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Disneyland Article
Is Disney Paying Its Share In Anaheim

ID:TMS-3661
Source:Los Angeles Times
Author:Daniel Miller
Dateline:September 24, 2017
Posted:September 30, 2017
 
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A few hours after the gates swing open at Disneyland and Disney California Adventure, the cars are still pouring into the massive 10,241-space parking garage.

They zoom into the six-story concrete structure, carloads of costumed kids, foreign tourists and graying baby boomers sporting Mickey Mouse ears, "Frozen" dresses and "Star Wars" backpacks.

The cash pours in too: Each vehicle pays $20 to park at the Mickey & Friends facility, $35 for a preferred space close to the escalators and elevators.

Even if the parking garage fills just half its spaces, it would still generate more than $35 million in annual revenue and easily hundreds of millions of dollars over the life of the structure.

That money all goes to Walt Disney Co. The city of Anaheim, which owns the garage and spent $108.2 million to build it, charges the company just $1 a year for the lease.

More than 20 years after Anaheim agreed to pay for the parking facility as part of Disneyland Resort's expansion, it has become a symbol of the city's complicated and increasingly tense relationship with its biggest and most powerful corporate citizen.

Over the last two decades or so, as Disney's annual profit has soared, the company has secured subsidies, incentives, rebates and protections from future taxes in Anaheim that, in aggregate, would be worth more than $1 billion, according to public policy experts who have reviewed deals between the company and the city.

Disney has negotiated these pacts with a carrot-and-stick approach - one that has often included the company's threat of directing its investment dollars elsewhere. The agreements have spurred development of billion-dollar projects, including the California Adventure theme park and the forthcoming Star Wars: Galaxy's Edge area at Disneyland.

The Burbank company masterfully works the political system, sometimes deploying aggressive strategies that belie its carefully cultivated image. Support for various deals benefiting Disney has come from Anaheim City Council members who have received generous campaign contributions through a byzantine network of political action committees funded by the company.

But now, for the first time in Disneyland's 62-year history, the entertainment giant is facing serious opposition from Anaheim politicians, including Mayor Tom Tait, who feel that the recent guarantees in particular were too much. The city's finances are squeezed for a variety of reasons - it has, for example, unfunded pension liabilities of $590 million. Despite the tens of millions of dollars in tax revenue and high-profile benefits that Disney brings to Anaheim, some of the city's working-class residents said they don't see enough of the upside.

In a letter to The Times, Disney challenged that view. "Disneyland Resort has played a pivotal role in Anaheim as a job creator and economic engine," the company said, noting that it is committed to investing more than $2 billion there in the next decade.

Faced with growing criticism inside City Hall, last year Disney stepped up its local political spending, contributing $1.22 million to 10 PACs that were involved in the November election, according to an analysis of campaign finance disclosures by The Times. The PACs, most of which also spent money on elections outside Anaheim, received funds from multiple sources, though Disney was often a significant donor.

Even with Disney's large PAC contributions - which dwarfed the money raised by the candidates it opposed - two politicians supported by the company lost to reform candidates, flipping the balance of power on the council. Now, Disney's ability to extract lucrative deals from the city is in question.

"Some of the big projects that they may be thinking about - some of the money they want to siphon off from the city - will probably get postponed," said City Councilman Jose F. Moreno, who defeated incumbent Jordan Brandman, a beneficiary of more than $250,000 spent by Disney-backed PACs. "It is about being pro-neighborhood, pro-city."

The election offered a measure of vindication for Tait, who for years has been the most prominent critic of the Disney pacts.

"A lot of these things aren't a natural, normal thing for any city to do," the mayor said. "It is way too much."

The biggest Disney deals since the 1990s include the following incentives:

Anaheim agreed in 1996 to issue $510 million in bonds to finance various infrastructure improvements, the expansion of the Anaheim Convention Center and the construction of the $108.2-million Mickey & Friends parking structure, which Disney needed for California Adventure and other projects. When the 40-year bonds, which include roughly $1.1 billion in interest, are paid off, Anaheim will transfer ownership of the garage to Disney. Meanwhile, the company pockets the parking revenue.

In 2015, Anaheim approved an agreement to shield Disney's theme parks from any potential entertainment tax for as many as 45 years. In return, Disney is building the "Star Wars"-themed area at Disneyland and will invest in another major project at its resort in the future. By a conservative estimate, an oft-discussed tax of $1 per ticket could have generated more than $1 billion for Anaheim.

Last year, the city granted Disney a tax rebate for a luxury hotel the company plans to build. The deal, which is estimated to be worth $267 million for Disney, would amount to the largest subsidy given to any hotel in the city.

