These 10 states may be closest to financial collapse

When California Treasurer Bill Lockyer sought a $7 billion federal loan guarantee from Treasury Secretary Timothy Geithner in May, it was a clear indication that states, and not just financial institutions, were struggling mightily to find firm fiscal footing in the face of the Great Recession.

As states continue to grapple with the current harsh economic conditions, the Pew Center on the States has compiled a list of the 10 that are closest to financial collapse, part of a report on the budgetary health of all 50 states. The report warns of potentially damaging consequences if states fail to take decisive measures to fix their money woes.

While California's economic struggles, such as issuing IOUs to state employees and business contractors, have been well documented, many more states are facing a combination of economic, money-management and political pressures that are driving them to the brink of collapse. The Pew report cites high home foreclosure rates, increasing joblessness, declining state revenues, poor money management, legal and political obstacles to balanced budgets and the size of budget gaps as the six factors that contribute to most of the problems.

The report points out that all states but two -- Montana and North Dakota -- faced budget shortfalls for fiscal year 2010, adding up to an estimated $162 billion in budget gaps. Tax collections in all states declined a record 11.7% from first quarter of 2008 to the first quarter of 2009, and unemployment continued to rise nationally, topping 10% this month.

The Terrible 10

By combining weighted scores for each state's rank in its six contributory factors, Pew created a list of the 10 that are in the highest degree of peril. They are: California, Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois and Wisconsin. Close behind those terrible 10 are Colorado, Georgia, Kentucky, New York and Hawaii.

The report also revealed four common problems that hurt the 10 worst states. Several of them are too dependent on a particular industry that has been devastated by the recession, such as gambling in Nevada and tourism in Florida. Many of the states, like California, New Jersey and Illinois, have a long history of borrowing to close budget gaps. Several have legal limitations that prevent them from making adjustments. For example, Oregon has a revenue cap that forces the state to deliver rebates to taxpayers in good times or bad. And most states just put off the tough decisions until it was too late.

Here's the worst-10 list in the order that Pew ranked each state, with highlights of what hurt each one:

California – Budget shortfall: 49.3%
"California topped all states for the magnitude of its budget shortfall in fiscal year 2010, both in dollars and in share -- in this case, nearly half -- of its general funds, which pay for most state operations."

Arizona – Budget shortfall: 41.1%
Like many states, "Arizona's lawmakers relied on one-time fixes to balance its budgets instead of making long-term changes," the report said. Lawmakers were still wrestling with a $1 billion gap in this year's budget in October.

Rhode Island – Budget shortfall: 19.2%
On top of its poor record of fiscal management, "Rhode Island constantly ranks near the top of states with the highest unemployment rates, and last year it had the highest home foreclosure rate in all of New England."

Michigan – Budget shortfall: 12.0%
"Two of the Big Three Detroit-based automakers went bankrupt in 2009, sending shockwaves through a state that is on track to lose a quarter of it jobs this decade."

Nevada – Budget shortfall: 37.8%
"Nevada's unique gaming-based economy is in jeopardy, as is its state budget that relies on gambling sales to provide 60% of its revenues."

Oregon ­– Budget shortfall: 14.5%
"State revenues plummeted 19% between the first quarter of 2008 and the first quarter of 2009, a reflection of Oregon's heavy reliance on income taxes," the report said. Voters have rejected adding a sales tax nine times, thwarting attempts at creating a new source of state revenue.

Florida – Budget shortfall: 22.8%
"For the first time since World War II, Florida's population is shrinking. This is a disturbing revelation for a state that has built its economy -- and structured its budget -- on the assumption that throngs of new residents will move to its sunny shores each year."

New Jersey – Budget shortfall: 29.9%
"New Jersey is playing catch-up after years of fiscal mismanagement and a daunting structural imbalance between what it collects and what it spends."

Illinois – Budget shortfall: 47.3%
"Since the last recession earlier this decade, the state piled up huge backlogs of Medicaid bills and borrowed money to pay its pension obligations," the report said. The 2010 budget shortfall topped $13.2 billion, among the worst in the nation.

Wisconsin – Budget shortfall: 23.2%
"Wisconsin's history of budget shortfalls and pattern of borrowing frequently to cover operating expenses, among other measures, made it poorly positioned to weather the most recent severe economic downturn."

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