State and local governments (SLGs) are "at a crossroads" in coming to terms with their retiree health benefit plans and liabilities, according to a study published by the Center for State and Local Government Excellence in Washington.

"Unfunded actuarial accrued liabilities (UAAL) for many governments are large in absolute value and relative to total state expenditures, debt and per capita income of the state," according to the report. Total unfunded liabilities were estimated at $558 billion.

The study, conducted by a research team at North Carolina State University, found that most SLGs continue to pay retiree health costs on a pay-as-you-go basis from general revenues, "despite rising expenditures for health care as a percentage of total employee compensation and escalating medical inflation." The resulting overhang of future financial obligation jeopardizes bond ratings, according to the study.

Still, SLGs consider retiree health benefits an essential tool to attract and retain employees, survey data suggests. In general, states have been much more aggressive than local governments in attempting to address retiree health liabilities through cost containment strategies, increasing cost-sharing with employees, wellness programs, claims auditing and even curtailing health benefits for future retirees, according to the report.

The current fiscal crisis experienced by most state and local governments "promises to divert the attention" of local officials from retiree health to "more immediate concerns," the report's authors warn. "Large unfunded liabilities must be addressed through long-term, intergenerational thinking," they conclude, but also note that "elected officials tend to think in terms of election cycles and outcomes."

The report is available on the Center's website here.