If you select the Group Type to be State/Province, the interface will change to the following:
You must then select the Country for which you would like to set up a State/Province group. You may not have a State/Province group containing states/provinces from different countries (e.g. Alberta and California).
After selecting the Country, a list of all State/Provinces (for the selected country) will be displayed in the Items list on the left. Here is what this will look like when Canada is selected: