The 38 Studios fiasco continues to haunt the citizens of Rhode Island. What started out as a bad decision continues to get worse. The question facing us is, what to do now?
Some politicians suggest that we can refuse to pay the bonds. They say that we can save $80 million while sending a message to Wall Street predators at the same time. This is a feel-good proposal designed to win votes. The reality is this course of action would come with a far larger price tag.
I think we need real leadership from our elected officials for a change, not more of the same deceptive “happy talk” that has caused Rhode Island so many problems over the last 30 years. Whether we are discussing our pension crisis, the high unemployment rate, or 38 Studios, I strongly believe that our problems stem from politicians who have betrayed the public by not facing the hard realities, by refusing to ask the tough questions, and by hiding the truth from the citizens they represent. Later, they embrace populist solutions to cover their tracks and hope voters forget that it was their actions that caused the problem in the first place.
If we examine the question of paying back the 38 Studios bondholders from an objective cost-benefit framework, I think the answer is clear: we should pay the bondholders back.
While not repaying the bonds won’t prevent Rhode Island from borrowing money, it will cost us real money over time. Outside consultants tell us that not paying back the loan will cost an additional $30 million to $360 million over and above the cost of the loan. The negative effects to our credit rating would likely last for several years. Already we see the rating agencies have put our state on watch because our officials are even mentioning the possibility of defaulting on the loan. To not repay the bonds would also deter other business from setting down roots in Rhode Island for fear our promises run hollow. The price tag in lost business would be staggering.
The insurance company will pay the bondholders if the state does not. Then they would likely sue the state for repayment, leading to a substantial downgrade of our ratings. This will cost our state – and likely our municipalities – more money in interest. That leaves less money for rebuilding our infrastructure like roads, bridges, and school improvements.
Our state has not fully funded the promise it made to cities and towns for school funding, it reduced the promise it made to its employees and retirees, and now they would default on these bonds. What a role model for our children and grandchildren.
My recommended course of action from the beginning has been to look at a negotiated settlement in which the bonds get paid back but are paid from several sources, not just the state of Rhode Island.
I would bring all of the stakeholders together: the insurance company, defendants, the trustee, a representative for the bondholders, and the state. I would explain that the insurance company received a commission and if the state did not pay, they would be on the hook for the full amount due. By paying a lower amount, let’s say $50 million, they could walk away. The trustee and defendants could pay $10 million and the defendants in the court cases could pay $15 million. Under this scenario, bondholders receive a very high rate of interest and still experience very little risk if the state or insurance company has to pay, the taxpayers save $75 million, and the state maintains its integrity and appeal for new businesses. The bondholders should accept a lower rate of interest in return for full payment of their bonds. The state has some culpability because I believe they did not do their proper due diligence and did not monitor the loan properly, so they would pay the rest. Everyone would sign an agreement not to sue and the payment issue would be over.
But there is a catch. Once the legislature finalizes the payment of 38 Studios into the budget, Rhode Island will lose our leverage with other stakeholders. If there is to be a negotiated settlement, it must be done before this year’s budget is approved. This gives us a window of only several weeks to obtain this settlement. I urge our leaders to act today.
We should still aggressively investigate every aspect of this debacle and prosecute where possible. Let’s learn from this embarrassment and create a political culture of transparency and accountability instead of the current environment of secrecy and insider deals.
I have learned through many years of experience that the hard thing to do and the right thing to do are usually the same thing. Let’s do the right thing for all our Rhode Island citizens.
Ernest Almonte is a Democratic candidate for General Treasurer. He served as Rhode Island Auditor General from 1994 to 2010.