Accounting rule could bust state budgets highlights the coming fiscal crisis in the states when governments are required to recognize medical benefits liabilities.


Just when states found some breathing room after years of belt-tightening, a new accounting rule is about to force them to deal with some $500 billion in hidden costs. The new rule, effective later this year, also has state employees worried their benefits soon might be on the chopping block.

Starting in December, states will have to tally up and publicly disclose the cost of health care benefits promised to teachers, police officers and other public sector workers who are retired or will retire in decades to come. Then states have to figure out a way to start putting aside money to cover the liabilities – or risk hurting their states’ credit rating.

“Easily, the number will reach $500 billion,” said Parry Young, a credit analyst at Standard & Poor’s Ratings Services, referring to the amount of money state and local governments may face in unfunded liabilities for retiree health care benefits. That figure exceeds the estimated $300 billion that states will owe in funding retiree pensions, Young said.

Currently, state and local governments use the “pay-as-you-go” approach and
set aside money each year for current retiree health care costs. The new rule
doesn’t require that states sock away the money needed to cover future retiree
health care. But states that don’t are in danger of getting a lower credit
rating from Wall Street, making it much more expensive to borrow money at a time
when states are borrowing at a record pace.

“The size of this liability [for retiree health benefits] may astonish the
public and most government officials,” Paul Maco, a partner of Vinson &
Elkins, an international law firm, said in a statement.

Read more in our report, Benath the Surface: Pennsylvania’s Looming Pension and Healthcare Benefits Crisis.