The business news is awash with panic today, what with financial stalwart Bear Stearns avoiding bankruptcy only by being gobbled up by J.P Morgan.

The five-alarm headlines may be a bit much: as Houston blogger Bonddad notes, "the markets are actually holding up pretty well." But there are other signs that fundamental problems in the economy are hurting the very ability of states to govern.

Today, the New York Times picks up on something we reported almost a month ago -- increasingly gloomy economic forecasts facing governors and state legislators. Thanks largely to plunging tax revenues, 25 states are anticipating shortfalls for fiscal year 2009 -- putting key programs and projects at risk:

Florida has seen its sales tax revenue decline for two straight fiscal years, the first time officials there recall that happening, the result of a collapsing housing market that has homeowners spending less. The state, which has no income tax, relies heavily on sales taxes for its state programs. [...]

Kentucky has its largest budget crisis in state history, sparked by the movement of manufacturing jobs overseas. [...]

To help close a $600 million budget gap in Virginia, the state made hundreds of thousands of dollars in cuts at universities, including dorm cleaning staff, library budgets and graduate assistantships. (The governor [Democrat Tim Kaine] wrote the state a check, giving back 5 percent of his salary, to help balance the books.)

The broader economic downturn may be out of the control of state lawmakers -- but it thrusts them into the difficult position of having to slash programs or raise taxes, both especially hard in an election year.