Rhode Island’s 3 Largest Debts Lean Heavily On General Revenue
Tuesday, April 02, 2013
Debt resolution is at the heart of Chafee's FY 14 budget proposal for the Rhode Island Department of Administration and the RI Economic Development Corporation.
In a March 19th hearing before the House Finance Committee, the Governor's fiscal year 2014 budget proposal was presented along with a follow up by Director, Richard Licht. State debt and payment obligation was at the forefront of discussion and the emphasis was laid heavily on the RIEDC.
The Governor recommends major general revenue changes for fiscal year 2014. According to the budget proposal for the Department of Administration as presented to the House Finance Committee, some of the biggest recommended expenditures of general revenue filtered through the DOA are debts and the RIEDC itself.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTAmong the myriad topics of expenditure brought before the House Finance Committee were three points of debt service that stood out. All three, if approved as suggested by the Governor’s proposed budget, would draw heavily from general revenue and are tied to the influence of the Rhode Island Economic Development Corporation.
1. 38 Studios Debt Service
The Job Creation Guarantee Program allows guaranteed loans not to exceed $125 million. This program is the culprit behind the now infamous 38 Studios deal that has left the state with a moral obligation of $75 million in defaulted loans to the now defunct company. $80.5 million of the $125 million was used, leaving $44.5 million available. The budget proposal includes $2.5 million from general revenues for the debt service in 2014 and an out-year assumption of $12.5 million per year.
2. RIPTA Debt Service
The Rhode Island Public Transit Authority has been running at a deficit for services and has, itself, incurred significant operating shortfalls. The Governor's budget recommendation is that the quasi-public Authority's debt service payments be made with general revenue in lieu of Authority sources. This includes $1.6 million in 2013 and $1.7 million in fiscal year 2014 from general revenues.
3. I-195 Debt Service
The 2011 Assembly's debt authorization for the major reconstruction project of I-195 stipulated that proceeds from land parcel sales would be used for debt service costs. Legislation assumed that $42 million of revenue bonds would be issued y the Rhode Island Economic Development Corporation to purchase land made available by the relocation of Interstate 195 from the Rhode Island Department of Transportation. Fiscal year 2014 budget recommendation, however, is $1.2 million from general revenues for debt service on the project. According to the I-195 Redevelopment Commission, contrary to the 2012 “one time expense of $3.9 million for the completion of land sales,” agreed to by the Assembly, the Commission requests $600,00 from general revenues for fiscal year 2014 based on “more updated projections.”
Fiscal Debt and Moral Obligation
Borrowers and lenders enter into a bargain with the understanding of repayment, said Edward M. Mazze, Professor of Marketing and Supply Chain Management at the University of Rhode Island College of Business Administration. At the state level, Mazze went on to say that failure to repay such financial obligations could result in an impact on the state’s reputation and on future bond issues. “This could lead to the risk of ratings agencies downgrading the state’s bond rating. If there is a finding of wrongdoing anywhere, then there is insurance on the loan.”
“The key thing to understand about government debt in Rhode Island is that, while our state government debt is quite a bit above the average, our local government debt is far below the average," said Sam Bell, state coordinator of the Rhode Island Progressive Democrats of America. "Because local governments pay a higher interest rate on their debt than state governments do, this is a rare example of responsible fiscal management in Rhode Island. However, the recent drive to underfund government at the state level and slash state aid to municipalities threatens this history of fiscal sanity.”
Bell said it's critical to understand that current low interest rates will not continue forever. "And if we delay investments until the Fed raises rates, we’re wasting an awful lot of tax dollars,” he said.
Rhode Island Economic Development Corporation: fit to oversee?
The EDC is organized as a quasi-public entity and consolidates all economic developmental activities into a single entity. It was formed from a merger of the Department of Economic Development and the Rhode Island Port Authority. The EDC describes their mission and strategy as “to create jobs, help companies expand and develop their workforce, and identify opportunities to bring new companies into our state.” The EDC Board is consists of 13 members including the Governor who serves as the chair. The Governor appoints all 12 Board members.
Professor Mazze said of the RIEDC management that he “doesn’t believe they have the people in place to manage such projects.” Mazze went on to say he believed outsourcing the EDC mission to private industry and consultants "with a proven track record of succeeding in larger investments.”
Bell concurred. “The EDC has been an obvious failure," he said. "And the idea that it can be reformed without changing the fundamentals of how it operates is naive. However, government-subsidized loans can be an effective economic development tool when properly managed.”
The EDC staffing expenditures are budgeted at $4.1 million to fund 44 positions for fiscal year 2014. The state appropriates $2.7 million to support 28 of the positions and the other 16 are funded from “other sources” in the amount of $1.4 million. Operating expenses for the EDC total $2.9 million with $1.9 million from general revenue.
Chafee, Licht and the EDC have proposed a plan to the General Assembly that addresses the serious issue of debt that weighs heavily on the future of the state's economy. Given the instability that debt creates for business development, the General Assembly appears cautiously amenable to the recommendations proposed by the Governor's budget and its endorsement by Director Licht.
However, that same, current unstable business foundation from which the state suffers has led to downsizing in staple companies like Hasbro, and Met-Life and makes the EDC's mission a difficult task: “...the Corporation serves as a government and community resource to help streamline the business expansion in, and relocation to, Rhode Island. The agency assists companies with commercial real estate, business financing, workforce training and other relevant issues.”
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