Josh Barro: Rhode Island should default on 38 Studios bonds
May 29th, 2012 at 5:00 am by Ted Nesi under Nesi's Notes, On the Main Site
If 38 Studios can’t pay off its $75 million EDC loan, as appears likely, it’ll be up to Rhode Island taxpayers to step in and cover the principal and interest payments bondholders are due through 2020, at a cost of nearly $90 million.
But as Marcia Van Wagner of Moody’s noted last week, these are moral obligation bonds, not general obligation bonds, which means the state only promised to ask for money to pay them off: “Once the appropriation request is submitted [by the governor] to the legislature, the state’s legal obligation has been met and the legislature may decide not to appropriate the funds,” Van Wagner wrote.
The possibility that Rhode Island would actually default seems remote; state officials from Governor Chafee on down told Moody’s taxpayers will make bondholders whole, and the Department of Revenue is already mulling how to deal with the burden left by 38 Studios. But writing in his new Boston Globe column, Josh Barro suggests Rhode Island should seriously consider stiffing bondholders:
Generally, states should perform on their moral obligations. But Rhode Island’s government has more moral obligations than it can possibly service. The state still struggles under a huge unfunded public employee pension obligation, even after a major set of pension reforms last year, which will freeze cost of living adjustments for current retirees for as long as 15 years.
Surely, the state had a moral obligation to pay those pension benefits in full. If it couldn’t afford to meet that obligation, how can it afford to appropriate the nearly $100 million that it will take to pay off the 38 Studios bondholders with interest? A default will surely make it difficult for Rhode Island to issue more moral obligation bonds — but if that means no more 38 Studios-style deals, so much the better.
Read the rest here. And Josh isn’t the only one writing about the 38 Studios deal:
- The Globe’s reporters looked at why it unraveled so fast and the demand for 38 Studios’ ex-workers.
- CNNMoney’s Ken Sweet reports the deal was flawed from the start and suggests the Chafee administration should have sought an injunction to keep the workers in place.
- Joystiq’s Alexander Sliwinski reports a “Reckoning” sequel was already in the works, though Electronic Arts passed on it.
- Big Huge Games’ lead designer wrote about the collapse and why it means no “Reckoning” patch.
- My WPRI 12 colleagues tried without success to interview Governor Carcieri.
- Chafee’s comments about the violence and sexism in video games sparked some debate.
- The Worcester T&G’s Peter Cohan explained why Massachusetts didn’t do what Rhode Island did.
Lastly, Curt Schilling wrote Sunday on Facebook: “Phillipians [sic] 4.4-4.9.” (Here’s the verse.) Oh, and if you missed it Friday night, Chafee and Raimondo are arguing over why she wasn’t at a 38 Studios briefing.
Update: Schilling tells his side of the story.
• Related: Josh Barro on why RI’s economic problems are so intractable (May 4)
Tags: 38 studios, josh barro
Nesi's Notes covers politics and the economy in and around Rhode Island for WPRI.com. (Twitter: 
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If we pay the “moral” obligation bonds, would the courts ask why pensions are a lesser moral obligation?
As a state, we now find ourselves in some strange moral dilemmas’s. More than half our population finds itself living in a municipality likely to be in receivership soon defaulting on their own moral obligations.
And the General Assembly this week will be debating whether or not to bring another money losing taxpayer subsidized initiative under the EDC’s wing being the East Bay Energy Consortium.
Will we ever learn that “politics as usual” is what got us here?
Ted,
That column by Barro from a few weeks ago was very good, thanks for the link.
I think it’s even *worse* than his despressing column, though. Looking beyond RI, look at the parts of Mass or CT most similar to Providence. In Mass, Worcester, Lowell, New Bedford are all old manufacturing cities about the same distance from Boston as us — and all of them are economic disasters too. CT towns like Bridgeport, New London, New Haven are not doing well either.
