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Lawmakers Feel Duped by Schilling’s 38 Studios Deal

Monday, May 21, 2012


In an effort to further distance themselves from the deal that made it possible for former Red Sox pitcher Curt Schilling’s 38 Studios to receive a $75 million loan guarantee, both current and former lawmakers say they were blindsided by General Assembly leadership and never would have supported the legislation if they knew the funds would be directed toward one company.

The complaints came last week when the Economic Development Corporation (EDC) acknowledged that Schilling’s video game company defaulted on a $1.125 million payment that was due on May 1. 38 Studios executives met with EDC board members last Wednesday to discuss options for keeping the company solvent and the board is expected to continue those talks today.

By the end of last week, 38 Studios had made the late payment to the EDC, but the company was unable to pay its employees and Governor Chafee said he is against offering more state aid to help bailout the cash-strapped video game maker.

While General Assembly members did not vote to give 38 Studios the $75 million loan guarantee, they did vote in favor of expanding the state’s Job Creation Guaranty Program from $50 million to $125 million in May 2010. By September, the EDC had signed off on awarding Schilling’s company the massive guarantee and 38 Studios had already signed a lease to move into their offices at One Empire Plaza.

“I really feel the wool was pulled over my eyes, in retrospect,” said Woonsocket State Rep. John Brien, who chairs the House Municipal Government Committee chairman. “I feel I was sold a bill of goods. Never once did I hear anything about 38 Studios.”

A Favor Factory

Brien, who claims former House Finance chairman Steven Costantino convinced him to co-sponsor the legislation, says he thought providing more access to funding for small businesses seemed like the right the idea at the time. He said he didn’t know until after the bill had passed that most of the funds were essentially earmarked for 38 Studios. He said that once he saw that Rep. Helio Melo had signed on to support the bill, he was sold.

“Unfortunately, the road to hell is paved with good intentions,” Brien said in an interview last week.

The legislation was originally included as part of a supplemental budget that passed in the House but never made it out of the Senate. At the time, six Representatives (Rod Driver, Larry Ehrhardt, Robert Jacquard, Charlene Lima, Brian Newberry and Bob Watson) voted against the article in the budget.

“If you don't want it to be a favor factory, kill the article," Watson, who was serving as House Minority Leader, said at the time. “This is like an attractive nuisance for all sorts of skullduggery."

When the issue came up again in May of that year, Watson was the only Rep. to vote against the bill.

We Were Totally Blindsided

According to former State Rep. John Loughlin, who was running for Congress in 2010 and did not cast a vote on the bill, Costantino was specifically asked whether a specific company was being considered for the extra funds or if the bill was designed to benefit a number of small businesses.

“I recall the answer was ‘no, that no one company was in mind for this,’” Loughlin said Sunday.

Loughlin said that given the economic climate at the time, it made sense for the EDC to “thoroughly vet small and mid-sized Rhode Island companies and those who want to relocate here and to guarantee loans,” but he noted that he came out against this deal once it became clear that the funds were going to “be basically sucked up by one company.”

State Representative Charlene Lima was another lawmaker who raised serious concerns about which companies would receive the extra funds from the EDC. She proposed an amendment that would have required any elected official to disclose whether they had contacted the EDC on behalf of any business seeking funds, but it was soundly defeated.

“I was up on the floor against it, I just smelled something funny at the time,” Rep. Lima told GoLocalProv last Tuesday. “We were totally blindsided in the first place. We didn’t have all the information before we voted for it. Now look what happened. I’m just so appalled.”

Leaders Turn Blind Eye

Schilling’s company has burned through all of the $49.8 million in funds it received to finance the business. The rest of the money is dedicated to paying bondholders. According to Chafee, 38 Studios has applied for $8.7 million in 2011 tax credits and is seeking another $12 million in credits for 2012.

At the time, lawmakers also were not aware Schilling’s company would eventually need more than $20 million in tax credits. House Minority Leader Brian Newberry said last week that he believes many lawmakers would have raised more questions if they had more information about the agreement in the first place.

“I voted against the expansion of the Job Creation Guaranty Program at the time precisely because I didn’t know where the money was going and I’m always suspicious of any government’s ability to try and pick winners and losers,” Newberry said. “I would imagine many of my colleagues who voted for the program would have voted differently if they had known [where the money was going.]”

But Loughlin said the entire deal was all too typical for Rhode Island. He said onerous taxes, unfriendly and burdensome regulation and high energy costs have strained economic development in the state, but politicians have failed to address the real problems.

“That's what brings on these pie-in-the-sky, Hail Mary deals,” Loughlin said. “Fix the real problems and you don't need to swing for the fences. Imagine if we had indexed taxes and regulation to be less than our neighbors, we could and should be an island of economic activity. Instead, the [Speaker] Fox's, [Senate President] Paiva-Weeds and yes, Carcieri's of the world are content to turn a blind eye to the real issues and instead take enormous risks on really bad deals.”

Editor's Note: A correction has been made to reflect that Rep. Jon Brien was convinced to support the legislation by former House Finance Chairman Steven Costantino.

Dan McGowan can be reached at [email protected].


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