Scott MacKay Commentary
Mon June 24, 2013
Will Rhode Island Ever Move Past Its 38 Studios Disaster?
Will Rhode Island ever get beyond the shadow of the 38 Studios-Curt Schilling disaster. RIPR political analyst Scott MacKay on why state government so far has not developed options for putting this behind us.
President John F. Kennedy said famously that ``life is unfair.’’ Some men,’’ he noted, ‘’are killed in a war, some men are wounded and some men never leave the country.’’
Kennedy’s words from 1962 resonate in Rhode Island’s messy $75 million Curt Schilling video game deal that now has the General Assembly playing the Hamlet-like role of whether to pay up or default on the bonds.
On one side are Gov. Lincoln Chafee and General Treasurer Gina Raimondo, two politicians who don’t agree on everything and may face-off against each other in next year’s election for governor. That they agree on something as important as 38 Studios debt is obviously a stance that we must pay attention to. Both the governor and the treasurer say Rhode Island’s financial reputation and borrowing ability would be seriously wounded by default.
Not everyone agrees. House Republican Leader Brian Newberry of North Smithfield, a lawyer, has done a study. Newberry concludes that the cost of walking away from this debt may be less than paying off the ill-fated bonds.
This situation galls most Rhode Island taxpayers. It should. Why should a recession-racked state with yawning needs in education, health care and road and bridge repair sacrifice those investments to pay millions to greedy Wall Street risk-takers who bought these high-interest bonds?
Or, as Newberry puts it, ``I find it very difficult to go back to my constituents and tell that I can justify finding extra money in the budget to repay bondholders but not pay similarly morally obligated pension benefits’’ that were chopped in the Raimondo-led public employee pension cuts of 2011.
From the beginning, 38 Studios was a stupendously foolish deal, even for a state government that over the decades has let taxpayers down too often. In his waning days in office, Former Gov. Donald Carcieri foisted this on our state and his enablers in the Assembly’s Democratic leadership and on the board of the Economic Development Corporation went along. Chafee, who was a candidate for governor at the time, vigorously opposed getting the state involved financially with this risk-laden video game business, but nobody in the State House marble power corridors listened.
Now, Chafee must try to get beyond this colossal mistake which has once again made Rhode Island a national laughingstock. He hasn’t gotten much help from lawmakers. The Assembly leadership knew that a $2.5 million bond payment is due in next year’s budget. Predictably, they fiddled while the days dwindled towards adjournment without a major study of the consequences that surround the default –pay up dilemma.
The Assembly loves to boast that it has become more transparent in recent years. Every time there is a new way to put information in a legislative web site, there are the usual florid news releases trumpeting the new Smith Hill religion of openness.
Sadly, this has not extended to such big topics as 38 Studios. There has been no meaningful oversight of this deal and no believable explanation of the Assembly’s role at leaving Rhode Island taxpayers on the hook.
Now, as the clock ticks, the Assembly has proposed a Rube Goldberg solution – put the bond money in the budget but perform a $50,000 study to explore default.
Moody’s, the financial rating firm, has already put our state on notice that failing to pay up would have a severe impact on Rhode Island’s ability to borrow in the future. Matt Fabian, a top Wall Street government bond analyst, has much the same message.
There is one glimmer of light at the end of this long dark tunnel. Fabian says Chafee has made a wise decision in hiring lawyer Max Wistow to sue the law firms, rating agencies and financial advisors and bond insurers that sold and profited from this deal. ``The states should sue everyone it can,’’ says Fabian.
Here’s a brutal forecast taxpayers aren’t going to want to hear: This won’t end well.
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