Looming public retiree health costs could sink states

Unfunded retiree health benefits for government workers could threaten states with the kind of financial crisis that has pushed Stockton, Calif., close to bankruptcy, according to Bloomberg News. Alaska leads the list of states with the largest unfunded health care liabilities, followed by Connecticut and New Jersey.

Based on projections in 2010, according to Bloomberg, states did not put aside funds to finance almost 96 percent of $627.4 billion owed for future retiree benefits. Without corrective measures, that deficit is likely to increase as health costs go up and more workers retire.

A similar gap has left Stockton staring at possible bankruptcy. The city faces a $417 million unfunded liability for retiree medical benefits. In February, the city entered a mandated 60-day mediation with its creditors that could lead to filing Chapter 9 bankruptcy.

Several states’ balance sheets are also out of kilter. Among 47 states, ranked in proportion to population, Alaska had the highest unfunded liability, owing $16,742 per resident in 2010 for retiree benefits other than pensions. Connecticut had the second-highest rate, owing $8,281 per resident. New Jersey was third, owing $7,597 per resident.

Other states among the top 10 in unfunded liability include: Delaware, $6,527 owed per resident; Michigan, $4,269; West Virginia, $3,784; North Carolina, $3,450; Illinois, $3,421; Alabama, $3,200; and New York, $2,932.

State officials have been slow to take steps to close the funding gap. All of the options are painful, such as cutting current services to pay for future retiree health costs, increasing employee contributions or raising the retirement age.

“It’s like a frog being slowly boiled to death,” David Crane, adviser to former California Gov. Arnold Schwarzenegger, told Bloomberg. “They’re not doing anything about the liabilities. In most states, they’re not being funded at all.”