State of the States

e fiscal condition of state governments continues to improve nearly five years
after the onset of the financial crisis. While challenges remain in the current
environment of slow economic growth, states have taken the necessary actions
to balance budgets and to ensure full and timely payment on debt obligations. In
fact, the vast majority of states were successful in balancing their fiscal year (
f
Y
)
2013 budgets on or ahead of the July 1, 2012, start.
t
h
is report reviews the progress states have made in balancing budgets in this
post-Great
r
ecession environment. Since our last report in
n
o
vember of 2011, states
have continued to benefit from modest revenue growth and more manageable
(i.e., more easily closed) budget gaps. Public sector job reductions continue, but
the rate of cuts has diminished.
t
h
e onset of federal austerity mentioned in our
last report is arguably the biggest threat to state financial health, although, as
then, we believe most states will make the necessary fiscal adjustments. While this
report focuses primarily on state governments, federal and state policy decisions
influence financial outcomes at the local level as well. While federal and state spending
cuts often result in similar retrenchment by local governments, legal and regulatory
frameworks within states, as well as intergovernmental transfer payments, have
rendered municipal bankruptcies and defaults very rare. Indeed, the lack of
bankruptcies and debt defaults among local governments more than four years after
the greatest economic crisis since the Great
d
e
pression is reassuring and, in fact,
consistent with our expectations.
t
h
e few financially stressed local governments and
US territories are unique situations and do not reflect the relative fiscal strengths
of US states.
t
h
e main points of this report are summarized below.

S
tate fiscal prospects have improved modestly, evidenced in slight revenue
growth, spending...