Government Too Big to Fail?

I'm reading about Bank of America laying off huge numbers and the Big 3 automakers possibly going into Chapter 11, because that's where the union (and upper management) death-grip on that industry can be broken. But the crisis in state and local governments brought on by the economic downturn? I'm hearing very little about laying off government employees and getting rid of upper management there. Is government the real "protected industry" that will bring us all down? What an irony that will be.