Finding the hidden cost of federal agency guidance

• Federal agencies often issue guidance to state officials and others about how they believe the recipients should comply with federal laws, creating a strong incentive for the recipient to go along.

• Utah has begun to require transparency in this guidance and is considering a bill that would further that value in the current legislative session.

• Overwhelming majorities of likely Utah voters support this move to greater transparency about the nature of the guidance and the impact it will have on Utah taxpayers.

Have you ever wondered what your bank was doing about climate change? You might be surprised to know that the federal government has – and at times has issued “guidance” to financial institutions as a result. The fact that few of us would be aware of this fact may, in part, explain why a recent survey of likely Utah voters reports high levels of support for making such guidance and its likely costs to taxpayers transparent.

In 2023, three federal agencies, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, issued a document called “Principles for Climate-Related Financial Risk Management for Large Financial Institutions.” As the Center for Practical Federalism notes, these agencies are “primarily tasked with supervising the liquidity of savings held by federally regulated banks, ensuring adherence to sound monetary policy.”

Notwithstanding, the principles document directed large financial institutions to adopt policies around climate change and environmental risk that would have, at best, only the most tenuous connection to their fiscal soundness. When a new presidential administration came into office, the agencies rescinded the prior guidance.

Whatever one thinks about the underlying policy, the see-sawing directions are a strange way of overseeing financial institutions.

This peculiar pattern is actually common. The Constitution tasks the executive branch with enforcing the laws enacted by Congress. Over time, a large number of administrative agencies have been created to carry out this task under the direction of the president. Since the mid-Twentieth Century, Congress has purported to delegate authority to these agencies to create legally binding rules intended to carry out policies established by statutes enacted by Congress.

In addition to these rules, however, agencies also offer non-binding “guidance” like the climate principles, which expresses a given federal agency’s perspective about what compliance with the law looks like. That may seem unexceptionable until we consider that the agency offering the guidance also enforces the laws that the recipient is responsible for following, and failure to follow the law can lead to sanctions.

This means that recipients of federal guidance have an extremely strong incentive to go along with the guidance even if they doubt it is really a good interpretation of Congressional legislation, and even though it is not technically binding.

When the recipients are businesses, they must pass on the costs of compliance to customers. For state officials (including public school administrators), who receive much of this guidance, compliance will be passed on to taxpayers.

This is the impetus for a recent change to Utah law, which requires state officials to make public the guidance they receive from federal agencies. The Utah Senate recently unanimously approved a bill that would extend that transparency requirement to school administrators and allow the State to begin to assess the financial costs to taxpayers of the decision of whether to comply with or resist demands made in guidance documents.

A survey conducted by Y2 Analytics for Sutherland Institute suggests that these laws are supported by Utahns. The survey of a representative sample of likely Utah voters found that while 64% believe federal agency guidance may or may not be appropriate based on specific context, an overwhelming majority believe such guidance should be made public (57% say transparency is “extremely important” while 27% say it is “very important” and 11% that it is “moderately important”).

The survey also found that strong majorities would support “a law requiring state officials to analyze compliance costs for federal guidance and report that information to state lawmakers and the public” (36% “extremely supportive,” 35% “very supportive,” and 20% “somewhat supportive”).

Utah has been at the forefront of this effort. That makes sense to most Utahns. It will also provide a helpful model to other states and, ideally, lead to more federal restraint in offering non-binding guidance in the future.