Nebraska's Capitol, from which legislation that would give bondholders priority in Chapter 9 bankruptcies is unlikely to emerge this year.

CHICAGO — A Nebraska bill to give bondholders priority over other creditors in the event of a municipal bankruptcy is not likely to pass in the 2015 legislative session.

Public employee unions, bondholders and cities have been negotiating for weeks and are unlikely to come to a final agreement by the June 5 end of the session, said several participants.

But the controversial measure, Legislative Bill 67, will be automatically revived when lawmakers return to the capitol in January 2016.

As originally introduced, LB 67 would give general obligation bondholders a statutory lien to ensure their payment priority over all other creditors, including pensioners, in the event of a Chapter 9.

The muni market is watching the Nebraska measure closely as statutory liens for bondholders have become more of an issue after Detroit and other bankrupt municipalities have treated bondholders as unsecured.

The Nebraska measure is modeled on a similar bill passed by Rhode Island in 2012.

The state's largest cities, Omaha and Lincoln, came out strong against the bill — as did unions — arguing that the issue is best left up to a federal bankruptcy judge.

"We think everybody should go in with parity, whether bondholders or pensioners, and let the bankruptcy court do what it's supposed to do," said Steve Curtiss, Omaha's finance director.

The bill is now is on the floor of the unicameral Legislature, with proponents and opponents agreeing not to take fresh action until they reach a compromise.

"There's a whole bunch of different ideas and we're still negotiating them and they can change from day to day," said Omaha City Attorney Paul Kratz.

"All the parties are trying to find out how to treat bondholders and pensioners in a fair and equitable manner in a bankruptcy situation," he said. "It's probably going to be carried over to next year."

The measure has seen one major amendment adopted, with eight more amendments pending, since its first public hearing in March.

The adopted amendment would exempt retirement obligations from the act that the bill applies to, making it governed under a different section of state law.

"What the bill has morphed into is, 'We'll give the pensions a real priority as well,' which wasn't exactly what we'd wanted," said Curtiss.

The unions that originally supported that amendment now reportedly want a different provision that would include more specific language that would put them on par with bondholders in the event of a bankruptcy.

"This amendment is designed to be more crystal clear," said Gary Krumland, spokesman and general counsel for the League of Nebraska Municipalities. "But it's significantly different than the original bill, and what was adopted is not acceptable to the other parties, and I'm not sure we're going to get a compromise [by session end]."

Since most municipal debt is made up of retirement and bond obligations, the bill as it is would leave only a small class of creditors as unsecured, said Curtiss.

"All that's left is anybody who sold the city a tractor or something," he said. "You're left with a fairly small group."

For Curtiss, even if the bill is ultimately enacted, its impact may never be felt because the chance of a Chapter 9 is so remote.

"It's kind of hard to gauge where this is going to wind up because it's taken some weird twists and turns," he said. "But we see the possibility of bankruptcy as extremely remote, almost implausible, so this is all a solution about nothing anyway."

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