Chafee: Candidates opposing 38 Studios debt payment ‘unfit to be governor’

GOV. LINCOLN D. CHAFEE said Tuesday that gubernatorial candidates Cranston Mayor Allan W. Fung and Ken Block are 'unfit to be governor' because of their opposition to repayment of the 38 Studios moral obligation bond debt. / PBN FILE PHOTO/FRANK MULLIN
GOV. LINCOLN D. CHAFEE said Tuesday that gubernatorial candidates Cranston Mayor Allan W. Fung and Ken Block are 'unfit to be governor' because of their opposition to repayment of the 38 Studios moral obligation bond debt. / PBN FILE PHOTO/FRANK MULLIN

(Updated, 3:19 p.m.)

PROVIDENCE – Gov. Lincoln D. Chafee on Tuesday issued a statement defending the need for Rhode Island to repay the 38 Studios LLC moral obligation bonds and criticizing gubernatorial candidates Cranston Mayor Allan W. Fung and Ken Block, who have voiced opposition to repayment.

Chafee asserted that “candidates who can’t understand” that paying the 38 Studios debt is essential for the state to continue its economic recovery and recoup taxpayers’ money through legal channels “are unfit to be governor.”

“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,” said Chafee. “We have been told in no uncertain terms that the reaction to not paying our debt obligations will be severe and have an adverse impact on Rhode Island.”

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Chafee’s mention of the potential threat to Rhode Island’s bond rating was a reference to a state-commissioned report by SJ Advisors released last week that concluded that failure to repay the bonds would probably result in a downgrade of Rhode Island’s bond rating to “junk bond” status, and could cost the state as much as $361.8 million more than the cost of repaying the 38 Studios debt.

Responding to Chafee’s criticism, Block said in a statement that the governor’s censure of candidates who oppose repayment reflected a refusal “to take ownership of his role” in the collapse of 38 Studios.

“These bonds are moral obligation bonds and are not owned by the taxpayers of Rhode Island,” said Block. “I find it unconscionable that the governor would put insider Wall Street investors ahead of the taxpayers who elected him. These investors were adequately warned and knew the risk they were taking when they purchased the bonds. The fact that Governor Chafee doesn’t understand this underlines his failed leadership.”

On Monday, Standard & Poor’s Rating Services placed Rhode Island on a negative credit watch due to the ongoing debate among state lawmakers about whether to repay the close to $90 million owed by Rhode Island as a result of the collapse of Curt Schilling’s failed video-game company.

S&P also cut the rating on bonds tied to 38 Studios by three levels to BBB, or two steps above junk. The securities were issued in 2010 by the R.I. Economic Development Corporation (now known as the R.I. Commerce Corporation), two years before the company filed for bankruptcy. The state’s current general-obligation rating is AA, third-highest.

“If Rhode Island were to fail to support any of its debt, we would likely take negative rating action, lowering G.O., appropriation, and moral obligation debt by multiple notches,” S&P said in Monday’s report.

Chafee said in his statement Tuesday that the consequences of a default on the 38 Studios bonds could jeopardize the state’s continued efforts to recover from the impact of the 2008 economic recession.

“With the latest employment metrics showing an increase in the number of employed Rhode Island residents and the largest one month drop of unemployed in 30 years, Rhode Island’s current approach to economic development is paying dividends,” Chafee said. “As we look to continue this positive momentum, candidates for governor should be espousing positions that take into account our state’s long-term future, not the instant gratification of appealing to primary voters.”

Greater Providence Chamber of Commerce President Laurie White joined the governor in urging lawmakers to support repayment of the 38 Studios bonds, writing in a letter to R.I. House Speaker Nicholas A. Mattiello that a decision to skip payments “would jeopardize the good credit and access to capital that allows businesses to locate and grow in Rhode Island.”

“Defaulting would put at risk the state’s ability to finance projects that stimulate the economy and put Rhode Islanders back to work,” White wrote. “It would also put at risk other Rhode Island entities’ ability to borrow. Bond indebtedness is necessary for state, city and town jurisdictions to pay for school construction, clean water, and other critical services and investments.”

Chafee’s proposed fiscal year 2015 budget included $12.3 million to pay down the nearly $90 million in debt incurred by the failed 38 Studios.

Bloomberg News contributed to this report.

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1 COMMENT

  1. Mr. Block’s response to Gov. Chaffee proves yet again why he is seriously unqualified to serve as governor of our state. His close ties to Carcieri, right up to and including some good-ole campaign folks, are enough to make you question his leadership ability and trustworthiness.