Feb. 19 (Bloomberg) — The Los Angeles Unified School District, the nation's largest outside New York City, owes so much for retiree health care that paying off its debt would cost $17,500 for each student — and there are 640,000 of them.

Local governments typically haven't been punished by investors for underfunding retiree health care and insurance, unlike pensions. Investors believe that, in a pinch, the governments can walk away from the obligations, said Michael Ginestro, head of fixed-income research for Bel Air Investment Advisors LLC, which manages $2.8 billion in Los Angeles.

A group of California state court decisions have upended that assumption, treating "other post-employment benefits," or OPEB, as vested rights that can be changed only through contract negotiations. The decisions threaten to add to the fiscal strains of cities and counties whose pension obligations are already putting pressure on their creditworthiness.