"Anaheim residents should ask themselves if the return on investment was worthwhile," said Michael Thom, an assistant professor at USC and an expert on tax incentives. "If not, then it's time to start asking elected officials why they continue to help Disney instead of spending the same resources on other things."

Disney declined requests to interview company executives, including Chief Executive Robert Iger and Disneyland Resort President Michael Colglazier.

But in a statement, the company disputed The Times' estimates and analysis valuing Disney's Anaheim incentives at more than $1 billion, arguing that future benefits and protections to the company shouldn't be part of the calculation. Two experts said the estimate is reasonable and that the deals should be included in any calculation of Disney's financial benefit. "Of course they have value. If they didn't, why did Disney want them?" Thom said.

Disney also said that its investments far outweigh the value of the deals from Anaheim and that it is contributing more than its fair share "despite what people with their own political agenda are insinuating."

Benefits for a changing city

As Anaheim's largest employer and taxpayer, Disney has been an undeniable boon to the once-sleepy agricultural town.

About 30,600 people work at Disneyland Resort, accounting for nearly 19% of Anaheim's jobs, based on a recent city report. The Anaheim Resort District, which includes two Disney theme parks, the convention center and dozens of hotels, is expected to account for $171.9 million in tax revenue during the fiscal year that ends next June - or 43% of general fund revenue.

According to the company, in 2016 Disneyland Resort "paid more than $125 million in taxes, bonds, levies, fees and contracts, directly benefiting Anaheim, its residents and local schools."

Disney has also taken steps to unburden Anaheim: Since 1992, the company has paid the city for police service at its resort property, and has done the same for fire and paramedic service since 2000; those contracts now generate more than $10 million a year for the city.

Many Anaheim stakeholders said that the company's direct and indirect impact on the city is unmatched. "There would be no tourism here without Disney," said Jay Burress, president of the nonprofit Visit Anaheim tourism bureau, which is partly funded by Disney tax revenue. "They are the hook that brings [people] here."

City Councilwoman Kris Murray, a Disney supporter, said the deals with the company have been good for taxpayers. "The city has a long history of partnering with private investment to raise its revenue, rather than having to go to our residents and local businesses for tax increases," she said. "We've been able to keep our taxes and fees lower than all of our neighbors."

Disney also said it is the city's largest contributor to local philanthropic endeavors, addressing issues including hunger, public health and education. The company said that in the last year, Disneyland Resort has given nearly $20 million to nonprofits that are mostly in Orange County, including more than $4 million to various causes in Anaheim. Among them is ACT Anaheim, an initiative Disney co-founded, that provides grants to nonprofits in the community.

"I have never seen a corporation that has taken so to heart their commitment to the surrounding community," said Shelley Hoss, president of the Orange County Community Foundation, which manages ACT.

Disney critics acknowledge the company's important role in the city. But they also note that Disneyland Resort is crucial to the company's bottom line. Cowen & Co. analyst Doug Creutz calculates that during Disney's last fiscal year, the resort accounted for about 20% to 25% of the $3.3 billion in operating income generated by Disney's parks and resorts unit. In the company's global stable of parks and resorts, only Walt Disney World Resort is more important to Disney's finances, he said.

Disneyland Resort's outsized success is why some believe the company, which returned $2.3 billion to shareholders in the form of dividends last fiscal year, should do more for the city that's home to its most storied property.

Rising poverty and crime, as well as changing demographics, have all fueled some discontent and unrest in the city of nearly 350,000 people. And the growing Latino population - Anaheim is now 53% Hispanic - contributed to a change in local elections brought on by a 2012 American Civil Liberties Union lawsuit over the city's allegedly discriminatory political system.

Even some Disney employees wonder whether the company - whose stock market value is about $152 billion - is squeezing more out of the city than necessary. Chris Shively, an Anaheim resident and server at Blue Bayou restaurant in Disneyland, drives by the Mickey & Friends garage each day knowing that city tax dollars are paying for the facility.

"It's a company - they have their own best interests," he said. "But it is definitely something where the company, Disney, got a great deal - a deal that we are paying for. Absolutely frustrating."

A history of deal-making

Disney's Anaheim deals represent only a portion of the overall incentives the company has secured.

There have been pacts for the construction of ESPN studios in Connecticut, new projects at Walt Disney World in Orlando and movies shot in production-friendly locales such as Australia. This year, Disney was awarded a $20.8-million subsidy to make "Captain Marvel" in California - the third-largest film incentive ever from the state.

Other entertainment companies also scour the globe for subsidies. But Disney is the master: The $866 million in incentives it secured for film production, real estate development and other projects from 2000 to 2016 far outpaced incentives won by its rival media conglomerates, according to IncentivesMonitor, a service of data firm Wavteq Ltd. Disney's haul was more than double what Time Warner Inc., Comcast Corp., Viacom Inc. and 21st Century Fox Inc. each got over the same period. The Wavteq tallies, calculated in a report for The Times, exclude certain kinds of incentives, such as those that protect against potential future costs - like the entertainment tax exemption.

