New Obama policy may restrict federal power and boost state, local authority

The Obama administration is in the early stages of a major shift in government powers that may boost the authority of state and local officials on a wide range of policies.

In executive memos, proposed legislation and public statements, it has struck a markedly different tone on the issue of “pre-emption” from that of the Bush administration, which regularly allowed federal regulators to pre-empt state and local authorities. Under the shift, the federal government should trump state and local authorities on a more restricted basis.

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“It’s almost a complete turnaround,” said Michael Bird, federal counsel at the National Conference of State Legislatures.

The issue will likely spark heated debate among House lawmakers next week when they mark up legislation, originally proposed by the administration, that creates a new federal Consumer Financial Protection Agency (CFPA), while also allowing state and local officials to pursue stricter regulations.

The administration is only eight months old and many of the policies will evolve in heady congressional debates, fierce lobbying battles and deep in the recesses of the government’s regulatory agencies. But the new tone itself may go a long way toward reorienting the relationship between state and federal powers.

The issue of pre-emption is at work in many of the most contentious battles under way and affects nearly every policy arena, whether consumer products, banking laws or food standards.

In May, the administration issued a memo that said pre-emption “should be undertaken only with full consideration of the legitimate prerogatives of the states and with a sufficient legal basis.” The memo directly criticized previous federal pre-emption efforts that occurred without explicit justification by Congress, and told agencies to review a decade’s worth of regulations.

“The position itself is a sea change,” said Doug Kendall, president of the Constitutional Accountability Center. The practice of pre-emption also came under fire in two Supreme Court rulings this year on medical drugs and bank regulations that granted more power for state lawsuits.

The issue doesn’t fall on pure partisan lines, said Joseph Zimmerman, an expert on pre-emption at the State University of New York at Albany. “They both are lobbied heavily,” he said.

But pre-emption draws a bright-line distinction on K Street. State and local officials, the trial bar and a range of consumer advocacy groups have cheered the administration’s position. Most business lobbyists counter that it could create a “patchwork quilt” of different regulations that would lead to more lawsuits and hurt consumers by driving up costs.

“It is sort of taking a step backward to create a litigation atmosphere that I think we last saw a decade or so ago,” said Bryan Quigley, senior vice president at the U.S. Chamber Institute for Legal Reform. Business lobbyists typically prefer a single national standard and regulatory agency.

The battle over pre-emption is now most pronounced in the congressional debate over the nation’s financial regulations and setting up the new consumer regulatory agency.

The issue will likely be a center of attention next week, when the House Financial Services Committee is scheduled to mark up the legislation. The issue is dividing Democrats on the committee, posing a major hurdle to the bill moving forward.

Committee Chairman Barney Frank (D-Mass.) and more progressive members such as Rep. Brad Miller (D-N.C.) support the administration’s language. Centrist Democrats would like to see the new agency pre-empt state officials. Rep. Melissa Bean (D-Ill.), a centrist New Democrat, is preparing an amendment in favor of pre-emption.

Consumer groups such as the Center for Responsible Lending, Consumer Federation of America and U.S. Public Interest Research Group are strongly in support of the administration’s position. On Tuesday, the Treasury Department met with about a dozen representatives for state and local governments to rally them behind the proposal.

“It was a call to arms,” Bird said.

The financial industry, meanwhile, is stridently opposed to allowing state officials to pursue additional rules.

“If you get rid of pre-emption, there goes the national banking system as we know it,” said Richard Hunt, president of the Consumer Bankers Association.

Prentiss Cox, a professor at the University of Minnesota Law School, said that in its proposal, the administration is recognizing “that states play a really vital role in consumer protections when federal offices are unwilling.”

Cox said state laws played a much greater role in banking regulation prior to the 1990s before being steadily eroded.

“You got a double whammy,” Cox said. “You were not only going to have federal rules pre-empt state protections, but those federal rules would in fact simply eliminate the state protection and replace them with nothing.”