We are wrapping up our fiscal year 2013 State Study and here is what we have found. Operating margins were generally solidly positive (except for New Jersey), and the states continued to rebuild cash and net asset positions depleted by the 2008-09 recession. However, there was no meaningful reduction in outstanding bonded indebtedness or unfunded liabilities for pensions and “other post employee benefits” (OPEBs aka retired worker healthcare costs). In short, income statements are improving but balance sheets remain under pressure. The balance sheet pressure is driven by inadequate funding of actuarially-determined annual employer contributions (referred to as “annual required contributions,” or ARCs) for pension and OPEBs. The problem is particularly acute with respect to OPEBs, where we routinely see ARC funding at less than 40% and many states choosing to contribute 0%. Moreover, continued balance sheet pressure is surprising because pension fund returns in the last few years have been quite strong due to positive equity market performance. The real issue is continued inaction by state governments to address their balance sheet pressures by either curbing future obligations or making adequate contributions. This inaction creates substantial credit risk and argues for caution in the selection of municipal bonds structures and maturities. Our municipal bullets often mention this balance sheet risk because, in our view, it is critical to measuring credit risk. Monitoring credit risk in today‘s municipal market is vital to finding relative value as municipal debt supply is falling and limiting the availability of bonds to buy, which is driving valuations higher. In all, our 2013 State Study highlights that balance sheet mismanagement is a systematic risk to the municipal market and one which our clients need to be aware of and appropriately compensated for when making security selection decisions.