CHICAGO — A state court ruling overturning portions of Wisconsin’s controversial law curtailing collective bargaining rights could negatively impact local governments if it stands, Moody’s Investors Service warned.

Wisconsin Act 10, which was part of Gov. Scott Walker’s budget-repair initiative last year, sharply limited collective bargaining rights at the state and local government level, triggering controversy and large-scale protests in Madison, the capital.

The state increased pension and health care premium payments for employees and cut local aid to governments to help eliminate the $3.6 billion deficit in its two-year $66 billion budget, relying on the collective bargaining changes at the local level to offset the cuts in aid.

The changes were projected to save around $1 billion annually in spending by municipalities. The law stripped non-public safety unions of their right to bargain over salary and benefit issues with the exception of base wages that were capped at growth in the consumer price index. Before passage of the law last year, those issues were subject to negotiation. 

“Ultimate repeal of these provisions of Act 10 would be a credit negative for Wisconsin local governments because it would slow the process of reducing public employee benefit costs by requiring negotiations with public sector unions to achieve cost savings,” Moody’s said in its weekly credit outlook.

While many local governments are still obligated to pay such benefits at levels set in existing contracts, Moody’s noted that many local governments have already realized significant savings during the past year.

Dane County Judge Juan Colas earlier this month overturned portions of the law affecting local governments as part of a lawsuit filed by unions in Milwaukee and Madison, finding they violated free-speech rights and the equal protection clause of the state constitution because safety personnel unions were excluded.

Wisconsin Attorney General J.B. Hollen appealed the Dane County decision and is asking the court to stay the lower court ruling during the appeals process.

Moody’s said if the stay is granted it doesn’t expect an impact on fiscal 2013 budgets.

“However, if the ruling is upheld and Act 10 is ultimately overturned, Wisconsin cities, counties, villages and school districts will have to return to traditional bargaining in order to manage personnel expenditures, a category which represents the majority of local government spending,” Moody’s analyst Rachel Cortez wrote.

Walker, a Republican, cited the Moody’s report in his push for a stay of the decision. “Moody’s recognizes the importance and positive impact of the reforms contained in Act 10. Hopefully local units of government in Wisconsin will not have to take on unnecessary debt-obligation costs, which would likely fall on the next generation,” he said.

Unions also scored a partial victory in a federal lawsuit earlier this year when a judge overturned portions of the law concluding that the state could not bar unions from deducting dues from member paychecks and requiring annual recertification votes.

Oral arguments are set for later this month at the appellate level.

As the Legislature prepared to vote on the Republican governor’s proposals early last year, Democratic senators opposed to the union changes fled the state so a quorum could not be reached.

Walker and the Republicans who controlled the Legislature eventually stripped fiscal provisions of the bill to lower the required quorum, and then passed the bill without the Democrats.

Anger over the bill ultimately resulted in a petition drive that forced Walker to face a recall election. The governor prevailed in the June race against Milwaukee Mayor Tom Barrett.

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