Support Grows for Defaulting on $100M Taxpayer Tab Over 38 Studios

Jun 4, 2013

The debate is intensifying over whether Rhode Island should default on the roughly $100 million owed by taxpayers due to the state's losing investment in failed video game-maker 38 Studios.

On Tuesday morning, the Rhode Island Republican Party sided with those arguing against paying back the moral obligation bonds bought by investors.

State GOP chairman Mark Smiley said, via news release:

"I am calling upon the General Assembly to not pay the 38 Studios bond.  The bond holders purchased an insurance policy as part of this bond and stand to be made whole if the state chooses not to pay it off.  Additionally, the bonds rate of return was much higher because it was more likely to default than general obligation bonds.  This is not a guaranteed bond and carries with it a higher risk.”
A bill has been proposed in the legislature that would block the state from using money in its budget to make payments on any moral obligation bonds related to 38 Studios.
Said Smiley, “I don’t really see the taxpayers taking the hit, because this isn’t a general obligation bond, it is a moral obligation bond.  It shouldn’t be looked at by bond rating institutions as the same thing.  Whatever the ramifications would be to our credit rating, they should be stacked up against the actual cost of paying off this bond and not to preserve the ability to issue this type of bond in the future. The taxpayers of Rhode Island should not be forced to pay for this. They never made this commitment.”

Smiley was joined later in the day by the five Republicans and one independent, Edward O'Neill, in the Rhode Island Senate. Via news release:

“From an examination of past history of moral obligation bonds, it seems the future borrowing interest rate won’t be affected enough to justify repaying the loan,” said Senate Minority Whip David E. Bates, (R-Dist. 32, Barrington, Bristol, East Providence).

Senator Dawson T. Hodgson, (R-Dist. 35, East Greenwich, North Kingstown, Narragansett, South Kingstown), said that the cost of defaulting on the loan should have been investigated much sooner.

“We have a fiduciary obligation to our citizens to oppose gratuitous transfers of public wealth to private hands,” Hodgson said.

Governor Lincoln Chafee and state Treasurer Gina Raimondo, among others, have come down on the side of paying back the bonds for 38 Studios. The bonds are so-called moral obligation bonds, which means the state is not legally obligated to repay them.

Yet Moderate Party founder and gubernatorial candidate Ken Block says the state should slam the brakes on for now in deciding whether to repay the bonds:

"This was a sad example of crony capitalism trumping the public good", said Block.  "Today, the 38 Studios deal is the subject of investigations and a lawsuit by the state claiming wrongdoing and malfeasance leading up to the decision to hand $75 million to 38 Studios, so why compound the mistake by making payments while the lawsuit is in the course of being decided on the merits?"
"Holding off on paying the bondholders until the legal process is complete is the least we can do to protect Rhode Island taxpayers," said Block.  "But beyond that, we also need to look at fixing our broken legislative process - a process which hurts the public interest by pushing though bad deals like 38 Studios in the middle of the night while unaccountably killing popular reforms like eliminating the Master Lever."

In related news, the House Finance Committee is slated to get a presentation Thursday on the possibility of defaulting on the bonds for 38 Studios:

Matt Fabian of Municipal Market Advisors will meet with the committee Thursday, June 6, at the rise of the House session (around 5:15 p.m.) in Room 35 on the basement level of the State House. The meeting will be televised live by Capitol Television, which can be seen on Channel 15 by Cox and Full Channel subscribers and Channel 34 by Verizon viewers and streams live at

.Fabian will appear before the House Finance Committee to address the pros and cons for the state and its affiliated entities of defaulting on a moral obligation. The presentation is intended to provide insight that a neutral, expert third party can bring to the topic, and while the meeting is an open, public hearing, no public testimony will be accepted. Public testimony was previously taken by the Finance Committee at a hearing on the Department of Administration budget, as well as on the bills submitted regarding the bond repayments.

As RIPR first reported last week, the Chafee administration is exploring the impact of not paying back the bonds.