Bill amended to tie city bankruptcy to pension funding level

Cities with pension plans not funded to a certain level would be unable to file for bankruptcy under a bill lawmakers amended on the second round of debate May 15.

Introduced by Columbus Sen. Paul Schumacher, LB72 initially proposed a statutory lien on government bonds to ensure that bondholders are paid first if the issuing government entity goes bankrupt. Current law authorizes counties, cities, villages and other Nebraska political subdivisions to file a petition in U.S. bankruptcy court.

Senators had expressed concern during general file debate about prioritizing bondholders over a city’s pensioners and services.

So Schumacher introduced an amendment on select file that instead would prevent a city or village with a defined benefit retirement plan from filing for bankruptcy unless the plan’s funded ratio reaches a certain percentage. The ratio would increase incrementally from approximately 52 percent for any petition filed between 2020 and 2023 to 90 percent after Jan. 1, 2038.

Schumacher said the rules determining which of a city’s creditors get paid first in the event of bankruptcy are unclear, creating uncertainty for a city’s bondholders and pensioners. The amendment would reduce that uncertainty by removing a city’s ability to declare bankruptcy unless it follows a path toward a higher level of pension funding, he said.

“Don’t follow it, continue underfunding your pensions, and you’re going to be stuck without the right to declare bankruptcy under our law,” Schumacher said.

This would protect bondholders, pensioners and the state if either of its two largest cities would go bankrupt, he added. Lincoln’s pension plan is approximately 75 percent funded, Schumacher said, but Omaha’s is only about 50 percent funded, which he said is too low.

The amendment also would allow a city or village without a pension plan — which Schumacher said is typical of most cities and villages in the state — to declare that its general obligation bonds would be equally and ratably secured by property taxes levied from year to year by the city or village. Those bonds would have a first lien on the property taxes levied.

Sen. Mark Kolterman of Seward supported the amendment, saying that it would help address the issue of underfunded city pension plans. He said the Legislature should continue to discuss pension reform because several Nebraska cities have plans that are only 50 to 60 percent funded.

“It’s all about keeping these plans solvent and stable so we don’t have to worry about bankruptcy,” Kolterman said.

Sen. Sue Crawford of Bellevue supported the amendment but said that Omaha and Lincoln do not because it could have unintended consequences for those cities’ bond ratings.

“The city of Omaha and the city of Lincoln have good bond ratings and are able to get bonds right now,” she said. “It’s not a concern they have and we don’t want to create that problem for them.”

Senators voted 30-0 to adopt the amendment and advanced LB72 to final reading by voice vote.