Any elected official in the
state of Rhode Island who recommends that we walk away from our 38 Studios debt
should have his head examined. As
painful as it is, the collapse of 38 Studios means we owe about $105 million to
the bondholders who helped finance the ill-fated venture. As legislators deal
with restructuring the RI EDC, they are also debating how to repay the loans
coming due and, taking a walk on the wild side, questioning if the state should
repay them at all.
Governor Chafee, who
believes we need to pay the bondholders their money with interest attached, has
placed a first payment in his budget for the next fiscal year, which starts
July 1st. Chafee’s repayment
plan calls for annual payments of $12.5 million for the next seven years,
preceded by a first payment of $2.5 million.
That would bring our total debt repayment to over $112 million and take
eight years to retire.
We now know, thanks to
intrepid reporting by WPRI’s Target 12 investigators, who those major bondholders
are: major insurance and financial service companies like USAA, the military
member insurance giant, and Transamerica, as well as Wells Fargo and First
Southwest. USAA and Transamerica purchased almost two-thirds of the $75 million
bond notes; USAA alone bought almost $36 million.
Walking away from
repayment rests on a spineless and self-destructive legal argument that straddles
the difference between a “moral obligation” as opposed to a “general
obligation” to repay. As WPRI’s report stated, “The 38 Studios debt was legally
classified as moral obligation bonds rather than general-obligation bonds.
Governments promise investors they’ll repay general-obligation bonds, but only
pledge to consider repaying moral-obligation bonds.” Of course, despite the
legal distinction, states always repay moral obligation bonds. To not do so
would label them as big time credit risks. As has been reported
elsewhere, only one state has defaulted on a moral obligation bond: Arkansas
and that was in the midst of the Great Depression.
Those who say we
should renege, like former Governor Carcieri who helped get us into this mess
in the first place, argue that the bondholders accepted risk in buying the
bonds and if we don’t pay they can go to their insurance companies for the make
good. Rhode Island taxpayers, who aren’t at fault, shouldn’t be burdened by it.
Too bad the world
doesn’t work that way. Should Rhode Island default on the obligation using a
legal tactic, our reputation in the global financial community would be ruined,
our credit rating would plummet, and costs would soar to get anyone to back our
bond offerings. We would drive a stake into all efforts to get our state viewed
more positively in national rankings and to spur outside investment and
economic development.
One thing we can do
is to attempt to renegotiate the terms of the repayment, as some are
advocating. That should be looked into, although it probably means we would end
up paying even more in the end for easier terms on the way through the
repayment program. The bottom line is that we have to repay. There is no honest
or proper way to get around it, so let’s get it going.
38 Studios’ financing
was an inside political deal that violated the loan and legislative processes
in the first place and then was badly managed. The process of properly vetting
such a risk, which may have stopped the inside wheeling and dealing in its
tracks, was strangled by an overwhelming desire to land a video game
development company and use it to nurture an industry within our borders. That
it was headed by Curt Schilling made it even more attractive for all the wrong
reasons. Curt is back on sports radio these days discussing what he always knew
best: baseball. The state’s taxpayers were again ill-used by their elected
officials and that, unfortunately, is tough luck. We have a process to change
that by not reelecting them, but that’s another headache inducing sad story.