SNW Asset Management clients have seen us write about pension funding issues many times. When state and local leadership make a constructive change we typically see it as a credit positive. For example, in 2012 California enacted pension changes that increased retirement ages and capped annual payouts. But this week we learned just how difficult it is to implement broad pension reform. In a letter to the California Governor the U.S. Department of Labor threatened to withhold $1.6 billion in grant funding to state and local transit agencies. The conflict is rooted in the Urban Mass Transit Act of 1964. The Act ties money for public transit with a requirement that transit agencies preserve collective bargaining rights of transit workers. The U.S. Department of Labor argued that the changes from California’s pension reform did in fact impinge on transit workers collective bargaining rights and as a result would halt the grant payments. This is important because Moody’s Investor Service estimates on average transit agencies would lose 13% of their operating budget and as much as 40% of their capital funding if the Federal grants stop flowing. The loss of these funds would create immediate financial stress. This week the California Governor proposed new legislation aimed at temporarily rolling back pension reforms specifically for transit workers. This example shows just how difficult it is to curtail a municipalities pension liabilities. Furthermore, comprehensive pension reform is not just a credit specific issue but is affected by a wide range of local, state and federal policies.