Office of Advocacy

August 21, 1997

Honorable Bernard E. Anderson
Assistant Secretary
Employment Standards Administration
Department of Labor
200 Constitution Ave., N.W.
Washington, DC 20210

Re: RIN 1215-AA99: Regulations Implementing the Federal Coal Mine Health and Safety Act of 1969, as Amended

Dear Mr. Anderson:

This letter is the official comments of the Small Business Administration's (SBA) Office of Advocacy on the Employment Standards Administration's (ESA) rule for implementing the Black Lung Benefits Act.(1) These comments are to be placed on the public docket.

The Office of Advocacy was established by Congress under Public Law No. 94-305 to represent the views of small businesses before Federal agencies and Congress. Advocacy is required by § 612 of the Regulatory Flexibility Act (RFA)(2) to monitor agencies' compliance with the RFA.

Advocacy has two primary concerns with the proposal. 1) Advocacy will address the ESA's failure to use established SBA size standards. The ESA is required by the RFA to use the SBA definitions when determining the economic impact of the rule or to follow the appropriate statutory process for selecting an alternative size standard. 2) Advocacy will also address the agency's economic impact analysis. Advocacy believes that the ESA's RFA certification(3)is inadequate because the agency has failed to provide appropriate data to substantiate a factual basis for this certification.(4) Based on a preliminary assessment and information received from mining industry employers, Advocacy is convinced that the proposed changes to the black lung regulations may have a significant impact on a substantial number of small entities. The agency should complete an initial regulatory flexibility analysis detailing the potential impact of this rule on small businesses.

Small Business Definition

When determining if a proposed rule will have a significant economic impact on a substantial number of small entities,(5) the RFA requires that agencies comply with the size standards established by the SBA.(6) If an agency decides to deviate from the pre-established size standard for the purposes of a particular rule, the agency must consult with the SBA prior to publishing the proposed rule. The agency also must publish the alternative size standard for public comment.

For the purposes of the proposed rule, ESA defines a small mine as a mine with a net worth of less than $10 million or has been in operation for less than three years. The SBA defines a small mine as a mine which employs less than 500 employees. Although the preamble discusses the use of SBA and Mine Safety and Health Administration (MSHA) definitions, there is no indication that ESA contacted SBA to discuss alternatives. For the purposes of determining the economic impact of the proposed rule on small businesses, ESA must use the SBA definition or follow the statutory procedure for developing an alternative. ESA's decision to deviate from SBA's standards for the economic analysis was made independent of any consultation with the Office of Advocacy. Such a decision, without consultation with Advocacy, is a violation of the law.

Quantitative Data on the Mining Industry

Advocacy contends that the agency has not provided the quantitative data necessary to substantiate the agency's certification that this rule will not have a substantial impact on small businesses. In fact, the agency has not provided the public with estimates on the number of small mines which will be affected by this rule, either as a whole or by mining sector (e.g., surface and underground bituminous and anthracite). Data available to Advocacy indicate that the coal mining industry includes 1,811 small firms, 95 percent of the mines in the industry.(7) Therefore, Advocacy maintains that there are a substantial number of small firms affected by this rule and an initial regulatory flexibility analysis must be completed.

Economic Impact Analysis

Determining a rule's impact on small businesses and other small entities is an important part of the rulemaking process.(8) It is the burden of the agency to conduct a complete analysis of the affected industry and publish its findings for public comment. The analysis should provide a detailed breakdown of the economic impact of the proposed changes by various sizes, types of operations, and practices within the small mining industry.

The economic impact data provided by the ESA on small coal mining firms is not sufficient to substantiate the agency's assertion that "small firms are not expected to be disproportionately affected by these changes."(9) First, the criteria for RFA is a significant impact (not a "disproportionate" burden). After evaluating the preliminary information provided by ESA in the preamble, the Office of Advocacy concludes that the impact on small firms likely would be both significant and disproportionate.

For instance:

• The agency predicts that in a maximum impact scenario, the total costs for the coal industry would be an additional $3.65 per $100 of payroll. This would be an 84 percent increase over current costs ($4.33 per $100 of payroll).(10)
• The agency projects that approval rates for claims will increase and result in an increase in the premium rate of less than 75 cents per $100 of payroll for underground bituminous miners. Using ESA estimates of the average annual per employee wage costs of $38,355, the increase in premium rates for this industry sector would be $287 per employee each year. This would be a 17 percent increase in insurance costs.
• Advocacy examined just one sector of this industry to demonstrate just how significant the cost of this rule will be for small firms. For an anthracite mine with 20 employees, the costs of labor represents 37 percent of revenue value. ESA indicates that average labor costs in the industry equal less than one fourth of the value of its product output. Assuming that receipts are equal to output, this size and type of mine does not enjoy the economies of scale and higher productivity per employee of larger mines. Therefore, the insurance costs based on payroll will be significantly greater. We estimate that similar costs will be discovered for many or all the small mines affected by this rule. (11)

Given the rule's potential economic impact on small mines, Advocacy is making several suggestions for improving the agency's economic data. Generally, the process of preparing an economic analysis requires an ample amount of due diligence on the part of the agency. In order to provide the public with the necessary economic information to solicit constructive public comment, the ESA's process of analyzing the impact of the black lung regulations should be transparent, clearly illustrating the cost of implementing the rule on the various segments which comprise the small mining industry. Economic assumptions and methodologies should be made known so that the analysis can be reviewed actuarially. If costs are determined to be significant in a particular industry sector and/or in a particular small business size range, this would justify a full analysis with regulatory alternatives for small entities.

