PhillyDeals: Investors want Wisconsin governor to beat unions

Of all the Republican proposals for not paying retired teachers and state troopers the pensions promised in more prosperous times, investors prefer Wisconsin-style union-busting over the state-bankruptcy gamble proposed by ex-U.S. House Speaker Newt Gingrich and ex-Florida Gov. Jeb Bush.

State bankruptcy could let governments break their union contracts and cancel benefits, but it "is less desirable to the bondholder, because it creates a higher level of uncertainty that would increase borrowing costs for states and local municipalities," says Michael Crow, who manages $3 billion in clients' bond investments in state and local governments for Glenmede, the Philadelphia trust bank.

Barring unions from negotiating benefits, as Wisconsin Gov. Scott Walker wants to do, is more likely to improve states' credit

ratings, Crow told me.

Why are radical measures being considered at all?

It's not just the recession, Crow says: "We've had a structural imbalance, with state [liabilities] far outpacing state revenue growth, over the 10-year period from 1999 to 2008," even before the economy stopped.

He blames two factors: Medicaid spending on congressionally mandated health care for the poor, and state-funded public school spending, which has risen faster than inflation because of rising salaries and benefits negotiated by local districts - sealed in union contracts and protected by state bargaining laws.

How do we know weaker unions would mean lower pay and benefits? "I do not have any research to back that up," Crow acknowledged. New Jersey teachers can't strike, yet "the state has one of the highest per-student costs in the nation," he said.

Doesn't the specter of Wisconsin teachers pouring out of classrooms to occupy state buildings make investors nervous? "I don't think there's a long-term impact" just from protesting, Crow said. But if unions "succeed in forcing what is obviously a state with very strong Republican control to back down, it would create a blueprint for opposition." That blueprint would make radical change harder in other states.

If Wisconsin beats the unions, will Pennsylvania copy? Pennsylvania is not in as bad a shape, said Crow, who credits milder debt loads in the years in which Tom Ridge and later Ed Rendell were governors.