Detroit’s filing for bankruptcy generated plenty of headlines last week. In the latest issue of Barron’s, Randall Forsyth ponders the implications for more than just the Motor City.

In and of itself, Detroit’s insolvency has limited implications for the municipal-bond market and state and local finances in general. The Motor City’s bankruptcy is the sad culmination of six decades of decline, with industry and population fleeing and the tax base eviscerated, a downward spiral exacerbated by years of corrupt and incompetent governance. The extent of the collapse of Detroit is unique, even compared with the New York fiscal crisis of the 1970s, which affected a metropolis of seven million, 10 times the current population of Detroit.

But in one sense, Detroit’s bankruptcy obscures a potentially greater crisis brewing in another major Midwest city, Chicago. On the same day that Moody’s raised its outlook for Uncle Sam’s triple-A rating to “stable” from “negative,” it slashed its rating on the Windy City by three full notches, to A3 from Aa3, an unusually severe action; ratings agencies tend to move in single, well-telegraphed steps.

While Chicago still has an investment-grade rating, Moody’s, citing the Second City’s huge, $36 billion pension-fund deficit, also issued a negative outlook, indicating that further downgrades could be ahead for its $7.7 billion in general-obligation bonds. Again, the public-pension crisis for Illinois, which affects retirement systems on the state and local level, is not news. The escalation of the crisis is the new development.

Detroit stands out in size and scale, compared with other municipalities that recently have filed for bankruptcy, such as Vallejo and San Bernadino in California, which fell victim to the real-estate crash, or Jefferson County, Ala., which was buried under massive sewer-system debt. What also distinguishes Detroit — and what hangs over Chicago—are the competing obligations to bond holders and pensioners.