BUSINESS
12/20/2010 09:57 am ET Updated May 25, 2011

State Budget Crisis 'Largest Threat To The U.S. Economy' (VIDEO)

The future looks bleak for state and local government budgets.

Even as states struggle to cut services, many could soon be in the position of New Jersey, California and Illinois, facing billion-dollar deficits that, unlike the Federal deficit, must be filled. And there's no easy way to repair the budget: When local governments' problems worsen, it becomes more expensive to borrow money. New Jersey governor Chris Christie, who has ruthlessly slashed funding for state programs, might soon see other states following his lead, 60 Minutes reports.

The debt markets tend to punish the weak. When municipal bonds seem risky, investors demand higher yields, forcing already strapped governments to pay more for loans. The higher cost of borrowing spurs yet more borrowing, the Wall Street Journal notes, creating a vicious cycle for local government budgets. If the local governments default in large enough numbers, the bond markets could spread the pain to healthy governments as well, initiating a large-scale crisis, the WSJ notes.

"The first words out of my mouth are usually an apology," Illinois comptroller Dan Hynes told 60 Minutes.

The state is six months behind paying about $5 billion in bills, Hynes said. States across the nation face a similar squeeze. California is looking at a $19 billion deficit. New Jersey will face a $10 billion deficit next year, 60 Minutes reports.

Christie has carved more than a fourth from New Jersey's budget. In addition to slashing education funds, he infamously killed a tunnel project, which many said would have been a boon for state's economy.

"The bottom line is I don't have the money," Christie told 60 Minutes. "I can't pay people for those jobs if I don't have the money to pay them."

In September, prominent analyst Meredith Whitney, who made her name predicting Citigroup's troubles, compared municipal governments to banks pre-crisis.

"The similarities between the states and the banks are extreme, to the extent that states have been spending dramatically, growing leverage dramatically," Whitney said in September. "You borrow from future dollars to benefit the present, basically generational robbery."

Bond markets can exacerbate the problem, as investors help push state funding costs up. "It's a downward spiral," George Rusnak, national director of fixed income for Wells Fargo, told the WSJ.

In her 60 Minutes interview, Whitney issued an even more stark summation of the crisis. "It has tentacles as wide as anything I've seen," Whitney said. "I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy."

WATCH New Jersery governor Christie on 60 Minutes: