Jefferson County has been fighting filing what would be the largest municipal bankruptcy in history for roughly three years, thanks to the soured sewer bond deal. Its problems were aggravated when the state Supreme Court ruled in March that the county couldn't collect an employment tax that brought in about one-third of its general fund revenue.
Following that ruling, Jefferson County laid off hundreds of staff last week and will close four of its five courthouses to the public, starting June 27. County police said they will no longer respond to traffic accidents and will take longer to respond to calls because of a reduced work week for its officers.
Such actions and reactions illustrate the risk of investing in Alabama bonds, Mr. Fabian said.
"In contrast to expected behavior by other states, we believe it is far from likely that Alabama would intervene ... to aid any local bond issuers in distress," he wrote in a research note.
Because borrowing costs for other nearby municipalities and the state itself tend to soar when a community gets in fiscal stress, states often intervene and sometimes offer financial assistance.
More than half of the states have some sort of active supervision or financial review of local governments, said James Spiotto, a partner in law firm Chapman & Cutler LLP and an expert on laws affecting distressed municipalities.
Alabama, however, is not among them, and its officials have showed little desire to provide assistance to Jefferson County.