Transcription:
Chip Barnett: (
Hi and welcome to another Bond Buyer podcast, I'm Chip Barnett. My guests today are Natalie Cohen, she's the founder of The Public Purse and National Municipal Research, and John Mousseau, he's the President and Chief Executive Officer at Cumberland Advisors. We're gonna be looking at what's been happening in Florida, specifically, the battle between Governor Ron DeSantis and the Disney Company over recent legislation on sex education and public schools and how this has affected special districts, especially Reedy Creek. Welcome to the Bond Buyer.
Natalie Cohen: (
Thanks Chip.
John Mousseau: (
Thanks Chip. Thanks for having us.
Chip Barnett: (
Well, let's take a look at the issue first. Can you give us a little background on what's been going on?
Natalie Cohen: (
So to put things into context, I wanted to just mention special districts in general. They are typically headed by a commercial interest, usually a property developer. Many of them start as dirt, hence the nickname, dirt bonds, and a developer or his company or her company comes along with a vision of what the land could become at some point and builds out from there puts the sticks in the ground and a special district is created in the beginning. The leaders of the special district are just the developer and whoever he's working with become the board of supervisors. And that's true for a lot of the other states that have special districts. This is common in Texas. It's common in Colorado. It's common in California. It's also in the Midwest. There are states that have a lot of special districts.
Natalie Cohen: (
And so it's not an unusual setup. The unusual part, I guess, of Reedy Creek is that it was a vision by the Disney Company that they could build in what was swampland in central Florida. And the district has been around for some 55 years. I think something like that. And so, I mean, just basically most listeners know the governor and the legislature very quickly passed a bill. I don't know the official name, parents rights in school, but it's come to be known as the 'don't say gay' that nothing about sexual orientation could be taught anywhere up to third grade and then abolished Reedy Creek. And that was partly because Disney had protested. Disney said we don't think this law is appropriate and it should be eliminated. And so hence the battle began, the districts were abolished and no one knows exactly how they will be. Disney will be reconstituted on that property officially they go to Orange and Oceola county. So that's kind of the background of what's happening right now.
John Mousseau: (
Yeah, I would add to it from the bond side of things, the district has probably a little under about a billion dollars or so of outstanding debt. And this all happened during a time period where interest rates were rising pretty vigorously across the whole yield curve and municipals and, and there's some taxable debt and tax-exempt debt, but, a lot of the tax-exempt debt has been around for a while. So a lot of it has call dates that are five years, six years, et cetera. So if you, if you try to work out the relative amount of the sell off of the bonds really hasn't been that much compared to the market. If you boil it all down, you probably have, you know, interest rates in general up about a hundred and call it 60 basis points, something of that nature during that time.
John Mousseau: (
And these are maybe off about 15 basis points more, and, you know, the ratings are still strong. They're under review, of course, but you really haven't seen much trading in them. Most, most of those bonds are issued at higher interest rates. So there'd be a natural reluctance to sell the bonds anyway, even even with the selloff in the market. Most of the yields, the book yields on these bonds were still appreciably above even where yields got to now, cause we were such a low level of yields. So, from the bond side of things, there hasn't been that much damage. I mean, the damage in the lower rated parts of the bond market, like triple B bonds, et cetera, has been much, much, much worse. You couldn't even compare this and of course, and Natalie can comment on this, but the understanding is that if you were to dissolve this district, you need to find a way to defease the bonds. The state would have to do that. And of course that would mean either calling all the bonds or certainly having the state issue bonds and advance refund this debt to its call dates. That would certainly be preferable to bondholders, as opposed to if you saw some kind of extraordinary call on the bonds, which, you know, I'm not a lawyer, but I don't think that could really happen.
