"We're still where we were five years ago," PFM's Miller said. "If we continue on, it will cause budget problems. It's going to squeeze out jobs and pay raises."
Affecting Ratings
Since state and local governments began disclosing the projected costs of promised retirement benefits about five years ago, bond analysts have begun weighing the obligations when they grade government debt.
Connecticut's "fixed costs for debt, pension, and other post-employment benefits (OPEB) relative to budget are among the highest in the nation" and remain a fiscal challenge, Moody's analysts said in a January report. Taken together, "they will continue to consume an increasingly larger portion of the state's budget," absent further changes, the analysts said.
"Rating agencies are forcing states that ignore it to expect their credit ratings to be impacted," said CanagaRetna. "States are looking to catch up."
Moody's cut Connecticut's $14.6 billion of general- obligation debt one step to Aa3, its fourth-highest grade in January. It gave the state a "stable" outlook, citing steps taken last year to curb pension and benefits liabilities.
More Urgent Needs
States have been slow in tackling the retiree health-care cost issue to avoid pressure for benefit cuts or funding increases, which may divert money from other priorities, said David Crane, who was an adviser to former California Governor Arnold Schwarzenegger, a Republican. Schwarzenegger's final budget, passed in 2010, included reduced pension benefits for new employees and higher contributions for the rest.
"It's like a frog being slowly boiled to death," said Crane, who teaches at Stanford University near Palo Alto, California. "They're not doing anything about the liabilities. In most states, they're not being funded at all."
Until accounting-rule changes in 2008 forced state and local governments to disclose other post-employment benefits besides pensions, most didn't track the liability. There was no requirement to put money aside to pay for the promised coverage.
By 2009, when Moody's cut Connecticut's bond grade, they said the state owed more for retirees than its annual budget. The Nutmeg State, with a about 3.57 million people in 2010, had the second-highest unfunded liability per person, at $8,281, trailing only Alaska, with about 710,200 residents, at $16,742.