Last Friday, flanked by bemused children and supporters holding red, octagonal signs that read STOP WOKE, Florida Gov. Ron DeSantis signed a bill dissolving the state’s Disney World district.
For 55 years, Disney has run its own fiefdom south of Orlando, a “special district” in which the company effectively controls zoning, permitting, and building codes; builds roads and bridges; and runs utilities and services. The Reedy Creek Improvement District was a unique arrangement that gave governmental power to a single corporation, which in turn gave Florida one of the world’s most popular tourist destinations. Disney’s power in Tallahassee was legendary; in Orlando, a longtime Disneyologist told my colleague Jim Newell, attacking Disney was “like attacking Mother Teresa.”
All that seemed to come to an end last week, as DeSantis took his revenge for the Walt Disney Corporation’s opposition to his “don’t say gay” bill.
But the Mouse may have one last trick up his sleeve: Reedy Creek is $1 billion to $2 billion in debt. One other perk for a corporation playing local government is the ability to raise money through tax-exempt municipal bonds. The bondholders who lent that money expected to be paid back by Reedy Creek, with its superior taxing powers, unstoppable revenue generator (Disney World and its surrounding ecosystem), and autocratic control. In fact, when Florida created Reedy Creek in 1967, the Legislature explicitly promised bond buyers that it would not “limit or alter the rights of the District” to use its tools.
“Is there a conflict between dissolution of Reedy Creek and the state’s commitment in 1967? Of course!” said Clayton Gillette, a bond expert at New York University Law School. “It seems quite clear this was intended to avoid exactly what’s happened.”
Who pays Mickey’s billion-dollar debts now? As the Florida attorney Jacob Schumer argued in Bloomberg Tax on Tuesday, there are no easy answers. It’s supposed to fall to the two counties that share custody of Disney World, but neither county is ready to put a half-billion dollars on its balance sheet. One county executive said it would be “catastrophic for our budget” to pay for public safety at Disney World. It’s not even clear the counties would be capable of raising taxes enough to do so, since Florida limits regular county property tax rates far below what’s permitted in Reedy Creek, or how the debt should be apportioned between them. The state isn’t even permitted to pay off the bondholders all at once.
All of that is exactly why Wall Street lent money to the Mouse—not to the snowbird homeowners of Orange and Osceola counties.
It’s a peculiar situation, but one with a long history in the United States. To what extent should the promises made in municipal bond contracts stop lawmakers from changing things about those jurisdictions later on? “It’s an unbelievably complicated legal question,” observed David Schleicher, a law professor at Yale who studies local government. On the one hand, states aren’t allowed to impair contracts. On the other, states are supposed to have total control over cities. Reedy Creek isn’t the first time those two ideas have come into conflict.
In the rough-and-tumble world of 19th century public finance, cities and states concocted nimble schemes to shake off their creditors. State courts, whose judges often answered directly to voters, looked kindly on these attempts to avoid paying back bondholders when railroad projects or other big initiatives went south. One particularly hilarious workaround came in 1879, when the Alabama Legislature dissolved the state’s largest city, Mobile, to let residents off the hook for a couple million dollars in railroad-related debt. In its place, the legislature created a new city, the Port of Mobile, home to more than 90 percent of old Mobile’s inhabitants, but with none of the debt! That was too much for the U.S. Supreme Court, which sided with the Mobile bondholders in 1886.
In general terms, the idea that bondholders control urban destiny is a familiar one. The bankers who lend cities money and the ratings agencies that assess cities’ creditworthiness have historically scared local leaders away from making big investments in infrastructure or social welfare. The more you borrow, the more expensive borrowing gets. This “feedback loop of penalties rooted in dependence on the bond market,” Destin Jenkins argues in his history Bonds of Inequality, has made American cities what they are. For places abandoned by the white middle class in the 20th century, the resulting cycle of disinvestment and decline was hard to reverse.
Most of the time, the rights of municipal bondholders only come into play when a city just can’t pay. After declaring bankruptcy, for example, Detroit had to negotiate to divide up city revenue among public services, retiree pensions, and investors who owned its debt. That’s a pretty rare occurrence.
But sometimes, debt comes with conditions that go beyond just paying it back. Urban renewal czar Robert Moses famously committed the toll revenue from his New York City bridges and tunnels to his Triborough Bridge Authority, using the bond contracts, or covenants, to ensure that the toll money could not support mass transit. Later, the Port Authority of New York and New Jersey sold bonds with the assurance that it wouldn’t start spending money on mass transit. When the states later decided to subsidize the PATH trains under the Hudson River, bondholders sued, and the Supreme Court agreed in 1977 that the Port Authority had done them wrong.
But every case is different, and there’s little agreement on how much a government can go about its business if new policies affect old debt contracts. Both New York and New Jersey have turnpike authorities that issued bonds tied to toll revenue, with the condition that the state wouldn’t mess with the authorities. Later, each state made it harder for the turnpike authorities to raise tolls. New York courts said that wasn’t allowed; New Jersey courts said it was. Confusing!
One place this comes up these days is when rich neighborhoods try to secede from cities. In Georgia, for example, the wealthy neighborhood of Eagle’s Landing tried to secede from the city of Stockbridge. Capital One Bank sued, saying the departure would break the contracts of the Stockbridge bonds it owned. The idea also prompted warnings from rating agencies that the secession might undermine the municipal debt market in the whole state, making it harder for Georgia cities to borrow money. It would be risky, the argument went, to buy municipal debt if the city in question could lose all its high-value properties and high-earner residents the next day.
Reedy Creek is a bit of a weirder situation, since the district wasn’t in any trouble at all; the state just decided to abolish its special powers. But this might not be weird for long, given the way that political polarization appears to be trumping traditional growth politics in some jurisdictions. “If we go down this path where states are trying to dissolve local governments because of their policies, and those governments are active in the bond market, you’re going to get some type of governance risk,” said Robert Greer, a bond expert at Texas A&M. By which he means: Would you think twice, in the future, about buying bonds from a blue city in a red state? If you were a blue city, could you quietly write your own powers into your debt contracts as a preemptive defense against state preemption?
There’s one more option for investors who want to be paid by the Mouse. Florida’s bill won’t abolish Reedy Creek until next year, and there’s a provision that allows a new independent special district to be reestablished. “If Disney promises to be a good boy and sit in the corner with the dunce cap on and make the appropriate political contributions, maybe they’ll be reauthorized,” Schleicher said. Mickey might not get all his powers back, but just the Reedy Creek tax rate would probably be enough to make Wall Street and the courts happy—if not Disney itself.
For more on the battle between Disney and Ron DeSantis, listen to this recent episode of What Next.