States promised retiree health care and never funded it. That's finally starting to change.

Every state that employs a police officer, a clerk, or a teacher makes two retirement promises: a pension, and — in most states — a subsidy toward health insurance after they retire, before Medicare or alongside it.▸ The pension side gets funded by law in most places. The health care side, for decades, mostly didn't. It was simply paid out of each year's budget as retirees submitted premiums, with nothing set aside for the workers still on the job. That bill is now measured in the hundreds of billions of dollars, and — for the first time since anyone started tracking it consistently — it is shrinking.

These retiree health subsidies are called "other post-employment benefits," or OPEB — everything besides a pension that a public employer promises a worker for after they retire, almost all of it health insurance.▸ Unlike pensions, which nearly every state funds through a dedicated trust with statutory contribution rules, OPEB was for decades financed pay-as-you-go: this year's premiums for today's retirees, paid out of this year's budget, with the cost of tomorrow's retirees left for tomorrow's taxpayers. A 2018 accounting rule change (GASB 74/75) forced states to report the total price tag on their balance sheets for the first time, and it wasn't small.

States had set aside $95 billion in dedicated OPEB plan assets by the end of fiscal 2022, according to Pew's March 2026 analysis.▸ Against that, they had promised $552 billion more than they'd funded — a 14.6% funded ratio, meaning states have set aside roughly 15 cents for every dollar of retiree health care they've already promised current and former workers. For comparison, the typical state pension system was about 80% funded over the same stretch — pensions get the statutory contribution schedule; OPEB, in most states, still doesn't.

The $552 billion gap is still one of the largest unfunded obligations carried by any layer of American government.▸ But it is smaller than it's been in years. Pew has published comparable 50-state figures four times since the accounting rule took effect, and each cycle tells the same story in a different direction: the gap grew through 2018, held roughly flat through 2019, then dropped by nearly a quarter by 2022.

The improvement is real money, not just a rounding update: contributions into state OPEB plans exceeded benefit payments by $11.8 billion between 2019 and 2022, and investment returns added another $12.7 billion on top — pushing plan assets from $69 billion to $95 billion even as several states simultaneously trimmed future liabilities through benefit changes and updated cost projections, per Pew's brief.▸ Five states — Alaska, Arizona, Ohio, Oregon, and Utah — now report their OPEB plans as fully funded, up from three (Alaska, Arizona, and Oregon) in Pew's 2019 data. Even so, 34 states still contributed less in 2022 than their own actuaries say is needed to keep the gap from growing — down from a high point earlier in the decade, but still a majority of states pushing part of this year's true cost into some future year's budget.

None of this is an abstraction for the roughly 19.9 million people employed by state and local governments as of March 2024, according to the Census Bureau's Annual Survey of Public Employment & Payroll — the workforce whose future retiree health coverage depends on whichever state's funding discipline they happen to work under.▸ A teacher retiring in a fully funded state and one retiring in a state still paying benefits entirely out of next year's budget are covered by the identical promise, backed by very different math.

Fiscal 2022 is the most recent year for which Pew has published comprehensive 50-state OPEB data; some states report on staggered fiscal years and lags of one to two years between a valuation date and its public release are typical for actuarial OPEB reporting. The $647 billion total obligation figure in the first chart is the sum of Pew's separately reported assets ($95B) and funding gap ($552B); Pew's own reported decline in total liabilities from FY2019 implies roughly $643 billion — a small difference attributable to independent rounding across the report's figures, not a data conflict.