The health of individual states is important because the United States' recovery from the Great Recession depends heavily on the degree to which states emerge from their economic doldrums. But the actions needed to repair finances in the 10 most vulnerable states -- think higher taxes and lower government expenditures -- could slow down the entire nation's economic recovery. The immediate problem, and the one dysfunctional states like California, Rhode Island, Arizona, Michigan, Oregon, Nevada, Florida, New Jersey, Wisconsin and Illinois, are dealing with, is the requirement that they balance the budget every year. States are forbidden from running deficits. That doesn't mean they can't borrow money to fill the holes. It just means that for every dollar that goes out, whether to debt payments, pension obligations, education, welfare or Medicaid, there must be a corresponding dollar coming in.
But if all states have to balance budgets, why are some in such terrible shape?
Simply put, the states in the most trouble have put off difficult decisions for decades. They have not been willing to finance expenditures with tax dollars. They did not put aside money in "rainy day funds" like many of their healthier neighbors. Instead, they kicked the can down the road by borrowing money, making accounting adjustments, and making promises to change things in "the future." Add one recession to the recipe and you end up with a handful of states that may be past the point of no return.
