Budget Nightmare: 10 Most Broke States

July 7, 2009— -- The economic problems of American families are now pounding many state governments which are in turn slashing services to balance their budgets in one of the most difficult years in decades.

High on the chopping block are benefits to the poor, money for education, highway repairs, hours that state offices are open and even closures of state parks and recreation areas.

Things are so bad that 48 states addressed or are facing shortfalls in the fiscal year that just started. The total deficit: $166 billion, according to the Center on Budget and Policy Priorities. Many states are also already predicting shortfalls next year.

Only Montana and North Dakota have so far been unscathed in their state budgets.

The problem: as workers get laid off or see their pay cut, they end up owing the state less in income tax. Further compounding the issue is a shortfall in sales tax caused by consumers cutting back in the recession. Finally, companies are making less money and also paying less in taxes.

"It's a revenue problem, not a spending problem," said Elizabeth McNichol, a senior fellow at the center.

Unlike the federal government, nearly every state is legally required to balance its budget. For many, the spending cuts would have been worse without the $787 billion federal economic stimulus package.

No one is immune from the wide-ranging cuts.

"States are really looking at everything," said Todd Haggerty, a research analyst with the National Conference of State Legislatures. "Anything and everything is on the table."

To come up with a list of the worst state budget situations, ABC News asked the Center on Budget and Policy Priorities to look at the budget gaps that states closed -- or still need to close -- as a percentage of their overall budgets.

Coming in at the top of the busted list is California, which is going through a miserable budget crisis. But there are also some surprises on the list, including Alaska and Vermont.

California: $53.7 billion shortfall or 58 percent of its budget

Perhaps no state has a more daunting problem to overcome than California. Its massive deficit is larger than the entire budgets of several states. The state has almost a $27 billion gap to close before balancing its budget. The $53.7 billion figure adds in the massive gap that the state has already closed. There's very little fat to trim without residents feeling even more pain.

Adding to the attention today will be Michael Jackson's memorial service, reportedly estimated to cost up to $4 million for police overtime. While the city of Los Angeles will be footing that bill -- for now -- the cost draws even more attention to the state's troubles.

The Golden State's problems are emblematic of the nation's. But whatever happens in California could actually have implications for all of us: the state accounts for 12 percent of the nation's gross domestic product and the largest share of retail sales of any state.

The cash flow shortage is so bad that last week the state, which if counted as a country would have the eighth largest economy in the world, had to start issuing IOUs to make its bills. The IOUs, issued for the first time since 1992, are being given to vendors and residents who were owned tax refunds. (The IOUs pay an interest rate of 3.75 percent, better than most people are seeing in their savings accounts these days.) The state hopes to redeem the script in October.

Residents seeking to get a new driver's license or even call with questions about their IOUs might find their pleas falling on deaf ears. Governor Arnold Schwarzenegger is shutting down most of state government for three "Furlough Fridays."

Voters in May rejected five ballot measures that would have helped stop the budget crisis. Now, to raise cash, Schwarzenegger has called for selling off certain state properties.

He also proposed eliminating $70 million of funding for state parks, which would likely result in the closure of 220 parks. The legislature is trying to avoid those closures through a $15 increase in annual motor vehicle registration fees. California drivers would then get free admission to the parks.

To help close the gap, the state has also increased co-payments and reduced dental benefits in its children's health program. Other big cuts include state aid to local school districts, a 10,000-student enrollment cut at the California State University system and the elimination of dental and vision services for many Medicaid recipients.