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.

"New Jersey, on the other hand," says Crow, faces a massive budget shortfall. But, as in cash-strapped Massachusetts and Illinois, the Legislature in New Jersey is still dominated by Democrats, who don't want to cut allied labor unions too deeply, and GOP Gov. Christie "has not pushed," as Crow puts it.

Cities - especially in New Jersey, where the state gives more generously to urban schools than Pennsylvania - face pressure for more radical cuts.

"Fiscal conservatives are seeing this as an opportunity to correct those structural imbalances," Crow said. "Any success on their part is positive," from an investors' point of view. Even if government workers and retirees have to make do with less.

Developer Paul Giegerich says his plan to redevelop the long-vacant, Horace Trumbauer-designed, high-ceilinged former Beneficial Bank building at 12th and Chestnut into a $9 million, David Schultz-designed fancy pool hall and bar-restaurant is easing ahead.

An ordinance introduced by City Councilman Frank DiCicco won preliminary approval from the Planning Commission last week. But the proposal is being fought by residents of the nearby White Building, who have opposed approvals by both the Liquor Control Board and the Philadelphia Historic Commission.

Who doesn't like pool halls? "There was an era when it was associated with gambling and drinking and prostitution," notes Giegerich, co-owner of New York's 20-year-old Amsterdam Billiard Club. In Philadelphia, pool remains "a regulated use, lumped in with tattoo parlors and porn shops," he said, and easier to block than other uses. Even if today's pool players are more likely to have learned the game in college frat houses and rich kids' basements.