AP

THE American Federation of State, County and Municipal Employees, Council 25, occupies a hulking building in downtown Detroit. Deep in its basement is the office of Local 207, one of the city's most aggressive public-sector unions. John Riehl, its president, has taped a poster to the wall carrying an old war cry: “No Contract No Work”. The sign dates from a strike in 1986. Mr Riehl hopes to revive the old battle spirit. Detroit's mayor, Dave Bing, is urging unions to make concessions. Several have agreed. Most have not.

The trouble is, the city is broke. Mr Bing's office sits high above Detroit's barren streets. “We have not made the structural changes we should have made,” he explains. Few cities have such a sprawling workforce—50 bargaining units in all—or so little money to pay for it. But Detroit is not alone. Most cities and states will collect only meagre revenues for at least the next year. While politicians mull tax increases and service cuts, public-sector workers continue to gobble up money—in Philadelphia, they account for 61% of spending. The crisis, however, at least illuminates a simple fact. The status quo is unaffordable.

For years, public-sector workers have basked in an alternative reality. Nevertheless, as private-sector unions have faded, public-sector ones have thrived. In 2008 37% of government workers were unionised, nearly five times the share in the private sector (see chart), and the same share that was unionised 25 years earlier. Over that period, the share of unionised private-sector jobs collapsed from 17% to 8%. In 2009, for the first time, public workers comprised more than half of America's union members. Democrats in particular have little incentive to anger workers, who are often their electoral foot-soldiers, and neither party wants to prod them to strike, since they hold monopolies. Those who defy unions do so at their peril. In 2005 Arnold Schwarzenegger, the governor of California, tried to curb the unions' power. His effort was quickly terminated.

As a result, public-sector workers are spoiled rotten. Government employees earn 21% more than private ones and are 24% more likely to have access to health care. Only 21% of private workers enjoy a defined-benefit (DB) pension, which guarantees retirement income based on years of service and final salary. But 84% of state and local workers still receive DB plans.

All this might be grand if states and cities could afford it, but they cannot; unlike the federal government, they have the pesky obligation to balance their budgets. The recession has already drained pension funds. The National League of Cities (NLC) expects municipal revenue to continue to drop in 2010, 2011 and even beyond. States will have faced $256 billion of budget gaps between fiscal years 2009 and 2011, according to the National Association of State Budget Officers (NASBO).

Frustration is beginning to boil over. Last year Vallejo, in California's San Francisco Bay Area, sank into bankruptcy under the weight of its labour costs. In California itself, the unfunded liabilities of retirement programmes are expected to exceed $100 billion through 2015. One local blog tracks coddled public-sector pensioners: a former police chief in Newport Beach scrapes by on $221,554.56 a year.

Barry Bluestone, a dean at Northeastern University in Boston, is the son of a former vice-president of the United Auto Workers (UAW). But even he thinks public-sector unions must adapt. “As more and more people are stressed and see themselves losing their own jobs, they're going to see public unions simply as standing up for their own members,” he says.

Cutting costs, however, is difficult. States protect retirement benefits for existing workers—they will pay for past promises for years to come—and broader change is politically tricky. This year many politicians took the path of least resistance. Twenty-three states sacked workers, according to NASBO. Structural reform was less common. Only 11 states cut employee benefits. One of the year's most popular measures, for both states and cities, was requiring workers to take unpaid holiday. “It is the easiest way of not having to have a showdown with unions,” explains Michael Pagano of the University of Illinois at Chicago, a co-author of the NLC's report. “It clearly is not a long-term solution.”

But the scale of the slowdown has emboldened some. A quarter of the cities in the NLC's survey have revised their health benefits downwards. On December 2nd New York, historically a union stronghold, passed broad pension reform for new workers. Philadelphia's mayor, Michael Nutter, has already sacked workers, passed a temporary tax increase and stopped sweeping up leaves. Now he wants unions to accept concessions, such as a revised pension plan for newly hired workers and more flexible work rules. “This is a time of shared sacrifice,” he insists.

For those most in trouble, crisis may spark even more dramatic reform. “This is a very exciting time for permanent change,” argues Steve Goldsmith, a former mayor of Indianapolis and now a professor at Harvard's Kennedy School. In the 1990s he forced unions to bid against the private sector to deliver services, competition that saved the city $230m over five years. Now, he contends, more cities may try to change the way they operate. Philadelphia is studying how to deliver services more efficiently. In Detroit, Mr Bing is urging unions to take furloughs and reduce health costs for new hires, among other concessions. The real work, however, will come later. The staff of Mr Bing's Operations Restructuring project are pondering how to transform the way Detroit is run.

Northeastern's Mr Bluestone, a former lineman at Ford, argues that public-sector unions are at a point of decision. They must, he says, “improve productivity, improve the services they offer and find innovative ways to deliver them.” Otherwise, taxpayers will turn elsewhere. Teachers' unions, for example, can blame only themselves for the rise of charter schools. It took the UAW years to adapt to global realities. Compared with the public-sector unions, it looks nimble.