I was thinking yesterday and looks like i found intermediate solution, which will keep reasonable number of albums but allow to have states classification.
So the idea is to keep albums structure as described above, but in the album header make links to particular state (using image tags), so if you click on the state in the album description - you'll get only LHs of the state. Tried - looks like this working:
http://www.lightphotos.net/photos/index.php?cat=10