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Perhaps the biggest problem I found with having State Militia's was that it auto-promoted far too many junior officers to Major Generals and I found myself with way too many useless senior officers as a consequence.
In my Confederate Campaign I was much more conservative and whilst I still recruited units at the State level I didn't form them all into State Militia's instead placing a lot of the smaller forces as garrisons in forts until they were ready to be called to the front.
I just started a Union '61 Campaign but my setting is a bit different:
- I use 4 Theaters: I inserted a "Mississippi Theater" focused on operations along the Mississippi river. Its recruitment base are Illinois and Indiana.
- I use only 1 Department for each Theater
- I keep 2+ Field Armies for Theater (except Mississippi, currently fields only one)
- New infantry and cavalry units are always volunteer and recruited at minimum strength (1500/1250). This in order to tap on the draft recruit pool and maximize manpower usage
- I very rarely rotate units back to the Department for replenishment, more likely I would transfer a decimated unit to garrison a nearby fort to give them some time to replenish or I just transfer them out of Divisional command up to Corps command as a "Reserve" role, so they see less action.