U.S. states may find the cost of providing medical care for retired state employees will dwarf the outlays for their retirement benefits, according to a new report.

Many big companies are slashing both health and pension benefits, especially in struggling industries such as airlines and autos. But it is much more difficult for states to make similar cuts, at least for unionized employees, because that can require changing current laws.

For example, New Jersey expects to pay more than $1 billion to provide health care for both its current and retired employees, according to Tom Vincz, a spokesman for state treasurer Bradley Abelow.

"And the kicker is that $721 million of that is for retired teachers," he said. Local school districts pick up the tab for teachers who are still working. "But we as a state pay the full boat for retirement benefit costs," Vincz said.

By fiscal 2010, New Jersey will spend 25 percent more on retiree health care than on medical coverage for its current workers, the Rockefeller Institute of Government said in a recent report.

New York City Mayor Michael Bloomberg has gotten off to an early start at earmarking funding. Over the next two years, the Republican mayor wants to set aside $2 billion for this future liability, which he forecasts at $50 billion. Officials have not specified a time frame.

Although the stock market's swoon in 2000 forced many states to sharply boost pension fund contributions, the health care liability is setting off alarms.

Starting next year, states and "large" cities and towns will have to estimate this liability, the Rockefeller report said.

"The amounts are large and can dwarf the amount of unfunded pension liabilities," it added.

The Rockefeller Institute is not alone in raising this concern.

Mercer Human Resource Consulting estimates the health care liability for state and local governments at $1 trillion.

A Mercer actuary, Steve McElhaney, developed the estimate based on the number of public-sector employees and retirees nationwide and on an average retiree health care benefits package.

The $1 trillion is the present value of all the medical benefits states and local governments owe for their current retirees and the cost of future benefits active employees have earned to date, explained Mercer spokeswoman Stephanie Poe.

Jersey City, New Jersey-based Lord Abbett economist Milton Ezrati said it can be hard to cut public employees' benefits because elected officials "know that their labor force went into the civil service for the security, making any attempt to follow the lead of corporate plans politically dangerous."

Benefits were boosted in the late 1990s, when the rising stock market led states to believe they could afford them.

"More than half of all states now pay 84 percent of all their beneficiaries' medical expenses," Ezrati said.

State and local governments now face grim choices, such as raising taxes, cutting spending or benefits or setting aside dollars now, as New York City is doing.

Debt sales are another approach, the Rockefeller Institute said, noting Gainesville, Florida, has already followed this path. "Investment banks are marketing this option to governments," it added.

Lord Abbett noted that some states and municipalities have holes in their pension funds that could be filled by selling bonds. It said there are varying estimates of how much debt might be sold.

"All are huge, verging on tens of billions a year," said Ezrati.

(http://today.reuters.co.uk)