State has option of defaulting on 38 Studios bonds

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A panel of financial experts raised the question Wednesday: Would it be better for the state to default on its $75 million loan guarantee to Curt Schilling’s now bankrupt video game company.

Much has been said about the $100 million or more that state taxpayers owe on the bond payments pledged by 38 Studios and backed by a moral obligation of the state.

But it’s not a legal obligation, as was pointed out in a forum by the Stephen Hopkins Center for Civil Rights.

Robert Flanders is the former judge who acted as receiver in Central Falls, where municipal bond holders get paid while pensioners get cuts.

But defaulting on a municipal bond would make borrowing more expensive. That’s not necessarily so on a moral obligation bond, which the state legislature could just decide to not pay.

It’s a class of bonds that does not require voter approval, which is why it pays a little more.

“The state is doing this as an end run around the voters and an end around the process that was designed to protect the state from excessive debt issuance,” said Josh Barro, who writes for Bloomberg.

Barro suggested the state not pay the bondholders. It might mean it couldn’t sell any more bonds of this type. But that might not be so bad.

“You can have guarantees that the state makes like 38 Studios that no one really is aware of until they hit the fan and there’s problems,” Flanders said.

Some will argue if the state can go back on a deal with retirees, why must it honor a deal with bond buyers?

“The state has a legal obligation to folks who have retired and folks who are currently participating in the pension system that overrides the moral obligation related to those existing bonds,” said Bob Walsh of the National Education Association Rhode Island.

The speakers emphasized that there’s little chance the state’s bond rating for borrowing from traditional revenue or general obligation bonds would be affected by a default on the moral obligation bonds.

Gov. Lincoln Chafee said he’ll request the money be paid. The legislature will make the decision.

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