The bankruptcy challenges a long-held assumption in the $3.7 trillion municipal-bond market that large cities will take whatever steps necessary, including raising taxes, to cover their debts. The move is opposed by unions seeking to protect retiree benefits from cuts so other obligations can be paid.

Since the beginning of the recession, three cities in California -- Vallejo, Stockton and San Bernardino -- and Central Falls, Rhode Island, all sought court protection because they couldn’t cover their bills. Last year, a judge approved cutting pension payments to Central Falls retirees by as much as 55 percent as part of the city’s debt reorganization plan.

Municipal bankruptcies are rare. There were 54 from 1970 to 2009, only four of which were cities and counties, according to the Washington-based National League of Cities. Analysts said they don’t expect many to follow Detroit.

No Trend

“We view Detroit’s default and subsequent bankruptcy filing as idiosyncratic, and not as a symptom of a wider issue in the municipal market,” Jane Hudson Ridley, a credit analyst with Standard & Poor’s, said in a July 19 statement. “Although we have seen isolated pockets of distress across the country, we do not view bankruptcy filings or defaults as a trend.”

Detroit’s situation is being watched closely by investors, who’ve pushed borrowing costs higher for Michigan relative to similarly rated states, and by union leaders concerned that its bankruptcy may inspire other cash-strapped cities.

“It’s more than troubling,” said Harold Schaitberger, the president of the International Association of Fire Fighters union in Washington. “If they can see that a major city in this country can simply use the bankruptcy code as a way to walk away from all of its obligations to thousands of workers and tens of thousands of retirees, we’re very concerned about what signal that sends.”

No Panacea

Prices in the broader municipal debt market were little changed after Detroit’s bankruptcy, with benchmark 10-year yields rising 0.02 percent to 2.79 percent on July 19, according to Municipal Market Advisors Inc.’s indexes.

Bankruptcy isn’t a cure-all. Both Vallejo and Stockton had difficulty dealing with crime after reducing their police forces. Jefferson County, Alabama, scaled back hospital services, fired hundreds of employees, and curbed road clean up, leaving dead animals to rot on the street.