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.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThe 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.
