When Florida Gov. Ron DeSantis and fellow Republicans in the legislature decided to make an example of The Walt Disney Company for opposing a social-issue law they had passed, it opened up a can of worms for investors in some of Sunshine State’s municipal bonds.
They way DeSantis and his allies demonstrated their displeasure over Disney's public opposition to their "Don't Say Gay" law was to pass a law dissolving a special district created to serve Disney's Orlando-area resorts.
Questions arose — and still remain — about almost $1 billion of municipal bonds outstanding that were issued for the Reedy Creek Improvement District.
In March, the Florida Legislature passed the law
Opponents of the law call it "Don't Say Gay" and say the policy will hurt LGBTQ+ children. Supporters counter it lets parents decide on how their children are taught about these topics.
Disney came out against the legislation, saying it would fight to have it repealed.
DeSantis and GOP lawmakers responded by proposing and passing a hastily assembled bill that
Reedy Creek has the same authority as a county government and includes 39 square miles of land in Orange and Osceola counties.
Natalie Cohen, founder of
"Yes, wary, especially of special districts," she said.
Reedy Creek’s bonds priced at a premium until the governor and legislature started talking about dissolution, then dropped to around 86, she said.
"It is a disturbing trend that elected officials are using their powers to punish companies and municipal governments (and individuals) based on their social views," Cohen said.
She noted that Florida has used the special district approach to foster development for decades. She said there are 1,713 governments in Florida, of which 1,139, or two-thirds, are special purpose, according to the Census Bureau.
"The Reedy Creek structure taxed Disney to pay for police, fire, sanitation, roads, water, etc. for the Disney megaplex that was built out of a swamp in central Florida since 1967," she said. "Yes, of course, it’s unusual. But if the state takes on that responsibility, does that mean the good people of Florida will be paying taxes to maintain the services and the nearly $1 billion debt that support Disney?"
Most investors and analysts expect the Reedy Creek situation to have a narrow impact on Florida bondholders, said Richard Ciccarone, president of
“However, the rapid political response to revoke Reedy Creek’s special protective status raises questions about whether long-standing legal credit structures involving not only special districts, but even other state municipal bond issuers, could be at risk. For most investors, this first blow is strike one on the political stability scale of risk,” he said.
“More than likely, the spotlight on special districts will likely trigger reformer attempts to enact broader governance changes that could affect new and existing Florida special districts,” Ciccarone said. “If economic incentives or business controls are tightened, supply could be curtailed, or credit quality could be diluted.”
The Reedy Creek situation may not cause investors to shy away from buying Florida bonds, but they will probably take a harder look at the credits, said John Hallacy, founder of
“I believe that any investor has to have a higher level of credit review when approaching a special district. Reedy Creek is atypical because it is so dominated by Disney,” Hallacy told The Bond Buyer. “Most districts have some diversification either among developers or owners of property. Special districts do provide important public infrastructure that often is not achievable through other financing.”
The scope of Reedy Creek, almost twice the size of Manhattan and serving four Disney theme parks and associated resorts, is well beyond the typical special district.
"You might say that the political brouhaha between the governor and Disney aroused a sleeping tiger," Ciccarone said.
“Up until recently, the state hadn’t paid much attention to the enormous laissez-faire powers that it had granted Disney in 1967. At that time, Florida’s economic and political prowess represented only a fraction of what it is today. The bargain to induce the expansive Disney vision by creating Reedy Creek paid off for both Disney and Florida as each prospered over the past 55 years,” Ciccarone told The Bond Buyer. “However, the sudden unwinding of Reedy Creek’s special district powers in dramatic fashion is unnerving, not only regarding Florida special district but, also to Florida bondholders in general.”
At a recent Power Players Miami conference held by Bloomberg, Miami City Mayor Francis Suarez said he would be happy to discuss the evolving situation with any company that had a problem with the new law and hoped it wouldn’t cause firms or investors to stay away from his city.
He noted that the
“I would have preferred not to see that have happened,” he said, adding that he and Miami-Dade County Mayor Daniella Levine Cava, a Democrat, tried to intervene to keep the event in Miami, but were ultimately unsuccessful.
“I think what happens is that these ideological battles have real consequences and they affect people — they affect people’s lives, they affect people’s jobs,” he said. “And I think that’s something we have to be really conscious of because when something goes from the ideological to the real it becomes magnified in its impact.”
The difference between Reedy Creek and the typical special district created to support a subdivision or commercial project is evident in its AA-minus or equivalent issuer ratings.
Fitch said its action was primarily in response to the dissolution bill and the uncertainty with respect to the servicing of Reedy Creek's debt after the June 1, 2023, dissolution date.
The situation remains murky and what this all means for bondholders is still unclear, Michael Rinaldi, head of U.S. local government ratings at Fitch Ratings, told The Bond Buyer in a
“The dissolution bill was essentially a paragraph long. It did not prescribe a mechanism with respect to the treatment of Reedy Creek's outstanding debt, subsequent to the dissolution date. So there are some questions as to exactly how the debt will be treated from that point,” he said.
He said, however, the situation was unique and not easily transferrable to other states.
“The action by the state to dissolve Reedy Creek and several other much smaller, special districts is certainly an unusual action,” Rinaldi said. “In our opinion, this doesn't necessarily serve as a precursor to similar dissolution measures or interference in the operations of other local governments across the state. Our view it really reflects a very unique level of discord between the state and Disney.”
But risks remain for potential bond investors.
“Until the dust has settled, and it becomes clear whether the Reedy Creek incident will bring about any changes or impacts that could have a wider reach, potential investors wouldn’t be foolish to demand a measured response to compensate them for uncertainties which are yet to develop in detail,” Ciccarone said.
The mixing of social issue politics with bond business, previously seen in
In several Republican-dominated states, legislatures have penalized public finance firms for perceived hostility to the fossil fuel and firearms industries.
The Louisiana House this month passed a bill which would limit firms that "discriminate" against the firearms industry from getting government business.
It came after a municipal bond underwriter was disqualified in November from underwriting a bond refinancing due to unanswered questions about its gun policies.
Louisiana was following Texas, which last year passed a similar gun law that took some previously active underwriters
Also, Oklahoma lawmakers last month passed a bill that would prevent banks from participating in municipal bond deals if they discriminate against the gun business. Similar bills have also been introduced in Kansas, Kentucky and West Virginia.
Separately, West Virginia’s Board of Treasury Investments will no longer use a BlackRock Inc. investment fund as part of its banking transactions, a decision based on the firm’s environmental, social and governance policies that urge companies to embrace net zero investment strategies which the state Treasurer said would harm the coal, oil and natural gas industries.
In Texas, the implementation process for a state law aimed at financial firm boycotts of the fossil fuel industry led a municipal bond issuer to
