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(Adds governor's intention to sign budget; quotes)
By Hilary Russ
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.
Governor Lincoln Chafee said he would sign the spending plan.
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 junk territory.
"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 painful."
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 and Diane Craft)