Rhode Island remains on track to make a $2.5 million interest payment next year on bonds that were used to finance the facilities of 38 Studios, a now-bankrupt videogame company founded by former Boston Red Sox pitcher Curt Schilling.
The state's House Finance Committee approved a budget late Tuesday night that included making an interest payment next May on $75 million of taxable bonds that the state sold in 2010 to make a loan to the company and lure it to Rhode Island.
The company's loan payments were originally supposed to secure the bonds. Now the state could wind up paying $89 million for them, according to its director of administration, Richard Licht.
Recently, some lawmakers had suggested the state walk away from the debt as it confronts a budget gap of $30 million for the fiscal year starting July 1, raising concerns about Rhode Island's credit rating and also about the willingness of issuers in the $3.7 trillion municipal bond market to honor their debts.
The state legislature will have to approve funds each year to make the interest payments. Even if it approves a transfer this year, it is not obligated to make one next year, Finance Committee Chairman Helio Melo said.
The state budget must still pass the entire House and then be approved by the Democrat-controlled Senate.
Worried their fellow lawmakers will abandon the bonds, Democratic leaders in the Senate called a special caucus earlier on Tuesday evening, where Licht and State Deputy Treasurer Mark Dingley warned that the municipal bond market would penalize Rhode Island if it defaulted on the debt.
"This isn't about 38 Studios. It's about protecting our reputation," Licht said, adding there were options to refinance the debt so that it pays less interest.
On Monday Moody's Investors Service downgraded its rating of the bonds and also put $2.1 billion of Rhode Island's debt under review for possible downgrade.
"Failure is contagious," Licht also said, adding that ratings would drop across the state in the advent of default, in turn pushing up the costs of borrowing for all Rhode Island's issuers.
That could prove painful for the small state and its towns, which have struggled in recent years with high unemployment and with covering the costs of their public pensions.
When it went under last year, 38 Studios - named after Schilling's Major League jersey number - said it had owed more than $150 million and had less than $22 million in assets. Schilling said the company cost him $50 million of his own fortune.
(Reporting by Lisa Lambert in Washington; Additional reporting by Ros Krasny; Editing by Lisa Shumaker)