CHICAGO - A pair of bills in Nebraska would require issuers to either give bondholders clear priority over pensioners or advertise the lack of priority in bold type on the first page of official statements.
Legislative Bill 67 would formally give general obligation bondholders a first lien priority over pensioners.
LB 66 would not impose such a requirement, but it would force issuers to advertise on the first page of their official statements if their bondholders have no clear priority over pensioners.
The bills' sponsor, State Sen. Paul Schumacher, R-Columbus, said the lack of clarity on the federal level regarding the position of bondholders versus pensioners prompted him to introduce legislation favoring bondholders.
The uncertainty was highlighted by the recent bankruptcies of Detroit and Stockton, Calif., where the cities chose to elevate pension claims over bond claims.
In both cases, judges tantalized investors by affirming the theoretical ability to impair pension benefits while in practice leaving them largely untouched while approving huge haircuts to many bonds.
In Rhode Island, by contrast, the state passed a law prioritizing general obligation bondholders, who emerged intact from the Central Falls bankruptcy in 2012 while pensioners took steep cuts.
Legislation similar to LB 67 favoring bondholders died on the floor last year, and Schumacher said cities should now have to choose between prioritizing bondholders or advertising their risks.
"[The bills] put the municipalities in a situation where they have to face reality," Schumacher said. "You can't have it both ways: either give the bondholders priority or at least tell them they might not have priority in the event of a bankruptcy."
LB 66 would also require issuers to state the size of an issuer's unfunded pension obligation; the actual amount of the valuation of the real estate subject to taxation; and the actual amount of the valuation of the real estate that will not be available for debt-service payments because of tax-increment financing districts.
The local officials of any issuer's governing board that allows any misstatements of material fact or omissions could be held personally liable if sued by a bondholder under LB 66.
That provision already exists in Nebraska law, according to Schumacher.
The Judiciary Committee will hold a hearing on LB 66 Wednesday.
LB 67, which would give bondholders a first lien on taxes and property in the event of a bankruptcy, has no hearing date yet.
"Representatives of some bondholders last year felt that some of the recent bankruptcy proceedings, including Detroit, suggested that it would be wise to have a clear statement in state law of the priorities of bondholders versus other creditors in the event of a bankruptcy, that the federal courts would be apt to follow clear guidance," Schumacher said.
Critics, including advocates for municipal issuers, say LB 66's disclosure requirements are unnecessary and that LB 67 is overly punishing to retirees.
Some provisions of LB 66, like stating the size of an unfunded pension obligation and the real estate valuation and the potential for personal liability, are already part of SEC rules, said Paul Kratz, Omaha's city attorney.
As for the heart of the bill - the statement that bondholders may not be favored in a bankruptcy - that too is already obvious, Kratz said.
"I think most everybody that buys bonds understands that if a municipality files for bankruptcy, everything is up in the air," said Kratz. "The bankruptcy court is the place to settle these matters."
Kratz said the city strongly opposed last year's legislation formally prioritizing bondholders and will do so again this year. The bill is unfair to retirees and features troubling language that would give banks the ability to control and foreclose on city property in the event of a bankruptcy, according to Kratz.
"As you saw in Michigan, the yin-yang is there between the debt obligations and the pension obligations, and this bill would say the bankers get everything, and pensioners you've got to take it in the shorts," he said. "Couple that with the concept that part of the interest rate charged to cities includes a risk factor, then it seems like why should you further eliminate that risk when it's very minimal to begin with?"
A representative from Omaha's bond counsel, Kutak Rock, and its underwriter, DA Davidson, are also expected to testify in opposition to LB 66 at Tuesday's hearing.
Nebraska allows its municipalities to file for bankruptcy, though none so far have done so. Several so-called sanitary improvement districts have filed for bankruptcy - making Nebraska a leading state for the number of Chapter 9s - but those typically involve no pension debt.