CHICAGO --- Officials from Nebraska’s largest cities urged state lawmakers not to put “Goldman Sachs ahead of common citizens” by passing a bill that would give bondholders priority over pensioners in the event of a municipal bankruptcy.

Legislative Bill 67, introduced by Sen. Paul Schumacher, R-Columbus, got its first public hearing March 3 before Banking, Commerce and Insurance Committee. It attracted several opponents and one lone supporter, a lobbyist for the state’s banks.

The committee could vote on the bill as early as March 5.

The legislation would give general obligation bondholders a statutory lien to ensure their payment priority over all other creditors, including pensioners, in the event of a municipal bankruptcy.

The measure is an effort to address on a state level the national uncertainty about the status of pensions versus bond debt following the bankruptcies of Detroit and Stockton, Calif., according to Schumacher.

It’s modeled on a similar measure passed by Rhode Island in 2012. Roughly 29 states have a statutory lien on general obligation bonds.

A similar measure sponsored by Schumacher died in the Legislature last year.

“It’s back again because it’s an unresolved controversy that won’t go away,” Schumacher told committee members during the Tuesday afternoon hearing. “It’s better that everyone negotiates for their position now, and have it resolved by the Legislature, than having a great deal of uncertainty and human suffering in 10 to 15 years from now.”

Robert Hallstrom, a lobbyist for the Nebraska Bankers Association, argued that the market would eventually start to penalize Nebraska issuers if the bill isn’t passed, and that taxpayers will be the ones forced to pay for the rise in borrowing costs.

“It’s difficult for me to say that the existence of a statutory lien has an X% factor difference but I suspect over time these types of things will work their way into the market,” Hallstrom said.

The bulk of the hour-long hearing was taken up with testimony against the measure, led by officials from Omaha and Lincoln.

Steve Curtis, Omaha’s finance director, said the “only item” keeping the city from a triple-A rating is its unfunded retirement obligations, and that a statutory lien for GO bonds has never been raised as a concern by ratings analysts. He added that most of the city’s bond buyers are large out-of-state financial institutions like mutual funds and banks.

“We ask you not to put firms like Goldman Sachs and Prudential ahead of the common citizens,” Curtis said.

Omaha city attorney Paul Kratz said bondholders and employees should arrive in the bankruptcy court on “equal footing.”

“The bill would give a preference for banks so that if a bankruptcy ever occurs, then the banks would be paid in full,” Kratz said. “The philosophical question is: Is that the right thing to do? I suggest to you it ought to be left up to the bankruptcy judge,” he said. “There are too many factors, too many issues involved [in a bankruptcy] to try to predetermine who’s going to get the first bite of the pie.”

He added that in his 17 years with the city, no ratings analysts or bond counsel have suggested that giving bondholders preference in a Chapter 9 was a concern.

A representative from the League of Nebraska Municipalities told lawmakers that the causes of a bankruptcy are too local and unpredictable to enshrine bondholder priority in state law.

“It’s best to wait and see what the circumstances are and work with the bankruptcy judge at that time,” said league spokesman Gary Krumland.

Sen. Matt Williams, a committee member, said he doubted whether bondholders would ever be to blame for a municipality filing for bankruptcy.

“The bondholders are the lenders to the city and didn’t create any of the management decisions or any of the circumstances that could have cause the bankruptcy – they’re the one part involved that couldn’t have any part,” Williams said.

“I wouldn’t say they’re the one part,” Krumland responded, but acknowledged that he couldn’t think of any way in how a bondholder could help drive a city into bankruptcy.

In closing, Schumacher said cities should be forced to choose between creditors now instead of duking it out during a crisis.

“We have a classic situation of two reasonably innocent parties: the bondholders and the city workers,” Schumacher said. “So the cities are caught between a rock and a hard place,” he said. “We can take some action here. It’s probably easier to deal with the situation now than then, and probably wiser too.”

Like Hallstrom, Schumacher warned that the market would likely start to penalize Nebraska issuers if the uncertainty is not dealt with.

The chairman of the committee, Sen. Les Seiler, R-Hastings, asked Schumacher why none of the big investment banks showed up to support the bill if it’s so important to them.

“I don’t know that if Goldman Sachs flew someone out from New York they could have put it any better,” than supporters did during the hearing, Schumacher said.

“But they could have made their position known,” Seiler said.

“They’ll make their concerns known in the market,” Schumacher replied.

A companion bill, LB 66, which would require issuers to disclose on page one of their offering documents that bondholders do not have priority over pensioners, is likely to remain on hold while lawmakers tackle LB 67. Schumacher said he considers it a kind of back up if LB 67 fails, saying issuers should be required to either give bondholders priority or inform investors of their uncertain position up front.

At a January hearing on LB 66, several bond market participants testified against the bill, saying it could prompt national investors to shun Nebraska paper. No one spoke in favor of it except Schumacher.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.