ROCHESTER, New York - October 12, 2010 - Big U.S. cities could be squeezed by unfunded public pensions as they and counties face a $574 billion funding gap, a study to be released on Tuesday shows.

The gap at the municipal level would be in addition to $3 trillion in unfunded liabilities already estimated for state-run pensions, according to research from the Kellogg School of Management at Northwestern University and the University of Rochester.

“What is yet to be seen is how this burden will be distributed between state and local governments and whether the federal government will be called upon for bailouts,” said Joshua Rauh of the Kellogg School.

The financial demands of unfunded pension promises come as state and local governments grapple with years of falling tax revenue related to the Depression.

The combination has raised concern that defaults, which are historically rare in the $2.8 trillion municipal bond market where local governments obtain money, could now rise.

“The bondholders would be competing with the pension beneficiaries for scarce government resources,” said Rauh.