The House Finance Committee heard several bills yesterday concerning the operation of the RI Economic Development Corporation (EDC) in the wake of last years 38 Studios fiasco, including two bills that would prohibit the state or the EDC from making payments to the bondholders of the failed video game company.
The bills, H5639 and H5888, would stop the state from making any payment to bondholders until all of the bondholders can be identified in the case of the former, and in the latter, would prohibit the state from making payments to the bondholders regardless of whether they can be identified. The bills have been introduced by Reps. Charlene Lima and Karen MacBeth, respectively.
Rep. Lima, growing more upset as she presented her bill, said, “The biggest problem in government is lack of transparency, and this deal was no different. The bondholders did not hold up their end of the bargain.”
Lima contends that, by not filing the agreed upon documentation with the state, the bondholders violated their contracts, and therefore the state has no obligation to repay the debt.
MacBeth testified that the legal definition of a moral bond removes the state’s obligation. “The two criteria for repayment of a moral obligation bond are being the primary bondholder, and ability to pay,” she said, “38 studios was the primary bondholder, and the state does not have the ability to pay.” She added, “These bonds were insured. The insurer knew the risks. Let the insurer pay.”
A representative of the Occupy Providence movement, Randall Rose, also testified in support of MacBeth’s bill. He said that the only reason to pay these bonds is the fear of retaliation by Wall Street. “This was an inefficient way to borrow money, and amounts to an end-run on the Rhode Island constitution.” By Rhode Island law, the public cannot be held obligated to a debt that was not put forth by ballot measure.
A currently unemployed finance director, Brian Kelly, testified that if the bonds were not paid, and if there was a retaliation by Wall Street in the form of increased interest rates to state bonds, “We would have to float $11 billion in bonds at a 1 percent increase in interest to equal the debt from 38 Studios.”
He also indicated that the bonds were insured, and analogized the situation to sports teams that insure players with guaranteed performance contracts who then get injured. “In either case, a claim is filed, and the losses are covered. This is what insurance is for. The insurers knew the risk.”
Rep. Lima called the bondholders “cowards” for not coming forward, and House Minority Leader Brian Newberry said, “The fact that no one from EDC is here to testify is disrespectful to this committee, disrespectful of the House. The impacts of these bills are at EDC’s feet, and the fact that no one is here to testify is an outrage.”
EDC execs did offer a letter concerning the bills to legislators that all indicated that the letter was received just minutes before the hearing. Rep. MacBeth called the letter incomplete, at best. “It has no fiscal note, and no evidence of future negative impacts to bond ratings. We’re just supposed to take their word for it?”
Other EDC related bills heard at the meeting were H5268 which would cap any one loan by EDC at $10 million, H5463 which would prohibit EDC from making any loan guarantees, H5643 prohibiting the state from paying interest on 38 Studios loans, H5745 imposing a limit of $5 million in EDC loans to any one entity, and H5746 which would impose an aggregate limit of $1 billion on any EDC loans out at one time.
Committee Chair Helio Melo, when asked if he found any of the testimony particularly compelling, and if he thought that an oversight committee would have been a more effective way to ferret out those questions, said “Nothing really jumped out at me, but I think that introducing legislation is a good way to uncover the questions that need asking.”
“In today’s testimony we heard questions regarding the state’s obligation to the bondholders, the possible effects of non-payment, and the role of the bond insurers. I’m sure there will be many more in the coming weeks.”