Rhode Island Gov. Lincoln Chafee requested $12.5 million for this year's 38 Studios debt service payment in his fiscal 2015 budget.

Debate is simmering again among Rhode Island politicians over whether to honor its agreement to repay the 38 Studios moral obligation debt.

The answer is clear, according to a firm hired by a state agency to explore the fallout of nonpayment in the bond market.

"I feel fairly certain that it will cost the state more to not appropriate the money," SJ Advisors attorney Linda Port told members of the House Committee on Finance at the capitol in Providence on Tuesday night.

But many politicians and others, in a repeat of a debate from 2013, are questioning whether the state should honor the agreement it made to guarantee debt issued through a state agency in 2010 to lure video game developer 38 Studios to Rhode Island from Massachusetts.

The company, owned by former Boston Red Sox pitcher Curt Schilling, soon collapsed, and filed for Chapter 7 bankruptcy in 2012.

SJ Advisors, in a report released Friday, warned of "a cascading series of negative consequences" should the state not pony up.

SJ Advisors, of Eden Prairie, Minn., said that defaulting on the debt and the state's moral obligation pledge, could trigger downgrades of the state's general obligation debt to junk status.

Gov. Lincoln Chafee requested $12.5 million for this year's debt service payment in his fiscal 2015 budget.

On Monday, Standard & Poor's, citing uncertainty, said it could lower Rhode Island's GO and other debt by at least two notches should it not pay.

"We haven't noted clear, broad-based support for repayment of this debt," S&P director Henry Henderson said in an interview.

"What's most important is not so much the [SJ Advisors] report itself, but that all the debate is going on about whether the state should pay the debt," Henderson said. "From a credit standpoint, we're interested in what type of support there is for repayment."

Lawmakers in 2013 debated at length whether to honor the debt. Part of the ultimate agreement to make last year's $2.5 million payment included the commissioning of an independent report.

SJ Advisors founder and principal Steve Johnson told the finance panel Tuesday that his firm represents borrowers.

"We are independent, so in a sense we have no ties to financial institutions, to insurance companies, or to investors or rating agencies, for that matter," he said.

Johnson and Port told lawmakers that consequences would include downgrades of GO and appropriation debt, lower ratings over extended periods, credit spreads on future issuance and increased rates for I-195 redevelopment district project bonds. The latter, related to available land near downtown Providence after the relocation of that interstate, contain an acceleration provision should its rating drop below A-minus or the equivalent from another rating company.

State Director of Administration Richard Licht said 38 Studios bond insurer Assured Guaranty Municipal Corp. was "clear and emphatic" that it had no interest in renegotiating debt unless Rhode Island defaults.

Licht said that despite a transaction "we all know was a terrible, terrible mistake," Rhode Island should pay. "We have to separate the transaction itself from the obligation of making this payment."

Rep. Eileen Naughton, D-Warwick, said bond rating agencies should await a determination by investigators whether the transaction involved fraud.

"The investment marketplace should be very interested in making sure that there isn't fraud and deception, rather than issue threats against the state that's trying get at the issue. [The rating agencies] are bullying us," she said.

Earlier in the day, Chafee, who opposed the deal while running for governor in 2010, railed against Republican gubernatorial candidates Allan Fung, the mayor of Cranston, and Ken Block, a businessman, both of whom urged not to pay the debt.

 "The consequences of default would place Rhode Island as one of the lowest state bond ratings in the nation, and the industry would reduce Rhode Island to 'junk bond' status. ... Common sense dictates that you pay your debts, however distasteful."

Chafee also said not paying could compromise the state's position in its lawsuit to reclaim money from the failed company.

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