Key Takeaways:

• Court rules U.S. Department of Labor's (DOL) determination to deny California transit agencies' requests for federal transportation funds on the basis of California's 2013 pension reform legislation (PEPRA) was arbitrary and capricious
• 2021 preliminary injunction remains in place, under which DOL cannot refuse to approve applications for federal funds on the basis of PEPRA
• Court's ruling provides option for parties to "fast track" request for appellate review

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On December 28, 2022, the United States District Court for the Eastern District of California issued a significant ruling in a long-running legal challenge to the application of the California Public Employees' Pension Reform Act of 2013 (PEPRA) to transit agency employees. Central to the case is the DOL's interpretation of "Section 13(c)" of the Urban Mass Transportation Act of 1964 (UMTA), regarding collective bargaining rights for employees of transit agencies that receive federal funding. Under Section 13(c), when a state or local transit agency requests federal funds, the DOL must certify that the interests of the agency's employees are protected under an arrangement that, among other conditions, includes provisions for both the preservation of rights under existing collective bargaining agreements ("CBAs"), and the continuation of collective bargaining rights.

In October 2021, the DOL reversed its prior position and issued a broad, prospective determination that PEPRA is fundamentally inconsistent with Section 13(c),and so precludes the approval of federal grants for almost all California transit agencies. Last month, the court ruled that the DOL lacked authority to make that determination. The court further ruled that DOL's process in reconsidering its prior position was arbitrary and capricious because the DOL failed to consider "important aspects" of the issue, including how its determination would affect long-term transit projects worth billions of dollars, as well as COVID relief funding for California transit agencies.

While a preliminary injunction issued by the court last year remains in place, the ruling requires the parties to consider an agreement to convert it to a permanent injunction, to allow for prompt appellate review.

I.   2013 Lawsuit Resulted in Delayed Application of PEPRA to Transit Agencies

PEPRA made several significant changes to public pension law in California, for the state and other public employers, including certain mandatory employee contributions, lower benefit formulas, and reforms intended to eliminate "pension spiking." However, application of PEPRA to employees of transit agencies was delayed by the California State Legislature, to accommodate litigation that began in 2013 involving the DOL's initial determination that PEPRA's effect on the collective bargaining rights of transit agency employees prevented certification under Section 13(c).

In 2014, the court issued an order in the original case, holding that the DOL exceeded its authority in determining both that PEPRA prevents the preservation of rights and benefits under existing CBAs with respect to new employees hired after the effective date of PEPRA, and that PEPRA prevents the continuation of employees' collective bargaining rights. The court ordered the DOL to revisit the question in light of its ruling. In 2016 the court vacated the DOL's second decision – which was the same as the first decision, but for different reasons – as inconsistent with the court's 2014 order. The litigation continued, and in 2018, the court issued a permanent injunction prohibiting the DOL from relying on PEPRA to refuse to certify grants for the two transit agencies involved in the original lawsuit.

II.   Leadership Changes Resulted in Revised Positions at DOL

The DOL's position on whether PEPRA conflicts with Section 13(c) has changed over time, with changes in the executive administration presiding over the DOL. After the 2016 Presidential election, the DOL chose not to continue with an appeal of the court's prior rulings against it. In 2019, the DOL concluded that PEPRA is not a bar to certification under Section 13(c), and certified several grant applications for a number of California transit agencies, over objections filed by the International Amalgamated Transit Union ("ATU"), which, through affiliated local unions, represents many California transit agency employees. The ATU filed the current lawsuit to challenge the DOL's 2019 certification decision. Originally, the state of California, on behalf of local transit agencies, was aligned with the DOL in defending the position that PEPRA cannot be relied on to prohibit grant certifications under Section 13(c).

However, following the 2020 Presidential election, the DOL notified the court that its position had changed again, and it would no longer defend PEPRA, and the case was put on hold. In October 2021, while the case was still on hold, the DOL issued a determination that PEPRA precludes certification of federal grants under Section 13(c), although DOL advised that its new determination would apply prospectively only, and that it would continue to comply with the 2019 injunction that prohibits the DOL from using PEPRA to refuse to certify grants to the two agencies involved in the first lawsuit.

After that change, the DOL's and ATU's positions were aligned in the case, as both entities argued to the court that PEPRA prohibits grant certifications under Section 13(c). The state of California continued to defend PEPRA, arguing that the court has already determined in three prior rulings that PEPRA does not disturb “fair and equitable arrangements” for transit workers in California and is consistent with Section 13(c).

III.   Ruling Orders Parties to Quickly Agree on Next Steps

In addition to invalidating the DOL's 2021 determination that PEPRA precludes certification under Section 13(c), the court's ruling ordered the parties to submit a joint status report to the court within 30 days that includes a proposed schedule for resolving the case. The court suggested that the parties could agree to convert the preliminary injunction issued last year to a permanent injunction, which would allow the DOL and ATU to move forward to promptly appeal the court's ruling.