the looming crisis in the states

NYTimes | For most of this year, the state of Illinois has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments. Faced with $4.5 billion in overdue payments, Illinois has proposed a precarious plan to sell its delinquent bills to Wall Street investors in exchange for cash, calculating that the interest it must pay the investors will be less than the late fees it owes.

It is no way to run the nation’s fifth largest state, and it is not even clear that investors will agree, but these kinds of shaky deals are likely to become increasingly common as the states try to cope with the greatest fiscal drought since the Great Depression. Starved for revenue and accustomed to decades of overspending, many states have been overwhelmed. They are facing shortfalls of $140 billion next year. Even before the downturn, states jeopardized their futures by accumulating trillions in debt that they swept into some far-off future.

But that future is not so distant, and the crushing debt has made recovery far more difficult to achieve. As The Times reported, Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s. The city of Prichard, Ala., has stopped sending out its pension checks, breaking state law and shocking its employees.

A state or city unable to make its bond payments would send harmful ripples through the financial system that could cause damage even to healthier governments. But if states act quickly to deal with their revenue losses and address their debt — and receive sufficient aid from Washington — there is still time to avoid a crisis.

The most immediate cause of the states’ problems is the decline in tax revenue caused by the downturn, just as the demand for services has increased.

Over the last two years, combined sales, personal and corporate taxes have fallen by more than 10 percent. Although revenue is likely to tick up slightly in 2011, federal stimulus money — which has been keeping many states afloat — is largely scheduled to expire. Renewing a portion of that aid would be one of the most effective ways to assist the economy.