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Conclusion: We may be seeing the early stages of union busting in Wisconsin, which, if successful, could be a marginal positive for the municipal bond market.

Position: Covered our short position in the etf MUB on 2/16 in the Hedgeye Virtual Portfolio

The last couple of days have seen large scale protests on the Capitol in Wisconsin.  As much as they are likely disgruntled, Wisconsin natives aren’t protesting the fact that Yale (the alma mater of Keith and myself) is ranked ahead of the University of Wisconsin in Division 1 hockey.  Rather these are protests by government unions, in large part teachers, who are upset with the deficit cutting proposals currently set forth by Governor Walker to limit the ability of many public employees to negotiate their contracts on a go-forward basis. In effect, this would end 50-years of collective bargaining rights.

Governor Walker’s proposals are seen as aggressive by many on the left and, in fact, being called union busting tactics by much of the prominent union leadership in Wisconsin.  The key proposals include:

-          All public employees will be required to contribute 5.6% of their pay to their pensions (much more than now);

-          All public employees will be required to pay 12.6% of healthcare premiums, up from 6% now;

-          Public employees will only be able to negotiate pay raises that are on par with annual increases in CPI;

-          Contracts will be established with a duration of one year; and

-          Union fees will become optional and each year public employees will have the right to vote via a secret ballot to decide whether they want to stay in the union.

While the Republicans currently hold a majority in the Wisconsin Senate, with 19 seats of the 33 seat house, they are actually one short of a quorum needed to conduct business.  So, while the debate on Governor Walker’s bill was set to begin yesterday, the Democratic caucus responded by, literally, leaving town.  In fact, according to Democratic State Senator Jon Erpenbach, the Democratic State Senators had actually all left Wisconsin and assembled in Rockford, Illinois.  According to Erpenbach:

“The plan is to try and slow this down because it's an extreme piece of legislation that's tearing this state apart.”

No doubt leaving Wisconsin and refusing to debate is a sure fire slow down tactic, albeit a theatrical one.  Despite these theatrics in Wisconsin, the reality remains that heading into fiscal 2012, which starts for most States on July 1, 2011, States are collectively facing a ~$134BN budget deficit.   

In the past couple of fiscal years, the stimulus program has paid almost $200BN to the States, which has allowed them to fund their budget gaps.  As such, which we outline in the chart below, we have seen a very limited drop off in State and local government employment over the past three years compared to the dramatic drop off in private employment.  No doubt, this is set to change and change dramatically in the coming quarters as State governments will be forced to make cuts. According to some studies, employment costs are as much as 50% of State budget expenses, so it is likely that the battle we are seeing in Wisconsin spreads nationwide.

Civil Unrest In . . . Wisconsin? - djchart

The extent to which these new plans can be passed will be a function of the strength of the unions, and the extent to which they are willing to battle.  Over the course of the past 40 years the unionization of State and local governments has gone up dramatically, while unionization in the private sector has declined steadily.  Currently, more than 1/3 of these employees are unionized.  So, this lobby is large and motivated.

We called this out in our Q1 Theme Presentation, but the risk of these large and well organized unions is that they delay much needed fiscal reform.  Only time will tell the extent to which unions can impeded these fiscal reforms, but the gauntlet is being thrown down as highlighted by some recent quotes:

-          Randy Weingarten, president of the 1.5 million-member American Federation of Teachers (January, 2011):

“ Governor Christie’s vilification of teachers and their unions is a cloak for all of the cuts that have been or about to be visited upon public education.”

-          Gerald McEntee, President of the American Federation of State, County, and Municipal Employees (January 19, 2011):


“The stakes have never been higher… We’ll be running ground operations, hitting the airwaves and taking on the forces allied against us.”

The battle lines have been drawn and the future of fiscal reform at the State and local level is in the crosshairs.  But the reality remains, fiscal deficits loom and perhaps Governor Walker of Wisconsin summed it up best in a recent article in the New York Times:

“I’m just trying to balance my budget. To those who say why didn’t I negotiate on this? I don’t have anything to negotiate with. We don’t have anything to give. Like practically every other state in the country, we’re broke. And it’s time to pay up.”


Daryl G. Jones

Managing Director