Chafee reveals RI’s confusion about the 38 Studios bonds

My friend Josh Barro of Bloomberg View, who spends a happily inordinate amount of time writing about Rhode Island, interviewed Governor Chafee this week during the governor’s media roadshow in Connecticut and New York City. Josh pressed the governor on why he’s flatly ruled out defaulting on the 38 Studios bonds yet signed a law that reneged on promises made to state retirees – and Chafee’s reply was not convincing:

That raises a question that many state residents – especially retired employees – would like to see answered: If Rhode Island can’t afford to keep its promises to retirees, how can it afford to keep its promise to the 38 Studios bondholders? Chafee isn’t prepared to answer. …

And when it came to 38 Studios, Chafee couldn’t even answer a simple question: Is it ever appropriate for the state to issue moral obligation bonds?

“I’m not an expert on that issue,” he responded. After a year of dealing with the fallout from 38 Studios’ collapse, you would think he would be.

As the interview ended, Chafee remarked, “I’ll have to think a little more about Josh’s question” — the one about why you can freeze COLAs but can’t default on 38 Studios.

Local officials are fearful that the bond market won’t differentiate between a default on the moral-obligation bonds issued for 38 Studios and the general-obligation bonds backed by the state’s full faith and credit, particularly since Rhode Island is a municipal minnow compared with, say, California. A top policymaker once asked me to imagine a Wall Street Journal headline the day after: “Rhode Island defaults on bonds.”

While that’s certainly possible, it’s worth scrutinizing.

First of all, if any state officials in the country should be able to go to Wall Street and soothingly explain why the 38 Studios case is a unique one and the default won’t set a precedent, wouldn’t they be Gina Raimondo – a former venture capitalist beloved by financiers who crafted a landmark law slashing pension liabilities – and Rosemary Booth Gallogly – a veteran policymaker who’s overseen the successful restructuring of municipal budgets in Central Falls and elsewhere, all while explicitly protecting bondholders?

Maybe, maybe not. (And maybe Raimondo and Gallogly aren’t interested in trying.) But if that’s the case, a moral-obligation bond is effectively a general-obligation bond in all but name, with full repayment by Rhode Island taxpayers promised no matter what. If so, shouldn’t voters have to approve moral-obligation bonds at the ballot box as they already do with general-obligation bonds – and shouldn’t Rhode Island be paying the lower interest rate investors get on a lower-risk general-obligation bond?

13 thoughts on “Chafee reveals RI’s confusion about the 38 Studios bonds

  1. Ugh…Chafee should stay home and never sit for another interview. The pain this pension reform has caused retirees, state employees and teachers is unbelievable, and the gov’s responses to Barro’s questions are uninformed and cavalier at the same time. Everyone forgets that before the crash, the pension system was 70% funded. It lost two billion dollars and probably would be on the road to making that up if Raimondo hadn’t invested a sizable chunk in hedge funds.

    Pension reform is really another 38 studios debacle because it was a foolish quick fix that had no basis in reality. The corporate class got together , pushed it through, and sweetened the pot for the GA who, for the most part, don’t know what planet they are on and just wanted to win their elections with help from EngageRI. They fawned at Raimondo’s feet because she went to Harvard, Oxford, and has money (how pathetic) in the same way Fox and friends fell at the feet of Curt shilling, a washed up baseball player. Both events were pushed through with little thought and lots of speed. 38 studios is costing 100 million, and the unwinding of pension reform will cost too. What a mess.

  2. Good article,Ted. You forgot to mention the question of the insurance. Why did the state spend money on insurance when they intended for the taxpayers to repay the bonds if 38 Studios failed? None of it makes sense.

    Forget about Raimondo making any effort to justify a default or even a reduced payment of the bonds. If she did, she would no longer be the “handmaiden of WS” and the outpouring of money from her friends in the financial industry into her political coffers would soon dry up.

    Oh well, it’s not as if we needed the money for anything important: eroding infrastructure, underfunded higher ed, the need for expanded early childhood educational programs, the rising unfunded pension liabiility (in spite of the Treasurer’s pension reform law and her modifications of the pension investments to “lower” risk), etc.

  3. Ted, this was one of the smartest and most thoughtful blog posts I’ve seen you do.

    ‘Double-barrel’ bonds and ‘moral obligation’ bonds are a scam.

    They are nothing more than a way for wall street to fatten its margins and do an end run around democratic approval as required by GO bonds.

    They should not be legal.

  4. So the residents of this state pay the insurance companies big money for insurance with no intention of ever using it – boy, they make out alright. The bond holders get to gamble their money with the expectation of high returns, and if they lose, we the taxpayer bail them out. Something is terribly wrong here.

  5. Not to mention, I saw a zombie on ‘The Walking Dead’ a few nights ago that seemed much more responsive to direct stimuli than Governor Chafee did during this latest interview.

  6. reimundo could care less about the damage she did to the retirees under the guise of protecting the system…..then she goes and invest the funds in questionable hedge funds that only enrich her cronies….when one invests there is always a risk…sometimes you win….sometime you loose….the investors knew this
    so make whole committments to rich investors but cut the throats of working class retirees…..way to go reimundo… way you can win a democratic primary and I don’t care how much money you spend….remember karl rowe in the last election!!!

  7. raimondo started out with good intentions but now she has turned into a pure politician pretty quickly.

    if you think her eyes are on the governrship, and thats it well you can forget it… she wants to be a senator or president.

    it was probably pretty easy to become a “player” in this state as most of the other politicians are stupid, uninfformed and owned by unions and social activists.

    • That’s for sure. I didn’t like the title of the article either, it implies that Gump’s confusion is shared by the rest of us.

  8. The reason RI should not make good on these bonds is that the bond investors defrauded the state by pretending they did a professional investigation of the worthiness of the investment, and found it was a good risk, before applying for the guarantee. Obviously they did not, since a venture into a high risk industry by a former ball player who had never even run a lemonade stand was clearly destined to fail. This is what John Corzine did with Global Financial, where his staff said the investments in Euro bonds was overly risky, and his response was that they shouldn’t worry because the European Community would bail them out. Fraud is fraud, and the bondholders have only themselves to blame. Their scheme is to keep their profits but share their losses with the rest of us.


    A pension COLA is simply method of providing a defined pension benefit. The fact that the Colorado Legislature has opted to deliver contracted Colorado PERA retirement benefits by means of a pension COLA annual escalator does not relieve the State of Colorado of its contractual obligation to pay the total, accrued, defined public pension benefit. The Colorado Legislature could just as well have created a statutory contract providing a larger monthly Colorado PERA annuity payment at retirement, with NO COLA.

    If the Colorado Legislature had created a statutory PERA contract providing that 90 percent of the total, defined pension benefit derived from the COLA escalator (for example, a small initial base benefit at retirement, perhaps 20 percent of final salary, but also a quite large COLA escalator, perhaps a 10 percent COLA) would any public pension attorney argue that the State of Colorado should be able to break its contracts and take 90 percent of a worker’s total, accrued pension benefit after 30 years of work? No.
    Then, why do so many legislators believe that it is acceptable for the State of Colorado to break its contracts and take a third or half of a PERA retiree’s total, accrued pension benefit?


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