The current economic hotspots are mostly a few major cities with some mix of a high-tech cluster, a lot of financial firms, strong universities (especially sci-tech), or a few growing regional hubs not located right next to a major metro (e.g., Charlotte). Old-line manufacturing cities that are basically secondary centers located near a major metro hub are doing poorly all over the country, from Worcester, MA to Tacoma, WA or Gary, IN.
I don’t think anyone in the country has found a formula that works well for cities in positions like Providence. Does anyone have any good role models? Add in the fact that we are too small a state (vs Gary or Bridgeport being a small part of their states) and I really don’t see how you get out of the death spiral.
RIprof,
The so called “role model” brilliance of Bill Clinton held that we could throw away all those lowly jobs to 3rd world countries because we were now an information society.
What he never figured on was that the info age would be done in isolation (e.g. Palo Alto) leaving all the Central Falls of the world in the keyboard dust.
“moral” obligation?? In RI, now that’s funny!
While I hate to devolve into the crass, I must firmly state that Josh Barro’s article appears to have been significantly easier to write than it was to read. Barro epitomizes the so-called “arm chair” conclusions about state policy that true journalists are supposed to avoid like the plague.
To equivocate pension obligations with bonded moral obligations is to fall so wide of the mark in terms of their scope, purpose, and effect on the state budget, that it is to be considered irresponsible. A pension is a legal agreement. If it can be negotiated upward, as Rhode Island unions have proven historically adept at, and it can certainly be renegotiated downward, especially when such an exclusion would quite certainly bankrupt the state. Moral obligation bond programs are entities that provide low cost borrowing to essential service providers or economic stimulators/job providers. One doesn’t have to look far in New England to find what successful moral obligation programs look like. Maine, Vermont, and New Hampshire have operated such programs benefitting hospitals, colleges, local municipalities, and small businesses for decades without a single default. The difference? Strong oversight.
38 studios was clearly a state lending scheme gone far astray, but to suggest that the answer is to default is to completely and purposefully ignore the benefits that these programs have provided. The bond market is nothing but a system of lenders and borrowers. To default on the 38 studios bonds will inevitably increase the borrowing rates for any small or medium businesses in the future and send a message to the lenders that Rhode Island is a bad investment. Barro, not sufficed with just the baby, would punt mother out with the proverbial bath water for all Rhode Islanders.
Not quite
You miss the connection to the pension situation.
When judges / justices examine the ultimate RI reasonableness claims in the use of “police powers”, you can bet they will weigh all matters to judge just how far RI really was in a financial corner.
I agree with you premise that ordinary people might look at this and say that it is in everyone’s best interest not to pi$$ off the bond market.
However, courts do not look at these matters in the same way ordinary people measure them.
State pensions were not, and never have been neotiated with unions, so they can’t be re-neotiated down. They are implied contracts through statute.
Rhode island is so similar to a failed communist state, it’s time to simply print our own currency and pay everybody with that. Our leaders can say whatever they want real or imagined (like they do now), and we’ll all trudge along on our merry way (like we do now). Wow.
Not – “If it can be negotiated upward, as Rhode Island unions have proven historically adept at, and it can certainly be renegotiated downward”
True but there were NO negotiations downward were there? That’s way the state finds itself in court.
[...] Related: Josh Barro: Rhode Island should default on 38 Studios bonds (May [...]
Exactly right. If RI does not default the State will have a weak argument in any pension lawsuit. Imagine telling the judge that the State had no money for worker’s pensions, but somehow, found the funds for a moral obligation bond. Talk about hypocrisy. Fox and friends say they will pay. Isn’t he a lawyer for god’s sake.
If you people read the newer posts, investors are anticipating Rhode Island to default on the bonds. This will impact Rhode Island crediablity. When Rhode Island has to float a bond issue, Rhode Island will have to pay interest on the bond at least 15% higher that other states.
I have to agree with Ed on this one, except one point. RI crediablity? No such thing.