Ten States That Cannot Pay Their Bills

Balancing the budget is not just a federal problem, but a state one as well. The Great Recession resulted in some of the worst state revenues and budget shortages of all time. According to a report on state budgets by the Center for Budget Policy Priorities, dozens of states faced shortfalls of hundreds of millions — or even billions — of dollars.

24/7 Wall St. examined the 10 states that had budget shortfalls of 27% or more of their general funds for fiscal year 2011 — the states that were short the most money before they balanced their budgets. For the most part, the states with the worst budget gaps also had among the most anemic economies. Because of their budget shortfalls, all of them have been forced to make dramatic cuts to government services.

Read: Ten States That Cannot Pay Their Bills

Every state but Vermont is required by its own law to balance the budget. In order to do so, state governments have to take extreme measures, instituting deep cuts that often hurt a diversity of residents. In the 2011 fiscal year, 29 states made cuts to services benefiting the disabled and elderly, 34 reduced funds for K-12 and early education, and all but six states reduced positions, benefits or wages of government employees.

The housing crisis was one of the primary causes for many of the largest budget deficits. The housing markets in states such as Nevada, Illinois and Arizona — all of which are on the list — have been hit particularly hard. Home values in Nevada declined the largest amount in the country between 2006 and 2010. Home values in Arizona decreased the fifth-largest amount over that same period. Sick housing markets weaken the economy and lower tax bases, which hurts state revenues and in turn helps create a budget gap.

Overall, weak state economies contributed to lower revenues and rising budget shortfalls. Not surprisingly, states with slower-growing economies tended to have a larger budget gaps. And although the GDP of every state in the nation grew between 2006 and 2010, seven of the 10 states on this list fell within the 15 states with the smallest increases.

While economic slowdowns and housing problems hit most of the states with the worst budget gaps, there were some exceptions. In four of the 10 states, home values actually rose between 2006 and 2010, the worst period of the recession. Similarly, other states with budget shortfalls weathered the recession relatively well and managed to maintain fairly healthy economies. In Washington state, for example, the median income rose 5.8%, the 16th-most in the country, while GDP increased 13.4%, the 12th most.

These are the 10 states that cannot pay the bills.

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