Chafee won’t default on 38 Studios bonds; may try refinancing

Gov. Lincoln Chafee won’t consider defaulting on the 38 Studios bonds.

“I take ‘moral obligation’ to the fullest extent of those words,” Chafee told in a State House interview this week. “We made a moral obligation and I’m going to live up to it.”

Asked how he reconciles that with his support for last year’s pension cuts, Chafee said: “I don’t think the words were as strongly associated as the exact words ‘moral obligation.'”

“I think we – to the Rhode Island state workers, teachers, public safety employees, we want to look out for their future,” he said. “But this is selling bonds based on those words – ‘moral obligation.'”

The R.I. Economic Development Corporation sold $75 million worth of moral obligation bonds in 2010 to finance 38 Studios. They differ from the more familiar general obligation bonds because with moral obligation bonds a state only pledges that its governor will ask lawmakers to use taxpayer money to pay bondholders; with general obligation bonds, the state pledges its full faith and credit toward repayment.

Rhode Island officials including Chafee and Treasurer Gina Raimondo have steadfastly refused to even consider stiffing investors who bought the 38 Studios bonds despite suggestions by former R.I. Supreme Court Justice Robert Flanders, Josh Barro, Gary Sasse and others that they should in light of the state’s fiscal woes.

“Moral obligations should be taken very seriously and not casually dismissed solely on the ground that the taxpayers do not have a legal obligation,” Sasse, who served in the Carcieri administration, told “Nevertheless, the state should consider both the long and short term costs and benefits of all options.”

State officials should be studying all options, including a negotiated settlement with bondholders, Sasse said. “It would be equally irresponsible for any official to take a position either to have the taxpayer meet the moral obligation or default or negotiate until evidence-based due diligence is completed,” he said.

State officials are, however, considering asking lawmakers to spend the money next year to refinance the bonds by converting them to general-obligation bonds at lower interest rates, Revenue Director Rosemary Booth Gallogly told Bloomberg News this week.

“We’ve looked at it preliminarily just to see if that’s an option and probably will pursue it,” Gallogly told Bloomberg. “If it were beneficial we would probably be able to sell that to the General Assembly.” She estimates paying off the bonds in full could cost state taxpayers around $100 million.

• Related: RI officials tell Moody’s state will pay off 38 Studios bonds (May 24)

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