The problem is that as unions become extinct in the private sector, public sector unions will fight back tooth and nail to make sure that if bankruptcy does occur, that they are privileged over all other creditors. As happened with the GM bankruptcy.
Every vendor, every pensioner, every citizen will go down hard to preserve public sector unions.
“Every vendor, every pensioner, every citizen will go down hard to preserve public sector unions.”
And Obama will make sure the unions get preferential treatment, too. He couldn’t care less who else is hurt.
I think that's less likely to happen in a state bankruptcy. In GM'S case, the Federal government had a lot of leverage because it was providing debtor-in-possession (DIP) financing. In the case of Chrysler, most of the creditors were TARP recipients, and essentially were thus forced to go along with whatever the Feds wanted.
I don't see what would give the Feds a comparable amount of leverage in the case of a state bankruptcy. There's no need for DIP financing, and banks typically don't make up a large portion of a state's creditors. On the contrary, a state's creditors largely consist of pension funds, university endowments, and bond funds held by retirees, all of which are politically powerful constituencies.