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)

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

  1. insight into the future… but the taxpayers (yourself included) havent heard a judgement just yet,when a elite red sox player files for bankruptcy that soon he should be under a microscope. huh carcieri. yes we all share the burden but who can afford the most.

  2. This is why the state should stop referring to unauthorized bond issues as “moral obligation” bonds; it leads to small-minded people making unwarranted assumptions.

    For the record, the initial bond offering doesn’t even use the phrase “moral obligation” to refer to these bonds (it does, however, use the phrase to refer to past bonds, and they may have used the phrase to refer to these bonds in latter offerings, I don’t know). This is what the bond offering actually says:

    “The 2010 bonds and the interest thereon do not constitute a debt, liability or obligation of the state or any political subdivision thereof (other than a special or limited obligation of the issuer) and neither the faith and credit nor the taking or taxing power of the state or any political subdivision or municipality thereof is pledged to the payment of the 2010 bonds or the interest thereon. The issuer has no taxing power. The obligation of the state to make payments for deposit into the Capital Reserve Fund is subject to annual appropriation by the state General Assembly.” [Errors, excluding the lack of an Oxford comma, my own]

    It would be nice if the governor decided that that paragraph was the important one, but maybe no one read it to him.

    Converting the bonds to GO bonds would save money (asuming the bonds are to be paid off either way), but that would tie the hands of future governors or legislatures to deny the debt, making it tough to support. Besides, the conversion would require the consent of the voters, and it might be too late for the November ballot.

    On an almost completely unrelated note, Providence offering a bond for general road maintenance, otherwise known as an operating expense, is an awful idea, but they are just following the state’s lead there.

  3. What about the moral obligation to pay retirees what they were promised? Why are Chaffee and Raimondo so afraid to ask this administration in DC whay they are doing bad things to pension funds, the elderly,and state budgets by almost five straight years of ridiculously low interest rates? This is a national problem, much bigger than this 38 studios issue. Needs federal attention. Where is our Congressional delegation on this?

  4. NFN – but the state never called these “moral obligation” bonds. That is a made up term being used by Moody’s to try to protect itself for having rated such bonds as relatively low risk.

    What the bond prospectus says (in capital letters on the first page) is:

    What part of english don’t they understand down at the governor’s office? And I’m not trying to say the governor is stupid, his staff is stupid.

    Further, the Governor has no power whatsoever to make this decisions. At least Speaker Fox got it right in his interview, it is up to the legislature. If the Governor’s counsel is to use the bully pulpit to urge the legislature to make these appropriations and to suggest that they could be modestly trimmed by refinancing, he should say so.

    His evasions on the pension reform are classic. I’m not suggesting that policy commands an identical response to pensionholders and bondholders – it is pretty easy to see that cutting pensions is not going to stop people lining up for state jobs, whereas failure to subsidize the 38 Studios bonds will curtail the availability of grey market financing, but our legal obligations to the two are very similar. And this continued charade, as if these bonds are sacrosanct is an embarrassment to informed political discourse.

    The real question is how important is our access to grey market, i.e. non-voter approved borrowing. The pols don’t want it debated in that context because they think such access is a critical slush fund for them and they recognize that when put this way citizens are much less likely to be supportive of a 38 Studios bailout.


  5. and again, NFN, but ‘refinancing’. First of all, I belivee there are no refinancing provisions in the current bonds so we wouldn’t save any money unless we were to, in effect, cause the bonds to be in ‘default’ or ‘haircut’ in some kind of forced or negotiated refinancing in which the current bondholders waive some prerogatives. The only difference between forcing the current bondholders to take a lower interest rate and floating the issue again is a whole mess of fees to the the same leeches that were attached to the first deal. I don’t hear them jumping up and offering to do the issue for free . . . That said the behind the scenes kind of play is that the money market analysts agree that the appearance of refinancing the bonds is better so they won’t club the state’s ratings even if the state is, in effect, haircutting these bondholders.

    The more important question for the ratings agencies is how they could hurt the state’s general obligation rating if the state refuses to subsidize bonds that are not general obligtations. When the state shed pension obligations the market gave favorable guidance because the state had less liabilities preventing it from servicing its actual legal obligations. They can’t have it both ways (well, they can if we let people like Chafee lead the debate).

  6. Folks, there is new legislation being worked up as we speak to create a new bond raising quasi government authority for wind farm initiatives.

    Senate Pres P Weed wants to grant state authority for wind farm initiatives where it is promised that taxpayers won’t have a contractual obligation to pay the money losing bonds, but might have a “moral obligation”.

    Watch out for what is called the East Bay Energy Consortium in the next legislative session. The money at taxpayer risk will be much greater than 38 Studios, and go on year after year.

  7. Go ahead, DON’T make good on your debt, regardless of their name, and see how tough it willbe to ever borrow from the public again. I dare RI to default. You will be paying prime plus 20% for the next 50 years, if anyone is foolish enough to loan you a cent at all.

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