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Republican study warns against bailout of state pensions

By Karen Pierog

(Reuters) - State and local governments facing pension liabilities that already total in the trillions of dollar will be forced to seek bailouts from the government, Republican Party Congressional staffers said in a study released on Wednesday, as they warned that such bailouts could have dire consequences.

Republican staff of the U.S. Congress Joint Economic Committee said with state debt topping $4 trillion, including $2.8 trillion in unfunded pension benefits and at least $627 billion for retiree health care, states may buckle under the pressure to raise taxes, cut spending and take other measures to pay off their debt.

"Despite the massive federal debt and fiscal imbalances, it will be hard for Washington policy makers to deny sympathetic retired teachers, police and firefighters after a previous Congress bailed out Wall Street and U.S. automakers," the Republican staff commentary said.

But it warned that any federal bailout would test the political fabric of the nation, citing the tensions in the European Union over the Greek bailout as a similar situation.

In a federal bailout, taxpayers in U.S. states now keeping up with their pension liabilities would be paying for states with the worst-funded public retirement systems, the study said.

Because of the difficulties faced in reforming public pension systems -- including union opposition to any reduction in pension and other benefits and the protections provided by law and even by state constitutions -- the study said that a different approach should be taken.

It recommended that the U.S. government reduce its potential aid to states in proportion to their unfunded liabilities until their pension funds become solvent over a specific time frame.

It also suggested that the ability of states to issue tax-free bonds could be revoked if their pension funds are expected to go broke within 10 years.

"As undesirable as a federal bailout of state pensions is, setting forth the terms and conditions of a potential bailout may be exactly what is needed to prevent one from happening," the study said. "If the states understand how severe the terms of a federal bailout would be, they are more likely to take action now to fix their unsustainable pensions."

(Editing by Peter Bohan)

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