Fiscal Advisers Say More Info Need to Decide 38 Studios' Repayment Question

May 15, 2014

URI's Leonard Lardaro speaks to House Oversight.
Credit Ian Donnis / RIPR

Outside fiscal advisers told the House Oversight Committee Thursday that lawmakers need more information to decide the merits of paying debt related to the failed video game company 38 Studios.

Two of the three advisers, Gary Sasse of Bryant University and Robert Cusack of Whalerock Point Partners, say the state hasn’t done enough due diligence to decide whether to repay the moral obligation bonds. Cusack says House Speaker Nicholas Mattiello should go to New York to meet with the leading credit-rating agencies. Cusack says the state should also talk with the largest holders of Rhode Island’s general obligation debt to get their sense of the 38 Studios question.

"Collectively, these investors essentially are the market and will determine the impact for Rhode Island," he says. "We need to know their opinion. This should take the right analyst about a week."

Lawmakers are trying to balance calls to pay the 38 Studios money with public disgust over the state’s losing investment in the bankrupt company. As state Representative Michael Chippendale (R-Foster) says, "Rhode Islanders want this to stop. They want this to explode now.”

URI economics professor Leonard Lardaro told the Oversight Committee some of the predictions in a state-commissioned report about the impact of not paying back 38 Studios bondholders are unrealistic.

He says there’s not a precedent to support SJ Advisors’ view that Rhode Island’s credit will sink to junk bond status if it skips repaying the money. But Lardaro says broader trends mean Rhode Island will face higher borrowing costs anyway, and he says not paying back the money would be a mistake.

“Remember that you’re going to be reinforcing our state’s negative image, providing the world with another example of what not to do as they shake their heads and laugh at us,” Lardaro says.

Rhode Island taxpayers remain on the hook for about $90 million due to the bankruptcy of 38 Studios in 2012. The latest budget from Governor Lincoln Chafee includes almost $12.5 million dollars to cut down that debt. Lawmakers traditionally make changes to the governor's budget before the next fiscal year starts July 1.