The painter was on a deadline to turn it in, so he didn't have time to fix it. He pointed it out to the production person at Disney and offered to paint it out if they wanted him to. The painting was sent up to a committee of marketing execs for approval. The artist never got a call to change it, so he assumed they liked it with the semi-subliminal penis in it. During the scene where Eric and Ursula are about to be married, it appears that the priest is getting an erection.
Closer inspection reveals that it is only the priest's knee.
After he passes across the screen, below him and to his left Mickey Mouse, Donald Duck, and Goofy can be seen sitting in the crowd. It certainly sounds like it if you're told what to listen for. But that's probably not what he's saying. For one thing, it makes no sense to the plot. For another, Disney, who never does anything nowadays without looking at the bottom line, surely doesn't see any market value to their customers in naked teenagers.