(Adds governor's intention to sign budget; quotes)
By Hilary Russ
June 16 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.
Governor Lincoln Chafee said he would sign the spending
The state budget for fiscal 2015 contains a $12.3 million
allocation for debt service costs on the bonds.
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. The company filed for bankruptcy in 2012.
Some lawmakers had balked at paying for the Schilling 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
"I was pleased that the debate on whether to pay the 38
Studios moral obligation bond ended with the right decision for
Rhode Island," Chafee said in a statement. "I have been
unequivocal in my belief that we must honor our debts, however
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
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
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 and Diane