The Biden administration is trying to prohibit California from receiving billions of dollars in new federal aid because, the administration claims, the state’s 2013 Public Employee Pension Reform Act (PEPRA) denied workers the right to bargain for changes to their retirement benefits. The move could undermine state-worker pension reforms passed over the last decade.

In a letter to the state, the Department of Labor says that the 2013 pension-reform act “significantly interferes” with the collective bargaining rights of public employees, including transit workers. As a result, California risks losing some $12 billion in transportation money, most of it from the recently passed federal infrastructure bill. The administration is strong-arming the state and its municipalities to choose between tens of billions of dollars in savings for a deeply indebted pension system and grants from Washington. And its move raises serious questions about similar reforms enacted by other states that allow collective bargaining by public employees, including New York and New Jersey.

The financial and stock market crisis of 2008 undermined the fiscal stability of many government pension systems. As unfunded liabilities ballooned, government contributions of taxpayer money into worker retirements rose sharply, burdening government budgets. California’s pension system, fully funded at the beginning of 2000, saw its unfunded debt bloat to $170 billion by 2012. The state’s retirement system had, by that time, only about 70 percent of the money needed to fulfill its future obligations to retirees. California taxpayers, meanwhile, were absorbing huge increases in payments into the system, and faced years more. Between 1998 and 2012, California’s contributions to the pensions system increased from $1.2 billion to $3.7 billion. Municipalities and school districts, their workers part of the system, absorbed even bigger increases.

The state had limited options to fix the problem. A California supreme court ruling held that local governments could reduce pension benefits only for new workers but had to leave untouched the rate at which current workers earned benefits, even for work they had yet to do. In response, the state passed PEPRA, which reduced pension accrual rates for new workers. In California’s mammoth pension system, which at the time had some $610 billion in liabilities, the savings were small at first—amounting to just $680 million the first year. The state projected that as it hired new workers and older employees retired, the reforms would save about $75 billion over 30 years on the retirement systems for teachers and other public employees.

Public-sector unions in the state had defeated broader reforms that California tried to institute, and they fought vigorously to roll back the 2013 legislation. Transit-worker unions, among others, filed suit against the law, only to be denied by the courts. The Obama administration then tried to intervene, arguing that the reforms violated the 1964 Urban Mass Transportation Assistance Act, which gives the Department of Labor veto power over federal aid if it deems a state to have compromised the collective bargaining rights of transit workers or otherwise to have worsened their working conditions. The Trump administration subsequently dropped federal objections to the reform law. But the Biden DOL, under Secretary (and former union official) Marty Walsh, has reinstated them in the wake of the new federal infrastructure bill.

The Labor Department’s ruling, California governor Gavin Newsom said in a letter to Walsh, “deprives financially beleaguered California public transit agencies that serve essential workers and our most vulnerable residents of critical support, including American Rescue Plan Act funds that those agencies need to survive through the pandemic.” Newsom called the decision a “complete reversal” from a 2019 ruling by the Labor Department, which held that the state’s pension reforms did not represent a violation of federal law.

The battle has implications for many other state reforms. California was not alone in reducing pension benefits after the 2008 financial crisis. More than 40 states altered their pensions to save money and bolster the financial stability of their retirement systems. Even so, state and local pension debt has skyrocketed, from about $900 billion in 2013 to about $1.6 trillion today. Despite its reforms, California’s pension system holds only about $7 in assets for every $10 in debt it owes, and its unfunded liabilities have increased to $185 billion.

Numerous other states might face similar challenges from Biden’s Labor Department. New York, enduring rising costs from pensions but constrained by the state constitution from making changes that apply to current workers, passed reforms in 2012 that reduced retirement benefits for new workers. Like California, New York permits collective bargaining among public workers for salaries and benefits; the state estimated that it will save $80 billion from those reforms. New Jersey passed even more sweeping reforms in 2011, which applied equally to new workers and those already employed by the state. Passed over the objections of public-worker unions, who claimed the reform law violated their bargaining rights, the bipartisan pension legislation was projected to save the deeply indebted state system some $180 billion over 30 years.

The Biden administration lobbied for its massive infrastructure bill as a way to unleash new federal resources at the state level. Now the administration seems intent on using that money to undermine state pension reform in California—and, if successful there, who knows where else.

Photo by PATRICK T. FALLON/AFP via Getty Images


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next