Greece Problems

The world is breathing a sigh of relief now that the financial crisis in Greece is "over." Yeah, right. Greece's financial misdeeds — the country has racked up a lot of debts it can't pay — will probably come back to haunt Europe, and soon.

But we in America shouldn't be too smug, because U.S. states have their own money problems, many of them worse than anything facing Greece — and the problems at home are starting to erupt!

Let's put things in perspective. Greece's gross domestic product (GDP) is approximately $357 billion. Meanwhile, the state of Illinois has a GDP of around $633 billion — and, on Monday, Fitch Ratings downgraded Illinois' credit rating and warned of possible further action, leaving the state's credit on negative watch.

Why? Because Illinois has a $13 billion budget deficit and is careening into a liquidity crisis.

Is Illinois not big enough for you? California is the largest U.S. state with roughly $1.8 trillion in GDP — the eighth largest in the world. That puts it roughly on par with Russia, Spain, or Brazil. How bad are things in California?

• California is wrestling with a $22 billion budget deficit.
• The deficit is expected to get worse, and hit $25 billion in 2012. And that's a CONSERVATIVE estimate. Other estimates put it over $40 billion.
• Including state pension obligations, California's debt burden is 37% of its economic output.
• The crisis is so bad, the credit default swaps — or insurance against default — on California general obligation debt now show California's bonds are at greater risk than the bonds of Kazakhstan, Croatia, Bulgaria and Thailand. That's right, Kazakhstan! Where Borat comes from!
• The financial situation is so severe that California is paroling prisoners early, slashing what once were deemed essential services, and doing the equivalent of rifling the couch cushions (shifting funds temporarily) to try and bridge the fiscal gap.

Across America, the big picture is just scary. According to the Center on Budget and Policy Priorities, 48 states face shortfalls in their budgets for fiscal year 2010 that total $196 billion or 29% of state budgets — the largest gaps on record. Experts say 10 states are bordering on insolvency — along with California and Illinois, other states in the hot seat including Arizona, Florida, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin. They are all in the soup, financially. And in 2011, many states face revenue gaps as big as or bigger than the ones they are wrestling with this year. Sure, states have faced budget crises before. But not like this, not in modern history. The last recession saw budget shortfalls that lasted for several years, but they were half the size (or less) of the gaps that states are facing now. Collectively, U.S. states will probably face a shortfall of $180 billion in 2011 and at least $120 billion in fiscal 2012 (the fiscal year starts in July). States are required to balance their budgets. They'll probably do this by slashing services and payrolls. As firefighters, police officers and teachers get pink slips, they cut back on their personal spending — which worsens the downward economic spiral.