of providing retiree health benefits – though certainly consequential – appear to be somewhat smaller than unfunded pension liabilities. for example, one recent estimate suggests that state governments have a collective liability of almost $ 600 billion for retiree health benefits. 4 not all of the longer - term issues facing state and local fiscal authorities involve closing budget gaps. for example, in light of the recent experience, an important question is whether 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 ) ; and robert novy - marx and joshua d. rauh ( forthcoming ), “ public pension promises : how big are they and what are they worth? ” journal of finance. see jeffrey r. brown and david w. wilcox ( 2009 ), “ discounting state and local pension liabilities, ” american economic review, vol. 99 ( may ), pp. 538 – 42. it should be noted that future pension accruals generally seem to be accorded a lower level of protection. see pew center on the states ( 2010 ), the trillion dollar gap : underfunded state retirement systems and the road to reform ( washington : pcs, february ). bis central bankers ’ speeches anything can be done to reduce the sensitivity of state and local budgets to the business cycle. as the past couple of years have shown, the balanced - budget rules under which most states operate can force sharp cuts in services and increases in taxes during recessions, which is just the time when many people in the state are economically most vulnerable. moreover, the instability in funding streams and tax rates associated with the business cycle can impede planning by both the public and the private sectors. by and large, the evidence suggests that balanced - budget rules provide valuable fiscal discipline for states, and i do not advocate eliminating them. 5 however, even with these rules in place, the question remains whether the effects of the business cycle on state budgets can be mitigated in the future. one strategy used by many governments is to build up a rainy day fund 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 11 - 1 / 2 percent at the end of fiscal 2006. these comparatively high reserve - fund

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