In Wisconsin, Scott Walker, the new governor, declared that the state was “broke.” He does not mean that Madison intends to default on its obligations to debt holders; he means that public employees will have to increase contributions toward their benefits in an amount equal to 7 percent of their pay. For some employees, the cuts will mean real hardship. Public institutions like schools are also likely to suffer. Though elected officials prefer not to mention it, taxpayers will also have to ante up. Illinois sharply raised its income tax; Arizona voted for a sales-tax increase. Both of those states had markedly low tax rates to begin with, but Illinois’s case should be troubling to bondholders. Even after raising taxes, the state is planning to borrow about $12 billion to cover pensions and past-due bills — pushing both benefit costs and current expenses into the future.

The deficit problems have, at times, seemed to blend with the issue of pensions into a single, giant mess. As E. J. McMahon of the Manhattan Institute observes, “This is a conflating of different things.” States and cities have to put money aside to pay for future pensions, and the portion of that obligation that is “unfunded” represents a huge liability — from $1 trillion to $3.5 trillion, depending on your assumptions about future pension-fund investment returns. This underfunding won’t be felt in a big bang but as a continuous burden for years to come.

Nonetheless, because governments are required to make catch-up payments to those funds, the pension problem is worsening the current budget squeeze. In some cities, the pressure is suffocating. In Miami, according to Fitch, the pension-fund obligation eats up 25 percent of the city budget. In Philadelphia, which has neglected to make payments, the pension fund could be exhausted as early as 2015, says Joshua Rauh of the Kellogg School at Northwestern. Rob Dubow, the city’s finance director, insists that “we’ll make contributions to make sure that doesn’t happen.” The city has budgeted a huge $460 million contribution next year. “The real story” of the pension debacle, Dubow says, “is that it will leave less money for police and fire and sanitation.”

For a long while, government budget-cutting obeyed a distinctive political calculus: pensions were considered untouchable, so jobs were eliminated instead. Now, governments are going after pensions. Many states have taken the easy step of reducing benefits for new employees. Benefits for existing workers were considered inviolable. But some, like New Mexico and Mississippi, are dunning employees for higher contributions, and Wisconsin may follow. Minnesota and Colorado have watered down pension cost-of-living increases; both have been sued.

Whether such efforts will significantly ease the states’ burdens may depend on the courts. In Illinois, where the pension underfunding is among the most egregious, the state constitution says that “benefits shall not be diminished.” This language has long been interpreted to mean that when a public employee is promised a pension that increases with each year of service, the rate of accrual can never be changed. Sidley Austin, a law firm in Chicago hired by a pro-business civic group, has circulated a memo arguing that the clause refers only to benefits already earned — not to the rate of accrual in the future. That interpretation, if acted on by the Legislature, would shatter previous notions of pension protections. Sidley also makes the even-more-explosive argument that if Illinois’s pension funds dried up, the state could not be forced to contribute more. Let pensioners go hungry.

That is unlikely. Even in Illinois, pensions will be paid. Failure to do so would embroil the government in court for years. That may be the hope of ideologues, who envision that the courts — or possibly even a bankruptcy filing — could be used to alter employee contracts. In the 1930s, progressives persuaded Congress to let cities declare bankruptcy to escape the clutches of creditors. Now, conservatives want Congress to authorize states to file for bankruptcy. “Some people on the right see it as a chance to whack the public unions,” says David Skeel, a law professor at the University of Pennsylvania who has written in favor of state bankruptcy. It’s not hard to fathom why Gingrich, who as speaker of the House in the 1990s briefly shut down the U.S. government, would favor default by the states.

But the fantasy of using bankruptcy to suspend government runs up against a hard truth: even in bankruptcy, cities and states don’t disappear — nor do their obligations. Orange County, Calif., which entered bankruptcy in the mid-1990s after its treasurer ran up massive losses in derivatives, ultimately paid every cent it owed. “Among the reasons so few [cities] choose to go this option is, it’s not clear what they gain,” Kurtter of Moody’s says.