Under new accounting rules, state and local governments are being forced to tally the estimated cost of health-care benefits they've promised current and future retirees, a sobering exercise for elected officials, government employees and the taxpayers who support them.

Currently, governments budget each year for what they think they'll pay when retirees visit doctors, purchase prescriptions, are hospitalized or take advantage of other nonpension benefits they are entitled to receive. Unlike pension funds, which hold money to cover future pension benefits, governments are not mandated to set aside money for future retiree medical benefit costs.

They still won't be required to under a new accounting rule state and municipal governments are implementing over the next three years. However, the new rule forces them to put a price tag on the cost of those promises. And in many cases, the price tag will be staggering.

Credit Suisse estimates state and local governments are facing more than $1.5 trillion in unfunded health care and other nonpension benefits they are obligated to pay. By comparison, companies in the Standard & Poor's 500 had a $321 billion deficit for nonpension related retirement benefits at the end of 2005 vs. a $140 billion pension deficit.

Although S&P and its competitors have considered those costs in determining credit ratings, putting a sharper number on government financial statements could jeopardize credit ratings. That could make it more expensive for governments to borrow money.

"We're taking this very seriously," said Mary Soderberg, Gov. Ed Rendell's executive deputy budget secretary.

"It is forcing governments to step back and look at the full liability of health-care packages they provide. ... It's a good thing that we know what this will cost 20 or 30 years down the road."

In Texas, politicians were so scared by the prospect of reckoning retiree benefit costs that Lone Star legislators considered making compliance with the rule voluntary. They subsequently relented. If they hadn't, bond investors still would have messed with Texas.

"Any analyst worth his or her salt is going to ask for that number, and it's going to get factored in," said Robert MacIntosh, co-director of municipal investments for Eaton Vance in Boston. "I really don't think the market has priced it in yet. Municipalities are just getting a handle on it now."

Public companies have had to put the cost of retiree health-care liabilities on their books since the early 1990s. In turn, it made them rethink their benefit packages -- and governments eager to reduce the size of their deficit are doing the same. For elected officials, it's easier to ask retirees to pay more for health insurance, accept reduced benefits or both than it is to increase taxes or reduce spending on roads, schools and other services.

Pennsylvania expects to pay $625 million to provide health-care benefits to about 106,000 retirees and their dependents in the fiscal year beginning July 1. It initially estimated its unfunded retiree health care promises at $13.8 billion, saying it would have to come up with another $500 million annually over an extended period of time in order to fund the cost of future benefits.

To reduce the deficit, retired state workers are being asked to contribute more toward the cost of their benefits under union contracts that take effect July 1.

Port Authority, which has a deficit of about $700 million, is shifting more of the benefit costs to nonunion workers and will seek similar concessions in union negotiations next year. The transit agency expects to pay about $26 million next year to cover the cost of health-care benefits for its 3,700 retirees and their spouses. Nonunion workers who retire after July 1 won't have health-care benefits. Chief Financial Officer Claudia Allen says the measures will help reduce the $700 million deficit.

But with PAT facing a projected $50 million budget deficit in the fiscal year beginning July 1, coming up with additional funds to set aside for future costs of retiree benefits "is not an option at this time," Mr. Allen said.

The new rule, known as GASB 45, was issued in 2004 by the Government Accounting Standards Board. The Norwalk, Conn., group establishes the rules for the way governments keep their books. Because of the difficulties involved in determining the cost of promised benefits, GASB delayed implementation. Governments with annual revenue of $100 million or more are required to adjust their financial statements for fiscal years beginning after Dec. 15, 2006. Smaller governments will follow suit over the next two years.

Calculating the costs requires a host of assumptions, including how many retirees and spouses will be covered, how long they will live, what kind of medical problems they'll have, and how fast health-care costs will increase, says Nancy Luttrell of Cowden Associates, a Downtown actuarial and benefit consulting firm. Another assumption is based on whether governments set aside money to cover future costs or continue operating on a pay-as-you-go basis, paying benefit bills as they come due. Governments that set aside money will report smaller deficits -- but many of them don't have the flexibility to take advantage of the incentive.

Governments have some latitude in making the assumptions, which raises concerns that some will try to reduce the price tag by erring on the side of optimism. There also are doubts about whether even the best-intentioned governments can accurately project future costs.

"Accurate is a relative term in this case," said Amy R. Laskey, managing director of Fitch Ratings. "Like every other projection, it's not going to be perfect."

Some are upset that the new rule doesn't force governments to fund retiree health-care benefits the same way they fund pension benefits.

"The rub is: It's not a mandate," said Richard Dreyfuss, a senior fellow with the Commonwealth Foundation, a Harrisburg public policy group that promotes limited government. "By not funding it, the liability doesn't go away. It just builds."

Credit Suisse says only 13 states have partially pre-funded nonpension retirement benefits costs, with Ohio being the most aggressive. The Wall Street firm says Ohio has set aside $11 billion to cover an estimated obligation of $30 billion.

"Our concern is not so much the size of the number," said Ms. Laskey. "What we're really looking at ... is what they're going to do to address the liability. We're seeing a lot of discussion at this point about revamping benefit programs."