June 16 (Reuters) - Rhode Island lawmakers approved an $8.7 billion budget on Monday that includes funds to pay for bonds issued on behalf of ex-Boston Red Sox pitcher Curt Schilling's now-defunct video game company.
Some had balked at paying for the debt because they did not want taxpayers to suffer for a soured deal reached under a previous governor.
The state had backed the bonds with its "moral obligation," but not a more explicitly binding legal commitment to pay. The bonds are also insured, but choosing to default likely would have led credit rating agencies to downgrade Rhode Island into junk territory.
The state spending plan for fiscal 2015, which contains a $12.3 million allocation for debt service costs on the bonds, now heads to Governor Lincoln Chafee. His office said he is still reviewing the full budget bill, but he has been an ardent supporter of paying the 38 Studios debt in order to protect the state's standing in the municipal bond market.
In 2010, Rhode Island's economic development agency issued $75 million of bonds on behalf of Schilling's company, called 38 Studios, in order to lure it to Rhode Island from Maynard, Massachusetts.
Former Governor Donald Carcieri, who left office in January 2011, supported the deal. The company filed for bankruptcy in 2012.
A state-commissioned study by SJ Advisors found that not paying the debt service would actually cost the state more money than paying it, because a dramatic downgrade could cause the state's future borrowing costs to soar.
In May, Standard & Poor's Ratings Services cut the 38 Studios bonds three notches to 'BBB,' simultaneously warning that it could also slash Rhode Island's 'AA' general obligation credit rating by several notches if lawmakers allowed a default.
This was the second year in a row that legislators wrestled with whether to pay for the bonds. However, the 38 Studios debate became more dramatic this year in part because it is an election year.
Municipal bond investors have been watching to see whether Rhode Island would pay. Failing to do so could have been seen as a message that an important guarantee in municipal capital markets was being tested.
The broader muni market has about $21 billion of state-issued moral obligation debt outstanding, according to Moody's Investors Service, which rates about $5.4 billion of it. Local governments also issue such debt, but totals were not available.
The Rhode Island budget also closes a $67 million budget gap with savings and reductions. It eliminates planned tolls on the Sakonnet River Bridge and instead imposes a 1-cent gas tax, indexed to inflation, to begin in July 2015 to help fund bridge and transportation infrastructure. (Reporting by Hilary Russ; Editing by Dan Grebler)