The House of Representatives last week adopted a state budget which promotes economic development and encourages companies to invest and grow in Rhode Island. Two key measures include a lowered corporate tax rate and a reduced estate tax burden. We listened to our business and community leaders who urged us to do more to grow jobs and the economy. After years of economic stagnation, we sent a bold message that Rhode Island is a state that is finally “open for business.”
With such a great emphasis being placed on improving our state’s economic climate, we also had to make an extremely difficult but necessary budget decision. We included $12.3 million that is due to bond holders for the repayment of the moral obligation bonds in the 38 Studios debacle. As distasteful and maddening as that payment is, our state must not reverse the economic momentum we will achieve with many of our budgetary investments.
When I met with leading executives at Moody’s and Standard & Poor’s in New York last month, they made it abundantly clear that a failure to make this payment would trigger a default and result in a substantial multi-notch downgrade of our state’s credit rating. That means it will cost the state more to make much needed capital investments now and in the foreseeable future. The state budget includes asking voters this fall to approve $248 million in general obligation bonds for significant renovations and new construction projects involving transportation hubs, the University of Rhode Island’s engineering school, pollution abatement and many others. Failing to pay the 38 Studios obligations will likely cause the cost for these projects and all of other investments underway in the state and our municipalities to skyrocket – an impact potentially far greater than the nearly $90 million owed in the next decade as a result of the 38 Studios mess.
The bond rating companies also informed me that they view moral obligation bonds as just a slight step below general obligation ones, and that their reaction to a default would be the same. Even putting the bond payment in an escrow account and not making a scheduled payment would be considered the same as a default.
I am aware that some Rhode Islanders believe we should call Wall Street’s bluff. But no state has reneged on a bond payment since Arkansas during the Great Depression. I would not want Rhode Island to be known as the first state in nearly 80 years to default on an obligation. What kind of message is that sending to businesses we want to attract to our state? That is not the kind of history I want to make.
I did not come to this conclusion without careful consideration. In addition to making the trip to New York, I read the state-commissioned analysis and I talked with dozens of experts in Rhode Island who offered me similar viewpoints. Many of them also testified before our House Finance and Oversight committees, including top officials at CVS Caremark, Amica Insurance, the Greater Providence and the Northern Rhode Island chambers of commerce, the RI League of Cities and Towns, and the RI Public Expenditure Council.
Len Lardaro, the well-respected URI economist, told our committee that failure to pay the bond would be the equivalent of taping a piece of paper on Rhode Island’s back and saying “Kick Me!”
Perhaps just as importantly, a default would severely limit any opportunity to collect damages from the responsible parties in the active lawsuit by the state. With this payment, we keep alive the very real opportunity to reclaim a good share of the lost money without suffering the financial and reputational damages of a default.
I certainly understand the anger of Rhode Islanders about the colossal failure of 38 Studios, and I share that outrage. When I voted in 2010 for the creation of a $125 million job creation loan guaranty program for the Economic Development Corporation, I – and nearly all of my colleagues – had no idea that $75 million would be utilized by one video game company.
But the public needs to separate these emotions from the decision on the fiscal responsibility the state has to meet our obligations, no matter how distasteful.
To date, I have declined to issue subpoena power to our House Oversight Committee, but I reserve the right to do so in the future. I am reluctant at present because there are investigations being conducted by the Attorney General’s Office and the State Police, as well as depositions being taken in a civil lawsuit, with testimony hopefully being unsealed in the near future.
Subpoena power will be an ineffective tool to learn anything more while these actions are taking place. At a minimum, subpoenas will require extensive Superior Court litigation and thousands of dollars of legal fees which will probably produce testimony where witnesses will plead their Fifth Amendment rights and provide us with no further testimony.
It is not in the public interest to raise unrealistic expectations that issuing subpoenas is somehow a magic bullet that would be more effective than a State Police or Attorney General’s investigation. I have great confidence in the integrity, professionalism and thoroughness of the State Police, and I believe that such investigations should be conducted by the experts.
In the meantime, while we await the results of these potential criminal and civil actions, I am confident that the bond repayment is the responsible approach to take. We have to get Rhode Island out of its economic malaise, and our business-focused budget puts us on a positive path to prosperity. We can’t reverse our course and renege on an obligation that could jeopardize economic growth for decades to come.
Nicholas A. Mattiello is the Speaker of the House of Representatives. He is a Democrat from Cranston.