Retired state and county workers in Hawai'i get health benefits that are among the most generous in the nation, and the perk could leave taxpayers liable for billions of dollars in unfunded costs.

The state pays 100 percent of the medical, prescription drug, dental and vision insurance for life for retirees with 25 years of service, a benefit few private employers offer.

With a package like that, "you would almost be insane not to work for the state government," said Lowell Kalapa, Tax Foundation of Hawaii president.

Hawai'i taxpayers stand behind the promised benefits and are almost certain to find the burden increasing as healthcare costs continue to rise and baby boomers retire.

Until now, the state has avoided calculating just how much the future healthcare benefit will cost. But a change in government accounting standards will force the state to do just that next year. The state and counties must begin reporting their health insurance liabilities in July 2007.

The most recent estimate of the retiree healthcare benefit liability came from a 1999 report by the State Auditor that put it at $4.5 billion.

People familiar with the issue say to expect a large number when it is released next year.

California's Legislative Analyst's Office last month estimated that state's retiree healthcare benefit liability is $40 billion to $70 billion. Maryland had an unfunded liability of $20 billion.

"It's pretty clear that the amount of liability is going to be in the billions," said John Radcliffe, University of Hawai'i Professional Assembly executive director and chairman of the Hawaii Employer-Union Health Benefits Trust Fund.

The state has taken steps to limit retirees' healthcare benefits and bring down its liability.

Employees hired before July 1, 1996, were given full benefits even if they had put in only 10 years of service before reaching retirement age. Those hired after that date must have 25 years of service to get full benefits. Workers hired after June 30, 2001, no longer get health coverage for their dependents paid when they retire.

One idea broached in the 1999 State Auditor's report was switching to a defined-contribution plan where state and local governments are only responsible for a set amount of the retirees' healthcare costs. Other alternatives include retirees making contributions toward the costs. Those ideas would have to be enacted for future employees since the state is contractually obligated to continuing with the current retirees benefits.

Randy Perreira, deputy executive director for the Hawaii Government Employees Association, said he doesn't expect a rash reaction from government once the liability estimate is available.

"Over time I'm sure it will cause both sides to look at the benefit structures," he said. But he noted that the state and counties must balance financial goals with hiring plans. A move to cut retiree benefits may make civil service less attractive to job seekers, he said.

The state's generous benefits "made up for the fact that you made half of what you made in the private sector," Kalapa said.

Local state and county retirees acknowledge their healthcare benefits are generous.

"I think we're way better off," said Yoshiaki Kimura, a former school teacher who retired for a medical problem in his late 50s. The state covered his insurance premiums until he turned 65 and went on Medicare. The state now reimburses him for Medicare payments and pays for his supplemental health coverage. "They're good," the Manoa resident said.

Hawai'i's benefits are more generous than most other states. Only six other states offered 100 percent healthcare premium funding for retirees and their families in 1998, the State Auditor's report said. A California study released last month said that 17 states were offering 100 percent health benefit costs for some retirees as of 2003.

Hawai'i government retirees have better health benefits than most private sector retirees. The Hawaii Employers Council found in a 2002 survey of 159 employers that only 21 percent offered post-retirement healthcare benefits.

"One has to question whether or not governments here or on the Mainland should be funding these types of plans when the trend in the private sector is in the other direction," Kalapa said.

By a rough calculation, a 62-year-old worker retiring from a state job, eligible for full benefits and living to age 79 with a spouse, would get premiums and reimbursements worth more than $172,000. That estimate doesn't take into account probable increases in premiums for the Hawaii Medical Service Association, Hawaii Dental Service and Vision Service Plan and Medicare Plan B reimbursements during the next 17 years.

To make sure states and local governments are giving a full accounting of employee costs, the Government Accounting Standards Board, a Norwalk, Conn., nonprofit, changed the bookkeeping rules two years ago. Instead of just noting the current year's cost, government accountants also must quantify future retirement liability.

While the state and counties aren't required to pay the entire liability amount immediately, they most likely will have to boost what they pay annually for healthcare.

In Hawai'i, the state and counties paid $466.9 million last year toward employee health insurance. Of that, $246.8 million was for retirees. That covered insurance and claims for one year only.

Employers, unions and others say it's only a matter of time before the state and counties have to help fund future liabilities.

"If we don't fund it, the liability on our balance sheet is going to grow and grow and grow," Hawai'i County Controller Deanna Sako said. "At some point it's going to affect our bond rating."

That's a concern to the state and counties, which over the past year have issued more than $1 billion of bonds. A ratings cut could add millions to what they pay in interest. That could result in cuts to government programs funded by taxpayers.

Mayor Mufi Hannemann alluded to the liability problem when he proposed a $20 million reserve fund this year. Hawai'i County's administration has sought a $4 million increase in its healthcare budget to start funding the liability, Sako said.

One scenario calls for using the state's and counties' Employer-Union Benefits Trust Fund to collect funds over and above the annual pay-as-you-go costs. Money earned on investing this extra amount will count toward what's owed and work down the unfunded liability.

Russ Saito, state comptroller, declined to speculate on where the money will come from. For now he's focusing on getting an actuarial study done this year on the amount of the liability.

"I think everyone is just kind of saying we've got to wait and see what happens with the study," said Mary Patricia Waterhouse, director of the City and County of Honolulu's Department of Budget and Fiscal Services.

As health insurance costs rise, governments could decide to rearrange budgets so that more money goes to pay for the benefits or raise money through a bond issue. Another alternative would be to take a look at the benefits.

Rick Matoon, senior economist for the Federal Reserve Bank of Chicago, analyzed the problem for state and local governments last month. He wrote that governments may be forced to cut retiree benefits or require retirees to contribute more.

"Neither option will be politically popular, and both have the potential for reducing the appeal of public service to potential workers," he wrote. It "also could further squeeze state and local budgets, making reductions in discretionary programs such as economic development and higher education more likely."

The private sector faced the same issue when accounting rules were changed in 1992 to force a listing of future health insurance liabilities. Many jettisoned or cut benefits after the rule went into effect.

"That's when employers all of a sudden became aware of what a huge liability they had," said Betty Berni of the Honolulu office of Watson Wyatt Worldwide, which provides consulting on employee pay and benefit issues to companies.

HGEA executive Perreira said he expects the health insurance liability for state and county workers to be "a multibillion number" that will cause concern.

"The liability has always been there but now the liability will be publicized because it will be on the books," Perreira said. "It's going to be on the books and there's going to be a perception problem immediately."

Reach Greg Wiles at gwiles@honoluluadvertiser.com.