the recession and financial crisis because many pension fund investments have declined in value, and because many states have found it difficult to maintain pension contributions while their budgets are under stress. indeed, some estimates suggest that, on average, states would need to more than double their typical annual pension contributions over the next decade to avoid collectively exhausting their pension funds during the next couple of decades. 10 this daunting problem has no easy solution ; in particular, proposals that include modifications of benefits schedules must take into account that accrued pension benefits of state and local workers in many jurisdictions are accorded strong legal protection, including, in some states, constitutional protection. 11 in addition to pensions, states will have to address the burgeoning cost of retiree health benefits. estimates of these liabilities are subject to significant uncertainty, largely because we have little basis on which to project health - care costs decades into the future. however, one recent estimate suggests that state governments have a collective liability of almost $ 600 billion for retiree health benefits. 12 these benefits have traditionally been funded on a see, for example, henry m. levin, clive belfield, peter muennig, cecilia rouse, barbara wolfe, and nathan tefft ( 2007 ), “ the public returns to public educational investments in african american males ”, discussion paper ( minneapolis : early childhood research collaborative, april ), available at www. earlychildhoodrc. org / papers / dp112 - abstract. cfm. see alicia h. munnell, richard w. kopcke, jean - pierre aubry, and laura quinby ( 2010 ), valuing liabilities in state and local plans ( chestnut hill, mass. : center for retirement research at boston college, june ). see joshua rauh ( 2010 ), “ are state public pensions sustainable? why the federal government should worry about state pension liabilities ”, working paper series ( evanston, ill. : northwestern university, may ), available at http : / / ssrn. com / abstract = 1596679. see jeffrey r. brown and david w. wilcox ( 2009 ), “ discounting state and local pension liabilities ”, american economic review, vol. 99 ( may ), 538 – 42. it should be noted that future pension accruals and health benefits generally seem to be accorded a lower level of protection. see pew center on the states ( 2010 ), the trillion dollar gap : underfu

times when services are most needed. moreover, many government programs – in areas such as education or health care, for example – are likely to be most effective when funding sources are stable and predictable, allowing for longer - term planning. tools exist to help mitigate the effects of the business cycle on state budgets. many states deal with revenue fluctuations by building up reserve – or “ rainy day ” – funds during good economic times. measured as a percent of general fund expenditures, the aggregate reserve fund balances for all state governments stood at a record of about 12 percent at the end of 2006 ; the states represented by the slc had accumulated above - average reserves of around 16 percent. these high reserve - fund balances were helpful in lessening the severity of spending cuts or tax increases in many states. nevertheless, given the depth of the recent the southern legislative conference comprises the states of alabama, arkansas, florida, georgia, kentucky, louisiana, mississippi, missouri, north carolina, oklahoma, south carolina, tennessee, texas, virginia, and west virginia. see southern legislative conference ( 2010 ), “ what are the revenue estimates for fiscal years 2010 and 2011 in the slc states? ” question of the month, february, www. slcatlanta. org / qom / 2010 / quesfeb10. html. recession, even these historically high reserve - fund balances proved insufficient to buffer fully the budgets of most states. thus, state governments may wish to revisit their criteria for accumulating fiscal reserves. building a rainy - day fund during good times may not be politically popular, but it can pay off during the bad times. in principle, some smoothing of state government expenditures over time could take place through the capital budget. maintaining or even increasing the pace of infrastructure construction when the economy is weak fosters economic development and provides local jobs, and it may even allow the state to get more bang for the buck because of increased competition among private contractors when demand is slack. however, voters and policymakers may understandably be reluctant to approve new bond issues and take on additional costs for debt payments in a period of fiscal and economic stress. beyond balanced - budget rules, state government finances also fluctuate because of the increasing sensitivity of their revenues to changes in economic conditions. for example, capital income, which tends to vary substantially more than wage and salary income, has over time become a relatively more important source of state personal income taxes. 6 also, sales taxes that understandably