Josh Barro: Rhode Island should default on 38 Studios bondsMay 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.
• Related: Josh Barro on why RI’s economic problems are so intractable (May 4)