Gov. Lincoln Chafee

PROVIDENCE, R.I. — Paying the moral obligation debt the state took on for the failed firm 38 Studios will bolster Rhode Island in the capital markets, Gov. Lincoln Chafee said in an interview.

"This was a big decision that will strengthen the perception of Rhode Island, in my view," Chafee said at the State House late Tuesday afternoon, one day after the General Assembly passed an $8.7 billion budget for fiscal 2015 that included $12.3 million toward 38 Studios debt.

Chafee intends to sign the budget bill.

"I was absolutely adamant about paying this bond," Chafee added. "And a lot of the adamancy is because I want Rhode Island to be a place to do business. It's good for our reputation that we pay our debts, however painful. I believe it's essential for the future of our state. We need to send a clear message far beyond our borders that we honor our commitments."

Moody's Investors Service and Standard & Poor's threatened to lower the state's general obligation rating if it defaults on the bonds.

During his run for governor in 2010, Chafee opposed the $75 million loan guarantee the Rhode Island Economic Development Corp. provided to 38 Studios, backed by the state's moral obligation, to help entice former Boston Red Sox pitcher Curt Schilling to move his computer game production company to downtown Providence from Maynard, Mass. In 2012, however, Schilling laid off his employees by email and the company filed for Chapter 7 liquidation, sticking Rhode Island with the $75 million debt it guaranteed.

Chafee suggested the rating agencies tend to short-shrift Rhode Island. "I recognize that we suffered under significant stress, but maybe — because we're small and stuck between Connecticut, New York and Massachusetts — they don't notice that we've taken steps to improve our economy. We're in a slow recovery, but we're in a recovery."

Moody's rates Rhode Island general obligation bonds Aa2. Fitch Ratings and S&P both rate them AA.

Chafee, an independent turned Democrat who is not seeking re-election this year, defended the record of his administration, despite a poll released two months ago by Bryant University's Hassenfeld Institute for Public Leadership, the Providence Journal and Rhode Island Public Radio that said only 18% of Rhode Islanders surveyed thought state leaders were doing a good or excellent job.

"We've just gone through a very difficult economic time here," he said.

Rhode Island's seasonally adjusted unemployment rate in April was a nation-worst 8.3%, according to the federal Bureau of Labor Statistics.

"There are a number of issues here," said Gary Sasse, founding director of the Hassenfeld Institute and a former head of the state departments of administration and revenue. "There is a structural budget deficit and a high employment rate, and people think the management of the state is headed in the wrong direction. The feeling is that things are not well."

The governor said one of his most satisfying achievements was improving the status of the state's most distressed cities — Providence, Pawtucket, Woonsocket, West Warwick and Central Falls — through intercept programs.

"They just got hammered," said the governor.

Central Falls exited Chapter 9 bankruptcy in only 13 months. Moody's on Tuesday night revised its outlook on West Warwick to stable from negative while affirming its Baa2 rating, two levels above junk. Moody's cited the town's adoption of a five-year financial plan and cost-cutting in pension and health care.

Chafee, a former U.S. senator and Warwick mayor, touted the four bond referendum proposals in this year's budget. "Obviously I'll be campaigning hard for passage on all of them," he said.

They include $125 million to modernize the University of Rhode Island's College of Engineering complex; $53 million in bonds for environmental and water initiatives, including a proposal for $18 million in improvements to Roger Williams Park and Zoo; $40 million for the construction of Rhode Island Public Transit Authority hubs at the Garrahy complex and the Amtrak station in Providence; and $35 million for arts and cultural programs.

URI's engineering school projects a nearly 20% increase in enrollment over the next few years. "I know it's a big amount, but it's important," said Chafee. "We want to keep the good reputation of Rhode Island growing."

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