Some of the company's boldest deal-making efforts have occurred in Florida. For example, the state allowed Disney to create a local government, the Reedy Creek Improvement District, which oversees an area that includes Disney World and enjoys some of the benefits of cities, such as the ability to issue municipal bonds.

In Orlando and Anaheim, Disney has successfully secured agreements by threatening to hold back expansions to its existing theme parks, said Richard Foglesong, author of "Married to the Mouse," which details Disney's business in Florida.

"They use strong-arm tactics in order to get the things they want from local government," said Foglesong, a critic of the company. "At work is this very long-standing corporate culture, which says they are owed something from the public sector in return for their private investment."

In the 1990s, after Disney decided to build its second theme park and other projects in Anaheim, the company persuaded the City Council to pump more than $500 million into the surrounding area, creating the Anaheim Resort District. The money would pay for the Mickey & Friends garage, the convention center expansion and infrastructure improvements. Tait, then a councilman, was skeptical of the arrangement, but Disneyland President Paul Pressler wanted unanimous support, Tait recalled.

He said he got Pressler to agree to a few key concessions - including an entertainment tax exemption that expired in 20 years rather than continuing in perpetuity. Disney also agreed to guarantee debt from the bond issuance, shielding the city from some risk. Disney won Tait's vote. Pressler declined to comment.

"I think the deal should have been much better for the city. But it was the deal that was presented, and it was going to pass regardless of my vote," Tait said. "I would do it again, given the circumstances. It was much better than it would have been without my vote."

A Republican businessman, Tait had initially been seen as industry-friendly when he was appointed to a vacant seat on the council in 1994. But he later came to view the financing agreement as a poor one for the city.

Anaheim is still paying off $510 million in bonds issued in 1997 to fund the resort district improvements, relying on tax revenue from the Disneyland Resort and others to cover the debt. Today, Disney's booming business helps generate more tax revenue than is needed for the annual bond payments. But because of a complex financing structure created by Anaheim and Disney, the growing surplus - $104.1 million as of June 2016 - can only be used to pay off the debt.

Tom Schuette, a partner at Gurtin Municipal Bond Management who analyzed the bonds for The Times, said it was "somewhat surprising" that the "surplus funds do not flow back to the city's general fund," where the money could be freely spent. This structure "works out well for Disney and for bondholders" in part by giving them a cushion should there be financial problems in the future. But, he said, "it can easily be argued that the rest of the city is missing out."

Indeed, critics of the financing structure argue that it has put Disney's interests first because a large portion of the company's annual city tax payments go toward paying off the bonds - tying Anaheim's hands and limiting its ability to fix pressing problems.

"The area immediately around Disneyland is beautiful, but you go a few blocks in any direction and the streets are run-down, the sidewalks are cracked and broken," said Jeanine Robbins, an Anaheim resident and activist.

Disney opened California Adventure, the Grand Californian Hotel & Spa and the Downtown Disney retail area in 2001. The Mickey & Friends garage opened a year earlier.

The parking facility, which Disney pays to operate and maintain, is a gleaming edifice - a hulking mass of steel and concrete with floors named for Disney characters whose cheery faces emblazon buttons in the elevators.

The city does not know how much revenue the garage generates for Disney, which owns a portion of the land beneath the facility and leases the remainder from a third party, an Anaheim spokesman said.

The city doesn't see any of that parking money, but it can use part of a nearby Disney-owned lot for its convention center visitors and shares that revenue. Since that arrangement's inception in 2001 it has, according to the city spokesman, generated just $3.8 million in total for Anaheim.

New, hotly debated incentives

When it comes to deal-making with Disney, Anaheim is at a major disadvantage.

"You have one of the most sophisticated corporate entities around negotiating with a small, capacity-constrained local government," said Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. "There is an imbalance of sophistication, an imbalance of power and an imbalance of resources."

Creutz, the Cowen & Co. analyst, said it more plainly: "It is management's job to extract as much money as they can. It's - I guess - the City Council's job to give as little money as they can. Whether a City Council is as well-equipped to do their job that's another question."

The apparent imbalance, economists said, has been spotlighted over the last two years in fresh pacts that critics say are further impinging on the city's future finances.

Last year, Disney sought a tax rebate for a proposed hotel at its resort. Under a program started in 2015 to encourage the development of four-diamond properties, Anaheim offered hoteliers a 70% refund on the 15% bed tax collected from guests for 20 years. Without the incentive, Disney said it would not build the 700-room hotel, The Times reported last year.

