Let me just say that I am not a big fan of the "not" moving up bit, but here is another reason why some gyms do this (of course not the gym that dd's at

.)
There are gyms that only go up to Level 6 they don't even do Optional, so some gymnasts will do each compulsory level 2 or 3 times if they don't want to leave the gym to do Optional.
Last yr my dd did Level 6 (her first yr) and there was a girl from another gym that was doing Level 6 a second time - I couldn't understand why for the life of me she was doing it again because the yr before she finished 5th AA for Level 6. Well, come to find out she was doing Level 6 again because she couldn't do the giant, which was a requirement to become Level 7 at her gym. Seeing it on paper I couldn't understand, but when you hear the reasoning it make sense.
My dd ended up finishing 7th AA in States for Level 6 and there were 3 girls ahead of her that it was their 2nd yr. I sometimes wish they would split up not only by age but if they are 1st or 2nd yr Levels. I know this won't happen and I really am not complaining because as you can see dd held her own, but it does make me wonder.
This yr my dd is doing Level 7, right now she is the only 1 with all of her skills for competition. Level 7 in our state is in the Fall with States being in Jan. The coaches told our girls that if they do not have their skills that the won't be going back to 6, but they will only compete in Invitationals and will scratch the event (it's bars for all of them) that they don't have the skill in. They will not compete Sectionals or States. The funny thing is that all of the girls could compete bars with a cast handstand fly-a-way which they all have, but our gym says if you don't have the giant, you don't compete bars. As I said I am lucky that dd does have the giant and can do all of the routines, but if she didn't I wouldn't be too thrilled with paying all that money for her to go to Invitationals but couldn't even qualify for Sectionals. That's a lot of money that in my opinion would be wasted, besides travel costs - gas and meals.
Sorry I rambled for so long, but there are many reasons why gyms do what they do and us as parents will never really know why it is the way it is.