Steps to reproduce the issue

Click the Group Title heading.

Expected result

Groups sorted alphabetically whilst showing inheritance level.

Actual result

Groups sorted alphabetically but inheritance level not shown correctly.

System information (as much as possible)

With PHP debug enabled, allows errors to be visible.

1st error: libraries/cms/helper/usergroups.php (line 311) (once this error is fixed, see 2nd error below)
Undefined Property (that is the path attribute does not exist for the item)

2nd error: administrator/components/com_users/views/groups/tmpl/default.php (line 108)
Again, an Undefined Property (that is the level attribute does not exist for the item)

Additional comments

To fix this problem (works for my standard en-GB Joomla 3.6.5 stable-full install):
Insert into libraries/cms/helper/usergroups.php at line 311 the following:

if (!property_exists($parentGroup, 'path'))
{
    $parentGroup->path = array();
}

This will reveal the 2nd error. So, insert the following before the echo statement in administrator/components/com_users/views/groups/tmpl/default.php at line 108

$item->level = count($item->path);