RI lawmakers still mulling 38 Studios bond default

Rhode Island lawmakers on Thursday will take a second look at what would happen if the state refused to pay what it owes for its failed investment in former Red Sox pitcher Curt Schilling's bankrupt video game company.

The House Finance Committee has invited state and municipal bond expert Matt Fabian to discuss the implications of defaulting on the more than $100 million it owes for the 38 Studios deal. The meeting comes after a small number of state lawmakers suggested the state default and let insurance on the bonds pay bondholders.

Fabian will "address the pros and cons for the state" of not paying what it owes, according to Larry Berman, spokesman for House Speaker Gordon Fox. "The presentation is intended to provide insight that a neutral, expert third-party can bring to the topic."

The budget proposal before the General Assembly includes a $2.5 million bond payment in the next fiscal year, followed by annual payments of $12.5 million. House Rep. Karen MacBeth, D-Cumberland, and others have called on the General Assembly to block the payment. Since the session has worn on, more and more lawmakers have said they're open to defaulting.

On Tuesday, state Republican Party Chairman Mark Smiley and Moderate Party Chairman Ken Block also a candidate for governor joined the list of those favoring default. Block said the state should hold off on paying while the state's Economic Development Corp. is suing 38 Studios executives, Schilling and some of its former employees over the loan guarantee. Former Treasurer Frank Caprio said he, too, believes the state should consider defaulting.

"Why did the EDC pay this money for insurance if it serves no purpose?" Caprio said. "This issue is not going away. It's going to put pressure on future legislators and budget officers for years to come."

Gov. Lincoln Chafee and Treasurer Gina Raimondo oppose defaulting on the loans. Chafee told reporters Tuesday that he isn't swayed by the growing number of lawmakers who say they're open to defaulting. The Democratic governor said defaulting could hurt the state's reputation with investors or business leaders.

"It's going to be a stigma. It's a pall over the state," he said. "It might be a feel-good move, but let's pursue a lawsuit. We've got to live up to our obligations."

Chafee said he would veto any legislation that came to his desk that would prohibit the state from making payments on the debt.

The EDC is also against the idea, with agency Chief of Staff John Pagliarini warning that defaulting on the bonds could make it harder to finance economic development projects and negatively impact the state's bond ratings.

The EDC board approved the $75 million loan guarantee for 38 Studios in 2010 with the goal of bringing high-paying jobs to the economically struggling state. But the company folded last year, leaving the state on the hook for more than $100 million, when interest is factored in.

As more and more lawmakers have said they're open to the idea of defaulting, the question has hung up negotiations over the entire $8.2 billion budget proposal, which lawmakers must approve by July 1, the start of the new fiscal year.

Thursday's meeting with Fabian will be open to the public, but no members of the public will be allowed to address lawmakers. It will be the second time this year that the House Finance Committee has reviewed proposals to default on the bonds.

Fabian is managing director for Concord, Mass.-based Municipal Market Advisors, a research firm that provides analysis on the municipal bond market.