Factbox: Top budgetary threats to state and local governments

(Reuters) - The recession created budget emergencies in almost all states and in many cities and counties, spotlighting deeper, long-standing fiscal problems.

Members of Congress are now worrying publicly that the only solution will be a sweeping federal rescue, one Washington can barely afford under the burden of its own massive deficit.

Analysts, taxpayers and investors in the $2.9 trillion municipal bond market have begun to worry about possible consequences of the budget crises.

Below are the top threats to the economies of state and local governments and to those who buy and trade their debt.

PENSIONS, OTHER POST-EMPLOYMENT BENEFITS

Of the longer-term problems, none looms as large as underfunded pensions and other post-employment benefits for public employees.

The issue has boiled over in Wisconsin and other states where Republicans were recently elected as governors and state legislators. Public workers and Democrats are opposing moves to curb union rights and cut employee benefits.

All three rating agencies are giving greater scrutiny to how pension obligations affect states' credit-worthiness, and the U.S. Securities and Exchange Commission has rapped New Jersey for not properly disclosing low pension funding levels.

No one can say for certain how much states with economic woes have underfunded pensions and other benefits, such as healthcare, promised to retired employees. Estimates for states' pension under-funding range from $700 billion to $3 trillion because of disparities in calculating future returns on investments made by pension systems.

The Pew Center on the States put the total shortfall on promises made to retirees at $1.26 trillion.

In recent years, the Governmental Accounting Standards Board has required states to put promises made to retirees outside of pensions on their books. But these "OPEBs" are easier to change than pensions and could provide places for states to cut.

Some Republican members of Congress are considering allowing states to declare bankruptcy, which they cannot do now because the U.S. Constitution recognizes them as sovereign governments. Bankruptcy would allow states to sort out their finances in federal courts and renege on pension promises. States led by both Republicans and Democrats roundly oppose such a bold move, saying it would raise borrowing costs and do little to help their situations. The chances that any bill will make it through Congress and become law are small.