In a landmark day that could set precedents for municipalities and state governments wrestling with crippling budget deficits, Detroit moved forward into bankruptcy and Illinois legislators approved a sweeping pension reform plan.


A ruling Tuesday by a federal judge cleared the way for Detroit to proceed with the largest municipal bankruptcy in U.S. history, CNNMoney reported.


The ruling opens the door for the city to cut billions of dollars in payments that are owed to city employees, retirees, investors and other creditors.


Unions and pension funds had argued that the city should not be eligible to use bankruptcy court protections. They said that regardless of Detroit's financial troubles, city and state officials did not negotiate with creditors in good faith in an effort to reach a deal on its liabilities.


In his ruling, Judge Steven Rhodes found that the city did not meet that threshold, yet he ruled that such negotiations were impractical because of the huge number of creditors, which total more than 100,000. So, ultimately, he concluded that the city filed its petition properly.


One major union, the American Federation of State, County and Municipal Employees, has already said it plans to appeal the decision.


In Illinois, the state legislature on Tuesday passed a deal to shore up the state's debt-laden pension system by trimming pension benefits and increasing state contributions, The New York Times reported.


Illinois, whose state employee pension system is approximately $100 billion in arrears, has been the focus of intense attention across the country as states and municipalities struggle to come to grips with their own public pension problems. The compromise plan reached in a state where a strong labor movement had successfully resisted previous pension reform efforts could provide a template for agreements elsewhere, the Times wrote.


"Today, we have won," Gov. Pat Quinn, who made overhauling the pension system a focus of his administration, said in a statement after the vote. "This landmark legislation is a bipartisan solution that squarely addresses the most difficult fiscal issue Illinois has ever confronted." He is expected to sign the legislation today.


Crain's Chicago Business reported  (free registration required)  that Mayor Rahm Emanuel was unable to link legislation for the city to the state's pension reform vote on Tuesday. 


"The work is far from finished," Emanuel said in a statement after the vote in Springfield. "The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff."