So first off, I actually am confused why this is news. It seems pretty obvious to the non-lawyer that I am that a bankruptcy would open the door to all contracts with the city being voided in one way or another. I am surprised this was even taken up as debatable as to whether this could apply to the city's labor contracts. The punch line of my earlier posts is that the big question in a bankruptcy is how workers claims will be balanced against other claims, in particular bond debt.
Forbes already points out the role of bonds in the Vallejo bankruptcy in their recent story on the topic: Beware Defaulting Bonds. So at the end of the day, this would have been bizarre news if the ruling had been the contracts were inviolate in a bankruptcy... but as it is the state of things seems much as it was before. Still with the big questions unanswered.
For more on the situation in Vallejo, BusinessWeek had a recent report: Portrait of a Broke Town. What I have pointed out in the past is that as bad as Vallejo's situation is, from a purely fiscal perspective the state of Vallejo's city budget is nowhere near as bad as Pittsburgh's right now. Go figure.