Chafee Administration Analyzing Cost of Not Paying Back 38 Studios' Investors

May 28, 2013

The Chafee administration is conducting a financial analysis on the cost of not paying back the moral obligation bonds that funded a $75 million loan guaranty for failed video game maker 38 Studios, the governor's spokeswoman said Tuesday.

Chafee spokeswoman Christine Hunsinger says the governor remains a strong believer that paying back the investors who bought the bonds is the right thing to do.

Nonetheless, Hunsinger says an analysis of not paying back the investors is ongoing, with the participation of several state agencies and department heads. "We expect that analysis will be part of the conversation around the budget," she says, when the General Assembly finalizes plans in June for the next fiscal year starting July 1.

Rhode Island taxpayers remain on the hook for about $100 million due to the collapse last year of 38 Studios; Hunsinger says the anticipated cost of paying that money back is about $2 million in the FY2014 budget.

Regarding the analysis, Hunsinger says, "These situations very rarely occur, where states have a conversation about not paying their obligations. So the data is hard to compile and it's not as simple as some would make it seem."

A protest featuring critics from the left and right, organized by Occupy Providence, is slated to take aim Tuesday afternoon at what participants call the state's "bailout" of Wall Street investors for 38 Studios. The protest includes a 3:30 pm march from Burnside Park to the Statehouse and a speaking program involving state Representatives Karen MacBeth and Spencer Dickinson.

Some critics point to pension cuts for public employees in questioning why the state is so insistent on paying back moral obligation bonds. Treasurer Gina Raimondo and legislative leaders have sided with Chafee in calling repaying bonds an important stance for the state's credibility.

Bryant University's Gary Sasse has repeatedly criticized the Chafee administration over what he calls a lack of due diligence in scrutinizing the moral obligation bonds for 38 Studios.

During an interview Tuesday, Sasse said the best course of action on the moral obligation bonds remains fuzzy "because the governor has not come forth with a transparent cost-benefit analysis."

"If we didn't honor the bonds, we'd have $112 million or thereabouts to spend on education and other programs to help build the economy," Sasse says. "The question is, would it reduce our credit rating to a point where it was more expensive to default on the bonds, as opposed to honoring the bonds -- and we don't have an answer to that question."

Sasse says there's not much precedent to look to in other states. He says in one instance, in Washington state in the early 1980s, a water authority defaulted on revenue bonds. Sasse says the credit impact was minimal and was reversed within about three years.