If you didn't catch the Dec. 19 60 Minutes story on state finances, watch it here.
They interview Chris Christie and Meredith Whitney who describe the problem quite vividly.
The conclusion is the crisis will come to a head in 2011. I'm not so sure. I've been watching California kick the can down the road for four years now with federal bailouts, accounting gimmicks, and borrowing. I'm not so sure the games can't continue a little longer.
I wouldn't be surprised to see the new Republican Congress cave and give away billions to the states. Even with the Tea Party victories last fall, there are still a large number of establishment Republicans who will want to bail out their state and local buddies.
And if Congress doesn't bail out the states again and munis start defaulting? Expect the Dirty Fed to start bailing them out by buying muni debt.
The tendency to panic and borrow/print at the moment of default is universal: Bush/Paulson, Obama/Geithner, Congress, the Dirty Fed, the EU, the ECB, Japan... Don't be so sure it won't happen again for the states this year.