Local Court Considers Whether Anaheim Taxpayers Are Subsidizing Disneyland

JULIE LEOPO, Voice of OC

The entrance to the Disneyland park.

Is Disneyland receiving Anaheim subsidies?

Orange County Superior Court Judge Peter Wilson is now studying that very question because of a December class action lawsuit filed by Disneyland employees, including employees of a subcontractor inside the park, for allegedly failing to adhere to the minimum wage law passed by Anaheim voters in 2018 that applies to businesses receiving a city subsidy. 

The lawsuit alleges Disneyland is receiving a subsidy through the 1997 resort bonds, which helped build a parking garage and infrastructure improvements needed for California Adventure. 

“All this was paid for with what Disney would have otherwise paid in taxes. The money Anaheim gave Disney was raised by the issuance of municipal bonds,” reads the lawsuit. “The bonds are repaid with and secured by Disney taxes … Disney got a rebate of the best kind: it got its taxes back before it paid them.” 

Disney was expected to respond to the lawsuit last month, but Disney lawyers sought extensions and hadn’t filed a legal response as of Thursday. A status conference in the case is scheduled for March 20. It’s not clear when the public will get to hear arguments in the case. 

Disney is relying on City Attorney Rob Fabela’s opinion on the issue before the November 2018 election. 

“The union coalition is well aware that the City Attorney has previously looked at this issue and clearly stated that Measure L does not apply to the Disneyland Resort,” according to a statement provided by a Disneyland official. 

Anaheim Spokesman Mike Lyster said the matter has already been settled by Fabela. 

“While we welcome any inquiry about who Measure L might apply to, we have already looked at and continue to hold that the public-private partnership of the 1990s, in which Disney spent $1.4 billion and the city spent $550 million to expand the Anaheim Resort, does not fall under the tax rebate language of Measure L,” said Lyster in an email. 

Fabela, in his 2018 opinion on the issue, said the resort bonds don’t qualify as a city subsidy. 

“… in which the Anaheim Finance authority issued lease revenue bonds to help fund public improvements that resulted in Disney’s construction of California Adventure amounts to an ‘agreement to receive a tax rebate,’ and thus invokes Measure L coverage. The city Attorney’s office has studied this issue, and does not believe that to be the case,” reads the report.

“The City Attorney’s Office has found no evidence that the Bond Transaction discounts the taxes that Disney must pay, or that Disney receives a tax refund as a result of the Bond Transaction,” reads Fabela’s opinion. 

The $510 million 1997 resort bonds helped build the $108 million Mickey and Friends parking garage, which Disney operates and keeps all revenue from. The bonds also paid for the $170 million Convention Center expansion.

All of Disney’s incremental hotel, sales and property taxes — that would otherwise go to Anaheim — are used to pay down the bonds. 

And 20 percent of the citywide hotel tax helps pay down the bonds. 

Once the bonds are paid off, by 2037 or sooner, Anaheim will give the parking garage to Disney. It currently pays the city $1 a year to rent the garage. 

Measure L mandates a $16 an hour minimum wage from hospitality employers who receive a city subsidy, like the 70 percent hotel tax rebate over 20 years for luxury hotels, which has ended for incoming hotels. The minimum wage reaches $18 in 2022 and will be adjusted on cost of living increases after that. 

The minimum wage law defines the term subsidy as “… any agreement with the city pursuant to which a person other than the city has a right to receive a rebate of transient occupancy tax, sales tax, entertainment tax, property tax or other taxes, presently or in the future, matured or unmatured.” 

USC public policy professor Michael Thom said classifying the bonds, debt repayment and parking garage arrangement as a subsidy is tricky because of an array of different aspects, including the land the garage was built on is owned by Disney. 

“The tax revenue might not exist without Disney though, so that’s maybe one of the complications here,” Thom said. “The bond repayment was funded with tax increases at the time, not with existing ones. So that could be some way of trying to thread the needle as it were.” 

“This line between direct and indirect subsidies is quite blurry, as you can quite tell,” Thom said. “Because of the bonds and taxes that were implemented to pay them off.” 

Amihai Glazer, a UC Irvine economics professor, also said defining a subsidy in the arrangement between Disney and Anaheim is difficult. 

After reading through the 1996 resort development agreement, parking garage lease, minimum wage ordinance and Fabela’s opinion, Glazer said the situation is “very complicated.” 

“It’s not uncommon that institutions will give the land and then some other firm will do the construction and the building will be delivered to the institution which has given the land,” Glazer said. 

“The other complication is that the city of Anaheim can use it for some days on the Convention Center — so it isn’t exclusive to Disneyland. So it makes it appear as less of a subsidy,” Glazer said. 

Thom, like Glazer, said the classification of the parking structure could make it difficult to point to as a subsidy.

