Simmons: Default cost would exceed 38 Studios debt

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PROVIDENCE, R.I. (AP) — The cost to Rhode Island of not repaying the money owed after 38 Studios' bankruptcy would exceed the amount of the debt, the head of a business-backed public policy group told House lawmakers Thursday.

John Simmons, executive director of the Rhode Island Public Expenditure Council, testified before the Oversight Committee that the question isn't whether the state would be penalized, in reputation and borrowing costs, if it defaults on the bonds that financed the 38 Studios deal. He said the question is by how much.

Simmons noted that rating agencies including Moody's have already said Rhode Island would face bond rating downgrades, probably by multiple notches.

Rhode Island still owes some $87 million from the deal that gave 38 Studios a $75 million state-backed loan. The state's economic development agency is suing 38 Studios founder and ex-Red Sox pitcher Curt Schilling and 13 others over the company's collapse, saying the agency's board was misled into approving the transaction.

Simmons presented to the panel an analysis of default that projected increased borrowing costs of anywhere from $82 million — the best case scenario — to $167 million over 20 years. That doesn't include what Simmons called additional costly effects, including on historic tax credit bonds and other future borrowing.

"We're not going to punish anybody but ourselves if we don't pay," Simmons said, adding that lawmakers need to set aside the "emotional" issue of how the state got to this point — through a deal now widely disparaged as foolish.

"Is this really what we want to be known for?" he said of a default on the moral obligation bonds, for which repayment is not a legal requirement.

Gov. Lincoln Chafee's administration has said the state must honor the debt — no matter how distasteful it is to pay. He too has cited harm to the state's financial reputation and significantly higher borrowing costs.

The General Assembly last year approved shelling out the first appropriated funds — $2.4 million — to the bondholders, but only after heated debate. That debate is ramping up again as lawmakers will soon consider whether to appropriate $12.5 million for the next installment, and similar payments in future years.

Some in the Statehouse, including Oversight Chairwoman Karen MacBeth, have advocated for default, saying the insurer should cover the cost of the bonds.

"This committee isn't about, is it cheaper or not to pay?" the Cumberland Democrat told Simmons. "It's whether we should or should not."

Vice-Chairman Spencer Dickinson said he does, in fact, want the state to be known for default.

"My constituents believe that the reputation of this state would improve if we cut ourselves loose from this messy problem," he said.

MacBeth said she plans to bring other witnesses with opposing viewpoints before the panel. An independent report called for by the General Assembly on the consequences of default is due out soon.

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