Rep. John Erleborn (R-Ill.) has denounced the use of New York's public pension funds to help bail the city out iof its financial crisis.

He told a meeting of the International Foundation of Employe Benefit Plans: "Many (public plans) have become not funds for the exclusive benefit of the participants and beneficiaries, but political slush funds for the use of mayors and governors who find themselves with, in some cases, many millions of dollars in ready cash just sitting around waiting to be spent.

"New York City's use of public pension funds to buy bonds which were virtually unmarketable anywhere else is a prime example."

He also deplored the use of pension funds as bargining chips during contract negotiations. Talks between New York's labor leaders and city officials are stalled. At one point, officials had said managers of public must invest $683 million in order for the city to meet this week's payroll. No funds were invested, but money for meeting the payroll was found elsewhere.

Erlenborn is ranking minority member of the House labor standards subcommittee, which originates pension legislation. His counterpart, Sen. Jacob Javits (R.N.Y.), opposes Erlenborn's stand. Another subcommittee member, Sen. Lloyd Bentsen (D.-Tex.) has agreed reluctantly to support legislatiion to allow New York State and City pension funds to buy more city securities. Other subcommittee members have not taken stands on this issue.

The legislation needed is an extension of a 1975 law that exempted New York pension trustees from the fiduciary provisions of the tax law. (The law expires June 30.) These require that an investment be "prudent," and buying the bonds of a city on the verge of bankruptcy generally is not considered prudent. Nearly 37 percent of the funds' by the end of June.

If, however, federal loan guarantees for New York securities are voted by Congress, committee members could be expected to look upon the bounds as more a prudent investment. The House Banking Committee last week approved loan guarantees, but the Senate has not yet held hearings on the subject.

A House pension task force recently issued a report charging that public pensions were badly managed and audited. It is preparing to introduce legislation this summer to begin the process of bringing public plans up to federal standards, much the way private pension plans were affected by the Employe Retirement Income Security Act of 1974.

Earlier this month, Javits and Sen. Harrison Williams (D.-N.J.), introduced a bill containing major revisions of ERISA. To stem the tide plan terminations, it would offer a tax credit of 5 percent of the cost of maintaining a plan to employers whose plans exceed the minimum vesting and participation standards. It aslo would disallow Individual Retirement Accouns for corporate officers.

The bill would ease the burden of paperwork, create prototype plans that could be used by many businesses, and consolidate the administratration of pensions into a single agency.