“The city’s own documents refer to that parking structure as a public facility,” Thom said. “So Disney could very well say we’re not the only group that uses it.” 

The lawsuit states, “The parking garage was built on Disney property using funds derived exclusively from Disney’s tax payments, and after all the costs of construction are paid back with Disney taxes, Disney owns the building and all public use is extinguished.”

Leading up to the 2018 general election, Disney cancelled the proposed 700-room luxury hotel near Downtown Disney October 2018, after it asked the city to cancel the hotel tax subsidies when questions about Measure L began to swirl and hotel tax subsidy debates resurfaced.

Some of the other cancelled agreements included a minimum 30-year shield from any potential ticket tax on Disneyland tickets. The 2015 agreement called for Disney to invest at least $1 billion in the resort district for the 30-year protection, with an additional $500 million investment that would’ve extended the tax protection for 15 years. The agreement also said if Anaheim voters decided to tax Disneyland tickets or its parking garages, the city would give the money back to Disney. 

Lyster said Anaheim estimates that Disney has spent over $1 billion in the resort area, despite cancelling the agreement.  

Although Disney cancelled the 2015 agreement, attorneys representing the workers, Richard McCracken and Randy Renick, argue the parking garage is a subsidy, according to court filings. 

“The grand total of Disney improvements paid for with tax money was $208,279,728, including the California Adventure Parking Garage, for $90 million dollars. This was a rebate to Disney of its taxes on a grand scale. Because Disney got the money up-front, and the bonds to raise the money of course bear interest, the total time-value amount of the rebate now exceeds half a billion dollars,” reads the lawsuit. 

There’s also luxury hotels that will have to follow the minimum wage ordinance because they receive city subsidies. 

Although the previous City Council voted to cancel the luxury hotel subsidies in December 2016, Councilmembers recently extended a development agreement with the owners of the Anaheim Hotel, one of the oldest hotels in the resort district. The subsidy is also tied to that agreement. 

The Jan. 16 vote on the Anaheim Hotel renewed the subsidy debate, which gives luxury hoteliers 70 percent of Anaheim’s hotel tax for 20 years. The Council majority said the subsidy is needed to build the hotel. The luxury hotel subsidy policy was cancelled late 2016 after Councilmembers thought the city had secured enough luxury hotel rooms in the city. 

Both Glazer and Thom compared Disney’s relationship with Anaheim to the situation with the Los Angeles Angels. 

The majority of Anaheim Councilmembers began the process of selling the stadium land to a shadowy company Dec. 20. The only known member of the company, SRB Management, is Angels owner Arte Moreno. 

The starting price tag for Angel Stadium is $325 million, but back end negotiations on affordable housing and other community benefits are expected to lower the price. The city might be sued for allegedly secretly negotiating the stadium land sale

Leading up to the stadium land sale vote, some national experts on sports stadium deals said the starting price tag, along with back end price reductions, amounts to a subsidy. 

And despite the city’s position that the stadium land is going to be sold at market-rate prices, Glazer and Thom expressed doubt on that. 

“I don’t understand why when the city negotiates with the Angels about selling Angel Stadium, why it didn’t have competitive bids. Why did it only negotiate one party?” Glazer said. 

Thom said Anaheim is too willing to give concessions to Disney and the Angels because Councilmembers fear the team or the resort would leave the city. 

“That’s the big picture with all these things is it’s all too easy to get into this frame of mind where an elected official thinks if I don’t give out this subsidy, the sports team or theme park will leave. But most of the time they don’t leave,” Thom said. 

He said subsidies for theme parks and sports stadiums often don’t pan out the way cities said they would. 

“It shouldn’t come as a surprise to anybody when we look at the accounting, that the city and the county got hosed,” Thom said. 

Glazer said the minimum wage law won’t benefit very many residents because most Disneyland workers live outside of Anaheim. He said a ticket tax would add to the general fund and could help improve the lives of Anaheim residents. 

According to an annual jobs report on Anaheim’s website, roughly 16 percent of Disney’s 31,000 employees live in the city. 

Glazer and Thom said government subsidies usually don’t spur the growth that’s promised with them. 

“Many other economists, and I, would say largely that these subsidies are ineffective. That they don’t increase employment and they’re not even clear there’s a net profit,” Glazer said. 

He said often “the tax subsidies are greater than the increase in tax revenue and it doesn’t seem to make localities thrive.” 

Thom also said the jobs that are promised with the subsidies often don’t pan out either. 

“Time and time again studies say targeted incentives don’t work. Number two: wherever the development locates there, they become entrenched and keep bleeding the subsidies,” Thom said. “Meanwhile, the taxpayers are watching all of this happening, told its creating jobs, but it really isn’t. Even when it’s creating jobs … it’s not the best use of money.”

Spencer Custodio is a Voice of OC staff reporter. You can reach him at [email protected]. Follow him on Twitter @SpencerCustodio