A bill that would create a statutory lien on government bonds in order to ensure bondholder priority in bankruptcy proceedings advanced from general file April 23.
Columbus Sen. Paul Schumacher, sponsor of LB67, said the bankruptcy of Detroit and other cities in recent years has cast doubt on whether those who purchase bonds would be first in line in the unlikely event of a Nebraska municipal bankruptcy. While it is reasonable to assume that bondholders would receive priority for payment in a bankruptcy proceeding, he said, current law does not ensure it.
“This is an issue that is unresolved and unless we resolve it, it is going to haunt future Legislatures,” he said.
LB67 would create a statutory lien and grant a security interest on ad valorem taxes and bond-pledged revenue sources of the issuing governmental unit with respect to general obligation bonds. The lien would be valid, binding and prior against all parties having claims against the governmental unit in a bankruptcy filing.
Gothenburg Sen. Matt Williams supported the bill, saying the current uncertainty in bankruptcy priority could limit financing options for smaller municipalities or increase the cost of issuing bonds.
“All across our state, communities depend upon being able to issue municipal bonds to finance all kinds of projects,” Williams said.
Sen. Sue Crawford of Bellevue opposed the bill. In spite of serious economic challenges in recent years, she said, no municipality in Nebraska has come close to filing for bankruptcy.
In addition, Crawford said, allowing a bankruptcy judge to decide who is first in line could discourage a city from filing bankruptcy and encourage all parties involved to resolve their differences.
“The fact that we have uncertainty in our current structure is valuable,” Crawford said.
Omaha Sen. Jeremy Nordquist offered an amendment, adopted 30-0, that would remove retirement accounts, pension funds and any other vested post-employment benefit whenever payable from the list of security interests created by governmental units that are covered by the bill.
Those who purchase bonds know that there is risk involved, Nordquist said, and bondholders should not be placed in line ahead of pensioners to whom a city owes a promise. Exempting pension plan assets and future unfunded liabilities would be a more equitable way to provide the certainty sought by the bill, he said.
“Public servants … should be entitled to a level of protection,” Nordquist said.
Lincoln Sen. Adam Morfeld opposed LB67 but supported the Nordquist amendment. He said the change would not give pensioners priority over bondholders in the event of a municipal bankruptcy, but simply would exempt pensions from the law.
Morfeld said pensioners’ assets cannot be separated from the city that they worked for, unlike holders of municipal bonds who choose their investments and the risks. Pensioners often depend solely on their defined benefit payment, he said, while investors likely have other assets.
“Most bondholders and people that invest in bonds have very diversified interests,” he said.
Nordquist said senators are working on an additional amendment to be offered on select file that would ensure that municipalities would continue providing governmental services, including paying employees, during a bankruptcy proceeding.
The bill advanced to select file on a 30-0 vote.