State and local governments have set aside virtually no money to pay $1 trillion or more in medical benefits for retired civil servants, a USA TODAY survey found. Now with bills coming due as baby boomers start to retire, states, cities, school districts and other governments may be forced to raise taxes and cut benefits. According to an indepth report by Dennis Cauchon in the paper, public sector workers are in for a rude awakening. State governments have unfunded obligations worth $445 billion to subsidize health insurance for state troopers, teachers, judges and other civil servants after they retire, according to USA TODAY’s survey of state financial reports.

But cities, school systems, park districts, water authorities and other local governments have even bigger obligations, in excess of $500 billion, although the exact number isn’t known. And there won’t be any progress as states start to receive their slice of the $787 billion stimulus bill Congress has approved.

That money is aimed at immediate spending, not long-term costs like those associated with public pensions and benefits. Medical benefits for retirees are part of a larger burden taxpayers face in providing health care for an aging population. The federal government has a $1.2 trillion unfunded obligation to pay medical costs for retired federal workers and military personnel.

Medicare and Social Security push the nation’s unfunded promises above $50 trillion. For the first time last year, states and big cities were required for the first time to report the value of medical benefits promised to current and future retirees. State and local governments employ about 20 million people.

An additional 7 million are retired. Unlike private-sector companies, most governments subsidize health insurance for retired employees. Soaring medical costs have made the benefit valuable to workers, especially those who retire early. But the benefits also have the potential to bankrupt a city.

Dover, New Hampshire, a town of 26,000, will see its retiree health care costs triple to $3 million annually in the next 10 years as the number of retirees grows, according to its actuary. The USA TODAY study analyzed what states are doing to deal with the crisis. Many are cutting health benefits.

Most governments have the legal authority to reduce or end retiree health coverage as opposed to pensions, which cannot be cut under most states’ laws. When Rhode Island trimmed retiree medical benefits in October, 1,291 workers (or nine percent of the state’s workforce) retired to keep the more-generous older health plan. Other states are saving money to pay benefits down the road.

Alaska, Minnesota, Pennsylvania and Utah are among states that set aside some money last year to prepare for future medical costs.

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