The dirty secret of Empire State budgeting is that New York City depends disproportionately on Wall Street for its budget and New York State depends on New York City.In the last four months, the financial landscape has changed dramatically. Investment banks that have been the engine of the city's tax revenue for decades have disappeared entirely or morphed into restricted new entities. According to E.J. McMahon, my colleague at the Manhattan Institute, between 1980 and 2007 the securities industry's share of wages in the state rocketed from 3 percent to 18 percent, with the average Wall Street salary and bonus rising to $379,000. Wall Street revenues made up 20 percent of the state's budget. So the 40,000 local jobs lost in the financial sector are only the beginning. We're not facing a cyclical downturn; we're facing a fundamental alteration of the facts of financial life in New York. And the 20 percent unemployment in some upstate counties will not help ease the squeeze.But New York is playing Ford to California's GM at this stage of the crisis. While the Golden State economy is comparatively diversified, its financial meltdown is further along, with entire cities and towns throwing in the towel and declaring bankruptcy.The city of Vallejo—population 120,000—declared bankruptcy earlier this year because it was locked into spending 74 percent of its $80 million general fund budget on public-safety salaries. Police captains were entitled to receive $306,000 annually in pay and benefits, while 21 firefighters earned more than $200,000 a year, including overtime. After five years on the job, all were entitled to lifetime health benefits. Now two smaller towns north of San Francisco, Isleton and Rio Vista, also appear on the brink of bankruptcy.In a preview of political fights to come, both New York State and California budgets are being crippled by outsized public sector union pension obligations that are now coming due in a perfect storm—a combination of an aging population, a declining tax base, and a fiscal crisis.The Democrats who narrowly control both state legislatures have a notoriously cozy relationship with unions and they will be unlikely in the extreme to bite the hands that feed. But the unsupportable absurdities of the current arrangement are becoming evident.