The budgetary problems of all levels of government, from school districts to states, have occurred pretty rapidly, for the most part as the result of the worldwide financial crisis. But unlike the federal government, the lower levels of government are precluded by federal law from incurring debt to fund operaring deficits. Most commonly, adopting deficit-producing budgets is prohibited by state constitutions. They can sell bonds to finance certain revenue-producing capital projects, like airports, toll roads, schools, etc., but selling bonds to finance operaring deficits is not permitted, except at the federal level.

Local and state governments are generally prohibited from running deficits. If they borrow, it is supposed to be for capital projects such as building roads or schools. They can do some Enron-style accounting to make it look like they are borrowing to build a new library and then skim money off to pay operating costs, but a city or state cannot simply say “We’re going to spend more than we’re taking in.”

So the impending bankruptcy of many of the governmental entities smaller than the federal government is simply evidence of their efforts to cut spending not being deep or fast enough to keep up with declining tax revenues. Or alternatively, that the elected officials of those governments have permitted expenditures to exceed revenues, and now have no means to meet their obligations. That's the reason for the massive and dramatic budgetary cuts so widely reported on in places like California and Michigan. Some states still have a serious problem, but their political leadrrs have failed to address them--Illinois is a good example.