Rhode Island’s House Finance Committee approved an $8.2 billion budget late Tuesday night that includes an initial $2.5 million moral obligation payment on 38 Studios bonds.
The 12-0 vote came one day after Moody’s Investors Service threatened to downgrade the state’s Aa2 general obligation rating should Rhode Island withhold payment.
The full House of Representatives is scheduled to consider the budget bill next Tuesday.
Gov. Lincoln Chafee’s top finance officials urged lawmakers not to default on the bonds, and risk harming Rhode Island’s credit rating and reputation long-term. Chafee included the initial payment in his budget proposal.
The state is on the hook for a $75 million loan to the failed video game company guaranteed by the Rhode Island Economic Development Corp. and backed by the state’s moral obligation.
Moody’s called moral obligation tantamount to general obligation.
“This is no longer about 38 Studios. It’s about protecting the state’s reputation and its ability to access capital markets at a price taxpayers can afford,” said Department of Administration Director Richard Licht.
Moody’s on Monday also downgraded the bonds issued for 38 Studios, the now-bankrupt video-game company owned by former Boston Red Sox pitcher Curt Schilling, to Baa1 from A2. The rating agency also placed Rhode Island’s Aa3 appropriation bond ratings and the Job Creation Guarantee Program, the economic development vehicle behind the 38 Studios loan, on review for further downgrade.
The budget bill would eliminate the program. It also includes $50,000 for a market analysis of potential consequences of default.
“In the eyes of rating agencies, there is little to no distinction among state debt obligations when it comes to a default – whether they are GO debt, appropriation debt or moral obligation debt,” Office of Management and Budget Director Peter Marino wrote in a memo to Licht.
The Rhode Island Public Expenditure Council also warned that a default would nullify Rhode Island’s work over two decades toward improving its credit rating.
Fitch Ratings and Standard & Poor’s each rate Rhode Island’s GO bonds AA.
Chafee’s proposal would earmark $2.5 million in 38 Studios payments for fiscal 2014, and $12.5 million annually from fiscal years 2015 through 2021. Net capital reserve payments would total $89.2 million.
Debt service at current interest rates would amount to $104.6 million, according to Marino, who said $15.4 million is available through capitalized interest and the capital reserve fund.
According to Licht, Rhode Island bondholders would experience a portfolio loss should the state default on 38 Studios debt, tarnishing all Rhode Island debt. A 50-basis point increase in yield is about a 4% to 6% drop in price, or $100 million in market value, he said. Also, said Licht, Assured Guaranty Municipal Corp., insurer of the 38 Studios bonds, could sue the state.
38 Studios paid $563,000 in bond insurance for the $75 million debt issuance.
Spokesman Brian Bishop of the Stephen Hopkins Center for Civil Rights, whose organization has been critical of Moody’s, called Tuesday’s session a “scarefest.” He accused Moody’s of “acting as if they were directing public policy.”
The proposed budget accounts for the more than $30 million reduction in available resources caused by lower-than-anticipated revenue, but still includes funding for the restoration of the historic structures tax credit program, workforce development, and a 16-month trial period for tax-free wine and spirits sales to help Rhode Island stores compete with tax-free liquor sales in neighboring Massachusetts.