Retiree Obligations Cloud Fiscal Horizon

Even as they grapple with budget pressures from a sagging national economy, states are being forced to make tough decisions on how they will cope with an even more severe long-term fiscal concern: a projected price tag pushing $3 trillion to pay the pensions and health insurance of retired teachers and other government employees.

Those commitments are a remnant of a time when governments and teachers’ unions saw generous retirement packages as a fair trade for modest salaries. Now, as a generation of teachers enters retirement, the bills are coming due.

To meet those commitments, school districts are looking at diverting money that would otherwise have gone into operating funds. Teachers are being asked to contribute more of their salaries to keep pension funds and health-care systems afloat. And states are cutting retirement benefits while facing potentially more drastic measures down the road—from raising taxes to...