This bug has been been around for a long time. But since it was done with cheats they are probably not worried about it. But let me present the place where this bug is prevalent without cheats
Deorcnysse
This darkling city starts as level 1 (if you capture it first turn (obviously cheating, you can upgrade to fortress, conclave, town), but if you wait past first turn the city moves to a level higher than 2, and thus skips the level-up option like you did above. Hence, the reason you see this city at level 7+
I would hope that Deorcnysse have a special level-up pattern that will give it access to its higher level defenders that you already have programmed into the game.
