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As retiree health care bills mount, some states have a solution: Stop paying

The Wall Street Journal. logo The Wall Street Journal. 5/1/2019 Heather Gillers

North Carolina corrections official Charles Johnson will soon lose a major perk he can offer recruits when the state ends a promise to pay health-care bills once workers retire.

“It’s going to make a difficult situation even more difficult,” said Mr. Johnson, an assistant superintendent at Polk Correctional Institution in Butner, N.C. About 30% of the facility’s roughly 335 correctional-officer positions are currently empty, he said.

States across the U.S. are testing how far they can reduce health benefits for their retirees as a way of coping with mounting liabilities and balancing budgets.

The cuts are a response to dramatic increases in medical costs, budget shortfalls and the introduction of new accounting rules forcing governments to be more public about how much they owe. Officials also face fewer legal hurdles to cutting retiree health benefits than they face with public pensions, which enjoy ironclad legal protections in many states.

North Carolina, which will end future-retiree health-care coverage for new workers hired in 2021, is not the only state to take more drastic measures. Kansas is now asking retirees to pay the full cost of their health care, pushing their monthly premiums to as much as $1,000. In Iowa, the state last year capped the contribution its flagship university makes to retirees’ health care, cutting the liability by $465 million.

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U.S. states as a group have promised hundreds of billions more in retiree health benefits than they have saved up. The gap for so-called post-employment benefits, which mainly consist of retiree health care, amounts to roughly $600 billion, according to government data compiled by Eaton Vance Corp. That is on top of the $1.4 trillion states need to pay for promised pension benefits, according to The Pew Charitable Trusts.

“A lot of them didn’t realize how much they promised,” said Dan Levin, a senior vice president at Segal Consulting, which serves as the actuary for many cities and states.

Paying a portion of employees’ health-care bills once they retire became a benefit widely offered to public workers in the second half of the 20th century, according to the National Association of State Retirement Administrators. The value of these obligations accelerated along with increases in medical costs and the aging of the American workforce.

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State and city governments increasingly began looking to cut these costs as they struggled following the 2008 financial crisis. In Detroit and Stockton, Calif., officials agreed to reduce their support for retiree health care as a way of negotiating their exits from municipal bankruptcy protection in 2014 and 2015, respectively.

“You go to the low-hanging fruit before you go to the stuff that’s harder to get to,” said Marcia Van Wagner, an analyst for Moody’s Investors Service.

Accounting changes also forced states to re-examine their support for these obligations. New Governmental Accounting Standards Board rules imposed between 2006 and 2008 prompted many to measure their retiree health-care obligations for the first time. Then, last year, the same board dictated that governments must report these liabilities prominently in their annual financial statements rather than relegate them to footnotes.

Governments have taken a variety of approaches to chipping away at their liabilities. Over the past decade, states including New Jersey, Michigan, Connecticut, Kentucky and Texas have made changes such as reducing benefits, increasing premiums and fees and tightening eligibility requirements, according to state officials and the National Association of State Retirement Administrators.

Some states are getting even more aggressive. The Kansas Health Care Commission decided to charge retirees the full cost of coverage beginning in 2017. The monthly cost for the approximately 2,000 retirees enrolled jumped by hundreds of dollars, and three-quarters of them dropped out, according to the state’s acting secretary of administration, Duane Goossen. But Kansas’ retiree health-care liability fell to $508,000 from $6.1 million.

In North Carolina, state officials in 2011 increased the premiums for one of the state’s retiree plans and then in 2017 went deeper by ending the benefit altogether for new employees starting in 2021. The 2011 cut sparked a lawsuit from retirees but an appeals court decided in the state’s favor. The plaintiffs have appealed to the North Carolina Supreme Court.

Mr. Johnson, the assistant superintendent for Polk Correctional Institution, said he worries that ending retiree health care will spark workplace conflict. He said he went to work for the state in 1992 after leaving the U.S. military in part because his parents, both county workers, advised him to look for a public-service job that came with retirement benefits.

“You have half your staff that has a benefit and another half that doesn’t have it,” he said.

North Carolina Treasurer Dale Folwell said ending the benefit will help stabilize the state’s finances and ensure corrections officers continue to have affordable health care available to them while employed. North Carolina’s $28.5 billion unfunded retiree health-care liability is among the highest in the nation.

“It’s not emotional and it’s not political. It’s mathematical,” Mr. Folwell said.

Write to Heather Gillers at heather.gillers@wsj.com

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