The Contractual Impossibility of Unwinding Disney's Reedy Creek
Category: News & PoliticsVia: tacos • 4 weeks ago • 10 comments
By: Jacob Schumer
Much ado has been made about the legality of Florida's Senate Bill 4C purporting to dissolve Disney's Reedy Creek Improvement District: whether it was retaliation prohibited by the First Amendment, whether it was passed with sufficient formality, and so on. But there's a much more basic reason Florida can't dissolve Reedy Creek—it promised bond purchasers that it wouldn't.
What is the Reedy Creek Improvement District?
Reedy Creek is an independent special district—a kind of Florida government entity that typically has a specific purpose, such as operating a stormwater or hospital system. These districts are often funded by traditional property taxes, as well as fees and charges associated with the system they operate. Looking at Reedy Creek's enabling legislation, you might not realize that the district functionally has only one landowner, as the district has a theoretically democratically elected board of supervisors and doesn't mention the existence of Disney except to discuss the importance of tourism.
Reedy Creek has the powers of many special districts rolled into one—the power to build roads, the power to build a drainage system, the power to build power utilities, and more. But Reedy Creek also has unique and remarkable powers, in some ways over and above even cities and counties. One of the district's most-discussed features is that it is exempt from all Orange County and Osceola County regulations regarding building, zoning, construction, safety, sanitation, and more—a feature that the enabling act describes as "essential" to its purposes.
Reedy Creek's taxing power is exceptional; it can impose property taxes at a rate three times higher than the maximum amount for cities and counties. This is in addition to special maintenance and utility taxes. Reedy Creek has not been shy about using these taxes—in the 2022 budget, it sets its property taxes at around 13.57 "mills," with each "mill" representing an annual charge one-one thousandth of the property's assessed value. This tax rate is higher than the maximum of 10 mills allowed for cities and counties. Around one-third of those taxes are dedicated to one thing: paying debts.
Reedy Creek's Debt
Reedy Creek, like other special districts, can borrow money by issuing bonds, which can then be purchased by investors looking for fixed payments. Just like any other debt, the terms of the bond are based on the specific bond contract at issue. Reedy Creek is authorized to issue a few different kinds of bonds, but the most important ones are those that promise to pay from the property taxes collected by the district and those that pay from utility system revenue.
Reedy Creek's bond offerings very much rely on the district's unique powers. Its property-tax-based bonds discuss that the district can tax up to 30 mills and promise to tax at a rate high enough to pay the bonds. Its utility revenue bonds discuss the district's various powers to generate utility revenue and promises to fix fees and charges sufficient to generate sufficient revenue to pay the bonds.
In authorizing Reedy Creek to issue bonds, the Florida legislature included a remarkable statement—included in Reedy Creek's bond offerings—regarding its own promise to bondholders: "The State of Florida pledges to the holders of any bonds issued under this Act that it will not limit or alter the rights of the District to own, acquire, construct, reconstruct, improve, maintain, operate or furnish the projects or to levy and collect the taxes, assessments, rentals, rates, fees, tolls, fares and other charges provided for herein … until all such bonds together with interest thereon, and all costs and expenses in connection with any action or proceeding by or on behalf of such holders, are fully met and discharged."
The bill dissolving Reedy Creek doesn't say what should happen to these debts, but another statute does: By default, the local general-purpose government—the county—assumes the district's debt, along with all of its assets. This means that theoretically, Orange and Osceola counties will inherit upward of $1 billion in bond debt.
The Contract Problem
In case it was not obvious, dissolving Reedy Creek "limited" and "altered" its ability to improve and maintain its project and collect its various charges and taxes, and thus Florida would be violating its pledge to bondholders by dissolving Reedy Creek. However, even without that explicit language, the bill dissolving Reedy Creek would have problems under contracts clauses of the Florida and U.S. constitutions.
Stating that the county assumes the debt is simple enough—actually figuring out what that means is a different story. Reedy Creek spans both Orange and Osceola counties, so how will the debt be divided? Would it be by taxable value of property or by the properties themselves? And how would that apply to the utility revenue bonds when there is no easy way to divide which county the utilities rest in?
These difficult questions point to the basic contractual issue. By dissolving Reedy Creek, the legislature essentially rewrote the promises made in the district's bond offerings. Instead of bonds backed by a special district with the power to levy up to 30 mills in taxes, the property tax bonds will be backed jointly by two governments that can only generate a maximum of 10 mills in taxes. Instead of a unified utility system with special powers to charge various fees, supported by special taxing powers, utility revenue bonds will be jointly managed by two counties subject to additional taxing and spending restrictions.
Both the U.S. and Florida constitutions place strict limitations on the government's ability to impair its own contracts. Under the U.S. Constitution, a state can only impair an existing contract if the impairment is reasonable and necessary to serve an important government purpose. As early as 1866, the U.S. Supreme Court held that once a local government issues a bond based on an authorized taxing power, the state is contract-bound and cannot eliminate the taxing power supporting the bond. The Florida Constitution provides even greater protection from impairment of contracts.
With this law, the state of Florida has eliminated the government entity that backed the various bonds while violating its own explicit promise not to do so. It is hard to imagine a way that the state could successfully argue that this did not violate its own contractual obligations or unconstitutionally impair the contract between Reedy Creek and the bondholders. Florida could theoretically get rid of some of these contractual issues by writing a giant check to prepay or "redeem" the bonds, but that's prevented by at least one of the outstanding bonds—2018's utility revenue bond prohibits redemption until October of 2029.
Florida simply cannot promise to prospective bondholders that it won't interfere with Reedy Creek, and then dissolve Reedy Creek. If Reedy Creek is ever dissolved, it would be a monumental and complicated enterprise even on a years-long timeline. The district has a nine-figure annual budget for expenditures, and even ignoring its various debts, it has a plethora of other contracts that somehow would have to be assigned to and divided between Orange and Osceola counties. However, the dissolution will have to wait until all of its bonds are paid in full.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Jacob Schumer is an attorney based out of Maitland, Fla., with a practice concentrating on local government-related matters.
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