Still, Alan Reay, president of Atlas Hospitality Group, a real estate firm that specializes in hotels, says it would be hard for Disney "to argue that they wouldn't build that hotel without subsidies," given the company's financial position and the strong economy.

A city-commissioned study said that the new Disney hotel would create 5,050 construction jobs during the course of the project and 1,150 full- and part-time positions when it opens. The city projects Disney's hotel to generate about $381 million in transient occupancy tax during the rebate period - and about $267 million would flow back to the company. The subsidy, along with rebates for two non-Disney hotels from another developer, was approved in July 2016.

That deal came on the heels of another controversial vote to give Disney a long-term tax exemption that protects it from a potential levy on tickets to its local theme parks.

Several U.S. cities have such entertainment taxes. In San Francisco, a similar levy of up to $2.25 per ticket is projected to generate $1.4 million in revenue for the city this fiscal year.

In 1975 and 1991, the Anaheim council considered imposing an admission tax on local entertainment venues, but abandoned the idea amid opposition from Disney. In 1975, then-Mayor William Thom dropped his support of the tax after threats of a recall. Thom, who has since died, told The Times in 1991 that he "chickened out" under the pressure.

Besides Disneyland Resort, the only other business in Anaheim to hold a similar tax exemption is the Angels baseball franchise, a city spokesman said - and Disney negotiated for it in 1996 while purchasing a controlling stake in the team. (The company sold the Angels in 2003 but the exemption remains in place until 2029.)

In 2015, about a year before Disneyland Resort's 20-year entertainment tax exemption was scheduled to end, Disney sought to renew the safeguard, explaining that the scope of its continued investment in Anaheim hinged on getting a new deal. It also expressed concern that a tax on Disneyland Resort tickets could dissuade customers, according to reports.

But critics note that the $1 ticket tax that had long been discussed in civic circles would be less than 1% of Disneyland's regular adult price of admission, which is now $110. Since 2007, that price has risen 67% - and attendance has soared over the same period.

Although a $1 levy was never formally proposed, former council candidate Arturo Ferreras, who last year was defeated by Disney-backed incumbent Lucille Kring, said he thought "it would be nice if we could use those taxes for the benefit of the community."

In exchange for a new 30-year entertainment tax exemption, Disney promised to complete $1 billion in development at Disneyland Resort by the end of 2024. (The development, Star Wars: Galaxy's Edge, is now under construction and scheduled to open in 2019.) If Disney spends an additional $500 million, the company would get an additional 15-year extension. Under the agreement, Anaheim would have to reimburse the company for any entertainment tax that voters might approve. The exemption protects Disney not only from a potential ticket tax but also other prospective levies, including one on parking revenue.

An economic report produced for the city indicated that the first phase of Disney's new development would generate about $17.9 million in new annual tax revenue for the city, while the second phase would add an additional $8.9 million annually.

Theme park experts and analysts who cover Disney said that incentives Anaheim gave to the company decades ago may have been necessary to get it to expand its resort property. But now that Disney's presence is so firmly established in Anaheim, the company's threats to hold back investment in the resort are probably less realistic, especially as competition has grown, Foglesong and others said.

"Private marketplace factors would drive Disney to expand and improve the quality of the park, irrespective of whether they get a public subsidy," Foglesong said.

Disney's threat, however, was enough to convince some council members, including Murray. "They look at a finite amount of new investment every year and each one of [Disney's] facilities competes for those dollars," she said. "So, if extending the tax policy gave the comfort level to the corporate decision makers to invest another billion dollars in our city, that was a comfortable position to take."

A ticket tax could have been an economic boon for the city. In 2016, Disneyland welcomed 17.9 million visitors and California Adventure had 9.3 million guests, according to consulting firm Aecom. Even if attendance remained static, a $1 tax per ticket would generate $1.23 billion for the city over the next 45 years.

Disney disputed the calculation: "You can't put a value to a tax that has never, ever existed in the city of Anaheim."

The July 2015 meeting in which the City Council debated the tax exemption was a grueling affair that lasted past midnight as dozens of Anaheim stakeholders weighed in.

Colglazier, the Disneyland Resort president, made his case: "What we are trying to determine right now though is the scale of the next investment, as well as the viability of Anaheim for future expansions relative to other Disney parks around the world."

Mayor Tait didn't buy that claim - figuring that Disney was likely to invest in its thriving theme park operation whether it got the exemption or not. But he knew he was outnumbered: Three of the five council members had expressed support for Disney in recent years.

Before the vote, he delivered a warning.

"This just took "tax the tourists' off the table for 45 years. The people have a right to decide that. Not three people up here tonight, at 12:45 a.m., with a whole lot of political pressure," said Tait, resignation evident in his voice. "This just shouldn't happen. And for that reason, I am going to vote no. And I think, down the road, people will rue this day."
 

 
 
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