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SAN FRANCISCO, Jan 17 (Reuters) - U.S. state budgets are on the mend and economic growth of two percent or higher this year will help raise revenue but the threat to state finances from federal spending cuts remains, according to a report by Standard & Poor's Ratings Services.
Most states face "positive growth prospects for personal income and, therefore, tax revenues," the report released on Thursday said.
However, economic growth is not strong enough to keep pace with rising demand for public services so "numerous states face lingering structural mismatches between revenues and spending, albeit to a much smaller degree than earlier in the post-recession cycle", the report added.
"In short, state budgets are still decidedly in repair mode," the report said.
Federal spending cuts are the "single largest specific sectorwide risk to credit quality for state and - less directly - local governments in 2013," the report said, adding that "A reworking of the sequestration cuts to include Medicaid would likely represent the most significant challenge to states."
If Medicaid funding is cut, the fiscal outlook for states could "deteriorate substantially," the report said.
It noted that as the "first or second largest spending item in most state budgets, it's difficult to overstate the fiscal implications to states if the federal government became less financially supportive or predictable when it comes to Medicaid."