URI professor: 38 Studios loan default could affect future borrowing

The former headquarters for 38 Studios in downtown Providence.

A University of Rhode Island economics professor testified Thursday that if Rhode Island wants to borrow money in the future, defaulting on the debt stemming from the failure of Curt Schilling's 38 Studios could be expensive.

Len Lardaro, along with Gary Sasse, director of the Hassenfeld Institute for Public Leadership and Robert Cusack, portfolio manager for WhaleRock Point Partners, testified before the House Committee on Oversight.

"Non-payment means our bonds are more risky. That's going to raise the risk premiums of our bonds. Lower demand (means) we're going to have to pay higher prices, so the real interest costs and the costs in general will go up," Lardaro said.

Rhode Island still owes $87 million from the deal that gave Schilling's company a $75 million state-backed loan. 38 Studios went bankrupt.

The committee is examining the question of paying the bonds at a cost of more than $12 million a year.

Cusack and Sasse said more investigation is needed before making a decision.

"We haven't heard from the actual bond buyers themselves. They should be interviewed," Cusack said.

Sasse said some of the consultants on Wall Street don't agree that a default would be catastrophic.

"It's arguable. There are certain municipal bond consultants on Wall Street who take a different point of view," he said.

Earlier this week, an outside firm predicted that the Rhode Island's bonds will sink to junk status if the state defaults on the 38 Studios debt.

Gov. Lincoln Chafee said the debt should be honored.

However, Cranston Mayor Allan Fung and businessman Ken Block, two Republican gubernatorial candidates, say the state shouldn't pay.

Some in the legislature also want to default.

Democratic candidates Gina Raimondo, Angel Taveras and Clay Pell support making the bond payments.

The Associated Press contributed to this report.