Former star baseball pitcher Curt Schilling has done more than push pension talk off the front burner in Rhode Island. The business woes of the online video game company he founded, which appears to be unraveling faster than the 2011 Red Sox, have set off a political, media and bond-industry firestorm.
38 Studios LLC on Friday finally made a $1.125 million payment, which had been due May 1, to the Rhode Island Economic Development Corp., according to Gov. Lincoln Chafee.
“We have that check and it cleared,” Chafee said at a Friday press conference in Providence. One day earlier, Schilling’s company had hand-delivered a check to the EDC, only for the company’s chief financial officer to acknowledge the check wouldn’t clear.
Chafee also said the state would propose changing procedures for a company to be eligible for film tax credits, as a hedge against further taxpayer expense.
The company missed its most recent payroll. It has about 275 employees in Providence — full-time staff and full-time equivalent independent contractors — according to bond disclosure documents.
The state agency issued 38 Studios a controversial, $75 million loan guarantee in 2010 — backed by a sale to private investors of what technically are moral obligation bonds — to coax Schilling, who helped pitch the Boston Red Sox to two World Series championships, to move his company to downtown Providence from Maynard, Mass.
The EDC’s board is scheduled to meet again, this time in open session, on Monday afternoon. It met privately last week and considered a request from Schilling for more assistance.
The May 1 payment, according to the bond sale’s official statement, is an “annual guaranty fee” equal to 1.5% of the average amount of outstanding bonds. The company so far has received about two-thirds of the bond money and has yet to miss a bond payment. The balance sits in reserve accounts.
“We want to do everything to help the company, but we don’t want further expenditures for the taxpayers if the company isn’t going to make it,” Chafee said.
Revenue Director Rosemary Booth Gallogly said Friday that 38 Studios has used up the $49.8 million of loan proceeds it has received. She said if the company cannot make a $12.8 million loan payment next May, the EDC must tap a reserve account and Chafee would then ask the General Assembly to replenish funds.
The taxable bonds were sold in three series, with interest ranging from 6% to 7.75% and maturity dates ranging from 2015 to 2020.
Normally chatty to the media, Schilling has been silent during the controversy, brushing past reporters after the EDC meeting. His office has not returned frequent messages seeking comment.
Already the furor has cost one job, that of EDC executive director Keith Stokes. Stokes and former Gov. Donald Carcieri, a Republican, trumpeted the 38 Studios agreement. Chafee criticized the deal while running for the office in 2010. Chafee, an independent and former Republican, nonetheless retained Stokes after his election, but on Wednesday accepted his resignation.
Chafee late last week asked Colin Kane, a local developer and the chairman of the Route 195 Redevelopment District Commission, to succeed Stokes. But Kane turned down the position, when he and Chafee could not agree on compensation. "He was one of a number of candidates the governor was looking at," said a Chafee spokesman.
Chafee wasn’t a lonely voice in the wilderness when Rhode Island was making the 38 Studios deal. The state’s treasurer at the time, Frank Caprio, also opposed it. Caprio, a Democrat, was running for governor, eventually finishing a distant third in the race won by Chafee, running as an independent.
Bond and municipal distress experts also say public issuers must guard against overreaching for business commitments and local jobs, especially involving startup companies, risky sectors and celebrities.
“The downside of attracting business comes when you cross that threshold of offering full faith and credit,” said Bill Brandt, chief executive of Development Specialists Inc. and chairman of the Illinois Finance Authority. “State officials, as learned as they are, frequently buy into the panache and flash without regard to the underlying fundamentals.”
Schilling, ironically, has been an outspoken conservative on fiscal matters, often criticizing governments for excessive spending. He has backed Republican presidential candidates and even considered running on the GOP ticket for U.S. Senate in Massachusetts.
According to a bond covenant, Schilling, who moved the company to One Empire Plaza in April 2011, had to provide 450 jobs with salaries averaging no less than $67,500 annually by the end of his first year in Rhode Island.
