The hardships of recession aren't confined to the private sector. Dallas Fed regional economist Jason Saving takes a look at how state budgets are faring in the long, deep slump--starting with Texas.

States are in the midst of perhaps the most challenging fiscal environment of the postwar era. Spending and revenue patterns broke away from trend in the years leading up to the recession, leaving states relatively poorly positioned to overcome the slowdown. And while they have made adjustments...