Carrots and Sticks: How Cities Are Taking a New Approach to Regulatory Compliance

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This post is a response to the recent Governing article on regulatory compliance.

carrot stick(Getty Images)

There has been some recent buzz about the dangers of local regulatory compliance. Regulating businesses is necessary – you wouldn’t want to eat at an unsanitary restaurant, or take your car to an auto mechanic who wasn’t certified. However, some say that regulating businesses can be counterproductive, costly and raise equity concerns. Holding up examples of cities coming down hard against large swathes of businesses on relatively minor infractions can certainly make that case.

But these instances are the exception, not the rule.

Less Stick, More Carrot

While local governments would be wise to heed the warnings of fallout from “inspector zeal,” the regulatory reality is that most cities aren’t filling their coffers with health inspection fines. Ensuring that businesses operate in a healthy and safe way is clearly an important function of city government, but paying for inspectors can be expensive. And because cities are still facing fiscal challenges, many are approaching compliance with caution, carefully scoping out the financial, social and economic costs and benefits of their compliance approaches.

As a result, the regulatory environment emerging in most cities is guided by a clear articulation of the end game – to ensure safe, healthy communities and prosperous businesses. This means a more informed, sensible carrot-andstick approach: punitive “stick” measures when necessary, paired with a bushel of “carrots” in the form of compliance incentives and supports.

The “stick only” approach characterized by harsh, blanket enforcement is giving way to targeted compliance that leverages innovations in data and analytics, reforms bureaucratic red tape and makes it easier for businesses to comply in the first place.

Driving Innovation: The Impact of Analytics and Legislation 

New York City and others have enlisted the help of online review tools like Yelp to proactively identify health and safety concerns. A new Pew analysis noted that “[New York City’s] Department of Health and Mental Hygiene launched a nine-month pilot study in July 2012 that used data-mining software to screen and analyze about 294,000 Yelp reviews. It searched for keywords such as ‘sick’ or ‘food poisoning’ to find cases of foodborne illness that may not have been officially reported.”

Some cities – such as Boston, which has created a Problem Properties Taskforce – are even starting to use predictive analytics to better understand and pinpoint particular cases where compliance interventions can have the greatest impact.

Despite efforts to target the worst offenders, compliance “crackdowns” can disproportionately affect lower-income and legacy businesses that don’t have the skills or time to navigate government regulations and can’t afford to pay for fees, tax increases or compliance upgrades to their business. For these reasons, San Francisco is currently considering Legacy Business Legislation to help businesses that have been in operation for over 30 years remain in compliance and in their original locationThese businesses would be eligible for certain types of assistance, including priority access to pre-inspections for ADA compliancy, pro bono legal advice on leases, and property tax rebates. The legislation will predominantly support small mom-and-pop restaurants and cafes, and smaller bars and retailers that cater to the LGBT community.

Regulatory Overhauls

Even more common than predictive analytics and legacy business legislation is simply regulatory reform. Take ChicagoBoston, Cleveland, Kansas City, Mo., and Seattle, for example. These cities are making it easier for businesses to comply by reducing the number of permits and licenses, improving approval times, making requirements and timelines more transparent, revisiting outdated and onerous laws, and creating accessible ways for businesses to interface with government and obtain information.

Improving the ease of doing business is not only the most impactful compliance carrot available to local governments, but it is also a top contributor to a business-friendly environment (often surpassing low taxes). By using carrots and sticks in an innovative approach to regulatory compliance, cities are creating a win-win scenario in which the community is protected and businesses are encouraged to contribute to a vibrant, healthy economy.

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About the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.