Market participants worry that as the federal government faces growing pressure to deal with the huge unfunded liabilities of its Medicare and Social Security programs, it will cut benefits that employees will expect state and local governments to pick up.

"What's going to happen is the federal government is going to start reducing benefits, no question about that," said Thomas R. Saving, a former member of the Social Security Administration and Medicare Trust Funds, who now is a National Center for Policy Analysis senior fellow and Texas A&M University professor of economics. "States are going to be under a lot of pressure from their employees to give back some of the benefits that the feds cut."

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