By Hilary Russ

(Reuters) - Massachusetts Governor Deval Patrick said on Friday that he will file legislation to overhaul benefits for public retirees, including a proposal to double the number of years an employee would have to serve to be eligible.

The bill would require most current employees of the state and its cities, towns and school districts to work for 20 years instead of 10 years to become eligible for health benefits when they retire.

Retirees would also have to pay a higher percentage of their health insurance premiums, leaving the employer responsible for a smaller share.

The changes, which would not apply to current retirees or to employees who are within five years of retiring, would also raise the minimum age of eligibility to 60 from the current 55.

States' public pension systems are facing large unfunded liabilities that have led to reforms in most states. But massive gaps in public funds to pay for post-employment benefits have received less attention - until now.

On average, states have set aside only about 5 percent of what is estimated to be their retiree health care and other non-pension benefits such as life insurance. At the end of 2010 that left a $627 billion gap, according to a report by the Pew Center on the States.

In response, a growing number of states and cities have begun eliminating or reducing health coverage for retirees.

The proposed Massachusetts legislation could save the state and its local governments up to $20 billion over the next 30 years, Patrick said in a statement.

The commonwealth is scheduled to sell $230.5 million next week and an additional $1.2 billion over the next few months, according to a statement from Massachusetts Treasurer Steven Grossman.

"We think this nation-leading reform work will be reflected in lower interest costs for Massachusetts taxpayers," Grossman said.

The $230.5 million sale of general obligation refunding SIFMA index bonds was postponed from December.

(Reporting by Hilary Russ, editing by Tiziana Barghini)