The following are specific recommendations to improve the data to determine economic impact more realistically:

• The agency is using the criteria of one percent of payroll as the threshold for determining "significant." However, Advocacy believes that this threshold is inappropriate and essentially meaningless. First, small firms' costs may be concentrated in payroll and not other operating costs. Therefore, the percentage of costs will be much greater for small mines relative to larger, mechanized mines. Second, with payroll cost increases, there is no indication of correlating revenue or profit increases. Our preliminary investigation of the industry shows that the product prices are fixed, established by long-term contract. Larger firms may be able to absorb the costs in the short term with some measure of profitability. Smaller firms, however, may not be able to assume the added costs and remain competitive. Sector specific profit margins and standard industry practices, like long-term contracting, must be discussed in the analysis.
• The analysis should use SBA size standards to determine the impact of the proposed changes by various size ranges. Cost projections by size range is fundamental to determining economic impact. An example of how economic impact can vary by size is illustrated by the anthracite industry. Based on 1994 U.S. Census data, anthracite mines with fewer than 20 employees had estimated annual receipts of $821,000, mines with 20-24 employees had estimated receipts of $2.07 million and mines with 25-29 employees had estimated receipts of $2.99 million. Clearly, increased insurance premiums would have a significantly different economic impact depending on the size of the anthracite firm.
• The rule is anticipated to have a $40 million(12) impact on the entire coal mining industry. The agency's use of aggregate numbers to determine anticipated economic impact is not particularly useful. The analysis should explore how the regulation will impact specific sectors (e.g., anthracite and bituminous) within the industry by various sized firms. The analysis should also examine the rule's impact on different mining practices, e.g. surface and underground mining.
• The agency's economic data has concentrated on the rule's impact to commercially-insured coal mines. The agency should also estimate the impact of the rule on self-insured mines. In addition, the analysis should compare the potential impact of the rule between self-insured and commercial-insured firms.

To assist the agency, Advocacy has provided 1994 U.S. Census Bureau data detailing industry specific firm size by number of employees and company receipts. (The ESA indicated that the lack of such data was a reason not to use established SBA size standards in its economic impact study.(13)) For future reference, this information can be easily retrieved from Advocacy's homepage at http://archive.sba.gov/advo/.

Outreach

As we have indicated, Advocacy is convinced that this rule could have significant impact on small mines. Therefore, Advocacy recommends that the agency conduct extensive outreach to small mines to solicit information on the economic impact of this rule. Within the U.S. Government, several sources of information are available. For instance, the ESA's sister agency, the MSHA, maintains detailed industry data and mining company mailing lists. This information could be used for outreach purposes. The Office of Advocacy is also available to assist ESA identify small mining business organizations.

The RFA suggests that direct communication with the regulated industry can be beneficial for complying with the law.(14) Advocacy encourages ESA to incorporate the expertise of the mining business community; input from the regulated community is crucial to the development of an analysis which accurately reflects the industry.

Conclusion

In 1996 Congress and the President enacted the SBREFA, thus, renewing a public policy commitment to small businesses by reminding agencies of RFA obligations and by allowing by small businesses (through judicial review) to challenge agencies that fail to comply with the law. Good public policy and the law dictate that agencies provide the public a factual basis for an agency determining whether a rulemaking will have "a significant impact on a substantial number of small entities."

Advocacy has been contacted by several organizations representing various sectors of small coal mines concerned that these proposed changes were substantially understated by the agency and would significantly increase the cost and availability of black lung workers' compensation insurance. Advocacy encourages the agency to review the record for small businesses comments made on all aspects of the proposal. Aggressive outreach to the small mining industry will help determine the true economic impact of this proposed rule and any information on alternatives which would meet the agency's public policy objectives while mitigating the impact of the rule on small business.

In order for the ESA to meet its requirements under the RFA, the agency must develop a meaningful economic analysis which can be defended upon critical review. In the analysis, the agency also must use the SBA definition of small business or follow the statutory procedure for proposing an alternative definition.

If you have any questions about our comments, please contact me or Sarah Rice of my staff at (202) 205-6532.

Sincerely,

Jere W. Glover
Chief Counsel for Advocacy

cc: Honorable Sally Katzen

Enclosure

ENDNOTES

1. Fed. Reg., Vol. 62, No. 14 (January 22, 1997), p.p. 3338-3435.

2. 5 U.S.C. §§ 601 et seq.

3. Fed. Reg., Vol. 62, No. 14 (January 22, 1997), p. 3373.

4. 5 U.S.C. § 605(b)

5. 5 U.S.C. § 601.

6. 13 C.F.R. part 121.

7. See 13 C.F.R. part 121 and U.S. Bureau of the Census data 1994.

8. In the preamble, the agency appears to indicate that economic impact to small business can be correlated to the $100 million per year impact used for the Unfunded Mandates Reform Act of 1995. The use of the $100 million threshold is not relevant for determining the economic impact of the regulation to a particular size or a particular type of coal mine.

9. Red. Reg., Vol. 62, No. 14 (January 22, 1997), p. 3373.

10. Fed. Reg., Vol. 62, No. 14 (January 22, 1997), p. 3372.

11. Using data from the U.S. Bureau of the Census on firm revenues and the ESA, Advocacy calculated that an anthracite mine with 20 employees would have annual revenues of $2,069,000. This amount divided by 20 employees indicates that the firm has revenues of $103,450 per employee. With an average employee salary of $38, 355, the firm is incurring 37 percent labor costs. If the agency challenges this assertion, then ESA should provide additional information on industry salaries.

12. Fed. Reg., Vol. 62, No. 14 (January 22, 1997), p. 3373.

13. Fed. Reg., Vol. 62, No. 14 (January 22, 1997), p. 3371.

14. 5 U.S.C. §609.

* Last Modified: 6/14/01