Natalie Cohen: (
Yeah. And just to add onto that the statute actually would transfer to Orange and Oceola. It's mostly Orange county. And so there's a lot of concern, at least in those counties, are they gonna have to take it over? Are they gonna have to assume almost a billion dollars worth of debt in which case the taxes would be spread across all the residents of those counties, as opposed to what you have now, which is a very key component of special district finances that the taxes are specific are specifically focused for the residents within that district. And that is one reason why they're done that way so that it's not a generalized tax, but it is, basically Disney was taxing or the Reedy Creek was taxing Disney in order to build out the infrastructure. The state, I think, has reacted to that and said, well, the state might take it over. So try to envision that transaction, you know, financially the state would issue data, I guess, to refi, and then they would be responsible for running the infrastructure in that specific area. Basically it happened without any kind of a plan in place, nothing specific. It was just a reaction to Disney's social, political viewpoint on that. And unfortunately it's a little more complicated than just a statement.
John Mousseau: (
I couldn't agree more. And the thing is is that if you start suddenly moving over some of these costs and stuff to Orange and Osceola counties, you're doing it now in a time period where municipalities in general and certainly states and counties in particular are fairly flush from a credit standpoint, given the amount of sales, taxes, income taxes, federal monies, et cetera. But, you know, that's in the rear view mirror and you wonder how this plays out in those counties if you were to jump ahead a year or so and you were suddenly slowing down economically, and now you're saddled these counties with extra costs and there's a multiplier effect from those costs as well.
Natalie Cohen: (
Right. It's very extremely unusual for elected officials to simply dissolve a special district. That's been around a long time and has certainly, aside from whatever political complaints that a lot of people have that Disney was more privileged, they've certainly brought in a ton of tourism to the area — try to imagine Orlando without Disney, without all the Disney properties and the spillover of their activities and the number of visitors that come there and stay in hotels and so on. It's hard to imagine. So there's been a tremendous contribution to the state, so it's just, it's very unusual. And it's unsettling for bondholders, you know, at some point in other states, what might happen there? What could they do?
John Mousseau: (
Right. I mean, I think that's a great point, Natalie, is that, you know, there's a little level of reactionary to this, but when people would look at other types of special districts and start, you always want to be scrutinizing of credit, but what you hope is that there's not an alarmist type approach share on it. What Natalie said was great. And what people don't appreciate is the number of secondary and tertiary businesses that have been built up over the last 50 years or so close to it because of Disney. Not only hotels, but just think of businesses, like dry cleaning services, any anything you want to come up with that basically has its core as the Disney attraction there. And in the end, you're already starting to see individuals starting to file lawsuits on this stuff, against the state's actions, because they're looking at saying, okay, this is gonna end up with basically extra taxes for Orange and Osceola county and we haven't had any say in it at all. And that's the old 'taxation without representation' arguement.
Natalie Cohen: (
And if that does happen, then the counties are responsible for police, fire, sanitation, water, sewer, name your favorite infrastructure, and maintaining it, obviously Disney, unless it leaves would be in involved in that, but there's been a lot of discomfort among the local Reedy Creek police, sanitation, the fire department, and so on, because they've built up their own equity in pensions and benefits and it's unclear who their employer might be going forward. So, I guess it's complacency and I do think it will be worked out. So the legislature gave themselves a year to figure out what to do with this mess. So, again for financial reasons and also just assumption that it's gonna work itself out they have this period.
John Mousseau: (
I think when Natalie just said is important because they gave themselves a year's grace period, right? So that, that gets you beyond the midterm elections, not that the midterm elections in the country, that this has any bearing on that, but it does have probably, some discussion points in Florida elections, of course, but more importantly from the governor's standpoint. I'd be surprised if they didn't try to get to a solution that's kind of in the middle here on this. Cause it'll be beyond the midterm elections. He will have already gotten the political benefit out of this by 'taking on a big corporation.' In fact, he's already gotten the political benefit outta that. When, when in the reality is the best course of action, certainly from our perspective as people that manage manage bond portfolios is that you want to see a resolution on this, you know, you don't wanna see county saddled with more debt and at the same time you don't wanna see them having to necessarily replace a system that's worked really well for a while because if you suddenly switch over, there's gonna be a shakedown cruise period on this. And things probably won't work as well as they've worked for the past.