The same disclosure statement said that last June 24, the company’s auditing firm, PricewaterhouseCoopers LLP, issued a “going concern” opinion, saying that the company will require additional financing to fund future operations and raising substantial doubt about the company’s ability to survive.
Rhode Island is home to several distressed communities. Central Falls filed for bankruptcy under Chapter 9 last Aug. 1, and eight municipalities in 2011 received downgrades from Moody’s Investors Service. Providence has warned about bankruptcy as well. The state’s employment rate, 11.2%, trails only Nevada, according to the U.S. Department of Labor’s April statistics.
St. John’s University professor Anthony Sabino said risks are inherent in any business venture.
“Some of them backfire,” he said. “On its face, it appears that the Rhode Island agency did everything it could do. They conducted a lot of due diligence. It turned out badly and that’s fate.”
But, Sabino added, the loan guarantee seemed especially high for such a small state.
“It could be that in its desire to attract Mr. Schilling, state officials did overreach with the $75 million loan guarantee,” he said. ”I realize hindsight is 20-20, but if they had made the loan $25 million or $50 million, at least they’d contain their exposure.” The deal was part of a $125 million jobs creation, leaving other Rhode Island companies vying for the balance.
The crisis prompted Deputy Minority Whip Laurence Ehrhardt, R-North Kingston, to repeat his call to cap EDC loan guarantees for any one concern to $10 million.
According to Sabino, Schilling’s celebrity status may have mesmerized Rhode Island officials. “He’s a big, high-profile name and they wanted his business, it’s that simple,” said Sabino. “Had John Smith walked in off the street and said, 'Hi, I’d like a $75 million guaranteed loan,’ he wouldn’t have gotten too far.”
Sabino stressed taking a good, hard look at such proposals.
“When you have someone of star quality involved, you need to take a step back and ask yourself — don’t ask them, ask yourself — if you really need this deal. Are you being blinded or mesmerized? They might have said 'Curt Schilling, Red Sox Nation … yeah, OK.’ ”
Schilling, 45, has pitched in the World Series for three teams, including the Red Sox in 2004 and 2007. In 2004, when Boston won its first championship in 86 years, Schilling, with his team facing elimination in New York, defeated the Yankees in Game 6 of the American League Championship Series despite a severely injured right ankle as television cameras focused on his bloody right sock.
An avid video-game player, Schilling founded his company in 2006, one year before his retirement, calling it Green Monster Games. He later changed the name to 38 Studios, reflecting his Red Sox jersey number. The company also has a studio in Timonium, Md.
Despite his celebrity, Massachusetts took that good, hard look when the company sought state assistance — and let Schilling walk when he sought major concessions.
“I think in the end he was … hoping we would get in a bit of a bidding war with Rhode Island, and we weren’t prepared to do that,” Gregory Bialecki, Massachusetts’ secretary of housing and economic development, told the Statehouse News Service in 2010.
The searing memory of Evergreen Solar Inc. may have influenced Massachusetts officials. Eager to promote green-technology jobs, the state provided a $58 million loan package to Evergreen in 2008. But the company filed for Chapter 11 bankruptcy protection last August and the Bay State lost 800 jobs when Evergreen closed a manufacturing plant in Devens.
38 Studios in February released its first game, “Kingdoms of Amalur: Reckoning,” through Electronic Arts Inc. The Rhode Island-backed loan — 38 Studios has received two-thirds of the loan amount — is underwriting development of “Project Copernicus,” which the company has yet to release.
In Schilling’s firm, Rhode Island saw a chance to gain a technology foothold and possibly compete with the Route 128 corridor surrounding Boston, 50 miles to the north.
“Video gaming is cutting edge, but the saw cuts both ways,” Sabino said. “The cutting edge comes with risks and speculation.”
House Speaker Gordon Fox, D-Providence, while acknowledging a serious problem, held out hope for the company. “In this kind of sector there’s a risk there, absolutely. But it’s worth the risk. I still think that this company will take off. It’s a dynamic company that can pump new life into a down city like Providence.”