I just placed my second upgrade (15k people), right before a lizard destroyed my cityhall. I can rebuild it, but it is right away a level 3 cityhall and I cannot place a new upgrade till it's level 4. This means my water and sewage broke down and I need 35k people more to fix that!
I think that's buggy
If you have a policestation replaced, it starts level 1 and you must upgrade it again, why not the same with a cityhall.