Natalie Cohen: (
Yeah. And I think there is, unfortunately, there's a bit of a trend right now to for elected officials, other state governors and legislators to use their powers to mess around with either investors or the bond market. I'm thinking of Texas where, you know, they excluded certain banks from bidding on transactions because they claimed that they were boycotting fossil fuels, oil and gas in the state. And so the state of Texas has now strict legislation and rules around working only with companies that are supportive of fossil fuels. So, you know, it was big banks, it was big money center banks that were excluded from bidding on transactions there.
John Mousseau: (
And, you know, we haven't, we we've, we've looked at the Reedly Creek bonds, what we really don't have a handle on yet. But if you get to a more stable mark, you'll be able to judge. This is if, if this thing turns into this, kinda rolling tumbleweed of public finance issues, you you'll be able to tell if suddenly the spread on Oceola, Orange County, either, mostly general obligation type debt starts to widen out. The market's very efficient. It's sniffing this stuff out and you would see that in there and that's a cost that never would get talked about, not that cuz that's a cost above whatever the direct costs are.
Natalie Cohen: (
Self-inflicted
John Mousseau: (
Right. Yeah, absolutely. Or gubernatorial inflicted more to the point.
Natalie Cohen: (
Yes, yes, yes, absolutely.
Natalie Cohen: (
It's an unfortunate trend that that it then becomes, we don't like your government or what you stand for or what your, your company stands for. So we're gonna just get rid of the government, it's a government, special districts there, there are over 38,000 of them in this country and around 1,800 in the state of Florida alone. I mean, just think about, think about Lakewood Ranch. Think about Margaritaville. Right? Think about the villages, those are clearly corporately directed entities. So I don't know where it ends exactly.
John Mousseau: (
Right. Which is, which is probably a different way of saying, we hope they come up with a, uh, with a solution here and basically can go in and play nice in the sandbox. That's what we hope for. You know, one thing that we haven't seen is any discussion, like, let's say they were hell bent for leather to go through with this, could you form another County or some kind of other special issuing district that isn't relying upon Disney, but would be in kind of in charge where Disney used to be in charge? I have no idea, but I mean, you keep wondering about once, once you cross the Rubicon, if you can't come to a solution, you know, how do you get it so that things don't spiral outta control.
Natalie Cohen: (
Right. I mean, I don't know. John maybe you know, of other examples where a higher level of government actually dissolved a lower level of government that wasn't already some of the districts are set to terminate at some point, and that's true for a lot of the different types of special districts, but not, you know, they're not explicitly dissolved because of it.
John Mousseau: (
No and we did a little bit of looking and we couldn't come up with any. Its one of the, one of the basic tenets of, of government is that, you know, once you have an issue body, they tend to live on in perpetuity of their own volition,
Natalie Cohen: (
Certainly in looking at long term issues like pensions or whatever, the comment has always been well, municipalities don't go away. They're just there. Right. So therefore they will have time to make up for any deficiencies or any inadequacies. I don't necessarily agree with all of that, but that's always been the argument in the municipal market that there's no chapter seven where you liquidate a company that's in bankruptcy and you sell off the pieces and use that to pay back the debt holders and the shareholders. That's, you know, that's not really done in the municipal market.
John Mousseau: (
No, I was trying to think of how does someone look at other types of not only special district, but things like Meloow Roos bonds, et cetera. Right. You know, cause they're like second cousins of special districts.
Natalie Cohen: (
Yeah. I think there is underlying a attention between certain states and their local governments. If you have a Republican right-leaning governor and you have cities under your jurisdiction that are liberal, progressive, you know, Democrat run cities, there is a lot of tension there, I think at this time. And I, and there is a trend of that. I referenced Mississippi where Jackson, which is the state capital when there was a freeze in Texas and there was a freeze in Mississippi and in other Southern states, they were out of water for weeks in Jackson. And there was an offhand remark from the lieutenant governor and the governor saying, well, it's their fault, you know? And so it's unclear whether all this, the infrastructure funding that's supposed to help rebuild, maintain and build back better, different basic everyday systems like water and sewer, whether some of that money is actually gonna filter down from the state level to some of these jurisdictions. I hope that's not true. I hope I'm wrong.
