East Greenwich legislators – two Republicans and one Democrat – all say the state should not pay back the $75 million (plus interest) 38 Studios bond. The General Assembly will be voting in the next few weeks on whether to include a $12 million payment in next year’s budget.
The investment in Curt Schilling’s 38 Studios – which filed for bankruptcy in 2012 – came in the form of a moral obligation bond, passed by the General Assembly in 2010. A moral obligation bond says that if the borrower (in this case 38 Studios) defaults on the loan, the lending government entity (in this case, the state of Rhode Island), has the “moral obligation” to pay back the bonds issued to make the loan. However, that governing body is not legally obligated to do so. Hence the debate.
According to a report released by Gov. Chafee this week, failing to pay back the bond would lower the state’s credit rating and could end up costing the state anywhere from $36 million to $362 million. With interest, taxpayers are on the hook for about $89 million for the 38 Studios bond.
“We should definitely not pay it back,” said state Rep. Anthony Giarrusso (R-Dist. 30). “There’s so much dirt on this and paying it back just covers it up. We are taking away funding from the neediest residents – developmentally disabled, early learning and elderly, just to name a few – and paying off Wall Street billionaires that knew the risk.”
He continued, “We the people didn’t vote for it so why make us pay for it? Our roads and bridges are failing by the minute and they want to pay the bondholders that we paid insurance for.”
“At this point, I can’t support making the payments,” said Sen. Dawson Hodgson (R-Dist. 35). “In this deal, the level of risk was so high and was consented to by so many people in so many different areas of government. The only people were weren’t represented were the taxpayers and now the taxpayers are the ones left with the bill.”
Hodgson, who is running for Attorney General, has introduced a bill prohibiting the issuance of moral obligation bonds.
“It’s a very troubling concept. I call them extra-legal,” said Hodgson. “it’s a process that government began to undertake when they wished to issue debt without bothering to get voter approval.”
He said debt offerings should be put on the ballot, noting that Rhode Islanders “have shown a willingness” to take on debt for worthy projects.
Sen. Lou Raptakis (D-Dist. 33) is also against paying back the debt.
“I’m voting against it. I would rather take a roll of the dice,” he said. “We know the bondholders are going to be paid. Let the insurance companies take us to court.”
Raptakis said he was unimpressed with SJ Advisors, the company hired by Chafee to report on the potential risks of not paying back the bond. Representatives from the company testified before the state senate Wednesday.
“A big question to them was, why do you say S&P and Moody’s would downgrade us substantially? They couldn’t answer the question,” he said. “It’s a lot of money, but if you compare it to other projects, it’s not that substantial.”
Hodgson said there’s another reason to consider not paying back the bond: how repayment could affect the lawsuit filed by unions over the pension settlement.
“The unions are going to argue in the pension lawsuit, ‘You’re telling us the state has no legal obligation to pay out the pensions, but you have this 38 Studios and that’s not a legal obligation but you decided to pay it?’ We put ourselves at risk for losing the pension case in court,” he said.
“A lot of very important issues are flowing around this. We need to think holistically.”