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Donna Perry: Taxpayers are Owed Transparent Answers by the EDC

Thursday, May 17, 2012


The posted notice for the Wednesday emergency meeting of the state Economic Development Corporation (EDC) stated that the meeting was being called to address “unexpected occurrences” that have developed for 38 Studios, the company that was supposed to be the star centerpiece to an expanding on-line video game/knowledge industry sector in the state.

But if the week’s earlier headlines prove correct, what perhaps was unexpected, by the EDC anyway, was that a brand name baseball star buttressed byhigh priced creative cutting edge talent, plusgenerous helpings of hype and a hefty taxpayer backed loan, doesn’t necessarily add up to success. There are two Kingdoms that serve as the setting backdrops for this tale but it’s tricky to distinguish the heroes from the villains when you have plot details that remain murky and undisclosed.

But one plot detail is clear: something has gone terribly wrong in the Kingdom located at One Empire Plaza, when roughly $50 million of the $75 million dollar loan has already been accessed, yet the company seems unable to come up with a mere $1.1 million dollar “annual guarantee fee” that was due to the state just this past May 1st. It turns out that the ruling powers in the other Kingdom, otherwise known as the EDC, have been quietly growing alarmed over the missed payment in the days since and now it seems a broader concern is taking hold over whether the company may be on its way to becoming insolvent.This week, the state’s central taxpayer advocate, the RI Statewide Coalition, (RISC) is warning that any attempt by the EDC—through the Governor and ultimately the Legislature-- to force additional taxpayer subsidizing ofthe faltering 38 Studios should not be approved without a full—and transparent-- inquiry into the timeline of the company’s activities being conducted. Taxpayers deserve a full briefing—not sentenced to a bailout-- as the questions that need answering are piling up. To be fair, Governor Chafee inherited this arrangement and was highly criticized during his campaign for taking a cynical view of the Schilling deal. It could well turn out that he may have been right on the mark.

For starters, why didn’t the EDC raise a red flag a year ago when it apparently was noted in an audit that the company was not on track to meet the obligations of the loan?It’s been reported this week that contained in disclosure filings to bondholders this spring is information that indicates a June 2011 audit of 38 Studios by accounting firm PricewaterhouseCoopers expressed substantial doubt about the company’s financial stability and issued an opinion of “going concern”. What did the EDC know and when did it know it? What did it do to monitor and protect the state’s huge investment, outside of hiring IBM to act as a “third party monitor”?

Approximately $12.7 million in principal and interest payments on the EDC loan start coming due in 2013,but if all indications are that 38 Studios will not be able to meet those obligations, why is it only now that this potential insolvency became clear to the EDC? But what may be of utmost concern is the timeline connected to the roll-out of the second major game of Schilling’s enterprise. There are reports that the September 2012 debut of“Project Copernicus” is now on hold and this should be raising the largest red flag of all as the profits of this crucial second game were targeted to provide the bulk of the payback of the RI loan.

It’s uncertain if “Copernicus” is actually in trouble or just delayed but it was reported that it was taken off the list as an exhibit game in an important industry Expo next month. Should 38 Studios collapse, it would validate earlier criticism that a more prudent economic development strategy by the EDC would have been to use the Job Creation Loan Guarantee Program to spread out dozens of smaller loans to multiple promising start-up companies and refrain from singling out one company, as the EDC track record on this strategy has not been impressive.

Finally, it’s worth noting there are also reports this week that despite the financial problems, Schilling apparently tapped the loan to pay back himself some $ 4 million he personally invested in the company, and that high-priced creative talent, like writer R.A. Salvatore, is slated to receive over $ 5 million in royalties from the sale of the initial game, “Kingdoms of Amalur” from a revolving line of credit that was created out of the original loan.As things stand at this moment, it seems accurate to say the opposite of royalty is the treatment that’s destined for the anonymous characters playing in the real life roles of the taxpayers in the unforgiving kingdom of Rhode Island.

Donna Perry is the Executive Director of RISC,www.statewidecoalition.com




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