business community to finally say you have to seriously” consider the cost of new rules for small firms, said Stan DiOrio, legislative director for Sen. Wright.

To control costs, Boyles contacted the manufacturer of his fleets’ truck beds, which reviewed the design and dropped the trucks’ gross vehicle weight rating to 13,800 pounds apiece from 14,500. That allowed Boyles to escape the emissions rule, which applies to trucks rating 14,000 pounds or more.

The lower weight allowance caused him to lose about 3% of his jobs, said Boyles, who is also a board member for Entrepreneurs’ Organization’s Los Angeles chapter. But he didn’t have to spend time and money figuring out the regulations, which he said were crafted for solid-waste companies’ garbage trucks that run all day. Boyles thinks that industry’s regulations shouldn’t stretch to include his niche business.

Although it may sound like a dry topic to the casual observer, regulatory reform is close to the hearts and wallets of small-business owners. It was voted No. 3 out of the top 11 recommendations for state leaders by participants at the Governor’s Conference on Small Business and Entrepreneurship held in Los Angeles in November.

State Small Business Advocate Marty Keller, a governor’s appointee who shepherded the conference, has said he will work with officials to increase the dependability of agencies’ regulatory analysis.

On his blog, Keller said he and a group of small-business leaders recently met with the California Air Resources Board on small-business participation in the crafting of greenhouse gas regulations, a goal of the conference participants. The board now mentions small-business concerns and inclusion in its so-called scoping plan, which provides a framework for the regulations.

It’s a big job that would be helped by passage of the bill, which DiOrio worries might falter in today’s budget crisis environment despite what he said was its minimal cost.

California can no longer afford the luxury of ignoring the growing cost of regulations for its small firms, Varshney said. The state risks not only slowing its economic recovery but also losing its rank among leading innovators if it takes its appeal for granted, he said.

“Most people have no idea how the world has changed” as barriers to doing business elsewhere have dropped amid market globalization, he said. “That puts huge pressure on exactly how you treat a business. We are not considered a business-friendly state, and we know it.”

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