John Mousseau: (
Right. You know, some of this stuff gets into some of the real esoterics of bond law where there's certain other utility bonds can actually be redeemed before five or six years, something like that out there. Cuz some of the districts have different or some of the bonds have different provisions on that. Like, the real question is, does the legislature, are they able to move fast enough on this thing? Does, does it just linger? I, I don't know the answer to that.
Natalie Cohen: (
Yeah. And you brought up the fact that it's, we're, you know, we're heading into midterm elections. I don't know what kind of turnover there's gonna be in the state legislature, right. In the middle of all this.
John Mousseau: (
You always kind of like play what if or play devil's advocate. And if you are Charlie Krist, you get the Democratic nomination and you have the democratic nomination, why aren't you, why aren't you gonna use this as a campaign item and that's that. That's my point is that you would probably wanna diffuse this before then if I was the governor, like I said, you've won your war by taking on the corporation when in reality, the best solution is to kind of kiss and make up and find some common ground. But, you know, the other part too, is that things have gone on like sway for so long. It's like who would be responsible for what? Right. So suddenly, you know, there's a, there's a, there'd be a propensity for finger pointing. If nothing else,
Natalie Cohen: (
Hopefully, you know, it doesn't, it doesn't reduce or deteriorate Disney's property there, you know, that would also be SHA shame and people would say, well, I don't know, you know, it's not as safe as it used to be. They've maintained a very high quality, uh, standard, uh, in Disney. And certainly they've been, they have a, you know, police force and they are very careful about, you know, for child wanders off, making sure that they close everything down and find that kid right away. You know, that's a lot more than you can expect from many municipalities around the country, but the question is are they gonna in this process, if the worst does happen, are they gonna deteriorate the property that's there?
John Mousseau: (
No, you're right. You're right. We can talk about the bonds and they've lost value, but not that much relative to the market. Since this controversy really started to rear it's ugly head, it really, I guess towards the end of the first quarter, Disney, stock's gone from like 140 to 103. So, how much of that is tied into this? I don't know, but the controversy certainly has not helped Disney either.
Natalie Cohen: (
Well, I think, and you know, I've written a little bit about this is that Florida's tax structure is very dependent upon tourism and COVID obviously clobbered a lot of travel to the state, a lot of the hospitality and entertainment business and so on. And they and Missouri were the two last states to actually implement the Wayfair decision on taxing internet sales. So they do, both states do have it, but in the beginning of COVID they didn't. And certainly they lost a lot of that revenue. So it's a delicate balance to maintain with that. So yeah, Disney's not surprising that their stock would go down cuz they lost a lot of months of visitors.
John Mousseau: (
And I know you think about it made a good point. I mean with that in general. For a lot of states though, the Wayfair decision was an economic savior, with California at the top of the list.
Natalie Cohen: (
Right. And who, who knew that? You know, again, I did a frequency search at one point on the word unprecedented, but so many things in the last couple years have been unexpected, partly because of COVID global issues, the war in Ukraine, all of that. And on the other hand state and local governments never expected to get the amount of money that they did from sales tax and property tax, as well as people have moved from some of the inner cities to less dense areas, the supply is down. And so the prices have just gone step skyrocketed for family property. So that was another unprecedented revenue source. And then you add on top of that, the federal, as you mentioned on the federal stimulus monies and now the infrastructure and money. So things are good in muni land, but not necessarily on, you know, the ground street level um, in some places.
John Mousseau: (
And, and when we look at things, you know, we're always more or less looking at things statically. And like I said, I would say that I'd be hard pressed to think that you could continue with these levels in a couple of years, if you have any kind of reversion of the mean, like in terms of an economic slowdown, that includes and you've seen new home sales are down like six months in a row and is it a surprise? No. And you know, that carries over into everything for timeshares vacation properties, blah blah, blah, blah. And so what, you're hoping on, and this includes Oceola and Orange Counties as well, which was my original point is that you hope some of this money's in rainy day funds because if you're already starting to reverse and go down downhill a little bit, um, the extra cost involved by the Reedy Creek solution is not gonna play particularly well anywhere in those counties.
