Rhode Island's Depositors Economic Protection Corp. has paid off its $697 million debt -- 20 years early -- thanks to a strong economy, an aggressive litigation strategy, and rapid liquidation of assets.
In 1990, Rhode Island faced a crisis when several of its credit unions failed, leaving $1.2 billion in uninsured deposits. Originally the state was loath to issue bonds under its already stretched general obligation pledge so it created DEPCO to mitigate any concerns from ratings agencies. It didn't work, and Standard & Poor's placed the state on rating-watch with negative implications. At that time, Rhode Island had $422 million in outstanding debt.
The state backed the bonds with 0.6% of its sales tax and counted on the sale of some of the credit unions' properties, signed over to DEPCO as part of an agreement, to repay the rest. In the last few years, the state's economic boom has generated $350 million in sales tax revenue for DEPCO.
DEPCO has also aggressively pursued lawsuits against the failed institutions, netting over $100 million in one settlement. Until the rest of the legal issues are settled, the corporation will continue to exist. After that job is done, says John McJennett, DEPCO's executive director, there will be a few little things to settle.
"We would be the first state agency to go out of business in accordance with plans," said McJennett. "First we have to sell our building."
The remainder of the tasks comes from liquidating the credit unions' portfolios, and asset management, he said.
The bond payments are being held in escrow as part of a forward-float agreement with J.P. Morgan Securities Inc., backed by Treasuries. The trustee for the agreement is Citizens Trust Company.
Although ratings agencies view the repayment of DEPCO's debt as positive for the state, it still has one of the highest debt burdens in the country, a fact noted by Claire Cohen, a vice chairman at Fitch.
"I think it's a very positive thing that they've been able to weather the DEPCO situation and move onto other things," said John Fargnoli, a director at Standard & Poor's, which rates the state's GO debt at AA-minus. Moody's Investor's Service rates the state at A1 and Fitch at AA.
