(Bloomberg News) The near-failure by U.S. states to fund rising retiree health-care costs for millions of government workers threatens to produce budget crises similar to the one that pushed Stockton, California, to take a step toward bankruptcy last week.

States haven't financed almost 96 percent of the $627.4 billion they were projected to owe for future retiree benefits in 2010, according to Bloomberg Rankings data. The estimated deficit grew from about 95 percent in 2009 as governors coped with lower general-fund revenue and rising demand for services following the longest recession since the Great Depression.

"The whole country is dealing with" finding a way to finance the projected costs of retiree health care, said Chris Christie, New Jersey's Republican governor. His state owed almost $7,600 per resident for public workers' post-employment benefits other than pension payments. Alaska, Connecticut and New Jersey had the largest unfunded liabilities, ranked in proportion to population, among the 47 states examined.

"How do we deal with the cost of health care, especially the cost of health care as we get older?" Christie, 49, told reporters March 1. The first-term governor pushed for measures enacted last year that increased pension and health-care contribution rates for government workers and raised the age for retirement with full benefits to 65 from 62. The changes are forecast to cut costs by at least $10 billion over 30 years.

Widening Gap

Delays in containing such expenses just widen the funding gap, said Glen Volk, an actuary for Itasca, Illinois-based Gallagher Benefit Services Inc., a consulting firm. States also may face higher borrowing costs as well as more pressure to cut services to pay for promised retiree benefits, he said.

Most states cover such expenses on a pay-as-you-go basis, yet per capita U.S. health-care spending rising an average 5.8 percent annually for the 10 years through 2009 has made covering required payments increasingly difficult. Stockton, confronting a $417 million unfunded liability for retiree medical benefits, took a step toward Chapter 9 bankruptcy Feb. 29 when the City Council voted to enter a 60-day mediation with creditors.

"There's a point at which it becomes a problem," Volk said. He has helped municipal governments forecast retiree health-care liabilities.

Bankruptcy Lever

Cities including Central Falls, Rhode Island, and Vallejo, California, have used bankruptcy to cut promised benefits to current and retired workers. States can't seek court protection under the code's Chapter 9.

In Alaska, where Standard & Poor's said the unfunded liability for state retiree health care fell 47 percent in 2011, most of the reduction came from raised expectations of returns on assets in a trust fund set up to cover the costs, according to Gabriel Petek, an analyst in San Francisco.