Apart from covering the liability, governments can also seek to curb benefits, at least for new employees, such as Schwarzenegger did. Unions and other employee groups have rallied legislative allies to fight benefits erosion, however.

Michigan was the only state that made significant changes in 2011 that will reduce its retiree health-care costs, said Ron Snell, who tracks such issues for the National Conference of State Legislatures, a nonprofit organization in Denver. Employees hired after Jan. 1 won't be promised health benefits when they retire. Instead, the government and workers will contribute to a fund that retirees can use to pay for insurance.

Other states have increased worker contributions for benefits or copayments made by retirees, Snell said. Or they're increasing the number of years workers must put in to qualify, CanagaRetna said.

Exposed To Cuts

"In most states, OPEB, unlike pensions, isn't a contractual right," said S&P's Hitchcock. "So it's a lot easier to cut the benefit."

States also may be delaying funding the benefit in the hope that the federal health-care overhaul will compel retirees to buy insurance until they are covered by Medicare, Volk said.

"There's a bit of an attitude to see what happens under health-care reform," CanagaRetna said. "We're in a holding pattern."

Underfunded retiree benefits may pose a bigger fiscal challenge to many states than pensions, since few have set aside money to help cover the cost, Crane said.

By contrast, state retirement plans have hundreds of billions of dollars for future pension payments, with a median value of about 75 percent of the assets needed to meet obligations, according to a Bloomberg Rankings analysis. The most poorly financed, Illinois, still held enough money in 2010 to cover about 45 percent of what it expects to owe.

Since health benefits often aren't protected by law, states are under much less pressure to cover those future costs, said James Spiotto, a lawyer who heads Chapman & Cutler LLP's special litigation, bankruptcy and workout group in Chicago. That also means it may be easier to reduce the obligations than pension expenses, he said.

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