Inflation Adjustment Act: An Implementation Success Story

Publication first appeared in the American Bar Association Section of Administrative Law & Regulatory Practice's Administrative & Regulatory Law News Winter 2016 edition.  Reposted with permission.

The Administrative Conference of the United States may be a small agency – the 101-member Conference is supported by just fifteen full-time staff – but it can have a big effect. At the urging of the Obama Administration, Congress recently implemented much of the Conference’s Recommendation 2012-8, Inflation Adjustment Act. The Congressional Budget Office (CBO) predicted that these changes would lead to an increase in government revenue of more than $1.3 billion over the next ten years. Incidentally, based on its current appropriation, this sum of money would be adequate to fund the Conference for over 400 years! The recommendation was also endorsed in the President’s Fiscal Year 2016 Budget.

Recommendation 2012-8 addresses civil monetary penalties – fines paid by parties or entities that violate federal civil statutes. Civil monetary penalties play an important role in the federal government, both by deterring civil violations and, secondarily, by providing a source of revenue for the government. However, over time, if the amount of a civil penalty remains static, inflation diminishes its relative value. When this happens the penalty is weakened, shifting the incentive structure created by Congress and decreasing the penalty’s deterrent effect.

The Federal Civil Penalties Inflation Adjustment Act of 1990 (as amended in 1996) aims to combat the effect of inflation. The statute provides for regular adjustment of civil penalties to account for inflation, seeking to maintain the deterrent value of civil monetary penalties and increase the amount of money collected by the federal government. Unfortunately, the statute led to the creation of an “inflation gap” – a gap between the amount of a penalty as adjusted under the Act and what it should have been if the penalty had been increased to match inflation accurately.

Administrative Conference Recommendation 2012-8, and its accompanying report, took a close look at the Inflation Adjustment Act. The Conference investigated ways to close the “inflation gap,” and highlighted three main ways to do so. The Conference recommended that Congress amend the Act to address these three concerns – and Congress did just that in the Bipartisan Budget Act of 2015.

Recommendation 1(a) – Inflation Gap

Conference Recommendation 1(a) addressed the inflation gap created by an insufficient initial adjustment under the Inflation Adjustment Act. The Act, as amended in 1996, prohibited the first adjustment of a civil penalty under the Act from exceeding 10 percent of the penalty. Subsequent adjustments were limited to the rate of inflation, so if the initial 10 percent increase was not sufficient to account fully for past inflation, the penalty could never “catch up.” A growing “inflation gap” would exist between the adjusted penalty and the amount the penalty should be if accurately adjusted for inflation. The Bipartisan Budget Act of 2015 addresses this problem by allowing the first adjustment to be up to 150 percent of the amount of the penalty on the date the 2015 amendments were enacted.

Recommendation 1(b) – CPI Lag

The second issue addressed in the Conference recommendation is that of the Consumer Price Index (CPI) lag, created by some counterintuitive language in the Inflation Adjustment Act. The 1996 amendments directed that inflation adjustments be made according to the CPI – however, the Act defined “cost-of-living adjustment” in a way that required agencies to use CPI data that were between seven and 18 months old, depending on the time of year an agency decided to update its penalties. Because agencies were directed to rely on old CPI data, the adjustments necessarily lagged behind the true amount of inflation. Further, because each subsequent increase was based on the adjusted penalty, the CPI lag contributed to a growing difference between the penalty under the Act and the penalty amount necessary to fully adjust for inflation. The Bipartisan Budget Act addresses this problem by specifying that adjustments should be made based on the CPI for the month of October preceding the date of adjustment. This change not only makes the Act easier to understand but also decreases the lag significantly.

Recommendation 1(c) – Rounding Rules

Finally, the Conference recommendation addressed the Inflation Adjustment Act’s counterintuitive – and problematic – rounding rules. The Inflation Adjustment Act established six tiers of penalties, and directed agencies to round adjustments based on the amount of the penalty. For instance, for penalties between $100 and $1,000, the Act directed agencies to round adjustments to the nearest multiple of $100. This rounding scheme means that, for penalties at the lower end of each tier, adjustments would happen infrequently, and when they did, the adjustment would result in a dramatic change to the penalty. For instance, a penalty of $101 would remain at that value until the adjustment could be rounded up to $100 – that is, until there had been enough inflation to dictate an adjustment of $51. Assuming an annual inflation rate of about 2.5%, this means an adjustment would not be allowed for 15 years or more. At that point in time, the adjustment would be rounded to $100, and the new penalty value would almost double – from $101 to $201. In short, the Inflation Adjustment Act required a confusing, and counterintuitive, schedule for adjusting penalties. The Bipartisan Budget Act eliminates this complexity. It specifies that, instead of being based on a tiered system, penalty adjustments should be rounded to the nearest dollar.

The Bipartisan Budget Act of 2015 makes two additional changes to the Inflation Adjustment Act: it provides oversight and review authority to the Office of Management and Budget and the Government Accountability Office, and it eliminates the exemption of two statutes from the Act. The CBO predicted that the 2015 amendments to the Inflation Adjustment Act would lead to the $1.3 billion increase in revenue referenced above.

These changes to the Inflation Adjustment Act will help ensure that inflation adjustments to civil monetary penalties maintain pace with inflation. The changes also streamline the statute, making it easier for agencies to adjust their civil monetary penalties regularly, in turn making it easier for regulated parties and other entities to predict the cost of violation.  The 2015 amendments to the Inflation Adjustment Act track Administrative Conference Recommendation 2012-8 closely. It is implementation successes like this that the Conference works toward, as we continue our mission to improve administrative procedure throughout the federal government.

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