The $1 Billion Disney Question in Florida

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When Florida Republicans approved a bill to strip Walt Disney Co.

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of his special tax privileges in April amid controversy over how gender and sexuality are taught in schools, they failed to answer a key question: who is responsible for reimbursing nearly $1 billion dollars of municipal debt used to build roads, walkways and other infrastructure around Disney World?

Florida law says bondholders must be paid even if Disney’s special tax district, known as Reedy Creek, is dissolved. A separate law creating Reedy Creek promised bondholders that the state would not interfere with its tax collections. One of the bill’s sponsors is now considering reinstating a watered-down version of Reedy Creek to unravel the legal mess.

Those caught up in the fight include municipal bond investors, firefighters and the $210 billion global media and marketing firm behind Star Wars, the Avengers and ESPN.

Prices fell on many bonds, which sit in mutual funds managed by Goldman Sachs Asset Management, AllianceBernstein and other companies. Reedy Creek bonds maturing in 2028 were trading at 87.5 cents to the dollar on Thursday and Friday, down from around 100 cents in January, according to data from the City Securities Regulatory Council. Two major ratings firms have signaled the bonds could be downgraded, saying it’s not entirely clear who owes investors their money.

Since 1967, the Florida lands that house Disney’s theme parks have been effectively governed by the company, allowing it to run Walt Disney World with little paperwork. The WSJ’s Robbie Whelan explains the special tax district set to dissolve next year under new Florida law. Photo: AP

“It’s just speculation at this point,” said Michael Rinaldi, head of US local government ratings at Fitch Ratings. “We have no information.”

A spokesman for Governor Ron DeSantis said a plan for Reedy Creek is being finalized and could be released in the coming weeks. Mr. DeSantis, a Republican, said in a Fox News interview on Thursday night that “the bonds will be paid for by Disney.”

The Reedy Creek Improvement District is a 40 square mile area encompassing Disney theme parks, hotels and resorts in the Orlando area. Tens of thousands of these special districts exist across the United States, usually run by local councils and formed at the request of property owners who wish to pay taxes beyond what they owe the city or county. for additional services such as mosquito control.

Reedy Creek is unusual in that nearly all of the property is owned by a single taxpayer, Disney, which effectively funds and controls its own government. Reedy Creek operates outside of area building and zoning rules and uses tax revenue from Disney properties to run a local fire department and other services. About $60 million of the district’s $170 million budget for 2021 has been used to pay down debt on bonds issued to fund roads and a pedestrian bridge, among other projects.

Florida Governor Ron DeSantis said “the bonds will be paid for by Disney.”


Photo:

Ellen Schmidt/Associated Press

Created by Florida lawmakers more than 50 years ago at Disney’s behest, Reedy Creek was an easy target for Florida lawmakers disgruntled with Disney because of its opposition to the Parental Rights in Education bill. from Florida. Dubbed ‘Don’t Say Gay’ by critics, legislation approved in April prohibits classroom teaching about gender identity and sexual orientation for schoolchildren through grade three, and limits it for older students. aged.

After Disney, under pressure from employees, pledged to push for the repeal of the law, Florida lawmakers, at the request of Mr. DeSantis, introduced, heard and approved a bill dissolving Reedy Creek over a three-day period in mid-April. The disbandment is effective June 1, 2023. A Disney spokesperson declined to comment. A Reedy Creek spokesperson did not respond to a phone call.

State law states that when a special district is dissolved, the responsibility for payment of its debt rests with the local government of the area. In the case of Reedy Creek, there are four: Orange County, which encompasses most of Reedy Creek, Osceola County, and the towns of Bay Lake and Lake Buena Vista.

Reedy Creek said in a statement filed with the Municipal Securities Rulemaking Board, a self-regulatory body governing the bond market, that it “plans to explore its options while continuing its current operations.” The statement also cited a 1967 legal promise to Reedy Creek bondholders that the state would not alter the district’s ability to collect taxes.

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Florida Rep. Randy Fine, a Republican who sponsored the bill in the state House of Representatives, said he believes that requirement will no longer exist after the new law takes effect. ‘next year. He said a court or additional legislation could help determine how to divide the debt among local governments. Yet, he said, another option would be for lawmakers to reinstate a less powerful version of the Reedy Creek Improvement District in an effort to pay down debt.

In this scenario, “there continues to be a Reedy Creek that continues to hold this and continues to pay it back,” Mr. Fine said, but the legislature could withhold other powers that the district currently has, such as the ability to issue additional debt. by a promise of reimbursement in state law.

Mr. DeSantis’ office said in a statement when he signed the Reedy Creek bill that it did not expect him to raise taxes on residents. However, the impact on local governments could extend well beyond the assumption of debt payment.

PHOTOS: How Disney created its own government in Florida

Orange County Mayor Jerry Demings, a Democrat, told a news conference as the bill was being considered that Reedy Creek covered the costs of police, fire and 911 services. in the district. Resuming these operations without additional revenue would be “catastrophic for our budget”, he said. Osceola County said in a statement after the bill passed that it is “evaluating any cost changes to Osceola.”

Some municipal bond portfolio managers and analysts have expressed concern that partisan politics is creeping into the murky world of debt repayment promises.

Matt Freund, head of fixed income strategies at Calamos Investments LLC, which owns a small stake in a Reedy Creek bond issued in 2020, said he was confident the debt would be repaid.

“The impact of Florida’s action on the broader municipal finance industry remains to be seen,” Freund said.

Write to Heather Gillers at heather.gillers@wsj.com

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