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BRASILIA, Jan 13 (Reuters) - The cash-strapped Brazilian state of Rio de Janeiro is considering offering early retirement to thousands of employees as part of a bailout deal with the federal government, an official close to the negotiations said on Friday.
In a change to the original plan, the federal government is ready to give over three years of temporary debt relief to Rio in exchange for austerity measures to cut payroll spending, privatize its water utility and raise pension contributions.
The original plan was to last three years with the temporary suspension of debt payments, giving about 23 billion reais ($7.5 billion) in savings to Rio, which wracked up debt on infrastructure linked to this year's Olympics and 2014 World Cup.
"The situation in Rio is critical," said the government official who asked not to be named because he was not authorized to speak on the negotiations. "It will take some time to resolve that. Maybe more than three years."
Rio is in one of its worst crises ever as Brazil's recession enters a third year and amid a drop in oil royalty income and a surge in payroll spending. Several other states are also deeply indebted.
The state, a favorite with tourists, has delayed payments to police, doctors and teachers, sparking violent street protests. Crime has mounted and dilapidated hospitals have been running out of supplies.
President Michel Temer is racing to sign Rio's rescue plan next week, threading a fine line to give the state relief but without offering too many concessions that could be interpreted by markets as a relaxation of his austerity drive.
As part of the deal, Rio could offer a voluntary dismissal plan to civil servants to cut its ballooning payroll bills. Cuts in salaries and hours worked is also being considered.
The Rio governor's office did not immediately reply to a request for comment.
Rio could erase its expected budget deficit of nearly 20 billion reais this year with the combination of federal debt relief, spending cuts, measures to increase revenue and a fresh loan from a consortium of banks, the official said.
The country's largest lender, state-run Banco do Brasil, is interested in joining the consortium, which could include private Brazilian banks as well as international financial institutions, the official said.
The fresh loan would be backed by future proceeds from the privatization of Rio's water utility Cia Estadual de Águas e Esgotos SA, known as Cedae, which some market analysts price at between 3 billion and 4 billion reais.
Rio could also raise fresh cash by securitizing oil-royalty receivables via its state pension fund RioPrevidencia. But that option is seen as unlikely as the state has already compromised part of its oil revenues in a similar operation, the official said. (Reporting by Alonso Soto; Editing by Brad Brooks and Bernadette Baum)