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Rob Horowitz: Let’s Not Make the Bad 38 Studios Situation Even Worse

Tuesday, May 20, 2014

 

It is important that we not compound the reckless and ill-advised decision to go forward with the 38 Studios deal with another reckless and non-evidence-based decision to default on the moral obligation bonds issued to the now bankrupt video game company.

Governor Carcieri and the legislative leadership’s decision to place a speculative bet with $75 million of tax money on former Red Sox pitcher Curt Shilling’s video game company--despite the fact that the company was unable to attract a dime of private investment--was more like taking state money to Foxwoods and hoping for the best, than a hard-headed and informed economic decision.

It is understandable that people are angry and frustrated about what was a foreseeable waste of a big chunk of money. There is no excuse, however, for politicians who should know better to attempt to score cheap political points by capitalizing on the anger by advocating that the state should refuse to honor its ‘moral obligation’ and not pay back the loans.

The thin rationale that advocates of default offer is that the bonds issued in the 38 Studios case were moral obligation bonds to which there is no legal requirement of state repayment—as opposed to general obligation bonds backed by the state’s full faith and credit. They also correctly point out that the bond holders get paid a higher rate of return because of the increased risk.

What they fail to mention, even-though it has been painfully obvious since day one and confirmed by any financial expert who has looked at the situation, is that the rating agencies were not going to be reassured by that distinction and just about definitely would downgrade Rhode Island’s credit rating in the case of a default resulting in a costly boost in interest rates.

Even after Standard & Poor’s last week placed Rhode Island’s bonds on a credit watch just because there was an ongoing debate about default and an independent public finance firm retained by Governor Chafee to examine the situation warned that Rhode Island bonds would be lowered to “junk bond” status in the case of default, some default advocates continued to dig in.

The conclusion of SJ Advisors, a highly credible firm, couldn’t have been more definite.: “We expect that the rating agency reaction will be swift and severe, and that there will be a material and adverse effect on both the interest rates that the state pays when it issues debt and the market value of outstanding Rhode Island bonds,” Their form predicted that non-payment of the loans could be far more costly because of the increased interest costs on the rest of Rhode Island debt than paying them back.

The response of House Minority Leader Brian Newberry to give just one example, to this kind of information was not a change in position in light of this new evidence, but a call on the Attorney General to sue the rating agencies. I m not sure whether there was a full moon last week or not.

Some of the same people who say—and with some good evidence-that it is imperative that we improve our state’s business climate and our reputation as a difficult place to grow or start a business—are advocating the state not pay back these bonds. It is hard to see how that step can do anything but set Rhode Island’s reputation further back.

The default advocates in this case call to mind the hard line Tea Party conservatives in the national House of Representatives who brought our nation to the brink of default in 2011, believing that essentially nothing would happen if the national government failed to raise the debt ceiling.

This situation is not that dire. But the last thing Rhode Island needs is a national reputation as a state that does not pay its bills, not to mention dramatically increased borrowing costs for essential major new investments. It is time for responsible politicians to put evidence ahead of politics—and jump off the default bandwagon.

Rob Horowitz is a strategic and communications consultant who provides general consulting, public relations, direct mail services and polling for national and state issue organizations, various non-profits and elected officials and candidates. He is an Adjunct Professor of Political Science at the University of Rhode Island.

 

Related Slideshow: Who Wants to Pay and Who Wants to Default on the 38 Studios’ Bonds

GoLocalProv showcases which Rhode Island politicians and organizations want to pay or default on the 38 Studios' Bonds.

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CON

Allan Fung

Republican candidate for Governor

“I am repeating my opposition to the 38 Studios loan guaranty and to the use of taxpayer dollars to repay those moral obligation bonds.”

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CON

Ken Block

Republican candidate for Governor

“38 Studios was a bad deal and a bad investment from the very beginning and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better...As long as there are serious legal questions still to be decided, we need to stop the repayment process."

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PRO

RIPEC

John Simmons, executive director of the Rhode Island Public Expenditure Council

“We’re not going to punish anybody but ourselves if we don’t pay."

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PRO

Greater Providence Chamber of Commerce

Laurie White, President of Chamber of Commerce

“I think it’s important that action occur quickly. Our view is that economic development in Rhode Island has to be the main event. … We need a very dramatic, aggressive effort to change the path that we’re on.”

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PRO

Gina Raimondo

Democratic candidate for Governor

“Despite my frustration with everything surrounding this transaction, I believe it is in the best long-term interest of the state and all taxpayers to repay these bonds."

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PRO

Clay Pell

Democratic candidate for Governor

“Clay does not believe Rhode Island should default on its moral obligation bonds when they come due. 38 Studios was a terrible mistake — and another example of why we need to change the culture of politics in Rhode Island"-Devin Driscol.

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PRO

Angel Taveras

Democratic candidate for Governor

“While I share the frustration of many Rhode Islanders, I believe that not paying back 38 Studios bondholders would have a detrimental impact on the state’s bond rating that would far outweigh any short-term benefit we might gain. We cannot afford to default on our obligations.”

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PRO

Lincoln Chafee

Governor of Rhode Island

“The candidates who can’t understand these two obvious truths are unfit to be Governor. The consequences of default would place Rhode Island as one of the lowest state bond ratings in the nation, and the industry would reduce Rhode Island to ‘junk bond’ status. We have been told in no uncertain terms that the reaction to not paying our debt obligations will be severe and have an adverse impact on Rhode Island. In addition, failure to honor our obligations could have harmful effects on the pending lawsuit.”

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CON

Mike Stenhouse, CEO of RI Center for Freedom and Prosperity

"It's not just about not paying off bondholders.  Bondholders are adults, they knew the risk.  It's not just a question of the credit agencies.  It's a question of what would payment crowd out, what reforms could we achieve with that money, such as sales tax reform, which would enable us to create jobs."

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CON

Mike Riley

2012 Republican candidate for the 2nd Congressional District of Rhode Island.

"If we had a real Governor, he would stand up for the Taxpayers and the State of Rhode Island and stand up against threats by rating agencies."

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PRO

Professor Ed Mazze

Professor of business at University of Rhode Island

"Even though this is a moral obligation in terms of the way the financial deal is set up I still feel the state has an obligation to the bondholders, to make good on their payments."

 
 

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