Chip Barnett: (
I just wanna say this has been quite an interesting conversation. We've covered a whole lot of areas, from the whole situation is on the ground and right up until what's going on with the bonds. And what might be happening in the future is still kind of murky because Florida has over about a year to decide what to be doing, and it is kind of unprecedented. I know North Carolina has dissolved a municipality, but that was based on the fact that it was no longer viable and its books and finances were in a total mess — but this seems to be much more, say socially and politically motivated, rather than any kind of problems that were going on with Reedy Creek.
John Mousseau: (
You know, when you think about it, and Chip you kind of made a good point here, if you looked at the controversy and what it came out of and if you're looking at looking at it now through the prism of all these terrible things like these gun shootings and stuff, I hate to say it, it looks like small potatoes.
Natalie Cohen: (
It's a little off the bond market, but there was a really wonderful podcast. There's a radio station NYC that does a show called the United States of Anxiety. And they talked about Florida and they went from the gun violence to schools. And also what's going on with the schools in Florida in terms of parental rights and parental control. And the speaker mentioned the valedictorian, I think it's in Sarasota County, actually he was the class president and he's a senior graduating. And he was to give a speech and the principal pulled him over and said, you're not to mention the word gay and talk about this at all. And the kid has been an activist and he's in opposition to the legislation, not Reedy Creek, but to the don't say gay legislation. So it goes all the way up to senior year. And so he gave his speech, but he substituted the word curly hair, it it's on YouTube, you can find it. And it's, he's brilliant. He is a very, very smart guy and very well spoken. Obviously he made it to valedictorian. So, you know, there's, he gotta have a little bit of sense of humor and all this crazy stuff
John Mousseau: (
He's gonna go far based on his cleverness.
Natalie Cohen: (
Yes. Yes.
Chip Barnett: (
Well, this, this has been a great conversation. Do you have any last thoughts for our listeners today?
John Mousseau: (
No. I mean, my last thought would be compared to some of the other bigger issues that have hit the municipal bond market over the years, this is more of a speed bump. It's bigger in Florida than anywhere else, but it's not on the magnitude of say an Orange County, California, in 1994 or WOOPs bonds defaulting in 1983, or even on the level of a Jefferson County a few years ago. This is because this is a solvable situation.
Natalie Cohen: (
It is solvable. That's correct. Yes. If the legislators put their minds to it, I did wanna just comment one thing, which John, you mentioned the, the rise in interest rates and which is somewhat unprecedented as well. I was listening to, and I thought, when we had the taper tantrum in 2013, rates went up a hundred basis points, just almost immediately. And then when tax reform came around, it, it also happened. But I think this is even more significant in terms of a shift in rates.
John Mousseau: (
I'd agree with you. And you know, a lot of it is reversion of the mean, right? So if you looked at, I mean, muni's clearly got hurt worse in the last few months than almost any other sector and for all the, for the reasons they always get hurt, bond fund liquidations. But I think what spooked the market in, in particular, wasn't the level of rates, cuz you're really only back to the way you were towards the latter part of 18. And the Fed had already, you know, been raising rates all year at that point. It's more, it's more the swiftness of the horizon rates and I, and of course, and this doesn't really have anything to do with Reedy Creek, but it's like anything else, you know, a 2% bond issued at par in 30 years, has a duration of like 35% more than like a 4% bond issued at par in 30 years. And, and I think that's what nobody appreciated was that you could backed fairly fast and you're only getting, like I said, you're only getting kind of back to where you were in 18 from a Treasury standpoint, but just that unraveling spooked investors. And I we're gonna see tomorrow because last last week you had your first inflows in months into municipal bonds and we'll know tomorrow, whether there's been any follow through from it.
Chip Barnett: (
Natalie Cohen and John Mousseau. Thank you very much for being here with us today.
John Mousseau: (
Thanks Chip. Really appreciate putting together.
Natalie Cohen: (
Thank you. Appreciate the opportunity.
John Mousseau: (
Thanks a lot.
Chip Barnett: (
And to thank you to the listeners of this latest Bond Buyer podcast. Special thanks to Kevin Parise, who did the audio production for this episode. The Bond Buyer, I'm Chip Barnett, and thanks for listening.